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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

For the Quarterly Period Ended March 31, 2003

 

 

 

 

OR

 

 

 

 

o      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
incorporation or organization)

 

(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  ý                   No  o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).       Yes  o  No  ý

 

At May 13, 2003 there were outstanding 7,635,042 shares of common stock, no par value.

 

 



 

COASTCAST CORPORATION

INDEX

 

PART I.

 FINANCIAL INFORMATION:

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 (Unaudited)

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (Unaudited)

 

 

 

 

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

 

 

 

Item 4.

Controls and Procedures

 

 

 

PART II.

 OTHER INFORMATION:

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Signatures

 

Certifications

 

 

Forward Looking Statements

 

This document includes certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances.  Actual results may differ materially from these expectations due to changes in political, economic, business, competitive, market and regulatory factors.

 

2



 

COASTCAST CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

(Unaudited)

 

 

 

 

 

March 31,
2003

 

December 31,
2002

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

12,410,000

 

$

15,727,000

 

Trade accounts receivable, net of allowance for doubtful Accounts of $125,000 at March 31, 2003 and at December 31, 2002

 

5,276,000

 

3,805,000

 

Inventories (Note 2)

 

5,742,000

 

5,193,000

 

Prepaid expenses and other current assets

 

4,065,000

 

4,144,000

 

Assets held for sale (Note 3)

 

5,093,000

 

5,178,000

 

Total current assets

 

32,586,000

 

34,047,000

 

Property, plant and equipment, net

 

8,600,000

 

9,216,000

 

Other assets

 

1,256,000

 

1,255,000

 

 

 

$

42,442,000

 

$

44,518,000

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,598,000

 

$

2,081,000

 

Accrued liabilities

 

3,399,000

 

3,311,000

 

Total current liabilities

 

5,997,000

 

5,392,000

 

Long term liabilities

 

1,831,000

 

1,817,000

 

Total liabilities

 

7,828,000

 

7,209,000

 

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;
7,635,042 shares issued and outstanding

 

26,068,000

 

26,068,000

 

Retained earnings

 

9,139,000

 

11,875,000

 

Accumulated other comprehensive loss

 

(593,000

)

(634,000

)

Total shareholders’ equity

 

34,614,000

 

37,309,000

 

 

 

$

42,442,000

 

$

44,518,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

COASTCAST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2003

 

2002

 

Sales

 

$

10,731,000

 

$

21,956,000

 

Cost of sales

 

12,049,000

 

19,064,000

 

Gross (loss) profit

 

(1,318,000

)

2,892,000

 

Selling, general and administrative expenses

 

1,250,000

 

1,603,000

 

Impairment of fixed assets

 

55,000

 

 

(Loss) income from operations

 

(2,623,000

)

1,289,000

 

Other income, net

 

17,000

 

34,000

 

(Loss) income before income taxes

 

(2,606,000

)

1,323,000

 

Provision for income taxes

 

130,000

 

600,000

 

Net (loss) income

 

$

(2,736,000

)

$

723,000

 

 

 

 

 

 

 

NET (LOSS) INCOME PER SHARE (Note 5)

 

 

 

 

 

Net (loss) income per share – basic

 

$

(0.36

)

$

0.09

 

Weighted average shares outstanding

 

7,635,042

 

7,635,042

 

 

 

 

 

 

 

Net (loss) income per share – diluted

 

$

(0.36

)

$

0.09

 

Weighted average shares outstanding – diluted

 

7,635,042

 

7,636,792

 

 

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,

 

 

 

2003

 

2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

 

$

(2,736,000

)

$

723,000

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

677,000

 

1,022,000

 

Loss on disposal of machinery and equipment

 

 

3,000

 

Loss on disposal of assets held for sale

 

55,000

 

 

Deferred compensation

 

14,000

 

75,000

 

Pension liability

 

 

(99,000

)

Deferred income taxes

 

 

23,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(1,471,000

)

(3,155,000

)

Inventories

 

(549,000

)

(655,000

)

Prepaid expenses and other current assets

 

79,000

 

738,000

 

Accounts payable and accrued liabilities

 

605,000

 

(596,000

)

Net cash used in operating activities

 

(3,326,000

)

(1,921,000

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property, plant and equipment

 

(63,000

)

(625,000

)

Proceeds from disposal of machinery and equipment

 

2,000

 

15,000

 

Proceeds from assets held for sale

 

30,000

 

 

Other assets

 

40,000

 

40,000

 

Net cash provided by (used in) investing activities

 

9,000

 

(570,000

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net cash used in financing activities

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(3,317,000

)

(2,491,000

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

15,727,000

 

13,248,000

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

12,410,000

 

$

10,757,000

 

 

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, 2003, the related condensed consolidated statements of operations and cash flow for the three months ended March 31, 2003 and 2002 have been prepared by Coastcast Corporation (the “Company”) without audit.  In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise noted) have been made which are necessary to present fairly the financial position, results of operations and cash flows of the Company at March 31, 2003 and for the 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 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, 2002 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, 2002.  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 March 31, 2003 are not necessarily indicative of the results for the full year.

