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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K/A
(AMENDMENT NO. 2)
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 2-98277C
THE COLONEL'S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3262264
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5550 OCCIDENTAL HIGHWAY, TECUMSEH, MICHIGAN 49286
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (517) 423-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
----------------------------- ----------------------
Common Stock, $0.01 par value Nasdaq SmallCap Market
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _____ No __X__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
Number of shares outstanding of the registrant's Common Stock, $0.01 par
value (excluding shares of treasury stock) as of June 2, 1999: 24,518,326
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant based on the closing price on the Nasdaq
SmallCap Market on June 2, 1999: $5,130,960.
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The Colonel's International, Inc. (the "Company") files this Amendment
No. 2 to Form 10-K for the purpose of supplying the information required by
Items 6, 7, 7A and 8 of Part II of the Form 10-K, and amending and revising
Item 13 of Part III. Capitalized terms used but not defined in this
Amendment No. 2 have the meanings ascribed to them in the Form 10-K filed
by the Company with the Securities and Exchange Commission on March 31,
1999.
PART II
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data shown below for the Company for each of
the five years in the period ended December 31, 1998 has been derived from
the Consolidated Financial Statements of the Company. The following data
should be read in conjunction with the Consolidated Financial Statements
and related notes thereto included in Appendix A and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATIONS<F1>:
Operating revenues 29,931,869 $ 11,772,242 $ 6,476,625 $ -- $ --
Loss from continuing
operations (2,488,442) $ (1,190,086) (1,635,840) -- --
Net Income<F2> $11,005,592 $ 3,408,759 2,521,986 1,862,474 10,887,714
Basic and diluted
earnings per share $ 0.45 $ 0.14 $ 0.10
Pro forma earnings
per share<F3> $ 0.11
FINANCIAL CONDITION:
Current Assets $30,725,006 $ 16,267,880 $13,638,100 11,483,401 14,399,543
Current Liabilities $13,628,479 $ 13,160,122 16,659,846 15,026,023 15,886,485
Total Assets $52,422,893 $ 44,940,280 42,610,295 38,243,986 31,529,883
Long term obligations $ 3,942,686 $ 8,844,055 6,321,175 6,064,705 1,366,615
<FN>
______________________
<F1> The Company sold substantially all of the assets of The Colonel's used in
its bumper production operations to AutoLign Manufacturing Group, Inc.
pursuant to an Asset Purchase Agreement in December of 1998. As a result,
operating revenues and loss from continuing operations for all periods
presented do not include the operations of the bumper division. The
results of the discontinued operations are included in net income.
2
in Appendix A for pro forma results of operations as if the Company
and The Colonel's had been combined for 1995.
<F2> Effective December 31, 1995, The Colonel's changed its tax status from
an S Corporation to a C Corporation for federal income tax purpose.
Prior to December 31, 1995, The Colonel's income was not taxable to
the Company and was passed through its stockholders.
<F3> The pro forma earnings per share has been derived from the income
statement of the Company for the year ended December 31, 1995,
adjusted to give effect to the change in tax status of The Colonel's
as if such change had occurred at the beginning of the period.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BACKGROUND
As discussed herein, The Colonel's International, Inc. (the "Company")
has four subsidiaries: The Colonel's, Inc. ("The Colonel's"), The Colonel's
Truck Accessories, Inc. ("CTA"), The Colonel's Rugged Liner, Inc. ("CRL") and
Brainerd International Raceway, Inc. ("BIR"). CRL was formed in March 1998,
in connection with the acquisition of four Pennsylvania corporations engaged
in the truck accessories business. This acquisition was completed in April
1998. BIR's name was recently changed to The Colonel's Brainerd International
Raceway, Inc.
THE COLONEL'S, INC.
The Colonel's was organized in 1982 and began producing and selling
plastic bumpers and facias in 1983. By the start of 1996, The Colonel's
had grown through acquisitions, joint ventures and normal expansion to two
manufacturing plants, five distribution warehouses (located in Dallas,
Texas; Houston, Texas; Glendale (Phoenix), Arizona; West Memphis, Arkansas;
and Totowa, New Jersey), and a network of independent distributors that
sell The Colonel's products throughout the United States, Canada, Mexico
and the District of Columbia. The Company sold substantially all of the
assets of The Colonel's used in its bumper production operations to AutoLign
Manufacturing Group, Inc. pursuant to an Asset Purchase Agreement. This
transaction was completed on December 17, 1998. The sale consisted of
substantially all of The Colonel's inventory, machinery and equipment,
accounts receivable and prepaid items. AutoLign also assumed liabilities
such as accounts payable and purchase commitments. Certain real estate and
transportation equipment that was not part of the sale remains with The
Colonel's.
3
THE COLONEL'S TRUCK ACCESSORIES, INC.
CTA manufactures and sells pickup truck bedliners and tail gate covers
through a distributor network. In March 1997, CTA began to acquire retail
outlet stores to sell its manufactured items and other truck accessories
that it purchases from third parties to wholesale sub-distributors and
dealerships. These retail outlet stores offer installation services and
direct sales to retail customers. CTA markets through these various methods
to sell CTA's manufactured bedliners and other truck accessories products.
CTA's first acquisition, in March 1997, was Truckware in Baldwin
Park, California. Truckware, which was the Company's pilot retail outlet
store, attempted to attract customers from a competitor's product to CTA's
manufactured bedliner. In addition to selling bedliners, it purchased
products from other manufacturers and sold them through a warehouse/retail
outlet store setting. In 1997, CTA purchased certain assets of Eastern Off
Road Equipment, Inc., which had similar retail outlet stores in
Pennsylvania, Maryland, Virginia and West Virginia. In 1998, CTA purchased
the assets of the following: Road and Truck, which is located in Thousand
Oaks, California; Dealers Choice, which is located in Collinsville,
Illinois and serves the St. Louis metropolitan area; Duraliner of Nashville
in Nashville, Tennessee; Sun Shade Custom located in Franklin, Tennessee;
Wild Bill's Truck Accessories in Upland, California; Bedliner Kingdom in
Los Angeles, California; Southland Shell in Pomona, California; Accessories
Plus in Santa Clara, California; Truck Stuff in South Sacramento,
California and Roseville, California; and Camper Place Warehouse with
locations in El Paso, Texas, and Las Cruces, Ruidoso, and Roswell, New Mexico.
All these facilities warehouse and sell bedliners, caps and tonneau covers
that CTA manufactures, as well as other purchased truck accessory products
to the wholesale and retail markets.
In addition, CTA purchased the assets of Horizon Coach, Inc., a
manufacturing company located in Riverside, California. This facility
manufactures custom pick-up truck caps, sport tops and tonneau covers. CTA
uses this facility to supply products to CTA's truck accessory outlet
stores.
THE COLONEL'S RUGGED LINER, INC.
CRL was formed in March 1998 in connection with the acquisition by
merger of four Pennsylvania corporations: Rugged Liner, Inc., Triad
Management Group, Inc., Aerocover, Inc. and Ground Force, Inc.
(collectively, the "Rugged Liner Companies"). In this transaction, which
was consummated in April 1998, each of the Rugged Liner Companies merged
with and into CRL, with CRL being the surviving corporation. CRL,
which is located in Uniontown, Pennsylvania, manufactures non-skid
bedliners and bed mats, as well as ground lowering kits for sport
utility vehicles (SUVs) and three piece sliding tonneau covers for pickup
4
trucks. CRL has a distribution warehouse/service center in Pomona,
California and also markets its products through CTA's retail outlet
stores. CRL, as successor to the Rugged Liner Companies, concentrates its
efforts on export bedliner sales, and domestic ground effects, tonneau
cover and bed mat sales.
THE COLONEL'S BRAINERD INTERNATIONAL RACEWAY, INC.
BIR operates a motor sports facility located approximately six miles
northwest of Brainerd, Minnesota. Substantially all of BIR's revenues are
obtained from motor sports racing events at the racetrack. BIR schedules
racing and other events held at the racetrack during weekends in May
through September of each year. In 1998, BIR's name was changed from
Brainerd International Raceway, Inc. to The Colonel's Brainerd
International Raceway, Inc. to better reflect the racetrack's affiliation
with the Company and The Colonel's products.
In addition to spectator-related revenues, BIR receives: (i)
sponsorship fees from businesses which promote their products and services
at the Raceway; (ii) entry fees from participants in the races and other
events; and (iii) rent for use of the track for private racing events,
driving schools and the testing or filming of motor vehicle operations.
MAJOR SALE OF ASSETS
As mentioned above, the Company sold substantially all of the assets
of The Colonel's used in its bumper production operations to AutoLign
Manufacturing Group, Inc. pursuant to an Asset Purchase Agreement. This
transaction was completed on December 17, 1998. The sale consisted of
substantially all of The Colonel's inventory, machinery and equipment,
molds, accounts receivable, and prepaid items. AutoLign also assumed
certain accounts payable and purchase commitments.
ACQUISITIONS
During 1998, CTA (or the Company) acquired seventeen retail outlet
stores in eleven separate purchases and a competitor's manufacturing
business: the Rugged Liner Companies, long time competitors in the bedliner
aftermarket; The Colonel's Factory Outlets in Charlotte, North Carolina and
Flint, Michigan; Wild Bill's Truck Accessories in Upland, California;
Bedliner Kingdom in Los Angeles, California; Southland Shell in Pomona,
California; Road N' Truck in Thousand Oaks, California; Duraliner of
Nashville in Nashville, Tennessee; Dealer's Choice in Collinsville,
Illinois (St. Louis); Sun Shade Custom in Franklin, Tennessee; Accessories
Plus in Santa Clara, California; Truck Stuff in South Sacramento,
California and Roseville, California; and Camper Place Warehouse with
locations in El Paso, Texas, Las Cruces, Ruidoso, and Roswell, New Mexico.
5
FACILITIES
CTA's bedliner manufacturing facility occupies a 210,000 square foot
building located on 27 acres on the outskirts of Owosso, Michigan. Owosso
is located about 100 miles northwest of Milan, Michigan and about 30 miles
northeast of Lansing, Michigan. The building has power capacities
exceeding current use and would permit expansion if necessary. This plant
manufactures truck accessories. It is leased from a company owned by
Donald and Patsy Williamson, the majority shareholders of the Company.
