-----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, NnPX6ZG9tUYdHU2MPABU7EdZBNZJ3pILIZDfhZBJsfW2cWVUIAmfqPa0yMOWiIcz NBuTMePoUxuGXjKdCIflgw== 0001047469-99-010436.txt : 19990322 0001047469-99-010436.hdr.sgml : 19990322 ACCESSION NUMBER: 0001047469-99-010436 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTCAST CORP CENTRAL INDEX KEY: 0000914479 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 953454926 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12676 FILM NUMBER: 99568418 BUSINESS ADDRESS: STREET 1: 3025 E VICTORIA ST CITY: RANCHO DOMINGUEZ STATE: CA ZIP: 90221 BUSINESS PHONE: 3106380595 MAIL ADDRESS: STREET 1: 3025 EAST VICTORIA ST CITY: RANCHO DOMINIQUEZ STATE: CA ZIP: 90221 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 1-12676 ----------------------- 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. [ ] Aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange on March 15, 1999 ($8.500 per share): $52,255,000. As of March 15, 1999, 7,934,404 shares of the Common Stock, no par value, of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held June 18, 1999, are incorporated by reference into Part III of this Report. 1 COASTCAST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------- PART I PAGE - ---------------------------------------------------------------------------------------- Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 - ---------------------------------------------------------------------------------------- PART II - ---------------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6 Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8 Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 - ---------------------------------------------------------------------------------------- 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 20 - ---------------------------------------------------------------------------------------- PART IV - ---------------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
2 PART I ITEM 1. BUSINESS. GENERAL Coastcast Corporation is one of the largest manufacturers in the world of investment-cast titanium and stainless steel golf clubheads for high-quality, premium-priced metal woods, irons and putters. The Company believes it has manufactured more metal wood clubheads for high-quality, premium-priced golf clubs than any other manufacturer. Over the past two decades, golf clubs with perimeter-weighted heads have become much more popular among golfers because such clubs are more forgiving to off-center hits than other types of clubs. The investment-casting process has become the principal method for manufacturing clubheads because it facilitates the use of perimeter weighting designs and modern alloys and enhances manufacturing precision and uniformity. Manufacturing precision is particularly important in the manufacture of an oversized, thin-walled metal wood which can involve more than 200 separate manufacturing steps to produce a clubhead that meets strict standards for size, weight, strength and finish. The Company also manufactures a variety of investment-cast orthopedic implants and surgical tools (used principally in replacement of hip and knee joints in humans and small animals) and other specialty products, which products accounted for less than 7% of the Company's total sales for the year ended December 31, 1998. In the past three years, golf clubs with titanium alloy heads have become popular. The Company developed the capability of manufacturing titanium clubheads and began shipping titanium clubheads at the end of 1995. Titanium clubheads accounted for approximately 50% and 41% of the Company's total sales in 1997 and 1998, respectively. The Company was incorporated as a California corporation in 1980. BUSINESS STRATEGY - GOLF The Company recognizes that golf club companies are critical to its success and, accordingly, has designed its business strategy to engender customer satisfaction in order to maintain its industry leadership position. The Company's strategy consists of the following principal elements: - MAINTAIN RELIABLE, HIGH-QUALITY MANUFACTURING. The Company believes its manufacturing expertise, quality control, scheduling flexibility, substantial production capacity and its ability to manufacture golf clubheads using stainless steel or titanium alloys differentiate it from others in the industry. The Company endeavors to respond quickly to customers' orders and deliver high-quality clubheads on a timely basis. This capability is particularly important to golf club companies which can experience rapid growth from the increasing popularity of a particular club or set of clubs. - INTEGRATE OPERATIONS. The Company's operations are integrated, from the computer-aided manufacture of some of the tooling used to produce clubheads through foundry operations and finishing processes, including painting. - FOSTER CLOSE CUSTOMER RELATIONSHIPS. The Company believes that its responsive service has been a significant element of its success. The Company endeavors to be a value-added supplier by offering consistently high levels of customer service and support. The Company has a staff of 12 employees dedicated to sales and customer service. The Company maintains its own internal laboratory for testing of customers' products during the production process. The Company typically 3 delivers finished products to its customers within 10 weeks from receipt of the customer's order during peak production periods, within 6 to 8 weeks during other periods and within several weeks or even several days if necessary to accommodate a customer's need for more rapid delivery. With new products, depending on their complexity, a longer turnaround period may be expected. GOLF PRODUCTS The Company's golf products are generally used in golf clubs targeted at the high end of the market. These clubs must satisfy the requirements of highly-skilled amateur and professional golfers, including touring professionals. As such, golf clubs which incorporate clubheads manufactured by the Company are sometimes referred to in the industry as "tour-driven" golf clubs. The Company's clubheads are included in a variety of leading metal woods, irons and putters, some of which are listed below: CALLAWAY -------- GREAT BIG BERTHA HAWKEYE TITANIUM METAL WOODS GREAT BIG BERTHA TITANIUM METAL WOODS BIG BERTHA STEELHEAD METAL WOODS BIG BERTHA WARBIRD METAL WOODS GREAT BIG BERTHA TUNGSTEN TITANIUM IRONS X12 BIG BERTHA IRONS BIG BERTHA IRONS TOUR SERIES WEDGES BIG BERTHA BLADE PUTTERS S2H2 PUTTERS BOBBY JONES PUTTERS CLEVELAND --------- 8T TOUR ACTION TITANIUM METAL WOODS TA3 IRONS RTG WEDGES 588 WEDGES 691 WEDGES 485 WEDGES COBRA ----- KING COBRA TOUR TITANIUM METALWOODS KING COBRA OFFSET TITANIUM METALWOODS TRUSTY RUSTY PWR WEDGES BOBBY GRACE PUTTERS ODYSSEY ------- DUAL FORCE BLADE PUTTERS DF ROSSIE MALLET PUTTERS DUAL FORCE WEDGES VARIABLE DUROMETER PUTTERS TAYLOR MADE ----------- FIRESOLE TITANIUM METAL WOODS TITANIUM BUBBLE 2 IRONS BURNER BUBBLE TITANIUM 2 METAL WOODS TITANIUM 2 FAIRWAY RAYLORS TOUR WOODS BURNER BUBBLE 2 METAL WOODS BURNER TOUR IRONS LCG IRONS TITLEIST -------- 975D/976R TITANIUM METAL WOODS STARSHIP METAL WOODS DCI 981 & 981 SL IRONS DCI 962 IRONS OVERSIZE PLUS IRONS 962 "BLADE" IRONS BOB VOKEY WEDGES 4 NEVER COMPROMISE ---------------- ALPHA PUTTERS BETA PUTTERS GAMMA PUTTERS DELTA PUTTERS ALPHA II PUTTERS KAPPA PUTTERS PING ---- ISI TITANIUM METAL WOODS GOLF PRODUCT CUSTOMERS Over the past fifteen years, the Company has supplied investment-cast clubheads for metal woods, irons and putters to a majority of the top golf companies which produce high-quality, premium-priced golf clubs. Most golf club companies source the three principal components of a golf club--the clubhead, shaft, and grip--from independent suppliers which manufacture these components based on the golf club companies' designs and specifications. The Company currently is a major supplier of stainless steel and titanium clubheads to Callaway Golf Company, which is the producer of the Big Bertha line of steel metal woods and irons and the Great Big Bertha titanium metal woods and irons, and Odyssey putters and wedges, since its acquisition by Callaway in August 1997. In addition, the Company is a supplier of investment-cast steel and titanium clubheads for companies which market the Titleist, Taylor Made, Cleveland, Cobra, Never Compromise, Wilson and Daiwa brands of golf clubs. Substantially all of the clubheads manufactured by the Company are used in high-quality, premium-priced golf clubs. The Company believes that a substantial portion of the clubheads manufactured by it are incorporated in clubs sold in North America, although an increasing portion of the Company's clubheads are incorporated in clubs sold in parts of Asia, Europe and other parts of the world. Historically, a limited number of golf club companies have held a very substantial portion of the total market share for high-quality, premium-priced golf clubs in North America. Currently, some of the more popular high-quality, premium-priced clubs are Callaway metal woods and irons; Taylor Made metal woods and irons; Titleist metal woods, irons and putters; Odyssey putters; Wilson metal woods, irons and putters; and Cobra metal woods. Several of these golf clubheads are marketed by customers of the Company. Callaway (including Odyssey after its acquisition by Callaway in August 1997) accounted for 49%, 34% and 46% of the Company's total sales in 1998, 1997 and 1996, respectively. Fortune Brands (formerly American Brands, owner of Titleist and Cobra) accounted for 22% and 12% of the Company's total sales in 1998 and 1997, respectively. Taylor Made accounted for 14%, 23% and 18% of the Company's total sales in 1998, 1997 and 1996, respectively. A close working relationship typically exists between the Company and its principal golf club customers, and sales and marketing activities are conducted by a limited number of direct sales employees and senior executives of the Company. MANUFACTURING - GOLF INVESTMENT-CASTING PROCESS. Investment-casting is a highly specialized method of making metal products. It has become the principal method for the manufacture of golf clubheads. Previously, woods were made of wood and irons were produced by forging and machining. Greater flexibility in the shape and weight distribution of clubheads is possible with the investment-casting process. Investment-casting facilitates perimeter weighting and the use of modern alloys. It also enhances manufacturing precision and uniformity. The enhanced precision inherent in investment-casting is particularly important in the manufacture of metal woods which can involve more than 200 separate manufacturing steps. 5 The basic steps of investment-casting, in its simplest form, are as follows: - - Produce a metal die (sometimes called a wax mold) based on specifications provided by the customer. - - Inject wax into the die, producing a pattern the exact shape of the final casting. - - Surround (or "invest") the pattern with a ceramic material which is allowed to dry to form a ceramic shell. - - Remove the wax by heat, leaving a cavity in the ceramic shell in the shape of the desired casting. - - Pour molten metal into the cavity in the ceramic shell and allow it to solidify. - - Remove the ceramic material by mechanical and chemical action after the metal solidifies and clean the casting. - - Finish and inspect the casting. METAL ALLOYS. Most clubheads manufactured by the Company are made of titanium or stainless steel alloys. Titanium clubheads have similar tensile strength as stainless steel with approximately one-half the weight of steel. Therefore, a larger oversized clubhead can be manufactured using titanium without increasing clubhead weight. The Company's Gardena facility is devoted to titanium operations. POLISHING AND FINISHING. The Company conducts golf clubhead polishing and finishing operations in its facilities in Mexicali, Mexico. Finishing of the head for an iron or putter can require more than 50 separate steps and finishing of a head for a metal wood can involve as many as 100 separate steps. Most of the clubheads and substantially all of the metal woods manufactured by the Company are finished by it to customer specifications, although some of such clubheads--principally irons--are delivered to customers in an unfinished state. The Company, to assist its customers, at times also polishes and finishes limited quantities of investment-cast clubheads manufactured by other companies. QUALITY CONTROL. The Company believes that its success as a leading supplier of golf clubheads is largely attributable to its quality control measures. The Company attempts to monitor every aspect of the engineering and manufacturing process to assure the quality of the clubheads manufactured by the Company. Particular attention is paid to the quality of raw materials (principally wax, ceramic and metal alloys), gating techniques employed in channeling the flow of molten metal in the ceramic shell in the casting process, and rigorous inspection standards to assure compliance with the customers' product specifications throughout the manufacturing process. REGULATIONS. The Company uses hazardous substances and generates hazardous waste in the ordinary course of its business. The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials. Although the Company has not to date incurred any material liabilities under environmental laws and regulations and believes that its operations are in substantial compliance with applicable laws and regulations, environmental liabilities could arise in the future that may adversely affect the Company's business. See "Discontinued Operations" below. COMPETITION - GOLF The Company operates in a highly competitive environment. The Company competes against a number of manufacturers of investment-cast titanium clubheads for high-quality, premium-priced golf clubs, including but not 6 limited to: Sturm Ruger, Inc., and Cast Alloys, Inc. The Company competes principally against two significant U.S.-based manufacturers (Hitchner Manufacturing Co., Inc. and Cast Alloys, Inc.) of investment-cast steel clubheads. The Company also competes with several foreign manufacturers of investment-cast steel clubheads, including Worldmark Services Ltd. (formerly Fu-Sheng Industrial Co. Ltd.). The Company believes that its position as a leading manufacturer of titanium and steel clubheads for high-quality, premium-priced golf clubs is due to its ability to produce quality clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs, its experience and expertise in manufacturing investment-cast golf clubheads, and its integrated manufacturing operations. Although price is a factor, the Company does not compete solely on price. Quality and service are key success factors in the premium price golf clubhead market. The Company seeks to provide better products and service to its customers than its competitors in order to increase or retain market share. Although the Company's foreign competitors (the principal ones of which are located in Asia) are typically able to offer prices below the Company's prices, the Company believes that it has some competitive advantages over foreign manufacturers, including its ability to deliver clubheads more quickly to its customers due to shorter shipping and lead times. Shipment of clubheads to the United States from Asia usually requires at least two weeks by ocean freight. In addition, the Company believes that its foreign competitors have not demonstrated the same willingness and ability as the Company to commit sufficient resources to meet rapidly growing demand for popular golf clubs in a timely manner. Further, the Company believes that certain of its customers prefer products made in the United States. The Company also competes against golf club companies that internally produce clubheads for their clubs. The Company believes that one of the largest dozen golf club companies, Karsten Manufacturing Co., which produces the Ping brand of clubs, manufactures substantially all of the investment-cast steel clubheads for use in its own clubs. The Company believes that this golf club company produces clubheads for its own use only and does not currently compete with the Company for the business of other golf club companies. However, Karsten Manufacturing Co. has purchased some golf clubheads for its Ping brand from the Company. The Company also faces potential competition from those golf club companies that currently purchase golf clubheads from outside suppliers but may, in the future, manufacture clubheads internally. If the Company's current customers begin manufacturing clubheads internally, the Company's sales would be adversely affected. The Company believes that as long as component suppliers, such as the Company, provide high-quality component golf club parts at competitive prices and reliably, it is unlikely that many golf club companies will commence their own manufacturing. The Company experiences indirect competition from golf club companies that produce golf clubs with clubheads that are not investment-cast. For example, some clubheads for woods are made of wood, some clubheads for irons are forged, some clubheads for putters are machined, and some clubheads are made of graphite or other composites. The Company believes that the investment-cast, metal clubhead has a greater share of the market for clubheads for high-quality, premium priced golf clubs than these alternate types of clubheads. In particular, the metal wood has surpassed the wooden wood as the most popular wood and the investment-cast iron has surpassed the forged iron as the most popular type of iron. Graphite and other composite clubheads have been available for several years, but to date have not become nearly as popular as investment-cast clubheads. EMPLOYEES As of December 31, 1998, the Company employed 3,072 persons on a full-time basis. Of these employees, 2,163 and 184 were employed by Coastcast Corporation, S.A. and Coastcast Tijuana S. de R. L. de C. V., respectively, the Mexican subsidiaries of the Company. The Company considers its employee relations to be good. 7 The production and maintenance employees in the Gardena, California facility are represented by the United Steelworkers of America. There were 130 such employees as of December 31, 1998. The collective bargaining agreement for such employees was effective May 12, 1997, and will expire on May 11, 2000. ORTHOPEDIC IMPLANTS AND SPECIALTY PRODUCTS The Company also manufactures orthopedic implants and surgical tools (used principally for replacement of hip and knee joints in humans and small animals) and other specialty products. The Company believes that the engineering and manufacturing discipline required to manufacture these products has contributed to the Company's ability to manufacture golf products. The Company is endeavoring to develop its steel, titanium, and other alloy investment casting capabilities to potential customers in other commercial and industrial businesses outside of the golf business. At this stage, the Company cannot predict which product opportunities will result in profitable sales, and whether volumes will be significant. The Company believes that its principal competitors in this business are Precision Castparts Corporation and PED Manufacturing. TERMINATION OF CHINA JOINT VENTURE In December 1998, the Company entered into a joint venture agreement with a company in Taiwan to establish a new golf clubhead manufacturing plant in mainland China. That joint venture agreement has since been terminated. The parties concluded that current market conditions were not sufficiently stable to proceed with joint ownership of a new plant in China. The Company incurred no costs in connection with the terminated joint venture other than legal, accounting and administrative costs which were not material. DISCONTINUED OPERATIONS The Company historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business because of declining sales and operating losses on this portion of its business. This business was essentially phased out by June 1994. In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company conducted investigations to determine the source and extent of the contamination. In addition, the Company determined that certain of the contaminates were present prior to its ownership and entered into a remediation cost sharing agreement with the previous owner of the property. In August 1998, the Company sold the Wallingford, Connecticut property, under an agreement which stipulates that the Company and the previous owner bear the liability to remediate the property. The Company incurred a loss on the sale of the property. The loss on sale of the property plus the Company's share of the estimated remediation costs were not adequately covered by the original reserve. As a result, the Company reported a $157,000 loss from discontinued operations, net of income tax benefit, as shown on the Consolidated Statements of Income. ITEM 2. PROPERTIES. The Company's principal executive offices and one of two investment casting manufacturing facilities are located in a 120,000 square foot leased facility in Rancho Dominguez, California, a suburb of Los Angeles. The lease expires in October, 2003 and the Company has a five-year extension option. 8 The Company owns a complex of plants in Gardena, California (which is within approximately five miles of the Rancho Dominguez facilities), comprising an aggregate of approximately 110,000 square feet. These facilities are principally used for manufacturing titanium golf clubheads and tooling. In October 1994, the Company purchased approximately two acres of land contiguous to its Gardena facility. In April 1996, the Company purchased another approximately two acres of land next to the land purchased in October 1994. This land is available for future expansion if and when necessary. Clubhead polishing and finishing operations are conducted in facilities leased by the Company's subsidiary in Mexicali, Mexico under four lease agreements, comprising an aggregate of approximately 141,000 square feet. Three of the leases expire in December 2003, and the other lease expires in June 2001. The Company intends to move most of its steel casting operations to a 186,000 square foot leased investment casting facility for steel products in Tijuana, Mexico. The facility is currently operational. The Company has options to lease sites contiguous to the property as needed for future growth. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to legal actions arising in the ordinary course of business, none of which, individually or in the aggregate, in the opinion of management, after consultation with counsel, will have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Hans H. Buehler 66 Chairman of the Board and Chief Executive Officer Robert C. Bruning 56 Chief Financial Officer and Secretary Ramon F. Ibarra 46 Vice President, Manufacturing Bryan Rolfe 45 Vice President, New Product Development Kathleen H. Wainwright 34 Vice President, Sales
Mr. Buehler is one of the founders of the Company and has been Chairman of the Board since the Company's inception in 1980. Prior to founding the Company, he was President of the Rex Precision Products Division of Alco Standard Corporation, a competitor of the Company that was acquired by the Company in 1987. Mr. Buehler has more than 40 years of experience in the investment-casting business, including more than 30 years of experience in the manufacture of golf clubheads. Mr. Bruning joined the Company in May 1996. From 1989 to 1996, he was Chief Financial Officer of Zacky Farms, Inc., a producer of poultry products. From 1986 to 1988, Mr. Bruning was a partner at Coopers & Lybrand, LLP. Prior to that time he worked for Arthur Andersen, LLP for 19 years, 9 of which he served as a partner. 9 Mr. Ibarra joined the Company in June 1981. Since 1989, he has served as Vice President, Manufacturing of the golf operations of the Company. Prior to such time, he served as the production manager for the Company with respect to all phases of its business and as the plant manager at the facility located in Rancho Dominguez, California. Mr. Rolfe joined the Company in July 1998. From 1997 to June 1998, he was a consultant and President of Slotline Golf Company. From 1995 to 1997, he was the President and Chief Operating Officer of Cleveland Golf Company. Mr. Rolfe worked 20 years at Salomon North America in a variety of management positions, including Director of Operations and Finance from 1991 to 1995. Ms. Wainwright joined the Company in 1988. Since November 1996 she has served as Vice President, Sales. Prior to that time, she served the Company in various capacities, including plant manager at the facility located in Wallingford, Connecticut. Each officer serves at the pleasure of the Board of Directors of the Company. 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 - ----------- ------- ------- 1997 First Quarter $20 1/2 $12 1/2 Second Quarter 14 3/8 9 3/4 Third Quarter 15 3/4 10 3/4 Fourth Quarter 17 7/16 13 1/8 1998 First Quarter 22 5/8 13 3/8 Second Quarter 25 16 1/4 Third Quarter 19 5/8 8 3/8 Fourth Quarter 9 11/16 6 5/8
The approximate number of record holders of common stock of the Company as of March 15, 1999 was 174. DIVIDENDS The Company does not anticipate paying cash dividends in the foreseeable future. Any future determination as to payment of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. STOCK REPURCHASE On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. Under this authorization, the Company purchased 139,400 shares at a cost of $1.5 million for the year ended December 31, 1998. As of December 31, 1998, there were 457,000 shares remaining to be purchased under this authorization. In addition, in August 1998, the Board of Directors authorized the repurchase of a block of 925,400 shares in a privately negotiated transaction at a cost of $10.9 million. BUSINESS RISKS CUSTOMER CONCENTRATION. The Company's sales have been and very likely will continue to be concentrated among a small number of customers. Sales to as few as three customers accounted for 85% of sales during the year ended December 31, 1998 and sales to four customers accounted for 84% of sales during the years ended December 31, 1997 and 1996. Sales to the Company's top customer, Callaway Golf Company (including Odyssey Golf after its acquisition by Callaway in August 1997) accounted for 49% of sales for the year ended December 31, 1998. 11 The Company has no long-term contracts with, and is not the exclusive supplier to, any of its customers, which the Company believes is typical industry practice. Although the Company is now a principal supplier of steel and titanium clubheads to Callaway, there are other actual or potential sources of supply to Callaway and the level of future orders is not known at this time. In the event Callaway increases purchases from other suppliers, the Company could be adversely affected. Although the Company believes that its relationships with its customers are good and its prices are competitive, the loss of a significant customer or a substantial decrease in the sales of golf clubs by a significant customer could have a material adverse effect on the Company's business. COMPETITION. The Company operates in a highly competitive market. All of the Company's products are manufactured according to customers' designs and specifications. Accordingly, the Company competes against other independent domestic and foreign manufacturers which have the capability to manufacture investment-cast clubheads. The Company also experiences indirect competition from golf club companies that manufacture their own clubheads or make golf clubs with clubheads that are not investment-cast or are made of materials the Company is not currently capable of producing. Potential competition also exists from those golf club companies that currently purchase clubheads from the Company but may, in the future, manufacture clubheads internally. The Company believes that it competes principally on the basis of its ability to produce consistently high-quality golf clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs. Some of the Company's current and potential competitors may have greater resources than the Company. NEW PRODUCTS. The Company's historical success has been attributable, in part, to its ability to supply clubheads for companies whose new products rapidly attained a significant portion of the market for high-quality, premium-priced golf clubs. In the future, the Company's success will depend upon its continued ability to manufacture golf clubheads for such companies. There are no assurances, however, of the Company's ability to do so. If a golf club having a head not manufactured by the Company gains significant market share from customers of the Company, the Company's business would be adversely affected. NEW MATERIALS AND PROCESSES. The Company's future success is also dependent on continuing popularity of investment-cast clubheads. A significant loss of market share to golf clubs with heads made by other processes would have a material adverse impact on the Company's business. Similarly, the Company's future success is also dependent on continuing popularity of clubheads made of titanium or stainless steel alloys or other metal alloys which the Company is capable of casting. MANUFACTURING COST VARIATIONS. Consistent manufacture of high-quality products requires constant care in the manufacture and maintenance of tooling, monitoring of raw materials, and inspection for compliance with product specifications throughout the manufacturing process. Investment-casting is labor intensive, and numerous steps are required to produce a finished product. Variations in manufacturing costs and yields occur from time to time, especially with new products during the "learning curve" phase of production and products which are more difficult to manufacture such as titanium or oversized metal wood and iron golf clubheads. The length and extent of these variations are difficult to predict. DEPENDENCE ON POLISHING AND FINISHING PLANT IN MEXICO. A substantial portion of the golf clubheads manufactured by the Company, and some clubheads produced by other clubhead manufacturers, are polished and finished by the Company. The polishing and finishing processes used by the Company are highly labor intensive. The Company performs substantially all of these processes in its facilities in Mexicali, Mexico pursuant to the "maquiladora" duty-free program established by the Mexican and U.S. governments. Such program enables the Company to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico or paying certain Mexican taxes. The Company pays certain expenses of the Mexico facility in Mexican currency and thus is subject to fluctuations in currency value. The Company does not have any exchange rate hedging arrangements to protect against fluctuations in currency value. The Company is also subject to other customary risks of doing business 12 outside the United States. There can be no assurance that the Mexican government will continue the "maquiladora" program or that the Company will continue to be able to take advantage of the benefits of the program. The loss of these benefits could have an adverse effect on the Company's business. The Company believes that the North American Free Trade Agreement has not had any adverse effect on its Mexican operations. HAZARDOUS WASTE. In the ordinary course of its manufacturing process, the Company uses hazardous substances and generates hazardous waste. The Company has no material liabilities as of December 31, 1998 under environmental laws and regulations, and believes that its operations are in substantial compliance with applicable laws and regulations. Nevertheless, no assurance can be given that the Company will not encounter environmental problems or incur environmental liabilities in the future which could adversely affect its business. See also Item 1. Business - Discontinued Operations. DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment are dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions. A decrease in consumer spending on premium-priced golf clubs could have an adverse effect on the Company's business. SEASONALITY; FLUCTUATIONS IN OPERATING RESULTS. The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales in the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurance can be given, however, that these factors will mitigate the impact of seasonality in the future. RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon its senior management, and their ability to attract and retain qualified personnel. The Company does not have any non-competition agreements with any of its employees. There is no assurance that the Company will be able to retain its existing senior management personnel or be able to attract additional qualified personnel. SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common stock of the Company in the public market or the perception that such sales could occur may adversely affect prevailing market prices of such common stock. FLUCTUATIONS IN CALLAWAY GOLF COMPANY SHARES. The Company's common stock value has from time to time fluctuated somewhat in relation to the share value of the Callaway Golf Company. The prevailing market price of the Company's common stock could be adversely impacted by a substantial fluctuation in the market price of Callaway common stock. 13 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere herein.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE DATA) Consolidated Statement of Income Data (1): Sales $144,560 $149,515 $148,257 $76,001 $90,590 Gross Profit 22,365 28,533 33,826 12,914 22,746 Income from operations 11,971 17,776 24,454 5,941 15,317 Income from continuing operations before class action lawsuit settlement expense and income taxes 13,504 18,751 25,496 7,488 16,242 Class action lawsuit settlement expense -0- -0- -0- 2,075 -0- Income from Continuing Operations Data: Income before income taxes 13,504 18,751 25,496 5,413 16,242 Income taxes 5,672 7,875 10,430 2,114 6,420 Income from continuing operations 7,832 10,876 15,066 3,299 9,822 Income from Continuing Operations Per Share--Basic $ 0.91 $ 1.24 $ 1.72 $ 0.36 $ 1.10 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Income from Continuing Operations Per Share--Diluted $ 0.89 $ 1.22 $ 1.67 $ 0.36 $ 1.08 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Weighted Average Shares Outstanding--Basic 8,638 8,798 8,773 9,045 8,926 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Weighted Average Shares Outstanding--Diluted 8,837 8,924 9,038 9,099 9,113 -------- -------- -------- ------- ------- -------- -------- -------- ------- -------
AS OF DECEMBER 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS) Consolidated Balance Sheet Data (1): Working Capital $46,717 $56,795 $44,800 $34,788 $37,475 Total Assets 83,673 90,025 76,100 58,908 56,821 Total debt, including current portion -0- -0- -0- -0- -0- Deferred compensation 295 1,614 438 -0- -0- Shareholders' equity 77,142 78,391 66,487 50,252 51,076
(1) In October 1993, the Company announced its decision to discontinue its aerospace business. See Note 2 of Notes to Consolidated Financial Statements. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table sets forth for the periods indicated operating results expressed in thousands of dollars and as a percentage of sales.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Sales $144,560 100.0 $149,515 100.0 $148,257 100.0 Cost of sales 122,195 84.5 120,982 80.9 114,431 77.2 Gross profit 22,365 15.5 28,533 19.1 33,826 22.8 Selling, general and administrative 10,394 7.2 10,757 7.2 9,372 6.3 Income from continuing operations 11,971 8.3 17,776 11.9 24,454 16.5 Other income, net 1,533 1.1 975 0.6 1,042 .7 Income from continuing operations before income taxes 13,504 9.3 18,751 12.5 25,496 17.2
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Sales decreased $4.9 million, or 3%, to $144.6 million for 1998 from $149.5 million for 1997. Increases in sales of steel alloy metal woods and irons were more than offset by the decrease is sales of titanium alloy clubheads and steel alloy putters. Titanium clubhead sales represented 41% and 50% of total sales for 1998 and 1997, respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf after its acquisition by Callaway Golf Company in August 1997, represented 49% of total sales for 1998 compared to 34% in 1997. There is no assurance that sales to Callaway will represent similar percentages of total sales in the future. Gross profit decreased $6.1 million, or 21%, to $22.4 million for 1998 from $28.5 million for 1997. The gross profit margin decreased to 16% in 1998 from 19% in 1997. The decrease in gross margin was due principally to the significant decrease in the manufacturing volume of titanium clubheads during the last half of 1998, higher costs and lower yields relating to the start-up of three new products lines and start-up expenses related to the Tijuana plant. There was no gross profit for the quarter ended December 31, 1998 compared to $7.2 million for the comparable quarter in 1997. The gross profit margin decreased to 0% in the fourth quarter 1998 versus 20% in the fourth quarter of 1997. This decrease was principally due to the decrease in sales volume coupled with the negative effect of write-downs of inventory and non-producing assets and the start-up of the Tijuana plant. Selling, general and administrative expense decreased by $.4 million, or 4%, to $10.4 million for 1998 from $10.8 million for 1997. The decrease in selling, general and administrative expense was due primarily to decreased expenses related to the reversal of most of the prior years' accrual for the supplemental executive retirement program, partially offset by an increase in severance pay and legal fees and settlement costs related to a threatened proxy contest which was resolved in the fourth quarter. 15 YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Sales increased $1.2 million, or 1%, to $149.5 million for 1997 from $148.3 million for 1996. Decreases in sales of titanium alloy and steel alloy metal wood clubheads were more than offset by increases in sales of titanium alloy iron clubheads, putter clubheads, and steel alloy iron clubheads, and an increase in medical implant sales. Titanium clubhead sales represented approximately 50% and over 55% of total sales for 1997 and 1996, respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf after its acquisition by Callaway Golf Company in August 1997, represented 34% of total sales for 1997 compared to 46% in 1996. Gross profit decreased $5.3 million, or 16%, to $28.5 million for 1997 from $33.8 million for 1996. The gross profit margin decreased to 19% in 1997 from 23% in 1996. The decrease in gross margin was due principally to a change in the product mix from a preponderance of metal woods to irons and putters. Selling, general and administrative expense increased by $1.4 million, or 15%, to $10.8 million for 1997 from $9.4 million for 1996. The increase in selling, general and administrative expense was due primarily to increased payroll and related expenses, expenses related to the supplemental executive retirement program, and increased expenses associated with information systems, partially offset by a decrease in legal expenses. DISCONTINUED OPERATIONS The Company historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business because of declining sales and operating losses on this portion of its business. This business was essentially phased out by June 1994. In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company conducted investigations to determine the source and extent of the contamination. In addition, the Company determined that certain of the contaminates were present prior to its ownership and entered into a remediation cost sharing agreement with the previous owner of the property. In August 1998, the Company sold the Wallingford, Connecticut property, under an agreement which stipulates that the Company and the previous owner bear the liability to remediate the property. The Company incurred a loss on the sale of the property. The loss on sale of the property plus the Company's share of the estimated remediation costs were not adequately covered by the original reserve. As a result, the Company reported a $.2 million loss from discontinued operations, net of income tax benefit, as shown on the Consolidated Statements of Income. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents position at December 31, 1998 was $27.6 million compared to $28.2 million on December 31, 1997, a decrease of $.6 million. Net cash provided by operating activities was $19.1 million for the year ended December 31, 1998. Net income of $7.7 million, depreciation and amortization of $3.4 million, and a decrease in receivables and inventory of $16.2 million, were partially offset by an increase in prepaids and other current assets of $4.4 million, decrease in payables and accrued liabilities of $3.8 million and a decrease in deferred compensation of $1.3 million. Investing activities of $10.6 million consist primarily of $8.8 million of net capital expenditures and the purchase of Company-owned cash surrender value life insurance policies on certain key employees of $2.7 million. Net cash used by financing activities of $9.2 million consists mainly of the repurchase of Company common stock of $12.4 million partially offset by proceeds from exercise of stock options of $3.2 million including related tax benefits. 16 The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5 million and which had no outstanding balance at December 31, 1998. This line of credit, which expires on June 1, 1999, bears interest at the bank's prime rate or LIBOR plus 2%. On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. Under this authorization, the Company purchased 139,400 shares at a cost of $1.5 million for the year ended December 31, 1998. As of December 31, 1998, there were 457,000 shares remaining to be purchased under this authorization. In addition, in August 1998, the Board of Directors authorized the repurchase of a block of 925,400 shares in a privately negotiated transaction at a cost of $10.9 million. The Company believes that its current cash position, the working capital generated by future operations and the ability to borrow should be adequate to meet its financing requirements for current operations and the foreseeable future. QUARTERLY INFORMATION AND SEASONALITY Set forth below is certain unaudited quarterly financial information. The Company believes that all other necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statements included elsewhere herein.
