10-Q

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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, 2001
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 (State or other jurisdiction of incorporation or organization)	95-3454926 (I.R.S. Employer 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 4, 2001 there were outstanding 7,676,042 shares of common stock, no par value.

COASTCAST CORPORATION
INDEX

			Page Number
PART I. FINANCIAL INFORMATION:
	Item 1. Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and December 31, 2000	3
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 (Unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 (Unaudited)	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		7
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		7
PART II. OTHER INFORMATION:
	Item 5. Other Information		8
	Item 6. Exhibits and Reports on Form 8-K		8

2

COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

			(Unaudited) March 31, 2001			December 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	9,899,000		$	52,168,000
	Accounts receivable, net of allowance for doubtful accounts of $200,000 at March 31, 2001 and December 31, 2000			10,604,000			7,298,000
	Inventories (Note 2)			11,330,000			9,538,000
	Prepaid expenses and other current assets			2,979,000			3,530,000
	Deferred income taxes			908,000			889,000
		Total current assets		35,720,000			73,423,000
Property, plant and equipment, net				23,527,000			23,434,000
Other assets				2,232,000			2,493,000
		Total assets	$	61,479,000		$	99,350,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	4,334,000		$	3,769,000
	Dividend payable			—			38,209,000
	Accrued liabilities			3,947,000			3,805,000
		Total current liabilities		8,281,000			45,783,000
Deferred compensation				903,000			828,000
		Total liabilities		9,184,000			46,611,000
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; 7,676,042 and 7,641,769 shares issued and outstanding as of March 31, 2001 and December 31, 2000, respectively			26,257,000			25,847,000
Retained earnings				26,064,000			26,892,000
Accumulated other comprehensive loss				(26,000	)		—
		Total shareholders' equity		52,295,000			52,739,000
		Total liabilities and shareholders' equity	$	61,479,000		$	99,350,000

See accompanying notes to condensed consolidated financial statements.

3

COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	For the Three Months Ended March 31,
	2001			2000
Sales	$	27,303,000		$	37,230,000
Cost of sales		26,776,000			30,749,000
Gross profit		527,000			6,481,000
Selling, general and administrative expenses		1,844,000			1,935,000
(Loss) income from operations		(1,317,000	)		4,546,000
Other income, net		185,000			529,000
(Loss) income before income taxes		(1,132,000	)		5,075,000
(Benefit) provision for income taxes		(475,000	)		2,123,000
Net (loss) income	$	(657,000	)	$	2,952,000
NET (LOSS) INCOME PER SHARE (Note 3)
Net (loss) income per share — basic	$	(0.09	)	$	0.38
Weighted average shares outstanding		7,673,996			7,701,571
Net (loss) income per share — diluted	$	(0.09	)	$	0.38
Weighted average shares outstanding — diluted		7,689,285			7,845,839

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,
				2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income				$	(657,000	)	$	2,952,000
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:
	Depreciation and amortization				1,142,000			1,082,000
	Goodwill amortization				231,000			7,000
	Loss on disposal of machinery and equipment				1,000			2,000
	Deferred compensation				75,000			72,000
	Deferred income taxes				(45,000	)		37,000
	Changes in operating assets and liabilities:
		Accounts receivable			(3,306,000	)		(6,335,000	)
		Inventories			(1,792,000	)		(4,801,000	)
		Prepaid expenses and other current assets			551,000			527,000
		Income taxes payable			—			1,451,000
		Accounts payable and accrued liabilities			707,000			1,379,000
			Net cash used in operating activities		(3,093,000	)		(3,627,000	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property, plant and equipment				(1,236,000	)		(1,041,000	)
	Proceeds from disposal of machinery and equipment				—			6,000
	Other assets				30,000			(121,000	)
			Net cash used in investing activities		(1,206,000	)		(1,156,000	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock upon exercise of options net of related tax benefit				410,000			—
	Dividend paid				(38,380,000	)		—
			Net cash used in financing activities		(37,970,000	)		—
NET (DECREASE) IN CASH AND CASH EQUIVALENTS					(42,269,000	)		(4,783,000	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					52,168,000			42,740,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	9,899,000		$	37,957,000

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, 2001, and the related condensed consolidated statements of operations and cash flows for the three months ended March 31, 2001 and 2000 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, 2001, 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, 2000 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, 2000. 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 2000 balances to conform to the 2001 presentation.

