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, 2002
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 9, 2002 there were outstanding 7,635,042 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, 2002 (Unaudited)
and December 31, 2001 3
Condensed Consolidated Statements of
Operations for the Three Months
Ended March 31, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 2002 and 2001 (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
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 9
PART II. OTHER INFORMATION:
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 10
2
COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2002 2001
Current assets:
Cash and cash equivalents $ 10,757,000 $ 13,248,000
Accounts receivable, net of allowance for doubtful
accounts of $200,000 at March 31, 2002 and
December 31, 2001 10,448,000 7,293,000
Inventories (Note 2) 9,974,000 9,319,000
Prepaid expenses and other current assets 1,638,000 2,376,000
Deferred income taxes 254,000 264,000
Total current assets 33,071,000 32,500,000
Property, plant and equipment, net 20,712,000 21,127,000
Deferred income taxes 2,346,000 2,346,000
Other assets 1,418,000 1,458,000
Total assets $ 57,547,000 $ 57,431,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,667,000 $ 3,196,000
Accrued liabilities 4,185,000 4,252,000
Total current liabilities 6,852,000 7,448,000
Long term liabilities 1,704,000 1,728,000
Total liabilities 8,556,000 9,176,000
Commitments and contingencies
Shareholders' equity:
Series A Preferred stock, no par value, 200,000 shares
authorized, none issued and outstanding - -
Preferred stock, no par value, 1,800,000 shares
authorized, none issued and outstanding - -
Common stock, no par value, 20,000,000 shares
authorized; 7,635,042 shares issued and
outstanding as of March 31, 2002 and
December 31, 2001 26,067,000 26,067,000
Retained earnings 23,158,000 22,435,000
Accumulated other comprehensive loss (234,000) (247,000)
Total shareholders' equity 48,991,000 48,255,000
Total liabilities and shareholders' equity $57,547,000 $57,431,000
See accompanying notes to condensed consolidated financial statements.
3
COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
---------------------------------------------
2002 2001
------------------- --------------------
Sales $ 21,956,000 $ 27,303,000
Cost of sales 19,064,000 26,776,000
------------------- --------------------
Gross profit 2,892,000 527,000
Selling, general and administrative expenses 1,603,000 1,844,000
------------------- --------------------
Income (loss) from operations 1,289,000 (1,317,000)
Other income, net 34,000 185,000
------------------- --------------------
Income (loss) before income taxes 1,323,000 (1,132,000)
Provision (benefit) for income taxes 600,000 (475,000)
------------------- --------------------
Net income (loss) $ 723,000 $ (657,000)
=================== ====================
NET INCOME (LOSS) PER SHARE (Note 3)
Net income (loss) per share - basic $ 0.09 $ (0.09)
=================== ====================
Weighted average shares outstanding 7,635,042 7,673,996
=================== ====================
Net income (loss) per share - diluted $ 0.09 $ (0.09)
=================== ====================
Weighted average shares outstanding - diluted 7,636,792 7,673,996
=================== ====================
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,
---------------------------------------
2002 2001
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 723,000 $ (657,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,022,000 1,142,000
Goodwill amortization and impairment - 231,000
Loss on disposal of machinery and equipment 3,000 1,000
Deferred compensation 75,000 75,000
Pension liability (99,000) -
Deferred income taxes 23,000 (45,000)
Changes in operating assets and liabilities:
Accounts receivable (3,155,000) (3,306,000)
Inventories (655,000) (1,792,000)
Prepaid expenses and other current assets 738,000 551,000
Accounts payable and accrued liabilities (596,000) 707,000
----------------- ------------------
Net cash used in operating activities (1,921,000) (3,093,000)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (625,000) (1,236,000)
Proceeds from disposal of machinery and equipment 15,000 -
Other assets 40,000 30,000
----------------- ------------------
Net cash used in investing activities (570,000) (1,206,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of options - 410,000
Dividend paid - (38,380,000)
----------------- ------------------
Net cash used in financing activities - (37,970,000)
----------------- ------------------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,491,000) (42,269,000)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 13,248,000 52,168,000
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 10,757,000 $ 9,899,000
================= ==================
See accompanying notes to condensed consolidated financial statements.
