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EXCEL - IDEA: XBRL DOCUMENT - COAST DISTRIBUTION SYSTEM INCFinancial_Report.xls
EX-21 - SUBSIDIARIES OF REGISTRANT - COAST DISTRIBUTION SYSTEM INCd275385dex21.htm
EX-31.2 - CONSENT OF CFO PURSUANT TO SECTION 302 - COAST DISTRIBUTION SYSTEM INCd275385dex312.htm
EX-32.2 - CONSENT OF CFO PURSUANT TO SECTION 906 - COAST DISTRIBUTION SYSTEM INCd275385dex322.htm
EX-31.1 - CONSENT OF CEO PURSUANT TO SECTION 302 - COAST DISTRIBUTION SYSTEM INCd275385dex311.htm
EX-23.1 - CONSENT OF BURR PILGER MAYER, INC. - COAST DISTRIBUTION SYSTEM INCd275385dex231.htm
EX-32.1 - CONSENT OF CEO PURSUANT TO SECTION 906 - COAST DISTRIBUTION SYSTEM INCd275385dex321.htm
Table of Contents

 

 

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

For the fiscal year ended December 31, 2011

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, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   94-2490990

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

350 Woodview Avenue, Morgan Hill, California   95037
(Address of principal executive offices)   (Zip Code)

(408) 782-6686

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value, $.001 per share
Preferred Share Purchase Rights, $0.001 per share
  American Stock Exchange
American Stock Exchange
(Title of Class)   (Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act.    YES  ¨    NO  x.

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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer and large accelerated filer” and “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨      Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the outstanding shares of Common Stock held by non-affiliates of registrant as of June 30, 2011, the last day of the second quarter of fiscal 2011, which was determined on the basis of the closing price of registrant’s shares on that date, was approximately $10,917,000.

As of March 16, 2012, a total of 4,607,096 shares of registrant’s Common Stock were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Except as otherwise stated therein, Part III of the Form 10-K is incorporated by reference from registrant’s Definitive Proxy Statement expected to be filed on or before April 30, 2012 for its Annual Meeting.

 

 

 


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2011

TABLE OF CONTENTS

 

         Page No.  

FORWARD LOOKING STATEMENTS

     1   

Part I

  

Item 1

 

Business

     1   

Item 1A

 

Risk Factors

     5   

Item 1B

 

Unresolved Staff Comments

     11   

Item 2

 

Properties

     11   

Item 3

 

Legal Proceedings

     13   

Item 4

 

Mine Safety Disclosures

     13   
 

Executive Officers of the Registrant

     13   

Part II

  

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     14   

Item 6

 

Selected Financial Data

     16   

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   
 

Management Overview

     17   
 

Critical Accounting Policies and Use of Estimates

     18   
 

Results of Operations

     22   
 

Liquidity and Capital Resources

     24   
 

Seasonality and Inflation

     26   

Item 7A

 

Quantitative and Qualitative Disclosure About Market Risk

     27   

Item 8

 

Financial Statements and Supplementary Data

     28   
 

Index to Consolidated Financial Statements

     28   
 

Report of Independent Registered Public Accounting Firm

     29   
 

Consolidated Balance Sheets at December 31, 2011 and 2010

     30   
 

Consolidated Statements of Operations for the Years ended December 31, 2011, 2010 and 2009

     31   
 

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2011, 2010 and 2009

     32   
 

Consolidated Statements of Stockholders’ Equity for the Years ended December  31, 2011, 2010 and 2009

     33   
 

Consolidated Statements of Cash Flows for the Years ended December 31, 2011, 2010 and 2009

     34   
 

Notes to Consolidated Financial Statements

     35   
 

Schedule II—Valuation and Qualifying Accounts December 31, 2011, 2010 and 2009

     48   

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

     49   

Item 9A (T)

 

Controls and Procedures

     49   

Item 9B

 

Other Information

     50   

Part III

  

Item 10

 

Directors and Executive Officers of the Registrant

     51   

Item 11

 

Executive Compensation

     51   

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     51   

Item 13

 

Certain Relationships and Related Transactions and Director Independence

     51   

Item 14

 

Principal Accountant Fees and Services

     51   

Part IV

  

Item 15

 

Exhibits and Financial Statements and Schedules

     52   

Signatures

     S-1   

Exhibit Index

     E-1   

Exhibit 21

 

Subsidiaries of Registrant

  

Exhibit 23.1

 

Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm

  

Exhibit 31.1

 

Certifications of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 31.2

 

Certifications of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 32.1

 

Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

  

Exhibit 32.1

 

Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

  

101.INS*

 

XBRL instance Document

  

101.SCH*

 

XBRL Taxonomy Extension Schema Document

  

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

  

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

  

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

  

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

  

 

(i)


Table of Contents

FORWARD LOOKING STATEMENTS

Statements contained in this Annual Report that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or markets, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” The expectations, beliefs or views regarding our future financial condition or financial performance or trends in our business or markets that are contained in this Report are based on current information and are subject to a number of risks and uncertainties that could cause our financial condition or operating results in the future to differ, possibly significantly, from those expected at the current time. Those risks and uncertainties are described in Item 1A of Part I of this Report in the Section entitled “RISK FACTORS” and some of the factors and uncertainties that can affect our business, financial condition and results of operations also are set forth in Part II of this Report in the Section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” Readers of this Report are urged to read the cautionary statements contained in those Sections of this Report.

Due to these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements contained in this Report, which speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may otherwise be required by applicable law or the rules of the American Stock Exchange.

PART I

 

ITEM 1. BUSINESS

References in this Annual Report to “Coast,” “we,” “us,” or “our” or to the “Company” shall mean The Coast Distribution System, Inc and its subsidiaries taken as a whole.

Overview of Our Business

The Coast Distribution System, Inc. is one of North America’s largest suppliers of replacement parts, supplies and accessories for recreational vehicles (“RVs”), and boats to RV and boat dealers, supply stores and service centers (“Aftermarket Customers”), which resell the products they purchase from us, at retail, to consumers. We supply or distribute almost 10,000 products and serve more than 15,000 customers throughout the United States and Canada, from 13 regional distribution centers in the United States that are located in California, Texas, Oregon, Arizona, Colorado, Utah, Indiana, Pennsylvania, New York, Georgia, Florida and Wisconsin and 4 regional distribution centers in Canada located, respectively, in Montreal, Toronto, Calgary and Vancouver. Reference is made to Note G to our Consolidated Financial Statements, contained in Item 8 of this Report, for certain information regarding the Company’s operations in the United States and Canada, respectively.

We differ from traditional wholesale product distributors in our markets, in that approximately 30% of our sales are of “proprietary” products which we have introduced into the marketplace. Our proprietary products have been designed specifically for us, at our request, by independent product design firms or product manufacturers and are manufactured for us, generally on an exclusive basis, by a number of different independent manufacturers, mostly, but not entirely, in Asia. We market our proprietary products under our own brand-names in competition with or, in some cases that complement products from traditional manufacturers of RV and boating parts, supplies and accessories. For the most part, our proprietary products are comprised of products that are needed or used by RV and boating customers on a regular or recurring basis, such as trailer hitches, plastic wastewater tanks, vent lids, stabilizing jacks and battery boxes. Due to differences in costs, we generally are able to generate higher margins on sales of proprietary products than we are able to realize on sales of competing products. See “ProductsProprietary Products Strategy and Sales” below.

We also have recently begun to market and sell portable generators and certain other products, including some of our proprietary products, to other product distributors, national and regional home improvement and home accessories chains, catalogue stores, hardware stores and agricultural equipment outlets that sell outdoor power equipment to consumers. See “ProductsExpansion into New Markets” below.

The Company was incorporated in California in June 1977, and reincorporated in Delaware in April 1998.

 

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The RV and Boating Parts, Supplies and Accessories Aftermarkets

Many manufacturers of RV and boating 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 which reduces the amount of product inventories that retailers must carry and, therefore, their costs of operations.

The market for RV parts, supplies and accessories distributed by the Company is comprised of RV dealers and RV supply stores and service centers. The RV products that we sell include optional equipment and accessories, such as trailer hitches, air conditioning units, water heaters, portable generators, outdoor furniture, and other accessories, and replacement and repair parts and maintenance supplies. The market for the boating parts, supplies and accessories that we sell is comprised primarily of independent boat dealers that sell boats and boating parts, supplies and accessories at retail. Independent boat dealers primarily purchase replacement parts, boating supplies and smaller accessories from us.

Products

General. We carry a full line of almost 10,000 RV and boating parts, supplies and accessories which we purchase from more than 400 manufacturers, including the manufacturers which produce our proprietary products, in most cases on an exclusive basis specifically for us. The RV products that we distribute include 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, outdoor furniture, mirrors and compressors. Boating and marine products that we distribute include boat covers, stainless steel hardware, depth sounders, anchors, life jackets and other marine safety equipment and fishing equipment that are designed primarily for use on trailer-towable boats.

Proprietary Products Strategy and Sales. We have introduced into the RV and boating aftermarkets a growing number of proprietary products, which are products that are manufactured specifically for us, often on an exclusive basis, by a number of different independent manufacturers, based primarily, but not exclusively, in Asia. The proprietary products primarily include products that are needed or used by RV and boating customers on a regular or recurring basis, such as trailer hitches, plastic wastewater tanks, vent lids, stabilizing jacks and battery boxes. These products have been designed for us by independent professional product design firms or by the independent manufacturers that we have retained to manufacture the products for us. We market these proprietary products under our own brand-names in competition with brand name products from traditional suppliers, which usually sell their products to a number of different distributors and sometimes into other markets.

Generally, the costs to us of purchasing proprietary products are lower than the costs of purchasing competing products from traditional suppliers based in the United States. As a result, our proprietary products strategy has enabled us, over the years, to offer our customers lower-priced products, without compromising quality, and at the same time has enabled us to increase our gross profit margins. However, the costs of marketing our proprietary products generally are greater than for established brand-name products, which can offset some of the margin advantage we gain on sales of those products.

Expansion into New Markets. During the past few years we have begun to source from overseas manufacturers, and market and sell in the United States and Canada, products that have applications not only in the RV and boating markets, but also in other markets. We intend to continue our efforts to source additional products from independent manufacturers, primarily in Asia, that we can sell into multiple markets domestically, in order to increase our sales and gross margins and reduce our dependence on the RV and boating markets. It is too early to predict if this strategy will prove to be successful. Among other things, we have encountered stiff competition in those new markets from manufacturers and distributors of competing products. A number of those manufacturers and distributors are larger and have more marketing and capital resources than we do and are better known in those markets than we are. Additionally, we expect that it will be necessary for us to assume primary responsibility for marketing these foreign sourced products to consumers and, in some instances, for providing warranty service for such products, the costs of which could offset the margin advantage we enjoy on sales of these products.

 

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Marketing and Sales

Our Customers. Our customers include primarily (i) RV dealers, which purchase optional equipment and accessories for new recreational vehicles and replacement and repair parts for their service departments, (ii) independent RV supply stores and service centers that purchase parts, supplies and accessories for resale to owners of RVs 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. We are not dependent on any single customer for any material portion of our business and no single customer accounted for more than 2% of our sales in 2011, 2010 or 2009.

We have begun to market and sell portable generators and certain other products, including some of our proprietary products, to other distributors, national and regional home improvement and home accessories chains, catalogue stores, hardware stores and agricultural equipment outlets, which operate within the outdoor power equipment market. However, to date, our sales to those customers have not been material in relation to our sales of such products to RV and boating Aftermarket customers and there is no assurance that we will be successful in penetrating the outdoor power equipment market.

Our Customer Service Center and Electronic Order Entry and Warehousing System. We have designed and implemented a computer-based order entry and warehousing system which enables our customers to transmit orders electronically to our central computers and also enables us, subject to product availability, to prepare and invoice most customer orders within 24 hours of receipt.

We operate a national customer sales and service center through which our customers can obtain product information and place orders by telephone using toll-free telephone numbers. Our customer sales and service center is staffed by sales personnel who are trained to promote the sale of our products and to handle customer service issues. We also maintain web sites where our customers can submit orders electronically.

Orders transmitted by customers either electronically, or via telephone to the national customer sales and service center, are entered into our computer system and then are electronically transmitted to the regional distribution center selected by the customer, where the products are picked, 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.

Distribution

General. Our regional distribution and warehouse centers in North America carry an inventory of up to approximately 10,000 RV and boating parts, supplies and accessories, although the nature and number of products at each distribution and warehouse center does vary, based primarily on the historical product sales of each distribution center to customers in their respective geographic regions. We rely primarily on independent freight companies to ship our products to our customers.

We have implemented an inventory management and deployment system that we designed to improve our ability to fill customer orders from the distribution centers closest to the customer and, thereby, improve our responsiveness to the customer and at the same time reduce our costs of service. We track product sales from each of our distribution and warehouse centers and stock at each such center only the products which are in relatively high demand from customers in the region serviced by that distribution center. At the same time we offer our customers a program by which we ship products that are not available at the Company’s distribution center closest to the customer from the next closest of the Company’s distribution centers which stocks those products. This program reduces back-orders that could adversely affect service levels to our customers and, at the same time, reduces our costs because it eliminates the need to stock duplicative products at all of our warehouses.

Arrangements with Manufacturers

General. The products which we supply or distribute are purchased from more than 400 different manufacturers. As is typical in the industry, in most instances we acquire those products on a purchase order basis and we have no long term supply contracts or guaranteed price or delivery agreements with manufacturers, including the manufacturers that produce proprietary products for us. As a result, short-term inventory shortages can occur. We sometimes choose to carry only a single manufacturer’s products for certain of the brand-name product lines that we sell, although comparable products usually are available from multiple sources. In addition, generally we obtain each of our proprietary products from a single source manufacturer, although in many instances we own the tooling required for their manufacture.

 

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Dependence on a single manufacturer for any product or line of related products, however, presents some risks, including the risk that we will be unable to readily obtain products from alternative suppliers in the event that a single source supplier encounters production problems or decides either to enter into an exclusive supply arrangement or alliance with a competing distributor or to vertically integrate its operations to include the distribution of its products. Termination of a single source supply relationship could adversely affect our sales and operating income, possibly to a significant extent. See “Risk Factors” in Item 1A of Part I of this Report.

Our increased purchases of foreign sourced products subjects us to foreign currency risks that could reduce the margin advantage we would be able to realize on the sales of those products to our customers in North America. See “RISK FACTORS — Our financial performance can be adversely affected by currency fluctuations associated with our operations in Canada and our increased reliance on foreign product suppliers.

The following table identifies the product manufacturers that accounted for 5% or more of our total product purchases, and the respective percentages of our total product purchases accounted for by each of them, in each of 2011, 2010 and 2009:

 

     Percent of Company’s Total Product Purchases
in the Years Ended December 31,
 

Manufacturer

   2011     2010     2009  

Airexcel, Inc.

     27     20     18

Zhejiang Xingyu Industry & Trade Co., Ltd.

     6     *        *   

Thule Towing Systems

     *        *        5

 

* Less than 5%.

Airexcel, Inc. has manufactured and supplied us with Coleman® brand RV air conditioners for more than the past 15 years. Zhejiang Xingyu Industry & Trade Co., Ltd. (“Zhejiang”) manufactures and supplies us with portable generators. We began purchasing generators from Zhejiang in 2010, which we market and sell under our own “Powerhouse” brand name. Thule Towing Systems (formerly Valley Industries) had manufactured a number of towing products for us. No other product manufacturers accounted for as much as 5% of our product purchases in 2011, 2010 or 2009.

Product Warranties and Product Liability Insurance. We generally do not independently warrant the products that we distribute and sell. Instead, product manufacturers generally warrant the products they sell to us and allow us to return defective products for credit or replacement, including those that have been returned to us by our customers. However, we do sell portable generators under a product supply arrangement with the manufacturer which provides for us to share the costs of providing warranty services for these products. The warranty period is 24 months following the sale of a generator to a retail customer. At December 31, 2011 and 2010, we had established reserves of $564,000 and $469,000, respectively, for potential warranty claims with respect to those products. However, there is no assurance that warranty claims in the future will not exceed these amounts. See “MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Critical Accounting Policies—Warranty Costs” in Item 7 of this report below.

