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, 1998
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 90221
RANCHO DOMINGUEZ, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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.
------------------------------------------------------------------------
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. [ ]
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 15, 1999 ($8.500 per share): $52,255,000.
As of March 15, 1999, 7,934,404 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 18, 1999, 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, 1998
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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 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
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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 20
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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
more than 200 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 less than 7% of the Company's total sales for the year
ended December 31, 1998.
In the past three 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 50% and 41% of the Company's
total sales in 1997 and 1998, 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.
- 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 12 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
3
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
--------
GREAT BIG BERTHA HAWKEYE TITANIUM METAL WOODS
GREAT BIG BERTHA TITANIUM METAL WOODS
BIG BERTHA STEELHEAD METAL WOODS
BIG BERTHA WARBIRD METAL WOODS
GREAT BIG BERTHA TUNGSTEN TITANIUM IRONS
X12 BIG BERTHA IRONS
BIG BERTHA IRONS
TOUR SERIES WEDGES
BIG BERTHA BLADE PUTTERS
S2H2 PUTTERS
BOBBY JONES PUTTERS
CLEVELAND
---------
8T TOUR ACTION TITANIUM METAL WOODS
TA3 IRONS
RTG WEDGES
588 WEDGES
691 WEDGES
485 WEDGES
COBRA
-----
KING COBRA TOUR TITANIUM METALWOODS
KING COBRA OFFSET TITANIUM METALWOODS
TRUSTY RUSTY PWR WEDGES
BOBBY GRACE PUTTERS
ODYSSEY
-------
DUAL FORCE BLADE PUTTERS
DF ROSSIE MALLET PUTTERS
DUAL FORCE WEDGES
VARIABLE DUROMETER PUTTERS
TAYLOR MADE
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FIRESOLE TITANIUM METAL WOODS
TITANIUM BUBBLE 2 IRONS
BURNER BUBBLE TITANIUM 2 METAL WOODS
TITANIUM 2 FAIRWAY RAYLORS
TOUR WOODS
BURNER BUBBLE 2 METAL WOODS
BURNER TOUR IRONS
LCG IRONS
TITLEIST
--------
975D/976R TITANIUM METAL WOODS
STARSHIP METAL WOODS
DCI 981 & 981 SL IRONS
DCI 962 IRONS
OVERSIZE PLUS IRONS
962 "BLADE" IRONS
BOB VOKEY WEDGES
4
NEVER COMPROMISE
----------------
ALPHA PUTTERS
BETA PUTTERS
GAMMA PUTTERS
DELTA PUTTERS
ALPHA II PUTTERS
KAPPA PUTTERS
PING
----
ISI TITANIUM METAL WOODS
GOLF PRODUCT CUSTOMERS
Over the past fifteen years, the Company has supplied investment-cast
clubheads for metal woods, irons and putters to a majority 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 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, Never Compromise, Wilson and Daiwa
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 an increasing portion 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 49%, 34% and 46% of the Company's total sales in
1998, 1997 and 1996, respectively. Fortune Brands (formerly American Brands,
owner of Titleist and Cobra) accounted for 22% and 12% of the Company's total
sales in 1998 and 1997, respectively. Taylor Made accounted for 14%, 23% and
18% of the Company's total sales in 1998, 1997 and 1996, 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 more than 200 separate
manufacturing steps.
5
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.
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 more than 50 separate steps and
finishing of a head for a metal wood can involve as many as 100 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
6
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.).
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 times. Shipment of
clubheads to the United States from Asia usually requires at least two weeks
by ocean freight. In addition, the Company believes that its foreign
competitors have not demonstrated the same willingness and ability as the
Company to commit sufficient resources to meet rapidly growing demand for
popular golf clubs in a timely manner. 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
largest dozen 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, 1998, the Company employed 3,072 persons on a
full-time basis. Of these employees, 2,163 and 184 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.
7
The production and maintenance employees in the Gardena, California
facility are represented by the United Steelworkers of America. There were
130 such employees as of December 31, 1998. 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.
TERMINATION OF CHINA JOINT VENTURE
In December 1998, the Company entered into a joint venture agreement
with a company in Taiwan to establish a new golf clubhead manufacturing plant
in mainland China. That joint venture agreement has since been terminated.
The parties concluded that current market conditions were not sufficiently
stable to proceed with joint ownership of a new plant in China. The Company
incurred no costs in connection with the terminated joint venture other than
legal, accounting and administrative costs which were not material.
DISCONTINUED OPERATIONS
The Company 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 because of declining sales and operating
losses on this portion of its business. This business was essentially phased
out by June 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.
ITEM 2. PROPERTIES.
