SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
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 August 11, 1997 there were outstanding 8,794,334 shares of common stock, no
par value.
1
COASTCAST CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and
December 31, 1996 3
Condensed Consolidated Statements of Income
Three Months Ended June 30, 1997 and 1996 (Unaudited) 4
Six Months Ended June 30, 1997 and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996 (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 1. Legal Proceedings 11
Item 4. Submission of Matter to a Vote of Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
2
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
------------- --------------
A S S E T S
Current assets:
Cash and cash equivalents $ 13,913,000 $ 14,060,000
Trade accounts receivable, net of allowance for doubtful
accounts of $400,000 at June 30, 1997
and December 31, 1996 17,921,000 11,783,000
Inventories (Note 2) 26,703,000 21,660,000
Prepaid expenses and other current assets 1,372,000 4,800,000
Deferred income taxes 864,000 864,000
Net current assets of discontinued operations (Note 3) 838,000 808,000
------------- -------------
Total current assets 61,611,000 53,975,000
Property, plant and equipment, net 19,831,000 20,171,000
Other assets 2,016,000 1,954,000
------------- -------------
$ 83,458,000 $ 76,100,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,690,000 $ 5,043,000
Accrued liabilities 5,860,000 4,132,000
------------- -------------
Total current liabilities 11,550,000 9,175,000
Deferred compensation 1,067,000 438,000
------------- -------------
Total liabilities 12,617,000 9,613,000
------------- -------------
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;
8,794,334 and 8,777,890 shares issued and
outstanding as of June 30, 1997 and
December 31, 1996 respectively 38,545,000 38,205,000
Retained Earnings 32,296,000 28,282,000
------------- -------------
Total shareholders' equity 70,841,000 66,487,000
------------- -------------
$ 83,458,000 $ 76,100,000
------------- -------------
------------- -------------
See accompanying notes to condensed consolidated financial statements.
3
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JUNE 30,
-----------------------------
1997 1996
------------- -------------
Sales $ 39,938,000 $ 42,508,000
Cost of sales 31,956,000 30,933,000
------------- -------------
Gross profit 7,982,000 11,575,000
Selling, general and administrative expenses 3,278,000 3,188,000
------------- -------------
Income from operations 4,704,000 8,387,000
Other income, net 203,000 240,000
------------- -------------
Income before income taxes 4,907,000 8,627,000
Provision for income taxes 2,091,000 3,623,000
------------- -------------
Net income $ 2,816,000 $ 5,004,000
------------- -------------
------------- -------------
NET INCOME PER SHARE
Net income (Note 4) $ 0.32 $ 0.55
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,882,380 9,174,891
------------- -------------
------------- -------------
See accompanying notes to condensed consolidated financial statements.
4
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1997 1996
------------- -------------
Sales $ 68,939,000 $ 71,852,000
Cost of sales 56,932,000 52,496,000
------------- -------------
Gross profit 12,007,000 19,356,000
Selling, general and administrative expenses 5,462,000 5,374,000
------------- -------------
Income from operations 6,545,000 13,982,000
Other income, net 375,000 608,000
------------- -------------
Income before income taxes 6,920,000 14,590,000
Provision for income taxes 2,906,000 6,068,000
------------- -------------
Net income $ 4,014,000 $ 8,522,000
------------- -------------
------------- -------------
NET INCOME PER SHARE
Net income (Note 4) $ 0.45 $ 0.94
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,919,098 9,052,352
------------- -------------
------------- -------------
See accompanying notes to condensed consolidated financial statements.
5
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,014,000 $ 8,522,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,411,000 1,113,000
Loss on disposal of machinery and equipment 45,000 55,000
Change in accrual for disposal of aerospace business (52,000) (115,000)
Deferred compensation 629,000 --
Deferred income taxes 22,000 50,000
Changes in operating assets and liabilities:
Trade accounts receivable (6,138,000) (11,450,000)
Inventories (5,043,000) (8,620,000)
Prepaid expenses and other current assets 3,428,000 210,000
Income taxes payable 603,000 1,783,000
Accounts payable and accrued liabilities 1,772,000 3,557,000
------------- -------------
Net cash provided by (used in)
operating activities 691,000 (4,895,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales of short-term investments -- 10,088,000
Purchase of property, plant and equipment (1,124,000) (4,775,000)
Proceeds from disposal of machinery and equipment 8,000 --
Other assets (62,000) (55,000)
------------- -------------
Net cash (used in) provided by
investing activities (1,178,000) 5,258,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock upon exercise
of options, including related tax benefit 206,000 806,000
Non-employee director stock options 134,000 135,000
Repurchase of common stock -- (7,000)
------------- -------------
Net cash provided by financing activities 340,000 934,000
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (147,000) 1,297,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 14,060,000 9,237,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 13,913,000 $ 10,534,000
------------- -------------
------------- -------------
See accompanying 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 June 30, 1997, the
related condensed consolidated statements of income for the three and
six months and cash flows for the six months ended June 30, 1997 and
1996 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 June 30, 1997 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, 1996 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, 1996. 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 June 30, 1997 are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
June 30, December 31,
1997 1996
----------- -----------
Raw materials and supplies $13,048,000 $10,448,000
Tooling 298,000 294,000
Work-in-process 12,797,000 9,792,000
Finished goods 560,000 1,126,000
----------- -----------
$26,703,000 $21,660,000
----------- -----------
----------- -----------
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 June 30, 1997 were $838,000, principally
7
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.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS
PER SHARE, which the Company will adopt in its annual financial
statements for the year ended December 31, 1997. The Statement
replaces the presentation of primary EPS with a presentation of basic
EPS, which excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. The Statement also requires
the dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. Diluted EPS is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15.
