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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------------- EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-12676
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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, CALIFORNIA 90221
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 638-0595
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
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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
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing price of said stock on the New York Stock
Exchange on March 1, 2000 ($14.0625 per share): $82,253,000.
As of March 1, 2000, 7,701,571 shares of the Common Stock, no par value, of
the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held June 21, 2000, are incorporated by reference into Part
III of this Report.
1
COASTCAST CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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PART I PAGE
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Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 11
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
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PART III
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Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19
Item 13. Certain Relationships and Related Transactions 19
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
2
PART I
ITEM 1. BUSINESS.
GENERAL
Coastcast Corporation is one of the largest manufacturers in the world of
investment-cast titanium and stainless steel golf clubheads for high-quality,
premium-priced metal woods, irons and putters. The Company believes it has
manufactured more metal wood clubheads for high-quality, premium-priced golf
clubs than any other manufacturer. Over the past two decades, golf clubs with
perimeter-weighted heads have become much more popular among golfers because
such clubs are more forgiving to off-center hits than other types of clubs. The
investment-casting process has become the principal method for manufacturing
clubheads because it facilitates the use of perimeter weighting designs and
modern alloys and enhances manufacturing precision and uniformity. Manufacturing
precision is particularly important in the manufacture of an oversized,
thin-walled metal wood which can involve a significant number of separate
manufacturing steps to produce a clubhead that meets strict standards for size,
weight, strength and finish.
The Company also manufactures a variety of investment-cast orthopedic
implants and surgical tools (used principally in replacement of hip and knee
joints in humans and small animals) and other specialty products, which products
accounted for approximately 9% of the Company's total sales for the year ended
December 31, 1999.
In addition, in April 1999, the Company acquired a small company that casts
aluminum compressor wheels using the reusable investment pattern process. The
Company has converted a portion of the plant in Rancho Dominguez to support this
new business. The business will start generating revenue in the first quarter of
2000.
In the past several years, golf clubs with titanium alloy heads have become
popular. The Company developed the capability of manufacturing titanium
clubheads and began shipping titanium clubheads at the end of 1995. Titanium
clubheads accounted for approximately 41% and 42% of the Company's total sales
in 1998 and 1999, respectively.
The Company was incorporated as a California corporation in 1980.
BUSINESS STRATEGY - GOLF
The Company recognizes that golf club companies are critical to its success
and, accordingly, has designed its business strategy to engender customer
satisfaction in order to maintain its industry leadership position. The
Company's strategy consists of the following principal elements:
- MAINTAIN RELIABLE, HIGH-QUALITY MANUFACTURING. The Company believes
its manufacturing expertise, quality control, scheduling flexibility,
substantial production capacity and its ability to manufacture golf
clubheads using stainless steel or titanium alloys differentiate it
from others in the industry. The Company endeavors to respond quickly
to customers' orders and deliver high-quality clubheads on a timely
basis. This capability is particularly important to golf club
companies which can experience rapid growth from the increasing
popularity of a particular club or set of clubs.
- INTEGRATE OPERATIONS. The Company's operations are integrated, from
the computer-aided manufacture of some of the tooling used to produce
clubheads through foundry operations and finishing processes,
including painting.
3
- FOSTER CLOSE CUSTOMER RELATIONSHIPS. The Company believes that its
responsive service has been a significant element of its success. The
Company endeavors to be a value-added supplier by offering
consistently high levels of customer service and support.
The Company has a staff of 13 employees dedicated to sales and customer
service. The Company maintains its own internal laboratory for testing of
customers' products during the production process. The Company typically
delivers finished products to its customers within 10 weeks from receipt of the
customer's order during peak production periods, within 6 to 8 weeks during
other periods and within several weeks or even several days if necessary to
accommodate a customer's need for more rapid delivery. With new products,
depending on their complexity, a longer turnaround period may be expected.
GOLF PRODUCTS
The Company's golf products are generally used in golf clubs targeted at
the high end of the market. These clubs must satisfy the requirements of
highly-skilled amateur and professional golfers, including touring
professionals. As such, golf clubs which incorporate clubheads manufactured by
the Company are sometimes referred to in the industry as "tour-driven" golf
clubs.
The Company's clubheads are included in a variety of leading metal woods,
irons and putters, some of which are listed below:
CALLAWAY TAYLOR MADE
-------- -----------
GREAT BIG BERTHA HAWKEYE TITANIUM METAL WOODS FIRESOLE TITANIUM METAL WOODS
BIG BERTHA STEELHEAD PLUS METAL WOODS FIRESOLE OFFSET TITANIUM METAL WOODS
GREAT BIG BERTHA HAWKEYE TITANIUM IRONS BURNER BUBBLE 2 METAL WOODS
X14 STEELHEAD IRONS SUPER STEEL METAL WOODS
ODYSSEY DUAL FORCE BLADE PUTTERS SUPER STEEL OFFSET METAL WOODS
ODYSSEY DF ROSSIE MALLET PUTTERS
ODYSSEY DUAL FORCE WEDGES
ODYSSEY VARIABLE DUROMETER PUTTERS TITLEIST
--------
975D/976R TITANIUM METAL WOODS
975F TITANIUM METAL WOODS
CLEVELAND DCI 981 & 981 SL IRONS
--------- DCI 962 IRONS
RTG WEDGES BOB VOKEY WEDGES
588 WEDGES DCI 990 IRONS
691 WEDGES
485 WEDGES
PING
----
COBRA ISI TITANIUM METAL WOODS
----- ISI STEEL FAIRWAY METAL WOODS
TRUSTY RUSTY PWR WEDGES
GOLF PRODUCT CUSTOMERS
For almost twenty years, the Company has supplied investment-cast clubheads
for metal woods, irons and putters to many of the top golf companies which
produce high-quality, premium-priced golf clubs. Most golf club companies source
the three principal components of a golf club--the clubhead, shaft, and
grip--from independent suppliers which manufacture these components based on the
golf club companies' designs and specifications. The Company currently is a
major supplier of stainless steel and titanium clubheads to Callaway Golf
Company, which is the
4
producer of the Big Bertha line of steel metal woods and irons and the Great
Big Bertha titanium metal woods and irons, and Odyssey putters and wedges,
since its acquisition by Callaway in August 1997. In addition, the Company is
a supplier of investment-cast steel and titanium clubheads for companies
which market the Titleist, Taylor Made, Cleveland, Cobra, and Wilson brands
of golf clubs.
Substantially all of the clubheads manufactured by the Company are used in
high-quality, premium-priced golf clubs. The Company believes that a substantial
portion of the clubheads manufactured by it are incorporated in clubs sold in
North America, although many of the Company's clubheads are incorporated in
clubs sold in parts of Asia, Europe and other parts of the world. Historically,
a limited number of golf club companies have held a very substantial portion of
the total market share for high-quality, premium-priced golf clubs in North
America. Currently, some of the more popular high-quality, premium-priced clubs
are Callaway metal woods and irons; Taylor Made metal woods and irons; Titleist
metal woods, irons and putters; Odyssey putters; Wilson metal woods, irons and
putters; and Cobra metal woods. Several of these golf clubheads are marketed by
customers of the Company. Callaway (including Odyssey after its acquisition by
Callaway in August 1997) accounted for 47%, 49% and 34% of the Company's total
sales in 1999, 1998 and 1997, respectively. Fortune Brands (formerly American
Brands, owner of Titleist and Cobra) accounted for 25%, 22% and 12% of the
Company's total sales in 1999, 1998 and 1997, respectively. Taylor Made
accounted for 12%, 14% and 23% of the Company's total sales in 1999, 1998 and
1997, respectively.
A close working relationship typically exists between the Company and its
principal golf club customers, and sales and marketing activities are conducted
by a limited number of direct sales employees and senior executives of the
Company.
MANUFACTURING - GOLF
INVESTMENT-CASTING PROCESS. Investment-casting is a highly specialized
method of making metal products. It has become the principal method for the
manufacture of golf clubheads. Previously, woods were made of wood and irons
were produced by forging and machining. Greater flexibility in the shape and
weight distribution of clubheads is possible with the investment-casting
process. Investment-casting facilitates perimeter weighting and the use of
modern alloys. It also enhances manufacturing precision and uniformity. The
enhanced precision inherent in investment-casting is particularly important in
the manufacture of metal woods which can involve a significant number of
separate manufacturing steps.
The basic steps of investment-casting, in its simplest form, are as
follows:
- - Produce a metal die (sometimes called a wax mold) based on specifications
provided by the customer.
- - Inject wax into the die, producing a pattern the exact shape of the final
casting.
- - Surround (or "invest") the pattern with a ceramic material which is allowed
to dry to form a ceramic shell.
- - Remove the wax by heat, leaving a cavity in the ceramic shell in the shape
of the desired casting.
- - Pour molten metal into the cavity in the ceramic shell and allow it to
solidify.
- - Remove the ceramic material by mechanical and chemical action after the
metal solidifies and clean the casting.
- - Finish and inspect the casting.
5
METAL ALLOYS. Most clubheads manufactured by the Company are made of
titanium or stainless steel alloys. Titanium clubheads have similar tensile
strength as stainless steel with approximately one-half the weight of steel.
Therefore, a larger oversized clubhead can be manufactured using titanium
without increasing clubhead weight. The Company's Gardena facility is devoted to
titanium operations.
