<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] 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 000-23085
COYOTE SPORTS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER
AS SPECIFIED IN ITS CHARTER)
Nevada 88-0326730
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
2291 Arapahoe Avenue
Boulder, Colorado 80302
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (303) 417-0942
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at July 30, 1998
----- ----------------------------
Common Stock, $0.001 par value 4,758,004 shares
Transitional Small Business Disclosure Format Yes [_] No [X]
<PAGE>
COYOTE SPORTS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
<C> <S> <C>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997............................................. 1
Condensed Consolidated Statements of Operations (unaudited) for
the three and six months ended June 30, 1998 and 1997.......................... 2
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the three and six months ended June 30, 1998 and 1997.......... 3
Condensed Consolidated Statements of Cash Flows (unaudited) for
the three and six months ended June 30, 1998 and 1997.......................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 9
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<C> <S> <C>
Item 1. Legal Proceedings.............................................................. 15
Item 2. Changes in Securities and Use of Proceeds...................................... Not Applicable
Item 3. Defaults Upon Senior Securities................................................ Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders............................ Not Applicable
Item 5. Other Information.............................................................. Not Applicable
Item 6. Exhibits....................................................................... 15
Signatures ............................................................................... 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I - Financial Statements
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and equivalents $ 140,215 726,290
Restricted cash 90,000 702,814
Trade receivables, net 5,325,539 3,778,483
Inventories, net 3,804,181 3,582,194
Prepaid expenses and other current assets 904,962 439,130
----------- ------------
Total current assets 10,264,897 9,228,911
Property, plant and equipment, net 10,976,633 7,546,284
Goodwill, net 10,888,398 -
Other assets, net 960,961 90,058
----------- -----------
$33,090,889 16,865,253
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,312,194 2,705,928
Current portion of long term debt 814,353 452,237
Accounts payable 5,304,500 3,204,234
Accrued expenses 3,697,654 1,413,362
Current portion of obligation payable under purchase agreement - 87,000
----------- -----------
Total current liabilities 13,128,701 7,862,761
----------- -----------
Long-term debt, net of current portion 8,065,998 202,644
Related party notes payable 573,848 600,340
Deferred taxes and other liabilities 962,949 1,090,000
----------- -----------
Total liabilities 22,731,496 9,755,745
Minority interests in net assets of subsidiaries 503,061 396,874
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 4,000,000
shares, none issued or outstanding - -
Common stock, $.001 par value. Authorized 25,000,000
shares; issued and outstanding, 4,758,004 at
June 30, 1998 and 3,855,000 at December 31, 1997 4,758 3,855
Additional paid-in capital 15,326,801 12,664,642
Accumulated deficit (4,972,707) (5,493,167)
Accumulated comprehensive income (loss) (502,520) (462,696)
----------- -----------
Total stockholders' equity 9,856,332 6,712,634
Commitments and contingencies
----------- -----------
$33,090,889 16,865,253
=========== ===========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited consolidated financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 12,883,458 7,374,250 20,877,737 12,750,168
Cost of goods sold (9,855,220) (5,641,315) (16,039,970) (9,784,535)
-------------- -------------- -------------- -------------
Gross profit 3,028,238 1,732,935 4,837,767 2,965,633
Operating expenses (2,642,433) (2,340,753) (4,375,215) (4,071,540)
-------------- -------------- -------------- -------------
Operating income (loss) 385,805 (607,818) 462,552 (1,105,907)
Other income (expense):
Interest expense, net (306,631) (106,249) (399,849) (199,617)
Loss on forward exchange contracts, net - (16,000) (5,000) (39,000)
Debt financing costs (99,999) (550,000) (99,999) (550,000)
Other 93,030 - 93,030 -
-------------- -------------- -------------- -------------
Income (loss) before income taxes, minority
interests and extraordinary gain 72,205 (1,280,067) 50,734 (1,894,524)
Income tax (expense) benefit - 70,000 (13,000) 181,000
Minority interests in subsidiaries' losses 80,374 41,710 136,145 48,042
-------------- -------------- -------------- -------------
Net income (loss) before extraordinary item 152,579 (1,168,357) 173,879 (1,665,482)
Extraordinary item, net of taxes 346,581 - 346,581 -
-------------- -------------- -------------- -------------
Net income (loss) $ 499,160 (1,168,357) 520,460 (1,665,482)
