<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as Permitted
by Rule 14a-6(e)(2))
THE COLONEL'S INTERNATIONAL, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Not applicable.
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(2) Aggregate number of securities to which transaction applies: Not
applicable.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$38,000,000 is the amount of the purchase price set forth in the
Asset Purchase Agreement to which this Proxy Statement relates.
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(4) Proposed maximum aggregate value of transaction: $38,000,000
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(5) Total fee paid: $7,600
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
[COLONEL'S INTERNATIONAL LOGO]
THE COLONEL'S INTERNATIONAL, INC.
620 SOUTH PLATT ROAD
MILAN, MICHIGAN 48160
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of The Colonel's International, Inc.:
A Special Meeting of Shareholders of The Colonel's International, Inc.
(the "Company") will be held at the Company's offices at 620 South Platt
Road, Milan, Michigan 48160, on __________________, 1998, at 10:00 a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve an Amended and
Restated Asset Purchase Agreement and consummation of the
transactions contemplated by the Amended and Restated Asset
Purchase Agreement, pursuant to which substantially all of
the assets of The Colonel's, Inc., a wholly owned subsidiary
of the Company, would be sold.
2. To transact such other business as may properly come before the
Special Meeting.
The Board of Directors has fixed the close of business on December 1,
1998, as the record date for the determination of shareholders entitled to
notice of and to vote at the Special Meeting and any adjournments of the
Special Meeting. The following Proxy Statement and enclosed form of proxy
are being furnished to the holders of the Company's Common Stock on and
after __________, 1998.
Holders of Common Stock are entitled to dissenters' rights under the
Michigan Business Corporation Act pursuant to which such shareholders may
dissent from the transaction and obtain payment for their shares of Common
Stock. The relevant portions of the Michigan Business Corporation Act are
included as Appendix C to the following Proxy Statement.
By Order of the Board of Directors,
/s/ Donald J. Williamson
Donald J. Williamson, Chairman of the Board and
Chief Executive Officer
__________, 1998
YOUR VOTE IS IMPORTANT. EVEN IF YOU PLAN TO
ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD PROMPTLY.
<PAGE>
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS OF
THE COLONEL'S INTERNATIONAL, INC.
620 SOUTH PLATT ROAD
MILAN, MICHIGAN 48160
(734) 439-4200
TO APPROVE
AN AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
INVOLVING THE SALE OF SUBSTANTIALLY
ALL OF THE ASSETS OF
THE COLONEL'S, INC.,
A WHOLLY OWNED SUBSIDIARY
OF THE COMPANY
INTRODUCTION
The Colonel's International, Inc. (the "Company") is furnishing this
Proxy Statement and the enclosed form of proxy on or about __________,
1998 to holders of record of the Company's Common Stock, $0.01 par value
("Common Stock"), at the close of business on December 1, 1998 (the "Record
Date"). The Board of Directors of the Company is soliciting proxies to
vote at the special meeting of the Company's shareholders to be held on
__________________, 1998 (the "Special Meeting") and at any adjournments
of the Special Meeting. The Special Meeting will be held at the Company's
headquarters, 620 South Platt Road, Milan, Michigan 48160, at 10:00 a.m.,
local time.
The purpose of the Special Meeting is to consider and vote on approval
of the Amended and Restated Asset Purchase Agreement (the "Amended Asset
Purchase Agreement") attached as Appendix A to this Proxy Statement and
consummation of the transactions contemplated by the Amended Asset Purchase
Agreement. The Amended Asset Purchase Agreement provides for the sale (the
"Sale") of substantially all of the assets of The Colonel's, Inc., a wholly
owned subsidiary of the Company ("Seller"), to Colonel's Acquisition Corp.
("Buyer"), a newly formed Delaware corporation which is affiliated with an
investor group led by Philip B. Storm. Approval of the Amended Asset
Purchase Agreement and the Sale requires the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock.
(See "THE SALE--Vote Required.") The Company does not anticipate that any
other matter will come before the Special Meeting. Donald J. Williamson,
the Company's Chairman of the Board and Chief Executive Officer and a major
shareholder of the Company, and his wife Patsy L. Williamson have indicated
<PAGE>
that they intend to vote in favor of approval of the Amended Asset Purchase
Agreement and the Sale. Together, the Williamsons have control over
approximately 95% of the outstanding shares of Common Stock.
The Company's Board of Directors unanimously voted to approve and
adopt the original Asset Purchase Agreement dated September 14, 1998 (the
"Original Asset Purchase Agreement") at its September 8, 1998 meeting.
The Company's Board of Directors unanimously voted to approve and adopt
the Amended Asset Purchase Agreement on November 23, 1998.
Holders of Common Stock are entitled to dissenters' rights under the
Michigan Business Corporation Act (the "MBCA") pursuant to which such
holders may dissent from the Sale and obtain payment for their shares of
Common Stock in accordance with the provisions of the MBCA. See
"DISSENTERS' RIGHTS."
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR APPROVAL OF THE AMENDED ASSET PURCHASE AGREEMENT AND THE SALE
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THE SALE
SUMMARY OF CERTAIN ASPECTS OF THE SALE
The Company's shareholders should consider the following summary in
conjunction with the more detailed information appearing elsewhere in this
Proxy Statement.
NATURE OF THE TRANSACTION. Pursuant to the Amended Asset Purchase
Agreement, Seller would sell, and Buyer would purchase, substantially all
of Seller's assets used in the business of manufacturing and selling plastic
replacement bumpers, facias and related parts (the "Business").
CONSIDERATION TO BE RECEIVED IN THE SALE. The purchase price (the
"Purchase Price") for these assets is $38,000,000. See "SUMMARY OF THE
AMENDED ASSET PURCHASE AGREEMENT--Purchase Price." In addition,
Buyer would assume certain of Seller's liabilities relating to the
Business (subject to certain limitations).
CONSUMMATION OF THE SALE. Consummation of the Sale is subject to
certain conditions including, among other conditions, that the shareholders
of the Company approve the Amended Asset Purchase Agreement and the Sale and
that various ancillary agreements be entered into, including an agreement
(the "Real Estate Purchase Agreement") for the sale to Buyer of Seller's
leased facility located at 620 South Platt Road, Milan, Michigan (the "Milan
Property"), which is owned by 620 South Platt Road, L.L.C. (the "Property
Seller"), a Michigan limited liability company owned by Donald J.
Williamson, the Company's Chairman of the Board and Chief Executive
Officer, and his wife, Patsy L. Williamson. See "SUMMARY OF THE AMENDED
ASSET PURCHASE AGREEMENT--Conditions to Closing." Assuming satisfaction of
these conditions, it is anticipated that the closing (the "Closing") of the
Sale would occur on or about __________, 1998. The date of the Closing is
referred to in this Proxy Statement as the "Closing Date."
VOTE REQUIRED. Pursuant to the MBCA, the affirmative vote of the
holders of a majority of the outstanding shares of the Company's Common
Stock entitled to vote is required to approve the Amended Asset Purchase
Agreement and the Sale. Failures to vote, abstentions and broker non-votes
will have the same effect as votes against approval of the Amended Asset
Purchase Agreement and the Sale. As of the Record Date, the Company's
directors and executive officers and their affiliates held approximately 97%
of the outstanding shares of Common Stock. This number includes 23,567,080
shares of Common Stock, or approximately 95% of the outstanding shares of
Common Stock, held by Donald J. and Patsy L. Williamson, husband and wife.
See "SHARE OWNERSHIP." Mr. Williamson is the Company's Chairman of the
Board and Chief Executive Officer. Mr. and Mrs. Williamson have indicated
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<PAGE>
that they intend to vote in favor of approval of the Amended Asset Purchase
Agreement and the Sale. No approval of the Amended Asset Purchase Agreement
or the Sale by Buyer's shareholders is required.
DISSENTERS' RIGHTS. Holders of Common Stock are entitled to
dissenters' rights under the MBCA in connection with the Sale pursuant to
which such shareholders may dissent from the Sale and obtain payment for
their shares of Common Stock. See "DISSENTERS' RIGHTS."
FEDERAL INCOME TAX CONSEQUENCES. The proposed Sale will not have any
direct federal income tax consequences to the Company's shareholders. The
Sale will be accounted for under the purchase method of accounting. Upon
consummation of the proposed Sale, the Company will recognize a gain from
disposal of discontinued operations equal to the net proceeds (equal to the
sum of the consideration received less expenses of the proposed Sale) less
the net book value of the assets sold and liabilities assumed. For tax
purposes, the gain will be equal to the net proceeds of the Sale less the
tax basis of the assets sold and liabilities assumed.
OPINION OF FINANCIAL ADVISER. The Company has not sought the opinion
of a financial adviser in connection with either the Original Asset Purchase
Agreement, the Amended Asset Purchase Agreement or the Sale.
THE COLONEL'S INTERNATIONAL, INC. AND THE COLONEL'S, INC.
THE COLONEL'S INTERNATIONAL, INC. The Company, which is incorporated
under Michigan law, is a publicly held holding company with no independent
operations of its own. The Company has four wholly owned subsidiaries:
Seller, The Colonel's Truck Accessories, Inc. ("CTA"), Rugged Liner, Inc.
("Rugged Liner"), and Brainerd International Raceway, Inc. ("BIR"). In
addition, The Colonel's Dealers Choice Distribution, Inc. ("Dealers
Choice") is a wholly owned subsidiary of CTA. The Company's offices are
located at 620 South Platt Road, Milan, Michigan 48160.
The Company is the successor to Brainerd International, Inc.
("Brainerd"). Effective December 31, 1995, Brainerd merged with and into
the Company, with the Company being the surviving corporation. Pursuant to
that merger, shares of Brainerd common stock were converted into the same
number of shares of the Company's Common Stock. Also effective December
31, 1995, Brainerd Merger Corporation, a wholly owned subsidiary of
Brainerd, merged with and into Seller. Seller was the surviving
corporation in that merger and, as a result, became a wholly owned
subsidiary of the Company. At the same time, Brainerd transferred all of
its operating assets to BIR, which thereby became a subsidiary of the
Company.
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The truck accessory division of Seller was incorporated under Michigan
law as The Colonel's Truck Accessories, Inc. Effective January 1, 1997,
Seller transferred its truck bedliner operations to CTA. Rugged Liner was
formed in March 1998 in connection with the April 1998 acquisitions of four
Pennsylvania corporations engaged in the truck accessory business. Dealers
Choice was formed in August 1998 in connection with CTA's acquisition of
the stock of D.C. Sales and Leasing, Inc. and Dealer's Choice Distribution,
Inc., and the merger of those two entities with and into Dealers Choice.
The Company operates in three industry segments: manufacture of
automotive bumpers and other miscellaneous reinforcement beams and brackets
(Seller), manufacture and sale of bedliners and other truck accessories
at retail stores throughout the country (CTA, Rugged Liner and Dealers
Choice), and operation of a multi-purpose motor sports facility (BIR).
THE COLONEL'S, INC. Seller is a leading domestic manufacturer of
plastic replacement bumpers and facias for the automotive aftermarket
industry in North America. Seller designs, manufactures and distributes
plastic bumpers, facias, support beams and brackets for application as
replacement collision parts for domestic automobile models. In addition,
Seller purchases and resells plastic replacement bumpers and facias for use
as replacement collision parts on import automobile models and for models
manufactured domestically by foreign-based automobile manufacturers, and
manufactures parts for these models to a limited extent. Seller
manufactures its products through the use of reaction injection molding and
plastic injection molding technology at the Milan Property.
Seller distributes its products through warehouses operated by it or
its affiliates located in Michigan, Texas, Arizona, New Jersey and
Arkansas. Seller sells its products through a network of independent
distributors located throughout all fifty states, the District of Columbia,
Puerto Rico, Canada and Mexico. Seller's strategy is to provide a readily
available, high quality, low cost alternative to original equipment
manufacturer ("OEM") replacement bumpers, facias and other plastic
components through Seller's streamlined manufacturing process and extensive
distribution network.
COLONEL'S ACQUISITION CORP.
Buyer is a newly formed Delaware corporation and is affiliated with an
investor group led by Philip B. Storm. As of the date of this Proxy
Statement, Buyer does not have any independent operations, having been
formed for the purpose of entering into the Original and Amended Asset
Purchase Agreements and consummating the Sale. It is contemplated that,
subsequent to the consummation of the Sale, Buyer will focus exclusively on
growing Seller's current operations. Buyer's address is c/o William G.
Coon, Dean & Fulkerson, PC, 801 West Big Beaver Road, Troy, Michigan
48084-4724, telephone number (248) 362-1300.
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<PAGE>
BOARD RECOMMENDATION AND REASONS FOR THE SALE
Following the commencement by Seller of the manufacture and sale of
certain truck accessories, such as bedliners, and the subsequent
incorporation of CTA (see "THE COMPANY--The Colonel's Truck Accessories,
Inc."), the Board of Directors determined that the Company, through CTA,
has many opportunities for growth in the new and used truck accessories
market.
In early 1998, to raise additional capital for the growth of CTA's
truck accessory business, Company management met with certain financial
advisors to discuss a possible public offering of the Company's Common
Stock. In the course of those discussions, the financial advisors inquired
whether the Company would consider selling Seller or the assets of Seller.
The Board of Directors determined that such a sale may be attractive,
either as an alternative to or in addition to an equity offering, as it
could provide the Company with additional cash to fund the expansion of the
business conducted by CTA. In addition, the Board of Directors determined
that the business conducted by Seller may not have the same growth
opportunities it believes the truck accessory business offers. In the
opinion of the Company's management and its Board of Directors, selling the
assets of Seller would allow the Company to obtain funding necessary to
continue to expand its truck accessory business in a more expeditious
manner than other sources of funding.
Accordingly, the Board of Directors preliminarily determined to
explore a possible sale of Seller. During 1998, the Company received
several unsolicited offers to purchase the assets of Seller, and in one
instance discussed extensively with a third party a possible transaction
that was not consummated. In the summer of 1998, representatives of the
Company met with other potential buyers of Seller. Buyer entered into a
confidentiality agreement with Seller in June 1998 pursuant to which
certain financial and general information was exchanged and preliminary due
diligence was performed by Buyer. The parties negotiated the terms of the
Sale and entered into a letter of intent on July 31, 1998. Thereafter,
Buyer continued its due diligence review and the parties began negotiating
and drafting the definitive Original Asset Purchase Agreement, which was
signed on September 14, 1998. On September 8, 1998, the respective Boards
of Directors of Seller and the Company met to review and approve the
Original Asset Purchase Agreement and the related agreements.
The Company mailed its proxy statement relating to the Original
Asset Purchase Agreement to its shareholders on October 19, 1998 and on
October 30, 1998, the Company's shareholders approved the Original Asset
Purchase Agreement and the Sale at a Special Meeting of Shareholders.
Approximately 98.1% of the shares of the Company's outstanding Common
Stock were voted in favor of the Original Asset Purchase Agreement and the
Sale at that meeting.
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<PAGE>
The Original Asset Purchase Agreement required Seller to conduct an
audit of its business and deliver certain financial statements to Buyer
prior to the Closing. After Seller delivered these financial statements to
Buyer, Buyer notified Seller that it rejected those financial results
pursuant to the Original Asset Purchase Agreement. Thereafter, the parties
met several times to discuss certain amendments to the Original Asset
Purchase Agreement, and on November 24, 1998 entered into the Amended
Asset Purchase Agreement.
The most significant change between the Original Asset Purchase
Agreement and the Amended Assert Purchase Agreement is that the Purchase
Price decreased from $55,052,000 in the Original Asset Purchase Agreement
to $38,000,000 in the Amended Asset Purchase Agreement. The Amended Asset
Purchase Agreement contains certain other changes from the Original Asset
Purchase Agreement, which are discussed in this Proxy Statement. See
"SUMMARY OF THE AMENDED ASSET PURCHASE AGREEMENT--Material Differences
From the Original Asset Purchase Agreement."
Assuming shareholder approval of the Amended Asset Purchase Agreement
and the Sale at the Special Meeting, the Closing is expected to take place
on __________, 1998.
The terms of the Amended Asset Purchase Agreement, including the Pur-
chase Price, were the result of arm's-length negotiations between Buyer and
Seller and their respective representatives. The Company's Board of
Directors believes that the Sale will (i) despite the decrease in the
Purchase Price in the Amended Asset Purchase Agreement, provide the
Company with a fair price for the assets of Seller to be sold in the Sale
and (ii) provide the Company with cash to be used to expand the business
conducted by CTA and to pay down long-term debt. See "THE SALE--Use of
Proceeds; Business Following the Sale." In reaching its conclusion to
approve the Amended Asset Purchase Agreement and the Sale and to recommend
that the Company's shareholders approve the Amended Asset Purchase
Agreement and the Sale, the Board of Directors of the Company considered,
among others, the following factors:
(i) the terms and conditions of the Amended Asset Purchase Agreement,
including the Purchase Price and the fact that Buyer will assume
the Assumed Liabilities;
(ii) Buyer's ability to secure financing necessary to consummate the
Sale and its ability to perform and fulfill its post-Closing
obligations;
(iii) management's recommendation of the Sale
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(iv) industry conditions relating to the Business, including the
consolidation of other manufacturers and sellers of replacement
bumpers and existing competitive conditions; and
(v) the capital needs and potential growth prospects of the Company's
truck accessory business.
The Board of Directors did not assign relative weights to these
factors or determine that any factor was of particular importance. Rather,
the Board of Directors viewed its decision and recommendation as being
based on the totality of the information it considered.
The Company's Board of Directors believes that the Amended Asset
Purchase Agreement and the Sale are in the best interests of the Company
and its shareholders. Therefore, the Company's Board of Directors
unanimously recommends that the shareholders of the Company vote FOR
approval of the Amended Asset Purchase Agreement and the Sale.
USE OF PROCEEDS; BUSINESS FOLLOWING THE SALE
The Company generally intends to use the proceeds of the Sale to
expand the business conducted by CTA and the other subsidiaries of the
Company, as well as to pay down long-term debt. Upon the Closing of the
Sale, Seller, the Company and Mr. Williamson will enter into a
Noncompetition Agreement pursuant to which they will agree not to engage in
the Business currently conducted by Seller for a period of five years
following the Closing. See "SUMMARY OF THE AMENDED ASSET PURCHASE
AGREEMENT--Summary of Related Agreements."
In 1995, the Company determined that there was an opportunity within
the new and used vehicle accessories market. This opportunity was
considered to be attractive for the Company because many of such
accessories are produced from plastics that are already an integral part of
the Seller's current manufacturing capability and because such accessories
share like, though not identical, distribution systems. As a result of this
analysis, the Company formed CTA and launched the first accessory product
to be manufactured and distributed by CTA. This first product is a truck
bedliner. CTA has also started to manufacture shells, tonneau covers, bed
mats, aerocovers and ground effects packages.
During 1997, CTA purchased the assets of several companies, including
Truckware, Inc. of Baldwin Park, California, Eastern Off Road Equipment,
Inc. ("Eastern Off Road"), which has sales outlets in Pennsylvania,
Maryland, Virginia and West Virginia, Horizon Coach, Inc. of Riverside,
California, Wild Bills, Inc. of Upland, California, Bedliner Kingdom,
Inc., of Los Angeles, California, and Southland Camper Shell, Inc., of
Pomona, California. CTA believes that these purchases will allow CTA
increased access to distribution channels to facilitate retail sales of its
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manufactured products. Since year end, CTA has added retail stores in
Flint, Michigan; Charlotte, North Carolina; Nashville, Tennessee; St.
Louis, Missouri; Thousand Oaks, California; Franklin, Tennessee; Santa
Clara, California; Roseville, California; and Sacramento, California.
Also, in April 1998, through its newly formed subsidiary Rugged Liner, the
Company completed the acquisitions of four Pennsylvania corporations engaged
in the bedliner and truck accessory business. The Company believes that
these acquisitions will increase its presence in this market.
The market for bedliners is estimated at approximately 50% of the
total volume of new pickups sold in the United States, both foreign and
domestic, and is estimated to be 1,500,000 units per year. The pickup
truck and sport utility vehicle (SUV) market, which makes up a substantial
percentage of all vehicles sold, has continued to grow. As this market
expands, so does the auxiliary equipment market. CTA's truck accessories
are intended to reach this market. In addition, CTA has the ability to
install all of the products that it manufactures at each of its
sales/retail outlet stores.
The Company believes that CTA, Dealers Choice and Rugged Liner have
several opportunities for growth in the truck accessories market.
Following consummation of the Sale, the Company plans to continue expansion
in this market and to use the proceeds of the Sale primarily for CTA's
continued expansion, as well as to pay down the Company's long-term debt.
To that end, the Company has been examining potential acquisition
candidates throughout the United States.
The Sale will not have any direct effect on ownership of shares of
Common Stock. Each share of Common Stock outstanding prior to the
consummation of the Sale will remain unaffected by the Sale and each
shareholder of the Company immediately prior to the Sale will remain a
shareholder of the Company immediately after the Sale, with no change in
such shareholder's proportionate interest in the Company. Instead, the
Sale will result in the conversion of the assets currently owned by Seller
into cash.
FEDERAL INCOME TAX CONSEQUENCES
The proposed Sale will not have any direct federal income tax
consequences to the Company's shareholders. The Sale will be accounted for
under the purchase method of accounting. Upon consummation of the proposed
Sale, the Company will recognize a gain from disposal of discontinued
operations equal to the net proceeds (equal to the sum of the consideration
received less expenses of the proposed Sale) less the net book value of the
assets sold and liabilities assumed. For tax purposes, the gain will be
equal to the net proceeds of the Sale less the tax basis of the assets sold
and liabilities assumed.
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ACCOUNTING TREATMENT
The proposed Sale will be accounted for under the purchase method of
accounting as a sale of certain assets and a transfer of certain
liabilities and will be treated as discontinued operations in the Company's
financial statements.
INTERESTS OF CERTAIN PERSONS IN THE SALE
One of the conditions precedent to the parties' obligations to
consummate the Sale is that Buyer and the Property Seller shall have
consummated the sale of the Milan Property, which is currently leased by
Seller from the Property Seller. The Property Seller is a Michigan limited
liability company owned by Donald J. Williamson, the Company's Chairman of
the Board and Chief Executive Officer and a major shareholder of the
Company, and his wife, Patsy L. Williamson. Accordingly, Mr. Williamson
and his wife have an interest in the Sale different from their interests as
shareholders of the Company, because the Property Seller will receive
approximately $12 million in proceeds from the sale of the Milan Property
under the terms of the Real Estate Purchase Agreement. Both the Original
Asset Purchase Agreement and the Amended Asset Purchase Agreement
contemplated a $12 million purchase price for the Milan Property.
An additional condition precedent to the parties' obligations to
consummate the Sale is that Buyer and the following persons employed by the
Company and/or Seller shall have entered into Employment Agreements (the
"Employment Agreements") providing for Buyer's employment of such persons
following the Closing: (i) Gary Moore, the Secretary of Seller and the
Company and Seller's head of Customer Relations, (ii) Terry Sheir, Seller's
Sales Manager, and (iii) Ludwig Rupff, Seller's Plant Manager. Richard S.
Schoenfeldt, the Company's Vice President-Finance and Chief Financial
Officer, will remain with the Company following the Sale, rather than
working for Buyer, as had been contemplated under the Original Asset
Purchase Agreement.
SUMMARY OF THE AMENDED ASSET PURCHASE AGREEMENT
The Company, Seller, Mr. Williamson and Buyer are parties to the
Amended Asset Purchase Agreement. The following is a summary of certain
provisions of the Amended Asset Purchase Agreement. This summary is
qualified in its entirety by reference to the Amended Asset Purchase
Agreement, the complete text of which is attached as Appendix A to this
Proxy Statement. Terms that are not otherwise defined in this Proxy
Statement have the meanings set forth in the Amended Asset Purchase
Agreement. All shareholders of the Company are urged to read the
Amended Asset Purchase Agreement in its entirety.
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PURCHASE AND SALE OF PURCHASED ASSETS
Under the terms and conditions in the Amended Asset Purchase Agreement,
Seller will sell and Buyer will purchase all of Seller's right, title and
interest in and to the "Purchased Assets." The term "Purchased Assets" is
generally defined as all of the properties, assets and interests in properties
and assets of Seller relating to the Business, except for certain "Excluded
Assets," such as Seller's real property in West Memphis, Arkansas, its name
and logo (except to the extent that Seller's name and logo are licensed to
Buyer under the License Agreement discussed below), and various other
items. The Purchased Assets include such things as accounts and notes
receivable, inventory, (except for inventory specifically excluded by Buyer),
fixed assets, rights under contracts, prepaid expenses, intangible personal
property, licenses and permits, certain books and records, and certain other
assets and properties. In addition, Buyer will assume certain liabilities of
Seller, including real property lease obligations, accounts payable, personal
property lease obligations and accrued expenses (the "Assumed Liabilities")
subject to certain limitations.
PURCHASE PRICE
The aggregate Purchase Price for the Purchased Assets is $38,000,000.
At the Closing, Buyer will pay the Purchase Price in immediately available
funds and assume the Assumed Liabilities. The Original Asset Purchase
Agreement, which had contemplated a Purchase Price of $55,052,000,
provided that $10,000,000 of that amount would be paid under a fifteen-
year promissory note from Buyer to Seller. The Amended Asset Purchase
Agreement provides that the entire Purchase Price will be paid at the
Closing. Unlike the Original Asset Purchase Agreement, the Amended
Asset Purchase Agreement does not provide for certain "net worth" and
"net working capital" adjustments to be made to the Purchase Price.
See "--Material Differences From the Original Asset Purchase Agreement,"
below.
CLOSING
The Company anticipates that the Closing of the Sale will take place
on __________, 1998 if the Company's shareholders approve the Amended Asset
Purchase Agreement and the Sale at the Special Meeting and the other
conditions set forth in the Amended Asset Purchase Agreement and under
applicable laws are satisfied. See "SUMMARY OF THE AMENDED ASSET PURCHASE
AGREEMENT--Conditions to Closing," below.
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REPRESENTATIONS AND WARRANTIES; SURVIVAL
In the Amended Asset Purchase Agreement, each of the parties has made
certain representations and warranties. Seller, the Company and Mr.
Williamson have represented and warranted to Buyer as to matters such as
Seller's ownership of the Purchased Assets; the abilities of Seller, the
Company and Mr. Williamson to enter into and perform their respective
obligations under the Amended Asset Purchase Agreement; certain tax matters;
Seller's compliance with applicable laws, including environmental laws;
Seller's intellectual property; Seller's labor relations and employee
benefit plans; the absence of certain matters affecting the Business
between December 31, 1997 and the date of the Amended Asset Purchase
Agreement; and Seller's actions in response to the "Year 2000 problem."
These representations and warranties are set forth in Article II of the
Amended Asset Purchase Agreement, which is attached as Appendix A to this
Proxy Statement.
Buyer has also made a number of representations and warranties to
Seller, including those concerning Buyer's ability to enter into and
perform the Amended Asset Purchase Agreement and Buyer's assumption and
payment of the Assumed Liabilities. Buyer's representations and warranties
are set forth in Article III of the Amended Asset Purchase Agreement.
Most of the parties' respective representations and warranties will
survive for a period of 18 months following the Closing Date, with the
following exceptions: (i) Seller's representations relating to taxes will
survive for so long as any taxing authority has the power to make any
claim, assessment or reassessment with respect thereto; (ii) Seller's
representations relating to environmental compliance will survive for five
years from the Closing Date; (iii) Seller's representations contained in
Sections 2.01 (title to property), 2.02 (authority and consent), 2.03
(consents and approvals) and 2.04 (corporate organization) and Buyer's
representations contained in Sections 3.01 (authority and consent) 3.02
(consents and approvals) and 3.04 (corporate organization) of the Amended
Asset Purchase Agreement will survive indefinitely. In addition, if a party
makes a timely claim for indemnification (discussed below) with respect to
a particular representation or warranty before that representation or
warranty has expired, then the claim period will be extended until that
matter has been fully resolved.
INDEMNIFICATION
INDEMNIFICATION BY SELLER AND THE COMPANY. In Article IX of the Amended
Asset Purchase Agreement, Seller and the Company have agreed to indemnify,
defend and hold harmless Buyer from any losses arising out of (i) any
misrepresentation, breach of warranty or nonfulfillment of any of the
covenants or agreements of Seller, the Company or Mr. Williamson contained
in the Amended Asset Purchase Agreement or any related agreement or document;
-12-
<PAGE>
(ii) any liability of Seller other than the Assumed Liabilities; (iii)
certain environmental matters arising out of conditions in existence on the
Closing Date; (iv) certain tax matters; and (v) any and all actions, suits,
investigations, proceedings, demands, assessments, audits and judgments
arising out of any of the foregoing. In addition, Seller and the Company
agreed in the Amended Asset Purchase Agreement to indemnify and hold Buyer
harmless from and against any losses arising out of noncompliance with bulk
sales laws.
INDEMNIFICATION BY BUYER. Buyer has agreed to indemnify, defend and
hold harmless Seller from any losses arising out of (i) any Assumed
Liability; (ii) any misrepresentation, breach of warranty or nonfulfillment
of any of the covenants or agreements of Buyer contained in the Amended
Asset Purchase Agreement or any related agreement or document; (iii) any
liability of Buyer other than the Excluded Liabilities (which are defined
as all of Seller's liabilities other than the Assumed Liabilities) and (iv)
any and all actions, suits, investigations, proceedings, demands,
assessments, audits and judgments arising out of any of the foregoing.
GENERAL PROVISIONS CONCERNING INDEMNIFICATION. The parties' indemnity
obligations set forth in Article IX of the Amended Asset Purchase Agreement
are subject to a number of important exceptions and qualifications, including
the following. Buyer will not be entitled to indemnification with respect
to any breach of any representation, warranty, agreement or covenant by
Seller if, prior to the signing of the Amended Asset Purchase Agreement or
the Closing Date, certain of Buyer's representatives had actual knowledge of
the breach. In addition, neither party will be entitled to indemnification
unless and until its indemnity claims exceed $175,000 (the "Basket"), and
then only to extent that the party's claims exceed the Basket. The maximum
amount that either party may claim for indemnification is $17 million (the
"Cap"). However, the Basket and the Cap do not apply to certain
environmental matters.
PAYMENT OF INDEMNITY OBLIGATIONS. Generally, the indemnifying party
must pay the indemnified party the amount of the indemnification claim
within 15 days after the parties agree on the amount of the claim or the
claim is reduced to a final judgment of a court. However, Buyer has the
option of offsetting its indemnification claims against amounts owing by it
under the Note.
CERTAIN COVENANTS OF THE PARTIES
The parties have agreed to observe a number of covenants. For example,
Seller has agreed that, between the date of the Amended Asset Purchase
Agreement and the Closing Date, it will operate the Business only in the
ordinary course of business. The Amended Asset Purchase Agreement sets forth
a number of specific actions that Seller has agreed to refrain from taking
during that time period.
-13-
<PAGE>
CONDITIONS TO CLOSING
CONDITIONS TO OBLIGATIONS OF BUYER. The Amended Asset Purchase Agreement
provides that Buyer is not obligated to proceed to Closing unless certain
conditions are met (or Buyer waives fulfilment of any such conditions),
including the following:
(i) Seller has executed and delivered to Buyer all of the documents
and items required to be delivered by Seller at the Closing;
(ii) Each of the representations and warranties made by Seller, the
Company and Mr. Williamson in the Amended Asset Purchase Agreement
must be true and correct in all material respects at and as of the
Closing Date with the same force and effect as though made at and
as of the Closing Date;
(iii) Seller's Board of Directors and shareholder must have
approved the Sale and all permits, authorizations, approvals
and consents of third parties reasonably required in
connection with the consummation of the Sale must have been
duly obtained and shall be in full force and effect on the
Closing Date;
(iv) Except as Seller specifically discloses to Buyer, the business,
operations, financial condition, assets, liabilities, employee
relations, customer relations, and supplier and vendor relations
of Seller as of the Closing Date must not have changed in a
materially adverse manner since January 1, 1998 and, since January
1, 1998, Seller must have operated the Business and maintained its
assets and liabilities (including the Purchased Assets and the
Assumed Liabilities) in the ordinary course of business consistent
with past practices;
(v) Gary Moore, Terry Sheir and Ludwig Rupff must have entered into
their respective Employment Agreements;
(vi) The Company, Seller and Mr. Williamson each must have entered
into a noncompetition agreement with Buyer (the "Noncompetition
Agreement") (described below);
(vii) Buyer and the Property Seller must have consummated the
purchase and sale of the Milan Property;
(viii) Buyer must be satisfied, in its sole discretion, with the
results of its due diligence investigation of Seller and the
Business;
-14-
<PAGE>
(ix) Buyer shall have entered into an agreement with a nationally
recognized accounting firm to prepare (A) audited financial
statements of Seller's Business as of November 30, 1998, and for
the eleven months then ended and (B) a closing balance sheet of
Seller as of the Closing (the "Closing Balance Sheet")
(x) Buyer and the Company must have entered into a license agreement
granting Buyer certain rights to use the "The Colonel's"
registered and unregistered trademarks and tradenames (the
"License Agreement");
(xi) Buyer and Seller must have entered into a lease of Seller's
warehouse located in West Memphis, Arkansas (the "Lease"); and
(xii) Seller and the Company must have delivered to Buyer a certificate
concerning, among other things, Seller's and the Company's
cooperation with Buyer's accountants in preparing the audited
financial statements of Seller's Business as of November 30, 1998,
and for the eleven months then ended and their cooperation with an
environmental consulting firm with respect to certain
environmental investigations.
CONDITIONS TO THE OBLIGATIONS OF SELLER. Seller is not obligated to
proceed to Closing unless certain conditions are met (or Seller waives
fulfilment of any such conditions), including the following:
(i) Buyer has executed and delivered to Seller all of the documents
and items required to be delivered by Buyer at the Closing;
(ii) Each of the representations and warranties made by Buyer in the
Amended Asset Purchase Agreement must be true and correct in all
material respects at and as of the Closing Date with the same
force and effect as though made at and as of the Closing Date;
(iii) Buyer must have performed and complied in all material
respects with all the covenants, agreements, obligations and
conditions required to be performed or complied with by
Buyer at or prior to the Closing Date;
(iv) Buyer must have entered into the Employment Agreements;
(v) Buyer must have entered into the Noncompetition Agreement;
(vi) Buyer and the Property Seller must have consummated the purchase
and sale of the Milan Property; and
(vii) Buyer and Seller must have entered into the Lease.
-15-
<PAGE>
The parties have been granted early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company
is not aware of any other federal or state regulatory requirements that must
be complied with or approvals obtained in connection with the Sale. However,
Seller has agreed to use its best efforts to transfer certain permits and
licenses to Buyer. The transfer of such permits and licenses may be subject
to certain governmental approvals.
EARNEST MONEY DEPOSIT; TERMINATION
Upon execution of the Original Asset Purchase Agreement, Buyer deposited
with the Company's and Seller's attorneys a deposit of $100,000 (the "Earnest
Money Deposit"). If the Sale is consummated, the Earnest Money Deposit
will be credited toward the Purchase Price. However, if the Sale is not
consummated, and the reason the Sale is not consummated is a reason other
than a Refund Reason (as defined below), the Earnest Money Deposit will be
paid to Seller as liquidated damages. If the Sale is not consummated for a
Refund Reason, the Earnest Money Deposit will be returned to Buyer. The
"Refund Reasons" are (i) the Company's inability to obtain approval of the
shareholders of the Company prior to December 17, 1998, (ii) a material
breach by Seller of any covenant, representation or warranty contained in
the Amended Asset Purchase Agreement, (iii) Buyer's rejection of Seller's
updated Disclosure Schedules, and (iv) the failure of Seller's annualized
EBIT (earnings before interest and taxes) for fiscal year 1998, as adjusted
for certain expenses pursuant to the Asset Purchase Agreement, to equal or
exceed $7 million.
The Amended Asset Purchase Agreement may be terminated, and the Sale
abandoned, at any time before the Closing by mutual consent of Buyer and
Seller. Buyer may unilaterally terminate the Amended Asset Purchase Agreement
by giving written notice to Seller on or before the Closing Date if (i) the
Closing does not occur before December 17, 1998 through no fault of Buyer;
(ii) Buyer is not reasonably satisfied with the results of its due diligence
review of Seller; (iii) Seller's annualized EBIT for fiscal year 1998, as
adjusted for certain expenses pursuant to the Amended Asset Purchase
Agreement, does not equal or exceed $7 million; (iv) Buyer rejects the updated
Disclosure Schedules within five days after they are delivered to Buyer or
(v) Buyer reasonably concludes that all of the conditions to Closing set
forth in Article VI of the Amended Asset Purchase Agreement cannot be
satisfied. Seller may unilaterally terminate the Amended Asset Purchase
Agreement by giving written notice to the Buyer on or before the Closing Date
if (i) the Closing does occur before December 17, 1998 through no fault of
Seller or Mr. Williamson or (ii) Seller reasonably concludes that all of the
conditions to the Closing set forth in Article VII of the Amended Asset
Purchase Agreement cannot be satisfied. In general, if the Amended Asset
Purchase Agreement is terminated for reasons other than breach, it will be of
no further effect, with no liability on the part of any party to it.
-16-
<PAGE>
SUMMARY OF RELATED AGREEMENTS
As described above, the parties' respective obligations to consummate
the Sale are subject to the conditions that the following agreements (among
others) be executed: (i) the Employment Agreements; (ii) the Real Estate
Purchase Agreement between Buyer and the Property Seller relating to the
Milan Property; (iii) the License Agreement; and (iv) the Noncompetition
Agreement. There are three Employment Agreements, one for each of Gary
Moore, Terry Sheir, and Ludwig Rupff. Each Employment Agreement provides
that Buyer will employ the applicable person after the Closing, upon the
specific terms and conditions of that Employment Agreement. Accordingly,
none of Messrs. Moore, Shier or Rupff will be employed by the Company or
Seller following the Closing. Each Employment Agreement also contains
certain noncompetition provisions, pursuant to which each employee must
refrain from certain activities competitive with Buyer for a period of two
years from the termination of his employment with Buyer.
The Real Estate Purchase Agreement generally provides for the sale of
the Milan Property by the Property Seller to Buyer for a purchase price of
$12 million. Consummation of the sale contemplated by the Real Estate
Purchase Agreement is contingent on the consummation of the transactions
contemplated by the Amended Asset Purchase Agreement. Under the License
Agreement, Buyer will have the right to use the name "The Colonel's" on a
royalty-free basis for five years following the Closing, provided that it
observes the conditions of the License Agreement. Under the Noncompetition
Agreement, the Company, Seller and Mr. Williamson will agree not to compete
with Buyer in the Business of manufacturing replacement bumpers or facias
for a period of five years, to keep certain information concerning the
Business confidential for a period of five years following the Closing and
to refrain from taking certain other actions during that period.
MATERIAL DIFFERENCES FROM THE ORIGINAL ASSET PURCHASE AGREEMENT
This summary of material differences between the Original Asset
Purchase Agreement and the Amended Asset Purchase Agreement should be read
in conjunction with, and is qualified in its entirety by reference to, the
Amended Asset Purchase Agreement, the complete text of which is attached as
Appendix A to this Proxy Statement.
PURCHASE PRICE; NO ADJUSTMENTS TO PURCHASE PRICE. One of the
principal differences between the Original Asset Purchase Agreement and the
Amended Asset Purchase Agreement is that the Purchase Price has been
reduced from $55,052,000 to $38,000,000. However, unlike the Original
Asset Purchase Agreement, the Amended Asset Purchase Agreement does not
contain provisions for adjustments to the Purchase Price.