POLISHING AND FINISHING. The Company conducts golf clubhead polishing and
finishing operations in its facilities in Mexicali, Mexico. Finishing of the
head for an iron or putter can require numerous separate steps and finishing of
a head for a metal wood can involve many more separate steps. Most of the
clubheads and substantially all of the metal woods manufactured by the Company
are finished by it to customer specifications, although some of such
clubheads--principally irons--are delivered to customers in an unfinished state.
The Company, to assist its customers, at times also polishes and finishes
limited quantities of investment-cast clubheads manufactured by other companies.
QUALITY CONTROL. The Company believes that its success as a leading
supplier of golf clubheads is largely attributable to its quality control
measures. The Company attempts to monitor every aspect of the engineering and
manufacturing process to assure the quality of the clubheads manufactured by the
Company. Particular attention is paid to the quality of raw materials
(principally wax, ceramic and metal alloys), gating techniques employed in
channeling the flow of molten metal in the ceramic shell in the casting process,
and rigorous inspection standards to assure compliance with the customers'
product specifications throughout the manufacturing process.
REGULATIONS. The Company uses hazardous substances and generates hazardous
waste in the ordinary course of its business. The Company is subject to various
federal, state, local and foreign environmental laws and regulations, including
those governing the use, discharge and disposal of hazardous materials. Although
the Company has not to date incurred any material liabilities under
environmental laws and regulations and believes that its operations are in
substantial compliance with applicable laws and regulations, environmental
liabilities could arise in the future that may adversely affect the Company's
business. See "Discontinued Operations" below.
COMPETITION - GOLF
The Company operates in a highly competitive environment. The Company
competes against a number of manufacturers of investment-cast titanium clubheads
for high-quality, premium-priced golf clubs, including but not limited to: Sturm
Ruger, Inc., and Cast Alloys, Inc. The Company competes principally against two
significant U.S.-based manufacturers (Hitchner Manufacturing Co., Inc. and Cast
Alloys, Inc.) of investment-cast steel clubheads. The Company also competes with
several foreign manufacturers of investment-cast steel clubheads, including
Worldmark Services Ltd. (formerly Fu-Sheng Industrial Co. Ltd.), O-ta Precision
Casting Co. Ltd., Dynamic Precision Casting MFG. Co. Ltd. and Advanced Group
International Co. Ltd.
The Company believes that its position as a leading manufacturer of
titanium and steel clubheads for high-quality, premium-priced golf clubs is due
to its ability to produce quality clubheads in quantities sufficient to meet
rapidly growing demand for popular golf clubs, its experience and expertise in
manufacturing investment-cast golf clubheads, and its integrated manufacturing
operations.
Although price is a factor, the Company does not compete solely on price.
Quality and service are key success factors in the premium-price golf clubhead
market. The Company seeks to provide better products and service to its
customers than its competitors in order to increase or retain market share.
Although the Company's foreign competitors (the principal ones of which are
located in Asia) are typically able to offer prices below the Company's prices,
the Company believes that it has some competitive advantages over foreign
manufacturers, including its ability to deliver clubheads more quickly to its
customers due to shorter shipping and lead
6
times. Shipment of clubheads to the United States from Asia usually requires at
least two weeks by ocean freight. Further, the Company believes that certain of
its customers prefer products made in the United States.
The Company also competes against golf club companies that internally
produce clubheads for their clubs. The Company believes that one of the larger
golf club companies, Karsten Manufacturing Co., which produces the Ping brand of
clubs, manufactures substantially all of the investment-cast steel clubheads for
use in its own clubs. The Company believes that this golf club company produces
clubheads for its own use only and does not currently compete with the Company
for the business of other golf club companies. However, Karsten Manufacturing
Co. has purchased some golf clubheads for its Ping brand from the Company.
The Company also faces potential competition from those golf club companies
that currently purchase golf clubheads from outside suppliers but may, in the
future, manufacture clubheads internally. If the Company's current customers
begin manufacturing clubheads internally, the Company's sales would be adversely
affected. The Company believes that as long as component suppliers, such as the
Company, provide high-quality component golf club parts at competitive prices
and reliably, it is unlikely that many golf club companies will commence their
own manufacturing.
The Company experiences indirect competition from golf club companies that
produce golf clubs with clubheads that are not investment-cast. For example,
some clubheads for woods are made of wood, some clubheads for irons are forged,
some clubheads for putters are machined, and some clubheads are made of graphite
or other composites. The Company believes that the investment-cast, metal
clubhead has a greater share of the market for clubheads for high-quality,
premium priced golf clubs than these alternate types of clubheads. In
particular, the metal wood has surpassed the wooden wood as the most popular
wood and the investment-cast iron has surpassed the forged iron as the most
popular type of iron. Graphite and other composite clubheads have been available
for several years, but to date have not become nearly as popular as
investment-cast clubheads.
EMPLOYEES
As of December 31, 1999, the Company employed 4,303 persons on a full-time
basis. Of these employees, 2,655 and 772 were employed by Coastcast Corporation,
S.A. and Coastcast Tijuana S. de R. L. de C. V., respectively, the Mexican
subsidiaries of the Company. The Company considers its employee relations to be
good.
The production and maintenance employees in the Gardena, California
facility are represented by the United Steelworkers of America. There were 189
such employees as of December 31, 1999. The collective bargaining agreement for
such employees was effective May 12, 1997, and will expire on May 11, 2000.
ORTHOPEDIC IMPLANTS AND SPECIALTY PRODUCTS
The Company also manufactures orthopedic implants and surgical tools (used
principally for replacement of hip and knee joints in humans and small animals)
and other specialty products. The Company believes that the engineering and
manufacturing discipline required to manufacture these products has contributed
to the Company's ability to manufacture golf products.
The Company is endeavoring to develop its steel, titanium, and other alloy
investment casting capabilities to potential customers in other commercial and
industrial businesses outside of the golf business. At this stage, the Company
cannot predict which product opportunities will result in profitable sales, and
whether volumes will be significant.
The Company believes that its principal competitors in this business are
Precision Castparts Corporation and PED Manufacturing.
7
During the last half of 1999, the Company started manufacturing aluminum
compressor wheels using the reusable investment pattern process. This process
utilizes plaster molds and rubber patterns to produce complex, thin wall
aluminum compressor wheels. The Company believes that its principal competitors
in this business are Ross Aluminum Foundries, Sterling Division of Doncasters
plc, and the AlliedSignal Foundry in Ireland.
DISCONTINUED OPERATIONS
In 1993, the Company announced its decision to discontinue its aerospace
business. This business was substantially phased out in 1994. 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 conducted investigations to determine the source
and extent of the contamination. In addition, the Company determined that
certain of the contaminates were present prior to its ownership and entered into
a remediation cost sharing agreement with the previous owner of the property. In
August 1998, the Company sold the Wallingford, Connecticut property, under an
agreement which stipulates that the Company and the previous owner bear the
liability to remediate the property. The Company incurred a loss on the sale of
the property. The loss on sale of the property plus the Company's share of the
estimated remediation costs were not adequately covered by the original reserve.
As a result, for the year ended December 31, 1998, the Company reported a
$157,000 loss from discontinued operations, net of income tax benefit, as shown
on the Consolidated Statements of Income.
ITEM 2. PROPERTIES.
The Company's principal executive offices and one of two steel investment
casting manufacturing facilities are located in a 120,000 square foot leased
facility in Rancho Dominguez, California, a suburb of Los Angeles. Approximately
20,000 square feet of this facility has been allocated to the Company's new
aluminum compressor wheels business. The lease expires in October, 2003 and the
Company has a five-year extension option.
The Company owns a complex of plants in Gardena, California (which is
within approximately five miles of the Rancho Dominguez facilities), comprising
an aggregate of approximately 110,000 square feet. These facilities are
principally used for manufacturing titanium golf clubheads and tooling. In
October 1994, the Company purchased approximately two acres of land contiguous
to its Gardena facility. In April 1996, the Company purchased another
approximately two acres of land next to the land purchased in October 1994. This
land is available for future expansion if and when necessary.
Clubhead polishing and finishing operations are conducted in facilities
leased by the Company's subsidiary in Mexicali, Mexico under four lease
agreements, comprising an aggregate of approximately 142,000 square feet. Three
of the leases expire in December 2003, and the other lease expires in June 2006.
All four leases have a five-year extension option.
The Company has moved a significant portion of its steel golf clubhead
casting operations to a 186,000 square foot leased investment casting facility
in Tijuana, Mexico. The lease expires in April 2008 and the Company has two
five-year extension options. Also, the Company has options to lease sites
contiguous to the property as needed for future growth.
8
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to legal actions arising in the ordinary course of
business, none of which, individually or in the aggregate, in the opinion of
management, after consultation with counsel, will have a material adverse effect
on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Hans H. Buehler 67 Chairman of the Board and Chief Executive Officer
Larry J. Cornelius 58 Vice President, Titanium Operations
Norman Fujitaki 45 Chief Financial Officer and Secretary
Ramon F. Ibarra 47 Vice President, Manufacturing
William L. Osborn 45 Vice President, Mexicali Operations
Bryan Rolfe 47 Vice President, New Product Development
Roberto Roman 57 Vice President, Human Resources
Todd L. Smith 36 Executive Vice President, Operations
Kathleen H. Wainwright 35 Senior Vice President, Sales
K. Michael Wellman 55 Senior Vice President - Foundries
Mr. Buehler is one of the founders of the Company and has been Chairman of
the Board since the Company's inception in 1980. Prior to founding the Company,
he was President of the Rex Precision Products Division of Alco Standard
Corporation, a competitor of the Company that was acquired by the Company in
1987. Mr. Buehler has more than 40 years of experience in the investment-casting
business, including more than 30 years of experience in the manufacture of golf
clubheads.
