<PAGE>
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, 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 August 10, 1998 there were outstanding 9,054,204 shares of common stock, no
par value.
1
<PAGE>
COASTCAST CORPORATION
INDEX
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<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997 3
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, 1998 and 4
Six Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 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 4. Submission of Matter to a Vote of Securities Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
A S S E T S
Current assets:
Cash and cash equivalents $ 34,737,000 $ 28,187,000
Trade accounts receivable, net of allowance for doubtful
accounts of $600,000 at June 30, 1998 and $500,000
at December 31, 1997, respectively 14,937,000 12,893,000
Inventories (Note 2) 17,349,000 21,208,000
Prepaid expenses and other current assets 4,029,000 2,930,000
Deferred income taxes 1,597,000 1,597,000
-------------- --------------
Total current assets 72,649,000 66,815,000
Property, plant and equipment, net 24,001,000 19,079,000
Other assets 5,404,000 4,131,000
-------------- --------------
$ 102,054,000 $ 90,025,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,389,000 $ 4,986,000
Accrued liabilities 5,587,000 5,034,000
-------------- --------------
Total current liabilities 9,976,000 10,020,000
Deferred compensation 2,338,000 1,614,000
-------------- --------------
Total liabilities 12,314,000 11,634,000
-------------- --------------
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;
9,054,204 and 8,849,005 shares issued and outstanding as of
June 30, 1998 and December 31, 1997, respectively 42,560,000 39,233,000
Retained earnings 47,180,000 39,158,000
-------------- --------------
Total shareholders' equity 89,740,000 78,391,000
-------------- --------------
$ 102,054,000 $ 90,025,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------
FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------------
1998 1997
-------------- -----------
<S> <C> <C>
Sales $ 43,588,000 $ 39,938,000
Cost of sales 34,008,000 31,956,000
-------------- -----------
Gross profit 9,580,000 7,982,000
Selling, general and administrative expenses 3,105,000 3,278,000
-------------- -----------
Income from operations 6,475,000 4,704,000
Other income, net 428,000 203,000
-------------- -----------
Income before income taxes 6,903,000 4,907,000
Provision for income taxes 2,899,000 2,091,000
-------------- -----------
Net income $ 4,004,000 $ 2,816,000
-------------- -----------
-------------- -----------
NET INCOME PER SHARE (Note 3)
Net income per share - basic $ 0.44 $ 0.32
-------------- -----------
-------------- -----------
Weighted average shares outstanding 9,019,682 8,794,334
-------------- -----------
-------------- -----------
Net income per share - diluted $ 0.42 $ 0.32
-------------- -----------
-------------- -----------
Weighted average shares outstanding - diluted 9,437,014 8,882,380
-------------- -----------
-------------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Sales $ 88,909,000 $ 68,939,000
Cost of sales 69,680,000 56,932,000
--------------- -------------
Gross profit 19,229,000 12,007,000
Selling, general and administrative expenses 6,182,000 5,462,000
--------------- -------------
Income from operations 13,047,000 6,545,000
Other income, net 784,000 375,000
--------------- -------------
Income before income taxes 13,831,000 6,920,000
Provision for income taxes 5,809,000 2,906,000
--------------- -------------
Net income $ 8,022,000 $ 4,014,000
--------------- -------------
--------------- -------------
NET INCOME PER SHARE (Note 3)
Net income per share - basic $ 0.90 $ 0.46
--------------- -------------
--------------- -------------
Weighted average shares outstanding 8,956,572 8,789,286
--------------- -------------
--------------- -------------
Net income per share - diluted $ 0.86 $ 0.45
--------------- -------------
--------------- -------------
Weighted average shares outstanding - diluted 9,335,671 8,919,098
--------------- -------------
--------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,022,000 $ 4,014,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,541,000 1,411,000
Loss on disposal of machinery and equipment 1,000 45,000
Deferred compensation 724,000 629,000
Deferred income taxes 29,000 22,000
Non-employee director compensatory stock options 135,000 134,000