The Original Asset Purchase Agreement provided that the Purchase Price
would be increased or decreased to the extent that the amount of Seller's
-17-
<PAGE>
"Net Working Capital" (as defined in the Original Asset Purchase Agreement)
as of the Closing Date was greater than or less than Seller's Net Working
Capital as of December 31, 1997. The Original Asset Purchase Agreement also
provided that the Purchase Price would be decreased to the extent that the
net book value of the Purchased Assets as of the Closing Date was less than
the net book value of the Purchased Assets as of December 31, 1997. Again,
these adjustment provisions are not present in the Amended Asset Purchase
Agreement.
NO PROMISSORY NOTE. The Original Asset Purchase Agreement provided
that $10,000,000 of the original Purchase Price would be payable pursuant
to Buyer's promissory note over a fifteen-year period and further required
Seller and the Company to enter into a Subordination Agreement with Buyer's
lender. Under the terms of the Amended Asset Purchase Agreement, the
entire Purchase Price will be paid by Buyer in immediately available funds
at the Closing. Consequently, there is no requirement that Seller or the
Company enter into a Subordination Agreement with Buyer's lender.
INDEMNIFICATION. To reflect the decrease in the Purchase Price, the
Cap for certain indemnity claims was reduced from $25 million to $17
million. No change was made in the amount of the Basket for certain
indemnity, which remains at $175,000. Furthermore, because Buyer will not
issue a promissory note in partial payment of the Purchase Price (which was
contemplated under the Original Asset Purchase Agreement), Buyer's rights
to set off indemnity claims against such note have been deleted from the
Amended Asset Purchase Agreement.
DISCLOSURE SCHEDULE. Under the terms of the Original Asset Purchase
Agreement, Seller delivered its Disclosure Schedule (which contained
exceptions to certain of Seller's representations and warranties) prior to
the signing of the Original Asset Purchase Agreement. The Amended Asset
Purchase Agreement contemplates that Seller will deliver an updated
Disclosure Schedule at least ten days prior to the Closing and that, within
five business days following such delivery, Buyer may reject Seller's
Disclosure Schedule and terminate the Amended Asset Purchase Agreement.
TERMINATION. The Amended Asset Purchase Agreement may be terminated,
and the Sale abandoned, at any time before the Closing by mutual consent of
Buyer and Seller. Buyer may unilaterally terminate the Amended Asset
Purchase Agreement by giving written notice to Seller on or before the
Closing Date if (i) the Closing does not occur before December 18, 1998
(the Original Asset Purchase Agreement contemplated November 30, 1998)
through no fault of Buyer; (ii) Buyer is not reasonably satisfied with the
results of its due diligence review of Seller; (iii) Seller's annualized
EBIT for fiscal year 1997 does not equal or exceed $7,000,000 (the Original
Asset Purchase Agreement had provided that this Refund Reason was the
failure of Seller's EBIT for fiscal 1997 to equal or exceed $10,200,000);
(iv) Buyer rejects the updated Disclosure Schedule within five days after
-18-
<PAGE>
it is delivered to Buyer (the Original Asset Purchase Agreement had
given Buyer the right to reject certain financial statements, rather than
the disclosure schedule) or (v) Buyer reasonably concludes that all of the
conditions to Closing set forth in Article VI of the Amended Asset Purchase
Agreement cannot be satisfied. Seller may unilaterally terminate the
Amended Asset Purchase Agreement by giving written notice to the Buyer on or
before the Closing Date if (i) the Closing does occur before December 18,
1998 (the Original Asset Purchase Agreement contemplated November 30, 1998)
through no fault of Seller or Mr. Williamson or (ii) Seller reasonably
concludes that all of the conditions to the Closing set forth in Article VII
of the Amended Asset Purchase Agreement cannot be satisfied.
CONDITIONS TO CLOSING. As a result of various changes from the
Original Asset Purchase Agreement to the Amended Asset Purchase Agreement,
the parties' respective obligations to consummate the Sale are subject to
different conditions precedent than had been the case under the terms of
the Original Asset Purchase Agreement. In particular, Seller is no longer
under an obligation to engage an accounting firm to prepare a closing
balance sheet and Seller and the Company will be obligated to deliver a
certificate stating that they have fully cooperated in the preparation of
the audited financial statements of Seller's Business as of November 30,
1998, and for the eleven months then ended, as well as certain
environmental investigations. The closing conditions also vary in
numerous other minor respects from the Original Asset Purchase Agreement.
-19-
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected statement of operations and
balance sheet data for the periods indicated. The selected statement of
operations data and balance sheet data, at or for each of the years presented
below, was derived from the consolidated financial statements of the Company,
which have been audited by Deloitte & Touche LLP, independent auditors, and
which are set forth in Appendix B to this Proxy Statement. The selected
consolidated statement of operations and balance sheet data for the nine
months ended September 30, 1998 were derived from the unaudited consolidated
financial statements of the Company (also set forth in Appendix B), which
include all adjustments which management considers necessary for a fair
presentation of the data for such periods, all of which were of a normal
recurring nature. The results of the nine months ended September 30, 1998 are
not necessarily indicative of results to be expected for the full year. The
following table also sets forth pro forma statement of operations data for
1997 and 1996 and for the nine months ended September 30, 1998. The pro
forma statement of operations data set forth below is for informational
purposes only and may not be indicative of the results of operations of the
Company as they may be in the future or the results of operations of the
Company that would have been achieved had the Sale been consummated at the
assumed dates. The table should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Company's financial statements and related notes included in Appendix
B.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------- ------------- --------------
1995 1996 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
---------------------------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 28,503,726 $40,263,082 $46,350,114 $ 34,327,945 $ 43,333,927
Income from continuing operations $ 1,862,474 $ 2,521,986 $ 3,408,759 $ 2,977,610 $ 2,485,717
Income from continuing operations per
basic and diluted common share $ 0.10 $ 0.14 $ 0.12 $ 0.10
Pro forma net income per basic and
diluted share $ 0.11 <Fa>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net sales <Fb> $ 6,476,625 $11,772,242 $ $ 21,860,695
Income (loss) from continuing operations <Fb> $(2,490,421) $(2,030,656) $ $ 295,240
Income (loss) from continuing operations per
basic and diluted common share <Fb> $ (0.10) $ (0.08) $ $ 0.01
-20-
<PAGE>
BALANCE SHEET DATA:
Book value per share $ 0.53 $ 0.64 $ 0.78 $ 0.76 $ 1.01
Total assets $ 38,243,986 $42,610,295 $44,980,280 $44,847,573 $ 59,509,231
Long-term obligations $ 11,489,160 $10,189,908 $12,010,796 $12,661,095 $ 15,890,383
PRO FORMA BALANCE SHEET DATA (END OF
PERIOD):
Book value per share $ 1.47
Total assets $ 57,861,195
Long-term obligations $ 4,290,444
</TABLE>
-21-
<PAGE>
NOTES TO SELECTED FINANCIAL DATA:
(a) Effective December 31, 1995, the Company changed its tax status
from an S corporation to a C corporation for federal income tax
purposes. Pro forma net income per share for 1995 was computed by
dividing net income, adjusted to give effect to the change in tax
status of the Company as if such change and the acquisition of
Brainerd had occurred at the beginning of the period, by the weighted
average number of shares of Common Stock outstanding (24,177,805).
(b) Pro forma statement of operations data for the year ended
December 31, 1995 is not included as the operations of the
consolidated Company were substantially the operations of Seller and
thus the Company would have had no operations, giving effect to the
Sale.
(c) No dividends were paid by the Company on its Common Stock during
the periods presented.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements are based
upon the historical financial statements of the Company included in
Appendix B. The unaudited pro forma balance sheet has been prepared
to give effect to the Sale, as though it had been consummated on September
30, 1998. The unaudited pro forma statements of operations give
effect to the Sale and the use of the Sale proceeds as though the Sale
had been consummated as of the beginning of the earliest period presented.
Pro forma statement of operations data for the year ended December 31, 1995
is not included as the operations for the consolidated Company were
substantially the operations of Seller and thus the Company would have
had no operations, giving effect to the Sale.
The unaudited pro forma financial statements do not purport to be
indicative of the results that would have been obtained had the Sale
described above occurred as of the assumed dates. In addition, the
pro forma statements of operations do not purport to reflect the
actual results that would have been achieved had the Sale been
consummated on January 1, 1998, 1997 and 1996 or project the Company's
results of operations for any future period.
The unaudited pro forma financial statements should be read in
conjunction with the consolidated financial statements of the Company
and the notes thereto as included in Appendix B.
-22-
<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
THE COLONEL'S PRO FORMA CONSOLIDATED
INTERNATIONAL, INC. ADJUSTMENTS JUNE 30, 1998
------------------- ----------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,300,241 $ 37,290,000 <Fa> $
(16,428,110) <Fb> 22,162,131
Accounts Receivable 6,840,629 (2,528,392) <Fa> 4,312,237
Inventories 13,795,542 (5,501,763) <Fa> 8,293,779
Note Receivable - Related Party 200,000 0 200,000
Prepaid Expenses and Other Assets 1,596,414 (567,723) <Fa> 1,028,691
------------- ------------ ------------
23,732,826 12,264,012 35,996,838
NON-CURRENT ASSETS:
Property, Plant and equipment - Net 29,281,569 (13,182,638) <Fa> 16,098,931
------------- ------------ ------------
29,281,569 (13,182,638) 16,098,931
OTHER ASSETS:
Note Receivable - Related Party 746,315 0 746,315
Long-Term Portion of Deferred Compensation 228,176 0 228,176
Deposits 1,360,359 (729,410) <Fa> 630,949
Goodwill 3,152,403 0 3,152,403
Other 1,007,583 0 1,007,583
------------- ------------ ------------
6,494,836 (729,410) 5,765,426
TOTAL ASSETS $ 59,509,231 $ (1,648,036) $ 57,861,195
============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 6,450,132 $ (6,350,132) <Fb> $ 100,000
Current Portion of Long-Term Obligations 2,069,598 (547,638) <Fb> 1,521,960
Accounts Payable - Trade 4,500,910 (1,260,000) <Fa> 3,240,910
Accrued Expenses 1,394,296 338,221 <Fa> 1,732,517
Income Taxes Payable - Related to Sale 0 6,596,557 <Fa> 6,596,557
-23-
<PAGE>
Income Taxes Payable 1,422,514 0 1,422,514
------------- ------------ ------------
15,837,450 (1,222,993) 14,614,457
NON-CURRENT LIABILITIES:
Long Term Obligations, Net of Current
Portion 13,820,785 (9,530,340) <Fb> 4,290,445
Long-Term Portion of Deferred Compensation 228,176 0 228,176
Deferred Taxes - Long Term 4,655,644 (2,155,000) <Fa> 2,500,644
------------- ------------ -----------
18,704,605 (11,685,340) 7,019,264
STOCKHOLDERS' EQUITY:
Common Stock: 35,000,000 shares authorized
at $.01 par value, 24,631,832 shares issued
and outstanding, 246,318 0 246,318
Additional Paid-in Capital 9,230,912 0 9,230,912
Gain on Sale of Assets 0 11,260,297 <Fa> 11,260,297
Retained Earnings 15,489,946 0 15,489,946
------------- ------------ -----------
24,967,176 11,260,298 36,227,474
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,509,231 $ (1,648,036) $ 57,861,195
============= ============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
-24-
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) To reflect the Sale, for an estimated net cash consideration of
$37,290,000 ($38,000,000 less estimated expenses related to the
transaction) and the resulting pretax gain of $16,399,000.
<TABLE>
<CAPTION>
AMOUNT
------
(000)
<S> <C> <C>
Aggregate cash consideration, net of estimated fees and expenses $ 37,290
TOTAL CONSIDERATION $ 37,290
==========
CARRYING VALUE OF ASSETS SOLD AND LIABILITIES ASSUMED
Receivables 2,528
Inventories 5,502
Prepaid expenses 209
Deposits 729
Net property, plant and equipment 13,183
Accounts payable and accrued liabilities (1,260)
----------
NET ASSETS SOLD 20,891
----------
PRE-TAX GAIN 16,399
----------
Income Tax expense:
Current Income taxes 6,597
Deferred income taxes (1,796)
----------
4,801
Michigan Single Business Tax 338
----------
Total tax expense 5,139
NET OF TAX GAIN $ 11,260
==========
</TABLE>
(b) To reflect the repayment of borrowings of the Company ($16,428,110
consisting of $6,897,770 classified as current and $9,530,340
classified as non-current).
-25-
<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
THE COLONEL'S PRO FORMA CONSOLIDATED
INTERNATIONAL, INC. ADJUSTMENTS JUNE 30, 1998
------------------- ----------- -------------
<S> <C> <C> <C>
Sales $ 43,333,927 $ (21,473,232) <Fa> $ 21,860,695
Cost of Sales 31,033,227 (14,878,241) <Fa> 16,154,986
------------ ------------- ------------
Gross Profit 12,300,700 (6,594,991) 5,705,709
Selling, General and Administrative
Expenses 7,235,955 (2,146,824) <Fa> 5,089,131
------------ ------------- ------------
Income from Operations 5,064,745 (4,448,167) 616,578
Other Income (Expense)
Interest Expense (1,391,391) 1,022,006 <Fb> (369,385)
Interest Income 61,281 11,957 <Fb> 73,238
Rental Income 55,000 (55,000) -
Other (16,537) (8,654) <Fa> (25,191)
------------ ------------- ------------
Net Other Expenses (1,291,647) 970,309 (321,338)
Net Income (Loss) Before Taxes 3,773,098 (3,477,858) 295,240
Provision for Income Taxes (Benefit) 1,287,381 (1,287,381) - <Fc>
------------ ------------- ------------
Net Income (Loss) from Continuing
Operations $ 2,485,717 $ (2,190,477) $ 295,240
============ ============= ============
Basic and Diluted Earnings Per Share $ 0.10 $ 0.01
============ ============
Weighted Average Shares Outstanding 24,355,904 24,355,904
============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated statements
of operations.
-26-
<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
THE COLONEL'S PRO FORMA CONSOLIDATED
INTERNATIONAL, INC. ADJUSTMENTS DECEMBER 31, 1997
------------------- ----------- -----------------
<S> <C> <C> <C>
Sales $ 46,350,114 $ (34,577,872) <Fa> $ 11,772,242
Cost of Sales 33,245,888 (23,695,704) <Fa> 9,550,184
--------------- ------------- -------------
Gross Profit 13,104,226 (10,882,168) 2,222,058
Selling, General and Administrative
Expenses 6,790,311 (3,060,158) <Fa> 3,730,153
--------------- ------------- -------------
Income from Operations 6,313,915 (7,822,010) (1,508,095)
Other Income (Expense)
Interest Expense (1,299,488) 788,625 <Fb> (530,863)
Interest Income 170,101 (158,050) <Fa> 12,051
Rental Income 65,000 (65,000) -
Other 105,231 (108,980) <Fa> (3,749)
--------------- ------------- -------------
Net Other Expenses (959,156) 438,595 (522,561)
Net Income (Loss) Before Taxes 5,354,759 (7,385,415) (2,030,656)
Provision for Income Taxes (Benefit) 1,946,000 (1,946,000) -
--------------- ------------- -------------
Net Income (Loss) from Continuing
Operations $ 3,408,759 $ (5,439,415) $ (2,030,656)
=============== ============= =============
Basic and Diluted Earnings
(Loss) Per Share $ 0.14 $ (0.08)
=============== =============
Weighted Average Shares Outstanding 24,177,805 24,177,805
=============== =============
</TABLE>
See accompanying notes to pro forma condensed consolidated statements
of operations.
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<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
THE COLONEL'S PRO FORMA CONSOLIDATED
INTERNATIONAL, INC. ADJUSTMENTS DECEMBER 31, 1996
------------------- ----------- -----------------
<S> <C> <C> <C>
Sales $ 40,263,082 $ (33,786,457) <Fa> $ 6,476,625
Cost of Sales 28,140,066 (22,700,246) <Fa> 5,439,820
---------------- ---------------- ---------------
Gross Profit 12,123,016 (11,086,211) 1,036,805
Selling, General and Administrative
Expenses 6,931,713 (3,869,103) <Fa> 3,062,610
---------------- ---------------- ---------------
Income from Operations 5,191,303 (7,217,108) (2,025,805)
Other Income (Expense)
Interest Expense (1,214,400) 809,990 <Fb> (404,410)
Interest Income 71,730 (66,052) <Fa> 5,678
Rental Income 60,000 (60,000) <Fa> -
Other (37,647) (28,237) <Fa> (65,884)
---------------- ---------------- ---------------
Net Other Expenses (1,120,317) 655,701 (464,616)
Net Income (Loss) Before Taxes 4,070,986 (6,561,407) (2,490,421)
Provision for Income Taxes (Benefit) 1,549,000 (1,549,000) -
---------------- ---------------- ---------------
Net Income (Loss) from Continuing
Operations $ 2,521,986 $ (5,012,407) $ (2,490,421)
================ ================ ===============
Basic and Diluted Earnings (Loss)
Per Share $ 0.10 $ (0.10)
================ ===============
Weighted Average Shares Outstanding 24,177,805 24,177,805
================ ===============
</TABLE>
See accompanying notes to pro forma condensed consolidated statements
of operations.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(a) To give effect to the Sale and remove results of operations.
(b) To give effect to the elimination of interest expense attributable
to the repayment of current and long-term debt from the proceeds
on the Sale.
(c) The tax effects of the pro forma net operating loss carryforward
have not been reflected as an income tax benefit due to the
uncertainty of future realization.
THE SPECIAL MEETING
TIME, DATE AND PLACE
The Special Meeting will be held at 10:00 a.m. local time on
__________________, 1998 at the Company's headquarters, 620 South Platt
Road, Milan, Michigan 48160.
PURPOSE
The Special Meeting will be held for the purpose of considering
and voting upon a proposal to approve the Amended Asset Purchase Agreement
and the Sale and to transact any other business that may properly come
before the Special Meeting, or any adjournments of the Special
Meeting.
VOTING RIGHTS AND RECORD DATE
Only shareholders of record of Common Stock at the close of
business on the Record Date, which is December 1, 1998, are entitled to
notice of and to vote at the Special Meeting or at any adjournment of
that meeting. At the close of business on the Record Date, 24,631,832
shares of Common Stock were issued and outstanding. As of the Record
Date, approximately 97% of the outstanding shares of Common Stock were
beneficially owned by directors and executive officers of the Company
and their affiliates, including approximately 95% beneficially owned
by Donald J. and Patsy L. Williamson, husband and wife. Mr.
Williamson is the Company's Chairman of the Board and Chief Executive
Officer. See "SHARE OWNERSHIP." Mr. and Mrs. Williamson have
indicated that they intend to vote in favor of approval of the Amended
Asset Purchase Agreement and the Sale.
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<PAGE>
Each holder of record of Common Stock on the Record Date will be
entitled to one vote for each share registered in his or her name on
each matter presented for a vote of the shareholders at the Special
Meeting. The Amended Asset Purchase Agreement and the Sale must be
approved by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock. For the purpose of counting votes
on this proposal, failures to vote, abstentions and broker non-votes
will have the same effect as votes against approval of the Amended Asset
Purchase Agreement and the Sale.
VOTING BY PROXY
If a shareholder properly executes and returns a proxy in the form
enclosed with this Proxy Statement, the proxies named will vote the
shares represented by that proxy at the Special Meeting, and at any
adjournments of the Special Meeting. Where a shareholder specifies a
choice, the proxy will be voted in accordance with the shareholder's
specification. If no specific direction is given, the proxies will
vote the shares in favor of approval of the Amended Asset Purchase
Agreement and the Sale.
The Company's management does not currently know of any other
matter to be presented at the Special Meeting. If other matters are
presented, the shares for which proxies have been received will be
voted in accordance with the judgment of the proxies.
A shareholder may revoke a proxy at any time prior to its exercise
by written notice delivered to the Corporate Secretary of the Company
or by attending the Special Meeting and voting in person.
PROXY SOLICITATION
The Board of Directors, officers and employees of the Company will
initially solicit proxies by mail. If they consider advisable,
directors, officers and employees of the Company may also solicit
proxies in person or by telephone or facsimile transmission without
additional compensation.
EXPENSES
The Company will pay all expenses associated with solicitation of
proxies and printing and mailing this Proxy Statement, including all
expenses for postage, labor and materials.
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<PAGE>
THE COMPANY
THE COLONEL'S INTERNATIONAL, INC.
The Company is a holding company with no independent operations
of its own. Its four active subsidiaries are Seller, CTA, Rugged
Liner and BIR. References to "the Company" in this section should be
read to include the Company and its subsidiaries as a whole, unless
the context otherwise indicates.
The Company is a Michigan business corporation and is the
successor to Brainerd. The Company was formed in November 1995.
Effective December 31, 1995, Brainerd merged with and into the
Company, with the Company being the surviving corporation. Pursuant
to that merger, shares of Brainerd common stock were converted into
the same number of shares of the Company's Common Stock. Also
effective December 31, 1995, Brainerd Merger Corporation, a wholly
owned subsidiary of Brainerd, merged with and into Seller. Seller was
the surviving corporation in that merger and, as a result, became a
wholly owned subsidiary of the Company. At the same time, Brainerd
transferred all of its operating assets to BIR, which became a
subsidiary of the Company.
The truck accessory division of Seller was incorporated under
Michigan law as The Colonel's Truck Accessories, Inc. Effective
January 1, 1997, Seller transferred its truck bedliner operations to
CTA. Rugged Liner was formed in March 1998 in connection with the
April 1998 acquisitions of four Pennsylvania corporations engaged in
the truck accessory business.
The Company operates in three industry segments: manufacture of
automotive bumpers and other miscellaneous reinforcement beams and
brackets (Seller), manufacture of bedliners and sale of these
bedliners and other truck accessories at retail stores throughout the
country (CTA, Rugged Liner and Dealers Choice), and operation of a
multi-purpose motor sports facility (BIR). See Note 16 to the Audited
Consolidated Financial Statements for the years ended December 31,
1997, 1996 and 1995 included in Appendix B to this Proxy Statement for
certain financial information about the Company's three business
segments. A description of the business of the Company's subsidiaries
follows.
THE COLONEL'S, INC.
GENERAL
Seller is a leading domestic manufacturer of plastic replacement
bumpers and facias for the automotive aftermarket industry in North
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<PAGE>
America. Seller designs, manufactures and distributes plastic
bumpers, facias, support beams and brackets for application as
replacement collision parts for domestic automobile models. In
addition, Seller purchases and resells plastic replacement bumpers and
facias for use as replacement collision parts on import automobile
models and for models manufactured domestically by foreign-based
automobile manufacturers, and manufactures parts for these models to a
limited extent. Seller manufactures its products through the use of
reaction injection molding and plastic injection molding technology at
the Milan Property.
Seller distributes its products through warehouses operated by it
or its affiliates located in Michigan, Texas, Arizona, New Jersey and
Arkansas. Seller sells its products through a network of independent
distributors located throughout all fifty states, the District of
Columbia, Puerto Rico, Canada and Mexico. Seller's strategy is to
provide a readily available, high quality, low cost alternative to
original equipment manufacturer ("OEM") replacement bumpers, facias
and other plastic components through Seller's streamlined
manufacturing process and extensive distribution network.
PRODUCTS
The products manufactured and sold by Seller are primarily
plastic molded front and rear bumper panels designed for application
to specific automobile makes and models. Seller's products are sold
for distribution to collision repair shops, dealers and others in the
automobile aftermarket collision industry and are used for the
replacement of damaged automobile bumpers and related components.
During the years ended December 31, 1997, 1996 and 1995, products
which are manufactured by Seller represented 88%, 89% and 88%,
respectively, of Seller's sales and products which are purchased by
Seller from other manufacturers and marketed by Seller have
represented 12%, 11% and 12%, respectively, of Seller's sales during
those years.
Each product that Seller manufactures or distributes is designed
for application to an automobile or truck of a specific make, model
and year. Certain products may have more than one application because
different, but similarly designed, automobile models may have
identical bumpers or plastic molded components or because different
years of the same model automobile may have identical bumpers or
plastic molded components. In selecting products to manufacture and
distribute, Seller targets high volume automobile models and models
that statistically incur a higher frequency of accidents, since these
models support a higher volume of product sales for each dollar
invested in production tooling.
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<PAGE>
A majority of the specified parts manufactured by Seller are
produced to meet the design standards and engineering tolerances of
the Certified Auto Parts Association ("CAPA"), a national standard
setting organization. A sticker acknowledging compliance with these
standards and tolerances is affixed to each certified part
manufactured by Seller. CAPA is an independent association that
publishes specifications for high quality aftermarket automobile body
parts and certifies specific products as equivalent to factory built
service and replacement body parts. CAPA only certifies parts for
domestic automobile models. Approximately 68% of the automotive
bumpers manufactured by Seller are examined and tested by CAPA
and are certified as equivalent or superior to comparable OEM
replacement parts in terms of fit, form, function and material grade.
Seller's certified products are listed in the nationally distributed
CAPA Directory of Certified Competitive Auto Parts, and the CAPA
certification of Seller's bumpers is generally relied upon throughout
the automobile aftermarket industry and the automobile insurance
industry as an assurance of quality and dependability.
As of September 30, 1998, Seller manufactured and distributed
molded plastic replacement components for a total of 418 automotive
applications and purchased and distributed replacement components for
approximately 1,863 automotive applications. Unless and until the
Sale is consummated, Seller anticipates continuing to manufacture and
distribute replacement components for an equal or greater number of
applications in future operations. Seller's plan has been to
manufacture additional types of plastic automotive replacement
components, including OEM bumper recycling. Seller believes that
there are numerous additional automobile applications for its
manufacturing process, including doors, hoods, fenders and other body
or interior components, and believes that plastic components will
continue to be utilized in an increased number of applications by
automobile OEMs. Only new tooling for the injection presses and
certification of new products need be obtained to add additional
applications to existing lines. Additionally, Seller's existing
manufacturing facility has the capacity to produce an increased
volume of products through the addition of work shifts.
Seller believes it maintains a significant market advantage by
offering its automotive replacement components at lower prices than
those offered by OEMs for comparable replacement components. Seller
believes that its products are equivalent in quality, durability and
function to OEM-manufactured replacement components, but are generally
sold at prices that are less than the OEM suggested list price.
Furthermore, Seller believes its competitive pricing secures a
significant market advantage for its products in the aftermarket
collision industry. Competitive pricing of collision parts is
generally believed to be particularly important to automobile
-33-
<PAGE>
insurance companies which fund the purchase of a significant
percentage of automotive crash replacement parts.
Seller provides a limited lifetime warranty against defects in
material and workmanship and guarantees that its products generally
meet or exceed factory and industry specifications.
MANUFACTURING
Seller uses two distinct chemical processes to manufacture its
plastic products. The production cycle for each process is similar.
Raw materials are introduced into a machine press that contains a
machined tool or mold. Heat and pressure are applied to the raw
materials, forcing them into the shape of the mold. The resulting
plastic molded part is then removed from the molds to an adjacent work
station where small amounts of excess plastic are trimmed from each
part. After trimming, the part is cleaned and placed on a conveyor
belt leading to the paint application room. There, the part is
typically painted with a water-based black primer finish. After the
finish is dried in infrared ovens on the conveyor belt, each part is
then labeled and placed in a plastic bag, packaged in a box and
shipped or stored for shipment.
Seller primarily uses custom molding machines manufactured by
Cincinnati Milacron, which management believes are generally
recognized as state-of-the-art for the industry. The tooling is
primarily made of zinc alloy or steel and are built to Seller's
specifications. Seller presently maintains over 305 specially
designed tools, enabling production of approximately 418 different
automotive applications.
The primary manufacturing process used by Seller is referred to
as Reaction Injection Molding or the "RIM" process. Because the RIM
process is a low-temperature, low-pressure operation, Seller can use
zinc alloy tools for a majority of its manufacturing. Zinc alloy
tools are less expensive to build than conventional steel injection
molds.
The raw materials for the RIM process, consisting of polyol and
polyisocyanate, are available from several sources. The materials are
stored in two large closed tanks and are distributed to the presses by
a computer-regulated flow monitoring system. In the RIM process, two
reactive streams (a polyol containing extenders, catalysts and a
blowing agent; and a polyisocyanate) are mixed together under
controlled temperatures and pressures while being injected into the
tooling attached to each press.
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<PAGE>
The RIM tool is filled to approximately 90% of capacity during
the injection process. A chemical reaction causes the material to
heat and expand, forcing air out through a vent and allowing the
material to fill the mold completely. The result is a microcellular
plastic elastomeric or polyurethane part. The polyurethane part
produced is lightweight, corrosion resistant and will recover its
original form after minor impact, lessening the likelihood of
automobile body damage at very low speeds.
An alternative process used by Seller is referred to as injection
molding. In injection molding, small pellets containing reactive
polymers and catalysts are melted through heat and pressure. The
melted material is forced into the mold until it is completely filled.
The result is a thermoplastic olefin polypropylene part. A
significant benefit of this process is that excess plastic can be
reused after it has been trimmed off a completed part. Additionally,
a part manufactured using this injection molding process that is
damaged in production or rejected as scrap for quality-control reasons
can be reground into pellets and completely recycled and used again as
raw material. The recycling ability offered by the injection molding
process appears increasingly important with steadily rising solid
waste disposal costs.
At the end of each production run, the tooling and the last part
produced by the tooling are inspected by production personnel.
Preventive maintenance and repair of the tooling are performed on-site
by Seller's tool and die personnel in order to minimize waste, reduce
down-time, prolong tooling life and maintain product quality.
DISTRIBUTION AND SALES; PROPERTIES
Seller's products are distributed nationally from its
manufacturing facility and from affiliated warehouse facilities.
Seller's manufacturing facility is located at the Milan Property, 620
South Platt Road, Milan, Michigan 48160. Products are shipped by
Seller directly from the Milan Property to customers or to
distribution warehouses operated by Seller or its distributors.
Seller believes that its success has been achieved in part because of
an emphasis on rapid delivery of customer orders. To accomplish this,
it maintains large inventories of the products it manufactures. In
most cases, customer orders are shipped within 48 hours.
In November 1993, Seller relocated its principal operations and
headquarters to the Milan Property. The Milan Property is leased from
the Property Seller and is approximately 350,000 square feet. All of
Seller's bumper and auto collision parts manufacturing is conducted at
the Milan Property. Seller believes its manufacturing facility at the
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<PAGE>
Milan Property is suitable for its requirements and has adequate
capacity to accommodate foreseeable production demands.
Seller's sales personnel have responsibility for sales and
distribution of its products, promotion and advertising. The sales
staff is located at the main headquarters in Milan, Michigan.
Seller also operates a warehouse distribution facility at 401
West Crosstimbers, Houston, Texas. The distribution facility is
approximately 25,410 square feet in size, has four full-time employees
and is leased by Seller.
Seller operates a second warehouse distribution facility at 2928
Irving Blvd., Dallas, Texas. This distribution facility is
approximately 25,000 square feet in size, has five full-time employees
and is leased by Seller.
Seller operates a third warehouse distribution facility at 5010
West Pasadena Ave., Glendale, Arizona. This distribution facility is
approximately 52,360 square feet in size, has four full-time employees
and is leased by Seller.
Seller's fourth warehouse distribution facility is at 40 Vreeland
Ave., Totowa, New Jersey. This facility is approximately 23,000
square feet and is leased by Seller. It employs five full-time
employees.
Seller operates a fifth warehouse distribution facility at 110
East Jefferson Street, West Memphis, Arkansas. This facility is
approximately 65,000 square feet and is owned by Seller. In
addition to acting as a warehouse and distribution facility, this
facility also manufacturers recycled bumpers. The bumpers are sold
through all of Seller's distribution warehouses and to many of the
same customers as the Company's other subsidiaries. Stock is
transferred among warehouses at cost.
Seller maintains a fleet of 17 trucks for the transportation and
distribution of its products. Seller's trucks are maintained pursuant
to capital and operating equipment leases and are operated by 14 full-
time drivers employed by Seller. Approximately 60% of Seller's
products are delivered by Seller's trucks. The balance of Seller's
products are shipped by common carrier FOB to customer locations at
the customer's expense. The means of delivery utilized by Seller, in
combination with fairly flexible manufacturing processes, allows
orders to be filled on a faster basis than by OEM competitors.
Plastic replacement parts that are purchased internationally for
domestic resale are generally transported to distribution warehouse
facilities at Seller's expense.
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<PAGE>
Seller's products are principally marketed through independent
distributors and are sold primarily to automobile collision body
shops, automobile aftermarket supply stores and to regional and
national chain stores that sell automobile aftermarket parts. There
are approximately 80 independent distributors for Seller's products,
located in all 50 states, the District of Columbia, Puerto Rico,
Canada, Mexico and the Bahamas. The distributors for Seller are not
limited to exclusive sales of Seller's products and Seller does not
have any written agreements with its distributors. Compared with OEMs
that generally sell only their own parts to service departments in a
dealership network, Seller offers a relatively full line of
replacement bumpers and facias for multiple automobile models and
sells directly to distributors, body shops, automobile service centers
and retail customers.
Seller participates in industry and automotive trade shows each
year, including shows by the Automobile Body Parts Association
("ABPA"), the Bumper Recyclers Association of North America ("BRANA")
and the National Automotive Congress Expo ("NACE"), at which Seller
promotes its lines of plastic bumpers, facias, support beams and
brackets. Seller's products have been reviewed in national industry
publications such as COLLISION PARTS JOURNAL, BODY LANGUAGE and VOICE
OF THE AUTOMOTIVE BODY PARTS ASSOCIATION and approximately 68% of
Seller's manufactured facias are listed in the CAPA Directory of
Aftermarket Body Parts. Seller also promotes its products through
advertisements in specialized trade and consumer magazines, through
distribution of various professionally prepared product catalogs and
brochures and through publication of a quarterly newsletter
distributed to customers. In addition, Seller sponsors an annual
conference with its major customers and suppliers to strengthen
customer and supplier relations and facilitate feedback with respect
to product performance, emerging technology and current market
demands.
COMPETITION
The automotive aftermarket for plastic replacement bumpers and
facias is highly competitive. The market is dominated by OEMs such as
General Motors Corporation; Ford Motor Company; Chrysler Corporation;
Toyota Motor Sales, USA, Inc. and Nissan Motor Corp., USA. These OEMs
are more established and have greater financial resources than Seller.
These larger OEMs, however, also generally charge higher prices than
Seller for their products and generally distribute their products
through their own automobile dealership networks rather than through
independent distributors and body shops. Automobile insurance
companies have successfully advocated the use of less expensive parts
by body shops, and OEMs have lost market share in the collision parts
market as a result. This may lead OEMs to reduce their prices or
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<PAGE>
pursue such strategies as industrial rights litigation against
aftermarket parts competitors.
In addition, Seller competes with other non-OEM manufacturers of
plastic bumpers for the automotive aftermarket industry in North
America. Seller believes it is larger and offers a wider selection of
products than any of its non-OEM competitors. Recycling companies and
auto salvage companies also compete with Seller; however, Seller
believes that such competitors are generally small in size, service
only local or regional markets and offer products of varying quality.
There are also a number of potential competitors to Seller for
the non-OEM market. Certain companies based in Asia manufacture
replacement plastic automobile bumpers and facias for imported and
domestically made foreign automobiles. There can be no assurance that
these foreign companies that manufacture plastic automotive
replacement parts will not enter the domestic replacement bumper and
facia market and directly compete with Seller's products.
POSSIBLE INDUSTRIAL DESIGN CLAIMS AND LITIGATION
Seller manufactures replacement automobile parts that
substantially resemble original automotive parts manufactured by
domestic and foreign OEMs. Seller marks and packages its products
with its corporate name and distributes its products so as not to lead
Buyers to conclude that they are purchasing OEM-manufactured collision
parts. However, Seller is aware that some potential exists for
marketplace confusion notwithstanding its efforts to avoid product
confusion.
Other companies in the collision parts industry have from time to
time been the subject of claims and lawsuits brought by OEMs based on
claims of intellectual property right infringements. While Seller has
not to date been notified of any such claims or been subjected to any
such litigation, there can be no assurance that future claims will not
be made or that litigation will not be commenced against Seller based
on allegations of infringements of intellectual property rights.
There also can be no assurance that, if any such claims are made or
litigation commenced, such claims or litigation would not adversely affect
Seller's operations.
POSSIBLE FEDERAL INDUSTRIAL DESIGN LEGISLATION
Legislation has been introduced in the United States House of
Representatives on a number of occasions that would provide a
mechanism for registration of certain product design features and
would expand copyright protection for designs of replacement parts.
If enacted, such legislation might prohibit Seller from manufacturing
-38-
<PAGE>
and distributing its products using shapes and designs similar to
those of OEMs that register design features of automobile bumpers or
components. Such a prohibition could require Seller to commit
significant additional funds to analyze the product design of products
of its OEM competitors. Even if Seller were to undertake such
additional analysis, there can be no assurance that Seller's product
designs would not be subject to challenge by OEMs. Seller could be
required to expend significant resources for the defense of such
challenges, and it could be exposed to liability if it was found to
have violated a valid design registration. Accordingly, passage of
such legislation could effectively preclude Seller from continuing its
operations. It is not possible to predict whether legislation will,
in fact, ever be passed. If such legislation is enacted, however, it
is probable that it would adversely affect Seller. Industrial design
legislation has been opposed by representatives of the automobile
collision repair industry, the automobile insurance industry and by
various consumer organizations. However, there can be no assurance
that such opposition will prevent the passage of "design-rights"
legislation or the passage of compromise legislation that could extend
design rights for OEM automobile parts.
FOREIGN INDUSTRIAL DESIGN PROTECTION LAWS
Seller presently distributes and sells its products in Canada and
Mexico. Such sales represented 4.1% of total sales in 1997. Canadian
law extends protection for a period of up to ten years to registered
industrial designs having novelty in appearance as opposed to novelty
of mechanical construction, physical composition or method of
operation. Mexican law extends protection for a period of up to seven
years to registered designs under ornamentality and novelty standards
similar to Canadian law. Seller's management believes that most
bumper and facia designs lack the requisite degree of novelty to
qualify for design registration in Canada or Mexico. Seller has not
been the subject of or threatened with any design right claims under
Canadian or Mexican law; however, there can be no assurance that
Seller will not be the subject of future design rights claims under
Canadian or Mexican law or that Canada or Mexico will not amend
existing laws or enact more restrictive protections for industrial
design rights that could adversely affect sales of Seller's products
in those countries.
POSSIBLE ADDITION OF INDUSTRIAL DESIGN PROVISIONS TO GENERAL
AGREEMENT ON TARIFFS AND TRADE
Representatives from numerous countries meet periodically to
negotiate changes in the General Agreement on Tariffs and Trade
("GATT"), which was originally drafted in 1947. GATT determines many
of the basic rules for trade between countries that are signatories to
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<PAGE>
it. In April 1994, 124 countries, including the United States,
concluded more than seven years of talks under the Uruguay Round of
GATT. The Uruguay Round Agreement Act was approved by the U.S.
Congress and signed by President Clinton in December in 1994 and took
effect with respect to the United States on January 1, 1995.
As extended in the Uruguay Round, GATT provides greater
protection for intellectual property rights, such as patents,
trademarks and copyrights. Although it was reported that restrictive
protections for automotive parts made by OEMs and possible "industrial
design rights" were considered, no provisions of GATT specifically
require signatory nations to extend industrial design rights
protection to any of the replacement products manufactured by Seller.
If restrictive design rights for OEM automotive parts were ever
adopted as a part of GATT, it might have a significant adverse impact
on Seller's business. Under the Uruguay Round, GATT signatory nations
are scheduled to reconvene in the year 2000 to consider further terms
for market liberalization and trade expansion.