Mr. Cornelius joined the Company in March 1995. In July 1999, he was
promoted to Vice President Titanium Casting. From 1995 to 1999, he was the
Director of the Titanium operations. From 1992 to 1995, he was the Engineering
Manager for IMI Titanium Inc. Mr. Cornelius has over 22 years of experience in
the titanium business.
Mr. Fujitaki joined the Company in 1994. He served as Corporate Controller
from 1994 to March 1999 and was promoted to Chief Financial Officer in April
1999. He previously was employed for eight years by Neutrogena Corporation, a
manufacturer and marketer of skin and hair care products, for which he served as
Corporate Controller from September 1988.
Mr. Ibarra joined the Company in 1981. Since 1989, he has served as Vice
President, Manufacturing of the Company. Prior to such time, he served as the
production manager for the Company with respect to all phases of its business
and as the plant manager at the facility located in Rancho Dominguez,
California.
Mr. Osborn joined the Company in 1993. In July 1999, he was promoted to
Vice President Mexicali Finishing. Prior to this time, he served the Company in
various management capacities in the manufacturing area.
9
Mr. Rolfe joined the Company in July 1998. From 1997 to June 1998, he was a
consultant and President of Slotline Golf Company. From 1995 to 1997, he was the
President and Chief Operating Officer of Cleveland Golf Company. Mr. Rolfe
worked 20 years at Salomon North America in a variety of management positions,
including Director of Operations and Finance from 1991 to 1995.
Mr. Roman joined the Company in 1986. In July 1999, he was promoted to Vice
President - Human Resources. Prior to this time, he served the Company in
various management capacities in the human resource area. Mr. Roman has over 30
years of human resources experience.
Mr. Smith joined the Company in 1981. In February 2000, he was promoted to
Executive Vice President - Operations. From July 1999 to January 2000, he was
the Vice President - Operations. Prior to this time, he served the Company in
various management capacities in both the manufacturing and administrative
areas. Mr. Smith is the son of Hans H. Buehler.
Ms. Wainwright joined the Company in 1988. In February 2000, she was
promoted to Senior Vice President - Sales. From November 1996 to January 2000,
she has served as Vice President, Sales. Prior to that time, she served the
Company in various capacities, including plant manager at the facility located
in Wallingford, Connecticut.
Mr. Wellman joined the Company in 2000. In February 2000, he became the
Senior Vice President - Foundries. From 1993 to 1999, he was the President and
owner of Commercial Titanium Casting, Inc. From 1989 to 1993, he was the Group
Vice President of Sturm Ruger Inc. Mr. Wellman has over 26 years of foundry
experience.
Each officer serves at the pleasure of the Board of Directors of the
Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRINCIPAL MARKET AND PRICES
The common stock of the Company is listed on the New York Stock Exchange
under the symbol PAR. The following table sets forth the high and low sales
prices per share for the common stock of the Company as reported by the New York
Stock Exchange.
FISCAL YEAR HIGH LOW
- ----------- ---- ---
1999
First Quarter $ 9 7/8 $ 6 15/16
Second Quarter 12 3/4 8 7/8
Third Quarter 12 7/8 10 1/2
Fourth Quarter 16 13/16 10 11/16
1998
First Quarter 22 5/8 13 3/8
Second Quarter 25 16 1/4
Third Quarter 19 5/8 8 3/8
Fourth Quarter 9 11/16 6 5/8
The approximate number of record holders of common stock of the Company as of
March 1, 2000 was 145.
DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to payment of dividends will be at the
discretion of the Company's Board of Directors and will depend on the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors.
STOCK REPURCHASE
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, the
Company purchased 292,500 shares at a cost of $3.4 million for the year ended
December 31, 1999. As of December 31, 1999, 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.
BUSINESS RISKS
CUSTOMER CONCENTRATION. The Company's sales have been and very likely will
continue to be concentrated among a small number of customers. Sales to as few
as three customers accounted for 84% of sales during the year ended December 31,
1999 and sales to three or four customers accounted for 85% and 84% of sales
during the years ended December 31, 1998 and 1997, respectively. Sales to the
Company's top customer, Callaway Golf Company (including Odyssey Golf after its
acquisition by Callaway in August 1997) accounted for 47% of sales for the year
ended December 31, 1999.
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The Company has no long-term contracts with, and is not the exclusive
supplier to, any of its customers, which the Company believes is typical
industry practice. Although the Company is now a principal supplier of steel and
titanium clubheads to Callaway, there are other actual or potential sources of
supply to Callaway and the level of future orders is not known at this time. In
the event Callaway increases purchases from other suppliers, the Company could
be adversely affected. Although the Company believes that its relationships with
its customers are good and its prices are competitive, the loss of a significant
customer or a substantial decrease in the sales of golf clubs by a significant
customer could have a material adverse effect on the Company's business.
COMPETITION. The Company operates in a highly competitive market. All of
the Company's products are manufactured according to customers' designs and
specifications. Accordingly, the Company competes against other independent
domestic and foreign manufacturers which have the capability to manufacture
investment-cast clubheads. The Company also experiences indirect competition
from golf club companies that manufacture their own clubheads or make golf clubs
with clubheads that are not investment-cast or are made of materials the Company
is not currently capable of producing. Potential competition also exists from
those golf club companies that currently purchase clubheads from the Company but
may, in the future, manufacture clubheads internally. The Company believes that
it competes principally on the basis of its ability to produce consistently
high-quality golf clubheads in quantities sufficient to meet rapidly growing
demand for popular golf clubs. Some of the Company's current and potential
competitors may have greater resources than the Company.
NEW PRODUCTS. The Company's historical success has been attributable, in
part, to its ability to supply clubheads for companies whose new products
rapidly attained a significant portion of the market for high-quality,
premium-priced golf clubs. In the future, the Company's success will depend upon
its continued ability to manufacture golf clubheads for such companies. There
are no assurances, however, of the Company's ability to do so. If a golf club
having a head not manufactured by the Company gains significant market share
from customers of the Company, the Company's business would be adversely
affected.
NEW MATERIALS AND PROCESSES. The Company's future success is also dependent
on continuing popularity of investment-cast clubheads. A significant loss of
market share to golf clubs with heads made by other processes would have a
material adverse impact on the Company's business. Similarly, the Company's
future success is also dependent on continuing popularity of clubheads made of
titanium or stainless steel alloys or other metal alloys which the Company is
capable of casting.
MANUFACTURING COST VARIATIONS. Consistent manufacture of high-quality
products requires constant care in the manufacture and maintenance of tooling,
monitoring of raw materials, and inspection for compliance with product
specifications throughout the manufacturing process. Investment-casting is labor
intensive, and numerous steps are required to produce a finished product.
Variations in manufacturing costs and yields occur from time to time, especially
with new products during the "learning curve" phase of production and products
which are more difficult to manufacture such as titanium or oversized metal wood
and iron golf clubheads. The length and extent of these variations are difficult
to predict.
DEPENDENCE ON MANUFACTURING PLANTS IN MEXICO. A substantial portion of the
golf clubheads manufactured by the Company, including clubheads cast by the
Tijuana plant, and some clubheads produced by other clubhead manufacturers, are
polished and finished by the Company in its Mexicali facilities. The polishing
and finishing processes used by the Company are highly labor intensive. The
Company manufactures in Tijuana and Mexicali, Mexico pursuant to the
"maquiladora" duty-free program established by the Mexican and U.S. governments.
Such program enables the Company to take advantage of generally lower costs in
Mexico, without paying duty on inventory shipped into or out of Mexico or paying
certain Mexican taxes. The Company pays certain expenses of the Mexico
facilities in Mexican currency and thus is subject to fluctuations in currency
value. The Company does not have any exchange rate hedging arrangements to
protect against fluctuations in currency value. The Company is also subject to
12
other customary risks of doing business outside the United States. There can be
no assurance that the Mexican government will continue the "maquiladora" program
or that the Company will continue to be able to take advantage of the benefits
of the program. The loss of these benefits could have an adverse effect on the
Company's business. The Company believes that the North American Free Trade
Agreement has not had any adverse effect on its Mexican operations.
HAZARDOUS WASTE. In the ordinary course of its manufacturing process, the
Company uses hazardous substances and generates hazardous waste. The Company has
no material liabilities as of December 31, 1999 under environmental laws and
regulations, and believes that its operations are in substantial compliance with
applicable laws and regulations. Nevertheless, no assurance can be given that
the Company will not encounter environmental problems or incur environmental
liabilities in the future which could adversely affect its business. See also
Item 1. Business - Discontinued Operations.
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment are
dependent on discretionary spending by consumers, which may be adversely
affected by general economic conditions. A decrease in consumer spending on
premium-priced golf clubs could have an adverse effect on the Company's
business.
