<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
1982 Zanker Road, San Jose, California 95112
(Address of principal executive offices) (Zip Code)
(408) 436-8611
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
<S> <C>
(NAME OF EACH EXCHANGE ON
(TITLE OF CLASS) WHICH REGISTERED)
- ------------------------------------------------- ------------------------------------------------
Common Stock, without par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /x/.
As of March 17, 1998, the aggregate market value of the Common Stock held by
non-affiliates was approximately $11,180,000.
As of March 17, 1998, a total of 5,246,879 shares of Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference from Registrant's
Definitive Proxy Statement for its 1998 Annual Meeting which is to be filed on
or before April 30, 1998.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
The Coast Distribution System (the "Company") is the largest supplier
of replacement parts, supplies and accessories for recreational vehicles
("RVs"), and one of the largest suppliers of replacement parts, supplies and
accessories for boats, in North America. The Company supplies more than 25,000
products and serves more than 15,000 customers throughout the United States and
Canada, from 14 regional distribution centers in the United States that are
located in California, Texas, Oregon, Arizona, Colorado, Utah, Indiana,
Pennsylvania, New York, Georgia, Florida, Wisconsin and Alaska and 4 regional
distribution centers in Canada located, respectively, in Montreal, Toronto,
Calgary and Vancouver. Reference is made to Note I to the Consolidated Financial
Statements of the Company, contained elsewhere in this Report, for certain
information regarding the respective operating results of the Company's
operations in the United States and Canada in 1996 and 1997. The Company's
customers are comprised primarily of RV and boat dealers and RV and boating
parts supply stores and service centers ("After-Market Customers"), who resell
the products they purchase from the Company, at retail, to consumers that own or
use RVs and boats.
In order to improve its competitive position and increase its
profitability, the Company has introduced into the marketplace a growing number
of products that have been designed specifically for the Company by independent
product design firms and are manufactured for the Company, generally on an
exclusive basis, by a number of different independent manufacturers (the
"proprietary products"). These proprietary products are marketed by the Company
under its own brand-names in competition with brand name products from
traditional suppliers. The Company is able to obtain the proprietary products at
prices that generally are below those it would have to pay for functionally
equivalent brand name products. Sales of proprietary products accounted for
approximately 23% of the Company's net sales in each of the fiscal years ended
December 31, 1996 and 1997. See "Business--Products--Proprietary Products."
Although initially designed for sale to After-Market Customers, a
number of the Company's more recently designed proprietary products also are
suitable for installation as original equipment on RVs and boats at the time of
their manufacture. In addition, a number of the proprietary products have
applications in markets other than the RV and boating markets, such as the
automobile or leisure products markets. As a result, in 1997 the Company
established the DTS Manufacturing Division within the Company (the "DTS
Division") to implement programs to market and sell those proprietary products
to RV and boat manufacturers and to retail dealers and mass merchandisers in
other markets. Utilizing distinctive brand names and packaging, and in some
instances also different product designs, these proprietary products are
marketed separately, as products that are distinct, from the proprietary
products that are sold by the Company to RV and boating After-Market Customers.
The new DTS Division also will be identifying opportunities to design and
arrange for the manufacture of new proprietary products that can be installed as
original equipment on RVs and boats or that have applications in other markets.
To date, the operating results of the DTS Division have not been material. The
Company's RV and boating After-Market products business will continue to market
proprietary products designed for RV and boating After-Market Customers, under
the name "Coast Distribution".
To provide its customers with a high level of service, the Company
utilizes a computer-based order entry and warehousing system which enables
customers to transmit orders either telephonically or electronically to the
Company, and enables the Company to prepare and invoice most orders within 24
hours of receipt. The Company also has established a national customer service
center to enable customers to obtain product information and place orders by
telephone using Company toll-free telephone numbers. In addition, the Company
has developed and implemented marketing and customer service programs through
which the Company provides its customers with catalogues and pricing and
promotional programs, all of which are designed to assist customers to increase
their profitability and to strengthen the Company's relationships with its
customers. The Company believes that the breadth of its product lines, the
proprietary products it is able to offer to its customers, the computer
integration of its operations and the marketing and customer support programs it
offers, distinguish it from other distributors of recreational vehicle and
boating parts, supplies and accessories. See "Business - Marketing and Sales."
<PAGE> 3
DEVELOPMENTS IN 1997
Financial Performance. The factors that adversely affected the Company's
operating results in 1996 continued to affect the Company's operating results in
1997. The Company's sales declined by $3,334,000, or 2.4%, in 1997 due largely
to the inability of the Company to fully recapture market share that it lost in
1996 as a result of (i) the entry, as a competitor in the marketplace, of
Dometic Corporation ("Dometic"), which until 1996 had been the principal
supplier to the Company of recreational vehicle awnings, refrigerators and air
conditioners, and (ii) supply problems encountered in 1996 by new product
suppliers to the Company, including Recreation Vehicle Products, Inc., the
Company's current single source supplier of awnings; and increased price
competition within the RV and boating After-Market. See BUSINESS - Products
Arrangements with Manufacturers" in Part I of this Report and Management's
Discussion and Analysis of Financial Condition and Results of Operation in Part
II of this Report.
Sale of Investments. In previous years, the Company had acquired
minority ownership interests in certain other companies that operated in the
same or related businesses, with a view to acquiring a controlling interest in
those companies if their operating results later warranted additional
investments by the Company. For example, in 1992 the Company acquired a minority
investment in a distributor of RV products in Canada and in 1994 acquired the
remaining shares of that company (which now operates as a wholly-owned
subsidiary under the name "Coast Canada"). The Company also had acquired a 35%
ownership interest in H. Burden Limited ("Burden"), a privately-owned
distributor of caravan and boating products in Western Europe, and a 34%
minority interest in HWH Corporation, a privately owned manufacturer of
hydraulic leveling devices and jacks and other products primarily for
recreational vehicles ("HWH"). During 1997 and in early 1998, the Company took
advantage of opportunities that arose to dispose of the minority investments
that it had made in Burden and HWH.
The sale of the Company's investment in Burden took place on September
27, 1997 for a cash price to the Company of $4,198,000, plus a right to receive
additional cash payments of up to $330,000 if certain contingencies are
satisfied. The sale of the Company's investment in HWH was completed in
early 1998 for a cash price to the Company of $5,387,000. The proceeds of both
sales were used to reduce borrowings, pending use of the funds in its business.
For financial reporting purposes, the Company recorded losses on the sales of
its investments in Burden and HWH of $525,000 and $1,669,000, respectively.
See Management's Discussion and Analysis of Financial Condition and Results of
Operation in Part II of this Report.
There were a number of factors that led the Company to decide to sell
its investments in Burden and HWH. Firstly, both investments were illiquid and
there was no assurance as to when opportunities to sell those investments, at
prices comparable to those being offered to the Company, might arise in the
future. Secondly, the Company had no prospect of acquiring control of either of
these two companies and therefore had no meaningful ability to control their
future performance. Finally, the sales would provide the Company with additional
financial resources that could be used (i) to reduce bank borrowings, thereby
strengthening the financial condition of the Company and reducing interest
expense, and (ii) to support the growth and to increase the competitiveness of
its core product supply business in North America.
The Company continues to retain ownership interests in two foreign
distributors of RV parts, supplies and accessories, located respectively in
Sydney, Australia and Mexico City, Mexico. Both of these distributors are small,
each with annual sales in 1997 of less than $2,500,000, and neither of them is
material to the Company's operations or financial condition. The Company's
investments in these two companies are accounted for under the equity method of
accounting. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in Part II of this Report.
Delaware Reincorporation. In 1997, the Company's shareholders approved
a change in the Company's state of incorporation from California to Delaware.
That reincorporation is expected to become effective in April 1998. The
information regarding the effects of this change in the Company's state of
incorporation, set forth under the captions "The Charters and Bylaws of Coast
California and Coast Delaware" and "Significant Differences Between the
Corporation Laws of California and Delaware," at pages 15 to 27 of the Company's
Proxy Statement dated July 3, 1997, is incorporated herein by this reference.
2
<PAGE> 4
FORWARD LOOKING STATEMENTS
This Report contains forward-looking information which reflects
management's current views of the Company's 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 changing
product supply relationships in the RV industry and the uncertainties created by
those changes; increased price competition within the industry; possible changes
in economic conditions, prevailing interest rates or gasoline prices, or the
occurrence of unusually severe winter weather conditions, all of which 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;
and the Company's reliance on borrowings to fund a substantial portion of its
working capital requirements and capital expenditures. For information
concerning such factors and risks, see "BUSINESS - Products - Arrangements with
Manufacturers - Competition - Factors That Could Affect Future Performance" in
Part I, Item 1 of this Report; and Management's Discussion and Analysis of
Financial Condition and Results of Operation in Part II of this Report. 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.
THE PARTS, SUPPLIES AND ACCESSORIES MARKETS
Many manufacturers of replacement parts, supplies and accessories rely
on independent distributors, such as the Company, to market and distribute their
products or to augment their own product distribution operations. Distributors
relieve manufacturers of a portion of the costs associated with distribution of
their products while providing geographically dispersed selling, order
processing and delivery capabilities. At the same time, distributors offer
retailers access to a broad line of products and the convenience of rapid
delivery of orders.
The market for RV parts, supplies and accessories distributed by the
Company includes both recreational vehicle dealers ("RV dealers") and RV supply
stores and service centers. Optional equipment and accessories, such as awnings,
trailer hitches, air conditioning units, water heaters and other appliances make
up a large proportion of the Company's sales to RV dealers, while recreational
vehicle replacement parts, maintenance supplies and smaller accessories make up
a larger proportion of the Company's sales to supply stores and service centers.
Although supply stores and service centers generally purchase lower cost
products than those sold to RV dealers, supply stores and service centers
generally order more frequently and purchase a wider variety of products than do
RV dealers. The market for boating parts, supplies and accessories is comprised
primarily of independent boat dealers that sell boats and boating parts,
supplies and accessories at retail. Independent boat dealers purchase primarily
replacement parts, boating supplies and smaller accessories from the Company.
See "Business - Products."
Sales to RV and boat dealers generally have been more sensitive to
changes in economic conditions than have sales to supply stores and service
centers. During periods of higher interest rates or unemployment, consumers are
likely to postpone purchases of higher priced items such as RVs and boats and
higher priced accessories and convenience items such as appliances, awnings and
hitches. By contrast, continued demand among RV and boat owners for repair parts
and supplies, and increases in the total number of RVs and boats in use, have
increased the "aftermarket" for repair and maintenance items and for specialty
products and supplies. In addition, recreational vehicle manufacturers ("RV
manufacturers") have been increasing the number of accessories that they place
on their vehicles as original equipment at the time of manufacture. As a result,
in recent years sales of accessories to RV dealers have come to represent a less
significant percentage of the total product sales of After-Market distributors,
such as the Company.
The Company's sales are also affected by weather conditions, because
the usage and purchase of RVs and boats decline in the winter months due to the
colder weather. As a result, the Company's operating income declines and it
sometimes incurs losses in the winter months, particularly in years in which
there are unusually severe winter weather conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Seasonality and Inflation" in Part II of this Report.
3
<PAGE> 5
PRODUCTS
General. The Company carries a full line of more than 15,000
recreational vehicle parts, supplies and accessories which it purchases from
more than 500 manufacturers. Recreational vehicle products distributed by the
Company include awnings, antennae, vents, electrical items, towing equipment and
hitches, appliances such as air conditioners, refrigerators, ranges and
generators, LP gas equipment, portable toilets and plumbing parts, hardware and
tools, specialized recreational vehicle housewares, chemicals and supplies, and
various accessories, such as ladders, jacks, fans, load stabilizers, mirrors and
compressors. The Company also distributes various replacement parts and supplies
for manufactured housing, including tie-downs, skirting, windows and doors.
The Company stocks boating and marine parts, supplies and accessories
at 13 of its 14 warehouse and distribution centers in the United States and at
all 4 of its distribution centers in Canada. Products distributed by the Company
include boat covers, stainless steel hardware, depth sounders, anchors, life
jackets and other marine safety equipment and fishing equipment.
Proprietary Products. In order to improve its competitive position and
increase its profitability, the Company has introduced into the marketplace a
growing number of proprietary products, which are manufactured specifically for
the Company, generally on an exclusive basis, by a number of different
manufacturers (the "proprietary products"). The proprietary products, which are
designed for the Company by independent professional product design firms or by
the independent manufacturers retained to manufacture the products for the
Company, include trailer hitches, plastic wastewater tanks, portable toilets and
toilet chemicals, vent lids and stabilizing jacks. These proprietary products
are marketed by the Company under its own brand-names in competition with brand
name products from traditional suppliers, which usually sell their products to a
number of distributors and into other markets. Sales of proprietary products, on
which the Company has generally realized higher margins than on sales of
functionally equivalent name brand products, accounted for 23% of the Company's
net sales in 1997 and 1996. However, such products currently lack name brand
recognition, which may have a limiting effect on unit sales of and on the prices
that the Company is able to charge for such products. This lack of brand name
recognition also means that the costs to the Company of marketing the
proprietary products generally is greater than for brand-name products, which
somewhat offsets the margin advantage of the proprietary products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II of this Report.
The DTS Division. Although the Company's proprietary products were
initially designed for sale to After-Market Customers, a number of those
products also are suitable for installation as original equipment on RVs and
boats at the time of their manufacture or have applications in markets other
than the RV and boating markets, such as the automobile or leisure products
markets. As a result, in 1997 the Company established the DTS Manufacturing
Division within the Company (the "DTS Division"), to implement programs to
market and sell those proprietary products to RV and boat manufacturers and to
retail dealers and mass merchandisers in other markets. Utilizing distinctive
brand names and packaging, and in some instances also different product designs,
these proprietary products are marketed separately, as products that are
distinct, from the proprietary products that are sold by the Company's "Coast
Distribution" Division to RV and boating After-Market Customers. The new DTS
Division also will be identifying opportunities to design and arrange for the
manufacture of new proprietary products that can be installed as original
equipment on RVs and boats or that have applications in other markets. To date,
the operating results of the new DTS Division have not been material.
MARKETING AND SALES
The Company's customers include (i) RV dealers, which primarily
purchase optional equipment and accessories for new recreational vehicles and
replacement and repair parts for their service departments, (ii) independent
recreational vehicle supply stores and service centers that purchase parts,
supplies and accessories for resale to owners of recreational vehicles and for
their service centers, and (iii) independent boat dealers that purchase small
accessories for new boats and replacement parts and boating supplies for resale
to boat owners and operators. The Company is not dependent on any single
customer for any material portion of its business. No single customer accounted
for as much as 5% of the Company's sales in 1995, 1996 or 1997.
During the past several years, the Company has developed marketing and
customer service programs that are designed to assist its customers to increase
their profitability and also strengthen the relationships between the Company
and its customers.
4
<PAGE> 6
Customer Service Center and Computerized Order Entry and Warehousing
System. The Company has designed and implemented a computer-based order entry
and warehousing system which enables its larger customers to transmit orders
electronically to the Company's central computers and also enables the Company
to prepare and invoice most customer orders within 24 hours of receipt.
Approximately 1,000 of the Company's customers use this system to transmit
orders electronically to the Company's central data processing center using the
Company's toll-free telephone numbers.
The Company also operates a national customer service center in San
Jose, California, which enables the Company's customers to obtain product
information and to place orders by telephone using the Company's toll-free
telephone numbers. With the exception of holidays, the customer service center
is operational for a total of 13 hours per day, Monday through Friday, and 8
hours on Saturdays and is staffed by sales personnel who are trained to promote
the sale of the Company's products and to handle customer service issues.
Currently, the number of customer calls handled by the national customer service
center, which can be accessed by virtually all of the Company's customers in the
United States and Canada, ranges from 2,000 to 6,000 per day and the customer
service center has enabled the Company not only to improve customer service, but
also to reduce selling expenses.
Orders transmitted from customers either electronically or by telephone
to the national customer service center are input into the Company's IBM AS 400
computers and then are relayed to the regional distribution center selected by
the customer, where the products are selected, packed and shipped. At the time
the order is received, the customer is informed, either by electronic
confirmation, or by the sales person handling the customer's call at the
customer service center, that the order has been accepted and whether any items
are not currently in stock. In addition, the Company offers to participating
customers a "split shipment program" by which a customer's order for a product
that is not available from the Company's distribution center closest to the
customer, will be shipped to that customer from another of the Company's
distribution centers that has been pre-selected by that customer as a "back-up"
distribution center, when that product is available at that back-up distribution
center.