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------------------------------------------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales $45,321 $43,588 $31,627 $24,024 $29,001 $39,938 $43,935 $36,641 Gross profit (loss) 9,649 9,580 3,147 (11) 4,025 7,982 9,369 7,157 Income (loss) before taxes 6,928 6,903 1,175 (1,502) 2,013 4,907 6,449 5,382 Provision for income taxes 2,910 2,899 493 (630) 815 2,091 2,709 2,260 Income from continuing operations 4,018 4,004 682 (872) 1,198 2,816 3,740 3,122 Loss from discontinued operations -0- -0- (157) -0- -0- -0- -0- -0- Net income 4,018 4,004 525 (872) 1,198 2,816 3,740 3,122 Net income per share - basic .45 .44 .06 (.11) .14 .32 .43 .35 Net income per share - diluted .44 .42 .06 (.11) .13 .32 .42 .35
The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales during the six month period that include the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurances can be given, however, that these factors will mitigate the impact of seasonality. 17 BACKLOG As of December 31, 1998, the Company had a backlog of approximately $25.4 million as compared to a backlog of approximately $52.2 million as of December 31, 1997. The Company believes that its current backlog is scheduled to be shipped in the ensuing four months. Although many of the Company's customers release purchase orders months prior to the requested delivery date, these orders are generally cancelable without penalty provided that no production has commenced. If production has commenced, an order is cancelable upon payment of the cost of production. Historically, the Company's backlog generally has been the highest in the second and third quarters due principally to seasonal factors. Backlog is not necessarily indicative of future operating results. YEAR 2000 CONVERSION The Company has identified issues, developed plans and is working to resolve the potential impact of the year 2000 on its business operations and the ability of its computerized information systems to accurately process information that may be date sensitive. Problems might occur if any of its programs recognize a date using "00" as the year 1900 rather than the year 2000. The Company utilizes a number of computer programs. The primary information technology systems it utilizes are (1) the customer order and backlog system, and (2) the accounting and financial systems which include general ledger, accounts payable, accounts receivable, billing and collection, inventory value and location, and fixed assets. The Company believes that its customer order and backlog, and accounting and financial systems will be year 2000 compliant in a timely manner and will not be materially impacted by the year 2000. The maintenance and modifications to these programs are not material and are expensed as incurred. The Company has an experienced and dedicated staff to perform the functions identified and is reasonably confident that it will be year 2000 compliant in a timely manner. The Company has sent questionnaires to its major customers and suppliers. So far, approximately 75% of the major customers and suppliers have responded to the questionnaire and have revealed no circumstances that would cause a significant disruption to business operations. The Company's largest three customers represented 85% of sales for the year ended December 31, 1998. Should any one of these customers experience significant business interruption relating to non-year 2000 compliance, the Company could be materially impacted. To the extent that the Company relies on other third parties, such as banking institutions and major suppliers who are unable to address their year 2000 issues in a timely manner, the Company could be materially impacted. Based on the information collected to date, the Company does not believe that the cost of addressing the year 2000 issues will have material adverse impact on its financial position. The Company does not have a formal contingency plan but the Company plans to devote the resources required to resolve significant year 2000 issues in a timely manner. The Company maintains disaster recovery plans in the event of system failures, which include regular backup of historical information. FORWARD LOOKING INFORMATION This report and other reports of the Company contain or may contain certain forward-looking statements and information that are based on beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions as they relate to the Company or the Company's management, are used to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's 18 operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by the Company, the costs of product development and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors, and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information, other than quarterly information, required by this item is incorporated herein by reference to the consolidated financial statements and supplementary data listed in Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item with respect to directors is incorporated herein by reference to the information contained under the caption "Nomination and Election of Directors" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 18, 1999, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1998. Information with respect to executive officers is included in Part I of this Report. The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information contained under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 18, 1999, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1998. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the information contained under the caption "Executive Compensation and Other Information" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 18, 1999, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated herein by reference to the information contained under the captions "Voting Securities and Principal Shareholders" and "Stock Ownership of Management" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 18, 1999, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1998. 19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a)(1) LIST OF FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying Index to Financial Statements and Schedules are filed as part of this Report. (a)(2) LIST OF FINANCIAL STATEMENT SCHEDULE The financial statement schedule listed in the accompanying Index to Financial Statements and Schedule are filed as part of this Report. (a)(3) LIST OF EXHIBITS The exhibits listed in the accompanying Index to Exhibits are filed as part of this Report. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter of 1998. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 15, 1999 COASTCAST CORPORATION By: /s/ HANS H. BUEHLER --------------------------------- Hans H. Buehler, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 15, 1999. SIGNATURE TITLE /s/ HANS H. BUEHLER - ------------------------ Hans H. Buehler Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ ROBERT C. BRUNING - ------------------------ Robert C. Bruning Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ ROBERT L. GATES - ------------------------ Robert L. Gates Director /s/ EDWIN A. LEVY - ------------------------ Edwin A. Levy Director /s/ LEE E. MIKLES - ------------------------ Lee E. Mikles Director /s/ JONATHAN P. VANNINI - ------------------------ Jonathan P. Vannini Director 21 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER - --------------------------------- ----------- Independent Auditors' Report 23 Consolidated Balance Sheets as of December 31, 1998 and 1997 24 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 25 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1997 and 1998 26 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 27 Notes to Consolidated Financial Statements 28 SCHEDULES Independent Auditors' Report 39 Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1996, 1997 and 1998 40
22 INDEPENDENT AUDITORS' REPORT To the Board of Directors Coastcast Corporation: We have audited the accompanying consolidated balance sheets of Coastcast Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Coastcast Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California February 9, 1999 23 COASTCAST CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------- 1998 1997 ----------- ----------- A S S E T S Current assets: Cash and cash equivalents (Note 1) $27,551,000 $28,187,000 Trade accounts receivable, net of allowance for doubtful accounts of $600,000 and $500,000 at December 31, 1998 and 1997, respectively (Note 1) 7,556,000 12,893,000 Inventories (Notes 1 and 3) 10,326,000 21,208,000 Prepaid income taxes 4,011,000 - Prepaid expenses and other current assets 2,378,000 2,019,000 Deferred income taxes (Notes 1 and 8) 1,131,000 1,597,000 Net assets of discontinued operations (Note 1 and 2) - 911,000 ----------- ----------- Total current assets 52,953,000 66,815,000 Property, plant and equipment, net (Notes 1 and 4) 24,116,000 19,079,000 Cash surrender value of life insurance (Note 7) 6,215,000 3,529,000 Other assets 389,000 602,000 ----------- ----------- $83,673,000 $90,025,000 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,804,000 $ 4,986,000 Accrued liabilities (Note 6) 3,432,000 5,034,000 ----------- ----------- Total current liabilities 6,236,000 10,020,000 Deferred compensation (Note 7) 295,000 1,614,000 ----------- ----------- Total liabilities 6,531,000 11,634,000 Commitments and contingencies (Notes 2, 7 and 9) Shareholders' Equity (Notes 1 and 10): Preferred stock, no par value, 2,000,000 shares authorized; none issued and outstanding Common stock, no par value, 20,000,000 shares authorized; 7,989,404 and 8,849,005 shares issued and outstanding as of December 31, 1998 and 1997, respectively 30,309,000 39,233,000 Retained earnings 46,833,000 39,158,000 ----------- ----------- Total shareholders' equity 77,142,000 78,391,000 ----------- ----------- $83,673,000 $90,025,000 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 24 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------- Sales (Notes 1 and 12) $144,560,000 $149,515,000 $148,257,000 Cost of sales 122,195,000 120,982,000 114,431,000 ------------ ------------ ------------ Gross profit 22,365,000 28,533,000 33,826,000 Selling, general and administrative 10,394,000 10,757,000 9,372,000 ------------ ------------ ------------ Income from operations 11,971,000 17,776,000 24,454,000 Other income, net 1,533,000 975,000 1,042,000 ------------ ------------ ------------ Income before income taxes 13,504,000 18,751,000 25,496,000 Provision for income taxes (Notes 1 and 8) 5,672,000 7,875,000 10,430,000 ------------ ------------ ------------ Income from continuing operations 7,832,000 10,876,000 15,066,000 Loss from discontinued operations (net of income tax benefit of $113,000 - Notes 1 and 2) (157,000) - - ------------ ------------ ------------ Net income $ 7,675,000 $ 10,876,000 $ 15,066,000 ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME PER SHARE (Notes 1 and 11) Income from continuing operations per share - basic $ .91 $ 1.24 $ 1.72 Discontinued operations per share - basic (.02) - - ------------ ------------ ------------ Net income per share - basic $ .89 $ 1.24 $ 1.72 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares outstanding 8,637,724 8,797,734 8,772,815 ------------ ------------ ------------ ------------ ------------ ------------ Income from continuing operations per share - diluted $ .89 $ 1.22 $ 1.67 Discontinued operations per share - diluted (.02) - - ------------ ------------ ------------ Net income per share - diluted $ .87 $ 1.22 $ 1.67 ------------ ------------ ------------ ------------ ------------ ------------ Diluted weighted average shares outstanding 8,837,304 8,924,262 9,038,223 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 25 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
COMMON STOCK ----------------------------------- NUMBER OF SHARES AMOUNT RETAINED EARNINGS TOTAL --------------- ------------ ----------------- ------------ BALANCE AT JANUARY 1, 1996 8,734,694 $37,036,000 $13,216,000 $ 50,252,000 Net income 15,066,000 15,066,000 Stock options exercised, including related tax benefit (Note 10) 56,996 834,000 834,000 Director compensatory stock options 269,000 269,000 Stock options granted to non-employee (Note 10) 269,000 269,000 Repurchase of common stock (13,800) (203,000) (203,000) --------------- ----------- ------------- ------------ BALANCE AT DECEMBER 31, 1996 8,777,890 38,205,000 28,282,000 66,487,000 Net income 10,876,000 10,876,000 Stock options exercised, including related tax benefit (Note 10) 71,115 759,000 759,000 Director compensatory stock options 269,000 269,000 --------------- ----------- ------------- ------------ BALANCE AT DECEMBER 31, 1997 8,849,005 39,233,000 39,158,000 78,391,000 Net income 7,675,000 7,675,000 Stock options exercised, including related tax benefit (Note 10) 205,199 3,184,000 3,184,000 Director compensatory stock options 269,000 269,000 Repurchase of common stock (1,064,800) (12,377,000) (12,377,000) --------------- ----------- ------------- ------------ BALANCE AT DECEMBER 31, 1998 7,989,404 $30,309,000 $46,833,000 $ 77,142,000 --------------- ----------- ------------- ------------ --------------- ----------- ------------- ------------
See accompanying notes to consolidated financial statements. 26 COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,675,000 $10,876,000 $ 15,066,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,375,000 2,838,000 2,479,000 Loss on disposal of property, plant and equipment 1,001,000 305,000 79,000 Change in accrual for disposal of aerospace business (701,000) (180,000) (214,000) Deferred compensation (1,319,000) 1,176,000 438,000 Deferred income taxes 765,000 (656,000) 479,000 Non-employee director compensatory stock options 269,000 269,000 269,000 Changes in operating assets and liabilities: Trade accounts receivable 5,337,000 (1,110,000) (4,585,000) Inventories 10,882,000 452,000 (14,049,000) Prepaid expenses and other current assets (4,370,000) 2,781,000 (2,057,000) Accounts payable and accrued liabilities (3,784,000) 845,000 519,000 ------------ ----------- ------------ Net cash provided by (used in) operating activities 19,130,000 17,596,000 (1,576,000) ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net sales of short-term investments - - 14,718,000 Purchase of property, plant and equipment (8,787,000) (2,127,000) (7,653,000) Proceeds from disposal of property, plant and equipment 687,000 76,000 138,000 Purchase of life insurance policies and other assets (2,473,000) (2,177,000) (1,704,000) ------------ ------------ ------------ Net cash (used in) provided by investing activities (10,573,000) (4,228,000) 5,499,000 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Stock options granted to non-employee - - 269,000 Proceeds from issuance of common stock upon exercise of options, including related tax benefit 3,184,000 759,000 834,000 Repurchase of common stock (12,377,000) - (203,000) ----------- ----------- ------------ Net cash (used in) provided by financing activities (9,193,000) 759,000 900,000 ----------- ----------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (636,000) 14,127,000 4,823,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,187,000 14,060,000 9,237,000 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,551,000 $28,187,000 $ 14,060,000 ----------- ----------- ------------ ----------- ----------- ------------ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 8,546,000 $ 5,544,000 $ 10,500,000 ----------- ----------- ------------ ----------- ----------- ------------
See accompanying notes to consolidated financial statements. 27 COASTCAST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Coastcast Corporation (the "Company") and its wholly owned subsidiary. All material intercompany transactions have been eliminated in consolidation. ORGANIZATION AND OPERATIONS--Coastcast Corporation is incorporated under the laws of the State of California. The Company's principal business is the production of investment-cast golf clubheads, and precision investment castings and related engineering for the medical industry. The Company sells its products to customers of varying strength and financial resources, principally located in the United States. The Company's wholly owned subsidiaries are incorporated under the laws of the Mexican maquiladora program and its principal activities are the production of golf clubheads. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DISCONTINUED OPERATIONS--The Company has historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business, and as of June 1994 had essentially phased out this business (See Note 2). REVENUE RECOGNITION--Revenue is recognized when goods are shipped to the customer. CASH EQUIVALENTS--Cash equivalents consist of short-term investments with original maturities of three months or less. CONCENTRATION OF CREDIT RISK--The Company's financial instruments that are exposed to credit risk consist primarily of accounts receivable. The Company grants credit to substantially all of its customers, performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for potential credit losses. See also Note 12. INVENTORIES--Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation and amortization are provided using primarily straight-line methods over the estimated useful lives of the related assets as follows: Machinery and equipment 5-7 years Building and improvements 5-31 years Furniture, fixtures and computers 3-7 years Autos and trucks 5-7 years
IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of expected 28 future cash flows (undiscounted and without interest charges) is less than the carrying amount of an asset, an impairment loss is recognized. INCOME TAXES--Deferred tax assets and liabilities are recognized based on differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates (see Note 8). EARNINGS PER SHARE--Basic net income per share is based on the weighted average number of shares of common stock outstanding. Diluted net income per share is based on the weighted average number of shares of common stock outstanding and dilutive potential common equivalent shares from stock options (using the treasury stock method). FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. RECLASSIFICATIONS--Certain prior year balances have been restated to reflect current year classifications. ACCOUNTING PRONOUNCEMENT--In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company's required adoption date is January 1, 2000. The Company has not yet evaluated the impact of SFAS No. 133 on its results of operations or financial position but believes that the effect of the adoption of Statement No. 133 will not be material. 2. DISCONTINUED OPERATIONS The plan adopted in October 1993 to phase out the aerospace business was essentially completed by June 1994. In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company conducted investigations to determine the source and extent of the contamination. In addition, the Company determined that certain of the contaminates were present prior to its ownership and entered into a remediation cost sharing agreement with the previous owner of the property. In August 1998, the Company sold the Wallingford, Connecticut property, under an agreement which stipulates that the Company and the previous owner bear the liability to remediate the property. The Company incurred a loss on the sale of the property. The loss on sale of the property plus the Company's share of the estimated remediation costs were not adequately covered by the original reserve. As a result, the Company reported a $157,000 loss from discontinued operations, net of income tax benefit, as shown on the Consolidated Statements of Income. 29 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, ----------------------------- 1998 1997 ----------- ----------- Raw materials and supplies $ 5,137,000 $ 7,578,000 Tooling 225,000 540,000 Work-in-process 4,019,000 12,375,000 Finished goods 945,000 715,000 ----------- ----------- $10,326,000 $21,208,000 ----------- ----------- ----------- -----------
Included above are costs incurred for the production of tooling which is subsequently sold to customers upon acceptance of the first production unit. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, ----------------------------- 1998 1997 ----------- ----------- Land $ 2,186,000 $ 2,186,000 Buildings and improvements 9,945,000 7,436,000 Machinery and equipment 27,861,000 22,656,000 Autos and trucks 857,000 786,000 Furniture, fixtures and computers 3,078,000 2,669,000 ----------- ----------- 43,927,000 35,733,000 Less accumulated depreciation and amortization 19,811,000 16,654,000 ----------- ----------- $24,116,000 $19,079,000 ----------- ----------- ----------- -----------
Depreciation and amortization expense for 1998, 1997 and 1996 was $3,375,000, $2,838,000 and $2,479,000, respectively. 5. SHORT-TERM BORROWINGS The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5,000,000 and which had no outstanding balance at December 31, 1998 and 1997. This line of credit, which expires on June 1, 1999, bears interest at the bank's prime rate or LIBOR plus 2%. 6. ACCRUED LIABILITIES Accrued liabilities consist of the following: 30
DECEMBER 31, ----------------------------- 1998 1997 ----------- ----------- Accrued payroll and related expenses $1,279,000 $2,706,000 Accrued vacation 738,000 1,000,000 Accrued insurance 668,000 434,000 Accrued income taxes - 552,000 Other accrued expenses 747,000 342,000 ------------ ----------- $3,432,000 $5,034,000 ------------ ----------- ------------ -----------
7. RETIREMENT PLANS The Company has a defined benefit plan which covers substantially all of its hourly union employees. The plan provides for a monthly benefit payable for the participant's lifetime commencing the first day of the month following the attainment of age sixty-five in an amount equal to $9.50 to $10.85 multiplied by the participant's credited service. 31 The following table sets forth the plan's change in benefit obligation, change in plan assets and components of net pension cost:
DECEMBER 31, ------------------------------------------------ 1998 1997 1996 ---------- ---------- ---------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $1,778,000 $1,623,000 Service cost 75,000 34,000 Interest cost 139,000 112,000 Actuarial loss from change in assumptions 384,000 - Actuarial loss (gain) (33,000) 52,000 Benefits paid (63,000) (43,000) ---------- ---------- Benefit obligation at end of year 2,280,000 1,778,000 ---------- ---------- ---------- ---------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 2,187,000 1,883,000 Actual return on plan assets 115,000 347,000 Employer contributions - - Benefits paid (63,000) (43,000) ---------- ---------- Fair value of plan assets at end of year 2,239,000 2,187,000 ---------- ---------- ---------- ---------- Funded status (41,000) 409,000 Unrecognized actuarial loss (gain) 101,000 (275,000) Unrecognized prior service cost 91,000 98,000 Unrecognized transition obligation (121,000) (147,000) ---------- ---------- Net amount recognized $ 30,000 $ 85,000 ---------- ---------- ---------- ---------- COMPONENTS OF NET PENSION COST: Service cost $ 75,000 $ 34,000 $ 31,000 Interest cost 139,000 112,000 104,000 Return on plan assets (115,000) (347,000) (159,000) Amortization and deferral (44,000) 199,000 13,000 ---------- ---------- --------- Net pension cost $ 55,000 $ (2,000) $ (11,000) ---------- ---------- --------- ---------- ---------- ---------
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.5% and 7% in 1998 and 1997, respectively. The expected long-term rate of return on assets was 6.5% and 7% for 1998 and 1997, respectively. Effective January 1, 1996, the Company adopted a retirement savings plan (the "401(k) Plan") pursuant to which all U.S. employees who satisfy the age and service requirements under the plan and who are not covered by collective bargaining agreements may defer compensation for income tax purposes under section 401(k) of the Internal Revenue Code of 1986. Participants may contribute up to 15% of their compensation up to the maximum permitted under federal law. The Company is obligated to contribute annually an amount equal to 25% of each participant's contribution up to 6% of that participant's annual compensation. In accordance with the provisions of the 401(k) Plan, the Company matched employee contributions in the amount of $108,000, $78,000 and $102,000 during 1998, 1997 and 1996, respectively. 32 On September 1, 1996, the Company adopted a supplemental executive retirement plan (the "SERP") for certain key employees. Benefits generally accrued at a rate of 7% of final average salary per year of participation in the plan, up to 10 years. In general, participants in the plan only become fully vested with respect to their accrued benefits upon completion of 5 years of plan participation. The benefits under this plan were frozen effective December 31, 1997. In October 1998, the Chairman and Chief Executive Officer voluntarily relinquished all of his rights under this plan. In addition, a former executive has also forfeited his benefits under this plan. An amended and restated supplemental executive retirement plan was approved effective January 1, 1998. The amended plan revises the benefit formula for participants and provides additional flexibility with respect to funding. The following table sets forth the plan's change in benefit obligation, change in plan assets and components of net pension cost:
DECEMBER 31, ------------------------------------------ 1998 1997 1996 ----------- ----------- --------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 4,631,000 $ 3,455,000 Curtailment as of January 1, 1998 (4,032,000) - Service cost 81,000 759,000 Interest cost 83,000 276,000 Actuarial loss from change in assumptions 93,000 224,000 Amendment 186,000 - Actuarial loss (gain) 417,000 (83,000) Benefits paid - - ----------- ----------- Benefit obligation at end of year 1,459,000 4,631,000 ----------- ----------- ----------- ----------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning ----------- ----------- and end of year - - ----------- ----------- ----------- ----------- Funded status (1,459,000) (4,631,000) Unrecognized actuarial loss (gain) 491,000 135,000 Unrecognized prior service cost 177,000 183,000 Unrecognized transitional obligation 496,000 2,699,000 ----------- ----------- (Accrued)/prepaid benefit cost $ (295,000) $(1,614,000) ----------- ----------- ----------- ----------- COMPONENTS OF NET PENSION COST: Service cost $ 81,000 $ 759,000 $ 699,000 Interest cost 83,000 276,000 97,000 Return on plan assets - - - Amortization and deferral 74,000 198,000 66,000 Curtailment/forfeitures (1,807,000) (128,000) (103,000) 1996 amortized (unamortized) expense 250,000 71,000 (321,000) ----------- ----------- --------- Net pension cost (income) $(1,319,000) $ 1,176,000 $ 438,000 ----------- ----------- --------- ----------- ----------- ---------
33 The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% and 7.5% in 1998 and 1997, respectively. To fund this plan, the Company has purchased whole-life insurance contracts on certain participants. The cash surrender value of these policies is in an irrevocable rabbi trust and is presented as an asset of the Company in the accompanying consolidated balance sheets. The Company does not provide any other post-retirement benefits to its employees. 8. INCOME TAXES The provision for income taxes is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ---------- ---------- ----------- Current: Federal $3,675,000 $7,045,000 $ 8,319,000 State 753,000 1,703,000 1,405,000 Foreign 251,000 (73,000) 227,000 ---------- ---------- ----------- 4,679,000 8,675,000 9,951,000 ---------- ---------- ----------- Deferred: Federal 844,000 (651,000) 258,000 State 149,000 (149,000) 221,000 ---------- ---------- ----------- 993,000 (800,000) 479,000 ---------- ---------- ----------- $5,672,000 $7,875,000 $10,430,000 ---------- ---------- ----------- ---------- ---------- -----------
The actual provision on income before income taxes differs from the statutory federal income tax rate due to the following:
YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ---------- ----------- ----------- Federal income taxes at the statutory rate $4,726,000 $6,563,000 $ 8,924,000 State income taxes, net of federal benefit 618,000 1,030,000 1,541,000 California investment tax credit (67,000) (30,000) (349,000) Other items 395,000 312,000 314,000 ---------- ----------- ----------- $5,672,000 $7,875,000 $10,430,000 ---------- ----------- ----------- ---------- ----------- -----------
The tax effects of items comprising the Company's net deferred tax asset are as follows: 34
December 31, --------------------------- 1998 1997 ---------- ---------- Allowance for doubtful accounts $ 254,000 $ 213,000 Deferred compensation 124,000 688,000 Accrued expenses 404,000 557,000 Inventory reserve 750,000 635,000 State income taxes 299,000 455,000 Depreciation (252,000) (381,000) Other items (448,000) (570,000) ---------- ---------- $1,131,000 $1,597,000 ---------- ---------- ---------- ----------
9. COMMITMENTS OPERATING LEASES--The Company leases certain facilities under various operating leases with terms ranging from five to ten years. The leases contain renewal options for additional five or ten year periods which have not been included in the rental commitment schedule below. In general, these leases provide for payment of property taxes, maintenance and insurance by the Company and include rental increases based on the Consumer Price Index. The future minimum lease payments required under these leases as of December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, --------------------------------------------------------- 1999 $ 1,692,000 2000 1,692,000 2001 1,635,000 2002 1,578,000 2003 1,496,000 Thereafter 2,997,000 ----------- $11,090,000 ----------- -----------
Rent expense for 1998, 1997 and 1996 was approximately $1,669,000, $1,106,000 and $1,355,000, respectively. 10. STOCK OPTION PLANS Under the Company's 1996 Amended and Restated Employee Stock Option Plan ("1996 Employee Stock Option Plan"), a maximum of 1,950,000 shares of common stock may be issued pursuant to exercise of options granted to officers and key employees under the plan. Options may be granted under the plan at prices which are equal to or greater than the fair market value of the shares at the date of grant. The options become exercisable over a period of time as determined by the Board of Directors or a committee of directors and generally expire ten years from the date of grant or earlier following termination of employment. As of December 31, 1998, an aggregate of 624,692 shares had been purchased pursuant to exercise of options granted under the plan, options to purchase an aggregate of 853,817 shares were outstanding (including options which were then exercisable to purchase 513,334 shares), and 471,491 shares were available for additional grants of options under the plan. Under the Company's 1995 Amended and Restated Non-Employee Director Stock Option Plan ("1995 Director Stock Option Plan"), a maximum of 200,000 shares of common stock may be issued pursuant to exercise of options 35 granted under the plan to certain non-employee directors. Options are granted under the plan at prices equal to the fair market value of the shares at the date of grant. The options generally become exercisable over a three-year period of time and expire at the earlier of one year after the optionee ceases to be a director or ten years from the date of grant. As of December 31, 1998, no shares had been purchased under the plan, options to purchase an aggregate of 200,000 shares were outstanding under the plan, including 130,000 shares as to which such options were then exercisable, and no shares were available for additional grants of options under the plan. In April 1996, the Board of Directors granted to a non-employee options to purchase 30,000 shares of common stock, all of which were outstanding and exercisable as of December 31, 1998. These options were not issued under the foregoing option plans. In September 1997, the Board of Directors approved the repricing of all employee stock options having exercise prices above the fair market value as of the repricing date. A total of 591,783 shares were repriced. The following summarizes the Company's stock option activity under all arrangements for the three years ended December 31, 1998:
WEIGHTED AVERAGE EXERCISE NUMBER PRICE --------- -------- Balance, January 1, 1996 806,392 $10.73 Granted 689,698 16.81 Forfeited (147,635) 13.36 Exercised (56,996) 12.00 --------- -------- Balance, December 31, 1996 1,291,459 $14.48 Granted 63,540 15.50 Forfeited (70,371) 15.22 Exercised (71,115) 8.60 --------- -------- Balance, December 31, 1997 1,213,513 $13.57 Granted 530,230 14.68 Forfeited (454,727) 15.36 Exercised (205,199) 11.57 --------- -------- Balance, December 31, 1998 1,083,817 $13.75 --------- -------- --------- --------
The following table summarizes information about stock options outstanding at December 31, 1998: 36
WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE - ------------- -------------- -------------- ------------ --------------- ------------ $7.31 - 10.00 170,000 8.0 $ 9.08 110,000 $ 10.00 10.25 - 13.63 398,172 7.9 12.81 162,110 12.19 13.81 - 14.13 378,515 7.1 14.12 311,224 14.13 14.50 - 22.25 97,130 8.0 15.59 60,000 18.75 27.00 - 30.00 40,000 6.9 27.75 30,000 28.00 - ------------- -------------- -------------- ------------ --------------- ------------ $7.31 - 30.00 1,083,817 7.6 $ 13.75 673,334 $ 14.01 - ------------- -------------- -------------- ------------ --------------- ------------ - ------------- -------------- -------------- ------------ --------------- ------------
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for options granted under its 1996 Employee Stock Option Plan or its 1995 Director Stock Option Plan, except for stock options granted to directors on December 13, 1995, which were subject to approval and subsequently approved by shareholders on June 12, 1996. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 ------------ ----------- ----------- Net income: As reported $7,675,000 $10,876,000 $15,066,000 Pro forma 6,869,000 8,749,000 14,460,000 Net income per share - basic: As reported $ .89 $ 1.24 $ 1.72 Pro forma $ .80 $ .99 $ 1.65 Net income per share - diluted: As reported $ .87 $ 1.22 $ 1.67 Pro forma $ .76 $ .95 $ 1.55
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used in 1998, 1997 and 1996, respectively: no dividend yield, expected volatility of 71.8%, 67.0% and 61.8%, risk-free interest rate of 4.3%, 5.8% and 5.9%, and expected term of 4.0, 4.6 and 4.0 years. The weighted average fair value per share of options granted in 1998, 1997 and 1996 was $8.33, $7.42 and $8.25, respectively. 37 11. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 ---------- ----------- ----------- Numerator: Net income $7,675,000 $10,876,000 $15,066,000 ---------- ----------- ----------- Numerator for basic and diluted earnings per share--income available to common stockholders 7,675,000 10,876,000 15,066,000 Denominator: Denominator for basic earnings per share-- weighted-average shares 8,637,724 8,797,734 8,772,815 Effect of dilutive securities: Stock options 199,580 126,528 265,408 ---------- ----------- ----------- Dilutive potential common shares 199,580 126,528 265,408 Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 8,837,304 8,924,262 9,038,223 ---------- ----------- ----------- ---------- ----------- ----------- Basic earnings per share $ 0.89 $ 1.24 $ 1.72 ---------- ----------- ----------- ---------- ----------- ----------- Diluted earnings per share $ 0.87 $ 1.22 $ 1.67 ---------- ----------- ----------- ---------- ----------- -----------
The anti-dilutive options as of December 31, 1998, 1997 and 1996 were 1,023,817, 116,600 and 448,598, respectively. 12. BUSINESS SEGMENTS The Company is engaged principally in the business of manufacturing precision investment-cast titanium and stainless steel golf clubheads, representing 93%, 94% and 94% of sales for the years ended December 31, 1998, 1997 and 1996, respectively. On June 30, 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 131 "Disclosures About Segments of an Enterprise and Related Information" effective for fiscal years beginning after December 15, 1997. In accordance with the selection criteria established by SFAS 131, the Company has determined that it has one business segment. The Company derived 49%, 22% and 14% of sales from three top customers in 1998, 34%, 23%, 15% and 12% of sales from four top customers in 1997; and 46%, 18% and 13% of sales from three top customers in 1996. 38 INDEPENDENT AUDITORS' REPORT To the Board of Directors Coastcast Corporation: We have audited the consolidated financial statements of Coastcast Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 9, 1999; such report is included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule of Coastcast Corporation, listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Los Angeles, California February 9, 1999 39 COASTCAST CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(CHARGED)/ BALANCE AT CREDITED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------------------------------------- ------------ ------------ ------------ ----------- ------------ Allowance for doubtful accounts: Year ended December 31, 1996 (400,000) (400,000) Year ended December 31, 1997 (400,000) (100,000) (500,000) Year ended December 31, 1998 (500,000) (100,000) (600,000)
40 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE 3.1.1 Articles of Incorporation of the Company, as amended (1) 3.1.2 Certificate of Amendment of Articles of Incorporation filed with the California Secretary of State on December 6, 1993 (1) 3.2 Bylaws of the Company (1) 4 Specimen Stock Certificate of the Company (1) 10.1* 1993 Amended and Restated Employee Stock Option Plan ("Employee Plan") (1) 10.2* 1996 Amended and Restated Employee Stock Option Plan ("Employee Plan") (4) 10.3* Non-Employee Director Stock Option Plan ("Director Plan"), together with form of notice of grant and grant summary (1) 10.4* 1995 Amended and Restated Non-Employee Director Stock Option Plan ("Director Plan"), together with form of notice of grant and grant summary (1) 10.5 Agreement. effective May 11, 1997, between the Company and United Steelworkers of America (6) 10.6 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, 44 S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #70 in Mexicali, Mexico 10.7 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, 66 S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Avenue Galaxia #50 in Mexicali, Mexico 10.8 Lease Agreement, dated December 16, 1998, between Coastcast Corporation, 88 S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #30 in Mexicali, Mexico 10.9 Lease Agreement, dated January 22, 1996, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Calle Marte #162 in Mexicali, Mexico (2) 10.10 Guaranty, dated January 26, 1999, by the Company for the lease of the 110 Mexicali, Mexico facilities known as Mercurio #70 10.11 Guaranty, dated January 26, 1999, by the Company for the lease of the 116 Mexicali, Mexico facilities known as Avenue Galaxia #50 41 10.12 Guaranty, dated January 26, 1999, by the Company for the lease of the 122 Mexicali, Mexico facilities known as Mercurio #30 10.13 Guaranty, dated January 23, 1996, by the Company for the lease, dated January 22, 1996 (2) 10.14 Lease Agreement, dated September 1, 1997, between the Company and Watson Land Company for the facilities in Rancho Dominguez, California (5) 10.15 Lease Agreement, dated January 5, 1998, between Coastcast Tijuana, S. De 128 R.L. De C.V. and Frederick Clarke Sanders, Jr., Frederick Sanders Flourie, Monique Sanders Flourie, Scott Michael Sanders Flourie and Carlo E. Muzquiz Davila for real estate in Tijuana, Baja California, Mexico 10.16 Lease Guaranty Agreement, dated August 18, 1998, by the Company for the 146 lease of the Tijuana facility 10.17 Form of Indemnification Agreement (1) 10.18 Revolving Line of Credit Note and Credit Agreement, effective December 23, 1997, between the Company and Imperial Bank (6) 10.19 Revolving Line of Credit Note and First Amendment to Credit Agreement, 150 effective February 1, 1999, between the Company and Imperial Bank 10.20* Amended and Restated Coastcast Corporation Selected Employees Pension Plan, dated October 1, 1987 (1) 10.21* Amendment to the Coastcast Corporation Selected Employees Pension Plan, effective May 12, 1997 (6) 10.22* Coastcast Corporation 401(k) Retirement Plan, effective January 1, 1996 (2) 10.23 Coastcast Corporation S Corporation Termination, Tax Allocation and Indemnification Agreement dated December 1, 1993, between the Company and certain Shareholders(1) 10.24* Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3) 10.25* First Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3) 10.26* Second Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, dated February 18, 1997 (4) 10.27* Trust Agreement by and between Coastcast Corporation and Imperial Trust Company, dated September 1, 1996 (3) 42 10.28* Coastcast Corporation Amended and Restated Supplemental Executive 158 Retirement Plan, effective January 1, 1998 10.29* Amended and Restated Trust Agreement by and between Coastcast 181 Corporation and 180 Imperial Trust Company, dated December 18, 1998 10.30 Agreement dated November 6, 1998 between the Company and Jonathan Vannini (7) 10.31* Agreement dated November 6, 1998 between the Company and Richard W. Mora (7) 10.32* Agreement dated January 15, 1999 between the Company and Richard W. Mora 202 21 Subsidiaries of the Company 206 23 Consent of Independent Auditors 207 27 Financial Data Schedule 208
