-----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, OeblorCH+Orlo2uE8laMgjmJUXAz9UGbbNS4MFTQplWqEpONtnUBF1XF2ow8FPa3 6CABc4VndCVPJl/5Wo7Tyg== 0001047469-98-011143.txt : 19980325 0001047469-98-011143.hdr.sgml : 19980325 ACCESSION NUMBER: 0001047469-98-011143 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTCAST CORP CENTRAL INDEX KEY: 0000914479 STANDARD INDUSTRIAL CLASSIFICATION: NONFERROUS FOUNDRIES (CASTINGS) [3360] 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: 98571702 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 FORM 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, 1997 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 90221 RANCHO DOMINGUEZ, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 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 16, 1998 ($21.6875 per share): $171,116,000. As of March 16, 1998, 8,959,050 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 22, 1998, 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, 1997
- ----------------------------------------------------------------------------- PART I PAGE - ----------------------------------------------------------------------------- Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 8 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 19
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 last fifteen years, golf clubs with perimeter-weighted heads have become increasingly popular among golfers because such clubs are more forgiving to off-center hits than other types of clubs. The investment-casting process has become the principal method for manufacturing clubheads because it facilitates the use of perimeter weighting designs and modern alloys and enhances manufacturing precision and uniformity. Manufacturing precision is particularly important in the manufacture of an oversized, thin-walled metal wood which can involve more than 200 separate manufacturing steps to produce a clubhead that meets strict standards for size, weight, strength and finish. The Company also manufactures a variety of investment-cast orthopedic implants and surgical tools used principally in replacement of hip and knee joints in humans and small animals, which products accounted for less than 7% of the Company's total sales for the year ended December 31, 1997. RECENT DEVELOPMENTS In the past two years, golf clubs with titanium alloy heads have increased in popularity. The Company developed the capability of manufacturing titanium clubheads and began shipping titanium clubheads at the end of 1995. Titanium clubheads accounted for over 55% and approximately 50% of the Company's total sales in 1996 and 1997, respectively. BUSINESS STRATEGY - GOLF The Company recognizes that golf club companies are critical to its success and, accordingly, has designed its business strategy to engender customer satisfaction in order to maintain its industry leadership position. The Company's strategy consists of the following principal elements: - MAINTAIN RELIABLE, HIGH-QUALITY MANUFACTURING. The Company believes its manufacturing expertise, quality control, scheduling flexibility, substantial production capacity and its ability to manufacture golf clubheads using stainless steel or titanium alloys differentiate it from others in the industry. The Company endeavors to respond quickly to customers' orders and deliver high-quality clubheads on a timely basis. This capability is particularly important to golf club companies which can experience rapid growth from the increasing popularity of a particular club or set of clubs. - INTEGRATE OPERATIONS. The Company's operations are integrated, from the computer-aided manufacture of some of the tooling used to produce clubheads through foundry operations and finishing processes, including painting. - FOSTER CLOSE CUSTOMER RELATIONSHIPS. The Company believes that its responsive service has been a significant element of its success. The Company endeavors to be a value-added supplier by offering consistently high levels of customer service and support. The Company has a staff of 14 employees dedicated to sales and customer service. The Company maintains its own internal laboratory for testing of customers' products during the production process. The Company typically 3 delivers finished products to its customers within 12 weeks from receipt of the customer's order during peak production periods, within 8 to 10 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 ODYSSEY -------- ------- GREAT BIG BERTHA TITANIUM METAL WOODS DUAL FORCE BLADE PUTTERS BIG BERTHA WARBIRD METAL WOODS DF ROSSIE MALLET PUTTERS GREAT BIG BERTHA TUNGSTEN TITANIUM IRONS BLACKSPIN WEDGES X12 BIG BERTHA IRONS BIG BERTHA IRONS TAYLOR MADE TOUR SERIES WEDGES ----------- BIG BERTHA BLADE PUTTERS TITANIUM BUBBLE 2 IRONS S2H2 PUTTERS BURNER BUBBLE TITANIUM 2 METAL WOODS BOBBY JONES PUTTER TITANIUM 2 FAIRWAY RAYLORS TOUR WOODS CLEVELAND BURNER BUBBLE 2 METAL WOODS --------- BURNER TOUR IRONS 8T TOUR ACTION TITANIUM METAL WOODS LCG IRONS TA3 IRONS RTG WEDGES TITLEIST 588 WEDGES -------- 691 WEDGES 975D/976R TITANIUM METAL WOODS 485 WEDGES STARSHIP METAL WOODS DCI 962 IRONS COBRA OVERSIZE PLUS IRONS ----- 962 "BLADE" IRONS KING COBRA TOUR TITANIUM METALWOODS BOB VOKEY WEDGES KING COBRA OFFSET TITANIUM METALWOODS
GOLF PRODUCT CUSTOMERS Over the past ten years, the Company has supplied investment-cast clubheads for metal woods, irons and putters to a majority of the top golf companies which produce high-quality, premium-priced golf clubs. Most golf club companies source the three principal components of a golf club--the clubhead, shaft, and grip--from independent suppliers which manufacture these components based on the golf club companies' designs and specifications. The Company currently is a major supplier of stainless steel and titanium clubheads to Callaway Golf Company, which is the producer of the Big Bertha line of steel metal woods and irons and the Great Big Bertha titanium metal woods and irons. In addition, the Company is a supplier of investment-cast steel and titanium clubheads for companies which market the Titleist, Odyssey, Taylor Made, Cleveland, Goldwin, Wilson, Cobra and Daiwa brands of golf clubs. 4 Substantially all of the clubheads manufactured by the Company are used in high-quality, premium-priced golf clubs. The Company believes that a very substantial portion of the clubheads manufactured by it are incorporated in clubs sold in North America, although some 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 34%, 46% and 47% of the Company's total sales in 1997, 1996 and 1995, respectively. Taylor Made accounted for 23% and 18% of the Company's total sales in 1997 and 1996, respectively. Tommy Armour, including Odyssey until its divestiture in August 1997, accounted for 15%, 13% and 10% of the Company's total sales in 1997, 1996 and 1995, respectively. Fortune Brands (formerly American Brands; Titleist and Cobra) accounted for 12% and 13% of the Company's total sales in 1997 and 1995, respectively. A close working relationship typically exists between the Company and its principal golf club customers, and sales and marketing activities are conducted by a limited number of direct sales employees and senior executives of the Company. MANUFACTURING - GOLF INVESTMENT-CASTING PROCESS. Investment-casting is a highly specialized method of making metal products. It has become the principal method for the manufacture of golf clubheads. Previously, woods were made of wood and irons were produced by forging and machining. Greater flexibility in the shape and weight distribution of clubheads is possible with the investment-casting process. Investment-casting facilitates perimeter weighting and the use of modern alloys. It also enhances manufacturing precision and uniformity. The enhanced precision inherent in investment-casting is particularly important in the manufacture of metal woods which can involve more than 200 separate manufacturing steps. The basic steps of investment-casting, in its simplest form, are as follows: - - Produce a metal die (sometimes called a wax mold) based on specifications provided by the customer. - - Inject wax into the die, producing a pattern the exact shape of the final casting. - - Surround (or "invest") the pattern with a ceramic material which is allowed to dry to form a ceramic shell. - - Remove the wax by heat, leaving a cavity in the ceramic shell in the shape of the desired casting. - - Pour molten metal into the cavity in the ceramic shell and allow it to solidify. - - Remove the ceramic material by mechanical and chemical action after the metal solidifies and clean the casting. - - Finish and inspect the casting. METAL ALLOYS. Most clubheads manufactured by the Company are made of titanium or stainless steel alloys. Titanium clubheads have similar tensile strength as stainless steel with approximately one-half the weight of steel. 5 Therefore, a larger oversized clubhead can be manufactured using titanium without increasing clubhead weight. The Company's Gardena facility is devoted to titanium operations. POLISHING AND FINISHING. The Company conducts golf clubhead polishing and finishing operations in its facilities in Mexicali, Mexico. Finishing of the head for an iron or putter can require more than 50 separate steps and finishing of a head for a metal wood can involve as many as 100 separate steps. Most of the clubheads and substantially all of the metal woods manufactured by the Company are finished by it to customer specifications, although some of such clubheads--principally irons--are delivered to customers in an unfinished state. The Company, to assist its customers, at times also polishes and finishes limited quantities of investment-cast clubheads manufactured by other companies. QUALITY CONTROL. The Company believes that its success as a leading supplier of golf clubheads is largely attributable to its quality control measures. The Company attempts to monitor every aspect of the engineering and manufacturing process to assure the quality of the clubheads manufactured by the Company. Particular attention is paid to the quality of raw materials (principally wax, ceramic and metal alloys), gating techniques employed in channeling the flow of molten metal in the ceramic shell in the casting process, and rigorous inspection standards to assure compliance with the customers' product specifications throughout the manufacturing process. REGULATIONS. The Company uses hazardous substances and generates hazardous waste in the ordinary course of its business. The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials. Although the Company has not to date incurred any material liabilities under environmental laws and regulations and believes that its operations are in substantial compliance with applicable laws and regulations, environmental liabilities could arise in the future that may adversely affect the Company's business. See "Discontinued Operations" below. COMPETITION - GOLF The Company operates in a highly competitive environment. The Company competes against a number of manufacturers of investment-cast titanium clubheads for high-quality, premium-priced golf clubs, including but not limited to: Selmet, Inc., Sturm Ruger, Inc., and Cast Alloys, Inc. The Company competes principally against two significant U.S.-based manufacturers (Hitchner Manufacturing Co., Inc. and Cast Alloys, Inc.) of investment-cast steel clubheads. The Company also competes with several foreign manufacturers of investment-cast steel clubheads, including Worldmark Services Ltd. (formerly Fu-Sheng Industrial Co. Ltd.). The Company believes that its position as a leading manufacturer of titanium and steel clubheads for high-quality, premium-priced golf clubs is due to its ability to produce quality clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs, its experience and expertise in manufacturing investment-cast golf clubheads, and its integrated manufacturing operations. Although price is a factor, the Company does not compete solely on price. Quality and service are key success factors in the premium price golf clubhead market. The Company seeks to provide better products and service to its customers than its competitors in order to increase or retain market share. Although the Company's foreign competitors (the principal ones of which are located in Asia) are typically able to offer prices below the Company's prices, the Company believes that it has some competitive advantages over foreign manufacturers, including its ability to deliver clubheads more quickly to its customers due to shorter shipping and lead times. Shipment of clubheads to the United States from Asia usually requires at least two weeks by ocean freight. In addition, the Company believes that its foreign competitors have not demonstrated the same willingness and ability as the 6 Company to commit sufficient resources to meet rapidly growing demand for popular golf clubs in a timely manner. Further, the Company believes that certain of its customers prefer products made in the United States. The Company also competes against golf club companies that internally produce clubheads for their clubs. The Company believes that one of the largest dozen golf club companies, Karsten Manufacturing Co., which produces the Ping brand of clubs, manufactures substantially all of the investment-cast steel clubheads for use in its own clubs. The Company believes that this golf club company produces clubheads for its own use only and does not currently compete with the Company for the business of other golf club companies. However, in 1996, Karsten Manufacturing Co. purchased some steel 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, 1997, the Company employed 5,159 persons on a full-time basis. Of these employees, 3,837 were employed by Coastcast Corporation, S.A., the Mexican subsidiary 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 453 such employees as of December 31, 1997. The collective bargaining agreement for such employees was effective May 12, 1997, and will expire on May 11, 2000. ORTHOPEDIC IMPLANTS The Company also manufactures orthopedic implants and surgical tools used principally for replacement of hip and knee joints in humans and small animals. 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. Approximately 70 of the Company's employees serve in the medical implant and surgical tools operations. Such operations are conducted in the Rancho Dominguez, California facility. The Company believes that its principal competitors in this business are Precision Castparts Corporation and PED Manufacturing. 7 NEW MARKETS The Company continues to explore marketing its steel, titanium, and other alloy investment casting capabilities to potential customers in other commercial and industrial businesses outside of the golf business. In 1997, the Company continued its efforts in this area; however, at this early stage, the Company cannot predict which product opportunities will result in profitable sales, and whether volumes will be significant. DISCONTINUED OPERATIONS The Company historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business because of declining sales and operating losses on this portion of its business. This business was essentially phased out by June 1994. The net current assets of discontinued operations as of December 31, 1997 were $911,000, principally consisting of the estimated net realizable value of the Wallingford, Connecticut property including the related deferred tax asset. 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 is continuing to conduct further investigations to determine the source and extent of the contamination. The Company has recorded the net assets associated with its discontinued operations at the estimated net realizable value. However, since the precise source and extent of the contamination has not been identified at this time, no assurances can be given that the proceeds to be realized upon sale of this property less the cost of remediation will equal or exceed the estimated net realizable value. ITEM 2. PROPERTIES. The Company's principal executive offices and one of two investment casting manufacturing facilities are located in a 120,000 square foot leased facility in Rancho Dominguez, California, a suburb of Los Angeles. The lease expires in October, 2003 and the Company has a five-year extension option. The Company owns a complex of plants in Gardena, California (which is within approximately five miles of the Rancho Dominguez facilities), comprising an aggregate of approximately 110,000 square feet. These facilities are principally used for manufacturing titanium golf clubheads and tooling. In October 1994, the Company purchased approximately two acres of land contiguous to its Gardena facility. In April 1996, the Company purchased another approximately two acres of land next to the land purchased in October 1994. This land is available for future expansion if and when necessary. Clubhead polishing and finishing operations are conducted in facilities leased by the Company's subsidiary in Mexicali, Mexico under four lease agreements, comprising an aggregate of approximately 141,000 square feet. Three of the leases expire in December 1998, and the other lease expires in June 2001. The Company intends to move some of its steel casting operations to a 186,000 square foot leased investment casting facility for steel products in Tijuana, Mexico. The facility is currently under construction and is expected to be operational in 1998. 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 65 Chairman of the Board Richard W. Mora 57 President and Chief Executive Officer Robert C. Bruning 55 Chief Financial Officer and Secretary Jon A. Knartzer 52 Vice President, Operations Ramon F. Ibarra 45 Vice President, Manufacturing Kathleen H. Wainwright 33 Vice President, Sales