We also maintain insurance to protect us against product liability claims relating to all of the products we distribute and sell. Additionally, we often are able to obtain indemnification agreements from our product suppliers to protect us against product liability claims that may arise out of the use of the products they manufacture and supply to us for resale.

Competition

We face significant competition. There are a number of national and regional distributors of RV and boating parts, supplies and accessories that compete with us. There also are mass merchandisers, web retailers, catalog houses and national and regional retail chains specializing in the sale of RV or boating parts, supplies and accessories that purchase such products directly from manufacturers. The mass merchandisers, web retailers, and national and regional chains compete directly with the RV and boating supply stores and service centers that purchase products from us. This competition affects both the volume of our sales and the prices we are able to charge our customers for those products. Additionally, there is no assurance that changes in supply relationships or new alliances within the RV or boating products industry will not occur that would further increase competition.

We compete on the basis of the quality, speed and reliability of our service, the breadth of our product lines and on price. We believe that we are highly competitive in each of these areas.

 

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As discussed earlier in this Report, we sell portable generators and certain other products, not only in the RV and boating markets, but also in other markets, such as the outdoor power equipment market, in which we have not previously sold products. We also intend to seek additional products that we can source from overseas suppliers for resale into other markets in the United States and Canada. We expect to encounter intensive competition from manufacturers and distributors of competing products in those other markets. Many of those companies are larger and have greater marketing and financial resources than we do and are better known than us in these markets. Therefore, there is no assurance that we will be successful in competing against those companies.

Seasonality

Sales of RV and boating parts, supplies and accessories are seasonal. Generally, we have significantly higher sales during the six-month period from March through August than we do during the remainder of the year when winter weather conditions result in reductions in purchases and in the usage of RVs and boats and, therefore, also in the demand for our products, by consumers. Because a substantial portion of our expenses are fixed, operating income declines and we sometimes incurs losses and must rely more heavily on borrowings to fund our operations in the winter months when sales are lower.

Employees

At December 31, 2011, we had approximately 275 full-time employees, which include 70 employees in Canada. During the peak summer months, we also employ part-time workers at our regional distribution and warehouse centers. None of our employees is represented by a labor union and we believe that relations with our employees are good.

Our Website

Our internet website address is www.coastdistribution.com. Our Annual Report to Stockholders and all of our SEC filings are available on our website, without charge. Copies of these filings also are available as soon as reasonably practicable after we have filed or furnished these documents to the SEC at its website, which is www.sec.gov.

 

ITEM 1A. RISK FACTORS

Statements contained in this Annual Report that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance or future financial condition or trends in our business or markets constitute “forward-looking statements.” Forward-looking statements contain estimates, predictions and our expectations, beliefs and views about our future financial performance or future financial condition, or regarding financial or market trends that may affect our future results of operations. Such statements are based on current information available to us and our business is subject to a number of risks, market conditions and uncertainties that could cause our actual financial performance or financial condition in future periods to differ, possibly significantly, from our current expectations and the estimates that are set forth in the forward looking statements contained in this Annual Report and from our historical operating results. Set forth below is a discussion of those risks and uncertainties. However, readers of this Report are cautioned that it is not possible to predict all of the events or circumstances that might occur and might adversely affect our financial performance or operating results in the future and, therefore, there may be other risks to which our business is subject that are not addressed below.

Our business and financial performance are affected by economic conditions that affect consumers.

Our sales are affected directly by the level of purchases and the usage by consumers of RVs and boats which, in turn, are dependent on the ability and willingness of consumers to spend money to make purchases of and to use their RVs and boats. As a result, our sales are affected primarily by (i) the discretionary income that consumers have to spend, (ii) their confidence about economic conditions which determines their willingness to spend their discretionary income, (iii) the availability of and the interest rates payable on borrowings, including credit card debt, on which consumers generally rely to finance their purchases of and the costs of using RVs and boats, and (iv) the availability and prices of gasoline, which affect the ability and cost of operating and using their RVs and boats. As a result, our sales and earnings in the past have been, and our future sales and earnings can be, adversely affected by the following conditions:

 

   

Economic downturns and recessions and high rates of unemployment, which result in declines in discretionary income of and a loss of confidence among consumers about economic conditions and their own economic well-being and security, which cause them to reduce their purchases and usage of RVs and boats;

 

   

A tightening in the availability and increases in the costs of borrowings and consumer credit on which consumers rely to supplement their own funds when purchasing new and used RVs and boats and paying to maintain and purchase supplies and accessories for their RVs and boats; and

 

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Increases in the prices and shortages in the supply of gasoline, which increase the costs and sometimes even the ability and, therefore, the willingness of consumers to purchase and use RVs and boats.

Our results of operations in 2011, 2010 and 2009 illustrate the impact that adverse economic and market conditions can have on our business and financial performance. The recent economic recession, which is reported to have begun in late 2007 and to have continued through most of 2010, and the sluggishness of the economic recovery have had wide-ranging consequences for the economy as a whole and for the RV and boating industries in particular. These conditions have resulted in a considerable decline in economic activity throughout the country, high rates of unemployment and a significant decline in consumer confidence. As a result, consumers have significantly curtailed their discretionary expenditures, resulting in significant reductions in their purchases and usage of RVs and boats, which, in turn, led consumers to reduce their purchases of the products we sell.

Although economic conditions began to improve in 2011, considerable uncertainties remain with respect to the strength and sustainability of the economic recovery. As a result, while our net sales in 2011 remained substantially unchanged from 2010, customers reduced their purchases of higher margin products we sell, which contributed to a decline in our gross margin and our overall operating results in 2011. Moreover, due to these continuing economic uncertainties, we expect that consumers will be reluctant to increase their purchases and usage of RVs and boats and, therefore, their purchases of products we sell, at least during the first half of 2012, and we are not able to predict, with any degree of certainty, whether we will be able to achieve improvements in our operating results for the year ending December 31, 2012, as compared to 2011.

For a more detailed discussion of how these economic conditions affected our results of operation and financial condition in 2011, see “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” below, in Item 7 of this report.

The economic recession and credit crisis could have longer term adverse consequences for our business and future financial performance.

The economic recession and credit crisis led to closures and bankruptcies of many RV and boating dealers, as well as a number of well-known RV manufacturers, which has resulted in reductions in the number of RV dealers and supply stores and in the overall size of the RV and boating markets. As a result, we have encountered increased price competition in our markets, which contributed to a decline in our gross profit margin in 2011. In addition, in response to the economic recession and continuing economic uncertainties, consumers have reduced their discretionary spending and their heavy reliance on consumer credit, which has resulted in reductions in purchases and the usage of RVs and boats. Also, owners of RVs and boats have been increasing their purchases of RV and boating parts, supplies and accessories from lower-cost sellers, such as mass merchandisers and web-based retailers, resulting in reductions in sales by independent dealers, supply stores and service centers that comprise our Aftermarket Customers, causing those customers to reduce their purchases of the products we sell. We do not know and cannot predict whether or the extent to which consumers will increase their discretionary spending after economic conditions improve and, therefore, whether or not sales and usage of RVs and boats will recover to their pre-recession levels. If they do not, our market share, sales revenue and product pricing and, therefore, our future financial performance could be adversely affected.

In the future, we may have to restructure our business in response to worsening economic conditions, a decline in the RV or boating industries or to changing technology, products and markets. If we are not able to continue to improve our business processes, our financial and our information technology systems, or if we are not able to restructure our business in response to the deteriorating economic conditions, we may not be able to achieve our financial objectives.

Volatility of gasoline prices could affect our sales and future financial performance.

Increases in the costs of and shortages in the supplies of gasoline can lead consumers to reduce their usage of, and may discourage some consumers from purchasing, RVs and boats which, in turn, would result in decreases in their purchases of the products we sell. In particular, during the last few years there has been increased volatility in the prices of gasoline due to concerns about the supplies available to or within the United States, due to (i) the growth in demand and competition for oil and gasoline from emerging and high growth economies, such as China and India, (ii) conflicts and political unrest in the middle east, including the recent rise in tensions with Iran and its threats to cut off shipping traffic from and to other middle eastern oil producing countries and (iii) natural and human-made disasters, such as the gulf oil spill. It is also difficult to predict whether uncertainties regarding and increases in gasoline prices will have short or longer term effects on the use and purchases by consumers of RVs and boats. As a result these conditions and uncertainties also may increase cyclical swings in and make it more difficult to predict our future operating results.

 

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The credit crisis in Europe could adversely affect our future operating results.

The current credit crisis in Europe has created uncertainties with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations. These uncertainties have not only adversely impacted the financial markets, but also have had a negative impact on global economic activity. Moreover, concerns have arisen that a failure of the European Union to satisfactorily resolve this debt crisis could lead to a global economic recession, which could stall the economic recovery or even cause another economic recession in the United States that would lead to increases in unemployment, decreases in disposal income and declines in consumer confidence. Such an event could cause consumers to further reduce their purchases and usage of RVs and boats and, therefore, their need for and their purchases of the products sell, thereby adversely affecting our future operating results.

Our business is seasonal and our financial performance can be adversely affected by unusual weather conditions.

Our business is seasonal, because consumers generally increase their purchases and usage of RVs and boats and, therefore, increase their purchases of the products we sell, primarily in the spring and summer months, which coincide with our second and third fiscal quarters; whereas, such purchases and usage declines in the late fall and in the winter months, which coincide with the fourth and first quarters of our fiscal year. As a result, as a general rule our sales are higher and our financial performance is better in our second and third fiscal quarters than in our fourth and first fiscal quarters, during which we often incur losses.

However, the occurrence of unusually severe or extended winter weather conditions can adversely affect our operating results in our second and third fiscal quarters, and can lead to more severe swings in our sales and financial performance, because such conditions can have the effect of reducing the usage of RV and boats for periods extending beyond the ordinary winter months or to regions that ordinarily encounter milder winter weather conditions. Additionally, extended periods of unusually severe weather conditions sometimes also occur during the winter months, which can cause year-over-year declines in our sales in the first or fourth quarters of the year.

We rely heavily on bank borrowings in the operation of our business, which makes us more vulnerable to adverse changes in economic conditions.

We rely heavily on bank borrowings, under a revolving credit line, to fund our working capital requirements and capital expenditures. Our outstanding borrowings create additional risks for our business. Among other things, we may find it more difficult to obtain additional financing to fund expansion or take advantage of other business opportunities, and we use a substantial portion of our cash flow from operations to pay principal and interest on our debt. Our existing debt also makes us more vulnerable to general economic downturns and competitive pressures, which could cause us to fail to meet financial covenants in our bank loan agreement or lead the bank to impose restrictions on the borrowings that will be made available to us. In either of those events, it could become necessary for us to reduce the size and scope of our business, which could hurt our financial condition and operating results. Our revolving line of credit is scheduled to mature on July 10, 2014, at which time it will become necessary for us to either renew or replace that credit line. There is no assurance, however, that we will be able to do so, as this will depend on a number of factors, including our future results of operations and financial condition, and market and economic conditions in 2014 over which we do not have control.

Risks of our reliance on sole sources of supply for certain of our products.

We sometimes choose to carry only a single manufacturer’s products for certain of the brand-name product lines that we sell. In addition, we obtain each of our proprietary products from a single source manufacturer, although in many instances we own the tooling required for their manufacture. Dependence on a single manufacturer for any product or line of related products, however, presents some risks, including the risk that we will be unable to readily obtain alternative product supply sources in the event that a single source supplier (i) encounters quality or other manufacturing problems, or (ii) decides to enter into an exclusive supply arrangement or alliance with one of our competitors, or to vertically integrate its operations to include not only manufacturing, but also distribution, of its products. If any of our single source suppliers were to encounter any manufacturing problems or disruptions or terminate our supply relationship, our sales and earnings could decline, possibly to a significant extent.

Our financial results can be and sometimes have been adversely affected by changes in supply relationships in our markets.

As is the customary practice in our markets, in most instances we do not have long term supply contracts with our product suppliers. As a result, product suppliers are free to change the terms on which they sell us products or to discontinue supplying us with products altogether, because they may choose to distribute their products directly to aftermarket dealers or retailers or because they might choose to establish exclusive supply relationships with other distributors. Additionally, manufacturers of new RVs and boats may choose to incorporate optional equipment on their RVs and boats at the time of manufacture that, historically, were provided to their dealers by distributors such as the Company. Any of these occurrences could result in increased competition in our markets or could reduce the number of products we are able to offer our customers, which could cause our sales to decline and could result in lower margins and in reduced earnings.

 

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Our financial performance is subject to risks arising out of our proprietary products strategy.

In order to increase our sales and reduce our costs of sales and, thereby increase our profitability, we have introduced into the RV and boating markets a growing number of products that have been designed by or for us and which are manufactured and sold to us, generally on an exclusive basis, by a number of different manufacturers. More recently, we have begun sourcing and purchasing, from overseas suppliers, and marketing and selling a number of new products, such as portable generators, into new markets such as the outdoor power equipment market. We have only limited experience in marketing and selling such products, and there is no assurance that these products will gain acceptance among customers in those markets. We also encounter considerable competition from companies that manufacture or sell competing products in those same markets. Many of those companies are larger, more established and better known and have greater financial and marketing resources than we have. Also, we have greater responsibilities for quality control and in marketing and providing warranty protection and service for these products, as compared to the products we source from traditional suppliers for resale in the RV or boating markets. There is no assurance that we will be successful in marketing and selling these products, and the costs we incur in doing so may reduce our earnings or possibly even cause us to incur losses and we could encounter liabilities for possible warranty claims related to the proprietary products we sell.

Our financial performance and cash flows can be adversely affected by currency fluctuations associated with our operations in Canada and our increased reliance on foreign product suppliers.

Currency Risks Associated with our Canadian Operations. Our wholly-owned Canadian subsidiary accounts for approximately 24% of our annual net sales. That subsidiary purchases a substantial portion of the products it sells from manufacturers in the United States and pays for those products in U.S. dollars, but sells those products to its customers in Canadian dollars. In the event the Canadian dollar weakens in relation to the U.S. dollar, the costs of those products to our Canadian subsidiary would increase, thereby reducing its gross margin, unless it is able to pass the higher costs on to its customers by raising its prices without adversely affecting its sales volume. If our Canadian subsidiary is unable to pass the higher costs on to its customers, our gross profits, operating income and cash flows would decline during any periods when there are declines in the value of the Canadian dollar in relation to the U.S. dollar.

Currency and other Risks Associated with our Purchases of Foreign Sourced Products. As we increase our purchases of products from foreign suppliers, we may become increasingly vulnerable to the effects of political instability and adverse economic conditions in the countries in which those suppliers are located. Additionally, purchases of products in foreign countries create currency risks for us. In those instances when we pay for foreign sourced products in U.S. dollars, a weakening U.S. dollar may lead foreign suppliers to increase the prices they charge us for their products in order to mitigate their currency exchange risks. In those countries where we buy products in the local currency, to the extent it becomes necessary for us to convert U.S. dollars into the local currency in order to pay for those products, a weakening U.S. dollar would make the local currency more expensive for us, thereby increasing the costs to us of purchasing those products. Moreover, a devaluation of local currencies may lead foreign suppliers to increase the prices they charge us for their products. Any of these events or circumstances could reduce the margin advantage that we could otherwise realize on our sales of foreign sourced products in North America, unless we are able to pass along the higher costs to our customers without adversely affecting our sales volume. If we are unable to pass such higher costs on to our customers, our gross profits and operating income and our cash flows would decline.

When appropriate, we may attempt to limit our exposure to exchange rate changes by entering into currency exchange contracts. There is no assurance that we will hedge or will be able to hedge such foreign currency exchange risk or that our hedges will be successful. Our currency exchange gains or losses (net of hedges) may materially and adversely impact our cash flows and earnings.

We are subject to product liability risks and warranty claims.

