SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _________ to __________
---------------------------------
Commission file number 1-12676
COASTCAST CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3454926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3025 EAST VICTORIA STREET, RANCHO DOMINGUEZ, CA 90221
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310)638-0595
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
At November 1, 1996 there were outstanding 8,777,890 shares of common stock, no
par value.
1
COASTCAST CORPORATION
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 (Unaudited) 3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1996 and 1995 (Unaudited) 4
Nine Months Ended September 30, 1996 and 1995 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION:
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS September 30, December 31,
1996 1995
-------------- --------------
Current assets:
Cash and cash equivalents $ 16,639,000 $ 9,237,000
Short-term investments, at cost,
which approximates market value 2,554,000 14,718,000
Accounts receivable, net of allowance for doubtful
accounts of $400,000 and $300,000 at September 30,
1996 and December 31, 1995, respectively 12,524,000 7,198,000
Inventories (Note 2) 18,720,000 7,611,000
Prepaid expenses and other current assets 2,788,000 2,743,000
Deferred income taxes 1,240,000 1,240,000
Net current assets of discontinued operations (Note 3) 776,000 697,000
----------- -----------
Total current assets 55,241,000 43,444,000
Property, plant and equipment, net of
accumulated depreciation and amortization of
$14,296,000 and $12,676,000 at September 30, 1996
and December 31, 1995, respectively 19,651,000 15,214,000
Other assets 1,952,000 250,000
----------- -----------
Total assets $76,844,000 $58,908,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,048,000 $ 3,833,000
Accrued liabilities 4,744,000 4,823,000
Income taxes payable 467,000 -
----------- -----------
Total current liabilities 12,259,000 8,656,000
Deferred compensation 111,000 -
----------- -----------
Total liabilities 12,370,000 8,656,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, none issued and outstanding - -
Common stock, no par value, 20,000,000 shares
authorized; 8,777,890 and 8,734,694 shares
issued and outstanding as of September 30, 1996
and December 31, 1995, respectively 37,869,000 37,036,000
Retained earnings 26,605 000 13,216,000
----------- -----------
Total shareholders' equity 64,474,000 50,252,000
----------- -----------
Total liabilities and shareholders' equity $76,844,000 $58,908,000
----------- -----------
----------- -----------
See notes to condensed consolidated financial statements.
3
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months
Ended September 30,
--------------------------------
1996 1995
--------------------------------
Sales $ 41,495,000 $ 17,305,000
Cost of sales 31,943,000 13,974,000
-------------- --------------
Gross profit 9,552,000 3,331,000
Selling, general and administrative expenses 1,678,000 1,604,000
-------------- --------------
Income from operations 7,874,000 1,727,000
Other income 238,000 418,000
-------------- --------------
Income before settlement of class action
lawsuit and provision for income taxes 8,112,000 2,145,000
Class action lawsuit settlement expense - 2,075,000
-------------- --------------
Income before provision for income taxes 8,112,000 70,000
Provision for income taxes 3,245,000 29,000
-------------- --------------
Net income $ 4,867,000 $ 41,000
-------------- --------------
-------------- --------------
Net income per share (Note 4) $ .54 $ .00
------ ------
Weighted average shares outstanding 9,087,334 9,141,047
See notes to condensed consolidated financial statements.
4
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Nine Months
Ended September 30,
--------------------------------
1996 1995
-------------- --------------
Sales $ 113,347,000 $ 62,024,000
Cost of sales 84,439,000 49,503,000
-------------- --------------
Gross profit 28,908,000 12,521,000
Selling, general and administrative expenses 7,052,000 5,182,000
-------------- --------------
Income from operations 21,856,000 7,339,000
Other income 846,000 1,154,000
-------------- --------------
Income before settlement of class action
lawsuit and provision for income taxes 22,702,000 8,493,000
Class action lawsuit settlement expense - 2,075,000
-------------- --------------
Income before provision for income taxes 22,702,000 6,418,000
Provision for income taxes 9,313,000 2,631,000
-------------- --------------
Net income $ 13,389,000 $ 3,787,000
-------------- --------------
-------------- --------------
Net income per share (Note 4) $1.48 $.41
----- ----
Weighted average shares outstanding 9,064,076 9,148,081
See notes to condensed consolidated financial statements.