The Company's computer system also prints retail price stickers which
are shipped with the products ordered by the customer. The price stickers
identify the part numbers and contain the customer's name and the customer's
retail prices for the parts which are provided to the Company by the customer
and stored in the Company's computer system. The Company's computerized ordering
system also enables it to provide customers with inventory costing data with
respect to items purchased from the Company.
DISTRIBUTION
The Company's regional distribution and warehouse centers in North
America carry an inventory of up to approximately 15,000 recreational vehicle
parts, supplies and accessories. In addition, at 13 of the Company's
distribution centers in the United States and at all 4 of its distribution
centers in Canada, the Company carries, in varying quantities, up to
approximately 10,000 boating and marine parts, supplies and accessories. Each
regional distribution center is operated as a separate profit center.
The Company relies primarily on independent freight companies to ship
its products.
ARRANGEMENTS WITH MANUFACTURERS
General. The products which the Company distributes are purchased by it
from more than 600 different manufacturers. As is typical in the industry, in
most instances the Company acquires its products on a purchase order basis and
has no guaranteed price or delivery agreements with manufacturers, including the
manufacturers that supply proprietary products to the Company. As a result,
short-term inventory shortages can occur. The Company sometimes chooses to carry
only a single manufacturer's products for certain of the brand-name product
lines that it sells, although comparable products usually are available from
multiple sources. In addition, each of the proprietary products is obtained by
the Company from a single source manufacturer, although in most instances the
Company owns the tooling required for
5
<PAGE> 7
their manufacture. Dependence on a single manufacturer for any product or line
of related products, however, presents some risks, including the inability to
readily obtain alternative product supply sources in the event a single source
supplier encounters quality or other production problems, which can, and in 1996
did, adversely affect the Company's sales, as certain of its manufacturers were
unable to meet the Company's product requirements (see "Recent Changes in
Relationships With Manufacturers").
No manufacturer or supplier of products to the Company accounted for
more than 5% of the Company's product purchases in 1997, other than Recreation
Vehicle Products, Inc. ("RVP"). RVP supplies the Company with RV air
conditioners sold under the Coleman(R) brand name and awnings under the
Faulkner(R) brand name, the aggregate sales of which accounted for approximately
17% of the Company's net sales in 1997.
Manufacturers generally warrant the products distributed by the Company
and allow the Company to return defective products, including those that have
been returned to the Company by its customers. The Company does not
independently warrant the products that it distributes.
Recent Changes in Relationships with Manufacturers. During the
five-year period ended December 31, 1995, the Company purchased substantially
all of its requirements for RV air conditioners, awnings and refrigerators from
Dometic Corporation ("Dometic"), a division of White Consolidated Industries.
Sales of products purchased by the Company from Dometic accounted for 22% and
24%, respectively, of the Company's sales in 1994 and 1995. In August 1995,
Dometic notified the Company that Dometic had decided to integrate its
operations vertically and market its products directly to retail parts and
supply stores, service centers and RV dealers, in direct competition with the
Company beginning early in 1996, and, therefore, would be terminating its supply
agreement with the Company. Following that notification, in order to ensure that
the Company would have a source of supply for air conditioners and awnings, the
Company entered into a multi-year product distribution agreement with RVP, under
which RVP agreed to supply the Company with its requirements for RV air
conditioners and awnings for a minimum term of five (5) years, beginning in
1996.
However, during 1996 RVP encountered manufacturing and supply problems
in its efforts to meet the Company's requirements for awnings. These problems,
coupled with Dometic's entry into the market as a competitor of Coast, resulted
in a substantial decline in the Company's sales of awning products in 1996.
Although these manufacturing and supply problems were largely remedied by the
end of 1996, the Company has been unable to recapture fully the share of the
awning aftermarket that it lost in 1996 as a result of these problems and the
increased competition created by Dometic's entry into the aftermarket. Since
awning sales generate relatively higher profit margins, than do other RV
accessories, such as air conditioners, the Company's sales and operating
margins, and therefore also its operating profits, continued to be adversely
affected in 1997 by the loss of awning sales that occurred in 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
In 1996, the Company also began to encounter increased price competition
from other wholesale distributors of branded products that compete with the
Company's proprietary products. That increased price competition continued well
into 1997, adversely affecting the growth of the Company's sales of proprietary
products, which remained relatively unchanged in 1997 as compared to 1996. That
price competition also contributed to the declines in the Company's sales and
operating income in 1997.
As a result of the changes that have occurred in supply relationships in
the industry, there will continue to be increased competition from Dometic and
other manufacturers and distributors in the future, which could adversely affect
product pricing and the Company's sales and operating margins. Additionally,
there is no assurance that other changes in supply arrangements will not occur
in the future or that the Company will be able to recapture fully the sales
volume lost to competitors in 1996 and 1997.
COMPETITION
The Company faces significant competition. In addition to Dometic,
there are a number of national and regional distributors of recreational vehicle
and boating parts, supplies and accessories that compete with the Company. There
also are certain mass merchandisers, catalog houses and national and regional
retail chains specializing in the sale of
6
<PAGE> 8
recreational vehicle or boating parts, supplies and accessories, that purchase
such products directly from manufacturers. Such mass merchandisers and national
and regional chains compete directly with the RV and boating supply stores and
service centers that purchase products from the Company. Such competition
affects both the volume of Company's sales, and the prices it is able to charge
for the products it sells, to such RV and boating supply stores. Additionally,
there is no assurance that other changes in supply relationships or new
alliances within the recreational or boating products industry will not occur
that would further increase competition. See "Products" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company, like most of its competitors, competes on the basis of the
quality, speed and reliability of its service, the breadth of its product lines
and price. The Company believes that it is highly competitive in each of those
areas.
CERTAIN FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
Changes in Industry Supply Relationships; Increases in Competition.
Since 1996 product supply relationships in the RV accessories market have
undergone significant change. The changes have led to increased competition and,
in 1996 created supply problems for the Company, which adversely affected its
sales and margins and caused the Company to sustain losses from operations not
only in 1996, but also in 1997. There is no assurance that the Company will be
able to recapture fully the sales it lost in 1996 and 1997 or that it will be
able to return to profitability in 1998. There also is no assurance that
additional changes, that would increase competition or create further
uncertainties or supply problems for the Company, as well as others in the
industry, will not occur in the future. See "BUSINESS--Products-- Arrangements
with Manufacturers--Competition" in Part I of this Report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II of this Report.
Cyclical Nature of Business. The Company's sales are affected directly
by the purchase and usage levels of RVs and boats which, in turn, 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 RVs 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 RVs and boats, increases in fuel
prices which affect the costs of using RVs and boats, and unusually adverse
winter weather conditions. The occurrence of adverse economic conditions,
increases in interest rates or fuel prices, or the onset of unusually severe
winter weather conditions affecting large regions of North America, could result
in declines in the Company's sales that would adversely affect the Company's
future operating results.
Reliance on Borrowings; Debt Service Requirements. The Company has
financed its growth primarily with bank borrowings and institutional debt
financing and relies heavily on bank borrowings to fund working capital
requirements and capital expenditures. Although the Company did generate
approximately $1,544,000 of positive cash flow from operations in 1997 (despite
the decline in sales and the loss that it incurred during that year), and
expects to be able to continue to fund its working capital requirements and
capital expenditures in 1998 with a combination of internally generated funds
and available borrowings under its revolving bank credit line, the amount of its
outstanding borrowings could have adverse consequences for the Company in the
future. Among other things, (i) the Company is likely to find it more difficult
to obtain additional financing that might be needed to fund expansion or other
business opportunities; and (ii) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of principal and interest
on indebtedness, which makes the Company more vulnerable to general economic
downturns and competitive pressures. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
EMPLOYEES
At December 31, 1997, the Company had approximately 345 full-time
employees, which includes employees in Canada. During the peak summer months,
the Company also employs part-time workers at its regional distribution centers.
None of the Company's employees is represented by a labor union. The Company
believes that its relations with employees are good.
7
<PAGE> 9
ITEM 2. PROPERTIES
The Company operates 14 regional distribution centers in 13 states in
the United States and 4 regional distribution centers, each located in a
different Province, in Canada. Except for one facility owned by the Company, all
of these facilities are leased under triple net leases which require the Company
to pay, in addition to rent, real property taxes, insurance and maintenance
costs. The following table sets forth certain information regarding these
facilities.
<TABLE>
<CAPTION>
SQUARE
GEOGRAPHIC LOCATION FOOTAGE LEASE EXPIRATION DATE
- --------------------------------------------------------------------------------
<S> <C> <C>
Visalia, California........................... 70,000 February 28, 2007
Fort Worth, Texas............................. 90,670 April 30, 1999
San Antonio, Texas............................ 46,600 April 30, 1998
Denver, Colorado.............................. 50,000 September 30, 1999
Elkhart, Indiana.............................. 109,000 December 31, 1999
Lancaster, Pennsylvania....................... 64,900 February 29, 1999
Atlanta, Georgia.............................. 51,100 August 31, 1999
Tampa, Florida................................ 53,100 September 30, 1998
Phoenix, Arizona.............................. 36,500 March 31, 2002
Salt Lake City, Utah.......................... 37,800 March 31, 2000
Portland, Oregon.............................. 72,000 Owned
Albany, New York.............................. 52,500 April 30, 2004
Eau Claire, Wisconsin......................... 36,000 July 31, 1998
Anchorage, Alaska............................. 13,200 December 31, 1999
Montreal, Quebec.............................. 40,715 January 1, 2000
Toronto, Ontario.............................. 34,020 December 1, 1998
Calgary, Alberta.............................. 30,750 December 1, 1998
Vancouver, British Columbia................... 22,839 June 1, 1999
</TABLE>
A total of twelve of the Company's existing distribution center leases
are scheduled to expire within the next two years. The Company plans to seek
renewals or extensions of those leases.
The Company also leases 22,876 square feet of office space in San Jose,
California where its executive offices are located.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is named as a defendant, sometimes along
with product manufacturers and others, in product liability and personal injury
litigation. The Company believes that this type of litigation is incident to its
operations, and since it has insurance or indemnities from manufacturers
covering any potential liability, it believes that such litigation will not
materially affect the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE> 10
EXECUTIVE OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------- ------------ -----------------------------
<S> <C> <C>
Thomas R. McGuire....................................... 54 Chairman of the Board and Chief Executive Officer
Sandra A. Knell......................................... 40 Executive Vice President - Finance
and Chief Financial Officer and Secretary
Jeffrey R. Wannamaker................................... 37 Executive Vice President - Operations and President of
the Coast Distribution Division of the Company
David A. Berger......................................... 44 Executive Vice President - Marine
Sales and Marketing
Dennis A. Castagnola.................................... 50 Senior Vice President - Proprietary Products and
President of the DTS Division of the Company
</TABLE>
Set forth below is certain information regarding the Company's executive
officers.
THOMAS R. MCGUIRE. Mr. McGuire is a founder of the Company and for more
than five years has been Chairman of the Board and Chief Executive Officer of
the Company. From 1981 until August 1985 he also served as the Company's Chief
Financial Officer and Secretary.
SANDRA A. KNELL. Mrs. Knell has been the Company's Executive Vice
President - Finance, Chief Financial Officer and Secretary since August 1985.
From 1984 until she joined the Company, Mrs. Knell was an Audit Manager, and for
the prior four years was a senior and staff accountant, with Grant Thornton LLP
(formerly Alexander Grant & Co.). Mrs. Knell is a Certified Public Accountant.
JEFFREY R. WANNAMAKER. Mr. Wannamaker, who joined the Company in 1984,
has been Executive Vice President - Operations since 1995. From 1991 and until
his promotion to Executive Vice President, Mr. Wannamaker held the position of
Senior Vice President - Branch Operations of the Company. Prior to that time he
held various other management positions with the Company. In 1997, Mr.
Wannamaker was appointed as President of the Company's Coast Distribution
Division which markets and supplies products to RV and boating After-Market
Customers.
DAVID A. BERGER. Mr. Berger served as Executive Vice President -
Marketing from May 1988 until September 1993. Due to the growth of the Company's
marine products sales, in September 1993 the Company's marketing department was
restructured into two separate departments, one for marine products and the
other for R.V. products, and Mr. Berger was placed in charge of marketing for
the Company's marine products division. From August 1986 to May 1988, Mr. Berger
was Senior Vice President Purchasing of the Company. For the prior 14 years he
held various management positions with C/P Products Corp., a distributor of
recreational vehicle parts and accessories acquired by the Company in 1985.
DENNIS A. CASTAGNOLA. Mr. Castagnola was appointed to his current
position of Senior Vice President-Proprietary Products in May 1994, in which he
directs the Company's proprietary products program. From September 1993 until
May 1994, he served as Senior Vice President - R.V. Sales and Marketing. For the
prior 19 years, he held various positions with the Company, including Vice
President/Division Manager of the Company's Portland, Oregon Distribution
Center. In 1997, Mr. Castagnola was appointed as President of the Company's new
DTS Division which markets and supplies proprietary products to RV and boating
manufactures and to customers in markets other than the RV and boating
After-Market.
9
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's shares of common stock are listed and trade on the
American Stock Exchange under the trading symbol "CRV."
The following table sets forth for the calendar quarters indicated the
range of the high and low sales prices per share of the Company's common stock
on the American Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------ ---------
<S> <C> <C>
1996:
First Quarter...... $8-3/4 $ 5-13/16
Second Quarter..... 8-5/8 6-1/16
Third Quarter...... 6-3/8 4-3/4
Fourth Quarter..... 5-1/2 3-5/8
1997:
First Quarter...... $4-5/8 $ 3-5/8
Second Quarter..... 3-3/4 2-3/16
Third Quarter...... 4 3-1/4
Fourth Quarter..... 4-1/2 2-7/8
</TABLE>
On March 17, 1998, the closing price per share of the Company's common
stock on the American Stock Exchange was $2 3/4. There were approximately 1,305
holders of record of the Company's common stock as of March 7, 1998.
DIVIDENDS
The Company has a policy of retaining earnings to support the growth of
its business and, therefore, does not anticipate that any cash dividends will be
paid in the foreseeable future. In addition, payment of cash dividends by the
Company is restricted by its loan agreements. See Note E to the Company's
Consolidated Financial Statements.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The selected operating data set forth below for the fiscal years ended
December 31, 1997, 1996 and 1995, and the selected balance sheet data at
December 31, 1997 and 1996, are derived from the Company's audited financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements. The selected financial data for the fiscal
years ended December 31, 1994 and 1993 and at December 31, 1995, 1994, and 1993
are derived from audited financial statements which are not included in this
report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Operating Data:
- --------------
<S> <C> <C> <C> <C> <C>
Net Sales ................... $ 135,952 $ 139,286 $ 169,559 $ 177,774 $ 140,152
Cost of sales (including
distribution costs) ......... 117,272 118,361 138,806 146,987 115,670
--------- --------- --------- --------- ---------
Gross margin ...... 18,680 20,925 30,753 30,787 24,482
Selling, general and
administrative expenses ..... 20,147 21,525 22,260 23,216 19,639
--------- --------- --------- --------- ---------
Operating margin ....... (1,467) (600) 8,493 7,571 4,843
Equity in net earnings of
affiliated companies ........ 673 1,529 1,204 1,237 1,504
Interest expense ............ (3,336) (3,600) (4,249) (3,572) (3,051)
Loss from sales of
investments in affiliates ... (2,193) -- -- -- --
Other ....................... (246) 2,354 (22) 177 (251)
--------- --------- --------- --------- ---------
Earnings (loss) before
income taxes ............... (6,569) (317) 5,426 5,413 3,045
Income taxes (credits) ...... (1,303) (194) 2,082 1,828 608
--------- --------- --------- --------- ---------
Net earnings (loss) ......... $ (5,266) $ (123) $ 3,344 $ 3,585 $ 2,437
========= ========= ========= ========= =========
Net earnings (loss)
per share-diluted (1) ...... $ (1.01) $ (.03) $ .64 $ .70 $ .53
========= ========= ========= ========= =========
Weighted average number
of shares ................... 5,239 5,198 5,205 5,186 4,879
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------
(IN THOUSANDS)
Balance Sheet Data:
- ------------------
<S> <C> <C> <C> <C> <C>
Working capital....... $ 48,999 $ 45,639 $ 50,004 $ 42,127 $ 33,537
Total assets.......... 72,663 88,442 92,136 85,957 69,135
Long-term obligations(2) 29,726 33,771 38,376 32,624 28,339
Shareholders' equity.. 33,996 39,450 39,392 35,722 28,487
</TABLE>
- ----------
(1) See Note K to the Company's Consolidated Financial Statements.