EMPLOYEES
As of November 20, 1998, Seller had approximately 147 full-time
employees (including leased employees as described below), of which 10
were salaried managerial and administrative employees and
approximately 137 were hourly employees. Of the total number of
employees, 126 were in manufacturing, and the rest were in sales,
marketing, administrative and executive positions. Seller considers
its employee relations to be satisfactory.
Approximately 137 of the hourly workers at the Milan facility are
leased from Simplified Employment Services ("SES"), an employment
brokerage service. SES provides paychecks and benefits to these
employees and also pays the workers' compensation insurance and
payroll taxes relating to these employees. Seller pays a service fee
to SES in accordance with the contract between SES and Seller.
ENVIRONMENTAL REMEDIATION
As part of the lease agreement with the Property Seller for the
Milan Property, Seller is also responsible for up to $2,000,000 of the
costs of remediation of hazardous material, if any, that existed at
this site prior to Seller's entering into the lease in June 1993.
To date, the Company has not spent any monies and does not
have any knowledge of any hazard areas that would require clean up.
Seller has accrued reserves for cleanup costs. The cost of any remediation
that may be required at the Milan facility is not expected to have a
material adverse impact on the financial position of Seller.
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THE COLONEL'S TRUCK ACCESSORIES, INC.
GENERAL
In 1995, the Company determined that it believed there to be an opportun-
ity within the new and used vehicle accessories market. This opportunity
was considered to be attractive for the Company because many of such
accessories are produced from plastics that are already an integral
part of Seller's current manufacturing capability and because such
accessories share like, though not identical, distribution systems.
As a result of this analysis, the Company formed CTA and launched
the first accessory product to be manufactured and distributed by CTA.
This first product is a truck bedliner. CTA has also started to
manufacture shells and tonneau covers.
Once the decision to enter this market was made, CTA required
only 13 months to bring the manufacturing plant on line. The plant
began operations in May 1996 and successfully commenced marketing and
distribution in the last two quarters of that year. Prior to 1997,
these operations were conducted by Seller's former truck accessory
division. Effective January 1, 1997, however, Seller transferred its
truck bedliner operations to CTA.
PRODUCTS
Truck bedliners are plastic inserts that are placed into the rear
beds of pickup trucks. Owners purchase these inserts to protect the
paint and structural integrity of their truck beds. Many
manufacturer/distributors of this product are already in the
marketplace. Products range in quality from very poor to excellent.
Poor liners have bad fit and finish, may require special drilling into
the vehicle to support mounting attachments and are of thinner gauge
plastic. Excellent products do not have these deficiencies. Other
differentiating features of better products include side wall
reinforcements, drainage channels and other features. In the
Company's opinion, CTA makes a highly competitive product.
Shells are caps, made of fiberglass, that enclose the pickup
truck bed. Shells are usually as high as the cab. Tonneau covers are
flat fiberglass covers that cover the truck bed box at the rail level.
Both the shells and tonneau covers are generally custom painted to
match the color of the vehicle. Because these products are usually
special ordered, the products are sold before they are manufactured.
CTA's accessory product line currently consists mainly of truck
bedliners that are made to fit a number of different models. CTA
produces both under-the-rail and over-the-rail products. CTA
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manufactures approximately 47 different liners and also manufactures
fiberglass tonneau covers for all makes and models of pickup trucks,
as well as shells and caps. Additional products, such as tool boxes,
running boards, tires, wheels, mats, bug shields, visors, grill
covers, light covers, trim pieces, running lights and racks, are
currently purchased by CTA for distribution through retail sales and
distribution stores. However, CTA plans to manufacture many of these
products in the future.
MANUFACTURING
CTA uses plastic sheet extrusion machines (2) and rotary vacuum
formers (6) to produce liners. Raw materials, supplied by Phillips
Petroleum, are maintained in large vessels in CTA's Owosso, Michigan
plant. Keeping these materials inside avoids temperature and humidity
changes that affect the extrusion process and the quality of the
plastic sheet. This reduces variations in the quality of CTA's
extruded sheets.
CTA believes that it is unique among all United States liner
manufacturers in the type of equipment and the control of product
employed in this operation. The Company believes that CTA's ability
to control every element of production, from raw materials to finished
product, makes CTA's operation highly competitive.
CTA's extruded plastic sheets are inserted into rotary vacuum
formers in order to produce truck bedliners. After the product is
made by the vacuum formers, it is hand trimmed and checked for quality
assurance. The product is then inventoried against shipment to
customers. Inventory is held within the Owosso plant facility and
shipped by CTA's fleet of tractors and trailers.
Total annual production capacity in the plant is estimated at
over 700,000 units, assuming three shifts of operation. The facility
currently runs one shift per day.
Shells and tonneau covers are manufactured in Riverside,
California. This modern fiberglass plant uses traditional hand laid
up fiberglass molding techniques to produce highly polished fiberglass
surfaces. The four station paint line preparation, painting, baking
and drying allow the products to be custom painted to match each truck
color.
Because of their size, shells and tonneau covers are transported
to customers on specially designed trailers that carry a maximum of 24
shells.
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DISTRIBUTION AND SALES
Distribution is made to a highly fragmented network of
distributors and dealers across the United States. Many of Seller's
distributors for its collision repair parts may at some time enter
this market and allow CTA to achieve significant efficiencies across
its distribution channel.
CTA is also testing retail sales points for its liners coupled
with other accessory products produced by other manufacturers. The
test market for retail sales is Los Angeles, California, one of the
largest markets in the United States. The Los Angeles market has the
largest number of truck registrations in the United States. If this
model proves successful, it will be used as a template for retail
sales operations in other major markets.
Sales are directed from the Owosso facility through the marketing
manager to a force of four outside salespeople. CTA expanded this
sales department in 1997 to sustain the momentum created by the
initial liner introduction and to penetrate new distribution channels.
During 1997, CTA expanded distribution in areas where
distributors were weak. In February, 1997, CTA purchased certain of
the assets of Truckware, Inc. in Baldwin Park, California. This
purchase was the first in a series of purchases that allow CTA
increased access to distribution channels to facilitate retail sales
of its manufactured products.
In December, 1997, CTA purchased certain assets of Eastern Off
Road, which has sales outlets in Pennsylvania, Maryland, Virginia and
West Virginia. Eastern Off Road is an established truck accessories
outlet chain that has been in the marketplace for over 20 years.
By the end of 1997, CTA purchased three additional retail/
wholesale stores in California and started its own distribution
warehouse in North Carolina.
Since year end, CTA has added retail stores in Flint, Michigan;
Nashville, Tennessee; St. Louis, Missouri; Thousand Oaks, California;
Franklin, Tennessee; Santa Clara, California; Roseville, California;
and South Sacramento, California.
MARKET
The market for liners is estimated at approximately 50% of the
total volume of new pickups sold in the United States, both foreign
and domestic, and is estimated to be 1,500,000 units per year. The
pickup truck and sport utility vehicle market, which constitutes a
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substantial percentage of all vehicles sold, continues to grow. As
this market expands, so does the auxiliary equipment market. CTA's
truck accessories sold at retail targets this market. In addition,
CTA has the ability to install all of the products that it
manufactures at each of its sales/retail outlet stores.
COMPETITION
CTA estimates that there are approximately 12 other manufacturers
of bedliners in the United States. The two largest, Durakon
Industries, Inc. and PENDA Corporation, manufacture and sell the
majority of all bedliners in the United States. The ten remaining
manufacturers accounted for the remainder before CTA's entrance in the
market. CTA estimates that it is currently the third largest
manufacturer in this market.
EMPLOYEES
CTA employs approximately 271 people, including approximately 267
contract employees leased through SES. In connection with the
transfer of the bedliner division from Seller to CTA, these employees
are now employees of CTA. Management of CTA includes two former
Durakon employees with long experience in this industry sector. John
Carpenter, who is CTA's President, was formerly national sales manager
for Durakon. Dennis Bills was formerly a production manager for
Durakon and holds a similar position in CTA. The Company believes
that these two individuals, along with CTA's other management
personnel, bring a strong background to CTA's management team.
PROPERTIES
CTA manufactures bedliners in its Owosso, Michigan plant, which is
leased from the Property Seller. The plant has 240,000 square feet of
space, which CTA believes is adequate for current operations and planned
expansion, and has 85 full-time employees. CTA's executive offices are
located at 951 Aiken Road, Owosso, Michigan 48867.
The Baldwin Park, California facility serves the west coast as
the main retail sales point and warehouse facility. It also serves as
the offices of the west coast sales manager and has seven full-time
employees. The warehouse is 24,000 square feet and is located at
12907 Garney. Baldwin Park is in north central Los Angeles.
The Riverside, California manufacturing facility is 40,440 square
feet on 2.87 acres and is located at 6727 Columbus Avenue. Riverside
is on the southwest side of Los Angeles. The Riverside plant
manufactures shells and tonneau covers and employs 47 full-time
employees.
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The Charlotte, North Carolina facility is 15,500 square feet and
acts as the southwestern regional warehouse. It operates as a
wholesale warehouse and retail sales and installation center. It is
located at 2116 Wilkinson Boulevard and has five full-time employees.
The Flint, Michigan facility serves as CTA's home retail store.
Located adjacent to the area's largest mall and car dealership
complex, this old Firestone tire store of 14,000 square feet will
allow for installation of all products that the store sells. This
facility has six employees and is located at 30993 Linden Road.
The Upland, California facility, located northeast of Los
Angeles, operates under the name CTA-Wild Bills and performs
installation from bay doors located at the rear of the facility. Its
1,940 square feet serve mainly as a retail sales outlet. It has four
full-time employees and is located at 567 Central Avenue. It is
supplied by the Baldwin Park warehouse.
The Los Angeles, California facility operates under the name CTA-
Bedliner Kingdom and is located in the warehouse district in downtown
Los Angeles. This facility mainly stocks and installs liners and bed
mats. This 4,600 square foot facility, located at 1907 E. 7th Street,
acts as a retail sales point. It employs two full-time employees.
The Pomona, California facility, located at 4187 E. Mission
Boulevard, operates under the name CTA-Southland Shell. This 2.4 acre
open air corner lot houses outside displays of bedliners, caps, shells
and tonneau covers. The offices are housed in a trailer. The
facility employs one part-time and two full-time employees.
The Uniontown Central Warehouse, located on Route 119 in
Uniontown, Pennsylvania, is a 20,000 square foot leased facility that
acts as a central warehouse for all the CTA-Eastern Off Road retail
outlets. It acts as a central shipping and receiving point. It
employs three full-time warehouse employees.
Another location in Uniontown, Pennsylvania, is a CTA-Eastern Off Road
retail sales point of 5,000 square feet, located on Route 40. The facility
employs five full-time employees.
The Robinson Township, Pennsylvania CTA-Eastern Off Road retail
sales store is 2,400 square feet, and is located on Route 60 and Moon
Run on the outskirts of Pittsburgh. It employs three full-time employees.
The Greensburg, Pennsylvania facility, a CTA-Eastern Off Road
retail store, consists of 3,500 square feet and is located on Route 3.
It employs two full-time employees.
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The Morgantown, West Virginia facility is a CTA-Eastern Off Road
retail sales point of 2,350 square feet, located at 57 S. University
Avenue. It employs three full-time employees.
The Glen Bernie, Maryland facility is a CTA-Eastern Off Road
retail sales point of 2,400 square feet, located at 706 N. Cran
Highway and Dorsey Road. It employs three full-time employees.
The Wexford, Pennsylvania facility is a CTA-Eastern Off Road
retail sales point of 2,000 square feet, located on Route 19 at Route
910. It employs two full-time employees.
The Norfolk, Virginia facility is a CTA-Eastern Off Road retail
sales point of 6,000 square feet, located at 6320 Virginia Beach
Boulevard. It employs three full-time employees.
The Thousand Oaks, California facility was purchased in 1998.
This 3,500 square feet facility operates under the name CTA-Road N
Truck. It is a full retail sales and installation facility located
approximately 80 miles north of Los Angeles. The facility employs
four full-time employees and is located at 3234 E. Thousand Oaks
Boulevard.
The Nashville, Tennessee store was acquired in 1998. This 13,000
square foot facility, located at 85 Cleveland Street, acts as both
a wholesale warehouse and a retail sales point for the Nashville area.
Installations are performed in an installation facility adjacent to
the newly constructed retail sales center. The facility employs nine
full-time employees.
The Collinsville, Illinois facility was purchased in 1998. It is
located approximately 30 minutes from downtown St. Louis, Missouri,
and operates under the banner of CTA-Dealer's Choice. This 15,000
square foot, newly renovated facility serves as a wholesale
distribution point and retail sales store for the St. Louis area.
Located on Route 159 at 775 W. Morrison Avenue, it employs 19 full-
time employees.
The Franklin, Tennessee facility was purchased in July 1998 and
operates under the name Colonel's Sunshade Custom. This 4,800 square
foot retail sales store is located at 277 Mallary Station Road, Suite
107 and acts as a remote sales outlet for the Nashville facility.
Installations are performed at the back of the building. In addition
to the traditional truck accessories that are sold by other similar
stores, this facility also sells and installs window tinting for
autos, commercial buildings and residential homes. It employs seven
people.
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The Santa Clara, California facility was purchased in September 1998 and
operates under the name Colonel's Accessories Plus. This 22,000 square foot
warehouse and 6,000 square foot retail outlet store sells the complete line of
truck accessory products under the name CTA - Accessories Plus. It is located
at 2555 Lafayette Street and employs ten people.
The Roseville, California facility was purchased in September 1998 and
operates under the name Colonel's Truck Stuff. This 4,200 square foot
facility serves as a retail outlet store. It is located at 106 N.
Sunrise Ave and employs two people.
The South Sacramento, California location was purchased in
September 1998 and operates under the name CTA - Truck Stuff. This
6,800 square foot facility sells to both retail and wholesale
customers including dealerships and body customizing shops. It is
located at 15-B Quinta Court and employs four people.
The El Paso, Texas facility was purchased in September 1998 and operated
under the name CTA-Camper Place/Truck Parts Warehouse. This 6,400 square feet
facility sells to both retail and wholesale, and has installation facilities.
It is located at 9821 Montana Ave.
The Las Cruces, New Mexico facility was purchased in September 1998 and
operated under the name CTA- Camper Place/Truck Parts Warehouse. This 7,000
square feet facility sells to both retail and wholesale, and has installation
facilities. It is located at 1575 El Paseo Ave.
The Ruidoso, New Mexico facility was purchased in September 1998 and
operated under the name CTA- Camper Place/Truck Parts Warehouse. This 5,500
square feet facility sells to both retail and wholesale, and has installation
facilities. It is located at 109 Highway 70 East
The Roswell, New Mexico facility was purchased in September 1998 and
operated under the name CTA- Camper Place/Truck Parts Warehouse. This 7,500
square feet facility sells to both retail and wholesale, and has installation
facilities. It is located at 2114 West 2nd Ave.
All of the foregoing properties of CTA are leased from third parties.
RUGGED LINER, INC.
GENERAL
Rugged Liner was formed in March 1998 in connection with the
April 1998 acquisitions 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
these acquisitions, which were consummated in April 1998, each of the
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Rugged Liner Companies merged with and into Rugged Liner, with Rugged
Liner being the surviving corporation.
PRODUCTS
Rugged Liner, which is located in Uniontown, Pennsylvania, manufactures
non-skid bedliners and bed mats, as well as ground lowering kits for SUVs.
MANUFACTURING
At Rugged Liner's facility in Uniontown, Pennsylvania, extruded
plastic sheets are inserted into a rotary vacuum former to produce truck
bedliners. After the products are made by the vacuum formers, they are hand
trimmed and checked for quality assurance. The products are then inventoried
against shipment to customers. Inventory is held within the Rugged Liner
facility and shipped by Rugged Liner's fleet of tractors and trailers and by
common carrier. Total annual production capacity in the plant is estimated at
over 250,000 units, assuming three shifts of operation. The facility
currently runs one shift per day.
MARKET
Rugged Liner sells through a distributor network, through CTA
retail stores, and manufacturer's representatives. It primarily
targets export markets such as Central and South America and the Middle
East. The Company does not have reliable data concerning the world
market for bedliners.
COMPETITION
Rugged Liner estimates that there are approximately 12 other
manufacturers of bedliners in the United States. The two largest,
Durakon Industries, Inc. and PENDA Corporation, manufacture and sell
the majority of all bedliners in the United States. The ten remaining
manufacturers accounted for the remainder before CTA's entrance in the
market. Rugged Liner estimates that it is currently the fourth
largest manufacturer in this market.
EMPLOYEES
Rugged Liner employs approximately 46 people, including
approximately 45 contract employees leased through SES. In connection
with the acquisition of the Rugged Liner Companies, Mark German,
formerly one of the principals of the Rugged Liner Companies, became
the President of Rugged Liner and was appointed President of the
Company in May 1998. The Company believes that Mr. German's long-term
standing in the industry, along with CTA's management personnel, bring
a strong complementing background to the Company's management team.
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PROPERTIES
Rugged Liner has two leased properties. Rugged Liner manufactures
bedliners for export and SUV ground lowering kits 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. Rugged Liner also has a 150,000 square foot
distribution warehouse/service center in Pomona, California.
BRAINERD INTERNATIONAL RACEWAY, INC.
GENERAL OPERATIONS
BIR and its predecessors have operated the Brainerd International
Raceway, which is located at 4343 Highway 371 North, Brainerd,
Minnesota 56401 (the "Raceway"), since June 1973. At the Raceway,
BIR organizes and promotes various spectator events such as road
and drag races, including races for sports cars, motorcycles and
go-karts, and derives a substantial portion of its revenues from
ticket sales and spectator attendance. In addition, BIR permits the
use of the Raceway by others who organize and promote racing events,
and by individuals or commercial organizations who may use the Raceway
for things such as automobile road testing or filming. All racing
events, whether or not organized by BIR, are conducted over a two to
four-day period, usually encompassing a weekend.
SOURCES OF REVENUE
BIR derives its revenues from four principal sources: (i) ticket
sales; (ii) camping fees, concession sales, and track rentals; (iii)
entry fees; and (iv) sponsorship fees. Sponsors promote their names
and products at and in connection with the racing events. Sponsorship
fees are contracted for and often paid in whole or in part several
months prior to the commencement of each racing season. Entry fees
are received from race participants.
BIR permits overnight camping during racing events on the Raceway
grounds. Camping revenues were received by BIR for only five
spectator events in 1998. A local non-profit organization managed the
camping activities on a commission basis for BIR in 1998 and is
expected to do so again in 1999.
Beer, soft drinks, candy and fast food items such as hot dogs,
barbecued chicken and ribs are served at concession stands at various
locations around the Raceway, but principally near the grandstand
area. BIR allowed both for-profit and nonprofit organizations to
operate the concession stands for the five principal spectator events
in 1998. BIR receives a percentage of the gross sales of all
concessions, but neither BIR nor any affiliate of BIR operates any of
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the food concession stands. BIR currently plans to continue its
practice of allowing independent for-profit and nonprofit
organizations to operate the food concession stands.
BIR rents the Raceway to other organizations to conduct races, hold
driving schools or to test or film motor vehicle operations. BIR has also
rented the Raceway for use as the site of a camping convention. The fee
charged for such uses varies and is negotiated in each case.
EVENTS AND ACTIVITIES
During 1998, BIR organized and promoted several major spectator
events, including two drag races (the "Federal-Mogul Drag Racing
Series" and the NHRA "Visioneer Northstar Nationals"), two special
events (the "Tires Plus Show & Go" and the "Tires Plus Muscle Car
Shoot-Out"), one motorcycle race (the "AMA Hitching Post Classic") and
one "Cruisin' to Lakes" hot rod custom car show.
The Federal-Mogul Drag Racing Series, held on June 6 and 7, 1998,
was a drag racing event sponsored nationally by Federal-Mogul Corporation.
A drag race is generally conducted between two vehicles from a standing start
over a one-quarter mile track, using sophisticated starting and timing
systems. The Federal-Mogul Drag Racing Series was sanctioned by the National
Hot Rod Association (the "NHRA") and was one of a series of five events in
the Central State Division of the NHRA. The Federal-Mogul Drag Racing Series
was organized and promoted jointly by BIR and the NHRA, and included both
professional and amateur drivers who paid BIR an entry fee. A similarly
sponsored event has been held at the Raceway annually since 1977, with the
exception of 1984, when there was a scheduling conflict. The Sponsorship
Agreement with Federal-Mogul Corporation for this event will expire in 2002.
The Tires Plus Show & Go event, held on July 4 and 5, 1998, was
sponsored by Tires Plus under an agreement which extends through 2002.
This event featured "street rods," "street machines," antiques and
other classic cars that participated in both a car show and drag races
emphasizing a "back-to-the-fifties" style. The drag racing portion of
the event was sanctioned by the NHRA. The Tires Plus Muscle Car
Shoot-Out was held on July 5, 6, 1998. As with the Show & Go event,
this event is both a car show and a drag race. The Muscle Car Shoot-
Out involves 1955 to 1974 model year vehicles.
The AMA Hitching Post Classic, co-sponsored by Coca-Cola and held
on July 31 through August 2, 1998, was one of a series of nine races
conducted throughout the United States pursuant to the sanction of the
American Motorcyclist Association (the "AMA"). The event, previously
known as the Suzuki Classic, featured six races of motorcycles operating on
the road course. The races involved motorcycles of 250cc, 600cc, 750cc and
the Harley Davidson Twin Sport and Superbike classes.
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The Northstar Nationals event, held on August 20 through 23,
1998, was sponsored by Visioneer, Inc. under an agreement with the
NHRA. This event, previously known as the Champion Auto Stores
Nationals, features all professional drivers, most of whom have
national reputations, and was one of a series of drag races conducted
throughout the United States under the national sponsorship of the
R.J. Reynolds Tobacco Company and the sanction of the NHRA. The
four-day event features a series of drag races in the following
classes: Top Pull Dragster, Funny Car, Pro Stock, Pro Truck, Pro
Stock Motorcycle, Alcohol Drag, Alcohol Funny, all Sportsman's
categories and Muscle Sled Snowmobile Drags. The Northstar Nationals
are organized and promoted by the NHRA. The NHRA leases the Raceway
from BIR for a rental equal to one-half of the net profit of this
event, as defined in the lease agreement. Such profit is earned
primarily through the receipt of promotional fees and ticket sales.
BIR's responsibilities in this event are, among other things, to
provide the Raceway, ticket sellers and takers and security personnel,
and to assist in the management and operation of the event. The lease
agreement with the NHRA has been extended through the 2001 racing
season. Under the lease agreement, BIR is not permitted to conduct
any drag races at the Raceway that are not sanctioned by the NHRA.
BIR also organized and sponsored four weekend drag racing
"bracket" events in 1998, primarily for non-professional drivers from
Minnesota and surrounding states. In bracket racing, each driver
attempts to predict his car's performance; whether he wins or loses a
particular race will depend partially on how much his actual time over
a one-quarter mile distance exceeds his predicted time. While
spectators are encouraged to attend these drag racing events and BIR
receives revenues from ticket sales, camping fees and concessions,
they are not highly promoted.
In addition to the spectator events and the bracket races
discussed above, there are racing events conducted on approximately 20
other weekends that are primarily for nonprofessional drivers and are
often organized and sponsored by local and regional racing clubs, some
of which may be members of or affiliated with national sanctioning
organizations. While spectators attend these events, BIR does not
receive any revenues from ticket sales or engage in any significant
promotion of these events.
In 1998, two weekend events involved sports car racing and were
sponsored by the "Land O' Lakes" regional affiliate of The Sports Car
Club of America (the "SCCA"), which sanctions these events. In
addition, in 1998, four motorcycle racing events were held, each of
which was sponsored by the Central Roadracing Association, a club
located in the Minneapolis/St. Paul, Minnesota area and associated
with the AMA. During 1998, the Northland Region Karting Association,
affiliated with the World Karting Association (the "WKA"), organized
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and sponsored several go-kart racing events, and the Nord Stern Regional Club
of the Porsche Club of America organized four weekend racing events for
Porsche cars. A similar schedule has been established for 1999.
BIR will rent the Raceway to various individuals or organizations
for their own unsanctioned events. Chrysler Corporation currently
uses the track for winter cold weather testing, driving schools and to
test or film the operation of various motor vehicles.
In addition to attempting to continue to schedule the events
discussed above, BIR is also seeking to establish additional revenue
producing uses for the Raceway. Events under consideration include
additional spectator racing events and music festivals.
SANCTIONING ORGANIZATIONS
Most racing events conducted at the Raceway, including the five principal
spectator events held by BIR in 1998, are sanctioned by an organization which
establishes, publishes and enforces rules relating to a specific class or
type of participating vehicle. These rules generally relate to the
specifications that each class of car or other vehicle must meet to be
eligible to race, to driver conduct and to other racing matters. BIR enters
into agreements annually with the various applicable sanctioning bodies with
respect to each race it organizes and promotes. These agreements provide that
the appropriate sanctioning organization will sanction the race and provide
personnel to interpret and enforce its rules. The sanctioning bodies include
the SCCA (governing sports cars), the NHRA (governing drag racing), the AMA
(governing motorcycles) and the WKA (governing go-karts).
COMPETITION
The closest comparable race track which conducts road racing
events similar to those conducted by BIR is located at Elkhart Lake,
Wisconsin, which is approximately 75 miles northwest of Milwaukee,
Wisconsin, approximately 475 miles from the Raceway and approximately
350 miles from Minneapolis/St. Paul, Minnesota. While there are drag
race strips in Fargo, North Dakota, and Eau Claire, Wisconsin, the
closest drag race strips that own equipment and conduct major drag
race events comparable with that owned or conducted by BIR are located
in Indianapolis, Indiana and Denver, Colorado. While other regional
race tracks are not generally considered competitive with BIR, other
events in BIR's market area, such as sporting events, festivals and
concerts, may tend to attract persons who might otherwise attend BIR's
racing events. BIR does not generally consider the schedules of other
spectator events when scheduling its own events.
SEASONAL BUSINESS/WEATHER
Substantially all of BIR's revenues arise from operation of the
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Raceway during the period of April through October of each year.
BIR's revenues are derived primarily from ticket sales for racing
events, and adverse weather could materially diminish the revenues
that might otherwise be received by BIR. While sports car, stock car
and motorcycle races may be conducted in nearly all weather
conditions, spectator attendance is significantly reduced when it
rains. A drag racing event cannot be held in rain and adverse weather
could require the rescheduling of such events or the cancellation of
the event and the return of ticket sale proceeds to ticket Buyers. A
substantial majority of BIR's revenues arise from drag racing events.
In addition to adversely affecting attendance and concession sales,
adverse weather requires rescheduling of events, which results in
increased operating costs for the events. For example, the Brainerd
200 snowmobile race, held over the 1994-1995 New Years' weekend, was
adversely affected by limited snowfall occurring prior to the event,
which reduced the number of snowmobile riders who traditionally visit
the Brainerd area during that weekend. Bad weather was not a
significant factor in 1998.
EMPLOYEES
BIR employs four full-time employees. From April through October, BIR
employs four full-time grounds and track maintenance personnel. In addition,
BIR engages various independent contractors to handle matters such as public
relations, drag racing events, perimeter and grounds security, ticket sales
and ticket handling, emergency medical service, concessions and camping.
None of the independent contractors engaged by BIR are affiliated with BIR
as an officer or director.
PROPERTIES
BIR owns and operates a three-mile race track, including a one-quarter
mile drag strip, located approximately six miles northwest of Brainerd,
Minnesota. The Raceway was initially constructed and first utilized for
competitive racing in 1968. The site of the Raceway consists of approximately
611 acres. The terrain of the site is slightly rolling and partially wooded.
The track and various access roads are composed of blacktop.
The Raceway is enclosed by a five-foot chain link fence. The
site provides camping facilities and parking for approximately 15,000
vehicles. The Raceway contains several buildings, including a four-
story tower containing eleven executive viewing suites, a control
tower, three enclosed racing maintenance buildings divided into stalls
for participant repairs and various single story buildings containing
concession stands, restrooms and storage and service facilities
located throughout the property. The buildings are concrete or wood
frame construction. Grandstand bleachers for approximately 53,000
spectators are primarily located along the dragstrip.
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BIR made substantial improvements to the Raceway during the past
two years. In connection with the drag racing facility, BIR spent
approximately $600,000 on the following: replacement and upgrading of
the concrete guard rail on the straightaway, construction of a new restroom
facility in pit area, construction of a new administration building behind
the grand stands, construction of additional office space and renovation of
the Winston suites, installation of irrigation and drainage and new paved
roads, replacement of the burn out boxes, replacement of retention walls to
new heights for safety, construction of more bathrooms, garage area pads,
and improvement of the bridge and improvement of concession and camping areas.
BIR's executive offices are located at 17113 Minnetonka Boulevard, Suite
214, Minnetonka, Minnesota 55345, where BIR leases approximately 1,100 square
feet of office space. The lease term expires in February 2002.
LEGAL PROCEEDINGS
The Company has reserved a total of $291,000 against claims
asserted by opposing parties in various unrelated lawsuits, including
the following.
The Company has been served with three complaints, filed in 1995 and 1996,
pertaining to a class action suit arising from the production of bedliners.
These three lawsuits have been consolidated in the United States District
Court for the Southern District of Mississippi. The suits, which were brought
against Seller, CTA, Rugged Liner and various other bedliner manufacturers and
seek money damages, allege that the bedliners insulate a gas can when
filled in the back of a truck which may allow a static charge that may
result in a fire. Although the class action suit targets bedliner
manufacturers, the Company believes that other organizations should also
be involved, such as the service stations, gas can manufacturers, gas pump
manufacturers, etc. The Company has formed a coalition with the other
bedliner manufacturers to defend this class action suit. The coalition
currently is in settlement negotiations with the plaintiffs and has reached
a tentative settlement whereby the Company's liability would be $150,000. The
Company does not believe that any liability resulting from these lawsuits
will significantly affect its financial position, results of operations, or
cash flows.
Capstone Acquisitions, Inc. ("Capstone") filed suit in the United
States District Court for the District of South Carolina against Rugged
Liner on July 28, 1998. Capstone contends that pursuant to an October 1995
brokerage agreement between Capstone and Rugged Liner, Capstone is entitled
to payment of a four percent commission on the Company's acquisition of the
Rugged Liner Companies. Capstone also seeks to recover punitive damages.
In the alternative, Capstone seeks to recover the value of the brokerage
services it claims to have rendered to Rugged Liner. The Company plans to
vigorously defend this action.
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The Company is involved in various other legal proceedings that have
arisen in the normal course of its operations. While the results of such
proceedings and those discussed in the preceding paragraph cannot be predicted
with certainty, management believes that any amounts that may be required to
be paid in connection with the final outcome of such matters, in addition to
amounts presently accrued, will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been traded on Nasdaq SmallCap
Market since January 2, 1996. The number of holders of record of
Common Stock in the Company on December 1, 1998 was __________.
The table below sets forth the high and low bid prices by
calendar quarter for the Company's Common Stock for the first two
quarters of 1998, and all four quarters of 1997 and 1996. Such prices
reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 1997 1996
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
January-March $8.50 $5.75 $11.00 $4.75 $7.50 $5.00
April-June $9.375 $7.75 $11.00 $4.25 $9.00 $6.00
July-September $6.00 $8.125 $ 5.50 $3.25 $9.00 $5.50
October-December $ 9.50 $3.75 $7.50 $3.00
</TABLE>
During 1997 and 1996, and to date in 1998, the Company did not
declare or pay any cash dividends on its Common Stock. The Company does not
anticipate declaring or paying any dividends in the foreseeable future.
Management intends to apply earnings, if any, to the development of the
business of its subsidiaries. The Company's loan agreements prohibit the
Company from paying dividends without the prior consent of the Company's
lending institution. See Note 8 to the Company's Audited Consolidated
Financial Statements for the years ended December 31, 1997, 1996 and 1995
included in Appendix B to this Proxy Statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues for the Company were $17,293,000 for the quarter ending
September 30, 1998, compared to $12,271,000 for the same period in
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1997. The increase in 1998 was primarily due to increased sales by
CTA, and from acquisitions. Revenues increased for the nine months
ending September 30, 1998 over the same period in 1997 by $9,006,000.
This is primarily due to the acquisitions previously discussed, offset
by a decrease in revenue for The Colonel's.
Cost of sales increased from 69 percent of sales for the three months
ended September 30, 1997, to 73 percent for the same three-month period in
1998. Cost of sales for the first nine months of 1998 increased by 1
percent over the same period in 1997 to 72 percent. This increase is
primarily due to poor bumper sales resulting from mild conditions in the
snow belt during the 1997-1998 winter and the Company's decision to reduce
manufacturing to decrease on-hand bumper inventory.
Selling, general and administrative expenses as a percentage of sales
for the third quarter of 1998 grew to 18 percent, compared to 14 percent of
sales in the same period of 1997. Selling, general and administrative
expense increased 2.9 percent from 13.8 percent to 16.7 percent for the
nine months ending in 1998 as compared to the same period in 1997. This is
primarily due to additional operations that were acquired during the year
and the increased information systems expense in connecting each location
to the Company's headquarters.
Net income decreased $722,000 for the three months ended September 30,
1998 as compared to the three months ended September 30, 1997 mainly due to
the increase in selling, general and administrative expenses of $1.4
million compared to the same period in 1997. Overall, net income for the
nine months ending September 30, 1998 declined to $2,485,000 compared to
$2,977,000 for the same period in 1997. This is due to the increased
selling, general and administrative expenses of $2.5 million as a result of
expanding CTA's and Rugged Liner's businesses and an increase in interest
expense of $431,000.
Interest expense increased by $162,000 for the three months ending
September 30, 1998, over the same period of 1997. Interest for the nine
months ending September 30, 1998 increased $431,000 compared to same period
in 1997. The increase is the result of a higher average outstanding balance
under the new line of credit added in April 1998 and the Company's
acquisition line of credit.
The Company's income tax liability for the third quarter of 1998 was
approximately $627,000. The Company has accrued $1,422,000 to date for
federal income taxes.
Earnings per share during the third quarter of 1998, as compared to
the third quarter of 1997, were $.02 per share and $.05 per share,
respectively. For the nine months ending September 30, 1998 earnings per
share were $.10 compared to $.12 for the same period in 1997.
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YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER
31, 1996
Revenues for the Company were $46,350,000 and $40,263,000 for the
years ended December 31, 1997 and 1996, respectively. The $6,000,000
growth in 1997 was primarily due to the addition of revenues from the
bedliner plant and acquisitions. Seller continues to aggressively
market its products through improved quality, services and delivery.
Cost of sales increased to 72% of sales in 1997 compared to
approximately 70% of sales during the period ended December 31, 1996.
Although general economic increases in the cost of supplies and labor
have occurred over the past two years, Seller has been able to offset
many of these increases by operating more efficiently. Start up costs
for the newly acquired Riverside manufacturing facility and other retail
warehouses in North Carolina and Pennsylvania contributed to the increase.
Gross profits for 1997 and 1996 reflected approximately 28% and 30% of
sales, respectively.
Selling, general and administrative expenses decreased from
$6,931,000 in 1996 to $6,790,000 in 1997. These expenses represented
15% and 17% of sales in 1997 and 1996, respectively. This decrease was
primarily due to the installation of a new computer program that
allows information at the warehouse level to transfer automatically to
Milan. In addition, all accounts payable operations were moved to
Milan, resulting in a savings of personnel costs.
Interest expense increased from $1,214,000 in 1996 to $1,299,000
in 1997. This increase is due to the additional debt which was used
to finance the new equipment for the bedliner manufacturing facility
and working capital for inventory at the new warehouses.
Interest income increased in 1997 by $98,000 over the 1996 period.
Additional interest income in 1997 was generated by assessing customer
finance charges and interest on loans that the Company made.
The Company's net income before income taxes was $5,354,000, or
12% of sales in 1997, compared to $4,070,000, or 10% of sales in 1996.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER
31, 1995
The financial statements contain only the results of operations
of the Company and do not include any results of operations of
Brainerd for the year ended December 31, 1995 (as the merger with
Brainerd was not effective until December 31, 1995). For the year
ended December 31, 1996, the consolidated financial statements contain
the results of operations for both entities.
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Revenues for the Company were $40,263,000, and $28,503,000, for
the years ended December 31, 1996 and 1995, respectively. The
$11,760,000 growth in 1996 was primarily due to the addition of income
for the first time from BIR as well as from CTA and the new factory
warehouse in New Jersey in the amount of $2,765,000, $3,780,000, and
$1,033,000, respectively. Existing operations contributed an
additional $4,182,000 in growth during 1996.
In prior years, the Company offered free freight for full-truck
purchases. This policy was begun in 1993 in an effort to attract the
customers who had left after a fire in June 1993. This policy is no
longer in place. However, the Company continues to aggressively market
its products through improved quality, services and delivery.
Cost of sales have consistently been approximately 70% of sales
during the two-year period ended December 31, 1996. Although general
economic increases in the cost of supplies and labor have occurred
over the past two years, the Company has been able to offset these
increases by operating more efficiently. Also included in cost of
sales for 1996 are start-up costs for CTA and the New Jersey factory
outlet. Gross profits from 1995 to 1996 remained steady at
approximately 30% of sales.
Selling, general and administrative expenses significantly
increased from $3,534,000 in 1995 to $6,931,000, or 17% of sales, in
1996 due to the addition of the warehouse in New Jersey and the
addition of the CTA plant in Owosso, Michigan.
Interest expense rose from $971,000 in 1995 to $1,214,000 in
1996. This increase is due to the additional debt which was used to
finance the new equipment for the CTA manufacturing facility.
Interest income increased in 1995 by $13,000 but decreased in
1996 by $47,000. During 1995, the Company received insurance
proceeds which were invested until the funds were needed, resulting in
increased interest income. Additional interest income was generated by
assessing customer finance charges.
The Company's net income before income taxes was $4,070,000, or
10% of sales, in 1996, compared to $4,195,000, or 15% of sales, in 1995.
The Company operated as an "S" corporation until the merger with
Brainerd and related transactions took place on December 31, 1995. As
a result of the merger, the Company changed its status to a "C"
corporation. This status change resulted in a charge to income of
$2,333,000, which represents the net amount of deferred taxes recorded
at December 31, 1995.
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LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1998 AS COMPARED TO DECEMBER 31, 1997
The Company's consolidated current assets increased from $16,267,000
at December 31, 1997 to $23,732,000 at September 30, 1998. Consolidated
current liabilities increased from $13,160,000 at December 31, 1997 to
$15,837,000 at the end of the third quarter of 1998.
Cash decreased from $1,723,000 at December 31, 1997 to $1,300,000 at
September 30, 1998, primarily due to timing differences in collections and
pay downs on the Company's line of credit.
The accounts receivable balance at September 30, 1998 increased by
approximately $2,867,000 compared to December 31, 1997, primarily due to
the acquisition of the Rugged Liner Companies, and the other additional
fifteen warehouse/retail outlet stores that were acquired or started during
the first three quarters of 1998.
A note receivable from the majority shareholder was established during
the third quarter of 1997 for $1,044,000. The balance at September 30, 1998
and December 31, 1997 was $844,000 and $1,044,000, respectively. The note
receivable bears interest at 8% annually.
The inventory balance increased from $9,214,000 at December 31, 1997
to $13,795,000 as of September 30, 1998. This was primarily due to the
addition of 15 new retail outlet stores, Rugged Liner and the broadening of
inventories at Eastern Off Road to a more optimum level.
Prepaid expenses decreased by $92,000 from December 31, 1997 to
September 30, 1998, due to the normal expense of prepaid insurance and
taxes, offset by advance rentals and security deposits for new CTA
warehouses.