SEASONALITY; FLUCTUATIONS IN OPERATING RESULTS. The Company's customers
have historically built inventory in anticipation of purchases by golfers in the
spring and summer, the principal selling season for golf equipment. The
Company's operating results have been impacted by seasonal demand for golf
clubs, which generally results in higher sales in the second and third quarters.
The timing of large new product orders from customers and fluctuations in demand
due to a sudden increase or decrease in popularity of specific golf clubs have
contributed to quarterly or other periodic fluctuations. No assurance can be
given, however, that these factors will mitigate the impact of seasonality in
the future.
RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon its
senior management, and their ability to attract and retain qualified personnel.
The Company does not have any non-competition agreements with any of its
employees. There is no assurance that the Company will be able to retain its
existing senior management personnel or be able to attract additional qualified
personnel.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common
stock of the Company in the public market or the perception that such sales
could occur may adversely affect prevailing market prices of such common stock.
FLUCTUATIONS IN CALLAWAY GOLF COMPANY SHARES. The Company's common stock
value has from time to time fluctuated somewhat in relation to the share value
of the Callaway Golf Company. The prevailing market price of the Company's
common stock could be adversely impacted by a substantial fluctuation in the
market price of Callaway common stock.
13
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere herein.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
Consolidated Statement of Income Data (1):
Sales $120,383 $144,560 $149,515 $148,257 $ 76,001
Gross profit 21,773 22,365 28,533 33,826 12,914
Income from operations 14,355 11,971 17,776 24,454 5,941
Income from continuing operations
before class action lawsuit
settlement expense and income taxes 16,101 13,504 18,751 25,496 7,488
Class action lawsuit settlement expense -0- -0- -0- -0- 2,075
Income from Continuing
Operations Data :
Income before income taxes 16,101 13,504 18,751 25,496 5,413
Income taxes 6,582 5,672 7,875 10,430 2,114
Income from continuing operations 9,519 7,832 10,876 15,066 3,299
Income from Continuing Operations Per Share--
Basic $ 1.21 $ 0.91 $ 1.24 $ 1.72 $ 0.36
======== ======== ======== ======== ========
Income from Continuing Operations Per Share--
Diluted $ 1.20 $ 0.89 $ 1.22 $ 1.67 $ 0.36
======== ======== ======== ======== ========
Weighted Average Shares Outstanding--Basic 7,892 8,638 8,798 8,773 9,045
======== ======== ======== ======== ========
Weighted Average Shares Outstanding--Diluted 7,924 8,837 8,924 9,038 9,099
======== ======== ======== ======== ========
AS OF DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Consolidated Balance Sheet
Data:
Working Capital $58,155 $46,717 $56,795 $44,800 $34,788
Total Assets 92,316 83,673 90,025 76,100 58,908
Deferred compensation 541 295 1,614 438 -0-
Shareholders' equity 83,290 77,142 78,391 66,487 50,252
(1) In October 1993, the Company announced its decision to discontinue its
aerospace business. See Note 2 of Notes to Consolidated Financial
Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated operating results
expressed in thousands of dollars and as a percentage of sales.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Sales $120,383 100.0 $144,560 100.0 $149,515 100.0
Cost of sales 98,610 81.9 122,195 84.5 120,982 80.9
Gross profit 21,773 18.1 22,365 15.5 28,533 19.1
Selling, general
and administrative 7,418 6.2 10,394 7.2 10,757 7.2
Income from continuing
operations 14,355 11.9 11,971 8.3 17,776 11.9
Other income, net 1,746 1.5 1,533 1.1 975 0.6
Income from continuing
operations before
Income taxes 16,101 13.4 13,504 9.3 18,751 12.5
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Sales decreased $24.2 million, or 17%, to $120.4 million for 1999 from
$144.6 million for 1998. The decline in sales was due to an over 34% decrease
in sales volume of clubheads during the first half of 1999 partially offset
by an increase in clubhead sales in the second half of 1999. Titanium
clubhead sales represented approximately 42% and 41% of total sales for 1999
and 1998, respectively. Sales to Callaway Golf Company, including sales to
Odyssey Golf after its acquisition by Callaway Golf Company in August 1997,
represented 47% of total sales for 1999 compared to 49% in 1998. There is no
assurance that sales to Callaway will represent similar percentages of total
sales in the future.
Gross profit decreased $.6 million, or 3%, to $21.8 million for 1999 from
$22.4 million for 1998. The gross profit margin increased to 18% in 1999 from
16% in 1998. The improvement in gross margin was due principally to higher costs
incurred in the last half of 1998 associated with inventory write-downs, new
products and the start up of the Tijuana plant.
Selling, general and administrative expense decreased by $3.0 million, or
29%, to $7.4 million for 1999 from $10.4 million for 1998. The decrease in
selling, general and administrative expense was due primarily to decreased
payroll and related expenses, legal expenses and life insurance expense
partially offset by an increase in deferred compensation expense principally
because the prior year included the forfeiture and curtailment of these benefits
which resulted in a large reduction in deferred compensation expense for the
year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Sales decreased $4.9 million, or 3%, to $144.6 million for 1998 from $149.5
million for 1997. Increases in sales of steel alloy metal woods and irons were
more than offset by the decrease is sales of titanium alloy clubheads and steel
alloy putters. Titanium clubhead sales represented 41% and 50% of total sales
for 1998 and 1997, respectively.
15
Sales to Callaway Golf Company, including sales to Odyssey Golf after its
acquisition by Callaway Golf Company in August 1997, represented 49% of total
sales for 1998 compared to 34% in 1997.
Gross profit decreased $6.1 million, or 21%, to $22.4 million for 1998 from
$28.5 million for 1997. The gross profit margin decreased to 16% in 1998 from
19% in 1997. The decrease in gross margin was due principally to the significant
decrease in the manufacturing volume of titanium clubheads during the last half
of 1998, higher costs and lower yields relating to the start-up of three new
products lines and start-up expenses related to the Tijuana plant. There was no
gross profit for the quarter ended December 31, 1998 compared to $7.2 million
for the comparable quarter in 1997. The gross profit margin decreased to 0% in
the fourth quarter 1998 versus 20% in the fourth quarter of 1997. This decrease
was principally due to the decrease in sales volume coupled with the negative
effect of write-downs of inventory and non-producing assets and the start-up of
the Tijuana plant.
Selling, general and administrative expense decreased by $.4 million, or
4%, to $10.4 million for 1998 from $10.8 million for 1997. The decrease in
selling, general and administrative expense was due primarily to decreased
expenses related to the reversal of most of the prior years' accrual for the
supplemental executive retirement program, partially offset by an increase in
severance pay and legal fees and settlement costs related to a threatened proxy
contest which was resolved in the fourth quarter.
DISCONTINUED OPERATIONS
In 1993, the Company announced its decision to discontinue its aerospace
business. This business was substantially phased out in 1994. 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 conducted investigations to determine the source
and extent of the contamination. In addition, the Company determined that
certain of the contaminates were present prior to its ownership and entered into
a remediation cost sharing agreement with the previous owner of the property. In
August 1998, the Company sold the Wallingford, Connecticut property, under an
agreement which stipulates that the Company and the previous owner bear the
liability to remediate the property. The Company incurred a loss on the sale of
the property. The loss on sale of the property plus the Company's share of the
estimated remediation costs were not adequately covered by the original reserve.
As a result, the Company reported a $.2 million loss from discontinued
operations, net of income tax benefit, as shown on the Consolidated Statements
of Income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at December 31, 1999 was
$42.8 million compared to $27.6 million on December 31, 1998, an increase of
$15.2 million. Net cash provided by operating activities was $17.6 million for
the year ended December 31, 1999. Net income of $9.5 million, depreciation and
amortization of $4.1 million, a decrease in prepaids and other current assets of
$4.2 million and an increase in accounts payable and accrued liabilities of $2.1
million, were partially offset by an increase in accounts receivables and
inventory of $1.6 million and $.7 million, respectively. Cash provided from
investing activities of $.9 million consist primarily of the surrender of life
insurance policies of $6.2 million partially offset by $4.2 million of capital
expenditures and the net purchases of investments of $1.0 million. Net cash used
by financing activities of $3.3 million consists mainly of the repurchase of
Company common stock of $3.4 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
December 31, 1999. This line of credit, which expires on May 30, 2000, bears
interest at the bank's prime rate or LIBOR plus 2%.
16
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, the
Company purchased 292,500 shares at a cost of $3.4 million for the year ended
December 31, 1999. As of December 31, 1999, 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 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.
