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, 1998
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 11, 1998 there were outstanding 7,989,404 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, 1998 (Unaudited) and
December 31, 1997 3
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, 1998 and 1997 4
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (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 12
2
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- --------------
A S S E T S
Current assets:
Cash and cash equivalents $ 26,272,000 $ 28,187,000
Trade accounts receivable, net of allowance for doubtful
accounts of $6 00,000 at September 30, 1998 and $500,000
at December 31, 1997, respectively 10,212,000 12,893,000
Inventories (Note 2) 14,012,000 21,208,000
Prepaid expenses and other current assets 5,967,000 2,930,000
Deferred income taxes 1,597,000 1,597,000
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Total current assets 58,060,000 66,815,000
Property, plant and equipment, net 24,577,000 19,079,000
Other assets 6,988,000 4,131,000
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$ 89,625,000 $ 90,025,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,567,000 $ 4,986,000
Accrued liabilities 4,286,000 5,034,000
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Total current liabilities 8,853,000 10,020,000
Deferred compensation 2,701,000 1,614,000
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Total liabilities 11,554,000 11,634,000
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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;
8,006,404 and 8,849,005 shares issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively 30,366,000 39,233,000
Retained earnings 47,705,000 39,158,000
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Total shareholders' equity 78,071,000 78,391,000
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$ 89,625,000 $ 90,025,000
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See accompanying notes to condensed consolidated financial statements.
3
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
Sales $31,627,000 $43,935,000
Cost of sales 28,480,000 34,566,000
----------- -----------
Gross profit 3,147,000 9,369,000
Selling, general and administrative expenses 2,373,000 3,125,000
----------- -----------
Income from operations 774,000 6,244,000
Other income, net 401,000 205,000
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Income before income taxes 1,175,000 6,449,000
Provision for income taxes 493,000 2,709,000
----------- -----------
Income from continuing operations 682,000 3,740,000
Loss from discontinued operations (net of income
Tax benefit of $113,000) (157,000) -
----------- -----------
Net income $ 525,000 $ 3,740,000
----------- -----------
----------- -----------
NET INCOME PER SHARE (Note 3)
Income from continuing operations per share - basic $ 0.08 $ 0.43
Discontinued operations per share - basic (0.02) -
----------- -----------
Net income per share - basic $0.06 $ 0.43
----------- -----------
Weighted average shares outstanding 8,657,080 8,794,334
----------- -----------
Income from continuing operations per share - diluted $0.08 $ 0.42
Discontinued operations per share - diluted (0.02) -
----------- -----------
Net income per share - diluted $ 0.06 $ 0.42
----------- -----------
----------- -----------
Weighted average shares outstanding - diluted 8,699,307 8,903,784
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See accompanying notes to condensed consolidated financial statements.
4
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1998 1997
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Sales $ 120,536,000 $ 112,874,000
Cost of sales 98,160,000 91,498,000
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Gross profit 22,376,000 21,376,000
Selling, general and administrative expenses 8,555,000 8,587,000
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Income from operations 13,821,000 12,789,000
Other income, net 1,185,000 580,000
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Income before income taxes 15,006,000 13,369,000
Provision for income taxes 6,302,000 5,615,000
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Income from continuing operations 8,704,000 7,754,000
Loss from discontinued operations (net of income
Tax benefit of $113,000) (157,000) -
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Net income $ 8,547,000 $ 7,754,000
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NET INCOME PER SHARE (Note 3)
Income from continuing operations per share - basic $ 0.99 $ 0.88
Discontinued operations per share - basic (0.02) -
------------- -------------
Net income per share - basic $ 0.97 $ 0.88
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Weighted average shares outstanding 8,855,644 8,790,987
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Income from continuing operations per share - diluted $ 0.96 $ 0.87
Discontinued operations per share - diluted (0.02) -
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Net income per share - diluted $ 0.94 $ 0.87
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Weighted average shares outstanding - diluted 9,109,636 8,912,481
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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,
