<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(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, 1996
------------------------------------------------
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 1-9511
----------------
THE COAST DISTRIBUTION SYSTEM
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2490990
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
1982 ZANKER ROAD, SAN JOSE, CALIFORNIA 95112
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 436-8611
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal
year, if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES XX . NO .
---- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
5,207,923 shares of Common Stock
as of July 29, 1996
Page 1 of 14 Pages
Index to Exhibits on Sequentially Numbered Page 11
<PAGE> 2
THE COAST DISTRIBUTION SYSTEM AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
ASSETS (Unaudited) (Audited)
------ ----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 912 $ 501
Accounts receivable - net 25,202 12,083
Inventories 48,776 48,225
Other current assets 1,297 2,664
-------- -------
Total current assets 76,187 63,473
PROPERTY, PLANT, AND EQUIPMENT - NET 5,865 6,133
OTHER ASSETS 23,567 22,530
-------- -------
$105,619 $92,136
======== =======
LIABILITIES
-----------
CURRENT LIABILITIES
Current maturities of long-term
obligations $ 2,615 $ 2,588
Accounts payable - trade 14,841 7,376
Other current liabilities 2,394 2,005
Short-term notes payable 1,500 1,500
-------- -------
Total current liabilities 21,350 13,469
LONG-TERM OBLIGATIONS
Secured note payable to bank 35,226 29,024
Subordinated term note 4,667 7,000
Other long-term liabilities 2,602 2,667
-------- -------
42,495 38,691
REDEEMABLE PREFERRED STOCK
OF SUBSIDIARY 531 584
SHAREHOLDERS' EQUITY
Common stock, no par value;
authorized: 10,000,000;
issued and outstanding:
5,207,923 at June 30, 1996
and 5,155,429 at
December 31, 1995 19,235 19,155
Cumulative translation adjustment (61) 75
Retained earnings 22,069 20,162
-------- -------
41,243 39,392
-------- -------
$105,619 $92,136
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
THE COAST DISTRIBUTION SYSTEM AND SUBSIDIARIES
INTERIM CONDENSED STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $42,159 $53,514 $79,539 $97,869
Cost of sales, including
distribution costs 36,014 43,457 65,893 79,181
------- ------- ------- -------
Gross profit 6,145 10,057 13,646 18,688
Selling, general and
administrative expenses 5,549 5,547 11,204 12,099
------- ------- ------- -------
Operating income 596 4,510 2,442 6,589
Other income (expense):
Equity in net earnings
of affiliates 433 436 874 681
Interest expense (1,029) (1,217) (1,964) (2,252)
Other 2,138 (35) 2,129 (14)
------- ------- ------- -------
1,542 (816) 1,039 (1,585)
------- ------- ------- -------
Earnings before
income taxes 2,138 3,694 3,481 5,004
Income tax provision 983 1,470 1,563 2,008
------- ------- ------- -------
NET EARNINGS $ 1,155 $ 2,224 $ 1,918 $ 2,996
======= ======= ======= =======
Earnings per common
share (Note 3) $ .22 $ .42 $ .37 $ .57
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
THE COAST DISTRIBUTION SYSTEM AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
(Unaudited)
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,918 $ 2,996
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,190 1,324
Equity in net earnings of affiliated companies (874) (681)
Changes in assets and liabilities:
(Increase) in accounts receivable (13,119) (13,257)
(Increase) in inventories (551) (9,485)
Decrease in prepaids and other
current assets 1,367 178
Increase in accounts payable 7,465 9,334
Increase in note, accrueds, and other
current liabilities 416 2,990
-------- --------
Total adjustments (4,106) (9,597)
-------- --------
Net cash (used in) operating activities (2,188) (6,601)
Cash flows from investing activities:
Acquisition of businesses, net of cash
acquired (683) (668)
Capital expenditures (313) (1,164)
Decrease in other assets (89) 5
-------- --------
Net cash used in investing activities (1,085) (1,827)
Cash flows from financing activities:
Net borrowings (repayments) under
line-of-credit agreement 6,202 11,965
(Repayments) of other long-term debt (2,398) (3,371)
Issuance of Common Stock pursuant to Employee
Stock Option and Stock Purchase Plans 80 185
Redemption of redeemable preferred stock
of subsidiary (53) (50)
Dividends on preferred stock of subsidiary (11) (21)
-------- --------
Net cash provided by financing activities 3,820 8,708
-------- --------
Effect of exchange rate changes on cash (136) (99)
-------- --------
NET INCREASE (DECREASE) IN CASH 411 181
Cash beginning of period 501 413
-------- --------
Cash end of period $ 912 $ 594
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
THE COAST DISTRIBUTION SYSTEM AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present the Company's financial position as of June 30, 1996 and the
results of its operations for the three and six month periods, and
cash flows for the six months, ended June 30, 1996 and 1995. The
accounting policies followed by the Company are set forth in Note A to
the Company's financial statements in its Annual Report on Form 10-K
for its fiscal year ended December 31, 1995.