(2) Exclusive of current portion. For additional information regarding long-term
obligations, see Note E to the Company's Consolidated Financial Statements.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 ("RVs"), 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 RV and boat dealers
("After-Market Customers"). The Company's sales are affected primarily by (i)
usage of recreational vehicles and boats which affects the consumers' needs for
and purchase 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 RVs 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 RVs 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 RVs and boats, and increases in
gasoline prices and unusually adverse winter weather conditions which adversely
affect the use of RVs and boats. The occurrence of adverse economic conditions,
increases in interest rates or gasoline prices, or the onset of unusually severe
winter weather conditions affecting large regions of North America, could result
in declines in the Company's sales that would adversely affect the Company's
future operating results.
Factors Affecting Recent Operating Results
Changes in Supply Relationships in the RV After-Market. During the
five-year period ended December 31, 1995, the Company purchased substantially
all of its requirements for RV air conditioners, awnings and refrigerators from
Dometic Corporation ("Dometic"), a division of White Consolidated Industries.
Sales of such products accounted for 22% and 24%, respectively, of the Company's
sales in 1994 and 1995. During the first quarter of 1996, Dometic terminated its
supply agreement with the Company (as well as its supply agreements with other
independent distributors ("After-Market Distributors")) as a result of its
decision to integrate its operations vertically by marketing its products
directly to After-Market Customers in direct competition with the Company and
other After-Market distributors of RV products. In response to that action by
Dometic, the Company entered into a supply contract with RVP, which
manufacturers air conditions under the Coleman brand name and awnings under the
Faulkner brand name. Under that contract, RVP agreed to supply all of the
Company's requirements for RV air conditioners and awnings for a minimum term of
five years, commencing in 1996.
As a result of both the magnitude and timing of these changes in supply
relationships and the introduction, at the same time, of a number of new
proprietary products, RVP and certain of the Company's proprietary product
manufacturers encountered difficulties in meeting the Company's requirements for
their products for the spring and summer months of 1996, when demand from
After-Market customers is at its highest (see "Seasonality and Inflation"). In
addition, the Company encountered increased competition within the RV products
After-Market due to Dometic's entry as a competitor in that market and increased
price competition from other distributors seeking to regain market share lost to
the Company's proprietary products and to Dometic. Since the supply problems
encountered by the Company primarily affected its supply of, and therefore its
ability to meet customer demand for, higher margin products, the supply problems
and the increased competition adversely affected the Company's sales and
margins, particularly in the last three quarters of 1996, as the Company lost
sales of such products to its competitors.
Although the supply problems encountered in 1996 were largely remedied
by the end of 1996, those problems adversely affected the Company's operating
results in 1997, as the Company was unable to recapture market share for the
higher margin products that were affected by those problems. In addition, the
increased price competition which began in 1996 continued into 1997. As a
result, sales and operating margins declined, causing the Company to sustain a
12
<PAGE> 14
$1,467,000 loss from operations in 1997. Although the Company expects some
improvement in operating results in 1998, the conditions that caused the losses
in 1996 and 1997 are expected to have a residual adverse effect on operating
results, and the Company could sustain losses again, in 1998. There also is no
assurance that additional changes within the After-Market, that would increase
competition or create further supply or other problems for the Company, will not
occur in the future.
Sales of Burden and HWH Investments. In September 1997 the Company sold
its minority ownership interest in H. Burden Limited ("Burden"), which
distributes RV and boating accessories, parts and supplies in Western Europe for
a cash purchase price of $4,198,000, plus a right to receive additional payments
of up to $330,000 if certain contingencies are satisfied. In early 1998, the
Company completed the sale of its minority ownership interest in HWH
Corporation, a privately owned manufacturer of after-market products for
recreational vehicles ("HWH"), for a cash price of $5,387,000. (See "Business -
Developments in 1997" in Part I of this Report, for a discussion of the
principal reasons that led the Company to sell those investments.) Although the
amounts received from each of these sales exceeded the Company's cost of
acquiring those investments, for financial reporting purposes the Company
reported (non-cash) losses on those sales of $525,000 and $1,669,000,
respectively, because the carrying values of those investments had been
increased over the years by the Company's proportionate share of the earnings of
Burden and HWH. Those earnings were included in the Company's operating results
under the equity method of accounting.
Those losses, coupled with the Company's loss from operations, were the
principal causes of the net loss sustained by the Company in 1997.
RESULTS OF OPERATIONS
Net Sales. Net sales in 1997 decreased by approximately $3,334,000 or
2.4% as compared to 1996, due primarily to (i) the continuing adverse effects of
the changes in supply relationships that occurred in 1996; (ii) continuing of
increased price competition that began in 1996; and (iii) adverse weather
conditions which affected the Northern United States and Canada in the first
half of 1997.
Net sales in 1996 decreased by approximately $30,273,000 or 17.9% as
compared to 1995. This sales decrease was due to a number of factors, including
(i) changes in supply relationships that occurred in 1996; (ii) increased price
competition due to Dometic's entry into the marketplace as a vertically
integrated supplier to After-Market customers and price reductions by other
distributors on various third-party name brand products; and (iii) slowness in
sales of new recreational vehicles, during the year, which adversely affected
sales of accessories distributed by the Company.
Gross Margin. The Company's gross margin decreased to 13.7% of net
sales in 1997 as compared to 15.0% in 1996 and 18.1% in 1995. These declines
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 and product supply problems that occurred in 1996 and increased
price competition which, as discussed above, also adversely affected the
Company's sales revenue in 1997; and (iii) the impact of fixed costs on a lower
sales base, the combined effect of which more than offset the more favorable
margins which the Company realizes on sales of its proprietary products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 14.8% of net sales in 1997, 15.5% in 1996, and
13.1% in 1995. In absolute dollars, these expenses declined by approximately
$1,378,000 in 1997 and $735,000 in 1996, as compared to their respective prior
years. These decreases were primarily a result of increased efficiencies
associated with the Company's national call and service center, a reduction of
the Company's telephone expenses and the expiration of certain non-competition
agreements that were obtained by the Company in connection with its acquisition
of other businesses in previous years.
Operating Income (Loss). Due to the combined effects of the decreases
in sales and gross margin during 1996 and 1997, the Company's sustained a loss
from operations of $1,467,000 in 1997 as compared to a loss from operations of
$600,000 in 1996. In 1995 the Company generated income from operations of
$8,493,000.
13
<PAGE> 15
Equity in Net Earnings of Affiliated Companies. As described above, the
Company's minority ownership interests in Burden and HWH (as well as in two
other companies which are not material to the Company's operations) have been
accounted for under the equity method of accounting. Due to the sales of its
investments in Burden and HWH, the Company expects that, in the future, its
equity in the earnings (loss) of affiliates will not be material to its
operating results.
Interest Expense. Interest expense is ordinarily the most significant
component of Other income (expense). During 1997, interest expense decreased by
$264,000 or 7.3%, as compared to 1996. This decrease was the result of
reductions in average long-term borrowings outstanding during year as compared
to 1996 due to the Company's inventory reduction program and the sale of its
investment in Burden, the proceeds of which were used initially to reduce
borrowings and provide additional credit availability for operations.
During 1996, interest expense decreased by $649,000 or 15.3%, as
compared to 1995 as a result of: (i) a decrease in the rate of interest charged
under the Company's revolving bank credit facility, and (ii) reductions in
average long-term borrowings outstanding during the second half of 1996 as
compared to the same period in 1995.
The Company will continue to rely on borrowings to fund a substantial
portion of its working capital requirements and future growth and, as a result,
it anticipates that interest will continue to be a significant expense for the
Company.
Loss from Sales of Investments in Affiliates. Although the Company
received net cash proceeds from the sales of its investments in Burden and HWH
of approximately $4,198,000 and $5,387,000 respectively, for financial reporting
purposes, the Company recorded losses on those sales of approximately $525,000
and $1,669,000, respectively. Those losses represent, in each case, the excess
of the respective amounts at which each of those investments was carried on the
books of the Company for financial reporting purposes over the respective prices
at which those investments were sold. Under applicable accounting principles,
the Company's investments in Burden and HWH were carried at amounts equal to the
sum of (i) the respective amounts paid by the Company for such investments, plus
(ii) the proportionate share of the cumulative earnings of Burden and HWH,
respectively, that were allocated to the Company during the respective periods
that the Company held such investments.
By contrast, in 1996, other income included $2,122,000 of non-recurring
net proceeds from a favorable settlement of a lawsuit recorded in the second
quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances the 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
is entitled to borrow up to the lesser of (i) an amount equal to 80% of its
eligible accounts receivable and 50% of its eligible inventory (the "borrowing
base") or (ii) $50,000,000 (which will decrease to $35,000,000 effective on and
after May 22, 1998 and will be subject to seasonal reductions to $30,000,000
during the months from October 1 to January 1 each year). Borrowings under the
credit facility bear interest at a per annum rate of interest equal to the
bank's prime rate, plus 0.50%, or, at the Company's option, but subject to
certain limitations, at the bank's available LIBOR rate, plus 2.0% per annum,
until March 30, 1998, when they will increase to prime plus 0.75% and LIBOR plus
2.5%, respectively. The reduction, to $35,000,000, of the maximum borrowings
permitted under the credit facility and the increase in applicable interest
rates were agreed on by the Company and the lender in March 1998, as part of an
amendment agreement that also relaxes certain loan covenants applicable to the
Company retroactive to December 31, 1997 and extends the maturity of the credit
line to the year 2001.
14
<PAGE> 16
At March 6, 1998, outstanding borrowings under this credit facility
were $26,325,000. Borrowings under the credit facility are secured by
substantially all of the Company's assets and rank senior in priority to other
indebtedness of the Company and the agreement governing the credit facility (the
"Credit Agreement") contains certain restrictive covenants. The Company was in
compliance with those covenants, as retroactively amended, at December 31, 1997,
the most recent date as of which compliance with such covenants was required to
be determined under the Credit Agreement.
In 1997 and 1996, reductions in inventories enabled the Company to
generate cash from operating activities of $1,544,000 in 1997 and $4,182,000 in
1996. Excluding non-cash charges, operating cash flow declined in 1995 primarily
as a result of increases in inventory levels due to the addition of newly
introduced proprietary products and the opening of three new warehouse and
distribution centers. The Company anticipates that it will be able to reduce
inventories further in 1998 and, as a result, expects to generate cash flow from
operations in 1998.
Net cash provided by investing activities was $3,615,000 in 1997, as
compared to net cash used in investing activities of $1,082,000 in 1996 and
$3,597,000 in 1995. During 1997, the Company received proceeds of $4,198,000
from the sale of its investment in Burden. The Company used cash of $687,000 in
1996 and $668,000 in 1995 to acquire additional shares of Burden. Capital
expenditures were $456,000 in 1997, $445,000 in 1996, and $1,862,000) in 1995.
Capital expenditures during these years related principally to the acquisition
of warehouse equipment, the establishment and equipping of the national customer
service center, and additional investments in data processing equipment.
The Company leases the majority of its facilities and certain of its
equipment under noncancelable operating leases. In 1997, rent expense under all
operating leases was approximately $2.8 million. The Company's future lease
commitments are discussed in Note F to the Company's Consolidated Financial
Statements contained elsewhere in this Report.
Borrowings under the Company's revolving line of credit decreased by
$2,835,000 in 1997 and $1,068,000 in 1996 as compared to the previous year. The
Company made a principal payment of $2,333,000 on its outstanding senior
subordinated notes in 1997 and 1996, principally with borrowings under its long
term revolving bank credit facility. The Company is required to make two
additional principal payments, on the those subordinated notes, each in the
principal amount of $2,334,000, in June 1998 and 1999, respectively.
The Company believes that available credit under its revolving credit
facility, together with internally generated funds, will be sufficient to enable
the Company to meet its working capital requirements and other fixed charges
over the next 12 months, as well as to make the June 1998 principal payment on
the subordinated notes.
SEASONALITY AND INFLATION
Seasonality. Sales of recreational vehicle and boating parts,
accessories and supplies 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 in the winter months when sales are lower, particularly in years in which
there occurs unusually severe winter weather conditions in large regions of
North America.
15
<PAGE> 17
Set forth below is a summary of quarterly financial data for the two
years ended December 31, 1997, which indicates the effects on operating results
of the seasonality of the Company's business.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1997 1997 1997 1997
---------- --------- --------- ---------
(UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.................. $ 35,205 $ 41,600 $ 37,847 $ 21,300
Gross profit.............. 5,533 5,983 5,133 2,031
Net earnings (loss)....... (92) (51) (1,450) (3,673)
Net earnings (loss) per
share..................... $ (.02) $ (.01) $ (.28) $ (.70)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1996 1996 1996 1996
---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.................. $ 37,380 $ 42,159 $ 37,552 $ 22,195
Gross profit.............. 7,501 6,145 4,769 2,510
Net earnings (loss)....... 763 1,155 (464) (1,577)
Net earnings (loss) per
share..................... $ .15 $ .22 $ (.09) $ (.30)
</TABLE>
Inflation. 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
adversely affect the purchase and usage of recreational vehicles and boats,
which can adversely affect sales of the Company's products.
YEAR 2000.
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
Based on preliminary information, the costs of addressing the potential problems
are not currently expected to have a material adverse effect on the Company's
financial position, liquidity or results of operations in future periods.
However, if the Company, or its customers or vendors, are unable to resolve such
processing issues in a timely manner, it could pose a material financial risk.
Accordingly, the Company plans to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
FORWARD LOOKING INFORMATION.
This Report contains forward-looking information which reflects
Management's current view 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; possible changes in economic
conditions, prevailing interest rates or gasoline prices, or the occurrence of
unusually severe winter 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. See "Business --
Certain Factors that could Affect Future Performance in Part I of this Report.
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.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE COAST DISTRIBUTION SYSTEM AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Certified Public Accountants............................................... 18
Consolidated Balance Sheets, December 31, 1997 and 1996.......................................... 19
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995............................................................... 20
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1996 and 1995........................................... 21
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995................................................... 23
Notes to Consolidated Financial Statements....................................................... 24
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Years Ended December 31, 1997, 1996 and 1995........................................... 34
</TABLE>
(Other Financial Statement Schedules are omitted as the
information is not required, is not material or is otherwise
furnished.)
17
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
The Coast Distribution System
We have audited the accompanying consolidated balance sheets of The Coast
Distribution System and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Coast
Distribution System and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
We have also audited Schedule II of The Coast Distribution System and
Subsidiaries for each of the three years in the period ended December 31, 1997.
In our opinion this schedule presents fairly, in all material respects, the
information required to be set forth herein.