The Company's principal executive offices and one of two investment
casting manufacturing facilities are located in a 120,000 square foot leased
facility in Rancho Dominguez, California, a suburb of Los Angeles. The lease
expires in October, 2003 and the Company has a five-year extension option.
8
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 141,000 square feet.
Three of the leases expire in December 2003, and the other lease expires in
June 2001.
The Company intends to move most of its steel casting operations to a
186,000 square foot leased investment casting facility for steel products in
Tijuana, Mexico. The facility is currently operational. The Company has
options to lease sites contiguous to the property as needed for future growth.
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 66 Chairman of the Board and Chief Executive
Officer
Robert C. Bruning 56 Chief Financial Officer and Secretary
Ramon F. Ibarra 46 Vice President, Manufacturing
Bryan Rolfe 45 Vice President, New Product Development
Kathleen H. Wainwright 34 Vice President, Sales
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. Bruning joined the Company in May 1996. From 1989 to 1996, he was
Chief Financial Officer of Zacky Farms, Inc., a producer of poultry products.
From 1986 to 1988, Mr. Bruning was a partner at Coopers & Lybrand, LLP. Prior
to that time he worked for Arthur Andersen, LLP for 19 years, 9 of which he
served as a partner.
9
Mr. Ibarra joined the Company in June 1981. Since 1989, he has served as
Vice President, Manufacturing of the golf operations 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. 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.
Ms. Wainwright joined the Company in 1988. Since November 1996 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.
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
- ----------- ------- -------
1997
First Quarter $20 1/2 $12 1/2
Second Quarter 14 3/8 9 3/4
Third Quarter 15 3/4 10 3/4
Fourth Quarter 17 7/16 13 1/8
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 15, 1999 was 174.
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 139,400 shares at a cost of $1.5 million for the year ended
December 31, 1998. As of December 31, 1998, there were 457,000 shares
remaining to be purchased under this authorization. In addition, in August
1998, the Board of Directors authorized the repurchase of a block of 925,400
shares in a privately negotiated transaction at a cost of $10.9 million.
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 85% of sales during the year ended
December 31, 1998 and sales to four customers accounted for 84% of sales
during the years ended December 31, 1997 and 1996. Sales to the Company's top
customer, Callaway Golf Company (including Odyssey Golf after its acquisition
by Callaway in August 1997) accounted for 49% of sales for the year ended
December 31, 1998.
11
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 POLISHING AND FINISHING PLANT IN MEXICO. A substantial
portion of the golf clubheads manufactured by the Company, and some clubheads
produced by other clubhead manufacturers, are polished and finished by the
Company. The polishing and finishing processes used by the Company are highly
labor intensive. The Company performs substantially all of these processes in
its facilities in 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 facility 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 other
customary risks of doing business
12
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, 1998 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,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
Consolidated Statement of
Income Data (1):
Sales $144,560 $149,515 $148,257 $76,001 $90,590
Gross Profit 22,365 28,533 33,826 12,914 22,746
Income from operations 11,971 17,776 24,454 5,941 15,317
Income from continuing operations
before class action lawsuit
settlement expense and income taxes 13,504 18,751 25,496 7,488 16,242
Class action lawsuit settlement expense -0- -0- -0- 2,075 -0-
Income from Continuing
Operations Data:
Income before income taxes 13,504 18,751 25,496 5,413 16,242
Income taxes 5,672 7,875 10,430 2,114 6,420
Income from continuing operations 7,832 10,876 15,066 3,299 9,822
Income from Continuing Operations Per
Share--Basic $ 0.91 $ 1.24 $ 1.72 $ 0.36 $ 1.10
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Income from Continuing Operations Per
Share--Diluted $ 0.89 $ 1.22 $ 1.67 $ 0.36 $ 1.08
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Weighted Average Shares Outstanding--Basic 8,638 8,798 8,773 9,045 8,926
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Weighted Average Shares Outstanding--Diluted 8,837 8,924 9,038 9,099 9,113
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
AS OF DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
Consolidated Balance Sheet
Data (1):
Working Capital $46,717 $56,795 $44,800 $34,788 $37,475
Total Assets 83,673 90,025 76,100 58,908 56,821
Total debt, including
current portion -0- -0- -0- -0- -0-
Deferred compensation 295 1,614 438 -0- -0-
Shareholders' equity 77,142 78,391 66,487 50,252 51,076
(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,
--------------------------------------------------------------
1998 1997 1996
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Sales $144,560 100.0 $149,515 100.0 $148,257 100.0
Cost of sales 122,195 84.5 120,982 80.9 114,431 77.2
Gross profit 22,365 15.5 28,533 19.1 33,826 22.8
Selling, general
and administrative 10,394 7.2 10,757 7.2 9,372 6.3
Income from continuing
operations 11,971 8.3 17,776 11.9 24,454 16.5
Other income, net 1,533 1.1 975 0.6 1,042 .7
Income from continuing
operations before
income taxes 13,504 9.3 18,751 12.5 25,496 17.2
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. 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. There is no assurance that sales to Callaway will
represent similar percentages of total sales in the future.