QUARTERLY INFORMATION AND SEASONALITY
Set forth below is certain unaudited quarterly financial information. The
Company believes that all other necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly, and in accordance with generally accepted accounting principles, the
selected quarterly information when read in conjunction with the consolidated
financial statements included elsewhere herein.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $ 27,091 $ 33,582 $ 31,957 $ 27,753 $ 45,321 $ 43,588 $ 31,627 $ 24,024
Gross profit (loss) 5,849 7,636 3,776 4,512 9,649 9,580 3,147 (11)
Income (loss) before taxes 3,976 5,796 2,603 3,726 6,928 6,903 1,175 (1,502)
Provision for income taxes 1,670 2,434 1,032 1,446 2,910 2,899 493 (630)
Income from continuing
operations 2,306 3,362 1,571 2,280 4,018 4,004 682 (872)
Loss from discontinued
operations -0- -0- -0- -0- -0- -0- (157) -0-
Net income 2,306 3,362 1,571 2,280 4,018 4,004 525 (872)
Net income per share - basic .29 .43 .20 .29 .45 .44 .06 (.11)
Net income per share-diluted .29 .42 .20 .29 .44 .42 .06 (.11)
The Company's customers have historically built inventory in anticipation
of purchases by golfers in the spring and summer, the principal selling season
for golf equipment. The Company's operating results have been impacted by
seasonal demand for golf clubs, which generally results in higher sales during
the six month period that include the second and third quarters. The timing of
large new product orders from customers and fluctuations in demand due to a
sudden increase or decrease in popularity of specific golf clubs have
contributed to quarterly or other periodic fluctuations. No assurances can be
given, however, that these factors will mitigate the impact of seasonality.
BACKLOG
As of December 31, 1999, the Company had a backlog of approximately $34.5
million as compared to a backlog of approximately $25.4 million as of December
31, 1998. The Company believes that its current backlog is scheduled to be
shipped in the ensuing four months. Although many of the Company's customers
release purchase orders months prior to the requested delivery date, these
orders are generally cancelable without penalty provided that no production has
commenced. If production has commenced, an order is cancelable upon payment of
the cost of production. Historically, the Company's backlog generally has been
the highest in the second and third quarters due principally to seasonal
factors. Backlog is not necessarily indicative of future operating results.
17
YEAR 2000 CONVERSION AND RESIDUAL EFFECT
To date, the Company's has not experienced any problems associated with the
year 2000. However, that does not mean that the year 2000 problem will not
affect us in the future. For example, programs may fail to recognize February
29, 2000 as a leap year date as a result of an exception to the calculation of
leap years that will occur in the year 2000. These residual year 2000 issues
could have an adverse impact on our operations.
If residual year 2000 problems cause the failure of any of the technology,
software or systems necessary to use our products or operate our business, we
could lose customers, suffer significant disruptions in our business, lose
revenues and incur substantial liabilities and expenses. We could also become
involved in costly litigation resulting from residual year 2000 problems. These
problems could materially and adversely affect our business, results of
operations and financial condition. In addition, a disruption in the operations
of parties with whom we interact could materially and adversely affect our
business, results of operations and financial condition.
FORWARD LOOKING INFORMATION
This report and other reports of the Company contain or may contain certain
forward-looking statements and information that are based on beliefs of, and
information currently available to, the Company's management as well as
estimates and assumptions made by the Company's management. When used, the words
"anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and
similar expressions as they relate to the Company or the Company's management,
are used to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions relating to the Company's
operations and results of operations, competitive factors and pricing pressures,
shifts in market demand, the performance and needs of the industries served by
the Company, the costs of product development and other risks and uncertainties,
including, in addition to any uncertainties specifically identified in the text
surrounding such statements, uncertainties with respect to changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including the Company's stockholders, customers, suppliers,
business partners, competitors, and legislative, regulatory, judicial and other
governmental authorities and officials. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
actual results may vary significantly from those anticipated, believed,
estimated, expected, intended or planned.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information, other than quarterly information, required by this item is
incorporated herein by reference to the consolidated financial statements and
supplementary data listed in Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to directors is
incorporated herein by reference to the information contained under the caption
"Nomination and Election of Directors" in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on June 21, 2000, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1999. Information with respect to executive
officers is included in Part I of this Report. The information required by this
Item with respect to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated herein by reference to the information contained
under the caption "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" in the Proxy Statement relating to the Annual Meeting of Shareholders
to be held on June 21, 2000, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the information contained under the caption "Executive Compensation and Other
Information" in the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 21, 2000, which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the information contained under the captions "Voting Securities and Principal
Shareholders" and "Stock Ownership of Management" in the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on June 21, 2000,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the information contained under the caption "Certain Transactions" in the
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
June 21, 2000, which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the year ended December 31, 1999.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(1) LIST OF FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index to
Financial Statements and Schedules are filed as part of this Report.
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULE
The financial statement schedule listed in the accompanying Index to
Financial Statements and Schedule are filed as part of this Report.
(a)(3) LIST OF EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this Report.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1999.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 1, 2000 COASTCAST CORPORATION
By: /s/ HANS H. BUEHLER
---------------------------
Hans H. Buehler, Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 1, 2000.
SIGNATURE TITLE
--------- -----
/s/ HANS H. BUEHLER
- ---------------------------
Hans H. Buehler Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ NORMAN FUJITAKI
- ---------------------------
Norman Fujitaki Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ ROBERT L. GATES
- ---------------------------
Robert L. Gates Director
/s/ ROBERT H. GOON
- ---------------------------
Robert H. Goon Director
/s/ EDWIN A. LEVY
- ---------------------------
Edwin A. Levy Director
/s/ LEE E. MIKLES
- ---------------------------
Lee E. Mikles Director
/s/ PAUL A. NOVELLY
- ---------------------------
Paul A. Novelly Director
/s/ JONATHAN P. VANNINI
- ---------------------------
Jonathan P. Vannini Director
21
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER
- -------------------------------- -----------
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 1999 and 1998 24
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997 25
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1997, 1998 and 1999 26
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 27
Notes to Consolidated Financial Statements 28
SCHEDULES
Independent Auditors' Report 39
Schedule II--Valuation and Qualifying Accounts for the years ended December 31,
1997, 1998 and 1999 40
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Coastcast Corporation:
We have audited the accompanying consolidated balance sheets of Coastcast
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Coastcast Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 7, 2000
23
COASTCAST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------------------
1999 1998
----------------- -----------------
A S S E T S
Current assets:
Cash and cash equivalents (Note 1) $42,740,000 $ 27,551,000
Trade accounts receivable, net of allowance for doubtful
accounts of $500,000 and $600,000 at December 31, 1999
and 1998, respectively (Note 1) 9,179,000 7,556,000
Inventories (Notes 1 and 3) 11,059,000 10,326,000
Prepaid income taxes 550,000 4,011,000
Prepaid expenses and other current assets 1,627,000 2,378,000
Deferred income taxes (Notes 1 and 8) 1,485,000 1,131,000
----------------- -----------------
Total current assets 66,640,000 52,953,000
Property, plant and equipment, net (Notes 1 and 4) 24,170,000 24,116,000
Cash surrender value of life insurance (Note 7) - 6,215,000
Investments (Note 1) 925,000 -
Other assets, net 581,000 389,000
----------------- -----------------
$ 92,316,000 $ 83,673,000
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,949,000 $ 2,804,000
Accrued liabilities (Note 6) 3,536,000 3,432,000
----------------- -----------------
Total current liabilities 8,485,000 6,236,000
Deferred compensation (Note 7) 541,000 295,000
----------------- -----------------
Total liabilities 9,026,000 6,531,000
Commitments and contingencies (Notes 7 and 9)
Shareholders' Equity (Notes 1 and 10):
Preferred stock, no par value, 2,000,000 shares authorized;
none issued and outstanding
Common stock, no par value, 20,000,000 shares authorized;
7,701,571 and 7,989,404 shares issued and outstanding as of
December 31, 1999 and 1998, respectively 26,964,000 30,309,000
Retained earnings 56,352,000 46,833,000
Accumulated other comprehensive income (26,000) -
------------------ -----------------
Total shareholders' equity 83,290,000 77,142,000
------------------ -----------------
$92,316,000 $ 83,673,000
================== =================
See accompanying notes to consolidated financial statements.
24
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Sales (Notes 1 and 12) $120,383,000 $144,560,000 $149,515,000
Cost of sales 98,610,000 122,195,000 120,982,000
----------------- ----------------- -----------------
Gross profit 21,773,000 22,365,000 28,533,000
Selling, general and administrative 7,418,000 10,394,000 10,757,000
----------------- ----------------- -----------------
Income from operations 14,355,000 11,971,000 17,776,000
Other income, net 1,746,000 1,533,000 975,000
----------------- ----------------- -----------------
Income before income taxes 16,101,000 13,504,000 18,751,000
Provision for income taxes (Notes 1 and 8) 6,582,000 5,672,000 7,875,000
----------------- ----------------- -----------------
Income from continuing operations 9,519,000 7,832,000 10,876,000
Loss from discontinued operations (net of
income tax benefit of $113,000 - Notes 1 and 2) - (157,000) -
----------------- ----------------- -----------------
Net income $ 9,519,000 $ 7,675,000 $ 10,876,000
================= ================= =================
NET INCOME PER SHARE (Notes 1 and 11)
Income from continuing operations per
share - basic $ 1.21 $ .91 $ 1.24
Discontinued operations per share - basic - (.02) -
----------------- ----------------- -----------------
Net income per share - basic $ 1.21 $ .89 $ 1.24
================= ================= =================
Weighted average shares outstanding 7,892,360 8,637,724 8,797,734
================= ================= =================
Income from continuing operations per share -
diluted $ 1.20 $ .89 $ 1.22
Discontinued operations per share - diluted - (.02) -
----------------- ----------------- -----------------
Net income per share - diluted $ 1.20 $ .87 $ 1.22
================= ================= =================
Diluted weighted average shares outstanding 7,923,957 8,837,304 8,924,262
================= ================= =================
See accompanying notes to consolidated financial statements.