CTA's cap and tonneau cover manufacturing plant is in Riverside,
California. The 45,000 square foot facility is located about 25 miles
south east of Los Angeles and serves the western part of the country. CTA
plans to lease a 750,000 square foot manufacturing facility in Abilene,
Texas that was purchased by a related party for this purpose in August
1998. CTA plans to begin manufacturing and distribution product in
southern states during the second quarter of 1999. Abilene is about 120
miles west of Dallas, Texas.
CTA's other facilities include 27 warehouse/retail outlet stores in
the Los Angeles, California area, the Pittsburgh, Pennsylvania area, the
Southern New Mexico area, Charlotte, South Carolina, Nashville, Tennessee,
the St. Louis, Missouri Area, Flint, Michigan, and the San Francisco,
California area.
CRL manufactures, stores and sells bedliners mainly for export and SUV
ground lowering kits sold domestically in a 160,000 square foot building in
Uniontown, Pennsylvania, about one hour southeast of Pittsburgh,
Pennsylvania. This facility also serves as a master warehouse for the
Eastern Off Road retail outlet stores. It is leased from Mark German, the
Company's President.
BIR owns and operates a three-mile race track, including a one-quarter
mile drag strip, located approximately six miles northwest of Brainerd,
Minnesota. BIR's premises contain several buildings, including a four-
story tower with twelve executive viewing suites, a control tower, various
single story buildings containing concession stands, rest rooms and storage
and service facilities located throughout the property. The buildings are
concrete or wood frame and are suitable for warm weather use only.
Grandstand bleachers for approximately 40,000 spectators are primarily
located along the drag strip.
The Colonel's former Milan bumper manufacturing plant is a 350,000
square foot facility (plus a 45,000 square foot covered crane bay) situated
on a 62 acre site on the outskirts of Milan, Michigan. Milan is located
approximately 10 miles south of Ann Arbor, Michigan, 60 miles west of
Detroit, and 25 miles northwest of Toledo, Ohio. The Colonel's
manufactured aftermarket bumper facias at the Milan facility. This
6
facility was leased from a company owned by Donald and Patsy Williamson,
which sold the property to AutoLign in December 1998 in connection with The
Colonel's asset sale.
In April 1998, The Colonel's closed on the acquisition of a parcel of
real estate located at 5550 Occidental Highway, Tecumseh, Michigan. See
"Subsequent Events" below.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 31, 1998, the Company has funded
its working capital and capital expenditure requirements using cash flows
from operations and bank borrowing under revolving lines of credit and bank
notes. The revolving lines of credit and long term notes were paid in full
at the time of the sale of the bumper production operations described above.
The Company's consolidated current assets increased from $16,268,000
at December 31, 1997 to $30,725,000 at December 31, 1998. This increase
primarily relates to the net effect of an increase in cash of $16,579,000
and a $3,126,000 decrease in inventory as a result of the sale of the
bumper production operations. The Company's consolidated current
liabilities increased from $13,160,000 at December 31, 1997 to $13,628,000
at December 31, 1998. This increase primarily relates to a $6,000,000
decrease in the line of credit that was paid off as part of the sale of the
bumper production operations, an increase of accounts payable of $1,240,000,
and an increase of income taxes payable of $7,296,000 resulting from the
gain in connection with the sale of the bumper production operations. See
below for further discussion of these changes.
Cash increased by $16,579,000 at year end 1998 over year end 1997
because of the sale of the bumper production operations. The cash balance
was unusually high in 1997 because of the sale of the Company's Boynton
Beach, Florida property for $1,238,000, which was completed on December 31,
1997. Proceeds were subsequently used in 1998 to pay down the Company's
line of credit.
Accounts receivable decreased by approximately $901,000 as of December
31, 1998 over year end 1997, which reflects the net effect of increased
accounts receivable from continuing operations of approximately $1,353,000
and a decrease in receivables of $2,254,000 from the sale of the bumper
production operations. The increase in continued operations is from the
addition of the new warehouse distribution stores and the acquisition of
CRL. The Company's subsidiaries continue to offer early payment discounts
and incentives for prompt payments to their customers.
Inventories decreased by approximately $3,126,000 at the end of 1998 as
compared to year end 1997. Inventory decreased $5,891,000 as a result of the
7
sale, but increased by approximately $2,765,000, mainly due to the acquisition
of new production facilities and distribution stores. Tools to produce
bedliners are located in Owosso, Michigan and Uniontown, Pennsylvania. Tools
used to produce tonneau cover inventory are located in Riverside, California.
Tools used to manufacture ground effects lowering packages offered by CRL
are located in Owosso, Michigan and Uniontown, Pennsylvania.
Prepaid expenses increased $97,000 between December 31, 1997 and 1998
due to advance payments against rent for the new warehouse locations.
Generally, the Company pays security deposits and the first and last
months' rent when it leases a facility. The security deposits are recorded
in deposits while the last month's rent is recorded in prepaids.
Net deferred taxes at December 31, 1998 were $1,042,000, up $407,000
over 1997.
Plant, property and equipment decreased by approximately $9,399,000
from December 31, 1997 to December 31, 1998, primarily due to the sale of
the bumper production operations. In that sale, the Company sold fixed
assets with a net book value of approximately $11,335,000. Depreciation for
continued operations was $2,444,000. The Company acquired land valued at
$782,000 during the calendar year 1998.
Notes receivable at December 31, 1998 were reduced by an $845,000
commission paid to a related party in recognition of his efforts to broker
the sale of the bumper production operations. This commission was used as a
payment to related party notes. A new note for $1,401,000 began in October
1998 to a related party. The notes receivable balance at year end is
$1,601,000.
Deferred compensation decreased by $82,000, due to normal payments of
employee compensation.
Deposits on tools and machinery decreased by approximately $384,000
during 1998 compared to 1997 mainly due to the transfer of deposits as part
of the sale of the bumper production operations.
Goodwill increased by approximately $3,789,000 from December 31, 1997 to
December 31, 1998, primarily as a result of the purchase of the Rugged Liner
Companies and the other ten acquisitions made during 1998. The value paid for
these entities exceeded the value of their assets by $4,297,000. This excess
was recorded as goodwill, and the Company is amortizing this goodwill over a
seven-year period. The balance in goodwill at December 31, 1998 was $4,169,000.
LIABILITIES AND EQUITY
Accounts payable increased from $1,838,000 at December 31, 1997 to
$3,077,000 at December 31, 1998. The increase is a result of acquiring
accounts payable from the Rugged Liner Companies and various other
8
acquisitions, such as Dealers Choice, Road and Truck and Duraliner of
Nashville, plus an increase in normal accounts payable activity from the
increased number of stores.
Income taxes payable increased from $926,000 in 1997 to $8,222,000 in
1998, primarily due to the gain recognized for the sale of the bumper
production operations.
OUTSTANDING LOANS
The Colonel's $6,000,000 line of credit was paid off with proceeds
from the sale of the bumper production operations. The Colonel's has
suspended its credit facilities with its current lending institution until
the Company deems it necessary to reopen borrowing. Interest paid during
1998 on a monthly basis was at prime and was secured by all of the
Company's assets, principally accounts receivable and inventory.
The Colonel's long-term financing was also paid off from the sale of
the bumper production operations.
BIR has a term loan in the amount of $300,000 which is secured by
property. The loan requires quarterly interest payments at 2 percent above
prime and a single principal payment of $50,000 per year through 2004.
The Colonel's entered into a capital lease to finance equipment for
the new Owosso, Michigan bedliner plant. In 1995, The Colonel's leased
$2,689,000 worth of equipment under a six-year agreement that calls for
monthly payments of $41,000 and includes an option to purchase the
equipment for $1.00 upon expiration of the lease term. That amount
represents principal and interest at rates between 7.5 and 8.5 percent. The
lease is collateralized by the machinery. In 1996, The Colonel's leased
additional equipment in the amount of $3,744,000, structured in the same
manner as noted above. The balance on this leased equipment at December
31, 1998 was $4,400,000.
The Company regularly purchases and finances delivery trucks for use
at the retail outlet stores. The Company either finances through
dealership financing resources or leases. The outstanding amount due to
financing sources at December 31, 1998 was $136,000, and due on leases was
$48,000.
The Company believes that it will be able to satisfy ongoing cash
requirements for the next 12 months and thereafter with cash flows from
operations and the proceeds of the sale of the bumper production
operations, supplemented by borrowing arrangements that may be necessary
from time to time.
9
RESULTS OF CONTINUING OPERATIONS
The comparative financial statements are divided into two sections,
the results of operations of the continuing companies and the results of
discontinued operations as the result of the sale of the bumper production
operations for the years ending December 31, 1998, 1997, 1996. Refer to
the financial statements and notes thereto included in Appendix A for
further information.
Revenues for the continuing Company were $29,932,000, $11,772,000, and
$6,477,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The $23,455,000 growth in 1998 over the same period in 1996
was primarily due to the addition and acquisitions of sixteen new factory
warehouse/stores during 1997 and 1998. CTA was started in 1996 and has
grown through acquisitions of retail outlet warehouses. CTA's wholesale
business represented $7,826,000 in 1998 compared to $7,501,000 in 1997 and
$3,712,000 in 1996. CTA's warehouses and retail outlet stores contributed
$1,400,000 in 1997, the first year of operation, and $13,600,000 in 1998.
BIR revenues increased from $2,765,000 in 1996 to $2,871,000 and $3,364,000
in 1997 and 1998, respectively. CRL, which was acquired in April 1998,
contributed $5,142,000 in the eight months of 1998 following the Company's
acquisition of it.
Cost of sales decreased from 84% in 1996 to 81% in 1997, but increased
to 89% of sales in 1998. The increase in 1998 is due to the expansion and
start up of the CTA truck accessories stores, which generally sell at lower
gross margins in an effort to establish market share, and the change in
bedliner manufacturing to a non-skid surface which has added cost to the
product. Gross profit was 11% of sales in 1998 compared to 19% in 1997 and
16% in 1996.
Selling, general and administrative expenses continue to decrease from
47% of sales in 1996 to 32% in 1997 and 22% in 1998. Although sales
increased approximately 4.6 times since 1996, SG&A expenses only increased
2.2 times.