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.
15
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales increased $1.2 million, or 1%, to $149.5 million for 1997 from
$148.3 million for 1996. Decreases in sales of titanium alloy and steel alloy
metal wood clubheads were more than offset by increases in sales of titanium
alloy iron clubheads, putter clubheads, and steel alloy iron clubheads, and
an increase in medical implant sales. Titanium clubhead sales represented
approximately 50% and over 55% of total sales for 1997 and 1996,
respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf
after its acquisition by Callaway Golf Company in August 1997, represented
34% of total sales for 1997 compared to 46% in 1996.
Gross profit decreased $5.3 million, or 16%, to $28.5 million for 1997
from $33.8 million for 1996. The gross profit margin decreased to 19% in 1997
from 23% in 1996. The decrease in gross margin was due principally to a
change in the product mix from a preponderance of metal woods to irons and
putters.
Selling, general and administrative expense increased by $1.4 million,
or 15%, to $10.8 million for 1997 from $9.4 million for 1996. The increase in
selling, general and administrative expense was due primarily to increased
payroll and related expenses, expenses related to the supplemental executive
retirement program, and increased expenses associated with information
systems, partially offset by a decrease in legal expenses.
DISCONTINUED OPERATIONS
The Company 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 because of declining sales and operating
losses on this portion of its business. This business was essentially phased
out by June 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, 1998
was $27.6 million compared to $28.2 million on December 31, 1997, a decrease
of $.6 million. Net cash provided by operating activities was $19.1 million
for the year ended December 31, 1998. Net income of $7.7 million,
depreciation and amortization of $3.4 million, and a decrease in receivables
and inventory of $16.2 million, were partially offset by an increase in
prepaids and other current assets of $4.4 million, decrease in payables and
accrued liabilities of $3.8 million and a decrease in deferred compensation
of $1.3 million. Investing activities of $10.6 million consist primarily of
$8.8 million of net capital expenditures and the purchase of Company-owned
cash surrender value life insurance policies on certain key employees of $2.7
million. Net cash used by financing activities of $9.2 million consists
mainly of the repurchase of Company common stock of $12.4 million partially
offset by proceeds from exercise of stock options of $3.2 million including
related tax benefits.
16
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, 1998. This line of credit, which expires on June 1, 1999,
bears interest at the bank's prime rate or LIBOR plus 2%.
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 139,400 shares at a cost of $1.5 million for the year ended
December 31, 1998. As of December 31, 1998, there were 457,000 shares
remaining to be purchased under this authorization. In addition, in August
1998, the Board of Directors authorized the repurchase of a block of 925,400
shares in a privately negotiated transaction at a cost of $10.9 million.
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, 1998 DECEMBER 31, 1997
--------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $45,321 $43,588 $31,627 $24,024 $29,001 $39,938 $43,935 $36,641
Gross profit (loss) 9,649 9,580 3,147 (11) 4,025 7,982 9,369 7,157
Income (loss) before
taxes 6,928 6,903 1,175 (1,502) 2,013 4,907 6,449 5,382
Provision for income
taxes 2,910 2,899 493 (630) 815 2,091 2,709 2,260
Income from
continuing
operations 4,018 4,004 682 (872) 1,198 2,816 3,740 3,122
Loss from
discontinued
operations -0- -0- (157) -0- -0- -0- -0- -0-
Net income 4,018 4,004 525 (872) 1,198 2,816 3,740 3,122
Net income per share - basic .45 .44 .06 (.11) .14 .32 .43 .35
Net income per share - diluted .44 .42 .06 (.11) .13 .32 .42 .35
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.
17
BACKLOG
As of December 31, 1998, the Company had a backlog of approximately
$25.4 million as compared to a backlog of approximately $52.2 million as of
December 31, 1997. 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.
YEAR 2000 CONVERSION
The Company has identified issues, developed plans and is working to
resolve the potential impact of the year 2000 on its business operations and
the ability of its computerized information systems to accurately process
information that may be date sensitive. Problems might occur if any of its
programs recognize a date using "00" as the year 1900 rather than the year
2000.