    The results of operations for the period ended March 31, 2001, are not necessarily indicative of the results for the full year.

2.  INVENTORIES

    Inventories consisted of the following:

	March 31, 2001		December 31, 2000
Raw materials and supplies	$	3,831,000	$	3,854,000
Tooling		384,000		268,000
Work-in-process		6,571,000		5,038,000
Finished goods		544,000		378,000
	$	11,330,000	$	9,538,000

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).

6

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Three months ended March 31, 2001 compared with three months ended March 31, 2000:

    Sales decreased $9.9 million, or 26.6%, to $27.3 million for the three months ended March 31, 2001 from $37.2 million for the three months ended March 31, 2000. The decrease was mostly due to an almost 50% drop in steel golf clubhead sales.

    Gross profit decreased $6.0 million, or 92.3%, to $.5 million for 2001 from $6.5 million for 2000. Gross profit margins decreased to 1.9% in 2001 from 17.4% in 2000. The decrease in gross profit margin was primarily due to the decrease in steel golf clubhead sales and the continuing high scrap rates in the titanium manufacturing operations.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's cash and cash equivalents position at March 31, 2001 was $9.9 million compared to $52.2 million on December 31, 2000, a decrease of $42.3 million. Net cash used by operating activities was $3.1 million for the three months ended March 31, 2001. Net cash used in operating activities was primarily due to a $5.1 million increase in receivables and inventories and the net loss of $.7 million partially offset by depreciation and amortization of $1.4 million, an increase in payables and accrued liabilities of $.7 million and a decrease in prepaid expenses and other current assets of $.6 million. Net cash used in investing activities of $1.2 million consisted mainly of net capital expenditures for the three months ended March 31, 2001. Net cash used in financing activities of $38.0 million consisted of cash dividends paid of $38.4 million offset by proceeds from stock option exercises net of related tax benefit of $.4 million.

    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, 2001. This line of credit, which expires on May 31, 2001, bears interest at the bank's prime rate or LIBOR plus 2%.

    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. For the three months ended March 31, 2001, no shares were repurchased under this authorization. As of March 31, 2001, there are 788,842 shares remaining to be purchased under the December 1999 authorization.

    The Company has no long term debt. The Company believes that its current cash position, the working capital generated by future operations 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.

7

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, 2000, 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 share values

Adverse effect of increased energy costs

Shareholders rights plan could discourage acquisition proposals.

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 11-13 of Registrant's annual report on Form 10-K for the year ended December 31, 2000 (incorporated by reference to such Form 10-K filed with the Commission)
(b)	Reports on Form 8-K:
	None

8

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
Dated May 4, 2001	By:	/s/ NORMAN FUJITAKI Norman Fujitaki Chief Financial Officer (Duly Authorized and Principal Financial Officer)

9

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FORM 10-Q
COASTCAST CORPORATION INDEX
CONSENSED CONSOLIDATED BALANCE SHEETS
CONSENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
COASTCAST CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
COASTCAST CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk

PART II. OTHER INFORMATION

Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EX-11

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EXHIBIT 11

COASTCAST CORPORATION
COMPUTATION OF PER SHARE EARNINGS

	Three Months Ended March 31,
	2001			2000
Common stock outstanding at beginning of period		7,641,769			7,701,571
Exercise of stock options		34,273			—
Common stock outstanding at end of period		7,676,042			7,701,571
Weighted average shares outstanding, for computation of basic EPS		7,673,996			7,701,571
Dilutive effect of stock options after application of treasury stock method		15,289			144,268
Total diluted weighted average shares outstanding, for computation of diluted earnings per share		7,689,285			7,845,839
Net (loss) income	$	(657,000	)	$	2,952,000
Net (loss) income per common share — basic	$	(0.09	)	$	0.38
Net (loss) income per common and common equivalent share — diluted	$	(0.09	)	$	0.38

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EXHIBIT 11