-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KJoDLi21z6HAhf4uajksKSxZLRxmWSKuX35EXFwj1xcG6j0e/ufV0Wkv201mSZAr dL4qgyjH/w2NtN+ILPFf8Q== 0000912057-00-010046.txt : 20000307 0000912057-00-010046.hdr.sgml : 20000307 ACCESSION NUMBER: 0000912057-00-010046 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTCAST CORP CENTRAL INDEX KEY: 0000914479 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 953454926 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12676 FILM NUMBER: 562074 BUSINESS ADDRESS: STREET 1: 3025 E VICTORIA ST CITY: RANCHO DOMINGUEZ STATE: CA ZIP: 90221 BUSINESS PHONE: 3106380595 MAIL ADDRESS: STREET 1: 3025 EAST VICTORIA ST CITY: RANCHO DOMINIQUEZ STATE: CA ZIP: 90221 10-K405 1 10-K405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------------- EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 1-12676 -------------------------- COASTCAST CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3454926 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3025 EAST VICTORIA STREET RANCHO DOMINGUEZ, CALIFORNIA 90221 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 638-0595 ------------------------------------------------------------------ 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. /X/ Aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange on March 1, 2000 ($14.0625 per share): $82,253,000. As of March 1, 2000, 7,701,571 shares of the Common Stock, no par value, of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held June 21, 2000, are incorporated by reference into Part III of this Report. 1 COASTCAST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------- PART I PAGE - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- PART II - ---------------------------------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 - ---------------------------------------------------------------------------------------------------------- PART III - ---------------------------------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant 19 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 19 - ---------------------------------------------------------------------------------------------------------- PART IV - ---------------------------------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
2 PART I ITEM 1. BUSINESS. GENERAL Coastcast Corporation is one of the largest manufacturers in the world of investment-cast titanium and stainless steel golf clubheads for high-quality, premium-priced metal woods, irons and putters. The Company believes it has manufactured more metal wood clubheads for high-quality, premium-priced golf clubs than any other manufacturer. Over the past two decades, golf clubs with perimeter-weighted heads have become much more popular among golfers because such clubs are more forgiving to off-center hits than other types of clubs. The investment-casting process has become the principal method for manufacturing clubheads because it facilitates the use of perimeter weighting designs and modern alloys and enhances manufacturing precision and uniformity. Manufacturing precision is particularly important in the manufacture of an oversized, thin-walled metal wood which can involve a significant number of separate manufacturing steps to produce a clubhead that meets strict standards for size, weight, strength and finish. The Company also manufactures a variety of investment-cast orthopedic implants and surgical tools (used principally in replacement of hip and knee joints in humans and small animals) and other specialty products, which products accounted for approximately 9% of the Company's total sales for the year ended December 31, 1999. In addition, in April 1999, the Company acquired a small company that casts aluminum compressor wheels using the reusable investment pattern process. The Company has converted a portion of the plant in Rancho Dominguez to support this new business. The business will start generating revenue in the first quarter of 2000. In the past several years, golf clubs with titanium alloy heads have become popular. The Company developed the capability of manufacturing titanium clubheads and began shipping titanium clubheads at the end of 1995. Titanium clubheads accounted for approximately 41% and 42% of the Company's total sales in 1998 and 1999, respectively. The Company was incorporated as a California corporation in 1980. BUSINESS STRATEGY - GOLF The Company recognizes that golf club companies are critical to its success and, accordingly, has designed its business strategy to engender customer satisfaction in order to maintain its industry leadership position. The Company's strategy consists of the following principal elements: - MAINTAIN RELIABLE, HIGH-QUALITY MANUFACTURING. The Company believes its manufacturing expertise, quality control, scheduling flexibility, substantial production capacity and its ability to manufacture golf clubheads using stainless steel or titanium alloys differentiate it from others in the industry. The Company endeavors to respond quickly to customers' orders and deliver high-quality clubheads on a timely basis. This capability is particularly important to golf club companies which can experience rapid growth from the increasing popularity of a particular club or set of clubs. - INTEGRATE OPERATIONS. The Company's operations are integrated, from the computer-aided manufacture of some of the tooling used to produce clubheads through foundry operations and finishing processes, including painting. 3 - FOSTER CLOSE CUSTOMER RELATIONSHIPS. The Company believes that its responsive service has been a significant element of its success. The Company endeavors to be a value-added supplier by offering consistently high levels of customer service and support. The Company has a staff of 13 employees dedicated to sales and customer service. The Company maintains its own internal laboratory for testing of customers' products during the production process. The Company typically delivers finished products to its customers within 10 weeks from receipt of the customer's order during peak production periods, within 6 to 8 weeks during other periods and within several weeks or even several days if necessary to accommodate a customer's need for more rapid delivery. With new products, depending on their complexity, a longer turnaround period may be expected. GOLF PRODUCTS The Company's golf products are generally used in golf clubs targeted at the high end of the market. These clubs must satisfy the requirements of highly-skilled amateur and professional golfers, including touring professionals. As such, golf clubs which incorporate clubheads manufactured by the Company are sometimes referred to in the industry as "tour-driven" golf clubs. The Company's clubheads are included in a variety of leading metal woods, irons and putters, some of which are listed below:
CALLAWAY TAYLOR MADE -------- ----------- GREAT BIG BERTHA HAWKEYE TITANIUM METAL WOODS FIRESOLE TITANIUM METAL WOODS BIG BERTHA STEELHEAD PLUS METAL WOODS FIRESOLE OFFSET TITANIUM METAL WOODS GREAT BIG BERTHA HAWKEYE TITANIUM IRONS BURNER BUBBLE 2 METAL WOODS X14 STEELHEAD IRONS SUPER STEEL METAL WOODS ODYSSEY DUAL FORCE BLADE PUTTERS SUPER STEEL OFFSET METAL WOODS ODYSSEY DF ROSSIE MALLET PUTTERS ODYSSEY DUAL FORCE WEDGES ODYSSEY VARIABLE DUROMETER PUTTERS TITLEIST -------- 975D/976R TITANIUM METAL WOODS 975F TITANIUM METAL WOODS CLEVELAND DCI 981 & 981 SL IRONS --------- DCI 962 IRONS RTG WEDGES BOB VOKEY WEDGES 588 WEDGES DCI 990 IRONS 691 WEDGES 485 WEDGES PING ---- COBRA ISI TITANIUM METAL WOODS ----- ISI STEEL FAIRWAY METAL WOODS TRUSTY RUSTY PWR WEDGES
GOLF PRODUCT CUSTOMERS For almost twenty years, the Company has supplied investment-cast clubheads for metal woods, irons and putters to many of the top golf companies which produce high-quality, premium-priced golf clubs. Most golf club companies source the three principal components of a golf club--the clubhead, shaft, and grip--from independent suppliers which manufacture these components based on the golf club companies' designs and specifications. The Company currently is a major supplier of stainless steel and titanium clubheads to Callaway Golf Company, which is the 4 producer of the Big Bertha line of steel metal woods and irons and the Great Big Bertha titanium metal woods and irons, and Odyssey putters and wedges, since its acquisition by Callaway in August 1997. In addition, the Company is a supplier of investment-cast steel and titanium clubheads for companies which market the Titleist, Taylor Made, Cleveland, Cobra, and Wilson brands of golf clubs. Substantially all of the clubheads manufactured by the Company are used in high-quality, premium-priced golf clubs. The Company believes that a substantial portion of the clubheads manufactured by it are incorporated in clubs sold in North America, although many of the Company's clubheads are incorporated in clubs sold in parts of Asia, Europe and other parts of the world. Historically, a limited number of golf club companies have held a very substantial portion of the total market share for high-quality, premium-priced golf clubs in North America. Currently, some of the more popular high-quality, premium-priced clubs are Callaway metal woods and irons; Taylor Made metal woods and irons; Titleist metal woods, irons and putters; Odyssey putters; Wilson metal woods, irons and putters; and Cobra metal woods. Several of these golf clubheads are marketed by customers of the Company. Callaway (including Odyssey after its acquisition by Callaway in August 1997) accounted for 47%, 49% and 34% of the Company's total sales in 1999, 1998 and 1997, respectively. Fortune Brands (formerly American Brands, owner of Titleist and Cobra) accounted for 25%, 22% and 12% of the Company's total sales in 1999, 1998 and 1997, respectively. Taylor Made accounted for 12%, 14% and 23% of the Company's total sales in 1999, 1998 and 1997, respectively. A close working relationship typically exists between the Company and its principal golf club customers, and sales and marketing activities are conducted by a limited number of direct sales employees and senior executives of the Company. MANUFACTURING - GOLF INVESTMENT-CASTING PROCESS. Investment-casting is a highly specialized method of making metal products. It has become the principal method for the manufacture of golf clubheads. Previously, woods were made of wood and irons were produced by forging and machining. Greater flexibility in the shape and weight distribution of clubheads is possible with the investment-casting process. Investment-casting facilitates perimeter weighting and the use of modern alloys. It also enhances manufacturing precision and uniformity. The enhanced precision inherent in investment-casting is particularly important in the manufacture of metal woods which can involve a significant number of separate manufacturing steps. The basic steps of investment-casting, in its simplest form, are as follows: - - Produce a metal die (sometimes called a wax mold) based on specifications provided by the customer. - - Inject wax into the die, producing a pattern the exact shape of the final casting. - - Surround (or "invest") the pattern with a ceramic material which is allowed to dry to form a ceramic shell. - - Remove the wax by heat, leaving a cavity in the ceramic shell in the shape of the desired casting. - - Pour molten metal into the cavity in the ceramic shell and allow it to solidify. - - Remove the ceramic material by mechanical and chemical action after the metal solidifies and clean the casting. - - Finish and inspect the casting. 5 METAL ALLOYS. Most clubheads manufactured by the Company are made of titanium or stainless steel alloys. Titanium clubheads have similar tensile strength as stainless steel with approximately one-half the weight of steel. Therefore, a larger oversized clubhead can be manufactured using titanium without increasing clubhead weight. The Company's Gardena facility is devoted to titanium operations. POLISHING AND FINISHING. The Company conducts golf clubhead polishing and finishing operations in its facilities in Mexicali, Mexico. Finishing of the head for an iron or putter can require numerous separate steps and finishing of a head for a metal wood can involve many more separate steps. Most of the clubheads and substantially all of the metal woods manufactured by the Company are finished by it to customer specifications, although some of such clubheads--principally irons--are delivered to customers in an unfinished state. The Company, to assist its customers, at times also polishes and finishes limited quantities of investment-cast clubheads manufactured by other companies. QUALITY CONTROL. The Company believes that its success as a leading supplier of golf clubheads is largely attributable to its quality control measures. The Company attempts to monitor every aspect of the engineering and manufacturing process to assure the quality of the clubheads manufactured by the Company. Particular attention is paid to the quality of raw materials (principally wax, ceramic and metal alloys), gating techniques employed in channeling the flow of molten metal in the ceramic shell in the casting process, and rigorous inspection standards to assure compliance with the customers' product specifications throughout the manufacturing process. REGULATIONS. The Company uses hazardous substances and generates hazardous waste in the ordinary course of its business. The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials. Although the Company has not to date incurred any material liabilities under environmental laws and regulations and believes that its operations are in substantial compliance with applicable laws and regulations, environmental liabilities could arise in the future that may adversely affect the Company's business. See "Discontinued Operations" below. COMPETITION - GOLF The Company operates in a highly competitive environment. The Company competes against a number of manufacturers of investment-cast titanium clubheads for high-quality, premium-priced golf clubs, including but not limited to: Sturm Ruger, Inc., and Cast Alloys, Inc. The Company competes principally against two significant U.S.-based manufacturers (Hitchner Manufacturing Co., Inc. and Cast Alloys, Inc.) of investment-cast steel clubheads. The Company also competes with several foreign manufacturers of investment-cast steel clubheads, including Worldmark Services Ltd. (formerly Fu-Sheng Industrial Co. Ltd.), O-ta Precision Casting Co. Ltd., Dynamic Precision Casting MFG. Co. Ltd. and Advanced Group International Co. Ltd. The Company believes that its position as a leading manufacturer of titanium and steel clubheads for high-quality, premium-priced golf clubs is due to its ability to produce quality clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs, its experience and expertise in manufacturing investment-cast golf clubheads, and its integrated manufacturing operations. Although price is a factor, the Company does not compete solely on price. Quality and service are key success factors in the premium-price golf clubhead market. The Company seeks to provide better products and service to its customers than its competitors in order to increase or retain market share. Although the Company's foreign competitors (the principal ones of which are located in Asia) are typically able to offer prices below the Company's prices, the Company believes that it has some competitive advantages over foreign manufacturers, including its ability to deliver clubheads more quickly to its customers due to shorter shipping and lead 6 times. Shipment of clubheads to the United States from Asia usually requires at least two weeks by ocean freight. Further, the Company believes that certain of its customers prefer products made in the United States. The Company also competes against golf club companies that internally produce clubheads for their clubs. The Company believes that one of the larger golf club companies, Karsten Manufacturing Co., which produces the Ping brand of clubs, manufactures substantially all of the investment-cast steel clubheads for use in its own clubs. The Company believes that this golf club company produces clubheads for its own use only and does not currently compete with the Company for the business of other golf club companies. However, Karsten Manufacturing Co. has purchased some golf clubheads for its Ping brand from the Company. The Company also faces potential competition from those golf club companies that currently purchase golf clubheads from outside suppliers but may, in the future, manufacture clubheads internally. If the Company's current customers begin manufacturing clubheads internally, the Company's sales would be adversely affected. The Company believes that as long as component suppliers, such as the Company, provide high-quality component golf club parts at competitive prices and reliably, it is unlikely that many golf club companies will commence their own manufacturing. The Company experiences indirect competition from golf club companies that produce golf clubs with clubheads that are not investment-cast. For example, some clubheads for woods are made of wood, some clubheads for irons are forged, some clubheads for putters are machined, and some clubheads are made of graphite or other composites. The Company believes that the investment-cast, metal clubhead has a greater share of the market for clubheads for high-quality, premium priced golf clubs than these alternate types of clubheads. In particular, the metal wood has surpassed the wooden wood as the most popular wood and the investment-cast iron has surpassed the forged iron as the most popular type of iron. Graphite and other composite clubheads have been available for several years, but to date have not become nearly as popular as investment-cast clubheads. EMPLOYEES As of December 31, 1999, the Company employed 4,303 persons on a full-time basis. Of these employees, 2,655 and 772 were employed by Coastcast Corporation, S.A. and Coastcast Tijuana S. de R. L. de C. V., respectively, the Mexican subsidiaries of the Company. The Company considers its employee relations to be good. The production and maintenance employees in the Gardena, California facility are represented by the United Steelworkers of America. There were 189 such employees as of December 31, 1999. The collective bargaining agreement for such employees was effective May 12, 1997, and will expire on May 11, 2000. ORTHOPEDIC IMPLANTS AND SPECIALTY PRODUCTS The Company also manufactures orthopedic implants and surgical tools (used principally for replacement of hip and knee joints in humans and small animals) and other specialty products. The Company believes that the engineering and manufacturing discipline required to manufacture these products has contributed to the Company's ability to manufacture golf products. The Company is endeavoring to develop its steel, titanium, and other alloy investment casting capabilities to potential customers in other commercial and industrial businesses outside of the golf business. At this stage, the Company cannot predict which product opportunities will result in profitable sales, and whether volumes will be significant. The Company believes that its principal competitors in this business are Precision Castparts Corporation and PED Manufacturing. 7 During the last half of 1999, the Company started manufacturing aluminum compressor wheels using the reusable investment pattern process. This process utilizes plaster molds and rubber patterns to produce complex, thin wall aluminum compressor wheels. The Company believes that its principal competitors in this business are Ross Aluminum Foundries, Sterling Division of Doncasters plc, and the AlliedSignal Foundry in Ireland. DISCONTINUED OPERATIONS In 1993, the Company announced its decision to discontinue its aerospace business. This business was substantially phased out in 1994. In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company conducted investigations to determine the source and extent of the contamination. In addition, the Company determined that certain of the contaminates were present prior to its ownership and entered into a remediation cost sharing agreement with the previous owner of the property. In August 1998, the Company sold the Wallingford, Connecticut property, under an agreement which stipulates that the Company and the previous owner bear the liability to remediate the property. The Company incurred a loss on the sale of the property. The loss on sale of the property plus the Company's share of the estimated remediation costs were not adequately covered by the original reserve. As a result, for the year ended December 31, 1998, the Company reported a $157,000 loss from discontinued operations, net of income tax benefit, as shown on the Consolidated Statements of Income. ITEM 2. PROPERTIES. The Company's principal executive offices and one of two steel investment casting manufacturing facilities are located in a 120,000 square foot leased facility in Rancho Dominguez, California, a suburb of Los Angeles. Approximately 20,000 square feet of this facility has been allocated to the Company's new aluminum compressor wheels business. The lease expires in October, 2003 and the Company has a five-year extension option. The Company owns a complex of plants in Gardena, California (which is within approximately five miles of the Rancho Dominguez facilities), comprising an aggregate of approximately 110,000 square feet. These facilities are principally used for manufacturing titanium golf clubheads and tooling. In October 1994, the Company purchased approximately two acres of land contiguous to its Gardena facility. In April 1996, the Company purchased another approximately two acres of land next to the land purchased in October 1994. This land is available for future expansion if and when necessary. Clubhead polishing and finishing operations are conducted in facilities leased by the Company's subsidiary in Mexicali, Mexico under four lease agreements, comprising an aggregate of approximately 142,000 square feet. Three of the leases expire in December 2003, and the other lease expires in June 2006. All four leases have a five-year extension option. The Company has moved a significant portion of its steel golf clubhead casting operations to a 186,000 square foot leased investment casting facility in Tijuana, Mexico. The lease expires in April 2008 and the Company has two five-year extension options. Also, the Company has options to lease sites contiguous to the property as needed for future growth. 8 ITEM 3. LEGAL PROCEEDINGS. The Company is a party to legal actions arising in the ordinary course of business, none of which, individually or in the aggregate, in the opinion of management, after consultation with counsel, will have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Hans H. Buehler 67 Chairman of the Board and Chief Executive Officer Larry J. Cornelius 58 Vice President, Titanium Operations Norman Fujitaki 45 Chief Financial Officer and Secretary Ramon F. Ibarra 47 Vice President, Manufacturing William L. Osborn 45 Vice President, Mexicali Operations Bryan Rolfe 47 Vice President, New Product Development Roberto Roman 57 Vice President, Human Resources Todd L. Smith 36 Executive Vice President, Operations Kathleen H. Wainwright 35 Senior Vice President, Sales K. Michael Wellman 55 Senior Vice President - Foundries
Mr. Buehler is one of the founders of the Company and has been Chairman of the Board since the Company's inception in 1980. Prior to founding the Company, he was President of the Rex Precision Products Division of Alco Standard Corporation, a competitor of the Company that was acquired by the Company in 1987. Mr. Buehler has more than 40 years of experience in the investment-casting business, including more than 30 years of experience in the manufacture of golf clubheads. Mr. Cornelius joined the Company in March 1995. In July 1999, he was promoted to Vice President Titanium Casting. From 1995 to 1999, he was the Director of the Titanium operations. From 1992 to 1995, he was the Engineering Manager for IMI Titanium Inc. Mr. Cornelius has over 22 years of experience in the titanium business. Mr. Fujitaki joined the Company in 1994. He served as Corporate Controller from 1994 to March 1999 and was promoted to Chief Financial Officer in April 1999. He previously was employed for eight years by Neutrogena Corporation, a manufacturer and marketer of skin and hair care products, for which he served as Corporate Controller from September 1988. Mr. Ibarra joined the Company in 1981. Since 1989, he has served as Vice President, Manufacturing of the Company. Prior to such time, he served as the production manager for the Company with respect to all phases of its business and as the plant manager at the facility located in Rancho Dominguez, California. Mr. Osborn joined the Company in 1993. In July 1999, he was promoted to Vice President Mexicali Finishing. Prior to this time, he served the Company in various management capacities in the manufacturing area. 9 Mr. Rolfe joined the Company in July 1998. From 1997 to June 1998, he was a consultant and President of Slotline Golf Company. From 1995 to 1997, he was the President and Chief Operating Officer of Cleveland Golf Company. Mr. Rolfe worked 20 years at Salomon North America in a variety of management positions, including Director of Operations and Finance from 1991 to 1995. Mr. Roman joined the Company in 1986. In July 1999, he was promoted to Vice President - Human Resources. Prior to this time, he served the Company in various management capacities in the human resource area. Mr. Roman has over 30 years of human resources experience. Mr. Smith joined the Company in 1981. In February 2000, he was promoted to Executive Vice President - Operations. From July 1999 to January 2000, he was the Vice President - Operations. Prior to this time, he served the Company in various management capacities in both the manufacturing and administrative areas. Mr. Smith is the son of Hans H. Buehler. Ms. Wainwright joined the Company in 1988. In February 2000, she was promoted to Senior Vice President - Sales. From November 1996 to January 2000, she has served as Vice President, Sales. Prior to that time, she served the Company in various capacities, including plant manager at the facility located in Wallingford, Connecticut. Mr. Wellman joined the Company in 2000. In February 2000, he became the Senior Vice President - Foundries. From 1993 to 1999, he was the President and owner of Commercial Titanium Casting, Inc. From 1989 to 1993, he was the Group Vice President of Sturm Ruger Inc. Mr. Wellman has over 26 years of foundry experience. Each officer serves at the pleasure of the Board of Directors of the Company. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRINCIPAL MARKET AND PRICES The common stock of the Company is listed on the New York Stock Exchange under the symbol PAR. The following table sets forth the high and low sales prices per share for the common stock of the Company as reported by the New York Stock Exchange.
FISCAL YEAR HIGH LOW - ----------- ---- --- 1999 First Quarter $ 9 7/8 $ 6 15/16 Second Quarter 12 3/4 8 7/8 Third Quarter 12 7/8 10 1/2 Fourth Quarter 16 13/16 10 11/16 1998 First Quarter 22 5/8 13 3/8 Second Quarter 25 16 1/4 Third Quarter 19 5/8 8 3/8 Fourth Quarter 9 11/16 6 5/8
The approximate number of record holders of common stock of the Company as of March 1, 2000 was 145. DIVIDENDS The Company does not anticipate paying cash dividends in the foreseeable future. Any future determination as to payment of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. STOCK REPURCHASE On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. Under this authorization, the Company purchased 292,500 shares at a cost of $3.4 million for the year ended December 31, 1999. As of December 31, 1999, there were 164,500 shares remaining to be purchased under this authorization. In addition, in December 1999, the Board of Directors authorized the repurchase of an additional one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. BUSINESS RISKS CUSTOMER CONCENTRATION. The Company's sales have been and very likely will continue to be concentrated among a small number of customers. Sales to as few as three customers accounted for 84% of sales during the year ended December 31, 1999 and sales to three or four customers accounted for 85% and 84% of sales during the years ended December 31, 1998 and 1997, respectively. Sales to the Company's top customer, Callaway Golf Company (including Odyssey Golf after its acquisition by Callaway in August 1997) accounted for 47% of sales for the year ended December 31, 1999. 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 MANUFACTURING PLANTS IN MEXICO. A substantial portion of the golf clubheads manufactured by the Company, including clubheads cast by the Tijuana plant, and some clubheads produced by other clubhead manufacturers, are polished and finished by the Company in its Mexicali facilities. The polishing and finishing processes used by the Company are highly labor intensive. The Company manufactures in Tijuana and Mexicali, Mexico pursuant to the "maquiladora" duty-free program established by the Mexican and U.S. governments. Such program enables the Company to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico or paying certain Mexican taxes. The Company pays certain expenses of the Mexico facilities in Mexican currency and thus is subject to fluctuations in currency value. The Company does not have any exchange rate hedging arrangements to protect against fluctuations in currency value. The Company is also subject to 12 other customary risks of doing business outside the United States. There can be no assurance that the Mexican government will continue the "maquiladora" program or that the Company will continue to be able to take advantage of the benefits of the program. The loss of these benefits could have an adverse effect on the Company's business. The Company believes that the North American Free Trade Agreement has not had any adverse effect on its Mexican operations. HAZARDOUS WASTE. In the ordinary course of its manufacturing process, the Company uses hazardous substances and generates hazardous waste. The Company has no material liabilities as of December 31, 1999 under environmental laws and regulations, and believes that its operations are in substantial compliance with applicable laws and regulations. Nevertheless, no assurance can be given that the Company will not encounter environmental problems or incur environmental liabilities in the future which could adversely affect its business. See also Item 1. Business - Discontinued Operations. DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment are dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions. A decrease in consumer spending on premium-priced golf clubs could have an adverse effect on the Company's business. SEASONALITY; FLUCTUATIONS IN OPERATING RESULTS. The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales in the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurance can be given, however, that these factors will mitigate the impact of seasonality in the future. RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon its senior management, and their ability to attract and retain qualified personnel. The Company does not have any non-competition agreements with any of its employees. There is no assurance that the Company will be able to retain its existing senior management personnel or be able to attract additional qualified personnel. SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common stock of the Company in the public market or the perception that such sales could occur may adversely affect prevailing market prices of such common stock. FLUCTUATIONS IN CALLAWAY GOLF COMPANY SHARES. The Company's common stock value has from time to time fluctuated somewhat in relation to the share value of the Callaway Golf Company. The prevailing market price of the Company's common stock could be adversely impacted by a substantial fluctuation in the market price of Callaway common stock. 13 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere herein.