The Company utilizes a number of computer programs. The primary
information technology systems it utilizes are (1) the customer order and
backlog system, and (2) the accounting and financial systems which include
general ledger, accounts payable, accounts receivable, billing and
collection, inventory value and location, and fixed assets. The Company
believes that its customer order and backlog, and accounting and financial
systems will be year 2000 compliant in a timely manner and will not be
materially impacted by the year 2000. The maintenance and modifications to
these programs are not material and are expensed as incurred. The Company has
an experienced and dedicated staff to perform the functions identified and is
reasonably confident that it will be year 2000 compliant in a timely manner.
The Company has sent questionnaires to its major customers and
suppliers. So far, approximately 75% of the major customers and suppliers
have responded to the questionnaire and have revealed no circumstances that
would cause a significant disruption to business operations.
The Company's largest three customers represented 85% of sales for the
year ended December 31, 1998. Should any one of these customers experience
significant business interruption relating to non-year 2000 compliance, the
Company could be materially impacted. To the extent that the Company relies
on other third parties, such as banking institutions and major suppliers who
are unable to address their year 2000 issues in a timely manner, the Company
could be materially impacted.
Based on the information collected to date, the Company does not believe
that the cost of addressing the year 2000 issues will have material adverse
impact on its financial position. The Company does not have a formal
contingency plan but the Company plans to devote the resources required to
resolve significant year 2000 issues in a timely manner. The Company
maintains disaster recovery plans in the event of system failures, which
include regular backup of historical information.
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
18
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.
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 18, 1999,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1998. 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 18, 1999,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1998.
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 18, 1999, which will be
filed with the Securities and Exchange Commission no later than 120 days
after the close of the year ended December 31, 1998.
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
18, 1999, which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended December 31, 1998.
19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
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 1998.
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 15, 1999 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 15, 1999.
SIGNATURE TITLE
/s/ HANS H. BUEHLER
- ------------------------
Hans H. Buehler Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ ROBERT C. BRUNING
- ------------------------
Robert C. Bruning Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ ROBERT L. GATES
- ------------------------
Robert L. Gates Director
/s/ EDWIN A. LEVY
- ------------------------
Edwin A. Levy Director
/s/ LEE E. MIKLES
- ------------------------
Lee E. Mikles 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, 1998 and 1997 24
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996 25
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1996, 1997 and 1998 26
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 27
Notes to Consolidated Financial Statements 28
SCHEDULES
Independent Auditors' Report 39
Schedule II--Valuation and Qualifying Accounts for the years ended December 31,
1996, 1997 and 1998 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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 9, 1999
23
COASTCAST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
1998 1997
----------- -----------
A S S E T S
Current assets:
Cash and cash equivalents (Note 1) $27,551,000 $28,187,000
Trade accounts receivable, net of allowance for doubtful
accounts of $600,000 and $500,000 at December 31, 1998
and 1997, respectively (Note 1) 7,556,000 12,893,000
Inventories (Notes 1 and 3) 10,326,000 21,208,000
Prepaid income taxes 4,011,000 -
Prepaid expenses and other current assets 2,378,000 2,019,000
Deferred income taxes (Notes 1 and 8) 1,131,000 1,597,000
Net assets of discontinued operations (Note 1 and 2) - 911,000
----------- -----------
Total current assets 52,953,000 66,815,000
Property, plant and equipment, net (Notes 1 and 4) 24,116,000 19,079,000
Cash surrender value of life insurance (Note 7) 6,215,000 3,529,000
Other assets 389,000 602,000
----------- -----------
$83,673,000 $90,025,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,804,000 $ 4,986,000
Accrued liabilities (Note 6) 3,432,000 5,034,000
----------- -----------
Total current liabilities 6,236,000 10,020,000
Deferred compensation (Note 7) 295,000 1,614,000
----------- -----------
Total liabilities 6,531,000 11,634,000
Commitments and contingencies (Notes 2, 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;
7,989,404 and 8,849,005 shares issued and outstanding as of
December 31, 1998 and 1997, respectively 30,309,000 39,233,000
Retained earnings 46,833,000 39,158,000
----------- -----------
Total shareholders' equity 77,142,000 78,391,000
----------- -----------
$83,673,000 $90,025,000
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
24
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Sales (Notes 1 and 12) $144,560,000 $149,515,000 $148,257,000
Cost of sales 122,195,000 120,982,000 114,431,000
------------ ------------ ------------
Gross profit 22,365,000 28,533,000 33,826,000
