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, 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 November 3, 1997 there were outstanding 8,794,334 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,
1997 (Unaudited)and December 31, 1996 3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996 (Unaudited) 4
Nine Months Ended September 30, 1997 and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------- ------------
Current assets:
Cash and cash equivalents $ 23,786,000 $ 14,060,000
Accounts receivable, net of allowance for doubtful
accounts of $400,000 at September 30, 1997 and
December 31, 1996 15,130,000 11,783,000
Inventories (Note 2) 21,713,000 21,660,000
Prepaid expenses and other current assets 1,846,000 4,800,000
Deferred income taxes 864,000 864,000
Net current assets of discontinued operations (Note 3) 864,000 808,000
------------ ------------
Total current assets 64,203,000 53,975,000
Property, plant and equipment, net 19,473,000 20,171,000
Other assets 4,066,000 1,954,000
------------ ------------
Total assets $ 87,742,000 $ 76,100,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,383,000 $ 5,043,000
Accrued liabilities 7,318,000 4,132,000
------------ ------------
Total current liabilities 11,701,000 9,175,000
Deferred compensation 1,392,000 438,000
------------ ------------
Total liabilities 13,093,000 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 September 30, 1997
and December 31, 1996, respectively 38,613,000 38,205,000
Retained earnings 36,036 000 28,282,000
------------ ------------
Total shareholders' equity 74,649,000 66,487,000
------------ ------------
Total liabilities and shareholders' equity $ 87,742,000 $ 76,100,000
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
3
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------------------
1997 1996
------------- -------------
Sales $ 43,935,000 $ 41,495,000
Cost of sales 34,566,000 31,943,000
------------ ------------
Gross profit 9,369,000 9,552,000
Selling, general and administrative expenses 3,125,000 1,678,000
------------ ------------
Income from operations 6,244,000 7,874,000
Other income, net 205,000 238,000
Income before income taxes 6,449,000 8,112,000
Provision for income taxes 2,709,000 3,245,000
------------ ------------
Net income $ 3,740,000 $ 4,867,000
------------ ------------
------------ ------------
Net income per share (Note 4) $ 0.42 $ 0.54
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,903,784 9,087,334
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
4
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
1997 1996
------------ ------------
Sales $112,874,000 $113,347,000
Cost of sales 91,498,000 84,439,000
------------ ------------
Gross profit 21,376,000 28,908,000
Selling, general and administrative expenses 8,587,000 7,052,000
------------ ------------
Income from operations 12,789,000 21,856,000
Other income, net 580,000 846,000
------------ ------------
Income before income taxes 13,369,000 22,702,000
Provision for income taxes 5,615,000 9,313,000
------------ ------------
Net income $ 7,754,000 $ 13,389,000
------------ ------------
------------ ------------
Net income per share (Note 4) $ 0.87 $ 1.48
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,912,481 9,064,07
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
5
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,754,000 $ 13,389,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,117,000 1,784,000
Loss on disposal of machinery and equipment 156,000 60,000
Change in accrual for disposal of aerospace business (98,000) (139,000)
Deferred compensation 954,000 111,000
Deferred income taxes 42,000 61,000
Changes in operating assets and liabilities:
Trade accounts receivable (3,347,000) (5,326,000)
Inventories (53,000) (11,109,000)
Prepaid expenses and other current assets 2,954,000 (45,000)
Income taxes payable 1,149,000 467,000
Accounts payable and accrued liabilities 1,377,000 3,136,000
------------ ------------
Net cash provided by operating activities 13,005,000 2,389,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales of short-term investments - 12,164,000
Purchase of property, plant and equipment (1,627,000) (6,282,000)
Proceeds from disposal of machinery and equipment 52,000 -
Other assets (2,112,000) (1,702,000)
------------ ------------
Net cash (used in) provided by investing activities (3,687,000) 4,180,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock upon exercise
of options, including related tax benefit 206,000 834,000
Non-employee director stock options 202,000 202,000
Repurchase of common stock - (203,000)
------------ ------------
Net cash provided by financing activities 408,000 833,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,726,000 7,402,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 14,060,000 9,237,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 23,786,000 $ 16,639,000
------------ ------------
------------ ------------
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 September 30, 1997, the related
condensed consolidated statements of income for the three months and nine months
and cash flows for the nine months ended September 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 September 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 September 30, 1997, are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1997 1996
----------- -----------
Raw materials and supplies $11,630,000 $10,448,000
Tooling 434,000 294,000
Work-in-process 9,078,000 9,792,000
Finished goods 571,000 1,126,000
----------- -----------
$21,713,000 $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 September 30, 1997, were $864,000,
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 have 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, 1998. The Statement prohibits adoption during fiscal and interim
periods ending prior to December 15, 1998. 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 adopting SFAS No. 128 would not have a material
effect on the Company's financial statements for the three months and nine
months ended September 30, 1997.