Property, plant and equipment increased by $2,953,000 between December
31, 1997 and September 30, 1998. Depreciation expense was approximately
$3,670,000 for the nine months ended September 30, 1998. The Company used
its best estimate and available information to preliminarily allocate the
purchase price to the net assets acquired in the Rugged Liner acquisition.
Any subsequent adjustments that may be required will be offset to goodwill.
Deposits increased from $630,000 at December 31, 1997 to $1,360,000 at
September 30, 1998. The increase relates to progress payments toward
various new tools that are on order for The Colonel's and CTA. The Company
records payments for uncompleted tools in deposits until the tool is
completed, at which time the tool is transferred to property, plant and
equipment.
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Goodwill increased from $379,000 as of December 31, 1997 to $3,152,000
at September 30, 1998. The $2,773,000 increase is related to the
acquisition of the Rugged Liner Companies and is being amortized over seven
years along with goodwill recognized for the other acquisitions completed
in 1998.
Notes payable increased by $450,000 as the Company drew down on the
line of credit to purchase additional inventories and established an
acquisition line of credit for the purchase of Rugged Liner and other
retail outlet stores. See "Outstanding Debt," below.
Accounts payable increased from $1,837,000 at December 31, 1997 to
$4,500,000 at September 30, 1998. The increase is primarily the result of
increased accounts payable from the Rugged Liner Companies and various
other acquisitions during 1998, an increase in inventory levels and normal
accounts payable activity from the acquired retail outlet stores.
Accrued expenses increased $163,000 due to a credit for merchandise
granted in connection with an asset acquisition and advance ticket sales by
BIR.
OUTSTANDING DEBT
In May 1997, the Company entered into a $7,000,000 term note which
requires monthly principal payments of $167,000 plus interest at prime plus
0.25 percent. The term note has a maturity date of November 1, 2000. The
loan is secured by all of the Company's assets and had a balance of
$4,328,000 at September 30, 1998.
The Company's line of credit was renegotiated in April 1998. The
Company's $6,000,000 line of credit was increased to $8,000,000 and now
expires in May 1999. The line of credit is secured by all of the Company's
assets. Interest is paid at prime on a monthly basis. From time to time
the Company funds its line of credit with Eurodollars that allow the
Company to borrow at a rate below prime for a fixed period of time. The
outstanding balance on the line of credit was $6,450,000 at September 30,
1998.
In April 1998, the Company secured a $7,500,000 acquisition line of
credit with its primary lending institution, part of which was utilized in
the acquisition of the Rugged Liner Companies. The Company will pay
interest only on the outstanding balance until December 1998 when the
balance will be rolled into a term note where monthly payments of both
principal and interest will be due. The interest rate is equal to prime.
The balance at September 30, 1998 was $5,619,000.
BIR has a $300,000 line of credit which is secured by all of its
assets. There was a balance of $1,000 at September 30, 1998.
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BIR has a mortgage with a balance of $300,000 at September 30, 1998.
This loan requires quarterly interest payments at 2 percent above prime and
a single $50,000 principal payment in the third quarter of each year
through 2004.
In 1996, The Colonel's acquired three capital leases to finance
equipment for CTA. The Colonel's leased $6,435,000 worth of equipment
under a six-year agreement with monthly payments of approximately $100,000.
Each lease includes an option to purchase the equipment for $1.00 upon
expiration of the lease term. The leases are collateralized by the
machinery. At September 30, 1998, the balance due on these three capital
leases was $4,629,000.
During 1997, the Company also entered into a 24-month lease extension
on the semi-tractor trailers that it was already leasing from its lending
institution. Pursuant to the extension agreement, the Company continues to
lease the vehicles for an aggregate monthly payment of $15,000. Under the
extension agreement, the Company has an option to buy the trailers for
$1.00 upon completion of the extended term. The balance on this capital
lease was $138,000 at September 30, 1998.
In connection with the purchase of Dealers Choice, the Company assumed
a Small Business Administration loan. The balance on this loan as of
September 30, 1998 was $210,000. Also, the Company assumed a real estate
loan with the balance of $145,000 at September 30, 1998. The Company plans
to pay both loans off in the near future.
The Company has financed vehicles to be used at the sales retail
outlet stores. The collective balance on these vehicles at September 30,
1998 was $143,000. The collective balance on financed vehicles for all
other operations at September 30, 1998 was $89,000.
The Company anticipates that future capital requirements and
acquisitions will be financed through earnings from operations, amounts
under its line of credit, and amounts available on the acquisition line of
credit.
RECENT ACQUISITIONS
CTA made six acquisitions during the first six months of 1998: Road N
Truck, in Thousand Oaks, California; Duraliner, in Nashville, Tennessee;
the Rugged Liner Companies, as described above; Sun Shade Custom, in
Franklin, Tennessee; Dealers Choice Distribution, Inc., in Collinsville,
Illinois; and DC Sales, Inc. in Collinsville, Illinois. In addition, CTA
acquired seven retail outlet stores in three separate purchases during the
third quarter of 1998: Accessories Plus in Santa Clara, California; Truck
Stuff in South Sacramento, California and Roseville, California; and Camper
Place Warehouse, which has locations in El Paso, Texas, and Las Cruces,
Ruidoso, and Roswell, New Mexico.
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YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
During the year ended December 31, 1997, the Company has funded
its working capital and capital expenditure requirements using cash flows
from operations and bank borrowings under revolving lines of credit and bank
notes.
The Company's consolidated current assets increased from $13,638,000 at
December 31, 1996 to $16,267,000 at December 31, 1997. This increase
primarily relates to the $1,402,000 increase in cash as a result of the year
end sale of the Boynton Gardens property that the Company held in Florida,
inventory increase of $866,000 as a result of the addition of the new stores
and the $368,000 increase in accounts receivable. See below for further
discussion of these changes. The Company's consolidated current liabilities
decreased from $16,659,000 at December 31, 1996 to $13,160,000 at December
31, 1997. This decrease primarily relates to a $1,695,000 decrease in
accounts payable, a decrease of $1,426,000 in accrued expenses and a
reduction of $269,000 in income taxes payable.
Cash increased at year-end 1997 because of the sale of the Boynton
Gardens property. The sale of the land for $1,207,000 was completed on
December 31, 1997. Proceeds were subsequently used to pay down the line
of credit.
Accounts receivable increased by approximately $368,000 as of December
31, 1997 over 1996 due to increased sales and the addition of 12 new
warehouse distribution stores. The Company's subsidiaries continue to
offer early payment discounts and incentives for prompt payments to their
customers.
Inventories increased by approximately $867,000 at the end of 1997
as compared to year end 1996, primarily due to the new warehouses and
distribution stores.
Prepaid Expenses increased $199,000 between December 31, 1996 and 1997
due to advance payment of rents.
Plant, property and equipment net book value decreased from $27,028,000
as of December 31, 1996 to $26,328,000 at December 31, 1997. This was due
to normal scheduled depreciation of $4,357,000, the sale of the Florida
property and other various items, net of accumulated depreciation, for
$1,128,000 and additions of $4,785,000.
Note receivable of $1,044,000 at December 31, 1997 is from the majority
shareholder of the Company.
Deposits on tools and machinery decreased by approximately $526,000
during 1997 as various equipment and tools were placed in service. The
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Company separately classifies deposits made toward tools and machinery from
its regular assets until the equipment has been delivered, made operational
and placed in service. At December 31, 1997, approximately $630,000 remains
in deposits for tools currently under construction.
As a result of the merger with Brainerd, the value paid for BIR
exceeded the value of its assets by $425,000. Additionally, several of
the businesses from which the Company purchased assets in 1997 resulted
in goodwill. Goodwill is being amortized over a seven-year period and
totals $379,000 at December 31, 1997.
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 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. The statement changes the
reporting of certain items currently reported in the stockholders'
equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of
general purpose financial statements. Adoption of this standard will
require additional disclosure only. The Company adopted this standard
effective January 1, 1998, as required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which is
effective for fiscal years beginning after December 15, 1997. This
standard requires certain information regarding segments of a business
enterprise to be reported based on the way management organizes and
evaluates segments within the Company. The standard also requires
disclosures regarding products and services, geographical areas and
major customers. Adoption of this standard will require the Company
to include additional detail in its disclosures, including certain
disaggregated operating information. The Company will adopt this
standard in 1998, as required, but is not currently planning to elect
early adoption for interim financial periods during the year. At this
time, before giving effect to the Sale management anticipates that the
Company's reported segments will be composed of its three wholly owned
subsidiaries: Seller, BIR and CTA.
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EFFECTS OF YEAR 2000
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
could have date-sensitive "embedded technology" that could result in
failures or interruptions as a result of the year 2000 issue.
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 believes that these activities are
substantially complete at CTA, Rugged Liner and BIR. Activities with
respect to Seller are expected to begin in late 1998. These
activities generally will require the replacement of approximately
twenty personal computers and software updates for each of Seller's
five primary locations.
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 is in the process of initiating formal communications
with 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. The Company
has been informed by two of its significant suppliers, as well as
certain other parties with whom the Company conducts business, that
they are year 2000 compliant or will be in the near future. Because
the Company does not have any computer or other data links with its
customers, suppliers or others, the failure of such parties to
remediate their year 2000 problems is not expected to interfere
materially with the Company's systems.
In the aggregate, CTA, BIR and Rugged Liner have spent
approximately $269,000 to date to address this issue. Seller expects
to spend approximately $50,000 to replace the computers and update the
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software described above. 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 noted
above the Company has received assurances from certain third parties
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.
As of the date of this Proxy Statement, the Company has not
developed a formal contingency plan for addressing the year 2000 issue.
The Company believes that certain business operations currently
conducted using computers could be accomplished manually for some
period of time without material difficulties. The Company plans to
investigate the development of a contingency plan.
FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in
this Proxy Statement, 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
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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; the cost and availability
of inventories, raw materials and equipment furnished to the Company; the
degree of competition by the Company's competitors; changes in government
and regulatory policies; changes in interest rates or tax laws; 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.
DISSENTERS' RIGHTS
Holders of Common Stock are entitled to dissenters' rights under
the MBCA pursuant to which such holders may dissent from the Sale and
obtain payment for their shares of Common Stock in accordance with the
provisions of Sections 761 through 774 of the MBCA (the "Dissenters'
Rights Statute"), copies of which are attached to this Proxy Statement
as Appendix C.
The following is a summary of the Dissenters' Rights Statute and
the procedures for dissenting from the Sale and demanding dissenters'
rights thereunder. This summary is qualified in its entirety by
reference to the Dissenters' Rights Statute, which is reprinted in
full as Appendix C to this Proxy Statement. Any holder of Common Stock
who wishes to exercise statutory dissenters' rights or who wishes to
preserve the right to do so should refer to the Dissenters' Rights
Statute and consult counsel prior to taking any action. FAILURE TO
STRICTLY COMPLY WITH THE PROCEDURES SET FORTH IN THE DISSENTERS'
RIGHTS STATUTE COULD RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
The Dissenters' Rights Statute provides that persons in whose
name shares of Common Stock are registered in the records of the
Company, or beneficial owners of shares to the extent of the rights
granted by a nominee certificate on file with the Company, and persons
who are beneficial owners of shares held by nominees as the record
holders (collectively defined, for purposes of this section only, as
"shareholders") are entitled to dissenters' rights, but only if they
comply with the provisions set forth in the Dissenters' Rights
Statute.
Shareholders who wish to exercise dissenters' rights:
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(a) must deliver to the Company, before the vote with respect to
the Amended Asset Purchase Agreement is taken, written notice of
their intent to demand payment for their shares if the Amended
Asset Purchase Agreement is approved; and
(b) must not vote their shares in favor of approval of the Amended
Asset Purchase Agreement.
Shareholders who do not satisfy these requirements are not entitled
to payment for their shares under the Dissenters' Rights Statute. Although
shareholders electing to exercise dissenters' rights under the Dissenters'
Rights Statute must not vote FOR approval of the Amended Asset Purchase
Agreement and the Sale, such shareholders are not required to vote against
approval of the Amended Asset Purchase Agreement and the Sale to exercise
dissenters' rights. If a shareholder returns a signed proxy, but does not
specify a vote against approval of the Amended Asset Purchase Agreement and
the Sale or a direction to abstain, the proxy will be voted for approval
of the Amended Asset Purchase Agreement and the Sale, and cause the waiver
of that shareholder's dissenters' rights. A vote against approval of the
Amended Asset Purchase Agreement and the Sale is not sufficient to comply
with the notice requirements described above.
If the Amended Asset Purchase Agreement and the Sale are approved,
the Company must notify all shareholders entitled to assert dissenters'
rights under the Dissenters' Rights Statute that the action was taken
and send them a dissenters' notice no later than 10 days after the
Closing of the Sale.
Upon receipt of the dissenters' notice, dissenters must make a
payment demand by the date set by the Company in the notice. A
shareholder who elects to exercise dissenters' rights must mail or
deliver his or her written demand to: The Colonel's International,
Inc., Attn: Corporate Secretary, 620 South Platt Road, Milan, Michigan
48160. The written demand for payment should comply with the
provisions of the Dissenters' Rights Statute and should specify the
shareholder's name and mailing address, the number of shares of Common
Stock owned, and that the shareholder is demanding payment for his or
her shares. The shareholder also must certify that the shareholder
acquired beneficial ownership of the shares before the date set forth
in the dissenters' notice and deposit his or her share certificates in
accordance with the terms of the dissenters' notice. Failure to make a
payment demand or to deposit the share certificates where required,
each by the date set forth in the dissenters' notice, shall forfeit
the shareholder's entitlement to payment for his or her shares under
the Dissenters' Rights Statute.
Within seven days after the Sale is consummated or a payment
demand is received, whichever occurs later, the Company will pay
-67-
<PAGE>
dissenting shareholders who complied with the Dissenters' Rights
Statute the amount that the Company estimates to be the fair value of
the dissenters' shares, plus accrued interest.
A dissenting holder of Common Stock may notify the Company in
writing of his or her own estimate of the fair value of his or her
shares of Common Stock and the amount of interest due, and demand
payment of that estimate, less any payment made by the Company as
described above (or reject the Company's offer, if any, made to
shareholders who were not beneficial holders of Common Stock prior to
the time that the transaction was publicly announced), if (a) the
dissenter believes that the amount paid by the Company (or offered as
described above) is less than the fair value of such shares or that
interest was incorrectly calculated or (b) the corporation fails to
make payment within 60 days after the date set for demanding payment
in the dissenters' notice. This demand must be made within 30 days
after the Company made (or offered as described above) payment to the
shareholder. A shareholder who fails to meet this deadline waives his
or her right to demand payment and must accept the amount paid (or
offered) by the Company.
If a dissenter has rejected the Company's offer and demanded
payment of the fair value of the shares and interest due, the Company
must (unless it accepts the dissenter's demand) commence a judicial
proceeding within 60 days after receiving the payment demand and
petition an appropriate court, as described in the Dissenters' Rights
Statute, to determine the fair value of the shares and accrued
interest.
All dissenters whose demands remain unsettled will be made
parties to such a judicial proceeding, the purpose of which is to
determine the fair value of the shares. To this end, the court may
appoint one or more appraisers to receive evidence and recommend
decision on the question of fair value. Each dissenter made a party to
the proceeding is entitled to judgment for the amount the court finds
to be the fair value of his or her shares, plus interest, minus the
amount, if any, that the Company previously paid such dissenter for
his or her shares. The court shall assess the costs against the
Company, except that the court may assess costs against all or some of
the dissenters to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment
under the Dissenters' Rights Statute.
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<PAGE>
SHARE OWNERSHIP
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF THE COMPANY
Holders of record of shares of Common Stock at the close of
business on the Record Date will be entitled to vote at the Special
Meeting. As of the Record Date, there were 24,631,832 shares of
Common Stock outstanding. Each share of Common Stock is entitled to
one vote.
The following table sets forth information concerning the number
of shares of Common Stock held by each shareholder who is known to the
Company's management to be the beneficial owner of more than 5% of the
outstanding shares as of the Record Date:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF NATURE OF
OF BENEFICIAL BENEFICIAL BENEFICIAL PERCENT OF
OWNER OF COMMON STOCK OWNERSHIP OWNERSHIP CLASS<F1>
- --------------------- --------- --------- ----------
<S> <C> <C> <C>
Donald J. Williamson<F2> 11,934,580 shares Sole voting and investment power 48.32%
620 South Platt Road 0 shares Shared voting and investment power 0.00%
Milan, MI 48160
Patsy L. Williamson<F2> 11,639,870 shares Sole voting and investment power 47.12%
620 South Platt Road 0 shares Shared voting and investment power 0.00%
Milan, MI 48160
<FN>
____________________
<F1> See note 1 to the following table.
<F2> See note 2 to the following table.
</FN>
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the beneficial ownership of shares
of Common Stock, held as of the Record Date by each director, each of
the named executive officers and by all directors and executive
officers of the Company as a group:
-69-
<PAGE>
<TABLE>
<CAPTION>
NAME AMOUNT OF NATURE OF
OF BENEFICIAL BENEFICIAL BENEFICIAL PERCENT OF
OWNER OF COMMON STOCK OWNERSHIP OWNERSHIP CLASS<F1>
- --------------------- ---------- ---------- ----------
<S> <C> <C> <C>
John Carpenter 0 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
J. Daniel Frisina<F3><F5> 7,895 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
Ted M. Gans<F3><F5> 7,895 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
Mark German<F6> 413,167 shares Sole voting and investment power 1.67 <F*>
0 shares Shared voting and investment power <F*>
Donald R. Gorman<F3><F5> 7,370 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
Michael J. McCloskey<F4> 0 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
Ben C. Parr<F3><F5> 7,370 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
William Singleterry<F7> 5,000 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
Mark D. Stevens<F3> 5,700 shares Sole voting and investment power <F*>
0 shares Shared voting and investment power <F*>
Donald J. Williamson<F2><F3> 11,934,580 shares Sole voting and investment power 48.32 <F*>
0 shares Shared voting and investment power <F*>
Patsy L. Williamson<F2><F3><F4> 11,639,870 shares Sole voting and investment power 47.12 <F*>
0 shares Shared voting and investment power <F*>
Directors and Officers 24,035,847 shares Sole voting and investment power 97.30 <F*>
as a group 0 shares Shared voting and investment power 0.00 <F*>
<FN>
- ----------------------------------
<F*> Does not exceed 1%.
<F1> PERCENTAGES: The percentages set forth in this column were
calculated on the basis of (i) 24,631,832 shares of Common Stock
-70-
<PAGE>
outstanding as of the Record Date plus (ii) 68,715 shares of
Common Stock subject to options that were exercisable on the
Record Date or that will become exercisable within 60 days after
the Record Date. Shares subject to such options are considered
to be outstanding for purposes of this chart.
<F2> THE WILLIAMSONS: In the mergers by which Brainerd, the Company's
predecessor, merged with and into the Company and by which Seller
became a wholly owned subsidiary of the Company, a total of
23,500,000 shares of Common Stock in the Company were issued to
Donald J. Williamson and Patsy L. Williamson, proportionate to
their ownership of shares of common stock of Seller. Mrs.
Williamson also has options to acquire 6,735 shares of Common
Stock that were exercisable as of the Record Date.
<F3> STOCK OPTION GRANTS TO DIRECTORS: Pursuant to the Company's 1995
Long-Term Incentive Plan (the "LTIP"), the Company's Board of
Directors in February 1997 granted each non-employee Director of
the Company (Mrs. Williamson, Mr. Parr, Mr. Gorman, Mr. Darcy,
Mr. Frisina and Mr. Gans) options to acquire up to 5,000 shares
of Common Stock. These stock options were exercisable as of the
Record Date. The Board of Directors also granted Mr. Stevens
options to acquire 5,000 shares of Common Stock, which options
were exercisable as of the Record Date. Mrs. Williamson is not
currently a Director of the Company.
<F4> MICHAEL J. MCCLOSKEY: Mr. McCloskey resigned as Chief Executive
Officer as of June 30, 1997. Mr. McCloskey had been granted
certain options to acquire Common Stock. However, these options
were canceled upon Mr. McCloskey's resignation.
<F5> AUTOMATIC STOCK OPTION GRANTS TO NON-EMPLOYEE DIRECTORS: Under
the LTIP, each non-employee director of the Company receives an
automatic grant of options in March and September of each year.
The number of shares subject to each option started at 500 when
the LTIP was inaugurated in 1996. Under the terms of the LTIP,
for each grant after that time the number of shares subject to
each option increases by 5% from the previous grant. When a new
non-employee Director is elected or appointed to the Board, he or
she will immediately receive an option in an amount equal to the
last grant. Messrs. Frisina and Gans each received options to
purchase a total of 1,185 shares of Common Stock pursuant to
these automatic grant provisions during 1997. Messrs. Parr and
Gorman and Mrs. Williamson each received options to purchase a
total of 1,735 shares pursuant to these provisions in 1997, in
part due to the fact that each of them received options to
purchase 550 shares upon their appointment to the Board of
Directors in February 1997. All of the foregoing options are
-71-
<PAGE>
currently exercisable. Messrs. Frisina, Gans, Parr and Gorman
and Ms. Williamson were each granted options to purchase 635
shares of Common Stock on March 1, 1998. These options are
currently exercisable. Messrs. Frisina, Gans, Parr and Gorman
were each granted options to purchase 665 shares of Common Stock
on September 1, 1998. These options are not yet exercisable.
<F6> MARK GERMAN: Mr. German is the former majority shareholder of the
Rugged Liner Companies, four Pennsylvania corporations acquired
by the Company in April 1998. In these acquisitions, Mr. German
was issued a total of 413,167 shares of the Company's Common
Stock. Mr. German's father, mother and sister each were issued
13,620 shares of Common Stock. Mr. German disclaims beneficial
ownership of the shares owned by his family members and such
shares are not included in the number shown in the table.
<F7> STOCK OPTION GRANTS TO OFFICERS: In February 1997, Mr. Singleterry was
granted options to acquire up to 5,000 shares of Common Stock. These
stock options are currently exercisable.
</FN>
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Deloitte & Touche LLP, the Company's
independent accountants for the current fiscal year and the past
fiscal year, are expected to be present at the Special Meeting, will
have an opportunity to make a statement if they so desire to do so and
are expected to be available to respond to appropriate questions from
shareholders.
SHAREHOLDER PROPOSALS
Proposals of shareholders must be received by the Company no
later than January 15, 1999 to be considered for inclusion in the
Company's proxy statement for its 1999 annual meeting of shareholders.
Such shareholder proposals should be made in accordance with
Securities and Exchange Commission Rule 14a-8 and should be addressed
to the attention of the Secretary of the Company, 620 South Platt
Road, Milan, Michigan 48160. All other shareholder proposals must be
received by the Company no later than March 31, 1999 to be considered
to have been timely submitted to the Company.
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<PAGE>
APPENDIX A
AMENDED AND RESTATED
AMENDED ASSET PURCHASE AGREEMENT
Dated as of the 24th day of November, 1998
by and among
COLONEL'S ACQUISITION CORP.
and
THE COLONEL'S, INC.
THE COLONEL'S INTERNATIONAL, INC.
DONALD J. WILLIAMSON
<PAGE>
TABLE OF CONTENTS
ARTICLE I. PURCHASE AND SALE OF THE PURCHASED ASSETS. . . . . . . . . .A-1
Section 1.01. Purchase and Sale of Purchased Assets. . . . . . . .A-1
Section 1.02. Purchase Price . . . . . . . . . . . . . . . . . . .A-3
Section 1.03. Assumed Liabilities. . . . . . . . . . . . . . . . .A-3
Section 1.04. Allocation of Purchase Price . . . . . . . . . . . .A-3
ARTICLE II. REPRESENTATIONS AND WARRANTIES
OF SELLER AND THE SHAREHOLDER. . . . . . . . . . . . . . . .A-3
Section 2.01. Title to Property. . . . . . . . . . . . . . . . . .A-4
Section 2.02. Authority; Consent . . . . . . . . . . . . . . . . .A-4
Section 2.03. Consents and Approvals . . . . . . . . . . . . . . .A-5
Section 2.04. Corporate Organization . . . . . . . . . . . . . . .A-5
Section 2.05. Financial Statements . . . . . . . . . . . . . . . .A-5
Section 2.06. Absence of Undisclosed Liabilities . . . . . . . . .A-5
Section 2.07. Transactions with Certain Persons. . . . . . . . . .A-5
Section 2.08. Tax Matters. . . . . . . . . . . . . . . . . . . . .A-6
Section 2.09. Compliance with Laws; No Default or Litigation . . .A-6
Section 2.10. Real Property-Owned Premises . . . . . . . . . . . .A-7
Section 2.11. Real Property-Leased Premises. . . . . . . . . . . .A-7
Section 2.12. Personal Property-Owned. . . . . . . . . . . . . . .A-8
Section 2.13. Personal Property-Leased . . . . . . . . . . . . . .A-8
Section 2.14. Contracts. . . . . . . . . . . . . . . . . . . . . .A-8
Section 2.15. Accounts and Notes Receivable; Inventory . . . . . .A-9
Section 2.16. Equipment and Machinery. . . . . . . . . . . . . . .A-9
Section 2.17. Supplies . . . . . . . . . . . . . . . . . . . . . A-10
Section 2.18. Licenses and Permits . . . . . . . . . . . . . . . A-10
Section 2.19. Intellectual Property. . . . . . . . . . . . . . . A-10
Section 2.20. Claims Against Third Parties . . . . . . . . . . . A-10
Section 2.21. Labor Relations; Employees . . . . . . . . . . . . A-10
Section 2.22. Employee Benefit Plans . . . . . . . . . . . . . . A-11
Section 2.23. Environmental Compliance . . . . . . . . . . . . . A-13
Section 2.24. No Guarantees. . . . . . . . . . . . . . . . . . . A-14
Section 2.25. Insurance. . . . . . . . . . . . . . . . . . . . . A-14
Section 2.26. Power of Attorney. . . . . . . . . . . . . . . . . A-15
Section 2.27. No Brokers' or Finders' Fees . . . . . . . . . . . A-15
Section 2.28. Sole Shareholder . . . . . . . . . . . . . . . . . A-15
Section 2.29. Disclosure . . . . . . . . . . . . . . . . . . . . A-15
Section 2.30. Absence of Certain Changes or Events . . . . . . . A-15
Section 2.31. Year 2000. . . . . . . . . . . . . . . . . . . . . A-17
Section 2.32. Representations and Warranties as of Date
Hereof . . . . . . . . . . . . . . . . . . . . . . A-17
Section 2.33. Disclosure . . . . . . . . . . . . . . . . . . . . A-17
i
<PAGE>
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . A-18
Section 3.01. Authority; Consent . . . . . . . . . . . . . . . . A-18
Section 3.02. Consents and Approvals . . . . . . . . . . . . . . A-18
Section 3.03. Litigation . . . . . . . . . . . . . . . . . . . . A-19
Section 3.04. Corporate Organization . . . . . . . . . . . . . . A-19
Section 3.05. No Brokers' or Finders' Fees . . . . . . . . . . . A-19
Section 3.06. Payment of Assumed Liabilities . . . . . . . . . . A-19
Section 3.07. Access to Information. . . . . . . . . . . . . . . A-19
Section 3.08. Disclosure . . . . . . . . . . . . . . . . . . . . A-19
Section 3.09. Representations and Warranties as of Date Hereof . A-19
ARTICLE IV. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . A-19
Section 4.01. Taxes. . . . . . . . . . . . . . . . . . . . . . . A-19
Section 4.02. Cooperation on Tax Matters . . . . . . . . . . . . A-20
Section 4.03. Form 8594. . . . . . . . . . . . . . . . . . . . . A-20
ARTICLE V. EMPLOYEES AND EMPLOYEE PLANS. . . . . . . . . . . . . . . A-20
Section 5.01. Termination of Existing Employees. . . . . . . . . A-20
Section 5.02. Offers of Employment . . . . . . . . . . . . . . . A-20
Section 5.03. Terms of Employment. . . . . . . . . . . . . . . . A-20
Section 5.04. Benefit and Employee Plans . . . . . . . . . . . . A-21
Section 5.05. COBRA Obligations. . . . . . . . . . . . . . . . . A-21
ARTICLE VI. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. . . . . . . A-21
Section 6.01. Deliveries by Seller . . . . . . . . . . . . . . . A-21
Section 6.02. Representations and Warranties of Seller and
the Shareholder. . . . . . . . . . . . . . . . . . A-21
Section 6.03. Compliance . . . . . . . . . . . . . . . . . . . . A-21
Section 6.04. Compliance Certificate . . . . . . . . . . . . . . A-21
Section 6.05. Authorizations and Consents. . . . . . . . . . . . A-21
Section 6.06. No Change in Business or Financial Condition
Operation of Business in Ordinary Course . . . . . A-21
Section 6.07. Employment Agreements. . . . . . . . . . . . . . . A-22
Section 6.08. Noncompetition Agreements. . . . . . . . . . . . . A-22
Section 6.09. Milan Property Real Estate Purchase Agreement. . . A-22
Section 6.10. Consent of Simplified Employment Services. . . . . A-22
Section 6.11. Perfection of Title. . . . . . . . . . . . . . . . A-22
Section 6.12. Results of Due Diligence . . . . . . . . . . . . . A-22
Section 6.13. Audited November 30 Financial Statements . . . . . A-22
Section 6.14. Closing Balance Sheet. . . . . . . . . . . . . . . A-22
Section 6.15. License Agreement. . . . . . . . . . . . . . . . . A-22
Section 6.16. No New Lease Agreements. . . . . . . . . . . . . . A-22
Section 6.17. Environmental Reports. . . . . . . . . . . . . . . A-23
Section 6.18. Transfer of Tax Abatement Certificates . . . . . . A-23
ii
<PAGE>
Section 6.19. West Memphis Lease Agreement . . . . . . . . . . . A-23
Section 6.20. Subordination Agreement. . . . . . . . . . . . . . A-23
ARTICLE VII. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER . . . . . . A-23
Section 7.01. Deliveries by Buyer. . . . . . . . . . . . . . . . A-23
Section 7.02. Representations and Warranties of Buyer. . . . . . A-23
Section 7.03. Compliance . . . . . . . . . . . . . . . . . . . . A-23
Section 7.04. Compliance Certificate . . . . . . . . . . . . . . A-24
Section 7.05. Authorizations and Consents. . . . . . . . . . . . A-24
Section 7.06. Employment Agreement . . . . . . . . . . . . . . . A-24
Section 7.07. Noncompetition Agreements. . . . . . . . . . . . . A-24
Section 7.08. Milan Property Real Estate Purchase Agreement. . . A-24
Section 7.09 Shareholder Vote . . . . . . . . . . . . . . . . . A-24
Section 7.10 Lease Agreement. . . . . . . . . . . . . . . . . . A-24
ARTICLE VIII. CLOSING AND POST-CLOSING MATTERS . . . . . . . . . . . . A-24
Section 8.01. Closing Date . . . . . . . . . . . . . . . . . . . A-24
Section 8.02. Deliveries by Seller . . . . . . . . . . . . . . . A-24
Section 8.03. Deliveries by Buyer. . . . . . . . . . . . . . . . A-25
Section 8.04. Subsequent Documentation . . . . . . . . . . . . . A-25
ARTICLE IX. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . A-26
Section 9.01. Indemnification by Seller and TCI. . . . . . . . . A-26
Section 9.02. Indemnification by Buyer . . . . . . . . . . . . . A-26
Section 9.03. Notice . . . . . . . . . . . . . . . . . . . . . . A-26
Section 9.04. Defense of Claims. . . . . . . . . . . . . . . . . A-27
Section 9.05. Limitations on Indemnification . . . . . . . . . . A-27
Section 9.06. Payment of Losses. . . . . . . . . . . . . . . . . A-27
Section 9.07. Survival . . . . . . . . . . . . . . . . . . . . . A-28
Section 9.08. Limitations. . . . . . . . . . . . . . . . . . . . A-28
Section 9.09. Environmental Indemnity Obligations. . . . . . . . A-28
Section 9.10. Assignment of Claims . . . . . . . . . . . . . . . A-28
ARTICLE X. OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . A-28
Section 10.01. Operation of Business. . . . . . . . . . . . . . . A-28
Section 10.02. Buyer Representative . . . . . . . . . . . . . . . A-29
Section 10.03. Due Diligence. . . . . . . . . . . . . . . . . . . A-29
Section 10.04. Confidentiality. . . . . . . . . . . . . . . . . . A-30
Section 10.05. Earnest Money Deposit. . . . . . . . . . . . . . . A-30
Section 10.06. Environmental Obligations. . . . . . . . . . . . . A-30
iii
<PAGE>
ARTICLE XI. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . A-31
Section 11.01. Conditions of Termination. . . . . . . . . . . . . A-31
Section 11.02. Effect of Termination. . . . . . . . . . . . . . . A-31
ARTICLE XII. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . A-31
Section 12.01. Counterparts . . . . . . . . . . . . . . . . . . . A-31
Section 12.02. Cooperation. . . . . . . . . . . . . . . . . . . . A-31
Section 12.03. Further Assurances . . . . . . . . . . . . . . . . A-31
Section 12.04. Expenses . . . . . . . . . . . . . . . . . . . . . A-31
Section 12.05. Public Announcements . . . . . . . . . . . . . . . A-31
Section 12.06. Access to Records and Records Retention. . . . . . A-32
Section 12.07. Index and Captions . . . . . . . . . . . . . . . . A-32
Section 12.08. Notices. . . . . . . . . . . . . . . . . . . . . . A-32
Section 12.09. Entire Agreement . . . . . . . . . . . . . . . . . A-34
Section 12.10. Governing Law. . . . . . . . . . . . . . . . . . . A-34
Section 12.11. Choice of Forum; Waiver of Jury Trial. . . . . . . A-34
Section 12.12. Construction . . . . . . . . . . . . . . . . . . . A-35
Section 12.13. Waiver of Compliance . . . . . . . . . . . . . . . A-35
Section 12.14. Validity of Provisions . . . . . . . . . . . . . . A-35
Section 12.15. Schedules and Exhibits . . . . . . . . . . . . . . A-35
Section 12.16. No Intention to Benefit Third Parties. . . . . . . A-36
Section 12.17. Successors and Assigns . . . . . . . . . . . . . . A-36
iv
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS AMENDED ASSET PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of the 24th day of November, 1998 (the "Execution Date"), by
and among Colonel's Acquisition Corp. ("Buyer"), a newly-formed corporation
organized under the law of the State of Delaware, The Colonel's, Inc.
("Seller"), a corporation incorporated and organized under the law of the
State of Michigan, The Colonel's International, Inc., a corporation
incorporated and organized under the law of the State of Michigan and the
sole shareholder of Seller ("TCI"), and Donald J. Williamson, an individual
residing in the State of Michigan and a major shareholder of TCI (the
"Shareholder").
WITNESSETH:
WHEREAS, Seller is engaged in the business of manufacturing and
selling replacement bumpers, facias and related parts (the "Business").
TCI is the sole shareholder of Seller, and the Shareholder beneficially
owns a majority of the stock of TCI.
WHEREAS, Buyer, in reliance upon the representations, warranties and
covenants of Seller, TCI and the Shareholder set forth herein, desires to
purchase from Seller, and Seller desires to sell, transfer and convey
substantially all of the properties, assets, and interests in properties
and assets of Seller relating to the Business which are owned or leased by
Seller at Closing (the "Purchased Assets"), and in connection therewith,
Buyer has agreed to assume certain liabilities of Seller, all on the terms
and conditions set forth in this Agreement.
WHEREAS, 620 Platt Road, L.L.C., a Michigan limited liability company
(the "Property Seller") owns the real property and buildings located at 620
South Platt Road, Milan, Michigan (the "Milan Property") which is leased to
Seller in connection with the operation of the Business and, in addition to
the Buyer's purchase of the Purchased Assets, Buyer has agreed to purchase
the Milan Property from the Property Seller.
WHEREAS, Buyer, Seller, TCI and Shareholder previously executed an
Asset Purchase Agreement dated September 14, 1998 to govern the purchase
and sale of the Purchased Assets (the "September Agreement") and intend to
amend the September Agreement by executing this Agreement, the terms of
which and Schedules and Exhibits to shall hereinafter supersede the terms
of the September Agreement except as may be otherwise specifically provided
herein.
NOW THEREFORE, in consideration of the covenants, representations,
warranties, and mutual agreements herein contained, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Buyer and Seller hereby agree as follows:
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ARTICLE I.
PURCHASE AND SALE OF THE PURCHASED ASSETS
SECTION 1.01. PURCHASE AND SALE OF PURCHASED ASSETS. Subject to the
terms and conditions set forth in this Agreement, at Closing, Buyer shall
purchase from Seller and Seller shall sell, transfer, assign and deliver to
Buyer, all of the right, title and interest in and to the Purchased Assets,
free and clear of all mortgages, liens, pledges, charges, claims, security
interests, encumbrances, easements, encroachments, rights of third parties,
or other interests of any kind or character whatsoever, except (i) liens,
encumbrances and other obligations with respect to the "Assumed
Liabilities" set forth in SECTION 1.03 below and (ii) the liens
specifically set forth on SCHEDULE 1.01(a) (which shall be referred
to herein as the "Permitted Liens"). The Purchased Assets shall include
all of the properties, assets, and interests in properties and assets of
Seller relating to the Business which are owned or leased by Seller at
Closing, except for Seller's cash and those assets specifically set forth
on SCHEDULE 1.01(b) (the "Excluded Assets"). Except for the Excluded
Assets, the Purchased Assets shall include without limitation the following
items:
(a) all accounts and notes receivable;
(b) all inventory of raw materials, work-in-process, finished goods,
components, spare parts, replacement parts, shop supplies and
other items of personal property (except for inventory
specifically excluded by Buyer);
(c) all fixed assets, including plant equipment, office furniture and
equipment, vehicles and all other fixed assets and items of
personal property or fixtures;
(d) all real estate identified on SCHEDULE 1.01(c);
(e) all rights in, to and under leases of real estate, equipment,
machinery, vehicles and other items of personal property
(collectively, the "Assumed Leases");
(f) all rights in, to and under contracts, purchase orders, work
orders and similar agreements with third parties (collectively,
the "Purchased Contracts");
(g) all prepaid expenses, security deposits and prepaid insurance;
(h) all intangibles, including, without limitation, any trademarks or
tradenames and derivations thereof, the benefit of third party
representations, warranties and guarantees, customer lists,
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supplier lists, business plans and strategies, know-how,
correspondence, manuals, sales literature and promotional
material, trade secrets, computer software and programs the
telephone and telefax numbers used in the Business prior to
Closing, and all other intellectual property and proprietary
rights of any kind, whether or not patentable or registrable;
(i) to the extent assignable, all licenses, permits, franchises,
certificates, approvals and authorizations necessary to own and
operate the Purchased Assets and to conduct the Business;
(j) all software (whether proprietary or not) used in the operation
of the Business and all licenses thereto;
(k) all books, records and other information relating to the
Purchased Assets, other than the minute books, corporate records,
stock certificates, records and transfer ledgers, corporate seal,
correspondence and other records of Seller that constitute
records or communications with Seller or TCI's shareholders,
directors or officers (collectively, the "Corporate Records"),
provided that Seller shall, at Buyer's request, provide Buyer
with a copy of any Corporate Records that relate to any of the
Purchased Assets;
(l) all other miscellaneous assets, including, without limitation
stationary, purchase order and sale order forms and invoices,
brochures, advertising materials and similar items; and
(m) all assets set forth on SCHEDULE 1.01(D).