Product Liability Risks. Although we do not manufacture any of the products we sell, it is not uncommon for us to be named as an additional defendant in product liability lawsuits brought against the manufacturers of the products we sell. To protect ourselves from liability, we have been able in many instances to obtain indemnification agreements from these manufacturers or to be named as additional insureds under their product liability insurance policies. Nevertheless, we also maintain our own product liability insurance. We also conduct quality control testing, at our own product testing laboratories in the United States, of many of the proprietary products that we sell. However, although we have never incurred any material product liabilities in excess of the insurance coverages that we have obtained under policies of insurance maintained either by product manufacturers or by us, there is no assurance that we will not incur, in the future, product liabilities in amounts that materially exceed the insurance coverage and indemnification protections that we have and which, as a result, could adversely affect our results of operations or financial condition. Moreover, the

 

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risks of incurring liabilities for product defects has increased as a result of our proprietary products strategy, because many of the suppliers of those products are located overseas, making us a more attractive target for product liability claims.

Warranty Claims Risks. In certain instances, we have assumed the responsibility for dealing with and resolving product warranty claims from customers. As a result, we have had to establish reserves for potential product warranty claims which has increased our costs of sales. In addition, the amount of those reserves are determined based not only on historical warranty claims experience, but also on estimates of the amount and costs to us of future warranty claims. If the actual number or the costs of warranty claims were to exceed our estimates, it could become necessary for us to increase those reserves, which would result in an increase in our costs of sales that could adversely affect our profit margins and our results of operations. See “MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Critical Accounting PoliciesWarranty Costs” below in this Annual Report.

Risks of patent infringement claims.

We design, or have independent product design firms or manufacturers, design and engineer a number of the proprietary products that we introduce into the marketplace. From time to time manufacturers of competing products have threatened and on occasion have brought suits against us claiming that some of our proprietary or foreign sourced products infringe their patents. We retain a patent law firm to review all new products that we plan to introduce into the market for potential patent infringements and that firm works in concert with our product design engineers and independent design firms or manufacturers to ensure that our products do not infringe on patents or other proprietary rights held by competitors. To date we have not incurred any material liability as a result of any patent infringement claims that have been threatened or asserted against us. However, there can be no assurance that we will not incur liability for patent infringement in the future. Additionally, the filing of a patent infringement suit may require us to halt sales or to redesign newly introduced products to avoid patent infringement liability, which could reduce our sales and increase our costs and, thereby, adversely affect our results of operations.

We face substantial competition that could lead to declines in net sales or reductions in our gross profits.

We face significant competition in each of our markets which can adversely affect our sales, profit margins and operating results. In our RV and boating products markets we face competition not only from other wholesale distributors, but also from mass merchandisers, web retailers, catalog houses and national and regional retail chains that sell RV or boating parts, supplies and accessories. Moreover, due to their size and financial resources, some of those mass merchandisers and national or regional chains are able to purchase such products directly from manufacturers at prices comparable to the prices at which we are able to purchase such products from those same or competing manufacturers. The mass merchandisers, web retailers, and national and regional chains compete directly with the RV and boating dealers, supply stores and service centers that purchase products from us and, therefore, their pricing decisions and the breadth of the products they sell can affect both the volume of our sales and the prices we are able to charge our customers for the same or competing products. Additionally, price competition, particularly from such mass merchandisers and national chains, has been increasing as they seek to maintain and increase their market shares. As a result, in order to remain competitive it could become necessary for us to reduce our prices, including the prices at which we sell our proprietary and Coast branded products, in which event we could lose the price and margin advantages that we have gained from the sale of those products. If we match our competitors’ price reductions, our gross profits and gross margin could be adversely affected. Additionally, we face stiff competition in the sale of portable power generators and other products in the outdoor power equipment market from manufacturers and suppliers of competing products, some of which are larger, have greater marketing and capital resources and are better-known in that market, which could force us to reduce our prices for or prevent us from increasing our sales of those products and could cause us to incur losses as a result of our efforts to sell products in markets other than the RV and boating markets.

Risk that our deferred tax asset may not be fully realized.

We have recorded, on our balance sheet, a “deferred tax asset” which consists of tax credit and tax loss carryforwards and tax deductions (“tax benefits”) that are available to reduce income taxes that we would otherwise have to pay on the taxable income that we generate in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire at various dates in the future if not used to offset taxes on taxable income by such dates. Accordingly, our ability to fully use this deferred tax asset to reduce our tax liabilities in the future depends on the amount of taxable income that we are able to generate prior to such expiration dates. If we determine that it is no longer more likely, than not, that we will be able to fully utilize the deferred tax asset, we would be required

 

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to establish (or increase any existing) valuation allowance to reduce the recorded amount of the deferred tax asset on our balance sheet to the amount of the tax benefits we believe we will be able to use prior to their expiration dates. Such an allowance is established or increased by a non-cash operating charge that would increase the provision for income taxes or reduce any income tax benefit in the fiscal period in which that valuation allowance is established or increased. At December 31, 2011, we had a valuation allowance in the amount of nearly $1.2 million which has reduced the carrying value of our net deferred tax asset to $2.9 million. There is no assurance, however, that we will be able to fully utilize this deferred tax asset as that will depend on our future operating results.

Moreover, if we are not able to generate taxable income in the future that will enable us to fully utilize this deferred tax asset, it could become necessary for us to increase the valuation allowance in future periods, which would have the effect of increasing our income tax provision or reducing any income tax benefit that we would record in our statements of operations. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Critical Accounting Policies” below in this Annual Report.

Risk of unanticipated expenses upon new product introductions.

The introduction of new proprietary products is important to our future success. We may incur unexpected expenses, however, when we introduce new products. For example, we may experience unexpected engineering or design flaws that will force a recall of a new product. The costs resulting from these types of problems could be substantial, and could have a significant adverse effect on our earnings.

Loss of key management.

Our future performance is substantially dependent upon the continued services of certain members of our senior management. The loss of the services of any key members of senior management could have a material adverse effect upon us. In addition, our continued growth depends on our ability to attract and retain skilled executives. There can be no assurance that we will be able to retain our existing personnel or attract additional qualified executives in the future.

Risk of fluctuations in our share price.

The market price of our common stock may be subject to significant fluctuations in response to our operating results, our ability to meet market expectations and other factors. Variations in the market price of our common stock may also be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors. These market fluctuations, as well as general economic conditions, may adversely affect the market price and the liquidity of our common stock. We cannot assure that the market price of our common stock will not fluctuate or decline significantly in the future.

Reliance on our information technology systems exposes us to potential risks.

Reliance on our information technology systems exposes us to potential risks such as interruptions due to natural disasters, such as earthquakes or fire, cyber-attacks, unplanned data center and system outages, fraud perpetrated by malicious individuals and other causes. Our information technology systems are hosted in two locations: our headquarters in Morgan Hill, California and at a co-location managed by a third-party provider.

Our ability to manage our inventory in a volatile market could adversely affect our profitability.

Our success also depends upon our ability to successfully manage our inventory and to anticipate and respond to purchasing trends and customer demands in a timely manner. The use, and therefore the purchases, by consumers of the products we sell can be volatile and uncertain because they can be affected by a number of factors, including general economic and market conditions, gasoline prices, weather conditions and competition and consumer preferences, none of which are within our control. We usually must order inventory in advance of each year’s selling season. Moreover, the lead times for many of our purchases (particularly of foreign sourced products) may make it difficult for us to respond rapidly to new or changing product trends, increases or decreases in customer demand or changes in prices. If we misjudge the demand for our products or our customers’ purchasing habits, (i) we may have insufficient quantities of products to satisfy customer demand, resulting in a decline in our revenues, or (ii) we may accumulate and have to write down excess inventory, which would increase our costs of sales, either of which could adversely affect our results of operations.

 

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Failure of our internal control over financial reporting could harm our business and financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with principles generally accepted in the United States (“GAAP”). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to general accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock.

Other risks and uncertainties.

Additional risks and uncertainties that could affect our future financial performance or future financial condition are discussed below in Item 7 of this Report in the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and you are urged to read that section as well.

Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on forward-looking statements contained in this Report, which speak only as of the date of this Annual Report. We also disclaim any obligation to update forward-looking information contained in this Report, whether as a result of new information, future events or otherwise, except as may otherwise be required by applicable law or the rules of the American Stock Exchange.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

 

ITEM 2. PROPERTIES

We operate 13 regional warehouse and distribution centers in 12 states in the United States and 4 regional warehouse and distribution centers, each located in a different Province, in Canada. All of these facilities are leased under triple net leases which require us to pay, in addition to rent, real property taxes, insurance and maintenance costs. The following table sets forth certain information regarding those facilities.

 

Locations

   Square
Footage
     Lease
Expiration Dates
 
United States:      

Wilsonville, Oregon

     46,700         December 31, 2016   

Visalia, California

     230,300         December 31, 2016   

Fort Worth, Texas

     42,500         October 31, 2016   

San Antonio, Texas

     27,300         October 31, 2013   

Denver, Colorado

     50,000         January 31, 2016   

Elkhart, Indiana

     109,700         January 31, 2017   

Lancaster, Pennsylvania

     35,500         December 31, 2016   

Atlanta, Georgia

     65,800         August 31, 2014   

Tampa, Florida

     38,000         June 30, 2013   

Mesa, Arizona

     20,700         October 31, 2017   

Salt Lake City, Utah

     30,400         October 31, 2013   

Johnstown, New York

     52,500         November 30, 2012   

Eau Claire, Wisconsin

     17,300         January 31, 2015   
Canada:      

St. Bruno, Quebec

     59,600         December 31, 2021   

Orillia, Ontario

     36,500         November 30, 2016   

Calgary, Alberta

     41,200         January 31, 2016   

Langley, British Columbia

     22,800         December 31, 2016   

 

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As indicated in the above table, two of the warehouse and distribution center leases are scheduled to expire within the next 12 to 18 months. While we currently expect to renew those leases, we could decide, instead, either to relocate or close one or both of these distribution centers.

We also lease 18,100 square feet of space in Elkhart, Indiana where we maintain a product testing facility.

Our executive offices are located in Morgan Hill, California, a suburb of San Jose, where we lease 13,700 square feet of office space. Our address at that location is 350 Woodview Avenue, Morgan Hill, California 95037, where our telephone number is (408) 782-6686.

 

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ITEM 3. LEGAL PROCEEDINGS

From time to time we are named as a defendant, sometimes along with product manufacturers and others, in product liability and personal injury litigation. We believe that this type of litigation is incidental to our operations, and we have our own product liability insurance policies, and in many instances also indemnities from the manufacturers from which we obtain our products, to protect us from liabilities that could arise from such claims. On two occasions, we were named as a defendant in patent infringement litigation brought against manufacturers of certain of our proprietary products. To date we have not incurred any material liabilities in any product liability, personal injury or patent litigation and there is no legal action presently pending against us that we believe is likely to have a material adverse effect on our financial condition or results of operations. However, there is no assurance that we will not incur product liabilities in the future that exceed our product liability coverage. See “RISK FACTORS — We are subject to product liability risks and warranty claims” above.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

EXECUTIVE OFFICERS OF REGISTRANT

 

Name

   Age      Positions with Company

James Musbach

     61       President, Chief Executive Officer and a Director

Thomas R. McGuire

     68       Executive Chairman and Chairman of the Board of Directors

Sandra A. Knell

     54       Executive Vice President, Chief Financial Officer and Secretary

David A. Berger

     57       Executive Vice President — Operations

Dennis A. Castagnola

     64       Executive Vice President — Proprietary Products

Set forth below is certain information regarding the Company’s executive officers.

JAMES MUSBACH. Mr. Musbach, who had served as President of Coast from 1994 to 1995, rejoined the Company in September 2006 as its President and Chief Operating Officer. Mr. Musbach was promoted to the position of Chief Executive Officer of the Company effective April 2008. Between 1995 and his return to Coast, Mr. Musbach held various management positions with Raytek Corporation, a manufacturer of infrared non-contact temperature measurement tools, sensors and systems, most recently serving as an Executive Vice President of Raytek and the General Manager of Raytek’s Portable Products Division.

THOMAS R. MCGUIRE. Mr. McGuire is a founder of the Company and has been its Chairman of the Board since the Company’s inception in 1977. Mr. McGuire also served as the Company’s Chief Executive Officer from 1997 until April 2008, when he relinquished that position upon Mr. Musbach’s promotion to Chief Executive Officer. Mr. McGuire retains the position of Executive Chairman of the Company and continues as Chairman of the Board of Directors.

SANDRA A. KNELL. Mrs. Knell has been the Company’s Executive Vice President, 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. Mrs. Knell is a Certified Public Accountant.

DAVID A. BERGER. Mr. Berger has served as an Executive Vice President of the Company since May 1988. 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 that we acquired in 1985.

DENNIS A. CASTAGNOLA. Mr. Castagnola was appointed to his current position of Executive Vice President — Proprietary Products in August 2007. From November 2000 to August 2007, he served as Executive Vice President — Sales and, for the prior 25 years, he held various management positions with the Company, including Vice President/Division Manager of the Company’s Portland, Oregon distribution center.

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our 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 per share sales prices of our common stock as reported by the American Stock Exchange.

 

     Sales Prices Per Share  
     High      Low  

2011

     

First Quarter

   $ 4.70       $ 3.74   

Second Quarter

     4.40         2.85   

Third Quarter

     3.10         2.51   

Fourth Quarter

     2.78         2.00   

2010

     

First Quarter

   $ 4.48       $ 3.75   

Second Quarter

     4.55         4.00   

Third Quarter

     4.25         3.60   

Fourth Quarter

     4.07         3.33   

On March 16, 2012 the closing per share price of our common stock on the American Stock Exchange was $2.45 and there were approximately 700 holders of record of the Company’s shares.

Dividend Policy

In 2005, our Board of Directors adopted a cash dividend policy that provided for the payment of quarterly cash dividends. In November 2008, the Board decided to suspend the payment of cash dividends in order to preserve cash for the Company’s operations in response to the economic recession and the credit crisis. In addition, our bank line of credit agreement contains restrictions on the payment by us of cash dividends. As a result, we do not expect to pay cash dividends at least for the foreseeable future.

No cash dividends were paid in 2011, 2010 or 2009.

Stock Price Performance Graph

The graph that follows presents a five-year comparison of cumulative total returns for (i) Coast, (ii) an index comprised of companies within the recreational products markets that were selected by us (the “Peer Group”), and (iii) the NYSE American Stock Exchange composite index (the “AMEX Composite”). The Peer Group consists of Brunswick Corporation, Thor Industries, and Winnebago Industries, Inc., which, during the past five years, were manufacturers of recreational vehicles or boats, TriMas Corporation, which manufactures RV and trailer products, and West Marine Inc. which sells boating parts, supplies and accessories both at wholesale and at retail. The data for the graph was obtained from Research Data Group, Inc.

 

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The following stock performance graph assumes that $100 was invested, at the end of fiscal 2006, in Coast’s shares and in the shares of the companies comprising the Peer Group Index and the Amex Composite Index and that any dividends issued for the indicated periods were reinvested. Stockholder returns shown in the performance graph are not necessarily indicative of future stock performance.

 

LOGO

 

     At December 31,  
     2006      2007      2008      2009      2010      2011  

Coast Distribution

   $ 100.00       $ 70.87       $ 12.80       $ 48.61       $ 48.11       $ 27.97   

Peer Group Index

     100.00         69.47         21.77         56.47         76.77         66.21   

Amex Composite Index

     100.00         122.46         73.97         100.19         127.31         128.98   

Equity Compensation Plans

Certain information, as of December 31, 2011, with respect to our equity compensation plans is set forth in Item 12, in Part III, of this Report and is incorporated herein by this reference.

 

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ITEM 6. SELECTED FINANCIAL DATA

The selected operating data set forth below for the fiscal years ended December 31, 2011, 2010 and 2009, and the selected balance sheet data at December 31, 2011 and 2010, are derived from the Company’s audited consolidated financial statements included elsewhere in this Report and should be read in conjunction with those financial statements and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” set forth in Item 7 of this Report. The selected operating data for the fiscal years ended December 31, 2008 and 2007, and the selected balance sheet data at December 31, 2009, 2008 and 2007, are derived from the Company’s audited consolidated financial statements which are not included in this Report.

