<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 March 31, 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 May 10, 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>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997.............................................. 1
Condensed Consolidated Statements of Operations (unaudited) for
the three months ended March 31, 1998 and 1997.................................. 2
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the three months ended March 31, 1998 and 1997.................. 3
Condensed Consolidated Statements of Cash Flows (unaudited) for
the three months ended March 31, 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........................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 13
Item 2. Changes in Securities and Use of Proceeds........................................ 13
Item 3. Defaults Upon Senior Securities.................................................. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.............................. 14
Item 5. Other Information................................................................ Not Applicable
Item 6. Exhibits and Reports on Form 8-K................................................. 14
Signatures................................................................................ 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I - Financial Statements
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited) (Note)
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 544,932 726,290
Restricted cash 90,000 702,814
Trade receivables, net 5,508,269 3,778,483
Inventories, net 3,812,133 3,582,194
Tax refund receivable 231,000 227,000
Prepaid expenses and other current assets 481,670 212,130
----------------- ------------------
Total current assets 10,668,004 9,228,911
Property, plant and equipment, net 9,974,683 7,546,284
Goodwill, net 11,772,802 -
Other assets, net 1,127,510 90,058
----------------- ------------------
$ 33,542,999 16,865,253
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 2,849,757 2,705,928
Current portion of long term debt 880,101 452,237
Accounts payable 5,076,829 3,204,234
Accrued expenses 5,203,433 1,413,362
Current portion of obligation payable under purchase agreement 87,000 87,000
----------------- ------------------
Total current liabilities 14,097,120 7,862,761
----------------- ------------------
Long-term debt, net of current portion 7,779,562 202,644
Obligation payable under purchase agreement, net of current portion 728,000 728,000
Related party notes payable 656,543 600,340
Deferred tax liability 382,000 362,000
----------------- ------------------
Total liabilities 23,643,225 9,755,745
Minority interests in net assets of subsidiaries 341,103 396,874
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
March 31, 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 (5,471,867) (5,493,167)
Accumulated comprehensive income (loss) (301,021) (462,696)
----------------- ------------------
Total stockholders' equity 9,558,671 6,712,634
Commitments and contingencies
----------------- ------------------
$ 33,542,999 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.
1
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COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
Net sales $ 7,994,279 5,375,918
Cost of goods sold (6,184,750) (4,143,220)
---------------- --------------
Gross profit 1,809,529 1,232,698
Operating expenses (1,732,782) (1,730,787)
---------------- --------------
Operating income (loss) 76,747 (498,089)
Other expense:
Interest expense, net (93,218) (93,368)
Loss on forward exchange contracts, net (5,000) (23,000)
---------------- --------------
Loss before income taxes and minority interests (21,471) (614,457)
Income tax (expense) benefit (13,000) 111,000
Minority interests in subsidiaries' losses 55,771 6,332
---------------- --------------
Net income (loss) $ 21,300 (497,125)
================ ==============
Basic income (loss) per share $ 0.01 (0.14)
================ ==============
Diluted income (loss) per share $ 0.01 (0.14)
================ ==============
Shares used in calculating basic income (loss) per share amounts 4,055,678 3,450,000
================ ==============
Shares used in calculating diluted income (loss) per share amounts 4,094,529 3,450,000
================ ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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COYOTE SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---------------- -------------------
<S> <C> <C>
Net income (loss) $ 21,300 (497,125)
Other comprehensive income 161,675 10,420
Income tax effect - -
---------------- -------------------
Comprehensive income (loss) $ 182,975 (486,705)
================ ===================
</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>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Net cash used in operating activities (985,731) (1,001,275)
Cash flows from investing activities:
Purchase of property, plant and equipment (1,464,124) (185,621)
Acquisition of business, net of cash acquired (3,129,774) 5,425
------------- --------------
Net cash used in investing activities (4,593,898) (180,196)
------------- --------------
Cash flows from financing activities:
Payment on borrowings from stockholder 56,202 -
Notes payable to banks (262,000) 1,963,754
Borrowings on long term debt 4,041,007 -
Capital contributions 1,563,062 205,923
------------- --------------
Net cash provided by financing activities 5,398,271 2,169,677
------------- --------------
Increase (decrease) in cash and equivalents (181,358) 988,206
Cash and equivalents at beginning of period 726,290 305,006
------------- --------------
Cash and equivalents at end of period $ 544,932 1,293,212
============= ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 95,981 93,368
============= ==============
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.