 

Certain amounts in the prior year’s financial statements have been reclassified to conform to the March 31, 2003 presentation.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133.  FAS 149 is effective for contracts entered into or modified after June 30, 2003.  Management believes the adoption of FAS 149 will not have a significant affect on the Company’s results of operations or its financial condition.

 

SFAS No. 143, “Accounting for Asset Retirement Obligations,” which became effective for the Company on January 1, 2003, addresses the obligations and asset retirement costs associated with the retirement of tangible long-lived assets.  It requires that the fair value of the liability for an asset retirement obligation be recorded when incurred instead of over the life of the asset.  The asset retirement costs must be capitalized as part of the carrying value of the long-lived asset.  If the liability is settled for an amount other than the recorded balance, either a gain or loss will be recognized at settlement.

 

SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, requires companies to recognize

 

6



 

costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan.  The Company does not expect the adoption of this statement to have a material impact on the Company’s financial position or results of operations.

 

SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends SFAS No. 123, is effective for financial statements for fiscal years ending after December 15, 2002.  The Company has elected not to implement this voluntary change for the year ended December 31, 2002.  It is management’s assessment that this statement does not have any impact on the consolidated financial statements as the Company has adopted the “disclosure only” provisions of SFAS No. 123.

 

FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” clarifies the requirements of a guarantor in accounting for and disclosing certain guarantees issued and outstanding.  This interpretation is effective for years ending after December 15, 2002.  The Company does not expect the adoption of this interpretation to have a material impact on the Company’s financial position or results of operations.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”).  FIN 46 provides guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights.  Such entities are known as variable-interest entities.  The Company will apply the provisions of FIN 46 prospectively to any variable-interest entities created after January 31, 2003.  Since the Company has no current interests in variable-interest entities, the adoption of FIN 46 did not have a significant effect on the Company’s results of operations or its financial position.

 

2.  INVENTORIES

 

Inventories consisted of the following:

 

 

 

March 31,
2003

 

December 31,
2002

 

Raw materials and supplies

 

$

2,866,000

 

$

2,961,000

 

Tooling

 

52,000

 

73,000

 

Work-in-process

 

2,310,000

 

1,881,000

 

Finished goods

 

514,000

 

278,000

 

 

 

 

 

 

 

 

 

$

5,742,000

 

$

5,193,000

 

 

3.  ASSETS HELD FOR SALE AND OTHER RESTRUCTURING CHARGES

 

The Company experienced a significant diminishment of its golf clubhead sales and market share due principally to the increasing use by our customers of suppliers in China.  The products made in China are at prices lower than those the Company is able to offer.  As a result, during fiscal 2002, the Company implemented a plan which substantially reduced its workforce, closed certain facilities and significantly decreased the space used by its Tijuana operations.  Also, certain assets have been designated as “Held for Sale” or abandoned.  One of the closed facilities located in Gardena, California manufactured

 

7



 

titanium golf clubheads.  The Company still has the capability to produce titanium golf clubheads at its facility in Rancho Dominguez, California.

 

Assets Held for Sale – As of March 31, 2003, the Company classified $5,093,000 as assets held for sale from property, plant and equipment in accordance with SFAS No. 144.  These assets are mainly the land and buildings of the Gardena facility and other fixed assets, primarily machinery and equipment, not in use and available for immediate sale.  In August 2002, the Gardena facility was listed with a real estate agent.  In March 2003, the Company entered into an agreement to sell the Gardena property to a third party.  The closing of this transaction is contingent upon the satisfaction or waiver of certain contingencies by the buyer.  If these contingencies are satisfied or waived by the buyer, the closing date is expected to be in late June 2003 unless an extension is requested under the agreement.   Most of the other fixed assets were sold at an auction held on May 1, 2003.  Preliminary estimated proceeds from the auction, net of estimated expenses, and proceeds from the sale of the electrical substations for the two abandoned facilities in Mexicali, Mexico to our landlord, less the estimated cost to dispose of unsold fixed assets were approximately $136,000.  Assets held for sale are stated at the lower of their carrying amount or estimated fair value less the estimated cost to sell.