25
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
Common Stock Other
-------------------------- Compre-
Number of Retained hensive Comprehensive
Shares Amount Earnings Income Total Income
---------- ------------ ----------- -------- ------------ ------------
BALANCE AT JANUARY 1, 1997 8,777,890 $ 38,205,000 $28,282,000 $ -- $ 66,487,000
Stock options exercised, including related
income tax benefit (Note 10) 71,115 759,000 759,000
Director compensatory stock options 269,000 269,000
Net income 10,876,000 10,876,000 10,876,000
---------- ------------ ----------- -------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 8,849,005 39,233,000 39,158,000 78,391,000 $ 10,876,000
Stock options exercised, including related ============
income tax benefit (Note 10) 205,199 3,184,000 3,184,000
Director compensatory stock options 269,000 269,000
Repurchase of common stock (1,064,800) (12,377,000) (12,377,000)
Net income 7,675,000 7,675,000 7,675,000
---------- ------------ ----------- -------- ------------ ------------
BALANCE AT DECEMBER 31, 1998 7,989,404 30,309,000 46,833,000 77,142,000 $ 7,675,000
Stock options exercised, including related ============
income tax benefit (Note 10) 4,667 48,000 48,000
Repurchase of common stock (292,500) (3,393,000) (3,393,000)
Unrealized loss on investments, net of
income tax benefit of $19,000 (26,000) (26,000) (26,000)
Net income 9,519,000 9,519,000 9,519,000
---------- ------------ ----------- -------- ------------ ------------
BALANCE AT DECEMBER 31, 1999 7,701,571 $ 26,964,000 $56,352,000 $(26,000) $ 83,290,000 $ 9,493,000
========== ============ =========== ======== ============ ============
See accompanying notes to consolidated financial statements.
26
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,519,000 $ 7,675,000 $ 10,876,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,089,000 3,375,000 2,838,000
Goodwill amortization 18,000 -- --
Loss on disposal of machinery and equipment 91,000 1,001,000 305,000
Change in accrual for disposal of aerospace business -- (701,000) (180,000)
Deferred compensation 246,000 (1,319,000) 1,176,000
Deferred income taxes (334,000) 765,000 (656,000)
Non-employee director compensatory stock options -- 269,000 269,000
Changes in operating assets and liabilities:
Trade accounts receivable (1,621,000) 5,337,000 (1,110,000)
Inventories (728,000) 10,882,000 452,000
Prepaid expenses and other current assets 4,216,000 (4,370,000) 2,781,000
Accounts payable and accrued liabilities 2,127,000 (3,784,000) 845,000
------------ ------------ ------------
Net cash provided by operating activities 17,623,000 19,130,000 17,596,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,247,000) (8,787,000) (2,127,000)
Proceeds from disposal of machinery and equipment 80,000 687,000 76,000
Surrender (purchase) of life insurance policies 6,215,000 (2,686,000) (1,857,000)
Purchase of investments (1,107,000) -- --
Sales/maturities of investments 136,000 -- --
Purchase of business, net of cash acquired (233,000) -- --
Other assets 67,000 213,000 (320,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 911,000 (10,573,000) (4,228,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of
options net of related tax benefit 48,000 3,184,000 759,000
Repurchase of common stock (3,393,000) (12,377,000) --
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,345,000) (9,193,000) 759,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,189,000 (636,000) 14,127,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,551,000 28,187,000 14,060,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,740,000 $ 27,551,000 $ 28,187,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 3,436,000 $ 8,546,000 $ 5,544,000
============ ============ ============
See accompanying notes to consolidated financial statements.
27
COASTCAST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Coastcast Corporation (the "Company") and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in consolidation.
ORGANIZATION AND OPERATIONS--Coastcast Corporation is incorporated under
the laws of the State of California. The Company principal business is the
production of investment-cast golf clubheads, and precision investment castings
and related engineering for the medical industry. The Company sells its products
to customers of varying strength and financial resources, principally located in
the United States. The Company has three wholly-owned subsidiaries, two are
incorporated under the laws of the Mexican maquiladora program and their
principal activities are the production of golf clubheads, and the other is
incorporated in the State of California and manufactures aluminum compressor
wheels.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS--The Company has historically manufactured
investment-cast aerospace and other industrial products in addition to golf
clubheads and orthopedic implant products. In October 1993, the Company
announced its decision to discontinue its aerospace business, and as of June
1994, had essentially phased out this business (See Note 2).
REVENUE RECOGNITION--Revenue is recognized when goods are shipped to the
customer.
CASH EQUIVALENTS--Cash equivalents consist of short-term investments with
original maturities of three months or less.
CONCENTRATION OF CREDIT RISK--The Company's financial instruments that are
exposed to credit risk consist primarily of accounts receivable. The Company
grants credit to substantially all of its customers, performs ongoing credit
evaluations of its customers' financial condition and maintains an allowance for
potential credit losses. See also Note 12.
INVENTORIES--Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Depreciation and amortization are provided using primarily the
straight-line method over the estimated useful lives of the related assets as
follows:
Building and improvements 5-31 years
Machinery and equipment 5-7 years
Transportation 5-7 years
Furniture, fixtures and computers 3-7 years
28
IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of an asset, an impairment loss is recognized.
INVESTMENTS-- Investments are included in an irrevocable rabbi trust and
are considered available for sale and carried at fair value. Fair value for
fixed maturity investments and equity securities is based on quoted market
prices. Unrealized appreciation or depreciation on fixed maturity investments
and equity securities is included in shareholders' equity. Gains and losses on
sales of investments are computed on the specific identification method and are
reflected in Other income, net.
INCOME TAXES--Deferred income taxes are recognized based on differences
between the financial statement and tax bases of assets and liabilities using
presently enacted tax rates (see Note 8).
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 shares from stock options (using the
treasury stock method).
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
because of the short maturities of these instruments.
RECLASSIFICATIONS--Certain prior year balances have been reclassified to
reflect the current year presentation.
ACCOUNTING PRONOUNCEMENT--In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Company's required adoption date is January 1, 2001. The
Company believes that the effect of the adoption of Statement No. 133 will not
be material on its results of operations or financial position.
2. DISCONTINUED OPERATIONS
The plan adopted in 1993 to phase out the aerospace business was
substantially completed in 1994. 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 conducted investigations to determine the source and extent of the
contamination. In addition, the Company determined that certain of the
contaminates were present prior to its ownership and entered into a remediation
cost sharing agreement with the previous owner of the property. In August 1998,
the Company sold the Wallingford, Connecticut property, under an agreement which
stipulates that the Company and the previous owner bear the liability to
remediate the property. The Company incurred a loss on the sale of the property.
The loss on sale of the property plus the Company's share of the estimated
remediation costs were not adequately covered by the original reserve. As a
result, the Company reported a $157,000 loss from discontinued operations, net
of income tax benefit, as shown on the Consolidated Statements of Income.
29
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
--------------------------------------------
1999 1998
------------------- -------------------
Raw materials and supplies $ 4,771,000 $ 5,137,000
Tooling 165,000 225,000
Work-in-process 5,698,000 4,019,000
Finished goods 425,000 945,000
------------------- -------------------
$ 11,059,000 $ 10,326,000
=================== ===================
Included above are costs incurred for the production of tooling which is
subsequently sold to customers upon acceptance of the first production unit.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
---------------------------------------------
1999 1998
-------------------- -------------------
Land $ 2,186,000 $ 2,186,000
Buildings and improvements 10,517,000 9,945,000
Machinery and equipment 29,115,000 27,861,000
Transportation 2,436,000 857,000
Furniture, fixtures and computers 3,659,000 3,078,000
-------------------- -------------------
47,913,000 43,927,000
Less accumulated depreciation and amortization 23,743,000 19,811,000
-------------------- -------------------
$ 24,170,000 $ 24,116,000
==================== ===================
Depreciation and amortization expense for 1999, 1998 and 1997 was
$4,089,000, $3,375,000 and $2,838,000, respectively.
5. SHORT-TERM BORROWINGS
The Company maintains an unsecured revolving line of credit which allows
the Company to borrow up to $5,000,000 and which had no outstanding balance at
December 31, 1999 and 1998. This line of credit, which expires on May 30, 2000,
bears interest at the bank's prime rate or LIBOR plus 2%.
30
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
-----------------------------------------------
1999 1998
--------------------- --------------------
Accrued payroll and related expenses $ 1,533,000 $ 1,279,000
Accrued vacation 931,000 738,000
Accrued insurance 504,000 668,000
Other accrued expenses 568,000 747,000
--------------------- --------------------
$ 3,536,000 $ 3,432,000
===================== ====================
7. RETIREMENT PLANS
The Company has a defined benefit plan which covers substantially all of
its hourly union employees. The plan provides for a monthly benefit payable for
the participant's lifetime commencing the first day of the month following the
attainment of age sixty-five in an amount equal to $9.50 to $10.85 multiplied by
the participant's credited service.