2. The results of operations for the three and six-month periods ended
June 30, 1996 and 1995 are not necessarily indicative of the results
to be expected for the full year or for any other future periods.
3. Earnings per share are based upon the average number of common and
common equivalent (dilutive stock options and warrants) shares
outstanding during each period.
4. The Company leases its corporate offices, warehouse facilities and
data processing equipment. Those leases are classified as operating
leases as they do not meet the capitalization criteria of FASB
Statement No. 13. The office and warehouse leases expire over the
next seven years and the equipment leases expire over the next three
years.
The minimum future rental commitments under noncancellable operating
leases having an initial or remaining term in excess of one year as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------------------
Facilities Equipment Total
---------- --------- ------
<S> <C> <C> <C>
Year ending December 31,
1996 $2,965 $19 $2,984
1997 2,661 6 2,667
1998 2,221 5 2,226
1999 1,103 5 1,108
2000 165 3 168
Later years 477 -- 477
------ --- ------
$9,592 $38 $9,630
====== === ======
</TABLE>
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
General
- -------
Factors Generally Affecting Sales of RV and Boating Products
------------------------------------------------------------
The Company is the largest wholesale distributor of replacement parts,
accessories and supplies for recreational vehicles, and one of the largest
distributors of replacement parts, accessories and supplies for boats, in North
America. Sales are made by the Company to retail parts and supplies stores,
service and repair establishments, and new and used recreational vehicle and
boat dealers ("aftermarket customers"). The Company's sales are affected
primarily by (i) usage of recreational vehicles and boats which affects the
consumers' needs for and purchases of replacement parts, repair services and
supplies, and (ii) sales of new recreational vehicles and boats, because
consumers often "accessorize" their recreational vehicles and boats at the time
of purchase.
The usage and the purchase, by consumers, of recreational vehicles and
boats depend, in large measure, upon the extent of discretionary income
available to consumers and their confidence about economic conditions. Weather
conditions also affect the usage of recreational vehicles and boats. As a
result, the Company's sales and operating results can be, and in the past have
been, adversely affected by recessionary economic conditions, increases in
interest rates, which affect the availability and affordability of financing
for purchases of recreational vehicles and boats, increases in gasoline prices
which adversely affect the costs of using recreational vehicles and boats, and
weather conditions.
Factors Affecting Recent Operating Results
------------------------------------------
Until 1993, the Company's business consisted primarily of distributing
and marketing products that the Company purchased from third-party
manufacturers and that were sold under the brand names of those manufacturers
("third-party brand name products"). In order to improve its competitive
position and increase its profitability, during the past three years, the
Company has introduced into the marketplace a growing number of products,
including trailer hitches, plastic wastewater tanks, portable toilets and
toilet chemicals, vent lids and stabilizing jacks (the "Proprietary Products"),
that have been designed by independent design professionals, and are
manufactured by a number of independent manufacturers, specifically for the
Company. The Proprietary Products are marketed by the Company under its own
brand names in competition with functionally equivalent third-party brand name
products. The Company generally is able to obtain the Proprietary Products at
prices that are below those it would have to pay for functionally equivalent or
similar third-party brand name products and, as a result, the Company is able
to realize higher margins on sales of its Proprietary Products.