SECTION 1.02. PURCHASE PRICE. The aggregate consideration (the
"Purchase Price") to be paid by Buyer to Seller for the Purchased Assets
shall be an amount equal to Thirty Eight Million Dollars ($38,000,000),
plus the Assumed Liabilities (not to exceed $1,260,000), payable as
follows:
(a) the sum of Thirty Eight Million Dollars ($38,000,000),
payable at the Closing (as defined in SECTION 6.01) by wire
transfer of immediately available funds to an account in the
United States pursuant to the payment instructions of Seller
(the "Closing Payment"); and
(b) the assumption at the Closing of the Assumed Liabilities (as
identified and subject to the cap set forth in SECTION
1.03(a)(i)).
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SECTION 1.03. ASSUMED LIABILITIES.
(a) At the Closing, Buyer shall assume all ongoing liabilities and
obligations of Seller under (i) all trade payables and accrued
expenses of Seller as of the Closing Date as identified on
SCHEDULE 1.03(a)(i) and up to a maximum aggregate amount of
$1,260,000, and (ii) the Purchased Contracts and those Assumed
Leases agreed to be assumed by Buyer in Buyer's sole discretion
are specifically set forth on SCHEDULE 1.03(a)(ii) (collectively,
the "Assumed Liabilities").
(b) Except for the Assumed Liabilities, Buyer shall not assume or be
liable to pay any liabilities or obligations of Seller, TCI or
any of their affiliates. All other obligations and liabilities
of Seller as of the Closing shall be paid and satisfied in full
by Seller in accordance with their terms, subject to Seller's
good faith assertion of any defenses thereto. Any liability of
Seller that is not an Assumed Liability shall constitute an
"Excluded Liability" under this Agreement and will remain the
obligation of Seller and TCI, as the case may be. All
liabilities and obligations of TCI, Brainerd International
Raceway, Inc. and The Colonel's Truck Accessories, Inc. are
expressly included as Excluded Liabilities hereunder.
SECTION 1.04. ALLOCATION OF PURCHASE PRICE. The Purchase Price shall
be allocated among the Purchased Assets as mutually agreed upon by the
parties hereto and set forth on SCHEDULE 1.04. Seller shall not deviate
from the allocation set forth in SCHEDULE 1.04, as revised, on any return
to be filed with any taxing entity, including but not limited to IRS Form
8594, without the express written consent of Buyer.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
OF SELLER, TCI AND THE SHAREHOLDER
As a material inducement to Buyer to enter into this Agreement and all
other agreements and documents executed by Buyer in connection with this
Agreement, including but not limited to the Bill of Sale, the Assignment
and Assumption of Assumed Liabilities, the Noncompetition Agreements and
the License Agreement (each as defined herein) (the "Related Agreements")
and to consummate the transactions contemplated by this Agreement and the
Related Agreements, each of Seller, TCI and the Shareholder jointly and
severally make the representations and warranties set forth in this ARTICLE
II.
Upon execution of the September Agreement Seller and TCI delivered to
Buyer individually numbered schedules (collectively, the "Disclosure
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Schedule") corresponding to the sections and subsections of ARTICLE II of
the September Agreement and all other sections or subsections of the
September Agreement pursuant to which Seller or TCI was required to prepare
and deliver schedules. All exceptions to the representations and
warranties contained in a section or subsection of ARTICLE II of the
September Agreement were described in the Disclosure Schedule, and each
such exception qualified all representations and warranties in ARTICLE II
of the September Agreement that related to the subject matter of the
exception. At least ten (10) business days prior to the Closing, Seller
and TCI will deliver to Buyer individually numbered updates to the
previously delivered Disclosure Schedule, each of which shall correspond
to the sections and subsections of this Agreement (collectively, the
"Updated Disclosure Schedule"). Each update will list and fully describe
any additional exceptions to the representations and warranties contained
in such section or subsection, and will qualify all representations and
warranties in ARTICLE II that relate to the subject matter of the
exception. The Updated Disclosure Schedule will be deemed to incorporate
the Disclosure Schedule in its entirety and will contain a statement to
that effect. Any reference in this Agreement to the Updated Disclosure
Schedule shall be deemed to include the exceptions contained in both the
Disclosure Schedule and the Updated Disclosure Schedule. The date on
which the Disclosure Schedule is received by Buyer shall be known as the
"Delivery Date." After the Delivery Date, Buyer shall have the right,
in its sole discretion, to terminate this Agreement pursuant to and in
accordance with SECTION 11.01 of this Agreement by sending a written
notice of such termination to Seller within five (5) business days of
the Delivery Date. If Buyer does not deliver such termination notice to
Seller by the end of this five-day period, Updated Disclosure Schedule
shall be deemed accepted by Buyer.
SECTION 2.01. TITLE TO PROPERTY. Except as set forth in
SCHEDULE 2.01, Seller has good, valid and marketable title to its
properties, interests in properties and assets (other than those held by
lease), real or personal, tangible or intangible, that are used in the
Business, free and clear of all mortgages, liens, pledges, charges, claims,
security interests, encumbrances, easements, encroachments, rights of third
parties, or other interests of any kind or character.
SECTION 2.02. AUTHORITY; CONSENT. Seller, TCI and the Shareholder
each have the full capacity, right, power and authority to enter into,
execute and deliver this Agreement and the Related Agreements, to
consummate the transactions contemplated by this Agreement and any Related
Agreements, and to comply with and fulfill the terms and conditions of this
Agreement and any and all Related Agreements. Seller has the full
capacity, right, power and authority to sell, transfer, assign and deliver
all of the Purchased Assets held by it to Buyer. The execution and
delivery of this Agreement and all Related Agreements by Seller and the
consummation by Seller of the transactions contemplated hereby or thereby
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has been duly and validly authorized by all necessary action on the part of
the Board of Directors and TCI, the sole shareholder of Seller. This
Agreement and all Related Agreements each constitute a valid and binding
obligation of Seller enforceable in accordance with their respective terms
and conditions, subject as to enforcement to applicable bankruptcy,
insolvency, reorganization and other similar laws of general applicability
relating to or affecting creditors rights generally. No further action is
necessary by Seller or TCI, the sole shareholder of Seller, to make this
Agreement or any Related Agreements valid and binding upon it and
enforceable against Seller in accordance with the terms hereof or thereof
or to carry out the transactions contemplated hereby or thereby, except
that TCI must obtain the approval of its shareholders in order for Seller
and TCI to consummate the transactions contemplated by this Agreement.
Except as set forth in SCHEDULE 2.02, neither the execution and delivery of
this Agreement or any Related Agreement, nor the consummation of the
transactions contemplated hereby or thereby, nor compliance by Seller with
any of the provisions of this Agreement or any Related Agreement will:
(a) Conflict with, violate, result in a breach of, constitute a
material default (or an event which, with notice or lapse of time
or both, would constitute a material default) under, or give rise
to any right of termination, cancellation, or acceleration under
any provision of the Articles of Incorporation or Bylaws of
Seller, or any of the terms, conditions or provisions of any
note, lien, bond, mortgage, indenture, license, lease, contract,
commitment, agreement, understanding, arrangement, restriction or
other instrument or obligation to which Seller is a party or by
which Seller or any of its properties or assets may be bound;
(b) Violate any law, rule or regulation of any government or
governmental agency or body, or any judgment, order, writ,
injunction, or decree of any court, administrative agency, or
governmental agency or body applicable to Seller or any
properties or assets of Seller; or
(c) Constitute an event which, with or without notice, lapse of time,
or action by a third party, could result in the creation of any
lien, charge, or encumbrance upon any of the assets or properties
of Seller, or upon the Purchased Assets, or cause the maturity of
any liability, obligation, or debt of Seller to be accelerated or
increased.
SECTION 2.03. CONSENTS AND APPROVALS. Except as set forth on
SCHEDULE 2.03, the execution, delivery, and performance of this Agreement
and any Related Agreements by Seller and the consummation by Seller of the
transactions contemplated hereby or thereby will not require any notice to,
or consent, authorization or approval from any court or governmental
authority or any other third party. Except as set forth in SCHEDULE 2.03,
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any and all notices, consents, authorizations and approvals set forth on
SCHEDULE 2.03 have been made and obtained or will be made and obtained
prior to the Closing.
SECTION 2.04. CORPORATE ORGANIZATION. Seller is a corporation duly
organized and validly existing under the laws of the State of Michigan.
Seller is duly qualified as a foreign corporation to transact business in
the states set forth in SCHEDULE 2.04. Except as set forth on SCHEDULE
2.04, Seller has all the requisite power and authority to own, lease and
operate its properties and to carry on its business as it is now being
conducted. Seller prior to the Closing will deliver to Buyer (a) true and
complete copies of the Articles of Incorporation of Seller, including all
amendments thereto, (b) a Certificate of Good Standing for Seller issued by
the Michigan Department of Consumer and Industry Services and (c) copies of
the Bylaws of Seller, including all amendments thereto.
SECTION 2.05. FINANCIAL STATEMENTS. True and complete copies of the
audited consolidated financial statements of TCI as of December 31 in each
of the years 1995, 1996 and 1997 and the financial statements of the
Business as of December 31 in each of the years 1995, 1996 and 1997
(collectively the "Financial Statements"). The Financial Statements are
true and correct in all material respects and have been prepared by
Deloitte & Touche, LLP and, as applicable, Seller, from the books and
records of Seller and, as applicable, TCI, in accordance with generally
accepted accounting principles and contain and reflect all necessary
adjustments or accruals necessary for a fair presentation of the
financial condition or results of operation of Seller and, as applicable,
TCI. The balance sheets included in the Financial Statements fairly
present in all material respects the financial condition of Seller and, as
applicable, TCI, as of the date thereof, and the income statements and
statements of cash flows fairly present the results of the operations of
Seller and, as applicable, TCI, for the periods indicated. The Financial
Statements contain and reflect adequate provisions for all reasonably
anticipated liabilities and adequate reserves for all reasonably
anticipated material losses and costs and expenses.
SECTION 2.06. ABSENCE OF UNDISCLOSED LIABILITIES. Except as set
forth on SCHEDULE 2.06, Seller has no material indebtedness or liability
relating to the Business which is not shown on the Financial Statements or
provided for thereon, other than liabilities incurred or accrued in the
ordinary course of business.
SECTION 2.07. TRANSACTIONS WITH CERTAIN PERSONS. Except as set forth
in SCHEDULE 2.07, and except as incurred in the ordinary course of the
conduct of the Business, Seller is not owed any amount from, and does not
owe any amount to, or have any contracts with or commitments to (a) (i) any
shareholder of Seller or TCI, including Donald J. Williamson or (ii) anyone
related to any such shareholder (including individuals related to such
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shareholders by marriage), (b) any key employees of Seller, or (c) any
person, firm or corporation which directly or indirectly, alone or together
with others, controls, is controlled by, or is under common control with
any person described in SECTION 2.07(a)(i) or (ii) or (b) above. Except as
set forth in SCHEDULE 2.07, no assets or properties owned by any person
specified in SECTION 2.07(a)(i) and (ii), (b) or (c) above are used by
Seller in connection with the Business.
SECTION 2.08. TAX MATTERS.
(a) Until December 31, 1995 Seller was an "S Corporation" within the
meaning of Section 1361(a)(1) of the Internal Revenue Code of
1986, as amended (hereinafter referred to as the "Code"), and
had, from January 1, 1986 until that time, been an "S
Corporation." Prior to January 1, 1986, Seller was a "C"
Corporation." Prior to December 31, 1995, Seller, TCI and/or
Shareholder had not taken any action that would cause a
termination, of Seller's status as an "S Corporation."
(b) Except as set forth in SCHEDULE 2.08:
(1) All federal, state, county and local taxes, and all other
taxes of any kind or character, including, without
limitation, income (including gross and adjusted gross),
receipts, property (including real, personal and
intangible), sales, use, franchise, value added, excise,
recording, financial institutions, employees' income and
social security withholding, and all other withholding, and
social security and unemployment taxes, which are due and
payable by or on behalf of Seller, and all interest and
penalties thereon (collectively, the "Taxes" and
individually a "Tax"), have been paid (and, to the extent
applicable, withheld) in full (or are adequately reflected
as a liability in the Financial Statements). All
shareholders of Seller have reported their share of any
individual pass through items of income and loss as shown on
the federal and state tax returns of the Seller and have
paid the associated income taxes generated from those pass
through items.
(2) Seller has filed all currently due federal, state, county,
local and other tax returns, statements, forms, reports and
similar documents with respect to Taxes required to be filed
with the appropriate third parties and governmental agencies
in all jurisdictions in which such returns, statements,
forms, reports and similar documents are required to be
filed (collectively, the "Returns"); and all such Returns
are true, correct and complete in all material respects.
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(3) There is not now in force any extension of time with respect
to the date on which any Return was or is due to be filed by
or on behalf of or with respect to Seller, or any waiver or
agreement by Seller for an extension of time for the
assessment of any Tax.
(4) Seller is not subject to any penalty by reason of a
violation of any order, rule or regulation of, or with
respect to any Return or any other Tax return or report
required to be filed with, any Taxing authority.
(5) Seller does not have any pending requests for ruling with
any Taxing authority.
(6) There are no liens for Taxes upon the assets of Seller
except liens for current Taxes not yet due.
SECTION 2.09. COMPLIANCE WITH LAWS; NO DEFAULT OR LITIGATION. Except
as set forth in SCHEDULE 2.09:
(a) Seller is not in default or violation (nor is there any event
which, with notice or lapse of time or both, would constitute a
default or violation) in any material respect (i) under any
contract, agreement, lease, consent order, or other commitment to
which Seller is a party or the Business of Seller is subject or
bound or (ii) under any law, rule, regulation, writ, injunction,
order or decree of any court or any federal, state, local, or
other governmental department, commission, board, bureau, agency,
or instrumentality (including, without limitation, applicable
laws, rules and regulations relating to environmental protection,
antitrust, civil rights, health and occupational health and
safety);
(b) There are no actions, suits, claims, investigations, or legal
arbitration or administrative proceedings in progress, pending
or, to the knowledge of Seller, threatened by or against Seller
(or any of its assets or properties) whether at law or in equity,
whether civil or criminal in nature, or whether before or by a
federal, state, county, local, or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign nor has Seller been charged with or received any notice
of any violation of any rule, regulation, ordinance, law, order,
decree, or requirement relating to Seller, its properties,
assets, or the transactions contemplated by this Agreement;
(c) There are no unsatisfied judgments against the Seller, the
Business or the Purchased Assets; and
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(d) No action, suit or proceeding has been instituted or, to the
knowledge of Seller, threatened to restrain or prohibit or
otherwise challenge the legality or validity of the transactions
contemplated by this Agreement.
SECTION 2.10. REAL PROPERTY-OWNED PREMISES. SCHEDULE 2.10 contains a
list and brief description of all real property owned by Seller
(collectively, the "Owned Premises"). Seller has good and marketable title
in fee simple to the Owned Premises, and owns all improvements (including
buildings and other structures) thereon. Except as set forth in
SCHEDULE 2.10 all improvements (including buildings and other structures)
on the Owned Premises conform in all material respects to applicable
federal, state and local laws and regulations, including, but not limited
to, those relating to environmental protection, conservation, occupational
safety and health, zoning and business ordinances) and the Owned Premises
are zoned for the purpose for which Seller uses the Owned Premises. All
improvements (including buildings and other structures) are in good
condition and repair, and there does not exist any condition which
materially interferes with the economic value or use thereof.
SECTION 2.11. REAL PROPERTY-LEASED PREMISES. SCHEDULE 2.11 contains
a list and brief description of all real property leased by any third party
to Seller or from Seller to any third party (collectively, the "Leased
Premises"). With respect to the Leased Premises:
(a) Seller is the owner and holder of the entire interest in the
leasehold estates purported to be granted by their respective
leases;
(b) All leases related thereto are in full force and effect and
constitute legal, valid and binding obligations of Seller,
enforceable against Seller in accordance with their respective
terms; and
(c) There are no defaults currently existing, no notices of default
have been received by Seller and, to the knowledge of Seller, no
events have occurred which with the lapse of time, notice, or
otherwise would constitute a default under any of the leases.
Seller prior to the Closing will deliver to Buyer written copies of all
leases for the Leased Premises. No consent of any lessor of the Leased
Premises is required in connection with the transactions contemplated by
this Agreement, except as set forth in SCHEDULE 2.11. Except as set forth
in SCHEDULE 2.11, all improvements (including buildings and other
structures) on the Leased Premises conform in all material respects to
applicable federal, state and local laws and regulations, including, but
not limited to, those relating to environmental protection, conservation,
occupational safety and health, zoning and business ordinances) and the
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Leased Premises are zoned for the purpose for which Seller uses the Leased
Premises. All improvements (including buildings and other structures) are
in good condition and repair, and there does not exist any condition which
materially interferes with the economic value or use thereof.
SECTION 2.12. PERSONAL PROPERTY-OWNED. SCHEDULE 2.12 sets forth a
list of all tools, furniture, machinery, supplies, vehicles, equipment, and
other items of tangible personal property owned by Seller and used in the
Business having a book value in excess of Two Thousand Dollars ($2,000.00)
(the "Personal Property").
SECTION 2.13. PERSONAL PROPERTY-LEASED. SCHEDULE 2.13 contains a
list of all leases and other agreements under which Seller is a lessee of,
or holds or operates any tools, furniture, machinery, vehicles, equipment,
or other personal property used in the Business that is owned by any third
party and under which payments to such third party exceed Five Thousand
Dollars ($5,000.00) per annum (the "Leased Personal Property"). Seller on
or before the Closing will deliver to Buyer copies of the leases in writing
listed in SCHEDULE 2.13. Each of such leases and agreements is in full
force and effect and constitutes a legal, valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms. No
consent of any lessor of the Leased Personal Property is required in
connection with the transactions contemplated by this Agreement, except as
set forth in SCHEDULE 2.13. None of Seller, Shareholder or TCI has
knowledge of any facts or circumstances that would render any lease
respecting the Leased Personal Property unenforceable against any other
party thereto.
SECTION 2.14. CONTRACTS.
(a) SCHEDULE 2.14 lists the following contracts and leases (other
than those described in SCHEDULE 2.11 and SCHEDULE 2.13),
including all amendments thereto, to which Seller is a party
which relate to the Business (the "Contracts"):
(1) All loans, lines of credit, and related security agreements
in excess of $25,000;
(2) All agreements of guaranty or indemnification;
(3) All agreements, contracts and commitments containing any
covenant limiting the right of Seller to engage in any line
of business or compete with any person;
(4) All material distribution agreements;
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(5) All material Contracts with suppliers and vendors of parts,
equipment and other items used by Seller in the ordinary
course of business and valued in excess of $10,000;
(6) All software, computer technology and related agreements,
including licenses;
(7) All material licensing agreements; and
(8) All employment agreements and employee leasing agreements.
(b) All of the Contracts which are Purchased Assets ("Purchased
Contracts") are valid and binding obligations of Seller,
enforceable against Seller in accordance with their respective
terms, are in full force and effect, and, except as otherwise
specified in SCHEDULE 2.14, will continue in full force and
effect without the consent of any other party so that, after the
Closing, Buyer will be entitled to the full benefits thereof.
Except as set forth in SCHEDULE 2.14, none of the Purchased
Contracts contain any provisions that are triggered by any of the
transactions contemplated by this Agreement or any related
agreement. Except as disclosed in SCHEDULE 2.14, there are no
material defaults currently existing and, to the knowledge of the
Seller, no events have occurred or have failed to occur which,
after notice or lapse of time, or both, would constitute a
default or result in a right to accelerate or loss of rights
under the Purchased Contracts. No notices of default,
termination, or expiration have been received by Seller with
respect to such Purchased Contracts, and none of Seller,
Shareholder or TCI has knowledge of any facts or circumstances
that would render any of the Purchased Contracts unenforceable
against any other party thereto.
SECTION 2.15. ACCOUNTS AND NOTES RECEIVABLE; INVENTORY.
(a) The aggregate amount of accounts and notes receivable, rights to
refunds, and deposits of Seller relating to the Business (the
"Accounts and Notes Receivable") as of the respective dates of
the Financial Statements are reflected in the Financial
Statements, and all Accounts Receivable arising since January 1,
1998 represent or shall represent, net of reserves for doubtful
accounts, bona fide claims against debtors for sales, services
performed, or other charges arising in the ordinary course of
business, and, to the knowledge of Seller, no debtor thereunder
has asserted any defense thereto. All Accounts Receivable are
collectible in the ordinary course of business (without the
necessity of legal proceedings) within ninety (90) days after
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invoicing therefor or within such later commercially reasonable
date as payment may be due under the terms thereof.
(b) All of the finished goods, raw materials, work in progress, and
supplies owned by Seller and relating to the Business and all
rights of Seller to warranties received from its suppliers with
respect to the foregoing (to the extent assignable) and related
claims, credits, and rights of recovery with respect thereto (the
"Inventory") reflected on the Financial Statements or acquired
after the date of January 1, 1998 and prior to the Closing Date,
consists of or shall consist of a quality and quantity useable
or saleable in the ordinary course of business. All Inventory
had or shall have a commercial value at least equal to the
value shown on the Financial Statements and is or shall be
valued in accordance with generally accepted accounting
principles at the lower of cost or market. Except as
specifically determined by Buyer in Buyer's sole discretion,
all inventory will be retained by Buyer regardless of GAAP-
determined valuation. No purchase price adjustments will be
made to the extent GAAP-determined valuation differs from
the valuation of such inventory on Seller's books. After the
Closing, Seller shall have thirty (30) days to remove from
Buyer's premises all inventory which will not be retained by
Buyer, after which time such Inventory may be disposed of by
Buyer.
SECTION 2.16. EQUIPMENT AND MACHINERY.
(a) SCHEDULE 2.16 sets forth a list of, or otherwise describes,
(i) all material equipment, machinery, furniture, fixtures and
improvements, tooling, spare parts, supplies, and vehicles owned
or leased by Seller and used in the Business (including all
leases of such property and any existing contract rights to or
for such property which has been purchased or ordered by Seller
but not yet delivered to or received by Seller), (ii) any rights
of Seller to warranties applicable to the foregoing (to the
extent assignable) and licenses received from manufacturers and
sellers of any such item and (iii) any related claims, credits,
and rights of recovery with respect thereto (the "Equipment and
Machinery"). Except as set forth on SCHEDULE 2.16, Seller has
good title, free and clear of all material liens to the Equipment
and Machinery, except for any Equipment and Machinery which has
been sold in the ordinary course of conduct of the Business since
January 1, 1998. Except as set forth on SCHEDULE 2.16, Seller
holds good and transferable leasehold interests in all Equipment
and Machinery leased by it, and, to the knowledge of Seller, each
such lease constitutes a valid and binding obligation of the
lessor thereunder, enforceable against such lessor in accordance
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with its terms. None of Seller, Shareholder or TCI has knowledge
of any facts or circumstances that would render any such lease
unenforceable against any other party thereto.
(b) The Equipment and Machinery are in good operating condition and
repair (except for ordinary wear and tear), are sufficient for
the operation of the Business as presently conducted, and are in
conformity in all material respects with all applicable laws,
ordinances, orders, regulations and other requirements (including
applicable zoning, environmental, motor vehicle safety,
occupational safety and health laws and regulations relating
thereto currently in effect.
SECTION 2.17. SUPPLIES. Except as set forth in SCHEDULE 2.17, Seller
has not experienced any shortages of raw materials, components or other
supplies used in the Business (collectively "Supplies") within the twelve
(12) month period preceding the Execution Date.
SECTION 2.18. LICENSES AND PERMITS. Seller possesses all franchises,
licenses, permits, certificates, approvals, consents, clearances,
notifications, registrations, and other authorizations necessary to conduct
the Business as now conducted (the "Permits"), except where the failure
would not have a material adverse effect on the Purchased Assets or the
value of the Business as a going concern. To the knowledge of Seller and
except as set forth on SCHEDULE 2.18, all such Permits are freely
transferrable and will continue in full force and effect without the
consent of any other party, so that, after the Closing, Buyer will be
entitled to the full benefits of any Permits.
SECTION 2.19. INTELLECTUAL PROPERTY. Seller owns or possesses only
those corporate names, trade names, trademarks, service marks, mailing
lists, copyrights, works of art, trade secrets, computer programs, know-
how, proprietary processes and formulae, technology and all other
proprietary technical information, whether patentable or unpatentable, and
all applications and registrations of the foregoing set forth on SCHEDULE
2.19 (collectively, "Intellectual Property"). SCHEDULE 2.19 also contains
a list and brief description of all such Intellectual Property in written
form which has been registered with any state trademark office, with the
U.S. Patent and Trademark Office or with the U.S. Copyright Office. Except
as set forth in SCHEDULE 2.19, Seller is not, to the knowledge of the
Seller, infringing upon or otherwise acting adversely to, or engaging in
the unauthorized use or misappropriation of, any intellectual property,
rights of publicity, or rights of privacy which are owned by any other
person or entity, and there is no claim or action by any such person or
entity pending or, to the knowledge of Seller, threatened with respect
thereto.
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SECTION 2.20. CLAIMS AGAINST THIRD PARTIES. SCHEDULE 2.20 contains a
list and brief description of all of Seller's breach of contract and tort
claims against third parties related to the conduct of the Business.
SECTION 2.21. LABOR RELATIONS; EMPLOYEES. As of November 20, 1998,
Seller employed a total of approximately ten (10) employees in connection
with the Business ("Business Employees"). In addition, as of November 20,
1998 Seller leased approximately 141 persons to perform services from
Simplified Employment Services (the "Leased Employees"). All written
employment agreements, contracts, policies and commitments with or between
Seller and any of its Business Employees, directors, or officers, including,
without limitation, those relating to severance and all written agreements
with Business Employees as a group are listed in SCHEDULE 2.21. Listed on
SCHEDULE 2.21 are the names and related compensation of those Business
Employees receiving compensation (including itemized salary and bonuses) in
excess of $50,000 per year, based on 1997 W-2 statements. As of the date
of this Agreement, except as set forth in SCHEDULE 2.21:
(a) Seller has paid in full or accrued to all of its Business
Employees all wages, salaries, commissions, bonuses, fringe
benefit payments and all other direct and indirect compensation
of any kind for all services performed by them and each of them
to the date hereof;
(b) To the knowledge of the Seller, Seller is in compliance in all
material respects with (i) all federal, state and local laws,
ordinances and regulations dealing with employment and employment
practices of any kind, and (ii) all wages and hours requirements
and regulations;
(c) There is no unfair labor practice, safety, health, discrimination
or wage claim, charge, complaint or suit pending or, to the
knowledge of Seller, threatened against or involving Seller
before the National Labor Relations Board, Occupational Safety
and Health Administration, Equal Employment Opportunity
Commission, Department of Labor, or any other federal, state or
local agency;
(d) There is no labor dispute, strike, work stoppage, interference
with production or slowdown in progress or, to the knowledge of
Seller, threatened against or involving Seller;
(e) To the knowledge of Seller, there is no question of
representation under the National Labor Relations Act, as
amended, or any state equivalent thereof, pending with respect to
the Business Employees of Seller;
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(f) There is no employment-related grievance pending or, to the
knowledge of Seller, threatened against Seller;
(g) There exists no collective bargaining agreement to which Seller
is a party, and there is no collective bargaining agreement
currently being negotiated or subject to negotiation or
renegotiation by Seller; and
(h) There is no dispute, claim, or proceeding pending with or, to the
knowledge of Seller, threatened by the Immigration and
Naturalization Service with respect to Seller.
Seller will be solely responsible for payment of all of its Business
Employees and Leased Employees all wages, salaries, commissions, bonuses,
fringe benefit payments (including any accrued vacation pay) and all other
direct and indirect compensation of any kind for all services performed by
them and each of them as of the Closing Date. All such sums will be paid
by Seller before or within three (3) days after the Closing Date.
SECTION 2.22. EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 2.22(a) contains a list of each (i) employee welfare
benefit plan (as defined in SECTION 3(1) of the EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, as amended ("ERISA"))
(hereinafter referred to as "Employee Welfare Benefit Plan"), and
(ii) employee pension benefit plan (as defined in Section 3(2) of
ERISA) (hereinafter referred to as "Employee Pension Benefit
Plan"), (a) which was maintained or administered by Seller within
the three-year period immediately prior to Closing, (b) to which
Seller contributed to, or was legally obligated to contribute to
for the three-year period immediately prior to Closing, or
(c) under which Seller had any liability for the three-year
period immediately prior to Closing, with respect to its current
or former employees or independent contractors. Also contained on
SCHEDULE 2.22(a) is a list of each employee benefit plan,
program, arrangement, agreement, policy or commitment whether
insured or uninsured, funded or unfunded, that is not an Employee
Welfare Benefit Plan or an Employee Pension Benefit Plan,
relating to deferred compensation, bonuses, or compensation in
additional to regular pay or wages, stock options, employee stock
purchases, severance, unemployment, flexible benefits,
disability, vacation, sickness, leave of absence, fringe
benefits, employee awards, educational assistance or
reimbursement, equity participation (including but not limited to
stock appreciation and phantom stock plans), restricted stock,
employee discounts, excess benefits, rabbi, secular or voting
trust, child or dependent care, long term and nursing home care
and profit sharing (i) which is sponsored, maintained or
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administered by Seller, (ii) to which Seller contributes or is
legally obligated to contribute, or (iii) under which Seller has
any liability with respect to current or former employees or any
individuals providing services to Seller (an "Employee Plan").
Solely for purposes of this SECTION 2.22(a), the Employee Welfare
Benefit Plans, Employee Pension Benefit Plans and Employee Plans
are collectively referred to as "Employee Benefit Plans" and
individually referred to as an "Employee Benefit Plan".
(b) Seller shall provide Buyer no later than fifteen (15) business
days prior to the Closing Date with true and correct copies of
(i) all Employee Benefit Plans listed on SCHEDULE 2.22(a),
including all amendments, (ii) the most recent summary plan
description for each Employee Benefit Plan, and (iii) the IRS
Form 5500 most recently filed for each Employee Benefit Plan.
(c) Each of the Employee Benefit Plans is in compliance in all
material respects with the applicable provisions of ERISA, and
those provisions of the Code applicable to the Employee Benefit
Plans, and each Employee Benefit Plan intended to be qualified
under section 401(a) of the Code is so qualified. None of the
Employee Benefit Plans is subject to Title IV of ERISA or to
section 412 of the Code. All contributions to, and payments
from, the Employee Benefit Plans which may have been required to
be made in accordance with the Employee Benefit Plans or the Code
have been timely made. Each of the Employee Benefit Plans has
been administered at all times in all material respects in
accordance with its terms. To the knowledge of Seller there are
no pending investigations by any governmental agency involving
the Employee Benefit Plans, except with respect to this
transaction no termination proceedings involving the Employee
Benefit Plans, and no pending or, to the knowledge of the Seller,
threatened claims (except for claims for benefits payable in the
normal operation of the Employee Benefit Plans), suits or
proceedings against any Employee Benefit Plan or assertion of any
rights or claims to benefits under any Employee Benefit Plan.
(d) No Employee Benefit Plan fiduciary has engaged in a "prohibited
transaction" (as such term is defined in section 4975 of the Code
or section 406 of ERISA) which could subject any Employee Benefit
Plan or Seller to the tax or penalty on prohibited transactions
imposed by such section 4975 or the sanctions imposed under
Title I of ERISA.
(e) Seller is not obligated to contribute to any multiemployer plan
(as defined in ERISA Section 3(37)).
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(f) Seller has no obligation to provide any medical or health
benefits to any former employees or retired employees, except to
the extent required by COBRA. Seller is not subject to any
excise tax under Code Section 4980B for the current or any prior
taxable year.
(g) To the knowledge of the Seller, Seller has complied with the
requirements of COBRA and the rules and regulations thereunder.
Seller shall be solely responsible and liable for providing any
and all benefits to employees or others (or their covered
dependents) of Seller required under COBRA arising from any
qualifying event as defined under Code Section 162(k)(3) and
ERISA Section 603 occurring on or before the Closing Date.
SCHEDULE 2.22(g) contains a list of: (i) all persons who have
elected or who are eligible to elect COBRA continuation coverage
under any Employee Welfare Benefit Plan, (ii) the dates of each
qualifying event and COBRA continuation coverage periods for each
person and (iii) the claims experience of each such person for
the preceding twelve (12) months plus pending claims for
benefits which as of the Closing Date have not yet been paid.
SECTION 2.23. ENVIRONMENTAL COMPLIANCE. For purposes of this
SECTION 2.23, the following definitions apply:
"Environmental Claims" shall mean all accusations, allegations,
investigations, warnings, notice letters, notices of violations, liens,
orders, claims, demands, suits or administrative or judicial actions for
any injunctive relief, fines, penalties or any damage, including without
limitation personal injury, property damage (including any depreciation of
property values), lost use of property, natural resource damages, or
environmental response costs arising out of Environmental Conditions or
under Environmental Requirements.
"Environmental Conditions" shall mean the state of the environment,
including natural resources (E.G., flora and fauna), soil, surface water,
ground water, any present or potential drinking water supply, subsurface
strata or ambient air, relating to or arising out of the use, handling,
storage, treatment, recycling, generation, transportation, spilling,
leaking, pumping, pouring, injecting, emptying, discharging, emitting,
escaping, leaching, dumping, disposal, release or threatened release of
Hazardous Materials, whether or not yet discovered which could or does
result in Environmental Claims. With respect to Environmental Claims by
third parties, Environmental Conditions also include the exposure of
persons to Hazardous Materials at the work place or the exposure of persons
or property to Hazardous Materials migrating or otherwise emanating from,
to or located at, under or on the Owned Premises or the Leased Premises.
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"Environmental Expenses" shall mean any liability (including strict
liability), loss, cost, penalty, fine, punitive damages, encumbrance or
expense relating to any Environmental Claim or Environmental Conditions, or
incurred in compliance with any Environmental Requirements, including
without limitation the costs of investigation, cleanup, remedial,
monitoring, corrective or other responsive action, compliance costs,
settlement costs, lost property value, and related legal and consulting
fees and expenses.
"Environmental Requirements" shall mean all applicable present laws,
rules, regulations, ordinances, codes, policies, guidance documents,
approvals, plans, authorizations, licenses, permits issued by all
government agencies, departments, commissions, boards, bureaus or
instrumentalities of the United States, states, and political subdivisions
thereof and any foreign government body and all judicial, administrative,
and regulatory decrees, judgments and orders relating to human health,
pollution or protection of the environment (including without limitation
ambient air, surface water, ground water, land surface or surface strata),
including without limitation (i) laws relating to emissions, discharges,
releases or threatened releases of Hazardous Materials and (ii) laws
relating to the identification, generation, manufacture, processing,
distribution, use, treatment, storage, disposal, recovery, transport, or
other handling of Hazardous Materials. Environmental Laws shall include
without limitation the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), the Superfund Amendments
and Reauthorization Act ("SARA"), the Toxic Substances Control Act, as
amended, the Hazardous Materials Transportation Act, as amended, the
Resource Conservation and Recovery Act ("RCRA"), as amended, the Clean
Water Act, as amended, the Safe Drinking Water Act, as amended, the Clean
Air Act, as amended, the Atomic Energy Act of 1954, as amended, the
Occupational Safety and Health Act, as amended, and all analogous laws
promulgated or issued by any federal, state, or other governmental
authority or foreign governmental body.
"Hazardous Materials" shall mean any substance which is or becomes
defined as a "hazardous substance," "hazardous waste," "hazardous
materials," pollutant, or contaminant under any environmental law which is
applicable to Seller, including but not limited to CERCLA, SARA, RCRA, and
any analogous federal, state, local or foreign law, and petroleum
(including crude oil and any fraction thereof) and any natural or synthetic
gas (whether in liquid or gaseous state).
Except as set forth in SCHEDULE 2.23:
(a) The Owned Premises and the Leased Premises and all operations and
activities conducted thereon are, and at all times during
possession thereof by Seller have been, and to the knowledge of
Seller at all times prior to possession thereof were, in
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compliance with all applicable Environmental Requirements, in all
material respects.
(b) No Hazardous Material has ever been generated, manufactured,
refined, used, transported, treated, stored, handled, disposed,
transferred, produced, or processed at or on the Owned Premises
or the Leased Premises except in compliance with Environmental
Requirements.
(c) There are no existing or, to Seller's knowledge, potential
Environmental Claims relating to the Owned Premises or the Leased
Premises; and Seller has not received any notification or
knowledge of alleged, actual, or potential responsibility for,
any disposal, release, or threatened release at any location of
any Hazardous Material generated at or transported from the Owned
Premises or the Leased Premises by or on behalf of Seller.
(d) (i) no underground storage tank or other underground storage
receptacle (or associated equipment or piping) for Hazardous
Materials is currently located on the Owned Premises or the
Leased Premises, and there have been no releases of any Hazardous
Materials from any such underground storage tank or related
piping at any time prior to the Closing; and (ii) there have been
no past or present releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping,
leaching, disposing, or dumping of Hazardous Materials at, on, to
or from the Owned Premises or the Leased Premises in violation of
any Environmental Requirements.
(e) There are no PCBs or friable asbestos located at or on the Owned
Premises or the Leased Premises.
(f) No lien or other encumbrance has been imposed on the Owned
Premises or Leased Premises by any federal, state, local or
foreign governmental agency or authority due to either the
presence of any Hazardous Material on or off the Owned Premises
or Leased Premises or a violation of any Environmental
Requirement.
(g) There are no pending or, to the knowledge of Seller, threatened
Environmental Claims with respect to the Owned Premises or Leased
Premises.
(h) Seller has received no notices pursuant to the citizen's suit
provision of any Environmental Requirement Relating to the Owned
Premises or Leased Premises or any facility or operations
thereon.
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(i) Seller has not received any request for information, notice,
demand, letter, administrative inquiry, or formal or informal
complaint or claim with respect to any Environmental Conditions
or violation of any Environmental Requirement relating to the
Owned Premises or Leased Premises or any facility or operations
thereon.
SECTION 2.24. NO GUARANTEES. Except as disclosed in SCHEDULE 2.24,
none of the obligations or liabilities of Seller relating to the Business
is guaranteed by any other person, firm or corporation, nor has Seller
guaranteed the obligations or liabilities of any other person, firm or
corporation.
SECTION 2.25. INSURANCE.
(a) Seller is insured (i) with respect to its properties used in
connection with the Business and (ii) the conduct of the Business
by insurers that are not affiliates of Seller and that, to the
knowledge of Seller, are reputable. SCHEDULE 2.25 contains:
(1) A list of all policies of liabilities, theft, fidelity,
life, fire, product liability, workmen's compensation,
health, and other forms of insurance held by Seller in
connection with the Business, and specifies the insurer,
amount of coverage, premiums, deductibles, type of insurance
and policy number; and
(2) A list of all pending claims under such policies.
(b) The policies listed in SCHEDULE 2.25 are in full force and
effect, and all premiums due and payable with respect to such
policies are currently paid. To the knowledge of Seller, the
insurance coverage provided by the policies listed in
SCHEDULE 2.25 satisfies all contractual and statutory
requirements applicable to Seller. Seller has delivered or will
deliver to Buyer prior to the Closing copies of all insurance
policies listed on SCHEDULE 2.25.
SECTION 2.26. POWER OF ATTORNEY. SCHEDULE 2.26 contains a list of
the names of all persons, firms, associations or business organizations
holding general or special written powers of attorney from Seller and a
summary of the terms thereof.
SECTION 2.27. NO BROKERS' OR FINDERS' FEES. Except as provided in
SCHEDULE 2.27, no agent, broker, investment banker, person or firm acting
on behalf of Seller or under the authority of Seller, is or will be
entitled to any broker's or finder's fee or expenses or any other
commission or similar fee or expense directly or indirectly from any of the
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parties hereto in connection with any of the transactions contemplated by
this Agreement or any Related Agreements. Seller shall indemnify and hold
Buyer harmless from any cost or expense arising out of or relating to any
claim for a broker's or finder's fee incurred as a result of any agreement
of Seller in connection with the transactions provided for in this
Agreement.