-----------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,547,000 $ 7,754,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,392,000 2,117,000
Loss on disposal of machinery and equipment 785,000 156,000
Deferred compensation 1,087,000 954,000
Deferred income taxes 299,000 42,000
Non-employee director compensatory stock options 202,000 202,000
Changes in operating assets and liabilities:
Trade accounts receivable 2,681,000 (3,347,000)
Inventories 7,196,000 (53,000)
Prepaid expenses and other current assets (3,948,000) 2,954,000
Accounts payable and accrued liabilities (1,868,000) 2,428,000
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Net cash provided by operating activities 17,373,000 13,207,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (7,930,000) (1,627,000)
Proceeds from disposal of machinery and equipment 568,000 52,000
Other assets (2,857,000) (2,112,000)
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Net cash used in investing activities (10,219,000) (3,687,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of
options net of related tax benefit 3,190,000 206,000
Repurchase of common stock (12,259,000) -
------------- -------------
Net cash used in financing activities (9,069,000) 206,000
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,915,000) 9,726,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 28,187,000 14,060,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,272,000 $ 23,786,000
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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, 1998, the
related condensed consolidated statements of income for the three and nine
months and cash flows for the nine months ended September 30, 1998 and 1997
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, 1998 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,
1997 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, 1997. These condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto
contained in that annual report.
Certain reclassifications were made to 1997 balances to conform to the 1998
presentation.
The results of operations for the periods ended September 30, 1998 are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1998 1997
------------- -----------
Raw materials and supplies $ 5,972,000 $ 7,578,000
Tooling 421,000 540,000
Work-in-process 6,866,000 12,375,000
Finished goods 753,000 715,000
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$14,012,000 $21,208,000
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7
3. DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
esssentially completed by June 1994, except for the sale of the Wallingford,
Connecticut property. In connection with the offering for sale of this
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 has
conducted investigations to determine the source and extent of the
contamination. In addition, the Company determined that the certain of the
contaminates were present prior to its ownership and entered into a
remediation cost sharing agreement with the previous owner of the property.
In August 1998, the Company sold the Wallingford, Connecticut property which
stipulates that the Company and the previous owner bear the liability to
remediate the property. The Company incurred a loss on sale of the property.
The loss on sale of the property plus the Company's share of the estimated
remediation costs were not adequately covered by the original reserve. As a
result, the Company reported a $157,000 loss from discontinued operations,
net of income tax benefit, as shown on the condensed consolidated statements
of income.
4. EARNINGS PER SHARE
Basic net income per share is based on the weighted average number of shares
of common stock outstanding. Diluted net income per share is based on the
weighted average number of shares of common stock outstanding and dilutive
potential 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 decreased 28.0% to $31.6 million and increased 6.7% to $120.5 million
for the three months and nine months ended September 30, 1998, respectively,
from $43.9 million and $112.9 million for the three months and nine months
ended September 30, 1997, respectively. The decrease in sales in the quarter
was primarily due to a decrease in sales volume of titanium metalwood and
iron clubheads. The increase in sales for the nine months ended September
30, 1998 was mainly due to increased sales volume in steel and titanium iron
clubheads.
Gross profit decreased 67.0% to $3.1 million and increased 4.7% to $22.4
million for the three months and nine months ended September 30, 1998,
respectively, from $9.4 million and $21.4 million for the three months and
nine months ended September 30, 1997. Gross profit margins decreased to
10.0% and 18.6% for the three months and nine months ended September 30, 1998
respectively, from 21.3% and 18.9% for the comparable prior year periods, due
principally to a slow down in the sales of titanium clubheads coupled with
higher than expected costs during the start-up phase of three new innovative
product lines.
Selling, general and administrative expense decreased $.8 million, or 24.1%,
to $2.4 million for the three months ended September 30, 1998, from $3.1
million for the comparable prior year period. The decrease was due primarily
to a decrease in management compensation, partially offset by an increase in
legal expenses in connection with a proxy contest initiated by a shareholder
which was resolved in early November 1998.
DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
essentially completed by June 1994, except for the sale of the Wallingford,
Connecticut property. In connection with the offering for sale of this
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 has
conducted investigations to determine the source and extent of the
contamination. In addition, the Company determined that the certain of the
contaminates were present prior to its ownership and entered into a
remediation cost sharing agreement with the previous owner of the property.
In August 1998, the Company sold the Wallingford, Connecticut property which
stipulates that the Company and the previous owner bear the liability to
remediate the property. The Company incurred a loss on the sale of the
property. The loss on sale of the property plus the Company's share of the
estimated remediation costs were not adequately covered by the original
reserve. As a result, the Company reported a $157,000 loss from discontinued
operations, net of income tax benefit, as shown on the condensed consolidated
statements of income.
9
YEAR 2000 CONVERSION
The Company has identified and evaluated changes to its computer systems and
applications required to achieve a year 2000 date conversion with no
disruption to business operations. Maintenance or modification costs will be
expensed as incurred. The total cost of this effort is still being evaluated,
but is not expected to be material to the Company. The Company has
communicated with others with which it does significant business to determine
their year 2000 compliance readiness and the extent to which the Company is
vulnerable to any third party year 2000 issues. So far, these inquiries have
not revealed any circumstances that would cause a significant disruption to
business operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at September 30, 1998 was
$26.3 million compared to $28.2 million on December 31, 1997, an decrease of
$1.9 million. Net cash provided by operating activities was $17.4 million
for the nine months ended September 30, 1998. The net cash provided by
operating activities consisted of net income of $8.5 million, a decrease in
inventories of $7.2 million, a decrease in accounts receivables of $2.7
million, depreciation and amortization of $2.4 million, and an increase in
deferred compensation of $1.1 million, partially offset by an increase in
prepaid expenses and other current assets of $3.9 million and a decrease in
accounts payables and accrued liabilities of $1.9 million. Net cash used in
investing activities of $10.2 million consisted mainly of $7.9 million of net
capital expenditures and an increase in cash value of life insurance of $2.6
million for the nine months ended September 30, 1998. Net cash used by
financing activities of $9.1 million consisted mainly of the repurchase of
company common stock of $12.3 million offset by proceeds from exercise of
stock options of $3.2 million.
On October 25, 1995, the Board of Directors authorized the Company to
purchase up to one million shares of Coastcast common stock from time to time
in the open market or negotiated transactions. Under this authorization, the
Company purchased 122,400 shares at a cost of $1.4 million during the quarter
ended September 30, 1998. As of September 30, 1998, there were 474,000
shares remaining to be purchased under this authorization. In addition, in
August 1998, the Board of Directors authorized the repurchase of a block of
925,400 shares in a privately negotiated transaction at a cost of $10.9
million.
The Company has no long-term debt. The Company believes that its current
cash position, anticipated 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 5. Other Information
1. 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, 1997, 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
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.
2. On November 9, 1998, the Company and Jonathan Vannini announced as part
of an overall settlement between them that Mr. Vannini had withdrawn his
demand for a special meeting of shareholders of the Company and that the
litigation between them had been settled. Copies of the joint press release
of the Company and Mr. Vannini dated November 9, 1998 and the Agreement
dated November 6, 1998 between the Company and Mr. Vannini are included
as exhibits to this report, and such press release is incorporated herein
by this reference as though fully set forth herein.
11
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)
10.1 Agreement dated November 6, 1998 between the Company and
Jonathan Vannini
10.2 Agreement dated November 6, 1998 between the Company and
Richard W. Mora
11 Statement re: computation of per share earnings
27 Financial data schedule
99.1 Pages 11-13 of Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 (incorporated by reference to such
Form 10-K filed with the Commission)
99.2 Press release dated November 9, 1998
(b) Reports on Form 8-K:
None
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(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
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 11, 1998 By /s/ Robert C. Bruning
----------------- ----------------------
Dated Robert C. Bruning
Chief Financial Officer (Duly Authorized and
Principal Financial Officer)
13