- --------------------------------- * Management contract or compensating plan or arrangement. (1) Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (Registration No. 33-71294) filed on November 4, 1993, as amended by Amendment No. 1 filed on November 17, 1993, Amendment No. 2 filed on December 1, 1993, and Amendment No. 3 filed on December 9, 1993. (2) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1995. (3) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended September 30, 1996. (4) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1996. (5) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1997. (6) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1997. (7) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1998. 43 EX-10.6 2 EXHIBIT 10.6 LEASE AGREEMENT entered into by and between PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., (hereinafter referred to as PIMSA), herein represented by MR. EDUARDO MANUEL MARTINEZ PALOMERA, Party of the First Part, and by COASTCAST CORPORATION, S.A., (hereinafter referred to as COMPANY), herein represented by MR. WILLIAM LAWRENCE OSBORN, Party of the Second Part, pursuant to the following RECITALS and CLAUSES: R E C I T A L S I. PIMSA hereby declares that: A. It is a company organized and existing under the Mexican General Corporation Law, as per Public Instrument Number 20,032, executed before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. B. Mr. Eduardo Manuel Martinez Palomera is its attorney-in-fact, as it appears in Public Instrument Number 31,019, Volume 569, executed on November 26, 1997, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. C. PIMSA's registration number at the Federal Registry of Taxpayers is: PIM-790807-D96. D. The address at which it has its principal place of business is Avenida Galaxia Number 18-B, Parque Industrial Mexicali I, Mexicali, Baja California, Mexico. E. PIMSA has developed the Mexicali Industrial Park I and the Mexicali Industrial Park II, and is developing the Mexicali Industrial Park III and the Mexicali Industrial Park IV. The Mexicali Industrial Park I, hereinafter referred to as the Industrial Park, is more specifically shown and described on EXHIBIT "A", which is attached hereto and made a part hereof. F. The parties desire to enter into a Lease of Lots 4, 5, 6, 7 and 8 of Block 4, located in the Mexicali Industrial Park I, at Calle Mercurio Number 70, and of certain improvements constructed on the land. The land and PIMSA's Improvements together shall hereinafter be referred to as the Leased Property. G. That it has previously applied for and obtained financial loans through Mexican and Foreign Banking and Lending Institutions, with which funds, buildings and improvements located in the Industrial Parks have been, are being and will be constructed. 2 II. COMPANY hereby declares that: A. It is a company organized under the Mexican General Corporation Law as per Public Instrument Number 28,658, Volume 478, executed on January 26, 1994, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. B. Mr. William Lawrence Osborn verifies his capacity as General Director of Operations and General Manager of COMPANY as per Public Instrument Number 31,457, Volume 577, executed on November 09, 1998, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. C. COMPANY's registration number at the Federal Registry of Taxpayers is: CCO-821123-QA1. D. The address at which it has its principal place of business is Calle Mercurio Number 70, Mexicali Industrial Park I, Mexicali, Baja California, Mexico. Pursuant to the above, the parties agree as follows: C L A U S E S I. SCOPE OF LEASE AGREEMENT. On the express terms and conditions set forth hereinafter, the scope of this Lease Agreement is as follows: PIMSA hereby leases to COMPANY and COMPANY hereby leases from PIMSA the land in the Industrial Park as described on EXHIBIT "B", which is attached hereto and made a part hereof, and PIMSA's Improvements as more specifically described hereinafter in this Lease Agreement. II. CONSTRUCTION BY PIMSA. A. PIMSA has, at its expense, constructed on the land certain improvements which shall hereinafter be referred to as PIMSA's Improvements. Said PIMSA's Improvements have been constructed in accordance with plans and specifications which have been approved by PIMSA and COMPANY and such approval is hereby acknowledged by the parties. B. PIMSA has constructed all PIMSA's Improvements in accordance with all laws, ordinances, regulations, and orders of governmental authorities, and Industrial Park Regulations which are attached hereto as EXHIBIT "C". The term 3 "Improvements" shall, depending on the context, refer to either "PIMSA's Improvements", "COMPANY's Improvements" or both. The term "COMPANY's Improvements" shall refer to those improvements identified in Paragraph III.A. below. C. The Leased Property is considered Ready For Occupancy. D. Upon prior written consent of PIMSA, COMPANY may at any time prior to the commencement of the term hereof, at its sole risk, enter upon and install such trade fixtures and equipment in the Leased Property as it may elect; provided, however that, (I) COMPANY shall provide evidence of insurance satisfactory to PIMSA. III. INSTALLATIONS BY COMPANY. A. COMPANY may, at its expense, install on the Leased Property, such trade fixtures, equipment and furniture as it may deem necessary; provided that such items are installed and are removable without damage to the structural integrity of PIMSA's Improvements. Said trade fixtures, equipment and furniture shall remain COMPANY's property and unless COMPANY is in default hereunder, shall be removed by COMPANY on or before the expiration date of the term hereof. COMPANY may also install temporary improvements in the interior of PIMSA's Improvements upon the Leased Property provided that such COMPANY's Improvements are installed and are removable without damage to the structure of the PIMSA's Improvements. Such COMPANY's Improvements shall remain property of COMPANY and, unless COMPANY is in default hereunder, shall be removed by COMPANY upon expiration of the term hereof or earlier termination of this Lease. COMPANY shall repair, at its sole expense, all damage caused by the installation or removal of trade fixtures, equipment, furniture or temporary COMPANY's Improvements, reasonable wear and tear excepted. B. COMPANY shall perform all installations in accordance with all laws, ordinances, regulations, orders of governmental authorities, and the Industrial Park Regulations which are attached hereto as EXHIBIT "C". IV. LEASE TERM AND COMMENCEMENT DATE. A. LEASE AGREEMENT. This Lease Agreement shall be effective from the Commencement Date until the same is terminated as provided hereinafter, the complete period of tenancy being referred to herein as the "Lease Term". 4 B. INITIAL LEASE TERM. The initial term of this Lease ("Initial Term") shall commence on January 01, 1999, ("Commencement Date") and shall end on the last day of the fifth (5th) consecutive full Lease Year, as said term is hereinafter defined. C. LEASE YEAR. The term "Lease Year" as used herein, shall mean a period of twelve (12) consecutive full calendar months. The First Lease Year shall begin on the Commencement Date of the term hereof, if the Commencement Date of the term hereof shall occur on the first (1st) day of a calendar month; if not then the First Lease Year shall commence upon the first (1st) day of the calendar month next following the Commencement Date of the term hereof. Each succeeding Lease Year shall commence upon the anniversary date of the First Lease Year. D. OPTION TO RENEW. COMPANY shall have the right to extend the term of this Lease Agreement upon the terms, conditions and rentals set forth herein, for one (1) additional period of five (5) years, ("Renewal Terms"), by giving written notice to PIMSA not less than six (6) months prior to the expiration of the Initial Term of this Lease Agreement, so long as COMPANY is not then in default hereunder. V. RENT. A. INITIAL TERM. As minimum monthly rent for the Lease of the Leased Property during the Lease Term hereof, COMPANY shall pay to PIMSA at the address of PIMSA stated above, the monthly sum in Pesos, Mexican Currency, equal to the monthly payments in Dollars, United States Currency, payable as follows: 1. $29,064.00 Dollars, United States Currency, (Twenty Nine Thousand Sixty Four Dollars 00/100, United States Currency), upon the execution of this contract which sum shall be applied to the last three (3) months of the Initial Term. 2. Fifty Seven (57) equal monthly payments of $9,688.00 Dollars (Nine Thousand Six Hundred Eighty Eight Dollars 00/100, Untied States Currency), each payable in advance on the first (1st) day of each month during the Initial Term, commencing on the first (1st) month of the Initial Term. 3. Increase Of Monthly Rent For The Second, Third, Fourth and Fifth Lease Years. On the first (1st) day of the Second, Third, Fourth and Fifth Lease Years the 5 monthly rent for such Lease Years shall be increased by an amount which is equal to the product of: a. The monthly rent then being paid for the immediately preceding Lease Year, in accordance to Clause V.A.2., hereinabove, multiplied by b. The percentage increase in the Index (as hereinafter defined) during the immediately preceding Lease Year. 1) Maximum Rent Increase; No Decrease. Notwithstanding anything herein contained to the contrary, the monthly rent for the Second, Third, Fourth and Fifth Lease Years shall not be increased by an amount greater than ten percent (10%) of the rent for the immediately preceding Lease Year. In no event shall the monthly rent for the Second, Third, Fourth and Fifth Lease Years be decreased below the monthly rent for the immediately preceding Lease Year. 2) Index Defined. The term "Index" shall mean the United States Bureau of Labor Statistics Consumer Price Index for all Urban Consumers (all items, Los Angeles-Anaheim-Riverside area, 1982-1984=100). If the compilation or publication of the Index is transferred to any other department, bureau or agency of the United States government or is discontinued, then the index most similar to the Index shall be used to calculate the rent increases provided for herein. If PIMSA and COMPANY cannot agree on a similar alternate index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of such association, and the decision of the arbitrators shall be binding upon the parties. The cost of such arbitration shall be divided equally between PIMSA and COMPANY. B. ADDITIONAL RENT. With the exception of income tax imposed upon PIMSA, and any tax associated with the Sale or Transfer of the Leased Property or PIMSA's Improvements, which shall be borne by PIMSA, COMPANY will pay to PIMSA, as additional rent, an amount equal to the sum of all taxes and assessments of every kind which are or may be at any time during the Lease Term, levied against the Leased Property or the Lease Agreement, including but not limited to gross sales tax, value added tax or stamp tax, property tax and all such taxes and assessments, levied by any federal, state or municipal government, or any governmental authority. All such taxes and assessments shall be paid by PIMSA and reimbursed by COMPANY within ten (10) days after the receipt showing the payment thereof is presented to COMPANY by PIMSA. 6 In calculating the amount of COMPANY's reimbursement, all taxes which shall become due for the first and last years of the Lease Term shall be apportioned prorata between PIMSA and COMPANY in accordance with the respective number of months during which each party shall be in possession of the Leased Property. C. RENEWAL TERMS. 1. GRANT OF OPTION AND MANNER OF EXERCISE. COMPANY shall have the option to extend the term of this Lease for one (1) period of five (5) years, (the "Extended Term"). COMPANY shall give written notice to PIMSA not less than six (6) months prior to the expiration of the initial term, if COMPANY elects to exercise the option to extend granted herein. 2. RENT. The monthly rent for each Lease Year of the Extended Term shall be equal to the monthly rent for the immediately preceding Lease Year, plus an amount which is equal to the product of: a. The monthly rent paid by COMPANY during the immediately preceding Lease Year, multiplied by b. The percentage increase in the Index (as hereinabove defined) during the immediately preceding Lease Year. Notwithstanding anything herein contained to the contrary, the monthly rent for each Lease Year of the Extended Term shall not be increased by an amount greater than ten percent (10%) of the monthly rent for the immediately preceding Lease Year. In no event shall the monthly rent for any Lease Year of the Extended Term be decreased below the monthly rent for the immediately preceding Lease Year. D. COMPANY will pay the rent provided for in the above Paragraph A. in Pesos, Mexican Currency, at the rate of exchange effective in the free foreign market on the date such sums are paid, or in Dollars, United States Currency, as law and Foreign Exchange Rules allow, as PIMSA may elect. The foregoing will not be considered to impede or hinder PIMSA's possibilities and rights under Clause XII to negotiate or assign this agreement to Mexican, United States or other Foreign Banking or Lending Institutions. E. PRORATION. The rent for any partial month shall be prorated. 7 F. LIQUIDATED DAMAGES. In the event this Lease Agreement is terminated by PIMSA due to a default of COMPANY prior to or during the first (1st) six (6) months of the Lease Term, PIMSA shall be entitled to keep and retain as liquidated damages all sums paid or deposited by COMPANY, as prepaid rent or as a security deposit, in addition to any other rights of PIMSA provided for herein. G. SETOFF. The payment of any rent due under this Lease shall not be withheld or reduced for any reason whatsoever, and COMPANY agrees to assert any claim, demand, or other right against PIMSA only by an independent proceeding. VI. USE. The Leased Property shall be used and occupied for any lawful industrial purpose not in violation of the Industrial Park Regulations attached hereto as EXHIBIT "C". COMPANY shall promptly and adequately comply with all laws, ordinances and orders of all governmental authorities affecting the Leased Property, and its cleanliness, safety and labor facilities applicable to the COMPANY's use of the Leased Property. COMPANY shall not perform or omit any acts that may damage the Leased Property, or be a nuisance, or menace to other occupants of the Industrial Park. VII. INSURANCE. A. COMPREHENSIVE LIABILITY INSURANCE. During the Lease Term, COMPANY shall, at its own expense, obtain and maintain in full force a policy of comprehensive liability insurance including property damage, that insures COMPANY and PIMSA (and such other agents or employees of PIMSA, PIMSA's subsidiaries or affiliates, or PIMSA's assignees or any nominee of PIMSA holding any interest in the Leased Property, including without limitation, the holder of any mortgage encumbering the Leased Property) against liability for injury to persons and property and for death of any persons occurring in or about the Leased Property. The liability to such insurance shall be in the amount of $100,000.00 Dollars (One Hundred Thousand Dollars 00/100, United States Currency). B. FIRE AND OTHER INSURANCE. During the Lease Term, COMPANY at its sole expense, shall obtain and maintain in full force, in the amount of $924,000.00 Dollars (Nine Hundred Twenty Four Thousand Dollars 00/100, United States Currency), or as modified herein, a policy or policies of insurance for fire, lightning, explosion, falling aircraft, smoke, windstorm, earthquake, hail, vehicle damage, volcanic 8 eruption, strikes, civil commotion, vandalism, riots, malicious mischief, debris removal, steam boiler or pressure object or machinery breakage if applicable, and flood insurance, on all the Leased Property, including but not limited to the shell building and interior fit-up. COMPANY shall also obtain and maintain annual rental insurance in the amount of the annual rent provided for herein in favor of PIMSA. COMPANY shall be responsible for maintaining insurance on all of COMPANY's own property. Except for insurance upon COMPANY's property, PIMSA or its appointee shall be named the COMPANY's beneficiary of any and all proceeds from any such policy or policies, as their interests may appear. C. FORM AND DELIVERY OF POLICIES. Each insurance policy referred to in the preceding paragraphs shall be in a form approved by the Department of Finance and Public Credit and written with one or more companies licensed to do insurance in Mexicali, Baja California, Mexico, and shall provide that it shall not be subject to cancellation or change except after at least thirty (30) days prior written notice to PIMSA. The policies, or duly executed certificates for them, together with copies of receipts for payment of the premiums thereof, shall be delivered to PIMSA prior to the Commencement Date of the Lease Term, as provided in Clause IV hereof; all documents verifying the renewal of such policies shall be delivered to PIMSA at least thirty (30) days prior to the expiration of the term of such coverage. Prior to the Commencement Date of the Lease Term, each party shall procure and maintain such insurance covering its own liability and property as each deems appropriate. D. ADDITIONAL INSURANCE. COMPANY shall obtain and maintain in full force and effect such additional amounts of insurance as may be required by PIMSA, from time to time, in accordance with the provisions of this Clause VII, and in order to adequately and properly insure PIMSA of and for the then current replacement value of the Leased Property. E. WAIVER OF SUBROGATION. The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the premises and to the fixtures, personal property, tenant's improvements, and alterations of either PIMSA or COMPANY in or on the premises that are caused by or result from risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. If either party purchases insurance, the policy shall provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any 9 policy. If a party hereto cannot obtain such waiver of subrogation through reasonable efforts, it shall obtain insurance naming the other party as a coinsured under its policy in order to accomplish the intent of this provision. VIII. TAXES AND ASSESSMENTS. COMPANY agrees to pay all taxes and assessments of every kind levied upon any and all personal property of COMPANY, its successors and assigns, whether same shall be or may become a lien upon the Leased Property. All such taxes and assessments shall be paid by COMPANY before the same become delinquent. In the event that this contract is recorded at the Public Registry of Property, COMPANY shall pay all costs of such recordation, including, but not limited to, notary fees, charges, taxes and stamps required in connection therewith. IX. REPAIRS, ALTERATIONS AND IMPROVEMENTS. A. PIMSA. 1. After receipt of written notice from COMPANY, PIMSA at its expense, shall with the minimum interference with COMPANY's normal use of the Leased Property, diligently proceed to repair any structural defects in the roof or exterior bearing walls, excepting normal use, wear and damage. PIMSA shall not be liable for any damages, and shall not be obligated to make any repairs, caused by any negligent act or omissions of COMPANY, its employees, agents, invitees, or contractors. PIMSA shall have no other obligation to maintain or repair any other portion of the Leased Property. PIMSA shall not be liable to COMPANY for any damage resulting from PIMSA's failure to make any repairs, unless COMPANY has notified PIMSA of the need for such repairs, and PIMSA has failed to commence such repairs within ten (10) days after said notice has been given and failed to complete the same in a diligent manner. 2. If PIMSA fails to make the repairs described in Clause IX.A., COMPANY may, but shall not be required to, make or cause such repairs, to be made, and PIMSA shall, on demand, immediately pay to COMPANY the actual cost of the repairs. 10 B. COMPANY. 1. COMPANY, at its expense, shall keep and maintain in good order and repair, except for normal use and wear, all of the Leased Property, except for those obligations of PIMSA stated in Paragraph A.1., of this Clause, including but not limited to, all plumbing, sewage and other utility facilities that are within the Leased Property, as well as fixtures, partitions, walls (interior and exterior, including painting as often as necessary), floors, ceilings, signs, all air conditioning, heating and similar equipment, doors, window, plate glass and all other repairs of every kind and character to the Leased Property. COMPANY at its expense, shall repair all leaks except those caused by structural defects. The plumbing facilities shall not be used for any other purpose than that for which they were constructed. The expense of any breakage, stoppage or damage resulting from a violation of this provision, shall be borne by COMPANY. COMPANY shall store all trash only temporarily within the Leased Property, and shall arrange for the regular pick up of trash at COMPANY's expense. COMPANY shall not burn any trash of any kind in or about the Leased Property or the Industrial Park. 2. COMPANY shall require written consent to make any alteration, improvement or addition to the exterior walls and roof of the Leased Property with a cost exceeding $5,000.00 Dollars (Five Thousand Dollars 00/100, United States Currency); and COMPANY shall not damage any floors, walls, ceilings, partitions, or any wood, stone or ironwork on or about the Leased Property. 3. COMPANY shall keep the Leased Property free and clear of all encumbrances and liens arising out of acts or omissions of COMPANY, including those arising out of acts or construction done or ordered by COMPANY. However, if by reason of any work performed, materials furnished or obligations incurred by COMPANY with any third party, or any other act or omission by COMPANY, PIMSA is made liable or involved in litigation, COMPANY shall hold harmless and indemnify PIMSA including any costs and expenses, and attorneys' fees incurred by reason thereof. Should COMPANY fail fully to discharge any such encumbrances or liens within thirty (30) days after the date it has been instituted, or fail to provide a bond acceptable to PIMSA in the event of contest, PIMSA, at its option, may pay all or any part thereof. If PIMSA pays any such lien or encumbrances or any part thereof, COMPANY shall, on demand, immediately pay PIMSA the amount so paid, together with interest at the rate of twenty percent (20%) per annum from the date of payment. No 11 lien or encumbrance of any character whatsoever created by an act or omission by COMPANY shall in any way attach or affect the rights of PIMSA on the Leased Property. X. UTILITY SERVICES. During the term of this Lease Agreement, COMPANY shall promptly pay for any and all public and other utilities and related services furnished to the Leased Property, including but not limited to, water, gas, electricity and telephone charges. XI. RIGHT-OF-WAY. PIMSA is hereby granted a right-of-way upon, across, over and under the Leased Property for ingress, egress, installations, replacing, repairing and maintaining all utilities, including but not limited to water, gas, telephones and all electricity and any television or radio antenna system serving the Leased Property. By virtue of this right-of-way it shall be expressly permissible for the providing electrical and/or telephone company to erect and maintain the necessary poles and other necessary equipment on the Leased Property; provided that in exercising any right PIMSA may have under this Clause XI, PIMSA agrees to cause only a minimum interference with COMPANY's use and possession of the Leased Property. XII. ASSIGNMENT AND SUBLETTING. A. COMPANY shall have the right, upon prior written notice to PIMSA, to assign or transfer this Lease Agreement, or any interest therein, or permit the use of the Leased Property by any individual, corporation, or entity, or sublease all or part of the Leased Property, provided, however, that in the event of any such assignment, transfer or sublease, COMPANY and its Guarantor shall remain liable for all its obligations under this Lease Agreement. B. PIMSA shall have the right to assign and reassign, from time to time, any or all of the rights and obligations of PIMSA in this Lease Agreement, or any interest therein, without COMPANY's consent, provided that no such assignment or reassignment shall impair any of the rights of COMPANY herein, and provided further, that PIMSA shall remain liable for all of its obligations under this Lease Agreement. In the event of an assignment or reassignment, COMPANY shall not diminish or withhold any of the rents payable hereunder by asserting against such assignee any defense, setoff, or counterclaims which COMPANY may have against PIMSA or any 12 other person. COMPANY hereby specifically waives, with respect to withholding of rent, any preventative measures to guarantee payment of a claim, as provided by the Code of Civil Procedure. XIII. SUBORDINATION. During the term of this Lease Agreement, PIMSA shall have the right to encumber its interest in the Leased Property or in this Lease Agreement for any purpose it deems convenient, and COMPANY shall and hereby does subordinate its interest in this Lease Agreement and in the Leased Property to such encumbrance. However, in the event such encumbrance is foreclosed or judicially enforced, the one who holds the encumbrance shall agree to honor this Lease Agreement and accept the performance by COMPANY of its obligations hereunder. COMPANY shall execute any agreement which may be required by PIMSA in confirmation of such subordination and submit whatever public financial data may normally be requested by any trust, insurance company, bank or other recognized lending institution. Once that PIMSA shall have notified COMPANY in writing that it has assigned its interest in this Lease Agreement to any lending institution as security for a debt or other obligation of PIMSA, PIMSA shall not have the power to amend this Lease Agreement so as to reduce the rent, decrease the term or modify or negate any substantial obligation of COMPANY hereunder, or to accept a rescission of this contract, without the written consent of such lending institution. Such obligation shall continue until the lending institution shall have notified COMPANY in writing that such assignment has been terminated, on the understanding that if PIMSA fails to obtain such lending institution's approval to carry out the foregoing, the amendment of the term above mentioned shall have no effect whatsoever as against such lending institution. In addition, if the lending institution should notify COMPANY in writing requiring the payment of rents hereunder directly to such lending institution or its representative, then COMPANY shall be obligated to pay to such lending institution or its representative such subsequent monthly rental coming due under this Lease Agreement (together with any unpaid rent then past due), until the date on which such lending institution notifies COMPANY authorizing payment of rent to PIMSA or other party entitled thereto. COMPANY understands and agrees that except for the advanced rental payments provided for in Paragraph A.1. of Clause V of this Lease Agreement, PIMSA may not collect any rent more than one 13 (1) month in advance and COMPANY, at the request of PIMSA, shall provide a statement that no such advanced payment has been made; such document shall be binding upon COMPANY as against the lending institution to which this Lease Agreement may be assigned. In addition, the lending institution shall not be bound to recognize those payments made to PIMSA after the COMPANY has received notice requiring payments to be made to such lending institutions. XIV. ACCESS TO LEASED PROPERTY. Without undue interference to COMPANY's operation, PIMSA or its authorized representative shall have the right to enter the Leased Property during all COMPANY business hours, and in emergencies at all times, to inspect the Leased Property and to make repairs, additions, or alterations to the Leased Property. For a period commencing ninety (90) days prior to the termination of this Lease Agreement, PIMSA shall have access to the Leased Property for the purpose of exhibiting it to prospective clients and may post usual for sale or for lease signs upon the Leased Property. Except in case of emergency, PIMSA shall give notice to COMPANY before entering the Leased Property, and COMPANY shall have the right to accompany any representatives of PIMSA and prospective clients. XV. DAMAGE OR DESTRUCTION. A. TOTAL. In the event that the whole or a substantial part of the Leased Property is damaged or destroyed by fire, act of nature, or any other cause, so as to make COMPANY unable to continue the operation of its business, PIMSA shall, within fifteen (15) days from such destruction, determine whether the Leased Property can be restored within six (6) months, and notify COMPANY of said determination. If PIMSA determines that the Leased Property cannot be restored within six (6) months, either PIMSA or COMPANY shall have the right and option to immediately terminate this Lease Agreement, by advising the other thereof by written notice. If PIMSA determines that the Leased Property can be restored within said six (6) months, PIMSA shall, at its own expense, to the extent of the funds awarded to PIMSA from the proceeds of the insurance required under Clause VII hereinabove, proceed diligently to reconstruct PIMSA's Improvements, and in such event, PIMSA shall accept in lieu of rent during the period when COMPANY is substantially deprived of the use of the Leased Property any rental insurance proceeds which may be payable pursuant to rental insurance provided for hereinabove. 14 B. PARTIAL. In the event the said damage caused to the Leased Property does not prevent COMPANY from continuing the normal operation of its business on the Leased Property, PIMSA and COMPANY shall repair said damage, each party reconstructing that portion of the building and interior installations for which it was responsible during the original construction; provided that excluding damage or destruction to the parking lot during the period required for such repair work of PIMSA's Improvements or the improvements, rental payable hereunder by COMPANY shall be equitably prorated to the proportioned interference with COMPANY's use and possession of the Leased Property occasioned by such damage and repair, and in such event, PIMSA shall accept in lieu of the equitably prorated rent payable hereunder, during the period when COMPANY is partially deprived of the use and possession of the Leased Property, any rental insurance proceeds attributable to rent which may be payable pursuant to said insurance provided for hereinabove. XVI. LIMITATION OF LIABILITY. Except for intentional or negligent acts or omissions of PIMSA, its agents or employees, PIMSA shall not be liable to COMPANY or to any other person whatsoever for any loss or damage of any kind or nature caused by the intentional or negligent acts or omissions of COMPANY or other occupants of the Industrial Park or of adjacent property, or the public, or other causes beyond the control of PIMSA, including but not limited to, any failure to furnish, or any interruption of any utility or other services in or about the Leased Property. COMPANY recognizes that additions, replacements, and repairs to the Industrial Park will be made from time to time, provided that the same shall not substantially interfere with COMPANY's use and enjoyment of the Leased Property. XVII. INDEMNIFICATION. COMPANY agrees to indemnify and save PIMSA harmless from any and all claims for damages or losses of any nature whatsoever, arising from negligent act or omission of COMPANY or its contractors, licensees, agents, invitees, or employees, or arising from any accident, injury or damage whatsoever caused to any person or property occurring in or about the Leased Property, or the areas adjoining the Leased Property and from and against all costs and expenses, including attorneys' fees, incurred thereby. 15 PIMSA indemnifies and holds COMPANY harmless from any injury or damage to COMPANY or its agents or employees and from any and all liability for injury to third persons or damage to the property of third persons while lawfully upon the Leased Property occurring by reason of any negligent act or omission of PIMSA, its contractors, licensees, invitees, agents or employees. XVIII. NOTICES. All notices under this Lease Agreement shall be forwarded to the addresses mentioned in the Recitals above, with a copy to the Guarantor of this Lease Agreement, or such other addresses as may from time to time be furnished by the parties hereto. Said notices shall be in writing and if mailed, shall be deemed given ten (10) days after the date of mailing thereof. Duplicate notices shall be sent by certified airmail, postage prepaid, to such additional addresses as may from time to time be requested in writing by the parties hereto. XIX. COMPANY'S DEFAULT. A. Each of the following shall be a default of COMPANY. 1. Vacation or abandonment of Leased Property. 2. Failure to pay any installment of rent due and payable hereunder upon the date when said payment is due, said failure continuing for a period of ten (10) days. 3. Default in the performance of any of COMPANY's covenants, agreements or obligations hereunder, said default, except default in the payment of any installment of rent, continuing for fifteen (15) days after written notice thereof is given from PIMSA to COMPANY; 4. A general assignment by COMPANY for the benefit of creditors; 5. The filing of a voluntary petition in bankruptcy by COMPANY or the filing of an involuntary petition by COMPANY's creditors, said petition remaining undischarged for a period of ninety (90) days. 16 6. The appointment of a Receiver to take possession of substantially all of COMPANY's assets or of this leasehold, said receivership remaining undischarged for a period of ninety (90) days. 7. Attachment, execution or other judicial seizure of substantially all of COMPANY's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy hereof. B. In addition to the above, each of the following shall be considered a default of the COMPANY, if there is in respect to Guarantor: 1. A general assignment by Guarantor for the benefit of creditors; 2. The filing of a voluntary petition in bankruptcy by Guarantor or the filing of an involuntary petition by Guarantor's creditors, said petition remaining undischarged for a period of ninety (90) days; 3. The appointment of a Receiver to take possession of substantially all of Guarantor's assets or of this leasehold, said receivership remaining undissolved for a period of ninety (90) days or; 4. Attachment, execution or other judicial seizure of substantially all of Guarantor's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy thereof. C. Upon occurrence of any one of the foregoing defaults, PIMSA shall have the right, at its option, and in addition to other rights or remedies granted by law, including the right to claim damage, to do either of the following: 1. Immediately rescind this Lease Agreement and eject COMPANY from the Leased Property. 2. Claim Specific Performance. In the case of default as specified above, PIMSA shall, in addition to all other remedies, have the right to declare the entire unpaid balance of rent to the end of the five (5) year Lease Term then in effect, and all other sums due to PIMSA, immediately due and payable, plus interest at the rate of twenty percent (20%) per annum of said sums from the date of such declaration until payment in full, provided that PIMSA shall diligently proceed to lease the Leased Property to another tenant or 17 otherwise make beneficial use thereof in mitigation of damages, rent and all other sums due or payable to PIMSA. In the event the Leased Property is leased to another tenant during the aforesaid five (5) year Lease Term or otherwise used in a beneficial manner: a. PIMSA shall promptly refund to COMPANY that portion of rent and interest paid by COMPANY pursuant to this Paragraph 2. which is allocable to the period of the Lease Term during which the Leased Property was leased to another tenant or otherwise used in a beneficial manner as well as any other allocable sums paid by COMPANY to PIMSA, less any loss or damage incurred by PIMSA as a result of COMPANY's default, or; b. If such rent or other sums have not been paid by COMPANY to PIMSA, PIMSA shall credit such amount(s) to COMPANY. XX. RIGHT TO CURE DEFAULTS. In the event of COMPANY's breach or default of any term or provision herein, PIMSA may, without any obligation to do so, at any time after ten (10) days written notice, cure such breach or default, or make repairs to the Leased Property, for the account and at the expense of COMPANY. If PIMSA, by reason of such breach or default, pays any money, or is compelled to incur any expense, including attorneys' fees, the sums so paid or incurred by PIMSA with all interest, costs, and damages, shall be paid by COMPANY to PIMSA on the first (1st) day of the month following the incurring of such expenses. If any installment of rent or any other payment is not promptly paid when due, it shall bear interest of twenty percent (20%) per annum from the date on which it becomes due until paid; but this provision is not intended to relieve the COMPANY from fulfilling its obligations hereunder in the time and in the manner specified in this agreement. The foregoing interest, expenses and damages shall be recoverable from COMPANY by exercise of PIMSA's remedies hereinabove set forth. Efforts by PIMSA to mitigate the damages caused by COMPANY's breach of this Lease shall not be construed to be a waiver of PIMSA's right to recover damages under this Clause XX. Nothing in this Clause XX affects the right of PIMSA to indemnification by COMPANY in accordance with Clause XVII hereinabove for liability arising prior to the termination of this Lease for personal injuries or property damage. 18 XXI. WAIVER. In the event PIMSA or COMPANY does not compel the other to comply with any of the obligations hereunder, such action or omission shall not be construed as a waiver of a subsequent breach of the same or any other provision. Any consent or approval shall not be deemed to waive or render unnecessary the consent or approval of any subsequent or similar act by COMPANY or PIMSA. XXII. CERTIFICATES. COMPANY shall, within ten (10) days of receipt of a written request made by PIMSA, deliver to PIMSA a statement in writing certifying that this Lease Agreement is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified); the dates to which the rent and any other charges have been paid in advance, and that PIMSA's Improvements have been satisfactorily completed. It is intended that any such statement may be relied upon by any person, prospective purchaser, or lending institution interested in the Leased Property. XXIII. HOLDING OVER. If COMPANY should remain in possession of the Leased Property after the expiration of this Lease, COMPANY shall pay a minimum monthly rent equal to twice the then minimum monthly rent then paid in the month immediately preceding the month in which the holdover period began until COMPANY has delivered to PIMSA the Leased Property, or executed a new Lease Agreement. This provision shall not be construed as granting any right to COMPANY to remain in possession of the Leased Property after the expiration of the Lease Term. COMPANY shall indemnify PIMSA against any loss or liability resulting from delay by COMPANY in surrendering the Leased Property, if such loss or liability is founded on said delay, less any amounts paid pursuant to this clause. The parties agree that COMPANY shall quit and surrender the Leased Property at the expiration of this Lease Agreement, waiving the right provided by law. XXIV. SURRENDER. A. On the last day of the term of this Lease Agreement, or the sooner termination thereof pursuant to other provisions hereof, COMPANY shall quit and surrender the Leased Property in the same conditions as received by COMPANY, and restore the premises to a clean and good condition (normal 19 wear and tear excepted) together with PIMSA's Improvements that may have been made in the same. Prior to termination of this Lease Agreement, COMPANY shall have removed all of its property in accordance with Clause III hereof and all property not removed shall be deemed abandoned by COMPANY. COMPANY shall repair and restore the Leased Property to a good and clean condition, normal wear and tear excepted, while removing the COMPANY's property. XXV. QUIET ENJOYMENT. PIMSA agrees that COMPANY, upon paying the rent and all other charges provided for herein and upon complying with all of the terms and provisions of this Lease Agreement, shall lawfully and quietly occupy and enjoy the Leased Property during the Lease Term. XXVI. ATTORNMENT. COMPANY shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust made by PIMSA, its successors or assigns, encumbering the Leased Property, or any part thereof, if so requested, attorn to the purchaser upon such foreclosure or sale and recognize such purchaser as the lessor under this Lease. XXVII. ENVIRONMENTAL PROTECTION LAW. PIMSA hereby states that the Leased Property, its soil and underground are free and clear of any hazardous materials, wastes or contaminants. Nevertheless, PIMSA shall indemnify and save the COMPANY harmless from and against losses, demands, claims, payments, suits, actions and judgments of any nature and description brought against it by reason of the fact that contaminants existed on the Leased Property, soil and/or underground, or were deposited there, prior to date of signature of this Agreement. The COMPANY will be responsible for any losses, damages or injuries caused by the contaminants which are deposited on the Leased Property, soil or underground after date of signature of this Agreement. It will be the sole responsibility of the COMPANY to comply with all Federal State or Municipal environmental laws, rules and dispositions, which must be complied with by the COMPANY pursuant with the industrial activities it will perform in the Leased Property and therefore, must obtain the required licenses, authorizations, permits and any other document that it must possess pursuant with the aforestated environmental rules. 20 Furthermore, the COMPANY will be solely and exclusively responsible for any demand, claim, or proceeding initiated against PIMSA, and which results from acts or omissions by the COMPANY, regarding the handling of hazardous or toxic materials or wastes located in or moved to, from or through the Leased Property. The COMPANY in these cases, shall indemnify and save PIMSA harmless from and against losses, demands, claims, payments, suits, actions and judgments of any competent environmental authority. XXVIII. MISCELLANEOUS. A. This document contains all of the agreements and conditions made between the parties, and may not be modified orally in any manner other than by a written agreement signed by the authorized representative of the parties. B. If any term, covenant, condition or provision of this Lease Agreement, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction, to be invalid, void or unenforceable, the remainder of the terms, covenants, conditions or provisions of this Lease Agreement, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated. C. In the event that either party should bring an action against the other party for the possession of the Leased Property, or for the recovery of any sum due hereunder, or because of the breach or default of any covenant in this Lease Agreement, the prevailing party shall have the right to collect from the other party its costs and expense, including attorneys' fees. D. Every payment and performance required by this Lease Agreement, shall be paid and performed precisely on the date specified for such payment or performance and no delay or extension thereof shall be permitted. E. The titles and subtitles in these clauses of this document shall have no effect on the interpretation of the terms and provisions contained in this Lease Agreement. F. The parties agree that this Lease Agreement be governed by the Laws of the State of Baja California. For everything pertaining to the interpretation and compliance of this Lease Agreement the parties thereby expressly submit to the jurisdiction of the Civil Courts of the City of Mexicali, State of Baja California, waiving any other jurisdiction which 21 might be applicable by reason of their present or future domiciles or otherwise. G. This Lease Agreement shall be executed in Spanish and English. However, in the event a dispute or other inconsistency should arise regarding interpretation or meaning of this Lease Agreement, the English version shall control. H. Whenever the prior consent of either party, written or otherwise, is required as a condition for any act by the other party under this Lease Agreement, such party agrees not to arbitrarily or unreasonably withhold such consent. I. Each party shall execute such further documents as shall be requested by the other party, but only to the extent that the effect of said documents is to give legal effect to rights set forth in the Lease Agreement. J. COMPANY hereby covenants to PIMSA, and PIMSA relies upon said covenant as a material inducement to enter into this Lease, that COMPANY will deliver to PIMSA, concurrently with the execution and delivery hereof a Guaranty of this Lease in the form attached hereto as EXHIBIT "D", executed by, COASTCAST CORPORATION, or by such other Guarantor as may be acceptable to PIMSA. K. Submission of this instrument for examination or signature by COMPANY does not constitute a reservation of or option to Lease, and it is not effective as a Lease or otherwise until execution and delivery by both PIMSA and COMPANY. L. This Lease and each of its covenants and conditions shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions hereof. Whenever in this Lease Agreement a reference is made to PIMSA, such reference shall be deemed to refer to the person in whom the interest of the lessor hereunder shall be vested. Any successor or assignee of COMPANY who accepts an assignment or the benefit of this Lease Agreement and enters into possession or enjoyment hereunder shall thereby assume and agree to perform and be bound by the covenants and conditions thereof. M. In the event the Government of Mexico or any subdivision thereof appropriates, forcibly buys or in any other way takes over the assets or business of the lessee, and without due cause by COMPANY prevents COMPANY from doing 22 business in Mexico, the COMPANY may upon written notice to PIMSA terminate this Lease Agreement without liability or penalty for such termination and without further liability for rental payments due under this Lease Agreement but without prejudice to the rights of PIMSA and COMPANY to claim from the corresponding authority the damages caused. XXIX. Rider number I, PIMSA's Improvements, is attached hereto and by this reference made a part hereof. IN WITNESS WHEREOF, the parties have executed this Lease Agreement as of the 16th day of December, nineteen hundred ninety eight. "PIMSA" "COMPANY" /s/ Eduardo Manuel Martinez /s/ William Lawrence Osborn - --------------------------- --------------------------- PARQUE INDUSTRIAL MEXICALI, COASTCAST CORPORATION, S.A. S.A. DE C.V. Mr. William Lawrence Osborn Mr. Eduardo Manuel Martinez General Director of Operations Palomera and General Manager Executive Vice President W I T N E S S E S /s/ [ILLEGIBLE] /s/ Hans H. Buehler - --------------------------- --------------------------- EX-10.7 3 EXHIBIT 10.7 Exhibit 10.7 LEASE AGREEMENT entered into by and between PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., (hereinafter referred to as PIMSA), herein represented by MR. EDUARDO MANUEL MARTINEZ PALOMERA, Party of the First Part, and by COASTCAST CORPORATION, S.A., (hereinafter referred to as COMPANY), herein represented by MR. WILLIAM LAWRENCE OSBORN, Party of the Second Part, pursuant to the following RECITALS and CLAUSES: R E C I T A L S I. PIMSA hereby declares that: A. It is a company organized and existing under the Mexican General Corporation Law, as per Public Instrument Number 20,032, executed before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. B. Mr. Eduardo Manuel Martinez Palomera is its attorney-in-fact, as it appears in Public Instrument Number 31,019, Volume 569, executed on November 26, 1997, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. C. PIMSA's registration number at the Federal Registry of Taxpayers is: PIM-790807-D96. D. The address at which it has its principal place of business is Avenida Galaxia Number 18-B, Parque Industrial Mexicali I, Mexicali, Baja California, Mexico. E. PIMSA has developed the Mexicali Industrial Park I and the Mexicali Industrial Park II, and is developing the Mexicali Industrial Park III and the Mexicali Industrial Park IV. The Mexicali Industrial Park I, hereinafter referred to as the Industrial Park, is more specifically shown and described on EXHIBIT "A", which is attached hereto and made a part hereof. F. The parties desire to enter into a Lease of Lots 4, 5, 6, 7, 8 and 9 of Block 5, located in the Mexicali Industrial Park I, at Avenida Galaxia Number 50, and of certain improvements constructed on the land. The land and PIMSA's Improvements together shall hereinafter be referred to as the Leased Property. G. That it has previously applied for and obtained financial loans through Mexican and Foreign Banking and Lending Institutions, with which funds, buildings and improvements located in the Industrial Parks have been, are being and will be constructed. 