5
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
----------------------------------
1996 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,389,000 $ 3,787,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,784,000 1,362,000
Loss on disposal of machinery and equipment 60,000 66,000
Deferred compensation 111,000 -
Deferred income taxes 61,000 95,000
Changes in operating assets and liabilities:
Accounts receivable (5,326,000) (243,000)
Inventories (11,109,000) 2,054,000
Prepaid expenses and other current assets (45,000) 419,000
Income taxes payable 467,000 -
Accounts payable and accrued liabilities 3,136,000 614,000
Change in accrual for disposal of aerospace business (139,000) (233,000)
------------- -------------
Net cash provided by operating activities 2,389,000 7,921,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments 12,164,000 2,060,000
Purchase of property, plant and equipment (6,282,000) (2,458,000)
Proceeds from disposal of machinery and equipment - -
Other assets (1,702,000) (681,000)
------------- -------------
Net cash provided by (used in) investing
activities 4,180,000 (1,079,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of
options net of related tax benefit 834,000 -
Non-employee director stock options 202,000 -
Repurchase of common stock (203,000) -
------------- -------------
Net cash provided by financing activities 833,000 -
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,402,000 6,842,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,237,000 7,188,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 16,639,000 $ 14,030,000
------------- -------------
------------- -------------
See notes to condensed consolidated financial statements.
6
COASTCAST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1996, the related
condensed consolidated statements of income for the three and nine months and
cash flows for the nine months ended September 30, 1996 and 1995 have been
prepared by Coastcast Corporation (the "Company") without audit. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
have been made which are necessary to present fairly the financial position,
results of operations and cash flows of the Company at September 30, 1996 and
for the periods then ended.
Although the Company believes that the disclosure in the condensed consolidated
financial statements is adequate for a fair presentation thereof, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The December 31, 1995 audited statements were included in
the Company's annual report on Form 10-K under the Securities Exchange Act of
1934 for the year ended December 31, 1995. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto contained in that annual report.
The results of operations for the periods ended September 30, 1996 are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1996 1995
------------ ------------
Raw materials and supplies $8,079,000 $1,546,000
Tooling 224,000 178,000
Work-in-process 9,607,000 4,981,000
Finished goods 810,000 906,000
----------- -----------
$18,720,000 $7,611,000
----------- -----------
----------- -----------
3. DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
essentially completed by June 1994. The net current assets of discontinued
operations as of September 30, 1996 were $776,000,
7
principally consisting of the estimated net realizable value of the Wallingford,
Connecticut property including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut
property, the Company had an environmental assessment performed, which
identified the presence of certain chemicals associated with chlorinated
solvents in groundwater beneath a portion of the property. The Company is
currently conducting further investigation to determine the source and extent of
the contamination. The Company has recorded the net assets associated with its
discontinued operations at the estimated net realizable value. However, since
the precise source and extent of the contamination has not been identified at
this time, no assurances can be given that the proceeds to be realized upon the
sale of this property less the cost of remediation will equal or exceed the
estimated net realizable value.
4. EARNINGS PER SHARE
Net income per share is based on the weighted average number of shares of common
stock outstanding and dilutive common equivalent shares from stock options,
using the treasury stock method.
8
COASTCAST CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 139.9% and 82.7% to $41.5 million and $113.3 million for the
three months and nine months ended September 30, 1996, respectively, from $17.3
million and $62.0 million for the three months and nine months ended September
30, 1995, respectively. The increase was primarily due to sales of titanium
clubheads, mainly metal wood clubheads, which have significantly higher unit
sales prices than steel-alloy clubheads. Sales of titanium clubheads were
partially offset by a decrease in sales of steel-alloy metal wood clubheads.
Titanium clubhead sales represented 65% and 54% of total sales for the three
months and nine months ended September 30, 1996, respectively.