Changes in operating assets and liabilities:
Trade accounts receivable (2,044,000) (6,138,000)
Inventories 3,859,000 (5,043,000)
Prepaid expenses and other current assets (1,130,000) 3,428,000
Income taxes payable (552,000) 603,000
Accounts payable and accrued liabilities 509,000 1,720,000
------------ ------------
Net cash provided by operating activities 11,094,000 825,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,485,000) (1,124,000)
Proceeds from disposal of machinery and equipment 22,000 8,000
Other assets (1,273,000) (62,000)
------------ ------------
Net cash used in investing activities (7,736,000) (1,178,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise
of options net of related tax benefit 3,192,000 206,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,550,000 (147,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,187,000 14,060,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,737,000 $ 13,913,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
COASTCAST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1998, the related
condensed consolidated statements of income for the three and six months
and cash flows for the six months ended June 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 June 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 June 30, 1998 are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Raw materials and supplies $6,349,000 $7,578,000
Tooling 448,000 540,000
Work-in-process 8,374,000 12,375,000
Finished goods 2,178,000 715,000
------------ -----------
$17,349,000 $21,208,000
------------ -----------
------------ -----------
</TABLE>
7
<PAGE>
3. 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
<PAGE>
COASTCAST CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 9.3% and 29.0% to $43.6 million and $88.9 million for the
three months and six months ended June 30, 1998, respectively, from $39.9
million and $68.9 million for the three months and six months ended June
30, 1997, respectively. The increase was primarily due to increased sales
volume in steel and titanium iron clubheads.
Gross profit increased 20.0% and 60.0% to $9.6 million and $19.2 million
for the three months and six months ended June 30, 1998, respectively,
from $8.0 million and $12.0 million for the three months and six months
ended June 30, 1997. Gross profit margins increased to 22.0% and 21.6%
for the three months and six months ended June 30, 1998 respectively, from
20.0% and 17.4% for the comparable prior year periods, due principally to
increased production volume.
Selling, general and administrative expense decreased $0.2 million, or
6.1%, to $3.1 million for the three months ended June 30, 1998, from $3.3
million for the comparable prior year period. The decrease was due
primarily to decreased payroll and related expenses. Selling, general and
administrative expense increased $0.7 million, or 12.7%, to $6.2 million
for the six months ended June 30, 1998 from $5.5 million for the
comparable prior year period. The increase was due primarily to increased
payroll and related expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at June 30, 1998 was
$34.7 million compared to $28.2 million on December 31, 1997, an increase
of $6.5 million. Net cash provided by operating activities was $11.1
million for the six months ended June 30, 1998. The net cash provided by
operating activities consisted of net income of $8.0 million, a decrease
in inventories of $3.9 million, depreciation and amortization of $1.5
million, and an increase in deferred compensation of $0.7 million,
partially offset by an increase in trade accounts receivable of $2.0
million and an increase in prepaid expenses and other current assets of
$1.1 million. Net cash used in investing activities of $7.7 million
consisted mainly of $6.5 million of net capital expenditures and an
increase in cash value of life insurance of $1.0 million for the six
months ended June 30, 1998. Net cash provided by financing activities of
$3.2 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.
9
<PAGE>
COASTCAST CORPORATION
PART II. OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Securities Holders
The Company held its annual meeting of shareholders on June 22, 1998.
With respect to proposals to amend the Employee Stock Option Plan and the
Non-Employee Director Stock Option Plan, the meeting was adjourned until
July 8, 1998. The following matters were voted on and approved by the
shareholders.