In the first half of 1995, three manufacturers of third-party named
brand products, sales of which had accounted, in the aggregate, for
approximately 8% of the Company's net sales in the fiscal year ended December
31, 1994, terminated their supply arrangements with the Company as a result of
its introduction and promotion of functionally equivalent Proprietary Products.
In an unrelated development, in October 1995 Dometic Corporation, a
division of White Consolidated Industries ("Dometic"), which had supplied the
Company with substantially all of its requirements for air conditioners, awnings
and refrigerators that had accounted for 22% and 24%, respectively, of the
Company's net sales in 1994 and 1995, announced that it had decided to integrate
its operations vertically by marketing its products directly to retail RV
dealers, supply stores and service centers in direct competition with the
Company and other RV aftermarket product distributors and that, as a result, it
was terminating its supply agreement with the Company. In response to Dometic's
decision to terminate its supply agreement with the Company, the Company entered
into a multi-year product supply agreement with
6
<PAGE> 7
Recreation Vehicle Products, Inc. ("RVP"), which manufactures RV air
conditioners under the Coleman(R) brand name and awnings under the Faulkner
brand name. Under that product supply arrangement, RVP has agreed to supply
all of the Company's requirements for RV air conditioners and awnings.
Results of Operations
- ---------------------
The changes in the supply relationships within the RV products industry
and, in particular, the change in the Company's supplier of air conditioners and
awnings from Dometic to RVP, together with unusually severe weather conditions
and a slowing in consumer purchases and usage of recreation vehicles, adversely
affected the Company's operating results in the first six months of 1996, as
compared to the first six months of 1995.
Net sales decreased by approximately $18,330,000 or 19% in the six
months ended June 30, 1996, and by $11,355,000 or 21% in the three months ended
June 30, 1996, as compared to the corresponding six and three month periods
ended June 30, 1995. These sales decrease were due to (i) the effects of the
changes in supply relationships that occurred in 1995 and 1996, including supply
shortages as new suppliers have had to increase their levels of production to
meet the Company's product requirements; (ii) the replacement of third-party
name brand products with Proprietary Products, because the Proprietary Products
generally are sold at lower prices than the products they replaced; (iii)
slowness in the sales of new recreational vehicles, which adversely affects
sales of accessories distributed by the Company; and (iv) poor weather
conditions throughout most of North America that were not only unusually
severe, but also extended into the second quarter.
The Company's gross margin decreased to 17.2% of net sales in the six
months ended June 30, 1996 from 19.1% for the same period of 1995. For the
quarter ended June 30, 1996, the gross margin decreased to 14.6% of net sales
from 18.8% of net sales in 1995. These decreases were due primarily to (i)
changes in product mix to a greater proportion of lower margin products that
were attributable primarily to the changes in supply relationships that
occurred in 1995 and the related supply problems that were occasioned by those
changes; (ii) increased price competition in the markets in which the Company
operates, which the Company believes is due, at least in part, to price
reductions by other distributors in response to the competitive threat posed by
the Company's Proprietary Products, and (iii) the impact of fixed costs on a
lower sales base.
Selling, general and administrative expenses, in absolute dollars,
declined by 7% in the six months ended June 30, 1996, and were essentially
unchanged in the second quarter of 1996, as compared to the same six months and
quarter ended June 30, 1995. However, because of the decline in sales, these
expenses increased, as a percentage of net sales, to 14.1% in the first six
months of 1996 and 13.2% in the second quarter of 1996, as compared to 12.4%
and 10.4% in the same periods of 1995.
Due primarily to the combined effects of the declines in sales and
gross margin, operating income declined to $2,442,000 in the six months, and to
$596,000 in the quarter, ended June 30, 1996, as compared to operating income
of $6,589,000 and $4,510,000 in the six months and the quarter ended June 30,
1995, respectively. The Company expects that the conditions that caused these
declines in operating income and net earnings in the first half of 1996 also
will cause operating income and net earnings in the second half of 1996 to be
lower than in the second half of 1995.