/s/ Grant Thornton LLP
San Jose, California
February 27, 1998
18
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, 1997 1996
- ------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 308 $ 214
Accounts receivable (less allowance for
doubtful receivables of $1,080 in
1997 and $1,086 in 1996) 11,268 13,285
Inventories 37,581 43,193
Prepaid expenses 676 426
Deferred income taxes 1,980 2,038
Investment in affiliate 3,888 --
Income tax refunds receivable 1,703 883
------- -------
Total current assets 57,404 60,039
PROPERTY, PLANT & EQUIPMENT 4,709 5,355
OTHER ASSETS 409 12,458
Investments in affiliates 8,466 9,048
Costs in excess of net assets of acquired -- 35
businesses 1,675 1,507
------- -------
Non-competition agreements 10,550 23,048
------- -------
Other $72,663 $88,442
======= =======
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 3,421 $ 7,322
Accrued liabilities 2,226 1,911
Notes payable -- 1,500
Current maturities of long-term obligations 2,758 3,667
------- -------
Total current liabilities 8,405 14,400
LONG-TERM OBLIGATIONS 29,726 33,771
DEFERRED INCOME TAXES 182 348
COMMITMENTS -- --
REDEEMABLE PREFERRED STOCK OF SUBSIDIARY 354 473
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized
10,000,000 shares; issued and
outstanding, 5,246,879 shares in
1997 and 5,210,723 shares in 1996 19,559 19,440
Cumulative translation adjustment (305) (11)
Retained earnings 14,742 20,021
------- -------
33,996 39,450
------- -------
$72,663 $88,442
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 21
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands, except for per share amounts)
Net sales $ 135,952 $ 139,286 $ 169,559
Cost of products sold (including distribution costs) 117,272 118,361 138,806
--------- --------- ---------
Gross margin 18,680 20,925 30,753
Selling, general and administrative expenses 20,147 21,525 22,260
--------- --------- ---------
Operating margin (1,467) (600) 8,493
Equity in net earnings of affiliated companies 673 1,529 1,204
Other income (expense)
Interest expense (3,336) (3,600) (4,249)
Loss from sale of investments in affiliates (2,193) -- --
Other (246) 2,354 (22)
--------- --------- ---------
Earnings (loss) before income taxes (6,569) (317) 5,426
Income tax provision (benefit) (1,303) (194) 2,082
--------- --------- ---------
Net earnings (loss) $ (5,266) $ (123) $ 3,344
========= ========= =========
Earnings (loss) per share:
Basic $ (1.01) $ (.03) $ .65
========= ========= =========
Diluted $ (1.01) $ (.03) $ .64
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(5,266) $ (123) $ 3,344
Adjustment to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation 1,015 1,166 1,180
Amortization 608 1,084 1,501
Gain from sale of equipment (9) (62) (4)
Equity in net earnings of affiliated companies,
net of dividends (148) (950) (645)
Loss from sale of investments in affiliates 2,193 -- --
Deferred income taxes 227 (110) 18
Change in assets and liabilities net of
effects from business acquisitions:
Accounts receivable 2,299 (1,202) 1,194
Inventory 5,612 5,032 (5,647)
Prepaids and tax refunds receivable (924) (505) 80
Accounts payable (3,901) (54) 422
Accrued liabilities (162) (94) (1,259)
------- ------- -------
2,924 3,177 (5,210)
------- ------- -------
Net cash provided by operating
activities 1,544 4,182 184
Cash flows from investing activities:
Proceeds from sale of equipment 45 124 17
Decrease (increase) in other assets (172) 66 (797)
Acquisitions of businesses, net of cash acquired -- (827) (955)
Proceeds from sale of investment 4,198 -- --
Capital expenditures (456) (445) (1,862)
------- ------- -------
Net cash provided (used) in
investing activities 3,615 (1,082) (3,597)
Cash flows from financing activities:
Net borrowings (repayments) under notes
payable and line-of-credit agreements (2,835) (1,068) 6,477
Proceeds from issuance of long-term debt 259 161 361
Repayment of long-term debt (2,372) (2,613) (3,448)
Issuance of common stock under employee
stock purchase and stock option plans 119 285 716
Repurchase of common stock -- -- (589)
Income tax benefit of exercise of stock options -- -- 88
Redemption of redeemable preferred stock
of subsidiary (103) (106) (71)
Dividends on preferred stock of subsidiary (13) (18) (33)
------- ------- -------
Net cash provided (used) by financing activities (4,945) (3,359) 3,501
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Effect of exchange rate changes on cash $ (120) $ (28) $ --
------- ------- -------
NET INCREASE (DECREASE) IN CASH 94 (287) 88
Cash beginning of year 214 501 413
------- ------- -------
Cash end of year $ 308 $ 214 $ 501
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,312 $ 3,733 $ 4,329
Income taxes (608) 673 2,072
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 24
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Retained Translation
Three Years Ended December 31, 1997 Stock Earnings Adjustment Total
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 18,940 $ 16,851 $ (69) $ 35,722
Net earnings for the year -- 3,344 -- 3,344
Foreign currency translation adjustments -- -- 144 144
Issuance of common stock under employee
stock purchase plan 171 -- -- 171
Exercise of stock options 545 -- -- 545
Repurchase of common stock (589) -- -- (589)
Income tax benefit of exercise of non-qualified
stock options 88 -- -- 88
Dividends on preferred stock of subsidiary -- (33) -- (33)
-------- -------- ----- --------
Balance at December 31, 1995 19,155 20,162 75 39,392
Net loss for the year -- (123) -- (123)
Foreign currency translation adjustments -- -- (86) (86)
Issuance of common stock under employee
stock purchase plan 198 -- -- 198
Exercise of stock options 87 -- -- 87
Dividends on preferred stock of subsidiary -- (18) -- (18)
-------- -------- ----- --------
Balance at December 31, 1996 19,440 20,021 (11) 39,450
Net loss for the year -- (5,266) -- (5,266)
Foreign currency translation adjustments -- -- (294) (294)
Issuance of common stock under employee
stock purchase plan 119 -- -- 119
Dividends on preferred stock of subsidiary -- (13) -- (13)
-------- -------- ----- --------
Balance at December 31, 1997 $ 19,559 $ 14,742 $(305) $ 33,996
======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation. The Company consolidates the accounts of its
wholly-owned subsidiary, The Coast Distribution System (Canada) Inc. ("Coast
Canada"). Investments in unconsolidated affiliates (Note D) are accounted for by
the equity method. Operations of affiliates outside the United States and Canada
are generally included for periods within three months of the Company's year-end
to ensure preparation of consolidated financial statements on a timely basis.
All material intercompany transactions have been eliminated.
2. Inventories. Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market. Inventories consist primarily of
recreational replacement parts, supplies and accessories held for resale.
3. Property, Plant and Equipment. Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on a straight-line basis. The estimated lives used in determining depreciation
and amortization are:
Buildings and improvements 12-40 years
Warehouse and office equipment 5-7 years
Automobiles 3-5 years
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter. Currently the
amortization periods range from 5 to 17 years.
4. Revenue Recognition. Revenue from sales of product is recognized upon
shipment.
5. Industry Segment. The Company operates in one industry segment which is the
distribution of recreational replacement parts, supplies and accessories. The
Company distributes its product from 18 distribution centers located throughout
the United States and Canada. No single customer accounted for 10% or more of
the Company's revenues in 1997, 1996, or 1995.
6. Intangible Assets. The costs in excess of net assets of acquired businesses
are being amortized on a straight-line basis using periods ranging from four to
thirty years. Non-competition agreements are being amortized on a straight-line
basis over seven years. At December 31, 1997 and 1996, the accumulated
amortization applicable to intangible assets was approximately $4,898,000 and
$5,369,000 respectively. On an ongoing basis, management reviews the valuation
and amortization of intangibles. As part of this review, the Company evaluates
the recoverability of the intangibles based upon the operating income generated
by the related acquired businesses to determine if impairment has occurred.
7. Foreign Currency Translation. Exchange adjustments resulting from foreign
currency transactions are generally recognized in net earnings, whereas
adjustments resulting from the translation of financial statements are reflected
as a separate component of shareholders' equity. Net foreign currency
transaction gains or losses are not material in any of the years presented.
8. Forward Exchange Contracts. On a selective basis, the Company enters into
forward exchange contracts to reduce the impact of foreign currency fluctuations
on a portion of the inventory purchases of its subsidiary. The gains or losses
on these contracts are included in earnings in the period when the related
transactions being hedged are recognized. The contracts do not subject the
Company to significant market risk from exchange rate movements because the
contracts offset gains and losses on the balances and transactions being hedged.
At December 31, 1997, there were no forward exchange contracts outstanding.
9. Income Taxes. The Company provides a deferred tax expense or benefit equal to
the net change in the deferred tax liability or asset during the year. Deferred
income taxes represent tax credit carryforwards and future net tax effects
resulting from temporary differences between the financial statement and tax
basis of assets and liabilities, using enacted tax rates in effect for the year
in which the differences are expected to reverse. A valuation allowance is
provided against deferred tax assets when realization of the asset is not
expected to occur.
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenues and expenses during the
reporting period. Actual results could differ from those estimates.
11. Recently Issued Accounting Standards. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. Coast is in the
process of determining its preferred format. The adoption of SFAS No. 130 will
have no impact on Coast's consolidated results of operations, financial position
or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. Coast is in the process of evaluating the
disclosure requirements. The adoption of SFAS No. 131 will have no impact on
Coast's consolidated results of operations, financial position or cash flows.
NOTE B: ACQUISITIONS
H. BURDEN LIMITED - In 1993, the Company began acquiring shares of H.
Burden Limited ("Burden"). In 1996 the Company increased its ownership to 35% of
the outstanding shares. The cumulative purchase price paid for the shares was
$4,025,000. The investment in Burden was accounted for by the equity method and,
accordingly, the equity in net earnings of Burden was included in the Company's
consolidated statements of operations from the date of acquisition through
September 30, 1996. In September 1997, the Company sold its investment for
$4,528,000. The carrying value of the investment was $5,003,000, and the sale
resulted in a loss which is shown net of related selling expenses.
Pro forma results of operations assuming the Burden acquisition had
occurred as of the beginning of each respective year presented have not been
presented as such results do not differ materially from the reported results of
operations.
NOTE C: PROPERTY, PLANT & EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Buildings $ 2,791 $ 2,791
Warehouse equipment 3,434 3,305
Office equipment 4,427 4,686
Leasehold improvements 744 922
Automobiles 55 73
------- -------
11,451 11,777
Less accumulated depreciation
and amortization 7,379 7,059
------- -------
4,072 4,718
Land 637 637
------- -------
$ 4,709 $ 5,355
======= =======
</TABLE>
NOTE D: INVESTMENTS IN AFFILIATED
COMPANIES
The Company's 34% investment in HWH Corporation is accounted for using
the equity method of accounting. In February 1998, HWH repurchased all of the
shares Coast owned for $5,388,000. The carrying value of the investment was
$7,057,000 and, as of December 31,1997, the investment was written down to its
net realizable value, resulting in a loss. Summarized financial information of
HWH at December 31, 1996 and for each of the two years in the period ended
December 31, 1996, is presented as follows:
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Balance Sheet
As of December 31, 1996
- --------------------------------------------------------
(dollars in thousands)
<S> <C>
Cash and cash equivalents $ 1,626
Investments 1,719
Receivables 4,029
Inventory 9,052
Other current assets 659
Investments and long-term receivables 2,187
Property and equipment 1,251
Other assets 100
-------
$20,623
=======
Current liabilities $ 2,789
Long-term debt 120
Shareholders' equity 17,714
-------
$20,623
=======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Earnings
Year Ended December 31, 1996 1995
- -----------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Net sales $32,279 $30,946
Cost of goods sold 21,544 20,829
------- -------
Gross margin 10,735 10,117
Selling, general and
administrative expenses 6,837 6,069
Other income 375 534
------- -------
Earnings before income
taxes 4,273 4,582
Provision for income taxes 1,535 1,584
------- -------
Net earnings $ 2,738 $ 2,998
======= =======
</TABLE>
Summarized financial information of Burden at September 30, 1996 and
for the years ended September 30, 1996 and 1995 is presented as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheet
As of September 30, 1996
- ----------------------------------------------------------
(dollars in thousands)
<S> <C>
Cash $ 168
Receivables 8,540
Inventory 14,023
Other current assets 498
Property and equipment 11,297
Other assets --
-------
$34,526
=======
Current maturities $ 5,635
Other current liabilities 8,408
Long-term debt 8,403
Shareholders' equity 12,080
-------
$34,526
=======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Earnings
Year Ended September 30, 1996 1995
- -------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Net sales $64,526 $59,617
Cost of goods sold 52,316 47,771
------- -------
Gross margin 12,210 11,846
Selling, general and
administrative expenses 8,818 9,276
Other (income) expense 803 947
------- -------
Earnings before income taxes 2,589 1,623
Provision for income taxes 1,030 642
------- -------
Net earnings $ 1,559 $ 981
======= =======
</TABLE>
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has investments in two joint ventures, Coast to Coast RV
Services doing business in Australia and Accessorios Para Campers y Autobuses,
S.A De C.V. doing business in Mexico. The Company also has an investment in
Eur-Asia Recreational Vehicle Accessories Taiwan Company, a Taiwan corporation.
These investments are being accounted for using the equity method of accounting.
The Company's investments in unconsolidated affiliates are summarized
as follows:
<TABLE>
<CAPTION>
HWH Burden Other
- -----------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance at 1/1/96 $ 6,378 $ 4,004 $ 509
Investments -- 687 --
Equity in earnings (loss),
net of goodwill
amortization 852 512 165
Dividends received (525) (48) --
Translation adjustments -- (84) 8
Balance at 12/31/96 6,705 5,071 682
Investments -- -- --
Equity in earnings (loss),
net of goodwill
amortization 877 -- (203)
Dividends received (525) -- --
Translation adjustments -- (67) (70)
Sale/writedown
of investment (1,669) (5,004) --
Balance at 12/31/97 $ 5,388 $ -- $ 409
</TABLE>
NOTE E: LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
Long-term obligations consist of the following at
December 31: 1997 1996
(dollars in thousands)
- -------------------------------------------------------------------
<S> <C> <C>
Secured note payable to bank $25,121 $27,956
11.2% senior subordinated
secured notes - due June 1, 1999 4,668 7,001
8.75% note collateralized
by a deed of trust on land
and building, due in
monthly installments of
$13, final payment due in
November 2012 1,346 --
11.25% note collateralized
by a deed of trust on land
and building, due in
monthly installments of
$7, remaining principal
due in November 1997 -- 602
11.625% note collateralized
by a deed of trust on land
and building, due in
monthly installments of
$5, remaining principal
due in November 1997 -- 433
10% note collateralized
by a deed of trust on land
and building, due in
monthly installments of
$11, final payment
due in September 2004 663 728
Other note payable 126 183
Capital lease obligations 560 535
------- -------
32,484 37,438
Current portion 2,758 3,667
------- -------
$29,726 $33,771
======= =======
</TABLE>
Subsequent to 1998, annual maturities of long-term obligations (in
thousands) are $2,698 in 1999, $25,405 in 2000, $162 in 2001, $173 in 2002, and
$1,288 due thereafter.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Secured Note Payable to Bank
The secured note payable to bank represents a revolving credit
agreement, collateralized by substantially all assets of the Company. The
Company may borrow up to the lesser of (i) $50,000,000 or (ii) an amount equal
to 80% of the value of their eligible accounts receivable and 50% of the value
of their eligible inventory. Interest is payable at LIBOR, (6% at December 31,
1997) plus 200 basis points.
In March 1998 the Company amended its credit facility. Under the terms
of this revision, the credit facility will decrease to $35,000,000 on May 22,
1998 with a seasonal reduction to $30,000,000 between October 1 and January 1 of
each year. The amendment also modified certain of the Company's financial
covenants and changed the interest rate the Company pays to LIBOR plus 250 basis
points.
11.2% Senior Subordinated Secured Notes Due June 1, 1999
The notes are collateralized by substantially all of the assets of the
Company and bear interest at 11.2%. The notes require semiannual interest
payments on June 1 and December 1 of each year. Annual principal payments of
$2,333,000 commenced June 1, 1994 and continue through June 1, 1999.
The note agreements relating to the secured note payable to bank and to
the 11.2% senior subordinated secured notes contain certain restrictive
covenants. Included are covenants regarding profitability, minimum liquidity
ratios, restrictions on investments, and limitations on indebtedness, payment of
dividends, long-term leases, and mergers and consolidations.
The Company is in compliance with all the covenants, some of which were
revised by the amended agreement.
NOTE F: COMMITMENTS
Operating Leases
The Company leases its corporate offices, certain warehouse facilities,
and data processing equipment. These leases are classified as operating leases
as they do not meet the capitalization criteria of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases". The office and warehouse
leases expire over the next ten years and the equipment leases expire over the
next five years. Minimum future rental commitments under non-cancelable
operating leases having an initial or remaining term in excess of one year as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Equipment Facilities Total
- ----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
1998 $ 123 $2,395 $2,518
1999 57 1,523 1,580
2000 15 604 619
2001 8 577 585
2002 1 354 355
Thereafter -- 836 836
------ ------ ------
$ 204 $6,289 $6,493
====== ====== ======
</TABLE>
Rent expense charged to operations amounted to (in thousands) $2,758 in
1997, $3,116 in 1996, and $3,144 in 1995.
