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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 1-9511
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THE COAST DISTRIBUTION SYSTEM, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 94-2490990
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
350 Woodview Avenue, Morgan Hill, California 95037
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(Address of principal executive offices) (Zip Code)
(408) 782-6686
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
4,330,654 shares of Common Stock as of November 8, 2000
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 850 $ 641
Accounts receivable - net 17,096 12,981
Inventories 35,421 38,655
Other current assets 2,899 3,462
-------- --------
Total current assets 56,266 55,739
Property, Plant and Equipment - Net 4,547 4,364
Other Assets 8,856 9,584
-------- --------
$ 69,669 $ 69,687
======== ========
LIABILITIES
Current Liabilities
Current maturities of long-term obligations $ 1,901 $ 288
Accounts payable - trade 7,128 7,748
Other current liabilities 2,632 2,050
-------- --------
Total current liabilities 11,661 10,086
Long-Term Obligations
Secured note payable to bank 25,380 26,340
Other long-term liabilities 1,722 1,867
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27,102 28,207
Redeemable Preferred Stock of Subsidiary 78 151
Shareholders' Equity
Preferred stock, $.001 par value: 5,000,000 shares
authorized and none issued and outstanding: -- --
Common stock, $.001 par value: 20,000,000 shares
authorized; 4,330,654 and 4,302,846 issued as of
September 30, 2000 and December 31, 1999, respectively 16,800 16,751
Accumulated other comprehensive income (loss) (567) (367)
Retained earnings 14,625 14,859
-------- --------
30,858 31,243
-------- --------
$ 69,669 $ 69,687
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
INTERIM CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 37,076 $ 41,407 $ 127,888 $ 132,160
Cost of sales, including distribution costs 31,896 35,235 107,374 109,479
-------- -------- --------- ---------
Gross profit 5,180 6,172 20,514 22,681
Selling, general and administrative expenses 6,089 6,165 19,351 17,779
-------- -------- --------- ---------
Operating income (loss) (909) 7 1,163 4,902
Other income (expense)
Interest (719) (542) (2,350) (1,833)
Other 11 11 1,122 5
-------- -------- --------- ---------
(708) (531) (1,228) (1,828)
-------- -------- --------- ---------
Income (loss) before income taxes (1,617) (524) (65) 3,074
Income tax provision (benefit) (660) (361) 168 1,742
-------- -------- --------- ---------
NET INCOME (LOSS) $ (957) $ (163) $ (233) $ 1,332
======== ======== ========= =========
Income (loss) per common share:
Basic $ (.22) $ (.04) $ (.05) $ .28
======== ======== ========= =========
Diluted $ (.22) $ (.04) $ (.05) $ .28
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine months ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (233) $ 1,332
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 1,036 1,119
Changes in assets and liabilities:
Increase in accounts receivable (4,115) (3,032)
Decrease (increase) in inventories 3,234 (531)
Decrease in prepaids and other current assets 563 1,340
(Decrease) increase in accounts payable (620) 2,426
Increase (decrease) in accrueds, and other current liabilities 582 (200)
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Total adjustments 680 1,122
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Net cash provided by operating activities 447 2,454
Cash flows from investing activities:
Capital expenditures (836) (714)
Decrease in other assets 345 471
------- -------
Net cash used in investing activities (491) (243)
Cash flows from financing activities:
Net borrowings under line-of-credit agreement 740 3,222
Net repayments of other long-term debt (232) (2,496)
Issuances of Common Stock under Employee Stock Option and Purchase Plans 49 86
Redemption of redeemable preferred stock of subsidiary (103) (91)
Dividends on preferred stock of subsidiary (1) (5)
Repurchases of Common Stock -- (2,743)
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Net cash provided by (used in) financing activities 453 (2,027)
Effect of exchange rate changes on cash (200) 179
------- -------
NET INCREASE IN CASH 209 363
Cash beginning of period 641 435
------- -------
Cash end of period $ 850 $ 798
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present the Company's financial position as of September 30, 2000 and
the results of its operations and cash flows for the three and nine
months ended September 30, 2000 and 1999. The accounting policies
followed by the Company are set forth in Note A to the Company's
financial statements in its Annual Report on Form 10-K for its fiscal
year ended December 31, 1999.
2. The Company's business is seasonal and its results of operations for the
three and nine months ended September 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year.