 

Other Restructuring Charges – As of March 31, 2003, the balance in the accrued restructuring reserve was $1,103,000 compared to $1,175,000 as of December 31, 2002.  The reduction in the accrued restructuring reserve was due to utilization during the quarter ended March 31, 2003.  The accrued restructuring reserve is comprised of two components:  (i) the estimated lease obligation, net of estimated sublease income, from the expected idling of approximately 65,000 square feet of the Tijuana, Mexico facility, and (ii) the landlord’s cancellation of a lease commitment on one facility in Mexicali, Mexico, in exchange for the Company’s agreement to extend the lease on two facilities, which was considered a lease incentive.  This lease incentive is offsetting future rent expense on the two facilities, on a straight-line basis over the life of the extended leases.

 

8



 

4.  STOCK OPTIONS

 

The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans.  Accordingly, no compensation expense has been recognized for options granted under its 1996 Employee Stock Option Plan or its 1995 and 2001 Director Stock Option Plan.  Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company’s net (loss) income and (loss) earnings per share would have been changed to the pro forma amounts indicated below:

 

 

 

 

 

Quarter ended March 31,

 

 

 

 

 

2003

 

2002

 

Net (loss) income:

 

As reported

 

$

(2,736,000

)

$

723,000

 

 

 

 

 

 

 

 

 

Adjust for: Total stock-based compensation expense determined under the fair value method for all awards, net of tax

 

 

 

69,000

 

123,000

 

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

(2,805,000

)

$

600,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share -
basic

 

As reported

 

$

(0.36

)

$

0.09

 

 

 

Pro forma

 

$

(0.37

)

$

0.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share -
diluted

 

As reported

 

$

(0.36

)

$

0.09

 

 

 

Pro forma

 

$

(0.37

)

$

0.08

 

 

5.  NET (LOSS) INCOME PER SHARE

 

Basic net (loss) income per share is based on the weighted average number of shares of common stock outstanding.  Diluted net (loss) 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).

 

9



 

6.             COMPREHENSIVE (LOSS) INCOME

 

Comprehensive (loss) income consisted of the following:

 

 

 

Three Months
Ended March 31,

 

 

 

2003

 

2002

 

Net (loss) income

 

$

(2,736,000

)

$

723,000

 

Unrealized gain on investments

 

41,000

 

13,000

 

Comprehensive (loss) income

 

$

(2,695,000

)

$

736,000

 

 

7.     BUSINESS SEGMENTS

 

The Company’s management has organized its operations into 2 business segments:  Golf and Non-Golf.  The following tables set forth summarized financial information on the Company’s reportable segments:

 

 

 

Three Months
Ended March 31,

 

 

 

2003

 

2002

 

Net sales:

 

 

 

 

 

Golf

 

$

8,483,000

 

$

19,585,000

 

Non-golf

 

2,248,000

 

2,371,000

 

Total net sales

 

10,731,000

 

21,956,000

 

 

 

 

 

 

 

(Loss) income from operations:

 

 

 

 

 

Golf

 

(2,582,000

)

1,473,000

 

Non-golf

 

(41,000

)

(184,000

)

Total (loss) income from operations

 

$

(2,623,000

)

$

1,289,000

 

 

 

 

March 31,
2003

 

December 31,
2002

 

Identifiable assets:

 

 

 

 

 

Golf

 

$

16,636,000

 

$

15,596,000

 

Non-golf

 

4,584,000

 

4,314,000

 

Corporate

 

21,222,000

 

24,608,000

 

Total identifiable assets

 

$

42,442,000

 

$

44,518,000

 

 

Certain selling, general and administrative expenses were allocated based on a specific identification basis, with the remaining selling, general and administrative expenses allocated based on percent of sales.  Assets held for sale of $5,093,000 and $5,178,000, as of March 31, 2003 and December 31, 2002, respectively, are included in Corporate.

 

 8.  OTHER

 

On April 24, 2003, the Company announced that its board of directors voted (i) to establish a special committee of the board to consider whether it is in the Company’s best interest to remain an independent publicly traded company and (ii) to amend the Company’s Rights Agreement to permit Hans H. Buehler,

 

10



 

Chairman and CEO of the Company, to take certain preliminary actions in view of a potential acquisition of the Company.  Specifically, the amendment of the Company’s Rights Agreement allows Mr. Buehler to hold discussions, and take other actions for the purpose of formulating and submitting a bid with Paul A. Novelly (a member of the Company’s board of directors) and the Novelly Exempt Trust (a trust established by Mr. Novelly), without triggering the rights established in the Rights Agreement.