The Company maintains ownership positions in several companies in
related industries. The Company's ownership interests in these companies are
accounted for under the equity method of accounting. Under this method, the
Company includes in its operating results its pro rata share of the net
7
<PAGE> 8
income of these companies which is reported as "equity in net earnings of
affiliates." During the first six months of 1996, the Company's earnings from
its affiliate investments increased $193,000 or 28% from the same period in
1995. The Company's equity in the net earnings of these companies is not cash,
and the Company is dependent on the declaration of cash dividends by those
companies to realize any current cash from these investments. No dividends
were declared by those companies in the first six months of 1996.
In the six months ended June 30, 1996, interest expense decreased by
$288,000, or 13%, as compared to the same period in 1995. Interest expense in
the quarter ended June 30, 1996 decreased by $188,000 or 15% as compared to the
same quarter of 1995. These decreases were the result of a decrease in the
rate of interest charged under the Company's revolving credit facility.
Other income for the six and three month periods ended June 30, 1996
includes the net proceeds from the favorable settlement of a lawsuit, which
partially offset the decline in operating income in those periods.
Liquidity and Capital Resources
- -------------------------------
The Company finances its working capital requirements for its
operations primarily with borrowings under a long-term revolving bank credit
facility and internally generated funds. Under that credit facility, the
Company may borrow up to the lesser of (i) $50,000,000 or (ii) an amount equal
to 80% of its eligible accounts receivable and 50% of its eligible inventory
(the "borrowing base"). At July 23, 1996 outstanding borrowings under the
revolving credit facility were approximately $33,200,000.
The Company believes that available credit under the revolving credit
facility, together with internally generated funds, will be sufficient to
enable the Company to meet its working capital requirements for the foreseeable
future.
The Company generally uses cash for, rather than generating cash from,
operations in the first half of the year, because the Company builds
inventories, and accounts receivable increase, as its customers begin
increasing their product purchases for the spring and summer selling seasons.
During the first six months of 1996, reductions in inventories enabled the
Company to reduce the cash used for operations by approximately $4,400,000, as
compared to the same six months of 1995.
Net cash used in investing activities was $1,085,000 in the first six
months of 1996 and $1,827,000 for the same period in 1995. Capital
expenditures were $313,000 in 1996 and $1,164,000 in 1995. Cash used in
acquisition of businesses of $683,000 in 1996 and $668,000 in 1995 related to
the additional acquisition of a 5% interest in H. Burden, Ltd. in each year.
Net cash provided by financing activities, which primarily represents
increases in borrowings under the Company's revolving bank credit facility,
totaled $3,820,000 in the first six months of 1996 as compared to $8,708,000 in
the first six months of 1995. During the first six months of 1996, the Company
retired $2,333,000 principal amount of subordinated term notes with a
combination of borrowings under its revolving bank line of credit and cash from
operations.
Seasonality and Inflation
- -------------------------
Sales of recreational vehicle and boating parts, supplies and
accessories are seasonal. The Company has significantly higher sales during
the six-month period from April through September than it does during the
remainder of the year. Because a substantial portion of the Company's expenses
are fixed, operating income declines and the Company sometimes incurs losses
and must rely more heavily on borrowings to fund operating requirements in the
months when sales are lower.
8
<PAGE> 9
Generally, the Company has been able to pass inflationary price
increases on to its customers. However, inflation also may cause or may be
accompanied by increases in gasoline prices and interest rates. Such
increases, or even the prospect of increase in the price or shortages in the
supply of gasoline, can adversely affect the purchase and usage of recreational
vehicles, which can result in a decline in the demand for the Company's
products.