See "Management's Discussion & Analysis of Financial Condition and
Results of Operations - Seasonality and Inflation" in Item 2 of Part I
of this Report.
3. Basic earnings per share are computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per
share are computed using the weighted average number of common and
potentially dilutive securities outstanding during the period.
Potentially dilutive securities consist of the incremental common shares
issuable upon the exercise of stock options (using the treasury stock
method). Potentially dilutive securities are excluded from the
computation if their effect is anti-dilutive. At September 30, 2000,
744,000 common shares issuable on exercise of stock options were
excluded from the computation of diluted earnings per share as their
inclusion would have been anti-dilutive.
4. The Company leases its corporate offices, warehouse facilities and data
processing equipment. Those leases are classified as operating leases as
they do not meet the capitalization criteria of FASB Statement No. 13.
The office and warehouse leases expire over the next ten years and the
equipment leases expire over the next five years.
The minimum future rental commitments under noncancellable operating
leases having an initial or remaining term in excess of one year as of
December 31, 1999 are as follows:
YEAR ENDING
DECEMBER 31, EQUIPMENT FACILITIES TOTAL
------------ --------- ---------- -----
(DOLLARS IN THOUSANDS)
2000 $ 332 $ 2,766 $ 3,098
2001 325 2,673 2,998
2002 317 2,414 2,731
2003 300 2,341 2,641
2004 50 1,581 1,631
Thereafter -- 4,418 4,418
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$1,324 $16,193 $17,517
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5. The Company has one operating segment, the distribution of replacement
parts, accessories and supplies for recreational vehicles and boats.
Geographic net sales for the nine months ended September 30, 2000 are
as follows:
USA $105,847,000
Canada 22,031,000
Other 10,000
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$127,888,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Factors Generally Affecting Sales of RV and Boating Products
We believe that 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. Our sales are made to retail parts and
supplies stores, service and repair establishments and new and used RV and boat
dealers ("After-Market Customers"). Our sales are affected primarily by (i)
usage of RVs and boats which affects consumers' needs for and purchases of
replacement parts, repair services and supplies, and (ii) sales of new RVs and
boats, because consumers often "accessorize" their RVs 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, and changes in the prices of
gasoline and in interest rates. Weather conditions also affect the usage of RVs
and boats. As a result, our 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 gasoline prices which adversely affect
the costs of using RVs and boats, and unusually adverse weather conditions.
RESULTS OF OPERATIONS
Net Sales. Net sales declined by $4,331,000 or 10% in the quarter ended
September 30, 2000 as compared to the corresponding quarter of 1999. For the
nine months ended September 30, 2000, net sales declined by $4,272,000 or 3% as
compared to the nine months ended September 30, 1999. We believe that these
declines, which began late in the second quarter of 2000, were primarily
attributable to increases in gasoline prices and in interest rates which
resulted in a decrease in both the usage and purchases of recreational vehicles
and, in turn, led to a decline in purchases by customers of After-Market RV
parts, accessories and supplies.
Gross Margin. Our gross margin declined to 14.0% of net sales in the
three months ended September 30, 2000 from 14.9% for the same period of 1999.
For the nine months ended September 30, 2000 our gross margin declined to 16.0%
from 17.2% for the same period of 1999. These declines were due primarily to
increased price competition in the second and third quarters of the current year
in response to slowing sales in our markets, the adverse effect of lower sales
volume on fixed costs and a change in the mix of our sales to a higher
proportion of higher priced, but lower margin accessories.
Selling, General and Administrative Expenses. Although selling, general
and administrative expenses declined in absolute dollars in the third quarter of
2000, as compared to 1999, as a percentage of net sales, these expenses
increased to 16.4% for the third quarter of 2000 from 14.9% in the comparable
quarter of 1999. In the nine months ended September 30, 2000 these expenses
increased $1,572,000 or to 15.1% of net sales in 2000 as compared to 13.5% of
net sales in 1999. The increases were primarily attributable to higher selling
expenses and marketing costs.
Operating Income. The combination of the decline in sales and gross
margin and the increase in selling, general and administrative expenses produced
the declines in operating income in the quarter and nine months ended September
30, 2000.