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands, except per share data)  

Operating Data:

          

Net Sales

   $ 108,195      $ 108,600      $ 103,201      $ 132,237      $ 164,293   

Cost of sales (including distribution costs)(1)

     90,166        88,985        83,754        107,625        133,578   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     18,029        19,615        19,447        24,612        30,715   

Selling, general and administrative expenses

     18,573        18,330        18,552        26,559        28,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (544     1,285        895        (1,947     2,650   

Equity in net earnings of affiliated companies

     35        57        201        147        179   

Other income (expense)

          

Interest expense

     (540     (579     (624     (1,409     (2,098

Other

     (92     (194     (268     (8     (156
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (632     (773     (892     (1,417     (2,254

Earnings (loss) before income taxes

     (1,141     569        204        (3,217     575   

Income tax provision (benefit)

     (255     417        105        (1,378     360   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (886   $ 152      $ 99      $ (1,839   $ 215   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per diluted share(2)

   $ (0.20   $ 0.03      $ 0.02      $ (0.41   $ 0.05   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computation of net earnings (loss) per share

     4,535        4,574        4,494        4,446        4,526   

 

     At December 31,  
     2011      2010      2009      2008      2007  
     (In thousands, except per share data)  

Balance Sheet Data:

              

Working Capital

   $ 37,044       $ 36,757       $ 34,524       $ 40,394       $ 52,575   

Total assets

     47,736         47,782         45,472         52,459         69,307   

Long-term obligations(3)

     10,895         10,113         9,637         17,078         24,665   

Stockholders’ equity

     30,224         31,038         29,632         28,220         32,491   

Book value per share(4)

   $ 6.66       $ 6.79       $ 6.59       $ 6.35       $ 7.18   

Dividends per share

   $ 0.00       $ 0.00       $ 0.00       $ 0.13       $ 0.28   

 

(1) Distribution costs consist primarily of warehouse rent, labor and supply costs and product shipping costs.
(2) See Note I to the Company’s Consolidated Financial Statements included in Item 8 of this report.
(3) Exclusive of current portion. For additional information regarding long-term obligations, see Note C to the Company’s Consolidated Financial Statements included in Item 8 of this report.
(4) Based on the weighted average number of shares used in the computation of net earnings (loss) per share. See Note I to the Company’s Consolidated Financial Statements included in Item 8 of this report.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management Overview

We believe that Coast is one of the largest wholesale suppliers of replacement parts, supplies and accessories for recreational vehicles (“RVs”) and boats in North America. We supply more than 10,000 products and serve more than 15,000 customers throughout the United States and Canada, from 13 regional distribution centers in the United States and 4 regional distribution centers in Canada. Our sales are made primarily to retail parts and supplies stores, service and repair establishments and new and used RV and boat dealers (collectively, “Aftermarket Customers”).

Factors Generally Affecting Sales of RV and Boating Products

Our sales are affected primarily by:

 

   

The usage of RVs and boats by the consumers to whom our Aftermarket Customers sell our products, because such usage affects the consumers’ needs for and their purchases of replacement parts, repair services and supplies; and

 

   

Purchases of new and used RVs and boats by consumer, because they often “accessorize” their RVs and boats at or shortly after 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, their confidence about economic conditions and the availability and the costs to them of credit. As a result, recessionary conditions and a tightening in the availability or increases in the costs of borrowings to consumers often lead to declines in the purchase and, to a lesser extent, in the usage, of RVs and boats. Additionally, increases in the prices and shortages in the supply of gasoline can lead to declines in the usage and purchases of RVs and boats. Finally, the usage by consumers of RVs and boats and, therefore their need for and purchases of the products we sell are affected by weather conditions.

Overview of Fiscal 2011 Operating Results

The following table provides information comparing our results of operations in the fiscal year ended December 31, 2011 to our results of operation in fiscal 2010 and fiscal 2009. Dollars are in thousands, except per share data.

 

     Year Ended December 31,  
                  Increase (Decrease)
2011 vs. 2010
          Increase (Decrease)
2010 vs. 2009
 
     2011
Amount
    2010
Amount
    
Amount
   
Percent
    2009
Amount
   
Amount
   
Percent
 

Net Sales

   $ 108,195      $ 108,600       $ (405     (0.4 )%    $ 103,201      $ 5,399        5.2

Costs of sales(1)

     90,166        88,985         1,181        1.3     83,754        5,231        6.2

Gross profits

     18,029        19,615         (1,586     (8.1 )%      19,447        168        0.9

SG&A expenses

     18,573        18,330         243        1.3     18,552        (222     (1.2 )% 

Operating income (loss)

     (544     1,285         (1,829     (142.3 )%      895        390        43.6

Interest expense

     540        579         (39     (6.7 )%      (624     (45     (7.2 )% 

Earnings (loss) before income taxes

     (1,141     569         (1,710     (300.5 )%      204        365        178.9

Income tax provision (benefit)

     (255     417         (672     (161.2 )%      105        312        297.1

Net earnings (loss)

     (886     152         (1,038     (682.9 )%      99        53        53.5

Net earnings (loss) per share-diluted

     (0.20     0.03         (0.23     (7.66.7 )%      0.02        0.01        50.0

 

(1) Inclusive of distribution costs.

 

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Even though sales remained largely unchanged in 2011, as compared to 2010, as the above table indicates, in 2011 we incurred a loss from operations of $544,000 and a net loss of $886,000, or $0.20 per diluted share, as compared to operating income of $1.3 million and net earnings of $152,000, or $0.03 per diluted share, in 2010. The loss from operations and the net loss incurred in 2011 were primarily attributable to a nearly $1.6 million, or 8.1%, decrease in gross profits in 2011, as compared to 2010. That decrease was due primarily to (i) a change in the mix of products sold to a higher proportion of lower margin products, principally air conditioners, and (ii) price reductions on selected products in response to increased price competition in our markets in the face of continued weakness in consumer demand and rising gasoline prices that adversely affected the usage of RVs and boats particularly in the last four months of 2011. Partially offsetting the effect of the decrease in gross profits on our results of operations in 2011 were a $141,000 reduction in interest and other expense and a $255,000 income tax benefit.

Outlook for 2012

We are continuing to see fluctuations in consumer demand for RV and boating products due primarily to continued uncertainties about the strength and duration of the economic recovery and recent increases in the prices of gasoline. As a result, we expect that conditions in the RV and boating markets will remain unstable and difficult until there is a more sustained economic recovery that leads to steady decreases in rates of unemployment and increases in the availability of credit to small businesses and consumers, and gasoline prices stabilize.

Our strategic goals for 2012 are to achieve a return to profitability by (i) capturing additional market share and thereby increasing our sales, (ii) improving our gross margin, primarily by increasing our sales of higher-margin proprietary products and (iii) continuing to monitor and, where practicable, implementing additional measures to reduce our SG&A expenses. However, we are not able to predict whether we will succeed in achieving our goals for 2012, as this will depend in large measure on whether or not there is a meaningful improvement in economic conditions generally and in our markets in particular during 2012.

Critical Accounting Policies and Use of Estimates

General

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record most of our assets at the lower of cost or fair value. In the case of some of our assets, principally accounts receivable, inventories and deferred income taxes, we make adjustments to their cost or fair values to arrive at what we expect to be able to collect on outstanding accounts receivables, the amounts for which we expect to be able to sell our inventories and the amount of available tax loss and credit carryforwards and deductions that we will be able to use to reduce our future income tax liability. Those adjustments are made on the basis of a number of different factors, including the assumptions and judgments we make regarding economic and market conditions and trends and their impact on our financial performance. However, those assumptions and judgments are necessarily based on current information available to us. If those conditions or trends were to change in ways that we did not expect, then based on our assessment of how those changes will affect the prospects for realizing the values at which we had recorded these assets, pursuant to GAAP we may be required to further adjust the carrying values at which we record these assets for financial reporting purposes. Any resulting downward adjustments are commonly referred to as “write-downs” of the assets affected by the changed conditions.

It is our practice to establish reserves or allowances against which we are able to charge any such downward adjustments or “write-downs” to these assets. Examples include an allowance established for uncollectible accounts receivable (sometimes referred to as “bad debt reserves”), an allowance for inventory obsolescence and a valuation allowance against our deferred tax asset to the extent necessary to reduce its carrying value to the amount of that asset that we believe we are likely to be able to use to reduce our income tax liability in future periods. The amounts at which those allowances or reserves are established and maintained are based on our historical experience and also on our assumptions and judgments about economic or market conditions or trends and any other factors that could affect the values at which we had recorded such assets. We periodically increase or replenish the allowances following write-downs of uncollectible accounts or to take account of increased risks due to changes in economic or market conditions or trends. Increases in the allowances are effectuated by charges to income or increases in expense in the periods when those allowances are increased. As a result, our judgments or assumptions about market and economic conditions or trends and about their effects on our financial performance can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.

The decisions as to the timing of (i) adjustments or write-downs of this nature and (ii) the increases we make to our allowances or reserves, also require subjective evaluations or assessments about the effects and duration of changes in economic or market conditions or trends. For example, it is difficult to predict whether events or changes in economic or market conditions, such as increasing gasoline prices or interest rates or economic downturns, will be of short or long-term duration, and it is not uncommon for it to take some time after the onset of such changes for their full effects on our business to be recognized. Therefore, we make such estimates based upon the information available to us at that time and reevaluate and adjust the reserves and allowances for potential write-downs on a quarterly basis.

 

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Under GAAP, most businesses also must make estimates or judgments regarding the periods during which sales are recorded and also the amounts at which they are recorded. Those estimates and judgments will depend on such factors as the steps or actions that a business must take to complete a sale of products to or to perform services for a customer and the circumstances under which a customer would be entitled to return the products or reject or adjust the payment for the services rendered to it. Additionally, in the case of a business that grants its customers contractual rights to return products sold to them, GAAP requires that a reserve or allowance be established for product returns by means of a reduction in the amount at which its sales are recorded, based primarily on the nature, extensiveness and duration of those rights and historical return experience.

In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the carrying value of those assets and to establish adequate reserves or allowances for downward adjustments in those values that we may have to make in future periods.

Our Critical Accounting Policies

Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations that are discussed below.

Revenue Recognition and the Allowance for Product Returns. We recognize revenue from the sale of a product upon its shipment to the customer. Shipping and handling costs that are billed to our customers are included in revenue and our shipping and handling costs are included in costs of sales. We provide our customers with limited rights to return products that we sell to them. We establish an allowance for potential returns that reduces the amounts of our reported sales. We estimate the allowance based on historical experience with returns of like products and current economic and market conditions and trends, which can affect the level at which customers submit product for return.

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our business we extend 30 day payment terms to our customers and, due to the seasonality of our business, during late fall and winter we sometimes grant payment terms of longer duration to those of our customers that have good credit records. We regularly review our customers’ accounts and estimate the amount of, and establish an allowance for, uncollectible accounts receivable in each reporting period. The amount of the allowance is based on several factors, including the age of unpaid amounts, a review of significant past due accounts and current economic and market trends that can affect the ability of customers to keep their accounts current. Estimates of uncollectible amounts are reviewed periodically to determine if the allowance should be increased, and any increases are recorded in the accounting period in which the events or circumstances that require such increases become known. For example, if the financial condition of some of our customers or economic or market conditions were to deteriorate, adversely affecting the ability of customers to make payments to us on a timely basis, it could become necessary for us to increase the allowance for uncollectible accounts. Since the allowance is increased or replenished by recording a charge which is included in, and has the effect of increasing, selling, general and administrative expenses, an increase in the allowance will reduce income in the period when the increase is recorded.

Inventory and Reserve for Excess, Slow-Moving and Obsolete Inventory. We are a wholesale distributor and not a manufacturer of products and, therefore, all of our inventory consists of finished goods. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value and that value is reduced by an allowance for excess and slowing-moving or obsolete inventories. The amount of the allowance is determined on the basis of historical experience with different product lines and estimates or assumptions concerning future economic and market conditions and trends. If there is an economic downturn or a decline in sales, causing inventories of some product lines to accumulate, it may become necessary for us to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new or competitive products by manufacturers; however, due to the relative maturity of the markets in which we operate, usually these are not significant factors. Increases in this allowance also will cause a decline in operating results as such increases are effectuated by charges against income. Our reserves for excess and obsolete inventory were $1,401,000, or approximately 5.3% of total inventories, at December 31, 2011, as compared to $2,009,000, or approximately 7.8% of total inventories, at December 31, 2010. We were able to reduce our inventory reserve primarily as a result of sales and disposals of excess and obsolete inventory during 2011.

 

 

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Deferred Tax Asset and Valuation Allowance. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (“tax benefits”) that we believe will be available to us to offset or reduce the amounts of our income taxes in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the aggregate amount of the tax benefits available to us, that it is more likely, than not, that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the aggregate amount of the tax benefits available to us that it is more likely, than not, that we will be unable to utilize those tax benefits in their entirety prior to their expiration, then we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount that we believe we will be able to utilize. That reduction would be implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that would be recorded in our statement of operations. At December 31, 2011, the aggregate amount of our net deferred tax asset was approximately $2.9 million, as compared to $2.7 million at December 31, 2010. This increase was largely attributable to an increase in our NOL carryforwards in 2011.

Long-Lived Assets. Long-lived assets are reviewed for possible impairment at least annually or if and when events or changes in circumstances indicate the carrying amount of any of those assets may not be recoverable in full, by comparing the fair value of the long-lived asset to its carrying amount.

Foreign Currency Translation. The financial position and results of operations of our Canadian and other foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of each foreign subsidiary are translated into U.S. dollars at the rate of exchange in effect at the end of each reporting period. Revenues and expenses are translated into U.S. dollars at the average exchange rate for the reporting period. Foreign currency translation gains and losses not impacting cash flows are credited to or charged against other comprehensive earnings. Foreign currency translation gains and losses arising from cash transactions are credited to or charged against current earnings.

Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation, which requires the recognition of the fair value of compensation paid in stock or other equity instruments as an expense in the calculation of net earnings (loss). The Company recognizes stock-based compensation expense in the period in which the employee is required to provide service, which is generally over the vesting period of the individual equity instruments. Stock options issued in lieu of cash to non-employees for services performed are recorded at the fair value of the options at the time they are issued and are expensed as service is provided. Stock-based compensation expense in the years ended December 31, 2011 and 2010 totaled $440,000 and $429,000, respectively.

Warranty Costs. We generally do not independently warrant the products that we distribute. Instead, in almost all cases, the manufacturers of the products that we distribute warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However, we sell a line of portable generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. The duration of the warranty period for these products is 24 months following the sale of the product to a retail customer. We established warranty reserves for these products of $564,000 and $469,000 at December 31, 2011 and 2010, respectively. Those amounts were determined on the basis of a number of factors, including our sales of the products that we warrant and our historical and expected future warranty claims experience. In the event changes occur in the conditions or circumstances upon which those assumptions and estimates were made, it could become necessary for us to increase the reserve by means of a charge to our income.

 

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Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2011, that we believe are of significance, or potential significance to the Company based upon current operations.

In December 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” (Topic 805) – Business Combinations (ASU 2010-29), to improve consistency in how the pro forma disclosures are calculated. The amendment enhances the disclosure requirements and requires a description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. The amendment became effective for the Company beginning on January 1, 2011 and is applied prospectively to business combinations for which the acquisition date is after the effective date. The Company will assess the impact of the amendment if and when future business combinations occur.

In May 2011, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011, result in common definition of fair value and common requirements for measurement of and disclosure requirements between U.S. GAAP and International Financial Reporting standards (“IFRS”). Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance is not expected to have a material impact on our consolidated financial position and results of operations.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company has adopted this new standard in fiscal year December 31, 2011 and our adoption of the new guidance did not have a material impact on our consolidated financial position at, or on our results of operations or cash flows in 2011.

In September 2011, the Financial Accounting Standards Board (FASB) issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance is effective for us beginning January 1, 2012, with early adoption permitted. We are currently evaluating this guidance, but do not expect the adoption will have a material impact on our consolidated financial statements.

In December 2011, the FASB issued updated guidance on new disclosure requirements regarding the nature of an entity’s rights of set off and related arrangements associated with its financial instruments and derivative instruments. Under U.S. GAAP, certain derivative and repurchase agreement arrangements are granted exceptions from the general off-setting model. The new disclosure requirement will provide financial statements users information regarding both gross and net exposures. This guidance is effective for annual and interim financial statements beginning on or after January 1, 2013. Retrospective application is required. We do not expect a material impact on our consolidated financial statements as a result of the adoption of this standard.