SECTION 2.28. SOLE SHAREHOLDER. TCI is the sole shareholder of
Seller.
SECTION 2.29. DISCLOSURE. This Agreement and the Exhibits and
Schedules hereto (to the extent such Exhibits and Schedules have been
provided by Seller) do not contain any untrue statements of a material fact
or omit to state a material fact necessary to make the statements herein
contained not misleading.
SECTION 2.30. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set
forth on SCHEDULE 2.30, since January 1, 1998, Seller has operated its
business in the ordinary course consistent with past practice and, in
connection with the Business there has not been any:
(a) material adverse change in the assets, operations, business,
prospects or financial condition of the Business;
(b) (i) except for normal periodic increases in the ordinary course
of business consistent with past practice, increase in the
compensation payable to or to become payable to any Business
Employee of Seller whose total compensation for services rendered
to Seller is at an annual rate of $50,000 or higher as of January
1, 1998, (ii) bonus, incentive compensation, service award or
other like benefit granted, made or accrued, contingently or
otherwise, for or to the credit of any Business Employee of
Seller, (iii) employee welfare, pension, retirement,
profitsharing or similar payment or arrangement made or agreed to
by Seller for any Business Employee of Seller other than in the
ordinary course of business, or (iv) new employment agreement
been entered into by Seller with any Business Employee of Seller;
(c) addition to or modification of the Employee Benefit Plans, other
than (i) the extension of coverage to any employees of Seller who
became eligible after January 1, 1998, or (ii) changes required
by law;
(d) sale, assignment or transfer of any of the assets of Seller
material to the Business singly or in the aggregate;
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(e) cancellation of any indebtedness or waiver of any rights having a
value of $25,000 or greater to Seller in the Business, whether or
not in the ordinary course of business;
(f) execution and delivery, amendment, cancellation or termination of
any contract, license or other instrument material to the
Business;
(g) capital expenditure or the execution of any lease or any
incurring of liability therefore in connection with the Business
involving payments in excess of $25,000 in the aggregate;
(h) failure to repay any material obligation, except where such
failure would not have a material adverse effect on Seller or the
Business;
(i) failure to operate the Business in the ordinary course or to
preserve the Business intact, to keep available to Seller the
services of the employees of Seller and to preserve for Seller
the goodwill of Buyer's suppliers, customers, and others having
relations with the Business, except where such failure would not
have a material adverse effect on the Seller or the Business;
(j) change in accounting methods or practices;
(k) revaluation by Seller of any of the Purchased Assets, including
without limitation writing off Accounts Receivable other than in
the ordinary course of conduct of the Business;
(l) damage destruction or loss (whether or not covered by insurance)
adversely affecting the Purchased Assets or the Business;
(m) mortgage, pledge or encumbrance of any of the Purchased Assets;
(n) declaration, setting aside or payment of dividends or
distributions in respect of any outstanding securities of Seller,
any redemption, purchase or other acquisition of any of Seller's
outstanding securities, or any other payments, including the
payment of any amounts due on obligations of Seller to its
shareholders or directors;
(o) issuance or commitment to issue any shares or other equity
securities of Seller or obligations or securities convertible
into or exchangeable for shares or other equity securities of
Seller;
(p) indebtedness incurred for borrowed money or any commitment to
borrow money by Seller, or any loans made or agreed to be made by
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Seller, or any guarantee, assumption, endorsements of, or other
assumption of any obligation by Seller with respect to any
liabilities or obligations of any other persons except in the
normal course of business;
(q) incurrence of any liability involving $5,000 or more, except in
the ordinary course of business, or any increase or change in any
assumptions underlying or methods of calculating any bad debt,
contingency or other reserves of Seller;
(r) issuance of any purchase order, or group of related purchase
orders, for an aggregate amount in excess of $5,000 except in the
ordinary course of business;
(s) payment, discharge, satisfaction or compromise of any liabilities
or contingent liabilities other than the payment, discharge or
satisfaction (i) in the ordinary course of business and
consistent with past practice of liabilities reflected or
reserved against in the Financial Statements or incurred in the
ordinary course of business and consistent with past practice
since January 1, 1998, and (ii) of other liabilities or contingent
liabilities involving $5,000 or more singly and $25,000 or more
in the aggregate;
(t) agreement by Seller to do any of the foregoing;
(u) loss of any material customer or supplier; or
(v) other event or condition of any character which in any one case
or in the aggregate has had, or any event or condition known to
Seller which Seller reasonably expects will, in any once case or
in the aggregate, have a material adverse effect on Seller or the
Business.
SECTION 2.31. YEAR 2000.
(a) To the best of Seller's knowledge, Seller and the Business will
be Year 2000 Ready by December 30, 1999, provided that all plans
and programs of Seller described on SCHEDULE 2.31 are fully
carried out, whether before or after closing and whether by Buyer
or Seller. "Year 2000 Ready" means that Seller and its systems
(including all software systems, whether proprietary or not) and
processes (including manufacturing processes) ("Systems"), will
in all material respects correctly identify, recognize and
process four-digit year dates, and the Systems will in all
material respects continue to function properly with respect to
dates before, during and after January 1, 2000 with no material
errors or material Systems interruptions.
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(b) Seller has made no express or implied warranties regarding the
Year 2000 Readiness of itself, or any of its products, except as
set forth on SCHEDULE 2.31.
SECTION 2.32. REPRESENTATIONS AND WARRANTIES AS OF DATE HEREOF. The
representations and warranties contained in the foregoing SECTION 2.01
through SECTION 2.31 inclusive are made as of the date hereof, except as
otherwise expressly indicated therein.
SECTION 2.33. DISCLOSURE. Neither Seller, Shareholder, nor TCI shall
be deemed to have made to Buyer any representations or warranty other than
as expressly made by the Seller, Shareholder or TCI in this Agreement or
the Related Agreements to which it is a party. Without limiting the
generality of the foregoing, and notwithstanding any other express
representations and warranties made by TCI, Shareholder or Seller in this
Agreement or the Related Agreements to which Seller, Shareholder or TCI is
respectively a party, neither Seller, Shareholder nor TCI makes any
representation or warranty to Buyer with respect to (i) any projections,
estimates, financial plans or budgets delivered or made available prior to
the Closing to Buyer of future revenues, expenses or expenditures or future
results or operations; or (ii) except as expressly covered by a
representation or warranty contained in this Agreement or the Related
Agreements to which it is a party, any other information or documents
financial or otherwise made available to Buyer or their counsel,
accountants or advisers with respect to Seller.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF BUYER
As a material inducement to Seller to enter into this Agreement and
any Related Agreements and documents and to consummate the transactions
contemplated by this Agreement and any Related Agreements, Buyer represents
and warrants to Seller that:
SECTION 3.01. AUTHORITY; CONSENT. Buyer has the full capacity,
right, power and authority to enter into, execute and deliver this
Agreement and any and all Related Agreements, to consummate the
transactions contemplated by this Agreement and any Related Agreements, to
comply with and fulfil the terms and conditions of this Agreement and any
Related Agreements, and to purchase the Purchased Assets from Seller. The
execution and delivery of this Agreement and all Related Agreements by
Buyer and the consummation by Buyer of the transactions contemplated hereby
or thereby have been duly and validly authorized by all necessary action on
the part of the Board of Directors and Shareholders of Buyer. This
Agreement and all Related Agreements each constitutes a valid and binding
obligation of Buyer, enforceable in accordance with their respective terms
and conditions, subject as to enforcement to applicable bankruptcy,
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insolvency, reorganization and other similar laws of general applicability
relating to or affecting creditors rights generally. No further action is
necessary by Buyer to make this Agreement or any Related Agreements valid
and binding upon Buyer and enforceable against Buyer in accordance with the
terms hereof or thereof or to carry out the transactions contemplated
hereby or thereby. Neither the execution and delivery of this Agreement or
any Related Agreement, nor the consummation of the transactions
contemplated hereby or thereby, nor compliance by Buyer with any of the
provisions of this Agreement or any Related Agreement will:
(a) Conflict with, violate, result in a breach of, constitute a
default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or give rise to any right of
termination, cancellation, or acceleration under any provision of
Buyer's Articles of Incorporation or Bylaws or under any of the
terms, conditions or provisions of any note, lien, bond,
mortgage, indenture, license, lease, contract, commitment,
agreement, understanding, arrangement, restriction or other
instrument or obligation to which either Buyer is a party or by
which either Buyer or any of its respective properties or assets
may be bound;
(b) Violate any law, rule or regulation of any government or
governmental agency or body, or any judgment, order, writ,
injunction, or decree of any court, administrative agency, or
governmental agency or body applicable to Buyer or any properties
or assets of Buyer; or
(c) Constitute an event which, with or without notice, lapse of time,
or action by a third party, could result in the creation of any
lien, charge, or encumbrance upon any of the assets or properties
of Buyer, or cause the maturity of any liability, obligation, or
debt of Buyer to be accelerated or increased.
SECTION 3.02. CONSENTS AND APPROVALS. Except as set forth in
SCHEDULE 3.02, to the knowledge of Buyer, the execution and delivery of
this Agreement and any Related Agreements by Buyer and the consummation by
Buyer of the transactions contemplated hereby or thereby will not require
any notice to, or consent, authorization, or approval from any court or
governmental authority or any other third party. Except as set forth in
SCHEDULE 3.02, any and all notices, consents, authorization and approvals
set forth in SCHEDULE 3.02 have been made and obtained.
SECTION 3.03. LITIGATION. Except as set forth in SCHEDULE 3.03,
there is no action, proceeding or investigation in any court or before any
governmental or regulatory authority pending or, to the knowledge of Buyer,
threatened in writing or orally threatened against Buyer which seeks to
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enjoin or obtain damages in respect of the consummation of the transactions
contemplated hereby.
SECTION 3.04. CORPORATE ORGANIZATION. Buyer is a corporation formed,
organized and validly existing under the laws of the State of Delaware.
Buyer has all the requisite power and authority to own, lease and operate
its properties and carry on its business as it is now being conducted.
Buyer prior to closing will deliver to Seller (a) true and complete copies
of the Articles of Incorporation of Buyer, including all amendments
thereto; (b) a Certificate of Good Standing for Buyer issued by the
Secretary of State of the State of Delaware; and (c) copies of the Bylaws
of Buyer, including all amendments thereto, of Buyer.
SECTION 3.05. NO BROKERS' OR FINDERS' FEES. Except as provided in
SCHEDULE 3.05, no agent, broker, investment banker, person or firm acting
on behalf of Buyer or under the authority of Buyer, is or will be entitled
to any broker's or finder's fee or expenses or any other commission or
similar fee or expense directly or indirectly from any of the parties
hereto in connection with any of the transactions contemplated by this
Agreement or any Related Agreements. Buyer shall indemnify and hold Seller
harmless from any cost or expense arising out of or relating to any claim
for a broker's or finder's fee incurred as a result of any agreement of
Buyer in connection with the transactions provided for in this Agreement.
SECTION 3.06. PAYMENT OF ASSUMED LIABILITIES. Buyer will pay in full
each Assumed Liability on a timely basis in accordance with the terms of
such Assumed Liability.
SECTION 3.07. ACCESS TO INFORMATION. All documents, records and
books which Buyer has requested pertaining to this transaction have been
made available for inspection by Buyer, its attorneys and/or accountants
and Buyer has had a reasonable opportunity to ask questions of and receive
information and answers from a person or persons acting on behalf of Seller
concerning the ownership interest and, as Buyer deems necessary, to verify
the information provided by Seller, and all such questions have been
answered and all such information has been provided to the full
satisfaction of Buyer. To Buyer's knowledge, the Disclosure Schedule
delivered in conjunction with the execution of the September Agreement did
not state any basis for Buyer or its officers, directors, employees, agents
or affiliates to recover any claim for indemnification pursuant to ARTICLE
IX of this Agreement or the September Agreement, except for the Environmental
Matters set forth on SCHEDULE 9.09 for which Buyer will be entitled to
full indemnity pursuant to the terms of SECTION 9.09.
SECTION 3.08. DISCLOSURE. This Agreement and the Exhibits and
Schedules hereto (to the extent such Exhibits and Schedules have been
provided by Buyer) do not contain any untrue statements of a material fact
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or omit to state a material fact necessary to make the statements herein
contained not misleading.
SECTION 3.09. REPRESENTATIONS AND WARRANTIES AS OF DATE HEREOF. The
representations and warranties contained in the foregoing SECTION 3.01
through SECTION 3.08 inclusive are made as of the date hereof, except as
otherwise expressly indicated therein.
ARTICLE IV.
TAXES
SECTION 4.01. TAXES. Seller shall pay all state and local sales,
transfer, excise or other similar taxes (including without limitation all
state and local taxes in connection with the transfer of the Owned
Premises) and any deficiency, interest or penalty asserted with respect
thereto, and all recording and filing fees that may be imposed by reason of
the sale, transfer, assignment or delivery by Seller of the Purchased
Assets. Seller shall be responsible for the preparation and filing of all
required Returns and (except for Taxes assumed by the Buyer pursuant to
SECTION 1.03) shall be liable for the payment of any and all Taxes relating
to all periods through the Closing Date (including all Taxes resulting from
the sale and transfer by Seller of the Purchased Assets).
SECTION 4.02. COOPERATION ON TAX MATTERS. Seller shall furnish or
cause to be furnished to Buyer, as promptly as practicable, whether before
or after the Closing Date, such information and assistance relating to the
Business as is reasonably necessary for the preparation and filing by Buyer
of any Return, claim for refund, or other required or optional filings
relating to tax matters, for the preparation by Buyer for, and proof of
facts during, any tax audit, for the preparation by Buyer for any tax
protest, for the prosecution or defense by Buyer of any suit or other
proceeding relating to tax matters, or for the answer by Buyer to any
governmental or regulatory inquiry relating to tax matters.
Buyer shall retain possession of all files and records transferred to
Buyer hereunder and coming into existence after the Closing Date which
relate to the Business before the Closing Date, for a period of at least
five (5) years from the Closing Date. Buyer may dispose of or destroy any
files and records prior to that time in accordance with any reasonable
document retention policy hereinafter adopted by Buyer, provided that Buyer
provides Seller with an opportunity to copy such files and records prior to
disposal or destruction by Buyer. Any files or records so copied shall be
held by Seller in strict confidence, used only for the purposes set forth
in this Agreement. In addition, from and after the Closing Date, upon
reasonable notice and during normal business hours, Buyer shall provide
access to Seller and its attorneys, accountants, and other representatives,
at Seller's expense, to such files and records as Seller may reasonably
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deem necessary to properly prepare for, file, prove, answer, prosecute,
and/or defend any such Return, filing, audit, protest, claim, suit,
inquiry, or other proceeding.
SECTION 4.03. FORM 8594. Seller and Buyer shall cooperate in the
timely filing of Internal Revenue Service Form 8594 (or other appropriate
forms), which shall be prepared in accordance with the allocation of the
purchase price among the Purchased Assets (as set forth in SCHEDULE 1.04)
pursuant to Section 1060 of the Code, and any forms or documents required
to be filed with respect to such matters with state or local taxing
authorities.
ARTICLE V.
EMPLOYEES AND EMPLOYEE PLANS
SECTION 5.01. TERMINATION OF EXISTING EMPLOYEES. On the Closing Date
and prior to the Closing, Seller will terminate all Business Employees.
SECTION 5.02. OFFERS OF EMPLOYMENT. Prior to Closing and as soon as
practicable thereafter, Buyer will provide applications for employment and
consider for employment all Business Employees of Seller as of Closing.
Notwithstanding the foregoing, Buyer will have no obligation to offer
employment to any employee of Seller except those employees identified in
SECTION 6.07, and Buyer reserves the right to conduct substance abuse
testing prior to offering employment to any employee of Seller. All
Business Employees of the Business who are offered employment as of the
Closing Date will be considered "Transferred Employees" as of the date they
become employees of Buyer.
SECTION 5.03. TERMS OF EMPLOYMENT. Buyer will use its best efforts
to offer to any Transferred Employees a compensation and benefits package
comparable to the compensation and benefits package provided to the
Transferred Employees by Seller prior to Closing. To the extent allowable
by law, the Transferred Employees will receive credit, for eligibility and
vesting purposes, for their length of service as employees of Seller.
SECTION 5.04. BENEFIT AND EMPLOYEE PLANS. Buyer will, at a minimum,
continue to offer comparable benefits and employee plans to Transferred
Employees which were offered by Seller prior to Closing.
SECTION 5.05. COBRA OBLIGATIONS. Seller shall retain and remain
solely responsible for any and all obligations under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") to provide
any medical benefits, and to provide any notices with respect to such
benefits as may be required under COBRA, which arise on or before the
Closing Date with respect to Business Employees and Leased Employees.
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ARTICLE VI.
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer under this Agreement are subject to the
fulfillment, prior to or at the Closing, of the following conditions, any
one or more of which may be waived in writing by Buyer in its sole
discretion:
SECTION 6.01. DELIVERIES BY SELLER. Seller shall have executed and
delivered to Buyer the documents and items specified in SECTION 8.02
herein.
SECTION 6.02. REPRESENTATIONS AND WARRANTIES OF SELLER, TCI AND THE
SHAREHOLDER. Each of the representations and warranties by Seller, TCI
and the Shareholder contained in this Agreement shall be true and correct
in all material respects at and as of the Closing Date with the same force
and effect as though made at and as of the Closing Date.
SECTION 6.03. COMPLIANCE. Seller, TCI and the Shareholder shall have
performed and complied in all material respects with all the covenants,
agreements, obligations and conditions required by this Agreement to be
performed or complied with by them at or prior to the Closing Date.
SECTION 6.04. COMPLIANCE CERTIFICATE. Seller shall have delivered to
Buyer a certificate, dated the Closing Date, as to the fulfillment of the
conditions specified in SECTIONS 6.02 and 6.03 hereof, in substantially the
form attached as EXHIBIT 6.04.
SECTION 6.05. AUTHORIZATIONS AND CONSENTS. Approval of the
transaction by Seller's Board of Directors and shareholder, all permits,
authorizations, approvals and consents of any governmental body, state or
Federal (including such approvals as may be required in connection with
obtaining shareholder approval from Seller's shareholder or TCI),
and all consents of other third parties that may reasonably be
required in connection with the execution of this Agreement or the
effectuation of the transaction contemplated herein shall have been duly
obtained and shall be in full force and effect on the Closing Date.
SECTION 6.06. NO CHANGE IN BUSINESS OR FINANCIAL CONDITION; OPERATION
OF BUSINESS IN ORDINARY COURSE. Except as has been fully and completely
disclosed to Buyer in the Updated Disclosure Schedules, the business,
operations, financial condition, assets, liabilities, employee relations,
customer relations, and supplier and vendor relations of Seller as of the
Closing Date shall not have changed in a materially adverse manner since
January 1, 1998. Since January 1, 1998, Seller shall have operated the
Business and maintained its assets and liabilities (including the
Purchased Assets and the Assumed Liabilities) in the ordinary course of
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business consistent with past practices including: (a) paying payables
when due, (b) diligently collecting the full amount of all receivables in
the ordinary course of business, (c) maintaining all property and operating
equipment in good operating condition, (d) replacing all worn or obsolete
property and equipment in accordance with past practices, (e) maintaining
all property and liability insurance in accordance with past practices,
(f) not incurring any extraordinary or non-ordinary expense or obligations
and (g) not selling, encumbering or otherwise disposing of any assets
except in the ordinary course of business and in accordance with all other
provisions of this Agreement.
SECTION 6.07. EMPLOYMENT AGREEMENTS. Gary Moore, Terry Sheir and
Ludd Rupff shall have entered into an employment and noncompetition
agreements with Buyer, in the form of EXHIBIT 6.07 attached hereto and
incorporated herein by this reference (the "Employment Agreements").
SECTION 6.08. NONCOMPETITION AGREEMENTS. Seller, TCI and the
Shareholder each shall have entered into noncompetition agreements with
Buyer, in the form of EXHIBIT 6.08 attached hereto and incorporated herein
by this reference (the "Noncompetition Agreements").
SECTION 6.09. MILAN PROPERTY REAL ESTATE PURCHASE AGREEMENT. The
Property Seller shall have, simultaneously with the Closing of the
transaction contemplated hereby, consummated the transaction set forth in a
real estate purchase agreement between Buyer and Property Seller in the
form of EXHIBIT 6.09 attached hereto and incorporated herein by this
reference (the "Seller Real Estate Agreement").
SECTION 6.10. CONSENT OF SIMPLIFIED EMPLOYMENT SERVICES. Seller
shall have obtained the consent of Simplified Employment Services to the
transfer to Buyer of its existing employee leasing services agreement with
Seller, or Buyer and Simplified Employment Services shall have entered into
a replacement leasing services agreement reasonably acceptable to Buyer.
SECTION 6.11. PERFECTION OF TITLE. Seller shall execute and deliver
in form satisfactory to Buyer all documents necessary to perfect title to
or interest in any of the Purchased Assets.
SECTION 6.12. RESULTS OF DUE DILIGENCE. Buyer shall be satisfied, in
its sole discretion, with the results of the operational, market,
financial, legal, and environmental and governmental due diligence review
performed by Buyer and its affiliates, employees, auditors, legal counsel
and other authorized representatives, as provided in SECTION 10.02.
SECTION 6.13. AUDITED NOVEMBER 30 FINANCIAL STATEMENTS. Buyer shall
have entered into an Agreement with a nationally recognized accounting firm
(the "Buyer's Accountant") pursuant to which the Buyer's Accountant will,
at Buyer's expense, prepare audited financial statements of Seller as of
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November 30, 1998 for the eleven (11) months then ended (the "November 30,
1998 Financials"). The November 30, 1998 Financials shall be prepared from
the books and records of Seller with the full cooperation of Seller and
Seller's employees. The November 30, 1998 Financials shall be satisfactory
to Buyer in Buyer's sole discretion.
SECTION 6.14. CLOSING BALANCE SHEET. Buyer shall have entered into
an agreement with the Buyer's Accountant pursuant to which the Buyer's
Accountant will, at Buyer's expense, conduct a closing audit of Seller and
prepare a balance sheet, income statement and cash flows of Seller as of
the Closing Date (the "Closing Balance Sheet") within sixty (60) days of
the Closing. The scope of the audit shall be satisfactory to Buyer in
Buyer's sole discretion. Buyer may, in Buyer's discretion, enter into an
Agreement with the Buyer's Accountant that the Buyer's Accountant will, at
Buyer's expense, conduct an audit of Seller's operations from November 30,
1998 to the Closing Date and provide Buyer with a bringdown report updating
the November 30, 1998 Financials through the Closing Date.
SECTION 6.15. LICENSE AGREEMENT. Seller and TCI shall have entered
into a license agreement granting Buyer certain rights to use the "The
Colonel's" registered and unregistered trademarks and tradenames, in the
form of EXHIBIT 6.15 attached hereto and incorporated herein by this
reference (the "License Agreement").
SECTION 6.16. NO NEW LEASE AGREEMENTS. Between September 14, 1998
and the Closing Date, neither Seller nor TCI shall have (i) entered into
any Lease for real property for use in connection with the Business or
(ii) renewed or extended any existing lease for the Leased Premises without
the prior written consent of Buyer. For purposes of this SECTION 6.16,
renewing or extending any lease shall include taking any affirmative action
which would result in a binding obligation or, with respect to any existing
leases, failing to take any action which, if not taken, would result in a
binding obligation.
SECTION 6.17. ENVIRONMENTAL REPORTS. Seller shall have caused, at
Seller's sole expense, an environmental consulting firm chosen by Buyer
(the "Environmental Consulting Firm") to conduct a Phase I environmental
survey and limited environmental regulatory compliance assessment of the
Milan Property (the "Milan Property Phase I") and Buyer shall be satisfied,
in its sole discretion, with the results of the Milan Property Phase I.
SECTION 6.18. TRANSFER OF TAX ABATEMENT CERTIFICATES Seller and Buyer
shall have obtained the written consent of all applicable taxing
authorities to a transfer of all tax abatement certificates, if any,
relating to real or personal property used in the Business, and such
transfers shall have been made prior to or at Closing.
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SECTION 6.19. WEST MEMPHIS LEASE AGREEMENT. Buyer and Seller shall
have entered into a lease agreement pursuant to which Seller shall lease to
Buyer at a rental rate mutually acceptable to Buyer and Seller the real
property located at 110 East Jefferson Street, West Memphis, Arkansas,
which lease agreement shall be in the form of EXHIBIT 6.19 attached hereto
and incorporated herein by reference (the "Lease Agreement.")
SECTION 6.20. COOPERATION CERTIFICATE. Seller and TCI shall have
delivered to Buyer a certificate, dated the Closing Date (the "Cooperation
Certificate"), certifying that (i) Seller and Seller's employees cooperated
fully with (a) Buyer's Accountant in the preparation of the November 30,
1998 Financials and (b) the Environmental Consulting Firm in the
preparation of the Milan Property Phase I , and (ii) all financial and
other information provided to Buyer's Accountant and the Environmental
Consulting Firm by Seller and Seller's employees was true and correct in
all material respects, did not contain any untrue statements of a material
fact or omit to state a material fact necessary to make the information
provided not misleading, with respect to Buyer's Accountant, fairly and
accurately represented the financial condition of Seller and, with respect
to the Environmental Consulting Firm, fairly and accurately represented the
condition of the Milan Property. The certificate shall further state, and
Seller and TCI shall further agree, that the representations made in the
Cooperation Certificate shall constitute a representation made pursuant to
ARTICLE II of this Agreement, and, as such, shall be subject to all
provisions of this Agreement relating to or governing representations of
ARTICLE II, including the indemnification provisions set forth in ARTICLE
IX.
ARTICLE VII.
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at the Closing, of the following conditions, any
one or more of which may be waived in writing by Seller in its sole
discretion:
SECTION 7.01. DELIVERIES BY BUYER. Buyer shall have executed and
delivered to Seller the documents and items specified in SECTION 8.03
herein.
SECTION 7.02. REPRESENTATIONS AND WARRANTIES OF BUYER. Each of the
representations and warranties by Buyer contained in this Agreement shall
be true and correct at and as of the Closing Date with the same force and
effect as though made at and as of the Closing Date.
SECTION 7.03. COMPLIANCE. Buyer shall have performed and complied
with all the covenants, agreements, obligations and conditions required by
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this Agreement to be performed or complied with by it at or prior to the
Closing Date.
SECTION 7.04. COMPLIANCE CERTIFICATE. Buyer shall have delivered to
Seller a certificate, dated the Closing Date, as to the fulfillment of the
conditions specified in SECTIONS 7.02 and 7.03 hereof, in substantially the
form attached as EXHIBIT 7.04.
SECTION 7.05. AUTHORIZATIONS AND CONSENTS. Approval of the
transaction by Buyer's members and Board of Managers, all permits,
authorizations, approvals and consents of any governmental body, state or
Federal, and all consents of other third parties that may reasonably be
required in connection with the execution of this Agreement or the
effectuation of the transaction contemplated herein shall have been duly
obtained and shall be in full force and effect on the Closing Date.
SECTION 7.06. EMPLOYMENT AGREEMENTS. Buyer shall have entered into
the Employment Agreements.
SECTION 7.07. NONCOMPETITION AGREEMENTS. Buyer shall have entered
into the Noncompetition Agreements.
SECTION 7.08. SELLER REAL ESTATE PURCHASE AGREEMENT. Buyer and
Property Seller shall have simultaneously with the Closing of the
transaction contemplated hereby, consummated the transaction set forth in
the Seller Real Estate Agreement.
SECTION 7.09. SHAREHOLDER VOTE. This Agreement and the consummation
of the transactions contemplated therein shall have been approved by the
requisite vote of the shareholders of TCI and Seller.
SECTION 7.10. LEASE AGREEMENT. Buyer and Seller shall have entered
into the Lease Agreement.
ARTICLE VIII.
CLOSING AND POST-CLOSING MATTERS
SECTION 8.01. CLOSING DATE. The closing of the purchase and sale of
the Purchased Assets (the "Closing") shall take place on December 17, 1998
or such earlier or later date as may be mutually agreed upon by the parties
hereto (the "Closing Date"). The Closing shall take place at 9 a.m. at the
offices of Dean & Fulkerson, P.C., Fifth Floor, 801 West Big Beaver Road,
Troy, Michigan, or at such other place or time as the parties shall
mutually agree.
SECTION 8.02. DELIVERIES BY SELLER. At the Closing, Seller shall
deliver or cause to be delivered to Buyer the following duly executed
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documents and other items in form satisfactory to Buyer in its sole
discretion:
(a) All assignments and such other instruments of sale, transfer,
conveyance and assignment of the Purchased Assets as Buyer
reasonably may request, including a Bill of Sale in substantially
the form attached as EXHIBIT 8.02(a);
(b) A Certificate of Good Standing of Seller issued by the Michigan
Department of Consumer and Industry Services, dated as of a date
no later than ten (10) days prior to the Closing;
(c) A Compliance Certificate, in substantially the form attached as
EXHIBIT 6.04;
(d) The Employment Agreements;
(e) The Noncompetition Agreements as described in SECTIONS 6.08 and
8.07;
(f) The Seller Real Estate Agreement;
(g) The License Agreement;
(h) The Lease Agreement;
(i) All documents reasonably deemed by Buyer as being necessary to
perfect title to or interest in any of the Purchased Assets;
(j) The written legal opinion of Warner Norcross & Judd LLP, counsel
for Seller, dated the Closing Date, substantially in the form
attached as EXHIBIT 8.02(j); and
(k) The Cooperation Certificate.
SECTION 8.03. DELIVERIES BY BUYER. At the Closing, Buyer shall
deliver or cause to be delivered to Seller the following duly executed
documents and other items in form satisfactory to Seller in its sole
discretion:
(a) The sum of Thirty Eight Million Dollars ($38,000,000)
as specified in SECTION 1.02(a);
(b) An assumption of the Assumed Liabilities in the form attached as
EXHIBIT 8.03(b) and such other instruments of assumption as
Seller reasonably may request;
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(c) A Compliance Certificate, substantially in the form attached as
EXHIBIT 7.04;
(d) A Certificate of Good Standing for Buyer issued by the Secretary
of State of the State of Delaware, dated as of the most recent
practicable date prior to the Closing;
(e) The Employment Agreements;
(f) The Noncompetition Agreements;
(g) The Lease Agreement;
(h) The Seller Real Estate Agreement; and
(i) The written legal opinion of Ice Miller Donadio & Ryan,
Indianapolis, Indiana, counsel for Buyer, dated the Closing Date,
substantially in the form attached as EXHIBIT 8.03(j). For
matters implicating Michigan law, Ice Miller Donadio & Ryan may
rely fully on the written legal opinion of Dean & Fulkerson,
P.C., Troy, Michigan.
SECTION 8.04. SUBSEQUENT DOCUMENTATION. At any time and from time to
time after the Closing Date, Seller shall, upon the request of Buyer, and
Buyer shall, upon the request of Seller, execute, acknowledge and deliver,
or cause to be executed, acknowledged and delivered, such further
instruments and other documents, and perform or cause to be performed such
further acts, as may be reasonably required to evidence or effectuate the
sale, conveyance, transfer, assignment and delivery hereunder of the
Purchased Assets, the assumption by Buyer of the Assumed Liabilities, the
Purchased Contracts and the Assumed Leases, leases and agreements, and the
performance by the parties of any of their other respective obligations
under this Agreement.
ARTICLE IX.
INDEMNIFICATION
SECTION 9.01. INDEMNIFICATION BY SELLER AND TCI. Subject to the
terms of this ARTICLE IX, Seller and TCI jointly and severally agree to
indemnify, defend, and hold Buyer harmless from and against any and all
demands, claims, actions, or causes of action, assessments, losses,
settlements, penalties, forfeitures, expenses, damages and liabilities
(collectively, an "Indemnity Loss") asserted against, suffered, incurred,
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sustained or required to be paid by Buyer arising out of, relating to, or
as a direct or proximate result of: (a) any misrepresentation, breach of
warranty or nonfulfillment of any of the covenants or agreements of Seller,
TCI or the Shareholder contained in this Agreement, Schedule, Exhibit,
Related Agreement, certificate or other instrument or document furnished or
required to be furnished by Seller by this Agreement or a Related
Agreement; (b) any Excluded Liability, liability, obligation or commitment
of any nature (absolute, accrued, contingent or other) of Seller or
relating to the Purchased Assets or the operation of the Business prior to
the Closing and not expressly assumed by Buyer pursuant to this Agreement;
(c) any Environmental Expenses, any Environmental Claims, any Environmental
Conditions or any material violation of any Environmental Requirements
relating to the Owned Property, Lease Real Property or Seller's operation
of the Business in all cases arising out of conditions in existence on the
Closing Date; (d) without limiting the generality of the foregoing, the
failure of Seller to withhold, collect, pay or remit any sales or use Tax
or payroll or employment Tax imposed by any state or local Taxing authority
in connection with the sale of any product or good or the payment of any
wages or compensation or the employment of any persons (including Lease
Employees who are determined to have been or claim to have been employees
of Seller) by Seller on or before the Closing Date, (e) without limiting
the generality of the foregoing, the failure of the Seller or any of its
shareholders to pay any federal or state income tax due from the operation
of the Business prior to the Closing; and (f) any and all actions, suits,
investigations, proceedings, demands, assessments, audits and judgments
arising out of any of the foregoing.
In addition, Seller and TCI shall indemnify and hold Buyer and Buyer's
lenders, if any, harmless from and against any loss, claim, expense,
damage, or liability (including reasonable attorneys' fees and expenses) to
which Buyer and/or the Purchased Assets may become subject insofar as such
loss, claim, damage, or liability (or actions in respect thereof) arises
out of or is based upon a breach or alleged breach of, or failure to comply
with any provision of, or to give any notice or make any filing pursuant
to, any bulk sales law or similar statute, Buyer understands that no notice
or filings are being made in respect of the Purchased Assets under any such
law or statute.
SECTION 9.02. INDEMNIFICATION BY BUYER. Buyer agrees to indemnify,
defend, and hold Seller harmless from and against any and all Indemnity
Loss asserted against, suffered, incurred, sustained or required to be paid
by Seller arising out of, relating to, or as a direct or proximate result
of (a) any Assumed Liability; (b) any misrepresentation, breach of warranty
or nonfulfillment of any of the covenants or agreements of Buyer contained
in this Agreement, Schedule, Exhibit, Related Agreement, certificate or
other instrument or document furnished or required to be furnished by
Seller by this Agreement or a Related Agreement; (c) any liability,
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obligation or commitment of any nature (absolute, accrued, contingent or
other) of Buyer or relating to the Purchased Assets or the operation of the
Business after the Closing except with respect to any Excluded Liabilities;
and (d) any and all actions, suits, investigations, proceedings, demands,
assessments, audits and judgments arising out of any of the foregoing.
SECTION 9.03. NOTICE. If an indemnified party (the "Claimant")
believes that it has suffered or incurred any Indemnity Loss, it shall so
notify the party which the Claimant believes has an obligation to indemnify
(the "Indemnifying Party") promptly in writing describing such loss or
expense, the amount thereof, if known, and the method of computation of
such loss or expense, all with reasonable particularity. If any action at
law, suit in equity, or administrative action is instituted by or against a
third party with respect to which the Claimant intends to claim any
liability or expense as an Indemnity Loss under this ARTICLE IX, it shall
promptly notify the Indemnifying Party in writing of such action or suit,
describing such loss or expenses, the amount thereof, if known, and the
method of computation of such loss or expense, all with reasonable
particularity.
SECTION 9.04. DEFENSE OF CLAIMS. The Indemnifying Party shall have
thirty (30) business days after receipt of the notice referred to in
SECTION 9.03 to notify the Claimant that it elects to conduct and control
any legal or administrative action or suit with respect to an indemnifiable
claim. If the Indemnifying Party does not give the foregoing notice, the
Claimant shall have the right to defend, contest, settle, or compromise
such action or suit in the exercise of its exclusive discretion and the
Indemnifying Party shall reimburse the Claimant, on a monthly basis, for
all reasonable expenses incurred by Claimant in so defending, contesting,
settling, or compromising such actions or suit, including attorneys' fees.
If the Indemnifying Party gives the foregoing Election Notice, the
Indemnifying Party shall have the right to undertake, conduct, and control,
through counsel of its own choosing and at its sole expense, the conduct
and settlement of such action or suit, and the Claimant shall cooperate
with the Indemnifying Party in connection therewith; provided, however,
that (a) the Indemnifying Party shall not thereby consent to the imposition
of any injunction against the Claimant without the written consent of the
Claimant; (b) the Indemnifying Party shall permit the Claimant to
participate in such conduct or settlement through counsel chosen by the
Claimant, but the fees and expenses of such counsel shall be borne by the
Claimant except as provided in clause (c) below; and (c) upon a final
determination of such action or suit, the Indemnifying Party shall promptly
reimburse the Claimant, to the extent required under this ARTICLE IX, for
the full amount of any Indemnity Loss resulting from such action or suit
and all reasonable expenses related to such Indemnity Loss incurred by the
Claimant, except fees and expenses of counsel for the Claimant incurred
after the assumption of the conduct and control of such action or suit by
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the Indemnifying Party. So long as the Indemnifying Party is contesting
any such action or suit in good faith, the Claimant shall not pay or settle
any such action or suit. Notwithstanding the foregoing, the Claimant shall
have the right to pay or settle any such action or suit, provided that in
such event the Claimant shall waive any right to indemnity therefor by the
Indemnifying Party and no amount in respect thereof shall be claimed as an
Indemnity Loss under this ARTICLE IX. Notwithstanding the foregoing, each
party shall have the right to the benefit of any insurance maintained by
the other if such insurance insures against any claim brought against
either party.
SECTION 9.05. LIMITATIONS ON INDEMNIFICATION.
(a) INSURANCE PROCEEDS. The amount of Indemnity Losses hereunder
shall be computed after giving effect to the receipt of any and
all insurance proceeds with respect thereto.
(b) LIMITATION BASED ON KNOWLEDGE. Except as specifically set forth
in SECTIONS 9.09 and 10.06 herein, Buyer will not be entitled to
recover any Indemnity Losses with respect to any breach of any
representation or warranty of Seller made in the Agreement or
otherwise, if prior to the signing of the Agreement or the
Closing Date, Philip Storm, Robert Bedrosian or Richard Schoemer
had actual knowledge of any fact, circumstance or occurrence
that constitutes a breach of such representation or warranty.
(c) OFFSETS. The aggregate amount of Indemnity Losses in respect of
Taxes will be reduced by the amount, if any, of a refund on Taxes
paid or accrued for the periods ending on or prior to the
Closing; provided that such refund is paid to Buyers. The amount
of any Indemnity Losses in respect of Accounts Receivable shall
be reduced by the amount, if any, of collection of Accounts
Receivable due on or before the Closing in excess of the reserve
for bad debt as reflected in the Financial Statements.
SECTION 9.06. PAYMENT OF LOSSES. The Indemnifying Party shall pay
to the Claimant in cash the amount to which the Claimant may become
entitled by reason of the provisions of this ARTICLE IX, such payment to
be made within fifteen (15) business days after such amount is finally
determined either by mutual agreement of the parties or the date on
which both such amount and the Claimant's obligation to pay such amount
have been determined by a final judgment of a court or administrative body
having jurisdiction over such proceeding.
