10-Q 1 a10-q.txt FORM 10-Q 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, 2000 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 July 28, 2000 there were outstanding 7,661,872 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, 2000 (Unaudited) and December 31, 1999 3 Condensed Consolidated Statements of Income (Unaudited) Three Months Ended June 30, 2000 and 1999 4 Six Months Ended June 30, 2000 and 1999 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 (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 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, 2000 1999 --------------------- --------------------- A S S E T S Current assets: Cash and cash equivalents $ 42,940,000 $ 42,740,000 Trade accounts receivable, net of allowance for doubtful accounts of $500,000 at June 30, 2000 and at December 31, 1999 17,858,000 9,179,000 Inventories (Note 2) 11,951,000 11,059,000 Prepaid expenses and other current assets 1,784,000 2,177,000 Deferred income taxes 1,462,000 1,485,000 --------------------- -------------------- Total current assets 75,995,000 66,640,000 Property, plant and equipment, net 23,901,000 24,170,000 Other assets 1,617,000 1,506,000 --------------------- -------------------- $ 101,513,000 $ 92,316,000 ===================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,181,000 $ 4,949,000 Accrued liabilities 4,719,000 3,536,000 --------------------- -------------------- Total current liabilities 9,900,000 8,485,000 Deferred compensation 684,000 541,000 --------------------- -------------------- Total liabilities 10,584,000 9,026,000 --------------------- -------------------- 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; 7,738,372 and 7,701,571 shares issued and outstanding as of June 30, 2000 and December 31, 1999, respectively 27,488,000 26,964,000 Retained earnings 63,436,000 56,352,000 Accumulated other comprehensive income 5,000 (26,000) --------------------- -------------------- Total shareholders' equity 90,929,000 83,290,000 --------------------- -------------------- $ 101,513,000 $ 92,316,000 ===================== ====================
See accompanying notes to condensed consolidated financial statements. 3 COASTCAST CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
----------------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, ----------------------------------------- 2000 1999 ------------------ ------------------ Sales $ 46,705,000 $ 33,582,000 Cost of sales 37,867,000 25,946,000 ------------------ ------------------ Gross profit 8,838,000 7,636,000 Selling, general and administrative expenses 2,324,000 2,169,000 ------------------ ------------------ Income from operations 6,514,000 5,467,000 Other income, net 538,000 329,000 ------------------ ------------------ Income before income taxes 7,052,000 5,796,000 Provision for income taxes 2,920,000 2,434,000 ------------------ ------------------ Net income $ 4,132,000 $ 3,362,000 ================== ================== NET INCOME PER SHARE (Note 3) Net income per share - basic $ 0.54 $ 0.43 ================== ================== Weighted average shares outstanding 7,707,245 7,893,338 ================== ================== Net income per share - diluted $ 0.52 $ 0.42 ================== ================== Weighted average shares outstanding - diluted 7,969,591 7,921,391 ================== ==================
See accompanying notes to condensed consolidated financial statements. 4 COASTCAST CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
----------------------------------------- FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------------- 2000 1999 ------------------ ------------------ Sales $ 83,935,000 $ 60,673,000 Cost of sales 68,616,000 47,188,000 ------------------ ------------------ Gross profit 15,319,000 13,485,000 Selling, general and administrative expenses 4,259,000 4,381,000 ------------------ ------------------ Income from operations 11,060,000 9,104,000 Other income, net 1,067,000 668,000 ------------------ ------------------ Income before income taxes 12,127,000 9,772,000 Provision for income taxes 5,043,000 4,104,000 ------------------ ------------------ Net income $ 7,084,000 $ 5,668,000 ================== ================== NET INCOME PER SHARE (Note 3) Net income per share - basic $ 0.92 $ 0.71 ================== ================== Weighted average shares outstanding 7,704,408 7,932,912 ================== ================== Net income per share - diluted $ 0.90 $ 0.71 ================== ================== Weighted average shares outstanding - diluted 7,907,715 7,949,499 ================== ==================
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, --------------------------------------- 2000 1999 ----------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,084,000 $ 5,668,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,184,000 2,006,000 Goodwill amortization 14,000 6,000 Loss on disposal of machinery and equipment 16,000 94,000 Deferred compensation 143,000 152,000 Deferred income taxes 54,000 - Changes in operating assets and liabilities: Trade accounts receivable (8,679,000) (7,129,000) Inventories (892,000) (729,000) Prepaid expenses and other current assets 241,000 4,783,000 Prepaid income taxes 152,000 533,000 Accounts payable and accrued liabilities 1,415,000 3,492,000 ----------------- ------------------ Net cash provided by operating activities 1,732,000 8,876,000 ----------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (1,943,000) (1,388,000) Proceeds from disposal of machinery and equipment 12,000 62,000 Net surrender of life insurance policies - 843,000 Purchase of investments (20,000) (1,028,000) Purchase of business - (233,000) Other assets (105,000) 46,000 ----------------- ------------------ Net cash used in investing activities (2,056,000) (1,698,000) ----------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of options net of related tax benefit 524,000 - Repurchase of common stock - (1,087,000) ----------------- ------------------ Net cash provided by (used in) financing activities 524,000 (1,087,000) ----------------- ------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 200,000 6,091,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,740,000 27,551,000 ----------------- ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,940,000 $ 33,642,000 ================= ==================