============== ============== ============== =============
BASIC AND DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item $ 0.03 (0.34) 0.04 (0.48)
Extraordinary item, net of taxes 0.07 - 0.08 -
-------------- -------------- -------------- -------------
Net income (loss) $ 0.10 (0.34) 0.12 (0.48)
============== ============== ============== =============
Shares used in calculating basic earnings
per share 4,758,004 3,450,000 4,406,841 3,450,000
============== ============== ============== =============
Shares used in calculating diluted earnings
per share 4,820,235 3,450,000 4,457,957 3,450,000
============== ============== ============== =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 499,160 (1,168,357) $ 520,460 (1,665,482)
Other comprehensive income (loss) (201,499) 48,000 (39,824) 58,420
Income tax effect - - - -
--------------- -------------- --------------- -------------
Comprehensive income (loss) $ 297,661 (1,120,357) $ 480,636 (1,607,062)
=============== ============== =============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended June 30, Six months ended June 30,
-------------------------------- ---------------------------
1998 1997 1998 1997
-------------- -------------- ------------- ------------
Net cash provided (used) by operating activities $ 484,014 (120,731) 399,725 (1,122,006)
Cash flows from investing activities:
Purchase of property, plant and equipment (1,489,161) (3,647,039) (2,291,665) (3,832,660)
Acquisition of business, net of cash acquired - (203,484) (3,129,774) (198,059)
-------------- -------------- ------------- ------------
Net cash used in investing activities (1,489,161) (3,850,523) (5,421,439) (4,030,719)
-------------- -------------- ------------- ------------
Cash flows from financing activities:
Borrowings (repayments) on notes payable, net (36,491) 1,664,388 (298,491) 3,628,142
Borrowings on long-term debt, net 636,921 815,237 4,734,130 815,237
Capital contributions - 2,005,122 - 2,211,045
-------------- -------------- ------------- ------------
Net cash provided by financing activities 600,430 4,484,747 4,435,639 6,654,424
-------------- -------------- ------------- ------------
Increase (decrease) in cash and equivalents (404,717) 513,493 (586,075) 1,501,699
Cash and equivalents at beginning of period 544,932 1,293,212 726,290 305,006
-------------- -------------- ------------- ------------
Cash and equivalents at end of period $ 140,215 1,806,705 140,215 1,806,705
============== ============== ============= ============
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 313,840 32,879 409,821 126,247
============== ============== ============= ============
Non-cash financing activities:
Fair value of common stock issued for services $ - - 504,000 -
============== ============== ============= ============
Fair value of common stock issued in connection
with long term debt $ - - 600,000 -
============== ============== ============= ============
Fair value of common stock issued for acquisiton $ - - 1,500,000 -
============== ============== ============= ============
Fair value of common stock issued in connection
with notes payable $ - - 59,062 -
============== ============== ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and instructions to Form 10-QSB. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on 10-KSB (File No. 000-23085) for the fiscal year ended December 31,
1997 and in the Company's Registration Statement on Form SB-2 (File No. 333-
29077).
The financial information presented in this Quarterly Report on Form 10-QSB
reflects all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. The results for the interim periods are not
necessarily indicative of results to be expected for the full year. The Company
has experienced significant quarterly fluctuations in operating results and it
expects that these fluctuations in sales, expenses and net income or loss will
continue.
2. ACQUISITIONS
On March 27, 1997, the Company established a new entity, Sierra Materials,
LLC (Sierra). Sierra is 80% owned by the Company and 20% owned by two
individuals. Sierra was established to acquire Cape Composites, Inc. (d/b/a
Sierra Materials). Sierra Materials is a supplier of graphite and other advanced
composite materials for use in the sports and recreational markets. The
acquisition of Sierra Materials coincided with the formation of Sierra on March
27, 1997. The transaction was accounted for by the purchase method with the
assumption of approximately $650,000 in outstanding debt. The operations of
Sierra have been included in the Company's consolidated financial statements
from March 27, 1997 forward. No cash was paid and no goodwill was recorded as a
result of this acquisition.
On April 1, 1997, the Company acquired all of the outstanding stock of
Pentiumatics Sdn. Bhd. (Pentiumatics), a Southeast Asian entity whose principal
operations have not commenced. The acquisition has been accounted for by the
purchase method. Consideration for Pentiumatics was approximately $200,000 cash
and no goodwill was recorded. Subsequent to June 30, 1998, the Company exchanged
its ownership interest for an interest in another company (see Note 7).