In December 2011, the FASB issued new guidance on the presentation of comprehensive income. This guidance indefinitely deferred certain provisions, including the requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and in the statement in which other comprehensive income is presented. We believe that our adoption of this new standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

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Results of Operations

The following table sets forth certain financial data, expressed as a percentage of net sales, derived from our statements of operations for the respective periods indicated below:

 

     Year Ended December 31,  
     2011     2010     2009  

Net sales

     100.0     100.0     100.0

Cost of sales

     83.3        81.9        81.1   

Gross profit

     16.7        18.1        18.8   

SG&A expenses

     17.2        16.9        18.0   

Operating (loss) income

     (0.5     1.2        0.9   

Interest expense

     (0.5     0.5        0.6   

(Loss) earnings before taxes

     (1.1     0.5        0.2   

Income tax (benefit) provision

     (0.2     0.4        0.1   

Net (loss) earnings

     (0.8 )%      0.1     0.1

Net Sales

Net sales consist of revenues from the sales of the products we supply or distribute, net of an allowance for product returns. The following table sets forth certain information regarding the changes in our net sales in fiscal 2011 and 2010, in each case as compared to the immediately preceding year. Dollars in the table are in thousands.

 

2011   2010   % Change
    2011  vs. 2010    
  2009   % Change
    2010  vs. 2009    
    $ 108,195           $ 108,600       (0.4)%       $103,201       5.2%

2011 vs. 2010. We believe that the decrease in net sales in 2011 as compared to 2010 was due to decreases in purchases and in the usage of RVs and boats, and, therefore in the purchases of the products we sell, primarily as a result of (i) continuing uncertainties about the strength of the economy and persistently high rates of unemployment, which adversely affected consumer confidence and the willingness of consumers to make discretionary expenditures involved in purchasing and using RVs and boats, and (ii) rising gasoline prices, particularly during the last four months of 2011, which increased the costs and reduced the willingness of consumers to use their RVs and boats. Also contributing to the decline in the net sales during 2011 were unusually severe weather conditions in the Northeastern U.S. and Canada in the first half of 2011, which led to reductions in the usage of RVs and boats by consumers in those regions and, therefore, in their need for and purchase of the products we sell.

2010 vs. 2009. The increase in net sales in 2010 as compared to 2009 was due to a modest firming, in the first half of the year, in the demand for the products that we sell, as our customers replenished product inventories, and in the second half of the year, to an increase in sales of air conditioners that are installed on RVs. That increase in our share of the RV air conditioner after-market was primarily attributable to an unexpected withdrawal, from the RV market, of a manufacturer that had supplied air conditioners to some of the RV aftermarket distributors with which we compete, which led some of their After-Market Customers to order air conditioners from us.

Gross Margin

Gross profit is calculated by subtracting the costs of sales from net sales. Costs of sales consist primarily of the amounts paid to manufacturers and suppliers for the products that we purchase for resale, inbound freight charges, merchandise receiving, handling and storage costs, and out-bound freight charges. Gross margin is gross profits stated as a percentage of net sales.

 

     2011     2010     2009  
     (Dollars in thousands)  

Gross profit

   $ 18,029      $ 19,615      $ 19,447   

Gross margin

     16.7     18.1     18.8

 

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2011 vs. 2010. The decrease in our gross profits and the resulting decrease in our gross margin in 2011, as compared to 2010, was primarily due to (i) a change in the mix of products sold to a greater proportion of products, such as air conditioners, on which we realize lower margins than we do on sales of our other products, and (ii) selected price reductions that we implemented in response to increased price competition in our markets.

2010 vs. 2009. Although gross profits increased modestly in 2010, as compared to 2009, our gross margin declined to 18.1% in 2010 from 18.8% in 2009. This decline was due to a combination of factors, consisting primarily of (i) a change in the mix of products sold to a greater proportion of lower-margin items, (ii) selected price reductions that we implemented in response to increased price competition in our markets, (iii) an increase in freight-in costs.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of selling and marketing costs, and administrative labor and other administrative expenses, professional fees, insurance and the provision made for uncollectible accounts. The majority of our corporate overhead costs are incurred in the United States. A portion of those costs are allocated to our foreign operations to the extent that they directly benefit from the expenses incurred.

 

     2011     2010     2009  
     (Dollars in thousands)  

SG&A expenses

   $ 18,573      $ 18,330      $ 18,552   

As a percentage of net sales

     17.2     16.9     18.0

In 2009 and 2008 we implemented a number of cost cutting measures in response to the economic recession, including reductions in salaries and wages in both of those years. Effective July 1, 2010 we restored, on a prospective basis, one-half of those salary and wage reductions.

2011 vs. 2010. In 2011, SG&A expenses increased by $243,000, primarily because those expenses included a full 12 months of the partial restoration, in July 2010, of the reductions in salaries and wages that had been implemented in 2009 and 2008. By comparison, SG&A expenses in 2010 included that partial restoration for six months.

2010 vs. 2009. In 2010, we reduced our SG&A expenses by $222,000, as compared to 2009. This reduction was due primarily to workforce reductions and reductions in selling and marketing and other administrative expenses, which were partially offset by the partial restoration, effective July 1, 2010, of the salary and wage reductions we had implemented in 2009 and 2008.

Operating Income (Loss)

 

     2011     2010     2009  
     (Dollars in thousands)  

Operating income (loss)

   $ (544   $ 1,285      $ 895   

As a percentage of net sales

     (0.5 )%      1.2     0.9

2011vs. 2010. The $1,829,000, or 142.3%, decrease in operating income in 2011, as compared to 2010, was primarily the result of the decline in gross profits and, to a much lesser extent, the increase in SG&A expenses in 2011.

2010 vs. 2009. The $390,000, or 43.6%, increase in operating income in 2010, as compared to 2009, was primarily the result of the increase in net sales and the reduction in SG&A expenses in 2010.

Other Expense

 

     Year Ended December 31,  
     2011     2010     2009  
     (Dollars in thousands)  

Other expense

      

Interest expense

   $ 540      $ 579      $ 624   

Other expense

     92        194        268   
  

 

 

   

 

 

   

 

 

 

Total

   $ 632      $ 773      $ 892   
  

 

 

   

 

 

   

 

 

 

As a percentage of net sales

     0.6     0.7     0.9

The largest component of Other Expense is the interest expense that we incur on borrowings. The other component of Other Expense consists primarily of foreign currency gains or losses and gains or losses on disposal of assets.

2011 vs. 2010. Interest expense decreased in 2011 by $39,000, or 7%, in 2011, as compared to 2010, due primarily to a decrease in the average rate of interest charged on those borrowings which was due to declines in market rates of interest which determine the interest rates charged by the bank on those borrowings.

 

 

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2010 vs. 2009. Interest expense decreased in 2010 by $45,000, or 7%, in 2010, as compared to 2009, due primarily to a reduction in our average outstanding credit line borrowings and a decrease in the average rate of interest charged on those borrowings. That reduction in credit line borrowings was made possible by a modest reduction in average inventories primarily as a result of efficiencies realized in our distribution and warehouse operations and a decrease in accounts receivable primarily due to our continued application of the more stringent credit standards adopted in 2009 in response to the economic recession. The decrease in the average rate of interest charged on our credit line borrowings was due to declines in market rates of interest which determine the interest rates charged by the bank on those borrowings.

Income Tax Provision (Benefit)

 

     Year Ended December 31,  
     2011     2010     2009  

Income tax provision (benefit)

   $ (255   $ 417      $ 105   

Effective tax rate

     22.3     73.3     51.5

Our effective income tax rate is affected primarily by the amount of our expenses that are not deductible for income tax purposes, including stock based compensation expense, and by varying tax rates on income generated by our foreign subsidiaries, because tax rates in their respective countries vary, sometimes considerably, from income tax rates in the United States. In addition, in years when our income or loss is marginal, state franchise and other taxes can lead to increases in our overall tax rate (or decreases in our tax benefit).

Liquidity and Capital Resources

Working Capital, Liquidity and Cash Flows

We finance our working capital requirements for our operations primarily with borrowings under a revolving bank line of credit and internally generated funds. See “Sources and Uses of Cash” below.

Due to the nature of our business, our primary need for working capital is to finance our accounts receivable and our purchases of inventory. Typically we bill our customers on an open account basis with 1%, 10 day, net 30-day terms. During late fall and in winter, however, we sometimes provide our most creditworthy customers with payment terms of longer duration and, as a result, we generally use a greater proportion of our borrowing availability during the first and second quarters of each year than during other parts of the year.

Our revolving bank line of credit agreement permits us to borrow up to the lesser of (i) $25,000,000, or (ii) an amount equal to 85% of the value of our eligible accounts receivable and up to 55% of the value of our eligible inventory. Our borrowing base under our revolving credit line was $15,300,000 at December 31, 2011 as compared to $15,000,000 at December 31, 2010. Interest is payable at the bank’s prime rate (3.25% at December 31, 2011) plus 1.50% or, at the Company’s option but subject to certain limitations, at the bank’s LIBOR rate (0.3% at December 31, 2011) plus 3.00%. The maturity date of the revolving bank line of credit is July 10, 2014.

As of December 31, 2011, we were in compliance with all of our financial and other covenants under our bank line of credit agreement. Beginning March 31, 2012, we will be required to achieve a fixed charge coverage ratio of at least 1.1-to-1.0 for rolling 12 month periods ending on the last day of each fiscal quarter, and the bank has reduced the maximum amount of credit line borrowings that will be available to us by $1 million until that covenant is achieved.

At March 16, 2012, outstanding borrowings under the revolving credit facility totaled $13,800,000. Our bank borrowings are collateralized by substantially all of our consolidated assets and rank senior in priority to any other indebtedness that the Company may incur.

 

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Sources and Uses of Cash

We generally use cash for, rather than generate cash from, operations in the first half of the year, because we build inventories, and accounts receivables increase, as our customers begin increasing their product purchases prior to and in anticipation of the spring and summer selling seasons. See “Seasonality and Inflation” below.

Cash Used in Operations in 2011 and 2010. During 2011, we used cash of $0.7 million for our operations, primarily to fund our net loss of $0.9 million and a $1.0 million increase in accounts receivable, partially offset by $0.8 million in depreciation and amortization expenses and $0.4 million in stock-based compensation expense. By comparison, in 2010, we used cash of $1.6 million for our operations, which was comprised of a $2.9 million increase in inventory and a $1.0 million increase in accounts receivable, partially offset by a $0.4 million increase in accounts payable, $0.1 million increase in accrued liabilities, net earnings of $0.2 million, $0.7 million in depreciation and amortization and $0.4 in stock-based compensation expense.

Cash Provided by Financing Activities in 2011 and 2010. During 2011 and 2010, our financing activities provided us with $0.8 million and $0.4 million, respectively, of cash principally the result of net borrowings of long-term debt under our revolving bank line of credit.

Cash Flows Used in Investing Activities in 2011 and 2010. In 2011, we used $0.4 million of cash in investing activities principally to fund purchases of other assets and capital expenditures, primarily for warehouse, office, and computer equipment. In 2010, we used cash of $0.3 million in investing activities, primarily to fund the purchase of other assets and for capital expenditures, primarily for warehouse, testing and design, and computer equipment.

Contractual Obligations

Lease Obligations. We lease our facilities and certain of our equipment under non-cancelable operating leases. In 2011, rent expense under all operating leases totaled approximately $4.2 million. The following table sets forth our future operating lease commitments (in thousands of dollars), as of December 31, 2011:

 

Year Ending December 31,

      

2012

   $ 3,823   

2013

     3,554   

2014

     3,247   

2015

     3,084   

2016

     2,603   

Thereafter

     1,690   
  

 

 

 
   $ 18,001   
  

 

 

 

Total and Maturity of Contractual Obligations. The following table sets forth the total and the maturities of our contractual obligations, in thousands of dollars, at December 31, 2011:

 

     Maturities of Contractual Obligations  

Contractual Obligations at December 31, 2011:

   Total of
Contractual
Obligations
     Less than
One Year
     More than One
and Less than
Four Years
     Four to
Five Years
     More than
Five Years
 

Long-term debt obligations(1)

   $ 10,895       $ —         $ 10,895       $ —         $ —     

Operating lease obligations

     18,001         3,823         6,801         5,687         1,690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 28,896       $ 3,823       $ 17,696       $ 5,687       $ 1,690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of borrowings under our bank credit facility, which matures in July 2014.

 

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Our long term debt obligations consist primarily of borrowings under our long term revolving bank credit agreement. It is not possible to calculate future estimated interest payments on those borrowing predictably, because the amounts of such borrowings fluctuate throughout the year depending on our liquidity needs, which can vary widely primarily due to the seasonality of our business and the effects of prevailing economic conditions on the demand for and the purchases of our products by customers. Also, the interest rate on those borrowings is determined by reference to the bank’s prime rate or LIBOR, which also can and often do fluctuate during the year. Additionally, the formulas for determining the specific interest rate that will apply to such borrowings can change from year to year. Set forth above, under the caption “Financial Condition — Liquidity and Capital ResourcesWorking Capital Liquidity and Cash Flows” are the formulas for determining the interest rates that will apply to those borrowings during the fiscal year ending December 31, 2012.

Dividend Policy and Dividend Payments. In 2005, our Board of Directors adopted a dividend policy that provided for the payment of quarterly cash dividends to our stockholders. In November 2008, our Board of Directors suspended the payment of cash dividends in order to preserve cash for operations in response to the worsening of the economic recession and the tightening of credit by banks and other lending institutions to businesses, as well as consumers. In addition, our bank credit line agreement contains restrictions on our payment of cash dividends. As a result, we do not anticipate paying cash dividends at least for the foreseeable future.

Expected Uses and Sources of Funds

We expect to make capital expenditures in 2012 that we estimate will range from $300,000 to $400,000. We expect that these expenditures will be of a recurring nature, for such purposes as the replacement and upgrading of warehouse, computer or office equipment in the ordinary course of our business.

We expect to be able to fund these expenditures and our working capital requirements with borrowings under our revolving bank line of credit and internally generated funds, assuming that there is not a further worsening of the economic recession in 2012. See Item 1A of PART I of this Report above, entitled “RISK FACTORS — Our business and financial performance are affected by economic conditions — We rely heavily on bank borrowings in the operation of our business, which makes us more vulnerable to adverse changes in economic conditions” in Part I of this Report.

We will continue to explore opportunities to increase our sales and our market share and to improve our profit margins by, among other things, establishing new product supply relationships that enable us to increase the products that we source from lower cost, but high quality, overseas suppliers, including product suppliers in Asia, and to invest in tooling needed for such products. We also may seek to take advantage of other growth opportunities if and when they may arise. As a result, we may have occasion in the future to use internally generated funds or bank borrowings for these purposes. There is no assurance, however, that, if required, we will be able to obtain bank borrowings for these purposes.

Seasonality and Inflation

Seasonality. We generate significantly higher sales during the six-month period from March through August, when usage of RVs and boats are at their peak, than we do during the remainder of the year when weather conditions are not optimal for outdoor activities. Because a substantial portion our expenses are fixed, operating income declines and we may incur losses, and must rely more heavily on borrowings to fund operating requirements, during the period from September through February when our sales are lower.

 

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The following tables presents unaudited quarterly financial information for each of the fiscal years ended December 31, 2011 and 2010. This information has been prepared by us on a basis consistent with our audited financial statements included elsewhere in this Report. The information includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly operating results when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Report. These quarterly operating results are not necessarily indicative of results that may be expected in future periods.

 

     March 31,
2011
    June 30,
2011
     September 30,
2011
     December 31
2011
 
     (Unaudited)  

Revenues

   $ 24,697      $ 33,218       $ 31,586       $ 18,694   

Gross profit

     3,898        6,302         5,706         2,123   

Net (loss) earnings

     (1,039     980         612         (1,439

Net (loss) earnings per share — diluted

     (0.23     0.21         0.13         (0.32

 

     March 31,
2010
     June 30,
2010
     September 30,
2010
     December 31
2010
 
     (Unaudited)  

Revenues

   $ 24,102       $ 34,647       $ 32,245       $ 17,606   

Gross profit

     4,924         6,732         5,864         2,095   

Net (loss) earnings

     22         1,184         659         (1,713

Net (loss) earnings per share — diluted

     0.00         0.26         0.14         (0.38

Inflation. Generally, we have been able to pass inflationary price increases on to our 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 increases 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.