2 II. COMPANY hereby declares that: A. It is a company organized under the Mexican General Corporation Law as per Public Instrument Number 28,658, Volume 478, executed on January 26, 1994, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. B. Mr. William Lawrence Osborn verifies his capacity as General Director of Operations and General Manager of COMPANY as per Public Instrument Number 31,457, Volume 577, executed on November 09, 1998, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. C. COMPANY's registration number at the Federal Registry of Taxpayers is: CCO-821123-QA1. D. The address at which it has its principal place of business is Calle Mercurio Number 70, Mexicali Industrial Park I, Mexicali, Baja California, Mexico. Pursuant to the above, the parties agree as follows: C L A U S E S I. SCOPE OF LEASE AGREEMENT. On the express terms and conditions set forth hereinafter, the scope of this Lease Agreement is as follows: PIMSA hereby leases to COMPANY and COMPANY hereby leases from PIMSA the land in the Industrial Park as described on EXHIBIT "B", which is attached hereto and made a part hereof, and PIMSA's Improvements as more specifically described hereinafter in this Lease Agreement. II. CONSTRUCTION BY PIMSA. A. PIMSA has, at its expense, constructed on the land certain improvements which shall hereinafter be referred to as PIMSA's Improvements. Said PIMSA's Improvements have been constructed in accordance with plans and specifications which have been approved by PIMSA and COMPANY and such approval is hereby acknowledged by the parties. B. PIMSA has constructed all PIMSA's Improvements in accordance with all laws, ordinances, regulations, and orders of governmental authorities, and Industrial Park Regulations which are attached hereto as EXHIBIT "C". The term 3 "Improvements" shall, depending on the context, refer to either "PIMSA's Improvements", "COMPANY's Improvements" or both. The term "COMPANY's Improvements" shall refer to those improvements identified in Paragraph III.A. below. C. The Leased Property is considered Ready For Occupancy. D. Upon prior written consent of PIMSA, COMPANY may at any time prior to the commencement of the term hereof, at its sole risk, enter upon and install such trade fixtures and equipment in the Leased Property as it may elect; provided, however that, (I) COMPANY shall provide evidence of insurance satisfactory to PIMSA. III. INSTALLATIONS BY COMPANY. A. COMPANY may, at its expense, install on the Leased Property, such trade fixtures, equipment and furniture as it may deem necessary; provided that such items are installed and are removable without damage to the structural integrity of PIMSA's Improvements. Said trade fixtures, equipment and furniture shall remain COMPANY's property and unless COMPANY is in default hereunder, shall be removed by COMPANY on or before the expiration date of the term hereof. COMPANY may also install temporary improvements in the interior of PIMSA's Improvements upon the Leased Property provided that such COMPANY's Improvements are installed and are removable without damage to the structure of the PIMSA's Improvements. Such COMPANY's Improvements shall remain property of COMPANY and, unless COMPANY is in default hereunder, shall be removed by COMPANY upon expiration of the term hereof or earlier termination of this Lease. COMPANY shall repair, at its sole expense, all damage caused by the installation or removal of trade fixtures, equipment, furniture or temporary COMPANY's Improvements, reasonable wear and tear excepted. B. COMPANY shall perform all installations in accordance with all laws, ordinances, regulations, orders of governmental authorities, and the Industrial Park Regulations which are attached hereto as EXHIBIT "C". IV. LEASE TERM AND COMMENCEMENT DATE. A. LEASE AGREEMENT. This Lease Agreement shall be effective from the Commencement Date until the same is terminated as provided hereinafter, the complete period of tenancy being referred to herein as the "Lease Term". 4 B. INITIAL LEASE TERM. The initial term of this Lease ("Initial Term") shall commence on January 01, 1999, ("Commencement Date") and shall end on the last day of the fifth (5th) consecutive full Lease Year, as said term is hereinafter defined. C. LEASE YEAR. The term "Lease Year" as used herein, shall mean a period of twelve (12) consecutive full calendar months. The First Lease Year shall begin on the Commencement Date of the term hereof, if the Commencement Date of the term hereof shall occur on the first (1st) day of a calendar month; if not then the First Lease Year shall commence upon the first (1st) day of the calendar month next following the Commencement Date of the term hereof. Each succeeding Lease Year shall commence upon the anniversary date of the First Lease Year. D. OPTION TO RENEW. COMPANY shall have the right to extend the term of this Lease Agreement upon the terms, conditions and rentals set forth herein, for one (1) additional period of five (5) years, ("Renewal Terms"), by giving written notice to PIMSA not less than six (6) months prior to the expiration of the Initial Term of this Lease Agreement, so long as COMPANY is not then in default hereunder. V. RENT. A. INITIAL TERM. As minimum monthly rent for the Lease of the Leased Property during the Lease Term hereof, COMPANY shall pay to PIMSA at the address of PIMSA stated above, the monthly sum in Pesos, Mexican Currency, equal to the monthly payments in Dollars, United States Currency, payable as follows: 1. $32,871.00 Dollars, United States Currency, (Thirty Two Thousand Eight Hundred Seventy One Dollars 00/100, United States Currency), upon the execution of this contract which sum shall be applied to the last three (3) months of the Initial Term. 2. Fifty Seven (57) equal monthly payments of $10,957.00 Dollars (Ten Thousand Nine Hundred Fifty Seven Dollars 00/100, United States Currency), each payable in advance on the first (1st) day of each month during the Initial Term, commencing on the first (1st) month of the Initial Term. 3. Increase of Monthly Rent For the Second, Third, Fourth and Fifth Lease Years. On the first (1st) day of the Second, Third, Fourth and Fifth Lease Years the 5 monthly rent for such Lease Years shall be increased by an amount which is equal to the product of: a. The monthly rent then being paid for the immediately preceding Lease Year, in accordance to Clause V.A.2., hereinabove, multiplied by b. The percentage increase in the Index (as hereinafter defined) during the immediately preceding Lease Year. 1) Maximum Rent Increase; No Decrease. Notwithstanding anything herein contained to the contrary, the monthly rent for the Second, Third, Fourth and Fifth Lease Years shall not be increased by an amount greater than ten percent (10%) of the rent for the immediately preceding Lease Year. In no event shall the monthly rent for the Second, Third, Fourth and Fifth Lease Years be decreased below the monthly rent for the immediately preceding Lease Year. 2) Index Defined. The term "Index" shall mean the United States Bureau of Labor Statistics Consumer Price Index for all Urban Consumers (all items, Los Angeles-Anaheim-Riverside area, 1982-1984=100). If the compilation or publication of the Index is transferred to any other department, bureau or agency of the United States government or is discontinued, then the index most similar to the Index shall be used to calculate the rent increases provided for herein. If PIMSA and COMPANY cannot agree on a similar alternate index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of such association, and the decision of the arbitrators shall be binding upon the parties. The cost of such arbitration shall be divided equally between PIMSA and COMPANY. B. ADDITIONAL RENT. With the exception of income tax imposed upon PIMSA, and any tax associated with the Sale or Transfer of the Leased Property or PIMSA's Improvements, which shall be borne by PIMSA, COMPANY will pay to PIMSA, as additional rent, an amount equal to the sum of all taxes and assessments of every kind which are or may be at any time during the Lease Term, levied against the Leased Property or the Lease Agreement, including but not limited to gross sales tax, value added tax or stamp tax, property tax and all such taxes and assessments, levied by any federal, state or municipal government, or any governmental authority. All such taxes and assessments shall be paid by PIMSA and reimbursed by COMPANY within ten (10) days after the receipt showing the payment thereof is presented to COMPANY by PIMSA. 6 In calculating the amount of COMPANY's reimbursement, all taxes which shall become due for the first and last years of the Lease Term shall be apportioned prorata between PIMSA and COMPANY in accordance with the respective number of months during which each party shall be in possession of the Leased Property. C. RENEWAL TERMS. 1. GRANT OF OPTION AND MANNER OF EXERCISE. COMPANY shall have the option to extend the term of this Lease for one (1) period of five (5) years, (the "Extended Term"). COMPANY shall given written notice to PIMSA not less than six (6) months prior to the expiration of the initial term, if COMPANY elects to exercise the option to extend granted herein. 2. RENT. The monthly rent for each Lease Year of the Extended Term shall be equal to the monthly rent for the immediately preceding Lease Year, plus an amount which is equal to the product of: a. The monthly rent paid by COMPANY during the immediately preceding Lease Year, multiplied by b. The percentage increase in the Index (as hereinabove defined) during the immediately preceding Lease Year. Notwithstanding anything herein contained to the contrary, the monthly rent for each Lease Year of the Extended Term shall not be increased by an amount greater than ten percent (10%) of the monthly rent for the immediately preceding Lease Year. In no event shall the monthly rent for any Lease Year of the Extended Term be decreased below the monthly rent for the immediately preceding Lease Year. D. COMPANY will pay the rent provided for in the above Paragraph A. in Pesos, Mexican Currency, at the rate of exchange effective in the free foreign market on the date such sums are paid, or in Dollars, United States Currency, as law and Foreign Exchange Rules allow, as PIMSA may elect. The foregoing will not be considered to impede or hinder PIMSA's possibilities and rights under Clause XII to negotiate or assign this agreement to Mexican, United States or other Foreign Banking or Lending Institutions. E. PRORATION. The rent for any partial month shall be prorated. 7 F. LIQUIDATED DAMAGES. In the event this Lease Agreement is terminated by PIMSA due to a default of COMPANY prior to or during the first (1st) six (6) months of the Lease Term, PIMSA shall be entitled to keep and retain as liquidated damages all sums paid or deposited by COMPANY, as prepaid rent or as a security deposit, in addition to any other rights of PIMSA provided for herein. G. SETOFF. The payment of any rent due under this Lease shall not be withheld or reduced for any reason whatsoever, and COMPANY agrees to assert any claim, demand, or other right against PIMSA only by an independent proceeding. VI. USE. The Leased Property shall be used and occupied for any lawful industrial purpose not in violation of the Industrial Park Regulations attached hereto as EXHIBIT "C". COMPANY shall promptly and adequately comply with all laws, ordinances and orders of all governmental authorities affecting the Leased Property, and its cleanliness, safety and labor facilities applicable to the COMPANY's use of the Leased Property. COMPANY shall not perform or omit any acts that may damage the Leased Property, or be a nuisance, or menace to other occupants of the Industrial Park. VII. INSURANCE. A. COMPREHENSIVE LIABILITY INSURANCE. During the Lease Term, COMPANY shall, at its own expense, obtain and maintain in full force a policy of comprehensive liability insurance including property damage, that insures COMPANY and PIMSA (and such other agents or employees of PIMSA, PIMSA's subsidiaries or affiliates, or PIMSA's assignees or any nominee of PIMSA holding any interest in the Leased Property, including without limitation, the holder of any mortgage encumbering the Leased Property) against liability for injury to persons and property and for death of any persons occurring in or about the Leased Property. The liability to such insurance shall be in the amount of $100,000.00 Dollars (One Hundred Thousand Dollars 00/100, United States Currency). B. FIRE AND OTHER INSURANCE. During the Lease Term, COMPANY at its sole expense, shall obtain and maintain in full force, in the amount of $1,045,000.00 Dollars (One Million Forty Five Thousand Dollars 00/100, United States Currency), or as modified herein, a policy or policies of insurance for fire, lightning, explosion, falling aircraft, smoke, windstorm, earthquake, hail, vehicle damage, volcanic 8 eruption, strikes, civil commotion, vandalism, riots, malicious mischief, debris removal, steam boiler or pressure object or machinery breakage if applicable, and flood insurance, on all the Leased Property, including but not limited to the shell building and interior fit-up. COMPANY shall also obtain and maintain annual rental insurance in the amount of the annual rent provided for herein in favor of PIMSA. COMPANY shall be responsible for maintaining insurance on all of COMPANY's own property. Except for insurance upon COMPANY's property, PIMSA or its appointee shall be named the COMPANY's beneficiary of any and all proceeds from any such policy or policies, as their interests may appear. C. FORM AND DELIVERY OF POLICIES. Each insurance policy referred to in the preceding paragraphs shall be in a form approved by the Department of Finance and Public Credit and written with one or more companies licensed to do insurance in Mexicali, Baja California, Mexico, and shall provide that it shall not be subject to cancellation or change except after at least thirty (30) days prior written notice to PIMSA. The policies, or duly executed certificates for them, together with copies of receipts for payment of the premiums thereof, shall be delivered to PIMSA prior to the Commencement Date of the Lease Term, as provided in Clause IV hereof; all documents verifying the renewal of such policies shall be delivered to PIMSA at least thirty (30) days prior to the expiration of the term of such coverage. Prior to the Commencement Date of the Lease Term, each party shall procure and maintain such insurance covering its own liability and property as each deems appropriate. D. ADDITIONAL INSURANCE. COMPANY shall obtain and maintain in full force and effect such additional amounts of insurance as may be required by PIMSA, from time to time, in accordance with the provisions of this Clause VII, and in order to adequately and properly insure PIMSA of and for the then current replacement value of the Leased Property. E. WAIVER OF SUBROGATION. The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the premises and to the fixtures, personal property, tenant's improvements, and alterations of either PIMSA or COMPANY in or on the premises that are caused by or result from risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. If either party purchases insurance, the policy shall provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any 9 policy. If a party hereto cannot obtain such waiver of subrogation through reasonable efforts, it shall obtain insurance naming the other party as a coinsured under its policy in order to accomplish the intent of this provision. VIII. TAXES AND ASSESSMENTS. COMPANY agrees to pay all taxes and assessments of every kind levied upon any and all personal property of COMPANY, its successors and assigns, whether same shall be or may become a lien upon the Leased Property. All such taxes and assessments shall be paid by COMPANY before the same become delinquent. In the event that this contract is recorded at the Public Registry of Property, COMPANY shall pay all costs of such recordation, including, but not limited to, notary fees, charges, taxes and stamps required in connection therewith. IX. REPAIRS, ALTERATIONS AND IMPROVEMENTS. A. PIMSA. 1. After receipt of written notice from COMPANY, PIMSA at its expense, shall with the minimum interference with COMPANY's normal use of the Leased Property, diligently proceed to repair any structural defects in the roof or exterior bearing walls, excepting normal use, wear and damage. PIMSA shall not be liable for any damages, and shall not be obligated to make any repairs, caused by any negligent act or omissions of COMPANY, its employees, agents, invitees, or contractors. PIMSA shall have no other obligation to maintain or repair any other portion of the Leased Property. PIMSA shall not be liable to COMPANY for any damage resulting from PIMSA's failure to make any repairs, unless COMPANY has notified PIMSA of the need for such repairs, and PIMSA has failed to commence such repairs within ten (10) days after said notice has been given and failed to complete the same in a diligent manner. 2. If PIMSA fails to make the repairs described in Clause IX.A., COMPANY may, but shall not be required to, make or cause such repairs, to be made, and PIMSA shall, on demand, immediately pay to COMPANY the actual cost of the repairs. 10 B. COMPANY. 1. COMPANY, at its expense, shall keep and maintain in good order and repair, except for normal use and wear, all of the Leased Property, except for those obligations of PIMSA stated in Paragraph A.1., of this Clause, including but not limited to, all plumbing, sewage and other utility facilities that are within the Leased Property, as well as fixtures, partitions, walls (interior and exterior, including painting as often as necessary, floors, ceilings, signs, all air conditioning, heating and similar equipment, doors, window, plate glass and all other repairs of every kind and character to the Leased Property. COMPANY at its expense, shall repair all leaks except those caused by structural defects. The plumbing facilities shall not be used for any other purpose than that for which they were constructed. The expense of any breakage, stoppage or damage resulting from a violation of this provision, shall be borne by COMPANY. COMPANY shall store all trash only temporarily within the Leased Property, and shall arrange for the regular pick up of trash at COMPANY's expense. COMPANY shall not burn any trash of any kind in or about the Leased Property or the Industrial Park. 2. COMPANY shall require written consent to make any alteration, improvement or addition to the exterior walls and roof of the Leased Property with a cost exceeding $5,000.00 Dollars (Five Thousand Dollars 00/100, United States Currency); and COMPANY shall not damage any floors, walls, ceilings, partitions, or any wood, stone or ironwork on or about the Leased Property. 3. COMPANY shall keep the Leased Property free and clear of all encumbrances and liens arising out of acts or omissions of COMPANY, including those arising out of acts or construction done or ordered by COMPANY. However, if by reason of any work performed, materials furnished or obligations incurred by COMPANY with any third party, or any other act or omission by COMPANY, PIMSA is made liable or involved in litigation, COMPANY shall hold harmless and indemnify PIMSA including any costs and expenses, and attorneys' fees incurred by reason thereof. Should COMPANY fail fully to discharge any such encumbrances or liens within thirty (30) days after the date it has been instituted, or fail to provide a bond acceptable to PIMSA in the event of contest, PIMSA, at its option, may pay all or any part thereof. If PIMSA pays any such lien or encumbrances or any part thereof, COMPANY shall, on demand, immediately pay PIMSA the amount so paid, together with interest at the rate of twenty percent (20%) per annum from the date of payment. No 11 lien or encumbrance of any character whatsoever created by an act or omission by COMPANY shall in any way attach or affect the rights of PIMSA on the Leased Property. X. UTILITY SERVICES. During the term of this Lease Agreement, COMPANY shall promptly pay for any and all public and other utilities and related services furnished to the Leased Property, including but not limited to, water, gas, electricity and telephone charges. XI. RIGHT-OF-WAY. PIMSA is hereby granted a right-of-way upon, across, over and under the Leased Property for ingress, egress, installations, replacing, repairing and maintaining all utilities, including but not limited to water, gas, telephones and all electricity and any television or radio antenna system serving the Leased Property. By virtue of this right-of-way it shall be expressly permissible for the providing electrical and/or telephone company to erect and maintain the necessary poles and other necessary equipment on the Leased Property; provided that in exercising any right PIMSA may have under this Clause XI, PIMSA agrees to cause only a minimum interference with COMPANY's use and possession of the Leased Property. XII. ASSIGNMENT AND SUBLETTING. A. COMPANY shall have the right, upon prior written notice to PIMSA, to assign or transfer this Lease Agreement, or any interest therein, or permit the use of the Leased Property by any individual, corporation, or entity, or sublease all or part of the Leased Property, provided, however, that in the event of any such assignment, transfer or sublease, COMPANY and its Guarantor shall remain liable for all its obligations under this Lease Agreement. B. PIMSA shall have the right to assign and reassign, from time to time, any or all of the rights and obligations of PIMSA in this Lease Agreement, or any interest therein, without COMPANY's consent, provided that no such assignment or reassignment shall impair any of the rights of COMPANY herein, and provided further, that PIMSA shall remain liable for all of its obligations under this Lease Agreement. In the event of an assignment or reassignment, COMPANY shall not diminish or withhold any of the rents payable hereunder by asserting against such assignee any defense, setoff, or counterclaims which COMPANY may have against PIMSA or any 12 other person. COMPANY hereby specifically waives, with respect to withholding of rent, any preventative measures to guarantee payment of a claim, as provided by the Code of Civil Procedure. XIII. SUBORDINATION. During the term of this Lease Agreement, PIMSA shall have the right to encumber its interest in the Leased Property or in this Lease Agreement for any purpose it deems convenient, and COMPANY shall and hereby does subordinate its interest in this Lease Agreement and in the Leased Property to such encumbrance. However, in the event such encumbrance is foreclosed or judicially enforced, the one who holds the encumbrance shall agree to honor this Lease Agreement and accept the performance by COMPANY of its obligations hereunder. COMPANY shall execute any agreement which may be required by PIMSA in confirmation of such subordination and submit whatever public financial data may normally be requested by any trust, insurance company, bank or other recognized lending institution. Once that PIMSA shall have notified COMPANY in writing that it has assigned its interest in this Lease Agreement to any lending institution as security for a debt or other obligation of PIMSA, PIMSA shall not have the power to amend this Lease Agreement so as to reduce the rent, decrease the term or modify or negate any substantial obligation of COMPANY hereunder, or to accept a rescission of this contract, without the written consent of such lending institution. Such obligation shall continue until the lending institution shall have notified COMPANY in writing that such assignment has been terminated, on the understanding that if PIMSA fails to obtain such lending institution's approval to carry out the foregoing, the amendment of the term above mentioned shall have no effect whatsoever as against such lending institution. In addition, if the lending institution should notify COMPANY in writing requiring the payment of rents hereunder directly to such lending institution or its representative, then COMPANY shall be obligated to pay to such lending institution or its representative each subsequent monthly rental coming due under this Lease Agreement (together with any unpaid rent then past due), until the date on which such lending institution notifies COMPANY authorizing payment of rent to PIMSA or other party entitled thereto. COMPANY understands and agrees that except for the advanced rental payments provided for in Paragraph A.1. of Clause V of this Lease Agreement, PIMSA may not collect any rent more than one 13 (1) month in advance and COMPANY, at the request of PIMSA, shall provide a statement that no such advanced payment has been made; such document shall be binding upon COMPANY as against the lending institution to which this Lease Agreement may be assigned. In addition, the lending institution shall not be bound to recognize those payments made to PIMSA after the COMPANY has received notice requiring payments to be made to such lending institutions. XIV. ACCESS TO LEASED PROPERTY. Without undue interference to COMPANY's operation, PIMSA or its authorized representative shall have the right to enter the Leased Property during all COMPANY business hours, and in emergencies at all times, to inspect the Leased Property and to make repairs, additions, or alterations to the Leased Property. For a period commencing ninety (90) days prior to the termination of this Lease Agreement, PIMSA shall have access to the Leased Property for the purpose of exhibiting it to prospective clients and may post usual for sale or for lease signs upon the Leased Property. Except in case of emergency, PIMSA shall give notice to COMPANY before entering the Leased Property, and COMPANY shall have the right to accompany any representatives of PIMSA and prospective clients. XV. DAMAGE OR DESTRUCTION. A. TOTAL. In the event that the whole or a substantial part of the Leased Property is damaged or destroyed by fire, act of nature, or any other cause, so as to make COMPANY unable to continue the operation of its business, PIMSA shall, within fifteen (15) days from such destruction, determine whether the Leased Property can be restored within six (6) months, and notify COMPANY of said determination. If PIMSA determines that the Leased Property cannot be restored within six (6) months, either PIMSA or COMPANY shall have the right and option to immediately terminate this Lease Agreement, by advising the other thereof by written notice. If PIMSA determines that the Leased Property can be restored within said six (6) months, PIMSA shall, at its own expense, to the extent of the funds awarded to PIMSA from the proceeds of the insurance required under Clause VII hereinabove, proceed diligently to reconstruct PIMSA's Improvements, and in such event, PIMSA shall accept in lieu of rent during the period when COMPANY is substantially deprived of the use of the Leased Property any rental insurance proceeds which may be payable pursuant to rental insurance provided for hereinabove. 14 B. PARTIAL. In the event the said damage caused to the Leased Property does not prevent COMPANY from continuing the normal operation of its business on the Leased Property, PIMSA and COMPANY shall repair said damage, each party reconstructing that portion of the building and interior installations for which it was responsible during the original construction; provided that excluding damage or destruction to the parking lot during the period required for such repair work of PIMSA's Improvements or the improvements, rental payable hereunder by COMPANY shall be equitably prorated to the proportioned interference with COMPANY's use and possession of the Leased Property occasioned by such damage and repair, and in such event, PIMSA shall accept in lieu of the equitably prorated rent payable hereunder, during the period when COMPANY is partially deprived of the use and possession of the Leased Property, any rental insurance proceeds attributable to rent which may be payable pursuant to said insurance provided for hereinabove. XVI. LIMITATION OF LIABILITY. Except for intentional or negligent acts or omissions of PIMSA, its agents or employees, PIMSA shall not be liable to COMPANY or to any other person whatsoever for any loss or damage of any kind or nature caused by the intentional or negligent acts or omissions of COMPANY or other occupants of the Industrial Park or of adjacent property, or the public, or other causes beyond the control of PIMSA, including but not limited to, any failure to furnish, or any interruption of any utility or other services in or about the Leased Property. COMPANY recognizes that additions, replacements, and repairs to the Industrial Park will be made from time to time, provided that the same shall not substantially interfere with COMPANY's use and enjoyment of the Leased Property. XVII. INDEMNIFICATION. COMPANY agrees to indemnify and save PIMSA harmless from any and all claims for damages or losses of any nature whatsoever, arising from negligent act or omission of COMPANY or its contractors, licensees, agents, invitees, or employees, or arising from any accident, injury or damage whatsoever caused to any person or property occurring in or about the Leased Property, or the areas adjoining the Leased Property and from and against all costs and expenses, including attorneys' fees, incurred thereby. 15 PIMSA indemnifies and holds COMPANY harmless from any injury or damage to COMPANY or its agents or employees and from any and all liability for injury to third persons or damage to the property of third persons while lawfully upon the Leased Property occurring by reason of any negligent act or omission of PIMSA, its contractors, licensees, invitees, agents or employees. XVIII. NOTICES. All notices under this Lease Agreement shall be forwarded to the addresses mentioned in the Recitals above, with a copy to the Guarantor of this Lease Agreement, or such other addresses as may from time to time be furnished by the parties hereto. Said notices shall be in writing and if mailed, shall be deemed given ten (10) days after the date of mailing thereof. Duplicate notices shall be sent by certified airmail, postage prepaid, to such additional addresses as may from time to time be requested in writing by the parties hereto. XIX. COMPANY'S DEFAULT. A. Each of the following shall be a default of COMPANY. 1. Vacation or abandonment of Leased Property. 2. Failure to pay any installment of rent due and payable hereunder upon the date when said payment is due, said failure continuing for a period of ten (10) days. 3. Default in the performance of any of COMPANY's covenants, agreements or obligations hereunder, said default, except default in the payment of any installment of rent, continuing for fifteen (15) days after written notice thereof is given from PIMSA to COMPANY; 4. A general assignment by COMPANY for the benefit of creditors; 5. The filing of a voluntary petition in bankruptcy by COMPANY or the filing of an involuntary petition by COMPANY's creditors, said petition remaining undischarged for a period of ninety (90) days. 16 6. The appointment of a Receiver to take possession of substantially all of COMPANY's assets or of this leasehold, said receivership remaining undischarged for a period of ninety (90) days. 7. Attachment, execution or other judicial seizure of substantially all of COMPANY's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy hereof. B. In addition to the above, each of the following shall be considered a default of the COMPANY, if there is in respect to Guarantor: 1. A general assignment by Guarantor for the benefit of creditors; 2. The filing of a voluntary petition in bankruptcy by Guarantor or the filing of an involuntary petition by Guarantor's creditors, said petition remaining undischarged for a period of ninety (90) days; 3. The appointment of a Receiver to take possession of substantially all of Guarantor's assets or of this leasehold, said receivership remaining undissolved for a period of ninety (90) days or; 4. Attachment, execution or other judicial seizure of substantially all of Guarantor's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy thereof. C. Upon occurrence of any one of the foregoing defaults, PIMSA shall have the right, at its option, and in addition to other rights or remedies granted by law, including the right to claim damage, to do either of the following: 1. Immediately rescind this Lease Agreement and eject COMPANY from the Leased Property. 2. Claim Specific Performance. In the case of default as specified above, PIMSA shall, in addition to all other remedies, have the right to declare the entire unpaid balance of rent to the end of the five (5) year Lease Term then in effect, and all other sums due to PIMSA, immediately due and payable, plus interest at the rate of twenty percent (20%) per annum of said sums from the date of such declaration until payment in full, provided that PIMSA shall diligently proceed to lease the Leased Property to another tenant or 17 otherwise make beneficial use thereof in mitigation of damages, rent and all other sums due or payable to PIMSA. In the event the Leased Property is leased to another tenant during the aforesaid five (5) year Lease Term or otherwise used in a beneficial manner: a. PIMSA shall promptly refund to COMPANY that portion of rent and interest paid by COMPANY pursuant to this Paragraph 2. which is allocable to the period of the Lease Term during which the Leased Property was leased to another tenant or otherwise used in a beneficial manner as well as any other allocable sums paid by COMPANY to PIMSA, less any loss or damage incurred by PIMSA as a result of COMPANY's default, or; b. If such rent or other sums have not been paid by COMPANY to PIMSA, PIMSA shall credit such amount(s) to COMPANY. XX. RIGHT TO CURE DEFAULTS. In the event of COMPANY's breach or default of any term or provision herein, PIMSA may, without any obligation to do so, at any time after ten (10) days written notice, cure such breach or default, or make repairs to the Leased Property, for the account and at the expense of COMPANY. If PIMSA, by reason of such breach or default, pays any money, or is compelled to incur any expense, including attorneys' fees, the sums so paid or incurred by PIMSA with all interest, costs, and damages, shall be paid by COMPANY to PIMSA on the first (1st) day of the month following the incurring of such expenses. If any installment of rent or any other payment is not promptly paid when due, it shall bear interest of twenty percent (20%) per annum from the date on which it becomes due until paid; but this provision is not intended to relieve the COMPANY from fulfilling its obligations hereunder in the time and in the manner specified in this agreement. The foregoing interest, expenses and damages shall be recoverable from COMPANY by exercise of PIMSA's remedies hereinabove set forth. Efforts by PIMSA to mitigate the damages caused by COMPANY's breach of this Lease shall not be construed to be a waiver of PIMSA's right to recover damages under this Clause XX. Nothing in this Clause XX affects the right of PIMSA to indemnification by COMPANY in accordance with Clause XVII hereinabove for liability arising prior to the termination of this Lease for personal injuries or property damage. 18 XXI. WAIVER. In the event PIMSA or COMPANY does not compel the other to comply with any of the obligations hereunder, such action or omission shall not be construed as a waiver of a subsequent breach of the same or any other provision. Any consent or approval shall not be deemed to waive or render unnecessary the consent or approval of any subsequent or similar act by COMPANY or PIMSA. XXII. CERTIFICATES. COMPANY shall, within ten (10) days of receipt of a written request made by PIMSA, deliver to PIMSA a statement in writing certifying that this Lease Agreement is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified); the dates to which the rent and any other charges have been paid in advance, and that PIMSA's Improvements have been satisfactorily completed. It is intended that any such statement may be relied upon by any person, prospective purchaser, or lending institution interested in the Leased Property. XXIII. HOLDING OVER If COMPANY should remain in possession of the Leased Property after the expiration of this Lease, COMPANY shall pay a minimum monthly rent equal to twice the then minimum monthly rent then paid in the month immediately preceding the month in which the holdover period began until COMPANY has delivered to PIMSA the Leased Property, or executed a new Lease Agreement. This provision shall not be construed as granting any right to COMPANY to remain in possession of the Leased Property after the expiration of the Lease Term. COMPANY shall indemnify PIMSA against any loss or liability resulting from delay by COMPANY in surrendering the Leased Property, if such loss or liability is founded on said delay, less any amounts paid pursuant to this clause. The parties agree that COMPANY shall quit and surrender the Leased Property at the expiration of this Lease Agreement, waiving the right provided by law. XXIV. SURRENDER. A. On the last day of the term of this Lease Agreement, or the sooner termination thereof pursuant to other provisions hereof, COMPANY shall quit and surrender the Leased Property in the same conditions as received by COMPANY, and restore the premises to a clean and good condition (normal 19 wear and tear excepted) together with PIMSA's Improvements that may have been made in the same. Prior to termination of this Lease Agreement, COMPANY shall have removed all of its property in accordance with Clause III hereof and all property not removed shall be deemed abandoned by COMPANY. COMPANY shall repair and restore the Leased Property to a good and clean condition, normal wear and tear excepted, while removing the COMPANY's property. XXV. QUIET ENJOYMENT. PIMSA agrees that COMPANY, upon paying the rent and all other charges provided for herein and upon complying with all of the terms and provisions of this Lease Agreement, shall lawfully and quietly occupy and enjoy the Leased Property during the Lease Term. XXVI. ATTORNMENT. COMPANY shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust made by PIMSA, its successors or assigns, encumbering the Leased Property, or any part thereof, if so requested, attorn to the purchaser upon such foreclosure or sale and recognize such purchaser as the lessor under this Lease. XXVII. ENVIRONMENTAL PROTECTION LAW. PIMSA hereby states that the Leased Property, its soil and underground are free and clear of any hazardous materials, wastes or contaminants. Nevertheless, PIMSA shall indemnify and save the COMPANY harmless from and against losses, demands, claims, payments, suits, actions and judgments of any nature and description brought against it by reason of the fact that contaminants existed on the Leased Property, soil and/or underground, or were deposited there, prior to date of signature of this Agreement. The COMPANY will be responsible for any losses, damages or injuries caused by the contaminants which are deposited on the Leased Property, soil or underground after date of signature of this Agreement. It will be the sole responsibility of the COMPANY to comply with all Federal State or Municipal environmental laws, rules and dispositions, which must be complied with by the COMPANY pursuant with the industrial activities it will perform in the Leased Property and therefore, must obtain the required licenses, authorizations, permits and any other document that it must possess pursuant with the aforestated environmental rules. 20 Furthermore, the COMPANY will be solely and exclusively responsible for any demand, claim, or proceeding initiated against PIMSA, and which results from acts or omissions by the COMPANY, regarding the handling of hazardous or toxic materials or wastes located in or moved to, from or through the Leased Property. The COMPANY in these cases, shall indemnify and save PIMSA harmless from and against losses, demands, claims, payments, suits, actions and judgments of any competent environmental authority. XXVIII. MISCELLANEOUS. A. This document contains all of the agreements and conditions made between the parties, and may not be modified orally in any manner other than by a written agreement signed by the authorized representative of the parties. B. If any term, covenant, condition or provision of this Lease Agreement, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction, to be invalid, void or unenforceable, the remainder of the terms, covenants, conditions or provisions of this Lease Agreement, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated. C. In the event that either party should bring an action against the other party for the possession of the Leased Property, or for the recovery of any sum due hereunder, or because of the breach or default of any covenant in this Lease Agreement, the prevailing party shall have the right to collect from the other party its costs and expense, including attorneys' fees. D. Every payment and performance required by this Lease Agreement, shall be paid and performed precisely on the date specified for such payment or performance and no delay or extension thereof shall be permitted. E. The titles and subtitles in these clauses of this document shall have no effect on the interpretation of the terms and provisions contained in this Lease Agreement. F. The parties agree that this Lease Agreement be governed by the Laws of the State of Baja California. For everything pertaining to the interpretation and compliance of this Lease Agreement the parties thereby expressly submit to the jurisdiction of the Civil Courts of the City of Mexicali, State of Baja California, waiving any other jurisdiction which 21 might be applicable by reason of their present or future domiciles or otherwise. G. This Lease Agreement shall be executed in Spanish and English. However, in the event a dispute or other inconsistency should arise regarding interpretation or meaning of this Lease Agreement, the English version shall control. H. Whenever the prior consent of either party, written or otherwise, is required as a condition for any act by the other party under this Lease Agreement, such party agrees not to arbitrarily or unreasonably withhold such consent. I. Each party shall execute such further documents as shall be requested by the other party, but only to the extent that the effect of said documents is to give legal effect to rights set forth in the Lease Agreement. J. COMPANY hereby covenants to PIMSA, and PIMSA relies upon said covenant as a material inducement to enter into this Lease, that COMPANY will deliver to PIMSA, concurrently with the execution and delivery hereof a Guaranty of this Lease in the form attached hereto as EXHIBIT "D", executed by, COASTCAST CORPORATION, or by such other Guarantor as may be acceptable to PIMSA. K. Submission of this instrument for examination or signature by COMPANY does not constitute a reservation of or option to Lease, and it is not effective as a Lease or otherwise until execution and delivery by both PIMSA and COMPANY. L. This Lease and each of its covenants and conditions shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions hereof. Whenever in this Lease Agreement a reference is made to PIMSA, such reference shall be deemed to refer to the person in whom the interest of the lessor hereunder shall be vested. Any successor or assignee of COMPANY who accepts an assignment or the benefit of this Lease Agreement and enters into possession or enjoyment hereunder shall thereby assume and agree to perform and be bound by the covenants and conditions thereof. M. In the event the Government of Mexico or any subdivision thereof appropriates, forcibly buys or in any other way takes over the assets or business of the lessee, and without due cause by COMPANY prevents COMPANY from doing 22 business in Mexico, the COMPANY may upon written notice to PIMSA terminate this Lease Agreement without liability or penalty for such termination and without further liability for rental payments due under this Lease Agreement but without prejudice to the rights of PIMSA and COMPANY to claim from the corresponding authority the damages caused. XXIX. Rider number I, PIMSA's Improvements, is attached hereto and by this reference made a part hereof. IN WITNESS WHEREOF, the parties have executed this Lease Agreement as of the 16th day of December, nineteen hundred ninety eight. "PIMSA" "COMPANY" /s/ Eduardo Manuel Martinez /s/ William Lawrence Osborn - ------------------------------ ------------------------------ PARQUE INDUSTRIAL MEXICALI, COASTCAST CORPORATION, S.A. S.A. DE C.V. Mr. William Lawrence Osborn Mr. Eduardo Manuel Martinez General Director of Operations Palomera and General Manager Executive Vice President W I T N E S S E S - - - - - - - - - /s/ [Illegible] /s/ Hans H. Buehler - ------------------------------ ------------------------------ EX-10.8 4 EXHIBIT 10.8 Exhibit 10.8 LEASE AGREEMENT entered into by and between PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., (hereinafter referred to as PIMSA), herein represented by MR. EDUARDO MANUEL MARTINEZ PALOMERA, Party of the First Part, and by COASTCAST CORPORATION, S.A., (hereinafter referred to as COMPANY), herein represented by MR. WILLIAM LAWRENCE OSBORN, Party of the Second Part, pursuant to the following RECITALS and CLAUSES: R E C I T A L S I. PIMSA hereby declares that: A. It is a company organized and existing under the Mexican General Corporation Law, as per Public Instrument Number 20,032, executed before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. B. Mr. Eduardo Manuel Martinez Palomera is its attorney-in- fact, as it appears in Public Instrument Number 31,019, Volume 569, executed on November 26, 1997, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. C. PIMSA's registration number at the Federal Registry of Taxpayers is: PIM-790807-D96. D. The address at which it has its principal place of business is Avenida Galaxia Number 18-B, Parque Industrial Mexicali I, Mexicali, Baja California, Mexico. E. PIMSA has developed the Mexicali Industrial Park I and the Mexicali Industrial Park II, and is developing the Mexicali Industrial Park III and the Mexicali Industrial Park IV. The Mexicali Industrial Park I, hereinafter referred to as the Industrial Park, is more specifically shown and described on EXHIBIT "A", which is attached hereto and made a part hereof. F. The parties desire to enter into a Lease of Lots 1, 2, 3, 4, 5, 6, 7, 8 and a portion of Lot 9 of Block 2, located in the Mexicali Industrial Park I, at Calle Mercurio Number 30, and of certain improvements constructed on the land. The land and PIMSA's Improvements together shall hereinafter be referred to as the Leased Property. G. That it has previously applied for and obtained financial loans through Mexican and Foreign Banking and Lending Institutions, with which funds, buildings and improvements located in the Industrial Parks have been, are being and will be constructed. 