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, 2000, the related condensed consolidated statements of income for the three and six months and cash flows for the six months ended June 30, 2000 and 1999 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, 2000 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, 1999 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, 1999. 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, 2000 are not necessarily indicative of the results for the full year. 2. INVENTORIES Inventories consisted of the following:
June 30, December 31, 2000 1999 ----------- ------------ Raw materials and supplies $ 4,278,000 $ 4,771,000 Tooling 325,000 165,000 Work-in-process 6,871,000 5,698,000 Finished goods 477,000 425,000 ----------- ------------ $11,951,000 $ 11,059,000 =========== ============
7 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 COASTCAST CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales increased 39.0% and 38.2% to $46.7 million and $83.9 million for the three months and six months ended June 30, 2000, respectively, from $33.6 million and $60.7 million for the three months and six months ended June 30, 1999, respectively. The increase was primarily due to increased sales volume in steel iron and metal wood clubheads and titanium iron clubheads partially offset by a decrease in sales of titanium metal wood clubheads. Gross profit increased 15.8% and 13.3% to $8.8 million and $15.3 million for the three months and six months ended June 30, 2000, respectively, from $7.6 million and $13.5 million for the three months and six months ended June 30, 1999. Gross profit margins decreased to 18.9% and 18.3% for the three months and six months ended June 30, 2000 respectively, from 22.7% and 22.2% for the comparable prior year periods, due principally to product mix and revenue flow which were higher in iron clubheads than metal wood clubheads. OTHER In May 2000, the company announced that it engaged an investment banking firm to advise the board of directors on strategic alternatives in connection with unsolicited acquisition inquiries from unrelated third parties. Following discussions with several potential acquirors, the company did not receive any proposal for an acquisition of the company at a price which the board of directors considered to be attractive. The board will continue to consider and evaluate all strategic alternatives, as they arise, in an effort to enhance shareholder value. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Securities and Exchange Commission staff (the "Staff") issued Staff Accounting Bulletin Number 101 - Revenue Recognition in Financial Statements ("SAB 101") in December 1999. SAB 101, as amended, is effective during the fourth quarter of 2000. The Company has not yet completed its analysis of the effect of SAB 101 on its financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents position at June 30, 2000 was $42.9 million compared to $42.7 million on December 31, 1999, an increase of $.2 million. Net cash provided by operating activities was $1.7 million for the six months ended June 30, 2000. The net cash provided by operating activities consisted of net income of $7.1 million, depreciation and amortization of $2.2 million, and an increase in accounts payable and accrued liabilities of $1.4 million, partially offset by an increase in trade accounts receivable of $8.7 million. Net cash used in investing activities of $2.1 million consisted mainly of $1.9 9 million of net capital expenditures. Net cash provided by financing activities of $.5 million relates to proceeds from exercise of stock options including related tax benefits. The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5 million and which had no outstanding balance at June 30, 2000. This line of credit which expires on May 31, 2001, bears interest at the bank's prime rate or LIBOR plus 2%. 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, no purchases of shares were made during the six months ended June 30, 2000. As of June 30, 2000, there were 164,500 shares remaining to be purchased under this authorization. In addition, in December 1999, the Board of Directors authorized the repurchase of an additional one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. 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 4. Submission of Matter to a Vote of Securities Holders The Company held its annual meeting of shareholders on June 21, 2000. The following matters were voted on and approved by the shareholders. 1. Election of Directors to hold office until the 2000 Annual Meeting:
Votes For Votes Withheld --------- -------------- Hans H. Buehler 7,127,134 266,223 Robert L. Gates 7,080,597 312,760 Robert H. Goon 7,041,797 351,560 Edwin A. Levy 6,209,997 1,183,360 Lee E. Mikles 6,230,497 1,162,860 Paul A. Novelly 6,230,497 1,162,860 Jonathan P. Vannini 7,355,916 37,441
2. Ratification of Deloitte & Touche LLP as the Company's independent auditors: holders of 7,384,966 shares voted for such ratification, holders of 7,041 shares voted against such ratification and holders of 1,350 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, 1999, 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 share values. 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 Revolving Line of Credit Note, effective June 1, 2000, between the Company and Imperial Bank 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, 1999 (incorporated by reference to such Form 10-K filed with the Commission) ----------------------------------- (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 (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 July 28, 2000 By /s/ NORMAN FUJITAKI ------------------- -------------------------------------- Dated Norman Fujitaki Chief Financial Officer (Duly Authorized and Principal Financial Officer) 13