 

ITEM 7A 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. In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. The fair value of borrowings under our revolving credit facility approximates the carrying value of such obligations. As of December 31, 2011, we had outstanding borrowings under our revolving bank line of credit of $10.9 million.

We have substantial sales operations in Canada and as a result, our earnings, cash flows and financial position can be affected by movements in the Canadian dollar exchange rate. Consequently, we are exposed to market risk from foreign currency fluctuations associated with our Canadian operations and our Canadian currency denominated debt. Therefore, from time to time, we may hedge the net investment of our foreign operations in Canada by purchasing foreign exchange derivatives, to mitigate the risk of changes in value of our net investment in our Canadian subsidiary that can occur as a result of changes in currency exchange rates. As of December 31, 2011 we held no foreign currency derivatives. We do not use financial instruments for trading or other speculative purposes.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page No.  

Consolidated Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     29   

Consolidated Balance Sheets, December 31, 2011 and 2010

     30   

Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009

     31   

Consolidated Statements of Comprehensive Earnings (Loss) for the Years Ended December  31, 2011, 2010 and 2009

     32   

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2011, 2010 and 2009

     33   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

     34   

Notes to Consolidated Financial Statements

     35   

Financial Statement Schedules:

  

Schedule II — Valuation and Qualifying Accounts for the Years Ended December  31, 2011, 2010 and 2009

     48   

(Other Financial Statement Schedules are omitted as the information is not required, is not material or is otherwise furnished.)

  

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of The Coast Distribution System, Inc.

We have audited the accompanying consolidated balance sheets of The Coast Distribution System, Inc. and Subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations, comprehensive earnings (loss), stockholders’ equity, and cash flows for the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in Item 15(a) (2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010 and the results of their operations and their cash flows in each of the years in the three year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.

 

/s/ BURR PILGER MAYER, INC.

Burr Pilger Mayer, Inc.

E. Palo Alto, California

March 29, 2012

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     As of December 31,  
     2011      2010  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 4,180       $ 4,840   

Accounts receivable (less allowance for doubtful accounts of $387 in 2011 and $656 in 2010)

     10,900         9,863   

Inventories, net

     25,852         25,912   

Prepaid expenses

     736         869   

Deferred income taxes, net

     1,787         1,768   

Income tax refunds receivable

     206         136   
  

 

 

    

 

 

 

Total current assets

     43,661         43,388   

Property, plant and equipment

     1,313         1,707   

Other assets

     2,762         2,687   
  

 

 

    

 

 

 
   $ 47,736       $ 47,782   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 3,394       $ 3,375   

Accrued liabilities

     3,223         3,256   
  

 

 

    

 

 

 

Total current liabilities

     6,617         6,631   

Long-term obligations

     

Line of credit

     10,895         10,113   
  

 

 

    

 

 

 

Total liabilities

     17,512         16,744   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholders’ Equity:

     

Preferred stock, $.001 par value; authorized: 2,000,000 shares; none issued or outstanding

     —           —     

Common stock, $.001 par value; authorized: 10,000,000 shares; 4,781,597 and 4,660,097 issued as of December 31, 2011 and 2010, respectively

     17,320         16,861   

Accumulated other comprehensive earnings

     1,487         1,874   

Retained earnings

     11,417         12,303   
  

 

 

    

 

 

 

Total stockholders’ equity

     30,224         31,038   
  

 

 

    

 

 

 
   $ 47,736       $ 47,782   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended December 31,  
     2011     2010     2009  
     (Dollars in thousands, except per share data)  

Net sales

   $ 108,195      $ 108,600      $ 103,201   

Cost of products sold (including distribution costs)

     90,166        88,985        83,754   
  

 

 

   

 

 

   

 

 

 

Gross profit

     18,029        19,615        19,447   

Selling, general and administrative expenses

     18,573        18,330        18,552   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (544     1,285        895   

Equity in net earnings of unconsolidated affiliates

     35        57        201   

Other expense

      

Interest expense

     (540     (579     (624

Other

     (92     (194     (268
  

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (1,141     569        204   

Income tax provision (benefit)

     (255     417        105   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (886   $ 152      $ 99   
  

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share

   $ (0.20   $ 0.03      $ 0.02   
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ (0.20   $ 0.03      $ 0.02   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

 

     Year Ended December 31,  
     2011     2010      2009  
     (Dollars in thousands)  

Net earnings (loss)

   $ (886   $ 152       $ 99   

Other comprehensive earnings (loss):

       

Foreign currency translation adjustment

     (387     760         1,295   

Change in fair value of derivative

     —          —           (212
  

 

 

   

 

 

    

 

 

 

Comprehensive earnings (loss)

   $ (1,273   $ 912       $ 1,182   
  

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

 

     Common Stock      Accumulated
Other
Comprehensive
Earnings (Loss)
    Retained
Earnings
    Total  
     Number
of Shares
     Amounts ($)         

Balance at January 1, 2009

     4,449,431       $ 16,137       $ 31      $ 12,052      $ 28,220   

Net earnings for the year

     —              —          99        99   

Foreign currency translation adjustments

     —           —           1,295        —          1,295   

Derivative — change in fair value

           (212       (212
            

 

 

 

Comprehensive earnings for the year

               1,182   
            

 

 

 

Issuance of common stock under option plans

     —           —           —          —          —     

Stock-based compensation

     —           230         —          —          230   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

     4,449,431         16,367         1,114        12,151        29,632   

Net earnings for the year

     —              —          152        152   

Foreign currency translation adjustments

     —           —           760        —          760   
            

 

 

 

Comprehensive earnings for the year

               912   
            

 

 

 

Issuance of common stock under option plans

     33,666         65         —          —          65   

Issuance of restricted shares of common stock under equity incentive plan

     177,000         —           —          —          —     

Stock-based compensation

     —           429         —          —          429   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     4,660,097         16,861         1,874        12,303        31,038   

Net loss for the year

     —              —          (886     (886

Foreign currency translation adjustments

     —           —           (387     —          (387
            

 

 

 

Comprehensive loss for the year

               (1,273
            

 

 

 

Issuance of common stock under employee option plans

     7,000         19         —          —          19   

Issuance of restricted shares of common stock under equity incentive plan

     114,500         —           —          —          —     

Stock-based compensation

     —           440         —          —          440   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     4,781,597       $ 17,320       $ 1,487      $ 11,417      $ 30,224   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended December 31,  
     2011     2010     2009  

Cash flows from operating activities:

      

Net earnings (loss)

   $ (886   $ 152      $ 99   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

      

Depreciation

     657        716        814   

Amortization

     161        37        36   

Loss from sale of property and equipment

     31        2        15   

Equity in net earnings of unconsolidated affiliates, net of distributions

     (35     (57     (175

Loss from transfer of ownership in affiliated company

     —          98        —     

Stock-based compensation expense

     440        428        230   

Deferred income taxes

     (166     51        215   

Change in assets and liabilities:

      

Accounts receivable

     (1,037     (1,032     502   

Inventory

     60        (2,927     7,725   

Prepaids and income tax refunds receivable

     58        425        1,627   

Accounts payable

     19        433        (615

Accrued liabilities

     (33     107        (320
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (731     (1,567     10,153   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Proceeds from sale of property and equipment

     22        44        4   

Increase in other assets

     (123     (63     (250

Capital expenditures

     (329     (247     (166

Tax benefit from settlement of derivative instrument

     —          —          117   

Cash paid for derivative instrument

     —          —          (44
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (430     (266     (339
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Borrowings under line-of credit agreements

     110,648        108,945        102,150   

Repayments under line-of credit agreements

     (109,866     (108,469     (109,479

Repayments of capital lease obligations

     —          (111     (135

Issuance of common stock under employee stock purchase and stock option plans

     19        65        —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     801        430        (7,464

Effect of exchange rate changes on cash

     (300     682        1,351   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (660     (721     3,701   

Cash and cash equivalents beginning of year

     4,840        5,561        1,860   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents end of year

   $ 4,180      $ 4,840      $ 5,561   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

      

Cash paid (refunded) during the year for:

      

Interest

   $ 522      $ 579      $ 637   

Income taxes

     (24     (79     (2,146

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

1. Principles of Consolidation. The Company consolidates the accounts of its wholly-owned subsidiaries, The Coast Distribution System (Canada) Inc. (“Coast Canada”) and Eur-Asia Recreational Vehicle Accessories Taiwan Company (“Coast Taiwan”). Investments in unconsolidated affiliates are accounted for by the equity method. All material intercompany transactions have been eliminated.

2. Inventories. All of our inventory consists of finished goods, which are comprised of replacement parts, supplies and accessories held for resale. Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. We regularly assess the appropriateness of the inventory valuations with particular attention to obsolete, slow-moving and non-saleable inventory. At December 31, 2011 and 2010, our reserves for excess and obsolete inventory were $1,401,000 and $2,009,000, respectively.

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 15 years.

4. Revenue Recognition. Revenue from sales of products is recognized upon shipment. Shipping and handling costs that are billed to our customers are included in revenue. We provide our customers with a limited right of return. We establish an allowance for potential returns which reduces the amounts of our reported sales. We estimate the allowance based on historical experience with returns of like products and current economic data, which can affect the level at which customers submit product returns.

5. Segment Reporting. We have one operating segment, which is the distribution of recreational vehicle and boating replacement parts, supplies and accessories. We distribute our recreational vehicle and boating products from 17 distribution centers located throughout the United States and Canada. No single customer accounted for 10% or more of our net sales in 2011, 2010 or 2009.

6. Long-Lived Assets. Long-lived assets are reviewed for possible impairment at least annually or, more frequently, if and when events or changes in circumstances indicate the carrying amount of any of those assets may not be recoverable in full, by comparing the fair value of the long-lived asset to its carrying amount.

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 stockholders’ equity. The functional currency of our Canadian subsidiary is the Canadian dollar.

8. Derivative Financial Instruments. We sometimes use derivatives to partially offset our exposure to fluctuations in certain foreign currencies. We do not enter into derivatives for speculative or trading purposes. Derivatives are recorded at fair value on the balance sheet and gains or losses resulting from changes in fair value of the derivative are recorded based on the derivative’s hedge designation.

9. Cash and Cash Equivalents. Cash and cash equivalents include highly liquid instruments with maturities of three months or less and overnight investments funded with cash from sweep accounts maintained by the Company at one or more banks.

 

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Net Investment Hedges. As a part of our risk management policy, we have hedged certain portions of our net investment in our foreign operations. We have elected to designate those hedges for special hedge accounting treatment as net investment hedges. The hedges were held at fair value on the balance sheet, with the effective portion of the hedge, including the time value of holding the investment, accounted for as an offset to the foreign currency translation effects accounted for as adjustments to accumulated other comprehensive earnings (loss). In 2009 we recorded, in accumulated other comprehensive income, a loss of $212,165 as a result of the change in fair value of these hedges. We did not enter into any hedges in 2010 or 2011.

We document all hedging relationships at the inception of the hedge and have ensured that hedges are highly effective in offsetting changes in the value of net investment of its foreign subsidiaries. We record all changes in the value of these net investment hedges in accumulated other comprehensive earnings (loss) unless there is a substantial liquidation of the foreign subsidiary, at which time the amounts recorded in accumulated other comprehensive earnings (loss) would be recognized in current income.

10. Income Taxes. We provide 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 deductions and tax loss carryforwards and future net tax effects resulting from temporary differences between the book and tax bases of assets and liabilities, using enacted tax rates. A valuation allowance is established against deferred tax assets if and to the extent we determine that it is more likely, than not, that the deferred tax asset will not be realized in full.

11. Use of Estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), 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.

12. Earnings (Loss) per Share. Basic earnings (loss) per share for any period are computed using the weighted average number of common shares outstanding during that period. Unvested restricted shares are excluded from outstanding shares for purposes of this calculation. Diluted earnings (loss) 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 exercise of stock options and vested restricted shares (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.

Options to purchase 546,001, 422,000 and 452,000 shares in 2011, 2010 and 2009, respectively, and 232,501 and 177,000 restricted shares in 2011 and 2010, respectively were excluded from the computation of diluted earnings (loss) per share because the respective exercise prices per share of those options were greater than the average market price of our shares of common stock during the year, or because by including the unvested compensation expense associated with the options, the calculation of common stock equivalents under the treasury method would be anti-dilutive.

13. Fair Value Measurement of Financial Assets and Liabilities. We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring the fair values of financial and non-financial assets and liabilities. These tiers consist of:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

 

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The following tables summarize the fair value measurements (in thousands of dollars) of our financial assets and liabilities:

 

     At December 31, 2011  
     Total      Quoted market prices
in active markets
(level 1)
     Significant other
observable inputs
(level 2)
 

Cash Equivalents—Overnight Investments

   $ 3,190       $ —         $ 3,190   

 

     At December 31, 2010  
     Total      Quoted market prices
in active markets
(level 1)
     Significant other
observable inputs
(level 2)
 

Cash Equivalents—Overnight Investments

   $ 3,864       $ —         $ 3,864   

The Company had no level 3 assets or liabilities at December 31, 2011 and 2010.

We use the income approach to value derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single discounted present amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the asset and liabilities, which include interest rate and credit risk. We have used mid market pricing as a practical expedient for fair value measurements.

14. Accounts Receivable and the Allowance for Doubtful Accounts. The majority of our accounts receivable are due from RV and boat dealers, supply stores and service centers. Credit is extended to a customer based on evaluation of its financial condition and, generally, collateral is not required. We maintain allowances for doubtful accounts for estimated losses that would result from the inability of customers to make required payments on their accounts. We regularly evaluate the adequacy of the allowance for doubtful accounts. We estimate potential losses on our accounts receivable on the basis of the aging of accounts receivable balances, a review of significant past due accounts, and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, whether due to deteriorating economic conditions generally or otherwise, adversely affecting their ability to make payments, we would make additional provisions to increase the allowance for doubtful accounts.

15. Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718, Stock Compensation, which requires the recognition of the fair value of compensation paid in stock or other equity instruments as an expense in the calculation of net earnings (loss). Accordingly, we recognize stock-based compensation expense in the period in which the employee to whom stock-based compensation is awarded is required to provide service, which is generally over the vesting period of the individual equity instruments. Stock options granted in lieu of cash to non-employees for services performed are recorded at the fair value of the options at the time they are granted and are expensed as service is provided by the optionee.

16. Warranty Costs. We generally do not independently warrant the products that we distribute. Instead, the manufacturers of those products warrant their products and allow us to return defective products, including those that have been returned to us by our customers. However, we sell a line of portable generators under a product supply arrangement which obligates us to provide warranty services for these products and provides for us to share the costs of providing those services with the manufacturer. The warranty period is 24 months following the sale of the product to a retail customer. Accordingly, we maintained a warranty reserve for these products of $564,000 and $469,000 at December 31, 2011 and 2010, respectively. The actual amounts that we may become obligated to pay with respect to warranty claims on these products may differ from the amounts that were set aside in those reserves, because the reserves have been established on the basis not only of experience, but also on estimates that we have made regarding expected warranty returns and costs in the future and actual warranty experience may differ from those estimates.

We do maintain insurance to protect us against product liability claims relating to all of the products we distribute and sell, including the generator products.

17. Recent Accounting Pronouncements. With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2011, that we believe are of significance, or potential significance to the Company based upon current operations.

In December 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010 -29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” (Topic 805) – Business Combinations (ASU 2010-29), to improve consistency in

 

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how the pro forma disclosures are calculated. The amendment enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. The amendment became effective for the Company beginning on January 1, 2011 and is applied prospectively to business combinations for which the acquisition date is after the effective date. The Company will assess the impact of the amendment if and when future business combinations occur.