Interest Expense. Interest expense increased by $177,000, or 33%, and
by $517,000, or 28%, respectively, in the quarter and nine months ended
September 30, 2000, from the corresponding periods of 1999. These increases were
primarily the result of increases in average long-term borrowings outstanding
during the first nine months of 2000, which were used to fund operations and, in
1999, to repurchase shares of our common stock. We will continue to rely on
borrowings to fund a substantial portion of our working capital requirements and
future growth and, as a result, we anticipate that interest will continue to be
a significant expense for us.
Other Income. Other income in the nine months ended September 30, 2000
was attributable to a one time sale of one of our proprietary product lines to a
recreational vehicle supplies manufacturer, which has agreed to supply that
product line, along with products from its other product lines, to us in future
periods.
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Income Taxes. Our effective tax rate is affected by the amount of our
expenses that are not deductible for income tax purposes and by tax rates on
income generated by our foreign subsidiaries, which generally are higher than
domestic income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
We finance our working capital requirements primarily with borrowings
under a long-term revolving bank credit facility and internally generated funds.
Under the terms of the revolving credit facility which expires in May 2003, we
may borrow up to the lesser of (i) $35,000,000 with a seasonal increase to
$45,000,000 between March 1 and June 20 of each year, or (ii) an amount equal to
80% of eligible accounts receivable and 50% of eligible inventory (the
"borrowing base"). Interest on the revolving credit facility is payable at the
bank's prime rate plus 50 basis points or, at the Company's option but subject
to certain limitations, borrowings will bear interest at the bank's LIBOR rate,
plus 225 basis points. We also obtained, from our revolving credit lender, a
$5,000,000 term loan the proceeds of which were used primarily to fund purchases
of our common stock during 1999. Interest on the term loan is payable at the
bank's prime rate plus 100 basis points or at the bank's LIBOR rate, plus 275
basis points.
At November 6, 2000, outstanding borrowings under the revolving credit
facility and the term loan totaled $24,850,000. Borrowings under the credit
facility and term loan are secured by substantially all of the Company's assets
and rank senior in priority to other indebtedness of the Company.
We believe that available credit under our revolving credit facility,
together with internally generated funds, will be sufficient to enable us to
meet our working capital requirements and other cash requirements over the next
twelve months. We do not presently anticipate any material increases in our cash
requirements or material changes in our sources of funds in the foreseeable
future.
Net cash provided by operations was $447,000 in the first nine months
of 2000, as compared to $2,454,000 in the same period of 1999. Accounts
receivable collections slowed somewhat in the first nine months of 2000, as
compared to the same period of 1999, due primarily to sales declines experienced
by our customers primarily as a result of a slowing in consumer usage and
purchases of recreational vehicles and boats in apparent response to increases
in gasoline prices and interest rates in the second and third quarters of 2000.
During the third quarter of 2000, we began the implementation of a new inventory
management strategy which has contributed to a reduction of $3,234,000 in
inventory in the nine months ended September 30, 2000 as compared to an increase
of $531,000 for the same period of 1999. This strategy has enabled us to
accelerate payments to our vendors which has resulted in a reduction in our
accounts payable in the nine months ended September 30, 2000 of $620,000 as
compared to an increase in accounts payable of $2,426,000 in the nine months
ended September 30, 1999.
Capital expenditures were $836,000 in the first nine months of 2000 as
compared to $714,000 in the same period of 1999.
Financing activities provided us with net cash of $453,000 in the first
nine months of 2000 as compared to using cash of $2,027,000 in the comparable
period in 1999. In June 1999, we made the final payment, in the amount of
$2,333,000, on our outstanding senior subordinated notes. In early 1999 we began
an open market and private stock repurchase program and, during the first nine
months of 1999, we purchased $2,743,000 of shares of our common stock.
We lease the majority of our facilities and certain equipment under
non-cancelable operating leases. Our future lease commitments are described in
Note 4 of Notes to the Company's Interim Condensed Consolidated Financial
Statements included elsewhere in this Report.
SEASONALITY AND INFLATION
Sales of recreational vehicle and boating parts, supplies and
accessories are seasonal. We have significantly higher sales during the
six-month period from April through September than we do during the remainder of
the year, in the winter months when usage of recreational vehicles and boats is
curtailed largely due to weather conditions. Because a substantial portion of
our expenses are fixed, operating income declines and we sometimes incur losses
and must rely more heavily on borrowings to fund operating requirements in the
months when sales are lower.