On March 19, 1998, the Company acquired all of the outstanding stock of
Unifiber Corporation (Unifiber), a supplier of graphite golf shafts to premium
original equipment manufacturers, for a purchase price of $3,000,000 in cash and
521,739 shares of the Company's Common Stock recorded at fair value of
$1,500,000. The acquisition was accounted for by the purchase method. Under the
terms of the agreement, the previous owner has the option to sell the shares
back to the Company for a period of two years after the closing at a price of
$5.17 per share. In addition, the Company has agreed to pay the previous owner
$100,000 per year for the next five years for a not to compete agreement in
which the previous owner will not own, manage, operate, be employed at or be
connected to in any manner any business of the type conducted by Unifiber. The
Agreement provides for an earnout in the event Unifiber's financial performance
for the calendar year ending December 31, 1998, results in net income before
income taxes equal to $1,750,000. The earnout ranges from $500,000 to $2,000,000
based upon net income before income taxes of $1,750,000 to $2,500,000. Based on
historical operating results and forecasted operating results, management does
not expect to pay any amount of the earnout. As a result of the acquisition,
total assets recorded were $13,879,967 of which $10,998,427 was goodwill.
Liabilities assumed were $9,082,446. Goodwill is being amortized on a straight-
line basis over the expected benefit period.
5
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma financial information for the three and
six months ended June 30, 1998 and 1997 presents the combined results of
operations of the Company, Sierra Materials and Unifiber as if the acquisitions
had occurred as of the beginning of the periods indicated after giving effect to
certain adjustments. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the Company,
Sierra Materials and Unifiber constituted a single entity during such periods.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1998
-------------------------------------------- ---------------------------------------------
1998 1997 1998 1997
------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $12,883,458 13,350,416 24,637,021 24,947,282
Net income (loss) $ 499,160 (1,531,834) (1,580,087) (2,633,327)
Net income (loss) per diluted
share $ .10 (.37) (.35) (.64)
</TABLE>
3. LIQUIDITY
The Company had net income of $520,460 and incurred a loss of $1,665,482
for the six months ending June 30, 1998 and 1997, respectively. As of June 30,
1998, the Company had outstanding balances on notes payable and long-term debt
as listed below. For discussion, see "Liquidity and Capital Resources" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------
<S> <C>
Note payable under line of credit, variable interest rate of 1.5 %
over the bank's prime rate (9.0% at June 30, 1998), interest
payable quarterly $ 832,000
Note payable under line of credit, variable interest rate equal to the
lender's prime rate plus 1.5% (10.0% at June 30, 1998), interest payable
monthly 845,000
Note payable under line of credit and term loan, variable interest rate of
1.5 % over the lender's prime rate (10.0% at June 30, 1998), interest
payable monthly 1,626,745
Note payable under line of credit and term loan, variable interest rate of
1.5% over the lender's prime rate (10.0% at June 30, 1998), interest
payable monthly 2,205,818
Note payable secured by accounts receivable, variable interest rate of 1.75%
over the lender's base rate (9.25% at June 30, 1998), interest payable
monthly 190,000
Unsecured note payable, interest rate of 12%, interest payable quarterly in
arrears 6,000,000
Unsecured related party note payable to minority stockholder at an interest
rate of 5% 573,848
Note payable to individual with interest payable as
10,000 shares of the Company's common stock 200,000
Capital leases 292,982
------------------
$ $12,766,393
==================
</TABLE>
6
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. LIQUIDITY (CONTINUED)
In the fourth quarter of 1997, the Company commenced a $3,000,000 capital
expansion project to be financed in part by the $2,100,000 capital equipment
term loan. The capital expansion project is scheduled to be completed in the
third quarter of 1998.
At June 30, 1998, $90,000 in cash was restricted and held as collateral
against a standby letter of credit to secure an operating lease obligation.
Management believes that the combination of cash on hand of $140,215,
restricted cash on hand of $90,000, projected cash flows from operations,
extending the due dates of current debt agreements and entering into new debt
agreements will provide sufficient cash to meet its obligations as they come
due. However, there can be no assurance that operations will generate positive
cash flows, that the debt agreements will be extended or that new debt
agreements will provide sufficient cash to meet its obligations as they come
due.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Raw materials $1,005,344 845,469
Work in process 1,173,641 1,034,927
Finished goods 2,421,790 2,414,362
-------------------- --------------------
4,600,775 4,294,758
Valuation allowance (796,594) (712,564)
-------------------- --------------------
$3,804,181 3,582,194
==================== ====================
</TABLE>
5. REPORTING COMPREHENSIVE INCOME
The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
as of January 1, 1998. SFAS No. 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The cumulative translation adjustment is the
Company's only component of comprehensive income.
6. RELINQUISHMENT OF ASSETS
On June 15, 1998, the Company relinquished the rights to certain intangible
assets to the previous owner and will not distribute its winter sport products
under the ICE*USA trade name. The Company has removed all of the assets and
liabilities of ICE*USA from its consolidated financial statements which resulted
in a net extraordinary gain of $346,581 for the three and six months ended June
30, 1998.