4
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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 April 1, 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 principal operations of
Pentiumatics will be the extrusion of various metals which will be sold to
third parties, primarily for the manufacture of sporting goods. The
acquisition has been accounted for by the purchase method. Consideration for
Pentiumatics was approximately $200,000 cash and no goodwill was recorded.
The following unaudited pro forma financial information for the three months
ended March 31, 1997 presents the combined results of operations of the
Company, Sierra Materials and Pentiumatics as if the acquisitions had
occurred as of the beginning of 1997 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 Pentiumatics constituted a single entity during such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------
<S> <C>
Net sales $ 6,308,866
Net loss $ (546,835)
Net loss per share $ (.16)
</TABLE>
5
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
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 $14,826,342 of which $11,772,802 was goodwill. Liabilities
assumed were $10,028,821. Goodwill is being amortized on a straight-line
basis over the expected benefit period. The consolidated results will include
Unifiber's results of operations beginning April 1, 1998.
3. LIQUIDITY
The Company had net income of $21,300 and incurred a loss of $497,125 for the
three months ending March 31, 1998 and 1997, respectively. As of March 31,
1998, the Company had outstanding balances on eight notes payable. For
discussion, see "Liquidity and Capital Resources" in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Note payable under line of credit, variable interest rate
of 1.5 % over the bank's prime rate (8.5% at March 31,
1998), interest payable quarterly $895,000
Note payable under line of credit, variable interest rate
equal to the lender's prime rate plus 1.5% (10.0% at March
31, 1998), interest payable monthly 850,000
Note payable to individual with interest payable as 10,000
shares of the Company's common stock 200,000
Note payable under line of credit and term loan, variable
interest rate of 1.5 % over the lender's prime rate (10.0%
at March 31, 1998), interest payable monthly 974,579
Note payable under line of credit and term loan, variable
interest rate of 1.5% over the lender's prime rate (10.0%
at March 31, 1998), interest payable monthly 2,004,757
Note payable secured by accounts receivable, variable interest
rate of 1.75% over the lender's base rate (9.0% at March 31,
1998), interest payable monthly 261,000
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% 656,543
-----------
$11,841,879
===========
</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 $2,500,000 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 March 31, 1998, $90,000 in cash was restricted and held as collateral
against a standby letter of credit to secure an operating lease obligation.
As of March 31, 1998, under the agreement to acquire ICE*USA, the Company
had an obligation under purchase agreement of $815,000 and was in payment
default of approximately $100,000. The Company received written notice of
default on March 17, 1998 and had 30 days to cure its default. The Company
has not cured its default and may relinquish the rights to the intangible
assets to the previous owner and will not be able to distribute its winter
sports products under the ICE*USA trade name. For financial reporting
purposes, the Company has written down substantially all the assets of
ICE*USA, net of portion attributable to minority interest.
Management believes that the combination of cash on hand of $545,000,
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>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Raw materials $ 1,079,035 $ 845,469
Work in process 1,736,412 1,034,927
Finished goods 2,600,251 2,414,362
----------- ----------
5,415,698 4,294,758
Valuation allowance (1,603,565) (712,564)
----------- ----------
$ 3,812,133 $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," for the three months ended March 31, 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.