5
COASTCAST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated balance sheet as of March 31, 2002, and the
related condensed consolidated statements of operations and cash flows for the
three months ended March 31, 2002 and 2001 have been prepared by Coastcast
Corporation (the "Company") and are unaudited. 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, 2002, and for the period then ended.
Although the Company believes that the disclosure in the interim 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 accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The December
31, 2001 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,
2001. 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, 2002, are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
March 31, December 31,
2002 2001
------------------------ -----------------------
Raw materials and supplies $ 4,907,000 $ 5,009,000
Tooling 312,000 245,000
Work-in-process 4,086,000 3,658,000
Finished goods 669,000 407,000
------------------------ -----------------------
$ 9,974,000 $ 9,319,000
======================== =======================
3. EARNINGS PER SHARE
Basic net income (loss) per share is based on the weighted average number of
shares of common stock outstanding. Diluted net income (loss) 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).
6
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consisted of the following:
For the Three Months
Ended March 31,
--------------------------------------------------------
2002 2001
------------------------ -----------------------
Net income (loss) $ 723,000 $ (657,000)
Unrealized gain (loss) on investment, net of
income tax expense 13,000 (26,000)
------------------------ -----------------------
Comprehensive income (loss) $ 736,000 $ (683,000)
======================== =======================
5. SUBSEQUENT EVENT
The Company is experiencing a continuing diminishment of its golf clubhead
market share due to the increasing use by our customers of suppliers in China.
The products coming from China are at prices lower than those the Company is
able to offer. As a result, sales to our major customers are declining.
We have also learned that a major customer, Callaway Golf, is in the process of
acquiring certain assets of one of our former competitors for use in
manufacturing golf clubheads. If this acquisition is completed, it may result in
a further decline in business from Callaway.
The Company is taking aggressive steps to downsize its operations and reduce
costs in order to remain profitable on much lower revenues. This will result in
substantial consolidation charges which the Company expects to recognize over
the rest of 2002 and possibly into 2003.
In February 2002, the New York Stock Exchange (NYSE) notified the Company that
it had fallen below the NYSE's minimum equity and capitalization standards, and
requested that the Company provide a business plan demonstrating how it intends
to achieve and sustain compliance. According to the criteria, companies are
required to have a minimum shareholders' equity of $50 million and a minimum
market capitalization of $50 million over any consecutive 30-day trading period.
Companies below these levels must submit a business plan for the NYSE's
approval, demonstrating how the company anticipates meeting the standards within
an eighteen-month period.
On April 18, 2002, the Company announced that it had submitted a plan to the
NYSE setting forth the action that the Company intends to take to comply with
the eligibility standards. After reviewing the plan, the Committee will either
accept it (following which the Company will be subject to quarterly monitoring
for compliance with the plan), or not (in which event the Company will be
subject to NYSE trading suspension and delisting). The Company is evaluating its
alternatives should the Company's shares cease being traded on the NYSE.
7
COASTCAST CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three months ended March 31, 2002 compared with three months ended March 31,
2001:
Sales decreased $5.3 million, or 19.4%, to $22.0 million for the three months
ended March 31, 2002 from $27.3 million for the three months ended March 31,
2001. The decrease was mostly due to a decrease in titanium golf clubhead sales.
Gross profit increased $2.4 million, to $2.9 million for 2002 from $.5 million
for 2001. Gross profit margins increased to 13.2% in 2002 from 1.9% in 2001. The
increase in gross profit margin was primarily due to significantly lower scrap
rates in the titanium golf manufacturing operations in the first quarter of 2002
compared to the first quarter of 2001.
Selling, general and administrative expenses decreased $.2 million, or 11.1%, to
$1.6 million for 2002 from $1.8 million for 2001. The decrease was mainly due to
a decrease in payroll and related benefits.