Selling, general and administrative 10,394,000 10,757,000 9,372,000
------------ ------------ ------------
Income from operations 11,971,000 17,776,000 24,454,000
Other income, net 1,533,000 975,000 1,042,000
------------ ------------ ------------
Income before income taxes 13,504,000 18,751,000 25,496,000
Provision for income taxes (Notes 1 and 8) 5,672,000 7,875,000 10,430,000
------------ ------------ ------------
Income from continuing operations 7,832,000 10,876,000 15,066,000
Loss from discontinued operations (net
of income tax benefit of $113,000 - Notes 1 and 2) (157,000) - -
------------ ------------ ------------
Net income $ 7,675,000 $ 10,876,000 $ 15,066,000
------------ ------------ ------------
------------ ------------ ------------
NET INCOME PER SHARE (Notes 1 and 11)
Income from continuing operations per
share - basic $ .91 $ 1.24 $ 1.72
Discontinued operations per share - basic (.02) - -
------------ ------------ ------------
Net income per share - basic $ .89 $ 1.24 $ 1.72
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding 8,637,724 8,797,734 8,772,815
------------ ------------ ------------
------------ ------------ ------------
Income from continuing operations per share -
diluted $ .89 $ 1.22 $ 1.67
Discontinued operations per share - diluted (.02) - -
------------ ------------ ------------
Net income per share - diluted $ .87 $ 1.22 $ 1.67
------------ ------------ ------------
------------ ------------ ------------
Diluted weighted average shares outstanding 8,837,304 8,924,262 9,038,223
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
25
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
COMMON STOCK
-----------------------------------
NUMBER OF
SHARES AMOUNT RETAINED EARNINGS TOTAL
--------------- ------------ ----------------- ------------
BALANCE AT JANUARY 1, 1996 8,734,694 $37,036,000 $13,216,000 $ 50,252,000
Net income 15,066,000 15,066,000
Stock options exercised, including related
tax benefit (Note 10) 56,996 834,000 834,000
Director compensatory stock options 269,000 269,000
Stock options granted to non-employee (Note 10) 269,000 269,000
Repurchase of common stock (13,800) (203,000) (203,000)
--------------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 1996 8,777,890 38,205,000 28,282,000 66,487,000
Net income 10,876,000 10,876,000
Stock options exercised, including related
tax benefit (Note 10) 71,115 759,000 759,000
Director compensatory stock options 269,000 269,000
--------------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 1997 8,849,005 39,233,000 39,158,000 78,391,000
Net income 7,675,000 7,675,000
Stock options exercised, including related
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)
--------------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 1998 7,989,404 $30,309,000 $46,833,000 $ 77,142,000
--------------- ----------- ------------- ------------
--------------- ----------- ------------- ------------
See accompanying notes to consolidated financial statements.
26
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,675,000 $10,876,000 $ 15,066,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,375,000 2,838,000 2,479,000
Loss on disposal of property, plant and equipment 1,001,000 305,000 79,000
Change in accrual for disposal of aerospace business (701,000) (180,000) (214,000)
Deferred compensation (1,319,000) 1,176,000 438,000
Deferred income taxes 765,000 (656,000) 479,000
Non-employee director compensatory stock options 269,000 269,000 269,000
Changes in operating assets and liabilities:
Trade accounts receivable 5,337,000 (1,110,000) (4,585,000)
Inventories 10,882,000 452,000 (14,049,000)
Prepaid expenses and other current assets (4,370,000) 2,781,000 (2,057,000)
Accounts payable and accrued liabilities (3,784,000) 845,000 519,000
------------ ----------- ------------
Net cash provided by (used in) operating activities 19,130,000 17,596,000 (1,576,000)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments - - 14,718,000
Purchase of property, plant and equipment (8,787,000) (2,127,000) (7,653,000)
Proceeds from disposal of property, plant and equipment 687,000 76,000 138,000
Purchase of life insurance policies and other assets (2,473,000) (2,177,000) (1,704,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities (10,573,000) (4,228,000) 5,499,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options granted to non-employee - - 269,000
Proceeds from issuance of common stock upon exercise of
options, including related tax benefit 3,184,000 759,000 834,000
Repurchase of common stock (12,377,000) - (203,000)
----------- ----------- ------------
Net cash (used in) provided by financing activities (9,193,000) 759,000 900,000
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (636,000) 14,127,000 4,823,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,187,000 14,060,000 9,237,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,551,000 $28,187,000 $ 14,060,000
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 8,546,000 $ 5,544,000 $ 10,500,000
----------- ----------- ------------
----------- ----------- ------------
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 subsidiary. 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's 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's wholly owned
subsidiaries are incorporated under the laws of the Mexican maquiladora
program and its principal activities are the production of golf clubheads.
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
straight-line methods over the estimated useful lives of the related assets
as follows:
Machinery and equipment 5-7 years
Building and improvements 5-31 years
Furniture, fixtures and computers 3-7 years
Autos and trucks 5-7 years
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
28
future cash flows (undiscounted and without interest charges) is less than
the carrying amount of an asset, an impairment loss is recognized.