Mr. Buehler is one of the founders of the Company and has been Chairman of the Board since the Company's inception in 1980. Through December 31, 1997, he was also the Chief Executive Officer. 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 30 years of experience in the investment-casting business, including more than 20 years of experience in the manufacture of golf clubheads. Mr. Mora joined the Company in May 1995. Effective January 1, 1998, he became the President and Chief Executive Officer of the Company. Prior to that time, he served as President and Chief Operating Officer. From 1992 to 1995, he was Chief Operating Officer of Pharmavite Corporation, a producer and marketer of nutritional supplements. From 1971 to 1992, Mr. Mora worked for Bergen Brunswig Corporation, starting as a member of the sales force and ending in the position of Group Vice President. Mr. Bruning joined the Company in May 1996. From 1989 to 1996, he was Chief Financial Officer of Zacky Farms, Inc., a producer of poultry products. From 1986 to 1988, Mr. Bruning was a partner at Coopers & Lybrand, LLP. Prior to that time he worked for Arthur Andersen, LLP for 19 years, 10 of which he served as a partner. Mr. Knartzer joined the Company in November 1996. From 1995 to 1996, he was Vice President of Operations of Enertech, a privately held manufacturer of products for the nuclear power industry. From 1992 to 1995, he served as Director of Operations for Accuride International, a manufacturer of precision ball bearing equipment. Prior to that time, he held various management positions in operations, engineering, and quality assurance. Mr. Ibarra joined the Company in June 1981. Since 1989, he has served as Vice President, Manufacturing of the golf operations of the Company. Prior to such time, he served as the production manager for the Company with respect to all phases of its business and as the plant manager at the facility located in Rancho Dominguez, California. 9 Ms. Wainwright joined the Company in 1988. Since November 1996 she has served as Vice President, Sales. Prior to that time, she served the Company in various capacities, including plant manager at the facility located in Wallingford, Connecticut. Each officer serves at the pleasure of the Board of Directors of the Company. 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 - ----------- -------- -------- 1996 First Quarter $ 20 1/4 $ 9 3/4 Second Quarter 27 5/8 17 7/8 Third Quarter 23 3/4 14 3/8 Fourth Quarter 18 3/4 13 1997 First Quarter 20 1/2 12 1/2 Second Quarter 14 3/8 9 3/4 Third Quarter 15 3/4 10 3/4 Fourth Quarter 17 7/16 13 1/8
The approximate number of record holders of common stock of the Company as of March 16, 1998 was 230. 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. The Company did not perform any such transactions during the year ended December 31, 1997. As of December 31, 1997, there were 596,400 shares remaining to be purchased under this authorization. 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 four customers accounted for 84%, 84% and 76% of sales during the years ended December 31, 1997, 1996 and 1995, respectively. Sales to the Company's top customer, Callaway Golf Company (including Odyssey Golf after its acquisition in August 1997) accounted for 34% of sales for the year ended December 31, 1997. 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 11 orders is not known at this time. In the event Callaway increases purchases from other suppliers, the Company could be adversely affected. Although the Company believes that its relationships with its customers are good and its prices are competitive, the loss of a significant customer or a substantial decrease in the sales of golf clubs by a significant customer could have a material adverse effect on the Company's business. COMPETITION. The Company operates in a highly competitive market. All of the Company's products are manufactured according to customers' designs and specifications. Accordingly, the Company competes against other independent domestic and foreign manufacturers which have the capability to manufacture investment-cast clubheads. The Company also experiences indirect competition from golf club companies that manufacture their own clubheads or make golf clubs with clubheads that are not investment-cast or are made of materials the Company is not currently capable of producing. Potential competition also exists from those golf club companies that currently purchase clubheads from the Company but may, in the future, manufacture clubheads internally. The Company believes that it competes principally on the basis of its ability to produce consistently high-quality golf clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs. Some of the Company's current and potential competitors may have greater resources than the Company. NEW PRODUCTS. The Company's historical success has been attributable, in part, to its ability to supply clubheads for companies whose new products rapidly attained a significant portion of the market for high-quality, premium-priced golf clubs. In the future, the Company's success will depend upon its continued ability to manufacture golf clubheads for such companies. There are no assurances, however, of the Company's ability to do so. If a golf club having a head not manufactured by the Company gains significant market share from customers of the Company, the Company's business would be adversely affected. NEW MATERIALS AND PROCESSES. The Company's future success is also dependent on continuing popularity of investment-cast clubheads. A significant loss of market share to golf clubs with heads made by other processes would have a material adverse impact on the Company's business. Similarly, the Company's future success is also dependent on continuing popularity of clubheads made of titanium or stainless steel alloys or other metal alloys which the Company is capable of casting. MANUFACTURING COST VARIATIONS. Consistent manufacture of high-quality products requires constant care in the manufacture and maintenance of tooling, monitoring of raw materials, and inspection for compliance with product specifications throughout the manufacturing process. Investment-casting is labor intensive, and numerous steps are required to produce a finished product. Variations in manufacturing costs and yields occur from time to time, especially with new products during the "learning curve" phase of production and products which are more difficult to manufacture such as titanium or oversized metal wood and iron golf clubheads. The length and extent of these variations are difficult to predict. DEPENDENCE ON POLISHING AND FINISHING PLANT IN MEXICO. A substantial portion of the golf clubheads manufactured by the Company, and some clubheads produced by other clubhead manufacturers, are polished and finished by the Company. The polishing and finishing processes used by the Company are highly labor intensive. The Company performs substantially all of these processes in its facilities in Mexicali, Mexico pursuant to the "maquiladora" duty-free program established by the Mexican and U.S. governments. Such program enables the Company to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico or paying certain Mexican taxes. The Company pays certain expenses of the Mexico facility in Mexican currency and thus is subject to fluctuations in currency value. The Company does not have any exchange rate hedging arrangements to protect against fluctuations in currency value. The Company is also subject to other customary risks of doing business 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 12 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, 1997 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, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Consolidated Statement of Income Data (1): Sales $ 149,515 $ 148,257 $ 76,001 $ 90,590 $ 66,928 Gross Profit 28,533 33,826 12,914 22,746 16,722 Income from operations 17,776 24,454 5,941 15,317 10,998 Income from continuing operations before class action lawsuit settlement expense and income taxes 18,751 25,496 7,488 16,242 10,352 Class action lawsuit settlement expense -0- -0- 2,075 -0- -0- Income from Continuing Operations Data (2): Income before income taxes 18,751 25,496 5,413 16,242 10,352 Income taxes (2) 7,875 10,430 2,114 6,420 4,180 Income from continuing operations (2) 10,876 15,066 3,299 9,822 6,172 Income from Continuing Operations Per Share-- Basic (2), (3) $ 1.24 $ 1.72 $ 0.36 $ 1.10 $ 0.85 ------- ------- ------- ------- ------- Income from Continuing Operations Per Share-- Diluted (2), (3) $ 1.22 $ 1.67 $ 0.36 $ 1.08 $ 0.80 ------- ------- ------- ------- ------- Weighted Average Shares Outstanding--Basic (3) 8,798 8,773 9,045 8,926 7,295 ------- ------- ------- ------- ------- Weighted Average Shares Outstanding--Diluted (3) 8,924 9,038 9,099 9,113 7,747 ------- ------- ------- ------- ------- AS OF DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- ---------- (IN THOUSANDS) Consolidated Balance Sheet Data (1): Working Capital $ 56,795 $ 44,800 $ 34,788 $ 37,475 $ 22,031 Total Assets 90,025 76,100 58,908 56,821 38,608 Total debt, including current portion -0- -0- -0- -0- -0- Deferred compensation 1,614 438 -0- -0- -0- Shareholders' equity 78,391 66,487 50,252 51,076 31,309
(1) In October 1993, the Company announced its decision to discontinue its aerospace business. See Note 2 of Notes to Consolidated Financial Statements. (2) The Company was taxed as an S corporation for federal and state income tax purposes from 1983 until December 15, 1993. Income taxes, income from continuing operations, and income from continuing operations per share reflect the pro forma effect of income taxes for the year ended December 31, 1993 as if the Company had been taxed as a C corporation. (3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. For further discussion of earnings per share and the impact of Statement No. 128, see Notes 1 and 12 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, --------------------------------------------------------------------------------------- 1997 1996 1995 ------ ------ ------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ------- ---------- ------- -------- ------- Sales $ 149,515 100.0 $ 148,257 100.0 $ 76,001 100.0 Cost of sales 120,982 80.9 114,431 77.2 63,087 83.0 Gross Profit 28,533 19.1 33,826 22.8 12,914 17.0 Selling, general and administrative 10,757 7.2 9,372 6.3 6,973 9.2 Income from continuing operations 17,776 11.9 24,454 16.5 5,941 7.8 Other income, net 975 0.6 1,042 0.7 1,547 2.0 Class action lawsuit settlement expense -0- 0.0 -0- 0.0 2,075 2.7 Income from continuing operations before income taxes 18,751 12.5 25,496 17.2 5,413 7.1
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Sales increased $1.2 million, or 1%, to $149.5 million for 1997 from $148.3 million for 1996. Decreases in sales of titanium alloy and steel alloy metal wood clubheads were more than offset by increases in sales of titanium alloy iron clubheads, putter clubheads, and steel alloy iron clubheads, and an increase in medical implant sales. Titanium clubhead sales represented approximately 50% and over 55% of total sales for 1997 and 1996, respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf after its acquisition by Callaway Golf Company in August 1997, represented 34% of total sales for 1997 compared to 46% in 1996. There is no assurance that sales to Callaway will represent similar percentages of total sales in the future. Gross profit decreased $5.3 million, or 16%, to $28.5 million for 1997 from $33.8 million for 1996. The gross profit margin decreased to 19% in 1997 from 23% in 1996. The decrease in gross margin was due principally to a change in the product mix from a preponderance of metal woods to irons and putters. Selling, general and administrative expense increased by $1.4 million, or 15%, to $10.8 million for 1997 from $9.4 million for 1996. The increase in selling, general and administrative expense was due primarily to increased payroll and related expenses, expenses related to the supplemental executive retirement program, and increased expenses associated with information systems, partially offset by a decrease in legal expenses. 15 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Sales increased $72.3 million, or 95%, to $148.3 million for 1996 from $76.0 million for 1995. The increase was primarily due to sales of titanium alloy clubheads, which have significantly higher unit sales prices than steel-alloy clubheads. Sales of titanium alloy clubheads more than offset a decrease in sales of steel alloy clubheads. Titanium clubhead sales represented over 55% and over 6% of total sales for 1996 and 1995, respectively. For the year ended December 31, 1996, the majority of the Company's titanium sales were metal wood clubheads. Sales to Callaway Golf Company represented 46% of total sales for 1996 compared to 47% in 1995. Gross profit increased $20.9 million, or 162%, to $33.8 million for 1996 from $12.9 million for 1995. The gross profit margin increased to 23% in 1996 from 17% in 1995. The increase in gross margin was primarily due to the shift in production to titanium clubheads. Gross profit increased $4.5 million to $4.9 million in the fourth quarter 1996 from $0.4 million in the fourth quarter 1995. The gross profit margin increased to 14% in the fourth quarter 1996 from 3% in the fourth quarter 1995. The increase in gross margins was primarily due to higher volume, mainly titanium, and the absence of start-up costs of the titanium operations which were present in the fourth quarter 1995. The gross margin for the fourth quarter 1996 was 9% lower than the gross margin for the full year 1996, primarily due to seasonality of product ordering and the increase in production costs related to the start-up of new products. Selling, general and administrative expense increased by $2.4 million, or 34%, to $9.4 million for 1996 from $7.0 million for 1995 and decreased as a percentage of sales to 6% in 1996 from 9% in 1995. The increase in selling, general and administrative expense was due primarily to increased management bonus, increased payroll and related expenses, and expenses related to the supplemental executive retirement program. Other income, principally interest income, was $1.0 million for 1996, compared to $1.5 million for 1995. The decrease was due to lower cash balances during most of 1996, coupled with lower average interest rates. DISCONTINUED OPERATIONS The plan adopted in October 1993 to phase out the aerospace business was essentially completed by June 1994. The net current assets of discontinued operations as of December 31, 1997 were $911,000, principally consisting of the estimated net realizable value of the Wallingford, Connecticut property including the related deferred tax asset. 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 is continuing to conduct further investigations to determine the source and extent of the contamination. The Company has recorded the net assets associated with its discontinued operations at the estimated net realizable value. However, since the precise source and extent of the contamination has not been identified at this time, no assurances can be given that the proceeds to be realized upon sale of this property less the cost of remediation will equal or exceed the estimated net realizable value. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents position at December 31, 1997 was $28.2 million compared to $14.1 million on December 31, 1996, an increase of $14.1 million. Net cash provided by operating activities was $17.3 million for the year ended December 31, 1997. Net income of $10.9 million, depreciation and amortization of $2.8 million, a decrease in prepaid expenses of $2.8 million, an increase in deferred compensation of $1.2 million were partially offset by an increase in accounts receivable of $1.1 million. Investing activities of $4.2 million consist primarily of $2.1 million of net capital expenditures and the purchase of Company-owned cash surrender value life 16 insurance policies on certain key employees of $1.9 million. Net cash provided by financing activities of $1.0 million consists mainly of proceeds from exercise of stock options of $0.8 million including related tax benefits. 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, 1997. This line of credit, which expires on February 1, 1999, bears interest at the bank's prime rate or LIBOR, plus 2%. On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. No such purchases were made during the year ended December 31, 1997. As of December 31, 1997, there were 596,400 shares remaining to be purchased under this authorization. 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 earnings per share amounts for periods ended prior to December 31, 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements. 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, 1997 DECEMBER 31, 1996 --------------------------------------- ----------------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- -------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales $ 29,001 $ 39,938 $ 43,935 $ 36,641 $ 29,344 $ 42,508 $ 41,495 $ 34,910 Gross profit 4,025 7,982 9,369 7,157 7,781 11,575 9,552 4,918 Income before taxes 2,013 4,907 6,449 5,382 5,963 8,627 8,112 2,794 Provision for income taxes 815 2,091 2,709 2,260 2,445 3,623 3,245 1,117 Net income 1,198 2,816 3,740 3,122 3,518 5,004 4,867 1,677 Net income per share--basic .14 .32 .43 .35 .40 .57 .55 .19 Net income per share--diluted .13 .32 .42 .35 .39 .55 .54 .19
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 assurances can be given, however, that these factors will mitigate the impact of seasonality. 17 BACKLOG As of December 31, 1997, the Company had a backlog of approximately $52.2 million as compared to a backlog of approximately $28.5 million as of December 31, 1996. The Company believes that its current backlog is scheduled to be shipped in the ensuing four months. Although many of the Company's customers release purchase orders months prior to the requested delivery date, these orders are generally cancelable without penalty provided that no production has commenced. If production has commenced, an order is cancelable upon payment of the cost of production. Historically, the Company's backlog generally has been the highest in the second and third quarters due principally to seasonal factors. Backlog is not necessarily indicative of future operating results. YEAR 2000 CONVERSION The Company has identified and evaluated changes to computer systems and applications required to achieve a year 2000 date conversion with no disruption to business operations. Maintenance or modification costs will be expensed as incurred. The total cost of this effort is still being evaluated, but is not expected to be material to the Company. The Company plans to communicate with others with which it does significant business to determine their year 2000 compliance readiness and the extent to which the Company is vulnerable to any third party year 2000 issues. 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 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997. 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 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997. 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 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997. 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 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a)(1) LIST OF FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying Index to Financial Statements and Schedules are filed as part of this Report. (a)(2) LIST OF FINANCIAL STATEMENT SCHEDULE The financial statement schedule listed in the accompanying Index to Financial Statements and Schedule are filed as part of this Report. 19 (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 1997. 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 16, 1998 COASTCAST CORPORATION By: /s/ RICHARD W. MORA --------------------------------- Richard W. Mora, President and 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 16, 1998.