7
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUBSEQUENT EVENT
On July 23, 1998, the Company exchanged its 77% ownership interest in
Pentiumatics Sdn. Bhd for a 28% ownership interest in the outstanding common
stock of Unggul Galakan Sdn. Bhd (Unggul). Unggul wholly owns Action Wear Sdn.
Bhd (Action Wear), a southeast Asian manufacturer of athletic apparel. For the
twelve months ended December 31, 1997 (unaudited), Action Wear reported net
income of $819,000 on revenues of $8,500,000. As of December 31, 1997
(unaudited), Action Wear had net assets of $3,042,000.
8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Coyote designs, engineers, manufactures, markets and distributes brand name
sports equipment and recreational products worldwide. Through an aggressive
acquisition strategy, Coyote Sports Inc. wholly owns or has a controlling
interest in five operating entities worldwide; Apollo Sports Technologies,
Limited (Apollo), Reynolds Cycle Technology, Limited (Reynolds), Apollo Golf
Inc. (Apollo U.S.), Sierra Materials LLC (Sierra Materials), and Unifiber
Corporation (Unifiber). The Company's products include steel and graphite golf
shafts, premium grade cycle tubing and javelins. The Company also produces
graphite and other advanced composite materials for use in the production of
golf shafts, fishing poles, ski poles, hockey sticks and other sporting goods
products.
The Company's business objective is to become a leading provider of sports
equipment and recreational products. Coyote management intends to build a
consolidated group of companies engaged in related and complementary businesses
that work together to compete effectively in the sports equipment and recreation
products industry. The Company intends to continue to purchase companies within
the sports equipment and recreation products industry with experienced
management, that have well-established brand names and product lines, and strong
engineering and design capabilities. Management intends to strengthen and foster
the growth of these companies through the introduction of additional
manufacturing capabilities and techniques, expanded sales and marketing efforts
and vertical integration of company-wide manufacturing and distribution
capabilities.
HIGHLIGHTS
The Company reported record revenue and profits in the second quarter.
. Revenues grew to $12,883,000 for the three months ended June 30, 1998,
a 75% increase from $7,374,000 for the three months ended June 30,
1997. Revenues grew to $20,878,000 for the six months ended June 30,
1998, a 64% increase from $12,750,000 million for the six months
ended June 30, 1997.
. The Company recorded net income of $499,000, which included an
extraordinary gain of $347,000, compared to a net loss of $1,168,000
for the three months ended June 30, 1998 and 1997, respectively. The
Company recorded net income of $520,000, which included an
extraordinary gain of $347,000, compared to a net loss of $1,665,000
for the six months ended June 30, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
As discussed in greater detail below, the acquisition of Unifiber on March
19, 1998 has resulted in material increases in the Company's net sales, cost of
goods sold and operating expenses for the three and six months ended June 30,
1998 in comparison to the three and six months ended June 30, 1997. The
acquisition of Sierra Materials on March 27, 1997, has resulted in material
increases in the Company's net sales, cost of goods sold and operating expenses
for the six months ended June 30, 1998 in comparison to the same period in 1997.
The Company's results of operations could be materially adversely affected
by the traditional volatility in consumer demand for specific golf club brands.
The Company also believes that while it will often be impossible to predict such
shifts in advance, the Company's broad range of customers should reduce the
extent of the impact on the Company's financial results. Traditionally, the
Company has focused its attention on the original equipment manufacturer (OEM)
market. The Company plans to continue devoting a majority of its research and
development efforts on developing innovations for the OEM market which today
represents a large portion of the Company's sales. The Company believes that its
strong presence in the OEM market has helped to position it as a leader in the
design, development and manufacture of golf shafts. The Company believes that
its strong historical position with respect to OEM manufacturers gives it
credibility in the retail after market as well.
9
<PAGE>
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of net sales. The 1997 data
reflects the consolidated results of Apollo, Reynolds, Apollo U.S., ICE*USA
(ICE) and general corporate expenses from January 1, 1997 through June 30, 1997
and includes Sierra Materials and Pentiumatics from April 1, 1997 through June
30, 1997 as these entities were acquired as of April 1, 1997. The 1998 data
reflects the consolidated results of all entities except for Unifiber from
January 1, 1998 through June 30, 1998. Unifiber was acquired on March 19, 1998
and is included in the Company's results from April 1, 1998 through June 30,
1998, since the results from the period from March 20, 1998 to March 31, 1998
are not significant.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of goods sold (76) (77) (77) (77)
Gross profit 24 23 23 23
Operating expenses (21) (32) (21) (32)
Operating income (loss) 3 (9) 2 (9)
Interest expense (2) (1) (2) (2)
Debt financing costs (1) (7) - (4)
Other 1 - - -
Income (loss) before income taxes, minority
interests and extraordinary item 1 (17) - (15)
Income tax benefit - 1 - 2
Minority interests - - 1 -
Net income (loss) before extraordinary item 1 (16) 1 (13)
Extraordinary item, net of taxes 3 - 2 -
Net income (loss) 4 (16) 2 (13)
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales for the three months ended June 30, 1998 increased 75% to
$12,883,458 as compared to $7,374,250 for the comparable period of 1997. The
increase in net sales is primarily attributable to the acquisition of Unifiber.