INCOME TAXES--Deferred tax assets and liabilities are recognized based
on differences between financial statement and tax basis 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 equivalent 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 restated to
reflect current year classifications.
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, 2000. The Company has not yet evaluated the impact of SFAS No. 133
on its results of operations or financial position but believes that the
effect of the adoption of Statement No. 133 will not be material.
2. DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
essentially completed by June 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,
-----------------------------
1998 1997
----------- -----------
Raw materials and supplies $ 5,137,000 $ 7,578,000
Tooling 225,000 540,000
Work-in-process 4,019,000 12,375,000
Finished goods 945,000 715,000
----------- -----------
$10,326,000 $21,208,000
----------- -----------
----------- -----------
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,
-----------------------------
1998 1997
----------- -----------
Land $ 2,186,000 $ 2,186,000
Buildings and improvements 9,945,000 7,436,000
Machinery and equipment 27,861,000 22,656,000
Autos and trucks 857,000 786,000
Furniture, fixtures and computers 3,078,000 2,669,000
----------- -----------
43,927,000 35,733,000
Less accumulated depreciation and amortization 19,811,000 16,654,000
----------- -----------
$24,116,000 $19,079,000
----------- -----------
----------- -----------
Depreciation and amortization expense for 1998, 1997 and 1996 was
$3,375,000, $2,838,000 and $2,479,000, 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, 1998 and 1997. This line of credit, which expires on June 1,
1999, bears interest at the bank's prime rate or LIBOR plus 2%.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
30
DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
Accrued payroll and related expenses $1,279,000 $2,706,000
Accrued vacation 738,000 1,000,000
Accrued insurance 668,000 434,000
Accrued income taxes - 552,000
Other accrued expenses 747,000 342,000
------------ -----------
$3,432,000 $5,034,000
------------ -----------
------------ -----------
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,
------------------------------------------------
1998 1997 1996
---------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $1,778,000 $1,623,000
Service cost 75,000 34,000
Interest cost 139,000 112,000
Actuarial loss from change in assumptions 384,000 -
Actuarial loss (gain) (33,000) 52,000
Benefits paid (63,000) (43,000)
---------- ----------
Benefit obligation at end of year 2,280,000 1,778,000
---------- ----------
---------- ----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year 2,187,000 1,883,000
Actual return on plan assets 115,000 347,000
Employer contributions - -
Benefits paid (63,000) (43,000)
---------- ----------
Fair value of plan assets at end of year 2,239,000 2,187,000
---------- ----------
---------- ----------
Funded status (41,000) 409,000
Unrecognized actuarial loss (gain) 101,000 (275,000)
Unrecognized prior service cost 91,000 98,000
Unrecognized transition obligation (121,000) (147,000)
---------- ----------
Net amount recognized $ 30,000 $ 85,000
---------- ----------
---------- ----------
COMPONENTS OF NET PENSION COST:
Service cost $ 75,000 $ 34,000 $ 31,000
Interest cost 139,000 112,000 104,000
Return on plan assets (115,000) (347,000) (159,000)
Amortization and deferral (44,000) 199,000 13,000
---------- ---------- ---------
Net pension cost $ 55,000 $ (2,000) $ (11,000)
---------- ---------- ---------
---------- ---------- ---------
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.5% and 7% in 1998 and
1997, respectively. The expected long-term rate of return on assets was 6.5%
and 7% for 1998 and 1997, 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 $108,000, $78,000
and $102,000 during 1998, 1997 and 1996, 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. In October 1998, the Chairman and Chief
Executive Officer voluntarily relinquished all of his rights under this plan.
In addition, a former executive has also forfeited his benefits 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.
