<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 1-9511
THE COAST DISTRIBUTION SYSTEM, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2490990
------------------------------ ----------------------
(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification Number)
350 WOODVIEW AVENUE, MORGAN HILL, CALIFORNIA 95037
-------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(408) 782-6686
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [X] 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 July 31, 2000
<PAGE> 2
PART I - FINANCIAL INFORMATION
THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 803 $ 641
Accounts receivable - net 28,904 12,981
Inventories 39,797 38,655
Other current assets 2,310 3,462
-------- --------
Total current assets 71,814 55,739
PROPERTY, PLANT, AND EQUIPMENT - NET 4,617 4,364
OTHER ASSETS 9,052 9,584
-------- --------
$ 85,483 $ 69,687
======== ========
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term obligations $ 224 $ 288
Accounts payable - trade 15,671 7,748
Other current liabilities 2,523 2,050
-------- --------
Total current liabilities 18,418 10,086
LONG-TERM OBLIGATIONS
Secured note payable to bank 33,295 26,340
Other long-term liabilities 1,769 1,867
-------- --------
35,064 28,207
REDEEMABLE PREFERRED STOCK OF SUBSIDIARY 98 151
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
June 30, 2000 and December 31, 1999, respectively 16,800 16,751
Accumulated other comprehensive income (loss) (478) (367)
Retained earnings 15,581 14,859
-------- --------
31,903 31,243
-------- --------
$ 85,483 $ 69,687
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 46,940 $ 49,624 $ 90,812 $ 90,753
Cost of sales, including distribution costs 39,720 40,243 75,478 74,244
-------- -------- -------- --------
Gross Profit 7,220 9,381 15,334 16,509
Selling, general and administrative expenses 6,664 5,896 13,262 11,614
-------- -------- -------- --------
Operating income 556 3,485 2,072 4,895
Other income (expense)
Interest expense (908) (670) (1,630) (1,291)
Other 1,119 6 1,110 (6)
-------- -------- -------- --------
211 (664) (520) (1,297)
-------- -------- -------- --------
Income before income taxes 767 2,821 1,552 3,598
Income tax provision 456 1,666 828 2,103
-------- -------- -------- --------
NET INCOME $ 311 $ 1,155 $ 724 $ 1,495
======== ======== ======== ========
Income per common share:
Basic $ .07 $ .25 $ .17 $ .31
======== ======== ======== ========
Diluted $ .07 $ .25 $ .17 $ .31
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 724 $ 1,495
-------- --------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 678 758
Changes in assets and liabilities:
Increase in accounts receivable (15,923) (13,479)
Increase in inventories (1,142) (3,210)
Decrease in prepaids and other current assets 1,152 1,434
Increase in accounts payable 7,923 10,317
Increase (decrease) in accrueds and other
current liabilities 473 (170)
-------- --------
Total adjustments (6,839) (4,350)
-------- --------
Net cash used in operating activities (6,115) (2,855)
Cash flows from investing activities:
Capital expenditures (677) (564)
Decrease in other assets 278 872
-------- --------
Net cash (used in) provided by investing activities (399) 308
Cash flows from financing activities:
Net borrowings under line-of-credit agreement 6,955 9,853
Net repayments of other long-term debt (162) (2,569)
Issuance of Common Stock pursuant to Employee
Stock Option and Stock Purchase Plans 49 86
Redemption of redeemable preferred stock of subsidiary (53) (40)
Dividends on preferred stock of subsidiary (2) (4)
Repurchases of Common Stock -- (2,598)
-------- --------
Net cash provided by financing activities 6,787 4,728
Effect of exchange rate changes on cash (111) 158
-------- --------
NET INCREASE IN CASH 162 2,339
Cash beginning of period 641 435
-------- --------
Cash end of period $ 803 $ 2,774
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
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 June 30, 2000 and the
results of its operations and cash flows for the three and six month
periods ended June 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 six month periods ended June 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year.
See, "MANAGEMENT'S DISCUSSION AND 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 shares 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 June 30, 2000, 721,500 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
------ ------- -------
$1,324 $16,193 $17,517
====== ======= =======
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 six months ended June 30, 2000 are as follows:
USA..................................... $74,169,000
Canada ................................. 16,633,000
Other .................................. 10,000
-----------
$90,812,000
===========
5
<PAGE> 6
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, 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 recreational vehicle and
boat dealers ("After-Market Customers"). Our sales are affected primarily by (i)
usage of recreational vehicles and boats which affects the consumers' needs for
and purchases of replacement parts, repair services and supplies, and (ii) sales
of new recreational vehicles and boats, because consumers often "accessorize"
their recreational vehicles and boats at the time of purchase.
The usage and the purchase, by consumers, of recreational vehicles and
boats depend, in large measure, upon the extent of discretionary income
available to consumers and their confidence about economic conditions. Weather
conditions also affect the usage of recreational vehicles and boats. As a
result, the Company's sales and operating results can be, and in the past have
been, adversely affected by recessionary economic conditions, increases in
interest rates, which affect the availability and affordability of financing for
purchases of recreational vehicles and boats, increases in gasoline prices which
adversely affect the costs of using recreational vehicles and boats, and
unusually adverse weather conditions.
Results of Operations
Net Sales. Net sales declined by $2,684,000 or 5% in the quarter ended
June 30, 2000 as compared to the corresponding quarter of 1999. We believe that
the decline was primarily attributable to increases in gasoline prices and
interests rates which resulted in a decrease in both the usage and purchase of
recreational vehicles and, in turn, led to a decline in purchases by our
customers in response to those conditions. For the six months ended June 30,
2000, net sales were approximately unchanged from the same period of 1999, as
stronger first quarter net sales offset the decline in sales in the second
quarter.