2 II. COMPANY hereby declares that: A. It is a company organized under the Mexican General Corporation Law as per Public Instrument Number 28,658, Volume 478, executed on January 26, 1994, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. B. Mr. William Lawrence Osborn verifies his capacity as General Director of Operations and General Manager of COMPANY as per Public Instrument Number 31,457, Volume 577, executed on November 09, 1998, before attorney Fernando Diaz Ceballos, Notary Public Number 4 of the City of Mexicali, Baja California, Mexico. C. COMPANY's registration number at the Federal Registry of Taxpayers is: CCO-821123-QA1. D. The address at which it has its principal place of business is Calle Mercurio Number 70, Mexicali Industrial Park I, Mexicali, Baja California, Mexico. Pursuant to the above, the parties agree as follows: C L A U S E S I. SCOPE OF LEASE AGREEMENT. On the express terms and conditions set forth hereinafter, the scope of this Lease Agreement is as follows: PIMSA hereby leases to COMPANY and COMPANY hereby leases from PIMSA the land in the Industrial Park as described on EXHIBIT "B", which is attached hereto and made a part hereof, and PIMSA's Improvements as more specifically described hereinafter in this Lease Agreement. II. CONSTRUCTION BY PIMSA. A. PIMSA has, at its expense, constructed on the land certain improvements which shall hereinafter be referred to as PIMSA's Improvements. Said PIMSA's Improvements have been constructed in accordance with plans and specifications which have been approved by PIMSA and COMPANY and such approval is hereby acknowledged by the parties. B. PIMSA has constructed all PIMSA's Improvements in accordance with all laws, ordinances, regulations, and orders of governmental authorities, and Industrial Park Regulations which are attached hereto as EXHIBIT "C". The term 3 "Improvements" shall, depending on the context, refer to either "PIMSA's Improvements", "COMPANY's Improvements" or both. The term "COMPANY's Improvements" shall refer to those improvements identified in Paragraph III.A. below. C. The Leased Property is considered Ready For Occupancy. D. Upon prior written consent of PIMSA, COMPANY may at any time prior to the commencement of the term hereof, at its sole risk, enter upon and install such trade fixtures and equipment in the Leased Property as it may elect; provided, however that, (I) COMPANY shall provide evidence of insurance satisfactory to PIMSA. III. INSTALLATIONS BY COMPANY. A. COMPANY may, at its expense, install on the Leased Property, such trade fixtures, equipment and furniture as it may deem necessary; provided that such items are installed and are removable without damage to the structural integrity of PIMSA's Improvements. Said trade fixtures, equipment and furniture shall remain COMPANY's property and unless COMPANY is in default hereunder, shall be removed by COMPANY on or before the expiration date of the term hereof. COMPANY may also install temporary improvements in the interior of PIMSA's Improvements upon the Leased Property provided that such COMPANY's Improvements are installed and are removable without damage to the structure of the PIMSA's Improvements. Such COMPANY's Improvements shall remain property of COMPANY and, unless COMPANY is in default hereunder, shall be removed by COMPANY upon expiration of the term hereof or earlier termination of this Lease. COMPANY shall repair, at its sole expense, all damage caused by the installation or removal of trade fixtures, equipment, furniture or temporary COMPANY's Improvements, reasonable wear and tear excepted. B. COMPANY shall perform all installations in accordance with all laws, ordinances, regulations, orders of governmental authorities, and the Industrial Park Regulations which are attached hereto as EXHIBIT "C". IV. LEASE TERM AND COMMENCEMENT DATE. A. LEASE AGREEMENT. This Lease Agreement shall be effective from the Commencement Date until the same is terminated as provided hereinafter, the complete period of tenancy being referred to herein as the "Lease Term". 4 B. INITIAL LEASE TERM. The initial term of this Lease ("Initial Term") shall commence on January 01, 1999, ("Commencement Date") and shall end on the last day of the fifth (5th) consecutive full Lease Year, as said term is hereinafter defined. C. LEASE YEAR. The term "Lease Year" as used herein, shall mean a period of twelve (12) consecutive full calendar months. The First Lease Year shall begin on the Commencement Date of the term hereof, if the Commencement Date of the term hereof shall occur on the first (1st) day of a calendar month; if not then the First Lease Year shall commence upon the first (1st) day of the calendar month next following the Commencement Date of the term hereof. Each succeeding Lease Year shall commence upon the anniversary date of the First Lease Year. D. OPTION TO RENEW. COMPANY shall have the right to extend the term of this Lease Agreement upon the terms, conditions and rentals set forth herein, for one (1) additional period of five (5) years, ("Renewal Terms"), by giving written notice to PIMSA not less than six (6) months prior to the expiration of the Initial Term of this Lease Agreement, so long as COMPANY is not then in default hereunder. V. RENT. A. INITIAL TERM. As minimum monthly rent for the Lease of the Leased Property during the Lease Term hereof, COMPANY shall pay to PIMSA at the address of PIMSA stated above, the monthly sum in Pesos, Mexican Currency, equal to the monthly payments in Dollars, United States Currency, payable as follows: 1. $36,471.00 Dollars, United States Currency, (Thirty Six Thousand Four Hundred Seventy One Dollars 00/100, United States Currency), upon the execution of this contract which sum shall be applied to the last three (3) months of the Initial Term. 2. Fifty Seven (57) equal monthly payments of $12,157.00 Dollars (Twelve Thousand One Hundred Fifty Seven Dollars 00/100, United States Currency), each payable in advance on the first (1st) day of each month during the Initial Term, commencing on the first (1st) month of the Initial Term. 3. Increase Of Monthly Rent For The Second, Third, Fourth and Fifth Lease Years. On the first (1st) day of the Second, Third, Fourth and Fifth Lease Years the 5 monthly rent for such Lease Years shall be increased by an amount which is equal to the product of: a. The monthly rent then being paid for the immediately preceding Lease Year, in accordance to Clause V.A.2., hereinabove, multiplied by b. The percentage increase in the Index (as hereinafter defined) during the immediately preceding Lease Year. 1) Maximum Rent Increase; No Decrease. Notwithstanding anything herein contained to the contrary, the monthly rent for the Second, Third, Fourth and Fifth Lease Years shall not be increased by an amount greater than ten percent (10%) of the rent for the immediately preceding Lease Year. In no event shall the monthly rent for the Second, Third, Fourth and Fifth Lease Years be decreased below the monthly rent for the immediately preceding Lease Year. 2) Index Defined. The term "Index" shall mean the United States Bureau of Labor Statistics Consumer Price Index for all Urban Consumers (all items, Los Angeles-Anaheim-Riverside area, 1982-1984-100). If the compilation or publication of the Index is transferred to any other department, bureau or agency of the United States government or is discontinued, then the index most similar to the Index shall be used to calculate the rent increases provided for herein. If PIMSA and COMPANY cannot agree on a similar alternate index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of such association, and the decision of the arbitrators shall be binding upon the parties. The cost of such arbitration shall be divided equally between PIMSA and COMPANY. B. ADDITIONAL RENT. With the exception of income tax imposed upon PIMSA, and any tax associated with the Sale or Transfer of the Leased Property or PIMSA's Improvements, which shall be borne by PIMSA, COMPANY will pay to PIMSA, as additional rent, an amount equal to the sum of all taxes and assessments of every kind which are or may be at any time during the Lease Term, levied against the Leased Property or the Lease Agreement, including but not limited to gross sales tax, value added tax or stamp tax, property tax and all such taxes and assessments, levied by any federal, state or municipal government, or any governmental authority. All such taxes and assessments shall be paid by PIMSA and reimbursed by COMPANY within ten (10) days after the receipt showing the payment thereof is presented to COMPANY by PIMSA. 6 In calculating the amount of COMPANY's reimbursement, all taxes which shall become due for the first and last years of the Lease Term shall be apportioned prorata between PIMSA and COMPANY in accordance with the respective number of months during which each party shall be in possession of the Leased Property. C. RENEWAL TERMS. 1. GRANT OF OPTION AND MANNER OF EXERCISE. COMPANY shall have the option to extend the term of this Lease for one (1) period of five (5) years, (the "Extended Term"). COMPANY shall given written notice to PIMSA not less than six (6) months prior to the expiration of the initial term, if COMPANY elects to exercise the option to extend granted herein. 2. RENT. The monthly rent for each Lease Year of the Extended Term shall be equal to the monthly rent for the immediately preceding Lease Year, plus an amount which is equal to the product of: a. The monthly rent paid by COMPANY during the immediately preceding Lease Year, multiplied by b. The percentage increase in the Index (as hereinabove defined) during the immediately preceding Lease Year. Notwithstanding anything herein contained to the contrary, the monthly rent for each Lease Year of the Extended Term shall not be increased by an amount greater than ten percent (10%) of the monthly rent for the immediately preceding Lease Year. In no event shall the monthly rent for any Lease Year of the Extended Term be decreased below the monthly rent for the immediately preceding Lease Year. D. COMPANY will pay the rent provided for in the above Paragraph A. in Pesos, Mexican Currency, at the rate of exchange effective in the free foreign market on the date such sums are paid, or in Dollars, United States Currency, as law and Foreign Exchange Rules allow, as PIMSA may elect. The foregoing will not be considered to impede or hinder PIMSA's possibilities and rights under Clause XII to negotiate or assign this agreement to Mexican, United States or other Foreign Banking or Lending Institutions. E. PRORATION. The rent for any partial month shall be prorated. 7 F. LIQUIDATED DAMAGES. In the event this Lease Agreement is terminated by PIMSA due to a default of COMPANY prior to or during the first (1st) six (6) months of the Lease Term, PIMSA shall be entitled to keep and retain as liquidated damages all sums paid or deposited by COMPANY, as prepaid rent or as a security deposit, in addition to any other rights of PIMSA provided for herein. G. SETOFF. The payment of any rent due under this Lease shall not be withheld or reduced for any reason whatsoever, and COMPANY agrees to assert any claim, demand, or other right against PIMSA only by an independent proceeding. VI. USE. The Leased Property shall be used and occupied for any lawful industrial purpose not in violation of the Industrial Park Regulations attached hereto as EXHIBIT "C". COMPANY shall promptly and adequately comply with all laws, ordinances and orders of all governmental authorities affecting the Leased Property, and its cleanliness, safety and labor facilities applicable to the COMPANY's use of the Leased Property. COMPANY shall not perform or omit any acts that may damage the Leased Property, or be a nuisance, or menace to other occupants of the Industrial Park. VII. INSURANCE. A. COMPREHENSIVE LIABILITY INSURANCE. During the Lease Term, COMPANY shall, at its own expense, obtain and maintain in full force a policy of comprehensive liability insurance including property damage, that insures COMPANY and PIMSA (and such other agents or employees of PIMSA, PIMSA's subsidiaries or affiliates, or PIMSA's assignees or any nominee of PIMSA holding any interest in the Leased Property, including without limitation, the holder of any mortgage encumbering the Leased Property) against liability for injury to persons and property and for death of any persons occurring in or about the Leased Property. The liability to such insurance shall be in the amount of $100,000.00 Dollars (One Hundred Thousand Dollars 00/100, United States Currency). B. FIRE AND OTHER INSURANCE. During the Lease Term, COMPANY at its sole expense, shall obtain and maintain in full force, in the amount of $1,160,000.00 Dollars (One Million One Hundred Sixty Thousand Dollars 00/100, United States Currency), or as modified herein, a policy or policies of insurance for fire, lightning, explosion, falling aircraft, smoke, windstorm, earthquake, hail, vehicle damage, volcanic 8 eruption, strikes, civil commotion, vandalism, riots, malicious mischief, debris removal, steam boiler or pressure object or machinery breakage if applicable, and flood insurance, on all the Leased Property, including but not limited to the shell building and interior fit-up. COMPANY shall also obtain and maintain annual rental insurance in the amount of the annual rent provided for herein in favor of PIMSA. COMPANY shall be responsible for maintaining insurance on all of COMPANY's own property. Except for insurance upon COMPANY's property, PIMSA or its appointee shall be named the COMPANY's beneficiary of any and all proceeds from any such policy or policies, as their interests may appear. C. FORM AND DELIVERY OF POLICIES. Each insurance policy referred to in the preceding paragraphs shall be in a form approved by the Department of Finance and Public Credit and written with one or more companies licensed to do insurance in Mexicali, Baja California, Mexico, and shall provide that it shall not be subject to cancellation or change except after at least thirty (30) days prior written notice to PIMSA. The policies, or duly executed certificates for them, together with copies of receipts for payment of the premiums thereof, shall be delivered to PIMSA prior to the Commencement Date of the Lease Term, as provided in Clause IV hereof; all documents verifying the renewal of such policies shall be delivered to PIMSA at least thirty (30) days prior to the expiration of the term of such coverage. Prior to the Commencement Date of the Lease Term, each party shall procure and maintain such insurance covering its own liability and property as each deems appropriate. D. ADDITIONAL INSURANCE. COMPANY shall obtain and maintain in full force and effect such additional amounts of insurance as may be required by PIMSA, from time to time, in accordance with the provisions of this Clause VII, and in order to adequately and properly insure PIMSA of and for the then current replacement value of the Leased Property. E. WAIVER OF SUBROGATION. The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the premises and to the fixtures, personal property, tenant's improvements, and alterations of either PIMSA or COMPANY in or on the premises that are caused by or result from risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. If either party purchases insurance, the policy shall provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any 8 policy. If a party hereto cannot obtain such waiver of subrogation through reasonable efforts, it shall obtain insurance naming the other party as a coinsured under its policy in order to accomplish the intent of this provision. VIII. TAXES AND ASSESSMENTS. COMPANY agrees to pay all taxes and assessments of every kind levied upon any and all personal property of COMPANY, its successors and assigns, whether same shall be or may become a lien upon the Leased Property. All such taxes and assessments shall be paid by COMPANY before the same become delinquent. In the event that this contract is recorded at the Public Registry of Property, COMPANY shall pay all costs of such recordation, including, but not limited to, notary fees, charges, taxes and stamps required in connection therewith. IX. REPAIRS, ALTERATIONS AND IMPROVEMENTS. A. PIMSA. 1. After receipt of written notice from COMPANY, PIMSA at its expense, shall with the minimum interference with COMPANY's normal use of the Leased Property, diligently proceed to repair any structural defects in the roof or exterior bearing walls, excepting normal use, wear and damage. PIMSA shall not be liable for any damages, and shall not be obligated to make any repairs, caused by any negligent act or omissions of COMPANY, its employees, agents, invitees, or contractors. PIMSA shall have no other obligation to maintain or repair any other portion of the Leased Property. PIMSA shall not be liable to COMPANY for any damage resulting from PIMSA's failure to make any repairs, unless COMPANY has notified PIMSA of the need for such repairs, and PIMSA has failed to commence such repairs within ten (10) days after said notice has been given and failed to complete the same in a diligent manner. 2. If PIMSA fails to make the repairs described in Clause IX.A., COMPANY may, but shall not be required to, make or cause such repairs, to be made, and PIMSA shall, on demand, immediately pay to COMPANY the actual cost of the repairs. 10 B. COMPANY 1. COMPANY, at its expense, shall keep and maintain in good order and repair, except for normal use and wear, all of the Leased Property, except for those obligations of PIMSA stated in Paragraph A.1., of this Clause, including but not limited to, all plumbing, sewage and other utility facilities that are within the Leased Property, as well as fixtures, partitions, walls (interior and exterior, including painting as often as necessary), floors, ceilings, signs, all air conditioning, heating and similar equipment, doors, window, plate glass and all other repairs of every kind and character to the Leased Property. COMPANY at its expense, shall repair all leaks except those caused by structural defects. The plumbing facilities shall not be used for any other purpose than that for which they were constructed. The expense of any breakage, stoppage or damage resulting from a violation of this provision, shall be borne by COMPANY. COMPANY shall store all trash only temporarily within the Leased Property, and shall arrange for the regular pick up of trash at COMPANY's expense. COMPANY shall not burn any trash of any kind in or about the Leased Property or the Industrial Park. 2. COMPANY shall require written consent to make any alteration, improvement or addition to the exterior walls and roof of the Leased Property with a cost exceeding $5,000.00 Dollars (Five Thousand Dollars 00/100, United States Currency); and COMPANY shall not damage any floors, walls, ceilings, partitions, or any wood, stone or ironwork on or about the Leased Property. 3. COMPANY shall keep the Leased Property free and clear of all encumbrances and liens arising out of acts or omissions of COMPANY, including those arising out of acts or construction done or ordered by COMPANY. However, if by reason of any work performed, materials furnished or obligations incurred by COMPANY with any third party, or any other act or omission by COMPANY, PIMSA is made liable or involved in litigation, COMPANY shall hold harmless and indemnify PIMSA including any costs and expenses, and attorneys' fees incurred by reason thereof. Should COMPANY fail fully to discharge any such encumbrances or liens within thirty (30) days after the date it has been instituted, or fail to provide a bond acceptable to PIMSA in the event of contest, PIMSA, at its option, may pay all or any part thereof. If PIMSA pays any such lien or encumbrances or any part thereof, COMPANY shall, on demand, immediately pay PIMSA the amount so paid, together with interest at the rate of twenty percent (20%) per annum from the date of payment. No 11 lien or encumbrance of any character whatsoever created by an act or omission by COMPANY shall in any way attach or affect the rights of PIMSA on the Leased Property. X. UTILITY SERVICES. During the term of this Lease Agreement, COMPANY shall promptly pay for any and all public and other utilities and related services furnished to the Leased Property, including but not limited to, water, gas, electricity and telephone charges. XI. RIGHT-OF-WAY. PIMSA is hereby granted a right-of-way upon, across, over and under the Leased Property for ingress, egress, installations, replacing, repairing and maintaining all utilities, including but not limited to water, gas, telephones and all electricity and any television or radio antenna system serving the Leased Property. By virtue of this right-of-way it shall be expressly permissible for the providing electrical and/or telephone company to erect and maintain the necessary poles and other necessary equipment on the Leased Property; provided that in exercising any right PIMSA may have under this Clause XI, PIMSA agrees to cause only a minimum interference with COMPANY's use and possession of the Leased Property. XII. ASSIGNMENT AND SUBLETTING. A. COMPANY shall have the right, upon prior written notice to PIMSA, to assign or transfer this Lease Agreement, or any interest therein, or permit the use of the Leased Property by any individual, corporation, or entity, or sublease all or part of the Leased Property, provided, however, that in the event of any such assignment, transfer or sublease, COMPANY and its Guarantor shall remain liable for all its obligations under this Lease Agreement. B. PIMSA shall have the right to assign and reassign, from time to time, any or all of the rights and obligations of PIMSA in this Lease Agreement, or any interest therein, without COMPANY's consent, provided that no such assignment or reassignment shall impair any of the rights of COMPANY herein, and provided further, that PIMSA shall remain liable for all of its obligations under this Lease Agreement. In the event of an assignment or reassignment, COMPANY shall not diminish or withhold any of the rents payable hereunder by asserting against such assignee any defense, setoff, or counterclaims which COMPANY may have against PIMSA or any 12 other person. COMPANY hereby specifically waives, with respect to withholding of rent, any preventative measures to guarantee payment of a claim, as provided by the Code of Civil Procedure. XIII. SUBORDINATION. During the term of this Lease Agreement, PIMSA shall have the right to encumber its interest in the Leased Property or in this Lease Agreement for any purpose it deems convenient, and COMPANY shall and hereby does subordinate its interest in this Lease Agreement and in the Leased Property to such encumbrance. However, in the event such encumbrance is foreclosed or judicially enforced, the one who holds the encumbrance shall agree to honor this Lease Agreement and accept the performance by COMPANY of its obligations hereunder. COMPANY shall execute any agreement which may be required by PIMSA in confirmation of such subordination and submit whatever public financial data may normally be requested by any trust, insurance company, bank or other recognized lending institution. Once that PIMSA shall have notified COMPANY in writing that it has assigned its interest in this Lease Agreement to any lending institution as security for a debt or other obligation of PIMSA, PIMSA shall not have the power to amend this Lease Agreement so as to reduce the rent, decrease the term or modify or negate any substantial obligation of COMPANY hereunder, or to accept a rescission of this contract, without the written consent of such lending institution. Such obligation shall continue until the lending institution shall have notified COMPANY in writing that such assignment has been terminated, on the understanding that if PIMSA fails to obtain such lending institution's approval to carry out the foregoing, the amendment of the term above mentioned shall have no effect whatsoever as against such lending institution. In addition, if the lending institution should notify COMPANY in writing requiring the payment of rents hereunder directly to such lending institution or its representative, then COMPANY shall be obligated to pay to such lending institution or its representative each subsequent monthly rental coming due under this Lease Agreement (together with any unpaid rent then past due), until the date on which such lending institution notifies COMPANY authorizing payment of rent to PIMSA or other party entitled thereto. COMPANY understands and agrees that except for the advanced rental payments provided for in Paragraph A.1. of Clause V of this Lease Agreement, PIMSA may not collect any rent more than one 13 (1) month in advance and COMPANY, at the request of PIMSA, shall provide a statement that no such advanced payment has been made; such document shall be binding upon COMPANY as against the lending institution to which this Lease Agreement may be assigned. In addition, the lending institution shall not be bound to recognize those payments made to PIMSA after the COMPANY has received notice requiring payments to be made to such lending institutions. XIV. ACCESS TO LEASED PROPERTY. Without undue interference to COMPANY's operation, PIMSA or its authorized representative shall have the right to enter the Leased Property during all COMPANY business hours, and in emergencies at all times, to inspect the Leased Property and to make repairs, additions, or alterations to the Leased Property. For a period commencing ninety (90) days prior to the termination of this Lease Agreement, PIMSA shall have access to the Leased Property for the purpose of exhibiting it to prospective clients and may post usual for sale or for lease signs upon the Leased Property. Except in case of emergency, PIMSA shall give notice to COMPANY before entering the Leased Property, and COMPANY shall have the right to accompany any representatives of PIMSA and prospective clients. XV. DAMAGE OR DESTRUCTION. A. TOTAL. In the event that the whole or a substantial part of the Leased Property is damaged or destroyed by fire, act of nature, or any other cause, so as to make COMPANY unable to continue the operation of its business, PIMSA shall, within fifteen (15) days from such destruction, determine whether the Leased Property can be restored within six (6) months, and notify COMPANY of said determination. If PIMSA determines that the Leased Property cannot be restored within six (6) months, either PIMSA or COMPANY shall have the right and option to immediately terminate this Lease Agreement, by advising the other thereof by written notice. If PIMSA determines that the Leased Property can be restored within said six (6) months, PIMSA shall, at its own expense, to the extent of the funds awarded to PIMSA from the proceeds of the insurance required under Clause VII hereinabove, proceed diligently to reconstruct PIMSA's Improvements, and in such event, PIMSA shall accept in lieu of rent during the period when COMPANY is substantially deprived of the use of the Leased Property any rental insurance proceeds which may be payable pursuant to rental insurance provided for hereinabove. 14 B. PARTIAL. In the event the said damage caused to the Leased Property does not prevent COMPANY from continuing the normal operation of its business on the Leased Property, PIMSA and COMPANY shall repair said damage, each party reconstructing that portion of the building and interior installations for which it was responsible during the original construction; provided that excluding damage or destruction to the parking lot during the period required for such repair work of PIMSA's Improvements or the improvements, rental payable hereunder by COMPANY shall be equitably prorated to the proportioned interference with COMPANY's use and possession of the Leased Property occasioned by such damage and repair, and in such event, PIMSA shall accept in lieu of the equitably prorated rent payable hereunder, during the period when COMPANY is partially deprived of the use and possession of the Leased Property, any rental insurance proceeds attributable to rent which may be payable pursuant to said insurance provided for hereinabove. XVI. LIMITATION OF LIABILITY. Except for intentional or negligent acts or omissions of PIMSA, its agents or employees, PIMSA shall not be liable to COMPANY or to any other person whatsoever for any loss or damage of any kind or nature caused by the intentional or negligent acts or omissions of COMPANY or other occupants of the Industrial Park or of adjacent property, or the public, or other causes beyond the control of PIMSA, including but not limited to, any failure to furnish, or any interruption of any utility or other services in or about the Leased Property. COMPANY recognizes that additions, replacements, and repairs to the Industrial Park will be made from time to time, provided that the same shall not substantially interfere with COMPANY's use and enjoyment of the Leased Property. XVII. INDEMNIFICATION. COMPANY agrees to indemnify and save PIMSA harmless from any and all claims for damages or losses of any nature whatsoever, arising from negligent act or omission of COMPANY or its contractors, licensees, agents, invitees, or employees, or arising from any accident, injury or damage whatsoever caused to any person or property occurring in or about the Leased Property, or the areas adjoining the Leased Property and from and against all costs and expenses, including attorneys' fees, incurred thereby. 15 PIMSA indemnifies and holds COMPANY harmless from any injury or damage to COMPANY or its agents or employees and from any and all liability for injury to third persons or damage to the property of third persons while lawfully upon the Leased Property occurring by reason of any negligent act or omission of PIMSA, its contractors, licensees, invitees, agents or employees. XVIII. NOTICES. All notices under this Lease Agreement shall be forwarded to the addresses mentioned in the Recitals above, with a copy to the Guarantor of this Lease Agreement, or such other addresses as may from time to time be furnished by the parties hereto. Said notices shall be in writing and if mailed, shall be deemed given ten (10) days after the date of mailing thereof. Duplicate notices shall be sent by certified airmail, postage prepaid, to such additional addresses as may from time to time be requested in writing by the parties hereto. XIX. COMPANY'S DEFAULT. A. Each of the following shall be a default of COMPANY. 1. Vacation or abandonment of Leased Property. 2. Failure to pay any installment of rent due and payable hereunder upon the date when said payment is due, said failure continuing for a period of ten (10) days. 3. Default in the performance of any of COMPANY's covenants, agreements or obligations hereunder, said default, except default in the payment of any installment of rent, continuing for fifteen (15) days after written notice thereof is given from PIMSA to COMPANY; 4. A general assignment by COMPANY for the benefit of creditors; 5. The filing of a voluntary petition in bankruptcy by COMPANY or the filing of an involuntary petition by COMPANY's creditors, said petition remaining undischarged for a period of ninety (90) days. 16 6. The appointment of a Receiver to take possession of substantially all of COMPANY's assets or of this leasehold, said receivership remaining undischarged for a period of ninety (90) days. 7. Attachment, execution or other judicial seizure of substantially all of COMPANY's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy hereof. B. In addition to the above, each of the following shall be considered a default of the COMPANY, if there is in respect to Guarantor: 1. A general assignment by Guarantor for the benefit of creditors; 2. The filing of a voluntary petition in bankruptcy by Guarantor or the filing of an involuntary petition by Guarantor's creditors, said petition remaining undischarged for a period of ninety (90) days; 3. The appointment of a Receiver to take possession of substantially all of Guarantor's assets or of this leasehold, said receivership remaining undissolved for a period of ninety (90) days or; 4. Attachment, execution or other judicial seizure of substantially all of Guarantor's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy thereof. C. Upon occurrence of any one of the foregoing defaults, PIMSA shall have the right, at its option, and in addition to other rights or remedies granted by law, including the right to claim damage, to do either of the following: 1. Immediately rescind this Lease Agreement and eject COMPANY from the Leased Property. 2. Claim Specific Performance. In the case of default as specified above, PIMSA shall, in addition to all other remedies, have the right to declare the entire unpaid balance of rent to the end of the five (5) year Lease Term then in effect, and all other sums due to PIMSA, immediately due and payable, plus interest at the rate of twenty percent (20%) per annum of said sums from the date of such declaration until payment in full, provided that PIMSA shall diligently proceed to lease the Leased Property to another tenant or 17 otherwise make beneficial use thereof in mitigation of damages, rent and all other sums due or payable to PIMSA. In the event the Leased Property is leased to another tenant during the aforesaid five (5) year Lease Term or otherwise used in a beneficial manner: a. PIMSA shall promptly refund to COMPANY that portion of rent and interest paid by COMPANY pursuant to this Paragraph 2. which is allocable to the period of the Lease Term during which the Leased Property was leased to another tenant or otherwise used in a beneficial manner as well as any other allocable sums paid by COMPANY to PIMSA, less any loss or damage incurred by PIMSA as a result of COMPANY's default, or; b. If such rent or other sums have not been paid by COMPANY to PIMSA, PIMSA shall credit such amount(s) to COMPANY. XX. RIGHT TO CURE DEFAULTS. In the event of COMPANY's breach or default of any term or provision herein, PIMSA may, without any obligation to do so, at any time after ten (10) days written notice, cure such breach or default, or make repairs to the Leased Property, for the account and at the expense of COMPANY. If PIMSA, by reason of such breach or default, pays any money, or is compelled to incur any expense, including attorneys' fees, the sums so paid or incurred by PIMSA with all interest, costs, and damages, shall be paid by COMPANY to PIMSA on the first (1st) day of the month following the incurring of such expenses. If any installment of rent or any other payment is not promptly paid when due, it shall bear interest of twenty percent (20%) per annum from the date on which it becomes due until paid; but this provision is not intended to relieve the COMPANY from fulfilling its obligations hereunder in the time and in the manner specified in this agreement. The foregoing interest, expenses and damages shall be recoverable from COMPANY by exercise of PIMSA's remedies hereinabove set forth. Efforts by PIMSA to mitigate the damages caused by COMPANY's breach of this Lease shall not be construed to be a waiver of PIMSA's right to recover damages under this Clause XX. Nothing in this Clause XX affects the right of PIMSA to indemnification by COMPANY in accordance with Clause XVII hereinabove for liability arising prior to the termination of this Lease for personal injuries or property damage. 18 XXI. WAIVER. In the event PIMSA or COMPANY does not compel the other to comply with any of the obligations hereunder, such action or omission shall not be construed as a waiver of a subsequent breach of the same or any other provision. Any consent or approval shall not be deemed to waive or render unnecessary the consent or approval of any subsequent or similar act by COMPANY or PIMSA. XXII. CERTIFICATES. COMPANY shall, within ten (10) days of receipt of a written request made by PIMSA, deliver to PIMSA a statement in writing certifying that this Lease Agreement is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified); the dates to which the rent and any other charges have been paid in advance, and that PIMSA's Improvements have been satisfactorily completed. It is intended that any such statement may be relied upon by any person, prospective purchaser, or lending institution interested in the Leased Property. XXIII. HOLDING OVER. If COMPANY should remain in possession of the Leased Property after the expiration of this Lease, COMPANY shall pay a minimum monthly rent equal to twice the then minimum monthly rent then paid in the month immediately preceding the month in which the holdover period began until COMPANY has delivered to PIMSA the Leased Property, or executed a new Lease Agreement. This provision shall not be construed as granting any right to COMPANY to remain in possession of the Leased Property after the expiration of the Lease Term. COMPANY shall indemnify PIMSA against any loss or liability resulting from delay by COMPANY in surrendering the Leased Property, if such loss or liability is founded on said delay, less any amounts paid pursuant to this clause. The parties agree that COMPANY shall quit and surrender the Leased Property at the expiration of this Lease Agreement, waiving the right provided by law. XXIV. SURRENDER. A. On the last day of the term of this Lease Agreement, or the sooner termination thereof pursuant to other provisions hereof, COMPANY shall quit and surrender the Leased Property in the same conditions as received by COMPANY, and restore the premises to a clean and good condition (normal 19 wear and tear excepted) together with PIMSA's Improvements that may have been made in the same. Prior to termination of this Lease Agreement, COMPANY shall have removed all of its property in accordance with Clause III hereof and all property not removed shall be deemed abandoned by COMPANY. COMPANY shall repair and restore the Leased Property to a good and clean condition, normal wear and tear excepted, while removing the COMPANY's property. XXV. QUIET ENJOYMENT. PIMSA agrees that COMPANY, upon paying the rent and all other charges provided for herein and upon complying with all of the terms and provisions of this Lease Agreement, shall lawfully and quietly occupy and enjoy the Leased Property during the Lease Term. XXVI. ATTORNMENT. COMPANY shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust made by PIMSA, its successors or assigns, encumbering the Leased Property, or any part thereof, if so requested, attorn to the purchaser upon such foreclosure or sale and recognize such purchaser as the lessor under this Lease. XXVII. ENVIRONMENTAL PROTECTION LAW. PIMSA hereby states that the Leased Property, its soil and underground are free and clear of any hazardous materials, wastes or contaminants. Nevertheless, PIMSA shall indemnify and save the COMPANY harmless from and against losses, demands, claims, payments, suits, actions and judgments of any nature and description brought against it by reason of the fact that contaminants existed on the Leased Property, soil and/or underground, or were deposited there, prior to date of signature of this Agreement. The COMPANY will be responsible for any losses, damages or injuries caused by the contaminants which are deposited on the Leased Property, soil or underground after date of signature of this Agreement. It will be the sole responsibility of the COMPANY to comply with all Federal State or Municipal environmental laws, rules and dispositions, which must be complied with by the COMPANY pursuant with the industrial activities it will perform in the Leased Property and therefore, must obtain the required licenses, authorizations, permits and any other document that it must possess pursuant with the aforestated environmental rules. 20 Furthermore, the COMPANY will be solely and exclusively responsible for any demand, claim, or proceeding initiated against PIMSA, and which results from acts or omissions by the COMPANY, regarding the handling of hazardous or toxic materials or wastes located in or moved to, from or through the Leased Property. The COMPANY in these cases, shall indemnify and save PIMSA harmless from and against losses, demands, claims, payments, suits, actions and judgments of any competent environmental authority. XXVIII. MISCELLANEOUS. A. This document contains all of the agreements and conditions made between the parties, and may not be modified orally in any manner other than by a written agreement signed by the authorized representative of the parties. B. If any term, covenant, condition or provision of this Lease Agreement, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction, to be invalid, void or unenforceable, the remainder of the terms, covenants, conditions or provisions of this Lease Agreement, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated. C. In the event that either party should bring an action against the other party for the possession of the Leased Property, or for the recovery of any sum due hereunder, or because of the breach or default of any covenant in this Lease Agreement, the prevailing party shall have the right to collect from the other party its costs and expense, including attorneys' fees. D. Every payment and performance required by this Lease Agreement, shall be paid and performed precisely on the date specified for such payment or performance and no delay or extension thereof shall be permitted. E. The titles and subtitles in these clauses of this document shall have no effect on the interpretation of the terms and provisions contained in this Lease Agreement. F. The parties agree that this Lease Agreement be governed by the Laws of the State of Baja California. For everything pertaining to the interpretation and compliance of this Lease Agreement the parties thereby expressly submit to the jurisdiction of the Civil Courts of the City of Mexicali, State of Baja California, waiving any other jurisdiction which 21 might be applicable by reason of their present or future domiciles or otherwise. G. This Lease Agreement shall be executed in Spanish and English. However, in the event a dispute or other inconsistency should arise regarding interpretation or meaning of this Lease Agreement, the English version shall control. H. Whenever the prior consent of either party, written or otherwise, is required as a condition for any act by the other party under this Lease Agreement, such party agrees not to arbitrarily or unreasonably withhold such consent. I. Each party shall execute such further documents as shall be requested by the other party, but only to the extent that the effect of said documents is to give legal effect to rights set forth in the Lease Agreement. J. COMPANY hereby covenants to PIMSA, and PIMSA relies upon said covenant as a material inducement to enter into this Lease, that COMPANY will deliver to PIMSA, concurrently with the execution and delivery hereof a Guaranty of this Lease in the form attached hereto as EXHIBIT "D", executed by, COASTCAST CORPORATION, or by such other Guarantor as may be acceptable to PIMSA. K. Submission of this instrument for examination or signature by COMPANY does not constitute a reservation of or option to Lease, and it is not effective as a Lease or otherwise until execution and delivery by both PIMSA and COMPANY. L. This Lease and each of its covenants and conditions shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions hereof. Whenever in this Lease Agreement a reference is made to PIMSA, such reference shall be deemed to refer to the person in whom the interest of the lessor hereunder shall be vested. Any successor or assignee of COMPANY who accepts an assignment or the benefit of this Lease Agreement and enters into possession or enjoyment hereunder shall thereby assume and agree to perform and be bound by the covenants and conditions thereof. M. In the event the Government of Mexico or any subdivision thereof appropriates, forcibly buys or in any other way takes over the assets or business of the lessee, and without due cause by COMPANY prevents COMPANY from doing 22 business in Mexico, the COMPANY may upon written notice to PIMSA terminate this Lease Agreement without liability or penalty for such termination and without further liability for rental payments due under this Lease Agreement but without prejudice to the rights of PIMSA and COMPANY to claim from the corresponding authority the damages caused. XXIX. Rider number I, PIMSA's Improvements, is attached hereto and by this reference made a part hereof. IN WITNESS WHEREOF, the parties have executed this Lease Agreement as of the 16th day of December, nineteen hundred ninety eight. "PIMSA" "COMPANY" /s/ Eduardo Manuel Martinez Polomera /s/ William Lawrence Osborn PARQUE INDUSTRIAL MEXICALI, COASTCAST CORPORATION, S.A. S.A. DE C.V. Mr. William Lawrence Osborn Mr. Eduardo Manuel Martinez General Director of Operations Palomera and General Manager Executive Vice President W I T N E S S E S /s/ [ILLEGIBLE] /s/ Hans H. Buehler -------------------------- --------------------------- EX-10.10 5 EXHIBIT 10.10 G U A R A N T Y WHEREAS, PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., a Mexican Corporation (hereinafter referred to as PIMSA) is the owner of certain real property in the Industrial Park of Mexicali; and WHEREAS, this Guaranty is given by COASTCAST CORPORATION (hereinafter referred to as the GUARANTOR) to induce PIMSA to enter into a Lease Agreement, with COASTCAST CORPORATION, S.A., a Mexican Corporation (hereinafter referred to as COMPANY), dated December 16, 1998, for the Leased Property located on Lots 4, 5, 6, 7 and 8 of Block 4 in the Mexicali Industrial Park I. NOW, THEREFORE, in consideration of the foregoing, it is agreed: 1. OBLIGATION OF THE GUARANTOR. The GUARANTOR unconditionally guarantees to PIMSA, its successors and assigns, the prompt, full and complete payment and performance to PIMSA of all of the conditions, covenants, obligations, liabilities and agreements of COMPANY as set forth in the Lease Agreement, attached hereto as EXHIBIT "A" or any extension thereof between PIMSA and COMPANY. This Guaranty extends to and includes any and all interest due or to become due, together with all attorneys' fees, costs and expenses of collection incurred by PIMSA in connection with any matter covered by this Guaranty. 