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE DATA) Consolidated Statement of Income Data (1): Sales $120,383 $144,560 $149,515 $148,257 $ 76,001 Gross profit 21,773 22,365 28,533 33,826 12,914 Income from operations 14,355 11,971 17,776 24,454 5,941 Income from continuing operations before class action lawsuit settlement expense and income taxes 16,101 13,504 18,751 25,496 7,488 Class action lawsuit settlement expense -0- -0- -0- -0- 2,075 Income from Continuing Operations Data : Income before income taxes 16,101 13,504 18,751 25,496 5,413 Income taxes 6,582 5,672 7,875 10,430 2,114 Income from continuing operations 9,519 7,832 10,876 15,066 3,299 Income from Continuing Operations Per Share-- Basic $ 1.21 $ 0.91 $ 1.24 $ 1.72 $ 0.36 ======== ======== ======== ======== ======== Income from Continuing Operations Per Share-- Diluted $ 1.20 $ 0.89 $ 1.22 $ 1.67 $ 0.36 ======== ======== ======== ======== ======== Weighted Average Shares Outstanding--Basic 7,892 8,638 8,798 8,773 9,045 ======== ======== ======== ======== ======== Weighted Average Shares Outstanding--Diluted 7,924 8,837 8,924 9,038 9,099 ======== ======== ======== ======== ========
AS OF DECEMBER 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) Consolidated Balance Sheet Data: Working Capital $58,155 $46,717 $56,795 $44,800 $34,788 Total Assets 92,316 83,673 90,025 76,100 58,908 Deferred compensation 541 295 1,614 438 -0- Shareholders' equity 83,290 77,142 78,391 66,487 50,252
(1) In October 1993, the Company announced its decision to discontinue its aerospace business. See Note 2 of Notes to Consolidated Financial Statements. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table sets forth for the periods indicated operating results expressed in thousands of dollars and as a percentage of sales.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Sales $120,383 100.0 $144,560 100.0 $149,515 100.0 Cost of sales 98,610 81.9 122,195 84.5 120,982 80.9 Gross profit 21,773 18.1 22,365 15.5 28,533 19.1 Selling, general and administrative 7,418 6.2 10,394 7.2 10,757 7.2 Income from continuing operations 14,355 11.9 11,971 8.3 17,776 11.9 Other income, net 1,746 1.5 1,533 1.1 975 0.6 Income from continuing operations before Income taxes 16,101 13.4 13,504 9.3 18,751 12.5
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Sales decreased $24.2 million, or 17%, to $120.4 million for 1999 from $144.6 million for 1998. The decline in sales was due to an over 34% decrease in sales volume of clubheads during the first half of 1999 partially offset by an increase in clubhead sales in the second half of 1999. Titanium clubhead sales represented approximately 42% and 41% of total sales for 1999 and 1998, respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf after its acquisition by Callaway Golf Company in August 1997, represented 47% of total sales for 1999 compared to 49% in 1998. There is no assurance that sales to Callaway will represent similar percentages of total sales in the future. Gross profit decreased $.6 million, or 3%, to $21.8 million for 1999 from $22.4 million for 1998. The gross profit margin increased to 18% in 1999 from 16% in 1998. The improvement in gross margin was due principally to higher costs incurred in the last half of 1998 associated with inventory write-downs, new products and the start up of the Tijuana plant. Selling, general and administrative expense decreased by $3.0 million, or 29%, to $7.4 million for 1999 from $10.4 million for 1998. The decrease in selling, general and administrative expense was due primarily to decreased payroll and related expenses, legal expenses and life insurance expense partially offset by an increase in deferred compensation expense principally because the prior year included the forfeiture and curtailment of these benefits which resulted in a large reduction in deferred compensation expense for the year ended December 31, 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Sales decreased $4.9 million, or 3%, to $144.6 million for 1998 from $149.5 million for 1997. Increases in sales of steel alloy metal woods and irons were more than offset by the decrease is sales of titanium alloy clubheads and steel alloy putters. Titanium clubhead sales represented 41% and 50% of total sales for 1998 and 1997, respectively. 15 Sales to Callaway Golf Company, including sales to Odyssey Golf after its acquisition by Callaway Golf Company in August 1997, represented 49% of total sales for 1998 compared to 34% in 1997. Gross profit decreased $6.1 million, or 21%, to $22.4 million for 1998 from $28.5 million for 1997. The gross profit margin decreased to 16% in 1998 from 19% in 1997. The decrease in gross margin was due principally to the significant decrease in the manufacturing volume of titanium clubheads during the last half of 1998, higher costs and lower yields relating to the start-up of three new products lines and start-up expenses related to the Tijuana plant. There was no gross profit for the quarter ended December 31, 1998 compared to $7.2 million for the comparable quarter in 1997. The gross profit margin decreased to 0% in the fourth quarter 1998 versus 20% in the fourth quarter of 1997. This decrease was principally due to the decrease in sales volume coupled with the negative effect of write-downs of inventory and non-producing assets and the start-up of the Tijuana plant. Selling, general and administrative expense decreased by $.4 million, or 4%, to $10.4 million for 1998 from $10.8 million for 1997. The decrease in selling, general and administrative expense was due primarily to decreased expenses related to the reversal of most of the prior years' accrual for the supplemental executive retirement program, partially offset by an increase in severance pay and legal fees and settlement costs related to a threatened proxy contest which was resolved in the fourth quarter. DISCONTINUED OPERATIONS In 1993, the Company announced its decision to discontinue its aerospace business. This business was substantially phased out in 1994. In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company conducted investigations to determine the source and extent of the contamination. In addition, the Company determined that certain of the contaminates were present prior to its ownership and entered into a remediation cost sharing agreement with the previous owner of the property. In August 1998, the Company sold the Wallingford, Connecticut property, under an agreement which stipulates that the Company and the previous owner bear the liability to remediate the property. The Company incurred a loss on the sale of the property. The loss on sale of the property plus the Company's share of the estimated remediation costs were not adequately covered by the original reserve. As a result, the Company reported a $.2 million loss from discontinued operations, net of income tax benefit, as shown on the Consolidated Statements of Income. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents position at December 31, 1999 was $42.8 million compared to $27.6 million on December 31, 1998, an increase of $15.2 million. Net cash provided by operating activities was $17.6 million for the year ended December 31, 1999. Net income of $9.5 million, depreciation and amortization of $4.1 million, a decrease in prepaids and other current assets of $4.2 million and an increase in accounts payable and accrued liabilities of $2.1 million, were partially offset by an increase in accounts receivables and inventory of $1.6 million and $.7 million, respectively. Cash provided from investing activities of $.9 million consist primarily of the surrender of life insurance policies of $6.2 million partially offset by $4.2 million of capital expenditures and the net purchases of investments of $1.0 million. Net cash used by financing activities of $3.3 million consists mainly of the repurchase of Company common stock of $3.4 million. The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5 million and which had no outstanding balance at December 31, 1999. This line of credit, which expires on May 30, 2000, bears interest at the bank's prime rate or LIBOR plus 2%. 16 On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. Under this authorization, the Company purchased 292,500 shares at a cost of $3.4 million for the year ended December 31, 1999. As of December 31, 1999, there were 164,500 shares remaining to be purchased under this authorization. In addition, in December 1999, the Board of Directors authorized the repurchase of an additional one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. The Company believes that its current cash position, the working capital generated by future operations and the ability to borrow should be adequate to meet its financing requirements for current operations and the foreseeable future. QUARTERLY INFORMATION AND SEASONALITY Set forth below is certain unaudited quarterly financial information. The Company believes that all other necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statements included elsewhere herein.
YEAR ENDED YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 --------------------------------------------------------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales $ 27,091 $ 33,582 $ 31,957 $ 27,753 $ 45,321 $ 43,588 $ 31,627 $ 24,024 Gross profit (loss) 5,849 7,636 3,776 4,512 9,649 9,580 3,147 (11) Income (loss) before taxes 3,976 5,796 2,603 3,726 6,928 6,903 1,175 (1,502) Provision for income taxes 1,670 2,434 1,032 1,446 2,910 2,899 493 (630) Income from continuing operations 2,306 3,362 1,571 2,280 4,018 4,004 682 (872) Loss from discontinued operations -0- -0- -0- -0- -0- -0- (157) -0- Net income 2,306 3,362 1,571 2,280 4,018 4,004 525 (872) Net income per share - basic .29 .43 .20 .29 .45 .44 .06 (.11) Net income per share-diluted .29 .42 .20 .29 .44 .42 .06 (.11)
The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales during the six month period that include the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurances can be given, however, that these factors will mitigate the impact of seasonality. BACKLOG As of December 31, 1999, the Company had a backlog of approximately $34.5 million as compared to a backlog of approximately $25.4 million as of December 31, 1998. The Company believes that its current backlog is scheduled to be shipped in the ensuing four months. Although many of the Company's customers release purchase orders months prior to the requested delivery date, these orders are generally cancelable without penalty provided that no production has commenced. If production has commenced, an order is cancelable upon payment of the cost of production. Historically, the Company's backlog generally has been the highest in the second and third quarters due principally to seasonal factors. Backlog is not necessarily indicative of future operating results. 17 YEAR 2000 CONVERSION AND RESIDUAL EFFECT To date, the Company's has not experienced any problems associated with the year 2000. However, that does not mean that the year 2000 problem will not affect us in the future. For example, programs may fail to recognize February 29, 2000 as a leap year date as a result of an exception to the calculation of leap years that will occur in the year 2000. These residual year 2000 issues could have an adverse impact on our operations. If residual year 2000 problems cause the failure of any of the technology, software or systems necessary to use our products or operate our business, we could lose customers, suffer significant disruptions in our business, lose revenues and incur substantial liabilities and expenses. We could also become involved in costly litigation resulting from residual year 2000 problems. These problems could materially and adversely affect our business, results of operations and financial condition. In addition, a disruption in the operations of parties with whom we interact could materially and adversely affect our business, results of operations and financial condition. FORWARD LOOKING INFORMATION This report and other reports of the Company contain or may contain certain forward-looking statements and information that are based on beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions as they relate to the Company or the Company's management, are used to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by the Company, the costs of product development and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors, and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information, other than quarterly information, required by this item is incorporated herein by reference to the consolidated financial statements and supplementary data listed in Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item with respect to directors is incorporated herein by reference to the information contained under the caption "Nomination and Election of Directors" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 21, 2000, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. Information with respect to executive officers is included in Part I of this Report. The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information contained under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 21, 2000, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the information contained under the caption "Executive Compensation and Other Information" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 21, 2000, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated herein by reference to the information contained under the captions "Voting Securities and Principal Shareholders" and "Stock Ownership of Management" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 21, 2000, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to the information contained under the caption "Certain Transactions" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 21, 2000, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a)(1) LIST OF FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying Index to Financial Statements and Schedules are filed as part of this Report. (a)(2) LIST OF FINANCIAL STATEMENT SCHEDULE The financial statement schedule listed in the accompanying Index to Financial Statements and Schedule are filed as part of this Report. (a)(3) LIST OF EXHIBITS The exhibits listed in the accompanying Index to Exhibits are filed as part of this Report. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter of 1999. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 1, 2000 COASTCAST CORPORATION By: /s/ HANS H. BUEHLER --------------------------- Hans H. Buehler, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 1, 2000.
SIGNATURE TITLE --------- ----- /s/ HANS H. BUEHLER - --------------------------- Hans H. Buehler Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ NORMAN FUJITAKI - --------------------------- Norman Fujitaki Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ ROBERT L. GATES - --------------------------- Robert L. Gates Director /s/ ROBERT H. GOON - --------------------------- Robert H. Goon Director /s/ EDWIN A. LEVY - --------------------------- Edwin A. Levy Director /s/ LEE E. MIKLES - --------------------------- Lee E. Mikles Director /s/ PAUL A. NOVELLY - --------------------------- Paul A. Novelly Director /s/ JONATHAN P. VANNINI - --------------------------- Jonathan P. Vannini Director
21 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER - -------------------------------- ----------- Independent Auditors' Report 23 Consolidated Balance Sheets as of December 31, 1999 and 1998 24 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 25 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1998 and 1999 26 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 27 Notes to Consolidated Financial Statements 28 SCHEDULES Independent Auditors' Report 39 Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1997, 1998 and 1999 40
22 INDEPENDENT AUDITORS' REPORT To the Board of Directors Coastcast Corporation: We have audited the accompanying consolidated balance sheets of Coastcast Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Coastcast Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California February 7, 2000 23 COASTCAST CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------------------ 1999 1998 ----------------- ----------------- A S S E T S Current assets: Cash and cash equivalents (Note 1) $42,740,000 $ 27,551,000 Trade accounts receivable, net of allowance for doubtful accounts of $500,000 and $600,000 at December 31, 1999 and 1998, respectively (Note 1) 9,179,000 7,556,000 Inventories (Notes 1 and 3) 11,059,000 10,326,000 Prepaid income taxes 550,000 4,011,000 Prepaid expenses and other current assets 1,627,000 2,378,000 Deferred income taxes (Notes 1 and 8) 1,485,000 1,131,000 ----------------- ----------------- Total current assets 66,640,000 52,953,000 Property, plant and equipment, net (Notes 1 and 4) 24,170,000 24,116,000 Cash surrender value of life insurance (Note 7) - 6,215,000 Investments (Note 1) 925,000 - Other assets, net 581,000 389,000 ----------------- ----------------- $ 92,316,000 $ 83,673,000 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,949,000 $ 2,804,000 Accrued liabilities (Note 6) 3,536,000 3,432,000 ----------------- ----------------- Total current liabilities 8,485,000 6,236,000 Deferred compensation (Note 7) 541,000 295,000 ----------------- ----------------- Total liabilities 9,026,000 6,531,000 Commitments and contingencies (Notes 7 and 9) Shareholders' Equity (Notes 1 and 10): Preferred stock, no par value, 2,000,000 shares authorized; none issued and outstanding Common stock, no par value, 20,000,000 shares authorized; 7,701,571 and 7,989,404 shares issued and outstanding as of December 31, 1999 and 1998, respectively 26,964,000 30,309,000 Retained earnings 56,352,000 46,833,000 Accumulated other comprehensive income (26,000) - ------------------ ----------------- Total shareholders' equity 83,290,000 77,142,000 ------------------ ----------------- $92,316,000 $ 83,673,000 ================== =================
See accompanying notes to consolidated financial statements. 24 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 ----------------- ----------------- ----------------- Sales (Notes 1 and 12) $120,383,000 $144,560,000 $149,515,000 Cost of sales 98,610,000 122,195,000 120,982,000 ----------------- ----------------- ----------------- Gross profit 21,773,000 22,365,000 28,533,000 Selling, general and administrative 7,418,000 10,394,000 10,757,000 ----------------- ----------------- ----------------- Income from operations 14,355,000 11,971,000 17,776,000 Other income, net 1,746,000 1,533,000 975,000 ----------------- ----------------- ----------------- Income before income taxes 16,101,000 13,504,000 18,751,000 Provision for income taxes (Notes 1 and 8) 6,582,000 5,672,000 7,875,000 ----------------- ----------------- ----------------- Income from continuing operations 9,519,000 7,832,000 10,876,000 Loss from discontinued operations (net of income tax benefit of $113,000 - Notes 1 and 2) - (157,000) - ----------------- ----------------- ----------------- Net income $ 9,519,000 $ 7,675,000 $ 10,876,000 ================= ================= ================= NET INCOME PER SHARE (Notes 1 and 11) Income from continuing operations per share - basic $ 1.21 $ .91 $ 1.24 Discontinued operations per share - basic - (.02) - ----------------- ----------------- ----------------- Net income per share - basic $ 1.21 $ .89 $ 1.24 ================= ================= ================= Weighted average shares outstanding 7,892,360 8,637,724 8,797,734 ================= ================= ================= Income from continuing operations per share - diluted $ 1.20 $ .89 $ 1.22 Discontinued operations per share - diluted - (.02) - ----------------- ----------------- ----------------- Net income per share - diluted $ 1.20 $ .87 $ 1.22 ================= ================= ================= Diluted weighted average shares outstanding 7,923,957 8,837,304 8,924,262 ================= ================= =================
See accompanying notes to consolidated financial statements. 25 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 1997, 1998 and 1999
Common Stock Other -------------------------- Compre- Number of Retained hensive Comprehensive Shares Amount Earnings Income Total Income ---------- ------------ ----------- -------- ------------ ------------ BALANCE AT JANUARY 1, 1997 8,777,890 $ 38,205,000 $28,282,000 $ -- $ 66,487,000 Stock options exercised, including related income tax benefit (Note 10) 71,115 759,000 759,000 Director compensatory stock options 269,000 269,000 Net income 10,876,000 10,876,000 10,876,000 ---------- ------------ ----------- -------- ------------ ------------ BALANCE AT DECEMBER 31, 1997 8,849,005 39,233,000 39,158,000 78,391,000 $ 10,876,000 Stock options exercised, including related ============ income tax benefit (Note 10) 205,199 3,184,000 3,184,000 Director compensatory stock options 269,000 269,000 Repurchase of common stock (1,064,800) (12,377,000) (12,377,000) Net income 7,675,000 7,675,000 7,675,000 ---------- ------------ ----------- -------- ------------ ------------ BALANCE AT DECEMBER 31, 1998 7,989,404 30,309,000 46,833,000 77,142,000 $ 7,675,000 Stock options exercised, including related ============ income tax benefit (Note 10) 4,667 48,000 48,000 Repurchase of common stock (292,500) (3,393,000) (3,393,000) Unrealized loss on investments, net of income tax benefit of $19,000 (26,000) (26,000) (26,000) Net income 9,519,000 9,519,000 9,519,000 ---------- ------------ ----------- -------- ------------ ------------ BALANCE AT DECEMBER 31, 1999 7,701,571 $ 26,964,000 $56,352,000 $(26,000) $ 83,290,000 $ 9,493,000 ========== ============ =========== ======== ============ ============
See accompanying notes to consolidated financial statements. 26 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,519,000 $ 7,675,000 $ 10,876,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,089,000 3,375,000 2,838,000 Goodwill amortization 18,000 -- -- Loss on disposal of machinery and equipment 91,000 1,001,000 305,000 Change in accrual for disposal of aerospace business -- (701,000) (180,000) Deferred compensation 246,000 (1,319,000) 1,176,000 Deferred income taxes (334,000) 765,000 (656,000) Non-employee director compensatory stock options -- 269,000 269,000 Changes in operating assets and liabilities: Trade accounts receivable (1,621,000) 5,337,000 (1,110,000) Inventories (728,000) 10,882,000 452,000 Prepaid expenses and other current assets 4,216,000 (4,370,000) 2,781,000 Accounts payable and accrued liabilities 2,127,000 (3,784,000) 845,000 ------------ ------------ ------------ Net cash provided by operating activities 17,623,000 19,130,000 17,596,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (4,247,000) (8,787,000) (2,127,000) Proceeds from disposal of machinery and equipment 80,000 687,000 76,000 Surrender (purchase) of life insurance policies 6,215,000 (2,686,000) (1,857,000) Purchase of investments (1,107,000) -- -- Sales/maturities of investments 136,000 -- -- Purchase of business, net of cash acquired (233,000) -- -- Other assets 67,000 213,000 (320,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities 911,000 (10,573,000) (4,228,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of options net of related tax benefit 48,000 3,184,000 759,000 Repurchase of common stock (3,393,000) (12,377,000) -- ------------ ------------ ------------ Net cash (used in) provided by financing activities (3,345,000) (9,193,000) 759,000 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,189,000 (636,000) 14,127,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,551,000 28,187,000 14,060,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,740,000 $ 27,551,000 $ 28,187,000 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 3,436,000 $ 8,546,000 $ 5,544,000 ============ ============ ============