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G: STOCK OPTION AND
STOCK PURCHASE PLANS
Stock Option Plans
The Company has in effect a 1987 Nonqualified Stock Option Plan and a
1993 Stock Option and Incentive Plan ("the plans") which authorize the issuance
of options to purchase 700,000 shares of the Company's common stock to key
management employees of the Company and members of the Company's Board of
Directors. The plans are accounted for under the provisions of APB No. 25 and
generally provide that option prices will not be less than fair market value per
share on the date the option is granted, or 110% of fair market value in the
case of an option granted to any employee who, at the time of the grant, owns or
is deemed to own more than 10% of the total combined voting power of all classes
of stock of the Company. Accordingly, no compensation cost has been recognized
for the plans. Had compensation cost for the plans been determined based on the
fair value of the options at the grant dates consistent with the method of
Statement of Financial Accounting Standards 123, Accounting for Stock-Based
Compensation ("SFAS 123"), the Company's net earnings (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below. Pro
forma amounts may not be indicative of pro forma results in future periods
because the pro forma amounts below do not include pro forma compensation cost
for options granted prior to January 1, 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Net Earnings (loss)
attributable to
Common Shareholders
As reported $(5,279) $ (141) 3,338
Pro Forma (5,351) (211) 3,250
Per share - Basic
As reported $ (1.01) $ (0.03) $ 0.65
Pro Forma (1.02) (0.04) 0.64
Per share - Diluted
As reported $ (1.01) $ (0.03) $ 0.64
Pro Forma (1.02) (0.04) 0.63
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used: no expected dividends; expected volatility of 50% for 1997 and
45% for 1996 and 1995; risk-free interest rates of 6.2%, 6.1%, and 7.2%; an
expected forfeiture rate of 46%; and expected lives of 4 years. A summary of the
status of the Company's stock option plans is presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 183,200 $ 7.03 198,250 $ 6.00 432,709 $ 5.75
Granted 163,500 4.09 10,000 5.63 97,500 6.94
Exercised -- (24,675) 3.50 (151,034) 3.57
Forfeited (11,000) 5.08 (375) 3.62 (180,925) 6.93
------- ------- --------
Outstanding at end
of year 335,700 5.67 183,200 7.03 198,250 6.00
Weighted average fair
value of options granted
during the year $ 1.87 $ 2.40 $ 3.05
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following information applies to options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Options Weighted Average Remaining Contractual Options Weighted Average
Range Outstanding Exercise Price Life (Years) Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.50 - $6.50 213,200 $4.61 8 96,400 $5.20
$7.13 - $7.88 122,500 7.48 5 79,000 7.58
------- ----- ------- -----
335,700 $5.67 175,400 $6.27
</TABLE>
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plans
The Company had in effect a 1987 Employee Stock Purchase Plan and a 1997
Employee Stock Purchase Plan under which 850,000 shares of the Company's common
stock were reserved for issuance to all permanent employees who have met minimum
employment criteria. Employees who do not own 5% or more of the outstanding
shares are eligible to participate through payroll deductions. At the end of
each offering period, shares are purchased by the participants at 85% of the
lower of the fair market value at the beginning or the end of the offering
period. During the years ended December 31, 1997 and 1996, 36,156 and 30,619
shares, respectively, of common stock were issued under the 1987 Employee Stock
Purchase Plan. The 1987 plan expired on October 13, 1997. At December 31, 1997
400,000 shares under the 1997 plan remain available for issuance in future
offering periods.
NOTE H: EMPLOYEE BENEFIT PLAN
The Company has a 401(K) profit sharing plan in which all full-time
employees are eligible to participate on the first quarter following completion
of six months of employment. The plan allows participants to make pretax
contributions and apply for and secure loans from their account. The plan
provides for the Company to make discretionary contributions to be determined
annually. The Company contributed $54,364 in 1997, $39,803 in 1996, and $41,299
in 1995.
NOTE I: FOREIGN OPERATIONS
A summary of the Company's operations by geographic area is presented
below:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Net Sales
United States $ 115,283 $ 120,957
Canada 21,389 19,295
Eliminations (720) (966)
Operating Margin
United States (1,989) (1,013)
Canada 571 478
Eliminations (49) (65)
Identifiable Assets
United States 67,706 82,711
Canada 8,534 8,873
Eliminations (3,577) (3,142)
</TABLE>
Transfers between geographic areas have not been presented as they are not
significant.
NOTE J: INCOME TAXES
Pretax income (loss) for the years ended December 31 was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Domestic $(6,842) $ (378) $4,486
Foreign 273 61 940
-------- -------- ------
$(6,569) $ (317) $5,426
======== ======== ======
</TABLE>
The provision (benefit) for income taxes is summarized as follows for the
year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current: (dollars in thousands)
Federal $(1,619) $ (137) $ 1,386
State (19) 12 273
Foreign 108 41 405
------- ------- -------
(1,530) (84) 2,064
------- ------- -------
Deferred:
Federal 412 (129) (44)
State (152) 14 62
Foreign (33) 5 --
------- ------- -------
227 (110) 18
------- ------- -------
Income tax
provision $(1,303) $ (194) $ 2,082
======= ======= =======
</TABLE>
The total operating loss carryforwards available for state income tax
purposes at December 31, 1997 aggregate $4,120,000. The earliest carryforwards
begin to expire in 1999.
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Deferred tax assets
Inventory
capitalization $ 936 $ 1,034 $ 918
Bad debt provision 382 382 345
Inventory reserve 427 507 403
Property, plant and
equipment -- 1 41
Loss carryforwards 261 145 181
Other 34 45 11
------- ------- -------
Gross deferred
tax assets 2,040 2,114 1,899
Less valuation
allowance (60) (72) (76)
------- ------- -------
$ 1,980 $ 2,042 $ 1,823
------- ------- -------
Deferred tax liabilities
Investment in
affiliates $ (474) $ (257) $ (233)
Property, plant and
equipment (182) (91) (82)
------- ------- -------
Gross deferred
tax liabilities (656) (348) (315)
------- ------- -------
Net deferred
tax assets $ 1,324 $ 1,694 $ 1,508
======= ======= =======
</TABLE>
A reconciliation between actual tax expense(benefit) for the year and
expected tax expense(benefit) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Earnings (loss) before
income taxes $(6,569) $(317) $ 5,426
------- ----- -------
Expected income tax
expense at 34% (2,233) (108) 1,845
Higher rates on earnings
of foreign operations (34) 8 69
Goodwill amortization 231 229 267
Dividend exclusion on
earnings of affiliate (143) (242) (269)
Temporary differences related to sold
affiliates not previously recognized 913 -- --
State taxes
(net of federal benefit) (129) 44 225
Decrease in valuation
allowance (12) (4) (6)
Exclusion of earnings of
foreign affiliates 65 (133) (71)
Other 39 12 22
------- ----- -------
Income tax provision $(1,303) $(194) $ 2,082
======= ===== =======
</TABLE>
Deferred income taxes have not been provided on the undistributed earnings of
foreign subsidiaries or foreign joint ventures as they have been and will
continue to be reinvested. Where it is contemplated that earnings will not be
reinvested, the Company believes U.S. foreign tax credits would largely
eliminate any U.S. tax.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K: EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Net loss $(5,266)
Preferred
dividends (13)
-------
Net loss
attributable to common
shareholders $(5,279)
=======
Basic and diluted earnings
(loss) per share $(5,279) 5,239,152 ($1.01)
======= ========= ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
- ------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Net loss $(123)
Preferred
dividends (18)
-----
Net loss
attributable to
common shareholders $(141)
=====
Basic and diluted earnings
(loss) per share $(141) 5,198,402 ($0.03)
===== ========= ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Net earnings $ 3,344
Preferred
dividends (33)
--------
Net earnings
available to common
shareholders $ 3,311
========
Basic Earnings
per share $ 3,311 5,101,117 $0.65
=====
Effect of Dilutive
Securities
Stock options 51,745
Convertible debt 27 51,712
--------
Diluted earnings
per share $ 3,338 5,204,574 $0.64
======== ========= =====
</TABLE>
Options to purchase 335,700, 183,200 and 198,250 shares of common stock
were outstanding during the years 1997, 1996 and 1995, respectively. Not all of
these options were included in the computation of diluted EPS because either 1)
the options' exercise price was greater than the average market price of the
common shares, or 2) the inclusion of the options in 1997 or 1996 would have
been antidilutive because the company experienced a net loss in those years.
NOTE L: ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Payroll and related benefits $ 641 $ 723
Rent 127 267
Income and other taxes 890 461
Other 568 460
------ ------
$2,226 $1,911
====== ======
</TABLE>
NOTE M: NOTES PAYABLE
At December 31, 1997 and 1996 the Company owed HWH $1,500,000. The notes
payable are due on demand and interest is paid monthly at the Company's current
rate payable on its secured note payable to bank (see note E). At December 31,
1997 the note has been reclassified and netted against the HWH investment.
32
<PAGE> 34
NOTE N: FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term debt,
closely approximate their carrying value. Investments in affiliates, other than
HWH, consists of securities for which a reasonable estimate of fair value could
not be made as no quoted market prices for the securities exist and the costs of
determining fair value would be excessive. The investment in HWH is carried at
fair value, at December 31, 1997. As of December 31, 1997, the estimated fair
value of long-term debt, based on the current rates offered to the Company for
debt of the same remaining maturities, exceeds the carrying value by
approximately $126,000.
NOTE O: SIGNIFICANT CONCENTRATIONS
The Company's ability to satisfy demand for its products may be limited by
the availability of those products from the Company's suppliers. In 1995 the
Company entered into a multi-year supply agreement with Recreational Vehicle
Products, Inc. ("RVP"), which manufactures air conditioners under the Coleman(R)
brand name and awnings under the Faulkner(R) brand name. RVP is the Company's
principal supplier of these products, the sales of which accounted for
approximately 17% and 15% of the Company's net sales in 1997 and 1996.
NOTE P: OTHER INCOME
Other income in 1996 consists primarily of the proceeds to the Company from
the favorable settlement of a lawsuit with a former leading supplier. The
resultant gain is shown net of certain expenses incurred as a result of the
Company's involvement in the lawsuit.
33
<PAGE> 35
SCHEDULE II
THE COAST DISTRIBUTION SYSTEM AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
BALANCE, BALANCE,
BEGINNING OF END OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS(1) PERIOD
-------------------------------- ------------ --------- ------------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year Ended December 31, 1995 $ 1,140,000 $ 161,000 $ 364,000 $ 937,000
Year Ended December 31, 1996 $ 937,000 $ 534,000 $ 385,000 $1,086,000
Year Ended December 31, 1997 $ 1,086,000 $ 307,000 $ 313,000 $1,080,000
</TABLE>
- -------------------
(1) Write-off of doubtful accounts against the allowance and recoveries.
<TABLE>
<CAPTION>
BALANCE, BALANCE,
BEGINNING OF END OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS(1) PERIOD
-------------------------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Allowance for obsolete or
slow-moving inventory:
Year Ended December 31, 1995 $ 998,000 $ 594,000 $ 269,000 $ 1,323,000
Year Ended December 31, 1996 $ 1,323,000 $ 427,000 $ 380,000 $ 1,370,000
Year Ended December 31, 1997 $ 1,370,000 $ 432,000 $ 325,000 $ 1,477,000
</TABLE>
- -------------------
(1) Write-off of slow-moving or obsolete inventory or sale of inventory at
reduced margin.
34
<PAGE> 36
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information concerning the Company's executive officers
which is included in Part I of this Report, the information required by Item 10
is incorporated by reference from the Company's definitive proxy statement to be
filed with the Commission on or before April 30, 1998 for the Company's 1998
annual shareholders' meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 1998 for the Company's 1998 annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 1998 for the Company's 1998 annual meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 1998 for the Company's 1998 annual shareholders' meeting.
35
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The Consolidated Financial
Statements of The Coast Distribution System and Financial Statement Schedules:
See Index to Financial Statements on Page 17.
(2) Exhibits. See Index to Exhibits, elsewhere in this
Report, for a list and description of (i) exhibits previously filed by the
Company with the Commission and (ii) the exhibits being filed with this Report.
Compensation Plans and Arrangements. Set forth below is a list
of Compensation Plans and Arrangements that have been filed as exhibits
with the Commission, together with the respective exhibit numbers
thereof:
1983 Employee Stock Option Plan, as amended
-- See Exhibit 10.17
Nonqualified Stock Option Plan - 1987 -- See Exhibit 10.22
1987 Employee Stock Purchase Plan, as amended
-- See Exhibit 10.32
1993 Stock Option and Incentive Plan, as amended
-- See Exhibit 10.31
(b) Current Reports on Form 8-K. On October 8, 1997, the Company filed
a Current Report on Form 8-K dated September 27, 1997, under Item 5 ("Other
Events"), reporting the sale of its investment in Burden on September 27, 1997.
The Company did not file any other reports on Form 8-K during the quarter ended
December 31, 1997.
36
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1998 THE COAST DISTRIBUTION SYSTEM
By: /s/ Thomas R. McGuire
------------------------------------
Thomas R. McGuire,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.
Each person whose signature to this Report appears below hereby
appoints Thomas R. McGuire, Jeff Wannamaker and Sandra A. Knell, or any of them,
individually, to act severally as attorneys-in-fact and agents, with power of
substitution and resubstitution, for each of them, to sign on his behalf,
individually and in the capacities stated below, and to file any and all
amendments to this Annual Report, which amendment or amendments may make changes
and additions as such attorneys-in-fact may deem necessary or appropriate.
SIGNATURE TITLE DATE
/s/Thomas R. McGuire Chairman of the Board of March 27, 1998
-------------------------- Directors, Chief Executive
Thomas R. McGuire Officer and Director
/s/Sandra A. Knell Executive Vice President March 27, 1998
-------------------------- (Principal Financial and
Sandra A. Knell Principal Accounting
Officer)
/s/John E. Turco Director March 27, 1998
--------------------------
John E. Turco
/s/ Director March __, 1998
--------------------------
Louis B. Sullivan
/s/Robert S. Throop Director March 27, 1998
--------------------------
Robert S. Throop
/s/Ben A. Frydman Director March 27, 1998
--------------------------
Ben A. Frydman
/s/Brian P. Friedman Director March 27, 1998
--------------------------
Brian P. Friedman
S-1
<PAGE> 39
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------------ ----------------
<S> <C> <C>
3.1* Articles of Incorporation of the Company, as currently in effect. --
3.2* Bylaws of the Company, as currently in effect. --
10.1** Bank of America NT&SA Loan Agreement (Receivables and Inventory). --
10.2** Bank of America NT&SA Master Note. --
10.3** Bank of America NT&SA Security Agreement (Receivables and Inventory). --
10.4** Bank of America NT&SA Security Agreement (Equipment and Farm Products). --
10.5** Continuing Guarantee of Indebtedness of Coast R.V., Inc. by Coast Fabrication, Inc. --
10.6** Continuing Guarantee of Indebtedness of Coast R.V., Inc. by Thomas R. McGuire. --
10.7** 1983 Employee Incentive Stock Option Plan. --
10.8** Industrial Lease Agreement dated May 30, 1978. --
10.10** Standard Lease Agreement dated July 19, 1983. --
10.11 Agreement of Purchase and Sale dated September 13, 1984, among the Company, Trailer --
Equipment Distributors, Inc. ("Tedco") and its Principal Shareholder. (Incorporated by
reference to the same numbered exhibit in the Company's Current Report on Form 8-K
dated September 26, 1984.)
10.12 Lease Agreement dated September 26, 1984, by and between the Company and Tedco. --
(Incorporated by reference to the same numbered exhibit in the Company's Current Report
on Form 8-K dated September 26, 1984.)
10.13 Option Agreement, with form of Real Estate Purchase Agreement attached, relating to the --
warehouse and office facility being leased by the Company from Tedco. (Incorporated by
reference to the same numbered exhibit in the Company's Current Report on Form 8-K
dated September 26, 1984.)
10.14 Bank Loan Agreement dated July 19, 1984, between the Company and Bank of America NT&SA. --
(Incorporated by reference to the same numbered exhibit in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1984.)
10.15 Agreement of Purchase and sale dated May 3, 1985, between the Company and Rogers --
Distributing Corporation. (Incorporated by reference to the same numbered exhibit in
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1985.)
10.16 Stock Purchase Agreement dated April 29, 1985, among the Company and certain purchasers --
named therein. (Incorporated by reference to the same numbered exhibit in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1985.)
10.17* Amended and Restated 1983 Employee Stock Option Plan. --
</TABLE>
E-1
<PAGE> 40
<TABLE>
<S> <C> <C>
10.18 Agreement of Purchase and Sale dated June 25, 1985, between Coast R.V., Inc. and --
Coachmen Industries, Inc. (Incorporated by reference to the same numbered exhibit in
the Company's Current Report on Form 8-K dated June 28, 1985.)
10.19 Loan and Security Agreement dated June 28, 1985, between Coast R.V., Inc. and Mellon --
Financial Services Corporation. (Incorporated by reference to the same numbered
exhibit in the Company's Current Report on Form 8-K dated June 28, 1985.)
10.20 Note Purchase Agreement dated June 27, 1985 relating to the Company's 11.5% Convertible --
Subordinated Notes due 1993. (Incorporated by reference to the same numbered exhibit
in the Company's Current Report on Form 8-K dated June 28, 1985.)
10.21 Amendment No. 2 dated February 29, 1988 to Loan and Security Agreement between Coast --
R.V., Inc. and Mellon Financial Services Corporation. (Incorporated by reference to
the same numbered exhibit in the Company's Annual Report on Form 10-K dated March 28,
1988.)