2. TERM OF GUARANTY. The liability of the GUARANTOR shall continue until payment is made and performance given pursuant to every obligation of the COMPANY now due or hereafter to become due in accordance with the terms of the Lease Agreement or any extension thereof, between PIMSA and COMPANY, and until payment is made of any loss or damage incurred by PIMSA with respect to any matter covered by this Guaranty. This Guaranty shall be irrevocable. Nothing contained herein shall impose upon GUARANTOR any greater or different liability that is or may be imposed on said COMPANY under the Lease Agreement except GUARANTOR's liability to pay PIMSA attorneys' fees, costs and expenses of collection incurred in proceeding against GUARANTOR hereunder. 3. CONSENT TO PIMSA'S ACTS. The GUARANTOR consents, without affecting the GUARANTOR'S liability to PIMSA hereunder, that PIMSA may, without notice to or consent of the GUARANTOR, upon such terms as it may deem advisable: a) Extend, in whole or in part, by renewal or otherwise anytime of payment or performance on the part of COMPANY, provided for in the Lease Agreement; 2 b) Release, surrender, exchange, modify, impair or extend any period or duration, or any time for performance, or payment on the part of COMPANY, required by the Lease Agreement; and c) Settle or compromise any claim of PIMSA against COMPANY or against any other person, firm or corporation whose obligation is held by PIMSA as security for COMPANY's obligation to PIMSA under the Lease Agreement. The GUARANTOR hereby ratifies and affirms any such extension renewal, release, surrender, exchange, modification, impairment, settlement or compromise and all such acts shall be binding upon GUARANTOR who hereby waives all defenses, counterclaims or offsets which GUARANTOR might have solely by reason thereof. 4. WAIVER OF GUARANTOR. GUARANTOR waives: a) Notice of acceptance of this Guaranty by PIMSA. b) Notice of presentment, notice of nonperformance, notices of dishonor and notices of the existence, creation or incurring of new or additional indebtedness or obligations, demands for payment or performance or protest of any obligations of COMPANY to PIMSA under the Lease Agreement; c) Notice of the failure of any person, firm or corporation to pay to PIMSA any indebtedness held by PIMSA as collateral security for any obligation of COMPANY to PIMSA under the Lease Agreement; d) Any right to require PIMSA to (I) proceed against COMPANY; (II) proceed against or exhaust any security or other lien or right of or held by PIMSA from COMPANY; or (III) pursue any other remedy in the power of PIMSA whatsoever; e) Any defenses, offsets or claims whatsoever which COMPANY may have against PIMSA; f) Any defenses, offsets or claims arising from any governmental action or intervention which wholly or partially frustrates the performance of the Lease Agreement by the COMPANY or frustrates any or all of the purposes for which the Lease Agreement was entered into; g) Any defects in perfection of the assignment and pledge of the rents by failure to record the Lease Agreement or any instrument of assignment and pledge in the Public Registry under Mexican Law. 3 5. REPRESENTATIONS BY GUARANTOR. GUARANTOR represents and warrants that at the time of execution and delivery of this Guaranty, nothing exists to impair the effectiveness of the liability of GUARANTOR to PIMSA hereunder, or the immediate taking effect of this GUARANTY as the sole agreement between the GUARANTOR and PIMSA with respect to guaranteeing all of COMPANY's obligations to PIMSA under the Lease Agreement. GUARANTOR further represents and warrants that GUARANTOR is authorized to execute and deliver this Guaranty and that the person executing this Guaranty is authorized to execute the same for and on behalf of GUARANTOR. 6. REMEDY OF PIMSA. In the event of any default on the part of COMPANY as defined in the Lease Agreement, PIMSA may at its option proceed in the first instance against GUARANTOR, jointly and severally, to collect any obligation covered by this Guaranty, without first proceeding against COMPANY or any other person, firm or corporation and without first resorting to any property at any time held by PIMSA as collateral security. 7. MODIFICATION OF AGREEMENT. The whole of this Guaranty is herein set forth and there is no verbal or other written agreement and no understanding or custom affecting the terms hereof. This Guaranty can be modified only by a written instrument signed by the party to be charged therewith. 8. NON-WAIVER BY PIMSA. The liability of GUARANTOR under this Guaranty shall not be affected by the insolvency of COMPANY or PIMSA, at any time or by the acceptance by PIMSA of security, notes, acceptance, drafts or checks or by assignment, foreclosure or other dispositions thereof by PIMSA, at any time, or by PIMSA presenting or proving for allowance any secured or unsecured claim or demand or by PIMSA's acceptance of any composition, plan of reorganization, settlement, compromise, dividend, payment or distributions; and GUARANTOR shall not be entitled to claim any right in or benefit by reason of, any such composition, plan of reorganization, settlement, compromise, dividend, payment or distribution, or in or by reason of any security held by PIMSA, or the proceeds or other disposition thereof; unless and until all of said obligations, liabilities and indebtedness, together with interest, attorneys' fees and costs due to PIMSA under this Guaranty or under the Lease Agreement, shall have been paid in full. Nothing contained in this Agreement shall alter any of the rights or remedies of PIMSA against COMPANY. GUARANTOR authorizes PIMSA, without notice or demand and without affecting the liability of GUARANTOR hereunder, from time to time to: 4 a) Renew, compromise, extend, accelerate, or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof under the Lease Agreement, including increase or decrease of any amounts due thereunder or any rate of interest specified therein; b) Take and hold security for the payment of this Guaranty or the indebtedness guaranteed, and exchange, enforce, waive, release, any such security; c) Apply such security and direct the order or manner of sale thereof, as PIMSA in its discretion may determine; and d) Release or substitute any one or more of COMPANY or GUARANTOR. PIMSA may assign this Guaranty in whole or in part. GUARANTOR may assign this Guaranty in whole or in part, provided that GUARANTOR shall remain liable for its obligations hereunder unless released therefrom by PIMSA or its successors and provided further that GUARANTOR shall first give PIMSA sixty (60) days prior written notice. 9. APPLICABLE LAW. This Guaranty is entered into in the County of Imperial, State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with the laws of the State of California. The parties further agree that in the event a dispute should arise as to the obligations of either party hereto, the parties expressly waive the right to bring or remove any action in or to the otherwise appropriate Federal District Court. Such judicial actions shall be pursued exclusively in the appropriate State forum. 10. MISCELLANEOUS PROVISIONS. GUARANTOR agrees to pay to PIMSA a reasonable attorneys' fee and all other costs and expenses which may be incurred by PIMSA in the collection or efforts to collect the indebtedness owed by COMPANY to PIMSA pursuant to the Lease Agreement or in the collection or efforts to collect or enforcement of the sums due under this Guaranty, provided that if GUARANTOR is the prevailing party in any action or proceeding to enforce this Guaranty or collect any amounts allegedly due hereunder, PIMSA shall pay GUARANTOR a reasonable attorneys' fee and other costs and expenses which may be incurred by GUARANTOR. The paragraph headings of this Guaranty are not part of this Guaranty and shall have no effect upon the construction and interpretation of any part hereof and are inserted herein for convenience only. In the event that any provision hereof or any portion of any provision hereof shall be deemed to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other portion of said provision or any other 5 provision herein. All remedies herein conferred upon PIMSA shall be cumulative and no one exclusive of any other remedy conferred herein or by law or equity. Time is of the essence in the performance of each and every obligation herein imposed. GUARANTOR represents and warrants that it has all requisite power and authority to enter into this Guaranty agreement and to carry out the provisions and conditions of this Guaranty agreement and that neither the execution or delivery of this agreement or the consummation hereof nor the performance of the terms hereof will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under or result in the creation of any lien pursuant to any other agreement or instrument under which GUARANTOR is obligated. 11. ACKNOWLEDGEMENT OF ASSIGNMENT. In the event this Guaranty is assigned to a bank or other lending institution, the GUARANTOR shall furnish to such entity a letter stating that the GUARANTOR acknowledges receipt of notice of an assignment by PIMSA of said Guaranty; that said Guaranty is in full force and effect; that no changes to the Guaranty as originally executed have been made; that the GUARANTOR will not enter into any modification of this Guaranty without first obtaining prior written approval thereof from said lender; that said lender may rely solely upon the Guaranty with respect to the lender's right to receive the rents in accordance with the terms of the Lease Agreement; and that all payments made thereafter shall be made to the lender or its assigns at such times not in conflict with those permissible under the Lease Agreement, at such places and/or in United States Dollars as directed by the lender or its assigns. 12. NOTICE OF DEFAULT. Notwithstanding any provision to the contrary herein expressed or implied, no claim of default on the part of COMPANY or on the part of GUARANTOR shall be made hereunder unless and until notice of such defaults has been given to COMPANY as provided in the Lease Agreement and a copy thereof mailed to GUARANTOR by first class certified or registered mail, postage prepaid at: 3025 East Victoria Street, Rancho Dominguez, California 90221, Attention President. 13. SUCCESSORS BOUND. This Guaranty is binding jointly and severally upon GUARANTOR and its legal representatives and successors and shall inure to the benefit of PIMSA, its legal representatives, successors and assigns. IN WITNESS WHEREOF, GUARANTOR has signed this Agreement as of the 26th day of January, 1999. 6 "GUARANTOR" By: /s/ Hans H. Buehler -------------------------- Its: CEO Attest: By: /s/ Robert C. Bruning -------------------------- Its: CFO -------------------------- EX-10.11 6 EXHIBIT 10.11 Exhibit 10.11 G U A R A N T Y WHEREAS, PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., a Mexican Corporation (hereinafter referred to as PIMSA) is the owner of certain real property in the Industrial Park of Mexicali; and WHEREAS, this Guaranty is given by COASTCAST CORPORATION (hereinafter referred to as the GUARANTOR) to induce PIMSA to enter into a Lease Agreement, with COASTCAST CORPORATION, S.A, a Mexican Corporation (hereinafter referred to as COMPANY), dated December 16, 1998, for the Leased Property located on Lots 4, 5, 6, 7, 8 and 9 of Block 5 in the Mexicali Industrial Park I. NOW, THEREFORE, in consideration of the foregoing, it is agreed: 1. OBLIGATION OF THE GUARANTOR. The GUARANTOR unconditionally guarantees to PIMSA, its successors and assigns, the prompt, full and complete payment and performance to PIMSA of all of the conditions, covenants, obligations, liabilities and agreements of COMPANY as set forth in the Lease Agreement, attached hereto as EXHIBIT "A" or any extension thereof between PIMSA and COMPANY. This Guaranty extends to and includes any and all interest due or to become due, together with all attorneys' fees, costs and expenses of collection incurred by PIMSA in connection with any matter covered by this Guaranty. 2. TERM OF GUARANTY. The liability of the GUARANTOR shall continue until payment is made and performance given pursuant to every obligation of the COMPANY now due or hereafter to become due in accordance with the terms of the Lease Agreement or any extension thereof, between PIMSA and COMPANY, and until payment is made of any loss or damage incurred by PIMSA with respect to any matter covered by this Guaranty. This Guaranty shall be irrevocable. Nothing contained herein shall impose upon GUARANTOR any greater or different liability that is or may be imposed on said COMPANY under the Lease Agreement except GUARANTOR's liability to pay PIMSA attorneys' fees, costs and expenses of collection incurred in proceeding against GUARANTOR hereunder. 3. CONSENT TO PIMSA'S ACTS. The GUARANTOR consents, without affecting the GUARANTOR's liability to PIMSA hereunder, that PIMSA may, without notice to or consent of the GUARANTOR, upon such terms as it may deem advisable: a) Extend, in whole or in part, by renewal or otherwise anytime of payment or performance on the part of COMPANY, provided for in the Lease Agreement; 2 b) Release, surrender, exchange, modify, impair or extend any period or duration, or any time for performance, or payment on the part of COMPANY, required by the Lease Agreement; and c) Settle or compromise any claim of PIMSA against COMPANY or against any other person, firm or corporation whose obligation is held by PIMSA as security for COMPANY's obligation to PIMSA under the Lease Agreement. The GUARANTOR hereby ratifies and affirms any such extension renewal, release, surrender, exchange, modification, impairment, settlement or compromise and all such acts shall be binding upon GUARANTOR who hereby waives all defenses, counterclaims or offsets which GUARANTOR might have solely by reason thereof. 4. WAIVER OF GUARANTOR. GUARANTOR waives: a) Notice of acceptance of this Guaranty by PIMSA. b) Notice of presentment, notice of nonperformance, notices of dishonor and notices of the existence, creation or incurring of new or additional indebtedness or obligations, demands for payment or performance or protest of any obligations of COMPANY to PIMSA under the Lease Agreement; c) Notice of the failure of any person, firm or corporation to pay to PIMSA any indebtedness held by PIMSA as collateral security for any obligation of COMPANY to PIMSA under the Lease Agreement; d) Any right to require PIMSA to (I) proceed against COMPANY; (II) proceed against or exhaust any security or other lien or right of or held by PIMSA from COMPANY; or (III) pursue any other remedy in the power of PIMSA whatsoever; e) Any defenses, offsets or claims whatsoever which COMPANY may have against PIMSA; f) Any defenses, offsets or claims arising from any governmental action or intervention which wholly or partially frustrates the performance of the Lease Agreement by the COMPANY or frustrates any or all of the purposes for which the Lease Agreement was entered into; g) Any defects in perfection of the assignment and pledge of the rents by failure to record the Lease Agreement or any instrument of assignment and pledge in the Public Registry under Mexican Law. 3 5. REPRESENTATIONS BY GUARANTOR. GUARANTOR represents and warrants that at the time of execution and delivery of this Guaranty, nothing exists to impair the effectiveness of the liability of GUARANTOR to PIMSA hereunder, or the immediate taking effect of this GUARANTY as the sole agreement between the GUARANTOR and PIMSA with respect to guaranteeing all of COMPANY's obligations to PIMSA under the Lease Agreement. GUARANTOR further represents and warrants that GUARANTOR is authorized to execute and deliver this Guaranty and that the person executing this Guaranty is authorized to execute the same for and on behalf of GUARANTOR. 6. REMEDY OF PIMSA. In the event of any default on the part of COMPANY as defined in the Lease Agreement, PIMSA may at its option proceed in the first instance against GUARANTOR, jointly and severally, to collect any obligation covered by this Guaranty, without first proceeding against COMPANY or any other person, firm or corporation and without first resorting to any property at any time held by PIMSA as collateral security. 7. MODIFICATION OF AGREEMENT. The whole of this Guaranty is herein set forth and there is no verbal or other written agreement and no understanding or custom affecting the terms hereof. This Guaranty can be modified only by a written instrument signed by the party to be charged therewith. 8. NON-WAIVER BY PIMSA. The liability of GUARANTOR under this Guaranty shall not be affected by the insolvency of COMPANY or PIMSA, at any time or by the acceptance by PIMSA of security, notes, acceptance, drafts or checks or by assignment, foreclosure or other dispositions thereof by PIMSA, at any time, or by PIMSA presenting or proving for allowance any secured or unsecured claim or demand or by PIMSA's acceptance of any composition, plan of reorganization, settlement, compromise, dividend, payment or distributions; and GUARANTOR shall not be entitled to claim any right in or benefit by reason of, any such composition, plan of reorganization, settlement, compromise, dividend, payment or distribution, or in or by reason of any security held by PIMSA, or the proceeds or other disposition thereof; unless and until all of said obligations, liabilities and indebtedness, together with interest, attorneys' fees and costs due to PIMSA under this Guaranty or under the Lease Agreement, shall have been paid in full. Nothing contained in this Agreement shall alter any of the rights or remedies of PIMSA against COMPANY. GUARANTOR authorizes PIMSA, without notice or demand and without affecting the liability of GUARANTOR hereunder, from time to time to: 4 a) Renew, compromise, extend, accelerate, or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof under the Lease Agreement, including increase or decrease of any amounts due thereunder or any rate of interest specified therein; b) Take and hold security for the payment of this Guaranty or the indebtedness guaranteed, and exchange, enforce, waive, release, any such security; c) Apply such security and direct the order or manner of sale thereof, as PIMSA in its discretion may determine; and d) Release or substitute any one or more of COMPANY or GUARANTOR. PIMSA may assign this Guaranty in whole or in part. GUARANTOR may assign this Guaranty in whole or in part, provided that GUARANTOR shall remain liable for its obligations hereunder unless released therefrom by PIMSA or its successors and provided further that GUARANTOR shall first give PIMSA sixty (60) days prior written notice. 9. APPLICABLE LAW. This Guaranty is entered into in the County of Imperial, State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with the laws of the State of California. The parties further agree that in the event a dispute should arise as to the obligations of either party hereto, the parties expressly waive the right to bring or remove any action in or to the otherwise appropriate Federal District Court. Such judicial actions shall be pursued exclusively in the appropriate State forum. 10. MISCELLANEOUS PROVISIONS. GUARANTOR agrees to pay to PIMSA a reasonable attorneys' fee and all other costs and expenses which may be incurred by PIMSA in the collection or efforts to collect the indebtedness owed by COMPANY to PIMSA pursuant to the Lease Agreement or in the collection or efforts to collect or enforcement of the sums due under this Guaranty, provided that if GUARANTOR is the prevailing party in any action or proceeding to enforce this Guaranty or collect any amounts allegedly due hereunder, PIMSA shall pay GUARANTOR a reasonable attorneys' fee and other costs and expenses which may be incurred by GUARANTOR. The paragraph headings of this Guaranty are not part of this Guaranty and shall have no effect upon the construction and interpretation of any part hereof and are inserted herein for convenience only. In the event that any provision hereof or any portion of any provision hereof shall be deemed to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other portion of said provision or any other 5 provision herein. All remedies herein conferred upon PIMSA shall be cumulative and no one exclusive of any other remedy conferred herein or by law or equity. Time is of the essence in the performance of each and every obligation herein imposed. GUARANTOR represents and warrants that is has all requisite power and authority to enter into this Guaranty agreement and to carry out the provisions and conditions of this Guaranty agreement and that neither the execution or delivery of this agreement or the consummation hereof nor the performance of the terms hereof will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under or result in the creation of any lien to any other agreement or instrument under which GUARANTOR is obligated. 11. ACKNOWLEDGEMENT OF ASSIGNMENT. In the event this Guaranty is assigned to a bank or other lending institution, the GUARANTOR shall furnish to such entity a letter stating that the GUARANTOR acknowledges receipt of notice of an assignment by PIMSA of said Guaranty; that said Guaranty is in full force and effect; that no changes to the Guaranty as originally executed have been made; that the GUARANTOR will not enter into any modification of this Guaranty without first obtaining prior written approval thereof from said lender; that said lender may rely solely upon the Guaranty with respect to the lender's right to receive the rents in accordance with the terms of the Lease Agreement; and that all payments made thereafter shall be made to the lender or its assigns at such times not in conflict with those permissible under the Lease Agreement, at such places and/or in United States Dollars as directed by the lender or its assigns. 12. NOTICE OF DEFAULT. Notwithstanding any provision to the contrary herein expressed or implied, no claim of default on the part of COMPANY or on the part of GUARANTOR shall be made hereunder unless and until notice of such defaults has been given to COMPANY as provided in the Lease Agreement and a copy thereof mailed to GUARANTOR by first class certified or registered mail, postage prepaid at: 3025 East Victoria Street, Rancho Dominguez, California 90221, Attention President. 13. SUCCESSORS BOUND. This Guaranty is binding jointly and severally upon GUARANTOR and its legal representatives and successors and shall inure to the benefit of PIMSA, its legal representatives, successors and assigns. IN WITNESS WHEREOF, GUARANTOR has signed this Agreement as of the 26th day of January, 1999. 6 "GUARANTOR" By: /s/ Hans H. Buehler -------------------------- Its: ----------------------------- CEO Attest: By: /s/ Robert C. Bruning --------------------------- Its: CFO ---------------------------- EX-10.12 7 EXHIBIT 10.12 G U A R A N T Y WHEREAS, PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., a Mexican Corporation (hereinafter referred to as PIMSA) is the owner of certain real property in the Industrial Park of Mexicali; and WHEREAS, this Guaranty is given by COASTCAST CORPORATION (hereinafter referred to as the GUARANTOR) to induce PIMSA to enter into a Lease Agreement, with COASTCAST CORPORATION, S.A., a Mexican Corporation (hereinafter referred to as COMPANY), dated December 16, 1998, for the Leased Property located on Lots 1, 2, 3, 4, 5, 6, 7 and 8 and a portion of Lot 9 of Block 2 in the Mexicali Industrial Park I. NOW, THEREFORE, in consideration of the foregoing, it is agreed: 1. OBLIGATION OF THE GUARANTOR. The GUARANTOR unconditionally guarantees to PIMSA, its successors and assigns, the prompt, full and complete payment and performance to PIMSA of all of the conditions, covenants, obligations, liabilities and agreements of COMPANY as set forth in the Lease Agreement, attached hereto as EXHIBIT "A" or any extension thereof between PIMSA and COMPANY. This Guaranty extends to and includes any and all interest due or to become due, together with all attorneys' fees, costs and expenses of collection incurred by PIMSA in connection with any matter covered by this Guaranty. 2. TERM OF GUARANTY. The liability of the GUARANTOR shall continue until payment is made and performance given pursuant to every obligation of the COMPANY now due or hereafter to become due in accordance with the terms of the Lease Agreement or any extension thereof, between PIMSA and COMPANY, and until payment is made of any loss or damage incurred by PIMSA with respect to any matter covered by this Guaranty. This Guaranty shall be irrevocable. Nothing contained herein shall impose upon GUARANTOR any greater or different liability that is or may be imposed on said COMPANY under the Lease Agreement except GUARANTOR's liability to pay PIMSA attorneys' fees, costs and expenses of collection incurred in proceeding against GUARANTOR hereunder. 3. CONSENT TO PIMSA'S ACTS. The GUARANTOR consents, without affecting the GUARANTOR'S liability to PIMSA hereunder, that PIMSA may, without notice to or consent of the GUARANTOR, upon such terms as it may deem advisable: a) Extend, in whole or in part, by renewal or otherwise anytime of payment or performance on the part of COMPANY, provided for in the Lease Agreement; 2 b) Release, surrender, exchange, modify, impair or extend any period or duration, or any time for performance, or payment on the part of COMPANY, required by the Lease Agreement; and c) Settle or compromise any claim of PIMSA against COMPANY or against any other person, firm or corporation whose obligation is held by PIMSA as security for COMPANY's obligation to PIMSA under the Lease Agreement. The GUARANTOR hereby ratifies and affirms any such extension renewal, release, surrender, exchange, modification, impairment, settlement or compromise and all such acts shall be binding upon GUARANTOR who hereby waives all defenses, counterclaims or offsets which GUARANTOR might have solely by reason thereof. 4. WAIVER OF GUARANTOR. GUARANTOR waives: a) Notice of acceptance of this Guaranty by PIMSA. b) Notice of presentment, notice of nonperformance, notices of dishonor and notices of the existence, creation or incurring of new or additional indebtedness or obligations, demands for payment or performance or protest of any obligations of COMPANY to PIMSA under the Lease Agreement; c) Notice of the failure of any person, firm or corporation to pay to PIMSA any indebtedness held by PIMSA as collateral security for any obligation of COMPANY to PIMSA under the Lease Agreement; d) Any right to require PIMSA to (I) proceed against COMPANY; (II) proceed against or exhaust any security or other lien or right of or held by PIMSA from COMPANY; or (III) pursue any other remedy in the power of PIMSA whatsoever; e) Any defenses, offsets or claims whatsoever which COMPANY may have against PIMSA; f) Any defenses, offsets or claims arising from any governmental action or intervention which wholly or partially frustrates the performance of the Lease Agreement by the COMPANY or frustrates any or all of the purposes for which the Lease Agreement was entered into; g) Any defects in perfection of the assignment and pledge of the rents by failure to record the Lease Agreement or any instrument of assignment and pledge in the Public Registry under Mexican Law. 3 5. REPRESENTATIONS BY GUARANTOR. GUARANTOR represents and warrants that at the time of execution and delivery of this Guaranty, nothing exists to impair the effectiveness of the liability of GUARANTOR to PIMSA hereunder, or the immediate taking effect of this GUARANTY as the sole agreement between the GUARANTOR and PIMSA with respect to guaranteeing all of COMPANY's obligations to PIMSA under the Lease Agreement. GUARANTOR further represents and warrants that GUARANTOR is authorized to execute and deliver this Guaranty and that the person executing this Guaranty is authorized to execute the same for and on behalf of GUARANTOR. 6. REMEDY OF PIMSA. In the event of any default on the part of COMPANY as defined in the Lease Agreement, PIMSA may at its option proceed in the first instance against GUARANTOR, jointly and severally, to collect any obligation covered by this Guaranty, without first proceeding against COMPANY or any other person, firm or corporation and without first resorting to any property at any time held by PIMSA as collateral security. 7. MODIFICATION OF AGREEMENT. The whole of this Guaranty is herein set forth and there is no verbal or other written agreement and no understanding or custom affecting the terms hereof. This Guaranty can be modified only by a written instrument signed by the party to be charged therewith. 8. NON-WAIVER BY PIMSA. The liability of GUARANTOR under this Guaranty shall not be affected by the insolvency of COMPANY or PIMSA, at any time or by the acceptance by PIMSA of security, notes, acceptance, drafts or checks or by assignment, foreclosure or other dispositions thereof by PIMSA, at any time, or by PIMSA presenting or proving for allowance any secured or unsecured claim or demand or by PIMSA's acceptance of any composition, plan of reorganization, settlement, compromise, dividend, payment or distributions; and GUARANTOR shall not be entitled to claim any right in or benefit by reason of, any such composition, plan of reorganization, settlement, compromise, dividend, payment or distribution, or in or by reason of any security held by PIMSA, or the proceeds or other disposition thereof; unless and until all of said obligations, liabilities and indebtedness, together with interest, attorneys' fees and costs due to PIMSA under this Guaranty or under the Lease Agreement, shall have been paid in full. Nothing contained in this Agreement shall alter any of the rights or remedies of PIMSA against COMPANY. GUARANTOR authorizes PIMSA, without notice or demand and without affecting the liability of GUARANTOR hereunder, from time to time to: 4 a) Renew, compromise, extend, accelerate, or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof under the Lease Agreement, including increase or decrease of any amounts due thereunder or any rate of interest specified therein; b) Take and hold security for the payment of this Guaranty or the indebtedness guaranteed, and exchange, enforce, waive, release, any such security; c) Apply such security and direct the order or manner of sale thereof, as PIMSA in its discretion may determine; and d) Release or substitute any one or more of COMPANY or GUARANTOR. PIMSA may assign this Guaranty in whole or in part. GUARANTOR may assign this Guaranty in whole or in part, provided that GUARANTOR shall remain liable for its obligations hereunder unless released therefrom by PIMSA or its successors and provided further that GUARANTOR shall first give PIMSA sixty (60) days prior written notice. 9. APPLICABLE LAW. This Guaranty is entered into in the County of Imperial, State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with the laws of the State of California. The parties further agree that in the event a dispute should arise as to the obligations of either party hereto, the parties expressly waive the right to bring or remove any action in or to the otherwise appropriate Federal District Court. Such judicial actions shall be pursued exclusively in the appropriate State forum. 10. MISCELLANEOUS PROVISIONS. GUARANTOR agrees to pay to PIMSA a reasonable attorneys' fee and all other costs and expenses which may be incurred by PIMSA in the collection or efforts to collect the indebtedness owed by COMPANY to PIMSA pursuant to the Lease Agreement or in the collection or efforts to collect or enforcement of the sums due under this Guaranty, provided that if GUARANTOR is the prevailing party in any action or proceeding to enforce this Guaranty or collect any amounts allegedly due hereunder, PIMSA shall pay GUARANTOR a reasonable attorneys' fee and other costs and expenses which may be incurred by GUARANTOR. The paragraph headings of this Guaranty are not part of this Guaranty and shall have no effect upon the construction and interpretation of any part hereof and are inserted herein for convenience only. In the event that any provision hereof or any portion of any provision hereof shall be deemed to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other portion of said provision or any other 5 provision herein. All remedies herein conferred upon PIMSA shall be cumulative and no one exclusive of any other remedy conferred herein or by law or equity. Time is of the essence in the performance of each and every obligation herein imposed. GUARANTOR represents and warrants that it has all requisite power and authority to enter into this Guaranty agreement and to carry out the provisions and conditions of this Guaranty agreement and that neither the execution or delivery of this agreement or the consummation hereof nor the performance of the terms hereof will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under or result in the creation of any lien pursuant to any other agreement or instrument under which GUARANTOR is obligated. 11. ACKNOWLEDGEMENT OF ASSIGNMENT. In the event this Guaranty is assigned to a bank or other lending institution, the GUARANTOR shall furnish to such entity a letter stating that the GUARANTOR acknowledges receipt of notice of an assignment by PIMSA of said Guaranty; that said Guaranty is in full force and effect; that no changes to the Guaranty as originally executed have been made; that the GUARANTOR will not enter into any modification of this Guaranty without first obtaining prior written approval thereof from said lender; that said lender may rely solely upon the Guaranty with respect to the lender's right to receive the rents in accordance with the terms of the Lease Agreement; and that all payments made thereafter shall be made to the lender or its assigns at such times not in conflict with those permissible under the Lease Agreement, at such places and/or in United States Dollars as directed by the lender or its assigns. 12. NOTICE OF DEFAULT. Notwithstanding any provision to the contrary herein expressed or implied, no claim of default on the part of COMPANY or on the part of GUARANTOR shall be made hereunder unless and until notice of such defaults has been given to COMPANY as provided in the Lease Agreement and a copy thereof mailed to GUARANTOR by first class certified or registered mail, postage prepaid at: 3025 East Victoria Street, Rancho Dominguez, California 90221, Attention President. 13. SUCCESSORS BOUND. This Guaranty is binding jointly and severally upon GUARANTOR and its legal representatives and successors and shall inure to the benefit of PIMSA, its legal representatives, successors and assigns. IN WITNESS WHEREOF, GUARANTOR has signed this Agreement as of the 26th day of January, 1999. 6 "GUARANTOR" By: /s/ Hans H. Buehler ----------------------------- Its: CEO ----------------------------- Attest: By: /s/ Robert C. Bruning --------------------------- Its: CFO --------------------------- EX-10.15 8 EXHIBIT 10.15 EXHIBIT 10.15 LEASE AGREEMENT ENTERED INTO BY AND BETWEEN FREDERICK CLARKE SANDERS, Jr., FREDERICK SANDERS FLOURIE, MONIQUE SANDERS FLOURIE, SCOTT MICHAEL SANDERS FLOURIE, AND CARLO E. MUZQUIZ DAVILA (HEREINAFTER JOINTLY REFERRED TO AS "THE LESSOR"), AND COASTCAST TIJUANA, S DE R.L. DE C.V. (HEREINAFTER REFERRED TO AS THE "LESSEE"), REPRESENTED HEREIN BY MR. RAMON IBARRA FRANCO, PURSUANT TO THE FOLLOWING RECITALS AND CLAUSES: R E C I T A L S 1. THE LESSOR hereby declares that: a) It is a fideicommissary with powers to lease and perform improvements regarding the land identified as Lots F1 and F2, located at PASEO DEL CUCAPAH, FRACCIONAMIENTO EL LAGO, in the city of Tijuana, Baja California, as proven by public deed annexed herein as Attachment "A", with 30,614.15 square meters of surface (hereinafter referred to as the "Land", together with a plan stating the exact location of it, as well as its description under attached "A-1", which jointly constitute the present agreement. b) It is currently arranging to obtain official documentation on the part of the competent authorities that so define the industrial use of the Land. c) The Land has access to water, drainage, electricity, and electrical capabilities to provide services to the improvements, as defined hereinbelow, according to the requirements and specifications detailed in Attachment "B" herein, as well as to the Expansion Improvements, a term which is also defined hereinbelow. d) For the purposes of this Lease Agreement, the address at which it has its principal place of business is: BOULEVARD PACIFICO NO. 14533, PARQUE INDUSTRIAL PACIFICO, TIJUANA, BAJA CALIFORNIA. e) It has agreed to perform certain improvements to the Land, which are defined in Clause 2, as follows, and to lease said Land and the Lessor Improvements to the Lessee (hereinafter jointly referred to as "Leased Property") f) The land is free from any encumbrances and other ownership limitations, with the exception of easements, agreements, park regulations (as such term is defined hereinafter), along with other service constraints or easements, referred to as the "Permitted Easements"). g) They have the powers to enter into this agreement as accredited in the deed, as pertinent, with public deeds annexed hereof as Attachment "A", and ratified herein by Bancrecer, S.A. Said powers have not been revoked nor constrained. h) Is currently undertaking the organization of an association of tenants and owners of real estate and improvements in the PARQUE INDUSTRIAL EL LAGO (the "Park Association"), which shall operate according to its own statutes and the regulations of the PARQUE INDUSTRIAL EL LAGO (hereinafter the "Park Regulations"), annexed hereof as Attachment "C". i) For purposes of collection of rents and any additional rights derived hereof, they appoint Mr. Frederick Clarke Sanders as trustee of all individuals that form the LESSOR. II. Mr. Ramon Ibarra Franco hereby declares that: a) Coastcast Tijuana, S. de R.L. de C.V. is a duly organized company under the Mexican General Corporation Law, pursuant to public deed number 28155, volume 585, dated the 16th day of December, 1997, and granted before the faith of Notary Public Number Eight (8) for the City of Mexicali, Victor Ibanez Bracamontes, Attorney at Law, copy of which is annexed herein as Attachment "D". 1 b) It possesses sufficient powers to represent the Lessor, which have not been revoked nor constrained in any way, as accredited in the public deed referred to in the preceding paragraph. c) The address of its constituent shall be precisely that of the Leased Property. However, for purposes of previous notices to the Lessee prior to Final Occupancy, as this term is defined hereinafter, the address of the Lessee shall be as described in Clause 21. d) Its constituent wishes to enter into this lease with the Lessor regarding the Leased Property, according to the following terms and conditions. Pursuant to the above, both parties agree as follows: C L A U S E S: I.- LEASE AND DELIVERY The LESSOR hereby leases to LESSEE and LESSEE hereby leases from LESSOR the Leased Property described in Attachments "A" and "A1" hereof. II.- INDUSTRIAL INSTALLATIONS. 2.1 The LESSOR shall, at its expense, perform all works, provide all the necessary labor and all new items, and shall obtain all the necessary certificates and permits to build an industrial shell with a surface of 185,907 sq. feet on the Leased Property (hereinafter the "Industrial Installations"), in compliance with the preliminary plans, specifications, construction schedule, and construction terms so established by both parties, and which are annexed herein as Attachment "A1". 2.2 Through the approval of the plans and specifications, the LESSEE shall not assume technical accountability for the terms stated in Attachment "A1" herein. Approval on the part of the LESSEE is of a general nature, unless agreed upon otherwise, and does not exonerate the LESSOR of its accountability for the design, construction, and building of the Industrial Installations under the terms so required. 2.3 The LESSOR shall carry out all constructions regarding the LESSOR Improvements, in compliance with all laws, ordinances, regulations, orders of governmental authorities, as well as with the Park Regulations, which are annexed herein as Attachment "C". The term "LESSEE Improvements" shall refer to all those improvements so described in Clause 4 hereinbelow. The LESSOR shall compensate and exonerate the LESSEE from any and all claims or charges filed by contractors that perform the Industrial Installations, or by the authorities that in a declarative but not limitative manner include: payments to the INSTITUTO MEXICANO DEL SEGURO SOCIAL (Mexican Social Security Institute, or IMSS), the FONDO NACIONAL PARA LA VIVIENDA DE LOS TRABAJADORES (National Fund for Workers Housing, or INFONAVIT), and the fiscal authorities, as well as damages and fees that result, or may originate from the lack of compliance of the obligations on the part of the LESSOR due to the construction of the Industrial Installations and equipment for the Leased Property, according to the requirements of applicable laws and ordinances. 2.4 The LESSOR acknowledges and is in agreement with the LESSEE that the latter may request modifications regarding the design and specifications of the LESSOR Improvements, provided said modifications do not affect their cost or the works in accordance with the construction schedule pertaining to the latter. In the event that said changes affect the costs of the LESSOR Improvements, or the works in accordance with the construction schedule, the LESSOR and the LESSEE shall jointly determine the effect of those changes on the costs, as well as any extension to the construction schedule. If such were the case, where both parties were not able to reach an agreement regarding the costs and time in order to carry out said requested modifications, and also in the event that they 2 could not reach an agreement that resolves the dispute at issue in a satisfactorily manner, both parties agree to solve said controversy through Arbitration in accordance with what is provided in Clause 23.5 herein. The LESSOR agrees to provide the LESSEE with a copy of the request for modifications addressed to the constructor showing the costs and construction schedule, in order to obtain authorization on the part of the LESSEE for such purposes. 2.5 The LESSOR shall diligently complete the LESSOR Improvements in the Leased Property according to the plans and specifications, so that the LESSEE may utilize and occupy said Improvements in accordance with the following schedule: a) Beneficial Occupancy of the Leased Property: February 15, 1998. b) Final Occupancy of the Leased Property: March 15, 1998. For the purposes of this clause, Beneficial Occupancy and Final Occupancy are defined as follows: BENEFICIAL OCCUPANCY: Shall be defined as delivery to the LESSEE of the industrial area of the LESSOR Improvements, including walls, roofs, doors, floors, floor coverings, platforms and interior paint jobs, the entire production area (the "Initial Improvements"), so that the LESSEE may install its equipment within the Leased Property and begin the construction of certain improvements on the part of the LESSEE to the Leased Property, so that all such fixtures, equipment and any other improvements carried out on the part of the LESSEE are sale and may not be damaged by climate conditions or the construction process. FINAL OCCUPANCY: Shall be defined as the substantial completion of all works and finishes of the interior part of the industrial area and office area, as well as all the exterior parts and infrastructure of the LESSOR Improvements, in order to allow the LESSEE to make use of the Leased Property to commence normal unfolding of its operations unhindered, excluding non functional aesthetical issues or the punch list, without exceeding the amount of $66,000.00 Dollars, legal currency of the United States of America, regarding the construction costs of the LESSOR Improvements, in compliance with what is stated in Attachment "B" herein. In the event the cost for the construction of what is stated in the punch list exceeds the amount of $66,000.00 Dollars, legal currency of the United States of America, the date of the Final Occupancy shall be deferred in accordance with what is stated in Clause 2.10. The LESSOR agrees to conclude pending issues appearing in the punch list within a period of thirty (30) of the Date of Final Occupancy. By virtue of the aforesaid, the Date of Final Occupancy shall be that in which the LESSEE acknowledges the completion of the LESSOR Improvements, with the exception of the aforementioned punch list, as the result of an inspection carried through within the Leased Property by the representatives of the LESSEE and the LESSOR. Notwithstanding the aforementioned, in the event that a difference of opinions arises between the LESSEE and the LESSOR regarding the Date of Final Occupancy, both parties agree to perform to the best of their ability in order to amicably resolve the difference. If the difference still remains after a period of thirty (30) days following the notice of completion of the LESSOR Improvements, said difference shall have to be resolved through arbitration according to what is stated hereinbelow. 