SIGNATURE TITLE --------- ----- /s/ HANS H. BUEHLER - ------------------------------------- Chairman of the Board and Director Hans H. Buehler /s/ RICHARD W. MORA President, Chief Executive Officer - ------------------------------------- and Director (Principal Executive Richard W. Mora Officer) /s/ ROBERT C. BRUNING Chief Financial Officer and - ------------------------------------- Secretary (Principal Financial Robert C. Bruning and Accounting Officer) /s/ GEORGE L. GRAZIADIO - ------------------------------------ Director George L. Graziadio /s/ EDWIN A. LEVY - ------------------------------------ Director Edwin A. Levy /s/ VERNON R. LOUCKS JR. - ------------------------------------ Director Vernon R. Loucks Jr. /s/ LEE E. MIKLES - ------------------------------------ Director Lee E. Mikles /s/ PAUL A. NOVELLY - ------------------------------------ Director Paul A. Novelly
21 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER ----------- Independent Auditors' Report 23 Consolidated Balance Sheets as of December 31, 1997 and 1996 24 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 25 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997 26 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 27 Notes to Consolidated Financial Statements 28 SCHEDULES Independent Auditors' Report 37 Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1995, 1996 and 1997 38
22 INDEPENDENT AUDITORS' REPORT To the Board of Directors Coastcast Corporation: We have audited the accompanying consolidated balance sheets of Coastcast Corporation and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Long Beach, California February 3, 1998 23 COASTCAST CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------------- 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents (Note 1) $ 28,187,000 $ 14,060,000 Trade accounts receivable, net of allowance for doubtful accounts of $500,000 and $400,000 at December 31, 1997 and 1996, respectively (Note 1) 12,893,000 11,783,000 Inventories (Notes 1 and 3) 21,208,000 21,660,000 Prepaid expenses and other current assets 2,019,000 4,800,000 Deferred income taxes (Notes 1 and 8) 1,597,000 864,000 Net assets of discontinued operations (Note 2) 911,000 808,000 ------------- ------------- Total current assets 66,815,000 53,975,000 Property, plant and equipment, net (Notes 1 and 4) 19,079,000 20,171,000 Other assets (Note 7) 4,131,000 1,954,000 ------------- ------------- $ 90,025,000 $ 76,100,000 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,986,000 $ 5,043,000 Accrued liabilities (Note 6) 5,034,000 4,132,000 ------------- ------------- Total current liabilities 10,020,000 9,175,000 Deferred compensation (Note 7) 1,614,000 438,000 ------------- ------------- Total liabilities 11,634,000 9,613,000 Commitments and contingencies (Notes 2, 7 and 10) Shareholders' Equity (Notes 1 and 11): Preferred stock, no par value, 2,000,000 shares authorized; none issued and outstanding Common stock, no par value, 20,000,000 shares authorized; 8,849,005 and 8,777,890 shares issued and outstanding as of December 31, 1997 and 1996, respectively 39,233,000 38,205,000 Retained earnings 39,158,000 28,282,000 ------------- ------------- Total shareholders' equity 78,391,000 66,487,000 ------------- ------------- $ 90,025,000 $ 76,100,000 ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 24 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 1996 1995 -------------- -------------- ------------- Sales (Notes 1 and 9) $ 149,515,000 $ 148,257,000 $ 76,001,000 Cost of sales 120,982,000 114,431,000 63,087,000 -------------- -------------- ------------- Gross profit 28,533,000 33,826,000 12,914,000 Selling, general and administrative 10,757,000 9,372,000 6,973,000 -------------- -------------- ------------- Income from operations 17,776,000 24,454,000 5,941,000 Other income, net 975,000 1,042,000 1,547,000 Class action lawsuit settlement expense - - 2,075,000 -------------- -------------- ------------- Income before income taxes 18,751,000 25,496,000 5,413,000 Provision for income taxes (Notes 1 and 8) 7,875,000 10,430,000 2,114,000 -------------- -------------- ------------- Net income $ 10,876,000 $ 15,066,000 $ 3,299,000 -------------- -------------- ------------- -------------- -------------- ------------- NET INCOME PER SHARE (Notes 1 and 12) Net income per share -- basic $ 1.24 $ 1.72 $ 0.36 -------------- -------------- ------------- -------------- -------------- ------------- Weighted average shares outstanding 8,797,734 8,772,815 9,045,257 -------------- -------------- ------------- -------------- -------------- ------------- Net income per share -- diluted $ 1.22 $ 1.67 $ 0.36 -------------- -------------- ------------- -------------- -------------- ------------- Diluted weighted average shares outstanding 8,924,262 9,038,223 9,098,936 -------------- -------------- ------------- -------------- -------------- -------------
See accompanying notes to consolidated financial statements. 25 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
COMMON STOCK ---------------------------- NUMBER OF RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ------------- ----------- ------------- BALANCE AT JANUARY 1, 1995 9,091,994 $ 41,159,000 $ 9,917,000 $ 51,076,000 Net income 3,299,000 3,299,000 Stock options exercised, including related tax benefit (Note 11) 32,500 298,000 298,000 Repurchase of common stock (389,800) (4,421,000) (4,421,000) --------- ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1995 8,734,694 37,036,000 13,216,000 50,252,000 Net income 15,066,000 15,066,000 Stock options exercised, including related tax benefit (Note 11) 56,996 834,000 834,000 Director compensatory stock options 269,000 269,000 Stock options granted to non-employee (Note 11) 269,000 269,000 Repurchase of common stock (13,800) (203,000) (203,000) --------- ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1996 8,777,890 38,205,000 28,282,000 66,487,000 Net income 10,876,000 10,876,000 Stock options exercised, including related tax benefit (Note 11) 71,115 759,000 759,000 Director compensatory stock options 269,000 269,000 --------- ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1997 8,849,005 $ 39,233,000 $ 39,158,000 $ 78,391,000 --------- ------------- ------------ ------------- --------- ------------- ------------ -------------
See accompanying notes to consolidated financial statements. 26 COASTCAST CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 1995 ------------- ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,876,000 $ 15,066,000 $ 3,299,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,838,000 2,479,000 1,862,000 Loss on disposal of machinery and equipment 305,000 79,000 21,000 Change in accrual for disposal of aerospace business (180,000) (214,000) (314,000) Deferred compensation 1,176,000 438,000 - Deferred income taxes (656,000) 479,000 258,000 Non-employee director compensatory stock options 269,000 269,000 Changes in operating assets and liabilities: Trade accounts receivable (1,110,000) (4,585,000) (629,000) Inventories 452,000 (14,049,000) (749,000) Prepaid expenses and other current assets 2,781,000 (2,057,000) (1,657,000) Accounts payable and accrued liabilities 845,000 519,000 2,906,000 ------------- ------------- ----------- Net cash provided by (used in) operating activities 17,596,000 (1,576,000) 4,997,000 ------------- ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales of short-term investments - 14,718,000 4,921,000 Purchase of property, plant and equipment (2,127,000) (7,653,000) (3,797,000) Proceeds from disposal of machinery and equipment 76,000 138,000 41,000 Other assets (2,177,000) (1,704,000) 10,000 ------------- ------------- ----------- Net cash (used in) provided by investing activities (4,228,000) 5,499,000 1,175,000 ------------- ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Stock options granted to non-employee - 269,000 - Proceeds from issuance of common stock upon exercise of options, including related tax benefit 759,000 834,000 298,000 Repurchase of common stock - (203,000) (4,421,000) ------------- ------------- ----------- Net cash provided by (used in) financing activities 759,000 900,000 (4,123,000) ------------- ------------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 14,127,000 4,823,000 2,049,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,060,000 9,237,000 7,188,000 ------------- ------------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,187,000 $ 14,060,000 $ 9,237,000 ------------- ------------- ----------- ------------- ------------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for income taxes: $ 5,544,000 $ 10,500,000 $ 2,700,000 ------------- ------------- ----------- ------------- ------------- -----------
27 COASTCAST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Coastcast Corporation (the "Company") and its wholly owned subsidiary. All material intercompany transactions have been eliminated in consolidation. ORGANIZATION AND OPERATIONS--Coastcast Corporation is incorporated under the laws of the State of California. The Company's principal business is the production of investment-cast golf clubheads, and precision investment castings and related engineering for the medical industry. The Company sells its products to customers of varying strength and financial resources, principally located in the United States. The Company's wholly owned subsidiary is incorporated under the laws of the Mexican maquiladora program and its principal activities are the grinding, polishing and finishing of golf clubheads. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DISCONTINUED OPERATIONS--The Company has historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business, and as of June 1994 had essentially phased out this business (See Note 2). REVENUE RECOGNITION--Revenue is recognized when goods are shipped to the customer. CASH EQUIVALENTS--Cash equivalents consist of short-term investments with original maturities of three months or less. CONCENTRATION OF CREDIT RISK--The Company's financial instruments that are exposed to credit risk consist primarily of accounts receivable. The Company grants credit to substantially all of its customers, performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for potential credit losses. See also Note 9. INVENTORIES--Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation and amortization are provided using primarily straight-line methods over the estimated useful lives of the related assets as follows: Machinery and equipment 7 years Building and improvements 5-31 years Furniture, fixtures and computers 3-7 years Autos and trucks 5-7 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. INCOME TAXES--Deferred tax assets and liabilities are recognized based on differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates (see Note 8). EARNINGS PER SHARE--In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated to conform to the SFAS No. 128 requirements. Basic net income per share is based on the weighted average number of shares of common stock outstanding. Diluted net income per share is based on the weighted average number of shares of common stock outstanding and dilutive potential common equivalent shares from stock options (using the treasury stock method). FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. ACCOUNTING PRONOUNCEMENTS--In June 1997, The Financial Accounting Standards Board (FASB) issued Statement No. 130, REPORTING COMPREHENSIVE INCOME, which requires companies to report comprehensive income and its components as part of a full set of financial statements for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company intends to adopt SFAS in 1998. In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which requires operating segment disclosures using the "management approach" for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company intends to adopt SFAS No. 131 in 1998. The Company has not yet determined what its operating segments will be under SFAS No. 131. 2. DISCONTINUED OPERATIONS The plan adopted in October 1993 to phase out the aerospace business was essentially completed by June 1994. The net current assets of discontinued operations as of December 31, 1997 were $911,000, principally consisting of the estimated net realizable value of the Wallingford, Connecticut property including the related deferred tax asset. 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 is continuing to conduct further investigations to determine the source and extent of the contamination. The Company has recorded the net assets associated with its discontinued operations at the estimated net realizable value. However, since the precise source and extent of the contamination has not been identified at this time, no assurances can be given that the proceeds to be realized upon sale of this property less the cost of remediation will equal or exceed the estimated net realizable value. 29 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, -------------------------------- 1997 1996 ------------ ------------- Raw materials and supplies $ 7,578,000 $ 10,448,000 Tooling 540,000 294,000 Work-in-process 12,375,000 9,792,000 Finished goods 715,000 1,126,000 ------------ ------------- $ 21,208,000 $ 21,660,000 ------------ ------------- ------------ -------------
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, -------------------------------- 1997 1996 ------------ ------------ Land $ 2,186,000 $ 2,186,000 Buildings and improvements 7,436,000 7,376,000 Machinery and equipment 22,656,000 21,800,000 Autos and trucks 786,000 900,000 Furniture, fixtures and computers 2,669,000 2,160,000 ------------ ------------ 35,733,000 34,422,000 Less accumulated depreciation and amortization 16,654,000 14,251,000 ------------ ------------ $ 19,079,000 $ 20,171,000 ------------ ------------ ------------ ------------
Depreciation and amortization expense for 1997, 1996 and 1995 was $2,838,000, $2,479,000 and $1,862,000, 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, 1997 and 1996. This line of credit, which expires on February 1, 1999, bears interest at the bank's prime rate or LIBOR, plus 2%. 6. ACCRUED LIABILITIES Accrued liabilities consist of the following: 30
DECEMBER 31, -------------------------------- 1997 1996 ------------ ------------ Accrued payroll and related expenses $ 2,706,000 $ 2,222,000 Accrued vacation 1,000,000 834,000 Accrued insurance 434,000 782,000 Other accrued expenses 342,000 294,000 ------------ ------------ $ 4,482,000 $ 4,132,000 ------------ ------------ ------------ ------------
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. The following table sets forth the plan's funded status:
DECEMBER 31, -------------------------------- 1997 1996 ------------ ------------- Actuarial present value of accumulated benefit obligation, including vested benefits of $1,713,000 and $1,578,000, respectively $ 1,778,000 $ 1,592,000 ------------ ------------ ------------ ------------ Projected benefit obligation $ 1,778,000 $ 1,592,000 Fair value of plan assets 2,187,000 1,883,000 ------------ ------------ Plan assets in excess of projected benefit obligation 409,000 291,000 Unrecognized net gain (275,000) (106,000) Unrecognized prior service costs 98,000 70,000 Unrecognized transition amount (147,000) (172,000) ------------ ------------ Prepaid pension cost $ 85,000 $ 83,000 ------------ ------------ ------------ ------------ Net pension cost included the following components: Service cost $ 35,000 $ 31,000 Interest cost on projected benefit obligation 112,000 104,000 Actual return on plan assets (347,000) (159,000) Net amortization and deferral 198,000 13,000 ------------ ------------ Net period pension income $ (2,000) $ (11,000) ------------ ------------ ------------ ------------
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7% in 1997 and 1996. The expected long-term rate of return on assets was 7% for 1997 and 1996. 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 $78,000 and $102,000 during 1997 and 1996, respectively. 31 On September 1, 1996, the Company adopted a supplemental executive retirement plan (the "SERP") for certain key employees. Benefits generally accrue 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. To partially fund this plan, the Company purchases whole-life insurance contracts on the related participants. The cash surrender value of these policies is in an irrevocable rabbi trust and is presented as an asset of the Company, in "other assets" in the accompanying consolidated balance sheets. Deferred compensation expense under the SERP was $1,176,000 and $438,000 in 1997 and 1996, respectively. 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, ----------------------------------------------- 1997 1996 1995 ---------- ----------- ---------- Current: Federal $7,045,000 $ 8,319,000 $1,680,000 State 1,703,000 1,405,000 176,000 Foreign (73,000) 227,000 -- ---------- ----------- ---------- 8,675,000 9,951,000 1,856,000 ---------- ----------- ---------- Deferred: Federal (651,000) 258,000 210,000 State (149,000) 221,000 48,000 ---------- ----------- ---------- (800,000) 479,000 258,000 ---------- ----------- ---------- $7,875,000 $10,430,000 $2,114,000 ---------- ----------- ---------- ---------- ----------- ----------
The actual provision on income before income taxes differs from the statutory federal income tax rate due to the following:
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ---------- ----------- ---------- Federal income taxes at the statutory rate $6,563,000 $ 8,924,000 $1,895,000 State income taxes, net of federal benefit 1,030,000 1,541,000 363,000 California investment tax credit (30,000) (349,000) (168,000) Other items 312,000 314,000 24,000 ---------- ----------- ---------- $7,875,000 $10,430,000 $2,114,000 ---------- ----------- ---------- ---------- ----------- ----------
The tax effects of items comprising the Company's net deferred tax asset are as follows: 32
DECEMBER 31, ----------------------- 1997 1996 ---------- --------- Allowance for doubtful accounts $ 213,000 $ 170,000 Deferred compensation 688,000 187,000 Accrued expenses 557,000 128,000 Inventory reserve 635,000 417,000 State income taxes 455,000 584,000 Depreciation (381,000) (303,000) Other items (570,000) (319,000) ---------- --------- $1,597,000 $ 864,000 ---------- --------- ---------- ---------
9. MAJOR CUSTOMERS The Company derived 34%, 23%, 15% and 12% of sales from four top customers in 1997; 46%, 18% and 13% of sales from three top customers in 1996; and 47%, 13% and 10% of sales from three top customers in 1995. 10. 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 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, 1997 are as follows:
YEAR ENDING DECEMBER 31, -------------------------------------- 1998 $ 1,414,000 1999 1,310,000 2000 1,324,000 2001 1,281,000 2002 1,157,000 Thereafter 4,575,000 ----------- $11,061,000 ----------- -----------
Rent expense for 1997, 1996 and 1995 was approximately $1,106,000, $1,355,000 and $1,273,000, respectively. 11. 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 33 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, 1997, an aggregate of 445,493 shares had been purchased pursuant to exercise of options granted under the plan, options to purchase an aggregate of 1,033,513 shares were outstanding (including options which were then exercisable to purchase 408,659 shares), and 470,994 shares were available for additional grants of options under the plan. Under the Company's 1995 Amended and Restated Non-Employee Director Stock Option Plan ("1995 Director Stock Option Plan"), a maximum of 200,000 shares of common stock may be issued pursuant to exercise of options 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, 1997, no shares had been purchased under the plan, options to purchase an aggregate of 150,000 shares were outstanding under the plan, including 86,667 shares as to which such options were then exercisable, and 50,000 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 as of December 31, 1997, including 10,000 shares as to which such options were then exercisable. 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, 1997:
WEIGHTED AVERAGE EXERCISE NUMBER PRICE --------- -------- Balance, January 1, 1995 448,992 $13.66 Granted 431,500 8.00 Forfeited (41,600) 16.37 Exercised (32,500) 7.69 --------- -------- Balance, December 31, 1995 806,392 $10.73 Granted 689,698 16.81 Forfeited (147,635) 13.36 Exercised (56,996) 12.00 --------- -------- Balance, December 31, 1996 1,291,459 $14.48 Granted 63,540 15.50 Forfeited (70,371) 15.22 Exercised (71,115) 8.60 --------- -------- Balance, December 31, 1997 1,213,513 $13.57 --------- -------- --------- --------
The following table summarizes information about stock options outstanding at December 31, 1997: 34
WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE - ------------- ----------- ----------- -------- ----------- -------- $4.00 - 10.00 153,342 6.5 $ 8.30 133,342 $ 8.05 10.25 - 12.50 163,167 7.3 10.87 57,713 10.96 13.13 - 13.81 184,321 8.9 13.61 54,214 13.59 14.12 - 14.12 592,683 7.6 14.12 210,057 14.12 14.62 - 30.00 120,000 8.3 21.19 50,000 21.92 ----------- ----------- -------- ----------- -------- $4.00 - 30.00 1,213,513 7.7 $13.57 505,326 $12.87 ----------- ----------- -------- ----------- -------- ----------- ----------- -------- ----------- --------
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, --------------------------------------------- 1997 1996 1995 ----------- ----------- ---------- Net income: As reported $10,876,000 $15,066,000 $3,299,000 Pro forma 8,749,000 14,460,000 3,179,000 Net income per share - basic: As reported $ 1.24 $ 1.72 $ .36 Pro forma $ .96 $ 1.59 $ .34 Net income per share - diluted: As reported $ 1.22 $ 1.67 $ .36 Pro forma $ .95 $ 1.54 $ .34
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 1997, 1996 and 1995, respectively: no dividend yield, expected volatility of 67.0%, 61.8% and 61.8%, risk-free interest rate of 5.8%, 5.9% and 5.9%, and expected term of 4.6, 4.0 and 4.0 years. The weighted average fair value per share of options granted in 1997, 1996 and 1995 was $7.42, $8.25 and $5.40, respectively. 35 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ----------- ----------- ---------- Numerator: Net income $10,876,000 $15,066,000 $3,299,000 ----------- ----------- ---------- Numerator for basic and diluted earnings per share-- income available to common stockholders 10,876,000 15,066,000 3,299,000 Denominator: Denominator for basic earnings per share-- weighted-average shares 8,797,734 8,772,815 9,045,257 Effect of dilutive securities: Stock options 126,528 265,408 53,679 ----------- ----------- ---------- Dilutive potential common shares 126,528 265,408 53,679 Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 8,924,262 9,038,223 9,098,936 ----------- ----------- ---------- ----------- ----------- ---------- Basic earnings per share $1.24 $1.72 $0.36 ----------- ----------- ---------- ----------- ----------- ---------- Diluted earnings per share $1.22 $1.67 $0.36 ----------- ----------- ---------- ----------- ----------- ----------
36 INDEPENDENT AUDITORS' REPORT To the Board of Directors Coastcast Corporation: We have audited the consolidated financial statements of Coastcast Corporation and subsidiary as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 3, 1998; 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 Long Beach, California February 3, 1998 37 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, 1995 (300,000) (100,000) (400,000) Year ended December 31, 1996 (400,000) (400,000) Year ended December 31, 1997 (400,000) (100,000) (500,000)
38 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") (6) 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 42 America 10.6 Lease Agreement, dated December 17, 1993, between Productos Recreativos, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known Mercurio #70 in Mexicali, Mexico (2) 10.7 Lease Agreement, dated December 17, 1993, between Productos Recreativos, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Avenue Galaxia 50 in Mexicali, Mexico (2) 10.8 Lease Agreement, dated December 17, 1993, between Productos Recreativos, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #30 in Mexicali, Mexico (2) 10.9 Lease Agreement, dated January 22, 1996, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Calle Marte #162 in Mexicali, Mexico (4) 10.10 Guaranty, dated November 1, 1988, by the Company for the leases of the Mexicali, Mexico facilities (1) 10.11 Guaranty, dated January 23, 1996, by the Company for the lease, dated January 22, 1996 (4)
39 10.12 Lease Agreement, dated August 21, 1997, between Coastcast Corporation, S.A. and Inmobiliaria Y Fraccionadora Lomas, S.A. de C.V. for real estate in Tijuana, Baja California, Mexico (7) 10.13 Lease Agreement, dated September 1, 1997, between the Company and Watson Land Company for the facilities in Rancho Dominguez, California (7) 10.14 Assignment effective February 1, 1998 of Lease dated August 21, 1997, between 69 Coastcast Corporation, S.A. and Inmobiliaria Y Fraccionadora Lomas, S.A. de C.V. to Coastcast Tijuana, S. de R.L. de C.V. 10.15 Form of Indemnification Agreement (1) 10.16 Revolving Line of Credit Note and Credit Agreement, effective December 23, 1997, 72 between the Company and Imperial Bank 10.17* Amended and Restated Coastcast Corporation Selected Employees Pension Plan, dated October 1, 1987 (1) 10.18* Amendment to the Coastcast Corporation Selected Employees Pension Plan, effective 85 May 12, 1997 10.19* Coastcast Corporation 401(k) Retirement Plan, effective January 1, 1996 (4) 10.22 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 (5) 10.25* First Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (5) 10.26* Second Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, dated February 18, 1997 (6) 10.27* Trust Agreement by and between Coastcast Corporation and Imperial Trust Company, dated September 1, 1996 (5) 21 Subsidiaries of the Company (4) 24 Consent of Independent Auditors 86 27.1 FDS 27.2 FDS 27.3 FDS
- ---------------------- * 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. 40 (2) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1993. (3) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1994. (4) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1995. (5) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1996. (6) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1996. (7) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1997. 41 EX-10.5 2 EXHIBIT 10.5 EXHIBIT 10.5 COASTCAST CORPORATION AND UNITED STEELWORKERS OF AMERICA LOCAL 2018 INDEX
SECTION PAGE AGREEMENT.....................................................................3 ARTICLE 1 Recognition........................................................3 ARTICLE 2 Union Security.....................................................3 ARTICLE 3 Check Off..........................................................4 ARTICLE 4 Management Rights..................................................5 ARTICLE 5 Wages..............................................................5 ARTICLE 6 Probationary Employees.............................................6 ARTICLE 7 Hours of Work......................................................7 ARTICLE 8 Shift Premium......................................................8 ARTICLE 9 Paid Rest Periods..................................................8 ARTICLE 10 Seniority..........................................................9 ARTICLE 11 Leaves of Absence.................................................12 ARTICLE 12 Safety and Health.................................................14 ARTICLE 13 Holidays..........................................................15 1 ARTICLE 14 Vacations.........................................................16 ARTICLE 15 Group Health and Welfare Insurance................................18 ARTICLE 16 Pension Plan......................................................18 ARTICLE 17 Strikes and Lockouts..............................................18 ARTICLE 18 Grievance Procedure and Arbitration...............................19 ARTICLE 19 Bulletin Boards...................................................20 ARTICLE 20 Union Representation..............................................21 ARTICLE 21 Union Committee and Stewards......................................21 ARTICLE 22 Separability......................................................21 ARTICLE 23 Termination.......................................................22 ARTICLE 24 Waiver and Entire Agreement.......................................22 APPENDIX A Company Rules of Conduct..........................................23 APPENDIX B Section 1 Group & Job Classification and Starting Rates of Pay....26 SIGNATURE PAGE...............................................................27
2 AGREEMENT THIS AGREEMENT is made and entered into this 12th Day of May 1997, between COASTCAST CORPORATION, referred to hereinafter as the "Company", and UNITED STEELWORKERS OF AMERICA, referred to hereinafter as the "Union". ARTICLE 1 - RECOGNITION The Company recognizes the Union as the sole collective bargaining agent on all matters pertaining to wages, hours and conditions of employment for all its production and maintenance employees employed by the Company at its 14831 Maple Avenue, Gardena, California 90247 plant. The agreement does not cover office employees, engineers, technicians, salesmen, tool room/die shop personnel and supervisors or foremen having the authority to hire or discharge, or recommend such action. There shall be no discrimination, interference, restraint, or coercion by the Company or any of its agents or by the Union or any activity in the Union, or any of its members because of sex, race, color, creed, qualified handicapped, or Vietnam era veteran status. ARTICLE 2 - UNION SECURITY All present employees in the unit who are not members of the Union and all employees who are hired hereinafter shall become and remain members in good standing of the Union as a condition of employment on and after the 31st day following the effective date of this agreement, or after completion of 60 days of employment, whichever is the later. All such employees shall remain members in good standing during the life of this Agreement. The above provisions shall be effective where, when and only to the extent that they are consistent with and not in violation of state and federal laws. For the purpose of this Article, an employee shall be deemed to be a member of the Union in good standing so long as they tender the periodic dues and initiation fees uniformly required as a condition of acquiring and maintaining membership. The Union will indemnify, defend and hold the Employer harmless against all claims, demands, suits or other forms of liability that shall arise out of or by reason of action taken or not taken by the Employer an account of a payroll deduction of Union dues. 3 ARTICLE 3 - CHECK OFF 1. The Company will check off monthly dues, assessments and initiation fees each as designated by the International Treasurer of the Union, as membership dues in the Union, on the basis of individually signed check-off authorization cards in forms agreed to by the Company and the Union. 2. At the time of employment the Company will suggest that each new employee voluntarily execute an authorization for the check-off of the Union dues in the form agreed upon. A copy of such authorization card for the check-off of Union dues shall be forwarded to the Financial Secretary of the Local Union along with the membership application of such employees. 3. New check-off authorization cards other than those provided for above will be submitted to the Company through the Financial Secretary of the local union at intervals no more frequent than once each month. On or before the last day of each month the Union shall submit to the Company a summarized list of cards transmitted in each month. 4. Deductions on the basis of authorization cards submitted to the Company shall commence with respect to dues for the month in which the Company receives such authorization card or in which such card becomes effective, whichever is later. Dues for a given month shall be deducted from the fourth payroll period of each month. 5. In cases of earnings insufficient to cover deduction of dues, the dues shall be deducted from the next pay in which there are sufficient earnings, or a double deduction may be made from the first part of the following month, provided, however, that the accumulation of dues shall be limited to two months. The International Secretary Treasurer of the Union shall be provided with a list of those employees for whom double deduction has been made. 6. The Union will be notified of the reason for non-transmission of dues in case of inter-plant transfer, layoff, discharge, resignation, leave of absence, sick leave, retirement, death or insufficient earnings. 7. Unless the Company is otherwise notified, the only Union membership dues to be deducted for payment to the Union from the pay of the employee who has furnished an authorization shall be the monthly Union dues. The Company will deduct initiation fees when notified by notation on the lists referred to in Paragraph 3 of the subsection and assessments as designated by the International Secretary Treasurer. With respect to check-off authorization cards submitted directly to the Company, the Company will deduct initiation fees unless specifically requested not to do so by the International Secretary Treasurer of the Union after such check-off authorization cards have become effective. The International Secretary Treasurer of the Union shall be provided with a list 4 of those employees for whom initiation fees have been deducted under this paragraph. 8. The provisions of this section shall be effective in accordance and consistent with applicable provisions of federal law. ARTICLE 4 - MANAGEMENT RIGHTS 1. All management rights, powers, authority, and functions, whether heretofore or hereafter exercised, and regardless of the frequency or infrequency of their exercise, shall remain vested exclusively in the Company. It is expressly recognized that such rights, powers, authority and functions include, but are not limited to, the full and exclusive control, management, and operation of its business; the determination of the scope of its activities, materials to be acquired, products to be produced, the location of such production, and the methods pertaining thereto; the determination of schedules of work, production schedules, and reasonable standards of production; the right to establish or change job classifications and descriptions, subject to the provisions of this Agreement, the right to introduce new or improved procedures, machinery, or facilities; the right to maintain order and efficiency; the determination of the number, size and location of its plants, and the extent to which and the means and manner by which, its plants or any part thereof shall be operated, relocated and shut down; the right to make and enforce reasonable shop rules; the determination of the number and the assignments of duties and personnel, and the direction of the working force including, but not limited to, hiring, suspending, discharging, laying-off, recalling, promoting, demoting, assigning, or transferring of its employees. It is the intention of the Company and the Union that the rights, powers, authority, and functions referred to herein shall remain exclusively vested in the Company, except insofar as specifically surrendered by the express provisions of this Agreement, provided that the exercise of such rights shall not conflict with the provisions of this Agreement. 2. The Company's operating regulations, basic rules of conduct, and employees' responsibilities and other standards, as revised from time to time, shall be made available to the employees or the Union upon request. Appendix A to this Agreement outlines the Company Rules of Conduct. Employees will be governed by such rules and regulations and all other orders issued by the Company which are not in conflict with an express provision of this Agreement. ARTICLE 5 - WAGES 1. Job Rates: Set forth in Appendix B of this Agreement are the Job Rates for each Labor Group. 2. Employee Classifications: All non-probationary employees on the active payroll of 5 the Company, shall be classified in accordance with the Schedule of Job Classifications and Groups, as set forth in Appendix B of this Agreement, and shall be paid in accordance with the provisions thereof. All new employees shall be classified upon completion of 60 days. 3. The Company shall have the right to establish new job classifications and to assign appropriate labor grades to such classifications; and when changes in job content warrant, to change the labor group of any existing classification, provided such an action shall not be directed toward changing the labor grade of a job in which no substantial change has occurred. When the Company establishes a new job classification or changes the labor group of an existing classification, it shall notify the Union in writing within forty-eight (48) hours after any such action has been taken. Such notification shall state the basis on which the labor group was determined. The Union shall have the right within five (5) days of receipt of such notice from the Company to file a grievance beginning at the third step of the grievance procedure. In the event that the Company and the Union are unable to resolve the grievance, it may be appealed to arbitration. The Arbitrator's decision shall be limited to a determination of proper labor grade. 4. Effective May 12, 1997, each non-probationary employee in the bargaining unit who was on the Company's roster as of midnight, February 28, 1997, and who received less than $0.10 cents increase on March 1, 1997 as a result of the minimum wage increase shall have his hourly wage rate increased by three percent (3%). Effective May 12, 1998, each non-probationary employee in the bargaining unit who is on the Company's roster as of midnight, February 28, 1998, and who received less than $0.10 cents increase on March 1, 1998 as a result of the minimum wage increase, shall have his hourly wage rate increased by two and one half percent (2.5%). Effective May 12, 1999, each non-probationary employee in the bargaining unit who is on the Company's roster as of midnight, May 11, 1999, shall have his hourly wage rate increased by two percent (2.0%). ARTICLE 6 - PROBATIONARY EMPLOYEES No employee shall have seniority rights until they have completed sixty (60) calendar days of employment with the Company during which time they shall be considered a probationary employee. Upon completion of this period, seniority shall date from the time of the date of hire. Neither the probationary employee or the Union may bring any grievance or arbitration under the provisions of this Agreement concerning the discharge, discipline, demotion, transfer, or work assignment of any probationary employee. 6 ARTICLE 7-HOURS OF WORK 1. The normal hours of work shall be eight (8) per day and forty (40) per week. The daily hours of work shall be consecutive except for such rest period and lunch periods as may be provided in accordance with the practice established in the Company, and as mutually agreed to. 2. The normal starting time of various shifts shall be as follows:
Day Shift 6:00 a.m. to 8:00 a.m. Swing Shift 3:00 p.m. to 5:00 p.m. Night Shift 11:00 p.m. to 1:00 a.m.