See accompanying notes to consolidated financial statements. 27 COASTCAST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Coastcast Corporation (the "Company") and its wholly owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. ORGANIZATION AND OPERATIONS--Coastcast Corporation is incorporated under the laws of the State of California. The Company principal business is the production of investment-cast golf clubheads, and precision investment castings and related engineering for the medical industry. The Company sells its products to customers of varying strength and financial resources, principally located in the United States. The Company has three wholly-owned subsidiaries, two are incorporated under the laws of the Mexican maquiladora program and their principal activities are the production of golf clubheads, and the other is incorporated in the State of California and manufactures aluminum compressor wheels. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DISCONTINUED OPERATIONS--The Company has historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business, and as of June 1994, had essentially phased out this business (See Note 2). REVENUE RECOGNITION--Revenue is recognized when goods are shipped to the customer. CASH EQUIVALENTS--Cash equivalents consist of short-term investments with original maturities of three months or less. CONCENTRATION OF CREDIT RISK--The Company's financial instruments that are exposed to credit risk consist primarily of accounts receivable. The Company grants credit to substantially all of its customers, performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for potential credit losses. See also Note 12. INVENTORIES--Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation and amortization are provided using primarily the straight-line method over the estimated useful lives of the related assets as follows: Building and improvements 5-31 years Machinery and equipment 5-7 years Transportation 5-7 years Furniture, fixtures and computers 3-7 years
28 IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of an asset, an impairment loss is recognized. INVESTMENTS-- Investments are included in an irrevocable rabbi trust and are considered available for sale and carried at fair value. Fair value for fixed maturity investments and equity securities is based on quoted market prices. Unrealized appreciation or depreciation on fixed maturity investments and equity securities is included in shareholders' equity. Gains and losses on sales of investments are computed on the specific identification method and are reflected in Other income, net. INCOME TAXES--Deferred income taxes are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates (see Note 8). EARNINGS PER SHARE--Basic net income per share is based on the weighted average number of shares of common stock outstanding. Diluted net income per share is based on the weighted average number of shares of common stock outstanding and dilutive potential common shares from stock options (using the treasury stock method). FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. RECLASSIFICATIONS--Certain prior year balances have been reclassified to reflect the current year presentation. ACCOUNTING PRONOUNCEMENT--In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company's required adoption date is January 1, 2001. The Company believes that the effect of the adoption of Statement No. 133 will not be material on its results of operations or financial position. 2. DISCONTINUED OPERATIONS The plan adopted in 1993 to phase out the aerospace business was substantially completed in 1994. In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company conducted investigations to determine the source and extent of the contamination. In addition, the Company determined that certain of the contaminates were present prior to its ownership and entered into a remediation cost sharing agreement with the previous owner of the property. In August 1998, the Company sold the Wallingford, Connecticut property, under an agreement which stipulates that the Company and the previous owner bear the liability to remediate the property. The Company incurred a loss on the sale of the property. The loss on sale of the property plus the Company's share of the estimated remediation costs were not adequately covered by the original reserve. As a result, the Company reported a $157,000 loss from discontinued operations, net of income tax benefit, as shown on the Consolidated Statements of Income. 29 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, -------------------------------------------- 1999 1998 ------------------- ------------------- Raw materials and supplies $ 4,771,000 $ 5,137,000 Tooling 165,000 225,000 Work-in-process 5,698,000 4,019,000 Finished goods 425,000 945,000 ------------------- ------------------- $ 11,059,000 $ 10,326,000 =================== ===================
Included above are costs incurred for the production of tooling which is subsequently sold to customers upon acceptance of the first production unit. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, --------------------------------------------- 1999 1998 -------------------- ------------------- Land $ 2,186,000 $ 2,186,000 Buildings and improvements 10,517,000 9,945,000 Machinery and equipment 29,115,000 27,861,000 Transportation 2,436,000 857,000 Furniture, fixtures and computers 3,659,000 3,078,000 -------------------- ------------------- 47,913,000 43,927,000 Less accumulated depreciation and amortization 23,743,000 19,811,000 -------------------- ------------------- $ 24,170,000 $ 24,116,000 ==================== ===================
Depreciation and amortization expense for 1999, 1998 and 1997 was $4,089,000, $3,375,000 and $2,838,000, respectively. 5. SHORT-TERM BORROWINGS The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5,000,000 and which had no outstanding balance at December 31, 1999 and 1998. This line of credit, which expires on May 30, 2000, bears interest at the bank's prime rate or LIBOR plus 2%. 30 6. ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ----------------------------------------------- 1999 1998 --------------------- -------------------- Accrued payroll and related expenses $ 1,533,000 $ 1,279,000 Accrued vacation 931,000 738,000 Accrued insurance 504,000 668,000 Other accrued expenses 568,000 747,000 --------------------- -------------------- $ 3,536,000 $ 3,432,000 ===================== ====================
7. RETIREMENT PLANS The Company has a defined benefit plan which covers substantially all of its hourly union employees. The plan provides for a monthly benefit payable for the participant's lifetime commencing the first day of the month following the attainment of age sixty-five in an amount equal to $9.50 to $10.85 multiplied by the participant's credited service. 31 The following table sets forth the plan's change in benefit obligation, change in plan assets and components of net pension cost:
DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 2,280,000 $ 1,778,000 Service cost 48,000 75,000 Interest cost 140,000 139,000 Actuarial loss from change in assumptions (207,000) 384,000 Actuarial loss (gain) 39,000 (33,000) Benefits paid (146,000) (63,000) ----------- ----------- Benefit obligation at end of year 2,154,000 2,280,000 =========== =========== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 2,239,000 2,187,000 Actual return on plan assets 114,000 115,000 Benefits paid (146,000) (63,000) ----------- ----------- Fair value of plan assets at end of year 2,207,000 2,239,000 =========== =========== Funded status 53,000 (41,000) Unrecognized actuarial loss (gain) (29,000) 101,000 Unrecognized prior service cost 84,000 91,000 Unrecognized transition obligation (96,000) (121,000) ----------- ----------- Net amount recognized $ 12,000 $ 30,000 =========== =========== COMPONENTS OF NET PENSION COST: Service cost $ 48,000 $ 75,000 $ 34,000 Interest cost 140,000 139,000 112,000 Return on plan assets (114,000) (115,000) (347,000) Amortization and deferral (56,000) (44,000) 199,000 ----------- ----------- ----------- Net pension cost (income) $ 18,000 $ 55,000 $ (2,000) =========== =========== ===========
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7% and 6.5% in 1999 and 1998, respectively. The expected long-term rate of return on assets was 7% and 6.5% for 1999 and 1998, respectively. Effective January 1, 1996, the Company adopted a retirement savings plan (the "401(k) Plan") pursuant to which all U.S. employees who satisfy the age and service requirements under the plan and who are not covered by collective bargaining agreements may defer compensation for income tax purposes under section 401(k) of the Internal Revenue Code of 1986. Participants may contribute up to 15% of their compensation up to the maximum permitted under federal law. The Company is obligated to contribute annually an amount equal to 25% of each participant's contribution up to 6% of that participant's annual compensation. In accordance with the provisions of the 401(k) Plan, the Company matched employee contributions in the amount of $93,000, $108,000 and $78,000 during 1999, 1998 and 1997, respectively. 32 On September 1, 1996, the Company adopted a supplemental executive retirement plan (the "SERP") for certain key employees. Benefits generally accrued at a rate of 7% of final average salary per year of participation in the plan, up to 10 years. In general, participants in the plan only become fully vested with respect to their accrued benefits upon completion of 5 years of plan participation. The benefits under this plan were frozen effective December 31, 1997, except for the Chairman and Chief Executive Officer who voluntarily relinquished all of his rights under this plan. An amended and restated supplemental executive retirement plan was approved effective January 1, 1998. The amended plan revises the benefit formula for participants and provides additional flexibility with respect to funding. Under the amended plan, benefits generally accrues ratably over 25 years of service at 2% per year (up to a maximum of 25 years of service) with the actual benefit being dependent on years of service with Company subject to the social security offset. The following table sets forth the plan's change in benefit obligation, change in plan assets and components of net pension cost:
DECEMBER 31, ------------------------------------------ 1999 1998 1997 ----------- ------------ ------------ CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 1,459,000 $ 4,631,000 Curtailment as of January 1, 1998 -- (4,032,000) Service cost 94,000 81,000 Interest cost 83,000 83,000 Actuarial loss (gain) from change in assumptions (162,000) 93,000 Amendment 7,000 186,000 Actuarial loss (gain) (130,000) 417,000 ----------- ----------- Benefit obligation at end of year 1,351,000 1,459,000 =========== =========== CHANGE IN PLAN ASSETS: -- -- =========== =========== Funded status (1,351,000) (1,459,000) Unrecognized actuarial loss 191,000 491,000 Unrecognized prior service cost 162,000 177,000 Unrecognized transition obligation 457,000 496,000 ----------- ----------- (Accrued)/prepaid benefit cost $ (541,000) $ (295,000) =========== =========== COMPONENTS OF NET PENSION COST: Service cost $ 94,000 $ 81,000 $ 759,000 Interest cost 83,000 83,000 276,000 Amortization and deferral 69,000 74,000 198,000 Curtailment/forfeitures -- (1,807,000) (128,000) 1996 amortized (unamortized) expense -- 250,000 71,000 ----------- ----------- ----------- Net pension cost (income) $ 246,000 $(1,319,000) $ 1,176,000 =========== =========== ===========
33 The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for both 1999 and 1998. To fund this plan, the Company prior to December 31, 1998 purchased whole-life insurance contracts on certain participants. All the whole-life insurance contracts were surrendered for cash during 1999. A portion of the cash received from the surrender of the contracts is invested in marketable securities in an irrevocable rabbi trust and is presented as an asset of the Company in the accompanying consolidated balance sheets. The Company does not provide any other post-retirement benefits to its employees. 8. INCOME TAXES The provision for income taxes is as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current: Federal $ 5,464,000 $ 3,675,000 $ 7,045,000 State 1,173,000 753,000 1,703,000 Foreign 327,000 251,000 (73,000) ----------- ----------- ----------- 6,964,000 4,679,000 8,675,000 ----------- ----------- ----------- Deferred: Federal (309,000) 844,000 (651,000) State (73,000) 149,000 (149,000) ----------- ----------- ----------- (382,000) 993,000 (800,000) ----------- ----------- ----------- $ 6,582,000 $ 5,672,000 $ 7,875,000 =========== =========== ===========
The actual provision on income before income taxes differs from the statutory federal income tax rate due to the following:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Federal income taxes at the statutory rate $ 5,635,000 $ 4,726,000 $ 6,563,000 State income taxes, net of federal benefit 735,000 618,000 1,030,000 California investment tax credit (18,000) (67,000) (30,000) Other items 230,000 395,000 312,000 ----------- ----------- ----------- $ 6,582,000 $ 5,672,000 $ 7,875,000 =========== =========== ===========
34 The tax effects of items comprising the Company's net deferred income tax asset are as follows:
December 31, -------------------------- 1999 1998 ----------- ----------- Allowance for doubtful accounts $ 210,000 $ 254,000 Deferred compensation 227,000 124,000 Accrued expenses 464,000 404,000 Inventory reserve 575,000 750,000 State income taxes 309,000 299,000 Depreciation 115,000 (252,000) Other items (415,000) (448,000) ----------- ----------- $ 1,485,000 $ 1,131,000 =========== ===========
9. COMMITMENTS OPERATING LEASES--The Company leases certain facilities under various operating leases with terms ranging from five to ten years. The leases contain renewal options for additional five or ten year periods which have not been included in the rental commitment schedule below. In general, these leases provide for payment of property taxes, maintenance and insurance by the Company and include rental increases based on the Consumer Price Index. The future minimum lease payments required under these leases as of December 31, 1999 are as follows:
YEAR ENDING DECEMBER 31, -------------------------------------------- 2000 $ 1,710,000 2001 1,710,000 2002 1,710,000 2003 1,628,000 2004 824,000 Thereafter 2,529,000 ------------- $ 10,111,000 =============
Rent expense for 1999, 1998 and 1997 was approximately $1,710,000, $1,669,000 and $1,106,000, respectively. 10. STOCK OPTION PLANS Under the Company's 1996 Amended and Restated Employee Stock Option Plan ("1996 Employee Stock Option Plan"), a maximum of 1,950,000 shares of common stock may be issued pursuant to exercise of options granted to officers and key employees under the plan. Options may be granted under the plan at prices which are equal to or greater than the fair market value of the shares at the date of grant. The options become exercisable over a period of time as determined by the Board of Directors or a committee of directors and generally expire ten years from the date of grant or earlier following termination of employment. As of December 31, 1999, an aggregate of 629,359 shares had been purchased pursuant to the exercise of options granted under the plan, options to purchase an aggregate of 781,156 shares were outstanding (including options which were then exercisable to purchase 547,584 shares), and 539,485 shares were available for additional grants of options under the plan. 35 Under the Company's 1995 Amended and Restated Non-Employee Director Stock Option Plan ("1995 Director Stock Option Plan"), a maximum of 200,000 shares of common stock may be issued pursuant to exercise of options granted under the plan to certain non-employee directors. Options are granted under the plan at prices equal to the fair market value of the shares at the date of grant. The options generally become exercisable over a three-year period of time and expire at the earlier of one year after the optionee ceases to be a director or ten years from the date of grant. As of December 31, 1998, no shares had been purchased under the plan, options to purchase an aggregate of 200,000 shares were outstanding under the plan, including 136,666 shares as to which such options were then exercisable, and no shares were available for additional grants of options under the plan. In April 1996, the Board of Directors granted to a non-employee options to purchase 30,000 shares of common stock, all of which were outstanding and exercisable as of December 31, 1999. These options were not issued under the foregoing option plans. In September 1997, the Board of Directors approved the repricing of all employee stock options having exercise prices above the fair market value as of the repricing date. A total of 591,783 shares were repriced. The following summarizes the Company's stock option activity under all arrangements for the three years ended December 31, 1999:
WEIGHTED AVERAGE EXERCISE NUMBER PRICE --------- --------- Balance, January 1, 1997 1,291,459 $ 14.48 Granted 63,540 15.50 Forfeited (70,371) 15.22 Exercised (71,115) 8.60 --------- --------- Balance, December 31, 1997 1,213,513 $ 13.57 Granted 530,230 14.68 Forfeited (454,727) 15.36 Exercised (205,199) 11.57 --------- --------- Balance, December 31, 1998 1,083,817 $ 13.75 Granted 111,950 11.33 Forfeited (179,944) 12.92 Exercised (4,667) 10.25 --------- --------- Balance, December 31, 1999 1,011,156 $ 13.86 ========= =========
36 The following table summarizes information about stock options outstanding at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE PRICE AT 12/31/99 PRICE - ------------------- ----------------- ------------------- -------------- ------------------ ----------------- $7.31 - 10.00 152,500 7.1 $9.09 111,666 $9.62 10.38 - 13.63 370,017 7.2 12.91 230,013 12.68 14.13 375,109 6.5 14.13 291,438 14.13 14.50 - 22.25 73,530 7.0 19.57 41,133 20.28 27.00 - 30.00 40,000 5.9 27.75 40,000 27.75 ----------------- ------------------- -------------- ------------------ ----------------- $7.31 - 30.00 1,011,156 6.9 $13.86 714,250 $14.07 ================= =================== ============== ================== =================
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for options granted under its 1996 Employee Stock Option Plan or its 1995 Director Stock Option Plan, except for stock options granted to directors on December 13, 1995, which were subject to approval and subsequently approved by shareholders on June 12, 1996. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- 1999 1998 1997 ------------------ ----------------- ------------------ Net income: As reported $9,519,000 $7,675,000 $10,876,000 Pro forma 9,184,000 6,869,000 8,749,000 Net income per share - basic: As reported $1.21 $.89 $1.24 Pro forma $1.16 $.80 $.99 Net income per share - diluted: As reported $1.20 $.87 $1.22 Pro forma $1.14 $.76 $.95
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used in 1999, 1998 and 1997, respectively: no dividend yield, expected volatility of 67.0%, 71.8% and 67.0%, risk-free interest rate of 5.7%, 4.3% and 5.8%, and expected term of 4.0, 4.0 and 4.6 years. The weighted average fair value per share of options granted in 1999, 1998 and 1997 was $5.86, $8.33 and $7.42, respectively. 37 11. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1999 1998 1997 ----------- ----------- ----------- Numerator: Net income $ 9,519,000 $ 7,675,000 $10,876,000 ----------- ----------- ----------- Numerator for basic and diluted earnings per share-- income available to common stockholders 9,519,000 7,675,000 10,876,000 Denominator: Denominator for basic earnings per share-- weighted-average shares 7,892,360 8,637,724 8,797,734 Effect of dilutive securities: Stock options 31,597 199,580 126,528 ----------- ----------- ----------- Dilutive potential common shares 31,597 199,580 126,528 Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 7,923,957 8,837,304 8,924,262 =========== =========== =========== Basic earnings per share $ 1.21 $ 0.89 $ 1.24 =========== =========== =========== Diluted earnings per share $ 1.20 $ 0.87 $ 1.22 =========== =========== ===========
The anti-dilutive options as of December 31, 1999, 1998 and 1997 were 758,639, 1,023,817 and 116,600, respectively. 12. BUSINESS SEGMENTS The Company is engaged principally in the business of manufacturing precision investment-cast titanium and stainless steel golf clubheads, representing 91%, 93% and 94% of sales for the years ended December 31, 1999, 1998 and 1997, respectively. The Company has determined that it has one reportable business segment. The Company derived 47%, 25% and 12% of sales from its three top customers in 1999, 49%, 22% and 14% of sales from its three top customers in 1998 and 34%, 23%, 15% and 12% of sales from its four top customers in 1997. 38 INDEPENDENT AUDITORS' REPORT To the Board of Directors Coastcast Corporation: We have audited the consolidated financial statements of Coastcast Corporation and subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 7, 2000; such report is included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule of Coastcast Corporation, listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Los Angeles, California February 7, 2000 39 COASTCAST CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(CHARGED)/ BALANCE AT CREDITED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - --------------------------------- --------- --------- --------- --------- --------- Allowance for doubtful accounts: Year ended December 31, 1997 (400,000) (100,000) (500,000) Year ended December 31, 1998 (500,000) (100,000) (600,000) Year ended December 31, 1999 (600,000) 100,000 (500,000)
40 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE 3.1.1 Articles of Incorporation of the Company, as amended (1) 3.1.2 Certificate of Amendment of Articles of Incorporation filed with the California Secretary of State on December 6, 1993 (1) 3.2 Bylaws of the Company (1) 4 Specimen Stock Certificate of the Company (1) 10.1* 1993 Amended and Restated Employee Stock Option Plan ("Employee Plan") (1) 10.2* 1996 Amended and Restated Employee Stock Option Plan ("Employee Plan") (4) 10.3* Non-Employee Director Stock Option Plan ("Director Plan"), together with form of notice of grant and grant summary (1) 10.4* 1995 Amended and Restated Non-Employee Director Stock Option Plan ("Director Plan"), together with form of notice of grant and grant summary (1) 10.5 Agreement effective May 11, 1997, between the Company and United Steelworkers of America (6) 10.6 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #70 in Mexicali, Mexico (8) 10.7 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Avenue Galaxia #50 in Mexicali, Mexico (8) 10.8 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #30 in Mexicali, Mexico (8) 10.9 Lease Agreement, dated December 10, 1999, between Coastcast Corporation, S.A. and Parque 44 Industrial Mexicali, S.A. de C.V. for the facilities known as Calle Marte #162 in Mexicali, Mexico 10.10 Guaranty, dated January 26, 1999, by the Company for the lease of the Mexicali, Mexico facilities known as Mercurio #70 (8) 10.11 Guaranty, dated January 26, 1999, by the Company for the lease of the Mexicali, Mexico facilities known as Avenue Galaxia #50 (8)