Gross profit for the three months ended June 30, 1998 and 1997 was 24% and 23%
of net sales, respectively. Operating expenses for the three months ended June
30, 1998 were 21% of net sales as compared to 32% for the comparable period of
1997, as a result of an increase in sales relative to operating expenses.
The Company had operating income of $385,805 for the three months ended
June 30, 1998, as compared to an operating loss of $607,818 for the comparable
period in 1997. The turnaround in operating income is attributable to an
increase in sales and a tighter control on operating expenses.
Interest expense, net of interest income was $306,631 for the three months
ended June 30, 1998, as compared to $106,249 for the comparable period of 1997.
The increase in interest expense is attributable to the $6,000,000 note payable
entered into on March 19, 1998 to acquire Unifiber.
Minority interests in subsidiaries' losses were $80,374 and $41,710 for the
three months ended June 30, 1998 and 1997, respectively. Minority interests in
subsidiaries' losses are a result of the net effect on profits and losses of
Sierra Materials, ICE (prior to the relinquishment of ICE's assets) and
Pentiumatics and is based on the minorities' percentage ownership in Sierra
Materials (20%), ICE (prior to the relinquishment of ICE's assets) (20%) and
Pentiumatics (23%).
10
<PAGE>
Net income before an extraordinary gain of $346,581 for the three months ended
June 30, 1998 was $152,579 or $0.03 earnings per diluted share, as compared to a
net loss of $1,168,357 or $0.34 loss per share for the comparable period of
1997. Management attributes the turnaround to profitability primarily due to an
increase in golf shaft sales, to the acqusition of Unifiber and to lower
operating costs at Apollo.
As a result of the financial problems facing potential customers of
Pentiumatics due to the financial problems facing the Asian economy, the Company
exchanged its 77% ownership interest in Pentiumatics for a 28% ownership
interest in the outstanding common stock of Unggul Galakan Sdn. Bhd (Unggul).
Unggul owns 100% of Action Wear Sdn. Bhd (Action Wear), a southeast Asian
manufacturer of athletic apparel.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales for the six months ended June 30, 1998 increased 64% to $20,877,737
as compared to $12,750,168 for the comparable period of 1997. The increase in
net sales is primarily attributable to an increase in golf shaft sales and the
acquisition of Unifiber. Gross profit for the six months ended June 30, 1998
and 1997 was 23% of net sales. Operating expenses for the six months ended June
30, 1998 were 21% of net sales as compared to 32% for the comparable period of
1997, as a result of an increase in sales relative to operating expenses.
The Company had operating income of $462,552 for the six months ended June 30,
1998, as compared to an operating loss of $1,105,907 for the comparable period
in 1997. The turnaround in operating income is attributable to an increase in
sales and a tight control on operating expenses.
Interest expense, net of interest income was $399,849 for the six months ended
June 30, 1998 as compared to $199,617 for the comparable period of 1997. The
increase in interest expense is attributable to the $6,000,000 note payable
entered into on March 19, 1998 to acquire Unifiber.
Minority interests in subsidiaries' losses were $136,145 and $48,042 for the
six months ended June 30, 1998 and 1997, respectively. Minority interests in
subsidiaries' losses are a result of the net effect on profits and losses of
Sierra Materials, ICE (prior to the relinquishment of ICE's assets) and
Pentiumatics and is based on the minorities' percentage ownership in Sierra
Materials (20%), ICE (prior to the relinquishment of ICE's assets) (20%) and
Pentiumatics (23%).
Net income before an extraordinary gain of $346,581 for the six months ended
June 30, 1998 was $173,879 or $0.04 earnings per diluted share, as compared to a
net loss of $1,665,482 or $0.48 loss per share for the comparable period of
1997. Management attributes the turnaround to profitability primarily due to an
increase in golf shaft sales, to lower operating costs at Apollo, and to the
acquisition of Unifiber.