 

11



 

COASTCAST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

Sales decreased 51.1% to $10.7 million for the three months ended March 31, 2003 from $21.9 million for the three months ended March 31, 2002.  The decline in sales was mainly due to a 57% decrease in golf sales for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002.  Golf clubhead unit volume sales decreased 34% for the three months ended March 31, 2003 from the comparable periods in 2002.  Titanium golf clubhead sales decreased 76% for the three months ended March 31, 2003 from the comparable period in 2002.  The Company believes that this decrease in sales of golf clubheads resulted principally from the loss of market share to Chinese competitors.  Non-golf sales decreased 5% for the three months ended March 31, 2003 from the comparable periods in 2002 primarily due to a decrease in medical sales.

 

Gross loss of $1.3 million for the three months ended March 31, 2003 compares to a gross profit of $2.9 million for the three months ended March 31, 2002.  The gross (loss) profit margin was (12.3%) for the three months ended March 31, 2003 compared to 13.2% for the comparable period in 2002.  The decrease in margin was primarily due to the lower sales volume, product mix shifting to steel iron clubheads, which have lower margins and much lower average unit selling prices than titanium golf clubheads and steel metal woods, and high scrap rates.  The Company is in the process of ramping up production for increasing unit volumes for the second quarter of 2003 but the massive downsizing over the prior years is impacting our present quality and efficiencies.  The Company is working diligently to get these issues under control and reduce current losses.

 

The Company experienced a significant diminishment of its golf clubhead sales and market share due principally to the increasing use by our customers of suppliers in China.  The products made in China are at prices lower than those the Company is able to offer.  As a result, during fiscal 2002, the Company implemented a plan which substantially reduced its workforce, closed certain facilities and significantly decreased the space used by its Tijuana operations.  Also, certain assets have been designated as “Held for Sale” or abandoned.  One of the closed facilities, located in Gardena, California manufactured titanium golf clubheads.  The Company still has the capability to produce titanium golf clubheads at its facility in Rancho Dominguez, California.

 

Assets Held for Sale – As of March 31, 2003, the Company classified $5.1 million as assets held for sale from property, plant and equipment in accordance with SFAS No. 144.  These assets are mainly the land and buildings of the Gardena facility and other fixed assets, primarily machinery and equipment, not in use and available for immediate sale.  In August 2002, the Gardena facility was listed with a real estate agent.  In March 2003, the Company entered into an agreement to sell the Gardena property to a third party.  The closing of this transaction is contingent upon the satisfaction or waiver of certain contingencies by the buyer.  If these contingencies are satisfied or waived by the buyer, the closing date is expected to be in late June 2003 unless an extension is requested under the agreement.   Most of the other 7fixed assets were sold at an auction held on May 1, 2003.  Preliminary estimated proceeds from the auction, net of estimated expenses, and proceeds from the sale of the electrical substations for the two abandoned facilities in Mexicali, Mexico to our landlord, less the estimated cost to dispose of unsold fixed assets were approximately $0.1 million.  The assets held for sale are stated at the lower of their carrying amount or estimated fair value less the estimated cost to sell.

 

12



 

Other Restructuring Charges – As of March 31, 2003, the balance in the accrued restructuring reserve was $1.1 million compared to $1.2 million as of December 31, 2002.  The reduction in the accrued restructuring reserve was due to utilization during the quarter ended March 31, 2003.  The accrued restructuring reserve is comprised of two components:  (i) the estimated lease obligation, net of estimated sublease income, from the expected idling of approximately 65,000 square feet of the Tijuana, Mexico facility, and (ii) the landlord’s cancellation of a lease commitment on one facility in Mexicali, Mexico, in exchange for the Company’s agreement to extend the lease on two facilities, which was considered a lease incentive.  This lease incentive is offsetting future rent expense on the two facilities, on a straight-line basis over the life of the extended leases.

 

There is no deferred tax asset balance as of March 31, 2003 and December 31, 2002 since a full valuation allowance has been provided for against the deferred tax asset balance as of the balance sheet dates.

 

The effective tax rate for the three months ended March 31, 2003 was (5.0%) compared to 45.4% for the comparable prior year period.  The tax rate for the quarter ended March 31, 2003 is based on the estimated income tax payable in Mexico, and no tax benefits realized for the loss before income tax benefit for federal or state income taxes purposes in the United States.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s cash and cash equivalents position at March 31, 2003 was $12.4 million compared to $15.7 million on December 31, 2002, a decrease of $3.3 million.  Net cash used by operating activities was $3.3 million for the three months ended March 31, 2003.  The net cash used by operating activities included the net loss of $2.7 million, increases in receivables and inventories of $1.5 million and $0.5 million, respectively, offset by an increase in accounts payables and accrued liabilities of $0.6 million and depreciation and amortization of $0.7 million.

