<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 September 30, 1999
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 October 25, 1999 there were outstanding 7,875,171 shares of common stock, no
par value.
1
<PAGE>
COASTCAST CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and
December 31, 1998 3
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, 1999 and 1998 4
Nine Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (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
</TABLE>
2
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------------- ---------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,699,000 $ 27,551,000
Trade accounts receivable, net of allowance for doubtful
accounts of $600,000 at September 30, 1999 and at
December 31, 1998 10,065,000 7,556,000
Inventories (Note 2) 7,613,000 10,326,000
Prepaid expenses and other current assets 2,710,000 6,389,000
Deferred income taxes 1,131,000 1,131,000
--------------------- ---------------------
Total current assets 66,218,000 52,953,000
Property, plant and equipment, net 24,495,000 24,116,000
Other assets 1,568,000 6,604,000
--------------------- ---------------------
$ 92,281,000 $ 83,673,000
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,222,000 $ 2,804,000
Accrued liabilities 4,201,000 3,432,000
--------------------- ---------------------
Total current liabilities 8,423,000 6,236,000
Deferred compensation 517,000 295,000
--------------------- ---------------------
Total liabilities 8,940,000 6,531,000
--------------------- ---------------------
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;
7,875,171 and 7,989,404 shares issued and outstanding as of
September 30, 1999 and December 31, 1998, respectively 29,269,000 30,309,000
Retained earnings 54,072,000 46,833,000
--------------------- ---------------------
Total shareholders' equity 83,341,000 77,142,000
--------------------- ---------------------
$ 92,281,000 $ 83,673,000
===================== =====================
</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 SEPTEMBER 30,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Sales $ 31,957,000 $ 31,627,000
Cost of sales 28,181,000 28,480,000
------------------ ------------------
Gross profit 3,776,000 3,147,000
Selling, general and administrative expenses 1,544,000 2,373,000
------------------ ------------------
Income from operations 2,232,000 774,000
Other income, net 371,000 401,000
------------------ ------------------
Income before income taxes 2,603,000 1,175,000
Provision for income taxes 1,032,000 493,000
------------------ ------------------
Income from continuing operations 1,571,000 682,000
Loss from discontinued operations (net of income
tax benefit of $113,000) - (157,000)
------------------ ------------------
Net income $ 1,571,000 $ 525,000
================== ==================
NET INCOME PER SHARE (Note 3)
Income from continuing operations per share - basic $ 0.20 $ 0.08
Discontinued operations per share - basic - (0.02)
------------------ ------------------
Net income per share - basic $ 0.20 $ 0.06
================== ==================
Weighted average shares outstanding 7,872,939 8,657,080
================== ==================
Income from continuing operations per share - diluted $ 0.20 $ 0.08
Discontinued operations per share - diluted - (0.02)
------------------ ------------------
Net income per share - diluted $ 0.20 $ 0.06
================== ==================
Weighted average shares outstanding - diluted 7,910,221 8,699,307
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Sales $ 92,630,000 $ 120,536,000
Cost of sales 75,369,000 98,160,000
------------------ ------------------
Gross profit 17,261,000 22,376,000
Selling, general and administrative expenses 5,925,000 8,555,000
------------------ ------------------
Income from operations 11,336,000 13,821,000
Other income, net 1,039,000 1,185,000
------------------ ------------------
Income before income taxes 12,375,000 15,006,000
Provision for income taxes 5,136,000 6,302,000
------------------ ------------------
Income from continuing operations 7,239,000 8,704,000
Loss from discontinued operations (net of income
Tax benefit of $113,000) - (157,000)
------------------ ------------------
Net income $ 7,239,000 $ 8,547,000
================== ==================
NET INCOME PER SHARE (Note 3)
Income from continuing operations per share - basic $ 0.91 $ 0.99
Discontinued operations per share - basic - (0.02)
------------------ ------------------
Net income per share - basic $ 0.91 $ 0.97
================== ==================
Weighted average shares outstanding 7,912,701 8,855,644
================== ==================
Income from continuing operations per share - diluted $ 0.91 $ 0.96
Discontinued operations per share - diluted - (0.02)
------------------ ------------------
Net income per share - diluted $ 0.91 $ 0.94
================== ==================
Weighted average shares outstanding - diluted 7,936,186 9,109,636
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------------------------
1999 1998
------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,239,000 $ 8,547,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,020,000 2,392,000
Goodwill amortization 12,000 -
Loss on disposal of machinery and equipment 94,000 785,000
Deferred compensation 222,000 1,087,000
Deferred income taxes - 299,000
Non-employee director compensatory stock options - 202,000
Changes in operating assets and liabilities:
Trade accounts receivable (2,507,000) 2,681,000
Inventories 2,718,000 7,196,000
Prepaid expenses and other current assets 3,683,000 (3,948,000)
Accounts payable and accrued liabilities 2,065,000 (1,868,000)
------------------ ----------------------
Net cash provided by operating activities 16,546,000 17,373,000
------------------ ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,488,000) (7,930,000)
Proceeds from disposal of machinery and equipment 62,000 568,000
Surrender (purchase) of life insurance policies 6,215,000 (2,620,000)
Purchase of investments (965,000) -
Purchase of business (233,000) -
Other assets 51,000 (237,000)
------------------ ----------------------
Net cash provided by (used in) investing activities 1,642,000 (10,219,000)
------------------ ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of
options net of related tax benefit 47,000 3,190,000
Repurchase of common stock (1,087,000) (12,259,000)
------------------ ----------------------
Net cash used in financing activities (1,040,000) (9,069,000)
------------------ ----------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 17,148,000 (1,915,000)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 27,551,000 28,187,000
------------------ ----------------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 44,699,000 $ 26,272,000
================== ======================
</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 September 30, 1999, the
related condensed consolidated statements of income for the three and nine
months and cash flows for the nine months ended September 30, 1999 and 1998
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, 1999 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,
1998 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, 1998. 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 1998 balances to conform to the 1999
presentation.
