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 March 31, 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 May 12, 1997 there were outstanding 8,794,334 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 March 31, 1997 (Unaudited) and December 31, 1996 3 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION: Item 5. Other Information 9 Item 6. Exhibits and Reports on Form 8-K 9 2 COASTCAST CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, December 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 7,895,000 $ 14,060,000 Trade accounts receivable, net of allowance for doubtful accounts of $400,000 at March 31, 1997 and December 31, 1996 12,770,000 11,783,000 Inventories (Note 2) 29,900,000 21,660,000 Prepaid expenses and other current assets 3,576,000 4,800,000 Deferred income taxes 864,000 864,000 Net current assets of discontinued operations (Note 3) 821,000 808,000 ------------ ------------ Total current assets 55,826,000 53,975,000 Property, plant and equipment, net 19,951,000 20,171,000 Other assets 1,989,000 1,954,000 ------------ ------------ $ 77,766,000 $ 76,100,000 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,004,000 $ 5,043,000 Accrued liabilities 3,063,000 4,132,000 ------------ ------------ Total current liabilities 9,067,000 9,175,000 Deferred compensation 741,000 438,000 ------------ ------------ Total liabilities 9,808,000 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 March 31, 1997 and December 31, 1996, respectively 38,478,000 38,205,000 Retained earnings 29,480,000 28,282,000 ------------ ------------ Total shareholders' equity 67,958,000 66,487,000 ------------ ------------ $ 77,766,000 $ 76,100,000 ------------ ------------ ------------ ------------ See accompanying notes to condensed consolidated financial statements. 3 COASTCAST CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1996 ------------ ------------ Sales $ 29,001,000 $ 29,344,000 Cost of sales 24,976,000 21,563,000 ------------ ------------ Gross profit 4,025,000 7,781,000 Selling, general and administrative expenses 2,184,000 2,186,000 ------------ ------------ Income from operations 1,841,000 5,595,000 Other income, net 172,000 368,000 ------------ ------------ Income before income taxes 2,013,000 5,963,000 Provision for income taxes 815,000 2,445,000 ------------ ------------ Net income $ 1,198,000 $ 3,518,000 ------------ ------------ ------------ ------------ NET INCOME PER SHARE Net income (Note 4) $ 0.13 $ 0.39 ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING 8,971,031 8,929,812 ------------ ------------ ------------ ------------ See accompanying notes to condensed consolidated financial statements. 4 COASTCAST CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,198,000 $ 3,518,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 703,000 527,000 Loss on disposal of machinery and equipment 49,000 35,000 Change in accrual for disposal of aerospace business (22,000) (46,000) Deferred compensation 303,000 -- Deferred income taxes 9,000 20,000 Changes in operating assets and liabilities: Trade accounts receivable (987,000) (6,254,000) Inventories (8,240,000) (5,301,000) Prepaid expenses and other current assets 1,224,000 1,677,000 Income taxes payable -- 989,000 Accounts payable and accrued liabilities (108,000) 392,000 ------------ ------------ Net cash used in operating activities (5,871,000) (4,443,000) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net sales of short-term investments -- 6,035,000 Purchase of property, plant and equipment (539,000) (2,119,000) Proceeds from disposal of machinery and equipment 7,000 -- Other assets (35,000) (32,000) ------------ ------------ Net cash (used in) provided by investing activities (567,000) 3,884,000 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Non-employee director compensatory stock options 67,000 -- Proceeds from issuance of common stock upon exercise of options, including related tax benefit 206,000 216,000 Repurchase of common stock -- (7,000) ------------ ------------ Net cash provided by financing activities 273,000 209,000 ------------ ------------ NET DECREASE IN CASH (6,165,000) (350,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,060,000 9,237,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,895,000 $ 8,887,000 ------------ ------------ ------------ ------------ See accompanying notes to condensed consolidated financial statements. 5 COASTCAST CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The condensed consolidated balance sheet as of March 31, 1997, and the related condensed consolidated statements of income and of cash flows for the three months ended March 31, 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 March 31, 1997 and for the three month period 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 period ended March 31, 1997 are not necessarily indicative of the results for the full year. 2. INVENTORIES Inventories consisted of the following: March 31, December 31, 1997 1996 ------------ ------------ Raw materials and supplies $ 16,373,000 $10,448,000 Tooling 293,000 294,000 Work-in-process 12,111,000 9,792,000 Finished goods 1,123,000 1,126,000 ------------ ------------ $29,900,000 $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 March 31, 1997 were $821,000, 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 6 groundwater beneath a portion of the property. The Company is continuing to conduct further investigations 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 has 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. 7 COASTCAST CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three months ended March 31, 1997 compared with three months ended March 31, 1996: For the first quarter of 1997 as compared to the same period in 1996, sales were $29.0 million vs. $29.3 million, net income was $1.2 million vs. $3.5 million, and earnings per share were $0.13 vs. $0.39. Compared to the first quarter of last year, sales did not change, but the product mix was different. Titanium woods revenue declined by about one-third, and steel woods revenue declined by about one-half. In addition, the Company was in the start-up phase of two major programs--the titanium irons for Callaway and the newest titanium metal woods for Taylor Made. The combination of these factors caused earnings to be depressed. 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 March 31, 1997 were $821,000, 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 has 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. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments position at March 31, 1997 was $7.9 million compared to $14.0 million on December 31, 1996, a decrease of $6.1 million. Net cash used in operating activities was $5.9 million for the three months ended March 31, 1997. The net cash used in operating activities consisted primarly of an increase in inventories of $8.2 million and an increase in accounts receivable of $1.0 million, partially offset by net income of $1.2 million, depreciation and amortization of $0.7 million, and a decrease in prepaid expenses and other current assets of $1.2 million. Cash used in investing activities consisted mainly of $0.5 million of net capital expenditures for the three months ended March 31, 1997. Net cash provided by financing activities of $0.3 million consisted primarily 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 from financial institutions should be adequate to meet its financing requirements for the foreseeable future. 8 COASTCAST CORPORATION PART II. OTHER INFORMATION 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 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 4, 1993, as amended by Amendment No. 1 filed on November 17, 1993, Amendment No. 2 filed on December 1, 1993, and Amendment No. 3 filed on December 9, 1993 11.1 Statement re: computation of per share earnings (b) Reports on Form 8-K: None 9 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 May 12, 1997 By /s/ Robert C. Bruning - ------------ --------------------- Dated Robert C. Bruning Chief Financial Officer and Secretary (Duly Authorized and Principal Financial Officer) 10