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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 2-98277C
THE COLONEL'S INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-3262264
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
620 SOUTH PLATT ROAD, MILAN, MICHIGAN 48160
(Address of Principal Executive Offices) (Zip Code)
(734) 439-4200
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
There were 24,631,832 shares of the registrant's Common Stock, $0.01
par value, outstanding as of November 9, 1998.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The financial statements required under Item 1 of Part I are set
forth in Appendix A to this Form 10-Q and are herein incorporated by
reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BACKGROUND
The Colonel's International, Inc. (the "Company") is a publicly held
holding company with no independent operations of its own. The Company has
four wholly owned subsidiaries: The Colonel's, Inc. ("The Colonel's"), 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 COLONEL'S, INC.
The Colonel's was organized in 1982 and began producing and selling
plastic bumpers and facias in 1983. By the start of 1996, The Colonel's
had grown through acquisitions, joint ventures and normal expansion to two
manufacturing plants, five distribution warehouses (located in Dallas,
Texas; Houston, Texas; Glendale (Phoenix), Arizona; West Memphis, Arkansas;
and Totowa, New Jersey), and a network of independent distributors that
sell The Colonel's products throughout the United States, Canada, Mexico
and the District of Columbia.
THE COLONEL'S TRUCK ACCESSORIES, INC.
CTA manufactures and sells pickup truck bedliners and tail gate covers
through a distributor network. In March 1997, CTA began to acquire retail
outlet stores to sell manufactured items and other truck accessories that
it purchases to wholesale subdistributors and dealerships. These retail
outlet stores also offer installation services and direct sales to retail
customers. CTA uses various methods to market its manufactured bedliners
and other truck accessories products.
CTA's first acquisition, in March 1997, was Truckware in Baldwin
Park, California. Truckware was the Company's pilot retail outlet store
that converted existing customers from a competitor's product to CTA's
manufactured bedliner. In addition to bedliners, it purchased products
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from other manufacturers and sold them through a warehouse/retail outlet
store. In 1997, CTA purchased certain assets of Eastern Off Road
Equipment, Inc. with similar retail outlet stores located in Pennsylvania,
Maryland, Virginia and West Virginia. In 1998, CTA purchased the assets of
the following: Road and Truck, which is located in Thousand Oaks,
California; Dealers Choice, which is located in Collinsville, Illinois and
serves the St. Louis metropolitan area; Duraliner of Nashville in
Nashville, Tennessee; Sun Shade Custom located in Franklin, Tennessee; Wild
Bill's Truck Accessories in Upland, California; Bedliner Kingdom in Los
Angeles, California; Southland Shell in Pomona, California; Accessories
Plus in Santa Clara, California; Truck Stuff in South Sacramento,
California and Roseville, California; and Camper Place Warehouse, which has
locations in El Paso, Texas, and Las Cruces, Ruidoso, and Roswell, New
Mexico. All these facilities warehouse and sell bedliners, caps and tonneau
covers that CTA manufactures and other purchased truck accessory products
to the wholesale and retail markets.
Additionally, CTA purchased the assets of Horizon Coach, Inc., a
manufacturing company located in Riverside, California. This facility
manufactures custom pick-up truck caps, sport tops and tonneau covers. CTA
operates this facility under the name The Colonel's Truck Accessories,
Inc., and uses it to supply products to CTA's truck accessory outlet
stores.
RUGGED LINER, INC.
Rugged Liner was formed in March 1998 in connection with the
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 Rugged Liner Companies merged
with and into Rugged Liner, with Rugged Liner being the surviving
corporation. Rugged Liner, which is located in Uniontown, Pennsylvania,
manufactures non-skid bedliners and bed mats, as well as ground lowering
kits for sport utility vehicles. Rugged Liner has a distribution
warehouse/service center in Pomona, California and also markets it
products through CTA's retail outlet stores. Rugged Liner plans to
concentrate its efforts on export sales.
BRAINERD INTERNATIONAL RACEWAY, INC.
BIR operates a motor sports facility located approximately six miles
northwest of Brainerd, Minnesota. Substantially all of BIR's revenues are
obtained from motor sports racing events at this racetrack. BIR schedules
racing and other events held at the racetrack during weekends in the months
of May through September of each year.
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ACQUISITIONS THIS PERIOD
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.
LIQUIDITY AND CAPITAL RESOURCES
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.
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 locations, 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
the best estimates 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
holds payments toward 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 a result of the acquired
accounts payable of $575,000 from the Rugged Liner Companies and various
other acquisitions such as Dealers Choice, Road and Truck and Duraliner of
Nashville, plus an increase in inventory levels and normal accounts payable
activity from the acquired 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.
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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.
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.