Interest expense increased from $382,000 in 1996 to $526,000 in 1997
to $721,000 in 1998. This increase is due to the additional debt which was
used to finance the additional store inventories and an acquisition line of
credit (which was paid off when the bumper production operations were sold).
Interest income increased in 1998 by $45,000 over 1997 because of
short term investments of excess cash.
Results from continuing operations showed a loss for each of the three
years. The company plans to use the proceeds from the sale of the bumper
production operations to expand the truck accessories business and make
certain other investments as described below in subsequent events.
10
RESULTS OF DISCONTINUED OPERATIONS
As noted, in December 1998 the Company sold substantially all of the
assets of The Colonel's used in its bumper production operations. The
bumper production operations contributed $1,818,000 (net of tax) in net
profits and $11,676,000 (net of tax) from the sale of the assets. Taxes
on gain on sale of discontinued operations are approximately $5,382,000.
MARKET RISK DISCLOSURE
The Company has assets, liabilities and inventory purchase commitments
outside the United States that are subject to foreign market fluctuations.
At present, all sales transactions are conducted in United States Dollars.
The Company does not believe that it faces significant exposure to foreign
currency fluctuations. However, as the Company's sales to foreign
countries continue to expand there is a risk that such markets may suddenly
change and that the Company may have to accept payment in foreign
currencies.
The Company has a Canadian currency account which fluctuates with
the rate of exchange. Because this account is seldom used and there
presently is less than $15,000 (Canadian) in it, the Company believes
that the risks associated with this account are not material.
The Company from time to time purchases products from outside the
United States. The Company usually pays for its purchases in U.S.
Dollars. These purchases are based on the foreign countries' economic
conditions and because the Company markets and sells its products
throughout the world, it could be affected by a weak economic condition
associated with a foreign entity.
The Company currently has no outstanding borrowings. When the
Company borrows money in the future, the Company may be exposed to
changes in interest rates. The Company's interest rates are usually
based on the prime rate. If this rate changes there could be an adverse
effect on the Company's cash flow and profits.
The Company deals in a marketplace that generally has been favorably
changing over the past five years. The SUV market has increased in
the last five years. More new SUVs and trucks are now sold in the United
States than new automobiles. This market change has had a positive impact
on the Company. Any change in the buying habits of consumers would have an
adverse effect on the Company's marketplace and profit potential. Because
the Company invests up front money in tooling to manufacture models, any
downward trend would change the product mix analysis and drive costs
higher.
11
The Company's contract with the NHRA for the national race at the BIR
race facility is critical to the track. The track obtains 60% of its sales
and 70% of its profit from this race. The loss of the National race with
the NHRA will immediately impact the income potential at BIR.
The Company operates using a very thinly staffed management group.
The sudden loss of one of the key managers could have an immediate impact
on the corporation because of the lack of redundant or cross trained
personnel.
EFFECTS OF INFLATION
The Company believes that the relatively moderate inflation rate over
the last few years has not had a significant impact on the Company's
revenues or profitability. The Company does not expect inflation to have
any near-term material effect on the sales of its products, although there
can be no assurance that such an effect will not occur in the future.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No.133") which is effective for
fiscal years beginning after June 15, 2000. This statement standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by recognition of these items as
assets and liabilities in the statement of financial position and
measurement at fair value. The Company will adopt this statement effective
January 1, 2001, as required. The impact of SFAS No. 133 on the Company's
financial position and results of operations has not yet been determined.
SEGMENT REPORTING
For a discussion of the Company's business segments, see Note 17 to
the consolidated financial statements included in Appendix A.
YEAR 2000 READINESS DISCLOSURE
The "year 2000 issue" is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Accordingly, computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This situation could result in a system failure or miscalculations causing
disruptions to operations. The year 2000 issue is not limited to computer
programs or information technology systems, however. Instead, machinery
and other equipment may have date-sensitive "embedded technology" that
could result in failures or interruptions as a result of the year 2000
issue.
12
With respect to the Company's computer systems, the Company continues
to implement changes designed to provide accurate date recognition and data
processing with respect to the year 2000, including modifying existing
computer programs and converting to new programs. The Company has examined
all these systems that it believes are affected by the year 2000 problem
and believes that all of the systems have been adequately upgraded or
replaced. This study has included all of the computer systems that are
used to operate the Company's accounting, billing and customers systems,
inventory control, purchasing and payroll, alarm systems, and machine
controls.
With respect to the Company's machinery and other equipment, the
Company's management has met with representatives of the primary
manufacturer of such equipment and has been assured that the equipment will
not experience any material system interruptions or failures as a result of
the year 2000 issue. While the Company has no reason to believe that the
manufacturer's statements are incorrect, the Company has not undertaken an
independent investigation of the year 2000 readiness of all of its
machinery and other equipment.
The Company has surveyed many of its significant suppliers and
customers to determine the extent to which the Company may be vulnerable to
a failure by any of these third parties to remediate their own year 2000
problems. Based on these surveys, the Company believes that these third
parties have satisfactory plans in place to address the year 2000 problem.
The Company does not have any computer or other data links with its
customers, suppliers or others.
To date, the Company has spent approximately $270,000 to address the
year 2000 issue and estimates that it will additionally spend less than
$10,000 before year end. Such costs are being expensed as incurred and are
not expected to have a material impact on the Company's results of
operations, liquidity or financial position. The projected costs of year
2000 modifications and the projected date on which the Company believes it
will complete the project are management's best estimates, based on a variety
of assumptions. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Management does not expect any material disruptions to the Company's
operations arising from the failure of the Company's computer systems or
other equipment to properly handle the year 2000 issue. In most cases, the
Company's inventories of products should be sufficient to support sales for
some period of time following any such failure. If such problems were to
continue for an extended period of time, however, they could have a
material impact on the Company's results of operations, liquidity and
financial position. In addition, the Company could face potential adverse
effects if external systems, such as telephone lines or electrical service,
were rendered inoperable due to the year 2000 issue. Furthermore, while as
13
noted above certain third parties have stated that they are year 2000
compliant or will be in the near future, there can be no assurances that
such third parties will not experience year 2000 problems of their own,
thereby disrupting the Company's operations.
The Company is currently developing a contingency plan to respond to
address the year 2000 issue.
FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in
this report, particularly descriptions of the Company's plans to develop
and expand the business of CTA, contain forward-looking statements that are
based on management's beliefs, assumptions, current expectations, estimates
and projections about the industries in which the Company operates, the
economy, and about the Company itself. Words such as "anticipates,"
"believes," "estimates," "expects," "intends," "is likely," "plans,"
"predicts," "projects," variations of such words and similar expressions
are intended to identify such forward-looking statements. These statements
are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may
be expressed or forecasted in such forward-looking statements.
Furthermore, the Company undertakes no obligation to update, amend or
clarify forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include, but are not limited to, uncertainties relating
to changes in demand for the Company's products or trucks and SUVs; the cost
and availability of inventories, raw materials and equipment to the Company;
the degree of competition by the Company's competitors; changes in government
and regulatory policies; and changes in economic conditions. These matters
are representative of the Future Factors that could cause a difference
between an ultimate actual outcome and a forward-looking statement.
SUBSEQUENT EVENTS
In 1999, the Company purchased property along I-75 north of Flint,
Michigan for $1,150,000 to be used for future development.
The Company loaned $5,200,000 to Donald and Patsy Williamson to
purchase property near Flint, Michigan. The loan is secured by a mortgage
and personal guarantee. The mortgage calls for principal and interest
payments to be made to the company in the amount of $46,496 per month with
balance to be paid off no later than February 2005.
14
The Company purchased a Sabreliner Jet Aircraft Model 340A for
$800,000 which requires repairs of approximately $350,000. The repairs are
mainly for the major 60 month inspection and engine reconditioning,
interior work and paint. The Company expects the plane to be operational
in July 1999.
The Company purchased a 320,000 square foot building in Raisin
Township, just south of Tecumseh, Michigan. The purchase of $4,150,000
included the building which sits on 46 acres completely fenced and an
additional 104 acres outside the fence that is currently being studied for
development. The Company intends to use this facility as its headquarters,
and is considering conducting manufacturing operations at this facility as
well.
The Company signed a purchase commitment of $600,000 to erect and
install new bleacher sections at BIR race track. The stands are expected
to be installed before the NHRA National race in August 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the discussion under the heading "Market Risk Disclosure" in Item
7 above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under Item 8
are set forth in Appendix A to this Report on Form 10-K and are here
incorporated by reference.
15
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company and its subsidiaries are parties to certain transactions
with related parties which are summarized below. Many of the transactions
described below involve Donald and Patsy Williamson, husband and wife. Mr.
Williamson is the Chairman of the Board, the Chief Executive Officer and a
Director of the Company. Together, Mr. and Mrs. Williamson own
approximately 96 percent of the outstanding shares of the Company's
Common Stock.
PROMISSORY NOTES FROM DONALD J. WILLIAMSON AND RELATED ENTITIES. In
1997, the Company loaned an aggregate total of $1,044,956 to Mr. Williamson,
pursuant to two promissory notes executed in June and September 1997,
respectively. These notes bore interest at 8% and were due in bi-annual
installments beginning in September 1998. In August of 1998, $200,000 was
paid on the notes. The remaining balance has been charged to commission
expense in lieu of Mr. Williamson repaying the amount, in recognition of
Mr. Williamson's efforts in facilitating the sale.
On June 15, 1998, the Company loaned Mr. Williamson an additional
$200,000. This loan is evidence by a promissory note that is due in full
on June 30, 1999 and that bears interest at 8%.
On November 13, 1998, the Company loaned $1,401,000 to Williamson Buick-
GMC, Inc., a company owned by Mr. Williamson's wife. This loan is evidence by
a promissory note that is due in full on November 13, 1999 and that bears
interest at 8%.
In February 1999, the Company loaned $5,200,000 to South Saginaw,
L.L.C., a limited liability company owned by Mr. Williamson. To evidence
this loan, Mr. Williamson signed a mortgage providing for interest at the
annual rate of 8% and calling for monthly payments of principal and
interest beginning April 1, 1999. Mr. Williamson used the proceeds of this
loan to purchase real property in Davidson, Michigan.