SECTION 9.07. SURVIVAL. Notwithstanding the foregoing, the
Indemnifying Party shall have no liability with respect to any Indemnity
Loss notice of which is not received by the Indemnifying Party pursuant to
SECTION 9.03 hereof on or before the 18-month anniversary of the Closing
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Date; PROVIDED, HOWEVER, (i) the representations contained in SECTION 2.08
relating to Taxes shall survive for so long as any Taxing authority shall
have the power to make any claim, assessment or reassessment with respect
thereto; (ii) the representations contained in SECTION 2.22 relating to
Environmental Compliance shall survive for a period of five years from and
after the Closing Date; (iii) those representations contained in
SECTIONS 2.01, 2.02, 2.03, 2.04, 3.01, 3.02 or 3.04 shall survive
indefinitely; (iv) all covenants shall survive until fully performed; and
(v) with respect to a particular matter for which a notice of an Indemnity
Loss has been timely presented, the claims period shall be extended until
such matter has been fully resolved.
SECTION 9.08. LIMITATIONS. Except as expressly provided in SECTION
9.09 herein, no party hereto shall be entitled to any payment pursuant to
ARTICLE IX hereof arising from any breach of any representation or warranty
until (and only to the extent that) the aggregate amount of its Indemnity
Losses arising from breaches of representations and warranties exceeds
One Hundred Seventy Five Thousand Dollars ($175,000). When the aggregate
Indemnity Losses of a party entitled to indemnification pursuant to this
ARTICLE IX exceed an aggregate amount of Seventeen Million Dollars
($17,000,000) (the "Cap"), and such party has received indemnification
from the indemnifying party in an aggregate amount equal to the Cap,
then such party shall no longer be entitled to indemnification hereunder.
SECTION 9.09. ENVIRONMENTAL INDEMNITY OBLIGATIONS. Buyer shall be
entitled to full indemnification from Seller, and Seller shall fully and
completely indemnify Buyer for any demands, claims, actions, or causes of
action, assessments, losses, settlements, penalties, forfeitures, expenses
(including reasonable attorneys' and environmental consultants' fees),
damages and liabilities, including Environmental Expenses and Environmental
Claims (as those terms are defined in SECTION 2.23 herein, arising from any
of the matters identified on SCHEDULE 9.09 hereto (each an "Environmental
Matter"). SCHEDULE 9.09 shall include, at a minimum, (i) each Environmental
Matter listed on Schedule 9.09 to the September Agreement and (ii) all
matters relating in any way to the groundwater testing or the results
thereof (including any recommended remediation) on the Milan Property.
The indemnification described in this SECTION 9.09 shall not be subject
to the limitations set forth in SECTION 9.08 hereunder.
SECTION 9.10. ASSIGNMENT OF CLAIMS. To the extent Seller indemnifies
Buyer for any Indemnity Losses arising from any third party claim(s), Buyer
shall assign its rights to pursue such claim(s) to Seller. Buyer agrees to
participate, at Seller's expense and upon Seller's request, in any action
by Seller against such third party or parties and agrees to transfer to
Seller all amounts paid to Buyer as a result of such rights or claims
against such third party or parties.
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ARTICLE X.
OTHER MATTERS
SECTION 10.01. OPERATION OF BUSINESS. After the Execution Date, and
prior to the Closing, Seller will not engage in any practice, take any
action, or enter into any transaction outside the ordinary course of
business. Seller will use its best efforts to keep its Business and
properties substantially intact, including its present operations, physical
facilities, working conditions, and relationships with lessors, licensors,
suppliers, customers and employees.
(a) Without limiting the generality of the foregoing, each of Seller
and the Shareholder shall, between the Execution Date and the
Closing Date use its best efforts to:
(1) preserve Seller's present business organization intact and
conserve its goodwill;
(2) keep available and maintain the services of all officers,
employees, agents and representatives on the same or
substantially the same term (except as provided in SECTION
5.01);
(3) continue and preserve good relationships with suppliers,
customers, lenders and others having business dealings or
relationships with Seller;
(4) maintain in full force and effect all permits,
authorizations, approvals and consents required for the
business as presently conducted; and
(5) maintain and keep in good order, consistent with past
practice, all of Seller's tangible assets.
(b) Between the Execution Date and the Closing, neither Seller nor
the Shareholder shall, without the prior written consent of
Buyer:
(1) incur any indebtedness, except trade payables incurred in
the ordinary course of business consistent with past
practices;
(2) issue any equity securities or options, warrants, rights or
convertible securities,
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(3) declare, set aside or pay any dividends or other
distributions or payments on or in respect to its
outstanding shares;
(4) knowingly take any action or omit to take any action which
would cause or causes a material breach or default in any of
Seller's contracts, commitments or obligations;
(5) materially increase the annual level of compensation of any
employee; increase at all the annual level of compensation
of any person whose compensation from Seller in the last
preceding fiscal year exceeded $40,000; or grant any unusual
or extraordinary bonuses, benefits or other forms of direct
or indirect compensation to any employee, officer, directly
or consultant, except in amounts in keeping with past
practices by formulas or otherwise;
(6) increase, terminate, amend or otherwise modify any Employee
Benefit Plan; or
(7) enter into any agreement to do any of the foregoing.
SECTION 10.02. BUYER REPRESENTATIVE. After the Execution Date, and
prior to the Closing, Seller shall allow a representative of Buyer to be
present at all times and have reasonable and unrestricted access to,
Seller's Milan facility during normal business hours. Seller shall cause
its executive officers, including but not limited to its chief financial
officer, to (i) cooperate with this representative, (ii) provide this
representative with any information regarding the Business reasonably
requested by this representative and (iii) communicate on a regular basis
with this representative regarding the day-to-day business operations of
the Business.
SECTION 10.03. DUE DILIGENCE. Prior to the Closing Date, Seller
shall permit Buyer and Buyer's affiliates, employees, auditors, legal
counsel and other authorized representatives to conduct an operational,
market, financial, legal, environmental and governmental due diligence
review of Seller. In connection with this investigation and evaluation,
Seller shall provide such assistance as reasonably requested and shall give
access during reasonable business hours to all books, records, facilities
and personnel related to the Business. In addition, Seller shall permit
Buyer to (i) contact Seller's customers and suppliers to discuss any and
all aspects of Seller's Business and (ii) discuss any past, pending or
potential legal issues with Seller's counsel. All due diligence will be
coordinated with and in deference to Seller and shall be conducted with
Seller's full approval.
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SECTION 10.04. CONFIDENTIALITY. Buyer and Seller each acknowledge
that all written information provided any by party hereto to any other
party in connection with this Agreement, including all Schedules and
Exhibits hereto and all other information delivered prior to execution
hereof constitute proprietary and confidential information of the
disclosing party, provided that the confidential information of Seller will
become the proprietary and confidential information of Buyer as of the
Closing Date. In the event this Agreement fails to close, all information
and documents delivered to any party hereunder shall be immediately
returned to the disclosing party and the recipient of the information shall
retain no copies thereof. If this Agreement fails to close, each party
hereto covenants and agrees that it will not use any such confidential and
proprietary information in any way to compete with, or to solicit or engage
in business transactions with the other party's customers, suppliers or
employees unless such information (i) becomes available to such party
through a non-confidential means or otherwise comes into the public domain;
or (ii) is required to be disclosed by law. The covenants and agreements
of the parties contained herein may be enforced by equitable action for
specific performance as well as damages.
SECTION 10.05. EARNEST MONEY DEPOSIT. The parties hereto acknowledge
and agree that upon execution of the September Agreement, Buyer deposited
into a trust account in the name of Ted Gans, Esq., an earnest money deposit
of One Hundred Thousand Dollars ($100,000) (the "Earnest Money Deposit").
The Earnest Money Deposit is presently and shall continue to be held in
trust by Ted Gans, Esq. Execution of this Agreement by all parties hereto
shall be deemed to render null and void Buyer's November 12, 1998 request
for immediate return of the Earnest Money Deposit. The Earnest Money
Deposit shall be disbursed as follows: (i) if the transaction described
herein is consummated, the Earnest Money Deposit shall be credited to the
Purchase Price at Closing, and the Closing Payment to be made to Seller by
Buyer shall be reduced by the amount of the Earnest Money Deposit, (ii) if
the transaction described herein is not consummated, and the reason the
transaction is not consummated is a reason other than a Refund Reason (as
defined herein), the Earnest Money Deposit shall be paid to Seller as
liquidated damages, (iii) if the transaction described herein is not
consummated as a result of (a) Seller's inability to obtain approval of
the transaction from the shareholders of TCI prior to the Closing Date, to
the extent such approval is necessary, (b) a material breach by Seller of
any covenant, representation or warranty contained in this Agreement,
(c) a rejection by Buyer of the Updated Disclosure Schedule within five
(5) business days of the Delivery Date thereof pursuant to the preamble
of ARTICLE II of this Agreement, or (d) the failure of the Seller's
annualized adjusted EBIT for fiscal year 1998, calculated in accordance
with SCHEDULE 10.05, to equal or exceed Seven Million Dollars ($7,000,000)
(collectively, the "Refund Reasons"), the Earnest Money Deposit shall be
returned to Buyer.
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SECTION 10.06. ENVIRONMENTAL OBLIGATIONS. Seller shall, between the
Execution Date and the Closing, take all actions necessary to successfully
remediate each Environmental Matter set forth on SCHEDULE 9.09 hereto.
Seller shall be solely responsible for the cost of all such remediation.
For purposes of this Agreement, each Environmental Matter shall be
considered "successfully remediated" when an environmental consultant
mutually agreeable to Buyer and Seller certifies to Buyer that the real
property, method of operation or other property or activity affected by
such Environmental Matter is in full compliance with all applicable
Environmental Requirements (as that term is defined in SECTION 2.23).
Successful remediation of all Environmental Matters shall relieve Seller
from its indemnification obligations described in SECTION 9.09 herein.
Notwithstanding SECTION 6.03 or any other provision of this Agreement,
Seller's successful remediation of all Environmental Matters shall not be a
condition precedent to Buyer's obligation to consummate the transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that Seller shall be
solely responsible for any costs incurred in successfully remediating all
Environmental Matters.
ARTICLE XI.
TERMINATION
SECTION 11.01. CONDITIONS OF TERMINATION. Notwithstanding anything
to the contrary contained herein, this Agreement may be terminated, and the
transactions contemplated hereby may be abandoned, at any time before the
Closing by mutual consent of Buyer and Seller. Buyer may unilaterally
terminate this Agreement by giving written notice to Seller on or before
the Closing Date if (i) the Closing shall not have occurred on or before
the December 17, 1998 through no fault of Buyer; (ii) Buyer is not
reasonably satisfied with the results of its continuing operational, market,
financial, legal, environmental and governmental due diligence review of
Seller; (iii) Seller's annualized adjusted EBIT for fiscal year 1998,
calculated in accordance with SCHEDULE 10.05, shall not equal or exceed
Seven Million Dollars ($7,000,000); (iv) Buyer rejects the Updated
Disclosure Schedule within five (5) business days of the Delivery Date
thereof pursuant to the preamble of Article II of this Agreement; or (iv)
Buyer shall have reasonably concluded that all of the conditions to Closing
set forth in ARTICLE V cannot be satisfied. Seller may unilaterally
terminate this Agreement by giving written notice to the Buyer on or before
the Closing Date if (i) the Closing shall not have occurred on or before
December 17, 1998 through no fault of Seller or the Shareholder; or (ii)
Seller shall have reasonably concluded that all of the conditions to Closing
set forth in ARTICLE VI cannot be satisfied.
SECTION 11.02. EFFECT OF TERMINATION. Except as provided in
SECTION 12.04, in the event of termination pursuant to SECTION 11.01, this
Agreement shall terminate and have no further effect, with no liability on
the part of any party hereto.
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ARTICLE XII.
MISCELLANEOUS
SECTION 12.01. COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument.
SECTION 12.02. COOPERATION. The parties agree that after the Closing
they will from time to time, upon the request of the other party, and
without further consideration, execute, acknowledge, and deliver in proper
form any further instruments, and take such other action as such other
party may reasonably require, in order to effectively carry out the intent
of this Agreement.
SECTION 12.03. FURTHER ASSURANCES. Each party hereto, after the
execution of this Agreement, shall execute, acknowledge, and deliver any
further deeds, assignments, conveyances, and other assurances, documents,
and instruments of transfer, reasonably requested by the other, and will
take any other action consistent with the terms of this Agreement that may
reasonably be requested.
SECTION 12.04. EXPENSES. Buyer and Seller shall each bear their own
legal, accounting and out-of-pocket expenses in connection with the
preparation and closing of this Agreement and the negotiation and
consummation of the transaction contemplated herein. The provisions of
this SECTION 12.04 shall not apply with respect to expenses incurred by the
parties in connection with any action for breach of this Agreement.
Notwithstanding the foregoing, in the event the transaction contemplated
herein fails to be consummated for any reason other than a Refund Reason,
Seller shall be entitled to Earnest Money Deposit as liquidated damages.
SECTION 12.05. PUBLIC ANNOUNCEMENTS. Neither Buyer nor Seller, nor
anyone representing either Buyer or Seller, shall make any announcement,
press release, or similar communication to any other person, except as may
be required by law or shall be agreed upon in writing by the parties to
this Agreement concerning this Agreement or the transactions contemplated
herein. After the Closing, Seller and Buyer shall mutually agree upon the
content and timing of any public announcement, press release or similar
communication regarding the transaction, the Closing, or the terms of this
Agreement. Notwithstanding the foregoing, Buyer, TCI and Seller may each
continue such communications with employees, customers, suppliers,
franchisees, lenders, lessors, shareholders and other particular groups as
may be necessary or appropriate and not inconsistent with the best
interests of the other party or the prompt consummation of the transactions
contemplated herein.
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SECTION 12.06. ACCESS TO RECORDS AND RECORDS RETENTION. Seller and
Buyer shall (i) each provide the other with such assistance as may
reasonably be requested by any of them in connection with the preparation
of any Return, audit or other examination by any Taxing authority, or
judicial or administrative proceeding related to liability for Taxes,
(ii) each retain and provide the other with any records or other
information that may be relevant to such Return, audit or examination,
proceeding, or determination, and (iii) each provide the other with any
final determination of any such audit or examination, proceeding, or
determination that affects any amount required to be shown on any Return of
the other for any period. Without limiting the generality of the
foregoing, Buyer and Seller each shall retain, until the applicable
statutes of limitations (including any extensions thereof) have expired,
copies of all Returns, supporting work schedules, and other records or
information that may be relevant to such returns for all Tax periods or
portions thereof ending before or including the Closing Date and shall not
destroy or otherwise dispose of any such records without first providing
the other party with a reasonable opportunity to review and copy the same.
SECTION 12.07. INDEX AND CAPTIONS. The index and the captions of the
Sections and Articles of this Agreement are solely for convenient reference
and shall not be deemed to affect the meaning or interpretation of any
section or article hereof.
SECTION 12.08. NOTICES. All notices, requests, demands, and other
communications under this Agreement shall be in writing and shall be deemed
to have been duly given (i) on the date of service if served personally on
the party to whom notice is to be given, (ii) on the date of receipt by the
party to whom notice is to be given if transmitted to such party by
telefax, provided a copy is mailed as set forth below on date of
transmission, (iii) on the day after delivery to a nationally recognized
overnight courier service marked for next day delivery to the party to whom
notice is to be given, or (iv) on the third day after mailing if mailed to
the party to whom notice is to be given by registered or certified mail,
return receipt requested, postage prepaid, to the following addresses:
If to Buyer, to:
Philip B. Storm
966 Stratford Lane East
Bloomfield Hills, MI 48304
Telephone: 248/723-1649
Facsimile: 248/723-1651
and
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Colonel's Acquisition Corp.
c/o Philip B. Storm
620 South Platt Road
Milan, MI 48160
Telephone: 734/439-4200
Facsimile: 734/439-0414
and
c/o Monument Advisors, Inc.
Attn: Joseph P. Schaffer
111 Monument Circle, Suite 642
Indianapolis, Indiana 46204
Telephone: 317/656-5065
Facsimile: 317/656-5060
Copies to:
Steven K. Humke
ICE MILLER DONADIO & RYAN
One American Square
Box 82001
Indianapolis, Indiana 46282-0002
Telephone: 317/236-2394
Facsimile: 317/236-2219
and
William C. Coon
Dean & Fulkerson, P.C.
801 North Big Beaver Road, 5th Floor
Troy, MI 48084
Telephone: 248/362-1300
Facsimile: 248/362-1358
If to Seller, to:
The Colonel's, Inc.
Attn: Donald J. Williamson
951 Aiken Road
Owosso, MI 48867
Telephone: 800/433-3604
Facsimile: 517/725-8409
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Copies to:
Ted Gans, Esq.
100 West Long Lake Road
Suite 200
P.O. Box 1122
Bloomfield Hills, MI 48303
Telephone: (248) 642-2220
Facsimile: (248) 646-4648
and
Warner Norcross & Judd LLP
Attn: Alex J. DeYonker
900 Old Kent Building
111 Lyon St. N.W.
Grand Rapids, MI 40903
Telephone: (606) 752-2000
Facsimile: (616) 752-2500
Any party may change its address for purposes of this SECTION 12.08 by
giving the other parties written notice of the new address in the manner
set forth above.
SECTION 12.09. ENTIRE AGREEMENT. Except as otherwise expressly set
forth herein, this Agreement and the agreements expressly contemplated
hereby, including the Exhibits and Schedules referred to herein which form
a part of this Agreement, contain the entire understanding of the parties
hereto with respect to the subject matter hereof. There are no
representations, promises, warranties, covenants or undertakings other
than those expressly set forth or provided for in this Agreement or in
the agreements expressly contemplated hereby. This Agreement and the
agreements expressly contemplated hereby supersede all prior agreements
and understandings between the parties with respect to the transactions
contemplated by this Agreement including, but not limited to the letter
of intent dated July 31, 1998 and the September Agreement. No provision
of this Agreement may be amended or waived except in writing and no such
amendment shall extend to anything other than the specific subject matter
thereof. Notwithstanding the foregoing, the parties hereto understand
and agree that any default by any of them under any Related Agreement
shall constitute a default hereunder, entitling the non-defaulting party
to any remedy or right to indemnification available hereunder.
SECTION 12.10. GOVERNING LAW. This Agreement and all transactions
contemplated hereby shall be governed, construed and enforced in accordance
with the laws of the State of Michigan, and shall be treated in all
respects as a State of Michigan contract, without regard to any state's
laws related to choice or conflict of laws.
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SECTION 12.11. CHOICE OF FORUM; WAIVER OF JURY TRIAL. The parties to
this Agreement irrevocably consent to the jurisdiction and venue of the
courts of the State of Michigan and the United States District Court for
the Eastern District of Michigan with respect to any and all actions
related to this Agreement or the enforcement of this Agreement and the
parties to this Agreement hereby irrevocably waive any and all objections
thereto. The parties to this Agreement hereby knowingly and voluntarily
with the benefit of counsel, each waive trial by jury in any action,
proceeding, claim or counterclaims, whether in contract or tort or
otherwise, at law or in equity, arising out of or in any way relating to
this Agreement.
SECTION 12.12. CONSTRUCTION.
(a) The parties have participated jointly in the negotiation and
drafting of this Agreement, and, in the event of an ambiguity or
a question of intent or a need for interpretation arises, this
Agreement shall be construed as if drafted jointly by the
parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of
any of the provisions of this Agreement.
(b) (i) The terms "to the knowledge of Seller", "known to Seller" or
words of similar import mean the actual knowledge of Donald
J. Williamson, Richard S. Schoenfeldt, William Singleterry
and Gary Moore or any of them. Each of these parties or
individuals shall be obligated to conduct a reasonable
inquiry as to any issue upon which it is making a knowledge-
based representation or warranty, and shall be deemed to
have actual knowledge of all facts and information which
would have been discovered in such an inquiry.
(ii) The terms "to the knowledge of Buyer", "known to Buyer" or
words of similar import mean to the actual knowledge of
Philip Storm, Robert Bedrosian or Richard Schoemer or any
of them. Each of these parties or individuals shall be
obligated to conduct a reasonable inquiry as to any issue
upon which it is making a knowledge-based representation or
warranty, and shall be deemed to have actual knowledge of
all facts and information which would have been discovered
in such an inquiry.
(c) Except as otherwise specifically provided in this Agreement (such
as by "sole", "absolute discretion", "complete discretion" or
words of similar import), if any provision of this Agreement
requires or provides for the consent, waiver or approval of a
party, such consent, waiver, and/or approval shall not be
unreasonably withheld.
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SECTION 12.13. WAIVER OF COMPLIANCE. The party for whose benefit a
warranty, representation, covenant or condition is intended may in writing
waive any inaccuracies in the warranties and representations contained in
this Agreement or waive compliance with any of the covenants or conditions
contained herein and so waive performance of any of the obligations of the
other party hereto, and any defaults hereunder; provided, however, that
such waiver must be in writing, and shall not affect or impair the waiving
party's rights with respect to any other warranty, representation or
covenant or any default hereunder, nor shall any waiver constitute a
continuing waiver.
SECTION 12.14. VALIDITY OF PROVISIONS. Should any part of this
Agreement for any reason be declared by any court of competent jurisdiction
to be invalid, such decision shall not affect the validity of the remaining
portions of this Agreement, which remaining portions shall continue in full
force and effect as if this Agreement had been executed with the invalid
portion thereof eliminated therefrom, it being the intent of the parties
that they would have executed the remaining portions of this Agreement
without including any such part or portion which may for any reason be
declared invalid.
SECTION 12.15. SCHEDULES AND EXHIBITS. Each and every Schedule and
Exhibit to this Agreement, and each and every document to be delivered in
the future pursuant to this Agreement is hereby incorporated into this
Agreement and made an integral part hereof.
SECTION 12.16. NO INTENTION TO BENEFIT THIRD PARTIES. The provisions
of this Agreement are not intended to, and shall not, benefit any person
other than the parties to this Agreement, the provisions hereof are not
intended to, and shall not create any third party beneficiary right in any
person.
SECTION 12.17. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding on, and shall inure to the benefit of, the parties and their
respective successors and permitted assigns; provided, however, that
neither Seller nor Buyer may assign any rights or obligations under this
Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
"BUYER"
COLONEL'S ACQUISITION CORP.
By: /S/ PHILIP B. STORM
Philip B. Storm, President
"SELLER"
THE COLONEL'S, INC.
/S/ DONALD J. WILLIAMSON
By: Donald J. Williamson
Its: Director and Attorney-in-Fact
"TCI"
THE COLONEL'S INTERNATIONAL, INC.
/S/ DONALD J. WILLIAMSON
By: Donald J. Williamson
Its: Chief Executive Officer
"SHAREHOLDER"
/S/ DONALD J. WILLIAMSON
Donald J. Williamson
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APPENDIX B
FINANCIAL STATEMENTS
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . .B-3
Consolidated Statements of Income for the nine months and three
months ended September 30, 1998 (unaudited) and September 30, 1997
(unaudited), respectively . . . . . . . . . . . . . . . . . . . . .B-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 (unaudited) and September 30, 1997 (unaudited),
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . .B-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .B-7
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . B-12
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . B-13
Consolidated Statements of Income for years ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . B-15
Consolidated Statements of Stockholders' Equity for years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . B-16
Consolidated Statements of Cash Flows for years ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . B-17
Notes to Consolidated Financial Statements for years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . B-19
Independent Auditors' Report on Schedule II. . . . . . . . . . . . . . B-34
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . B-35
B-2
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,300,241 $ 1,723,652
Accounts receivable - trade (net of allowance
for doubtful accounts of $450,000 and $493,000
at September 30, 1998 and December 31, 1997,
respectively) 6,840,629 3,973,528
Note receivable from majority shareholder (Note 2) 200,000 200,000
Inventories (Note 3) 13,795,542 9,214,557
Prepaid expense 332,747 425,476
Deferred taxes - current 1,168,000 635,000
Current portion of deferred compensation/ other 95,667 95,667
----------- -----------
Total current assets 23,732,826 16,267,880
PROPERTY, PLANT, & EQUIPMENT - Net (Note 4) 29,281,569 26,328,039
OTHER ASSETS:
Note receivable from majority shareholder (Note 2) 746,315 844,956
Long-term portion of deferred compensation 228,176 255,857
Deposits 1,360,359 630,486
Goodwill 3,152,403 379,816
Investment in Land 745,000 0
Other 262,583 233,246
----------- -----------
Total other assets 6,494,836 2,344,361
TOTAL ASSETS $59,509,231 $44,940,280
=========== ===========
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 6) $ 6,450,132 $ 6,000,000
Current portion of long-term obligations 2,069,598 3,166,741
Accounts payable - trade 4,500,910 1,837,528
Accrued expenses (Note 5) 1,298,629 1,134,637
Current portion of deferred compensation 95,667 95,667
Income taxes payable 1,422,514 925,549
----------- -----------
Total current liabilities 15,837,450 13,160,122
LONG-TERM OBLIGATIONS, NET OF
CURRENT PORTION (Note 7) 13,820,785 8,844,055
LONG-TERM PORTION OF DEFERRED
COMPENSATION 228,176 255,857
DEFERRED TAXES - LONG-TERM 4,655,644 3,828,000
SHAREHOLDERS' EQUITY:
Common stock: 35,000,000 shares authorized
at $0.01 par value, 24,631,832 and
24,177,805 issued and outstanding, respectively 246,318 241,778
Additional paid-in-capital 9,230,912 5,606,239
Retained earnings 15,489,946 13,004,229
----------- -----------
Total shareholders' equity 24,967,176 18,852,246
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $59,509,231 $44,940,280
=========== ===========
</TABLE>
B-4
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDING THREE MONTHS ENDING
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $43,333,927 $34,327,945 $17,293,087 $12,271,056
COST OF SALES 31,033,227 24,407,361 12,598,422 8,429,590
----------- ----------- ----------- -----------
GROSS PROFIT 12,300,700 9,920,584 4,694,665 3,841,466
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,235,955 4,728,331 3,124,372 1,754,079
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 5,064,745 5,192,253 1,570,293 2,087,657
OTHER INCOME (EXPENSE):
Interest expense (1,391,391) (960,110) (494,064) (331,636)
Interest income 61,281 107,549 67,862 55,816
Rental income 55,250 45,000 24,000 15,000
Other (16,537) 176,390 3,795 152,521
----------- ----------- ----------- -----------
Other income (expense), net (1,291,647) (631,171) (398,407) (108,299)
NET INCOME BEFORE TAXES $ 3,773,098 $ 4,561,082 $ 1,171,886 $ 1,979,088
PROVISION FOR INCOME
TAXES (Note 8) 1,287,381 1,583,472 627,355 712,472
NET INCOME $ 2,485,717 $ 2,977,610 $ 544,531 $ 1,266,616
=========== =========== =========== ===========
EARNINGS PER SHARE (Note 9) $ 0.10 $ 0.12 $ 0.02 $ 0.05
=========== =========== =========== ===========
</TABLE>
B-5
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDING
SEPTEMBER 30
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,485,717 $ 2,977,610
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,815,866 2,813,019
Deferred tax provision 294,644 316,000
Loss on sale of property (17,407)
Changes in assets & liabilities that provided (used)
cash, net of effects of acquisitions:
Accounts receivable (1,596,515) 714,063
Inventories (2,400,759) 9,583
Prepaid expenses 136,525 207,370
Other current assets 74,550 17,162
Accounts payable 1,729,885 (2,450,755)
Accrued expenses (349,231) (563,155)
Income taxes payable 496,965 (714,126)
Net cash provided by operating activities 4,687,647 3,309,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of consolidated subsidiaries,
net of cash acquired (5,082,150)
Expenditures for property, plant & equipment (1,708,552) (1,762,731)
Proceeds from sale of property, plant & equipment 21,500
Net change in deposits (1,869,208) (1,310,799)
Additions to notes receivable--other (1,060,000)
Payment to stockholder for deposit on land (48,406)
Net cash (used in) investing activities (8,708,316) (4,112,030)
B-6
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes payable 450,132 (800,000)
Proceeds from long-term obligations 5,887,430 7,000,000
Principal payments on long-term debt (2,067,172) (4,187,534)
Principal payments on obligations under capital leases (673,132) (692,984)
Cash contribution from related party 15,045
Net cash provided by financing activities 3,597,258 1,334,527
NET INCREASE (DECREASE) IN CASH $ (423,411) $ 531,861
=========== ===========
CASH, BEGINNING OF PERIOD $ 1,723,652 321,486
----------- -----------
CASH, END OF PERIOD $ 1,300,241 $ 853,347
=========== ===========
Supplemental Schedule of noncash investing and
financing activities:
Notes payable and future inventory credits issued
in connection with acquisitions (See Note 12) $ 738,735
===========
Common stock issued in connection with the acquisition
of the Rugged Liner Companies (See Note 12) $ 3,677,619
===========
Transfer of deposits to property, plant and equipment
relating to property placed in service $ 1,139,335 $ 2,221,380
=========== ===========
Property additions from the issuance of capital leases $ - $ 351,705
=========== ===========
</TABLE>
B-7
<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 BASIS OF PRESENTATION
The financial information included herein is unaudited; however
such information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the results of
operations, financial position and cash flows for the periods
presented.
The results of operations for the three months and six months
ended September 30, 1998 are not necessarily indicative of the
results expected for the full year.
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", which is effective for
fiscal years beginning after December 15, 1997. The statement
changes the reporting of certain items currently reported in the
shareholders' equity section of the balance sheet and establishes
standards for reporting of comprehensive income and its
components in a full set of general purpose financial statements.
The effect of SFAS No. 130 is not material to the financial
position or results of operations of the Company.
SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information" applies to all public entities and is
effective for financial statement periods beginning after
December 15, 1997. However, SFAS No. 131 is not required to be
applied to interim financial statements in the initial year of
application. Therefore, the Company has elected not to adopt
SFAS No. 131 at this time.
Note 2 NOTE RECEIVABLE FROM MAJORITY SHAREHOLDER
During the third quarter of 1997, an unsecured note receivable
bearing interest at 8% per annum from the majority shareholder
of $1,044,956 was established.
B-8
<PAGE>
Note 3 INVENTORIES
<TABLE>
<CAPTION>
Inventories are summarized as follows: SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
-------------------------------
<S> <C> <C> <C>
Finished products $13,095,630 $8,644,944
Raw materials 699,912 569,613
----------- ----------
Total inventories $13,795,542 $9,214,557
=========== ==========
</TABLE>
Note 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major
classification as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
--------------------------------
<S> <C> <C> <C>
Land and improvements $ 2,531,217 $ 2,504,400
Track 1,746,310 1,533,760
Buildings 1,852,340 930,393
Leasehold improvements 1,258,325 1,684,643
Bleachers & fencing 760,955 755,662
Equipment 14,178,238 15,016,019
Transportation equipment 2,763,724 1,090,030
Furniture & fixtures 1,411,248 741,373
Tooling 30,176,816 25,709,982
Construction in progress 0 88,956
----------- -----------
Total 56,679,173 50,055,218
Less accumulated depreciation (27,397,604) (23,727,179)
----------- -----------
Net property, plant and equipment $29,281,569 $26,328,039
=========== ===========
</TABLE>
B-9
<PAGE>
Note 5 ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of the following: SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
-------------------------------
<S> <C> <C> <C>
Accrued legal $ 545,258 $ 513,977
Accrued environmental costs 100,000 100,000
Accrued taxes 58,720 55,301
Advance Sales Deposits 33,205 23,826
Other 561,446 441,533
---------- ----------
Total $1,298,629 $1,134,637
========== ==========
</TABLE>
Note 6 NOTE PAYABLE
<TABLE>
<CAPTION>
Note payable consists of the following: SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
------------- ------------
<S> <C> <C> <C>
Line of credit with a bank, interest is due monthly
at the bank's prime rate (8.0% at September 30, 1998) $6,450,132 $6,000,000
========== ==========
</TABLE>
The Company has a line of credit with a bank which was
renegotiated in April 1998 extending the maximum borrowing base
from $6,000,000 to $8,000,000, and expires in May 1999. The line
of credit is secured by all of the Company's assets. Remaining
availability under this line of credit at September 30, 1998 was
$1,549,868.
B-10
<PAGE>
Note 7 LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
Long-term obligations consist of the following: SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C> <C>
Term note payable to a bank, monthly principal
payments of $167,000 plus interest at the bank's
prime rate plus 1/4% (effective rate of 8.25% at
September 30, 1998) through November 2000,
and secured by the Company's assets $ 4,328,000 $ 5,831,000
Mortgage payable to a bank, interest at the bank's
prime rate plus 2% (effective rate of 10.5% at
September 30, 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 $62,771 including interest
at rates between 7.5% and 8.75%, collateralized
by the related machinery and equipment 4,629,562 5,214,866
Capital lease obligation through March 1999;
monthly installments of $15,987 including interest
at 8.5% 138,916 226,744
Acquisition line of credit. Interest at bank's prime
rate (8.0% at September 30, 1998) 5,619,179 --
Vehicle financing 233,777 212,065
Other 640,949 176,121
----------- -----------
Total 15,890,383 12,010,796
Less current portion (2,069,598) (3,166,741)
----------- -----------
Long-term portion $13,820,785 $ 8,844,055
=========== ===========
</TABLE>
Note 8 INCOME TAXES
The Company's income tax liability for the third quarter of 1998
was approximately $627,355.
B-11
<PAGE>
Note 9 EARNINGS PER SHARE
In accordance with SFAS 128, basic earnings per share for
September 30, 1998 and 1997 calculated as net income divided by
the weighted average number of common shares outstanding of
24,448,891 and 24,177,805, respectively. Diluted earnings per
share was calculated as net income divided by the weighted
average number of common shares outstanding of 24,456,574 and
24,178,506, respectively, which has been increased by the number
of additional common shares that would have been outstanding if
the dilutive shares had been issued (7,683) and (701) for 1998
and 1997 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 10 LITIGATION
Except as discussed in this Proxy Statement, no material
developments in the litigation discussed in the Company's
Form 10-K for the year ended December 31, 1997 occurred
during the first three quarters of 1998.
Note 11 ENVIRONMENTAL
No material developments in the environmental matters discussed
in the Company's Report on Form 10-K for the year ended December
31, 1997 occurred during the first three quarters of 1998.
Note 12 ACQUISITIONS
During 1998, the Company acquired inventory of $1,281,000,
accounts receivable of $219,000, property of $974,000, other
assets of $72,000, debt of $432,000, accounts payable of $358,000
and other liabilities of $15,000 as a result of the purchase of
Dealers Choice Distribution, Inc., DC Sales, Inc., Road and
Truck, Duraliner of Nashville, Truck Stuff, Inc., Accessories
Plus 4X4 Center, and Camper Place. The total cash paid for the
purchases was $1,070,000. In addition to cash paid, the company
issued notes payable for $225,000, and provided the seller with
future credits for the purchase of $513,000 of the Company's
inventory. Goodwill of approximately $68,000 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.
B-12
<PAGE>
During the second quarter of 1998, the Company also 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. A preliminary 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 $3,542,000, other assets of $360,000, debt
of $74,000, accounts payable of $575,000 and other liabilities of
$150,000. The total cash, stock and other consideration paid for
the assets, exclusive of the liabilities assumed, was $7,908,000.
Goodwill of approximately $2,854,000 has been recorded as a
result of this acquisition and is being amortized over seven
years. The portions of the allocation that relate to data that
was not available, will subsequently be adjusted to reflect the
finally determined amounts, with a corresponding adjustment of
goodwill.
B-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
The Colonel's International, Inc.
Milan, Michigan
We have audited the accompanying consolidated balance sheets of The
Colonel's International, Inc. (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. 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 audits 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Detroit, Michigan
March 24, 1998
B-14
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,723,652 $ 321,486
Accounts receivable - trade (net of allowance for
doubtful accounts of $493,000 and $575,000 at
December 31, 1997 and 1996, respectively) 3,973,528 3,605,281
Inventories (Note 4) 9,214,557 8,347,663
Prepaid expenses 425,476 226,670
Note receivable - related party (Notes 6 and 13) 200,000
Deferred taxes - current (Note 10) 635,000 1,045,000
Current portion of deferred compensation (Note 11) 95,667 52,000
Other 40,000
----------- -----------
Total current assets 16,267,880 13,638,100
PROPERTY, PLANT AND EQUIPMENT - Net
(Notes 5, 8 and 11) 26,328,039 27,028,350
OTHER ASSETS:
Note receivable - related party (Notes 6 and 13) 844,956
Long-term portion of deferred compensation (Note 11) 255,857 236,787
Deposits 630,486 1,156,868
Goodwill 379,816 366,497
Other 233,246 183,693
----------- -----------
Total other assets 2,344,361 1,943,845
----------- -----------
TOTAL ASSETS (Note 8) $44,940,280 $42,610,295
=========== ===========
(Continued)
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable (Note 7) $ 6,000,000 $ 5,450,000
Current portion of long-term obligations (Note 8) 3,166,741 3,868,733
Accounts payable - trade 1,837,528 3,532,752
Accrued expenses (Note 9) 1,134,637 2,561,361
Current portion of deferred compensation (Note 11) 95,667 52,000
Income taxes payable 925,549 1,195,000
----------- -----------
Total current liabilities 13,160,122 16,659,846
LONG-TERM OBLIGATIONS, NET OF CURRENT
PORTION (Note 8) 8,844,055 6,321,175
LONG-TERM PORTION OF DEFERRED
COMPENSATION (Note 11) 255,857 236,787
DEFERRED TAXES - LONG-TERM (Note 10) 3,828,000 3,949,000
STOCKHOLDERS' EQUITY:
Common stock; 35,000,000 shares authorized at $.01 par
value, 24,177,805 shares issued and outstanding (Note 3) 241,778 241,778
Additional paid-in capital 5,606,239 5,606,239
Retained earnings 13,004,229 9,595,470
----------- -----------
Total stockholders' equity 18,852,246 15,443,487
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,940,280 $42,610,295
=========== ===========
</TABLE>
See notes to consolidated financial statements.
B-16
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SALES (Note 13) $46,350,114 $40,263,082 $28,503,726
COST OF SALES (Note 13) 33,245,888 28,140,066 19,998,308
----------- ----------- -----------
GROSS PROFIT 13,104,226 12,123,016 8,505,418
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,790,311 6,931,713 3,534,648
----------- ----------- -----------
Income from operations 6,313,915 5,191,303 4,970,770
OTHER INCOME (EXPENSE):
Interest expense (1,299,488) (1,214,400) (971,623)
Interest income (Note 13) 170,101 71,730 119,628
Rental income (Note 13) 65,000 60,000 71,000
Other 105,231 (37,647) 5,699
----------- ----------- -----------
Other expense, net (959,156) (1,120,317) (775,296)
----------- ----------- -----------
NET INCOME BEFORE INCOME TAXES 5,354,759 4,070,986 4,195,474
PROVISION FOR INCOME TAXES (Note 10) 1,946,000 1,549,000 2,333,000
----------- ----------- -----------
NET INCOME $ 3,408,759 $ 2,521,986 $ 1,862,474
=========== =========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE (Note 2) $ 0.14 $ 0.10
=========== ===========
PROFORMA EARNINGS PER SHARE (Note 2) $ 0.11
===========
</TABLE>
See notes to consolidated financial statements.