Gross profit increased 187.9% and 131.2% to $9.5 million and $28.9 million for
the three months and nine months ended September 30, 1996, respectively, from
$3.3 million and $12.5 million for the three months and nine months ended
September 30, 1995. Gross profit margins increased to 23.0% and 25.5% for the
three months and nine months ended September 30, 1996 respectively, from 19.2%
and 20.2% for the comparable prior year periods, due principally to the shift in
production to titanium clubheads.
Selling, general and administrative expense increased 6.2% and 36.5% to $1.7
million and $7.1 million for the three months and nine months ended September
30, 1996, respectively, from $1.6 million and $5.2 million for the comparable
prior year periods. An increase in payroll and related expenses for the three
months ended September 30, 1996, compared to the prior year period was almost
offset by a decrease in legal fees. The increase for the nine month period over
the comparable prior year period was due primarily to increased payroll and
related expenses and increased legal fees.
DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
essentially completed by June 1994. The net current assets of discontinued
operations as of September 30, 1996 were $776,000, principally consisting of the
estimated net realizable value of the Wallingford, Connecticut property
including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut
property, the Company had an environmental assessment performed, which
identified the presence of certain chemicals associated with chlorinated
solvents in groundwater beneath a portion of the property. The Company is
currently conducting further investigation to determine the source and extent of
the contamination. The Company has recorded the net assets associated with its
discontinued operations at the estimated net realizable value. However, since
the precise source and extent of the contamination has not been identified at
this time, no assurances can be given that the proceeds to be realized upon the
sale of this property less the cost of remediation will equal or exceed the
estimated net realizable value.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments position at
September 30, 1996, was $19.2 million compared to $23.9 million on December 31,
1995, a decrease of $4.7 million. Net cash provided by operating activities was
$2.4 million for the nine months ended September 30, 1996. The operating
activities net cash was primarily provided by net income of $13.4 million,
depreciation and amortization of $1.8 million and an increase in accounts
payable and accrued liabilities of $3.1 million, partially offset by an increase
in inventories of $11.1 million and an increase in accounts receivable of $5.3
million. Capital expenditures were $6.3 million for the nine months ended
September 30, 1996.
On October 25, 1995, the Board of Directors authorized the Company to purchase
up to one million shares of the Company's common stock from time to time in the
open market or negotiated transactions. For the nine months ended September 30,
1996, the Company purchased and retired 13,800 shares for $203,000. As of
September 30, 1996, there were 596,400 shares remaining to be purchased under
this authorization.
The Company has no long term debt. The Company believes that its current cash
position, working capital generated from future operations and the ability to
borrow from financial institutions should be adequate to meet its financing
requirements for the foreseeable future.
10
COASTCAST CORPORATION
PART II. OTHER INFORMATION
Item 5. Other Information
The following business risks, as disclosed in Part II, Item 5 "Market for
Registrant's Common Equity and Related Stockholder Matters" on Form 10-K for the
fiscal year ended December 31, 1995, are hereby incorporated by reference as
those set forth fully herein:
Customer concentration
Competition
New products
New materials and processes
Manufacturing cost variations
Dependence on polishing and finishing plant in Mexico
Hazardous waste
Dependence on discretionary consumer spending
Seasonality; fluctuations in operating results
Reliance on key personnel
Shares eligible for future sale
Fluctuations in Callaway Golf Company shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit:
10.1 Coastcast Corporation Supplemental Executive
Retirement Plan, effective September 1, 1996
10.2 First Amendment to Coastcast Corporation Supplemental
Executive Retirement Plan,effective September 1, 1996
10.3 Trust Agreement by and between Coastcast Corporation
and Imperial Trust Company, dated September 1, 1996
11.1 Statement re: computation of per share earnings
(b) Reports on Form 8-K:
None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COASTCAST CORPORATION
November 1, 1996 By /s/ Robert C. Bruning
- --------------------- --------------------------------------
Dated Robert C. Bruning
Chief Financial Officer (Duly Authorized and
Principal Financial Officer)
12