This Report contains forward-looking information which reflects
Management's current views of future financial performance. The forward-looking
information is subject to certain risks and uncertainties, including but not
limited to, the effects on future performance of the changing product supply
relationships in the industry and the uncertainties created by those changes;
the potential for increased price competition; and possible changes in economic
conditions, prevailing interest rates or gasoline prices, or the occurrence of
unusually severe weather conditions, that can affect both the purchase and
usage of recreational vehicles and boats and which, in turn, affects purchases
by consumers of the products that the Company sells. For information concerning
such factors and risks, see the foregoing discussion in this section of this
Report entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operation." Due to such uncertainties and risks, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND EXHIBITS
---------------------------------------------
(a) Exhibits.
---------
Exhibit 11.1 Computations of Fully Diluted Earnings Per
Share for the Quarter and Six Months Ended
June 30, 1996
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K was filed during the quarter ended
June 30, 1996.
9
<PAGE> 10
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.
Date: August 12 , 1996 THE COAST DISTRIBUTION SYSTEM
By: /s/ SANDRA A. KNELL
---------------------------
Sandra A. Knell
Executive Vice President
and Chief Financial Officer
S-1
<PAGE> 11
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Page
- ------- ------------
Exhibit 11.1 Computations of Earnings Per Share for the
Quarter and Six Months Ended June 30, 1996 12
Exhibit 27 Financial Data Schedule 14
<PAGE> 1
EXHIBIT 11.1
------------
THE COAST DISTRIBUTION
Computation of Earnings Per Share
Quarter Ended June 30, 1996
<TABLE>
<CAPTION>
Primary Fully Diluted
Earnings Earnings
Per Share Per Share
----------- -------------
<S> <C> <C> <C>
I. Weighted Average Shares Outstanding 5,203,885 5,203,885
II. Common Stock Equivalents 13,281 13,281
----------- -----------
Average Number of Common and Common
Equivalent Shares 5,217,166 5,217,166
=========== ===========
Net Earnings $ 1,155,000 $ 1,155,000
Dividends paid on preferred stock of
subsidiary (5,000) (5,000)
----------- -----------
Net earnings available to common
shareholders $ 1,150,000 $ 1,150,000
Divided by Common and Equivalent
Shares 5,217,166 5,217,166
----------- -----------
Earnings Per Share $ 0.22 $ 0.22
=========== ===========
</TABLE>
<PAGE> 2
EXHIBIT 11.1 (Cont'd.)
------------
THE COAST DISTRIBUTION
Computation of Earnings Per Share
Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Primary Fully Diluted
Earnings Earnings
Per Share Per Share
------------ -------------
<S> <C> <C> <C>
I. Weighted Average Shares Outstanding 5,186,650 5,186,650
II. Common Stock Equivalents 19,131 19,278
----------- ------------
Average Number of Common and Common
Equivalent Shares 5,205,781 5,205,928
=========== ============
Net Earnings $ 1,918,000 $ 1,918,000
Dividends paid on preferred stock of
subsidiary (11,000) (11,000)
----------- ------------
Net earnings available to common
shareholders $ 1,907,000 $ 1,907,000
Divided by Common and Equivalent
Shares 5,205,781 5,205,928
----------- ------------
Earnings Per Share $ 0.37 $ 0.37
=========== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1996 AND THE STATEMENT OF INCOME FOR THE PERIOD ENDED
JUNE 30, 1996 INCLUDED IN REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 912
<SECURITIES> 0
<RECEIVABLES> 25,202
<ALLOWANCES> 0
<INVENTORY> 48,776
<CURRENT-ASSETS> 76,187
<PP&E> 5,865
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,619
<CURRENT-LIABILITIES> 21,350
<BONDS> 42,495
531
0
<COMMON> 19,235
<OTHER-SE> 22,069
<TOTAL-LIABILITY-AND-EQUITY> 105,619
<SALES> 79,539
<TOTAL-REVENUES> 79,539
<CGS> 65,893
<TOTAL-COSTS> 77,097
<OTHER-EXPENSES> (1,039)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,964
<INCOME-PRETAX> 3,481
<INCOME-TAX> 1,563
<INCOME-CONTINUING> 1,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,918
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