2.6 At all times, and upon signature of this agreement, the LESSEE and/or its representative, shall have the right to enter the Leased Property to inspect progress on construction of the LESSOR Improvements, and the LESSOR shall have readily available for the LESSEE and/or its representative, the construction log and any other construction report that is available so that the LESSEE and/or its representative, may continually assess the construction of the LESSOR Improvements. If so required by the LESSEE, the LESSOR shall make arrangements for the English translation of said reports for the LESSEE, and the LESSEE agrees to reimburse the LESSOR for any expense disbursed pertaining to said translations. 3 2.7 The LESSOR agrees to contract the services of a reputable laboratory approved by the LESSEE, and to provide the LESSEE with a copy of all results of tests done by the LESSOR or its contractors relating to the Leased Property or the construction of the LESSOR Improvements, and the LESSEE shall have the right to carry out independent tests in any part of the Leased Property, LESSOR Improvements, construction materials and fixtures. Such verification shall be at its own expense to determine if whether the Industrial installations are built in compliance with Attachment "B" hereof. Said independent tests carried out by the LESSEE shall exonerate the LESSOR of any obligation to build the LESSOR Improvements in compliance with Attachment "B" hereof. 2.8 In the event the results of any of the tests indicate the existence of a substantial deviation regarding the completion and specifications of the Lessor Improvements, the LESSEE shall notify the LESSOR of said deviation, and shall require an immediate correction of it, for which the LESSOR agrees to swiftly comply with said requirement. 2.9 In the event the LESSOR does not complete the construction of the LESSOR Improvements so that the LESSEE may occupy the Leased Property on the date of the Beneficial Occupancy stated hereinabove, the LESSEE shall have the right to receive a contractual penalty due to damages, which consists in the reduction of a day of rent for each calendar day of delay in the completion of the Initial LESSOR Improvements in compliance with Attachment "B" and with Clause 2.5 hereof, which defines the improvements to be completed at said date. The aforesaid reduction shall be applied to the first month and, when pertinent, to the subsequent months beginning on the month when the LESSEE commences payment of rents, as is stated herein. Notwithstanding the aforementioned, not the aforesaid penalty nor the rent reduction shall extend the date of the Final Occupancy, nor shall it diminish the compensation for damages the LESSEE has the right to receive in the event the LESSOR fails to comply in the delivery to the LESSEE of the Final Occupancy on the date stated in Clause 2.5 hereinbefore. 2.10 In addition, when the LESSOR fails to comply with the completion of the construction of the LESSOR Improvements, in compliance with Attachment "B", during or before the date of the Final Occupancy of the Leased Property, the LESSEE shall have the right to receive as compensation for damages, and in addition to the reduction of the rent stated in the preceding clause, an amount equivalent to two (2) days of rent for each calendar day of delay of the projected dates for the Final Occupancy. Also, and in the event said delay exceeds a period of thirty (30) days following the date of the Final Occupancy, the penalty for damages shall double, beginning on the thirty-first day of delay after said date of the Final Occupancy, for an amount equivalent to four (4) days of rent for each day of delay, with the understanding, notwithstanding, that (i) in case said delay continues for thirty (30) days after the date of the Final Occupancy as stated hereinabove, or (ii) in case the construction of the installations is stopped or suspended due to the lack of permits or due authorizations from the competent authorities for a period of thirty (30) or more consecutive days (except due to Acts of Nature or Force Majeure), then, in any of said cases, the LESSEE, at its own choice, shall terminate this agreement, for which the LESSEE shall have a right to immediately receive from the LESSOR the reimbursement of every rent deposit and/for advance that the LESSEE may have paid to the LESSOR to date according to what is stated hereto for, to continue with the accumulation of liquid damages. Any rent deduction granted according to this clause shall be applied to the first months, and in the event it is applicable to the months following the ones when the LESSEE begins rent payments, as is stated herein. The parties acknowledge and agree that the date of the Final Occupancy shall be extended for a period equivalent to the delays attributable to the LESSEE, or to its contractors or subcontractors, or due to an Act of Nature or Force Majeure. 2.11 Notwithstanding what is stated in paragraph 2.5 hereinbefore, the LESSOR expressly acknowledges and agrees that the LESSEE may go inside the Leased Property at any given moment during the construction of the LESSOR Improvements, in order to carry out the initial installations of the LESSOR Improvements in accordance with the construction schedule, and with the understanding that said installations shall not interfere with the construction of the LESSOR Improvements. Also, it 4 is understood that the entry of the LESSEE to the Leased Property at any given moment prior to the completion of the construction of the LESSOR Improvements, shall not be understood as the completion of the construction of the LESSOR Improvements in their entirety, or in part, as is stated herein. III. OCCUPANCY BY LESSEE The LESSEE shall use the Leased Property for manufacturing and storage activities, as well as for any other activity with industrial purposes as permitted by the Law, and that do not breach what is stated in the Park Regulations. 3.1 The LESSEE may, at its own risk and expense, install in the Leased Property, all those improvements, fixtures, equipment and furniture it deems necessary, which at every given moment shall be considered as exclusive property of the LESSEE, provided such goods are installed and removed without any substantial damage to the Leased Property. 3.2 The LESSEE shall repair the damages caused to the Leased Property during the installation or removal of the improvements, fixtures, equipment, and furniture stated in the preceding paragraph. 3.3 The LESSEE shall comply with the installation and removal of fixtures and equipment in accordance with all applicable laws, ordinances and regulations, assuming liability for any violation hereof. 3.4 The LESSEE agrees to withdraw said improvements, equipment and/or furniture it may have installed in the Leased Property before the date of the term of the lease, in order to leave the Leased Property in its normal conditions, with the understanding that the LESSOR Improvements include the piercing of roofs of the Leased Property. After having removed said improvements, the LESSEE shall repair the damaged area, and shall have to install a new roof section made up of corrugated steel. In the event the LESSEE fails to comply in removing said improvements, fixtures, equipment, and/or furniture from the Leased Property according to the terms provided hereinabove, the LESSOR shall have the right whether to remove said improvements, fixtures, equipment, and furniture from the Leased Property at the expense of the LESSEE, or to consider that said improvements, fixtures, equipment, and/or furniture have been gratuitously abandoned in the Leased Property by the LESSEE in favor of the LESSOR. 3.5 The LESSEE may not modify the basic structure, facade, and the essential public utilities of the Leased Property, and may not perform works or modifications resulting in a value exceeding $50,000.00 dollars (Fifty Thousand Dollars, 00/100, legal tender of the United States of America), without prior consent and in written form from the LESSOR, which shall not be denied without sufficient grounds. IV.- LESSEE IMPROVEMENTS 4.1 The LESSEE, at its expense, may install and build certain additional improvements, and it may also perform certain modifications, expansions, or additions to any of the LESSOR Improvements, provided said alterations, expansions, improvements and additions do not affect in an adverse manner the structural support of said LESSOR Improvements, or reduce the just market value of the Leased Property to a value below the value the Leased Property would have before their completion, provided said alterations are performed in a diligent manner, following working standards in compliance with all applicable laws, ordinances, regulations, and orders of governmental authorities. 4.2 The LESSOR acknowledges and agrees that said Lessor Improvements shall be the exclusive property of the LESSEE, and may be removed, at LESSEE'S choice, from the Leased Property in compliance with provisions stated in Clause 3 hereof. 5 4.3 The LESSEE shall compensate and exonerate the LESOR from any demand, claim due to furnishing of materials, claims on the part of the governmental authorities that in a declarative but not limitative manner include the INSTITUTO MEXICANO DE SEGURO SOCIAL (Mexican Institute for Social Security, or IMSS), the FONDO NACIONAL DE LA VIVIENDA PARA LOS TRABAJADORES (National Fund for Worker Housing, or INFONAVIT), and fiscal authorities; as well as any damage and expense resulting from the noncompliance on the part of the LESSEE of any of its obligations for the construction of the structures and Lessee Improvements, installations, machinery and equipment, repairs of the Leased Property when so required, in compliance with this agreement. V.- USE OF LEASED PROPERTY AND THE ENVIRONMENT 5.1 The LESSOR expressly acknowledges that the LESSEE intends to make use of the Leased Property as installations for warehouse and factory, and therefore expressly authorizes use of the Leased Property on the part of the LESSEE as general offices, warehouse, factory, storehouse, repair services, engineering services, sales, demonstration of products and training of clients and employees, and as secondary purposes as warehouse, vehicles parking spaces, and all other uses deemed incidental and in relation with manufacturing, storage and installation of offices with a legitimate intent. During the term of this lease the LESSEE shall not perform or permit any act within the Leased Property that violates the laws, ordinances, regulations, Park restrictions, or orders of governmental authorities. 5.2 The LESSOR guarantees that the Leased Property has not been previously used for an industrial or commercial purpose, and that it is free from any hazardous or toxic substances as these terms are defined in the current legislation. The LESSOR agrees to compensate and quickly exonerate the LESSEE from any claim or liability that may result with regards to the preceding item. Also, the LESSOR shall have to make the arrangements so that any lessee or owner of properties adjacent to the Leased Property complies with all the laws and regulations pertaining to hazardous or toxic residues or substances, and agrees to exonerate the LESSEE from any claim or liability derived from such item. 5.3 The LESSOR shall not be liable for any pollution caused by the LESSEE to the Leased Property during the term hereof, or any extension of it. The LESSEE agrees to compensate and exonerate the LESSOR from any liability that may result with regards to the use of the Leased Property on the part of the LESSEE, except when caused by a noncompliance on the part of the LESSOR. VI.- RENT 6.1 Beginning on the date of the Commencement of the Lease (as such term is defined hereinbelow), and during the initial effective term hereof, the LESSEE shall pay the LESSOR, at its domicile, or at any other domicile so indicated by the LESSOR, and within the first ten (10) days of each month, a monthly rent amounting to $57,631.00 (Fifty Seven Thousand Six Hundred and Thirty One and 00/100) Dollars, currency of the United States of America, or its equivalent in Pesos, Mexican Currency. Notwithstanding the aforementioned, during the first year of the lease as of the Date of Commencement of the Lease, as said term is defined in clause 7.2 hereof, the amount of $15,717.55 Dollars, U.S. currency, shall have to be credited each month towards the rent payments concerning the first eleven (11) monthly rent payments in compliance with what is stated in clause 19.1 hereof. 6.2 The monthly rent stated hereinabove shall be increased on an annual basis by two percent (2%), as of the second year, and said increase shall remain effective during and until the eighth (8th) year of the lease, thereby remaining without an increase on the ninth (9th) and tenth (10th) year of this lease. 6.3 In order to calculate the monthly rent, if paid in Pesos, Mexican Currency, the parties shall use the highest effective exchange rate currently in the sales market as used by the BANCO NACIONAL DE MEXICO, BANCOMER, and BANCA SERFIN, on the day of payment, or on the immediately preceding 6 business day, when the payment day is a nonworking day for bank institutions. 6.4 In the event the LESSEE decides to exercise the lease option stated in clause 7.4 hereof, the parties agree that the initial monthly rent with reference to said extension period, shall have to be equal to the rent corresponding to the fifth (5th) year of the original period of this lease. Subsequently, and during the extension periods, the monthly rent shall be increased at an annual rate of two percent (2%), during each anniversary of the new Date of Commencement of the Lease. 6.5 In the event of a delay, the LESSEE agrees to pay the LESSOR for damages, a monthly rate of five percent (5%) on the unpaid amounts, as of the tenth (10th) day elapsed once said notice of delay has been notified. VII. EFFECT OF LEASE AND DELIVERY OF THE LEASED PROPERTY 7.1 The life of the agreement shall be for a period of ten (10) compulsory years for the parties, unless it is extended in accordance with the provisions hereof, (hereinafter the "Period of Lease" or "Term of this Agreement"). The Term of this Agreement shall commence as of the date of Final Occupancy, the date when the LESSOR Improvements have been completed (hereinafter "the date of Commencement of the Lease"). 7.2 Date of Commencement of Rent: The first month of rent shall have to be paid in thirty days following the date of Final Occupancy. All adjustments to the rent, as stated in Clause 6.2 and 6.4 hereinabove, shall come into effect on the anniversary of the Date of Commencement of the Lease. 7.3 Notwithstanding the aforementioned, it is agreed upon that the LESSEE shall have access to the Leased Property in order to install the LESSEE Improvements as of the 15th day of January, 1998. 7.4 The LESSEE shall have the option of renewing the "Period of the Lease" for two (2) additional periods or terms of five (5) years each (hereinafter the "Period of Extension") by means of a simple notice furnished to the LESSOR upon expiration of the initial period of the lease or any of its extensions. VIII. INSURANCE 8.1 As of the Date of Commencement of the Lease, and during the life of this agreement, the LESSEE agrees to obtain an insurance policy covering the Leased Property against fire, Act of God or Force Majeure, explosion, and any other risk covered by the policy known as "Comprehensive Coverage Extension". The corresponding insurance policy shall be obtained for an amount enough to cover the replacement cost of $3,000,000.00 (Three Million 00/100 Dollars, legal tender of the United States of America), with said amount being payable to the LESSOR or its transferee. 8.2 Also, and from the Date of Commencement of the Lease, and during the term of this agreement, the LESSEE is obligated to obtain, at its expense, a civil liability insurance policy protecting the LESSEE and the LESSOR against any demand, claim or action due to injuries or death of any person, or for any liability arising from damages to foreign property regarding the use of the Leased Property by the LESSEE. The liability limit of the corresponding insurance shall be at least $150,000.00 (One Hundred and Fifty Thousand 00/100) Dollars, currency of the United States of America. 8.2 The policies referred to in paragraphs 8.1 and 8.2 hereinabove shall have to be obtained with an insurance company authorized to issue insurance in Mexico, to the satisfaction of the LESSOR. Furthermore, within the clauses of said policies, it shall have to be stated that the latter may not undergo any modification whatsoever with regards to its coverage without prior consent and in written form on the part of the LESSOR. The LESSEE shall have to notify the LESSOR with at least thirty (30) days in advance of its intention to change insurance companies, so that the LESSOR may review and analyze the authorization of the new insurance company. Such authorization may not be denied 7 without proper justification. Also, the corresponding policies shall establish in their clauses that, when pertinent, the LESSOR shall be notified with thirty (30) days in advance of its intention to terminate any such policies during the term hereof. A certified copy of the policies, as well as of the corresponding payment receipts, shall have to be delivered to the LESSOR, in its domicile, within fifteen (15) following the Date of Beneficial Occupancy. A certified copy of the documents of renewal of policies shall have to be delivered to the LESSOR with at least thirty (30) days before the date of completion of the policies. 8.4 Reciprocal Release. Both parties, as well as their authorized representatives, agree to remain mutually free from any claim for damages to any person, or to the Leased Property and its improvements, personal property, the LESSEE improvements, as well as the modifications both of the LESSOR and of the LESSEE, on or with regards to the Leased Property under the insurance policies contracted by the parties, and in effect when such damages occur. IX.- TAXES AND COSTS 9.1 The LESSOR shall be liable for the payment of the Income Tax and the Tax on Assets under the term of its obligations. On the other hand, the LESSEE shall be liable for the payment or reimbursement of the Property Tax to the LESSOR or for any other tax that could be stipulated on the Leased Property, and that may be derived thereof, or by the use of the latter on the part of the LESSOR, and to which the LESSEE is liable by law, including the Value Added Tax, and maintenance fees of the Industrial Park Association. X.- REPAIRS AND MAINTENANCE 10.1 LESSOR 10.1.1 During the entire term hereof, as well as any extension of it, and after having notified the LESSEE in written form, the LESSOR shall have to proceed with the repairs of any structural defect of the Leased Property arising sa a consequence of normal wear and tear of the latter, including exterior walls, foundations, floors, structural plumbing, cistern and ceiling. The LESSOR shall also have to provide maintenance to the parking areas, drainage, and paved areas where damages exceed the amount of $5,000.00 Dollars (Five Thousand Dollars 00/100, legal currency of the United States of America), due to disaster, occurring as a consequence of underground earth movements. On the other hand, the LESSEE agrees to make its best effort to timely notify the LESSOR on the existence of any structural defect. Notwithstanding the aforementioned, in the event the LESSEE Improvements require the piercing of roofs in order to install equipment and fixtures, then the maintenance and repair of the roof areas that were affected by any of the LESSEE Improvements shall be the exclusive responsibility of the LESSEE. In addition, both parties agree that the repair of said structural deficiencies shall be deemed as the sole repair by which the LESSOR shall be liable hereunder. The LESSEE agrees to make its greatest effort in notifying the LESSOR on a timely basis on the existence of any structural defect. The LESSOR shall then proceed diligently to carry out the repairs as soon as practically possible, and to continue with them until they are thoroughly concluded. Furthermore, the LESSOR accepts every and any obligation to immediately maintain a repair, at its expense, and with minimum interference to the operations of the LESSEE, any superficial or structural defect or damage, as well as the damages caused by underground movements, with no restrictions of cost applicable due to a disaster, of an area of the Leased Property so described in Attachment "E" of this agreement identified as the "Excluded Area." 10.1.2. The LESSOR shall not be liable, nor shall be obligated to repair the damages caused due to negligence of the part of the LESSEE, or of its workers, clients, contractors, or guests. 10.2 LESSEE 8 10.2.1 THE LESSEE shall be deemed liable for the repairs that should be performed due to damages to the Leased Property, other than those referred to in clause 10.1 hereinabove. The damages referred to in this clause including in a declarative but not limitative manner, the maintenance that should be performed on the plumbing systems, sewer, telephone, gas, and to the equipment and fixtures, interior walls, inferior and exterior paint jobs, floor tiles, modular ceilings, ventilation and A/C systems and fixtures, heating, doors and windows, glass, shipment and loading ramps and docks, lighting, electrical system, and so on, of the Leased Property, and in general, everything not deemed a structural repair as stated in clause 10.1.1 hereinbefore. All repairs performed by the LESSEE shall have to be of an equal quality to that of the originals. All expenses as a result of carelessness and negligence of the part of the LESSEE, as stated hereof, shall have to covered by the LESSEE. 10.2.2 The LESSEE shall have to keep the Leased Property, along with its improvements, free from any encumbrance or lien. With regards to the entirety of the parts of the Leased Property, the LESSEE shall have to care for them as to keep them clean and properly ordered, free from garbage, debris and forbidden materials. XI.- COMPENSATION 11.1 The LESSEE agrees to compensate and exonerate the LESSOR from any claim for damages and losses of any nature derived from negligence or omission on the part of the LESSEE, or of its contractors, licensees, agents, guests, employees, or derived from any accident, injury or any other damage caused to any person or property in or around the Leased Property, or in areas adjacent to the Leased Property, as well as against any and all fees and expenses, including legal fees, that should arise from such claims. 11.2 The LESSOR agrees to compensate and exonerate the LESSEE from any claim for damages or losses of any nature derived from negligence or omission on the part of the LESSOR, or of its contractors, licensees, agents, guests, or employees, or derived from any accident, injury or any other damage caused to any person or property in or around the Leased Property, or in areas adjacent to the Leased Property, as well as against any and all fees and expenses, including legal fees, that should arise from such claims. XII.- SERVICES 12.1 The LESSEE agrees to request directly from the renderers of the corresponding services, the public services the LESSEE may need to obtain from said renderers and shall immediately pay for any charge related with said services furnished to the LESSEE in the Leased Property including in declarative but not limitative manner, water, gas, electrical power and telephone service fees. 12.2 The LESSOR shall install or shall make arrangements for the installation, before the Date of Final Occupancy, of the infrastructure related with water and drainage services, fire hydrants, electrical power, and telephone lines, as are defined hereinbelow for the supply of water, drainage, fire hydrants, electrical power, and telephone service to the Leased Property in compliance with federal, state, and local regulations, and shall make all arrangements for the approval and acceptance of said infrastructure on the part of the authorities, whether they be federal, state, or local, that have jurisdiction over the streets adjacent to the Leased Property. In the event any charge, whether special or of any type, is filed against the Leased Property or the LESSEE, (other than rights of use), due to any of the aforesaid items, or by noncompliance on the part of LESSOR with any of its obligations as a developer, the LESSOR, at its expense, shall pay said charges and shall settle and close the matter. 12.3 The LESSOR guarantees that the Leased Property shall have at least 8000 Kva of 13,200 volts 9 available within the boundaries of the industrial shell. Consequently the LESSEE may contract the electrical power up to said capacity only upon payment of the rights of connection and contract. 12.4 The LESSOR guarantees that the Leased Property has or shall have twenty (20) telephone lines available at the time of the completion of the Industrial Installations; the LESSEE shall have the right of exclusive use regarding said lines. Consequently, the LESSEE shall be able to contract up to twenty (20) telephone lines through the payment of the "contract rights" to the telephone company. 12.5 The LESSOR guarantees that the Leased Property shall have the drainage system, fire hydrant, and water works completed before or on the date of the Final Occupancy, as stated in Attachment "A1" hereof, so that it may be able to perform the industrial activities it has planned by the use of the appropriate pipeline system and water system that provide services to the Leased Property. The LESSEE shall contract the water supply up to said capacity from the COMISION NACIONAL DE AGUAS (National Water Commission, or CNA), by means of the payment of rights for measuring equipment and rights of connection. 12.6 In the event the LESSOR is not willing to provide the infrastructure for the public utilities guaranteed by the LESSOR as of the date of the Final Occupancy, or when LESSEE is not able to contract said services due to causes not attributable to the LESSEE, the LESSOR shall directly provide the LESSEE with said services at its exclusive expense, until the LESSEE is able to contract said services, and the LESSOR shall pay the difference between the cost the LESSEE would normally pay if said services were furnished by the public utilities companies, and the cost of the LESSOR when providing said services. It is agreed upon that LESSOR'S liability according to this clause shall end once the LESSEE has contracted the services referred to in this clause, and the supply of said services has been initiated. 12.7 Furthermore, in the event that after sixty (60) days of the Final Occupancy there is a lack of availability of these services so that the LESSEE'S operations may not be adequately performed, LESSEE may proceed to immediately terminate this agreement, with no obligation whatsoever, and LESSOR shall promptly reimburse all amounts paid by LESSEE hereunder, including in declarative but not limitative manner, the amounts regarding guarantee deposit and advance rents. 12.8 The LESSEE agrees to contract all public utilities with the corresponding suppliers, at least sixty (60) days before the date of the Beneficial Occupancy in order to insure a timely supply of said utilities to the Leased Property. The LESSOR agrees to furnish timely support to said contractings, and to provide all the appropriate information required to date by said suppliers. Also, the LESSOR agrees to make the necessary corrections as required by the companies providing said utilities, and by any LESSOR Improvement, in order to facilitate and allow for the rendering of said services. XIII.- CESSION AND SUBLEASE 13.1 The LESSEE may not cede nor sublease its rights and obligations hereunder, unless it obtains prior consent in written form on the part of the LESSOR, which may not be denied without proper justification. Such consent may not be deemed necessary when the LESSEE cedes or subleases in favor of an affiliate or subsidiary provided the LESSEE and the Guarantor are jointly liable for the obligations of the transferee and/or sublessor, whichever the case. 13.2 The LESSOR shall have the right to cede, in whole or in part, its rights and obligations hereunder. Consequently, the LESSEE herein authorizes the LESSOR, so that the latter may formalize the cessions it deems necessary. Also, the LESSOR shall have the express right of guaranteeing any of its present or future obligations with its rights hereunder. XIV.- WITHHOLDING OF RENT 10 The LESSEE herein waives any right to withhold the rent payments, except as stated in clause 16.2 hereof. Consequently the LESSEE shall pay in a timely manner, and under the terms agreed upon herein, all rent payments the LESSEE has a right to. XV.- ACCESS TO LEASED PROPERTY 15.1 Upon prior notice, and without undue interference to LESSEE'S operations, the LESSOR, or its authorized representatives, shall have the right to enter the Leased Property during all LESSEE'S business hours, and at all times in the event of an emergency, to perform repairs, modifications, or alterations to the Leased Property for which it is authorized or obligated in accordance with this agreement. 15.2 The LESSOR shall have the right to show the Leased Property to any prospect client within six (6) months prior to the term of this lease, provided the LESSEE has not notified the LESSOR as is stated in clause 7.4 hereinbefore. Prior to any demonstration, the LESSOR shall communicate the identity of said client to the LESSEE, and in the event the prospect client is a competitor of the LESSEE, the latter shall have the right to deny such Demonstration. By the same token, during said period of six (6) months, the LESSOR shall have the right to post signs its deems appropriate on the facade of the Leased Property in order to promote the leasing of it. 15.3 Except in the event of emergencies, the LESSOR shall notify the LESSEE before the former enters the Leased Property, and the LESSEE shall have the right to accompany the representatives of the LESSOR, as well as the prospect clients. XVI.- RIGHT OF PARTIES TO COMPLY WITH THEIR OBLIGATIONS 16.1 If at any given moment the LESSEE, fails to comply with one or more of the obligations at its expense, in compliance with this lease, the LESSOR, ten (10) days after it notified the LESSEE in written form (or without notice in the event of an emergency), without waiver or exonerating the LESSEE from compliance of any of its obligations in compliance with the LEASE, shall be able, without any obligation whatsoever, to enter the Leased Property in order to take all necessary measures required to comply with the obligations of the LESSEE hereunder. All amounts paid by the LESSOR, and all costs and expenses incurred upon by the LESSOR with respect to the compliance of any obligations of the LESSEE shall be paid by the LESSEE to the LESSOR when the latter so requires it. 16.2 If at any given moment the LESSOR fails to comply with its obligations regarding the completion of the Industrial Installations, including the aforementioned punch list on or before the 15th of April, of 1998, five (5) days after it notified the LESSOR in written form, without waiver or exonerating the LESSOR from compliance of any of its obligations in compliance with the LEASE, shall be able, without any obligation whatsoever, to carry out any act in the interest of the LESSOR in compliance with the obligations of building and completing the Industrial Installations hereunder. All amounts paid by the LESSEE, as well as all the costs and expenses incurred upon by the LESSEE with regards to compliance of any of said obligations of the LESSOR, shall be paid by the LESSOR to the LESSEE when the latter so requires it, or in the event they are not paid within a period of thirty (30) days, said amounts shall be discounted from the payment of future rents. XVII.- DAMAGE OR DESTRUCTION 17.1 The LESSOR and the LESSEE, respectively, shall be liable for damages to the Leased Property caused by their own fault or negligence, or that of their representatives, employees or visitors. 17.2 In the event the LESSEE is hindered, whether completely or partially, with regards to the use of the Leased Property due to damages caused by fire, Act of God or Force Majeure, or due to any other cause that leads to the hindrance of its business operations, the rent shall be reduced in proportion 11 to the part of the Leased Property where use is hindered. If the LESSEE was hindered from using the Leased Property in its entirety, the rent shall not be paid during such period in which the LESSOR Improvements may not be used. In such case, and within a period of 20 days following the catastrophe, the LESSOR shall swiftly proceed, at its expense, and with funds coming from the insurance stated in clause eight (8) hereinbefore, to begin repairs, restoration or reconstruction of said LESSOR Improvements to the extent it is deemed necessary to provide the LESSEE with a property of equal quality, design, materials and construction than the one existing prior to the occurrence of damages, within a period that shall be agreed upon by both parties, and which should not exceed a period of three (3) months. 17.3 Notwithstanding the aforementioned, in the event such damages or destruction are total, or exceed 75% of the total insurable value of the LESSOR Improvements, and the LESSOR and LESSEE determine, within a period of ten (10) days following the damage or destruction, that the repairs, restoration or reconstruction may not be performed within a period of ninety (90) days following the damage or destruction, then the LESSEE shall have the right in any of these causes, and at its choice, to terminate this agreement through written notice furnished to the LESSOR within thirty (30) days following the date of damages with no responsibility whatsoever. In the event this agreement is terminated according to the provisions stated in this clause, the rent payable by the LESSEE in compliance with this agreement shall no longer be demandable in its entirety on the date of damages or destruction, and the LESSOR shall reimburse LESSEE with any amount received as advance payment for rent or guarantee deposit. 17.4 The percentage of the insurable value referred to in the preceding paragraph shall be determined by an insurance adjuster and the insurance company with which the insurance provided in clause eight (8) hereof was contracted. 17.5 If all obstacles to use the LESSOR Improvements are imputable to the LESSEE, its representatives, employees, and visitors, the LESSEE shall continue to pay the rent as if it were still making use of said shell. XVIII.- PARK OBLIGATIONS AND RESTRICTIONS 18.1 The LESSEE agrees to comply in their entirety with the Covenants and Restrictions of the Park, which are annexed and are integrated herein as Attachment "B", and to pay $0.50 cents (Fifty cents 50/100, legal tender of the United States of America) for each square meter of the land of the Leased Property per year (hereinafter the "Maintenance Fee", to be apportioned according to the date of the Final Occupancy during the first year), for street maintenance, common landscaping, common areas, and so on, of the Industrial Park. Said Maintenance Fee shall no longer be demandable in accordance with a case of catastrophe as defined in clause 17 hereof. XIX.- GUARANTIES 19.1 The LESSOR acknowledges receiving from the LESSEE herein, the amount of $230,524.00 (Two Hundred and Thirty Thousand Five Hundred and Twenty Four Dollars, 00/100, legal tender of the United States of America). From said amount the LESSOR shall apply the amount of $57,631.00 (Fifty Seven Thousand Six Hundred and Thirty One, 00/100 Dollars, legal tender of the United States of America) as guarantee deposit, which shall be reimbursed to the LESSEE upon termination of this agreement, without interests, and after the LESSOR verifies, through an inspector, that the Leased Property is in good condition, clean, except for normal wear and tear, unless agreed upon otherwise by both parties in written form. The balance of said deposit, that is, the amount of $172,893.00 (One Hundred and Seventy Two Thousand Eight Hundred and Ninety Three, 00/100, Dollars, legal tender of the United States of America) shall be applied to the payment of rents during the first year of the Term of Agreement, by proportionally amortizing said amount during the second (2nd) through twelfth (12th) months of the first year of rent. 12 19.2 In the event of anticipated termination of this agreement due to causes attributable to LESSEE, LESSOR shall have the right to withhold every amount delivered to LESSOR as rent payment, whether anticipated or deposit, aside from any other right pertaining to LESSOR. XX.- NOTICES 20.1 Any notice that should be done to the parties in compliance with the terms hereof shall be remitted to the addresses stated hereinbelow, or to any other addresses provided from time to time by the parties. Said notices shall have to be in written form and shall be delivered in person. If remitted by mail, said notices shall be considered as carried through upon ten (10) days following their deposit at the postal service. If remitted via facsimile, said notices shall have to be sent to the addresses and telephone numbers mentioned hereinbelow. Should the notices be sent by mail or via facsimile, a duplicate of said notices should be remitted by certified mail, freight prepaid, with acknowledgment of receipt to the domiciles mentioned hereinbelow, or to the additional domiciles provided by the parties from time to time in written form. TO THE LESSOR: Avenida Pacifico No. 14533 Parque Industrial Pacifico Tijuana, Baja California, RE: Mr. Frederick Clarke Sanders Telephone number: (66) 81-1211 Facsimile number: (66) 81-1346 TO THE LESSEE: COASTCAST TIJUANA, S. DE R.L. DE C.V. Paseo del Cucapah s/n Delegacion de la Presa Tijuana, Baja California 22500 Telephone number: (66) 27-9164 Facsimile number: (66) 27-9168 COASTCAST CORPORATION: 3025 E. Victoria Street Rancho Dominguez, California 90224 United States of America Telephone number: (310) 638-0595 Facsimile number: (310) 631-2884 XXI.- ANTICIPATED TERMINATION The LESSOR may terminate this agreement by any of the following causes: 21.1 In the event of termination of period stipulated in clause seven (7). 21.2 Noncompliance on the part of the LESSEE to pay the monthly rent, demandable by means of written notice given to the LESSEE according to the terms of clause 6.5 hereof, when said noncompliance persists for a period of ten (10) days following the receipt of said notice on the part of the LESSEE. 21.3 Noncompliance on the part of the LESSEE on any of the covenants, agreements and obligations stipulated herein when such noncompliance continues for a period of ten (10) days following receipt of written notice on the part of the LESSEE from the LESSOR stating such circumstance. In the event the noncompliance requires, with proper justification, of a period longer than the aforementioned thirty (30) days required to compensate, said term shall be extended accordingly. 21.4 A file for bankruptcy against the LESSEE or the Guarantor, if such action is not cancelled within ninety 13 (90) days following notice to LESSOR regarding the existence of such a request. 21.5 In the event of an injunction, execution, or any other measure derived from a judicial decision that engages a substantial part of the assets of the LESSEE or the Guarantor, said injunction, execution, or measure derived from a judicial decision that remains without being released or acquitted for a period of sixty (60) days following the execution of said resolutions or injunctions. 21.6 In the event of appointment of a beneficiary or depositary in order to take possession of all or a substantial part of the assets belonging to the LESSEE or the Guarantor. 21.7 In the event both parties are unable to reach an agreement in compliance with clause 23.7 hereof, referring to the manner in which to mitigate any negative effect of the current price of the dollar in relation to the rent, which derives from the coming into force of a new legislation, or due to Force Majeure or Act of God occurring within a period of sixty (60) days following the coming into effect of said legislation or Force Majeure. In the event the LESSOR initiates any action to terminate or rescind this agreement against the LESSEE for causes stipulated herein, the LESSEE shall reimburse the LESSOR with any cost related with the vacancy of the Leased Property on the part of the LESSEE, (i) if the LESSEE does not vacate the Leased Property, (ii) said action is resolved in favor of the LESSOR by the competent courts where the issue was cleared up, and (iii) retroactive as of the date in which the corresponding action was filed, the LESSEE shall pay the LESSOR as contract penalty a monthly amount equal to two (2) times the monthly effective rent on the date in which said action was initiated, or the effective rent prior to the termination of the agreement. The LESSEE acknowledges that this clause shall not be interpreted as an authorization to occupy the Leased Property after the effective period hereof. XXII.- RENT OPTION 22.1 The LESSOR herein grants in favor of the LESSEE an irrevocable option of leasing approximately 20,000 square meters of land adjacent to the Leased Property and indicated for reference in the plan annexed herein as Attachment "A-2" (hereinafter the "Adjacent Land or Option") for which the LESSOR agrees to carry out the construction of a building, on the basis of the specifications agreed upon by the LESSOR and the LESSEE. The rent Option of the Adjacent Land shall be in effect during the first five (5) years of the initial term hereof and may be exercised in two phases by the LESSEE, each one for approximately 10,000 square meters of land, marked for reference in the plan that is annexed herein as Attachment "A-2", and also marked in the same plan as Phase 1 and Phase 2 (hereinafter referred to as "Phase 1", and "Phase 2", respectively). The option granted herein shall be subject to the following terms: 22.1.1 The rent option of Phase 1 for the future construction of an expansion to the Leased Property shall be granted without any counterclaim for an initial term of two (2) years, beginning on the Date of Commencement of the Lease. 22.1.2 Upon termination of the second year of the Date of Commencement of the Lease, the LESSEE, at its choice, shall extend the term for the rent option of Phase 1 without performing any construction whatsoever of an industrial shell for an additional period of three (3) years, against payment to the LESSOR of the amount of $5,380.00 Monthly Dollars; said amount shall increase annually on every anniversary date of the Date of Commencement of the Lease, at the annual rate of two percent (2%). 22.1.3 The option to lease Phase 2, the Adjacent Land (or Option) for the eventual construction of an expansion of the Leased Property shall be granted with no consideration whatsoever for an initial term of three (3) years beginning on the Date of Commencement of the Lease. At its own choice, the LESSEE may extend the term of the option with respect to Phase 2 after said date, and for the remainder of the Initial Term of the Lease with without any need to perform any construction whatsoever, by paying LESSOR the amount of $5,380.00 Monthly Dollars, additional to the amount 14 stipulated in the preceding paragraph, and whose sum shall be increased at an annual basis on the same dates and percentages as those stated in paragraph 22.1.2 hereinbefore. 22.1.4 It is agreed upon that in the event the option to build an expansion to the industrial building in Phase 1 of the Adjacent Land is not exercised, the option to sublease Phase 2 of the Adjacent Land shall be automatically cancelled. In case the LESSEE exercises its option for expansion during the term stated in paragraphs 22.1.1 and 22.1.3 hereinbefore, there shall be no "option" rent for the land during the construction period. 22.1.5 Once the LESSEE has received notice from the LESSOR, by means of which the latter informs the former of the exercise of these Options, the LESSOR agrees to perform in a timely manner the preparation of the preliminary plans for the construction schedule (collectively referred to as the "Preliminary Expansion Plans", and said Preliminary Expansion Plans shall be prepared in accordance with the instructions on the part of the LESSEE, or as agreed upon by both parties. The Expansion Improvements in Phases 1 and 2, whichever the case, shall have to be completed in a period of six (6) months as of the date in which the LESSEE notifies the LESSOR of the former's approval of the Expansion Plans. The price for the lease shall be based on the cost of the land and the construction divided by eighty (80), with the understanding that said Expansion Improvements shall be built by the LESSOR or by an affiliate of the LESSOR at LESSOR'S expense; or otherwise, the parties shall carry out mutual negotiations regarding the rent for the use of the Adjacent Land (or Option), to be paid by the LESSEE. After said period, the initial rent for the Adjacent Land and/or the Improvements, whichever the case, shall be increased at an annual rate of two percent (2%). The remaining terms and conditions related to said Adjacent Land and/or Additional Adjacent Land and/or Improvements shall be subject to the provisions hereof, when applicable, including those that relate to contract penalties, rent increases, guarantee deposit, term of lease, etc. On the basis of the aforesaid, the terms related to each phase must be reflected in a modification to this agreement, to be entered into by and between the parties in accordance with the acceptance of the LESSEE in relation to the Expansion Plans that correspond to each of said phases. 