The following table sets forth the plan's change in benefit obligation,
change in plan assets and components of net pension cost:
DECEMBER 31,
------------------------------------------
1998 1997 1996
----------- ----------- ---------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 4,631,000 $ 3,455,000
Curtailment as of January 1, 1998 (4,032,000) -
Service cost 81,000 759,000
Interest cost 83,000 276,000
Actuarial loss from change in assumptions 93,000 224,000
Amendment 186,000 -
Actuarial loss (gain) 417,000 (83,000)
Benefits paid - -
----------- -----------
Benefit obligation at end of year 1,459,000 4,631,000
----------- -----------
----------- -----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning ----------- -----------
and end of year - -
----------- -----------
----------- -----------
Funded status (1,459,000) (4,631,000)
Unrecognized actuarial loss (gain) 491,000 135,000
Unrecognized prior service cost 177,000 183,000
Unrecognized transitional obligation 496,000 2,699,000
----------- -----------
(Accrued)/prepaid benefit cost $ (295,000) $(1,614,000)
----------- -----------
----------- -----------
COMPONENTS OF NET PENSION COST:
Service cost $ 81,000 $ 759,000 $ 699,000
Interest cost 83,000 276,000 97,000
Return on plan assets - - -
Amortization and deferral 74,000 198,000 66,000
Curtailment/forfeitures (1,807,000) (128,000) (103,000)
1996 amortized (unamortized) expense 250,000 71,000 (321,000)
----------- ----------- ---------
Net pension cost (income) $(1,319,000) $ 1,176,000 $ 438,000
----------- ----------- ---------
----------- ----------- ---------
33
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0% and 7.5% in 1998 and
1997, respectively. To fund this plan, the Company has purchased whole-life
insurance contracts on certain participants. The cash surrender value of these
policies is 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,
-------------------------------------
1998 1997 1996
---------- ---------- -----------
Current:
Federal $3,675,000 $7,045,000 $ 8,319,000
State 753,000 1,703,000 1,405,000
Foreign 251,000 (73,000) 227,000
---------- ---------- -----------
4,679,000 8,675,000 9,951,000
---------- ---------- -----------
Deferred:
Federal 844,000 (651,000) 258,000
State 149,000 (149,000) 221,000
---------- ---------- -----------
993,000 (800,000) 479,000
---------- ---------- -----------
$5,672,000 $7,875,000 $10,430,000
---------- ---------- -----------
---------- ---------- -----------
The actual provision on income before income taxes differs from the
statutory federal income tax rate due to the following:
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ----------- -----------
Federal income taxes at the statutory rate $4,726,000 $6,563,000 $ 8,924,000
State income taxes, net of federal benefit 618,000 1,030,000 1,541,000
California investment tax credit (67,000) (30,000) (349,000)
Other items 395,000 312,000 314,000
---------- ----------- -----------
$5,672,000 $7,875,000 $10,430,000
---------- ----------- -----------
---------- ----------- -----------
The tax effects of items comprising the Company's net deferred tax asset
are as follows:
34
December 31,
---------------------------
1998 1997
---------- ----------
Allowance for doubtful accounts $ 254,000 $ 213,000
Deferred compensation 124,000 688,000
Accrued expenses 404,000 557,000
Inventory reserve 750,000 635,000
State income taxes 299,000 455,000
Depreciation (252,000) (381,000)
Other items (448,000) (570,000)
---------- ----------
$1,131,000 $1,597,000
---------- ----------
---------- ----------
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, 1998 are as follows:
YEAR ENDING
DECEMBER 31,
---------------------------------------------------------
1999 $ 1,692,000
2000 1,692,000
2001 1,635,000
2002 1,578,000
2003 1,496,000
Thereafter 2,997,000
-----------
$11,090,000
-----------
-----------
Rent expense for 1998, 1997 and 1996 was approximately $1,669,000,
$1,106,000 and $1,355,000, 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, 1998, an aggregate of 624,692 shares had been purchased pursuant to
exercise of options granted under the plan, options to purchase an aggregate of
853,817 shares were outstanding (including options which were then exercisable
to purchase 513,334 shares), and 471,491 shares were available for additional
grants of options under the plan.
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
35
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
130,000 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, 1998. 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, 1998:
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
--------- --------
Balance, January 1, 1996 806,392 $10.73
Granted 689,698 16.81
Forfeited (147,635) 13.36
Exercised (56,996) 12.00
--------- --------
Balance, December 31, 1996 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
--------- --------
--------- --------
The following table summarizes information about stock options outstanding
at December 31, 1998:
36
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- ------------- -------------- -------------- ------------ --------------- ------------
$7.31 - 10.00 170,000 8.0 $ 9.08 110,000 $ 10.00
10.25 - 13.63 398,172 7.9 12.81 162,110 12.19
13.81 - 14.13 378,515 7.1 14.12 311,224 14.13
14.50 - 22.25 97,130 8.0 15.59 60,000 18.75
27.00 - 30.00 40,000 6.9 27.75 30,000 28.00
- ------------- -------------- -------------- ------------ --------------- ------------
$7.31 - 30.00 1,083,817 7.6 $ 13.75 673,334 $ 14.01
- ------------- -------------- -------------- ------------ --------------- ------------
- ------------- -------------- -------------- ------------ --------------- ------------
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,
-------------------------------------------------
1998 1997 1996
------------ ----------- -----------
Net income: As reported $7,675,000 $10,876,000 $15,066,000
Pro forma 6,869,000 8,749,000 14,460,000
Net income per share - basic: As reported $ .89 $ 1.24 $ 1.72
Pro forma $ .80 $ .99 $ 1.65
Net income per share - diluted: As reported $ .87 $ 1.22 $ 1.67
Pro forma $ .76 $ .95 $ 1.55
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 1998, 1997 and 1996, respectively: no dividend yield,
expected volatility of 71.8%, 67.0% and 61.8%, risk-free interest rate of 4.3%,
5.8% and 5.9%, and expected term of 4.0, 4.6 and 4.0 years. The weighted average
fair value per share of options granted in 1998, 1997 and 1996 was $8.33, $7.42
and $8.25, respectively.