7
<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 seven operating entities worldwide; Apollo Sports Technologies,
Limited (Apollo), Reynolds Cycle Technology, Limited (Reynolds), Apollo Golf
Inc. (Apollo U.S.), Sierra Materials LLC (Sierra Materials), ICE*USA LLC (ICE),
Pentiumatics Sdn. Bhd. (Pentiumatics) and Unifiber Corporation (Unifiber). The
Company's products include steel and graphite golf shafts, premium grade cycle
tubing, composite ski poles 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 recorded its first profitable quarter, saw record revenues and
in keeping with the Company's aggressive acquisition strategy acquired Unifiber
Corporation, a premium graphite golf shaft manufacturer and distributor, on
March 19, 1998.
* Revenues grew to $8.0 million, a 49% increase from $5.4 million for the
three months ended March 31, 1998 and 1997, respectively.
* The Company recorded net income of $21,000 compared to a net loss of
$497,000 for the three months ended March 31, 1998 and 1997,
respectively.
The addition of Unifiber doubles the Company's market share in the golf
shaft business and positions the Company as one of the largest manufacturers of
golf shafts in the world.
RESULTS OF OPERATIONS
As discussed in greater detail below, 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 three months ended March 31,
1998 in comparison to the three months ended March 31, 1997. The results of
operations of Unifiber, acquired on March 19, 1998, will be included in the
Company's results of operations starting April 1, 1998, since the results for
the period from March 20, 1998 to March 31, 1998 are not significant.
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
8
<PAGE>
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.
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 and general corporate
expenses from January 1, 1997 through March 31, 1997 and does not include Sierra
Materials and Pentiumatics as these entities were acquired as of April 1, 1997.
The 1998 data reflects the consolidated results of all entities except for
Unifiber which was acquired on March 19, 1998 and will be included in the
Company's results from April 1, 1998, since the results from the period from
March 20, 1998 to March 31, 1998 are not significant.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------
1998 1997
---- ----
<S> <C> <C>
Net sales 100% 100%
Cost of goods sold (77) (77)
Gross profit 23 23
Operating expenses (22) (32)
Operating income (loss) 1 (9)
Interest expense (1) (2)
Loss on forward
exchange contracts, net - -
Debt financing costs - -
Loss before income taxes
and minority interests - (11)
Income tax benefit - 2
Minority interests - -
Net income (loss) - (9)
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net sales for the three months ended March 31, 1998 increased 49% to
$7,994,000 as compared to $5,376,000 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 Sierra Materials. Gross profit for the three
months ended March 31, 1998 was 22.6% of net sales as compared to 22.9% for the
comparable period of 1997. Operating expenses for the three months ended March
31, 1998 were 21.7% of net sales as compared to 32.2% for the comparable period
of 1997, as a result of an increase in sales relative to operating expenses.
The Company had operating income of $77,000 for the three months ended March
31, 1998, as compared to an operating loss of $498,000 for the comparable period
in 1997.
Interest expense, net of interest income remained the same at $93,000 for
the three months ended March 31, 1998 and 1997.
The Company enters into forward currency exchange contracts from time to
time to hedge its exposures to changes in currency exchange rates primarily
between the U.S. dollar and the U.K. pound sterling. The Company incurred a loss
of $5,000 on forward currency exchange contracts for the three months ended
March 31, 1998, compared to a loss of $23,000 in the comparable period in 1997.
Minority interests in subsidiaries' losses were $56,000 and $6,000 for the
three months ended March 31, 1998 and 1997, respectively. Minority interests in
subsidiaries' losses are a result of the net effect on profits and losses of
Sierra Materials, ICE and Pentiumatics and is based on the minorities'
percentage ownership in Sierra Materials (20%), ICE (20%) and Pentiumatics
(23%).
9
<PAGE>
Net income for the three months ended March 31, 1998 was $21,000 or $0.01 per
share, as compared to a net loss of $497,000 or $(0.14) per share for the
comparable period of 1997. Management attributes the turnaround to
profitability primarily due to an increase in golf shaft sales and due to lower
operating costs at Apollo.