Gross Margin. Our gross margin declined to 15.4% of net sales in the
quarter ended June 30, 2000 from 18.9% for the same period of 1999. That
decline, in turn, caused our gross margin in the six months ended June 30, 2000
to decline to 16.9% of net sales from 18.2% in the same six months of 1999.
These declines were due primarily to (i) increased price competition in the
second quarter 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. Selling, general and
administrative expenses increased in the quarter and six months ended June 30,
2000 by $768,000, or 13.0%, and $1,648,000, or 14.2%, respectively, as compared
to the respective corresponding periods of 1999. As a percentage of net
revenues, such expenses represented 14.2% and 14.6%, respectively, in the
quarter and six months ended June 30, 2000, as compared to 11.9% and 12.8%,
respectively for those same three and six month periods of 1999. These increases
were primarily attributable to increases in selling expenses and in marketing
costs.
Operating Income. The declines in operating income in the quarter and
six months ended June 30, 2000, as compared to the corresponding periods of
1999, were due primarily to the combined effects of the decreases in gross
margin and the increases in selling, general and administrative expenses and, in
the second quarter of 2000, also to a lesser extent to the decline in net sales
in that quarter.
Interest Expense. Interest expense increased by $238,000, or 36%, and
by $339,000, or 26%, in the quarter and six months ended June 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 half of
2000, which were used to fund
6
<PAGE> 7
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 was the result of a one time sale of one of
the Company's proprietary product lines to a recreational vehicle supplies
manufacturer, which has agreed to supply that product, along with products from
its other product lines, to the Company in future periods.
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.
We also have obtained a $5,000,000 term loan from the same bank from which we
obtained our revolving credit facility. Under the terms of the revolving credit
facility and the term note, which expire 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") plus $5,000,000.
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. Interest on the $5,000,000 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 July 31, 2000, outstanding borrowings under the revolving credit
facility and the term loan totaled $27,500,000. 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 the revolving credit facility,
together with internally generated funds, will be sufficient to enable us to
meet our working capital 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.
We generally use cash for, rather than generating cash from, operations
in the first half of the year, because we build inventories, and our accounts
receivables increase, as our customers begin increasing their product purchases
for the spring and summer selling seasons. See "Seasonality and Inflation"
below.
Net cash used in operating activities was $6,115,000 in the first six
months of 2000, as compared to $2,855,000 in the same period of 1999. Accounts
receivable collections slowed somewhat in the first six 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 quarter of 2000.
Capital expenditures were $677,000 in the first six months of 2000 as
compared to $564,000 in the same period of 1999.
Financing activities provided us with net cash of $6,787,000 in the
first six months of 2000 as compared to $4,728,000 in the same period of 1999.
We increased our bank borrowings by $6,955,000 in the first six months of 2000,
and used those borrowings primarily for operations. In the corresponding six
month period of 1999, we increased our bank borrowings by $9,853,000, the
proceeds of which were used to fund operations, to make repurchases in private
and open market transactions of shares of our common stock for an aggregate
price of $2,598,000, and to retire the remaining $2,333,000 of our subordinated
notes.
We lease the majority of our facilities and certain of our equipment
under non-cancelable operating leases. Our future lease commitments are
described in Note 4 of Notes to the our Interim Condensed Consolidated Financial
Statements included elsewhere in this report.
7
<PAGE> 8
Seasonality and Inflation
Seasonality. Sales of our products 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. 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 operations in the months when sales are
lower.
Inflation. 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. Such increases,
or even the prospect of such increases or of 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 quarter of 2000 was due primarily to
increases in interests 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 our financial position, results of
operations and cash flows. To a lesser degree, we are exposed to market risk
from foreign currency fluctuations associated with our Canadian operations and
our Canadian currency denominated debt. We do not use financial instruments for
trading or other speculative purposes and we are not a 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
June 30, 2000, we had outstanding $33.3 million under our revolving credit
facility. If a hypothetical 100 basis point increase in interest rates had
occurred at June 30, 2000, that increase would have the effect of reducing our
pretax earnings for the six months ending December 31, 2000 by approximately
$150,000. The fair value of borrowings under our revolving credit facility
approximate the carrying value of those 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 our operating results 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 June 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.
--------------------
FORWARD-LOOKING INFORMATION
This Report contains forward-looking information which reflects
management's current views of future financial performance. The forward-looking
information is subject to certain risks and uncertainties, including, but not
limited to, the effect on future performance of changing product supply
relationships in our 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 weather conditions, that can affect both the purchase and usage
of RVs and boats and which, in turn, affects purchases by consumers and,
therefore, also by our After-Market Customers, of the products that we sell. For
information concerning these factors and risks, see the foregoing discussion in
this section of this Report entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and the Section entitled "Certain
Factors That Could Affect Future Performance" in our Annual Report on Form 10K
for the fiscal year ended December 31, 1999 that was filed with the Securities
and Exchange Commission in March 2000. 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.
8
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND EXHIBITS
(a) Exhibits.
Exhibit 11.1 -- Computation of Earnings (Loss) Per Share for the
three and six months ended June 30, 2000 and
1999.
Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended June 30,
2000.
9
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 10, 2000 THE COAST DISTRIBUTION SYSTEM, INC.
By: /s/ SANDRA A. KNELL
-------------------------------------
Sandra A. Knell, Executive Vice
President and Chief Financial Officer
S-1
<PAGE> 11
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT PAGE
------- ------------
Exhibit 11.1 Computation of Income (Loss) Per Share for
the three and six months ended June 30,
2000 and 1999 12
Exhibit 27 Financial Data Schedule 13
E-1