In order to remain profitable, the Company must continue to increase sales
while effectively managing costs. Profitability depends to a large extent on
management's ability to increase sales, reduce selling, general, and
administrative costs, more efficiently utilize existing plant capacities at
Apollo, Unifiber and Reynolds, expand manufacturing capacity at Sierra Materials
and by acquiring companies whose businesses would be complementary to, and
compatible with, the existing business of the Company's subsidiaries. There can
be no assurance that the Company will be able to achieve these goals or remain
profitable in the future.
SEASONALITY
As a result of the Company's present operations being primarily dependent upon
Apollo and Unifiber sales, management expects for the foreseeable future that
the Company's business will remain seasonal. Because the Company's customers
have historically built inventory in anticipation of purchases by golfers in the
spring and summer, the principal selling season for golf shafts, the Company's
primary product, the Company's operating results have been affected by seasonal
demand for golf clubs, which has generally resulted in higher sales in the
spring and summer months. The success of certain customers' products, patterns
of product introduction, and customer acceptance thereof, coupled with a
generally increasing overall demand for golf shafts, may mitigate the impact of
this seasonality
11
<PAGE>
THE YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millenium (year 2000) approaches. The Company
is utilizing both internal and external resources to identify, correct or
reprogram, and test the systems for year 2000 readiness. However, based on the
current systems in place which are predominantly readily available commercial
packages, management believes that the reprogramming efforts will be complete by
December 31, 1998, allowing adequate time for testing. Management has not yet
estimated the expected year 2000 readiness expense and related potential effect
on the Company's operations or the Company's suppliers and customers.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 the Company had an accumulated deficit of $4,972,707
compared to an accumulated deficit of $5,493,167 at December 31, 1997. Net
income for the six months ending June 30, 1998 was $520,460, compared to a net
loss of $1,665,482 for the comparable period in 1997.
As of June 30, 1998, the Company had eight outstanding notes payable. The
notes are broken out by operating entity and discussed below.
Parent
On December 18, 1997, the Company entered into a $400,000 unsecured note
payable with an individual. As of June 30, 1998, $200,000 was outstanding under
this note payable. The balance is due September 30, 1998.
On March 19, 1998, the Company entered into an unsecured Loan and Security
Agreement (Agreement) with a Lender for $6,000,000, with an interest rate of 12%
payable once a quarter, with principal due September 19, 1999. The proceeds were
primarily used in connection with the acquisition of Unifiber Corporation on
March 19, 1998. The Agreement is secured by the Company's co-founders' (the
Company's CEO and the President) shares of Common Stock. Under the terms of the
agreement, the Company issued 163,265 shares of the Company's Common Stock in
connection with the Agreement.
In the event that on March 19, 1999 any principal of the Loan remains unpaid
and the aggregate value of the initial consideration, based on the per-share
closing price of the Common Stock on March 19, 1999 on the NASDAQ Market
(Aggregate First Anniversary Reset Value) is less than $1,000,000 then the
Company shall deliver, at the Company's option, either an amount in cash or
Common Stock equal to $1,000,000 less the Aggregate First Anniversary Reset
Value
In the event that on September 19, 1999, the aggregate value of the initial
consideration, based on the per-share closing price of the Common Stock on
September 19, 1999 on the NASDAQ Market ( Aggregate Second Anniversary Reset
Value) is less than $1,000,000 then the Company shall deliver, at the Company's
option, either an amount in cash or Common Stock equal to $1,000,000 less the
Aggregate Second Anniversary Reset Value and any consideration received in
connection with the First Anniversary Reset Value. In the event that the Loan
is prepaid in full prior to the Maturity Date and the aggregate value of the
initial consideration, based on the per-share closing price of the Common Stock
on the NASDAQ Market (Aggregate Prepayment Date Reset Value) on the date of
prepayment is less than $1,000,000 then the Company shall deliver, at the
Company's option, either an amount in cash or Common Stock equal to $1,000,000
less the Aggregate Prepayment Date Reset Value. As of June 30, 1998, $6,000,000
was outstanding under this note payable
Apollo
One note payable provides for borrowings under a foreign line of credit up to
750,000 PS ($1,234,000 U.S.) with an interest rate of 1.5% over the bank's prime
rate. Amounts outstanding on the note are secured by substantially all Apollo's
assets. As of June 30, 1998, $832,000 was outstanding under this note payable.
In March 1997, the Company entered into an agreement with a lender to advance
loans secured by trade receivables. As of June 30, 1998, $190,000 was
outstanding under this agreement. The Agreement continues indefinitely until
notice to terminate is given by either party.
12
<PAGE>
Apollo U.S.