RESULTS OF OPERATIONS
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 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,
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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 2000 READINESS DISCLOSURE
The "year 2000 issue" is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Accordingly, computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This situation could result in a system failure or miscalculations causing
disruptions to operations. The year 2000 issue is not limited to computer
programs or information technology systems, however. Instead, machinery
and other equipment 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 The Colonel's 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
The Colonel'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. The Colonel's expects to spend
approximately $50,000 to replace the computers and update the software
described above. Such costs are being expensed as incurred and are not
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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 Form 10-Q, 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 Form 10-Q, particularly descriptions of the Company's plans to develop
and expand the business of CTA, contain forward-looking statements that are
based on management's beliefs, assumptions, current expectations, estimates
and projections about the industries in which the Company operates, the
economy, and about the Company itself. Words such as "anticipates,"
"believes," "estimates," "expects," "intends," "is likely," "plans,"
"predicts," "projects," variations of such words and similar expressions
are intended to identify such forward-looking statements. These statements
are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may
be expressed or forecasted in such forward-looking statements.
Furthermore, the Company undertakes no obligation to update, amend or
clarify forward-looking statements, whether as a result of new information,
future events or otherwise.
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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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
ITEM 5. OTHER INFORMATION.
On September 14, 1998, the Company, The Colonel's and Donald J.
Williamson, who is the Chairman of the Board and Chief Executive Officer
and a major shareholder of the Company, entered into an Asset Purchase
Agreement with Colonel's Acquisition Corp., a newly formed Delaware
corporation. Under the terms of the Asset Purchase Agreement, The
Colonel's agreed to sell, and Colonel's Acquisition Corp. agreed to
purchase, substantially all of The Colonel's assets used in its business of
manufacturing plastic replacement bumpers and related items. On October
19, 1998, the Company mailed its proxy statement concerning this
transaction to its shareholders, and on October 30, 1998 held a special
meeting of shareholders to consider and vote upon the Asset Purchase
Agreement and the transactions contemplated by that agreement. At this
meeting, approximately 98.1% of the outstanding shares of the Company's
common stock were voted in favor of the Asset Purchase Agreement and the
transactions contemplated thereby.
On November 12, 1998, the Company received written notice from
Colonel's Acquisition Corp. of its decision to terminate the Asset Purchase
Agreement pursuant to the terms of Section 10.05 and related sections of
that agreement. As of the date of this Form 10-Q, the Company does not
know whether the sale of the assets of The Colonel's contemplated by the
Asset Purchase Agreement will occur, although representatives of the
Company and Colonel's Acquisition Corp. plan to continue discussing this
matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibits are filed as part of this
report.
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EXHIBIT
NUMBER ITEM
- - ------ ----
2.1 Agreement and Plan of Merger by and among The Colonel's
International, Inc., The Colonel's Rugged Liner, Inc., Rugged
Liner, Inc., Triad Management Group, Inc., Aerocover, Inc.,
Ground Force, Inc., and certain shareholders of the foregoing,
dated March 13, 1998. Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated May 8, 1998.
2.2 First Amendment to Agreement and Plan of Merger, by and among The
Colonel's International, Inc., The Colonel's Rugged Liner, Inc.,
Rugged Liner, Inc., Triad Management Group, Inc., Aerocover,
Inc., Ground Force, Inc., and certain shareholders of the
foregoing, dated April 23, 1998. Incorporated by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
May 8, 1998.
2.3 Asset Purchase Agreement dated as of September 14, 1998 by and
among The Colonel's International, Inc., The Colonel's, Inc.,
Donald J. Williamson and Colonel's Acquisition Corp.
Incorporated by reference to Appendix A to the Registrant's
Definitive Proxy Statement dated October 19, 1998.
3.1 Articles of Incorporation of the Company, as amended.
Incorporated by reference from Exhibit 3.1 to the Company's
Report on Form 10-Q for the period ended March 31, 1997.
3.2 Bylaws of the Company, as amended. Incorporated by reference
from Exhibit 3.2 to the Company's Report on Form 10-Q for the
period ended March 31, 1997.
4.1 Articles of Incorporation of the Company, as amended. See
Exhibit 3.1 above.
4.2 Bylaws of the Company, as amended. See Exhibit 3.2 above.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. The Company did not file any Reports
on Form 8-K during the third quarter of 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE COLONEL'S INTERNATIONAL, INC.
Dated: November 16, 1998 By: /S/ RICHARD S. SCHOENFELDT
Richard S. Schoenfeldt
Vice President-Finance and Chief
Financial Officer (Duly Authorized
Officer and Principal Financial
Officer of the Registrant)
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APPENDIX A
<TABLE>
THE COLONEL'S INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
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<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
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Total other assets 6,494,836 2,344,361
TOTAL ASSETS $59,509,231 $44,940,280
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</TABLE>
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<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
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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
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Total shareholders' equity 24,967,176 18,852,246
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $59,509,231 $44,940,280
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</TABLE>
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<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 55,000 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>
-16-
<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)
-17-
<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>
-18-
<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.