Any employee who is required to come to work prior to the hours set fourth or to remain at work after the hours set forth, as part of his regular shift, shall be paid time and a half their regular rate for the actual hours that they worked prior to or after the regular shift hours set forth above. Any employee who is late punching-in for work will be charged in tenths of an hour. 3. The normal work week will be the calendar week beginning at 12:01 a.m. Monday. 4. a. Hours worked in excess of eight (8) in any one day or forty (40) in any one week shall be paid for at the premium rate of one and one-half (1-1/2) times the regular rate, including shift differentials. b. The provisions of 4a shall not apply in those instances when a majority of the employees in any department, during peak season or seasonal periods, shall agree to work a less than five (5) day week but more than eight (8) hours on any one day. In such an event, overtime premium rates will be paid only for those hours in that week in excess of forty (40) at one and one-half (1-1/2) times the regular rate. c. The provisions of 4a shall not apply in any situation where any individual employee because of absence during any work day that week seeks to and is granted the opportunity to work more than eight (8) hours on any other day during that week. In such an event, overtime will only be paid at time and a half for any hours worked in excess of forty (40) during that week. d. With the exception of 4b and 4c, any employee who is not given the opportunity to receive two (2) consecutive days off each week shall receive time and a half pay for the day they work which causes their failure to receive two (2) consecutive days off. 7 5. Hours worked on the seventh (7th) consecutive day which began on the normal work week (refer to Section 3 under this article) shall be paid at the rate of two (2) times the regular rate. Hours worked on the sixth (6th) consecutive day of the normal work week (refer to Section 3 under this article) shall be paid at the rate of one and one half (1-1/2) times the regular rate. Saturday and Sunday shall not be overtime days as such. 6. Time lost by an employee due to their own reasons, shall not be considered as time worked for the purpose of computing overtime pay on the sixth and/or seventh consecutive day. In computing days worked, holidays herein mentioned and absence for the following reason will be considered as days worked and paid for as such: The first day injured while working for the Company. 7. Employees are expected to work overtime when production requires. Employees will not unreasonably refuse to work overtime but when the facts are known to the Company in advance, employees shall be given notice as follows: Two (2) hours notice for required daily overtime, two (2) days notice for required weekly overtime. The Company has the discretion of selecting personnel for overtime work in accordance with production requirements. Whenever possible, the Company will distribute overtime among all employees qualified to perform the work in question by rotating employees starting the rotation in order of seniority. 8. Whenever employees report for work at their regular specified times, or are called in to work by the Company, they shall be guaranteed four (4) hours work or four hours pay at their regular straight time rate of pay, unless they absent themselves from work of their own volition or refuse other work assignment. 9. The provisions of 4a and 8 shall not apply in any instance wherein, through no fault of the Employer, an emergency situation arises through an Act of God. ARTICLE 8-SHIFT PREMIUM All employees who work on the second shift shall receive an additional twenty five cents ($0.25) per hour for all hours worked. All employees who work on the third shift shall receive an additional forty five cents ($0.45) per hour for all hours worked. ARTICLE 9-PAID REST PERIODS The employee shall have a 10 minute rest period in the first half of each work day and a 10 minute rest period in the second half of each work day. The time set aside for the rest period shall be at the sole discretion of the Company and may be changed from time to time. 8 ARTICLE 10-SENIORITY 1. Recognition of Seniority: The parties recognize the principal of seniority in promotional opportunities and in employment security. In furtherance of this recognition it is agreed that in the promotion of employees and in the increase or decrease of the working force, will be governed in accordance with the application of seniority as outlined in paragraph 3a, b, c, d, of this Article. 2. Definition: Seniority shall consist of an Employee's length of continuous service from the employee's date of most recent hire or re-hire, whichever is later, with the plants covered by this Agreement. One seniority list is maintained at the Gardena plant. 3. Application of Seniority: In all cases of promotion, demotion, reduction, or recall, the following factors shall be considered: a. Ability and skill to perform the work in question. b. Physical fitness. c. Work record. d. Seniority (by classification in cases of reductions and increases of work force). When it is determined that factors (a), (b), and (c) above are substantially equal, then length of continuous service shall prevail. 4. Probationary Employees: New employees of the Company shall be considered probationary employees until they have been in the employ of the Company for sixty (60) consecutive calendar days. Upon the completion of such sixty (60) calendar day period they shall cease to be probationary employees, shall be entered upon the seniority list and shall have seniority from the date of their last hiring by the Company. For the purpose of seniority, employees who are hired on the same calendar day shall establish their seniority dates in order of employee identification number (clock number) assignment. The Company expressly reserves the right to reject any new employee at anytime prior to the completion of his probationary period. There shall be no seniority among probationary employees and there shall be no responsibility for the re-employment or recall of probationary employees who have been discharged or laid off during their probationary period. 5. Promotions: a. When the Company fills job openings by promotion in a production department, the following procedure will be used and employees will be considered in the following manner: 9 1. Job openings will be posted plant-wide and may be bid by any employee who has completed his probationary period. The job opening and successful bidder will be determined by application of the provisions of Section 3 (Application of Seniority) of this Article, with first preference given to bidders within the Department first, then plant where opening exists, and last preference to all other bidders. 2. If after a reasonable time, not exceeding (60) days worked on the job, a promoted employee fails to perform satisfactorily the duties of the position to which the employee has been promoted, the Company shall have exclusive right to remove such employee from such position and return the employee to the employee's former job classification and shift. b. All permanent job openings and newly created jobs which occur within a production department shall be posted for a period of three (3) days excluding Saturdays, Sundays, and Holidays. Any employee who wishes to apply for such job opening will sign the bid form provided by the Company. All employees will be given full consideration for such jobs in accordance with Section 5(a)1, and (2) above, before the Company seeks applications to fill such openings from other sources. The name of the successful bidder will be posted throughout the plant. 6. Reduction in the Work Force: When the Company determines a reduction of the working force within a job classification in a department within a plant is necessary, those employees who are effected shall be entitled to displace other employees in accordance with the principal of seniority and the following procedures: a. Probationary employees in the job classification in which the reduction occurs will be the first to be laid off. b. Then, in the event employees who have established seniority with the Company are to be affected by the reduction, those employees having the least amount of seniority in the affected job classification will be reduced. c. Any employee selected for reduction under Paragraph 6(b) above, shall be entitled to displace the least senior employee in the same classification in Gardena provided he or she is qualified to perform the job without training. An employee who is laid off from his/her job classification may bump the least senior employee in a previously held classification if the job is relatively the same as that previously held. d. The Union and the employees who will be affected will be notified as far in advance as possible of any curtailment in operations requiring a reduction in the working force. e. Seniority provisions will not apply in cases of temporary layoff. A temporary layoff 10 is determined as a layoff not exceeding three (3) working days from day of occurrence. 7. Recall: When the work force is again increased, employees reduced from job classifications will be recalled to their previously held job classifications in order of seniority. 8. Seniority Lists: The Local Union shall be provided with an up-to-date seniority list upon request, not to exceed 4 times per year. 9. Shift Preference: It is the intent of the Company to place senior employees within a job classification and department on shifts of their preference; therefore, shift assignments will be made by the Company in accordance with production requirements and as openings occur in the following manner: a. Permanent Shift Assignments: When it is necessary to permanently transfer employees between shifts, the Company shall apply the principle of seniority to employees in the same classification and in the same department from which transfers are being made. The following procedure shall apply within the department when openings exist: 1. Employees who have on file a valid shift transfer request (limited to one request every six months) shall first be transferred in order of seniority. 2. The Company shall then ask for volunteers who shall be transferred in order of seniority. 3. If the vacancies cannot be filled in accordance with 1 and 2 above, employees shall then be transferred in accordance with skills and ability to perform the required job. 10. Transfer Out of the Bargaining Unit: Employees promoted or transferred out of a bargaining unit will retain such seniority as acquired prior to such promotion or transfer. 11. Department Transfers: Senior employees within a job classification will be given preferential consideration, in accordance with production requirements, for a transfer to other departments by completing a request for department change and filing such request with the Personnel Department. A copy of such request will then be given to the Union. 12. An employee shall lose all continuous service and department seniority if the employee: a. Quits 11 b. Is discharged for just cause. c. Is absent for three consecutive working days while regularly employed without notifying the Company. d. Does not return to work when called while laid off within seventy-two (72) hours of either: a telephone call where contact is made with the employee, or receipt of written notice by certified mail to return to work. It is the responsibility of each employee to keep the Company advised of his correct mailing address at all times. e. Overstays a leave of absence or accepts other employment while absent on leave. f. While on layoff does not contact the Company at three (3) month intervals. g. While on sick leave does not contact the Company at three (3) month intervals. h. Layoff or absence for any reason for a period of six (6) months by an employee of less than 5 years, or twelve months by an employee of more than 5 years. ARTICLE 11 - LEAVES OF ABSENCE 1. Authorized Leaves of Absence without pay, but with seniority accumulation uninterrupted, will be granted to employees who have established seniority with the Company in accordance with the provisions of this Article. 2. Medical Leaves. a. Non-Occupational Illness or Injury and Maternity Leaves. The company will grant leave of absence for medical reasons to employees who have six months seniority. Such leaves will be granted for up to a maximum of seven (7) months upon presentation of medical evidence satisfactory to the Company. Where applicable, employees will be entitled to leaves of absence in accordance with the Family and Medical Leave Act of 1993 and the Americans with Disabilities Act of 1990. b. Occupational Injury Leaves. 1. Employees absent because of any industrial injury sustained in the employment of the Company shall accrue continuous service and departmental seniority for up to one (1) year from the last day worked. 12 2. Any employee injured while on duty and leaving work with approval of the Company shall receive full pay for lost time in going to and returning from the doctor on the day they receive such injury, and if instructed by the doctor not to work the remainder of the shift. If a separate person is required for transportation to the clinic, that person would be paid. Company will pay for a maximum of (3) three follow-up visits or a total of six (6) hours where it is a Company approved clinic or doctor and the individual can't be scheduled through the Company during non-working hours. c. Return to Work. Before returning to work from Medical Leaves of Absence, employees must present to the Personnel Department a written statement from their doctor attesting to their fitness to return to work satisfactory to the Company. 3. Personal Leaves. Employees upon written application may be granted up to thirty (30) calendar days Leave of Absence for personal reasons when, in the judgment of the Company, good and compelling reasons exist and business operations permit. Such leaves may be extended at the option of the Company. 4. Union Business Leaves. a. Upon written request by the International Union, the Company will grant, if operating conditions permit, and reasonable notice has been provided, leaves up to two (2) weeks to the Bargaining Committee Chairman, for the purpose of attending Union district conferences of International Union conventions. b. Absences from work of all other Bargaining Unit employees who are Local Union Officers, or who are required to perform official Union business will be excused, if operating conditions permit, provided request for such absence is received by the Company's Personnel Department as much in advance of such absence as is possible. 5. Seniority Accumulation. Employees who are granted authorized Leaves of Absence under the provision of this Article shall continue to accumulate seniority while on such leaves and shall be reinstated to the active payroll upon conclusion of their Leaves of Absence in accordance with the provisions of Article 10, Seniority. 13 ARTICLE 12 - SAFETY AND HEALTH 1. The Company will provide all required safety equipment and personal protective gear to employees as required by departmental operations. Safety shoes will be provided for all individuals assigned to the Casting Department, Shell Department, and Caustic Wash-Out areas. All other employees desiring to purchase safety shoes may do so through payroll deduction. If an individual does not desire to purchase safety shoes, they will be provided with "Clip-On" toes guards a no expense. 2. The Company reserves the right to implement a Drug and Alcohol testing policy designed to provide a drug free work-place in accordance with Federal Law and Regulations. Employees will be provided with a detailed policy and will be required to comply with the provisions of the same as a condition of employment. 3. The Company's Drug and Alcohol testing policy will include screening for the use of controlled substances and/or alcohol by testing of blood, urine, and/or other body fluids under the following circumstances: a. All applicants for employment will provide urine specimens for laboratory testing at the time of any pre-employment physical examination, or, if no pre-employment physical is required, at a time designated by the Company. b. Current employees who are involved in an industrial accident, as defined in the Safety Policy, and who are reasonably suspected of using or being under the influence of controlled substances and/or alcohol, will be required to provide samples of blood, urine, and/or other body fluids for laboratory testing as soon as possible after the accident. c. Current employees who are reasonably suspected of using or being under the influence of controlled substances and/or alcohol during working hours will be required to provide samples of blood, urine, and/or other body fluids for laboratory testing as soon as possible after the reasonable suspicion arises. 14 ARTICLE 13 - HOLIDAYS 1. The following holidays will be paid for at the employee's basic straight-time hourly rate of pay (eight hours) when not worked, subject to all the provisions of this Article: New Year's Day Labor Day Memorial Day Thanksgiving Good Friday Christmas Day Independence Day 1 Floating Holiday * The Floating Holiday shall be observed in each year on a day selected by the Company. The Company will advise the Union in each year of the selection at least thirty (30) days before the selected day. 2. It is the intent of this Article to pay holiday pay for time not worked only to employees who have been in the employ of the Company for at least sixty (60) days or more prior to the observed holiday. 3. To be eligible for holiday pay, when not worked, an employee must have worked the scheduled work day of the plant immediately prior and immediately following such holiday, unless absent as a result of a verified illness or injury that lasts no longer than two (2) calendar weeks, unless such absence is for a good and sufficient reason, acceptable to Management. 4. Any employee who works on any of the above holidays shall be paid their overtime rate of time and one-half their regular straight-time hourly rate of pay for all work performed on the holiday, plus the eight (8) hours' holiday pay. 5. Any employee who is scheduled by the Company to performs work on a holiday, who agrees to report, and fails to report, shall not receive pay for the unworked holiday, unless their failure to report is for a reason clearly beyond control of the employee. 6. Should one of the above-enumerated holidays occur during the regularly scheduled vacation period of an employee, the employee shall receive an extra day's pay computed at the employee's basic hourly rate of pay. 7. Should one of the above-mentioned holidays occur on a Saturday or on a Sunday, the Company retains the right to observe said holidays on either the Friday immediately preceding the holiday or on the Monday immediately following the holiday, or an additional day's pay (eight hours) may be paid to the employee at his basic straight-time hourly rate of pay without specifically 15 observing said holiday. 8. An employee who is not on the active payroll of the Company (including Leave of Absence or Layoff) at the time the holiday occurs, shall not receive holiday pay for such holiday unless the absence commenced in the calendar week in which the holiday falls. ARTICLE 14 - VACATIONS 1. After completion of six (6) months of full time continuous employment. Employees will earn paid vacation as follows:
Length of Service Vacation Accrual Rate ----------------- --------------------- a. Less than six (6) months. Accrual Rate: -0- hrs. No vacation time accrues. b. More than six (6) months but Accrual Rate: 0.219 hrs. per day. Equal to one less than one (1) year. week (40 hours) by the end of the 1st year. c. More than one (1) year but Accrual Rate: 0.219 hrs. per day. Equal to two less than seven (7) years. weeks (80 hours) by the end of each full year of continuous employment. d. More than seven (7) years. Accrual Rate: 0.329 hrs. per day. Equal to three weeks (120 hours) by the end of each full year of continuous employment
2. Employees whose length of service from their hire date, as defined in paragraph 6 of this Article, was greater than seven (7) years as of July 21, 1987, and who have had no break in service since July 21, 1987, as defined in paragraph 6 of this Article, will be eligible to accrue vacation at a rate of 0.438 hours per day, equal to four weeks (160 hours) by the end of each full year of continuous service after 15 years. 3. Vacation pay will be computed by multiplying each employee's basic straight-time hourly rate by all vacation hours requested. Vacation pay will be paid to the eligible employee on the last regularly scheduled pay period immediately prior to the scheduled vacation. 4. The Company reserves the exclusive right to close the plant for an annual vacation period to permit all eligible employees to take their vacations at the same time. In the event the Company elects to close the plant for vacation purposes, the Company agrees to give the employees at least thirty (30) day written notice in advance of such closing. In the event the Company elects not 16 to close the plant for annual vacation, it is understood and agreed that vacation time off shall, insofar as possible, be granted at the time most desired by the employee; however, final right to allotment of vacation periods is reserved exclusively by management in order to ensure the orderly operation of the plant. Any individual entitled to vacation time may take up to the number of days he/she has accrued. Individuals requesting vacation must do so by completing the necessary form at the Personnel office not later than two weeks prior to the beginning of the vacation. 5. Time not worked but paid for, in accordance with this Agreement, shall be included in vacation pay computation. 6. An employees' period of service shall be determined by the employee's first employment in the Company and shall be presumed to have been continuous unless interrupted by resignation or discharge. In cases of re-employment after an interruption of service continuity, such employee's period of service shall begin as of the date of last re-employment. 7. In the event it is mutually agreeable to both the employee and the Company, the employee may work their vacation time, providing they receive their vacation pay in addition to regular compensation for time worked. 8. It is agreed that the intent of this section is to provide full vacation to eligible employees who have earned vacation by consistently working. Accordingly, vacation will not be earned or accrued for the entire period of a personal leave of absence or a non-job related injury or illness disability for more than two (2) weeks. In the case of a job related injury or illness disability, vacation will not be earned or accrued after the fourth (4th) week of absence. It is understood that an employee who has not been on a leave of absence for a period of more than two (2) weeks is considered to be consistently working. 9. Notwithstanding the accrual rates set forth in paragraph 1 of this Article, no employee shall accrue more than the number of vacation hours normally accrued during one and a half years. Accordingly, employees will cease to accrue vacation after accrual has reached the maximum accrual as indicated below until such time as he or she is paid for vacation: Annual Accrual Maximum Accrual -------------- --------------- 2 Weeks (80 Hours) 3 Weeks (120 Hours) 3 Weeks (120 Hours) 4 & 1/2 Weeks (180 Hours) 4 Weeks (160 Hours) 6 Weeks (240 Hours) 17 ARTICLE 15 - GROUP HEALTH AND WELFARE INSURANCE The Company shall maintain medical and hospitalization insurance benefits for its employees who have completed their probationary period. The cost of the insurance to the employee will be as follows: Employee only 0.00 Employee and Dependents 1/3 of the cost to the company of dependent coverage. Effective 10/1/96 the cost for dependent coverage is $14.36 per week.