In January 1998, the Company entered into a Loan and Security Agreement with a
lender to advance loans up to $2,300,000 at an interest rate of prime plus 1.5
percent secured by substantially all assets of Apollo U.S. Advances are
guaranteed by Sierra Materials and the parent company. Advances are calculated
on a daily basis and are based on defined eligible accounts receivable and
inventories. Under the terms of the agreement, the borrowings may be immediately
callable by the lender. The term of the agreement is for two years. At June 30,
1998, the outstanding balance on the loan was $845,000. The Company may not
declare or pay dividends without the written consent of the lender.
Unifiber
In March 1998, the Company entered into a Loan and Security Agreement with a
lender. The agreement provides advance loans up to $2,300,000, a term loan of
$1,100,000 and a capital equipment term loan not to exceed $200,000, at an
interest rate of prime plus 1.5 percent. Borrowings are secured by substantially
all of the assets of Unifiber and are guaranteed by Apollo U.S., Sierra
Materials and the parent company. Advances are calculated on a daily basis and
are based on defined eligible accounts receivable and inventories. Borrowings on
the capital equipment term loan can not exceed a defined percentage of invoice
prices for selected capital equipment. Under the terms of the agreement, the
borrowings may be immediately callable by the lender. The formal term of the
agreement is for two years. As of June 30, 1998, the total outstanding balance
under the Agreement was $2,205,818. The Company may not declare or pay dividends
without the written consent of the lender.
Sierra Materials
In January 1998, the Company entered into a Loan and Security Agreement with a
lender. The agreement provides advance loans up to $2,500,000, a term loan of
$169,365 and a capital equipment term loan not to exceed $2,100,000, at an
interest rate of prime plus 1.5 percent. Borrowings are secured by substantially
all of the assets of Sierra Materials and are guaranteed by Apollo U.S., and the
parent company. Advances are calculated on a daily basis and are based on
defined eligible accounts receivable and inventories. Borrowings on the capital
equipment term loan can not exceed a defined percentage of invoice prices for
selected capital equipment. Under the terms of the agreement, the borrowings may
be immediately callable by the lender. The formal term of the agreement is for
two years. As of June 30, 1998, the total outstanding balance under the
Agreement was $1,626,745. The Company may not declare or pay dividends without
the written consent of the lender.
In the fourth quarter of 1997, the Company commenced a $3,000,000 capital
expansion project to be financed in part by the $2,100,000 capital equipment
term loan. The capital expansion project is scheduled to be completed in the
third quarter of 1998.
Pentiumatics
The minority stockholders of Pentiumatics have made loans to the Company of
2,390,032 Malaysian Ringgits ($573,848) at June 30, 1998. The notes bear
interest at 5 percent with principal and interest due July 25, 2002.
On July 23, 1998, the Company exchanged its 77% ownership interest in
Pentiumatics Sdn. Bhd for a 28% ownership interest in the outstanding common
stock of Unggul Galakan Sdn. Bhd (Unggul). Unggul owns 100% of Action Wear Sdn.
Bhd (Action Wear), a southeast Asian manufacturer of athletic apparel. As a
result of this transaction, the debt to the minority stockholder no longer
exists on the Company's balance sheet at July 23, 1998.
At June 30, 1998, $90,000 in cash was restricted and held as collateral
against a standby letter of credit to secure an operating lease obligation.
Management believes that the combination of cash on hand of $140,215,
restricted cash on hand of $90,000, projected cash flows from operations,
extending the due dates of current debt agreements and entering into new debt
agreements will provide sufficient cash to meet its obligations as they come
due. However, there can be no assurance that operations will generate positive
cash flows, that the debt agreements will be extended or that new debt
agreements will provide sufficient cash to meet its obligations as they come
due.
13
<PAGE>
Net cash provided by operating activities was $399,725 for the six months
ending June 30, 1998 primarily due to an increase in operating profit and a
decrease in restricted cash.
Net cash used in investing activities of $5,421,439 for the six months ending
June 30, 1998 was a result of the acquisition of Unifiber and the purchase of
machinery and equipment by Sierra Materials.
Net cash provided by financing activities was $4,435,639 for the six months
ending June 30, 1998 primarily due to the borrowings on long-term debt to
acquire Unifiber.