LEASE OF MILAN, MICHIGAN FACILITY AND OWOSSO, MICHIGAN FACILITY. In
June of 1993, The Colonel's began leasing its former Milan, Michigan,
facility from 620 Platt Road, LLC. Donald Williamson and Patsy
Williamson are the sole members of 620 Platt Road, LLC. Rent expense to
The Colonel's for the Milan facility was $770,000 for the year ending
December 31, 1998. This lease has been canceled as a result of the
December 1998 sale of the assets of The Colonel's and the Milan facility
to AutoLign. CTA leases its Owosso, Michigan facility from 620 Platt Road,
LLC. Rent expense on this lease was $240,000 for the year ending December
31, 1998. An additional $60,000 was prepaid toward 1999 rent.
16
WILLIAMSON BUICK-GMC, INC. Mrs. Williamson owns several automobile
dealerships. The Colonel's engages in certain transactions with
these dealerships, including the purchase of automobiles, parts, and
automotive service and the lease of certain property from which rental
income is earned. During 1998, purchases of automobiles, parts and
services by The Colonel's from the Williamson dealerships were in the
amount of $191,455. CTA sold approximately $27,000 worth of bedliners to
the Williamson dealerships in 1998.
TRANSACTIONS WITH DIRECTORS. Ted M. Gans is a Director of the Company
and practices law with Ted M. Gans, P.C. During the past year, the Company
retained Ted M. Gans, P.C. for certain legal services and it is anticipated
that the Company may retain Ted M. Gans, P.C. to render certain legal
services during the current year. J. Daniel Frisina, a Director of the
Company, is Director of Global Development for Cheng Hong Legion Co., Ltd.,
which sells, among other products, automotive body replacement parts to The
Colonel's, as well as to other customers in the automotive crash parts
industry.
MARK GERMAN. Mark German is a Director and the President of the
Company. In March 1998, the Company and CRL entered into an agreement and
plan of merger to acquire the Rugged Liner Companies, each of which Mr.
German was the majority shareholder. In these transactions, the Company
paid an aggregate of approximately $4,230,451 in cash and issued an
aggregate of approximately $3,724,400 worth of the Company's Common Stock
to the shareholders of the Rugged Liner Companies, following the
adjustments as set forth in the agreement and plan of merger. The terms of
the transaction were arrived at pursuant to arms' length negotiations
between the Company and Mr. German. In March 1999, Mr. German exercised a
put option granted to him pursuant to the Rugged Liner Merger Agreement and
the Company redeemed 103,291 of his shares of Common Stock at a price of
$8.203 per share.
ITEM 14(a)(1). FINANCIAL STATEMENTS. Attached as Appendix A.
The following consolidated financial statements of The Colonel's
International, Inc. and subsidiaries are filed as a part of this report:
* Auditors' Report
* Consolidated Balance Sheets as of December 31, 1998 and
1997
* Consolidated Statements of Income for years ended December
31, 1998, 1997 and 1996
* Consolidated Statements of Stockholders' Equity for years
ended December 31, 1998, 1997 and 1996
* Consolidated Statements of Cash Flows for years ended
December 31, 1998, 1997 and 1996
17
* Notes to Consolidated Financial Statements for years ended
December 31, 1998, 1997 and 1996
* Independent Auditors' Report on Schedule II
* Schedule II - Valuation and Qualifying Accounts
* Report of Management
ITEM 14(a)(2). FINANCIAL STATEMENT SCHEDULES. Financial statement
schedules other than Schedule II have not been filed because such schedules
are either not applicable or full disclosure has been made in the financial
statements and notes thereto.
ITEM 14(a)(3). EXHIBITS. The following exhibits are filed as part of
this report.
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger between The Colonel's, Inc. and
Brainerd Merger Corporation and joined in by Brainerd
International, Inc. Incorporated by reference from Exhibit A to
the Proxy Statement of Brainerd International, Inc. for the
Annual Meeting of Shareholders of Brainerd International, Inc.
held on November 21, 1995.
2.2 Agreement and Plan of Reorganization among Brainerd
International, Inc. and The Colonel's Holdings, Inc. Incorporated
by reference from Exhibit D to the Proxy Statement of Brainerd
International, Inc. for the Annual Meeting of Shareholders of
Brainerd International, Inc. held on November 21, 1995.
2.3 Amended and Restated Asset Purchase Agreement by and between
Colonel's Acquisition Corp. (later renamed AutoLign Manufacturing
Group, Inc.), The Colonel's International, Inc., The Colonel's,
Inc. and Donald J. Williamson dated November 23, 1998.
Incorporated by reference to Appendix A to the Company's
Definitive Proxy Statement filed with the Securities and Exchange
Commission on December 7, 1998.
2.4 First Amendment to Amended and Restated Asset Purchase Agreement
by and between AutoLign Manufacturing Group, Inc. (formerly known
as Colonel's Acquisition Corp.), The Colonel's International, The
Colonel's, Inc. and Donald J. Williamson dated December 17, 1998.
Incorporated by reference to Exhibit 2(b) to the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on
December 30, 1998.
2.5 Agreement and Plan of Merger by and among The Colonel's
International, Inc., The Colonel's Rugged Liner, Inc., Rugged
18
Liner, Inc., Triad Management Group, Inc., Aerocover, Inc.,
Ground Force, Inc., and certain shareholders of the foregoing,
dated March 13, 1998. Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated May 8, 1998.
2.6 First Amendment to Agreement and Plan of Merger, by and among The
Colonel's International, Inc., The Colonel's Rugged Liner, Inc.,
Rugged Liner, Inc., Triad Management Group, Inc., Aerocover,
Inc., Ground Force, Inc., and certain shareholders of the
foregoing, dated April 23, 1998. Incorporated by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
May 8, 1998.
3.1 Articles of Incorporation of the Company, as amended.
Incorporated by reference from Exhibit 3.1 to the Company's
Report on Form 10-Q for the period ended March 31, 1997.
3.2 Bylaws of the Company, as amended. Incorporated by reference
from Exhibit 3.2 to the Company's Report on Form 10-Q for the
period ended March 31, 1997.
4.1 Articles of Incorporation. See Exhibit 3.1 above.
4.2 Bylaws. See Exhibit 3.2 above.
10.1 1995 Long-Term Incentive Plan, as amended. Incorporated by
reference from Exhibit A to the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders.<F*>
10.2 June 22, 1992 Title Rights Sponsorship Agreement between Champion
Auto Stores, Inc. and National Hot Rod Association, Inc.
Incorporated by reference from Brainerd International, Inc.'s
Registration Statement on Form S-1 (Registration No. 33-055876).
10.3 Loan Agreement between The Colonel's International, Inc. and
subsidiaries and Comerica Bank dated May 28, 1997. Incorporated
by reference from the Company's Report on Form 10-K for the year
ended December 31, 1997.
10.4 Master Revolving Note between Comerica Bank and The Colonel's
International, Inc. and subsidiaries dated March 17, 1998.
Incorporated by reference from the Company's Report on Form 10-K
for the year ended December 31, 1997.
10.5 Employment Agreement between The Colonel's, Inc. and John
Carpenter dated June 28, 1996. Incorporated by reference from
the Company's Report on Form 10-K for the year ended December 31,
1997.<F*>
19
21 Subsidiaries of the Registrant. Filed as an Exhibit to the
Company's Report on Form 10-K for the year ended December 31,
1999 as filed with the Securities and Exchange Commission on
March 31, 1999.
23 Consent of Deloitte & Touche, LLP
24 Powers of Attorney. Filed as an Exhibit to the Company's Report
on Form 10-K for the year ended December 31, 1999 as filed with
the Securities and Exchange Commission on March 31, 1999.
27 Financial Data Schedule
____________________
<F*> Management contract or compensatory plan or arrangement.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE COLONEL'S INTERNATIONAL, INC.
Dated: June 2, 1999 By: /S/ RICHARD S. SCHOENFELDT
Richard S. Schoenfeldt
Vice President-Finance and Chief Financial
Officer
(Principal Financial Officer and Duly
Authorized Representative)
21
APPENDIX A
FINANCIAL STATEMENTS
----------------------------------------------
THE COLONEL'S
INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996,
AND INDEPENDENT AUDITORS' REPORT
----------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
The Colonel's International, Inc.
Tecumseh, Michigan
We have audited the accompanying consolidated balance sheets of The
Colonel's International, Inc. (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche, LLP
June 2, 1999
A-1
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $18,303,097 $ 1,723,652
Accounts receivable - trade (net of allowance for
doubtful accounts of $1,048,000 and $493,000 at
December 31, 1998 and 1997, respectively) 3,072,330 3,973,528
Inventories (Note 4) 6,088,332 9,214,557
Prepaid expenses 522,793 425,476
Note receivable - Related party (Notes 6 and 13) 1,600,787 200,000
Deferred taxes - current (Note 10) 1,042,000 635,000
Current portion of deferred compensation (Note 11) 95,667 95,667
----------- -----------
Total current assets 30,725,006 16,267,880
PROPERTY, PLANT AND EQUIPMENT - Net
(Notes 5, 8 and 11) 16,929,227 26,328,039
OTHER ASSETS:
Note receivable - Related party (Notes 6 and 13) 844,956
Long-term portion of deferred compensation (Note 11) 173,678 255,857
Deposits 246,044 630,486
Goodwill (Note 3) 4,168,589 379,816
Other 180,349 233,246
----------- -----------
Total other assets 4,768,660 2,344,361
----------- -----------
TOTAL ASSETS (Note 8) $52,422,893 $44,940,280
=========== ===========
A-2
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
Notes payable (Note 7) $ $ 6,000,000
Current portion of long-term obligations (Note 8) 1,089,138 3,166,741
Accounts payable - trade 3,077,409 1,837,528
Accrued expenses (Note 9) 1,144,370 1,134,637
Current portion of deferred compensation (Note 11) 95,667 95,667
Income taxes payable 8,221,895 925,549
----------- -----------
Total current liabilities 13,628,479 13,160,122
LONG-TERM OBLIGATIONS, NET OF CURRENT
PORTION (Note 8) 3,942,686 8,844,055
LONG-TERM PORTION OF DEFERRED
COMPENSATION (Note 11) 173,678 255,857
DEFERRED TAXES - LONG-TERM (Note 10) 1,191,000 3,828,000
STOCKHOLDERS' EQUITY:
Common stock; 35,000,000 shares authorized at
$.01 par value, 24,631,832 and 24,177,805 shares issued
and outstanding in 1998 and 1997, respectively (Note 3) 246,318 241,778
Additional paid-in capital 9,230,911 5,606,239
Retained earnings 24,009,821 13,004,229
----------- -----------
Total stockholders' equity 33,487,050 18,852,246
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $52,422,893 $44,940,280
=========== ===========
See notes to consolidated financial statements.