It is agreed that in the event that a mandated National Health Insurance Plan is enacted, this article may be open for negotiation upon the written notification by registered mail of one party to the other of the desire to do so. The Company shall administer a voluntary dental plan for its employees who have completed their probationary period. Employees will pay the full cost of coverage for themselves and for their dependents through payroll deduction. ARTICLE 16 - PENSION PLAN The Company shall provide a Pension Plan for all eligible employees. Employees who may have earned a greater amount under the old plan will have that greater amount secured. The plan shall provide a monthly benefit after vesting as listed below for each year of accredited service up to 35 years. Effective May 12, 1997 $10.40 @ month Effective May 12, 1998 $10.60 @ month Effective May 12, 1999 $10.85 @ month
ARTICLE 17 - STRIKE AND LOCKOUTS 1. During the term of this Agreement, neither the Union, its officers, agents, members, nor any employee of the Company, will authorize, instigate, aid, condone, participate in, or engage in a strike, work stoppage, slowdown, boycott, picket line, sympathy strike, or other interruption, or interference of work or any impeding of production or business of the Company, regardless of 18 whether there is a claim by the Union of a breach of this Agreement or of state or federal law by the Company be discharged or otherwise disciplined; provided; in such case the only arbitrable issue will be whether the employee or employees so discharged or disciplined in fact engaged in the prohibitive conduct. 2. In the event of occurrence of a wildcat or unauthorized strike, the Union shall immediately: a. Notify the employees that such wildcat strike is unauthorized; b. Promptly order its members to return to work; c. Do whatever it can to prevent or stop such unauthorized acts. 3. During the term of this Agreement, the Company shall not cause, permit or engage in any lockout of its employees. ARTICLE 18 - GRIEVANCE PROCEDURE & ARBITRATION The purpose of this Article is to provide an efficient and orderly method for the settlement of disputes between the Company and the Union over the interpretation, meaning, application, compliance or claimed violation of any of the provisions of this Agreement. STEP 1: The aggrieved employee within three working days, or when the employee should reasonably have been aware of the event, will orally present the dispute to their immediate supervisor. The employee shall have the right to seek the assistance of a Union committee person. Upon request, an employee shall have the right to have a union committee person present during any investigatory meeting which may lead to discipline. STEP 2: If the grievance is not settled in Step 1, the grievance shall be reduced to writing by the employee or the Union within five (5) working days from the time of the occurrence which gave rise to the dispute. The Company's Personnel Manager, a Union Committeeman, the Union's Business Representative/Agent shall meet to resolve the dispute. STEP 3: If the grievance is not settled in Step 2 within five (5) working days it shall be referred for settlement meeting to the Company's Personnel Manager, a Union Committeeman who may represent the local union, and the International Representative. The request for a settlement meeting must be made in writing to the Company's Personnel Manager within 5 working days after the receipt of the Company's answer. 19 STEP 4: If the grievance has not been mutually resolved in Step 3 it may be appealed to arbitration by written notice by the Union to the Company within five (5) working days following the settlement meeting and the receipt of the Company's answer. Time Limitations: The time limitations set forth in this Article are of the essence to this Agreement. No grievance shall be accepted by the Company unless submitted or appealed within the time limits set forth in this Article. If the grievance is not timely submitted at any of the steps above, it shall be waived. Arbitration: If the Company or the Union chooses to arbitrate as set forth in this Article, The American Arbitration Association shall be asked to submit a list of at least nine (9) arbitrators from whom the company and the Union will choose to hear the dispute. The function of the Arbitrator shall be of judicial nature and not have the power to add to, ignore or modify any of the terms and conditions of this contract. The decision of the Arbitrator shall not go beyond what is necessary for the interpretation and application of this contract or the obligations of the parties under this contract to the specific grievance under arbitration. No decision shall decide issues not directly involved in the case. The Arbitrator's decision shall be binding upon the parties. The parties shall equally divide and pay the fees and expenses of the Arbitrator. Grievances regarding only alleged improper discharge must be filed in writing with the Personnel Manager within five (5) working days after the discharge at which time it shall begin at Step Two (2) of the grievance procedure. Other grievances shall follow the steps outlined above. The parties intend that this grievance and arbitration Article shall be the exclusive means by which disputes are resolved in all matters arising out os this Agreement or any matter arising from an employee's employment with the Company including, but not limited to, claims that the employee has been discriminated against on the ground of age, sex, race, religion, national origin, medical condition, handicap, sexual preference or any claim of sexual harassment or any claim under the Americans With Disabilities Act, as long as it does not infringe upon the employee's individual rights. ARTICLE 19 - BULLETIN BOARDS The Company shall provide space for a bulletin board in each plant for posting of Union notices and general information pertaining to the activities of the Union as are approved by the Company. 20 ARTICLE 20-UNION REPRESENTATIVES The authorized representatives of the Union (Local Business Agent and/or United Steelworkers of America Staff Representative) shall have the privilege of appearing upon the Company property during the regular working hours in order to meet with the Company's Director of Personnel in his/her office. The authorized representatives of the Union will be granted access to such other areas of the Company's premises and for such purposes and at such times as the Director of Personnel may approve in advance of such visits. Such access or approval will not be unreasonably denied. Except as provided in this Article, non-employee representatives or agents of the Union may not enter upon the Company's premises at any time. ARTICLE 21-UNION COMMITTEE AND STEWARDS It is agreed that a committee of six (6) employees shall be selected by the members of the Union and shall be known as the Union Committee or Stewards. Said Committee may meet with the Company at times fixed by mutual interest and to settle differences concerning the meaning, application or interpretation of this Agreement. The Company shall not be required to recognize any employee as Steward unless the Union has informed the Company, in writing of the employee's name, department and designation as a Steward. The Committee Chairman at Gardena, may be permitted to visit other departments for the purpose of conducting Union business, providing he receives permission from his supervisor or the supervisor of the department that he visits. Neither the Committee Chair nor any steward may conduct Union business during any employee's working time. Except as necessary to attend a grievance step as set forth in Article 18, a Union committee member or steward shall not be compensated by the Company for his Union activities and shall perform such duties during times when he is not scheduled to work for the Company. ARTICLE 22-SEPARABILITY Every clause of the Agreement shall be deemed separable from every other clause of the Agreement and in the event that any clause or clauses shall be finally determined to be in violation of any law by judgement or decree of any court of competent jurisdiction then any such clause or clauses only, to the extent only that any may be in violation, shall be deemed unenforceable without impairing the validity and enforceability of the rest of the Agreement. 21 ARTICLE 23-TERMINATION This Agreement shall continue in full force and effect until midnight May 11, 2000, and shall thereafter be renewed automatically for further periods of one (1) year each, unless sixty (60) days prior to the expiration date of this Agreement or any renewal thereof, notice in writing by registered mail is given by either party to the other of a desire to terminate this Agreement, or any renewal thereof, and upon the mailing of such timely notice, this Agreement or any renewal thereof, shall terminate at its expiration date. ARTICLE 24-WAIVER AND ENTIRE AGREEMENT The parties acknowledge that during the negotiations resulting in this Agreement, each had the unlimited right and opportunity to make demands and proposals with respect to any and all subjects or matters not removed by law from the area of collective bargaining and that the understandings and agreements arrived at by the parties after exercise of that right and opportunity are set forth in this Agreement. Therefore, the Company and the Union each voluntarily and unqualifiedly waives the right, and each agrees that the other shall not be obligated, to bargain collectively with respect to any subject or matter referred to or covered in this Agreement even though such subject or matter may not have been within the knowledge or contemplation by either or both of the parties at the time that they negotiated or signed this Agreement. All rights and duties of both parties are specifically expressed in this Agreement and such expression is all-inclusive. Any benefit existing prior to this Agreement is negated unless specifically incorporated into this Agreement. This does not apply to written policies the Company has presently in effect and not in conflict with the collective bargaining agreement. 22 APPENDIX A COMPANY RULES OF CONDUCT It is essential that all rules of good conduct be observed to maintain good working relations among all. Violations may result in disciplinary action. I. Violation of any of the following rules or conduct may result in discharge without prior warning: a. Fighting on Company property. b. Gambling on Company property. c. Immoral or indecent conduct. d. Stealing from the Company or fellow employees. e. Refusal to carry out work assignments. f. Falsification or misuse of Company records. g. Knowingly punching the time card of another employee. h. Reporting for work under the influence of alcohol or narcotics, or using, possessing or selling intoxicating beverages or illegal narcotics on Company property. i. Willful damage to company property or that of another employee. j. Possession of firearms or other harmful weapons on Company property. k. Use of abusive language toward fellow employees or supervisors. l. Two wage garnishments within a twelve (12) month period. m. Deliberate or repeated negligence in reporting production quantities, operation or work performed, and other reports. n. Performing personal work during working hours. 23 2. Violations of any of the following rules of conduct may result in written warning, disciplinary layoff, or discharge: a. Violations of Safety Rules. b. Quitting work early without permission of your supervisor. c. Misuse or tampering with fire protection or safety equipment. d. Excessive tardiness or absences from work. e. Absence from assigned work station without permission. f. Failure to punch your time card. g. Failure to report to your supervisor any damage you may have caused to Company's or co-worker's property. h. Horseplay. i. Coercion or intimidation of another employee. j. Malicious or idle gossip detrimental to the Company or its employees. k. Creating or contributing to unsanitary working conditions. l. Unauthorized solicitations for any purpose during working hours on Company property; unauthorized distribution of literature in working hours. m. Deliberate ridicule of your fellow employee's race, color, religion and/or disability. n. Failure to achieve or sustain minimum quality and quantity standards. o. Discarding litter on Company premises or parking lot. p. Parking on "reserved" or "no parking" areas; blocking exits, fire hydrants, etc. q. Negligence contributing to the damage to tools, equipment, or other property of the Company or fellow employees. 24 r. Working another job while employed full time with Coastcast Corp. is prohibited without the express permission of the Company. s. Failure to report to supervisor or personnel department on absenteeism or excessive tardiness. 25 APPENDIX B SECTION I -- GROUP AND JOB CLASSIFICATIONS AND STARTING RATES OF PAY: GROUP I Cone Assembler Inspector Dewax Operator Janitor Deburrer Wax Set Up Person Finishing Machine Operator Wax Base Runner Grinder Wax Preparer Injector Wax Painter Shell Dipper B Starting Rate of Pay: 12/4/96: $4.75; 3/1/97: $5.00; 9/1/97: $5.15; 3/1/98: $5.75 GROUP II Caustic Wash Out Heat Treat Operator Knock-Out Operator Shell Dipper A High Pressure Wash-Out Straightener Cut-Off Trainee Shell Robot Operator Forklift Operator Truck Driver Foundry Helper Vacuum Furnace Op Trainee Foundry Welder Welder Starting Rate of Pay: 5/12/97: $5.40; 9/1/97: $5.50 3/1/98: $6.10 GROUP III Melter Maintenance Electrician B Vacuum Furnace Operator Maintenance Mechanic B Cut-Off Operator Starting Rate of Pay: 5/12/97: $7.00 GROUP IV Maintenance Mechanic A Senior Vacuum Furnace Operator Maintenance Electrician A Starting Rate of Pay: 5/12/97: $9.00 26 Executed by the parties the day and year first above written: UNITED STEELWORKERS OF AMERICA COASTCAST CORPORATION AFL-CIO/CLC /s/ George F. Becker /s/ Richard W. Mora - ------------------------------------- -------------------------------------- George F. Becker Richard W. Mora International President President & COO /s/ Leo W. Gerard /s/ Jon Kuartzer - ------------------------------------- -------------------------------------- Leo W. Gerard, International Jon Kuartzer Secretary/Treasurer Vice-President of Operations /s/ Richard H. Davis /s/ Robert C. Brunning - ------------------------------------- -------------------------------------- Richard H. Davis, International Robert C. Brunning Vice-President, Administration Chief Financial Officer /s/ Leon Lynch /s/ Roberto Roman - ------------------------------------- -------------------------------------- Leon Lynch, International Roberto Roman Vice President, Human Affairs Director of Human Resources /s/ Jack R. Golden - ------------------------------------- Jack R. Golden, Director, District 12 /s/ Wayne A. Clary - ------------------------------------- Wayne A. Clary, Sub-District Director /s/ James Jaurnett - ------------------------------------- James Jaurnett, Business Representative /s/ Jose L. Valencia - ------------------------------------- Jose L. Valencia, Committee Member /s/ Javier Vera - ------------------------------------- Javier Vera, Committee Member /s/ Rafael Macias - ------------------------------------- Rafael Macias, Committee Member /s/ Obdulia Diaz - ------------------------------------- Obdulia Diaz, Committee Member /s/ Florencio Bermudez - ------------------------------------- Florencio Bermudez, Committee Member
27 EX-10.14 3 EXHIBIT 10.14 EXHIBIT 10.14 AGREEMENT entered by and between COASTCAST CORPORATION, S.A., represented by MR. RICHARD MORA, hereinafter referred to as ASSIGNOR, and COASTCAST TIJUANA, S. DE R.L. DE C.V., represented by MR. RAMON IBARRA FRANCO, to be known as ASSIGNEE, and which is formalized in accordance with the following Antecedents and Clauses: ANTECEDENTS: I. On August 20, nineteen hundred and ninety seven, COASTCAST CORPORATION, S.A., as LESSEE, entered into a Lease Agreement with INMOBILIARIA Y FRACCIONADORA LOMAS, S.A. DE C.V., as LESSOR, executed a Lease Agreement over a piece of land known as Lot "F", with an area of 30,614.15, square meters, located on Calle Cucapah, Parque Industrial El Lago, Tijuana, Baja California, over which an Industrial Building of nearly 185,907, square feet is under construction. A copy of the Lease Agreement as Exhibit "A", is attached hereto to form a part hereof. II. Under the terms of Clause 13, of the Lease Agreement mentioned above, LESSOR authorized LESSEE to assign in whole or in part the rights and obligations derived from the Lease Agreement, or sublease the rented property without previous notice to LESSOR, if ASSIGNEE was a subsidiary or affiliate of COASCAST CORPORATION, S.A. III. It is the desire of ASSIGNOR, to assign as of February first, nineteen hundred and ninety eight, the rights and obligations derived from the Lease Agreement referred to in Antecedent I above, that includes provided for in the Agreement referred to in the aforementioned Antecedents to ASSIGNEE, so that the latter may assume the character as LESSEE, as of the first of February nineteen hundred and ninety eight, and consequently, the only one obligated under the terms of such Agreement. IV. As a consequence of the foregoing, ASSIGNOR has notified INMOBLIARIA Y FRACCIONADORA LOMAS, S.A. DE C.V., its intention to assign the rights and obligations derived or that could be derived from the Lease Agreement referred in the previously 2 mentioned Antecedents. Copy of the notification is attached hereto to form a part hereof as Exhibit "B". Pursuant to the above, the parties agree as follows: CLAUSES: FIRST: ASSIGNOR assigns to ASSIGNEE, without limitation whatsoever and with effects beginning from February first, nineteen hundred and ninety eight, the rights and obligations derived from the Lease Agreement referred to in Antecedent I above, attached hereto to form a part hereof as Exhibit "A". ASSIGNOR, assigns, without cost or any consideration, to LESSEE, every and any right, over service, telephone systems and telephone lines, presently installed in the property object of Agreement mentioned above. SECOND: It is perfectly understood that by means of this Agreement, ASSIGNEE, COASTCAST TIJUANA, S. DE R.L. DE C.V., as of February first, nineteen hundred and ninety eight, will assume the character as LESSEE and therefor, the rights and obligations derived from the aforementioned Lease Agreement. In consequence, ASSIGNEE exonerates ASSIGNOR as of February first, nineteen hundred and ninety eight, of all and any obligations and responsibilities from such Lease Agreement and that originated after January thirty first nineteen hundred and ninety eight. ASSIGNOR exonerates and will maintain COASTCAST TIJUANA, S. DE R.L. DE C.V., free from any action, claim or demand of any kind for failure of compliance of Lease Agreement referred to in the aforementioned Antecedents, and which obligations originated before January thirty first nineteen hundred and ninety eight. THIRD: ASSIGNEE, in this act, accepts to assume, as of February first, nineteen hundred and ninety eight, the terms and conditions stipulated in the Lease Agreement, that as Exhibit "A", is attached to this Agreement in whose contents are here reproduced as of inserted to the letter, and is obligated to compliance of all and each of the Clauses. FOURTH: ASSIGNEE agrees in due time, to arrange for all public services, water, electricity, telephone and other services that give service to the property leased, object of this assignment, and so that such public services agreements are put in ASSIGNEE's name. 3 ASSIGNOR agrees on its part, to help ASSIGNEE in all necessary procedures for the execution of that set forth in this Clause. FIFTH: Each and every of the Covenants of the Lease Agreement will continue in force in the terms thereof. SIXTH: For everything pertaining to the interpretation and compliance of this Agreement, the parties hereby expressly submit themselves to the jurisdiction of the Civil Courts of the City of Tijuana, Baja California, waiving any other jurisdiction which might be applicable by reason of their present or future domiciles or otherwise. IN WITNESS WHEREOF this document is signed in triplicate, in the City of Tijuana, Baja California, on the first of February nineteen hundred and ninety eight. ASSIGNOR ASSIGNEE /s/ Richard Mora /s/ Ramon Ibarra Franco --------------------------- ----------------------------- COASTCAST CORPORATION, S.A. COASTCAST TIJUANA, S. DE R.L. represented by Mr. Richard Mora DE C.V., represented by Mr. Ramon Ibarra Franco WITNESS WITNESS /s/ [illegible] /s/ [illegible] --------------------------- ----------------------------- [illegible] [illegible] EX-10.16 4 EXHIBIT 10.16 EXHIBIT 10.16 [LETTERHEAD] January 26, 1998 Mr. Norman Fujitaki Corporate Controller Coastcast Corporation 14831 Maple Avenue Gardena, CA 90247 Dear Mr. Fujitaki: It is with great pleasure that we extend to you Imperial Bank's commitment to make available to Coastcast Corporation the following credit accommodation, effective as of December 23, 1997: TYPE: Unsecured Revolving Line of Credit AMOUNT: $5,000,000.00 MATURITY: 364 days from date of documentation PURPOSE: Fund cash flow timing differences INTEREST RATE: Prime or LIBOR plus 200 basis points FEES: $250.00 for documentation This loan commitment will be subject to a Credit Agreement to be drawn by the Bank containing covenants satisfactory to Bank and agreed to by Coastcast Corporation. If the terms of this commitment meet with your approval, please sign and return a copy of this letter. This offer expires thirty (30) days from the date hereof unless accepted by your return of the enclosed copy signed by an authorized officer or unless extended by the Bank in writing. Sincerely, /s/ Donald D. Douthwright /s/ Brougham J. Morris Donald D. Douthwright Brougham J. Morris Regional Vice President Senior Vice President Accepted and agreed to on ___________________ , 1998 Coastcast Corporation By: /s/ Robert C. Bruning -------------------------------- Title: CFO -------------------------------- [LOGO] IMPERIAL BANK Member FDIC NOTE $5,000,000.00 INGLEWOOD, California, FEBRUARY 2, 1998 On FEBRUARY 1, 1999, and as hereinafter provided, for value received, the undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking corporation, or order, at its LOS ANGELES AIRPORT REGIONAL office, the principal sum of $5,000,000.00 (Maximum) or such sums up to the maximum if so stated, as the Bank may now or hereafter advance to or for the benefit of the undersigned in accordance with the terms hereof, together with interest from date of disbursement or N/A, whichever is later, on the unpaid principal balance / / at the rate of % per year /X/ at the rate of 0.000*% per year in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in such Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, divided by 360, which shall, for interest computation purposes, be considered one year. Interest shall be payable /X/ monthly / / quarterly / / included with principal / / in addition to principal / /, beginning FEBRUARY 26, 1998, and if not so paid shall become a part of the principal. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. / / (If checked), Principal shall be payable in installments of $ , or more, each Installment on the day of each , beginning . Advances not to exceed any unpaid balance owing at any one time equal to the maximum amount specified above, may be made at the option of Bank. Any partial prepayment shall be applied to the installments, if any, in inverse order of maturity. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this note, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s) to pay principal or interest when due; the filing as to each person obligated hereon, whether as maker, co-maker, endorser or guarantor (individually or collectively referred to as the "Obligor") of a voluntary or involuntary petition under the provisions of the Federal Bankruptcy Act; the issuance of any attachment or execution against any asset of any Obligor; the death of any Obligor; or any deterioration of the financial condition of any Obligor which results in the holder hereof considering itself, in good faith, insecure. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent ten or more days, Obligor agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment, but nothing in this paragraph is to be construed as any obligation on the part of the holder of this note to accept payment of any payment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, each Obligor promises to pay all costs and expenses of collection and reasonable attorneys fees incurred by the holder hereof on account of such collection, plus interest at the rate applicable to the principal, whether or not suit is filed hereon. Each Obligor shall be jointly and severally liable hereon and consents to renewals, replacements and extensions of time for payment hereof, before, at or after maturity; consents to the acceptance, release or substitution of security for this note; and waives demand and protest and the right to assert any statute of limitations. Any married person who signs this note agrees that recourse may be had against separate property for any obligations hereunder. The indebtedness evidenced hereby shall be payable in lawful money of the United States. In any action brought under or arising out of this note, each Obligor, including successor(s) or assign(s) hereby consents to the application of California law, to the jurisdiction of any competent court within the State of California, and to service of process by any means authorized by California law. No single or partial exercise of any power hereunder, or under any deed of trust, security agreement or other agreement in connection herewith shall preclude other or further exercises thereof or the exercise of any other such power. The holder hereof shall at all times have the right to proceed against any portion of the security for this note in such order and in such manner as such holder may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of the holder hereof in exercising any right hereunder, or under any deed of trust, security agreement or other agreement, shall not operate as a waiver of such right, or of any other right, under this note or any deed of trust, security agreement or other agreement in connection herewith. *SEE LIBOR ADDENDUM TO NOTE ATTACHED HERETO AND MADE A PART HEREOF BY THIS REFERENCE. COASTCAST CORPORATION - ------------------------------------- ---------------------------------- By: /s/ Robert C. Bruning - ------------------------------------- ---------------------------------- - ------------------------------------- ---------------------------------- [LOGO] IMPERIAL BANK LIBOR ADDENDUM MEMBER FDIC TO NOTE This Libor Addendum ("Addendum") is dated as of FEBRUARY 2, 1998, and is by and between COASTCAST CORPORATION ("Borrower") and Imperial Bank ("BANK"). This Addendum amends and supplements the Note to which it is attached (the "Note") and forms a part of and is incorporated into the Note. In the event of any inconsistency between the terms herein and the terms of the Note, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meanings set forth in the Note. 1. ADVANCES. 1.1 PRIME LOANS. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to Bank's Prime Rate shall be referred to herein as "Prime Loans" and each such advance shall be a "Prime Loan." Each Prime Loan shall bear interest at an annual rate equal to the sum of 0.000% plus the Bank's Prime Rate. "Prime Rate" shall mean the rate of interest publicly announced by Bank from time to time in Inglewood, California, as its prime rate for lending. The Prime Rate is not intended to be the lowest rate of interest charged by the Bank in connection with extensions of credit to borrowers. 1.2 LIBOR LOANS. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to the Libor Rate shall be referred to herein as "Libor Loans" and each such advance shall be a "Libor Loan." Each Libor Loan shall bear interest at the Libor Rate, as defined below. A Libor Loan shall be in the minimum amount of FIVE HUNDRED DOLLARS ($500,000.00) or such greater amount which is an integral multiple of Fifty Thousand Dollars ($50,000). No Libor Loan shall be made after the last Business Day that is at least THREE (3) MONTHS prior to the Maturity Date described in the Note. 2. INTEREST ON LIBOR LOANS. 2.1 RATE OF INTEREST. Each Libor Loan shall bear interest on the unpaid principal amount thereof from the Loan Date through the date paid (whether by acceleration or otherwise) at a rate equal to the sum of 2.000% per annum plus the Libor Rate for the Interest Period. (a) "Loan Date" shall mean the date on which (i) a Libor Loan is made, a Libor Loan is continued, or a Prime Loan is converted to a Libor Loan. (b) "Interest Period" shall mean a period of ONE (1) MONTH, commencing on the applicable Loan Date, as selected by Borrower pursuant to Section 2.2; PROVIDED, HOWEVER, that Borrower may not select an Interest Period that would otherwise extend beyond the Maturity Date of the Loan. Borrower may also select a twelve (12) month Interest Period if and when Bank notifies Borrower that such Interest Period is available, as determined by Bank in its sole discretion. (c) "Libor Rate" shall mean, for the applicable Interest Period for a Libor Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the Libor Base Rate for such Interest Period divided by (ii) 1.00 minus the Reserve Requirement Rate (expressed as a decimal fraction) for such Interest Period. (d) "Libor Base Rate" shall mean with respect to any Interest Period, the rate equal to the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of: (i) the offered rates per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears at 11:00 a.m., London time, on the Reuters Screen LIBOR Page on the Business Day that is two (2) Business Days before the first day of such Interest Period, in each case if at least four (4) such offered rates appear on such page, or (ii) if clause (i) is inapplicable, (x) the offered rate per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears as of 11:00 a.m., London time on the Telerate Monitor on Telerate Screen 3750 on the Business Day which is two (2) Business Days before the first day of such Interest Period; or (y) if clause (x) above is inapplicable, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interest rates per annum offered by at least three (3) prime banks selected by Bank at approximately 11:00 a.m. London time, on the Business Day which is two (2) Business Days before such date for deposits in U.S. Dollars to prime banks in the London interbank market, in each case for a period equal to such Interest Period in an amount equal to the amount to which the Libor Rate applies. Page 1 of 4 (e) "Business Day" means any day on which Bank is open for business in the State of California. (f) "Reuters Screen LIBOR Page" means the display designated as page LIBOR on the Reuters Monitor Money Rates Service or such other page as may replace the LIBOR page on that service for the purpose of displaying London interbank offered rates of major banks. (g) "Reserve Requirement Rate" means, for any Interest Period, the aggregate of the rates, effective as of the Business Day which is two (2) Business Days before the first day of the Interest Period, at which: (i) reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System; and (ii) any additional reserves are required to be maintained by Bank by reason of any Regulatory Change against (x) any category of liabilities which includes deposits by reference to which the Libor Rate is to be determined as provided in the definition of "Libor Base Rate;" or (y) any category of extensions of credit or other assets which include Libor Loans. (h) "Regulatory Change" means, with respect to Bank, any change on or after the date of the Note and this Addendum in any Governmental Regulation, including the introduction of any new Governmental Regulation or the rescission of any existing Governmental Regulation. (i) "Governmental Regulation" means any (i) United States Federal, state or foreign law or regulation (including without limitation Regulation D); and (ii) the adoption or making of any interpretation, application, directive or request applying to a class of lenders, including Bank, of or under any United States Federal, state, or any foreign law or regulation (whether or not having the force of law) by any court or by any governmental, central banking, monetary or taxing authority charged with the interpretation or administration of such law or regulation. 2.2 DETERMINATION OF INTEREST RATES. Subject to the terms and condition of the Note and this Addendum, Borrower, at its option, may request an advance in the form of a Libor Loan, a continuation of a Libor Loan, or a conversion of a Prime Loan into a Libor Loan, only upon delivery to Bank of an irrevocable written notice received by Bank at least three (3) Business Days prior to the requested Loan Date, specifying (i) the principal amount of such Libor Loan, (ii) the requested Loan Date, and (iii) the selected Interest Period. Upon receiving such notice, Bank shall determine (which determination shall be in accordance with Section 2.1 and shall, absent manifest error, be final, conclusive and binding upon all parties hereto) the Libor Rate applicable to such Libor Loan two (2) Business Days prior to the Loan Date, and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower. If Borrower shall fail to notify Bank of its selected Interest Period for a Libor Loan (including the continuation of an existing Libor Loan or the conversion of a Prime Loan into a Libor Loan), the Borrower shall be deemed to have selected an Interest Period of three (3) months. 2.3 COMPUTATION OF INTEREST AND FEES. All computations of interest and fees payable pursuant to the Note shall be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed (less the date of repayment). 2.4 RECORDATION BY BANK. Bank is hereby authorized to record the Loan Date, the applicable Interest Period, the principal amount, and the interest rate of each Libor Loan made (or continued or converted) by Bank, and the date and amount of each payment or prepayment of principal thereof, in Bank's records. Any such recordation shall constitute PRIMA FACIE evidence of the accuracy of the information recorded; PROVIDED that the failure to make any such recordation shall not in any way affect the Borrower's obligations hereunder. 3. CONVERSION TO PRIME LOANS. 3.1 ELECTION BY BORROWER. Subject to all the terms and conditions of this Addendum, Borrower may elect from time to time to convert a Libor Loan to a Prime Loan by giving Bank at least three (3) Business Days' prior irrevocable notice of such election, and any such conversion of a Libor Loan shall be made on the last day of the Interest Period with respect thereto. 3.2 FAILURE OF NOTICE BY BORROWER. If Borrower otherwise fails to give notice specifying its requests with respect to any Libor Loans that are scheduled to become due, such failure shall be deemed, in the absence of any notice from Borrower to the contrary, to be notice of a requested advance in the form of a Prime Loan in a principal amount equal to the amount of said Libor Loan. 4. PREPAYMENTS. 4.1 VOLUNTARY PREPAYMENT BY BORROWER. Subject to the terms and conditions of the Note and this Addendum, Borrower may, upon at least three (3) Business Days' irrevocable notice to Bank as provided herein, at any time and from time to time on any Business Day prepay any Prime Loan or Libor Loan in whole or in part, without penalty or premium, other than customary actual "Breakage Fees" and "Prepayment Costs" as defined below, resulting from prepayment of any Libor Loan prior to the expiration of the Interest Period relating thereto. The notice of prepayment shall specify the date and amount of the prepayment, and the Loan to which the Page 2 of 4 prepayment applies. Each partial prepayment of a Libor Loan shall be in an amount not less than Fifty Thousand Dollars ($50,000) or such greater amount which is an integral multiple of Fifty Thousand Dollars ($50,000), PROVIDED, that unless a Libor Loan is prepaid in full, no prepayment shall be made if, after giving effect to such prepayment, the aggregate principal amount of Libor Loans having the same Interest Period shall be less than FIVE HUNDRED ($500,000.00). Notice of prepayment having been delivered as aforesaid, the principal amount of the prepayment specified in such notice shall become due and payable on the prepayment date set forth in such notice. All payments of principal under this Section 4 shall be accompanied by accrued but unpaid interest on the amount being prepaid through the date of such prepayment. 4.2 BREAKAGE FEES. If for any reason (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or acceleration), Bank receives all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan, Borrower shall immediately notify Borrower's account officer at Bank and, on demand by Bank, pay Bank the Breakage Fees, defined as the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank (without regard to whether Bank actually so invests said funds) by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank's determination as to such amount shall be conclusive and final, absent manifest error. 4.3 PREPAYMENT COSTS. Borrower shall pay to Bank, upon the demand of Bank, such other amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any loss, costs or expense incurred by it as a result of any prepayment by Borrower (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or prepayment due to acceleration) of all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan (including without limitation any failure by Borrower to borrow a Libor Loan on the Loan Date for such borrowing specified in the relevant notice of borrowing hereunder). Such costs shall include, without limitation, any interest or fees payable by Bank to lenders of funds obtained by it in order to make or maintain its loans based on the London interbank eurodollar market. Bank's determination as to such costs shall be conclusive and final, absent manifest error. 5. REMEDIES UPON EVENTS OF DEFAULT. 5.1 CONVERSION TO PRIME LOANS. If any Event of Default has occurred and is continuing under the Note or this Addendum, then in addition to all other remedies available to Bank under the Note, at the option of Bank and without demand or notice, all Libor Loans then outstanding shall be automatically converted to Prime Loans on the last day of each respective Interest Period for each Libor Loan. 5.2 INDEMNITY. Borrower agrees to pay and indemnify Bank for, and to hold Bank harmless from, any and all cost, loss or expense (including without limitation any such cost, loss or expense arising from interest or fees payable by Bank to lenders of funds obtained by it in order to maintain its Libor Loans hereunder, or in its reemployment of funds obtained in connection with the making or maintaining of Libor Loans) which Bank may sustain or incur as a consequence of any default by Borrower in connection with or related to: (a) payment of the principal amount of or interest on Libor Loans, (b) making a borrowing or conversion of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or (c) making a prepayment of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or any prepayment (whether optional or mandatory) of any Libor Loan prior to the end of the applicable Interest Period for such Loan. 6. ADDITIONAL PROVISIONS REGARDING LIBOR LOANS. 