8
COASTCAST CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 5.8% to $43.9 million, and decreased 0.4% to $112.9 million, for
the three months and nine months ended September 30, 1997, compared to $41.5
million and $113.3 million for the three months and nine months ended September
30, 1996, respectively. Increased sales of iron and putter clubheads for the
three months and nine months ended September 30, 1997, versus the comparable
prior year periods were partially offset and more than offset, respectively, by
decreased sales of metal wood clubheads.
Gross profit decreased 2.1% and 26.0% to $9.4 million and $21.4 million for the
three months and nine months ended September 30, 1997, from $9.6 million and
$28.9 million for the three months and nine months ended September 30, 1996,
respectively. Gross profit margins decreased to 21.3% and 18.9% for the three
months and nine months ended September 30, 1997, respectively, from 23.0% and
25.5% for the comparable prior year periods, due principally to product mix and
revenue flow which were higher in iron and putter clubheads than metal wood
clubheads.
Selling, general and administrative expense increased 82.4% and 21.1% to $3.1
million and $8.6 million for the three months and nine months ended September
30, 1997, respectively, from $1.7 million and $7.1 million for the comparable
prior year periods. The increase was mainly due to expenses associated with the
supplemental executive retirement plan, which became effective September 1,
1996, and increased payroll and related expenses for the three months and nine
months ended September 30, 1997, compared to the prior year periods.
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, 1997, were $864,000, 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 have 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 and cash equivalents position at September 30, 1997, was
$23.8 million compared to $14.1 million on December 31, 1996, an increase of
$9.7 million. Net cash provided by operating activities was $13.0 million for
the nine months ended September 30, 1997. The operating activities net cash was
primarily provided by net income of $7.8 million, a decrease in prepaid expenses
and other current assets of $3.0 million, depreciation and amortization of $2.1
million, an increase in accounts payable and accrued liabilities of $1.4
million, an increase in income taxes payable of $1.1 million, and an increase
in deferred compensation of $1.0 million, partially offset by an increase in
accounts receivable of $3.3 million. Net cash used in investing activities of
$3.7 million consisted mainly of an increase in other assets of $2.1 million and
$1.6 million of net capital expenditures for the nine months ended September 30,
1997. Net cash provided by financing activities of $0.4 million consisted of
proceeds from exercise of stock options, and non-employee director 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 such agencies regard as hazardous waste. The Company does not admit
to any wrongdoing, but has agreed to a settlement. The settlement does not have
a material adverse impact on the Company's financial condition or results of
operations.
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
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) 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
11
10.1 Lease, dated August 21, 1997, between Coastcast
Corporation, S.A. and Inmobilaria Y Fraccionadora
Lomas, S.A. de C.V. for real estate in Tijuana,
Baja California, Mexico
10.2 Lease, dated September 1, 1997, between the
Company and Watson Land Company for the
facilities in Rancho Dominguez, California
11.1 Statement re: computation of per share earnings
99 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
November 3, 1997 By /s/ Robert C. Bruning
- ----------------------- ------------------------------------------
Dated Robert C. Bruning
Chief Financial Officer (Duly Authorized and
Principal Financial Officer)
13