In May 2011, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011, result in common definition of fair value and common requirements for measurement of and disclosure requirements between U.S. GAAP and International Financial Reporting standards (“IFRS”). Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance is not expected to have a material impact on our consolidated financial position or results of operations.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted this new guidance in fiscal year December 31, 2011. Our adoption of the new guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2011, the Financial Accounting Standards Board (FASB) issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance is effective for us beginning January 1, 2012, with early adoption permitted. We are currently evaluating this guidance, but do not expect the adoption will have a material impact on our consolidated financial statements.

In December 2011, the FASB issued updated guidance on new disclosure requirements regarding the nature of an entity’s rights of set off and related arrangements associated with its financial instruments and derivative instruments. Under U.S. GAAP, certain derivative and repurchase agreement arrangements are granted exceptions from the general off-setting model. The new disclosure requirement will provide financial statements users information regarding both gross and net exposures. This guidance is effective for annual and interim financial statements beginning on or after January 1, 2013. Retrospective application is required. We do not expect a material impact on our consolidated financial statements as a result of the adoption of this standard.

In December 2011, the FASB issued new guidance on the presentation of comprehensive income. This guidance indefinitely deferred certain provisions, including the requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and in the statement in which other comprehensive income is presented. We believe that our adoption of this new standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

NOTE B: PROPERTY, PLANT AND EQUIPMENT

Property and equipment consist of the following at December 31:

 

     2011     2010  
     (In thousands)  

Warehouse equipment

   $ 5,546      $ 5,634   

Office equipment

     5,285        5,740   

Leasehold improvements

     1,635        1,706   

Automobiles

     130        192   
  

 

 

   

 

 

 
     12,596        13,272   

Less accumulated depreciation and amortization

     (11,283     (11,565
  

 

 

   

 

 

 
   $ 1,313      $ 1,707   
  

 

 

   

 

 

 

Depreciation and amortization expense totaled $818,000, 753,000 and $850,000 in 2011, 2010 and 2009, respectively.

 

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NOTE C: LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at December 31:

 

     2011      2010  
     (In thousands)  

Secured notes payable to bank under line of credit due July 10, 2014

   $ 10,895       $ 10,113   

Secured Notes Payable to Bank

The secured notes payable to bank evidence borrowings under a revolving credit facility which permits us to borrow up to the lesser of (i) $25,000,000, or (ii) an amount equal to 85% of the value of our eligible accounts receivable and up to 55% of the value of our eligible inventory. The Company’s borrowing base at December 31, 2011 was $15,300,000 as compared to $15,000,000, at December 31, 2010. Interest is payable at the bank’s prime rate (3.25% at December 31, 2011) plus 1.50% or, at the Company’s option but subject to certain limitations, at the bank’s LIBOR rate (.3% at December 31, 2011) plus 3.00%. The credit facility is scheduled to mature at July 10, 2014.

As of December 31, 2011, we were in compliance with all of our financial and other covenants under our bank line of credit agreement. Beginning March 31, 2012, we will be required to achieve a fixed charge coverage ratio of at least 1.1-to-1.0 for rolling 12 month periods ending on the last day of each fiscal quarter, and the bank has reduced the maximum amount of credit line borrowings that will be available to us by $1 million until that covenant is achieved. The bank line of credit agreement also contains certain other covenants, which restrict our ability to pay dividends above certain levels, repurchase our stock and invest in or acquire other businesses.

At March 16, 2012, outstanding borrowings under the revolving credit facility totaled $13,800,000. Our credit facility borrowings are secured by substantially all of our consolidated assets and rank senior in priority to any other indebtedness that the Company may incur.

NOTE D: COMMITMENTS AND CONTINGENCIES

Operating Leases. We lease our corporate offices, warehouse facilities, and some of our office equipment. These leases are classified as operating leases as they do not meet the required capitalization criteria. The office and warehouse leases expire at various dates over the next twelve years.

Minimum future rental commitments under non-cancelable operating leases as of December 31, 2011, in thousands of dollars, are as follows:

 

Year Ending December 31,

      

2012

   $ 3,823   

2013

     3,554   

2014

     3,247   

2015

     3,084   

2016

     2,603   

Thereafter

     1,690   
  

 

 

 
   $ 18,001   
  

 

 

 

Rent expense charged to operations amounted to $4,170,000 in 2011, $4,511,000 in 2010, and $4,519,000 in 2009.

 

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Legal Proceedings. We are subject to legal proceedings, claims and litigation arising in the ordinary course of business, including product liability and personal injury and intellectual property litigation. While the outcome of currently pending litigation is not yet determinable, based on the information currently available to us, we do not expect that any liabilities or costs that might be incurred to resolve these matters will have a material adverse effect on our financial condition, results of operations or cash flows.

NOTE E: STOCK INCENTIVE PLANS

In August 2008, our shareholders approved the 2008 Equity Incentive Plan (the “2008 Plan”), which provides for the grant of equity incentives, consisting of options, stock appreciation rights (SARs), and restricted shares of common stock (“restricted shares”), to officers, other key employees, directors and consultants. The 2008 Plan initially set aside, for the grant of such equity incentives, 300,000 shares of our common stock, plus an additional 41,500 shares which was equal to the total of the shares that were then available for the grant of new options under our then existing stockholder-approved stock incentive plans (the “Previous Plans”). At the same time, those 41,500 shares ceased to be available for the grant of equity incentive under those Previous Plans. At December 31, 2011, options to purchase a total of 546,001 shares of our common stock and a total of 232,501 shares of restricted stock were outstanding, and 52,666 shares remained available for future grants of equity incentives, under the 2008 Plan.

At the time the 2008 Plan was adopted, options to purchase a total of 593,333 shares of our common stock, granted under the Previous Plans, were outstanding. The Previous Plans had provided that, if outstanding options were to expire or otherwise terminate, the shares that had been subject to those options that were left unexercised would become available for the grant of new options under those Plans. However, the 2008 Plan provides that if any of the outstanding options granted under the Previous Plans expire or are terminated for any reason, they will not become available for the grant of equity incentives under those Plans and, instead, the number of shares that are available for grants of equity incentives under the 2008 Plan will be increased by an equivalent number of shares. At December 31, 2011, options to purchase a total of 340,667 shares of our common stock were still outstanding under the Previous Plans.

Information Regarding Stock Options. The fair value of each option was estimated as of the date of grant using a binomial model. This model incorporates certain assumptions including a risk-free market interest rate, the expected dividend yield of the underlying common stock, the expected life of the option and expected volatility in the market value of the underlying common stock.

We used the following assumptions in estimating the fair value of the options issued in the periods indicated below:

 

     Year Ended December 31,  
     2011     2010     2009  

Options granted under Equity Incentive Plans:

      

Expected volatility

     72.00     71.00     57.00

Risk free interest rates

     2.15     2.79     1.76

Expected dividend yields

     N/A        N/A        N/A   

Expected lives

     10 years        10 years        3 years   

Expected volatilities are based on the historical volatility of the Company’s common stock. The risk free interest rate is based upon market yields for United States Treasury debt securities. The expected dividend yields are based upon the Company’s dividend policy in effect in each of the years presented and the fair market value of the Company’s shares at the time of grant. Expected lives are based on several factors including the average holding period of the outstanding options, their remaining terms and the cycle of our long range business plan.

 

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The following tables summarize stock option activity during the years ended December 31, 2011 and 2010:

 

     Year Ended December 31, 2011  
     Shares     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Values
 

Outstanding at January 1, 2011

     652,001      $ 5.01         

Granted

     8,000        2.74         

Exercised

     (7,000     0.82         

Forfeited

     (107,000     7.54         
  

 

 

         

Outstanding at December 31, 2011

     546,001        4.54         2.8 years       $ 202,800   
  

 

 

         

Exercisable at December 31, 2011

     476,801        5.01         2.7 years       $ 131,000   
  

 

 

         

Options vested and expected (as of December 31, 2011) to vest in the future

     546,001        4.54         2.8 years       $ 202,800   
  

 

 

         
     Year Ended December 31, 2010  
     Shares     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Values
 

Outstanding at January 1, 2010

     707,667      $ 4.99         

Granted

     8,000        4.25         

Exercised

     (33,666     1.94         

Forfeited

     (30,000     7.78         
  

 

 

         

Outstanding at December 31, 2010

     652,001        5.01         3.3 years       $ 545,000   
  

 

 

         

Exercisable at December 31, 2010

     461,901        5.85         3.1 years       $ 207,800   
  

 

 

         

The aggregate intrinsic value in each of the tables above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock on December 31, 2011 and 2010, respectively, and the exercise price for in-the-money options that would have been received by the option holders if all in-the-money options had been exercised on December 31, 2011 or 2010, respectively). The total pre-tax intrinsic values of the options exercised during 2011 and 2010 were $ 21,000 and $72,950, respectively.

The weighted-average grant-date fair values of options granted during the years ended December 31, 2011 and 2010 were $1.97 and $3.23, respectively.

A summary of the status of the Company’s nonvested stock options as of December 31, 2011 and 2010 and the changes that occurred during each of the years then ended is presented below:

 

     Shares     Weighted Average
Grant Date
Fair Value
 

Nonvested at January 1, 2011

     190,100      $ 1.11   

Granted

     8,000        1.97   

Vested

     (128,900     1.37   

Forfeited

     —          —     
  

 

 

   

Nonvested at December 31, 2011

     69,200      $ 0.73   
  

 

 

   
     Shares     Weighted Average
Grant Date
Fair Value
 

Nonvested at January 1, 2010

     368,500      $ 1.38   

Granted

     8,000        3.23   

Vested

     (182,650     1.72   

Forfeited

     (3,750     2.60   
  

 

 

   

Nonvested at December 31, 2010

     190,100        1.11   
  

 

 

   

 

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As of December 31, 2011 and 2010, there was $8,550 and $88,900, respectively, of total unrecognized compensation cost related to nonvested options granted under the Company’s equity incentive plans. At December 31, 2011 and 2010, those costs were expected to be recognized over a weighted average period of 0.5 years and 1.1 years, respectively.

Set forth below is additional information with respect to the stock options that were outstanding under our equity incentive plans at December 31, 2011:

 

Range

   Outstanding
Options
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (Years)
     Options
Exercisable
     Weighted
Average
Exercise
Price
 

$0.63 – $4.50

     239,001       $ 1.66         3.6         169,801       $ 1.81   

$4.75 – $9.80

     307,000       $ 6.78         2.2         307,000       $ 6.78   
  

 

 

          

 

 

    

$0.63 – $9.80

     546,001       $ 4.54         2.8         476,801       $ 5.01   
  

 

 

          

 

 

    

Restricted Shares. We awarded a total of 114,500 and 177,000 restricted shares of common stock (“restricted shares”) during 2011 and 2010, respectively, to certain officers and other key management employees under the 2008 Plan. Restricted shares are shares of common stock that are granted subject to a risk of possible forfeiture back to the Company, if the recipient of the shares ceases to remain in the Company’s continuous service for a specified period or periods of time. If the recipient remains in the Company’s continuous service for the requisite period of time, the restricted shares will become “vested” (that is, cease to be subject to forfeiture). Until restricted shares become vested, those shares may not be sold or otherwise transferred, in whole or in part, by the holders of those shares, and are subject to additional restrictions. We record stock-based compensation expense for restricted share awards based on the fair market value of the shares on their respective award dates and such expense is recorded over the respective vesting periods of the awards. At December 31, 2011, the unrecognized stock-based compensation cost attributable to these restricted shares totaled approximately $700,660 which, as of that date, was expected to be recognized over a weighted average period of approximately 1.7 years. During 2011, 58,999 of the 177,000 restricted shares granted in 2010 became vested. As of December 31, 2011, all of the holders of the remaining 232,501 unvested restricted shares were still in the Company’s employ and all of those restricted shares are expected to vest over the remainder of their respective vesting periods. The aggregate intrinsic value of these restricted shares, at December 31, 2011, was $523,100.

A summary of the status of the Company’s restricted stock activity is presented below:

A summary of restricted stock activity during the years ended December 31, 2011 and 2010 is presented below:

 

    

Shares
    Weighted Average
Grant Date
Fair Values
 

Outstanding at January 1, 2011

     177,000      $ 4.15   

Granted

     114,500        4.47   

Vested

     (58,999     4.15   

Forfeited

     —          —     
  

 

 

   

Outstanding and unvested at end of year

     232,501      $ 4.31   
  

 

 

   
    

Shares
    Weighted Average
Grant Date
Fair Values
 

Outstanding at January 1, 2010

     —        $ —     

Granted

     177,000        4.15   

Vested

     —          —     

Forfeited

     —          —     
  

 

 

   

Outstanding and unvested at end of year

     177,000      $ 4.15   
  

 

 

   

 

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NOTE F: EMPLOYEE BENEFIT PLAN

We have established a profit sharing plan in which all full-time employees are eligible to participate beginning the first quarter following the completion of three months of employment with the Company or any of its subsidiaries. This plan allows participants to make pretax contributions and apply for and secure loans from their respective accounts. The plan permits the Company to make discretionary contributions to be determined annually by the Company’s Board of Directors or Compensation Committee. The Company made no contributions to the plan in 2011, 2010 or 2009.

NOTE G: FOREIGN OPERATIONS

A summary of the Company’s operations by geographic area is presented below for the years ended December 31:

 

     2011     2010      2009  
     (In thousands)  

Net sales to external customers

       

United States

   $ 81,856      $ 80,890       $ 78,345   

Canada

     26,339        27,710         24,856   

Other

     —          —           —     

Operating income (loss)

       

United States

   $ 7      $ 206       $ (198

Canada

     (582     769         1,037   

Other

     31        310         56   

Identifiable assets

       

United States

   $ 35,317      $ 34,175       $ 33,163   

Canada

     11,630        12,742         11,403   

Other

     789        865         906   

The Company has an equity investment in a corporation which conducts a business that is similar to the Company’s business, but in a much smaller scale, in Mexico. That investment, which is included in long term assets on the Company’s consolidated balance sheet, totaled approximately $710,000 and $757,000 at December 31, 2011 and 2010, respectively. The results of operation of this corporation are included in equity in the net earnings of unconsolidated affiliates in the Company’s consolidated statements of operations.

NOTE H: INCOME TAXES

Pretax income (loss) for the years ending December 31, 2011, 2010 and 2009 was taxed in the following jurisdictions:

 

     Year Ended December 31,  
     2011     2010     2009  
     (In thousands)  

Domestic

   $ (500   $ (383   $ (691

Foreign

     (641     952        895   
  

 

 

   

 

 

   

 

 

 
   $ (1,141   $ 569      $ 204   
  

 

 

   

 

 

   

 

 

 

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)

 

The provision (benefit) for income taxes in each of 2011, 2010 and 2009 is summarized below:

 

     Year Ended December 31,  
     2011     2010     2009  
     (In thousands)  

Current

      

Federal

   $ —        $ —        $ (1

State

     67        86        85   

Foreign

     (166     273        317   
  

 

 

   

 

 

   

 

 

 
     (99     359        401   

Deferred

      

Federal

     (178     (30     (231

State

     —          13        (43

Foreign

     22        75        (22
  

 

 

   

 

 

   

 

 

 
     (156     58        (296
  

 

 

   

 

 

   

 

 

 
   $ (255   $ 417      $ 105   
  

 

 

   

 

 

   

 

 

 

Deferred tax assets (liabilities) were comprised of the following at December 31:

 

     2011     2010  
     (In thousands)  

Deferred tax assets

    

Inventory

   $ 1,185      $ 1,195   

Bad debt provision

     85        134   

Property, plant and equipment

     59        53   

Deferred credits

     1,281        1,282   

Loss carryforwards

     1,035        940   

Rent

     150        149   

Other

     431        369   
  

 

 

   

 

 

 

Gross deferred tax assets

     4,226        4,122   

Less valuation allowance

     (1,213     (1,198
  

 

 

   

 

 

 
     3,013        2,924   
  

 

 

   

 

 

 

Deferred tax liabilities

    

Property, plant and equipment

     (22     (98

Unremitted earnings of foreign affiliates

     (77     (78
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (99     (176
  

 

 

   

 

 

 

Net deferred tax assets(1)

   $ 2,914      $ 2,748   
  

 

 

   

 

 

 

 

(1) Of the total deferred tax assets at December 31, 2011 and 2010, $1,787,000 and $1,768,000 were included in current assets and $1,127,000 and $980,000 in 2011 and 2010 were included in other long-term assets at December 31, 2011 and 2010, respectively.