--
10.22 Nonqualified Stock Option Plan - 1987. (Incorporated by reference to Exhibit 4.1 in
the Company's Registration Statement on Form S-8 (File No. 33-15322) filed with the
Commission on June 25, 1987.)
10.23 1987 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.1 in the
Company's Registration Statement on Form S-8 (File No. 33-18696) filed with the
Commission on December 1, 1987.)
--
10.24 Agreement of Purchase and Sale of Assets dated as of March 24,
1988 entered into between the Company and SunWest Wholesale
Distributors. (Incorporated by reference to the same numbered
exhibit to the Company's Current Report on Form 8-K dated April 1,
1988.)
10.25 Note Agreement dated as of March 15, 1988 between the Company and Massachusetts Mutual --
Life Insurance Company and MassMutual Corporate Investors. (Incorporated by reference
to the same numbered exhibit to the Company's Current Report on Form 10-K dated
April 1, 1988.)
10.26 Stock Purchase Agreement dated as of May 22, 1989 relating to the acquisition of shares --
of HWH Corporation. (Incorporated by reference to the same numbered exhibit to the
Company's Current Report on Form 8-K dated May 24, 1989.)
10.27 Letter Agreement between Company and Furman Selz relating to HWH Shares. (Incorporated --
by reference to the same numbered exhibit to the Company's Current Report on Form 8-K
dated May 24, 1989.)
10.28 Note Agreement dated as of June 1, 1989 relating to sale and issuance of $14,000,000 of --
10-year Subordinated Notes and $1,000,000 of 6-year Convertible Subordinated Notes.
(Incorporated by reference to the same numbered exhibit to the Company's Current Report
on Form 8-K dated August 17, 1989.)
10.29 Asset Purchase Agreement dated as of August 17, 1989 which provides for the acquisition --
of substantially all of the assets of Griffin's Outboard Marine, Inc. (Incorporated by
reference to the same numbered exhibit to the Company's Current Report on Form 8-K
dated August 17, 1989.)
</TABLE>
E-2
<PAGE> 41
<TABLE>
<S> <C> <C>
10.30 Amendment dated September 22, 1989 to Griffin's Outboard Marine Asset Purchase --
Agreement. (Incorporated by reference to the same numbered exhibit to the Company's
Current Report on Form 8-K dated September 22, 1989.)
10.31 1993 Stock Option and Incentive Plan. (Incorporated by reference to Exhibit 4.3 to the --
Company's Registration Statement on Form S-8 (File No. 33-64582) filed with the
Commission on June 17, 1993.)
10.32 Share Option Agreement dated as of March 19, 1993, among the Company, H. Burden --
Limited ("Burden) and the shareholders of Burden, pursuant to which the Company has
acquired common shares, and may acquire additional common shares, of Burden.
(Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K
dated April 29, 1994.)
10.33 Second Amended and Restated Loan Agreement between the Company and Mellon Bank, --
together with First Amendment thereto (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1995).
10.34 Distribution Agreement dated October 11, 1995 between the Company and Recreation --
Vehicle Products, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995).
21 Subsidiaries. --
23.1 Consent of Grant Thornton, LLP, Independent Certified Public Accountants, re Consolidated
Financial Statements of The Coast Distribution System. --
24 Power of Attorney - Included on Signature Page. --
27.1 1997 Financial Data Sheet.
27.2 1996 Restated Financial Data Sheet. --
27.3 1995 Restated Financial Data Sheet. --
99.1 Pages 15 to 27 of the Company's Proxy Statement dated July 3, 1997 (Incorporated by reference
from the Company's Notice of Annual Meeting and Proxy Statement dated July 3, 1997.
As Filed in 1997's. --
</TABLE>
- ---------------------
* Incorporated by reference to the same numbered exhibit in the Company's
Registration Statement on Form S-1 (File No. 33-4393) filed with the
Commission on March 28, 1986.
** Incorporated by reference to the same numbered exhibit in the Company's
Registration Statement No. 2-86420LA on Form S-18.
E-3
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT*
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
Subsidiaries Incorporated in the United States
- ----------------------------------------------
C/P Products Corp................................. Indiana
United Sales and Warehouse of Texas, Inc.......... Texas
Foreign Subsidiaries:
- ---------------------
The Coast Distribution System (Canada) Inc........ Quebec, Canada
</TABLE>
- ----------------------------
* In accordance with the descriptions set forth in Paragraph (b) of Item 601
of Regulation S-K, there have been omitted those subsidiaries that, if
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as of December 31, 1997.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 27, 1998, accompanying the consolidated
financial statements and schedule of The Coast Distribution System and
Subsidiaries (the Company) included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. We hereby consent to the incorporation
by reference of said report in the Company's Registration Statements on Forms
S-8 (File Nos. 33-10769, 33-15322, 33-18696, 33-64582 and 33-86072, effective
December 12, 1986, June 25, 1987, December 1, 1987, June 17, 1993 and November
8, 1994, respectively) and on Form S-3 (File No. 33-33780, effective March 9,
1990).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF, AND THE STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1997
INCLUDED IN REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE
SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 308
<SECURITIES> 0
<RECEIVABLES> 12,348
<ALLOWANCES> 1,080
<INVENTORY> 37,581
<CURRENT-ASSETS> 57,404
<PP&E> 12,088
<DEPRECIATION> 7,379
<TOTAL-ASSETS> 72,663
<CURRENT-LIABILITIES> 8,405
<BONDS> 29,726
354
0
<COMMON> 19,559
<OTHER-SE> 14,437
<TOTAL-LIABILITY-AND-EQUITY> 72,663
<SALES> 135,952
<TOTAL-REVENUES> 135,952
<CGS> 117,272
<TOTAL-COSTS> 137,419
<OTHER-EXPENSES> (1,766)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,336
<INCOME-PRETAX> (6,569)
<INCOME-TAX> (1,303)
<INCOME-CONTINUING> (5,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,266)
<EPS-PRIMARY> (1.01)<F1>
<EPS-DILUTED> (1.01)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF, AND THE STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1996
INCLUDED IN REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE
SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 13,285
<ALLOWANCES> 1,086
<INVENTORY> 43,193
<CURRENT-ASSETS> 60,039
<PP&E> 5,355
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,442
<CURRENT-LIABILITIES> 14,400
<BONDS> 33,771
473
0
<COMMON> 19,440
<OTHER-SE> 20,010
<TOTAL-LIABILITY-AND-EQUITY> 88,442
<SALES> 139,286
<TOTAL-REVENUES> 139,286
<CGS> 118,361
<TOTAL-COSTS> 139,886
<OTHER-EXPENSES> (3,883)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,600
<INCOME-PRETAX> (317)
<INCOME-TAX> (194)
<INCOME-CONTINUING> (123)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123)
<EPS-PRIMARY> (.03)<F1>
<EPS-DILUTED> (.03)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF, AND THE STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1995
INCLUDED IN REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE
SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 501
<SECURITIES> 0
<RECEIVABLES> 12,083
<ALLOWANCES> 937
<INVENTORY> 48,225
<CURRENT-ASSETS> 63,473
<PP&E> 6,133
<DEPRECIATION> 0
<TOTAL-ASSETS> 92,136
<CURRENT-LIABILITIES> 13,469
<BONDS> 38,376
584
0
<COMMON> 19,155
<OTHER-SE> 20,162
<TOTAL-LIABILITY-AND-EQUITY> 92,136
<SALES> 169,559
<TOTAL-REVENUES> 169,559
<CGS> 138,806
<TOTAL-COSTS> 161,066
<OTHER-EXPENSES> 3,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,249
<INCOME-PRETAX> 5,426
<INCOME-TAX> 2,082
<INCOME-CONTINUING> 3,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,344
<EPS-PRIMARY> .65<F1>
<EPS-DILUTED> .64
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
THE CHARTERS AND BYLAWS OF COAST CALIFORNIA AND COAST DELAWARE
If the Proposed Reincorporation is approved by the shareholders and becomes
effective, the Company will be governed by the Certificate of Incorporation and
Bylaws of Coast Delaware and by the Delaware General Corporation Law. The
material differences between Coast California's Articles of Incorporation and
Bylaws and Coast Delaware's Certificate of Incorporation and Bylaws are
described below. Certain changes altering the rights of shareholders and powers
of management could be implemented in the future by amendment of the Certificate
of Incorporation following shareholder approval, and certain of such changes
could be implemented by amendment of the Bylaws of Coast Delaware without
shareholder approval. For a discussion of such changes, see "Significant
Differences Between the Corporation Laws of California and Delaware." Approval
by the shareholders of the Proposed Reincorporation will constitute an approval
of the inclusion in the Coast Delaware Certificate of Incorporation and Bylaws
of each of the provisions described below. This discussion of the Certificate of
Incorporation and Bylaws of Coast Delaware is qualified by reference to Exhibits
B and C hereto, respectively.
Name Change. The Articles of Incorporation of Coast California provide that
the name of the Company is "The Coast Distribution System." The Certificate of
Incorporation for Coast Delaware provides that the name shall be "The Coast
Distribution System, Inc." Accordingly, if the Reincorporation Proposal is
approved, the name of the Company shall be changed to "The Coast Distribution
System, Inc." upon the effectiveness of the Merger.
Board of Directors. See "Significant Differences Between the Corporation
Laws of California and Delaware -- Size of the Board of Directors" and
"-- Classified Board of Directors."
Authorized Stock. The Articles of Incorporation of Coast California
authorize 10,000,000 shares of Common Stock, without par value. The Certificate
of Incorporation of Coast Delaware provides for 20,000,000 shares of Common
Stock, $.001 par value per share, and 5,000,000 shares of Preferred Stock, with
a par value of $.001 per share. The Certificate of Incorporation of Coast
Delaware authorizes the Board of Directors of Coast Delaware to fix the rights,
preferences, privileges and restrictions of one or more series of the authorized
shares of Preferred Stock, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, without further vote or
action by the stockholders. Although the Board has no present intention of doing
so, issuance of the authorized Preferred Stock with terms giving it substantial
voting power, conversion or other rights could have the effect of (i) delaying,
deferring or preventing a change in control of the Company or (ii) otherwise
modifying the rights of holders of the Company's Common Stock. See "Preferred
Stock of Coast Delaware."
Common Stock of Coast Delaware. Of the 20,000,000 authorized shares of
Common Stock of Coast Delaware, 5,246,879 shares will be issued upon conversion
of the outstanding shares of Coast California's Common Stock in the Proposed
Reincorporation and approximately 761,335 shares of Common Stock will be
reserved for issuance under the Plans to be assumed by Coast Delaware. The
balance of approximately 13,991,786 shares of Common Stock, and all of the
authorized shares of Preferred Stock, of Coast Delaware will be available for
issuance from time to time in connection with acquisitions of other businesses,
to raise additional capital or for other corporate purposes, without further
action by the stockholders of Coast Delaware. At this time, there are no
specific plans or commitments or any agreements or arrangements for the issuance
of any of these remaining shares.
Preferred Stock of Coast Delaware. The Preferred Stock of Coast Delaware
will be issuable from time to time in one or more series as determined by the
Board of Directors of Coast Delaware without further vote or action by the
stockholders. Dividend rates, conversion rights, if any, liquidation
preferences, rights and terms of redemption (including sinking fund provisions)
and redemption prices will also be determined by the Board of Directors of Coast
Delaware at the time that Preferred Stock, if any, is issued.
The Board of Directors believes that the availability of authorized but
unissued preferred stock can be of considerable value by providing an
alternative form of consideration in connection with the raising of capital or
the acquisition of other businesses through the issuance of securities of Coast
Delaware, the terms and
15
<PAGE> 2
characteristics of which can be determined by the Board of Directors at the time
of actual issuance based on market conditions and to meet other circumstances
then existing.
If the Reincorporation Proposal is approved by the Company's shareholders
and the Proposed Reincorporation is consummated, no further stockholder vote or
action will be necessary for the issuance of the Preferred Stock, unless
required by Delaware law or AMEX rules. In general, Delaware law and AMEX rules
would require that the issuance of shares of Preferred Stock in a merger or
business combination or other transaction be approved by the Company's
stockholders at an annual or a special meeting of the stockholders if the
Preferred Stock could be converted into a number of shares of Common Stock that
would increase the shares of Common Stock outstanding by twenty percent (20%) or
more. The Board of Directors of Coast Delaware will determine matters such as
the Preferred Stock dividend rights, conversion ratios, voting rights,
redemption prices, and similar matters. The issuance of shares of Preferred
Stock may affect the rights of existing stockholders by diluting their
percentage interests of Common Stock, if the Preferred Stock is convertible into
Common Stock; granting the holders of Preferred Stock preferences as to
dividends or proceeds on liquidation; and diluting their voting rights if the
Preferred Stock provides for voting rights.
The availability of authorized but unissued shares of Preferred Stock could
affect the ability of a third party to gain voting control of the Company,
because the Board of Directors would be able to authorize the issuance, in a
private placement or otherwise, of shares of Preferred Stock with voting rights
to one or more persons and, thereby, dilute the voting power of a potential
acquiror without first having to obtain stockholder approval. Additionally,
unissued shares of Preferred Stock would be available in connection with the
adoption of a stockholders' rights plan pursuant to which the Company would be
able to issue to existing stockholders rights to purchase Preferred Stock that
could be issued in circumstances that would dilute the equity position of a
potential acquiror. In either of these situations, the issuance of shares of
Preferred Stock could adversely affect a potential takeover bid.
At this time, there are no specific plans, commitments, agreements or
arrangements to issue any shares of Preferred Stock, either as defensive or
anti-takeover measures or for any other purpose.
Monetary Liability of Directors. The Articles of Incorporation of Coast
California and the Certificate of Incorporation of Coast Delaware both provide
for the elimination of personal monetary liability of directors to the fullest
extent permissible under the laws of each corporation's respective state of
incorporation. The provision eliminating monetary liability of directors set
forth in the Certificate of Incorporation of Coast Delaware is potentially more
expansive in that it incorporates future amendments to Delaware law with respect
to the elimination of such liability. See "Significant Differences Between the
Corporation Laws of California and Delaware -- Indemnification and Limitation of
Liability."
Shareholder Voting by Ballot. The Articles of Incorporation of Coast
California contain no provision relating to shareholder election of directors by
ballot. Coast California's Bylaws, however, provide that the election of
directors at shareholders' meetings may be by voice or ballot, unless before
such vote a shareholder demands a vote by ballot, in which case such vote must
be by ballot. The Certificate of Incorporation of Coast Delaware provides that
election of directors need not be by written ballot. See "Significant
Differences Between the Corporation Laws of California and Delaware -- Voting by
Ballot."
Certain Anti-Takeover Provisions. The Bylaws of Coast California provide
that shareholders may take action either at a duly called and held meeting or by
written consent of the shareholders and that the record holders of 10% or more
of the outstanding shares of Coast California Common Stock ("10% shareholders")
may call a special meeting of the shareholders to take action on any matter upon
which shareholders of a California corporation may vote, which include the
election and removal of directors, the amendment of the articles of
incorporation or bylaws of a corporation and mergers, reorganizations and
business combinations. The Certificate of Incorporation and Bylaws of Coast
Delaware provide that the shareholders may only take action at a duly called and
held meeting of stockholders and not by written consent, and that stockholders
may not call special meetings of stockholders. These provisions will make it
more difficult to effect a takeover of the Company by means of certain
transactions, such as a merger or sale of substantially all the Company's
assets, or by a proxy contest, by requiring a shareholders' meeting to be held
before such a transaction can be
16
<PAGE> 3
consummated and by delaying any such meeting until the next annual or special
meeting of stockholders is called by action of the Board of Directors.
Delaware Law provides other anti-takeover protection through Section 203 of
the Delaware General Corporation Law. See "Significant Differences Between the
Corporation Laws of California and Delaware -- Shareholder Approval of Certain
Business Combinations."
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE
The General Corporation Laws of California and Delaware differ in many
respects. It is not practical to summaries all of such differences in this Proxy
Statement, but some of the principal differences that could materially affect
the rights of shareholders are discussed below.