The results of operations for the periods ended September 30, 1999 are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials and supplies $3,788,000 $5,137,000
Tooling 195,000 225,000
Work-in-process 2,939,000 4,019,000
Finished goods 691,000 945,000
---------- ------------
$7,613,000 $10,326,000
========== ============
</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 1.3% to $32.0 million and decreased 23.2% to $92.6 million
for the three months and nine months ended September 30, 1999, respectively,
from $31.6 million and $120.5 million for the three months and nine months
ended September 30, 1998, respectively. The slight increase in sales in the
quarter was primarily due to an increase in titanium golf clubhead and
medical and other specialty product sales offset by a decrease in steel iron
and putter sales. The decrease in sales for the nine months ended September
30, 1999 was mainly due to decreased sales of steel irons and putters and
titanium irons partially offset by an increase in steel metal wood sales.
Gross profit increased 22.6% to $3.8 million and decreased 22.8% to $17.3
million for the three months and nine months ended September 30, 1999,
respectively, from $3.1 million and $22.4 million for the three months and
nine months ended September 30, 1998. Gross profit margins increased to 11.8%
for the three months ended September 30, 1999 compared to 10.0% for the three
months September 30, 1998 and remained unchanged at 18.6% for the nine months
ended September 30, 1999 and 1998. The slight improvement in gross margin for
the quarter was because the third quarter of 1998 was negatively impacted by
a slow down in titanium clubhead sales and higher than expected costs during
the start-up of three new product lines. The third quarter of 1999 margin of
11.8% was lower than the nine month ended September 30, 1999 margin of 18.6%
primarily due to higher scrap mainly due to new programs and increasing
product transfers to our new Tijuana foundry which had higher than expected
rejects. The company is taking aggressive steps to deal with this problem and
is seeing improvement.
Selling, general and administrative expense decreased 33.3% to $1.6 million
and 30.6% to $5.9 million for the three months and nine months ended
September 30, 1999, respectively, from $2.4 million and $8.5 million for
three months and nine months ended September 30, 1998, respectively. The
decrease in expense for the quarter was due primarily to a decrease in
expenses associated with the supplemental executive retirement program and a
decrease in legal expenses. The decrease in expense for the nine months ended
September 30, 1999 was mainly due to a decrease in payroll and related fringe
benefits and the decrease in expenses associated with the supplemental
executive retirement program.
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 not 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. These inquiries have not revealed any circumstances that would cause
a significant disruption to business operations.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at September 30, 1999 was
$44.7 million compared to $27.6 million on December 31, 1998, an increase of
$17.1 million. Net cash provided by operating activities was $16.5 million
for the nine months ended September 30, 1999. The net cash provided by
operating activities consisted of net income of $7.2 million, a decrease in
prepaid expenses and other current assets of $3.7 million, depreciation and
amortization of $3.0 million, a decrease in inventories of $2.7 million, an
increase in accounts payables and accrued liabilities of $2.1 million,
partially offset by an increase in accounts receivables of $2.5 million. Net
cash provided by investing activities of $1.6 million consisted mainly of
$6.2 million from the surrender of the cash value of life insurance policies,
partially offset by net capital expenditures of $3.5 million and purchases of
long-term investments of $1.0 million for the nine months ended September 30,
1999. Net cash used by financing activities of $1.0 million consisted mainly
of the repurchase of company common stock of $1.1 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 118,900 shares at a cost of $1.1 million during the nine
months ended September 30, 1999. As of September 30, 1999, there were 338,100
shares remaining to be purchased under this authorization.
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.
FORWARD LOOKING INFORMATION
Except for the historical information, other statements in this report are
forward-looking statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially, including, but not limited to, industry
conditions, economic conditions, competitive factors and pricing pressures,
and shifts in market demand as well as other risks detailed in the Company's
Securities and Exchange Commission filings.