41 10.12 Guaranty, dated January 26, 1999, by the Company for the lease of the Mexicali, Mexico facilities known as Mercurio #30 (8) 10.13 Guaranty, dated December 10, 1999, by the Company for the lease, dated December 10, 1999 67 10.14 Lease Agreement, dated September 1, 1997, between the Company and Watson Land Company for the facilities in Rancho Dominguez, California (5) 10.15 Lease Agreement, dated January 5, 1998, between Coastcast Tijuana, S. De R.L. De C.V. and Frederick Clarke Sanders, Jr., Frederick Sanders Flourie, Monique Sanders Flourie, Scott Michael Sanders Flourie and Carlo E. Muzquiz Davila for real estate in Tijuana, Baja California, Mexico (8) 10.16 Lease Guaranty Agreement, dated August 18, 1998, by the Company for the lease of the Tijuana facility (8) 10.17 Form of Indemnification Agreement (1) 10.18 Revolving Line of Credit Note and Credit Agreement, effective December 23, 1997, between the Company and Imperial Bank (6) 10.19 Revolving Line of Credit Note, effective June 1, 1999, between the Company and Imperial Bank (9) 10.20* Amended and Restated Coastcast Corporation Selected Employees Pension Plan, dated October 1, 1987 (1) 10.21* Amendment to the Coastcast Corporation Selected Employees Pension Plan, effective May 12, 1997 (6) 10.22* Coastcast Corporation 401(k) Retirement Plan, effective January 1, 1996 (2) 10.23 Coastcast Corporation S Corporation Termination, Tax Allocation and Indemnification Agreement dated December 1, 1993, between the Company and certain Shareholders(1) 10.24* Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3) 10.25* First Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3) 10.26* Second Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, dated February 18, 1997 (4) 10.27* Coastcast Corporation Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 1998 (8) 10.28* Coastcast Corporation Amended and Restated Supplemental Executive Retirement Plan, effective 73 January 1, 1999
42 10.29* Trust Agreement by and between Coastcast Corporation and Imperial Trust Company, dated September 1, 1996 (3) 10.30* Amended and Restated Trust Agreement by and between Coastcast Corporation and Imperial Trust Company, dated December 18, 1998 (8) 10.31* Second Amendment to the Coastcast Corporation Grantor Trust (10) 10.32 Agreement dated November 6, 1998 between the Company and Jonathan Vannini (7) 10.33* Agreement dated November 6, 1998 between the Company and Richard W. Mora (7) 10.34* Agreement dated January 15, 1999 between the Company and Richard W. Mora (8) 10.35 Stock Purchase Agreement, dated April 22, 1999 between the Company and the selling shareholders of California Precision Aluminum Casting, Inc. (9) 21 Subsidiaries of the Company 98 23 Consent of Independent Auditors 99 27 Financial Data Schedule 100
- ------------------------ * Management contract or compensating plan or arrangement. (1) Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (Registration No. 33-71294) filed on November 4, 1993, as amended by Amendment No. 1 filed on November 17, 1993, Amendment No. 2 filed on December 1, 1993, and Amendment No. 3 filed on December 9, 1993. (2) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1995. (3) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended September 30, 1996. (4) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1996. (5) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1997. (6) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1997. (7) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1998. (8) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1998. (9) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended June 30, 1999. (10) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1999. 43 EX-10.9 2 EXHIBIT 10.9 LEASE AGREEMENT ENTERED INTO BY AND BETWEEN PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., (HEREINAFTER REFERRED TO AS PIMSA), HEREIN REPRESENTED BY MR. EDUARDO MANUEL MARTINEZ PALOMERA, PARTY OF THE FIRST PART, AND BY COASTCAST CORPORATION, S.A., (HEREINAFTER REFERRED TO AS COMPANY), HEREIN REPRESENTED BY MR. WILLIAM LAWRENCE OSBORN, PARTY OF THE SECOND PART, PURSUANT TO THE FOLLOWING RECITALS AND CLAUSES: R E C I T A L S I. PIMSA HEREBY DECLARES THAT: A. IT IS A COMPANY ORGANIZED AND EXISTING UNDER THE MEXICAN GENERAL CORPORATION LAW, AS PER PUBLIC INSTRUMENT NUMBER 20,032, EXECUTED BEFORE ATTORNEY FERNANDO DIAZ CEBALLOS, NOTARY PUBLIC NUMBER 4 OF THE CITY OF MEXICALI, BAJA CALIFORNIA, MEXICO. B. EDUARDO MANUEL MARTINEZ PALOMERA IS ITS ATTORNEY-IN-FACT, AS IT APPEARS IN PUBLIC INSTRUMENT NUMBER 31,019, VOLUME 569, EXECUTED ON NOVEMBER 26, 1997, BEFORE ATTORNEY FERNANDO DIAZ CEBALLOS, NOTARY PUBLIC NUMBER 4 OF THE CITY OF MEXICALI, BAJA CALIFORNIA, MEXICO. C. PIMSA'S REGISTRATION NUMBER AT THE FEDERAL REGISTRY OF TAXPAYERS IS: PIM-790807-D96. D. THE ADDRESS AT WHICH IT HAS ITS PRINCIPAL PLACE OF BUSINESS IS AVENIDA GALAXIA NUMBER 18-B, PARQUE INDUSTRIAL MEXICALI I, MEXICALI, BAJA CALIFORNIA, MEXICO. E. PIMSA HAS DEVELOPED THE MEXICALI INDUSTRIAL PARK I AND THE MEXICALI INDUSTRIAL PARK II, AND IS DEVELOPING THE MEXICALI INDUSTRIAL PARK III AND THE MEXICALI INDUSTRIAL PARK IV. THE MEXICALI INDUSTRIAL PARK I, HEREINAFTER REFERRED TO AS THE INDUSTRIAL PARK, IS MORE SPECIFICALLY SHOWN AND DESCRIBED ON EXHIBIT "A", WHICH IS ATTACHED HERETO AND MADE A PART HEREOF. F. THE PARTIES DESIRE TO ENTER INTO A LEASE OF LOTS 3, 4, 5, 9 AND A PORTION OF LOT 10 OF BLOCK 6, LOCATED IN THE MEXICALI INDUSTRIAL PARK I, AT CALLE MARTE NUMBER 162, AND OF CERTAIN IMPROVEMENTS CONSTRUCTED ON THE LAND. THE LAND AND PIMSA'S IMPROVEMENTS TOGETHER SHALL HEREINAFTER BE REFERRED TO AS THE LEASED PROPERTY. G. THAT IT HAS PREVIOUSLY APPLIED FOR AND OBTAINED FINANCIAL LOANS THROUGH MEXICAN AND FOREIGN BANKING AND LENDING INSTITUTIONS, WITH WHICH FUNDS, BUILDINGS AND IMPROVEMENTS LOCATED IN THE INDUSTRIAL JPARKS HAVE BEEN, ARE BEING AND WILL BE CONSTRUCTED. 2 II. COMPANY HEREBY DECLARES THAT: A. IT IS A COMPANY ORGANIZED UNDER THE MEXICAN GENERAL CORPORATION LAW AS PER PUBLIC INSTRUMENT NUMBER 28,658, VOLUME 478, EXECUTED ON JANUARY 26, 1994, BEFORE ATTORNEY FERNANDO DIAZ CEBALLOS, NOTARY PUBLIC NUMBER 4 OF THE CITY OF MEXICALI, BAJA CALIFORNIA, MEXICO. B. MR. WILLIAM LAWRENCE OSBORN VERIFIES HIS CAPACITY AS GENERAL DIRECTOR OF OPERATIONS AND GENERAL MANAGER OF COMPANY AS PER PUBLIC INSTRUMENT NUMBER 31,457, VOLUME 577, EXECUTED ON NOVEMBER 09, 1998, BEFORE ATTORNEY FERNANDO DIAZ CEBALLOS, NOTARY PUBLIC NUMBER 4 OF THE CITY OF MEXICALI, BAJA CALIFORNIA, MEXICO. C. COMPANY'S REGISTRATION NUMBER AT THE FEDERAL REGISTRY OF TAXPAYERS IS: CCO-821123-QA1. D. THE ADDRESS AT WHICH IT HAS ITS PRINCIPAL PLACE OF BUSINESS IS CALLE MERCURIO NUMBER 70, MEXICALI INDUSTRIAL PARK I, MEXICALI, BAJA CALIFORNIA, MEXICO. PURSUANT TO THE ABOVE, THE PARTIES AGREE AS FOLLOWS: C L A U S E S I. SCOPE OF LEASE AGREEMENT. ON THE EXPRESS TERMS AND CONDITIONS SET FORTH HEREINAFTER, THE SCOPE OF THIS LEASE AGREEMENT IS AS FOLLOWS: PIMSA HEREBY LEASES TO COMPANY AND COMPANY HEREBY LEASES FROM PIMSA THE LAND IN THE INDUSTRIAL PARK AS DESCRIBED ON EXHIBIT "B", WHICH IS ATTACHED HERETO AND MADE A PART HEREOF, AND PIMSA'S IMPROVEMENTS AS MORE SPECIFICALLY DESCRIBED HEREINAFTER IN THIS LEASE AGREEMENT. II. CONSTRUCTION BY PIMSA. A. PIMSA HAS, AT ITS EXPENSE, CONSTRUCTED ON THE LAND CERTAIN IMPROVEMENTS WHICH SHALL HEREINAFTER BE REFERRED TO AS PIMSA'S IMPROVEMENTS. SAID PIMSA'S IMPROVEMENTS HAVE BEEN CONSTRUCTED IN ACCORDANCE WITH PLANS AND SPECIFICATIONS WHICH HAVE BEEN APPROVED BY PIMSA AND COMPANY AND SUCH APPROVAL IS HEREBY ACKNOWLEDGED BY THE PARTIES. 3 B. PIMSA HAS CONSTRUCTED ALL PIMSA'S IMPROVEMENTS IN ACCORDANCE WITH ALL LAWS, ORDINANCES, REGULATIONS, AND ORDERS OF GOVERNMENTAL AUTHORITIES, AND INDUSTRIAL PARK REGULATIONS WHICH ARE ATTACHED HERETO AS EXHIBIT "C". THE TERM "IMPROVEMENTS" SHALL, DEPENDING ON THE CONTEXT, REFER TO EITHER "PIMSA'S IMPROVEMENTS", "COMPANY'S IMPROVEMENTS" OR BOTH. THE TERM "COMPANY'S IMPROVEMENTS" SHALL REFER TO THOSE IMPROVEMENTS IDENTIFIED IN PARAGRAPH III.A. BELOW. C. THE LEASED PROPERTY IS CONSIDERED READY FOR OCCUPANCY. D. UPON PRIOR WRITTEN CONSENT OF PIMSA, COMPANY MAY AT ANY TIME PRIOR TO THE COMMENCEMENT OF THE TERM HEREOF, AT ITS SOLE RISK, ENTER UPON AND INSTALL SUCH TRADE FIXTURES AND EQUIPMENT IN THE LEASED PROPERTY AS IT MAY ELECT; PROVIDED, HOWEVER THAT, (I) COMPANY SHALL PROVIDE EVIDENCE OF INSURANCE SATISFACTORY TO PIMSA. III. INSTALLATIONS BY COMPANY. A. COMPANY MAY, AT ITS EXPENSE, INSTALL ON THE LEASED PROPERTY, SUCH TRADE FIXTURES, EQUIPMENT AND FURNITURE AS IT MAY DEEM NECESSARY; PROVIDED THAT SUCH ITEMS ARE INSTALLED AND ARE REMOVABLE WITHOUT DAMAGE TO THE STRUCTURAL INTEGRITY OF PIMSA'S IMPROVEMENTS. SAID TRADE FIXTURES, EQUIPMENT AND FURNITURE SHALL REMAIN COMPANY'S PROPERTY AND UNLESS COMPANY IS IN DEFAULT HEREUNDER, SHALL BE REMOVED BY COMPANY ON OR BEFORE THE EXPIRATION DATE OF THE TERM HEREOF. COMPANY MAY ALSO INSTALL TEMPORARY IMPROVEMENTS IN THE INTERIOR OF PIMSA'S IMPROVEMENTS UPON THE LEASED PROPERTY PROVIDED THAT SUCH COMPANY'S IMPROVEMENTS ARE INSTALLED AND ARE REMOVABLE WITHOUT DAMAGE TO THE STRUCTURE OF THE PIMSA'S IMPROVEMENTS. SUCH COMPANY'S IMPROVEMENTS SHALL REMAIN PROPERTY OF COMPANY AND, UNLESS COMPANY IS IN DEFAULT HEREUNDER, SHALL BE REMOVED BY COMPANY UPON EXPIRATION OF THE TERM HEREOF OR EARLIER TERMINATION OF THIS LEASE. COMPANY SHALL REPAIR, AT ITS SOLE EXPENSE, ALL DAMAGE CAUSED BY THE INSTALLATION OR REMOVAL OF TRADE FIXTURES, EQUIPMENT, FURNITURE OR TEMPORARY COMPANY'S IMPROVEMENTS, REASONABLE WEAR AND TEAR EXCEPTED. B. COMPANY SHALL PERFORM ALL INSTALLATIONS IN ACCORDANCE WITH ALL LAWS, ORDINANCES, REGULATIONS, ORDERS OF GOVERNMENTAL AUTHORITIES, AND THE INDUSTRIAL PARK REGULATIONS WHICH ARE ATTACHED HERETO AS EXHIBIT "C". 4 IV. LEASE TERM AND COMMENCEMENT DATE. A. LEASE AGREEMENT. THIS LEASE AGREEMENT SHALL BE EFFECTIVE FROM THE COMMENCEMENT DATE UNTIL THE SAME IS TERMINATED AS PROVIDED HEREINAFTER, THE COMPLETE PERIOD OF TENANCY BEING REFERRED TO HEREIN AS THE "LEASE TERM". B. INITIAL LEASE TERM. THE INITIAL TERM OF THIS LEASE ("INITIAL TERM") SHALL COMMENCE ON FEBRUARY 01, 2000 ("COMMENCEMENT DATE") AND SHALL END ON THE LAST DAY OF THE SEVENTY SEVENTH (77TH) CONSECUTIVE MONTH (JUNE 30, 2006). C. LEASE YEAR. THE TERM "LEASE YEAR" AS USED HEREIN, SHALL MEAN A PERIOD OF TWELVE (12) CONSECUTIVE FULL CALENDAR MONTHS. THE FIRST LEASE YEAR SHALL BEGIN ON THE COMMENCEMENT DATE OF THE TERM HEREOF, IF THE COMMENCEMENT DATE OF THE TERM HEREOF SHALL OCCUR ON THE FIRST (1ST) DAY OF A CALENDAR MONTH; IF NOT THEN THE FIRST LEASE YEAR SHALL COMMENCE UPON THE FIRST (1ST) DAY OF THE CALENDAR MONTH NEXT FOLLOWING THE COMMENCEMENT DATE OF THE TERM HEREOF. EACH SUCCEEDING LEASE YEAR SHALL COMMENCE UPON THE ANNIVERSARY DATE OF THE FIRST LEASE YEAR. D. OPTION TO RENEW. COMPANY SHALL HAVE THE RIGHT TO EXTEND THE TERM OF THIS LEASE AGREEMENT UPON THE TERMS, CONDITIONS AND RENTALS SET FORTH HEREIN, FOR ONE (1) ADDITIONAL PERIOD OF FIVE (5) YEARS, ("RENEWAL TERMS"), BY GIVING WRITTEN NOTICE TO PIMSA NOT LESS THAN SIX (6) MONTHS PRIOR TO THE EXPIRATION OF THE INITIAL TERM OF THIS LEASE AGREEMENT, SO LONG AS COMPANY IS NOT THEN IN DEFAULT HEREUNDER. V. RENT A. INITIAL TERM. AS MINIMUM MONTHLY RENT FOR THE LEASE OF THE LEASED PROPERTY DURING THE LEASE TERM HEREOF, COMPANY SHALL PAY TO PIMSA AT THE ADDRESS OF PIMSA STATED ABOVE, THE MONTHLY SUM IN PESOS, MEXICAN CURRENCY, EQUAL TO THE MONTHLY PAYMENTS IN DOLLARS, UNITED STATES CURRENCY, PAYABLE AS FOLLOWS: 1. $29,682.00 DOLLARS, UNITED STATES CURRENCY, (TWENTY NINE THOUSAND SIX HUNDRED EIGHTY TWO DOLLARS 00/100, UNITED STATES CURRENCY), UPON THE EXECUTION OF THIS CONTRACT WHICH SUM SHALL BE APPLIED TO THE LAST THREE (3) MONTHS OF THE INITIAL TERM. 2. SEVENTY FOUR (74) EQUAL MONTHLY PAYMENTS OF $9,894.00 DOLLARS (NINE THOUSAND EIGHT HUNDRED NINETY FOUR DOLLARS 00/100, UNITED STATES CURRENCY), EACH PAYABLE IN ADVANCE ON THE FIRST (1ST) DAY OF EACH MONTH DURING THE INITIAL TERM, COMMENCING ON THE FIRST (1ST) MONTH OF THE INITIAL TERM. 5 3. INCREASE OF MONTHLY RENT COMMENCING ON THE THIRD LEASE YEAR. ON THE FIRST (1ST) DAY OF THE THIRD LEASE YEAR THE MONTHLY RENT SHALL BE INCREASED BY AN AMOUNT WHICH IS EQUAL TO THE PRODUCT OF: a. THE MONTHLY RENT THEN BEING PAID FOR THE IMMEDIATELY PRECEDING LEASE YEAR, IN ACCORDANCE TO CLAUSE V.A.2., HEREINABOVE, MULTIPLIED BY b. THE PERCENTAGE INCREASE IN THE INDEX (AS HEREINAFTER DEFINED) DURING THE IMMEDIATELY PRECEDING LEASE YEAR. 1) MAXIMUM RENT INCREASE; NO DECREASE. NOTWITHSTANDING ANYTHING HEREIN CONTAINED TO THE CONTRARY, THE MONTHLY RENT FOR THE THIRD, FOURTH AND FIFTH LEASE YEARS SHALL NOT BE INCREASED BY AN AMOUNT GREATER THAN TEN PERCENT (10%) OF THE RENT FOR THE IMMEDIATELY PRECEDING MONTH. IN NO EVENT SHALL THE MONTHLY RENT FOR THE THIRD, FOURTH AND FIFTH LEASE YEARS BE DECREASED BELOW THE MONTHLY RENT FOR THE IMMEDIATELY PRECEDING LEASE YEAR. 2) INDEX DEFINED. THE TERM "INDEX" SHALL MEAN THE UNITED STATES BUREAU OF LABOR STATISTICS CONSUMER PRICE INDEX FOR ALL URBAN CONSUMERS (ALL ITEMS, LOS ANGELES-RIVERSIDE-ORANGE COUNTY, CALIFORNIA AREA, 1982-1984=100). IF THE COMPILATION OR PUBLICATION OF THE INDEX IS TRANSFERRED TO ANY OTHER DEPARTMENT, BUREAU OR AGENCY OF THE UNITED STATES GOVERNMENT OR IS DISCONTINUED, THEN THE INDEX MOST SIMILAR TO THE INDEX SHALL BE USED TO CALCULATE THE RENT INCREASES PROVIDED FOR HEREIN. IF PIMSA AND COMPANY CANNOT AGREE ON A SIMILAR ALTERNATE INDEX, THEN THE MATTER SHALL BE SUBMITTED FOR DECISION TO THE AMERICAN ARBITRATION ASSOCIATION IN ACCORDANCE WITH THE THEN RULES OF SUCH ASSOCIATION, AND THE DECISION OF THE ARBITRATORS SHALL BE BINDING UPON THE PARTIES. THE COST OF SUCH ARBITRATION SHALL BE DIVIDED EQUALLY BETWEEN PIMSA AND COMPANY. B. ADDITIONAL RENT. WITH THE EXCEPTION OF INCOME TAX IMPOSED UPON PIMSA, AND ANY TAX ASSOCIATED WITH THE SALE OR TRANSFER OF THE LEASED PROPERTY OR PIMSA'S IMPROVEMENTS, WHICH SHALL BE BORNE BY PIMSA, COMPANY WILL PAY TO PIMSA, AS ADDITIONAL RENT, AN AMOUNT EQUAL TO THE SUM OF ALL TAXES AND ASSESSMENTS OF EVERY KIND WHICH ARE OR MAY BE AT ANY TIME DURING THE LEASE TERM, LEVIED AGAINST THE LEASED PROPERTY OR THE LEASE AGREEMENT, INCLUDING BUT NOT LIMITED TO GROSS SALES TAX, VALUE ADDED TAX OR STAMP TAX, PROPERTY TAX AND ALL SUCH TAXES AND ASSESSMENTS, LEVIED BY ANY FEDERAL, STATE OR 6 MUNICIPAL GOVERNMENT, OR ANY GOVERNMENTAL AUTHORITY. ALL SUCH TAXES AND ASSESSMENTS SHALL BE PAID BY PIMSA AND REIMBURSED BY COMPANY WITHIN TEN (10) DAYS AFTER THE RECEIPT SHOWING THE PAYMENT THEREOF IS PRESENTED TO COMPANY BY PIMSA. IN CALCULATING THE AMOUNT OF COMPANY'S REIMBURSEMENT, ALL TAXES WHICH SHALL BECOME DUE FOR THE FIRST AND LAST YEARS OF THE LEASE TERM SHALL BE APPORTIONED PRORATA BETWEEN PIMSA AND COMPANY IN ACCORDANCE WITH THE RESPECTIVE NUMBER OF MONTHS DURING WHICH EACH PARTY SHALL BE IN POSSESSION OF THE LEASED PROPERTY. C. RENEWAL TERMS. 1. GRANT OF OPTION AND MANNER OF EXERCISE. COMPANY SHALL HAVE THE OPTION TO EXTEND THE TERM OF THIS LEASE FOR ONE (1) PERIOD OF FIVE (5) YEARS, (THE "EXTENDED TERM"). COMPANY SHALL GIVE WRITTEN NOTICE TO PIMSA NOT LESS THAN SIX (6) MONTHS PRIOR TO THE EXPIRATION OF THE INITIAL TERM, IF COMPANY ELECTS TO EXERCISE THE OPTION TO EXTEND GRANTED HEREIN. 2. RENT. THE MONTHLY RENT FOR EACH LEASE YEAR OF THE EXTENDED TERM SHALL BE EQUAL TO THE MONTHLY RENT FOR THE IMMEDIATELY PRECEDING LEASE YEAR, PLUS AN AMOUNT WHICH IS EQUAL TO THE PRODUCT OF: a. THE MONTHLY RENT PAID BY COMPANY DURING THE IMMEDIATELY PRECEDING LEASE YEAR, MULTIPLIED BY b. THE PERCENTAGE INCREASE IN THE INDEX (AS HEREINABOVE DEFINED) DURING THE IMMEDIATELY PRECEDING LEASE YEAR. NOTWITHSTANDING ANYTHING HEREIN CONTAINED TO THE CONTRARY, THE MONTHLY RENT FOR EACH LEASE YEAR OF THE EXTENDED TERM SHALL NOT BE INCREASED BY AN AMOUNT GREATER THAN TEN PERCENT (10%) OF THE MONTHLY RENT FOR THE IMMEDIATELY PRECEDING LEASE YEAR. IN NO EVENT SHALL THE MONTHLY RENT FOR ANY LEASE YEAR OF THE EXTENDED TERM BE DECREASED BELOW THE MONTHLY RENT FOR THE IMMEDIATELY PRECEDING LEASE YEAR. D. COMPANY WILL PAY THE RENT PROVIDED FOR IN THE ABOVE PARAGRAPH A. IN PESOS, MEXICAN CURRENCY, AT THE RATE OF EXCHANGE EFFECTIVE IN THE FREE FOREIGN MARKET ON THE DATE SUCH SUMS ARE PAID, OR IN DOLLARS, UNITED STATES CURRENCY, AS LAW AND FOREIGN EXCHANGE RULES ALLOW, AS PIMSA MAY ELECT. 7 THE FOREGOING WILL NOT BE CONSIDERED TO IMPEDE OR HINDER PIMSA'S POSSIBILITIES AND RIGHTS UNDER CLAUSE XII TO NEGOTIATE OR ASSIGN THIS AGREEMENT TO MEXICAN, UNITED STATES OR OTHER FOREIGN BANKING OR LENDING INSTITUTIONS. E. PRORATION. THE RENT FOR ANY PARTIAL MONTH SHALL BE PRORATED. F. LIQUIDATED DAMAGES. IN THE EVENT THIS LEASE AGREEMENT IS TERMINATED BY PIMSA DUE TO A DEFAULT OF COMPANY PRIOR TO OR DURING THE FIRST (1ST) SIX (6) MONTHS OF THE LEASE TERM, PIMSA SHALL BE ENTITLED TO KEEP AND RETAIN AS LIQUIDATED DAMAGES ALL SUMS PAID OR DEPOSITED BY COMPANY, AS PREPAID RENT OR AS A SECURITY DEPOSIT, IN ADDITION TO ANY OTHER RIGHTS OF PIMSA PROVIDED FOR HEREIN. G. SETOFF. THE PAYMENT OF ANY RENT DUE UNDER THIS LEASE SHALL NOT BE WITHHELD OR REDUCED FOR ANY REASON WHATSOEVER, AND COMPANY AGREES TO ASSERT ANY CLAIM, DEMAND, OR OTHER RIGHT AGAINST PIMSA ONLY BY AN INDEPENDENT PROCEEDING. VI. USE. THE LEASED PROPERTY SHALL BE USED AND OCCUPIED FOR ANY LAWFUL INDUSTRIAL PURPOSE NOT IN VIOLATION OF THE INDUSTRIAL PARK REGULATIONS ATTACHED HERETO AS EXHIBIT "C". COMPANY SHALL PROMPTLY AND ADEQUATELY COMPLY WITH ALL LAWS, ORDINANCES AND ORDERS OF ALL GOVERNMENTAL AUTHORITIES AFFECTING THE LEASED PROPERTY, AND ITS CLEANLINESS, SAFETY AND LABOR FACILITIES APPLICABLE TO THE COMPANY'S USE OF THE LEASED PROPERTY. COMPANY SHALL NOT PERFORM OR OMIT ANY ACTS THAT MAY DAMAGE THE LEASED PROPERTY, OR BE A NUISANCE, OR MENACE TO OTHER OCCUPANTS OF THE INDUSTRIAL PARK. VII. INSURANCE. A. COMPREHENSIVE LIABILITY INSURANCE. DURING THE LEASE TERM, COMPANY SHALL, AT ITS OWN EXPENSE, OBTAIN AND MAINTAIN IN FULL FORCE A POLICY OF COMPREHENSIVE LIABILITY INSURANCE INCLUDING PROPERTY DAMAGE, THAT INSURES COMPANY AND PIMSA (AND SUCH OTHER AGENTS OR EMPLOYEES OF PIMSA, PIMSA'S SUBSIDIARIES OR AFFILIATES, OR PIMSA'S ASSIGNEES OR ANY NOMINEE OF PIMSA HOLDING ANY INTEREST IN THE LEASED PROPERTY, INCLUDING WITHOUT LIMITATION, THE HOLDER OF ANY MORTGAGE ENCUMBERING THE LEASED PROPERTY) AGAINST LIABILITY FOR INJURY TO PERSONS AND PROPERTY AND FOR DEATH OF ANY PERSONS OCCURRING IN OR ABOUT THE LEASED PROPERTY, THE LIABILITY TO SUCH INSURANCE SHALL BE IN THE AMOUNT OF $100,000.00 (ONE HUNDRED THOUSAND DOLLARS 00/100, UNITED STATES CURRENCY). 8 B. FIRE AND OTHER INSURANCE. DURING THE LEASE TERM, COMPANY AT ITS SOLE EXPENSE, SHALL OBTAIN AND MAINTAIN IN FULL FORCE, IN THE AMOUNT OF $720,000.00 DOLLARS (SEVEN HUNDRED TWENTY THOUSAND DOLLARS 00/100, UNITED STATES CURRENCY), OR AS MODIFIED HEREIN, A POLICY OR POLICIES OF INSURANCE FOR FIRE, LIGHTNING, EXPLOSION, FALLING AIRCRAFT, SMOKE, WINDSTORM, EARTHQUAKE, HAIL, VEHICLE DAMAGE, VOLCANIC ERUPTION, STRIKES, CIVIL COMMOTION, VANDALISM, RIOTS, MALICIOUS MISCHIEF, DEBRIS REMOVAL, STEAM BOILER OR PRESSURE OBJECT OR MACHINERY BREAKAGE IF APPLICABLE, AND FLOOD INSURANCE, ON ALL THE LEASED PROPERTY, INCLUDING BUT NOT LIMITED TO THE SHELL BUILDING AND INTERIOR FIT-UP. COMPANY SHALL ALSO OBTAIN AND MAINTAIN ANNUAL RENTAL INSURANCE IN THE AMOUNT OF THE ANNUAL RENT PROVIDED FOR HEREIN IN FAVOR OF PIMSA. COMPANY SHALL BE RESPONSIBLE FOR MAINTAINING INSURANCE ON ALL OF COMPANY'S OWN PROPERTY. EXCEPT FOR INSURANCE UPON COMPANY'S PROPERTY, PIMSA OR ITS APPOINTEE SHALL BE NAMED THE COMPANY'S BENEFICIARY OF ANY AND ALL PROCEEDS FROM ANY SUCH POLICY OR POLICIES, AS THEIR INTERESTS MAY APPEAR. C. FORM AND DELIVERY OF POLICIES. EACH INSURANCE POLICY REFERRED TO IN THE PRECEDING PARAGRAPHS SHALL BE IN A FORM APPROVED BY THE DEPARTMENT OF FINANCE AND PUBLIC CREDIT AND WRITTEN WITH ONE OR MORE COMPANIES LICENSED TO DO INSURANCE IN MEXICALI, BAJA CALIFORNIA, MEXICO, AND SHALL PROVIDE THAT IT SHALL NOT BE SUBJECT TO CANCELLATION OR CHANGE EXCEPT AFTER AT LEAST THIRTY (30) DAYS PRIOR WRITTEN NOTICE TO PIMSA. THE POLICIES, OR DULY EXECUTED CERTIFICATES FOR THEM, TOGETHER WITH COPIES OF RECEIPTS FOR PAYMENT OF THE PREMIUMS THEREOF, SHALL BE DELIVERED TO PIMSA PRIOR TO THE COMMENCEMENT DATE OF THE LEASE TERM, AS PROVIDED IN CLAUSE IV HEREOF; ALL DOCUMENTS VERIFYING THE RENEWAL OF SUCH POLICIES SHALL BE DELIVERED TO PIMSA AT LEAST THIRTY (30) DAYS PRIOR TO THE EXPIRATION OF THE TERM OF SUCH COVERAGE. PRIOR TO THE COMMENCEMENT DATE OF THE LEASE TERM, EACH PARTY SHALL PROCURE AND MAINTAIN SUCH INSURANCE COVERING ITS OWN LIABILITY AND PROPERTY AS EACH DEEMS APPROPRIATE. D. ADDITIONAL INSURANCE. COMPANY SHALL OBTAIN AND MAINTAIN IN FULL FORCE AND EFFECT SUCH ADDITIONAL AMOUNTS OF INSURANCE AS MAY BE REQUIRED BY PIMSA, FROM TIME TO TIME, IN ACCORDANCE WITH THE PROVISIONS OF THIS CLAUSE VII, AND IN ORDER TO ADEQUATELY AND PROPERLY INSURE PIMSA OF AND FOR THE THEN CURRENT REPLACEMENT VALUE OF THE LEASED PROPERTY. 9 E. WAIVER OF SUBROGATION. THE PARTIES RELEASE EACH OTHER, AND THEIR RESPECTIVE AUTHORIZED REPRESENTATIVES, FROM ANY CLAIMS FOR DAMAGE TO ANY PERSON OR TO THE PREMISES AND TO THE FIXTURES, PERSONAL PROPERTY, TENANT'S IMPROVEMENTS, AND ALTERATIONS OF EITHER PIMSA OR COMPANY IN OR ON THE PREMISES THAT ARE CAUSED BY OR RESULT FROM RISKS INSURED AGAINST UNDER ANY INSURANCE POLICIES CARRIED BY THE PARTIES AND IN FORCE AT THE TIME OF ANY SUCH DAMAGE. IF EITHER PARTY PURCHASES INSURANCE, THE POLICY SHALL PROVIDE THAT THE INSURANCE COMPANY WAIVES ALL RIGHT OF RECOVERY BY WAY OF SUBROGATION AGAINST EITHER PARTY IN CONNECTION WITH ANY DAMAGE COVERED BY ANY POLICY. IF A PARTY HERETO CANNOT OBTAIN SUCH WAIVER OF SUBROGATION THROUGH REASONABLE EFFORTS, IT SHALL OBTAIN INSURANCE NAMING THE OTHER PARTY AS A COINSURED UNDER ITS POLICY IN ORDER TO ACCOMPLISH THE INTENT OF THIS PROVISION. VIII. TAXES AND ASSESSMENTS. COMPANY AGREES TO PAY ALL TAXES AND ASSESSMENTS OF EVERY KIND LEVIED UPON ANY AND ALL PERSONAL PROPERTY OF COMPANY, ITS SUCCESSORS AND ASSIGNS, WHETHER SAME SHALL BE OR MAY BECOME A LIEN UPON THE LEASED PROPERTY. ALL SUCH TAXES AND ASSESSMENTS SHALL BE PAID BY COMPANY BEFORE THE SAME BECOME DELINQUENT. IN THE EVENT THAT THIS CONTRACT IS RECORDED AT THE PUBLIC REGISTRY OF PROPERTY, COMPANY SHALL PAY ALL COSTS OF SUCH RECORDATION, INCLUDING, BUT NOT LIMITED TO, NOTARY FEES, CHARGES, TAXES AND STAMPS REQUIRED IN CONNECTION THEREWITH. IX. REPAIRS, ALTERATIONS AND IMPROVEMENTS. A. PIMSA 1. AFTER RECEIPT OF WRITTEN NOTICE FROM COMPANY, PIMSA AT ITS EXPENSE, SHALL WITH THE MINIMUM INTERFERENCE WITH COMPANY'S NORMAL USE OF THE LEASED PROPERTY, DILIGENTLY PROCEED TO REPAIR ANY STRUCTURAL DEFECTS IN THE ROOF OR EXTERIOR BEARING WALLS, EXCEPTING NORMAL USE, WEAR AND DAMAGE. PIMSA SHALL NOT BE LIABLE FOR ANY DAMAGES, AND SHALL NOT BE OBLIGATED TO MAKE ANY REPAIRS, CAUSED BY ANY NEGLIGENT ACT OR OMISSIONS OF COMPANY, ITS EMPLOYEES, AGENTS, INVITEES, OR CONTRACTORS. PIMSA SHALL HAVE NO OTHER OBLIGATION TO MAINTAIN OR REPAIR ANY OTHER PORTION OF THE LEASED PROPERTY. PIMSA SHALL NOT BE LIABLE TO COMPANY FOR ANY DAMAGE RESULTING FROM PIMSA'S FAILURE TO MAKE ANY REPAIRS, UNLESS COMPANY HAS NOTIFIED PIMSA OF THE NEED FOR SUCH REPAIRS, AND PIMSA HAS FAILED TO COMMENCE SUCH REPAIRS WITHIN TEN (10) DAYS AFTER SAID NOTICE HAS BEEN GIVEN AND FAILED TO COMPLETE THE SAME IN A DILIGENT MANNER. 