The Company has determined that the effect of adopting SFAS No. 128
would not have a material effect on the Company's financial statements
for the three months and six months ended June 30, 1997.
8
COASTCAST CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales decreased 6.1% and 4.2% to $39.9 million and $68.9 million for
the three months and six months ended June 30, 1997, respectively,
from $42.5 million and $71.9 million for the three months and six
months ended June 30, 1996, respectively. The decrease was primarily
due to a change in the revenue mix from a preponderance of metal woods
to irons and putters, which have lower unit sales prices than metal
wood clubheads.
Gross profit decreased 31.0% and 38.0% to $8.0 million and $12.0
million for the three months and six months ended June 30, 1997,
respectively, from $11.6 million and $19.4 million for the three
months and six months ended June 30, 1996. Gross profit margins
decreased to 20.0% and 17.4% for the three months and six months
ended June 30, 1997 respectively, from 27.2% and 26.9% for the
comparable prior year periods, due principally to the shift in
production to irons and putters.
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 June 30, 1997 were $838,000, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at June 30, 1997 was
$13.9 million compared to $14.1 million on December 31, 1996, a
decrease of $0.2 million. Net cash provided by operating activities
was $0.7 million for the six months ended June 30, 1997. The net cash
provided by operating activities consisted of net income of $4.0
million, a decrease in prepaid expenses and other current assets of
$3.4 million, an increase in accounts payable and accrued liabilities
of $1.8 million, depreciation and amortization of $1.4 million, and an
increase in deferred compensation of $0.6 million, partially offset by
an increase in trade accounts receivable of $6.1 million and an
increase in inventories of $5.0 million. Net cash used in investing
activities consisted mainly of $1.1 million of net capital
expenditures for the six
9
months ended June 30, 1997. Net cash provided by financing activities of
$0.3 million consisted mainly of proceeds from exercise of stock options.
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 should be adequate to meet its
financing requirements for the foreseeable future.
10
COASTCAST CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Certain government agencies have asserted claims that for a period of
time the Company did not comply with all applicable regulations
regarding certain materials they regard as hazardous waste. The
Company does not admit to any wrongdoing, but has agreed in principle
to a settlement. Management believes that the settlement will not
have a material adverse impact on the Company's financial condition or
results of operations.
Item 4. Submission of Matter to a Vote of Securities Holders
The Company held its annual meeting of shareholders on June 11, 1997.
The following matters were voted and approved by the shareholders.
1. Election of Directors to hold office until the 1997 Annual Meeting:
Votes For Votes Withheld
--------- --------------
Hans H. Buehler 7,734,891 68,776
George L. Graziadio 7,725,713 77,854
Edwin A. Levy 7,731,241 72,426
Vernon R. Loucks, Jr. 7,730,841 72,826
Lee E. Mikles 7,725,337 78,330
Richard W. Mora 7,727,491 76,176
Paul A. Novelly 7,731,241 72,426
2. Ratification of Deloitte & Touche LLP as the Company's
independent auditors: holders of 7,759,617 shares voted for such
ratification, holders of 32,460 shares voted against such ratification
and holders of 11,540 shares abstained from voting on such
ratification.
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, 1996, are hereby
incorporated by reference as though set forth fully herein:
Customer concentration
Competition
New products
New materials and processes
Manufacturing cost variations
Dependence on polishing and finishing plant in Mexico
11
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) Exhibits:
3.1.1 Articles of Incorporation of the Company, as
amended (1)
3.1.2 Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on December 6, 1993 (1)
3.2 Bylaws of the Company (1)
(1) Incorporated by reference to the exhibits to
the Registration Statement on Form S-1
(Registration No. 33-71294) filed on
November 17, 1993, Amendment No. 2 filed on
December 1, 1993, and Amendment No. 3 filed on
December 9, 1993
10.1 Amended and Restated Coastcast Corporation 401(k)
Retirement Plan, effective January 1, 1997
11.1 Statement re: computation of per share earnings
99.1 Pages 10-12 of Registrant's Annual Report on Form
10-K for the year ended December 31, 1996
(incorporated by reference to such Form 10-K filed
with the Commission)
(b) Reports on Form 8-K:
None
12
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
August 11, 1997 By /s/ Robert C. Bruning
- -------------------- ------------------------
Dated Robert C. Bruning
Chief Financial Officer (Duly Authorized
and Principal Financial Officer)
13