10
<PAGE>
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, 1998, 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)
10.1 Second Amendment to the Coastcast Corporation
Grantor Trust
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, 1998
(incorporated by reference to such Form 10-K
filed with the Commission)
(b) Reports on Form 8-K:
None
- --------------------------------
(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
<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
October 25, 1999 By /s/ Norman Fujitaki
- ----------------------- -----------------------------
Dated Norman Fujitaki
Chief Financial Officer (Duly Authorized
and Principal Financial Officer)
12
<PAGE>
SECOND AMENDMENT TO THE
COASTCAST CORPORATION
GRANTOR TRUST
The Coastcast Corporation Grantor Trust (the "Trust") is hereby
amended, pursuant to the right to amend reserved in Section 17(a) of the
Trust, as follows:
1. Effective September 9, 1999, Section 1(g) is amended in its
entirety to read as follows:
(g) DISTRIBUTION OF EXCESS TRUST FUND TO EMPLOYERS. In the
event that the Plan Administrator, prior to a Change in Control, or
the Independent Plan Administrator in its sole and absolute
discretion, after a Change in Control, determines that the assets of
the Trust Fund exceed 120 percent of the present value of current
accrued benefit obligations that are to be paid under the Plan, the
Trustee, at the direction of the Plan Administrator prior to a
Change in Control, or the Independent Plan Administrator in its sole
and absolute discretion after a Change in Control, shall distribute
to the Company and the Subsidiaries all or part of such excess
portion of the Trust Fund. The Trustee shall honor a direction that
specifies: the present value of current accrued benefit obligations
that are to be paid under the Plan (present value shall be
determined as of a valuation date within 180 days of the date of the
direction); the 120 percent value; and the amount to be distributed
to the Company and the Subsidiaries. Any such direction shall be
accompanied by the certification of an enrolled actuary that
specifies the present value of current accrued benefit obligations
under the Plan as of such valuation date.
2. Except as amended above, the Plan shall continue in full force
and effect, without any changes.
IN WITNESS WHEREOF, Company and Trustee have caused their duly
authorized officers to execute this Amendment on the date written below.
"Company" "Trustee"
Coastcast Corporation Union Bank of California, N.A.
By /s/ HANS BUEHLER By /s/ KARL D. LESSEY
------------------------------- ----------------------------------
Hans Buehler, President and CEO Name: Karl D. Lessey
Title: Vice President
Date: 9/9/99 Date: 9/15/99
---------------------------- --------------------------------
EXHIBIT 10.1
<PAGE>
COASTCAST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Common stock outstanding at beginning of period 7,870,504 8,959,050 7,989,404 8,849,005
Exercise of options 4,667 95,154 4,667 205,199
Repurchase of common stock - (1,047,800) (118,900) (1,047,800)
---------------- ----------------- -------------- ---------------
Common stock outstanding at end of period 7,875,171 8,006,404 7,875,171 8,006,404
================ ================= ============== ===============
Weighted average shares outstanding,
for computation of basic earnings per share 7,872,939 8,657,080 7,912,701 8,855,644
Dilutive effect of stock options after application of
treasury stock method 37,282 42,227 23,485 253,992
---------------- ----------------- -------------- ---------------
Total diluted weighted average shares outstanding,
for computation of diluted earnings per share 7,910,221 8,699,307 7,936,186 9,109,636
================ ================= ============== ===============
Income from continuing operations $1,571,000 $682,000 $7,239,000 $8,704,000
Loss from discontinued operations - (157,000) - (157,000)
---------------- ----------------- -------------- ---------------
Net income $1,571,000 $525,000 $7,239,000 $8,547,000
================ ================= ============== ===============
Net income per share data:
Income from continuing operations per share -
basic $0.20 $0.08 $0.91 $0.99
Discontinued operations per share - basic - (0.02) - (0.02)
---------------- ----------------- -------------- ---------------
Net income per share - basic $0.20 $0.06 $0.91 $0.97
================ ================= ============== ===============
Income from continuing operations per share -
diluted $0.20 $0.08 $0.91 $0.96
Discontinued operations per share - diluted - (0.02) - (0.02)
---------------- ----------------- -------------- ---------------
Net income per share - diluted $0.20 $0.06 $0.91 $0.94
================ ================= ============== ===============
</TABLE>
Exhibit 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 44,699
<SECURITIES> 0
<RECEIVABLES> 10,665
<ALLOWANCES> 600
<INVENTORY> 7,613
<CURRENT-ASSETS> 66,218
<PP&E> 47,202
<DEPRECIATION> 22,707
<TOTAL-ASSETS> 92,281
<CURRENT-LIABILITIES> 8,423
<BONDS> 0
0
0
<COMMON> 29,269
<OTHER-SE> 54,072
<TOTAL-LIABILITY-AND-EQUITY> 92,281
<SALES> 92,630
<TOTAL-REVENUES> 92,630
<CGS> 75,369
<TOTAL-COSTS> 75,369
<OTHER-EXPENSES> 5,925
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,375
<INCOME-TAX> 5,136
<INCOME-CONTINUING> 7,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,239
<EPS-BASIC> .91
<EPS-DILUTED> .91
</TABLE>