31
The following table sets forth the plan's change in benefit obligation,
change in plan assets and components of net pension cost:
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 2,280,000 $ 1,778,000
Service cost 48,000 75,000
Interest cost 140,000 139,000
Actuarial loss from change in assumptions (207,000) 384,000
Actuarial loss (gain) 39,000 (33,000)
Benefits paid (146,000) (63,000)
----------- -----------
Benefit obligation at end of year 2,154,000 2,280,000
=========== ===========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 2,239,000 2,187,000
Actual return on plan assets 114,000 115,000
Benefits paid (146,000) (63,000)
----------- -----------
Fair value of plan assets at end of year 2,207,000 2,239,000
=========== ===========
Funded status 53,000 (41,000)
Unrecognized actuarial loss (gain) (29,000) 101,000
Unrecognized prior service cost 84,000 91,000
Unrecognized transition obligation (96,000) (121,000)
----------- -----------
Net amount recognized $ 12,000 $ 30,000
=========== ===========
COMPONENTS OF NET PENSION COST:
Service cost $ 48,000 $ 75,000 $ 34,000
Interest cost 140,000 139,000 112,000
Return on plan assets (114,000) (115,000) (347,000)
Amortization and deferral (56,000) (44,000) 199,000
----------- ----------- -----------
Net pension cost (income) $ 18,000 $ 55,000 $ (2,000)
=========== =========== ===========
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% and 6.5% in 1999 and
1998, respectively. The expected long-term rate of return on assets was 7% and
6.5% for 1999 and 1998, respectively.
Effective January 1, 1996, the Company adopted a retirement savings plan
(the "401(k) Plan") pursuant to which all U.S. employees who satisfy the age and
service requirements under the plan and who are not covered by collective
bargaining agreements may defer compensation for income tax purposes under
section 401(k) of the Internal Revenue Code of 1986. Participants may contribute
up to 15% of their compensation up to the maximum permitted under federal law.
The Company is obligated to contribute annually an amount equal to 25% of each
participant's contribution up to 6% of that participant's annual compensation.
In accordance with the provisions of the 401(k) Plan, the Company matched
employee contributions in the amount of $93,000, $108,000 and $78,000 during
1999, 1998 and 1997, respectively.
32
On September 1, 1996, the Company adopted a supplemental executive
retirement plan (the "SERP") for certain key employees. Benefits generally
accrued at a rate of 7% of final average salary per year of participation in the
plan, up to 10 years. In general, participants in the plan only become fully
vested with respect to their accrued benefits upon completion of 5 years of plan
participation. The benefits under this plan were frozen effective December 31,
1997, except for the Chairman and Chief Executive Officer who voluntarily
relinquished all of his rights under this plan. An amended and restated
supplemental executive retirement plan was approved effective January 1, 1998.
The amended plan revises the benefit formula for participants and provides
additional flexibility with respect to funding. Under the amended plan, benefits
generally accrues ratably over 25 years of service at 2% per year (up to a
maximum of 25 years of service) with the actual benefit being dependent on years
of service with Company subject to the social security offset.
The following table sets forth the plan's change in benefit obligation,
change in plan assets and components of net pension cost:
DECEMBER 31,
------------------------------------------
1999 1998 1997
----------- ------------ ------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 1,459,000 $ 4,631,000
Curtailment as of January 1, 1998 -- (4,032,000)
Service cost 94,000 81,000
Interest cost 83,000 83,000
Actuarial loss (gain) from change in assumptions (162,000) 93,000
Amendment 7,000 186,000
Actuarial loss (gain) (130,000) 417,000
----------- -----------
Benefit obligation at end of year 1,351,000 1,459,000
=========== ===========
CHANGE IN PLAN ASSETS: -- --
=========== ===========
Funded status (1,351,000) (1,459,000)
Unrecognized actuarial loss 191,000 491,000
Unrecognized prior service cost 162,000 177,000
Unrecognized transition obligation 457,000 496,000
----------- -----------
(Accrued)/prepaid benefit cost $ (541,000) $ (295,000)
=========== ===========
COMPONENTS OF NET PENSION COST:
Service cost $ 94,000 $ 81,000 $ 759,000
Interest cost 83,000 83,000 276,000
Amortization and deferral 69,000 74,000 198,000
Curtailment/forfeitures -- (1,807,000) (128,000)
1996 amortized (unamortized) expense -- 250,000 71,000
----------- ----------- -----------
Net pension cost (income) $ 246,000 $(1,319,000) $ 1,176,000
=========== =========== ===========
33
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0% for both 1999 and
1998. To fund this plan, the Company prior to December 31, 1998 purchased
whole-life insurance contracts on certain participants. All the whole-life
insurance contracts were surrendered for cash during 1999. A portion of the cash
received from the surrender of the contracts is invested in marketable
securities in an irrevocable rabbi trust and is presented as an asset of the
Company in the accompanying consolidated balance sheets.
The Company does not provide any other post-retirement benefits to its
employees.
8. INCOME TAXES
The provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ 5,464,000 $ 3,675,000 $ 7,045,000
State 1,173,000 753,000 1,703,000
Foreign 327,000 251,000 (73,000)
----------- ----------- -----------
6,964,000 4,679,000 8,675,000
----------- ----------- -----------
Deferred:
Federal (309,000) 844,000 (651,000)
State (73,000) 149,000 (149,000)
----------- ----------- -----------
(382,000) 993,000 (800,000)
----------- ----------- -----------
$ 6,582,000 $ 5,672,000 $ 7,875,000
=========== =========== ===========
The actual provision on income before income taxes differs from the
statutory federal income tax rate due to the following:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Federal income taxes at the statutory rate $ 5,635,000 $ 4,726,000 $ 6,563,000
State income taxes, net of federal benefit 735,000 618,000 1,030,000
California investment tax credit (18,000) (67,000) (30,000)
Other items 230,000 395,000 312,000
----------- ----------- -----------
$ 6,582,000 $ 5,672,000 $ 7,875,000
=========== =========== ===========
34
The tax effects of items comprising the Company's net deferred income tax
asset are as follows:
December 31,
--------------------------
1999 1998
----------- -----------
Allowance for doubtful accounts $ 210,000 $ 254,000
Deferred compensation 227,000 124,000
Accrued expenses 464,000 404,000
Inventory reserve 575,000 750,000
State income taxes 309,000 299,000
Depreciation 115,000 (252,000)
Other items (415,000) (448,000)
----------- -----------
$ 1,485,000 $ 1,131,000
=========== ===========
9. COMMITMENTS
OPERATING LEASES--The Company leases certain facilities under various
operating leases with terms ranging from five to ten years. The leases contain
renewal options for additional five or ten year periods which have not been
included in the rental commitment schedule below. In general, these leases
provide for payment of property taxes, maintenance and insurance by the Company
and include rental increases based on the Consumer Price Index.
The future minimum lease payments required under these leases as of
December 31, 1999 are as follows:
YEAR ENDING
DECEMBER 31,
--------------------------------------------
2000 $ 1,710,000
2001 1,710,000
2002 1,710,000
2003 1,628,000
2004 824,000
Thereafter 2,529,000
-------------
$ 10,111,000
=============
Rent expense for 1999, 1998 and 1997 was approximately $1,710,000,
$1,669,000 and $1,106,000, respectively.
10. STOCK OPTION PLANS
Under the Company's 1996 Amended and Restated Employee Stock Option Plan
("1996 Employee Stock Option Plan"), a maximum of 1,950,000 shares of common
stock may be issued pursuant to exercise of options granted to officers and key
employees under the plan. Options may be granted under the plan at prices which
are equal to or greater than the fair market value of the shares at the date of
grant. The options become exercisable over a period of time as determined by the
Board of Directors or a committee of directors and generally expire ten years
from the date of grant or earlier following termination of employment. As of
December 31, 1999, an aggregate of 629,359 shares had been purchased pursuant to
the exercise of options granted under the plan, options to purchase an aggregate
of 781,156 shares were outstanding (including options which were then
exercisable to purchase 547,584 shares), and 539,485 shares were available for
additional grants of options under the plan.
35
Under the Company's 1995 Amended and Restated Non-Employee Director Stock
Option Plan ("1995 Director Stock Option Plan"), a maximum of 200,000 shares of
common stock may be issued pursuant to exercise of options granted under the
plan to certain non-employee directors. Options are granted under the plan at
prices equal to the fair market value of the shares at the date of grant. The
options generally become exercisable over a three-year period of time and expire
at the earlier of one year after the optionee ceases to be a director or ten
years from the date of grant. As of December 31, 1998, no shares had been
purchased under the plan, options to purchase an aggregate of 200,000 shares
were outstanding under the plan, including 136,666 shares as to which such
options were then exercisable, and no shares were available for additional
grants of options under the plan.
In April 1996, the Board of Directors granted to a non-employee options to
purchase 30,000 shares of common stock, all of which were outstanding and
exercisable as of December 31, 1999. These options were not issued under the
foregoing option plans.
In September 1997, the Board of Directors approved the repricing of all
employee stock options having exercise prices above the fair market value as of
the repricing date. A total of 591,783 shares were repriced.