-19-
<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>
-20-
<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.
-21-
<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.
-22-
<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 Item 1 of Part II of this Form 10-Q, 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.
-23-
<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.
Note 13 SUBSEQUENT EVENTS
On September 14, 1998, the Company, The Colonel's and Donald J.
Williamson, who is the Chairman of the Board and Chief Executive
Officer and a major shareholder of the Company, entered into an
Asset Purchase Agreement with Colonel's Acquisition Corp., a newly
formed Delaware corporation. Under the terms of the Asset Purchase
Agreement, The Colonel's agreed to sell, and Colonel's Acquisition
Corp. agreed to purchase, substantially all of The Colonel's assets
used in its business of manufacturing plastic replacement bumpers
and related items. On October 19, 1998, the Company mailed its
proxy statement concerning this transaction to its shareholders,
and on October 30, 1998 held a special meeting of shareholders to
consider and vote upon the Asset Purchase Agreement and the
transactions contemplated by that agreement. At this meeting,
approximately 98.1% of the outstanding shares of the Company's
common stock were voted in favor of the Asset Purchase Agreement
and the transactions contemplated thereby.
On November 12, 1998, the Company received written notice from
Colonel's Acquisition Corp. of its decision to terminate the Asset
Purchase Agreement pursuant to the terms of Section 10.05 and
related sections of that agreement. As of the date of this Form
10-Q, the Company does not know whether the sale of the assets of
The Colonel's contemplated by the Asset Purchase Agreement will
occur, although representatives of the Company and Colonel's
Acquisition Corp. plan to continue discussing this matter.
-24-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER ITEM
- - ------ ----
2.1 Agreement and Plan of Merger by and among The Colonel's
International, Inc., The Colonel's Rugged Liner, Inc., Rugged
Liner, Inc., Triad Management Group, Inc., Aerocover, Inc.,
Ground Force, Inc., and certain shareholders of the foregoing,
dated March 13, 1998. Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated May 8, 1998.
2.2 First Amendment to Agreement and Plan of Merger, by and among The
Colonel's International, Inc., The Colonel's Rugged Liner, Inc.,
Rugged Liner, Inc., Triad Management Group, Inc., Aerocover,
Inc., Ground Force, Inc., and certain shareholders of the
foregoing, dated April 23, 1998. Incorporated by reference to
Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated
May 8, 1998.
2.3 Asset Purchase Agreement dated as of September 14, 1998 by and
among The Colonel's International, Inc., The Colonel's, Inc.,
Donald J. Williamson and Colonel's Acquisition Corp.
Incorporated by reference to Appendix A to the Registrant's
Definitive Proxy Statement dated October 19, 1998.
3.1 Articles of Incorporation of the Company, as amended.
Incorporated by reference from Exhibit 3.1 to the Company's
Report on Form 10-Q for the period ended March 31, 1997.
3.2 Bylaws of the Company, as amended. Incorporated by reference
from Exhibit 3.2 to the Company's Report on Form 10-Q for the
period ended March 31, 1997.
4.1 Articles of Incorporation of the Company, as amended. See
Exhibit 3.1 above.
4.2 Bylaws of the Company, as amended. See Exhibit 3.2 above.
10.1 Employment Agreement dated as of April 23, 1998 between The
Colonel's Rugged Liner, Inc. and Mark German.
27 Financial Data Schedule
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED STATEMENT OF INCOME, BALANCE SHEETS, AND STATEMENT OF
CASH FLOWS OF THE COLONEL'S INTERNATIONAL, INC. AND ITS SUBSIDIARIES AS OF
AND FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,300,241
<SECURITIES> 0
<RECEIVABLES> 6,840,629
<ALLOWANCES> 450,000
<INVENTORY> 13,795,542
<CURRENT-ASSETS> 23,732,826
<PP&E> 56,679,173
<DEPRECIATION> 27,397,604
<TOTAL-ASSETS> 58,677,231
<CURRENT-LIABILITIES> 15,272,521
<BONDS> 0
<COMMON> 246,318
0
0
<OTHER-SE> 25,218,043
<TOTAL-LIABILITY-AND-EQUITY> 59,509,231
<SALES> 43,333,927
<TOTAL-REVENUES> 43,392,736
<CGS> 31,033,227
<TOTAL-COSTS> 38,269,182
<OTHER-EXPENSES> 16,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,391,391
<INCOME-PRETAX> 3,773,098
<INCOME-TAX> 1,287,381
<INCOME-CONTINUING> 2,882,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,882,902
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