Size of the Board of Directors. The Bylaws of Coast California provide for
a Board of Directors of from six (6) to eleven (11) members, with the exact
number currently set at six (6) directors. Under California law, although
changes in the number of directors must in general be approved by a majority of
the outstanding shares, the Board of Directors may fix the exact number of
directors within a stated range set forth in the articles of incorporation or
bylaws, if that stated range has been approved by the shareholders. Delaware law
permits the Board of Directors alone to change the authorized number of
directors unless the directors are not authorized to amend the bylaws or the
number of directors is fixed in the certificate of incorporation (in which case
a change in the number of directors may be made only by amendment to the
certificate of incorporation following approval of such change by the
stockholders). The Certificate of Incorporation of Coast Delaware provides that
the number of directors shall be designated in the manner provided in the Bylaws
and authorizes the Board of Directors to make, alter, amend or repeal the
Bylaws. The Bylaws of Coast Delaware provide for a Board of Directors initially
consisting of six (6) members, and that such number may be changed from time to
time by resolution adopted by the Board of Directors. Following the Proposed
Reincorporation, the Board of Directors of Coast Delaware could (although it has
no current intention to do so) change the number of directors without
shareholder approval. If the Reincorporation Proposal is approved, the six (6)
directors of Coast California who are elected at the Annual Meeting of
Shareholders will continue as the directors of Coast Delaware after the Proposed
Reincorporation is consummated, but will be divided into three (3) classes of
two (2) directors each, with each class serving a term of three (3) years
expiring in successive years. See "Classified Board of Directors" below.
Classified Board of Directors. A classified board is one on which a certain
number, but not all, of the directors are elected on a rotating basis each year.
Under California law, directors generally are elected annually, but corporations
that have eight hundred (800) or more shareholders of record and have their
stock listed on the AMEX may designate a classified board by adopting amendments
to their articles and bylaws, which amendments must be approved by the
shareholders. Delaware law permits, but does not require, a classified board of
directors, with staggered terms under which one-half or one-third of the
directors are elected for terms of two or three years, respectively. This method
of electing directors makes a change in the composition of the board of
directors and, consequently, a potential change in control of a corporation a
lengthier and more difficult process. The Articles of Incorporation and Bylaws
of Coast California do not provide for a classified board of directors.
The Bylaws of Coast Delaware provide for a classified board of directors
consisting of three (3) classes of two (2) directors each, with each class
elected for a term of three (3) years expiring in successive years. The persons
elected as directors of Coast California at the Annual Meeting will, if the
Reincorporation is approved and becomes effective, serve as the directors of
Coast Delaware and will be designated as Class I, Class II and Class III
directors as set forth in "Proposal One -- Election of Directors" above.
The Board believes that the staggered three-year terms of a classified
board, with the election of one-third of the directors each year, will help to
assure the continuity and stability of the Company's long-term policies in the
future and permit it to more effectively represent the interests of
shareholders, since at least two-thirds of the directors at any given time will
have prior experience as directors of the Company.
17
<PAGE> 4
The classification of directors, however, will have the effect of making it
more difficult to change the overall composition of the Board of Directors. At
least three meetings of the shareholders, instead of one, will be required for
the shareholders to change the entire Board. In addition, the provision under
Delaware law that the directors of a classified board may only be removed for
cause (unless provided otherwise in the certificate of incorporation) will also
make it more difficult to change the composition of the Board. See "Removal of
Directors" below.
Cumulative Voting. Under California law, if any shareholder has given
notice of his or her intention to cumulate votes for the election of directors,
any other shareholder of the corporation also is entitled to cumulative his or
her votes at such election. Under California law, corporations such as Coast
California that have eight hundred (800) or more shareholders of record and have
their stock listed on the AMEX may eliminate such cumulative voting rights by
adopting amendments to their articles and bylaws, which amendments must be
approved by the shareholders. Under Delaware law, cumulative voting in the
election of directors is not mandatory and not allowed unless specifically
provided for in a corporation's certificate of incorporation. The Certificate of
Incorporation and Bylaws of Coast Delaware specifically provide for cumulative
voting and, therefore, the stockholders of Coast Delaware will continue to have
cumulative voting rights.
Removal of Directors. Under California law, any director or the entire
board of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote. Nonetheless, California law
does not permit the removal of any individual director (unless the entire board
is removed) if the number of votes cast against such removal would be sufficient
to elect the director under cumulative voting. Under Delaware law, a director of
a corporation that does not have cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote. In the case of a Delaware corporation having cumulative voting, if less
than the entire board is to be removed, a director may not be removed without
cause unless the number of shares voted against such removal would not be
sufficient to elect the director under cumulative voting. The Certificate of
Incorporation of Coast Delaware provides for cumulative voting. Furthermore,
under Delaware law, directors on a classified board may not be removed without
cause unless the certificate of incorporation provides otherwise. The Bylaws of
Coast Delaware provide for a classified board and the Certificate of
Incorporation of Coast Delaware is silent regarding removal of directors.
Consequently, the directors of Coast Delaware may be removed only for cause.
Filling Vacancies on the Board of Directors. Under California law, any
vacancy on the board of directors, other than one created by removal of a
director, may be filled by the board. If the number of directors is less than a
quorum, a vacancy may be filled by the unanimous written consent of the
directors then in office, by the affirmative vote of a majority of the directors
at a meeting held pursuant to notice or waivers of notice or by a sole remaining
director. A vacancy created by removal of a director may be filled by the board
only if so authorized by a corporation's articles of incorporation or by a bylaw
approved by the corporation's shareholders. Coast California's Bylaws provide
that vacancies occurring in the Board of Directors by reason of removal of
directors may be filled only by approval of the shareholders. Under Delaware
law, vacancies and newly created directorships may be filled by a majority of
the directors then in office (even though less than a quorum) unless otherwise
provided in the certificate of incorporation or bylaws (and unless the
certificate of incorporation directs that a particular class is to elect such
director, in which case other directors elected by such class, or a sole
remaining director, shall fill such vacancy). In the case of a classified board
of directors, Delaware law provides that a new director chosen to fill a vacancy
in the manner described above shall hold office until the next election of the
class for which he or she was chosen. The Bylaws of Coast Delaware provide that
vacancies occurring in the Board of Directors for any reason may be filled by
vote of a majority of the remaining members of the Board of Directors.
Written Consent of Shareholders. Both the California and Delaware General
Corporation Laws provide that the shareholders of a corporation may take action
by written consent without a meeting, unless the corporation's charter documents
provide otherwise. The Articles of Incorporation of Coast California do not
prohibit shareholder actions by written consent, and accordingly, the
shareholders of Coast California may take action without a meeting. The
Certificate of Incorporation of Coast Delaware explicitly prohibits
18
<PAGE> 5
shareholder actions by written consent. As a result, the shareholders of Coast
Delaware will be able to take action only at a duly called meeting of the
shareholders.
The provision which prohibits shareholder action by written consent would
give all shareholders of the Company the opportunity to participate in
determining any proposed shareholder action and would prevent the holders of a
majority of the voting power of the Company from using the written consent
procedure to take shareholder action. Persons attempting unfriendly takeovers of
corporations have attempted to use written consent procedures in order to deal
directly with the shareholders and avoid negotiations with the boards of
directors of such companies.
The provision prohibiting shareholder action by written consent may have
the effect of delaying consideration of a shareholder proposal until the next
annual meeting unless a special meeting is called by the Board of Directors.
Because the elimination of the procedures for shareholders to act by written
consent could make more difficult an attempt to obtain control of the Company,
such action could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of the Company.
Elimination of the written consent procedure also means that a meeting of
shareholders would be required in order for the Company's shareholders to
replace the Board. This provision will thus make the removal of incumbent
directors more difficult. In addition, since this provision could increase the
amount of time required for a takeover bidder to obtain control of the Company,
such provision could discourage certain tender offers and other attempts to
obtain control of the Company, even though such attempts may be beneficial to
the Company and its stockholders. Because tender offers for control usually
involve a purchase price higher than the prevailing market price, the provision
prohibiting shareholder action by written consent could also discourage open
market purchases by a potential takeover bidder. Such tender offers or open
market purchases could increase the market price of the Company's Common Stock,
enabling shareholders to sell their shares at a price higher than that which
would otherwise prevail. In addition, this provision could make the Company's
Common Stock less attractive to persons who invest in securities in anticipation
of an increase in price if a takeover attempt develops and could discourage
accumulation of large blocks of the Company's Common Stock, thus tending to
reduce temporary fluctuations in the market price of the Company's Common Stock
which are caused by such accumulations. Therefore, shareholders could be
deprived of certain opportunities to sell their shares at temporarily higher
prices.
Power to Call Special Shareholders' Meetings. Under California law, a
special meeting of shareholders may be called by the board of directors, the
chairman of the board, the president, 10% shareholders and such additional
persons as are authorized by the articles of incorporation or the bylaws. Under
Delaware law, a special meeting of shareholders may be called by the board of
directors or by any other person authorized to do so in the certificate of
incorporation or the bylaws. Unlike the Bylaws of Coast California, the Bylaws
of Coast Delaware do NOT contain provisions entitling 10% shareholders to call a
special meeting of shareholders.
The elimination of the provision entitling 10% shareholders to call special
meetings of the shareholders is designed to prevent persons attempting
unfriendly takeovers to bypass and avoid negotiations with the Board of
Directors and to avoid the disruption and expense that would be associated with
the holding of such special meetings with respect to matters that have not been
given full consideration by the Board of Directors.
The elimination of the provision entitling holders of 10% of the
outstanding voting stock of the Company to call special meetings may have the
effect of delaying consideration of a shareholder proposal until the next annual
meeting, unless a special meeting of stockholders is called by the Board of
Directors. In addition, since elimination of this provision could increase the
amount of time required for a takeover bidder to obtain control of the Company,
it could discourage certain tender offers and other attempts to obtain control
of the Company, even though such attempts may be beneficial to the Company and
its stockholders. Because tender offers for control usually involve a purchase
price higher than the prevailing market price, the elimination of this provision
could also discourage open market purchases by a potential takeover bidder. Such
tender offers or open market purchases could increase the market price of the
Company's Common Stock, enabling shareholders to sell their shares at a price
higher than that which would otherwise prevail. In addition, elimination of this
provision could make the Company's Common Stock less attractive to persons who
invest in securities in anticipation of an increase in price if a takeover
attempt develops and could discourage
19
<PAGE> 6
accumulation of large blocks of the Company's Common Stock, thus tending to
reduce temporary fluctuations in the market price of the Company's Common Stock
which are caused by such accumulations. Therefore, shareholders could be
deprived of certain opportunities to sell their shares at temporarily higher
prices. Elimination of this provision also means that shareholders seeking to
remove or replace incumbent directors would be required to wait until the next
annual stockholders meeting to attempt to take such action, thereby making
removal of incumbent directors more difficult.
Shareholder Approval of Certain Business Combinations. In the last several
years, a number of states (but not California) have adopted special laws
designated to make certain kinds of "unfriendly" corporate takeovers, or other
transactions involving a corporation and one or more of its significant
shareholders, more difficult. Under Section 203 of the Delaware General
Corporation Law ("Section 203"), a Delaware corporation is prohibited from
engaging in a "business combination" with an "interested shareholder" for three
(3) years following the time such person becomes an interested shareholder,
unless specified conditions are met.
An "interested shareholder" is defined under Section 203 to include, with
certain exceptions, a person or group who or which owns fifteen percent (15%) or
more of the corporation's outstanding voting stock (including rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or understanding,
or upon the exercise of conversion or exchange rights, and stock with respect to
which the person has voting rights only) or is an affiliate or associate of the
corporation and was the owner of fifteen percent (15%) or more of such voting
stock at any time within the previous three years.
For the purposes of Section 203, the term "business combination" is defined
broadly to include (i) mergers with or caused by the interested shareholder;
(ii) sales or other dispositions to the interested shareholder (except
proportionately with the corporation's other shareholders) of assets of the
corporation or a subsidiary equal to ten percent (10%) or more of the aggregate
market value of the consolidated assets or its outstanding stock; (iii) the
issuance or transfer by the corporation or a corporation's subsidiary of stock
of the corporation or such subsidiary to the interested shareholder (except for
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the interested shareholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or (iv) receipt by the interested shareholder (except
proportionately as a shareholder), directly or indirectly, of loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or a subsidiary.
The three (3) year moratorium imposed on business combinations by Section
203 does not apply if: (i) before the time such shareholder becomes an
interested shareholder the board of directors approves either the business
combination or the transaction that caused the person to become an interested
shareholder; (ii) the interested shareholder owns eighty-five percent (85%) of
the corporation's voting stock upon consummation of the transaction that caused
him or her to become an interested shareholder (excluding from the eighty-five
percent (85%) calculation shares owned by directors who are also officers of
such corporation and shares held by employee stock plans that do not permit
employees to decide confidentially whether to accept a tender or exchange
offer); or (iii) at or after the time such person becomes an interested
shareholder, the board approves the business combination and it also is approved
at a shareholder meeting by sixty-six and two-thirds percent (66 2/3%) of the
voting stock not owned by the interested shareholder.
Section 203 applies only to Delaware corporations that have a class of
voting stock listed on a national securities exchange (as is Coast California
and as Coast Delaware would be), or are quoted on an interdealer quotation
system such as the Nasdaq National Market, or are held of record by more than
two thousand (2,000) shareholders. Such a corporation may, however, elect not to
be governed by Section 203 by a provision in its original certificate of
incorporation or an amendment thereto or to its bylaws, which amendment must be
approved by majority shareholder vote and may not be further amended by the
board of directors. Coast Delaware voting stock will be quoted on the AMEX, and
Coast Delaware does not intend to elect not to be governed by Section 203.
Therefore, Section 203 will apply to Coast Delaware
Section 203 would allow the Company additional time to evaluate a takeover
proposal, prepare appropriate alternatives, and thereby encourage persons
contemplating a transaction with the Company to
20
<PAGE> 7
negotiate directly with the Company on a fair and equitable basis. Section 203
could make more difficult or discourage a tender offer for the Company's Common
Stock, or the completion of a "two-tiered" merger by a holder of a substantial
block of the Company's Common Stock, irrespective of whether such action might
be perceived by shareholders holding a majority of the Company's Common Stock to
be beneficial to the Company and its shareholders.
Section 203 could adversely affect the ability of shareholders to benefit
from certain transactions which are opposed by the Board or by shareholders
owning 15% of the Company's Common Stock, even if the price offered in such
transactions represents a premium over the then-current market price of the
Company's Common Stock. To the extent that the Board's disapproval of a proposed
transaction discourages establishment of a controlling stock interest, the
position of the Board and current management may be strengthened, thereby
assisting those persons in retaining their positions.
The Board believes that becoming subject to the provisions of Section 203
will be in the best interests of the Company and its shareholders. In the past,
there have been a number of surprise takeovers of publicly-owned corporations
which have occurred through tender offers or other sudden purchases of a
substantial number of outstanding shares. Such tender offers and other share
purchases are often followed by a merger or acquisition of the target
corporation by the purchaser without negotiations with the Board of Directors of
the target corporation. Such a "two-tiered" business combination automatically
eliminates minority interests in the target corporation, often for less valuable
consideration per share then was paid in the purchaser's original tender offer
or market purchases. In other instances, a purchaser has used its controlling
interest to effect other transactions having an adverse impact on the target
corporation and its shareholders. The protections afforded by Section 203 will
increase the likelihood that anyone contemplating a transaction with the Company
would negotiate directly with the Company in advance. The Board believes that it
is in a better position than the individual shareholders of the Company to
negotiate effectively for an adequate price for all the shareholders, since the
Board is likely to be more knowledgeable than any individual shareholder in
assessing the business and prospects of the Company.
Loans to Officers and Employees. Under California law, any loan or guaranty
to or for the benefit of a director or officer of the corporation or its parent
requires approval of the shareholders unless such loan or guaranty is provided
under a plan approved by shareholders owning a majority of the outstanding
shares of the corporation. In addition, under California law, shareholders of
any corporation with one hundred (100) or more shareholders of record may
approve a bylaw authorizing the board of directors alone to approve loans or
guaranties to or on behalf of officers (whether or not such officers are
directors) if the board of directors determines that any such loan or guaranty
reasonably may be expected to benefit the corporation. The Bylaws of Coast
California do not authorize the Board of Directors to make such loans or
guarantees. Under Delaware law, a corporation may make loans to, guarantee the
obligations of or otherwise assist its officers or other employees and those of
its subsidiaries (including directors who are also officers or employees) when
such action, in the judgment of the directors, may reasonably be excepted to
benefit the corporation.
Indemnification and Limitation of Liability. California and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit
corporations to adopt a provision in their articles or certificate of
incorporation eliminating the liability of a director to the corporation or its
shareholders for monetary damages for breach of the director's fiduciary duty of
care. Nonetheless, certain differences exist between the laws of the two states
respecting indemnification and limitation of liability.