B-17
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 6,021,000 $ 602,100 $ 1,244,511 $11,641,343 $13,487,954
Net income 1,862,474 1,862,474
Transactions with stockholders (Note 13) (6,430,333) (6,430,333)
Change in par value from $.10 to $.01 (596,079) 596,079
Exchange of common shares to effect
merger (Note 3) 18,156,805 235,757 3,717,243 3,953,000
---------- --------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 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
========== ========= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
B-18
<PAGE>
<TABLE>
7THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,408,759 $ 2,521,986 $ 1,862,474
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 4,428,877 3,751,121 2,673,758
Deferred tax provision 289,000 (193,000) 2,333,000
(Gain) loss on sale of property, plant
and equipment (85,019) (24,041) 22,573
Changes in assets and liabilities that provided
(used) cash, net of effects from the
1997 and 1995 acquisitions:
Accounts receivable:
Trade (368,247) (1,313,169) 182,453
Insurance 4,352,239
Inventories (866,894) (1,541,757) (683,346)
Prepaid expenses (198,806) (61,978) 90,998
Other Assets (134,662)
Accounts payable (1,695,223) 594,258 71,600
Accrued expenses (1,426,724) 130,287 (2,855,361)
Income taxes payable (269,451) 1,195,000
----------- ----------- -----------
Net cash provided by operating activities 3,081,610 5,058,707 8,050,388
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired 277,237
Expenditures for property, plant and equipment (3,383,578) (3,214,198) (2,734,576)
Proceeds from sale of property, plant and
equipment 1,229,782 99,326 8,964
Net change in deposits (principally for tooling
and equipment) (522,873) (1,632,215) (1,540,845)
Additions to notes receivable - related party (1,044,956) (1,243,291)
Payments received on notes receivable -
related party 490,000 1,205,117
Payments received on notes receivable - other 302,401 237,209
Proceeds from sale of assets held for sale 23,000 35,000 275,000
----------- ----------- -----------
Net cash used in investing activities (3,698,625) (3,919,686) (3,515,185)
(Continued)
B-19
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes payable 550,000 1,270,000 (1,820,000)
Proceeds from long-term obligations 7,033,387 580,015 6,000,062
Principal payments on long-term debt (4,686,213) (3,028,821) (2,956,790)
Principal payments on obligations under
capital leases (877,993) (273,019) (126,218)
Distributions paid to stockholders (5,162,253)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 2,019,181 (1,451,825) (4,065,199)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 1,402,166 (312,804) 470,004
CASH, BEGINNING OF YEAR 321,486 634,290 164,286
----------- ----------- -----------
CASH, END OF YEAR $ 1,723,652 $ 321,486 $ 634,290
=========== =========== ===========
(Continued)
</TABLE>
B-20
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION -
Cash paid during the year for interest $1,308,875 $1,145,817 $ 910,706
========== ========== ==========
Cash paid during the year for income taxes $2,209,268
==========
SUPPLEMENTAL SCHEDULES OF
NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property additions from issuance of capital leases $ 351,705 $3,483,673 $2,689,007
========== ========== ==========
Increase in deposits from noncash interim financing $1,396,611 $2,087,061
========== ==========
Transfer of deposits to property, plant and equipment
relating to property placed in service $1,049,255 $3,171,589
========== ==========
Stockholder contribution of deposit on land $ 48,406
==========
Reclassification of note receivable as
stockholder distribution $1,482,024
==========
Property received as payment on note
receivable $ 473,477
==========
Inventory received as payment on note
receivable $ 425,976
==========
Stockholder contribution of note receivable $ 213,944
==========
B-21
<PAGE>
Note payable received on sale of property $ 60,000
==========
</TABLE>
See notes to consolidated financial statements. (Concluded)
B-22
<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------------------
1. ORGANIZATION
The Colonel's International, Inc. (the "Company") is a holding company
for three wholly owned subsidiaries, The Colonel's, Inc. (the
"Colonel's"), the Colonel's Truck Accessories, Inc. ("CTA") and
Brainerd International Raceway, Inc. ("BIR"). 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. 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. BIR was
incorporated in Minnesota in 1982 and operates a multi-purpose motor
sports facility in Brainerd, Minnesota. BIR 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 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:
B-23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
Leasehold improvements are amortized over the shorter of the life of
the lease or their estimated useful life of 10-25 years.
The Company holds payments toward uncompleted tools in deposits until
the tool is completed, at which time the tool is transferred to
property, plant and equipment. 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 product, revenue is recognized at the
time the product is shipped to customers. For service sales, revenue is
recognized when earned.
GOODWILL - 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 - Anticipated legal and other professional fees are
accrued in the same period that the related matters are accrued.
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.
B-24
<PAGE>
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 TAX - 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.
Effective December 31, 1995, The Colonel's changed its tax status from
an S Corporation to a C Corporation for federal income tax purposes.
Prior to December 31, 1995, The Colonel's income was not taxable to
the company and was passed through to its stockholders.
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.
NET INCOME PER SHARE - In accordance with SFAS 128, basic earnings per
share for 1997 and 1996 was calculated as net income divided by the
weighted average number of common shares outstanding (24,177,805).
Diluted earnings per share was calculated as net income divided by the
weighted average number of common shares outstanding (24,177,805)
increased by the number of additional common shares that would have
been outstanding if the dilutive shares had been issued (701) and
(160) for 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, 1997, options to purchase 2,900 shares of common stock at
$8.00 per share 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 1997. The options, which expire on
February 28, 2007, were still outstanding at the end of 1997.
B-25
<PAGE>
Pro forma net income per share for 1995 was computed by dividing net
income, adjusted to give effect to the change in tax status of The
Colonel's as if such change and the acquisition had occurred at the
beginning of the period, by the weighted average common shares
outstanding (24,177,805). There were no dilutive shares for 1995.
RECLASSIFICATIONS - Certain 1996 and 1995 amounts have been
reclassified to conform to the 1997 presentation.
3. BUSINESS COMBINATION
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 operations are included in the consolidated operating results since
the date of acquisition. Goodwill of approximately $84,000 has been
recorded as a result of these acquisitions and is being amortized over
seven years. These acquisitions were made for the purpose of
expanding CTA.
Effective December 31, 1995, the Company completed its merger with the
Colonel's. The Company issued 23,500,000 shares of its common stock
in exchange for all of the outstanding common stock of BIR. For
accounting purposes, the acquisition has been treated as a
recapitalization of the Colonel's with the Colonel's as the acquiror
("reverse acquisition"). The purchase price of $3,953,000 was
allocated to the assets acquired and liabilities assumed based on the
estimated fair values at the date of acquisition. The excess of the
purchase price over the estimated fair values of the net assets
acquired, totaling $425,609, has been recorded as goodwill, and is
being amortized over 7 years. The estimated fair value of assets
acquired and liabilities assumed are summarized as follows: current
assets of $277,237; property, plant and equipment of $4,682,400; other
assets of $25,556; current liabilities of $243,803; long-term
liabilities of $450,000 and deferred tax liabilities of $764,000.
The following pro forma financial information (unaudited) is presented
for the year ended December 31, 1995, as if the purchase of BIR had
occurred on January 1, 1995.
B-26
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995
<S> <C> <C>
Revenue $31,382
=======
Income before taxes $ 4,385
=======
Net income $ 2,915
=======
Earnings per share $ 0.12
=======
</TABLE>
4. INVENTORIES
Inventories at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Finished products $8,644,944 $7,213,704
Raw materials 569,613 1,133,959
---------- ----------
Total inventories $9,214,557 $8,347,663
========== ==========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 is summarized as follows:
B-27
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Land and improvements $ 2,504,400 $ 3,619,717
Track 1,533,760 1,533,760
Buildings 930,393 793,990
Leasehold improvements 1,684,643 707,076
Bleachers and fencing 755,662 731,886
Equipment (including equipment under capital lease) 15,016,019 14,316,710
Transportation equipment 1,090,030 1,000,690
Furniture and fixtures 741,373 611,510
Tooling 25,709,982 23,229,532
Construction in progress 88,956
----------- -----------
Total 50,055,218 46,544,871
Less accumulated depreciation and amortization (23,727,179) (19,516,521)
----------- -----------
Net property, plant and equipment $26,328,039 $27,028,350
=========== ===========
</TABLE>
The gross amount of equipment recorded under capital leases was
$7,709,814 and $7,358,109 at December 31, 1997 and 1996, respectively.
The related accumulated depreciation was $2,181,961 and $1,245,451 at
December 31, 1997 and 1996, respectively.
The Company purchased land in Florida for a total of $1,115,000 in
1996. During 1997, this land was sold for $1,207,000.
6. NOTE RECEIVABLE - RELATED PARTY
The note receivable from the majority stockholder is payable upon
demand and bears interest at 8%.
7. LINE OF CREDIT AND NOTE PAYABLE
Notes payable at December 31 consist of the following:
B-28
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Line of credit with a bank, interest is due monthly
at the bank's prime rate (8.5% at December 31, 1997) $6,000,000 $4,450,000
Bridge note payable to a bank, interest is due
monthly at the bank's prime rate plus one-half percent,
due May 1997 1,000,000
---------- ----------
Total $6,000,000 $5,450,000
========== ==========
</TABLE>
The line of credit with a bank was renegotiated in May 1997, which
increased maximum borrowings from $4,500,000 to $6,000,000. The line
expires in May 1998.
The above line of credit and note payable are with the same bank as
the term notes (Note 8) and are secured by the same collateral. The
weighted average interest rate on the line and note were 8.48% and
8.31% in 1997 and 1996, respectively.
The bridge note payable from a bank represents amounts advanced to the
Company for the purchase of land in Florida which was subsequently
sold. The bridge note was paid in full in May 1997 with proceeds from
a $7,000,000 term note (See Note 8).
8. LONG-TERM OBLIGATIONS
Long-term obligations at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Term note payable to a bank, monthly principal
payments of $167,000 plus interest at the bank's
prime rate plus 1/4% (effective rate of 8.75%
at December 31, 1997) through November 2000,
and secured by the Company's assets $ 5,831,000
Term note payable to a bank, monthly principal
payments of $200,000 plus interest at the bank's
prime rate plus 1/2% (effective rate of 8.75%
at December 31, 1996) through November 1997 $ 2,600,000
B-29
<PAGE>
Mortgage payable to bank, interest at 9.25%,
payable in monthly installments of $52,000
through May 1998, and secured by underlying
property 796,908
Mortgage payable to a bank, interest at the bank's
prime rate plus 2% (effective rate of 10.50% at
December 31, 1997), annual principal payments
of $50,000 plus interest due quarterly, through
September 2004. Secured by underlying property 350,000 400,000
Capital lease obligations through December 2002;
monthly installments of $62,771 including
interest at rates between 7.5% and 8.75%,
collateralized by the related machinery and
equipment (see Note 11) 5,214,866 5,967,897
Capital lease obligation through March 1999;
monthly installments of $15,987 including
interest at 8.5% 226,744
Vehicle financing 212,065 231,365
Other 176,121 193,738
----------- -----------
Total 12,010,796 10,189,908
Less current portion (3,166,741) (3,868,733)
----------- -----------
Long-term $ 8,844,055 $ 6,321,175
=========== ===========
</TABLE>
On May 28, 1997, the Company executed a $7,000,000 term note which
requires monthly principal payments of $167,000 plus interest. The
proceeds from this term note were used to pay the remaining balance
due on the term note obtained in April 1995 which called for payments
of $200,000 plus interest on a monthly basis. The proceeds were also
used to pay the remaining balance due on a mortgage payable, which
required monthly installments of $52,000 through May 1998. The
$7,000,000 term note proceeds were also used to pay a $1,000,000
bridge note payable (see Note 7). The term note prohibits the
Company from paying dividends without prior consent.
This bank loan agreement is collateralized by all of the Company's
assets and contains certain covenants which require the Company to
maintain minimum levels of net worth and not to exceed certain debt
ratios. The Company was out of compliance with one covenant at
December 31, 1997; however, the Company obtained a waiver from the
bank.
The scheduled future repayments of long-term obligations at December
31, 1997 are as follows:
B-30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 3,166,741
1999 3,093,139
2000 2,879,878
2001 1,194,722
2002 1,168,945
Thereafter 507,371
-----------
Total $12,010,796
===========
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Accrued legal (Note 14) $ 513,977 $1,136,516
Accrued compensation for NuPar (Note 14) 100,000
Accrued environmental costs (Note 15) 100,000 598,717
Accrued taxes 55,301 417,165
Other 465,359 308,963
---------- ----------
Total $1,134,637 $2,561,361
========== ==========
</TABLE>
10. INCOME TAXES
Effective December 31, 1995, the Company changed its tax status from a
non-taxable entity to a taxable entity. As a result of this change,
the Company recorded a $2,333,000 provision to reflect the tax
consequences of the difference between the financial statements and
the tax bases of assets and liabilities at that date.
For the years ended December 31, the Company's provision for income
taxes consists of the following:
B-31
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Current:
Federal $1,516,000 $1,592,000
State 141,000 150,000
---------- ----------
Total current $1,657,000 $1,742,000
Deferred:
Federal 266,000 (182,000)
State 23,000 (11,000)
---------- ----------
Total deferred $ 289,000 $ (193,000)
---------- ----------
Total provision for income taxes $1,946,000 $1,549,000
========== ==========
</TABLE>
The temporary differences which give rise to deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts $ 183,000 $ 213,000
Inventory obsolescence 99,000 115,000
Accrued legal 190,000 458,000
Accrued environmental cleanup 37,000 222,000
Other 126,000 37,000
----------- -----------
Total $ 635,000 $ 1,045,000
=========== ===========
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards 347,000 367,000
Depreciation (3,408,000) (3,483,000)
Other (327,000) (372,000)
----------- -----------
Total (3,388,000) (3,488,000)
Valuation allowance (440,000) (461,000)
----------- -----------
Total $(3,828,000) $(3,949,000)
=========== ===========
</TABLE>
B-32
<PAGE>
The consolidated income tax provisions 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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Federal income tax at statutory rate $1,820,000 $1,385,000
State taxes 108,000 122,000
Other 18,000 42,000
---------- ----------
Provision for income taxes $1,946,000 $1,549,000
========== ==========
Effective tax rate 36% 38%
=== ===
</TABLE>
At December 31, 1997, the Company has net operating loss and net
capital loss carryforwards for tax purposes as follows:
<TABLE>
<CAPTION>
NET NET
EXPIRATION OPERATING LOSS CAPITAL LOSS
DATE CARRYFORWARDS CARRYFORWARDS
<S> <C> <C> <C>
1998 $275,529
2004 $142,646
2005 598,794
2008 278,040
</TABLE>
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 and net capital 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 (see
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 pay the taxes, insurance and
maintenance expense related to the leased property. Minimum future
lease payments under noncancelable leases at December 31, 1997 are
summarized as follows:
B-33
<PAGE>
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C> <C>
Years ending December 31:
1998 $1,394,448 $ 1,991,585
1999 1,250,566 1,673,285
2000 1,202,605 1,310,491
2001 1,202,605 1,292,678
2002 1,202,605 1,295,078
Thereafter 420,287 3,479,877
---------- -----------
Total 6,673,116 $11,042,994
-----------
Less amount representing interest 1,231,506
----------
Present value of minimum lease payments 5,441,610
Less current maturities 994,895
----------
Long-term portion of capital lease obligations $4,446,715
==========
</TABLE>
Rent expense, including month to month rentals, was approximately
$1,652,808, $1,364,000, and $1,447,000 for the years ended December
31, 1997, 1996 and 1995, respectively. Included in rent expense are
amounts paid to the related parties of the Company for rental of its
principal operating facilities (Note 13).
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 with
John Carpenter 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
B-34
<PAGE>
assigned to compensation. The deferred cost amount is being
amortized to operations over the term of the agreement.
The Company has purchase commitments totaling $895,000 for tooling
equipment to be received in 1998.
12. STOCK OPTIONS
The Company has an incentive stock option 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 Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" which was effective for the Company beginning January 1,
1996. This Statement encourages compensation cost to be measured
based on the fair value of the equity instrument awarded. In
accordance with this statement, the Company has elected to continue
the application of Accounting Principles Board Opinion No. 25 which
recognizes compensation cost based on the intrinsic value of the
equity instrument award. If compensation costs had been determined in
accordance with SFAS No. 123, net income would have decreased by $17,210
from $3,408,759 to $3,391,549 and basic and diluted earnings per share
would have remained unchanged at $0.14.
Under SFAS No. 123, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions; expected volatility
of 91 percent, risk-free interest rate of 5.74 percent, expected
life of 7.19 years and no expected payment of dividends. The weighted-
average grant-date fair value of the options granted during the year
was $5.34.
During 1997, the Company granted options aggregating 32,575 shares to
outside directors. Of the options granted to outside directors, 2,900
shares have an option price of $8.00 per share, 26,650 shares have an
option price of $6.50 per share, and the remaining 3,025 shares have
an option price of $5.00 per share. The Company also granted options
aggregating 32,050 shares to employees at an option price of $6.50 per
share. No options were exercised during 1997 or 1996. At December
31, 1997, and 1996, 62,700 and 1,050 shares had vested, respectively.
13. RELATED PARTY TRANSACTIONS
The primary parties related to the Company are as follows:
B-35
<PAGE>
- The majority stockholders, with whom various transactions
are made.
- 620 Platt Road LLP ("Platt"), a company affiliated through
common ownership, to which rental payments are made for the
Milan facility and 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
1996.
- Williamson Buick-GMC, Inc., a company affiliated through
common ownership, from which automobiles, parts, and service
are purchased and sold, and rental income is earned.
A summary of transactions with these related parties as of and for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
Majority Stockholders:
Short-term advances to stockholders $5,162,753
Cash payments on short-term advances (500)
Reduction of note receivable 1,482,024
Assumption of land contract receivable (213,944)
Note receivable from stockholders $1,044,956
Interest income on note receivable 50,663
----------
Shareholder distributions 6,430,333
Platt:
Rental payments 1,350,000 $1,000,000 840,000
Capital contribution 48,406
Arkansas:
Sales of inventory 136,963 346,000
Purchases of inventory 744,600
Inventory in satisfaction of note receivable 425,976
Property, plant and equipment in
satisfaction of note receivable 473,477
Cash in satisfaction of note receivable 1,000,000
B-36
<PAGE>
Williamson Buick:
Purchases of automobiles, parts and service 66,831 280,310 73,500
Rental income 11,000
Interest income on note receivable 15,598 43,400
Sales of inventory 110,043 51,198
</TABLE>
14. LITIGATION
In connection with the acquisition of a facility in Florida (known as
"NuPar"), the Company signed employment agreements with the former
NuPar shareholders for the three year period beginning December 1991.
In 1994, the former NuPar shareholders filed a lawsuit against the
Company for $1,800,000 claiming they had met the conditions of the
agreements and are therefore entitled to the payments thereunder. In
July 1995, the Company settled these actions for $1.4 million, payable
in installments through January 1997. In January 1997, the Company
made the final payment toward this settlement.
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 for $100,000 and $1.02 for every bedliner sold in excess of
25,000 in the one-year period beginning December 1997 deliverable
through December 1998.
The Company has been served with various lawsuits pertaining to a
class action suit arising from the production of bedliners. The suits
allege that the bedliners insulate a gas can when filled which may
cause a static charge that could result in a fire. The Company has
formed a coalition with other bedliner manufacturers to defend this
class action suit. Though the Company did not produce bedliners at
the time of the alleged incidents, the Company has elected to
participate in the class action suit. As of December 31, 1997, the
coalition was in settlement negotiations with the plaintiffs in this
case. The Company believes that any resulting liability will not
significantly affect its financial position, results of operations or
cash flows.
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
B-37
<PAGE>
believes that any resulting liability should not materially affect its
financial position, results of operations or cash flows.
15. ENVIRONMENTAL REMEDIATION
As part of the lease agreement with a related party for the Milan,
Michigan facility, the Company is also responsible for the remediation
of environmental contamination due to hazardous materials, up to an
amount of $2,000,000, which existed at this site prior to the Company
entering into the lease in June 1993. The Company has accrued the
estimated remediation costs based on an environmental study of the
site. The Company has accrued its best estimate of the cost of
remediation based on known facts. It is possible that this estimate
may change in the near term as the project progresses. 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
affects its financial position, results of operations or cash flows.
16. SEGMENTS OF BUSINESS
The Company operates in three industry segments: manufacture of
automotive bumpers and other miscellaneous reinforcement beams and
brackets at the manufacturing plant in Milan, Michigan ("Bumpers"),
manufacture of bedliners at the manufacturing plant in Owosso,
Michigan and sale of these bedliners and other truck accessories at
retail stores throughout the country ("Truck Accessories"), and
operation of a multi-purpose motor sports facility in Brainerd,
Minnesota ("Raceway").
Financial information below is listed by industry segment. There are
no operating results of the Raceway as of December 31, 1995 as the
date of acquisition was December 31, 1995.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
SALES
Bumpers $34,832,951 $33,717,282 $28,503,726
Truck Accessories 8,654,776 3,780,562
Raceway 2,871,387 2,765,238
----------- ----------- -----------
TOTAL $46,350,114 $40,263,082 $28,503,726
=========== =========== ===========
B-38
<PAGE>
INCOME FROM OPERATIONS:
Bumpers $ 7,440,943 $ 5,980,202 $ 4,970,770
Truck Accessories (1,249,241) (1,106,957)
Raceway 122,213 318,059
----------- ----------- -----------
TOTAL $ 6,313,915 $ 5,191,304 $ 4,970,770
=========== =========== ===========
IDENTIFIABLE ASSETS:
Bumpers $28,951,846 $28,920,376 $32,833,184
Truck Accessories 10,416,765 8,128,454
Raceway 5,571,669 5,561,465 5,410,802
----------- ----------- -----------
TOTAL $44,940,280 $42,610,295 $38,243,986
=========== =========== ===========
CAPITAL EXPENDITURES:
Bumpers $ 3,061,303 $ 4,017,274 $ 5,584,083
Truck Accessories 290,173 5,214,081
Raceway 1,433,062 686,511
----------- ----------- -----------
TOTAL $ 4,784,538 $ 9,917,866 $ 5,584,083
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Bumpers $ 2,787,601 $ 2,793,190 $ 2,673,758
Truck Accessories 1,129,495 545,951
Raceway 511,781 411,980
----------- ----------- -----------
TOTAL $ 4,428,877 $ 3,751,121 $ 2,673,758
=========== =========== ===========
</TABLE>
The Colonel's had sales of over 23% to one customer in 1997.
17. SUBSEQUENT EVENT
As part of the continued expansion in the CTA lines of business, the
Company, on March 13, 1998, entered into an Agreement and Plan of
Merger to acquire the capital stock of a manufacturer of truck
accessories for $4,250,000 in cash and $4,250,000 worth of the
Company's Common Stock, subject to adjustment as set forth in the
agreement. Additionally, three other acquisitions totaling
approximately $950,000 were made during the first quarter of 1998.
B-39
<PAGE>
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents the Company's quarterly results:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C> <C>
Net revenues $10,937,133 $11,119,756 $12,271,056 $12,022,169
Gross profit 3,379,739 2,699,379 3,841,466 3,182,642
Net income 1,030,543 680,451 1,266,616 431,149
Basic and diluted
earnings per share $ 0.04 $ 0.03 $ 0.05 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C> <C>
Net Revenues $9,900,074 $8,544,230 $11,210,682 $10,608,096
Gross Profit 2,891,168 2,160,617 2,884,066 4,187,165
Net income 901,802 391,750 307,950 920,484
Basic and diluted
earnings per share $ 0.04 $ 0.02 $ 0.01 $ 0.03
</TABLE>
B-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
The Colonel's International, Inc.
Milan, Michigan
We have audited the consolidated financial statements of The Colonel's
International, Inc. (the "Company") as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, and have
issued our report thereon dated March 24, 1998; 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 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
Detroit, Michigan
March 24, 1998
B-41
<PAGE>
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
ADDITIONS
----------------------- DEDUCTIONS -
CHARGED TO CHARGED WRITE-OFFS
BALANCE COSTS AND TO OTHER AND BALANCE
JANUARY 1 EXPENSES ACCOUNTS DISPOSALS DECEMBER 31
<S> <C> <C> <C> <C> <C>
DOUBTFUL ACCOUNTS RESERVES
For the year ended December 31:
1997 $574,000 $153,000 -- $(234,000) $493,000
1996 401,200 172,895 -- (95) 574,000
1995 345,900 143,018 -- (87,718) 401,200
INVENTORY RESERVES
For the year ended December 31:
1997 146,658 121,342 -- -- 268,000
1996 146,658 -- -- -- 146,658
1995 -- 146,658 -- -- 146,658
TAX VALUATION ALLOWANCE
For the year ended December 31:
1997 461,000 11,000 -- (32,000) 440,000
1996 510,000 -- -- (49,000) 461,000
1995 -- 510,000 -- -- 510,000
</TABLE>
B-42
<PAGE>
APPENDIX C
DISSENTERS' RIGHTS STATUTE
SECTION 450.1761. DEFINITIONS.
As used in sections 762 to 774:
(a) "Beneficial shareholder" means the person who is a beneficial
owner of shares held by a nominee as the record shareholder.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving corporation by merger of that
issuer.
(c) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 762 and who exercises that right when and in
the manner required by sections 764 through 772.
(d) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(e) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none, at a rate
that is fair and equitable under all the circumstances.
(f) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(g) "Shareholder" means the record or beneficial shareholder.
SECTION 450.1762. RIGHT OF SHAREHOLDER TO DISSENT AND OBTAIN PAYMENT FOR
SHARES.
(1) A shareholder is entitled to dissent from, and obtain payment of
the fair value of his or her shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is
a party if shareholder approval is required for the merger by section 703a
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or 736(5) or the articles of incorporation and the shareholder is entitled
to vote on the merger, or the corporation is a subsidiary that is merged
with its parent under section 711.
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution but not including a sale pursuant
to court order.
(d) An amendment of the articles of incorporation giving rise to
a right to dissent pursuant to section 621.
(e) A transaction giving rise to a right to dissent pursuant to
section 754.
(f) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the
board provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(g) The approval of a control share acquisition giving rise to a
right to dissent pursuant to section 799.
(2) Unless otherwise provided in the articles of incorporation,
bylaws, or a resolution of the board, a shareholder may not dissent from
any of the following:
(a) Any corporate action set forth in subsection (1)(a) to (e)
as to shares that are listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the national association of securities dealers, on the record
date fixed to vote on the corporate action or on the date the resolution of
the parent corporation's board is adopted in the case of a merger under
section 711 not requiring shareholder vote under section 713.
(b) A transaction described in subsection (1)(a) in which
shareholders receive cash or shares that satisfy the requirements of
subdivision (a) on the effective date of the merger or any combination
thereof.
(c) A transaction described in subsection (1)(b) in which
shareholders receive cash or shares that satisfy the requirements of
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<PAGE>
subdivision (a) on the effective date of the share exchange or any
combination thereof.
(d) A transaction described in subsection (1)(c) that is
conducted pursuant to a plan of dissolution providing for distribution of
substantially all of the corporation's net assets to shareholders in
accordance with their respective interests within 1 year after the date of
closing of the transaction, where the transaction is for cash or shares
that satisfy the requirements of subdivision (a) on the date of closing or
any combination thereof.
(3) A shareholder entitled to dissent and obtain payment for his or
her shares pursuant to subsection (1)(a) to (e) may not challenge the
corporate action creating his or her entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
(4) A shareholder who exercises his or her right to dissent and seek
payment for his or her shares pursuant to subsection (1)(f) may not
challenge the corporate action creating his or her entitlement unless the
action is unlawful or fraudulent with respect to the shareholder or the
corporation.
SECTION 450.1763. ASSERTION OF DISSENTERS' RIGHTS AS TO FEWER THAN ALL
REGISTERED SHARES; RIGHTS OF PARTIAL DISSENTER.
(1) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his or her name only if he or she
dissents with respect to all shares beneficially owned by any 1 person and
notifies the corporation in writing of the name and address of each person
on whose behalf he or she asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as
to which he or she dissents and his or her other shares were registered in
the names of different shareholder.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his or her behalf only if all of the following apply:
(a) He or she submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights.
(b) He or she does so with respect to all shares of which he or
she is the beneficial shareholder or over which he or she has power to
direct the vote.
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<PAGE>
SECTION 450.1764. CORPORATE ACTION CREATING DISSENTERS' RIGHTS; VOTE OF
SHAREHOLDERS; NOTICE.
(1) If proposed corporate action creating dissenters' rights under
section 762 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this act and shall be accompanied by a copy of
sections 761 to 774.
(2) If corporate action creating dissenters' rights under section 762
is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in section
766. A shareholder who consents to the corporate action is not entitled to
assert dissenters' rights.
SECTION 450.1765. DELIVERY OF NOTICE OF SHAREHOLDER'S INTENT TO ASSERT
DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under
section 762 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights must deliver to the
corporation before the vote is taken written notice of his or her intent to
demand payment for his or her shares if the proposed action is effectuated
and must not vote his or her shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1) is not entitled to payment for his or her shares under this act.
SECTION 450.1766. AUTHORIZATION AT SHAREHOLDERS' MEETING; DELIVERY OF
DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under
section 762 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of section 765.
(2) The dissenters' notice must be sent no later than 10 days after
the corporate action was taken, and must provide all of the following:
(a) State where the payment demand must be sent and where and
when certificates for shares represented by certificates must be deposited.
(b) Inform holders of shares without certificates to what extent
transfer of the shares will be restricted after the payment demand is
received.
C-4
<PAGE>
(c) Supply a form for the payment demand that includes the date
of the first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that the person asserting
dissenters' rights certify whether he or she acquired beneficial ownership
of the shares before the date.
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the subsection (1) notice is delivered.
SECTION 450.1767. SHAREHOLDER RECEIVING DISSENTER'S NOTICE; REQUIRED
ACTION.
(1) A shareholder sent a dissenter's notice described in section 766
must demand payment, certify whether he or she acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to section 766(2)(c), and deposit his or her
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her share
certificates under subsection (1) retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit his or her
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his or her shares under this act.
SECTION 450.1768. RESTRICTION OF TRANSFER OF SHARES WITHOUT CERTIFICATES.
(1) The corporation may restrict the transfer of shares without
certificates from the date the demand for their payment is received until
the proposed corporate action is taken or the restrictions released under
section 770.
(2) The person for whom dissenters' rights are asserted as to shares
without certificates retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
SECTION 450.1769. PAYMENT BY CORPORATION TO DISSENTER; ACCOMPANYING
DOCUMENTS.
(1) Except as provided in section 771, within 7 days after the
proposed corporate action is taken or a payment demand is received,
whichever occurs later, the corporation shall pay each dissenter who
complied with section 767 the amount the corporation estimates to be the
fair value of his or her shares, plus accrued interest.
C-5
<PAGE>
(2) The payment must be accompanied by all of the following:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and if available the latest interim financial statements.
(b) A statement of the corporation's estimate of the fair value
of the shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under
section 772.
SECTION 450.1770. PROPOSED ACTION NOT TAKEN WITHIN PRESCRIBED NUMBER OF
DAYS; PROCEDURE.
(1) If the corporation does not take the proposed action within 60
days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on shares without certificates.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 766 and repeat the payment demand
procedure.
SECTION 450.1771. ELECTION TO WITHHOLD PAYMENT FROM DISSENTERS.
(1) A corporation may elect to withhold payment required by section
769 from a dissenter unless he or she was the beneficial owner of the
shares before the date set forth in the dissenters' notice pursuant to
section 766(2)(c).
(2) To the extent the corporation elects to withhold payment under
subsection (1), after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who shall agree to accept it in
full satisfaction of his or her demand. The corporation shall send with its
offer a statement of its estimate of the fair value of the shares, an
explanation of how the interest was calculated, and a statement of the
dissenter's right to demand payment under section 772.
C-6
<PAGE>
SECTION 450.1772. NOTIFICATION OF DISSENTER'S OWN ESTIMATE; REJECTION OF
OFFER.
(1) A dissenter may notify the corporation in writing of his or her
own estimate of the fair value of his or her shares and amount of interest
due, and demand payment of his or her estimate, less any payment under
section 769, or reject the corporation's offer under section 771 and demand
payment of the fair value of his or her shares and interest due, if any 1
of the following applies:
(a) The dissenter believes that the amount paid under section
769 or offered under section 771 is less than the fair value of his or her
shares or that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under section 769
within 60 days after the date set for demanding payment.
(c) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on shares without certificates within 60 days after
the date set for demanding payment.
(2) A dissenter waives his or her right to demand payment under this
section unless he or she notifies the corporation of his or her demand in
writing under subsection (1) within 30 days after the corporation made or
offered payment for his or her shares.
SECTION 450.1773. UNSETTLED DEMANDS; COMMENCEMENT OF PROCEEDING WITHIN
PRESCRIBED NUMBER OF DAYS.
(1) If a demand for payment under section 772 remains unsettled, the
corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit
court of the county in which the corporation's principal place of business
or registered office is located. If the corporation is a foreign
corporation without a registered office or principal place of business in
this state, it shall commence the proceeding in the county in this state
where the principal place of business or registered office of the domestic
corporation whose shares are to be valued was located.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled parties to the
C-7
<PAGE>
proceeding as in an action against their shares and all parties shall be
served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) is plenary and exclusive. The court may
appoint 1 or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds the fair value of
his or her shares, plus interest, exceeds the amount paid by the
corporation or for the fair value, plus accrued interest, of his or her
after-acquired shares for which the corporation elected to withhold payment
under section 771.
SECTION 450.1773A. APPOINTMENT OF REFEREE; POWERS.
(1) In a proceeding brought pursuant to section 773, the court may,
pursuant to the agreement of the parties, appoint a referee selected by the
parties and subject to the approval of the court. The referee may conduct
proceedings within the state, or outside the state by stipulation of the
parties with the referee's consent, and pursuant to the Michigan court
rules. The referee shall have powers that include, but are not limited to,
the following:
(a) To hear all pretrial motions and submit proposed orders to
the court. In ruling on the pretrial motion and proposed orders, the court
shall consider only those documents, pleadings, and arguments that were
presented to the referee.
(b) To require the production of evidence, including the
production of all books, papers, documents, and writings applicable to the
proceeding, and to permit entry upon designated land or other property in
the possession or control of the corporation.
(c) To rule upon the admissibility of evidence pursuant to the
Michigan rules of evidence.
(d) To place witnesses under oath and to examine witnesses.
(e) To provide for the taking of testimony by deposition.
(f) To regulate the course of the proceeding.
C-8
<PAGE>
(g) To issue subpoenas, when a written request is made by any of
the parties, requiring the attendance and testimony of any witness and the
production of evidence including books, records, correspondence, and
documents in the possession of the witness or under his or her control, at
a hearing before the referee or at a deposition convened pursuant to
subdivision (e). In case of a refusal to comply with a subpoena, the party
on whose behalf the subpoena was issued may file a petition in the court
for an order requiring compliance.
(2) The amount and manner of payment of the referee's compensation
shall be determined by agreement between the referee and the parties,
subject to the court's allocation of compensation between the parties at
the end of the proceeding pursuant to equitable principles, notwithstanding
section 774.
(3) The referee shall do all of the following:
(a) Make a record and reporter's transcript of the proceeding.
(b) Prepare a report, including proposed findings of fact and
conclusions of law, and a recommended judgment.
(c) File the report with the court, together with all original
exhibits and the reporter's transcript of the proceeding.
(4) Unless the court provides for a longer period, not more than 45
days after being served with notice of the filing of the report described
in subsection (3), any party may serve written objections to the report
upon the other party. Application to the court for action upon the report
and objections to the report shall be made by motion upon notice. The
court, after hearing, may adopt the report, may receive further evidence,
may modify the report, or may recommit the report to the referee with
instructions. Upon adoption of the report, judgment shall be entered in the
same manner as if the action had been tried by the court and shall be
subject to review in the same manner as any other judgment of the court.
SECTION 450.1774. DETERMINATION, ASSESSMENT OF COSTS.
(1) The court in an appraisal proceeding commenced under section 773
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under
section 772.
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<PAGE>
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable in
the following manner:
(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially comply
with the requirements of sections 764 through 772.
(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this act.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and
that the fees for those services should not be assessed against the
corporation, the court may award to those counsel reasonable fees paid out
of the amounts awarded the dissenters who were benefitted.
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<PAGE>
THE COLONEL'S INTERNATIONAL, INC.
620 SOUTH PLATT ROAD
MILAN, MICHIGAN 48160
SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 30, 1998
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
THE SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Summary of Certain Aspects of the Sale . . . . . . . . . . . . . . . . . .2
The Colonel's International, Inc. and The Colonel's, Inc.. . . . . . . . .3
Colonel's Acquisition Corp.. . . . . . . . . . . . . . . . . . . . . . . .4
Board Recommendation and Reasons for the Sale. . . . . . . . . . . . . . .4
Use of Proceeds; Business Following the Sale . . . . . . . . . . . . . . .5
Federal Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . .6
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Interest of Certain Persons in the Sale. . . . . . . . . . . . . . . . . .7
SUMMARY OF THE AMENDED ASSET PURCHASE AGREEMENT. . . . . . . . . . . . . .7
Purchase and Sale of Purchased Assets. . . . . . . . . . . . . . . . . . .7
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Representations and Warranties; Survival . . . . . . . . . . . . . . . . .8
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Certain Covenants of the Parties . . . . . . . . . . . . . . . . . . . . 10
Conditions to Closing. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Earnest Money Deposit; Termination . . . . . . . . . . . . . . . . . . . 11
Summary of Related Agreements. . . . . . . . . . . . . . . . . . . . . . 11
Material Differences From the Original Asset Purchase Agreement. . . . . 12
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . 14
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . 14
Condensed Consolidated Balance Sheet as of September 30, 1998. . . . . . 16
Condensed Consolidated Statement of Operations as of
September 30, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Condensed Consolidated Statement of Operations as of
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Condensed Consolidated Statement of Operations as of
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Time, Date and Place . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Voting Rights and Record Date. . . . . . . . . . . . . . . . . . . . . . 21
Voting by Proxy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Proxy Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Colonel's International, Inc.. . . . . . . . . . . . . . . . . . . . 22
The Colonel's, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Colonel's Truck Accessories, Inc.. . . . . . . . . . . . . . . . . . 29
Rugged Liner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Brainerd International Raceway, Inc. . . . . . . . . . . . . . . . . . . 34
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Market for the Company's Common Stock and
Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
DISSENTERS' RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SHARE OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . 51
SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . . . 52
APPENDIX A: AMENDED ASSET PURCHASE AGREEMENT
APPENDIX B: FINANCIAL STATEMENTS
APPENDIX C: DISSENTERS' RIGHTS STATUTE
<PAGE>
[FRONT]
PROXY PROXY
THE COLONEL'S INTERNATIONAL, INC.
620 SOUTH PLATT ROAD
MILAN, MICHIGAN 48160
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder hereby appoints Donald J. Williamson and
Richard S. Schoenfeldt, and each of them, each with full power of
substitution, proxies to represent the shareholder listed on the reverse
side of this Proxy and to vote all shares of Common Stock of The Colonel's
International, Inc. that the shareholder would be entitled to vote on all
matters which come before the Special Meeting of Shareholders to be held at
the offices of The Colonel's International, Inc., 620 South Platt Road,
Milan, Michigan 48160, on _______________, 1998, at 10 a.m. local time,
and any adjournment of that meeting.
IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSAL
IDENTIFIED ON THIS PROXY. THE SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS THAT MAY
COME BEFORE THE MEETING.
PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
[BACK]
THE COLONEL'S INTERNATIONAL, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
1. Proposal to approve the Amended For Against Abstain
Asset Purchase Agreement and the Sale [ ] [ ] [ ]
Your Board of Directors
Recommends that You Vote
FOR this Proposal
Dated: _________________________, 1998
______________________________________
______________________________________
Signature of Shareholder(s)
IMPORTANT -- Please sign exactly as
your name(s) appears on this Proxy.
When signing on behalf of a
corporation, partnership, estate or
trust, indicate title or capacity of
person signing. IF SHARES ARE HELD
JOINTLY, EACH HOLDER SHOULD SIGN.