10 2. IF PIMSA FAILS TO MAKE THE REPAIRS DESCRIBED IN CLAUSE IX.A., COMPANY MAY, BUT SHALL NOT BE REQUIRED TO, MAKE OR CAUSE SUCH REPAIRS, TO BE MADE, AND PIMSA SHALL, ON DEMAND, IMMEDIATELY PAY TO COMPANY THE ACTUAL COST OF THE REPAIRS. B. COMPANY 1. COMPANY, AT ITS EXPENSE, SHALL KEEP AND MAINTAIN IN GOOD ORDER AND REPAIR, EXCEPT FOR NORMAL USE AND WEAR, ALL OF THE LEASED PROPERTY, EXCEPT FOR THOSE OBLIGATIONS OF PIMSA STATED IN PARAGRAPH A.1., OF THIS CLAUSE, INCLUDING BUT NOT LIMITED TO, ALL PLUMBING, SEWAGE, AND OTHER UTILITY FACILITIES THAT ARE WITHIN THE LEASED PROPERTY, AS WELL AS FIXTURES, PARTITIONS, WALLS (INTERIOR AND EXTERIOR, INCLUDING PAINTING AS OFTEN AS NECESSARY), FLOORS, CEILINGS, SIGNS, ALL AIR CONDITIONING, HEATING AND SIMILAR EQUIPMENT, DOORS, WINDOW, PLATE GLASS AND ALL OTHER REPAIRS OF EVERY KIND AND CHARACTER TO THE LEASED PROPERTY. COMPANY AT ITS EXPENSE, SHALL REPAIR ALL LEAKS EXCEPT THOSE CAUSED BY STRUCTURAL DEFECTS. THE PLUMBLING FACILITIES SHALL NOT BE USED FOR ANY OTHER PURPOSE THAN THAT FOR WHICH THEY WERE CONSTRUCTED. THE EXPENSE OF ANY BREAKAGE, STOPPAGE OR DAMAGE RESULTING FROM A VIOLATION OF THIS PROVISION, SHALL BE BORNE BY COMPANY. COMPANY SHALL STORE ALL TRASH ONLY TEMPORARILY WITHING THE LEASED PROPERTY, AND SHALL ARRANGE FOR THE REGULAR PICK UP OF TRASH AT COMPANY'S EXPENSE. COMPANY SHALL NOT BURN ANY TRASH OF ANY KIND IN OR ABOUT THE LEASED PROPERTY OR THE INDUSTRIAL PARK. 2. COMPANY SHALL REQUIRE WRITTEN CONSENT TO MAKE ANY ALTERATION, IMPROVEMENT OR ADDITION TO THE EXTERIOR WALLS AND ROOF OF THE LEASED PROPERTY WITH A COST EXCEEDING $5,000.00 (FIVE THOUSAND DOLLARS 00/100, UNITED STATES CURRENCY; AND COMPANY SHALL NOT DAMAGE ANY FLOORS, WALLS, CEILINGS, PARTITIONS, OR ANY WOOD, STONE, OR IRONWORK ON OR ABOUT THE LEASED PROPERTY. 3. COMPANY SHALL KEEP THE LEASED PROPERTY FREE AND CLEAR OF ALL ENCUMBRANCES AND LIENS ARISING OUT OF ACTS OR OMISSIONS OF COMPANY, INCLUDING THOSE ARISING OUT OF ACTS OR CONSTRUCTION DONE OR ORDERED BY COMPANY. HOWEVER, IF BY REASON OF ANY WORK PERFORMED, MATERIALS FURNISHED OR OBLIGATIONS INCURRED BY COMPANY WITH ANY THIRD PARTY, OR ANY OTHER ACT OR OMISSION BY COMPANY, PIMSA IS MADE LIABLE OR INVOLVED IN LITIGATION, COMPANY SHALL HOLD HARMLESS AND INDEMNIFY PIMSA INCLUDING ANY COSTS AND EXPENSES, AND ATTORNEY'S FEES INCURRED BY REASON THEREOF. SHOULD COMPANY FAIL FULLY TO DISCHARGE ANY SUCH ENCUMBRANCES OR LIENS WITHIN THIRTY (30) DAYS AFTER THE DATE IT HAS BEEN INSTITUTED, OR 11 FAIL TO PROVIDE A BOND ACCEPTABLE TO PIMSA IN THE EVENT OF CONTEST, PIMSA, AT ITS OPTION, MAY PAY ALL OR ANY PART THEREOF. IF PIMSA PAYS ANY SUCH LIEN OR ENCUMBRANCES OR ANY PART THEREOF, COMPANY SHALL, ON DEMAND, IMMEDIATELY PAY PIMSA THE AMOUNT SO PAID, TOGETHER WITH INTEREST AT THE RATE OF TWENTY PERCENT (20%) PER ANNUM FROM THE DATE OF PAYMENT. NO LIEN OR ENCUMBRANCE OF ANY CHARACTER WHATSOEVER CREATED BY AN ACT OR OMISSION BY COMPANY SHALL IN ANY WAY ATTACH OR AFFECT THE RIGHTS OF PIMSA ON THE LEASED PROPERTY. X. UTILITY SERVICES. DURING THE TERM OF THIS LEASE AGREEMENT, COMPANY SHALL PROMPTLY PAY FOR ANY AND ALL PUBLIC AND OTHER UTILITIES AND RELATED SERVICES FURNISHED TO THE LEASED PROPERTY, INCLUDING BUT NOT LIMITED TO, WATER, GAS, ELECTRICITY AND TELEPHONE CHARGES. XI. RIGHT-OF-WAY. PIMSA IS HEREBY GRANTED A RIGHT-OF-WAY UPON, ACROSS, OVER, AND UNDER THE LEASED PROPERTY FOR INGRESS, EGRESS, INSTALLATIONS, REPLACING, REPAIRING AND MAINTAINING ALL UTILITIES, INCLUDING BUT NOT LIMITED TO WATER, GAS, TELEPHONES, AND ALL ELECTRICITY AND ANY TELEVISION OR RADIO ANTENNA SYSTEM SERVING THE LEASED PROPERTY. BY VIRTUE OF THIS RIGHT-OF-WAY IT SHALL BE EXPRESSLY PERMISSIBLE FOR THE PROVIDING ELECTRICAL AND/OR TELEPHONE COMPANY TO ERECT AND MAINTAIN THE NECESSARY POLES AND OTHER NECESSARY EQUIPMENT ON THE LEASED PROPERTY; PROVIDED THAT IN EXERCISING ANY RIGHT PIMSA MAY HAVE UNDER THIS CLAUSE XI, PIMSA AGREES TO CAUSE ONLY A MINIMUM INTERFERENCE WITH COMPANY'S USE AND POSSESSION OF THE LEASED PROPERTY. XII. ASSIGNMENT AND SUBLETTING. A. COMPANY SHALL HAVE THE RIGHT, UPON PRIOR WRITTEN NOTICE TO PIMSA, TO ASSIGN OR TRANSFER THIS LEASE AGREEMENT, OR ANY INTEREST THEREIN, OR PERMIT THE USE OF THE LEASED PROPERTY BY ANY INDIVIDUAL, CORPORATION, OR ENTITY, OR SUBLEASE ALL OR PART OF THE LEASED PROPERTY, PROVIDED, HOWEVER, THAT IN THE EVENT OF ANY SUCH ASSIGNMENT, TRANSFER OR SUBLEASE, COMPANY AND ITS GUARANTOR SHALL REMAIN LIABLE FOR ALL ITS OBLIGATIONS UNDER THE LEASE AGREEMENT. B. PIMSA SHALL HAVE THE RIGHT TO ASSIGN AND REASSIGN, FROM TIME TO TIME, ANY OR ALL OF THE RIGHTS AND OBLIGATIONS OF PIMSA IN THIS LEASE AGREEMENT, OR ANY INTEREST THEREIN, WITHOUT COMPANY'S CONSENT, PROVIDED THAT NO SUCH ASSIGNMENT OR REASSIGNMENT SHALL IMPAIR ANY OF THE RIGHTS OF 12 COMPANY HEREIN, AND PROVIDED FURTHER, THAT PIMSA SHALL REMAIN LIABLE FOR ALL OF ITS OBLIGATIONS UNDER THIS LEASE AGREEMENT. IN THE EVENT OF AN ASSIGNMENT OR REASSIGNMENT, COMPANY SHALL NOT DIMINISH OR WITHHOLD ANY OF THE RENTS PAYABLE HEREUNDER BY ASSERTING AGAINST SUCH ASSIGNEE ANY DEFENSE, SETOFF, OR COUNTERCLAIMS WHICH COMPANY MAY HAVE AGAINST PIMSA OR ANY OTHER PERSON. COMPANY HEREBY SPECIFICALLY WAIVES, WITH RESPECT TO WITHHOLDING OF RENT, ANY PREVENTATIVE MEASURES TO GUARANTEE PAYMENT OF A CLAIM, AS PROVIDED BY THE CODE OF CIVIL PROCEDURE. XIII. SUBORDINATION. DURING THE TERM OF THIS LEASE AGREEMENT, PIMSA SHALL HAVE THE RIGHT TO ENCUMBER ITS INTEREST IN THE LEASED PROPERTY OR IN THIS LEASE AGREEMENT FOR ANY PURPOSE IT DEEMS CONVENIENT, AND COMPANY SHALL AND HEREBY DOES SUBORDINATE ITS INTEREST IN THIS LEASE AGREEMENT AND IN THE LEASED PROPERTY TO SUCH ENCUMBRANCE. HOWEVER, IN THE EVENT SUCH ENCUMBRANCE IS FORECLOSED OR JUDICIALLY ENFORCED, THE ONE WHO HOLDS THE ENCUMBRANCE SHALL AGREE TO HONOR THIS LEASE AGREEMENT AND ACCEPT THE PERFORMANCE BY COMPANY OF ITS OBLIGATIONS HEREUNDER. COMPANY SHALL EXECUTE ANY AGREEMENT WHICH MAY BE REQUIRED BY PIMSA IN CONFIRMATION OF SUCH SUBORDINATION AND SUBMIT WHATEVER PUBLIC FINANCIAL DATA MAY NORMALLY BE REQUESTED BY ANY TRUST, INSURANCE COMPANY, BANK OR OTHER RECOGNIZED LENDING INSTITUTION. ONCE THAT PIMSA SHALL HAVE NOTIFIED COMPANY IN WRITING THAT IT HAS ASSIGNED ITS INTEREST IN THIS LEASE AGREEMENT TO ANY LENDING INSTITUTION AS SECURITY FOR A DEBT OR OTHER OBLIGATION OF PIMSA, PIMSA SHALL NOT HAVE THE POWER TO AMEND THIS LEASE AGREEMENT SO AS TO REDUCE THE RENT, DECREASE THE TERM OR MODIFY OR NEGATE ANY SUBSTANTIAL OBLIGATION OF COMPANY HEREUNDER, OR TO ACCEPT A RESCISSION OF THIS CONTRACT, WITHOUT THE WRITTEN CONSENT OF SUCH LENDING INSTITUTION. SUCH OBLIGATION SHALL CONTINUE UNTIL THE LENDING INSTITUTION SHALL HAVE NOTIFIED COMPANY IN WRITING THAT SUCH ASSIGNMENT HAS BEEN TERMINATED, ON THE UNDERSTANDING THAT IF PIMSA FAILS TO OBTAIN SUCH LENDING INSTITUTION'S APPROVAL TO CARRY OUT THE FOREGOING, THE AMENDMENT OF THE TERM ABOVE MENTIONED SHALL HAVE NO EFFECT WHATSOEVER AS AGAINST SUCH LENDING INSTITUTION. IN ADDITION, IF THE LENDING INSTITUTION SHOULD NOTIFY COMPANY IN WRITING REQUIRING THE PAYMENT OF RENTS HEREUNDER DIRECTLY TO SUCH LENDING INSTITUTION OR ITS REPRESENTATIVE, THEN COMPANY SHALL BE OBLIGATED TO PAY TO SUCH LENDING INSTITUTION OR ITS REPRESENTATIVE EACH SUBSEQUENT MONTHLY RENTAL COMING DUE UNDER THIS LEASE AGREEMENT (TOGETHER WITH 13 ANY UNPAID RENT THEN PAST DUE), UNTIL THE DATE ON WHICH SUCH LENDING INSTITUTION NOTIFIES COMPANY AUTHORIZING PAYMENT OF RENT TO PIMSA OR OTHER PARTY ENTITLED THERETO. COMPANY UNDERSTANDS AND AGREES THAT EXCEPT FOR THE ADVANCED RENTAL PAYMENTS PROVIDED FOR IN PARAGRAPH A.1. OF CLAUSE V OF THIS LEASE AGREEMENT, PIMSA MAY NOT COLLECT ANY RENT MORE THAN ONE (1) MONTH IN ADVANCE AND COMPANY, AT THE REQUEST OF PIMSA, SHALL PROVIDE A STATEMENT THAT NO SUCH ADVANCED PAYMENT HAS BEEN MADE; SUCH DOCUMENT SHALL BE BINDING UPON COMPANY AS AGAINST THE LENDING INSTITUTION TO WHICH THIS LEASE AGREEMENT MAY BE ASSIGNED. IN ADDITION, THE LENDING INSTITUTION SHALL NOT BE BOUND TO RECOGNIZE THOSE PAYMENTS MADE TO PIMSA AFTER THE COMPANY HAS RECEIVED NOTICE REQUIRING PAYMENTS TO BE MADE TO SUCH LENDING INSTITUTIONS. XIV. ACCESS TO LEASED PROPERTY. WITHOUT UNDUE INTERFERENCE TO COMPANY'S OPERATION, PIMSA OR ITS AUTHORIZED REPRESENTATIVE SHALL HAVE THE RIGHT TO ENTER THE LEASED PROPERTY DURING ALL COMPANY BUSINESS HOURS, AND IN EMERGENCIES AT ALL TIMES, TO INSPECT THE LEASED PROPERTY AND TO MAKE REPAIRS, ADDITIONS, OR ALTERATIONS TO THE LEASED PROPERTY. FOR A PERIOD COMMENCING NINETY (90) DAYS PRIOR TO THE TERMINATION OF THIS LEASE AGREEMENT, PIMSA SHALL HAVE ACCESS TO THE LEASED PROPERTY FOR THE PURPOSE OF EXHIBITING IT TO PROSPECTIVE CLIENTS AND MAY POST USUAL FOR SALE OR FOR LEASE SIGNS UPON THE LEASED PROPERTY. EXCEPT IN CASE OF EMERGENCY, PIMSA SHALL GIVE NOTICE TO COMPANY BEFORE ENTERING THE LEASED PROPERTY, AND COMPANY SHALL HAVE THE RIGHT TO ACCOMPANY ANY REPRESENTATIVES OF PIMSA AND PROSPECTIVE CLIENTS. XV. DAMAGE OR DESTRUCTION. A. TOTAL. IN THE EVENT THAT THE WHOLE OR A SUBSTANTIAL PART OF THE LEASED PROPERTY IS DAMAGED OR DESTROYED BY FIRE, ACT OF NATURE, OR ANY OTHER CAUSE, SO AS TO MAKE COMPANY UNABLE TO CONTINUE THE OPERATION OF ITS BUSINESS, PIMSA SHALL, WITHIN FIFTEEN (15) DAYS FROM SUCH DESTRUCTION, DETERMINE WHETHER THE LEASED PROPERTY CAN BE RESTORED WITHIN SIX (6) MONTHS, AND NOTIFY COMPANY OF SAID DETERMINATION. IF PIMSA DETERMINES THAT THE LEASED PROPERTY CANNOT BE RESTORED WITHIN SIX (6) MONTHS, EITHER PIMSA OR COMPANY SHALL HAVE THE RIGHT AND OPTION TO IMMEDIATELY TERMINATE THIS LEASE AGREEMENT, BY ADVISING THE OTHER THEREOF BY WRITTEN NOTICE. IF PIMSA DETERMINES THAT THE LEASED PROPERTY CAN BE RESTORED WITHIN SAID SIX (6) MONTHS, PIMSA SHALL, AT ITS OWN EXPENSE, TO THE EXTENT OF THE FUNDS AWARDED TO PIMSA FROM THE PROCEEDS OF THE INSURANCE REQUIRED UNDER CLAUSE VII HEREINABOVE, 14 PROCEED DILIGENTLY TO RECONSTRUCT PIMSA'S IMPROVEMENTS, AND IN SUCH EVENT, PIMSA SHALL ACCEPT IN LIEU OF RENT DURING THE PERIOD WHEN COMPANY IS SUBSTANTIALLY DEPRIVED OF THE USE OF THE LEASED PROPERTY ANY RENTAL INSURANCE PROCEEDS WHICH MAY BE PAYABLE PURSUANT TO RENTAL INSURANCE PROVIDED FOR HEREINABOVE. B. PARTIAL. IN THE EVENT THE SAID DAMAGE CAUSED TO THE LEASED PROPERTY DOES NOT PREVENT COMPANY FROM CONTINUING THE NORMAL OPERATION OF ITS BUSINESS ON THE LEASED PROPERTY, PIMSA AND COMPANY SHALL REPAIR SAID DAMAGE, EACH PARTY RECONSTRUCTING THAT PORTION OF THE BUILDING AND INTERIOR INSTALLATIONS FOR WHICH IT WAS RESPONSIBLE DURING THE ORIGINAL CONSTRUCTION; PROVIDED THAT EXCLUDING DAMAGE OR DESTRUCTION TO THE PARKING LOT DURING THE PERIOD REQUIRED FOR SUCH REPAIR WORK OF PIMSA'S IMPROVEMENTS OR THE IMPROVEMENTS, RENTAL PAYABLE HEREUNDER BY COMPANY SHALL BE EQUITABLY PRORATED TO THE PROPORTIONED INTERFERENCE WITH COMPANY'S USE AND POSSESSION OF THE LEASED PROPERTY OCCASIONED BY SUCH DAMAGE AND REPAIR, AND IN SUCH EVENT, PIMSA SHALL ACCEPT IN LIEU OF THE EQUITABLY PRORATED RENT PAYABLE HEREUNDER, DURING THE PERIOD WHEN COMPANY IS PARTIALLY DEPRIVED OF THE USE AND POSSESSION OF THE LEASED PROPERTY, ANY RENTAL INSURANCE PROCEEDS ATTRIBUTABLE TO RENT WHICH MAY BE PAYABLE PURSUANT TO SAID INSURANCE PROVIDED FOR HEREINABOVE. XVI. LIMITATION OF LIABILITY. EXCEPT FOR INTENTIONAL OR NEGLIGENT ACTS OR OMISSIONS OF PIMSA, ITS AGENTS OR EMPLOYEES, PIMSA SHALL NOT BE LIABLE TO COMPANY OR TO ANY OTHER PERSON WHATSOEVER FOR ANY LOSS OR DAMAGE OF ANY KIND OR NATURE CAUSED BY THE INTENTIONAL OR NEGLIGENT ACTS OR OMISSIONS OF COMPANY OR OTHER OCCUPANTS OF THE INDUSTRIAL PARK OR OF ADJACENT PROPERTY, OR THE PUBLIC, OR OTHER CAUSES BEYOND THE CONTROL OF PIMSA, INCLUDING BUT NOT LIMITED TO, ANY FAILURE TO FURNISH, OR ANY INTERRUPTION OF ANY UTILITY OR OTHER SERVICES IN OR ABOUT THE LEASED PROPERTY. COMPANY RECOGNIZES THAT ADDITIONS, REPLACEMENTS, AND REPAIRS TO THE INDUSTRIAL PARK WILL BE MADE FROM TIME TO TIME, PROVIDED THAT THE SAME SHALL NOT SUBSTANTIALLY INTERFERE WITH COMPANY'S USE AND ENJOYMENT OF THE LEASED PROPERTY. XVII. INDEMNIFICATION. COMPANY AGREES TO INDEMNIFY AND SAVE PIMSA HARMLESS FROM ANY AND ALL CLAIMS FOR DAMAGES OR LOSSES OF ANY NATURE WHATSOEVER, ARISING FROM NEGLIGENT ACT OR OMISSION OF COMPANY OR ITS CONTRACTORS, LICENSEES, AGENTS, INVITEES, OR EMPLOYEES, OR ARISING FROM ANY ACCIDENT, INJURY OR DAMAGE WHATSOEVER CAUSED TO ANY PERSON OR PROPERTY OCCURRING IN OR ABOUT THE 15 LEASED PROPERTY, OR THE AREAS ADJOINING THE LEASED PROPERTY AND FROM AND AGAINST ALL COSTS AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED THEREBY. PIMSA INDEMNIFIES AND HOLDS COMPANY HARMLESS FROM ANY INJURY OR DAMAGE TO COMPANY OR ITS AGENTS OR EMPLOYEES AND FROM ANY AND ALL LIABILITY FOR INJURY TO THIRD PERSONS OR DAMAGE TO THE PROPERTY OF THIRD PERSONS WHILE LAWFULLY UPON THE LEASED PROPERTY OCCURRING BY REASON OF ANY NEGLIGENT ACT OR OMISSION OF PIMSA, ITS CONTRACTORS, LICENSEES, INVITEES, AGENTS OR EMPLOYEES. XVIII. NOTICES. ALL NOTICES UNDER THIS LEASE AGREEMENT SHALL BE FORWARDED TO THE ADDRESSES MENTIONED IN THE RECITALS ABOVE, WITH A COPY TO THE GUARANTOR OF THIS LEASE AGREEMENT, OR SUCH OTHER ADDRESSES AS MAY FROM TIME TO TIME BE FURNISHED BY THE PARTIES HERETO. SAID NOTICES SHALL BE IN WRITING AND IF MAILED, SHALL BE DEEMED GIVEN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF. DUPLICATE NOTICES SHALL BE SENT BY CERTIFIED AIRMAIL, POSTAGE PREPAID, TO SUCH ADDITIONAL ADDRESSES AS MAY FROM TIME TO TIME BE REQUESTED IN WRITING BY THE PARTIES HERETO. XIX. COMPANY'S DEFAULT. A. EACH OF THE FOLLOWING SHALL BE A DEFAULT OF COMPANY. 1. VACATION OR ABANDONMENT OF LEASED PROPERTY. 2. FAILURE TO PAY ANY INSTALLMENT OF RENT DUE AND PAYABLE HEREUNDER UPON THE DATE WHEN SAID PAYMENT IS DUE, SAID FAILURE CONTINUING FOR A PERIOD OF TEN (10) DAYS. 3. DEFAULT IN THE PERFORMANCE OF ANY OF COMPANY'S COVENANTS, AGREEMENTS OR OBLIGATIONS HEREUNDER, SAID DEFAULT, EXCEPT DEFAULT IN THE PAYMENT OF ANY INSTALLMENT OF RENT, CONTINUING FOR FIFTEEN (15) DAYS AFTER WRITTEN NOTICE THEREOF IS GIVEN FROM PIMSA TO COMPANY; 4. A GENERAL ASSIGNMENT BY COMPANY FOR THE BENEFIT OF CREDITORS; 5. THE FILING OF A VOLUNTARY PETITION IN BANKRUPTCY BY COMPANY OR THE FILING OF AN INVOLUNTARY PETITION BY COMPANY'S CREDITORS, SAID PETITION REMAINING UNDISCHARGED FOR A PERIOD OF NINETY (90) DAYS. 16 6. THE APPOINTMENT OF A RECEIVER TO TAKE POSSESSION OF SUBSTANTIALLY ALL OF COMPANY'S ASSETS OR OF THIS LEASEHOLD, SAID RECEIVERSHIP REMAINING UNDISCHARGED FOR A PERIOD OF (90) DAYS. 7. ATTACHMENT, EXECUTION OR OTHER JUDICIAL SEIZURE OF SUBSTANTIALLY ALL OF COMPANY'S ASSETS OR THIS LEASEHOLD, SUCH ATTACHMENT, EXECUTION OR OTHER SEIZURE REMAINING UNDISMISSED OR UNDISCHARGED FOR A PERIOD OF NINETY (90) DAYS AFTER THE LEVY HEREOF. B. IN ADDITION TO THE ABOVE, EACH OF THE FOLLOWING SHALL BE CONSIDERED A DEFAULT OF THE COMPANY, IF THERE IS IN RESPECT TO GUARANTOR: 1. A GENERAL ASSIGNMENT BY GUARANTOR FOR THE BENEFIT OF CREDITORS; 2. THE FILING OF A VOLUNTARY PETITION IN BANKRUPTCY BY GUARANTOR OR THE FILING OF AN INVOLUNTARY PETITION BY GUARANTOR'S CREDITORS, SAID PETITION REMAINING UNDISCHARGED FOR A PERIOD OF NINETY (90) DAYS; 3. THE APPOINTMENT OF A RECEIVER TO TAKE POSSESSION OF SUBSTANTIALLY ALL OF GUARANTOR'S ASSETS OR OF THIS LEASEHOLD, SAID RECEIVERSHIP REMAINING UNDISSOLVED FOR A PERIOD OF NINETY (90) DAYS OR; 4. ATTACHMENT, EXECUTION OR OTHER JUDICIAL SEIZURE OF SUBSTANTIALLY ALL OF GUARANTOR'S ASSETS OR THIS LEASEHOLD, SUCH ATTACHMENT, EXECUTION OR OTHER SEIZURE REMAINING UNDISMISSED OR UNDISCHARGED FOR A PERIOD OF NINETY (90) DAYS AFTER THE LEVY THEREOF. C. UPON OCCURRENCE OF ANY ONE OF THE FOREGOING DEFAULTS, PIMSA SHALL HAVE THE RIGHT, AT ITS OPTION, AND IN ADDITION TO OTHER RIGHTS OR REMEDIES GRANTED BY LAW, INCLUDING THE RIGHT TO CLAIM DAMAGE, TO DO EITHER OF THE FOLLOWING: 1. IMMEDIATELY RESCIND THIS LEASE AGREEMENT AND EJECT COMPANY FROM THE LEASED PROPERTY. 2. CLAIM SPECIFIC PERFORMANCE. IN THE CASE OF DEFAULT AS SPECIFIED ABOVE, PIMSA SHALL, IN ADDITION TO ALL OTHER REMEDIES, HAVE THE RIGHT TO DECLARE THE ENTIRE UNPAID BALANCE OF RENT TO THE END OF THE SEVENTY SEVEN (77) MONTH LEASE TERM THEN IN EFFECT, AND ALL OTHER SUMS DUE TO PIMSA, IMMEDIATELY DUE AND PAYABLE, PLUS INTEREST AT THE RATE OF TWENTY PERCENT (20%) PER ANNUM OF SAID SUMS FROM THE DATE OF SUCH DECLARATION UNTIL PAYMENT IN FULL, PROVIDED THAT PIMSA SHALL DILIGENTLY PROCEED TO LEASE THE LEASED PROPERTY TO 17 ANOTHER TENANT OR OTHERWISE MAKE BENEFICIAL USE THEREOF IN MITIGATION OF DAMAGES, RENT AND ALL OTHER SUMS DUE OR PAYABLE TO PIMSA. IN THE EVENT THE LEASED PROPERTY IS LEASED TO ANOTHER TENANT DURING THE AFORESAID SEVENTY SEVEN (77) MONTH LEASE TERM OR OTHERWISE USED IN A BENEFICIAL MANNER: a. PIMSA SHALL PROMPTLY REFUND TO COMPANY THAT PORTION OF RENT AND INTEREST PAID BY COMPANY PURSUANT TO THIS PARAGRAPH 2. WHICH IS ALLOCABLE TO THE PERIOD OF THE LEASE TERM DURING WHICH THE LEASED PROPERTY WAS LEASED TO ANOTHER TENANT OR OTHERWISE USED IN A BENEFICIAL MANNER AS WELL AS ANY OTHER ALLOCABLE SUMS PAID BY COMPANY TO PIMSA, LESS ANY LOSS OR DAMAGE INCURRED BY PIMSA AS A RESULT OF COMPANY'S DEFAULT, OR; b. IF SUCH RENT OR OTHER SUMS HAVE NOT BEEN PAID BY COMPANY TO PIMSA, PIMSA SHALL CREDIT SUCH AMOUNT(S) TO COMPANY. XX. RIGHT TO CURE DEFAULTS. IN THE EVENT OF COMPANY'S BREACH OR DEFAULT OF ANY TERM OR PROVISION HEREIN, PIMSA MAY, WITHOUT ANY OBLIGATION TO DO SO, AT ANY TIME AFTER TEN (10) DAYS WRITTEN NOTICE, CURE SUCH BREACH OR DEFAULT, OR MAKE REPAIRS TO THE LEASED PROPERTY, FOR THE ACCOUNT AND AT THE EXPENSE OF COMPANY. IF PIMSA, BY REASON OF SUCH BREACH OR DEFAULT, PAYS ANY MONEY, OR IS COMPELLED TO INCUR ANY EXPENSE, INCLUDING ATTORNEYS' FEES, THE SUMS SO PAID OR INCURRED BY PIMSA WITH ALL INTEREST, COSTS, AND DAMAGES, SHALL BE PAID BY COMPANY TO PIMSA ON THE FIRST (1ST) DAY OF THE MONTH FOLLOWING THE INCURRING OF SUCH EXPENSES. IF ANY INSTALLMENT OF RENT OR ANY OTHER PAYMENT IS NOT PROMPTLY PAID WHEN DUE, IT SHALL BEAR INTEREST OF TWENTY (20%) PER ANNUM FROM THE DATE ON WHICH IT BECOMES DUE UNTIL PAID; BUT THIS PROVISION IS NOT INTENDED TO RELIEVE THE COMPANY FROM FULFILLING ITS OBLIGATIONS HEREUNDER IN THE TIME AND IN THE MANNER SPECIFIED IN THIS AGREEMENT. THE FOREGOING INTEREST, EXPENSES AND DAMAGES SHALL BE RECOVERABLE FROM COMPANY BY EXERCISE OF PIMSA'S REMEDIES HEREINABOVE SET FORTH. EFFORTS BY PIMSA TO MITIGATE THE DAMAGES CAUSED BY COMPANY'S BREACH OF THIS LEASE SHALL NOT BE CONSTRUED TO BE A WAIVER OF PIMSA'S RIGHT TO RECOVER DAMAGES UNDER THIS CLAUSE XX. NOTHING IN THIS CLAUSE XX AFFECTS THE RIGHT OF PIMSA TO INDEMNIFICATION BY COMPANY IN ACCORDANCE WITH CLAUSE XVII HEREINABOVE FOR LIABILITY ARISING PRIOR TO THE TERMINATION OF THIS LEASE FOR PERSONAL INJURIES OR PROPERTY DAMAGE. 18 XXI. WAIVER. In the event PIMSA or COMPANY does not compel the other to comply with any of the obligations hereunder, such action or omission shall not be construed as a waiver of a subsequent breach of the same or any other provision. Any consent or approval shall not be deemed to waive or render unnecessary the consent or approval of any subsequent or similar act by COMPANY or PIMSA. XXII. CERTIFICATES. COMPANY shall, within ten (10) days of receipt of a written request made by PIMSA, deliver to PIMSA a statement in writing certifying that this Lease Agreement is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified); the dates to which the rent and any other charges have been paid in advance, and that PIMSA'S Improvements have been satisfactorily completed. It is intended that any such statement may be relied upon by any person, prospective purchaser, or lending institution interested in the Leased Property. XXIII. HOLDING OVER. If COMPANY should remain in possession of the Leased Property after the expiration of this Lease, COMPANY shall pay a minimum monthly rent equal to twice the then minimum monthly rent then paid in the month immediately preceding the month in which the holdover period began until COMPANY has delivered to PIMSA the Leased Property, or executed a new Lease Agreement. This provision shall not be construed as granting any right to COMPANY to remain in possession of the Leased Property after the expiration of the Lease Term. COMPANY shall indemnify PIMSA against any loss or liability resulting from delay by COMPANY in surrendering the Leased Property, if such loss or liability is founded on said delay, less any amounts paid pursuant to this clause. The parties agree that COMPANY shall quit and surrender the Leased Property at the expiration of this Lease Agreement, waiving the right provided by law. XXIV. SURRENDER. A. On the last day of the term of this Lease Agreement, or the sooner termination thereof pursuant to other provisions hereof, COMPANY shall quit and surrender the Leased Property in the same conditions as received by COMPANY, and restore the premises to a clean and good condition (normal 19 wear and tear excepted) together with PIMSA's Improvements that may have been made in the same. Prior to termination of this Lease Agreement, COMPANY shall have removed all of its property in accordance with Clause III hereof and all property not removed shall be deemed abandoned by COMPANY. COMPANY shall repair and restore the Leased Property to a good and clean condition, normal wear and tear excepted, while removing the COMPANY's property. XXV. QUIET ENJOYMENT. PIMSA agrees that COMPANY, upon paying the rent and all other charges provided for herein and upon complying with all of the terms and provisions of this Lease Agreement, shall lawfully and quietly occupy and enjoy the Leased Property during the Lease Term. XXVI. ATTORNMENT. COMPANY shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust made by PIMSA, its successors or assigns, encumbering the Leased Property, or any part thereof, if so requested, attorn to the purchaser upon such foreclosure or sale and recognize such purchaser as the lessor under this Lease. XXVII. ENVIRONMENTAL PROTECTION LAW. PIMSA hereby states that the Leased Property, its soil and underground are free and clear of any hazardous materials, wastes or contaminants. Nevertheless, PIMSA shall indemnify and save the COMPANY harmless from and against losses, demands, claims, payments, suits, actions and judgments of any nature and description brought against it by reason of the fact that contaminants existed on the Leased Property, soil and/or underground, or were deposited there, prior to date of signature of this Agreement. The COMPANY will be responsible for any losses, damages or injuries caused by the contaminants which are deposited on the Leased Property, soil or underground after date of signature of this Agreement. It will be the sole responsibility of the COMPANY to comply with all Federal, State or Municipal environmental laws, rules and dispositions, which must be complied with by the COMPANY pursuant with the industrial activities it will perform in the Leased Property and therefore, must obtain the required licenses, authorizations, permits and any other document that it must possess pursuant with the aforestated environmental rules. 