A-3
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------
1998 1997 1996
SALES (Note 13) $29,931,869 $11,772,242 $ 6,476,625
COST OF SALES (Note 13) 26,709,718 9,550,184 5,439,820
----------- ----------- -----------
GROSS PROFIT 3,222,151 2,222,058 1,036,805
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,682,569 3,730,153 3,062,610
----------- ----------- -----------
Loss from operations (3,460,418) (1,508,095) (2,025,805)
OTHER INCOME (EXPENSE):
Interest expense (720,532) (526,294) (381,829)
Interest income (Note 13) 56,582 12,052 5,678
Other (5,702) (3,749) (65,884)
----------- ----------- -----------
Other expense, net (669,652) (517,991) (442,035)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT (4,130,070) (2,026,086) (2,467,840)
INCOME TAX BENEFIT (Note 10) 1,641,628 836,000 832,000
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (2,488,442) (1,190,086) (1,635,840)
----------- ----------- -----------
DISCONTINUED OPERATIONS:
Income from discontinued operations, net
of tax (Note 10) 1,818,316 4,598,845 4,157,826
Gain on sale of discontinued operations, net of
tax (Note 10) 11,675,718 - -
----------- ----------- -----------
A-4
NET INCOME $11,005,592 $ 3,408,759 $ 2,521,986
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
From continuing operations $ (0.10) $ (0.05) $ (0.07)
Income and gain from discontinued operations 0.55 0.19 0.17
----------- ----------- -----------
Net income $ 0.45 $ 0.14 $ 0.10
=========== =========== ===========
See notes to consolidated financial statements.
A-5
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
BALANCE, JANUARY 1, 1996 24,177,805 $241,778 $5,557,833 $ 7,073,484 $12,873,095
Net income - - 2,521,986 2,521,986
-
Transactions with stockholders (Note 13) - 48,406 - 48,406
----------- -------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1996 24,177,805 241,778 5,606,239 9,595,470 15,443,487
Net income - - 3,408,759 3,408,759
----------- -------- ---------- ----------- -----------
- - - -
BALANCE, DECEMBER 31, 1997 24,177,805 241,778 5,606,239 13,004,229 18,852,246
Issuance of common shares to acquire
Rugged Liner (Note 3) 454,027 4,540 3,673,078 3,677,618
Transactions with stockholders (Note 13) (48,406) (48,406)
Net income - - 11,005,592 11,005,592
----------- -------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 24,631,832 $246,318 $9,230,911 $24,009,821 $33,487,050
=========== ======== ========== =========== ===========
A-6
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,005,592 $ 3,408,759 $ 2,521,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations (13,494,034) (4,598,845) (4,157,826)
Depreciation and amortization 2,951,677 1,831,562 1,209,550
Commission payment to majority stockholders (Note 13) 946,315
Deferred tax provision (3,044,000) 289,000 (193,000)
Gain on sale of property, plant and equipment - (85,019) (24,041)
Changes in assets and liabilities that provided
(used) cash, net of effects from the 1998
discontinued operations and acquisitions:
Accounts receivable - Trade (845,429) (679,654) (276,661)
Inventories (1,438,503) (1,139,166) (1,330,437)
Prepaid Expenses (395,913) 17,546 (47,915)
Other Assets 58,143 (134,662) -
Accounts Payable 939,819 545,171 179,535
Accrued Expenses (289,490) (1,411,724) 83,287
Income taxes payable 7,296,346 (269,451) 1,195,000
------------ ----------- -----------
Net cash provided by (used in) continuing operations 3,690,523 (2,226,483) (840,522)
Net cash provided by discontinued operations 25,283,735 5,308,093 5,899,229
------------ ----------- -----------
Net cash provided by operating activities 28,974,258 3,081,610 5,058,707
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of consolidated subsidiaries, net of cash
acquired (5,404,155) - -
Expenditures for property, plant and equipment (1,684,989) (673,980) (578,676)
Proceeds from sale of property and equipment - 1,208,688 91,015
Net change in deposits (605,539) (891,840) (2,710,582)
Additions to notes receivable - related party (1,702,146) (1,044,956) 490,000
A-7
Payments received on notes receivable - related party 200,000
Payments received on notes receivable - other - 302,401
Proceeds from sale of assets held for sale - 23,000 35,000
------------ ----------- -----------
Net cash used in continuing investing activities (9,196,829) (1,379,088) (2,370,842)
Net cash provided by (used in) discontinued investing
activities 10,263,677 (2,319,537) (1,548,844)
------------ ----------- -----------
Net cash provided by (used in) investing activities 1,066,848 (3,698,625) (3,919,686)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under notes payable (6,000,000) 550,000 1,270,000
Proceeds from long-term obligations 7,214,811 7,033,387 580,015
Principal payments on long-term debt (13,633,706) (4,686,213) (3,028,821)
Principal payments on obligations under capital leases (994,360) (877,993) (273,019)
Transactions with stockholders (48,406) - -
------------ ----------- -----------
Net cash (used in) provided by financing activities (13,461,661) 2,019,181 (1,451,825)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,579,445 1,402,166 (312,804)
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,723,652 321,486 634,290
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,303,097 $ 1,723,652 $ 321,486
============ =========== ===========
(continued)
A-8
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,740,608 $ 1,308,875 $ 1,145,817
============ =========== ===========
Cash paid during the year for taxes $ 250,000 $ 2,209,268
============ ===========
SUPPLEMENTAL SCHEDULES OF NONCASH
FINANCING AND INVESTING ACTIVITIES:
Commission payment to majority shareholders in lieu of
receiving payment on remaining balance of note
receivable (Note 13) $ 946,315
============
Future inventory credits issued in connection
with acquisitions (Note 3) $ 513,223
============
Common stock issued in connection with the acquisition
of Rugged Liner Companies (Note 3) $ 3,677,618
============
Transfer of deposits to property, plant and equipment
relating to property placed in service $ 481,180 $ 1,049,255 $ 3,171,589
============ =========== ===========
Property additions from the issuance of capital leases $ 351,705 $ 3,483,673
=========== ===========
Increase in deposits from noncash interim financing $ 1,396,611
===========
A-9
Transactions with stockholders (Note 13) $ 48,406
===========
(concluded)
See notes to consolidated financial statements
A-10
THE COLONEL'S INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------
1. ORGANIZATION
The Colonel's International, Inc. (the "Company") is a holding company
for four wholly owned subsidiaries, The Colonel's, Inc. ("The
Colonel's"), The Colonel's Truck Accessories, Inc. ("CTA"), The
Colonel's Rugged Liner, Inc. ("CRL") and The Colonel's Brainerd
International Raceway, Inc. ("CBIR"). In addition, The Colonel's
Dealers Choice ("Dealers Choice") is a wholly owned subsidiary of CTA.
The Colonel's was incorporated in Michigan in 1982 and principally
designs, manufactures and distributes plastic automotive bumper
fascias and miscellaneous reinforcement beams and brackets, as
replacement collision parts to the automotive aftermarket industry in
North America. The Colonel's manufactures its products using reaction
injection molding and plastic injection molding technology and sells
its products through warehouses and a network of distributors.
Substantially all of the assets of The Colonel's were sold to
Colonel's Acquisition Corp. (a newly formed corporation which is
affiliated with an investor group) on December 17, 1998, (Note 16).
CTA began operations on January 1, 1996 and was subsequently
incorporated in Michigan in 1997. CTA produces truck bedliners for
sale to new vehicle dealers and the automotive aftermarket. CTA also
owns several retail stores and sells manufactured bedliners and other
truck accessories. CRL was formed in March of 1998 in connection with
the April 1998 acquisitions of four Pennsylvania corporations engaged
in the truck accessory business, (Note 3). CBIR was incorporated in
Minnesota in 1982 and operates a multi-purpose motor sports facility
in Brainerd, Minnesota. CBIR organizes and promotes various spectator
events relating to road and drag races.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries, The Colonel's, CTA, CRL
and BIR, from the date of acquisition. All significant intercompany
accounts and transactions have been eliminated.
INVENTORIES are stated at the lower of cost or market, cost determined
by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful
lives of the assets as follows:
A-11
Track 7 years
Buildings 15
Leasehold improvements 10-25
Equipment 5-10
Bleachers and fencing 5
Furniture and fixtures 3-10
Vehicles 3-7
Tooling 5-7
Leasehold improvements are amortized over the shorter of the life of
the lease or their estimated useful life of 10-25 years.
Expenditures for major renewals and betterments that extend the useful
life of the related asset are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. When
properties are retired or sold, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss on
disposition is recognized.
REVENUE RECOGNITION - For sales of products, revenue is recognized at
the time the product is shipped to customers. For service sales,
revenue is recognized when earned.
GOODWILL is being amortized using the straight-line method over 7
years.
RECOVERABILITY OF ASSETS - The Company evaluates long-lived assets and
certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When it is probable that undiscounted future
cash flows will not be sufficient to recover an asset's carrying
amount, the asset is written down to its fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount
or fair value less cost to sell.
ACCRUED LEGAL FEES - Legal and other professional fees are accrued
in the same period that they are incurred.
ACCRUED ENVIRONMENTAL COSTS - The Company accounts for environmental
costs when environmental assessments or remedial efforts are probable,
and the costs can be reasonably estimated. Generally, the timing of
these accruals coincide with the earlier of a feasibility study or the
Company's commitment to a plan of action based on the known facts.