SUBSEQUENT EVENT
The Company is experiencing a continuing diminishment of its golf clubhead
market share due to the increasing use by our customers of suppliers in China.
The products coming from China are at prices lower than those the Company is
able to offer. As a result, sales to our major customers are declining.
We have also learned that a major customer, Callaway Golf, is in the process of
acquiring certain assets of one of our former competitors for use in
manufacturing golf clubheads. If this acquisition is completed, it may result in
a further decline in business from Callaway.
The Company is taking aggressive steps to downsize its operations and reduce
costs in order to remain profitable on much lower revenues. This will result in
substantial consolidation charges which the Company expects to recognize over
the rest of 2002 and possibly into 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at March 31, 2002 was $10.7
million compared to $13.2 million on December 31, 2001, a decrease of $2.5
million. Net cash used by operating activities was $1.9 million for the three
months ended March 31, 2002. Net cash used in operating activities was primarily
due to a $3.2 million increase in receivables and a $.7 million increase in
inventories partially offset by depreciation and amortization of $1.0 million
and net income of $.7 million. Net cash used in investing activities of $.6
million consisted mainly of net capital expenditures for the three months ended
March 31, 2002.
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 March
31, 2002. This line of credit, which expires on May 31, 2002, bears interest at
the bank's prime rate or LIBOR plus 2%. The Company expects to renew this line
of credit in June 2002.
8
The Company has no long term debt. The Company believes that its current cash
position and the ability to borrow should be adequate to meet its financing
requirements for current operations and the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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, 2001, 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 manufacturing plants 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
Adverse effect of increased energy costs
Shareholders rights plan could discourage acquisition proposals.
In February 2002, the New York Stock Exchange (NYSE) notified the Company that
it had fallen below the NYSE's minimum equity and capitalization standards, and
requested that the Company provide a business plan demonstrating how it intends
to achieve and sustain compliance. According to the criteria, companies are
required to have a minimum shareholders' equity of $50 million and a minimum
market capitalization of $50 million over any consecutive 30-day trading period.
Companies below these levels must submit a business plan for the NYSE's
approval, demonstrating how the company anticipates meeting the standards within
an eighteen-month period.
On April 18, 2002, the Company announced that it had submitted a plan to the
NYSE setting forth the action that the Company intends to take to comply with
the eligibility standards. After reviewing the plan, the Committee will either
accept it (following which the Company will be subject to quarterly monitoring
for compliance with the plan), or not (in which event the Company will be
subject to NYSE trading suspension and delisting). The Company is evaluating its
alternatives should the Company's shares cease being traded on the NYSE.
9
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 Pages 10-12 of Registrant's annual report on Form 10-K for
the year ended December 31, 2001 (incorporated by reference
to such Form 10-K filed with the Commission)
(b) Reports on Form 8-K:
None
10
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 9, 2002 By /s/ Norman Fujitaki
___________ __________________________________
Dated Norman Fujitaki
Chief Financial Officer (Duly Authorized and Principal
Financial Officer)
11
EXHIBIT 11
COASTCAST CORPORATION
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(UNAUDITED)
Three Months Ended March 31,
------------------------------------------
2002 2001
------------------ ------------------
Common stock outstanding at beginning of period 7,635,042 7,641,769
Exercise of stock options - 34,273
------------------ ------------------
Common stock outstanding at end of period 7,635,042 7,676,042
================== ==================
Weighted average shares outstanding, for computation of basic EPS 7,635,042 7,673,996
Dilutive effect of stock options after application of treasury stock method 1,750 -
------------------ ------------------
Total diluted weighted average shares outstanding, for computation of
Diluted earnings per share 7,636,792 7,673,996
================== ==================
Net income (loss) $ 723,000 $ (657,000)
================== ==================
Net income (loss) per common share - basic $ 0.09 $ (0.09)
================== ==================
Net income (loss) per common and common equivalent share - diluted $ 0.09 $ (0.09)
================== ==================
12