 

The Company has no long term debt.  In response to declining sales, the Company reduced its workforce and has taken other steps in an effort to maintain its current cash position and to improve the financial outlook based on lower sales.  The Company plans to use its current cash position and cash flow from operations to meet its current financing requirements.

 

OTHER

 

On April 24, 2003, the Company announced that its board of directors voted (i) to establish a special committee of the board to consider whether it is in the Company’s best interest to remain an independent publicly traded company and (ii) to amend the Company’s Rights Agreement to permit Hans H. Buehler, Chairman and CEO of the Company, to take certain preliminary actions in view of a potential acquisition of the Company.  Specifically, the amendment of the Company’s Rights Agreement allows Mr. Buehler to hold discussions, and take other actions for the purpose of formulating and submitting a bid with Paul A. Novelly (a member of the Company’s board of directors) and the Novelly Exempt Trust (a trust established by Mr. Novelly), without triggering the rights established in the Rights Agreement.

 

13



 

SUMMARY OF CRITICAL POLICIES AND ESTIMATES

 

See critical policies and estimates discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

The Company has investments and pension plan assets which are subject to market risk.

 

Item 4.  Controls and Procedures

 

The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of the Company’s published financial statements and other disclosures included in this report.  Within the 90-day period prior to the date of this report, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the Securities and Exchange Commission within the required time periods.

 

Since the date of the most recent evaluation of the Company’s internal controls by the Chief Executive Officer and Chief Financial Officer, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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COASTCAST CORPORATION

 

PART II.  OTHER INFORMATION

 

Item 5.  Other Information

 

The following business risks, as disclosed in Part I, Item 1 “Business” on Form 10-K for the fiscal year ended December 31, 2002, 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

Shareholder 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, as amended April 19, 2001 (2)

10.1

 

Guaranty, dated March 28, 2003 by the Company for the lease of the Mexicali, Mexico facilities known as Mercurio #30

10.2

 

Guaranty, dated March 28, 2003 by the Company for the lease of the Mexicali, Mexico facilities known as Avenue Galaxia #50

11

 

Statement re: computation of per share earnings

99.1

 

Pages 7-9 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (incorporated by reference to such Form 10-K filed with the Commission)

99.2

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 


 

(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

 

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(2)              Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended June 30, 2001

 

(b)  Reports on Form 8-K:

 

On April 24, 2003, the Company announced that its board of directors voted (i) to establish a special committee of the board to consider whether it is in the Company’s best interest to remain an independent publicly traded company and (ii) to amend the Company’s Rights Agreement to permit Hans H. Buehler, Chairman and CEO of the Company, to take certain preliminary actions in view of a potential acquisition of the Company.  Specifically, the amendment of the Company’s Rights Agreement allows Mr. Buehler to hold discussions, and take other actions for the purpose of formulating and submitting a bid with Paul A. Novelly (a member of the Company’s board of directors) and the Novelly Exempt Trust (a trust established by Mr. Novelly), without triggering the rights established in the Rights Agreement.

 

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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 13, 2003

 

By

/s/ Hans H. Buehler

 

Dated

 

Hans H. Buehler

 

Chief Executive Officer (Duly Authorized and Principal
Executive Officer)

 

 

May 13, 2003

 

By

/s/ Norman Fujitaki

 

Dated

 

Norman Fujitaki

 

Chief Financial Officer (Duly Authorized and Principal
Financial Officer)

 

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CERTIFICATION

 

I, Hans H. Buehler, Chief Executive Officer of Coastcast Corporation, certify that:

 

1.        I have reviewed this quarterly report on Form 10-Q of Coastcast Corporation;

 

2.        Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.        Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.        The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

 

b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date”); and

 

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

 

 

5.        The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or person performing the equivalent function):

 

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

 

6.        The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 

/s/ Hans H. Buehler

 

Hans H. Buehler

Chief Executive Officer

 

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CERTIFICATION

 

I, Norman Fujitaki, Chief Financial Officer of Coastcast Corporation, certify that:

 

1.         I have reviewed this quarterly report on Form 10-Q of Coastcast Corporation;

 

2.        Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.        Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.        The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)       designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)       evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date”); and

c)       presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.        The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or person performing the equivalent function):

 

a)       all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)       any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.        The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 13, 2003

 

/s/ Norman Fujitaki

 

Norman Fujitaki

Chief Financial Officer

 

19