A-12
Accruals are recorded based on existing technology available,
presently enacted laws and regulations, and without giving effect to
insurance proceeds. Such accruals are not discounted. As assessments
and cleanups proceed, environmental accruals are periodically reviewed
and adjusted as additional information becomes available as to the
nature or extent of contamination, methods of remediation required,
and other actions by governmental agencies or private parties.
INCOME TAXES - The Company provides for deferred income taxes under the
asset and liability method, whereby deferred income taxes result from
temporary differences between the tax bases of assets and liabilities
and their reported amounts in the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of accounts
and notes receivable, accounts and notes payable and long-term debt
are a reasonable estimate of their fair value.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the operating period.
Actual results could differ from those estimates.
EARNINGS PER SHARE - Basic earnings per share for 1998, 1997 and
1996 was calculated as net income divided by the weighted average
number of common shares outstanding of 24,491,270, 24,177,805 and
24,177,805, respectively. Diluted earnings per share was calculated
as net income divided by the weighted average number of common shares
outstanding, increased by the number of additional common shares that
would have been outstanding if the dilutive shares had been issued of
2,729, 701 and 160 for 1998, 1997 and 1996, respectively. Due to the
small number of additional potentially dilutive shares, there was no
material effect on earnings per share, therefore basic and diluted
earnings per share are the same. (Note 12).
On March 1 and September 1, 1998, options to purchase 3,175 and 3,325
shares of common stock at $8.25 and $6.88 per share, respectively,
were issued. These options were not included in the computation of
diluted earnings per share because the exercise price of the options
was greater than the average market price of the common shares
outstanding during 1998.
RECLASSIFICATIONS - Certain 1997 and 1996 amounts have been
reclassified to conform to the 1998 presentation.
A-13
3. BUSINESS COMBINATIONS
During 1998, the Company acquired inventory of $1,281,000, accounts
receivable of $219,000, property of $974,000, other assets of
$42,000, debt of $432,000, accounts payable of $359,000 and other
liabilities of $47,000 in seven separate purchases. The total cash
paid for the assets was approximately $1,265,000. In addition to cash
paid, the Company provided the seller with future credits for the
purchase of $513,000 of the Company's inventory. Goodwill of
approximately $100,000 has been recorded as a result of these
acquisitions, and is being amortized over seven years. The
acquisitions have been accounted for under the purchase method and,
accordingly, the results of operations are included in the
consolidated operating results since the date of acquisition. These
acquisitions were made for the purpose of expanding CTA.
Also, during the second quarter of 1998, the Company acquired the
Rugged Liner Companies. The acquisition has been accounted for under
the purchase method, and accordingly the results of operations are
included in the consolidated operating results since the date of
acquisition. The allocation of the purchase price to the net assets
acquired resulted in the Company acquiring inventory of $899,000,
accounts receivable of $1,052,000 property of $2,389,000, other assets
of $109,000, debt of $13,000, accounts payable of $575,000 and other
liabilities of $150,000. The total cash, stock (454,027 shares), and
other consideration paid for assets, exclusive of the liabilities
assumed, was $7,908,000. Goodwill of approximately $4,197,000 has been
recorded as a result of this acquisition and is being amortized over
seven years. In accordance with the Asset Purchase Agreement each share
of buyer's common stock issued to the shareholders of the Rugged Liner
Companies is subject to the right to require the Company to redeem such
shares up to 25% annually beginning in 1999 and ending in 2002. The
redemption price is not to be less than the per share price of $8.20
as initially calculated on the purchase date (Note 18).
The following pro forma financial information (unaudited) for
continuing operations is presented for the years ended December 31,
1998 and 1997 as if the Rugged Liner Companies and certain of the
other 1998 acquisitions had occurred on January 1, 1997:
1998 1997
Revenue $33,362,331 $25,064,825
=========== ===========
Net Loss from continuing operations $(2,770,163) $(2,299,742)
=========== ===========
A-14
Loss per share - basic and diluted $ (0.11) $ (0.10)
=========== ===========
During 1997, the Company acquired inventory of $904,000, accounts
receivable of $20,000, deposits of $20,000 and fixed assets of
$497,000 in four separate purchases. The total cash paid for the
assets was approximately $1,525,000. The acquisitions have been
accounted for under the purchase method, and accordingly the results
of the operations are included in the consolidated operating result
since the date of acquisition. Goodwill of approximately $84,000 has
been recorded as result of these acquisitions and is being amortized
over seven years. These acquisitions were made for the purpose of
expanding CTA.
4. INVENTORIES
Inventories at December 31 are summarized as follows:
1998 1997
Finished products $5,701,017 $8,644,944
Raw materials 387,315 569,613
---------- ----------
Total inventories $6,088,332 $9,214,557
========== ==========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 is summarized as follows:
1998 1997
Land and improvements $ 3,276,217 $ 2,504,400
Track 1,781,299 1,533,760
Buildings 1,201,433 930,393
Leasehold improvements 751,642 1,684,643
Bleachers and fencing 755,662 755,662
Equipment (including equipment under capital lease) 9,623,859 15,016,019
Transportation equipment 1,246,535 1,090,030
Furniture and fixtures 853,624 741,373
Tooling 3,483,510 25,709,982
Construction in progress 88,956
----------- -----------
A-15
Total 22,973,781 50,055,218
Less accumulated depreciation and amortization (6,044,554) (23,727,179)
----------- -----------
Net property, plant and equipment $16,929,227 $26,328,039
=========== ===========
The gross amount of equipment recorded under capital leases was
$7,709,814 at December 31, 1998 and 1997. The related accumulated
depreciation was $3,137,966 and $2,181,961 at December 31, 1998 and
1997, respectively.
The Company purchased land in Flint and Collinsville for a total of
$781,817 in 1998.
6. NOTES RECEIVABLE - RELATED PARTY
During the third quarter of 1997 an unsecured note receivable at an
interest rate of 8% from the majority stockholders was established for
$1,044,956 of which $200,000 was paid in 1998. In December, 1998 the
remaining balance of $844,956 plus interest of $101,359 was
cancelled and commission expense to the majority stockholder was
recorded for his efforts to consummate the sale of The Colonel's
(Note 16).
On June 15, 1998 a note receivable to the majority stockholder for
$200,000 was issued. The note is due and payable by June 30, 1999 and
bears interest at 8%.
On November 13, 1998 a note receivable to Williamson Buick-GMC, Inc. a
company affiliated through common ownership for $1,401,000 was issued.
The note is due and payable by November 13, 1999 and bears interest at
8%.
7. LINE OF CREDIT
The line of credit expired in conjunction with the sale of The
Colonel's effective December 17, 1998 (Note 16). The weighted average
interest rate on the line was 7.75% and 8.48% in 1998 and 1997,
respectively.
8. LONG-TERM OBLIGATIONS
Long-term obligations at December 31 consist of the following:
A-16
1998 1997
Term note payable to a bank, monthly principal payments of
$167,000 plus interest at the bank's prime rate plus 1/4%
November 2000, and secured by the Company's assets,
fully repaid in conjunction with the sale of The Colonel's (Note 16) $ 5,831,000
Mortgage payable to a bank, interest at the bank's prime rate
plus 2% (effective rate of 9.5% at December 31, 1998),
annual principal payments of $50,000 plus interest due quarterly,
through September 2004. Secured by underlying property $ 300,000 350,000
Capital lease obligations through December 2002; monthly
installments of $100,217 including interest at rates between
7.5% and 8.75%, collateralized by the related machinery
and equipment (see Note 11) 4,399,655 5,214,866
Capital lease obligation through March 1999; monthly
installments of $15,987 including interest at 8.5% 47,594 226,744
Vehicle financing 136,245 212,065
Other 148,330 176,121
----------- -----------
Total 5,031,824 12,010,796
Less current portion (1,089,138) (3,166,741)
----------- -----------
Long-term $ 3,942,686 $ 8,844,055
=========== ===========
The scheduled future repayments of long-term obligations at
December 31, 1998 are as follows:
1999 $1,089,138
2000 1,056,878
2001 1,209,493
2002 1,168,945
2003 457,370
Thereafter 50,000
----------
Total $5,031,824
==========
A-17
9. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
1998 1997
Accrued settlements (Note 14) $ 562,663 $ 513,977
Accrued environmental costs (Note 15) 100,000
Accrued taxes 203,726 55,301
Other 377,981 465,359
---------- ----------
Total $1,144,370 $1,134,637
========== ==========
10. INCOME TAXES
For the years ended December 31, the Company's provision for income
taxes consists of the following:
1998 1997 1996
Current:
Federal $ (891,000) $ (740,000) $ (639,000)
State (83,000) (58,000) (49,000)
----------- ---------- ----------
Total Current (974,000) (798,000) (688,000)
Deferred
Federal (603,000) (34,000) (137,000)
State (64,000) (4,000) (7,000)
----------- ---------- ----------
Total deferred (667,000) (38,000) (144,000)
Income tax benefit $(1,641,000) $ (836,000) $ (832,000)
=========== ========== ==========
Tax provision of discontinued operations $ 932,000 $2,782,000 $2,381,000
=========== ========== ==========
Tax provision for gain on sale of
discontinued operations $ 5,382,000
===========
A-18
The temporary differences which give rise to deferred tax assets and
liabilities at December 31 are as follows:
1998 1997
Current deferred tax assets:
Allowance for doubtful accounts $ 398,000 $ 183,000
Inventory obsolescence 157,000 99,000
Accrued legal 253,000 190,000
Accrued environmental cleanup -- 37,000
Other 234,000 126,000
----------- -----------
Total $ 1,042,000 $ 635,000
=========== ===========
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards $ 315,000 $ 347,000
Depreciation (914,000) (3,408,000)
Other (277,000) (327,000)
----------- -----------
Total (876,000) (3,388,000)
Valuation allowance (315,000) (440,000)
----------- -----------
Total $(1,191,000) $(3,828,000)
=========== ===========
The consolidated income tax provision differs from the amount computed
on pretax income using the U.S. statutory income tax rate for the
years ended December 31, for the following reasons:
1998 1997 1996
Federal income tax at statutory rate $(1,407,000) $(754,564) $(757,920)
State taxes (114,000) (66,411) (68,489)
Other (120,000) (15,025) (5,591)
----------- --------- ---------
Income tax benefit $(1,641,000) $(836,000) $(832,000)
=========== ========= =========
Effective tax rate 40% 36% 38%
=========== ========= =========
A-19
At December 31, 1998, the Company has net operating loss carryforwards
for tax purposes of $1,019,480 expiring 2004 to 2008. The Company has
recorded a valuation allowance on 100% of these amounts because
management believes it is more likely than not that the net operating
loss carryforwards will not be utilized due to limitations in existing
tax laws on their use.