The Company continues to consider the acquisition of additional businesses
complementary to the Company's business. The Company would require additional
debt or equity financing, if it were to engage in a material acquisition in the
future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND ANALYST REPORTS
Certain written and oral statements made or incorporated by reference from
time to time by Coyote Sports, Inc., its subsidiaries, its representatives in
this report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, or otherwise, are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). Forward-looking statements include, without limitation, any statement
that may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties which may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by Coyote Sports, Inc. with the SEC, including Forms 8-
K, 10-QSB, and 10-KSB, and include, among others, the following: adverse
international, national and local general economic and market conditions,
general decreases in consumer spending for sports equipment and recreational
products, intense competition, including entry of new competitors, increased or
adverse governmental regulation, inadequate capital, unexpected costs, lower
revenues and net income than forecasted, loss of significant customers, price
increases for raw materials, inability to raise prices, the risk of litigation
and administrative proceedings involving the Company and its employees, higher
than anticipated labor costs, labor disputes, the possible fluctuation and
volatility of the Company's operating results and financial condition, adverse
publicity and news coverage, adverse currency exchange rates, inability to carry
out marketing and sales plans, loss of key executives, changes in interest
rates, inflationary factors, and other factors referenced or incorporated by
reference in this report and other reports. The risks included here are not
exhaustive. Other sections of this report may include additional factors which
could adversely impact Coyote Sports, Inc.'s business and financial performance.
Moreover, Coyote Sports, Inc. operates in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on Coyote Sports, Inc.'s business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. Given
these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
14
<PAGE>
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
On July 23, 1997, the Company's subsidiary, Unifiber Corporation, was sued by
Aero Industrial Ltd., in the Superior Court for the State of California, County
of San Diego. The complaint alleges that Unifiber breached the terms of it
lease at 8929 Aero Drive, San Diego, California by vacating the premises on or
about July 2, 1997. In addition, the complaint alleges that Unifiber has failed
to pay monthly rent and additional rent for the lease. The complaint alleged
damages in excess of $2,000,000. On June 28, 1998, the Company entered into a
stipulation for settlement under the Superior Court for the State of California,
County of San Diego, and agreed to pay Aero Industrial the sum of $615,000 as
payment in full of all claims arising from the breach of Unifiber's lease.
ITEM 6. EXHIBITS.
(a) Exhibits
11.1 Computation of per share income (loss)
27.1 Financial Data Schedule
15
<PAGE>
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.
Dated: August 5, 1998 COYOTE SPORTS, INC.
By: /s/ =John Paul McNeill
-----------------------
John Paul McNeill
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
COMPUTATION OF PER SHARE INCOME (LOSS)
(unaudited)
<TABLE>
<CAPTION>
Exhibit 11.1
<S> <C> <C>
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ----------------
Net income (loss) $ 499,160 (1,168,357) $ 520,460 (1,665,482)
--------------- -------------- --------------- ----------------
Common shares outstanding at beginning
of period 4,758,004 3,450,000 3,855,000 3,450,000
Net effect of shares issued during the period - - 551,841 -
--------------- -------------- --------------- ----------------
Shares used in computing basic income (loss)
per share 4,758,004 3,450,000 4,406,841 3,450,000
--------------- -------------- --------------- ----------------
Net effect of dilutive stock options 62,231 - 51,116 -
--------------- -------------- --------------- ----------------
Shares used in computing diluted income (loss)
per share 4,820,235 3,450,000 4,457,957 3,450,000
=============== ============== =============== ================
Basis income (loss) per share $ 0.10 (0.34) $ 0.12 (0.48)
=============== ============== =============== ================
Diluted income (loss) per share $ 0.10 (0.34) $ 0.12 (0.48)
=============== ============== =============== ================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 230,215 230,215
<SECURITIES> 0 0
<RECEIVABLES> 6,100,930 6,100,930
<ALLOWANCES> 775,391 775,391
<INVENTORY> 3,804,181 3,804,181
<CURRENT-ASSETS> 10,264,897 10,264,897
<PP&E> 11,868,331 11,868,331
<DEPRECIATION> 891,698 891,698
<TOTAL-ASSETS> 33,090,889 33,090,889
<CURRENT-LIABILITIES> 13,128,701 13,128,701
<BONDS> 0 0
0 0
0 0
<COMMON> 4,758 4,758
<OTHER-SE> 9,851,574 9,851,574
<TOTAL-LIABILITY-AND-EQUITY> 33,090,889 33,090,889
<SALES> 12,883,458 20,877,737
<TOTAL-REVENUES> 12,883,458 20,877,737
<CGS> 9,855,220 16,039,970
<TOTAL-COSTS> 9,855,220 16,039,970
<OTHER-EXPENSES> 2,649,402 4,387,184
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 306,631 399,849
<INCOME-PRETAX> 72,205 50,734
<INCOME-TAX> 0 13,000
<INCOME-CONTINUING> 152,579 173,879
<DISCONTINUED> 0 0
<EXTRAORDINARY> 346,581 346,581
<CHANGES> 0 0
<NET-INCOME> 499,160 520,460
<EPS-PRIMARY> .10 .12
<EPS-DILUTED> .10 .12
</TABLE>