Set forth below is a reconciliation between actual tax expense and expected tax expense for the respective periods presented below:

 

     Year Ended December 31,  
     2011     2010     2009  
     (In thousands)  

Earnings (loss) before income taxes

   $ (1,141   $ 569      $ 204   
  

 

 

   

 

 

   

 

 

 

Expected income tax expense at 34%

   $ (388   $ 193      $ 69   

Difference in rates on earnings of foreign operations

     80        6        (19

Stock based compensation and other nondeductible expenses

     43        96        95   

State taxes and credits (net of federal benefit)

     40        80        (5

Change in valuation allowance

     7        36        (5

Unremitted earnings of foreign subsidiaries

     (1     —          8   

Exclusion of earnings of foreign affiliates

     (12     (6     (58

Other

     (24     12        20   
  

 

 

   

 

 

   

 

 

 

Income tax provision (benefit)

   $ (255   $ 417      $ 105   
  

 

 

   

 

 

   

 

 

 

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)

 

Deferred income taxes have been provided on the undistributed earnings of certain foreign subsidiaries where it is contemplated that earnings will not be reinvested.

At December 31, 2011, the operating loss carryforwards available for federal and state income tax purposes were $1,925,000 and $4,622,000, respectively. The earliest carryforwards begin to expire in 2012. At December 31, 2011, foreign tax credit carryforwards available for federal income tax purposes totaled $66,000, which expire in 2015. State targeted tax area credit carryforwards of $1,245,000 are available with no expiration dates.

It is our policy to classify interest and penalties as a component of tax expense. At December, 31, 2011 we had $260,000 of unrecognized tax benefits, none of which impacted the effective tax rate. Interest and penalties totaled $120,000, which was accrued on the balance sheet at December 31, 2011.

The Company and its domestic subsidiaries file income tax returns in the US federal jurisdiction and in various state jurisdictions. The Company’s foreign subsidiaries file income tax returns in the respective jurisdictions in which they are based. With few exceptions, we are no longer subject to tax examinations by taxing authorities for years before 2006. We do not expect total unrecognized tax benefits to change significantly during the year ending December 31, 2012 due to the expiration of any statutes of limitations.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

Unrecognized Tax Benefits (in thousands):

   2011     2010  

Balance as of January 1,

   $ 260      $ 241   

Additions for tax positions related to the current year

     29        19   

Reductions for tax positions of prior years

     (29     —     
  

 

 

   

 

 

 

Balance as of December 31,

   $ 260      $ 260   
  

 

 

   

 

 

 

 

45


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)

 

NOTE I: EARNINGS (LOSS) PER SHARE

We calculate basic earnings (loss) per share (EPS) of our common stock by dividing the Company’s net earnings (loss) by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. The outstanding stock options and restricted shares were not considered to be dilutive securities for the year ended December 31, 2011 due to the net loss incurred by the Company in 2011. Set forth below are the computations of basic and diluted earnings (loss) per share for each of the following periods:

 

     Year Ended December 31,  
     2011     2010      2009  
     (In thousands)  

Numerator:

       

Net earnings (loss)

   $ (886   $ 152       $ 99   
  

 

 

   

 

 

    

 

 

 

Denominator:

       

Weighted average shares outstanding

     4,535        4,475         4,449   

Dilutive effect of stock options and restricted shares

     —          99         45   
  

 

 

   

 

 

    

 

 

 

Denominator for diluted earnings (loss) per share

     4,535        4,574         4,494   
  

 

 

   

 

 

    

 

 

 

NOTE J: ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

 

     2011      2010  
     (In thousands)  

Payroll and related benefits

   $ 662       $ 658   

Rent

     429         426   

Income and other taxes

     413         486   

Other

     1,719         1,686   
  

 

 

    

 

 

 
   $ 3,223       $ 3,256   
  

 

 

    

 

 

 

NOTE K: WARRANTY RESERVE

We generally do not independently provide warranties on the products that we distribute. Instead, in almost all cases, the manufacturers of the products that we distribute warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However, we sell a line of portable generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. Accordingly, we maintain a reserve against which we charge warranty claims. The amount of the reserve is determined based primarily on our historical warranty claims experience and the number of portable generators that we sell each year. We periodically increase the warranty reserve to replenish it after it has been reduced by warranty claims charged against it or to increase the reserve in response to increases in claims or in the number of generators that we have sold. Those increases are effectuated by means of a provision for warranty claims which is recorded as a component of our costs of sales in our consolidated statements of operations.

Accrued warranty expense, which is included in accrued liabilities on the consolidated balance sheet, as of December 31, 2011 and December 30, 2010 was as follows (in thousands):

 

     2011     2010  

Accrued warranty balance as of January 1,

   $ 469      $ 358   

Warranty costs incurred

     (878     (616

Provision for warranty claims

     973        727   
  

 

 

   

 

 

 

Accrued warranty balance as of December 31,

   $ 564      $ 469   
  

 

 

   

 

 

 

 

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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)

 

L: SIGNIFICANT CONCENTRATIONS

Our ability to satisfy demand for our products may be limited by the availability of those products from our suppliers. We purchase air conditioners from Airxcel, Inc. (“Airxcel”) and generators from Zhejiang Xingyu Industry and Trade Co., Ltd, (“Zhejiang”). Our purchases from Airxcel accounted for approximately 27%, 20%, and 18% of our total product purchases in 2011, 2010, and 2009, respectively. Our purchases from Zhejiang accounted for 6% of our total product purchases in 2011 and less than 5% in 2010, and 2009. In 2009 we purchased towing products from Thule Towing Systems, LLC. (“Thule”), formerly known as Valley Industries, Inc., which amounted to 5% of our total product purchases in 2009. Since 2010, we have obtained towing products from other manufacturers.

Concentration of Credit Risk. We maintain bank accounts with high quality financial institutions to minimize credit risk. However, our deposit balances may periodically exceed federal deposit insurance limits.

NOTE M: QUARTERLY FINANCIAL DATA

 

     Quarter Ended  
     March 31,
2011
    June 30,
2011
     September 30,
2011
     December 31,
2011
 
     (Unaudited)  

Net Sales

   $ 24,697      $ 33,218       $ 31,586       $ 18,694   

Gross profit

     3,898        6,302         5,706         2,123   

Net earnings (loss)

     (1,039     980         612         (1,439

Net earnings (loss) per share — diluted

     (0.23     0.21         0.13         (0.32
     Quarter Ended  
     March 31,
2010
    June 30,
2010
     September 30,
2010
     December 31,
2010
 
     (Unaudited)  

Net Sales

   $ 24,102      $ 34,647       $ 32,245       $ 17,606   

Gross profit

     4,927        6,732         5,864         2,095   

Net earnings (loss)

     22        1,184         659         (1,713

Net earnings (loss) per share — diluted

     —          0.26         0.14         (0.38

 

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Table of Contents

SCHEDULE II

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

December 31, 2009, 2010 and 2011

 

Description

   Balance at
Beginning of
Period
     Adjustments     Write Off
of Bad Debts
    Balance at
End of Period
 

Allowance for doubtful accounts:

         

Year Ended December 31, 2009

   $ 1,399,000       $ (411,000   $ (248,000   $ 740,000   

Year Ended December 31, 2010

   $ 740,000       $ (48,000   $ (36,000   $ 656,000   

Year Ended December 31, 2011

   $ 656,000       $ (160,000   $ (109,000   $ 387,000   

Description

   Balance at
Beginning of
Period
     Adjustments     Write Off
of Scrapped
Inventory
    Balance at
End of Period
 

Allowance for obsolete or slow-moving inventory:

         

Year Ended December 31, 2009

   $ 2,341,000       $ (282,000   $ (263,000   $ 1,796,000   

Year Ended December 31, 2010

   $ 1,796,000       $ 470,000      $ (257,000   $ 2,009,000   

Year Ended December 31, 2011

   $ 2,009,000       $ 179,000      $ (787,000   $ 1,401,000   

Description

   Balance at
Beginning of
Period
     Additions     Deductions(1)     Balance at
End of Period
 

Valuation allowance for deferred tax assets:

         

Year Ended December 31, 2009

   $ 1,166,000       $ —        $ (5,000   $ 1,161,000   

Year Ended December 31, 2010

   $ 1,161,000       $ 37,000      $ —        $ 1,198,000   

Year Ended December 31, 2011

   $ 1,198,000       $ 15,000      $ —        $ 1,213,000   

 

(1) Net operating loss carryforwards used or expired.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

 

ITEM 9A(T). CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of December 31, 2011, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting in the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Internal Control Over Financial Reporting

Management’s Annual Report on Internal Control Over Financial Reporting

Management of The Coast Distribution System, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:

 

   

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

 

   

provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and board of directors; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated financial statements.

Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of such controls to future periods are subject to the risks that the controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.

 

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Table of Contents

Management’s Assessment of Internal Control over Financial Reporting

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design and the testing of the operational effectiveness of the Company’s internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on that assessment, management determined that, as of December 31, 2011, The Coast Distribution System, Inc. maintained effective internal control over financial reporting.

The foregoing report on internal control over financial reporting shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.

Section 989G of the Dodd-Frank Act, signed into law in July 2010, permanently exempts smaller reporting companies, such as the Company, and other non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act requiring SEC reporting companies to obtain and include in their annual reports on Form 10-K, an attestation report from their independent registered accountants with respect to the effectiveness of their internal control over financial reporting. As a result, no such attestation report is included in this Annual Report.

 

ITEM 9B. OTHER INFORMATION

None.

 

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Table of Contents

PART III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

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 our definitive proxy statement expected to be filed with the Commission on or before April 30, 2012 for the Company’s 2012 Annual Stockholders’ Meeting.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference from our definitive proxy statement expected to be filed with the Commission on or before April 30, 2012 for the Company’s 2012 Annual Stockholders’ Meeting.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except for the information below regarding our equity compensation plans, the information required by Item 12 is incorporated herein by reference from our definitive proxy statement expected to be filed with the Commission on or before April 30, 2012 for the Company’s 2012 Annual Stockholders’ Meeting.

The following table provides information relating to our equity compensation plans as of December 31, 2011:

 

     Column A      Column B      Column C  
     Number of
Securities to be Issued
on Exercise of
Outstanding Options
     Weighted Average
Exercise Price
of Outstanding
Options
     Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column A
 

Equity compensation plans approved by stockholders Stock option and incentive plans

     546,001       $ 4.54         52,666   

Equity compensation plans not approved by stockholders

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     546,001       $ 4.54         52,666   
  

 

 

       

 

 

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated herein by reference from our definitive proxy statement expected to be filed with the Commission on or before on or before April 30, 2012 for the Company’s 2012 Annual Stockholders’ Meeting.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated herein by reference from our definitive proxy statement to be filed with the Commission on or before April 30, 2012 for the Company’s 2012 Annual Stockholders’ Meeting.

 

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Table of Contents

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

 

  (a) The following documents are filed as part of this Report:

 

  (1) Financial Statements. The Consolidated Financial Statements of The Coast Distribution System, Inc. and Financial Statement Schedules: See Index to Financial Statements on Page 28 of this Report.

 

  (2) Financial Statement Schedules. Schedule II — Valuation and Qualifying Accounts is set forth at Page 48 of this Report. All other schedules are omitted as the information is not required, is not material or is otherwise furnished.

 

  (3) 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.

 

52


Table of Contents

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.

 

 

    THE COAST DISTRIBUTION SYSTEM, INC.

Dated: March 30, 2012

    By:  

/S/ JAMES MUSBACH

      James Musbach
      President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints James Musbach, Thomas R. McGuire and Sandra A. Knell, and each of them individually, to act severally as his or her attorneys-in-fact and agent, with full power and authority, including the power of substitution and resubstitution, to sign and file on his or her behalf and in each capacity stated below, all amendments and/or supplements to this Annual Report on Form 10-K, which amendments or supplements may make changes and additions to this Report as such attorneys-in-fact, or any of them, may deem necessary or appropriate.

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.

 

Signature

  

Title

 

Date

/S/ JAMES MUSBACH

James Musbach

  

President, Chief Executive Officer and Director

(Principal Executive Officer)

  March 30, 2012

/S/ THOMAS R. MCGUIRE

Thomas R. McGuire

  

Executive Chairman and Chairman of the Board of Directors

  March 30, 2012

/S/ SANDRA A. KNELL

Sandra A. Knell

  

Executive Vice President and Chief Financial Officer

(Principal Financial and Principal Accounting Officer)

  March 30, 2012

/S/ JOHN W. CASEY

John W. Casey

  

Director

  March 30, 2012

/S/ LEONARD P. DANNA

Leonard P. Danna

  

Director

  March 30, 2012

/S/ BEN A. FRYDMAN

Ben A. Frydman

  

Director

  March 30, 2012

/S/ ROBERT S. THROOP

Robert S. Throop

  

Director

  March 30, 2012

 

S-1


Table of Contents

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description of Exhibits

  3.1A    Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on July 1, 1997 and as in effect since that date (incorporated by reference to Exhibit B to the Company’s Definitive Proxy Statement dated and filed with the SEC on July 3, 1997).
  3.3    Amended and Restated Bylaws of the Company effective as of December 19, 2007 (Incorporated by reference to the Exhibit 3.3 to the Company’s Current Report on Form 8-K dated December 19, 2007).
  4.1    Rights Agreement, dated as of February 3, 2006, between the Company and U.S. Stock Transfer Corporation, which includes, as Exhibit A, a form of Certificate of Designation for the Series A Junior Participating Preferred Stock; as Exhibit B, the Form of Rights Certificate and. As Exhibit C, a Summary of Rights. (Incorporated by reference from the same numbered Exhibit to the Company’s Registration Statement on Form 8-A filed with the Commission on
February 6, 2006).
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 SEC on June 17, 1993).
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).
10.36    1999 Stock Incentive Plan (Incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000).
10.39    Third Amended and Restated Loan & Security Agreement dated as of August 30, 2005 between Coast and certain of its Subsidiaries and Standard Federal Bank NA, LaSalle Business Credit, LLC, and LaSalle Business Credit, a Division of ABN AMRO BANK N.V., Canada Branch. (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated August 30, 2005 and filed with the SEC on September 6, 2005).
10.40    2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (File No. 333-136864 filed with the Commission on August 24, 2006).
10.44    The 2008 Equity Incentive Plan approved by the Company’s stockholders (incorporated by reference to Appendix A to the Company’s definitive Proxy Statement filed with the SEC on July 22, 2008).
10.45    Fourth Amendment and Waiver, dated as of March 27, 2008, entered into by the Company and Bank of America, N. A., amending certain of the terms and provisions of the Loan and Security Agreement for the Company’s revolving bank credit line. (Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 31, 2009.)
10.46    Fifth Amendment to Third Amended & Restated Loan and Security Agreement entered into November 30, 2009 by The Coast Distribution System, Inc. and Bank of America, N. A. (Incorporated by reference to Exhibit 10.46 to the Company’s Current Report on Form 8-K dated November 30, 2009.)

 

E-1


Table of Contents

Exhibit
Number

  

Description of Exhibits

10.47    Seventh Amendment to Third Amended & Restated Loan and Security Agreement entered into as November 8, 2010 by the Company and Bank of America, N. A. (Incorporated by reference to Exhibit 10.99 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.)
10.48    Eighth Amendment to Third Amended & Restated Loan and Security Agreement entered into as of May 10, 2011 by the Company and Bank of America, N.A. (Incorporated by reference toExhibit10.48 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.)
10.49    Ninth Amendment to Third Amended & Restated Loan and Security Agreement entered into as of July 27, 2011 by the Company and Bank of America, N.A. (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 27, 2011.)
10.50   

Tenth Amendment to Third Amended & Restated Loan and Security Agreement entered into as of November 8, 2011 between the Company and Bank of America, N.A. (Incorporated by reference to Exhibit 99.1

to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.)

21    Subsidiaries of Registrant
23.1    Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm
24    Power of Attorney — Included on Signature Page.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*    XBRL instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business reporting Language). Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are otherwise not subject to liability under these sections.

 

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