1. Election of Directors to hold office until the 1999 Annual Meeting:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Hans H. Buehler 6,717,580 1,282,779
George L. Graziadio 6,712,608 1,287,751
Edwin A. Levy 6,715,720 1,284,639
Vernon R. Loucks, Jr. 7,714,120 286,239
Lee E. Mikles 6,842,620 1,157,739
Richard W. Mora 7,705,120 295,239
Paul A. Novelly 6,714,608 1,285,751
</TABLE>
2. Amendment of the Company's 1996 Amended and Restated Employee Stock
Option Plan: holders of 3,305,095 shares voted for such amendment, holders of
2,895,323 shares voted against such amendment, and holders of 52,602 shares
abstained from voting on such amendment. The Board of Directors of the
Company, after additional consideration including the large number of shares
that were voted against the proposal, has rescinded the amendment. No
options have been or will be granted under the rescinded amendment to the
plan. Any future amendment of the plan by the Board of Directors which would
authorize grants of additional options to officers and directors of the
Company will be subject to shareholder approval.
3. Amendment of the Company's 1995 Amended and Restated Non-Employee
Director Stock Option Plan: holders of 3,102,738 shares voted for such
amendment, holders of 3,095,818 shares voted against such amendment, and
holders of 54,464 shares abstained from voting on such amendment. The Board
of Directors of the Company, after additional consideration including the
large number of shares that were voted against the proposal, has rescinded
the amendment. No options have been or will be granted under the rescinded
amendment to the plan. Any future amendment of the plan by the Board of
Directors which would authorize grants of additional options to officers and
directors of the Company will be subject to shareholder approval.
4. Ratification of Deloitte & Touche llp as the Company's independent
auditors: holders of 7,945,448 shares voted for such ratification, holders
of 18,689 shares voted against such ratification and holders of 36,222 shares
abstained from voting on such ratification.
10
<PAGE>
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, 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.
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 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, 1997 (incorporated by
reference to such Form 10-K filed with the Commission)
(b) Reports on Form 8-K:
None
11
<PAGE>
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 10, 1998 By /s/ Robert C. Bruning
--------------- ---------------------------------------
Dated Robert C. Bruning
Chief Financial Officer (Duly Authorized and
Principal Financial Officer)
12
<PAGE>
COASTCAST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Common stock outstanding at beginning of period 8,959,050 8,794,334 8,849,005 8,777,890
Exercise of options 95,154 - 205,199 16,444
----------- ---------- ---------- -----------
Common stock outstanding at end of period 9,054,204 8,794,334 9,054,204 8,794,334
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Weighted average shares outstanding,
for computation of basic earnings per share 9,019,682 8,794,334 8,956,572 8,789,286
Dilutive effect of stock options after application of
treasury stock method 417,332 88,046 379,099 129,812
----------- ---------- ---------- -----------
Total diluted weighted average shares outstanding,
For computation of diluted earnings per share 9,437,014 8,882,380 9,335,671 8,919,098
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Net income 4,004,000 2,816,000 8,022,000 4,014,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Net income per common share - basic $ .44 $ .32 $ .90 $ .46
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Net income per share and common
equivalent per share - diluted $ .42 $ .32 $ .86 $ .45
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
Exhibit 11
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 34,737
<SECURITIES> 0
<RECEIVABLES> 15,537
<ALLOWANCES> 600
<INVENTORY> 17,349
<CURRENT-ASSETS> 72,649
<PP&E> 42,069
<DEPRECIATION> 18,068
<TOTAL-ASSETS> 102,054
<CURRENT-LIABILITIES> 9,976
<BONDS> 0
0
0
<COMMON> 42,560
<OTHER-SE> 47,180
<TOTAL-LIABILITY-AND-EQUITY> 102,054
<SALES> 88,909
<TOTAL-REVENUES> 88,909
<CGS> 69,680
<TOTAL-COSTS> 69,680
<OTHER-EXPENSES> 6,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,831
<INCOME-TAX> 5,809
<INCOME-CONTINUING> 8,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,022
<EPS-PRIMARY> .90
<EPS-DILUTED> .86
</TABLE>