6.1 LIBOR RATE TAXES. All payments of principal, interest, fees, costs, expenses and all other amounts payable to Borrower pursuant to the Note and this Addendum shall be made free and clear of and without reduction by reason of all present and future income, stamp and other taxes or other charges whatsoever imposed, assessed, levied or collected by any national government or any political subdivision or taxing authority thereof or any organization of which it is a member (excluding (i) any taxes imposed on or measured by the overall net income or gross receipts of Bank by any such entity, and (ii) any taxes which would have been imposed even if no provisions for Libor Loans had appeared in this Addendum) (collectively, "Libor Taxes"). If any Libor Taxes are required to be withheld from any amounts payable to Bank, Borrower shall pay such additional amounts as may be necessary so as to yield to Bank a net amount equal to the total amount of the payments provided for in this Addendum or under the Note which Bank would have received if such amounts had not been subject to Libor Taxes. If any Libor Taxes are payable directly by Borrower, they shall be paid by Borrower prior to the date on which penalties attach for failure to timely pay such Libor Taxes. Within forty five (45) days after the date on which payment of any such Libor Taxes is due pursuant to applicable law, Borrower will furnish Bank the original receipt for the full payment of such Libor Taxes or, if such is not available, evidence of such payment satisfactory in form and substance to Bank. Borrower shall indemnify and hold Bank harmless against, and will reimburse to Bank, upon demand, any incremental taxes, interest or penalties that may become payable by Bank as a result of any failure by Borrower to pay any Libor Taxes when due. Page 3 of 4 6.2 INABILITY TO DETERMINE FAIR INTEREST RATE. If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the Libor Loans for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, (ii) the Libor Rate does not accurately reflect the cost to Bank of lending the Libor Loan, or (iii) by reason of any changes arising after the date of the Note affecting the London interbank eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in Sections 2.1 and 2.2 above, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate applicable to Libor Loans, or until such time as Bank notifies Borrower that the circumstances giving rise to Bank's notice no longer exist. While such circumstances continue to exist, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.3 ILLEGALITY OR IMPRACTICABILITY. If (i) due to any Governmental Regulation it shall become unlawful for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, or (ii) due to any contingency occurring after the date of the Note which has a material adverse effect on the London interbank eurodollar market, it has become impracticable for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, and in such event, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.4 GOVERNMENTAL REGULATIONS; INCREASED COSTS. Borrower shall pay to Bank, within 15 days after demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any increased costs incurred by Bank that Bank determines are attributable to its making or maintaining of any Libor Loans to Borrower (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (a) imposes a new tax or changes the basis of taxation of any amounts payable to Bank under the Note or this Addendum in respect of any Libor Loans (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which such Bank has its principal office); or (b) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits or other liabilities with or for the account of Bank (including any Libor Loans or any deposits referred to in the definition of Libor Base Rate); or (c) imposes any other condition affecting the Note (or any of such extensions of credit or liabilities); or (d) imposes or modifies a Governmental Regulation regarding capital adequacy which has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank ("Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material. Bank will notify Borrower of any event occurring after the date of the Note which will entitle Bank to Additional Costs pursuant to this Section 6.4 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for Additional Costs under this Section 6.4. Determinations and allocations by Bank for purposes of this Section 6.4 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Libor Loans or of making or maintaining Libor Loans or on amounts receivable by it in respect of Libor Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive and final, absent manifest error. This Addendum is executed as of the date first written above. BORROWER BANK Coastcast Corporation , IMPERIAL BANK, - ---------------------------------- a California corporation a California banking corporation -------------------------------- By /s/ Robert C. Bruning By /s/ Brougham Morris ------------------------------- -------------------------------------- Its CFO Brougham Morris, Senior Vice President ------------------------------- Its ----------------------------------- By , ------------------------------- Its ------------------------------- Page 4 of 4 [LOGO] CREDIT AGREEMENT This Credit Agreement ("Agreement") is made by and between Coastcast Corporation, a California corporation ("Borrower") and Imperial Bank, a California banking corporation ("Bank"). In consideration of mutual covenants and conditions hereof, the parties hereto agree as follows: 1. REPRESENTATIONS OF BORROWER Borrower represents and warrants that: 1.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing and in good standing under the laws of the State of California, without limit as to the duration of its existence and is authorized and in good standing to do business in the State of California; Borrower has powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing in each State in which the character of the properties owned by it therein or the conduct of its business makes such qualification necessary; and Borrower has the power and adequate authority to make and carry out this Agreement. Borrower has no investment in any other business entity. 1.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of or in conflict with any law or regulation or any term or provision of Borrower's articles of incorporation, by-laws, as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms, subject only to bankruptcy, insolvency or similar laws affecting creditors rights generally. 1.03 NO CONFLICT. The execution, delivery and performance of this Agreement are not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrower is a party or by which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 1.04 LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrower which if determined adversely to Borrower or its interest would have a material adverse effect on the financial condition of Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. 1.05 FINANCIAL CONDITION. The balance sheet of Borrower as of September 30, 1997, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct, and said balance sheet truly presents the financial condition of Borrower as of the date thereof, and has been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. 1.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are not subject to any liens or encumbrances other than those permitted by Section 3.03 hereof. 1.07 TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 1.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 1.09 REGULATION U. None of the proceeds of any loan from the Bank to Borrower shall be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). 2. AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, under borrowings, or other indebtedness, it will, unless Bank shall otherwise consent in writing: 2.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. 2.02 INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses and/or in the exercise of good business judgment. 2.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: a. The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and b. It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto. All financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principals applied on a basis consistent with previous years. 2.04 CURRENT ASSETS TO CURRENT LIABILITIES. Borrower shall maintain a ratio of current assets to current liabilities of not less than 3.00 to 1.00. 2.05 DEBT TO TANGIBLE NET WORTH. Borrower shall maintain a ratio of total liabilities to tangible net worth (tangible net worth shall be defined as the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, leaseholds, organization expense, other similar intangible items, and all amounts due from officers, stockholders and affiliates, over its liabilities less subordinated debt) of not more than 1.00 to 1.00. 2.06 PROFITABLE OPERATIONS. Borrower shall maintain profitable operations at fiscal year end. 2.07 OUT-OF-DEBT PERIOD. The unpaid balance of the loan made to Borrower under this Agreement shall be zero for a 30 consecutive day period prior to each anniversary date of this Agreement. 2.08 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's Page 2 of 7 representatives to have access to, and to examine its properties, books and records at all reasonable times and upon reasonable notice during normal business hours; and furnish Bank: a. QUARTERLY FINANCIAL STATEMENT. As soon as available, and in any event within forty-five (45) days after the close of each quarter of each fiscal year of Borrower, commencing with the quarter next ending, a balance sheet, profit and loss statement, Statement of Cash Flows, and reconciliation of Borrower's capital account as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail accompanied by Form 10-Q, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower, subject, however, to year-end audit adjustments. b. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within one hundred and twenty (120) days after the end of each fiscal year of Borrower, deliver to Bank, the same consolidated financial statements as otherwise provided quarterly, all in reasonable detail accompanied by Form 10-K, submitted on an "Unqualified" basis by an independent certified public accountant selected by Borrower but acceptable to Bank. c. COMPLIANCE CERTIFICATE. Promptly after the receipt of any quarterly or annual financial statements of Borrower, a certificate of chief financial officer of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof; d. AUDIT REPORTS. Promptly after the receipt thereof by Borrower, copies of any detailed audit reports submitted to Borrower by independent accountants in connection with each annual or interim audit of the accounts of Borrower made by such accountants. e. OTHER REPORTS AND STATEMENTS. Promptly after the same are available, copies of all such proxy statements, financial statements and reports as Borrower shall send to its stockholders, if any, and copies of all reports which Borrower may file with the Securities and Exchange Commission or any governmental authority at any time substituted therefor. f. OTHER INFORMATION. Such other information relating to the affairs of Borrower as the Bank reasonably may request form time to time; 2.09 NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence of any Event of Default hereunder or any event which upon notice and lapse of time would be an Event of Default. 2.10 OPERATING ACCOUNTS. Maintain most operating accounts with Bank during the term of any loans from Bank to Borrower. Borrower shall maintain, or cause to be maintained, on deposit with Imperial Bank, non-interest bearing demand deposit balances sufficient to compensate Bank for all services provided by Bank. Balances shall be calculated after reduction for the reserve requirement of the Federal Reserve Board and uncollected funds. Any deficiencies shall be charged directly to the Borrower on a monthly basis. 2.11 ATTORNEY'S FEES. Pay promptly to Bank without demand after notice, with interest thereon from the date of expenditure at the rate applicable to any loans from Bank to Borrower, reasonable attorneys' fees and all costs and expenses paid or incurred by Bank in collecting or compromising any such loan after the occurrence of an Event of Default, whether or not suit is filed. If suit is brought to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and court costs in addition to any other remedy or recovery awarded by the court. Page 3 of 7 2.12 DOCUMENTATION FEE. A documentation fee of $250.00 shall be due upon execution of this Agreement. 3. NEGATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, it will not, without Bank's written consent: 3.01 TYPE OF BUSINESS. Make any substantial change in the character of its business. 3.02 OUTSIDE INDEBTEDNESS. Other than in the ordinary course of business and consistent with past practices, create, incur, assume or permit to exist any indebtedness for borrowed moneys, other than loans from Bank, except obligations now existing as shown in the financial statement dated September 30, 1997, excluding those obligations being refinanced by Bank. 3.03 LIENS AND ENCUMBRANCES. Other than in the ordinary course of business which includes obtaining collaboration agreements with corporate partners, and consistent with past practices, create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned and given as security in connection with this agreement, other than liens for taxes not delinquent and liens in Bank's favor, except for those already existing as of September 30, 1997. 3.04 LOANS, INVESTMENT, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business and consistent with past practices or make any investment in the securities of any person or other entity inconsistent with company investment guidelines; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business an consistent with past practices. The foregoing will not restrict Borrower from issuing guarantees or otherwise becoming obligated to its landlords for security deposits. 3.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary course of its business consistent with past practices; or except in the ordinary course of business, sell, lease assign or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any dividends, property or other asset accompanies by the leasing back of the same. 4. EVENTS OF DEFAULT The occurrence of any of the following events (each an "Event of Default") shall, at Bank's option, terminate Bank's commitment to lend and make all sums of principal and interest then remaining unpaid on all of Borrower's indebtedness to Bank immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived: 4.01 FAILURE TO PAY. Failure to pay any installment of principal or interest on any indebtedness of Borrower to Bank within 10 days of due date. 4.02 BREACH OF COVENANT. Failure to perform any other term or condition of this Agreement binding upon Borrower within 20 days of notice from Bank. 4.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any respect. Page 4 of 7 4.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business. 4.05 JUDGMENTS, ATTACHMENTS. Any money judgment greater than $100,000, writ or warrant of attachment, or similar process shall be entered or filed against Borrower or any of its assets and shall remain unvacated, unbonded or unstayed for a period later than five days prior to the date of any proposed sale thereunder. 4.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors, if not terminated within 60 days, shall be instituted by or against Borrower and, if instituted against it, shall be consented to. 5. MISCELLANEOUS PROVISIONS 5.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank or any holder of any note issued by Borrower to Bank, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or any note issued in connection with a loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 5.02 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 5.03 INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assigns of Borrower. 5.04 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby agree to submit. 5.05 OFFSET. In addition to and not in limitation of all rights of offset that Bank or other holder of any note issued by Borrower in favor of Bank may have under applicable law, Bank or other holder of such notes shall, upon the occurrence of any Event of Default or any event which with the passage of time or notice would constitute such an Event of Default, have the right to appropriate and apply to the payment of the outstanding balance owing under any such note any and all balances, credits, deposits, accounts or monies of Borrower then or thereafter with Bank or other holder, within ten (10) days after the Event of Default, and notice of the occurrence of any Event of Default by Bank to Borrower. 5.06 SEVERABILITY. Should any one or more provisions of the Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 5.07 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 5.08 ACCOUNTING. All accounting terms shall have the meanings applied under generally accepted accounting principles unless otherwise specified. 5.09 MODIFICATION. This Agreement may be modified only by a writing signed by both parties hereto. Page 5 of 7 5.10 JUDICIAL REFERENCE. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Credit Agreement, any General Security Agreement executed by Borrower in favor of Bank or any Note executed by Borrower in favor of Bank (collectively, in this Section 5.11, the "Agreement") which controversy, dispute or claim is not settled in writing within thirty (30) days after the "CLAIM DATE" (defined as the date on which a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 ET SEQ. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or San Diego County if none (the "COURT"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Section 5.11 shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. (b) Except as expressly set forth in this Section 5.11, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of Page 6 of 7 fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise by determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. This Agreement is executed on behalf of the parties by duly authorized representatives as of February 2, 1998. IMPERIAL BANK ("BANK") By: /s/ Brougham J. Morris --------------------------- Brougham J. Morris, Senior Vice President COASTCAST CORPORATION ("BORROWER") By: /s/ Robert C. Bruning --------------------------- Robert C. Bruning, Chief Financial Officer Page 7 of 7 EX-10.18 5 EXHIBIT 10.18 EXHIBIT 10.18 AMENDMENT TO THE COASTCAST CORPORATION SELECTED EMPLOYEES PENSION PLAN This Amendment to The Coastcast Corporation Selected Employees Pension Plan (the "Plan"), which plan was originally adopted effective January 1, 1989, made pursuant to the right to amend reserved in Section 14.1 of the Plan, amends and modifies the Plan, effective May 12, 1997, as follows: 1. Effective May 12, 1997, Sections 5.1(f) and (g) of the Plan are hereby amended and new subsections (h), (i) and (j) are hereby added to the end thereof to read as follows: (f) $9.50 for Severances occurring on or after December 4, 1990 but before December 4, 1991; (g) $10.00 for Severances occurring on or after December 4, 1991; (h) solely with respect to Participants employed in an Eligible Classification on or after May 12, 1997 but before May 12, 1998, $10.40 for Severances occurring on or after May 12, 1997 but before May 12, 1998; (i) solely with respect to Participants employed in an Eligible Classification on or after May 12, 1998 but before May 12, 1999, $10.60 for Severances occurring on or after May 12, 1998 but before May 12, 1999; and (j) solely with respect to Participants employed in an Eligible Classification on or after May 12, 1999, $10.85 for Severances occurring on or after May 12, 1999. 2. Except as amended above the Plan shall continue in full force and effect without any changes. IN WITNESS WHEREOF, the Company by its duly authorized officer, has caused this Amendment to be executed this 14 day of October, 1997. COASTCAST CORPORATION By: /s/ Richard W. Mora ------------------------------ Richard W. Mora, President and Chief Operating Officer EX-24 6 EXHIBIT 24 EXHIBIT 24 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 3, 1998, appearing in this Annual Report on Form 10-K of Coastcast Corporation for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Long Beach, California March 23, 1998 EX-27.1 7 EXHIBIT 27.1
5 FOR THE YEAR ENDED DECEMBER 31, 1997 1,000 YEAR DEC-31-1998 JAN-01-1997 DEC-31-1997 28,187 0 13,393 500 21,208 66,815 35,733 16,654 90,025 10,020 0 0 0 39,233 39,158 90,025 149,515 149,515 120,982 120,982 10,757 0 0 18,751 7,875 10,876 0 0 0 10,876 1.24 1.22
EX-27.2 8 EXHIBIT 27.2
5 FOR THE YEAR ENDED DECEMBER 31, 1996 AND QUARTERLY PERIODS ENDED JUNE 30, 1996 AND SEPTEMBER 30, 1996 1,000 YEAR 6-MOS 9-MOS DEC-31-1997 DEC-31-1996 DEC-31-1996 JAN-01-1996 APR-01-1996 JUL-01-1996 DEC-31-1996 JUN-30-1996 SEP-30-1996 14,060 10,534 16,639 0 4,630 2,554 12,183 19,048 12,924 400 400 400 21,660 16,231 18,720 53,975 54,484 55,241 34,422 32,543 33,947 14,251 13,722 14,296 76,100 73,610 76,844 9,175 13,902 12,259 0 0 0 0 0 0 0 0 0 38,205 37,970 37,869 28,282 21,738 26,605 76,100 73,610 76,844 148,257 71,852 113,347 148,257 71,852 113,347 114,431 52,496 84,439 114,431 52,496 84,439 9,372 5,374 7,052 0 0 0 0 0 0 25,496 14,590 22,702 10,430 6,068 9,313 15,066 8,522 13,389 0 0 0 0 0 0 0 0 0 15,066 8,522 13,389 1.72 .97 1.53 1.67 .94 1.48
EX-27.3 9 EXHIBIT 27.3
5 FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1997 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-01-1997 JUL-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 7,895 13,913 23,786 0 0 0 13,170 18,321 15,530 400 400 400 29,900 26,703 21,713 55,826 61,611 64,203 34,779 35,362 35,582 14,828 15,531 16,109 77,766 83,458 87,742 9,067 11,550 11,701 0 0 0 0 0 0 0 0 0 38,478 38,545 38,613 29,480 32,296 36,036 77,766 83,458 87,742 29,001 68,939 112,874 29,001 68,939 112,874 24,976 56,932 91,498 24,976 56,932 91,498 2,184 5,462 8,587 0 0 0 0 0 0 2,013 6,920 13,369 815 2,906 5,615 1,198 4,014 7,754 0 0 0 0 0 0 0 0 0 1,198 4,014 7,754 .14 .46 .88 .13 .45 .87
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