11. COMMITMENTS
The Company leases trucks and equipment under capital leases (Notes 5
and 8). The Company also leases warehouse and retail store
space under noncancelable operating lease agreements. The warehouse
leases require that the Company pays the taxes, insurance and
maintenance expense related to the leased property. Minimum future
lease payments under noncancelable leases at December 31, 1998 are
summarized as follows:
CAPITAL OPERATING
LEASES LEASES
Years ending December 31:
1999 $1,342,408 $1,235,145
2000 1,241,794 748,201
2001 1,214,492 616,511
2002 1,202,605 512,849
2003 420,287 487,097
Thereafter 961,763
---------- ----------
Total 5,421,586 $4,561,566
Less amount representing interest 838,092 ==========
----------
Present value of minimum lease payments 4,583,494
Less current maturities 930,369
----------
Long-term portion of capital lease obligations $3,653,125
==========
Rent expense, including month to month rentals, was approximately
$2,591,978, $1,652,808 and $1,364,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Included in rent expense are
amounts paid to the related parties of the Company for rental of its
principal operating facilities (Note 13).
A-20
The Company entered into a ten-year consulting agreement beginning
January 1, 1994, with the former president of the Company. The
agreement guarantees him $52,000 per year. The Company may terminate
this agreement, but is obligated to pay the remaining compensation due
under the terms of the agreement. The Company recorded a liability
and related deferred costs for the remaining compensation due under
the terms of the agreement based upon the net present value of such
payments. The deferred cost amount is being amortized to operations
over the term of the agreement.
The Company entered into a three-year sales agency agreement beginning
March 1, 1997, and will make guaranteed payments of $102,000 per year.
The Company may terminate this agreement, but is obligated to pay a
portion of the remaining compensation due under the terms of the
agreement. The Company recorded a liability and related deferred costs
for the portion assigned to compensation. The deferred cost amount is
being amortized to operations over the term of the agreement.
The Company signed a purchase commitment of $600,000 to erect and
install new bleacher sections at the CBIR race track during 1999.
12. STOCK OPTIONS
The Company has an incentive stock option plan, 'The 1995 Long-Term
Incentive Plan' that provides for up to 3,000,000 shares of common
stock options to key employees, executive officers and outside
directors, and also permits the grant or award of restricted stock,
stock appreciation rights or stock awards. The term of the option
cannot exceed 10 years from the grant date. The vesting period for the
options is 6 months.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no
compensation cost for stock options is recognized for stock option
awards granted at or above fair market value. Had compensation cost
for the Company's stock-based compensation plan been determined based
upon fair values at the grant dates for awards under the plan in
accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income would have been $10,984,800,
$3,188,036 and $2,516,312 for 1998, 1997 and 1996, respectively. Basic
and diluted earnings per share would have been $0.45, $0.13 and $0.10
for 1998, 1997 and 1996, respectively.
The fair value of the options granted included in the above
calculation is estimated on the date of the grant using the Black-
A-21
Scholes option-pricing model with the following weighted average
assumptions used for the years ended December 31,
1998 1997 1996
Risk free interest rate 5.34% 5.74% 6.00%
Expected life 10 years 7.19 years 10 years
Expected volatility 85% 91% 53%
Dividend Yield 0% 0% 0%
Weighted average grant date fair value $ 6.53 $ 5.34 $ 4.26
Information with respect to options granted and cancelled for the
years ended December 31, is as follows:
AVERAGE PRICE
SHARES PER SHARE
Options Outstanding at December 31, 1995 - -
Options granted 2,150 $6.01
--------
Options Outstanding at December 31, 1996 2,150 $6.01
Options granted 64,625 $6.50
--------
Options Outstanding at December 31, 1997 66,775 $6.48
Options granted 6,500 $7.55
Options cancelled (10,900) $6.50
--------
Options Outstanding at December 31, 1998 62,375 $6.59
========
Summary information about the Company's stock options outstanding at
December 31, 1998 is as follows:
A-22
NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE
$5-$7 56,300 5.67 $ 6.42
$7-$9 6,075 8.67 $ 8.13
----- ------- ----- ------
$5-$9 62,375 6.00 $ 6.59
======= ===== ======
At December 31, 1998, 1997, and 1996, 59,050, 63,750 and 1,050 shares
had vested, respectively.
13. RELATED PARTY TRANSACTIONS
The primary parties related to the Company are as follows:
- The majority stockholders, with whom various transactions are
made.
- 620 Platt Road LLC ("Platt"), a company affiliated through common
ownership, to which rental payments are made for the Milan
facility and the Owosso facility.
- The Colonel's Factory Outlet of Arkansas, Inc. ("Arkansas"), a
company affiliated through common ownership, with which various
transactions are made, including sales and purchases of
inventory, and payment for and reimbursement of Arkansas'
expenses. This company was a related party through June of 1997.
- South Saginaw LLC ("Saginaw"), a company affiliated through
common ownership in which a loan was made subsequent to December
31, 1998 (Note 18).
- Williamson Buick - GMC, Inc., a company affiliated through common
ownership, from which automobiles, parts, and service are
purchased and sold, rental income is earned and a loan was made.
A summary of transactions with these related parties as of and for the
years ended December 31 is as follows:
A-23
1998 1997 1996
Majority stockholders:
Note receivable from stockholder (Note 6) $ 200,000
Note receivable from stockholders (Note 6) $1,044,956
Collection on note receivable from stockholders 200,000
Interest income on note receivable from stockholders 50,696 50,663
Commission payment to majority stockholders in
lieu of receiving payment on remaining balance of note
receivable and interest in conjunction with the sale of
The Colonel's. 946,315
Platt:
Rental payments 1,070,000 1,350,000 $1,000,000
Capital repayment 48,406
Capital contribution 48,406
Arkansas:
Sales of inventory 136,963
Williamson Buick:
Purchases of automobiles, parts and service 191,455 66,831 280,310
Rental income
Interest income on note receivable 15,598
Sales of inventory 27,000 110,043 51,198
Note Receivable 1,401,000
14. LITIGATION
The Company was both a defendant and counter-plaintiff in a suit filed
December 5, 1991, in the United States District Court, Eastern
District of Michigan, Flint, Michigan, in a private action seeking
damages under the federal anti-trust statutes. The Colonel's settled
this case in November 1997 for $100,000 and a royalty payment of $1.02
on all future sales of bedliners in excess of an annual threshold of
25,000. The royalty payments are to be paid annually until expiration
of the patent in May of 2004.
The Company had been involved in various lawsuits pertaining to a
class action suit resulting from the production of bedliners. The
suits alleged that the bedliners insulate a gas can when filled which
may cause a static charge that could result in a fire. The Company
formed a coalition with other bedliner manufacturers to defend this
class action suit. Though the Company did not produce bedliners at
A-24
the time of the alleged incidents, the Company elected to participate
in the class action suit. This suit was settled in 1998 for $144,000.
This amount is included in accrued legal expenses at December 31,
1998.
The Company and its subsidiaries are involved in various other legal
proceedings, which have arisen in the normal course of its operations.
The Company has accrued its best estimate of the cost of litigation
based on known facts. It is possible that this estimate may change in
the near term as the lawsuits progress. Although the final resolution
of any such matters could have a material effect on the Company's
operating results for the particular reporting period in which an
adjustment of the estimated liability is recorded, the Company
believes that any resulting liability should not materially affect its
financial position, results of operations or cash flows.
15. ENVIRONMENTAL REMEDIATION
The Company sold The Colonel's Inc. to Colonel's Acquisition Corp. on
December 17, 1998. The first amendment dated December 17, 1998, to the
Amended and Restated Asset Purchase Agreement, requires the Company to
provide for successful remediation of environmental matters, to the
extent not completed as of December 17, 1998. An Environmental Escrow
Fund (the "Fund") in the amount of $250,000, funded by the Company,
was established at closing as per the terms and conditions set forth
in Environmental Escrow Fund Agreement. The funds in the environmental
escrow fund shall be released periodically and paid directly to an
environmental consultant upon approval by Colonel's Inc. and Autolign,
Inc., or released to The Colonel's Inc. if not used by December 31,
2000, unless the Environmental Escrow Fund Agreement is terminated, in
writing, at an early date mutually by The Colonel's Inc. and Autolign,
Inc. in which case the unused funds will be released to The Colonel's
Inc. at such early date. The Company believes that the Fund is
adequate to cover any future environmental liabilities.
16. DISCONTINUED OPERATIONS
On December 17, 1998, the Company sold substantially all of the assets
of The Colonel's to Colonel's Acquisition Corp. for $38,000,000 plus
assumption of liabilities of approximately $900,000. The sale
resulted in a pre-tax gain of approximately $17,058,000. Results for
1997 and 1996 have been restated to classify these operations as
discontinued.
A-25
17. SEGMENTS OF BUSINESS
In 1998 the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information," which established standards for reporting
information about operating segments in annual financial statements
and requires selected information about operating segments in interim
financial reports issued to stockholders. The statement also
established standards for related disclosures about products and
services, geographic areas, and major customers. Operating segments
are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's
chief operating decision-maker is its Chief Executive Officer.
The Company's reportable segments are strategic business units that
offer different products and services. The business units have been
divided into two reportable segments; the manufacture of bedliners at
the manufacturing plants in Owosso, Michigan and Union Town,
Pennsylvania, and sale of these bedliners and other truck accessories
throughout the country ("Truck Accessories"), and operation of a
multi-purpose motor sports facility in Brainerd, Minnesota
("Raceway").
The accounting policies of the product segments are the same as those
described in Note 1 of Notes to the Consolidated Financial Statements.
The Company evaluates performance based on stand-alone product segment
operating income. Intersegment sales and transfers, interest income
and expense are not significant. Reportable segments for 1997 and
1996 have been restated to exclude the "bumper segment" which was
discontinued during 1998.