The Articles of Incorporation of Coast California contain a provision that
eliminates the liability of directors to the corporation to the fullest extent
permissible under California law. California law does not permit the elimination
of monetary liability where such liability is based on: (a) intentional
misconduct or knowing and culpable violation of law; (b) acts or omissions that
a director believes to be contrary to the best interests of the corporation or
its shareholders, or that involve the absence of good faith on the part of the
director; (c) receipt of an improper personal benefit; (d) acts or omissions
that show reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should be aware of a risk of serious injury to the corporation
or its shareholders; (e) acts or
21
<PAGE> 8
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation and its shareholders; (f)
interested transactions between the corporation and a director in which a
director has a material financial interest; and (g) liability for improper
distributions, loans or guarantees.
The Certificate of Incorporation of Coast Delaware also contains a
provision that eliminates the liability of directors to the fullest extent
permissible under Delaware law, as such law exists currently or as it may be
amended in the future. Under Delaware law, such provision may not eliminate or
limit a director's monetary liability for (a) breaches of the director's duty of
loyalty to the corporation or its shareholders; (b) acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law; (c)
payment of unlawful dividends or unlawful stock repurchases or redemptions; or
(d) transactions in which the director received an improper personal benefit.
Such limitation of liability provision also may not limit a director's liability
for violation of, or otherwise relieve Coast Delaware or its directors from the
necessity of complying with, federal or state securities laws, or affect the
availability of non-monetary remedies such as injunctive relief or rescission.
Although the laws of both states allow for the elimination of the liability
of directors for damages resulting from a breach of the directors' fiduciary
duty of care to the corporation, California's General Corporation Law and
Delaware's General Corporation Law differ with regard to the extent to which
they allow directors' personal liability for monetary damages resulting from a
breach of the duty of care to be limited. While Delaware law implies that a
Delaware corporation may limit the liability of a director even for gross
negligence, California law contains no such implication and in fact contains
provisions that imply the contrary. Those provisions expressly proscribe the
inclusion in a California corporation's articles of incorporation of any
provision intended to eliminate or limit a director's liability "for acts or
omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders" or for "acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders." Delaware's General Corporation Law
contains no such restrictions. Accordingly, a director of a Delaware corporation
apparently can commit acts or make omissions that would result in such
director's liability under California law but may not under Delaware law.
California law permits indemnification of expenses incurred in derivative
or third-party actions, except that with respect to derivative actions (a) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines that such person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that such court shall determine, and (b) no indemnification
may be made without court approval in respect of amounts paid or expenses
incurred in settling or otherwise disposing of a threatened or pending action or
amounts incurred in defending a pending action that is settled or otherwise
disposed of without court approval.
Indemnification is permitted by California law only for acts taken in good
faith and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action.
California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Delaware law, which requires
indemnification relating to a successful defense on the merits or otherwise).
Delaware law generally permits indemnification of expenses incurred in the
defense or settlement of a derivative or third-party action, provided there is a
determination by a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the shareholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation. Without court approval, however, no indemnification maybe made
in respect of any derivative action in which such person is adjudged liable for
negligence or misconduct in the performance of his or her duty to the
corporation. Delaware law requires indemnification of
22
<PAGE> 9
expenses when the individual being indemnified has successfully defended the
action on the merits or otherwise.
California corporations may include in their articles of incorporation a
provision that extends the scope of indemnification through agreements, bylaws
or other corporate action beyond that specifically authorized by statute. The
Articles of Incorporation of Coast California include such a provision.
In 1988, following shareholder approval, Coast California amended its
Articles of Incorporation to permit indemnification beyond that expressly
mandated by the California Corporations Code and to limit director monetary
liability to the extent permitted by California law. Coast California also
entered into indemnification agreements with its officers and directors,
following approval of such agreements by the Company's shareholders.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of other rights under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise. Under
Delaware law, therefore, the indemnification agreements entered into by Coast
California with its officers and directors may be assumed by Coast Delaware upon
completion of the Proposed Reincorporation. If the Proposed Reincorporation is
approved, the indemnification agreements will be amended to the extent necessary
to conform the agreements to Delaware law, and a vote in favor of the Proposed
Reincorporation is also approval of such amendments to the indemnification
agreements. In particular, the indemnification agreements will be amended to
include within their purview future changes in Delaware law that will expand the
permissible scope of indemnification of directors and officers of Delaware
corporations.
Although the General Corporation Laws of both California and Delaware
provide that corporations may include in their bylaws, or in agreements with
their directors and officers, provisions expanding the scope of indemnification
beyond that otherwise provided by law, California's General Corporation Law,
just as it restricts the power of California corporations to eliminate or limit
directors' liability stemming from gross negligence in the performance of
directorial duties, does not allow California corporations to indemnify
directors and officers for liabilities stemming from gross negligence. Delaware
General Corporation Law, on the other hand, does not so restrict Delaware
corporations. Accordingly, Delaware corporations apparently may provide greater
indemnification to their directors and officers than may California
corporations.
Currently, no actions are pending or threatened against officers or
directors of the Company in their capacities as such. The Board of Directors is
not aware of any threatened litigation or proceeding that may result in any
potential liability of a director or a claim for indemnification by any director
or officer.
The indemnification and limitation of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of Coast California made before the Proposed Reincorporation becomes effective.
Inspection of Shareholders List. Both California and Delaware law allow any
shareholder to inspect the shareholders' list for a purpose reasonably related
to such person's interest as a shareholder. California law also gives an
absolute right to inspect and copy the corporation's shareholder list by persons
holding an aggregate of five percent (5%) or more of a corporation's voting
shares, or shareholders holding an aggregate of one percent (1%) or more of such
shares who have filed a Schedule 14A with the Securities and Exchange Commission
relating to the election of directors. Delaware law does not provide for any
such absolute right of inspection, and no such right is granted under the
Certificate of Incorporation or Bylaws of Coast Delaware. Lack of access to
shareholder records although unrelated to a shareholder's interest as a
shareholder could result in impairment of the shareholder's ability to
coordinate opposition to management proposals, including proposals with respect
to a change in control of the Company.
Dividends and Repurchases of Shares. California law dispenses with the
concepts of par value of shares as well as statutory definitions of capital,
surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
23
<PAGE> 10
Under California law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and repurchases of its
shares) unless either the corporation's retained earnings immediately before the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses and
deferred charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the
corporation's current assets would be at least equal to its current liabilities
(or 1 1/4 times its current liabilities if the average pre-tax and pre-interest
expense earnings for the preceding two fiscal years were less than the average
interest expense for such years). Such tests apply to California corporations on
a consolidated basis.
Delaware law permits a corporation to declare and pay dividends out of
surplus, or, if no surplus exists, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year, as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation.
To date, the Company has not paid cash dividends on its capital stock. It
is the present policy of the Board of Directors to retain earnings for use in
the Company's business, and, therefore, the Company does not anticipate making
payment of cash dividends on its Common Stock in the foreseeable future.
Shareholder Voting. Both California and Delaware law generally require that
a majority of the shareholders of both acquiring and target corporations approve
statutory mergers. Delaware law does not require a shareholder vote of the
surviving corporation in a merger (unless the corporation provides otherwise in
its certificate of incorporation) if (a) the merger agreement does not amend the
existing certificate of incorporation, (b) each share of the surviving
corporation outstanding before the merger is an identical outstanding or
treasury share after the merger, and (c) the number of shares to be issued by
the surviving corporation in the merger does not exceed twenty percent (20%) of
the shares outstanding immediately before the merger. California law contains a
similar exception to its voting requirements for reorganizations where
shareholders or the corporation itself, or both, immediately before the
reorganization will own immediately after the reorganization equity securities
constituting more than five-sixths of the voting power of the surviving or
acquiring corporation or its parent entity.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. In contrast, Delaware law
generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation that adversely
affects a specific class of shares.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than fifty percent (50%) but less than ninety percent (90%) of
such common stock or its affiliate unless all of the holders of such common
stock consent to the transaction. This provision of California law may have the
effect of making a "cash-out" merger by a majority shareholder more difficult to
accomplish. Although Delaware law does not parallel California law in this
respect, under some circumstances Section 203 of the Delaware General
Corporation Law does provide similar protection against coercive two-tiered bids
for a corporation in which the shareholders are not treated equally. See
"Shareholder Approval of Certain Business Combinations."
California law also provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is made
by an interested party (generally a controlling or managing party of the target
corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to shareholders.
This fairness opinion requirement does not apply to a corporation that does not
have shares held of record by at least one hundred (100) persons or to a
transaction
24
<PAGE> 11
that has been qualified under California state securities laws. California law
also provides that if a tender of shares or vote is sought pursuant to an
interested party's proposal and a later proposal is made by another party at
least ten (10) days before the date of acceptance of the interested party
proposal, the shareholders must be informed of the later offer and be afforded a
reasonable opportunity to withdraw any vote, consent or proxy, or to withdraw
any tendered shares. Delaware law has no comparable provisions, and the
shareholders of Coast Delaware might therefore be deprived of an opportunity to
consider such other proposal.
Amendment of Articles of Incorporation. In general, Delaware law requires
an amendment to a certificate of incorporation to be approved by a majority of
the outstanding stock entitled to vote thereon. In addition, a separate class
vote is required if the amendment would:
(a) increase or decrease the aggregate number of authorized shares of such
class;
(b) increase or decrease the par value of the shares of such class; or
(c) alter or change the powers and rights of such class so as to adversely
affect the holders of shares of such class.
Notwithstanding, Delaware law allows the number of authorized shares of a class
to be increased or decreased by the affirmative vote of holders of a majority of
the stock of the corporation (without class voting) if the certificate of
incorporation so provides (and such provision was adopted by the affirmative
vote of holders of a majority of such class). Coast Delaware's Certificate of
Incorporation does not so provide.
The California General Corporation Law also requires approval of a majority
of the outstanding shares for an amendment of articles of incorporation. It
further provides that approval of a majority of a class of shares is required,
whether or not otherwise required in the articles of incorporation, if the
amendment would:
(a) increase or decrease the aggregate number of authorized shares of such
class;
(b) effect an exchange, reclassification or cancellation of all or part of
such class;
(c) effect an exchange, or create a right of exchange, of all or part of
the shares of another class into shares of such class;
(d) change the rights, preferences, privileges or restrictions of the
shares of such class;
(e) create a new class of shares having rights, preferences or privileges
senior to such class, or increase the rights, preferences or privileges
or the number of authorized shares of a class having rights preferences
or privileges that are senior to the shares of such class;
(f) in the case of preferred shares, divide the shares into series having
different rights, preferences and privileges; or
(g) cancel or otherwise affect dividends on the shares of such class which
have accrued but have not been paid.
In addition, if a series of a class of stock would be adversely affected by
such amendment differently than other series of the same class, the amendment
must also be approved by holders of such series.
Supermajority Provisions. Delaware law permits a Delaware corporation to
specify a supermajority vote requirement for approval of certain transactions by
shareholders. California law similarly permits supermajority provisions. If a
California corporation has one hundred (100) or more shareholders, however, then
(a) an amendment to its articles of incorporation for the purpose of including
therein a supermajority voting requirement must be approved by the same
proportion of the outstanding shares as the supermajority vote provision
requires, (b) a supermajority vote provision may not require a vote in excess of
sixty-six and two-thirds percent (66 2/3%), and (c) any supermajority provision
automatically becomes inoperative after two years, unless renewed by another
shareholder vote.
Interested Director Transactions. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the require-
25
<PAGE> 12
ments of good faith and full disclosure, are met. With certain exceptions, the
conditions are similar under California and Delaware law. Under California and
Delaware law, (a) either the shareholders or the board of directors must approve
any such contract or transaction after full disclosure of the material facts,
and, under California law, the contract or transaction must also be "just and
reasonable" to the corporation in the case of approval of the board of
directors, or (b) the contract or transaction must have been "just and
reasonable" (in California) or "fair" (in Delaware) as to the corporation at the
time it was approved. In the latter case, California law explicitly places the
burden of proof on the interested director. Under California law, if shareholder
approval is sought, the interested director is not entitled to vote his shares
at a shareholder meeting with respect to any action regarding such contract or
transaction. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors (except that interested directors may be
counted for the purpose of establishing a quorum). Under Delaware law, if board
approval is sought, the contract or transaction must be approved by a majority
of the disinterested directors (even though less than a majority of a quorum).
Therefore, certain transactions that the Board of Directors of Coast California
might not be able to approve because the number of disinterested directors is
not large enough to constitute a majority of a quorum could be approved by a
majority of the disinterested directors of Coast Delaware, although less than a
majority of a quorum. The Company is not aware of any plan to propose any
transaction involving directors of the Company that could not be so approved
under California law but could be so approved under Delaware law.
Voting by Ballot. California law provides that the election of directors
may proceed in the manner described in a corporation's bylaws. Coast
California's Bylaws provide that the election of directors at shareholders'
meetings may be by voice vote or ballot, unless before such vote a shareholder
demands a vote by ballot, in which case such vote must be by ballot. Under
Delaware law, the right to vote by written ballot may be restricted as so
provided in the certificate of incorporation. The Certificate of Incorporation
and Bylaws of Coast Delaware provide that election need not be by ballot. It may
be more difficult for a shareholder to contest the outcome of a vote that has
not been conducted by written ballot.
Shareholder Derivative Suits. California law provides that a shareholder
bringing a derivative action on behalf of a corporation need not have been a
shareholder at the time of the transaction in question, provided that certain
tests are met. Under Delaware law, a shareholder may only bring a derivative
action on behalf of the corporation if the shareholder was a shareholder of the
corporation at the time of the transaction in question or his or her stock
thereafter devolved upon him or her by operation of law. California law also
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond. Delaware does not have a similar bonding requirement.
Appraisal Rights. Under both California and Delaware law, a shareholder of
a corporation participating in certain major corporate transactions may, under
varying circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she otherwise would receive in the
transaction. Under Delaware law, such appraisal rights are not available (a)
with respect to the sale, lease or exchange of all or substantially all of the
assets of a corporation, (b) with respect to a merger or consolidation by a
corporation the shares of which either are listed on a national securities
exchange or are held of record by more than two thousand (2,000) holders if such
shareholders receive only shares of the surviving corporation or shares of any
other corporation that either are listed on a national securities exchange or
are held of record by more than two thousand (2,000) holders, plus cash in lieu
of fractional shares, or (c) to shareholders of a corporation surviving a merger
if no vote of the shareholders of the surviving corporation is required to
approve the merger because the merger agreement does not amend the existing
certificate of incorporation, each share of the surviving corporation
outstanding before the merger is an identical outstanding or treasury share
after the merger and the number of shares to be issued in the merger does not
exceed twenty percent (20%) of the shares of the surviving corporation
outstanding immediately before the merger and if certain other conditions are
met.
The limitations on the availability of appraisal rights under California
law are different from those under Delaware law. California law generally
affords appraisal rights in sales of asset reorganizations as well as in
26
<PAGE> 13
corporate mergers and other business combinations involving a California
corporation. However, shareholders of a California corporation whose shares are
listed on a national securities exchange (as are the shares of Coast California)
or on a list of over-the-counter margin stocks issued by the Board of Governors
of the Federal Reserve System generally do not have such appraisal rights unless
the holders of at least five percent (5%) of the class of outstanding shares
make written demands for cash payments by exercise of their appraisal rights or
the corporation or any law restricts the transferability of the corporation's
shares. In addition, shareholders of a California corporation that is a party to
a merger or other corporate reorganization will not have such appraisal rights
if the corporation's shareholders or the corporation itself, or both,
immediately before the reorganization will own, immediately after the
reorganization, equity securities (other than warrants or rights to subscribe to
such equity securities) constituting more than five-sixths (5/6ths) of the
voting power of the surviving or acquiring corporation or its parent entity (as
will be the case in the Proposed Reincorporation).
Appraisal or dissenters' rights are, therefore, not available to
shareholders of Coast California with respect to the Proposed Reincorporation.
Dissolution. Under California law, shareholders holding fifty percent (50%)
or more of the total voting power of a corporation may authorize a dissolution
of the corporation, with or without the approval of the corporation's board of
directors, and this right may not be modified by the articles of incorporation.
Under Delaware law, unless the board of directors approves a proposal to
dissolve the corporation, the dissolution must be approved by shareholders
holding one hundred percent (100%) of the total voting power of the corporation.
Only if the dissolution is initiated by the board of directors may it be
approved by a simple majority of the corporation's shareholders. In the event of
such a board-initiated dissolution, Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority voting
requirement in connection with dissolutions. Coast Delaware's Certificate of
Incorporation contains no such supermajority voting requirement, however, and a
majority of shares voting at a meeting at which quorum is present would be
sufficient to approve a dissolution of Coast Delaware if such a dissolution were
to be first approved by its Board of Directors.
27