37
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---------- ----------- -----------
Numerator:
Net income $7,675,000 $10,876,000 $15,066,000
---------- ----------- -----------
Numerator for basic and diluted earnings per
share--income available to common stockholders 7,675,000 10,876,000 15,066,000
Denominator:
Denominator for basic earnings per share--
weighted-average shares 8,637,724 8,797,734 8,772,815
Effect of dilutive securities:
Stock options 199,580 126,528 265,408
---------- ----------- -----------
Dilutive potential common shares 199,580 126,528 265,408
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 8,837,304 8,924,262 9,038,223
---------- ----------- -----------
---------- ----------- -----------
Basic earnings per share $ 0.89 $ 1.24 $ 1.72
---------- ----------- -----------
---------- ----------- -----------
Diluted earnings per share $ 0.87 $ 1.22 $ 1.67
---------- ----------- -----------
---------- ----------- -----------
The anti-dilutive options as of December 31, 1998, 1997 and 1996 were
1,023,817, 116,600 and 448,598, respectively.
12. BUSINESS SEGMENTS
The Company is engaged principally in the business of manufacturing
precision investment-cast titanium and stainless steel golf clubheads,
representing 93%, 94% and 94% of sales for the years ended December 31, 1998,
1997 and 1996, respectively. On June 30, 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard ("SFAS") No. 131
"Disclosures About Segments of an Enterprise and Related Information" effective
for fiscal years beginning after December 15, 1997. In accordance with the
selection criteria established by SFAS 131, the Company has determined that it
has one business segment.
The Company derived 49%, 22% and 14% of sales from three top customers in
1998, 34%, 23%, 15% and 12% of sales from four top customers in 1997; and 46%,
18% and 13% of sales from three top customers in 1996.
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, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, and have issued our report thereon
dated February 9, 1999; 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 9, 1999
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, 1996 (400,000) (400,000)
Year ended December 31, 1997 (400,000) (100,000) (500,000)
Year ended December 31, 1998 (500,000) (100,000) (600,000)
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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, 44
S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities
known as Mercurio #70 in Mexicali, Mexico
10.7 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, 66
S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities
known as Avenue Galaxia #50 in Mexicali, Mexico
10.8 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, 88
S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities
known as Mercurio #30 in Mexicali, Mexico
10.9 Lease Agreement, dated January 22, 1996, between Coastcast Corporation,
S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities
known as Calle Marte #162 in Mexicali, Mexico (2)
10.10 Guaranty, dated January 26, 1999, by the Company for the lease of the 110
Mexicali, Mexico facilities known as Mercurio #70
10.11 Guaranty, dated January 26, 1999, by the Company for the lease of the 116
Mexicali, Mexico facilities known as Avenue Galaxia #50
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10.12 Guaranty, dated January 26, 1999, by the Company for the lease of the 122
Mexicali, Mexico facilities known as Mercurio #30
10.13 Guaranty, dated January 23, 1996, by the Company for the lease, dated
January 22, 1996 (2)
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 128
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
10.16 Lease Guaranty Agreement, dated August 18, 1998, by the Company for the 146
lease of the Tijuana facility
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 and First Amendment to Credit Agreement, 150
effective February 1, 1999, between the Company and Imperial Bank
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* Trust Agreement by and between Coastcast Corporation and Imperial Trust
Company, dated September 1, 1996 (3)
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10.28* Coastcast Corporation Amended and Restated Supplemental Executive 158
Retirement Plan, effective January 1, 1998
10.29* Amended and Restated Trust Agreement by and between Coastcast 181
Corporation and 180 Imperial Trust Company, dated December 18, 1998
10.30 Agreement dated November 6, 1998 between the Company and Jonathan
Vannini (7)
10.31* Agreement dated November 6, 1998 between the Company and Richard W. Mora
(7)
10.32* Agreement dated January 15, 1999 between the Company and Richard W. Mora 202
21 Subsidiaries of the Company 206
23 Consent of Independent Auditors 207
27 Financial Data Schedule 208
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* 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.
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