Financial information segregated by reportable product segments is as
follows:
1998 1997 1996
SALES:
Truck Accessories $26,568,227 $ 8,900,855 $ 3,711,387
Raceway 3,363,642 2,871,387 2,765,238
----------- ----------- -----------
Sub-Total 29,931,869 11,772,242 6,476,625
Discontinued Operations 26,734,953 34,577,872 33,786,457
----------- ----------- -----------
Total $56,666,822 $46,350,114 $40,263,082
=========== =========== ===========
A-26
INCOME FROM OPERATIONS:
Truck Accessories $(3,498,039) $(1,630,308) $(2,343,864)
Raceway 37,621 122,213 318,059
----------- ----------- -----------
Sub-Total (3,460,418) (1,508,095) (2,025,805)
Discontinued Operations 3,657,431 7,822,010 7,217,108
----------- ----------- -----------
Total $ 197,013 $ 6,313,915 $ 5,191,303
=========== =========== ===========
IDENTIFIABLE ASSETS:
Truck Accessories $46,795,302 $11,490,331 $ 9,485,769
Raceway 5,497,591 5,571,669 5,561,465
----------- ----------- -----------
Sub-Total 52,292,893 17,062,000 15,047,234
Discontinued Operations 27,878,280 27,563,061
----------- ----------- -----------
Total $52,292,893 $44,940,280 $42,610,295
=========== =========== ===========
CAPITAL EXPENDITURES:
Truck Accessories $ 5,192,829 $ 826,857 $ 4,555,969
Raceway 425,798 290,173 686,511
----------- ----------- -----------
Sub-Total 5,618,627 1,117,030 5,242,480
Discontinued Operations 1,606,490 3,667,508 4,675,386
----------- ----------- -----------
Total $ 7,225,117 $ 4,784,538 $ 9,917,866
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Truck Accessories $ 1,904,826 $ 1,146,495 $ 666,926
Raceway 539,307 511,781 411,980
----------- ----------- -----------
Sub-Total 2,444,133 1,658,276 1,078,906
Discontinued Operations 2,755,539 2,770,601 2,672,215
----------- ----------- -----------
Total $ 5,199,672 $ 4,428,877 $ 3,751,121
=========== =========== ===========
A-27
All of the Company's identifiable assets are located within the United
States. Net sales are attributed to the geographic areas based on the
location of the customer. The geographic distribution of the Company's
sales is set forth below:
1998 1997
United States $54,425,273 $44,927,722
Foreign 2,241,549 1,422,392
----------- -----------
Consolidated $56,666,822 $46,350,114
=========== ===========
The Company had sales of 24% to one customer in 1998 and 23% in 1997
relating to the discontinued segment.
18. SUBSEQUENT EVENTS
The Company acquired 61 acres of land in Flint, Michigan for $1,150,000
million for potential future development. The Company also acquired a
plane for $800,000 with a $350,000 commitment for repairs to the
plane.
During May 1999, the Company moved its headquarters from Milan,
Michigan to Tecumseh, Michigan in a newly acquired facility for a
purchase price of $4,150,000.
In April 1999, the Company acquired 30 used injection molding
machines for a total consideration of $805,000.
The Company loaned $5,200,000 million to South Saginaw LLC, 100% owned by
the majority stockholders of the Company for the purchase of a golf
course in Flint, Michigan. The loan is secured by the personal
guaranty of the majority stockholders.
Pursuant to Section 2.4.4 of the Asset Purchase Agreement between the
Company and the Rugged Liner Companies, on March 6, 1999, the
shareholders of the Rugged Liner Companies exercised 25% of their put
option of 113,506 shares at $8.20 per share for a total redemption price
of $931,089 (Note 3).
As per the requirements of the Securities and Exchange Commission
(SEC), the Company was required to file Form 10-K with SEC on March
31, 1999. The Company has not filed this Form as of June 2, 1999.
A-28
19. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
During the fourth quarter of 1998 the Company recorded the following
year-end adjustments which increased the loss from continuing
operations before income tax benefit for the following items:
Allowance for doubtful accounts $ 845,000
Inventory:
Obsolescence reserve 160,000
Net adjustments to reduce inventory balance 2,800,000
These inventory adjustments resulted in a negative gross profit margin
from continuing operations of approximately $2,622,000 in the fourth
quarter of 1998 on related revenues of approximately $7,948,000 (excluding
CBIR).
Under the Company's method of accounting for inventory and cost of sales,
it is necessary to perform physical inventory counts on an interim basis
and adjust the accounting records accordingly. These procedures may not
have been consistently performed in 1998. Consequently, it is not
possible to determine which portion, if any, of the above net
adjustments to reduce inventory balance applies to the previously reported
quarterly financial information for each quarter of 1998.
******
A-29
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
The Colonel's International, Inc.
Tecumseh, Michigan
We have audited the accompanying consolidated financial statements of The
Colonel's International, Inc. (the "Company") as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31,
1998, and have issued our report thereon dated May 19, 1999; such report is
included elsewhere in this Form 10-K. Our audits also included the
financial statement schedule of The Colonel's International, Inc. listed in
Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. In our opinion, based on our
audits, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche, LLP
June 2, 1999
1
THE COLONEL'S INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS DEDUCTIONS
----------------------------------
CHARGED TO CHARGED TO WRITE-OFFS
BALANCE COSTS AND TO OTHER AND BALANCE
JANUARY 1 EXPENSES ACCOUNTS DISPOSALS DECEMBER 31
DOUBTFUL ACCOUNTS RESERVES
For the year ended December 31:
1998 493,000 845,000 73,000 (363,000) 1,048,000
1997 574,000 153,000 0 (234,000) 493,000
1996 401,200 172,895 0 (95) 574,000
INVENTORY RESERVES
For the year ended December 31:
1998 268,000 158,349 134,309 (146,658) 414,000
1997 146,658 121,342 0 0 268,000
1996 146,658 0 0 0 146,658
TAX VALUATION ALLOWANCE
For the year ended December 31:
1998 440,000 0 (125,000) 315,000
1997 461,000 11,000 (32,000) 440,000
1996 510,000 0 (49,000) 461,000
2
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger between The Colonel's, Inc. and
Brainerd Merger Corporation and joined in by Brainerd
International, Inc. Incorporated by reference from Exhibit A to
the Proxy Statement of Brainerd International, Inc. for the
Annual Meeting of Shareholders of Brainerd International, Inc.
held on November 21, 1995.
2.2 Agreement and Plan of Reorganization among Brainerd
International, Inc. and The Colonel's Holdings, Inc. Incorporated
by reference from Exhibit D to the Proxy Statement of Brainerd
International, Inc. for the Annual Meeting of Shareholders of
Brainerd International, Inc. held on November 21, 1995.
2.3 Amended and Restated Asset Purchase Agreement by and between
Colonel's Acquisition Corp. (later renamed AutoLign Manufacturing
Group, Inc.), The Colonel's International, Inc., The Colonel's,
Inc. and Donald J. Williamson dated November 23, 1998.
Incorporated by reference to Appendix A to the Company's
Definitive Proxy Statement filed with the Securities and Exchange
Commission on December 7, 1998.
2.4 First Amendment to Amended and Restated Asset Purchase Agreement
by and between AutoLign Manufacturing Group, Inc. (formerly known
as Colonel's Acquisition Corp.), The Colonel's International, The
Colonel's, Inc. and Donald J. Williamson dated December 17, 1998.
Incorporated by reference to Exhibit 2(b) to the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on
December 30, 1998.
2.5 Agreement and Plan of Merger by and among The Colonel's
International, Inc., The Colonel's Rugged Liner, Inc., Rugged
Liner, Inc., Triad Management Group, Inc., Aerocover, Inc.,
Ground Force, Inc., and certain shareholders of the foregoing,
dated March 13, 1998. Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated May 8, 1998.
2.6 First Amendment to Agreement and Plan of Merger, by and among The
Colonel's International, Inc., The Colonel's Rugged Liner, Inc.,
Rugged Liner, Inc., Triad Management Group, Inc., Aerocover,
Inc., Ground Force, Inc., and certain shareholders of the
foregoing, dated April 23, 1998. Incorporated by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
May 8, 1998.
3.1 Articles of Incorporation of the Company, as amended.
Incorporated by reference from Exhibit 3.1 to the Company's
Report on Form 10-Q for the period ended March 31, 1997.
3.2 Bylaws of the Company, as amended. Incorporated by reference
from Exhibit 3.2 to the Company's Report on Form 10-Q for the
period ended March 31, 1997.
4.1 Articles of Incorporation. See Exhibit 3.1 above.
4.2 Bylaws. See Exhibit 3.2 above.
10.1 1995 Long-Term Incentive Plan, as amended. Incorporated by
reference from Exhibit A to the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders.<F*>
10.2 June 22, 1992 Title Rights Sponsorship Agreement between Champion
Auto Stores, Inc. and National Hot Rod Association, Inc.
Incorporated by reference from Brainerd International, Inc.'s
Registration Statement on Form S-1 (Registration No. 33-055876).
10.3 Loan Agreement between The Colonel's International, Inc. and
subsidiaries and Comerica Bank dated May 28, 1997. Incorporated
by reference from the Company's Report on Form 10-K for the year
ended December 31, 1997.
10.4 Master Revolving Note between Comerica Bank and The Colonel's
International, Inc. and subsidiaries dated March 17, 1998.
Incorporated by reference from the Company's Report on Form 10-K
for the year ended December 31, 1997.
10.5 Employment Agreement between The Colonel's, Inc. and John
Carpenter dated June 28, 1996. Incorporated by reference from
the Company's Report on Form 10-K for the year ended December 31,
1997.<F*>
21 Subsidiaries of the Registrant. Filed as an Exhibit to the
Company's Report on Form 10-K for the year ended December 31,
1999 as filed with the Securities and Exchange Commission on
March 31, 1999.
23 Consent of Deloitte & Touche, LLP
24 Powers of Attorney. Filed as an Exhibit to the Company's Report
on Form 10-K for the year ended December 31, 1999 as filed with
the Securities and Exchange Commission on March 31, 1999.
27 Financial Data Schedule
____________________
<F*> Management contract or compensatory plan or arrangement.