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Generally, we have been able to pass inflationary price increases on to
customers. However, inflation also may cause or may be accompanied by increases
in gasoline prices and interest rates. Even in the absence of inflationary
conditions, increases, or even the prospect of increase in the price, or
shortages in the supply, of gasoline, can adversely affect the purchase and
usage of RVs and boats, which can result in a decline in the demand for our
products. We believe that the decrease in our net sales in the second and third
quarters of 2000 was due primarily to increases in interest rates and gasoline
prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk with respect to financial instruments is
primarily related to changes in interest rates with respect to borrowing
activities, which may adversely affect its financial position, results of
operations and cash flows. To a lesser degree, we are exposed to market risk
from foreign currency fluctuations associated with the Company's Canadian
operations and its Canadian currency denominated debt. We do not use financial
instruments for trading or other speculative purposes and are not party to any
derivative financial instruments.
In seeking to minimize the risks from interest rate fluctuations, we
manage exposures through our regular operating and financing activities. As of
September 30, 2000, we had outstanding $27.1 million under our revolving credit
facility. At September 30, 2000 a hypothetical 100 basis point increase in
interest rates would result in a reduction of approximately $65,000 in 2000
pretax earnings. The fair value of borrowings under our revolving credit
facility approximate the carrying value of these obligations.
We sometimes enter into forward exchange agreements to reduce the
effect of foreign currency fluctuations on a portion of our inventory purchases
in Canada for our Canadian operations. The gains and losses on these contracts
are reflected in earnings in the period during which the transactions being
hedged are recognized. We believe that these agreements do not subject us to
significant market risk from exchange rate movements because the agreements
offset gains and losses on the balances and transactions being hedged. As of
September 30, 2000, there were no such agreements outstanding.
Approximately 20% of our debt is denominated in Canadian currency,
which also exposes us to market risk associated with exchange rate movements.
Historically, we have not used derivative financial instruments to manage our
exposure to foreign currency rate fluctuations since the market risk associated
with our foreign currency denominated debt has not been considered significant.
--------------------------
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION CONTAINED IN THIS
REPORT
This Report contains forward-looking information which reflects
Management's current views of future financial performance. The forward-looking
information is subject to certain risks and uncertainties which could cause
actual operating results to differ, possibly significantly, from expected
operating results. Those risks and uncertainties, are more fully described in
our Annual Report on Form 10-K for our fiscal year ended December 31, 1999,
filed with the Securities and Exchange Commission, and they include:
o the effect on future performance of changing product supply
relationships in the industry and the uncertainties created by those
changes; and
o the potential for increased price competition; possible changes in
economic conditions, prevailing interest rates or gasoline prices,
or the occurrence of unusual weather conditions, that can affect
both the purchase and usage of RVs and boats and, in turn, purchases
by consumers of the products that the Company sells.
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.
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PART II -- OTHER MATTERS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on August 22, 2000. The
only matter presented for a vote of the Stockholders at that Meeting was the
election of two Class III Directors each for a term of three years. The
candidates nominated by the Board of Directors were the only persons nominated
for election as Class III Directors at the Meeting and their election was
uncontested. Set forth below is the name of each of those nominees and the
number of votes cast for their election or withheld. As the election was
uncontested, there were no broker non-votes.
Directors Elected at the Annual Meeting:
Nominee/Director Votes "For" Votes "Withheld"
---------------- ----------- ----------------
Thomas R. McGuire 3,641,102 28,598
Ben A. Frydman 3,635,092 34,608
Directors Continuing in Office. Continuing in office were Robert S.
Throop, a Class I Director whose term of office extends to the Annual Meeting in
2001, and John W. Casey, a Class II Director whose term of office extends to
2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND EXHIBITS
(a) Exhibits.
Exhibit 11.1 Computation of Earnings (Loss) Per Share for
the quarter and nine months ended September 30,
2000 and 1999.
Exhibit 27. Financial Data Schedule.
(b) Current Reports on Form 8-K.
There were no Current Reports on Form 8-K filed in the quarter
ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 9, 2000 THE COAST DISTRIBUTION SYSTEM, INC.
By: /s/ SANDRA A. KNELL
------------------------------
Sandra A. Knell
Executive Vice President and
Chief Financial Officer
S-1
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
Exhibit 11.1 Computation of Income (Loss) Per Share for the Quarter and Nine
Months ended September 30, 2000 and 1999
Exhibit 27. Financial Data Schedule
E-1