20 Furthermore, the COMPANY will be solely and exclusively responsible for any demand, claim, or proceeding initiated against PIMSA, and which results from acts or omissions by the COMPANY, regarding the handling of hazardous or toxic materials or wastes located in or moved to, from or through the Leased Property. The COMPANY in these cases, shall indemnify and save PIMSA harmless from and against losses, demands, claims, payments, suits, actions and judgments of any competent environmental authority. XXVIII. MISCELLANEOUS A. This document contains all of the agreements and conditions made between the parties, and may not be modified orally in any manner other than by a written agreement signed by the authorized representative of the parties. B. If any term, covenant, condition or provision of this Lease Agreement, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction, to be invalid, void or unenforceable, the remainder of the terms, covenants, conditions or provisions of this Lease Agreement, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated. C. In the event that either party should bring an action against the other party for the possession of the Leased Property, or for the recovery of any sum due hereunder, or because of the breach or default of any covenant in this Lease Agreement, the prevailing party shall have the right to collect from the other party its costs and expense, including attorneys' fees. D. Every payment and performance required by this Lease Agreement, shall be paid and performed precisely on the date specified for such for such payment or performance and no delay or extension thereof shall be permitted. E. The titles and subtitles in these clauses of this document shall have no effect on the interpretation of the terms and provisions contained in this Lease Agreement. F. The parties agree that this Lease Agreement be governed by the Laws of the State of Baja California. For everything pertaining to the interpretation and compliance of this Lease Agreement the parties thereby expressly submit to the jurisdiction of the Civil Courts of the City of Mexicali, State of Baja California, waiving any other jurisdiction which might be applicable by reason of their present or future domiciles or otherwise. 21 G. This Lease Agreement shall be executed in Spanish and English. However, in the event a dispute or other inconsistency should arise regarding interpretation or meaning of this Lease Agreement, the English version shall control. H. Whenever the prior consent of either party, written or otherwise, is required as a condition for any act by the other party under this Lease Agreement, such party agrees not to arbitrarily or unreasonably withhold such consent. I. Each party shall execute such further documents as shall be requested by the other party, but only to the extent that the effect of said documents is to give legal effect to rights set forth in the Lease Agreement. J. COMPANY hereby covenants to PIMSA, and PIMSA relies upon said covenant as a material inducement to enter into this Lease, that COMPANY will deliver to PIMSA, concurrently with the execution and delivery hereof a Guaranty of this Lease in the form attached hereto as EXHIBIT "D", executed by, COASTCAST CORPORATION, or by such other Guarantor as may be acceptable to PIMSA. K. Submission of this instrument for examination or signature by COMPANY does not constitute a reservation of or option to Lease, and it is not effective as a Lease or otherwise until execution and delivery by both PIMSA and COMPANY. L. This Lease and each of its covenants and conditions shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions hereof. Whenever in this Lease Agreement a reference is made to PIMSA, such reference shall be deemed to refer to the person in whom the interest of the lessor hereunder shall be vested. Any successor or assignee of COMPANY who accepts an assignment or the benefit of this Lease Agreement and enters into possession or enjoyment hereunder shall thereby assume and agree to perform and be bound by the covenants and conditions thereof. M. In the event the Government of Mexico or any subdivision thereof appropriates, forcibly buys or in any other way takes over the assets or business of the lessee, and without due cause by COMPANY prevents COMPANY from doing business in Mexico, the COMPANY may upon written notice to PIMSA terminate this Lease Agreement without liability or penalty for such termination and without further liability for 22 rental payments due under this Lease Agreement but without prejudice to the rights of PIMSA and COMPANY to claim from the corresponding authority the damages caused. XXIX. Rider number I, PIMSA's Improvements, is attached hereto and by this reference made a part hereof. XXX. This Lease Agreement is in lieu of Lease Agreement dated January 22, 1996. IN WITNESS WHEREOF, the parties have executed this Lease Agreement as of the tenth day of december nineteen hundred ninety nine. "PIMSA" "COMPANY" /s/ Eduardo Manuel Martinez Palomera /s/ William Lawrence Osborn - ------------------------------------ ----------------------------- PARQUE INDUSTRIAL MEXICALI, COASTCAST CORPORATION, S.A. S.A. DE C. V. Mr. William Lawrence Osborn Mr. Eduardo Manuel Martinez General Director of Operations Palomera and General Manager Executive Vice President W I T N E S S E S /S/ ILLEGIBLE /S/ Hans H. Buehler - -------------------------- -------------------------------- 23 RIDER NUMBER 1 TO LEASE AGREEMENT BETWEEN PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V. AND COASTCAST CORPORATION, S.A. PIMSA'S NUMBERS The following improvements will be included in this Lease Agreement: 1. 300 kva electrical substation. EX-10.13 3 EXHIBIT 10.13 G U A R A N T Y WHEREAS, PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., A MEXICAN CORPORATION (HEREINAFTER REFERRED TO AS PIMSA) IS THE OWNER OF CERTAIN REAL PROPERTY IN THE INDUSTRIAL PARK OF MEXICALI; AND WHEREAS, THIS GUARANTY IS GIVEN BY COASTCAST CORPORATION (HEREINAFTER REFERRED TO AS THE GUARANTOR) TO INDUCE PIMSA TO ENTER INTO A LEASE AGREEMENT, WITH COASTCAST CORPORATION, S.A., A MEXICAN CORPORATION (HEREINAFTER REFERRED TO AS COMPANY), DATED DECEMBER 10, 1999, FOR THE LEASED PROPERTY LOCATED ON LOTS 3,4,5,9 AND A PORTION LOT 10 OF BLOCK 6 IN THE MEXICALI INDUSTRIAL PARK I. NOW, THEREFORE, IN CONSIDERATION OF THE FOREGOING, IT IS AGREED: 1. OBLIGATION OF THE GUARANTOR. THE GUARANTOR UNCONDITIONALLY GUARANTEES TO PIMSA, ITS SUCCESSORS AND ASSIGNS, THE PROMPT, FULL AND COMPLETE PAYMENT AND PERFORMANCE TO PIMSA OF ALL OF THE CONDITIONS, COVENANTS, OBLIGATIONS, LIABILITIES AND AGREEMENTS OF COMPANY AS SET FORTH IN THE LEASE AGREEMENT, ATTACHED HERETO AS EXHIBIT "A" OR ANY EXTENSION THEREOF BETWEEN PIMSA AND COMPANY. THIS GUARANTY EXTENDS TO AND INCLUDES ANY AND ALL INTEREST DUE OR TO BECOME DUE, TOGETHER WITH ALL ATTORNEYS' FEES, COSTS AND EXPENSES OF COLLECTION INCURRED BY PIMSA IN CONNECTION WITH ANY MATTER COVERED BY THIS GUARANTY. 2. TERM OF GUARANTY. THE LIABILITY OF THE GUARANTOR SHALL CONTINUE UNTIL PAYMENT IS MADE AND PERFORMANCE GIVEN PURSUANT TO EVERY OBLIGATION OF THE COMPANY NOW DUE OR HEREAFTER TO BECOME DUE IN ACCORDANCE WITH THE TERMS OF THE LEASE AGREEMENT OR ANY EXTENSION THEREOF, BETWEEN PIMSA AND COMPANY, AND UNTIL PAYMENT IS MADE OF ANY LOSS OR DAMAGE INCURRED BY PIMSA WITH RESPECT TO ANY MATTER COVERED BY THIS GUARANTY. THIS GUARANTY SHALL BE IRREVOCABLE. NOTHING CONTAINED HEREIN SHALL IMPOSE UPON GUARANTOR ANY GREATER OR DIFFERENT LIABILITY THAT IS OR MAY BE IMPOSED ON SAID COMPANY UNDER THE LEASE AGREEMENT EXCEPT GUARANTOR'S LIABILITY TO PAY PIMSA ATTORNEYS' FEES, COSTS AND EXPENSES OF COLLECTION INCURRED IN PROCEEDING AGAINST GUARANTOR HEREUNDER. 3. CONSENT TO PIMSA'S ACTS. THE GUARANTOR CONSENTS, WITHOUT AFFECTING THE GUARANTOR'S LIABILITY TO PIMSA HEREUNDER, THAT PIMSA MAY, WITHOUT NOTICE TO OR CONSENT OF THE GUARANTOR, UPON SUCH TERMS AS IT MAY DEEM ADVISABLE: a) EXTEND, IN WHOLE OR IN PART, BY RENEWAL OR OTHERWISE ANYTIME OF PAYMENT OR PERFORMANCE ON THE PART OF COMPANY, PROVIDED FOR IN THE LEASE AGREEMENT; 2 b) RELEASE, SURRENDER, EXCHANGE, MODIFY, IMPAIR OR EXTEND ANY PERIOD OR DURATION, OR ANY TIME FOR PERFORMANCE, OR PAYMENT ON THE PART OF COMPANY, REQUIRED BY THE LEASE AGREEMENT; AND c) SETTLE OR COMPROMISE ANY CLAIM OF PIMSA AGAINST COMPANY OR AGAINST ANY OTHER PERSON, FIRM OR CORPORATION WHOSE OBLIGATION IS HELD BY PIMSA AS SECURITY FOR COMPANY'S OBLIGATION TO PIMSA UNDER THE LEASE AGREEMENT. THE GUARANTOR HEREBY RATIFIES AND AFFIRMS ANY SUCH EXTENSION RENEWAL, RELEASE, SURRENDER, EXCHANGE, MODIFICATION, IMPAIRMENT, SETTLEMENT OR COMPROMISE AND ALL SUCH ACTS SHALL BE BINDING UPON GUARANTOR WHO HEREBY WAIVES ALL DEFENSES, COUNTERCLAIMS OR OFFSETS WHICH GUARANTOR MIGHT HAVE SOLELY BY REASON THEREOF. 4. WAIVER OF GUARANTOR. GUARANTOR WAIVES: a) NOTICE OF ACCEPTANCE OF THIS GUARANTY BY PIMSA. b) NOTICE OF PRESENTMENT, NOTICE OF NONPERFORMANCE, NOTICES OF DISHONOR AND NOTICES OF THE EXISTENCE, CREATION OR INCURRING OF NEW OR ADDITIONAL INDEBTEDNESS OR OBLIGATIONS, DEMANDS FOR PAYMENT OR PERFORMANCE OR PROTEST OF ANY OBLIGATIONS OF COMPANY TO PIMSA UNDER THE LEASE AGREEMENT; c) NOTICE OF THE FAILURE OF ANY PERSON, FIRM OR CORPORATION TO PAY TO PIMSA ANY INDEBTEDNESS HELD BY PIMSA AS COLLATERAL SECURITY FOR ANY OBLIGATION OF COMPANY TO PIMSA UNDER THE LEASE AGREEMENT; d) ANY RIGHT TO REQUIRE PIMSA TO (I) PROCEED AGAINST COMPANY; (II) PROCEED AGAINST OR EXHAUST ANY SECURITY OR OTHER LIEN OR RIGHT OF OR HELD BY PIMSA FROM COMPANY; OR (III) PURSUE ANY OTHER REMEDY IN THE POWER OF PIMSA WHATSOEVER; e) ANY DEFENSES, OFFSETS OR CLAIMS WHATSOEVER WHICH COMPANY MAY HAVE AGAINST PIMSA; f) ANY DEFENSES, OFFSETS OR CLAIMS ARISING FROM ANY GOVERNMENTAL ACTION OR INTERVENTION WHICH WHOLLY OR PARTIALLY FRUSTRATES THE PERFORMANCE OF THE LEASE AGREEMENT BY THE COMPANY OR FRUSTRATES ANY OR ALL OF THE PURPOSES FOR WHICH THE LEASE AGREEMENT WAS ENTERED INTO; g) ANY DEFECTS IN PERFECTION OF THE ASSIGNMENT AND PLEDGE OF THE RENTS BY FAILURE TO RECORD THE LEASE AGREEMENT OR ANY INSTRUMENT OF ASSIGNMENT AND PLEDGE IN THE PUBLIC REGISTRY UNDER MEXICAN LAW. 3 5. REPRESENTATIONS BY GUARANTOR. GUARANTOR REPRESENTS AND WARRANTS THAT AT THE TIME OF EXECUTION AND DELIVERY OF THIS GUARANTY, NOTHING EXISTS TO IMPAIR THE EFFECTIVENESS OF THE LIABILITY OF GUARANTOR TO PIMSA HEREUNDER, OR THE IMMEDIATE TAKING EFFECT OF THIS GUARANTY AS THE SOLE AGREEMENT BETWEEN THE GUARANTOR AND PIMSA WITH RESPECT TO GUARANTEEING ALL OF COMPANY'S OBLIGATIONS TO PIMSA UNDER THE LEASE AGREEMENT. GUARANTOR FURTHER REPRESENTS AND WARRANTS THAT GUARANTOR IS AUTHORIZED TO EXECUTE AND DELIVER THIS GUARANTY AND THAT THE PERSON EXECUTING THIS GUARANTY IS AUTHORIZED TO EXECUTE THE SAME FOR AND ON BEHALF OF GUARANTOR. 6. REMEDY OF PIMSA. IN THE EVENT OF ANY DEFAULT ON THE PART OF COMPANY AS DEFINED IN THE LEASE AGREEMENT, PIMSA MAY AT ITS OPTION PROCEED IN THE FIRST INSTANCE AGAINST GUARANTOR, JOINTLY AND SEVERALLY, TO COLLECT ANY OBLIGATION COVERED BY THIS GUARANTY, WITHOUT FIRST PROCEEDING AGAINST COMPANY OR ANY OTHER PERSON, FIRM OR CORPORATION AND WITHOUT FIRST RESORTING TO ANY PROPERTY AT ANY TIME HELD BY PIMSA AS COLLATERAL SECURITY. 7. MODIFICATION OF AGREEMENT. THE WHOLE OF THIS GUARANTY IS HEREIN SET FORTH AND THERE IS NO VERBAL OR OTHER WRITTEN AGREEMENT AND NO UNDERSTANDING OR CUSTOM AFFECTING THE TERMS HEREOF. THIS GUARANTY CAN BE MODIFIED ONLY BY A WRITTEN INSTRUMENT SIGNED BY THE PARTY TO BE CHARGED THEREWITH. 8. NON-WAIVER BY PIMSA. THE LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL NOT BE AFFECTED BY THE INSOLVENCY OF COMPANY OR PIMSA, AT ANY TIME OR BY THE ACCEPTANCE BY PIMSA OF SECURITY, NOTES, ACCEPTANCE, DRAFTS OR CHECKS OR BY ASSIGNMENT, FORECLOSURE OR OTHER DISPOSITIONS THEREOF BY PIMSA, AT ANY TIME, OR BY PIMSA PRESENTING OR PROVING FOR ALLOWANCE ANY SECURED OR UNSECURED CLAIM OR DEMAND OR BY PIMSA'S ACCEPTANCE OF ANY COMPOSITION, PLAN OF REORGANIZATION, SETTLEMENT, COMPROMISE, DIVIDEND, PAYMENT OR DISTRIBUTIONS; AND GUARANTOR SHALL NOT BE ENTITLED TO CLAIM ANY RIGHT IN OR BENEFIT BY REASON OF, ANY SUCH COMPOSITION, PLAN OF REORGANIZATION, SETTLEMENT, COMPROMISE, DIVIDEND, PAYMENT OR DISTRIBUTION, OR IN OR BY REASON OF ANY SECURITY HELD BY PIMSA, OR THE PROCEEDS OR OTHER DISPOSITION THEREOF; UNLESS AND UNTIL ALL OF SAID OBLIGATIONS, LIABILITIES AND INDEBTEDNESS, TOGETHER WITH INTEREST, ATTORNEYS' FEES AND COSTS DUE TO PIMSA UNDER THIS GUARANTY OR UNDER THE LEASE AGREEMENT, SHALL HAVE BEEN PAID IN FULL. NOTHING CONTAINED IN THIS AGREEMENT SHALL ALTER ANY OF THE RIGHTS OR REMEDIES OF PIMSA AGAINST COMPANY. GUARANTOR AUTHORIZES PIMSA, WITHOUT NOTICE OR DEMAND AND WITHOUT AFFECTING THE LIABILITY OF GUARANTOR HEREUNDER, FROM TIME TO TIME TO: 4 a) RENEW, COMPROMISE, EXTEND, ACCELERATE, OR OTHERWISE CHANGE THE TIME FOR PAYMENT OF, OR OTHERWISE CHANGE THE TERMS OF THE INDEBTEDNESS OR ANY PART THEREOF UNDER THE LEASE AGREEMENT, INCLUDING INCREASE OR DECREASE OF ANY AMOUNTS DUE THEREUNDER OR ANY RATE OF INTEREST SPECIFIED THEREIN; b) TAKE AND HOLD SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE INDEBTEDNESS GUARANTEED, AND EXCHANGE, ENFORCE, WAIVE, RELEASE, ANY SUCH SECURITY; c) APPLY SUCH SECURITY AND DIRECT THE ORDER OR MANNER OF SALE THEREOF, AS PIMSA IN ITS DISCRETION MAY DETERMINE; AND d) RELEASE OR SUBSTITUTE ANY ONE OR MORE OF COMPANY OR GUARANTOR. PIMSA MAY ASSIGN THIS GUARANTY IN WHOLE OR IN PART. GUARANTOR MAY ASSIGN THIS GUARANTY IN WHOLE OR IN PART, PROVIDED THAT GUARANTOR SHALL REMAIN LIABLE FOR ITS OBLIGATIONS HEREUNDER UNLESS RELEASED THEREFROM BY PIMSA OR ITS SUCCESSORS AND PROVIDED FURTHER THAT GUARANTOR SHALL FIRST GIVE PIMSA SIXTY (60) DAYS PRIOR WRITTEN NOTICE. 9. APPLICABLE LAW. THIS GUARANTY IS ENTERED INTO IN THE COUNTY OF IMPERIAL, STATE OF CALIFORNIA, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES FURTHER AGREE THAT IN THE EVENT A DISPUTE SHOULD ARISE AS TO THE OBLIGATIONS OF EITHER PARTY HERETO, THE PARTIES EXPRESSLY WAIVE THE RIGHT TO BRING OR REMOVE ANY ACTION IN OR TO THE OTHERWISE APPROPRIATE FEDERAL DISTRICT COURT. SUCH JUDICIAL ACTIONS SHALL BE PURSUED EXCLUSIVELY IN THE APPROPRIATE STATE FORUM. 10. MISCELLANEOUS PROVISIONS. GUARANTOR AGREES TO PAY TO PIMSA A REASONABLE ATTORNEYS' FEE AND ALL OTHER COSTS AND EXPENSES WHICH MAY BE INCURRED BY PIMSA IN THE COLLECTION OR EFFORTS TO COLLECT THE INDEBTEDNESS OWED BY COMPANY TO PIMSA PURSUANT TO THE LEASE AGREEMENT OR IN THE COLLECTION OR EFFORTS TO COLLECT OR ENFORCEMENT OF THE SUMS DUE UNDER THIS GUARANTY, PROVIDED THAT IF GUARANTOR IS THE PREVAILING PARTY IN ANY ACTION OR PROCEEDING TO ENFORCE THIS GUARANTY OR COLLECT ANY AMOUNTS ALLEGEDLY DUE HEREUNDER, PIMSA SHALL PAY GUARANTOR A REASONABLE ATTORNEYS' FEE AND OTHER COSTS AND EXPENSES WHICH MAY BE INCURRED BY GUARANTOR. THE PARAGRAPH HEADINGS OF THIS GUARANTY ARE NOT PART OF THIS GUARANTY AND SHALL HAVE NO EFFECT UPON THE CONSTRUCTION AND INTERPRETATION OF ANY PART HEREOF AND ARE INSERTED HEREIN FOR CONVENIENCE ONLY. IN THE EVENT THAT ANY PROVISION HEREOF OR ANY PORTION OF ANY PROVISION HEREOF SHALL BE DEEMED TO BE INVALID OR UNENFORCEABLE, SUCH INVALIDITY OR UNENFORCEABILITY SHALL NOT AFFECT ANY OTHER PORTION OF SAID PROVISION OR ANY OTHER 5 PROVISION HEREIN. ALL REMEDIES HEREIN CONFERRED UPON PIMSA SHALL BE CUMULATIVE AND NO ONE EXCLUSIVE OF ANY OTHER REMEDY CONFERRED HEREIN OR BY LAW OR EQUITY. TIME IS OF THE ESSENCE IN THE PERFORMANCE OF EACH AND EVERY OBLIGATION HEREIN IMPOSED. GUARANTOR REPRESENTS AND WARRANTS THAT IS HAS ALL REQUISITE POWER AND AUTHORITY TO ENTER INTO THIS GUARANTY AGREEMENT AND TO CARRY OUT THE PROVISIONS AND CONDITIONS OF THIS GUARANTY AGREEMENT AND THAT NEITHER THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR THE CONSUMMATION HEREOF NOR THE PERFORMANCE OF THE TERMS HEREOF WILL CONFLICT WITH OR RESULT IN A BREACH OF THE TERMS, CONDITIONS OR PROVISIONS OF OR CONSTITUTE A DEFAULT UNDER OR RESULT IN THE CREATION OF ANY LIEN PURSUANT TO ANY OTHER AGREEMENT OR INSTRUMENT UNDER WHICH GUARANTOR IS OBLIGATED. 11. ACKNOWLEDGEMENT OF ASSIGNMENT. IN THE EVENT THIS GUARANTY IS ASSIGNED TO A BANK OR OTHER LENDING INSTITUTION, THE GUARANTOR SHALL FURNISH TO SUCH ENTITY A LETTER STATING THAT THE GUARANTOR ACKNOWLEDGES RECEIPT OF NOTICE OF AN ASSIGNMENT BY PIMSA OF SAID GUARANTY; THAT SAID GUARANTY IS IN FULL FORCE AND EFFECT; THAT NO CHANGES TO THE GUARANTY AS ORIGINALLY EXECUTED HAVE BEEN MADE; THAT THE GUARANTOR WILL NOT ENTER INTO ANY MODIFICATION OF THIS GUARANTY WITHOUT FIRST OBTAINING PRIOR WRITTEN APPROVAL THEREOF FROM SAID LENDER; THAT SAID LENDER MAY RELY SOLELY UPON THE GUARANTY WITH RESPECT TO THE LENDER'S RIGHT TO RECEIVE THE RENTS IN ACCORDANCE WITH THE TERMS OF THE LEASE AGREEMENT; AND THAT ALL PAYMENTS MADE THEREAFTER SHALL BE MADE TO THE LENDER OR ITS ASSIGNS AT SUCH TIMES NOT IN CONFLICT WITH THOSE PERMISSIBLE UNDER THE LEASE ASSIGNMENT, AT SUCH PLACES AND/OR IN UNITED STATES DOLLARS AS DIRECTED BY THE LENDER OR ITS ASSIGNS. 12. NOTICE OF DEFAULT. NOTWITHSTANDING ANY PROVISION TO THE CONTRARY HEREIN EXPRESSED OR IMPLIED, NO CLAIM OF DEFAULT ON THE PART OF COMPANY OR ON THE PART OF GUARANTOR SHALL BE MADE HEREUNDER UNLESS AND UNTIL NOTICE OF SUCH DEFAULTS HAS BEEN GIVEN TO COMPANY AS PROVIDED IN THE LEASE AGREEMENT AND A COPY THEREOF MAILED TO GUARANTOR BY FIRST CLASS CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID AT: 3025 EAST VICTORIA STREET, RANCHO DOMINGUEZ, CALIFORNIA 90221, ATTENTION PRESIDENT. 13. SUCCESSORS BOUND. THIS GUARANTY IS BINDING JOINTLY AND SEVERALLY UPON GUARANTOR AND ITS LEGAL REPRESENTATIVES AND SUCCESSORS AND SHALL INURE TO THE BENEFIT OF PIMSA, ITS LEGAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS. IN WITNESS WHEREOF, GUARANTOR HAS SIGNED THIS AGREEMENT AS OF THE 10TH DAY OF DECEMBER 1999. 6 "GUARANTOR" BY: /s/ Hans H. Buehler ------------------- ITS: CHRMN. & CEO ------------------- ATTEST: BY: /s/ Norman Fujitaki ------------------- ITS: CFO ------------------- EX-10.28 4 EXHIBIT 10.28 COASTCAST CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10.28 73 TABLE OF CONTENTS
PAGE PREAMBLE.........................................................................1 ARTICLE I DEFINITIONS..............................................................1 1.1 Actuarial Equivalent.....................................................1 1.2 Board....................................................................1 1.3 Cause....................................................................2 1.4 Change of Control........................................................2 1.5 Company..................................................................3 1.6 Disability...............................................................3 1.7 Early Retirement Date....................................................3 1.8 Effective Date...........................................................3 1.9 Eligible Employee........................................................4 1.10 ERISA....................................................................4 1.11 Estimated Section 401(k) Plan Benefit....................................4 1.12 Estimated Social Security Benefit........................................4 1.13 Final Average Salary.....................................................5 1.14 Good Reason..............................................................5 1.15 Independent Plan Administrator...........................................6 1.16 Normal Retirement Date...................................................6 1.17 Participant..............................................................6 1.18 Plan.....................................................................6 1.19 Plan Year................................................................6 1.20 Plan Administrator.......................................................6 1.21 Postponed Retirement Date................................................6 1.22 Prior Plan Benefit.......................................................6 1.23 Retirement...............................................................7 1.24 Retirement Date..........................................................7 1.25 Section 401(k) Plan......................................................7 1.26 Termination of Employment................................................7 1.27 Years of Participation...................................................7 1.28 Years of Service.........................................................7 ARTICLE II ELIGIBILITY FOR BENEFITS.................................................8 2.1 Eligibility to Participate...............................................8 2.2 Entitlement to Benefits..................................................8 (a) Normal or Early Retirement........................................8 (b) Termination of Employment Prior to Retirement........................................................8 (c) Pre-Retirement Death Benefit......................................8
-i- PAGE (d) Post-Retirement Death Benefit.....................................9 (e) Disability Retirement Benefit.....................................9 2.3 Forfeiture of Benefits...................................................9 ARTICLE III BENEFITS................................................................10 3.1 Amount of Benefit.......................................................10 3.2 Form of Benefit.........................................................10 3.3 Payment of Benefits.....................................................11 3.4 Payees Under Legal Disability...........................................11 3.5 Withholding for Taxes...................................................11 3.6 Mailing of Payments.....................................................12 3.7 Grantor Trust...........................................................12 3.8 Protective Provisions...................................................12 ARTICLE IV CHANGE OF CONTROL.......................................................12 4.1 Entitlement to Benefits.................................................12 4.2 Full Vesting............................................................13 ARTICLE V OPERATION AND ADMINISTRATION OF THE PLAN................................13 5.1 Plan Administrator Powers...............................................13 5.2 Composition of Plan Administrator.......................................13 5.3 Plan Administrator Procedure............................................14 5.4 Notices and Communications..............................................14 5.5 Reporting and Disclosure................................................15 5.6 Conflict of Interest....................................................15 5.7 Indemnification.........................................................15 ARTICLE VI APPLICATION FOR BENEFITS................................................15 6.1 Application for Benefits................................................15 6.2 Content of Denial.......................................................15 6.3 Appeals.................................................................16 6.4 Arbitration.............................................................16 6.5 Exhaustion of Remedies..................................................17 ARTICLE VII MISCELLANEOUS MATTERS...................................................17 7.1 Amendment or Termination................................................17 7.2 Effect of Reorganization or Transfer of Assets..........................17 7.3 Rights of Participants..................................................18 7.4 Assignment of Benefits..................................................18 7.5 Other Plans.............................................................18 7.6 Interpretation..........................................................18 7.7 Receipt or Release......................................................19 7.8 Governing Law...........................................................20
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PAGE Exhibit A Recognition or Predecessor Employer Service.............................20 Exhibit B Enhanced Benefit Accrual Formula for Larry Cornelius....................21