The following summarizes the Company's stock option activity under all
arrangements for the three years ended December 31, 1999:
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
--------- ---------
Balance, January 1, 1997 1,291,459 $ 14.48
Granted 63,540 15.50
Forfeited (70,371) 15.22
Exercised (71,115) 8.60
--------- ---------
Balance, December 31, 1997 1,213,513 $ 13.57
Granted 530,230 14.68
Forfeited (454,727) 15.36
Exercised (205,199) 11.57
--------- ---------
Balance, December 31, 1998 1,083,817 $ 13.75
Granted 111,950 11.33
Forfeited (179,944) 12.92
Exercised (4,667) 10.25
--------- ---------
Balance, December 31, 1999 1,011,156 $ 13.86
========= =========
36
The following table summarizes information about stock options outstanding
at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE PRICE AT 12/31/99 PRICE
- ------------------- ----------------- ------------------- -------------- ------------------ -----------------
$7.31 - 10.00 152,500 7.1 $9.09 111,666 $9.62
10.38 - 13.63 370,017 7.2 12.91 230,013 12.68
14.13 375,109 6.5 14.13 291,438 14.13
14.50 - 22.25 73,530 7.0 19.57 41,133 20.28
27.00 - 30.00 40,000 5.9 27.75 40,000 27.75
----------------- ------------------- -------------- ------------------ -----------------
$7.31 - 30.00 1,011,156 6.9 $13.86 714,250 $14.07
================= =================== ============== ================== =================
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 Director Stock Option Plan, except for
stock options granted to directors on December 13, 1995, which were subject to
approval and subsequently approved by shareholders on June 12, 1996. 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 income and earnings per share
would have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997
------------------ ----------------- ------------------
Net income: As reported $9,519,000 $7,675,000 $10,876,000
Pro forma 9,184,000 6,869,000 8,749,000
Net income per share - basic: As reported $1.21 $.89 $1.24
Pro forma $1.16 $.80 $.99
Net income per share - diluted: As reported $1.20 $.87 $1.22
Pro forma $1.14 $.76 $.95
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The following weighted-average
assumptions were used in 1999, 1998 and 1997, respectively: no dividend yield,
expected volatility of 67.0%, 71.8% and 67.0%, risk-free interest rate of 5.7%,
4.3% and 5.8%, and expected term of 4.0, 4.0 and 4.6 years. The weighted average
fair value per share of options granted in 1999, 1998 and 1997 was $5.86, $8.33
and $7.42, respectively.
37
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
----------- ----------- -----------
Numerator:
Net income $ 9,519,000 $ 7,675,000 $10,876,000
----------- ----------- -----------
Numerator for basic and diluted earnings per share--
income available to common stockholders 9,519,000 7,675,000 10,876,000
Denominator:
Denominator for basic earnings per share--
weighted-average shares 7,892,360 8,637,724 8,797,734
Effect of dilutive securities:
Stock options 31,597 199,580 126,528
----------- ----------- -----------
Dilutive potential common shares 31,597 199,580 126,528
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 7,923,957 8,837,304 8,924,262
=========== =========== ===========
Basic earnings per share $ 1.21 $ 0.89 $ 1.24
=========== =========== ===========
Diluted earnings per share $ 1.20 $ 0.87 $ 1.22
=========== =========== ===========
The anti-dilutive options as of December 31, 1999, 1998 and 1997 were
758,639, 1,023,817 and 116,600, respectively.
12. BUSINESS SEGMENTS
The Company is engaged principally in the business of manufacturing
precision investment-cast titanium and stainless steel golf clubheads,
representing 91%, 93% and 94% of sales for the years ended December 31, 1999,
1998 and 1997, respectively. The Company has determined that it has one
reportable business segment.
The Company derived 47%, 25% and 12% of sales from its three top customers
in 1999, 49%, 22% and 14% of sales from its three top customers in 1998 and 34%,
23%, 15% and 12% of sales from its four top customers in 1997.
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Coastcast Corporation:
We have audited the consolidated financial statements of Coastcast Corporation
and subsidiaries as of December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, and have issued our report thereon
dated February 7, 2000; such report is included elsewhere in this Annual Report
on Form 10-K. Our audits also included the financial statement schedule of
Coastcast Corporation, listed in Item 14(a)(2). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 7, 2000
39
COASTCAST CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(CHARGED)/
BALANCE AT CREDITED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------------- --------- --------- --------- --------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1997 (400,000) (100,000) (500,000)
Year ended December 31, 1998 (500,000) (100,000) (600,000)
Year ended December 31, 1999 (600,000) 100,000 (500,000)
40
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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)
4 Specimen Stock Certificate of the Company (1)
10.1* 1993 Amended and Restated Employee Stock Option Plan ("Employee Plan") (1)
10.2* 1996 Amended and Restated Employee Stock Option Plan ("Employee Plan") (4)
10.3* Non-Employee Director Stock Option Plan ("Director Plan"), together with form of notice of
grant and grant summary (1)
10.4* 1995 Amended and Restated Non-Employee Director Stock Option Plan ("Director Plan"), together
with form of notice of grant and grant summary (1)
10.5 Agreement effective May 11, 1997, between the Company and United Steelworkers of America (6)
10.6 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, S.A. and Parque
Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #70 in Mexicali, Mexico
(8)
10.7 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, S.A. and Parque
Industrial Mexicali, S.A. de C.V. for the facilities known as Avenue Galaxia #50 in Mexicali,
Mexico (8)
10.8 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, S.A. and Parque
Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #30 in Mexicali, Mexico
(8)
10.9 Lease Agreement, dated December 10, 1999, between Coastcast Corporation, S.A. and Parque 44
Industrial Mexicali, S.A. de C.V. for the facilities known as Calle Marte #162 in Mexicali,
Mexico
10.10 Guaranty, dated January 26, 1999, by the Company for the lease of the Mexicali, Mexico
facilities known as Mercurio #70 (8)
10.11 Guaranty, dated January 26, 1999, by the Company for the lease of the Mexicali, Mexico
facilities known as Avenue Galaxia #50 (8)
41
10.12 Guaranty, dated January 26, 1999, by the Company for the lease of the Mexicali, Mexico
facilities known as Mercurio #30 (8)
10.13 Guaranty, dated December 10, 1999, by the Company for the lease, dated December 10, 1999 67
10.14 Lease Agreement, dated September 1, 1997, between the Company and Watson Land Company for the
facilities in Rancho Dominguez, California (5)
10.15 Lease Agreement, dated January 5, 1998, between Coastcast Tijuana, S. De R.L. De C.V. and
Frederick Clarke Sanders, Jr., Frederick Sanders Flourie, Monique Sanders Flourie, Scott
Michael Sanders Flourie and Carlo E. Muzquiz Davila for real estate in Tijuana, Baja
California, Mexico (8)
10.16 Lease Guaranty Agreement, dated August 18, 1998, by the Company for the lease of the Tijuana
facility (8)
10.17 Form of Indemnification Agreement (1)
10.18 Revolving Line of Credit Note and Credit Agreement, effective December 23, 1997, between the
Company and Imperial Bank (6)
10.19 Revolving Line of Credit Note, effective June 1, 1999, between the Company and Imperial Bank (9)
10.20* Amended and Restated Coastcast Corporation Selected Employees Pension Plan, dated October 1,
1987 (1)
10.21* Amendment to the Coastcast Corporation Selected Employees Pension Plan, effective May 12, 1997
(6)
10.22* Coastcast Corporation 401(k) Retirement Plan, effective January 1, 1996 (2)
10.23 Coastcast Corporation S Corporation Termination, Tax Allocation and Indemnification Agreement
dated December 1, 1993, between the Company and certain Shareholders(1)
10.24* Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3)
10.25* First Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, effective
September 1, 1996 (3)
10.26* Second Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, dated
February 18, 1997 (4)
10.27* Coastcast Corporation Amended and Restated Supplemental Executive Retirement Plan, effective
January 1, 1998 (8)
10.28* Coastcast Corporation Amended and Restated Supplemental Executive Retirement Plan, effective 73
January 1, 1999
42
10.29* Trust Agreement by and between Coastcast Corporation and Imperial Trust Company, dated
September 1, 1996 (3)
10.30* Amended and Restated Trust Agreement by and between Coastcast Corporation and Imperial Trust
Company, dated December 18, 1998 (8)
10.31* Second Amendment to the Coastcast Corporation Grantor Trust (10)
10.32 Agreement dated November 6, 1998 between the Company and Jonathan Vannini (7)
10.33* Agreement dated November 6, 1998 between the Company and Richard W. Mora (7)
10.34* Agreement dated January 15, 1999 between the Company and Richard W. Mora (8)
10.35 Stock Purchase Agreement, dated April 22, 1999 between the Company and the selling shareholders
of California Precision Aluminum Casting, Inc. (9)
21 Subsidiaries of the Company 98
23 Consent of Independent Auditors 99
27 Financial Data Schedule 100
- ------------------------
* Management contract or compensating plan or arrangement.
(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.
(2) Incorporated by reference to the exhibits to Form 10-K for the fiscal year
ended December 31, 1995.
(3) Incorporated by reference to the exhibits to Form 10-K for the fiscal year
ended September 30, 1996.
(4) Incorporated by reference to the exhibits to Form 10-K for the fiscal year
ended December 31, 1996.
(5) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended September 30, 1997.
(6) Incorporated by reference to the exhibits to Form 10-K for the fiscal year
ended December 31, 1997.
(7) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended September 30, 1998.
(8) Incorporated by reference to the exhibits to Form 10-K for the fiscal year
ended December 31, 1998.
(9) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended June 30, 1999.
(10) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended September 30, 1999.
43