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, commence manufacturing at Pentiumatics, 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.
As of March 31, 1998, under the agreement to acquire ICE*USA, the Company was
in payment default of approximately $100,000. The Company received written
notice of default on March 17, 1998 and had 30 days to cure its default. The
Company has not cured its default and may relinquish the rights to the
intangible assets to the previous owner and will not be able to distribute its
winter sports products under the ICE*USA trade name.
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
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 compliance. 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
definitively assessed the year 2000 compliance expense and related potential
effect on the Company's operations or the Company's suppliers and customers.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998 the Company had an accumulated deficit of $5,472,000
compared to an accumulated deficit of $5,493,000 at December 31, 1997. Net
income for the three months ending March 31, 1998 was $21,000, compared to a net
loss of $497,000 for the comparable periods in 1997.
As of March 31, 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 March 31, 1998, $200,000 was outstanding
under this note payable. The balance is due June 18, 1998.
10
<PAGE>
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 March 31, 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 March 31, 1998, $895,000 was outstanding under this note payable.
As of April 24, 1998, the credit facility is being reviewed for renewal. The
Company intends to renew this credit facility on similar terms to what the bank
historically provided. However, there can be no assurance that the bank will
renew this credit facility.
In March 1997, the Company entered into an agreement with a lender to advance
loans secured by trade receivables. As of March 31, 1998, $261,000 was
outstanding under this agreement. The Agreement continues indefinitely until
notice to terminate is given by either party.
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, ICE 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 March 31, 1998, the outstanding balance on the loan was $850,000.
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, ICE 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 March 31, 1998, the total
outstanding balance under the Agreement was $2,004,757. The Company may not
declare or pay dividends without the written consent of the lender.
11
<PAGE>
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., ICE 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 March 31, 1998, the total outstanding balance
under the Agreement was $974,579. 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 $2,500,000 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 ($656,443) at March 31, 1998. The notes bear
interest at 5 percent with principal and interest due July 25, 2002.
At March 31, 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 $545,000,
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.
Net cash used in operating activities was $986,000 for the three months
ending March 31, 1998 primarily due to an increase in trade receivables and
other assets.
Net cash used in investing activities of $4,594,000 for the three months
ending March 31, 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 $5,398,000 for the three months
ending March 31, 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
12
<PAGE>
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.
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 its
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 alleges
damages in excess of $2,000,000. The Company intends to vigorously defend
itself against the complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On December 18, 1997, the Company entered into a $400,000 unsecured note
payable with an individual. In connection with the note payable, the Company
issued 10,000 shares of common stock in February 1998 to the individual.
In February 1998, the Company issued 200,000 shares of common stock for
services to be rendered from January 1, 1998 to June 30, 1999.
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.
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
13
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 10, 1998, the Company received the written consent of 67.4% of its
stockholders to increase the shares available for option under the Company's
1997 Stock Option Plan by 500,000 shares. As of March 31, 1998, 565,500 stock
options had been granted pursuant to the 1997 Stock Option Plan. In addition,
on March 10, 1998, the Company received the written consent of 63.8% of its
stockholders to adopt the 1998 Stock Option Plan which reserves 1,000,000 shares
for options. No options have been granted to date pursuant to the 1998 Stock
Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Computation of per share income (loss)
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed by the Company during
the first quarter of fiscal 1998:
March 19, 1998 Form 8-K Acquisition of Unifiber Corporation
March 19, 1998 Form 8-K/A Acquisition of Unifiber Corporation with
additional exhibits
March 19, 1998 - Form 8-K Loan Agreement
14
<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: May 11, 1998 COYOTE SPORTS, INC.
By: /s/ John Paul McNeill
----------------------
John Paul McNeill
Chief Financial Officer
15
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 634,932
<SECURITIES> 0
<RECEIVABLES> 6,286,281
<ALLOWANCES> 778,012
<INVENTORY> 3,812,133
<CURRENT-ASSETS> 10,668,004
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