-iii- COASTCAST CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PREAMBLE The principal objective of the Coastcast Corporation Supplemental Executive Retirement Plan ("Plan") is to help ensure that the Company provides a competitive level of benefits in order to attract, retain, and motivate selected executives. The Plan is designed to provide retirement benefits to selected employees that will help the Company meet this objective. The Plan was originally adopted effective September 1, 1996. The Plan was amended and restated effective as of January 1, 1998 (the "Restatement Effective Date") to freeze benefits at the level accrued as of December 31, 1997 for all participants as of that date, except Hans Buehler. Mr Buehler voluntarily agreed to reduce his accrued benefits under the Plan to zero and shall not continue to participate in the Plan. With respect to Participants with an accrued benefit as of December 31, 1997 who continued to be employed on December 18, 1998, such Participants shall be entitled (subject to satisfaction of the vesting and other conditions imposed under the Plan) to the greater of their accrued benefit as of December 31, 1997 (the "Prior Plan Benefit") or the accrued benefit determined under this amended and restated Plan document, which includes a revised benefits formula and counts service prior to the Effective Date for purposes of determining accrued benefits. The Plan was further amended and restated effective as of January 1, 1999 to revise the benefit accrual formula by the addition of Section 3.1(d). The Plan was established for the purpose of providing benefits to a select group of management or highly compensated employees. The benefits under the Plan are considered unfunded. Accordingly, it is intended that the Plan be exempt from the requirements of Parts II, III, and IV of Title I of Employee Retirement Income Security Act of 1974 ("ERISA") pursuant to Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. ARTICLE I DEFINITIONS 1.1 ACTUARIAL EQUIVALENT. The "Actuarial Equivalent" of two (2) forms of benefits shall be determined using the following actuarial assumptions: Interest rate: 7.5% Mortality: 1983 Group Annuity Mortality Table (80%of male factors applied on a unisex basis) 1.2 BOARD. The Board of Directors of Coastcast Corporation or its delegate. -1- 1.3 CAUSE "Cause" shall mean: (a) Theft or embezzlement from the Company or its affiliates (regardless of whether or not such affiliates maintain the Plan), (b) Fraud or other acts of dishonesty in the conduct of the business of the Company or its affiliates (regardless of whether or not such affiliates maintain the Plan) or the fulfillment of the Participant's assigned responsibilities thereunder, (c) Conviction of, or plea of NOLO CONTEDERE to, any felony or any crime involving moral turpitude, (d) Willful and knowing action which is materially injurious to the business or reputation of the Company or its affiliates (regardless of whether or not such affiliates maintain the Plan). 1.4 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred upon the occurrence of any one (or more) of the following events: (a) the Company is merged or consolidated or reorganized into or with another corporation and less than a majority of the combined voting power of the then outstanding securities of the surviving corporation immediately thereafter is held in the aggregate by the holder of Voting Stock (as defined below) of the Company immediately prior to such transaction; (b) the Company sells or otherwise transfers all or substantially all of its assets to any other corporation, if less than a majority of the combined voting power of the then outstanding voting securities of such corporation immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) as a result of, or in connection with, any cash tender or exchange offer, merger, reorganization or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the individuals who were members of the Board immediately prior to the Transaction cease to constitute a majority of the members of the Board or of the board of directors of any successor to the Company, unless the election or nomination for election by the holders of the Voting Stock of the Company was approved by a vote of the majority of Board members then still in office who were members of the Board immediately prior to the Transaction; or (d) in connection with a transfer or assignment of Voting Stock by the current beneficial owners of Voting Stock, the beneficial ownership of Voting Stock changes such that less than a majority of the Voting Stock outstanding immediately after such assignment or transfer is held by the current beneficial owners of Voting Stock. -2- For purposes of this Section, (i) "Voting Stock" shall mean shares of the Company representing the combined voting power of the then outstanding securities entitled to vote generally in the election of the Board, and (ii) "beneficial ownership" and "beneficial owners" shall have the meaning ascribed to it under Rule 13d-3 or any successor rule or regulation promulgated under the Securities Exchange Act of 1934, as amended, as well as any person or entity who, directly or indirectly, controls, is controlled by or under common control with such beneficial owner. 1.5 COMPANY. Coastcast Corporation and any affiliated companies that maintain the Plan. 1.6 DISABILITY. Any cessation of the Participant's employment with the Company as a result of the inability of the Executive to perform his usual duties for the Company for an extended period by reason of mental or physical illness or injury. The Plan Administrator, in its complete and sole discretion, shall determine a Participant's Disability after receiving competent medical advice using nondiscriminatory standards and may rely on the determination of any disability insurance carrier providing benefits under the terms of any employer provided disability insurance coverage. At all times during the period of Disability, the Participant must be receiving medical care from a competent physician unless the Participant provides the Plan Administrator with written proof acceptable to the Plan Administrator that additional medical care will be of no benefit. The Plan Administrator may require that the Participant submit to an examination on an annual basis by a competent physician or medical clinic selected by the Plan Administrator to confirm whether a Disability is continuing. The Plan Administrator shall have discretion to make a determination based on the medical evidence. 1.7 EARLY RETIREMENT DATE. (a) The first day of any month coincident with or next following the month in which the Participant terminates employment with the Company: (i) After becoming eligible for early retirement benefits, but (ii) Before his Normal Retirement Date. (b) A Participant first becomes eligible for early retirement benefits when: (i) He or she attains age fifty-five (55), and (ii) He or she has at least five (5) Years of Participation. 1.8 EFFECTIVE DATE. The original effective date of the Plan was September 1, 1996 (the "ORIGINAL EFFECTIVE DATE"). The effective date of this amended and restated Plan, is January 1, 1998 (the "RESTATEMENT EFFECTIVE DATE"), but the amendments continuing benefit accruals after December 31, 1997 only apply with respect to Participants who were Eligible Employees on or after December 18, 1998. -3- 1.9 ELIGIBLE EMPLOYEE. A management level or highly compensated employee of the Company who is designated to participate in the Plan by the Plan Administrator. 1.10 ERISA. The Employee Retirement Income Security Act of 1974, as amended. 1.11 ESTIMATED SECTION 401(k) PLAN BENEFIT. (a) A Participant's annual retirement benefit payable as a straight life annuity at Retirement, based on the Actuarial Equivalent value of the Company Matching Contributions to the Section 401(k) Plan on his behalf (computed in accordance with the rules of Paragraph (b) below). (b) The amount of the Elective Deferral Contributions and Company Matching Contributions is computed as if: (i) The Participant had commenced participation in the Section 401(k) Plan on the date when he first became eligible to make Elective Deferral Contributions to that plan, and (ii) The Participant elected the maximum Elective Deferral Contributions and had received the maximum amount of Company Matching Contribution that he could receive each year, based upon the amount of his income that is taken into account under the Section 401(k) Plan for that year. 1.12 ESTIMATED SOCIAL SECURITY BENEFIT. (a) The annual Primary Insurance Amount estimated by the Administrative Committee to be payable to the Participant under the Social Security Act at his Normal Retirement Date (based on the assumption that the Participant is eligible to receive Social Security Benefits, even if his actual Social Security retirement age is later), determined without regard to any Late Retirement Credit under the Social Security Act. (b) The Estimated Social Security Benefit for a Participant whose employment is terminated before age sixty-five (65) will be calculated assuming the Participant will: (i) Not receive any future wages that would be treated as wages for purpose of the federal Social Security Act, and (ii) Begin receiving Social Security benefits at his Normal Retirement Date under this Plan (based on the assumption that the Participant is eligible to receive Social Security Benefits, even if his actual Social Security retirement age is later). -4- (c) The Estimated Social Security Benefit of a Participant will not be increased by reason of any increase in the Primary Insurance Amount that occurs following the termination of his employment. 1.13 FINAL AVERAGE SALARY. (a) The Participant's average annual salary (excluding bonuses and other non-regular forms of compensation) earned from the Company (before adjustments for pre-tax contributions to Company sponsored employee benefit Plans) during the three (3) highest salary years of the five (5) year period ending on the December 31st next preceding the Termination of Employment Date. Solely for purposes of determining the Prior Plan Benefit, Final Average Salary shall be calculated based on the three (3) highest salary years of the five (5) year period ending on December 31, 1997. (b) In the event that the Participant has less than three (3) calendar years of employment with the Company, his Final Average Salary shall be the average amount of his annualized salary for the entire period. 1.14 GOOD REASON. The occurrence of any of the following circumstances after a Change of Control, unless, in the case of events described in Paragraphs (a), (b), (c) or (d) below, the circumstances are fully corrected before the effective date of the Participant's notice that he is resigning from the Company: (a) A significant reduction or adverse change in the nature or scope of the Participant's powers, functions, titles, position, responsibilities or duties in respect of the Company or any affiliate, other than a change to which the Participant consents; (b) The Company's reduction in the Participant's annual base salary (or any bonus provided for in a written employment agreement between the Company and the Participant) as in effect immediately before the Change of Control or as it may be subsequently increased; (c) The Company's failure to pay within seven (7) days of the due date any portion of: (i) The Participant's current compensation, or (ii) An installment of deferred compensation under any deferred compensation plan of the Company; (d) The Company's material reduction or failure to continue in effect any compensation or benefits plan in which the Participant participated immediately before the Change of Control that is material to his total compensation, including but not limited to this Plan or any similar plans adopted before the Change of Control. This provision shall not apply if an -5- equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; Notwithstanding the foregoing, no act or omission by the Company or any Affiliate shall constitute Good Reason unless: (i) the Participant gives the Company or the Affiliate written notice thereof within six (6) months after he first knew or should have known of such act or omission; and (ii) the act or omission is not remedied within thirty (30) days after receipt of such notice. 1.15 INDEPENDENT PLAN ADMINISTRATOR. A person, persons or entity which, prior to a Change in Control has accepted in writing the position of Independent Plan Administrator under the grantor trust agreement established under Section 3.7 hereof. The appointment of the Independent Plan Administrator shall be determined under the provisions of the grantor trust agreement established under Section 3.7 hereof. Unless otherwise designated under the grantor trust agreement established under Section 3.7 hereof, the Independent Plan Administrator shall be a committee, the members of which shall be Hans Buehler, Norman Fujitaki and Robert Gates. After a Change in Control, the designation of the Independent Plan Administrator may not be changed without written consent of a majority of the persons designated as the Independent Plan Administrator. 1.16 NORMAL RETIREMENT DATE. The Participant's sixty-fifth (65th) birthday. 1.17 PARTICIPANT. An Eligible Employee who has become a participant in the Plan in accordance with Section 2.1. 1.18 PLAN. Coastcast Corporation Supplemental Executive Retirement Plan. 1.19 PLAN YEAR. The fiscal year of the Plan, which shall be the period beginning on January 1 and ending on the following December 31. 1.20 PLAN ADMINISTRATOR. The person, persons or entity appointed by the Board pursuant to Article V to manage, administer, interpret, and construe the Plan. 1.21 POSTPONED RETIREMENT DATE. The first day on which the Participant terminates employment with the Company following his Normal Retirement Date. 1.22 PRIOR PLAN BENEFIT. The Participant's annual accrued benefit based on Years of Participation and Final Average Salary at December 31, 1997 under the terms of the Plan in effect prior to the Restatement Effective Date. The Prior Plan Benefit is frozen as of December 31, 1997. -6- 1.23 RETIREMENT. The termination of a Participant's employment with the Company after he has satisfied the requirements for benefits under Section 2.2 below. 1.24 RETIREMENT DATE. A Participant's Normal, Early, or Postponed Retirement Date (whichever is applicable). 1.25 SECTION 401(k) PLAN. The Coastcast Corporation 401(k) Retirement Plan as amended from time to time. 1.26 TERMINATION OF EMPLOYMENT. A participant's cessation of employment with the Company and affiliates for any reason whatsoever, voluntary or involuntary, including by reason of death or Disability. 1.27 YEARS OF PARTICIPATION. The number of complete Plan Years that the Participant has been a Participant in the Plan while employed by the Company, beginning with the first Plan Year in which the Participant commences participation in the Plan pursuant to Section 2.1 of the Plan. A Participant will be credited with one (1) Year of Participation for each Plan Year on or after the Effective Date during which the Participant completes twelve (12) months of continuous service for the Company and is a Participant in the Plan. Participants beginning participation on the Original Effective Date of the Plan shall receive credit for a full Year of Participation for the initial short Plan Year. 1.28 YEARS OF SERVICE. (a) A Participant's years of service with the Company, including periods prior to the Effective Date. Only complete Years of Service will be taken into account under the Plan. (b) A Participant will be credited with one (1) Year of Service for each computation period during which the Participant completes twelve (12) months of continuous service for the Company. A computation period shall be the Plan Year. Except as otherwise set forth in resolutions of the Board: (i) Each Participant will receive credit for all Years of Service with the Company prior to commencing participation in the Plan, and (ii) A Participant will be credited with any time while he is on a leave of absence approved by the Company, including disability leave, up to a maximum of two (2) additional Years of Service. (c) Notwithstanding anything herein to the contrary, the Plan Administrator may in its sole discretion designate in writing for any participant the extent to which some or all service with a predecessor entity shall be treated as service with the Company. Any such designation shall be attached hereto as Exhibit A. -7- ARTICLE II ELIGIBILITY FOR BENEFITS 2.1 ELIGIBILITY TO PARTICIPATE (a) An individual shall become a Participant at the time, and on the conditions specified by the Plan Administrator. (b) The Participants in the Plan as of the Restatement Effective Date are the individuals specified in Exhibit A attached hereto. Additional participants may be added to Exhibit A by the Plan Administrator without requiring an amendment to the Plan. (c) If it is subsequently determined that the participation of any individual in the Plan is inconsistent with the Plan being exempt from the requirements of Parts II, III and IV of Title I of ERISA, at the election of the Plan Administrator, the present value of the current accrued benefit payable to that individual shall be paid in a lump sum as soon as administratively possible after such determination is made. 2.2 ENTITLEMENT TO BENEFITS. A Participant shall be entitled to the accrued benefit determined pursuant to Article III hereof in accordance with the following: (a) NORMAL OR EARLY RETIREMENT. A Participant who has a Termination of Employment on or after his Early Retirement Date or Normal Retirement Date will be eligible to retire and receive accrued benefits under this Plan at his Normal Retirement Date. Notwithstanding the foregoing, the Participant may elect up to thirteen (13) months prior to Termination of Employment to receive Actuarial Equivalent reduced benefits beginning on or after his Early Retirement Date. (b) TERMINATION OF EMPLOYMENT PRIOR TO RETIREMENT. A Participant who has a Termination of Employment for a reason other than death or Disability prior to attaining Early Retirement Date, but after completing five (5) Years of Participation, shall be entitled to receive a deferred vested accrued benefit at his Normal Retirement Date. (c) PRE-RETIREMENT DEATH BENEFIT. In the event of the Participant's death while still employed by the Company or an affiliate and after completing five (5) Years of Participation, the Participant's surviving spouse, if any, shall be entitled to receive a survivor benefit at the Participant's Normal Retirement Date. The amount of the benefit payable to the surviving spouse shall be determined as if: (i) The Participant had retired on the day before his death, and (ii) Elected to receive his benefit in the form of an Actuarial Equivalent one hundred percent (100%) joint and survivor annuity. The value of the joint and -8- survivor annuity will be the Actuarial Equivalent of the accrued benefit to which the Participant would have become entitled based on his Years of Service at the time of his death. (d) POST-RETIREMENT DEATH BENEFIT. In the event of the Participant's death after Termination of Employment, no further benefits shall be payable under the Plan unless the Participant has elected, pursuant to Section 3.2(b), to have benefits payable over the joint lives of the Participant and the Participant's spouse, in which case the Actuarial Equivalent benefit payments shall continue over the life of the Participant's spouse or, if the Participant was entitled to deferred vested benefits at the time of death, shall commence on the date Participant would have become eligible for Retirement. (e) DISABILITY RETIREMENT BENEFIT. In the event of a Participant's Termination of Employment on account of a Disability which is expected to continue until the date Participant otherwise would be eligible for Retirement, Participant shall be entitled to receive a deferred vested accrued benefit at his Normal Retirement Date, without regard to Years of Participation. For purposes of determining the Participant's accrued benefit, the period of Disability prior to the date Participant otherwise would be eligible for Retirement will be considered an approved leave of absence for which Participant may be entitled to up to a maximum of two (2) additional Years of Service credit. 2.3 FORFEITURE OF BENEFITS. Notwithstanding anything herein to the contrary, the benefit payable hereunder to a Participant shall be forfeited if he: (a) Engage in competition with the Company (either before or after Retirement) without the Board's prior authorization in writing. Prohibited competition shall include the direct or indirect competition with the Company or any affiliate in connection with any prohibited business (including, without limitation, employment by, rendering advisory or consulting services to, service as a partner, shareholder, director, officer, employee, agent, representative or independent contractor of, or financial investment in a prohibited business). For purposes of this paragraph, "prohibited business" shall mean any business (and any branch office, location or operation thereof) which competes with any service or product line of the Company or any Affiliate in any standard metropolitan statistical areas in which the Company maintains current operations or has expansion plan to which Participant is privy and any business involved in casting golf club heads for manufacturers of premium price golf clubs; provided, however, that a Participant may hold for investment less than one percent (1%) of the outstanding common stock or debt securities of any corporation which is regular traded on a recognized stock exchange; (b) Is discharged for Cause; or (c) Experiences a Termination of Employment prior to completing five (5) Years of Participation. -9- ARTICLE III BENEFITS 3.1 AMOUNT OF BENEFIT. A Participant retiring in accordance with Section 2.2 above will be eligible for a monthly retirement benefit equal to one-twelfth the greater of the Prior Plan Benefit (as of December 31, 1997) or the amount determined in Paragraph (a) below. (a) The annual retirement benefit payable at a Participant's Normal Retirement Date will be two percent (2%) of his Final Average Salary for each Year of Service, not to exceed twenty-five (25). However, in no event will a participant's Years of Service in excess of twenty-five (25) be taken into account in determining the amount of his benefit. Furthermore, the Participant's benefit will be reduced by the following amounts: (i) His Estimated Social Security Benefit, and (ii) The amount of benefit payable as a straight life annuity at Normal Retirement Date, based on the Actuarial Equivalent value of the benefit funded by the Company payable pursuant to the terms of any tax-qualified defined benefit pension plan sponsored by the Company for the benefit of one or more Participants. (b) The annual retirement benefit payable to a Participant at an Early Retirement Date will equal the Actuarial Equivalent of his benefit determined in accordance with Paragraph (a) above (reduced for each month that the benefit payment begins before age sixty-five (65)). (c) The annual retirement benefit payable to a Participant at his Postponed Retirement Date will equal his benefit determined in accordance with Paragraph (a) above based on his Years of Service and Final Average Salary as of his Postponed Retirement Date. (d) Notwithstanding anything herein to the contrary, the monthly retirement benefit for Larry Cornelius shall, in lieu of the amount determined in accordance with Paragraph (a) above, equal one twelfth (1/12) of the amount determined in Schedule B attached hereto, provided that Mr. Cornelius continues to be employed through his Normal Retirement Date. In the event Mr. Cornelius experiences a Termination of Employment for a reason other than death or Disability prior to attaining his Normal Retirement Date, the amount of the monthly retirement benefit shall be determined under this Section 3.1, without regard to this Paragraph (d) or Schedule B. 3.2 FORM OF BENEFIT. (a) The benefit determined under this Plan will be payable in the form of a straight life annuity over the life of the Participant. -10- (b) In accordance with rules and procedures prescribed by the Plan Administrator, a Participant may elect at least thirteen (13) months prior to Termination of Employment that his benefit be paid in the form of a joint and (100%) survivor annuity payable over the joint lives of the Participant and the Participant's spouse that will be the Actuarial Equivalent of the amount of the Participant's benefit calculated pursuant to Paragraph (a) above. This election must be made prior to the year in which the benefit becomes payable. 3.3 PAYMENT OF BENEFITS. (a) Participants are not entitled to receive a distribution of their benefits prior to Retirement. (b) Benefits will begin on the first day of the month coincident with or next following the Participant's Retirement Date. Benefits will continue to be paid on the first day of each succeeding month. (c) The last payment will be on the first day of the month in which the retired Participant dies or forfeits, unless the Participant has elected that his benefit be paid in an optional form in accordance with the provisions of Section 3.2(b) above. 3.4 PAYEES UNDER LEGAL DISABILITY. (a) If the Plan Administrator believes that any payee is: (i) A minor, or (ii) Legally incapable of giving a valid receipt and discharge for any payment due him, the Plan Administrator may have the payment, or any part of it, made to the person(s) or institution that it believes is caring for or supporting the payee. (b) any payment under Paragraph (a) above shall be a payment for the benefit of the payee and shall, to the extent thereof, be a complete discharge of any liability under the Plan to the payee. 3.5 WITHHOLDING FOR TAXES. Any payments out of the Plan may be subject to withholding for taxes as may be required by any applicable federal or state law. To the extent that the benefit under this Plan is considered wages for income or employment tax purposes during any period prior to the time benefits become payable hereunder, the Company may withhold such taxes from the Participant's current compensation as may be required by any applicable federal or state law. -11- 3.6 MAILING OF PAYMENTS. (a) All payments under the Plan shall be delivered in person or mailed to the last address of the Participant (or, in the case of the death of the Participant, to the last address of his surviving spouse). (b) Each Participant shall be responsible for furnishing the Plan Administrator with his current address. 3.7 GRANTOR TRUST. Although the Company is responsible for the payment of all benefits under the Plan, the Company may, in its discretion, contribute funds or assets (including insurance policies on the life of any or all Participants) to a grantor trust for the purpose of paying benefits under this Plan. Such trust may be irrevocable, but assets of the trust shall be subject to the claims of creditors of the Company. To the extent any benefits provided under the terms of the Plan are actually paid from the trust, the Company shall have no further obligation with respect thereto. To the extent any benefits provided under the terms of the Plan are not paid from the trust, such benefits shall remain the obligation of and shall be paid by the Company. The Participants shall have the status of unsecured creditors insofar as their legal claim for benefits under the Plan and the Participants shall have no security interest or preferred claim in or to the assets of any such grantor trust. 3.8 PROTECTIVE PROVISIONS. Each Participant, as a condition of participation, shall be required to cooperate with the Company by furnishing any and all information requested by the Plan Administrator, to facilitate payment of benefits hereunder by taking such physical examinations as may be requested by the Plan Administrator. If the Participant refuses to so cooperate, the Company shall have no further obligation to the Participant under the Plan. ARTICLE IV CHANGE OF CONTROL Notwithstanding anything in this Plan to the contrary, the provisions of this Article IV apply to those Participants whose employment is terminated within one (1) year following a Change of Control ("Affected Participants"), as expressly provided herein. 4.1 ENTITLEMENT TO BENEFITS. If the employment of an Affected Participant is terminated by the Company in an involuntary termination for any reason other than Cause (or the Affected Participant voluntarily resigns upon 30 days written notice for Good Reason), at any time within one (1) year following a Change of Control and prior to becoming entitled to Retirement under Section 2.2 above, he shall be entitled to receive a benefit at Normal Retirement Date computed according to Section 3.1 above as if the termination of employment date was the Affected Participant's Normal Retirement Date, provided that this shall not increase the Participant's Years of Service. Notwithstanding the foregoing, the Participant may elect up to -12- thirteen (13) months prior to Termination of Employment to receive Actuarial Equivalent reduced benefits beginning on or after his Early Retirement Date. 4.2 FULL VESTING. An Affected Participant entitled to benefits under Section 4.1 shall be fully vested in his or her accrued benefit without regard to Years of Participation, but nothing herein shall increase the amount of the Participant's accrued benefit or accelerate the timing of payment thereof. ARTICLE V OPERATION AND ADMINISTRATION OF THE PLAN 5.1 PLAN ADMINISTRATOR POWERS. The Plan Administrator shall have all powers necessary to supervise the administration of the Plan and control its operations. In addition to any powers and authority conferred on the Plan Administrator elsewhere in the Plan or by law, the Plan Administrator shall have the following powers and authority: (a) To designate agents to carry out responsibilities relating to the Plan; (b) To employ such legal, actuarial, accounting, clerical, and other assistance as it may deem appropriate in administering this Plan; (c) To establish rules and procedures for the conduct of the Plan Administrator's business and the administration of this Plan; (d) To administer this Plan and to decide all questions which may arise under this Plan. All determinations by the Plan Administrator shall be binding upon all parties, to the maximum extent permitted by law. The Plan Administrator shall have discretionary authority in all aspects of the administration and interpretation of the Plan, including the interpretation and construction of the Plan and the ability to make determinations of disputed facts; and (e) To perform or cause to be performed such further acts as it may deem to be necessary or appropriate in the administration of the Plan. 5.2 COMPOSITION OF PLAN ADMINISTRATOR. (a) The Plan Administrator (who need not be Participants or even employees of the Company) shall be appointed by the Board of the Company and shall continue until termination of such status in accordance with the provisions of this Article V. In the event the Board does not designate the Plan Administrator, the Plan Administrator shall be the Company and may the Company's authorized officers may act on its behalf in a representative capacity. Notwithstanding the foregoing, if the Company creates a trust as described in Section 3.7 hereof, and, if such trust provides for an Independent Plan Administrator, then, following a Change in -13- Control of the Company, the Independent Plan Administrator (or any successor Independent Plan Administrator) under the trust shall serve as Plan Administrator of this Plan, so long as such entity is serving as Independent Plan Administrator under the trust. (b) The Plan Administrator or any individual member thereof may resign at any time by giving written notice to the Board, effective as the date stated in the notice. The Plan Administrator or any individual member thereof may be removed by the Board at any time. (c) In the case of a Plan Administrator or an individual member thereof who is also an employee of the Company, his Status as Plan Administrator shall terminate as of the effective date of the termination of his employment, except as otherwise provided in resolutions adopted by the Board. (d) Upon the death, resignation, or removal of the Plan Administrator, the Board may appoint a successor. Notice of the appointment of a successor member shall be given by the Company in writing to the other members of the Plan Administrator. 5.3 PLAN ADMINISTRATOR PROCEDURE. (a) In the event the Plan Administrator is a committee of two or more individuals, a majority of the members of the Plan Administrator shall constitute a quorum. Any action authorized by a majority of the members: (i) Present at any meeting, or (ii) In writing without a meeting, shall constitute the actions of the Plan Administrator. (b) The Plan Administrator may designate one or more individuals as authorized to execute any document or documents on behalf of the Plan Administrator. 5.4 NOTICES AND COMMUNICATIONS. (a) All communications from Participants to the Plan Administrator shall be in writing, on forms prescribed by the Plan Administrator. These communications shall be mailed or delivered to the office designated by the Plan Administrator, and shall be deemed to have been given when received by the Plan Administrator. (b) Each communication from the Plan Administrator to a Participant or beneficiary shall be in writing and may be delivered in person or by mail. These communications shall be deemed to have been delivered and received by the Participant three (3) days after the date when it is deposited in the United States Mail with postage prepaid, addressed to the Participant or beneficiary at this last address of record with the Plan Administrator. -14- 5.5 REPORTING AND DISCLOSURE. The Company (and not the Plan Administrator) shall be responsible for the reporting and disclosure of information required to be reported or disclosed pursuant to ERISA or any other applicable law. 5.6 CONFLICT OF INTEREST. Any member of the Plan Administrator who is also a Participant shall not be qualified to act or vote on any matter relating solely to himself. 5.7 INDEMNIFICATION. To the extent permitted by law, the Certificate of Incorporation of the Company, the Bylaws of the Company and any indemnity agreements between the Company and its directors or employees, the Company shall indemnify each member of the Board and of the Plan Administrator, and any other employee of the Company with duties under the Plan, against expenses (including any amount paid in settlement) reasonably incurred by him in connection with any claims against him by reason of his conduct in the performance of his duties under the Plan. ARTICLE VI APPLICATION FOR BENEFITS 6.1 APPLICATION FOR BENEFITS. (a) The Plan Administrator may require any person claiming benefits under the Plan ("Claimant") to submit an application therefor, together with such other documents and information as the Plan Administrator may require. (b) Within ninety (90) days following receipt of the application and all necessary documents and information, the Plan Administrator's authorized delegate reviewing the claim shall furnish the Claimant with written notice of the decision rendered with respect to the application. (c) Should special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the expiration of the initial ninety (90) day period. (i) The notice shall indicate the special circumstances requiring an extension of time and the date by which a final decision is expected to be rendered. (ii) In no event shall the period of the extension exceed ninety (90) days from the end of the initial ninety (90) day period. 6.2 CONTENT OF DENIAL . In the case of a denial of the Claimant's application, the written notice shall sat forth: (a) The specific reasons for the denial; -15- (b) References to the Plan provisions upon which the denial is based; (c) A description of any additional information or material necessary for perfection of the application (together with an explanation of why the material or information is necessary); and (d) An explanation of the Plan's claims review procedure. 6.3 APPEALS. (a) In order to appeal the decision rendered with respect to his application for benefits or with respect to the amount of his benefits, the Claimant must follow the appeal procedures set forth in this Section 6.3. (b) The appeal must be made, in writing: (i) In the case where the claim is expressly rejected, within sixty (60) days after the date of notice of the decision with respect to the application, or (ii) In the case where the claim has neither been approved nor denied within the applicable period provided in Section 6.1 above, within sixty (60) days after the expiration of the period. (c) The Claimant may request that his application be given full and fair review by the Plan Administrator. The Claimant may review all pertinent documents and submit issues and comments in writing in connection with the appeal. (d) The decision of the Plan Administrator shall be made promptly, and not later than sixty (60) days after the Plan Administrator's receipt of a request for review, unless special circumstances require an extension of time for processing. In such a case, a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. (e) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner designed to be understood by the Claimant, with specific references to the pertinent Plan provisions upon which the decision is based. 6.4 ARBITRATION. If the claim is denied after review, the Applicant shall submit the claim to binding arbitration. Such arbitration shall be binding and final. There shall be one arbitrator, who shall be a retired superior court or federal court judge. The arbitrator shall have the authority only to enforce the legal and contractual rights of the parties and shall not add to, modify, disregard or refuse to enforce any contractual provision, The arbitrator shall have no right, power or jurisdiction to award an Applicant any punitive or exemplary damages of any kind. THE PARTICIPANT AND THE COMPANY ACKNOWLEDGE AND AGREE -16- THAT BY BECOMING A PARTICIPANT UNDER THE PLAN, THEY ARE AGREEING TO THIS ARBITRATION PROVISION AND ARE WAIVING ALL RIGHTS TO A TRIAL BY JURY. The prevailing party in any arbitration shall be entitled to recover his or its reasonable attorneys' fees and costs. The provision of California Code of Civil Procedure Sections 1281, et seq. govern this arbitration provision. 6.5 EXHAUSTION OF REMEDIES. No legal action for benefits under the Plan may brought unless and until the Claimant has exhausted his remedies under this Article VI. ARTICLE VII MISCELLANEOUS MATTERS 7.1 AMENDMENT OR TERMINATION. (a) The Board may, at its sole discretion, amend or terminate this plan at any time or from time to time, in whole or in part by a duly adopted resolution, provided that, without the consent of each existing Participant, no amendment or termination may adversely affect that Participant's rights to receive accrued benefits as provided in the Plan, as in effect prior to such amendment or termination. (b) The termination of the Plan will result in the immediate vesting of accrued benefits. (c) All benefits will be payable at the time the Participant would have otherwise been eligible to receive benefits under the provisions of this Plan in effect before Plan termination. However, the Board may elect to accelerate the payment of the benefits under the Plan, and to pay such benefits in the form of lump sum distributions. Any lump sum benefits paid under this Section 7.1(c) will be the Actuarial Equivalent of the benefits determined under Section 3.1 above. 7.2 EFFECT OF REORGANIZATION OR TRANSFER OF ASSETS. (a) In the event of a consolidation, merger, sale, liquidation, or other transfer of substantially all of the operating assets of the Company to any other company, the ultimate successor to the business of the Company shall automatically be deemed to have elected to continue this Plan in full force and effect, in the same manner as if the Plan had been adopted by resolution of its board of directors. (b) The presumption set forth in Paragraph (a) above shall not apply if the successor, by resolution of its board of directors, elects not to so continue this Plan in effect. In such a case, the Plan shall terminate as of the effective date set forth in the board resolution. -17- 7.3 RIGHTS OF PARTICIPANTS. (a) Nothing contained herein will confer on any Participant the right to be retained in the service of the Company, nor will it interfere with the Company's right to discharge or otherwise deal with the Participants without regard to the existence of this Plan. The Company reserves the right to terminate the employment of any Participant without any liability for any claim against the Company except to the extent provided herein. (b) The benefits under the Plan are unfunded. Accordingly, no Participant shall have a preferred claim on, or a beneficial ownership interest in, any assets of the Company prior to the time such assets are paid to him in the form of benefits. (c) All rights created under the Plan shall be mere unsecured contractual rights of Participants against the Company. However, nothing in this document shall in any way diminish any rights of a Participant to pursue his rights as a general creditor of Company with respect to his benefits under the Plan. 7.4 ASSIGNMENT OF BENEFITS. To the maximum extent permitted by law, no benefit under this Plan may be assigned or alienated. Any purported transfer, assignment, encumbrance, or attachment thereof shall be void and of no effect. In the event of a dispute involving any individual's right to receive the benefit hereunder, the Plan Administrator or the Company may enter an interpleader action. Payments of the benefit to a court of competent jurisdiction with proper notice to the appropriate parties in dispute shall be in full satisfaction of all claims against the Plan Administrator and the Company as to the Plan, and shall be equivalent to a receipt and release pursuant to Section 7.7. 7.5 OTHER PLANS. This Plan shall not affect the right of any Participant to participate in and receive benefits under and in accordance with the provisions of any other employee benefit plans which are now or hereafter maintained by the Company, unless the terms of such other employee benefit plan or plans specifically provide otherwise. 7.6 INTERPRETATION. (a) The provisions of this Plan shall in all cases be interpreted in a manner that is consistent with the Plan satisfying the applicable requirements of ERISA. (b) If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan will be construed and enforced as if the provision had not been included in it. (c) Unless the context clearly indicates otherwise, the masculine gender shall include the feminine, the singular shall include the plural, and the plural shall include the singular. -18- (d) Article and section headings are for convenience of reference only and shall not be deemed to be part of the substance of this instrument or in any way to enlarge or limit the contents of any Article or Section. 7.7 RECEIPT OR RELEASE. Any payment to a Participant in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan Administrator and the Company, and the Plan Administrator may require such Participant, as a condition precedent to such payment, to execute a receipt and release to such effect. 7.8 GOVERNING LAW. Except to the extent preempted by ERISA, this Plan shall be construed, administered, and governed in all respects in accordance with the laws of the State of California. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. IN WITNESS WHEREOF, CoastCast Corporation has caused this Plan document to be executed by its duly authorized officer as of the 19th day of February, 1999. COASTCAST CORPORATION By: /s/ Hans H. Buehler ------------------------------- Hans H. Buehler, Chairman & CEO -19- EXHIBIT A RECOGNITION OF PREDECESSOR EMPLOYER SERVICE The following designated individuals shall be entitled to Years of Service credit with the predecessor employer designated opposite their name, provided they continue to be employed with the Company on the earlier of their Normal Retirement Date, death or Disability. Years of Service with the designated predecessor employer will not be credited in the event of Termination of Employment before Normal Retirement Date for any reason other than death or Disability. NAME PREDECESSOR EMPLOYER EMPLOYMENT DATES - ---- -------------------- ---------------- Gordon Green Chri-Tek Tool and Mold, Inc. August 13, 1997-May 30, 1993 Stanley Green Chri-Tek Tool and Mold, Inc. August 13, 1997-May 30, 1993 -20- EXHIBIT B ENHANCED BENEFIT ACCRUAL FORMULA FOR LARRY CORNELIUS Subject to the terms of section 3.1(d), the annual retirement benefit for Larry Cornelius (the "Participant") shall be equal to the greater of the Prior Plan Benefit (as of December 31, 1997) or the amount determined in Paragraph (A) below. (A) The annual retirement benefit payable at the Participant's Normal Retirement Date will be determined based on the designated percentage for the specified period, as follows: (1) fourteen percent (14%) of his Final Average Earnings for the cumulative Years of Service periods prior to January 1, 1999; plus (2) three percent (3%) of his Final Average Earnings for each Year of Service during Plan Years 1999 through 2001; plus (3) five percent (5%) of his Final Average Earnings for each Year of Service during Plan Years 2002 through 2004; plus (4) six percent (6%) of his Final Average Earnings for each Year of Service during Plan Years 2005 through 2006. However, in no event will a cumulative percentage in excess of fifty percent (50%) be taken into account in determining the amount of the Participant's benefit. (B) The amount determined in Paragraph (A) above shall be reduced by the following amounts: (1) The Participant's Estimated Social Security Benefit; and (2) The amount of the benefit payable as a straight life annuity at Normal Retirement Date, based on the Actuarial Equivalent value of the benefit, if any, funded by the Company that is payable pursuant to the terms of any tax-qualified defined benefit pension plan sponsored by the Company. -21- EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES Coastcast Corporation, S.A. a Mexico corporation Coastcast Tijuana, S. de R.L. de C.V., a Mexico corporation California Precision Aluminum Casting, Inc., a California corporation EX-23 6 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-77540 of Coastcast Corporation on Form S-8 of our reports, dated February 7, 2000, appearing in this Annual Report on Form 10-K of Coastcast Corporation for the year ended December 31, 1999. /s/ Deloitte & Touche LLP Los Angeles, California March 2, 2000 EX-27 7 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-2000 JAN-01-1999 DEC-31-1999 42,740 0 9,679 500 11,059 66,640 47,913 23,743 92,316 8,485 0 0 0 26,964 56,326 92,316 120,383 120,383 98,610 98,610 7,418 0 0 16,101 6,582 9,519 0 0 0 9,519 1.21 1.20
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