22.1.5.A For purposes of calculating the rent of the Expansion, the Adjacent Land shall have a value of $50.00 (Fifty Dollars, 00/100, currency of the United States of America) per square meter as of the Date of Commencement of the Lease, which shall be increased at an annual rate of two percent (2%). 22.1.5.B The term of the lease for the Leased Property shall be coextensive with the expansion of the lease. XXIII.- MISCELLANEOUS 23.1 In the event each of the parties exercise any action against the other in order to protect certain rights hereunder, said noncompliance shall not be interpreted as a waiver to any right derived hereof. 23.2 This agreement may only be modified by written accord signed by the authorized representatives of the parties. 23.3 In the event any part exercises an action against the other to demand compliance of this agreement, the party obtaining favorable resolution shall have a right to the expenses and costs and reasonable legal fees. 23.4 In compliance to what is provisioned by article 2869, paragraph III of the Civil Code for the State of Baja California, both parties agree to register this agreement, at LESSEE'S expense, in the REGISTRO PUBLICO DE LA PROPIEDAD (Public Registry of the Property), in the city of Tijuana, B.C., in the understanding that both parties agree to carry out all acts, ratifications, and certifications required for such purposes. 23.5 In the event of controversy due to the interpretation and compliance hereof, the parties expressly submit to the settlement of their controversies in arbitration in accordance with the terms stipulated 15 in the Code of Commerce currently in effect in Mexico, for which both parties agree that the arbitration decision should be carried out in the Spanish language, with one sole arbitrator, who shall be an expert of matters of leasing of industrial shells, with domicile in Tijuana, Baja California, and said arbitrator shall be designated by mutual accord of the parties, and in the event of not reaching an agreement, the arbitrator shall be designated at the request of any of the parts by the Professional Association of Civil Engineers of the city of Tijuana, Baja California. Each party shall be responsible for its own costs and fees derived from the arbitration decision, and said costs and fees shall have to be eventually divided into equal parts between the parties. The arbitration decision shall be considered final and not subject to appeal. Notwithstanding the aforementioned, the parties agree that in any matter related with the noncompliance or termination of this agreement, they shall expressly submit to the jurisdiction of the Civil Courts of the city of Tijuana, Baja California, thereby waiving any other jurisdiction which might be applicable by reason of their present of future domiciles o otherwise. 23.6 In the event any provision hereof is by any one reason or another forbidden or not demandable in any aspect, this Agreement shall have to be interpreted as if said provision was never included within said agreement. 23.7 In view of the fact that is the intention of the parties under the terms hereof, that the LESSOR receives the Total Value of the Dollar with regards to the rents during the entire term of this agreement and its extensions, and that the LESSEE may make use of the Leased Property during said periods, both parties agree that in the event a new legislation comes into effect in the future, or that by an Act of God or Force Majeure, the effects deriving with regarding to this, provided they are exercised by the LESSEE, are those referring to the current price of the dollar as it undergoes a substantial reduction with respect to the payment of rent to the LESSOR, the LESSEE agrees not to exercise any of said rights that may derive in such decrease, unless such rights are a consequence of the Law. Notwithstanding the aforementioned and in order to be able to mitigate any negative effect on the value of the Dollar with regards to the rent, and so that the LESSOR may comply with its financial commitments contracted by the construction of the LESSOR Improvements, the LESSOR and LESSEE agree to carry out a diligent and comprehensive search for an equitable and law-abiding solution at that moment, so that the LESSOR may continue to receive the total value of the dollar with regards to the rent payments, and the LESSEE continues to enjoy and occupy the Leased Property. XXIV.- CORPORATE GUARANTEE 24.1 The LESSEE hereby delivers a guarantee from COASTCAST CORPORATION (for purposes of this agreement, the "Guarantor") to the LESSOR, under the Document of Guarantee, which is annexed herein as Attachment "D". Moreover, COASTCAST CORPORATION agrees to guarantee all and each one of the obligations of the LESSEE hereunder. Also, COASTCAST CORPORATION shall have to provide the LESSOR with the information audited on annual basis regarding its financial situation during the entire term of this agreement. IN WITNESS WHEREOF, the parties enter into this Lease Agreement in the places and dates indicated as follows: 16 THE LESSOR THE LESSEE MR. FREDERICK CLARKEE SANDERS COASTCAST TIJUANA, S. DE R.L. DE C.V. - ------------------------------ ----------------------------------- (SIGNED) Name: Ramon Ibarra Franco Place: San Diego, California (SIGNED) Date: January 5, 1998 Place: ----------------------------- Date: January 5, 1998 MR. FREDERICK CLARKE SANDERS FLOURIE - --------------------------------- (SIGNED) Place: San Diego, California Date: January 5, 1998 MS. MONIQUE SANDERS FLOURIE - --------------------------------- (SIGNED) Place: San Diego, California Date: January 5, 1998 MR. SCOTT MICHAEL SANDERS FLOURIE - --------------------------------- (SIGNED) Place: San Diego, California Date: January 5, 1998 17 MR. CARLO MUZQUIZ DAVILA - --------------------------------- (SIGNED) Place: San Diego, California THE GUARANTOR COASTCAST CORPORATION -------------------------------- (SIGNED) Name: Dick W. Mora Place: (RANCHO DOMINGUEZ, CA.) -------------------------- Date: January 5, 1998 BANCRECER, S.A. WITNESS INSTITUCION DE BANCA MULTIPLE GRUPO FINANCIERO BANCRECER DIVISION FIDUCIARIA - ----------------------------- ----------------------------------- (SIGNED) (SIGNED) (ILLEGIBLE NAME OF REVIEWER) Name: MR. ANGEL ORTEGA 18 EX-10.16 9 EXHIBIT 10.16 LEASE GUARANTY AGREEMENT FOR AND IN CONSIDERATION of the agreement of Monique Sanders Flourie, Frederick Clarke Sanders, Frederick Clarke Sanders Flourie, Scott Michael Sanders Flourie and Carlo Enrique Muzquiz Davila ("Lessor and CoastCast Tijuana, S. de R. L. de C.V. ("Lessee"), dated January 5, 1998, and further, to induce Lessor to enter into the Lease, and for other good and valuable consideration, CoastCast Corporation, Inc. ("Guarantor"), a California corporation, unconditionally and irrevocably guarantees to Lessor the prompt, full, and complete performance of all of the terms, covenants, and provisions of, the Lease, and the full and prompt, payment of all rentals, deposits, and other sums now or hereafter becoming due and payable pursuant to the terms and provisions of the Lease, and any and all renewals, extensions, amendments, or modifications of the Lease (all of the foregoing are collectively the "Obligations"). In the event any sums owing on any of the Obligation shall become due, Guarantor shall immediately pay all of such sums due to Lessor without demand or notice whatsoever. In the event any of the terms, covenants or provisions of the Lease are not performed promptly saw therein provided, Guarantor shall immediately so perform such terms, covenants, or provisions without any demand or notice whatsoever. It shall not be necessary or required in order to enforce Guarantor's obligations under this Lease Guaranty Agreement that Lessor shall have made demand for payment or performance upon Lessee or any other person liable on or for the Obligations for payment to Lessee or to any other person liable thereon or have given notice to Lessee or any other person liable thereon of non-payment or non-performance of said Obligations, or any other notice whatsoever. It shall not be necessary or required, and Guarantor shall not be entitled to require, that Lessor file suit or proceed to obtain or assert a claim against Lessee for the Obligations, or any part thereof, or file suit or proceed to obtain or assert a claim against any other person liable for the Obligations, or any part thereof, or make any effort to collect or enforce the performance of the Obligations, or any part thereof, from any such other person liable for the Obligations, or any part thereof, before or as a condition of enforcing the liability of Guarantor under this Lease Guaranty Agreement. Guarantor waives any right to the benefit of or to require or control application of any security or the proceeds of any security now existing or hereafter obtained by Lessor as security for the Obligations or any dispersements, payments, or other property at any time received by, paid to, or in the possession of Lessor. Guarantor shall not have any recourse or action against Lessor by reason of any action Lessor may take or omit to take in connection with security or any other guaranty at any time existing thereof. 2 This is a guaranty of payment and performance and not merely of collection. No renewal, extension, or rearrangement of any other indulgence with respect to the Obligations, or any part thereof, no release of or substitution for any security or other guaranty now or hereafter held by Lessor for Obligations, or of any part thereof, no failure to perfect any lien or security interest, no impairment of collateral, no release of Lessee or any other person primarily or secondarily liable on or for any of the Obligations, or any part thereof, no delay in enforcement of the payment or performance of the Obligations, or any part thereof, and no delay or omission or power with respect to the Obligations, or any part thereof, or any security therefor or guaranty thereof or under this Lease Guaranty Agreement shall in any manner impair the rights of Lessor or the obligations and liability of Guarantor Hereunder. Guarantor further waives notice of the acceptance of this guaranty and waives grace, demand, notice of default, notice of intent to accelerate maturity, notice that Lessor will not accept late payments, notice of acceleration maturity, presentment for acceleration, presentment for payment, protest notice of pretest and of dishonor, and diligence on taking any action with respect to this Lease Guaranty Agreement or said Obligations or any property, rights, or interests which secure this Lease Guaranty Agreement or said Obligations. Guarantor consents to and waives notice of any and all renewals, extensions, and rearrangements of said Obligations and to the release of all or any part of any property, rights, or interests which secure this Lease Guaranty Agreement or said Obligations or any person liable for any of the Obligations. The obligations, covenants, agreements and duties of Guarantor under this Lease Guaranty Agreement shall in no way be affected or impaired by (i) the involuntary or involuntary bankruptcy, assignment for the benefit of credits, reorganization or similar proceeding affecting Lessee or any of LESSEE's assets, or (ii) the release of Lessee from the performance or observance of any of the agreements, covenants, terms or conditions contained in the documents evidencing the Obligations by LESSEE's bankruptcy, receivership, or similar protective filing. This Lease Guaranty Agreement shall continue to be effective or be reinstalled, as the case may be, if at any time any payment or performance of any of the Obligations is rescinded or must be otherwise returned by Lessor in connection with the insolvency, bankruptcy or reorganization of Lessee or otherwise, all as though such payment had not been made. Guarantor hereby irrevocable waives any and all claims or other rights which it may now have or hereafter acquire against Lessee or any other 3 guarantor of the Obligations that arise from the existence, payment, performance or enforcement of Guarantor's liabilities or Obligations under this Lease Guaranty Agreement, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification, and any right to participate in any claim or remedy of Lessor against Lessee or any other guarantor of the Obligations or any collateral which Lessor now has or hereafter acquires, whether or not such right, claim or remedy arises in equity or under contract, statute or common law including without limitation, the right to take in receipt from Lessee, directly or indirectly, in cash or other property or by setoff or in any other manner, payment or security on account of such right, claim or remedy. Without limiting the generality of and in addition to the foregoing, Guarantor hereby irrevocably waives any and all claims or other rights it may now have or hereafter acquire against Lessor, Lessee or any other person under the laws of the State of California. If any amount shall be paid to Guarantors in violation of this paragraph and the Obligations shall not have been paid in full, such amount shall be deemed to have been paid to Guarantor for the benefit, and held in trust for the benefit of Lessor and shall forthwith be paid to Lessor to be credited and applied upon the Obligations. This Lease Guaranty Agreement is intended for and shall inure to the benefit of Lessor and each and every other person who shall from time to time be or become the owner, assignee or holder of the Lease or any of the Obligations hereby guaranteed, and each and every reference herein to "Lessor" shall also include and refer to each and every successor or assignee of Lessor at any time holding or owing any part of or interest in any part of the Lease or the Obligations hereby Guaranteed. This Lease Guaranty Agreement shall be transferable and negotiable, in whole or in part, by Lessor and its assigns, with the same force and effect and to the same extent that the Lease or the Obligations are transferable. Guarantor expressly waives notice of transfer or assignment of the Lease or the Obligations, or any part thereof, or of the rights of Lessor Hereunder. Any proceeding under this Lease Guaranty Agreement may be brought by Lessor as to some, but less than all, Obligations, at LESSOR's sole discretion, and any such proceeding brought by Lessor with respect to some, but less than all, Obligations shall not in any manner whatsoever affect, waive, diminish, or impair the rights of Lessor to thereafter institute proceeding as to any or all Obligations not therefore the subject of any proceeding under this Lease Guaranty Agreement, either simultaneously or serially, until all Obligations have been fully and finally paid and discharged. The exercise of any right or remedy granted to or conferred upon Lessor in this Lease Guaranty Agreement or in any 4 instrument, document, or other writing now or hereafter evidencing, securing, or otherwise pertaining to said Obligations or this Lease Guaranty Agreement shall be wholly discretionary with Lessor, and such right or remedy shall not in any manner affect, impair, or diminish the obligations and liabilities of Guarantor or any person liable on said Obligations, or constitute or be deemed a waiver of any such right or remedy or any other past, present, or future right or remedy of Lessor. This Lease Guaranty Agreement and the obligations of Guarantor hereunder, and all of the terms, provisions, covenants, warranties, waivers, and agreements contained herein or in any writing evidencing, securing, or otherwise pertaining to the Obligations shall be binding upon Guarantor and its successors, legal representatives and assigns. Any notice or demand to Guarantor or in connection herewith may be given and shall conclusively be deemed and considered to have been given and received upon the deposit thereof in writing in the U.S. Mails, duly stamped and address to such Guarantor at the address of Guarantor shown below or at Guarantor's most recent address as then shown by the records of Lessor, but actual notice, however, given or received, shall always be effective. The last preceding sentence shall not be construed in anywise to affect or impair any waiver of notice or demand herein provided or to require giving of notice of any kind whatsoever to or upon Guarantor in any situation or for any reason. Guarantor shall pay to Lessor its collection and enforcement costs, including reasonable attorney's fees, if the Obligations are not paid or performed by Guarantor when due as required herein or if this Lease Guaranty Agreement is enforced through any judicial proceedings whatsoever. In addition, Guarantor shall pay collection and enforcement costs, including reasonable attorney's fees, that Lessor has incurred in collecting or enforcing or attempting to collect or enforce the Obligations from Lessee. THIS LEASE GUARANTY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED, AND INTERPRETED UNDER THE LAWS OF THE STATE OF CALIFORNIA, UNITED STATES OF AMERICA. EXECUTED EFFECTIVE AS OF THE 14 DAY OF AUGUST, 1998. By: /s/ Richard W. Mora ---------------------------- PRINTED NAME: Richard W. Mora TITLE: Chief Executive Officer EX-10.19 10 EXHIBIT 10.19 [LOGO] PROMISSORY NOTE
- --------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $5,000,000.00 02-01-1999 06-01-1999 00003 000 00709056974 259 - --------------------------------------------------------------------------------------------------------------- REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR LOAN OR ITEM. BORROWER: COASTCAST CORPORATION LENDER: Imperial Bank 3025 E. Victoria Street Los Angeles Airport Regional Office Rancho Dominguez, CA 90221-5616 9920 S. La Cienega Blvd., Suite 206 Inglewood, CA 90301-4423 - --------------------------------------------------------------------------------------------------------------- Principal Amount: $5,000,000.00 Initial Rate: 7.750% Date of Note: February 1, 1999
PROMISE TO PAY. COASTCAST CORPORATION ("Borrower") promises to pay to Imperial Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of Five Million & 00/100 Dollars ($5,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on June 1, 1999. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning February 28, 1999, and all subsequent interest payments are due on the last day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to change from time to time based on changes in an index which is the Imperial Bank Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as its Prime Rate of Interest from time to time. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. The index currently is 7.750%. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate equal to the index, resulting in an initial rate of 7.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. INTEREST RATE OPTIONS. The following interest rate options are available under this Note: (a) DEFAULT OPTION. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph above (the "Default Option"). (b) LIBOR. A margin of 2,000 percentage points over LIBOR. For purposes of this Note, LIBOR shall mean London Inter-Bank Offered Rate as provided in the LIBOR ADDENDUM TO NOTE attached hereto and made a part hereof. When the interest rate is based on a fixed rate, the rate shall be in effect for a period of the number of days or months as indicated in the rate option description (the "Interest Period"), in any case extended to the next succeeding business day when necessary, beginning on a borrowing date, conversion date or expiration date of the then current Interest Period. Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Provided Borrower is not in default under this Note, Borrower may designate in advance which of the above interest rate indexes shall be applicable to any loan advance under this Note and shall designate any optional Interest Period applicable to any fixed rate loan or advance. In the absence of any such designation the interest rate option shall be the Default Option. Thereafter unpaid principal balances under this Note may be converted (at the end of an Interest Period if the index used to determine the interest rate therefore is a fixed rate) to another of the above interest rate options, or continued for an additional interest period, when applicable, as designated by Borrower in advance; and in the absence of sufficient advance designation as to conversion to or continuation of a fixed rate index, the index shall be converted to the Default Option. Notwithstanding the foregoing, a fixed rate index may not be elected for a loan or advance under this Note, nor any conversion to or continuation of a fixed rate index be elected, if the Interest Period thereof would extend beyond the maturity of this Note. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within ten (10) days; or (b) if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 5.000 percentage points over the index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. (Initial Here [Illegible]) This Note shall be governed by and construed in accordance with the laws of the State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent 02-01-1999 PROMISSORY NOTE Page 2 (Continued) - ------------------------------------------------------------------------------- permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or by an authorized person. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: Hans Buehler, CEO & Chairman of the Board; and Robert C. Bruning, CFO & Secretary. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. REFERENCE PROVISION. 1. Other than (i) non-judicial 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 document ("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 the 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 Los Angeles 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 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date 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 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 Agreement 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. 2. Except as expressly set forth in this Agreement, 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. 3. 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 fact, conclusions of law, 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. 4. 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 be 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, 1280 through 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. CREDIT AGREEMENT. This Note is subject to the provisions of the Credit Agreement dated February 2, 1998, and all amendments thereto and replacements therefor. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: COASTCAST CORPORATION x /s/ Robert C. Bruning ----------------------- Authorized Officer - ------------------------------------------------------------------------------- Variable Rate, Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver.3.26b(c) 1989 CFI ProServices, Inc. All rights reserved. (CA-D20 09COAST.LNC1.OVL) [LOGO] LIBOR ADDENDUM TO NOTE This Libor Addendum ("Addendum") is dated as of FEBRUARY 1, 1999, 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 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 THOUSAND 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. (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 conditions 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 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 THOUSAND DOLLARS ($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. 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/ Donald D. Douthwright ---------------------, ----------------------------- Its CFO for Brougham Morris ------------------- Its Senior Vice President ------------------------- By --------------------, Its ------------------- FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment ("Amendment") amends that certain Credit Terms and Conditions Agreement ("Agreement") dated February 2, 1998, by and between IMPERIAL BANK ("Bank") and COASTCAST CORPORATION ("Borrower") (the "Agreement") as follows: 1. A new Paragraph 1.10 is hereby added to the Agreement to read in its entirety as follows: "YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable, represent and warrant that they have reviewed the areas within their operations and business which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the Year 2000 Problem and have made related appropriate inquiry of material suppliers and vendors, and based on such review and program, the Year 2000 Problem will not have a material adverse effect upon their financial condition, operations or business as now conducted. "Year 2000 Problem" means the possibility that any computer applications or equipment used by Borrower may be unable to recognize and properly perform date sensitive functions involving certain dates prior to and any dates on or after December 31, 1999." 2. A new paragraph 2.13 is hereby added to the Agreement to read in its entirety as follows: "YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) any customer, supplier or vendor whose compliance is material to Borrower's business, becomes Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Agent such certifications or other evidence of Borrower's compliance with the terms of this paragraph as Agent may from time to time require." 3. Except as provided above, the Agreement remains unchanged. 4. This Amendment shall be effective as of February 1, 1999, and the parties hereby confirm that the Agreement as amended is in full force and effect. COASTCAST CORPORATION IMPERIAL BANK "BORROWER" "BANK" By: /s/ Robert C. Bruning By: /s/ Donald D. Douthwright --------------------- ------------------------ Robert C. Bruning for Brougham J. Morris Chief Financial Officer Senior Vice President EX-10.28 11 EXHIBIT 10.28 COASTCAST CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS
Page ---- PREAMBLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.1 Actuarial Equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.3 Cause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.4 Change of Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.5 Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1.6 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1.7 Early Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . . .3 1.8 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1.9 Eligible Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1.10 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1.11 Estimated Section 401(k) Plan Benefit. . . . . . . . . . . . . . . . . . .4 1.12 Estimated Social Security Benefit. . . . . . . . . . . . . . . . . . . . .4 1.13 Final Average Salary . . . . . . . . . . . . . . . . . . . . . . . . . . .5 1.14 Good Reason. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 1.15 Independent Plan Administrator. . . . . . . . . . . . . . . . . . . . . .6 1.16 Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.17 Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.18 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.19 Plan Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.20 Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.21 Postponed Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . .6 1.22 Prior Plan Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.23 Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.24 Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.25 Section 401(k) Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.26 Termination of Employment. . . . . . . . . . . . . . . . . . . . . . . . .7 1.27 Years of Participation . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.28 Years of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 ARTICLE II ELIGIBILITY FOR BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . .8 2.1 Eligibility to Participate . . . . . . . . . . . . . . . . . . . . . . . .8 2.2 Entitlement to Benefits. . . . . . . . . . . . . . . . . . . . . . . . . .8 (a) Normal or Early Retirement. . . . . . . . . . . . . . . . . . . . . .8 (b) Termination of Employment Prior to Retirement . . . . . . . . . . . .8 (c) Pre-Retirement Death Benefit. . . . . . . . . . . . . . . . . . . . .8
-i- (d) Post-Retirement Death Benefit . . . . . . . . . . . . . . . . . . . .9 (e) Disability Retirement Benefit.. . . . . . . . . . . . . . . . . . . .9 2.3 Forfeiture of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . .9 ARTICLE III BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.1 Amount of Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Form of Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 Payment of Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.4 Payees Under Legal Disability. . . . . . . . . . . . . . . . . . . . . . 11 3.5 Withholding for Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.6 Mailing of Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.7 Grantor Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.8 Protective Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IV CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Entitlement to Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Full Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE V OPERATION AND ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . 13 5.1 Plan Administrator Powers. . . . . . . . . . . . . . . . . . . . . . . . 13 5.2 Composition of Plan Administrator. . . . . . . . . . . . . . . . . . . . 13 5.3 Plan Administrator Procedure . . . . . . . . . . . . . . . . . . . . . . 14 5.4 Notices and Communications . . . . . . . . . . . . . . . . . . . . . . . 14 5.5 Reporting and Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 14 5.6 Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.7 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI APPLICATION FOR BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . 15 6.1 Application for Benefits . . . . . . . . . . . . . . . . . . . . . . . . 15 6.2 Content of Denial. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.3 Appeals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.4 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.5 Exhaustion of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VII MISCELLANEOUS MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.1 Amendment or Termination . . . . . . . . . . . . . . . . . . . . . . . . 17 7.2 Effect of Reorganization or Transfer of Assets . . . . . . . . . . . . . 17 7.3 Rights of Participants . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.4 Assignment of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.5 Other Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.6 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.7 Receipt or Release . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
-ii- Exhibit A Recognition of Predecessor Employer Service. . . . . . . . . . . . . . . 20
-iii- COASTCAST CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PREAMBLE The principal objective of the Coastcast Corporation Supplemental Executive Retirement Plan ("Plan") is to help ensure that the Company provides a competitive level of benefits in order to attract, retain, and motivate selected executives. The Plan is designed to provide retirement benefits to selected employees that will help the Company meet this objective. The Plan was originally adopted effective September 1, 1996. This amendment and restatement of the Plan freezes benefits at the level accrued as of December 31, 1997 for all participants as of that date, except Hans Buehler. Mr. Buehler has voluntarily agreed to reduce his accrued benefits under the Plan to zero and shall not continue to participate in the Plan. With respect to Participants with an accrued benefit as of December 31, 1997 who continue to be employed on December 18, 1998, such Participants shall be entitled (subject to satisfaction of the vesting and other conditions imposed under the Plan) to the greater of their accrued benefit as of December 31, 1997 (the "Prior Plan Benefit") or the accrued benefit determined under this amended and restated Plan document, which includes a revised benefit formula and counts service prior to the Effective Date for purposes of determining accrued benefits. The Plan was established for the purpose of providing benefits to a select group of management or highly compensated employees. The benefits under the Plan are considered unfunded. Accordingly, it is intended that the Plan be exempt from the requirements of Parts II, III, and IV of Title I of Employee Retirement Income Security Act of 1974 ("ERISA") pursuant to Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. ARTICLE I DEFINITIONS 1.1 ACTUARIAL EQUIVALENT. The "Actuarial Equivalent" of two (2) forms of benefits shall be determined using the following actuarial assumptions: Interest rate: 7.5% Mortality: 1983 Group Annuity Mortality Table (80% of male factors applied on a unisex basis)
1.2 BOARD. The Board of Directors of Coastcast Corporation or its delegate. -1- 1.3 CAUSE. "Cause" shall mean: (a) Theft or embezzlement from the Company or its affiliates (regardless of whether or not such affiliates maintain the Plan), (b) Fraud or other acts of dishonesty in the conduct of the business of the Company or its affiliates (regardless of whether or not such affiliates maintain the Plan) or the fulfillment of the Participant's assigned responsibilities thereunder, (c) Conviction of, or plea of NOLO CONTENDERE to, any felony or any crime involving moral turpitude, (d) Willful and knowing action which is materially injurious to the business or reputation of the Company or its affiliates (regardless of whether or not such affiliates maintain the Plan). 1.4 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred upon the occurrence of any one (or more) of the following events: (a) the Company is merged or consolidated or reorganized into or with another corporation and less than a majority of the combined voting power of the then-outstanding securities of the surviving corporation immediately thereafter is held in the aggregate by the holders of Voting Stock (as defined below) of the Company immediately prior to such transaction; (b) the Company sells or otherwise transfers all or substantially all of its assets to any other corporation, if less than a majority of the combined voting power of the then-outstanding voting securities of such corporation immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) as a result of, or in connection with, any cash tender or exchange offer, merger, reorganization or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the individuals who were members of the Board immediately prior to the Transaction cease to constitute a majority of the members of the Board or of the board of directors of any successor to the Company, unless the election or nomination for election by the holders of the Voting Stock of the Company was approved by a vote of the majority of Board members then still in office who were members of the Board immediately prior to the Transaction; or (d) in connection with a transfer or assignment of Voting Stock by the current beneficial owners of Voting Stock, the beneficial ownership of Voting Stock changes such that less than a majority of the Voting Stock outstanding immediately after such assignment or transfer is held by the current beneficial owners of Voting Stock. -2- For purposes of this Section, (i) "Voting Stock" shall mean shares of the Company representing the combined voting power of the then outstanding securities entitled to vote generally in the election of the Board, and (ii) "beneficial ownership" and "beneficial owners" shall have the meaning ascribed to it under Rule 13d-3 or any successor rule or regulation promulgated under the Securities Exchange Act of 1934, as amended, as well as any person or entity who, directly or indirectly, controls, is controlled by or under common control with such beneficial owner. 1.5 COMPANY. Coastcast Corporation and any affiliated companies that maintain the Plan. 1.6 DISABILITY. Any cessation of the Participant's employment with the Company as a result of the inability of the Executive to perform his usual duties for the Company for an extended period by reason of mental or physical illness or injury. The Plan Administrator, in its complete and sole discretion, shall determine a Participant's Disability after receiving competent medical advice using nondiscriminatory standards and may rely on the determination of any disability insurance carrier providing benefits under the terms of any employer provided disability insurance coverage. At all times during the period of Disability, the Participant must be receiving medical care from a competent physician unless the Participant provides the Plan Administrator with written proof acceptable to the Plan Administrator that additional medical care will be of no benefit. The Plan Administrator may require that the Participant submit to an examination on an annual basis by a competent physician or medical clinic selected by the Plan Administrator to confirm whether a Disability is continuing. The Plan Administrator shall have discretion to make a determination based on the medical evidence. 1.7 EARLY RETIREMENT DATE. (a) The first day of any month coincident with or next following the month in which the Participant terminates employment with the Company: (i) After becoming eligible for early retirement benefits, but (ii) Before his Normal Retirement Date. (b) A Participant first becomes eligible for early retirement benefits when: (i) He or she attains age fifty-five (55), and (ii) He or she has at least five (5) Years of Participation. 1.8 EFFECTIVE DATE. The original effective date of the Plan was September 1, 1996. The effective date of this amended and restated Plan, is January 1, 1998, but the amendments continuing benefit accruals after December 31, 1997 only apply with respect to Participants who were Eligible Employees on or after December 18, 1998. -3- 1.9 ELIGIBLE EMPLOYEE. A management level or highly compensated employee of the Company designated by the Plan Administrator to be eligible to participate in the Plan. 1.10 ERISA. The Employee Retirement Income Security Act of 1974, as amended. 1.11 ESTIMATED SECTION 401(k) PLAN BENEFIT. (a) A Participant's annual retirement benefit payable as a straight life annuity at Retirement, based on the Actuarial Equivalent value of the Company Matching Contributions to the Section 401(k) Plan on his behalf (computed in accordance with the rules of Paragraph (b) below). (b) The amount of the Elective Deferral Contributions and Company Matching Contributions is computed as if: (i) The Participant had commenced participation in the Section 401(k) Plan on the date when he first became eligible to make Elective Deferral Contributions to that plan, and (ii) The Participant elected the maximum Elective Deferral Contributions and had received the maximum amount of Company Matching Contribution that he could receive each year, based upon the amount of his income that is taken into account under the Section 401(k) Plan for that year. 1.12 ESTIMATED SOCIAL SECURITY BENEFIT. (a) The annual Primary Insurance Amount estimated by the Administrative Committee to be payable to the Participant under the Social Security Act at his Normal Retirement Date (based on the assumption that the Participant is eligible to receive Social Security Benefits, even if his actual Social Security retirement age is later), determined without regard to any Late Retirement Credit under the Social Security Act. (b) The Estimated Social Security Benefit for a Participant whose employment is terminated before age sixty-five (65) will be calculated assuming the Participant will: (i) Not receive any future wages that would be treated as wages for purposes of the federal Social Security Act, and (ii) Begin receiving Social Security benefits at his Normal Retirement Date under this Plan (based on the assumption that the Participant is eligible to receive Social Security Benefits, even if his actual Social Security retirement age is later). -4- (c) The Estimated Social Security Benefit of a Participant will not be increased by reason of any increase in the Primary Insurance Amount that occurs following the termination of his employment. 1.13 FINAL AVERAGE SALARY. (a) The Participant's average annual salary (excluding bonuses and other non-regular forms of compensation) earned from the Company (before adjustments for pre-tax contributions to Company sponsored employee benefit Plans) during the three (3) highest salary years of the five (5) year period ending on the December 31st next preceding the Termination of Employment Date. Solely for purposes of determining the Prior Plan Benefit, Final Average Salary shall be calculated based on the three (3) highest salary years of the five (5) year period ending on December 31, 1997. (b) In the event that the Participant has less than three (3) calendar years of employment with the Company, his Final Average Salary shall be the average amount of his annualized salary for the entire period. 1.14 GOOD REASON. The occurrence of any of the following circumstances after a Change of Control, unless, in the case of events described in Paragraphs (a), (b), (c) or (d) below, the circumstances are fully corrected before the effective date of the Participant's notice that he is resigning from the Company: (a) A significant reduction or adverse change in the nature or scope of the Participant's powers, functions, titles, position, responsibilities or duties in respect of the Company or any affiliate, other than a change to which the Participant consents; (b) The Company's reduction in the Participant's annual base salary (or any bonus provided for in a written employment agreement between the Company and the Participant) as in effect immediately before the Change of Control or as it may be subsequently increased; (c) The Company's failure to pay within seven (7) days of the due date any portion of: (i) The Participant's current compensation, or (ii) An installment of deferred compensation under any deferred compensation plan of the Company; (d) The Company's material reduction or failure to continue in effect any compensation or benefits plan in which the Participant participated immediately before the Change of Control that is material to his total compensation, including but not limited to this Plan or any similar plans adopted before the Change of Control. This provision shall not apply if an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; -5- Notwithstanding the foregoing, no act or omission by the Company or any Affiliate shall constitute Good Reason unless: (i) the Participant gives the Company or the Affiliate written notice thereof within six (6) months after he first knew or should have known of such act or omission; and (ii) the act or omission is not remedied within thirty (30) days after receipt of such notice. 1.15 INDEPENDENT PLAN ADMINISTRATOR. A person, persons or entity which, prior to a Change in Control has accepted in writing the position of Independent Plan Administrator under the grantor trust agreement established under Section 3.7 hereof. The appointment of the Independent Plan Administrator shall be determined under the provisions of the grantor trust agreement established under Section 3.7 hereof. Unless otherwise designated under the grantor trust agreement established under Section 3.7 hereof, the Independent Plan Administrator shall be a committee, the members of which shall be Hans Buehler, Robert Bruning and Robert Gates. After a Change in Control, the designation of the Independent Plan Administrator may not be changed without the unanimous written consent of the designated Independent Plan Administrator. 1.16 NORMAL RETIREMENT DATE. The Participant's sixty-fifth (65th) birthday. 1.17 PARTICIPANT. An Eligible Employee who has become a participant in the Plan in accordance with Section 2.1. 1.18 PLAN. Coastcast Corporation Supplemental Executive Retirement Plan. 1.19 PLAN YEAR. The fiscal year of the Plan, which shall be the period beginning on January 1 and ending on the following December 31. 1.20 PLAN ADMINISTRATOR. The person, persons or entity appointed by the Board pursuant to Article V to manage, administer, interpret, and construe the Plan. 1.21 POSTPONED RETIREMENT DATE. The first day on which the Participant terminates employment with the Company following his Normal Retirement Date. 1.22 PRIOR PLAN BENEFIT. The Participant's accrued benefit based on Years of Participation and Final Average Salary at December 31, 1997 under the terms of the Plan in effect prior to the Effective Date of this amended and restated Plan. The Prior Plan Benefit is frozen as of December 31, 1997. 1.23 RETIREMENT. The termination of a Participant's employment with the Company after he has satisfied the requirements for benefits under Section 2.2 below. -6- 1.24 RETIREMENT DATE. A Participant's Normal, Early, or Postponed Retirement Date (whichever is applicable). 1.25 SECTION 401(k) PLAN. The Coastcast Corporation 401(k) Retirement Plan as amended from time to time. 1.26 TERMINATION OF EMPLOYMENT. A participant's cessation of employment with the Company and affiliates for any reason whatsoever, voluntary or involuntary, including by reason of death or Disability. 1.27 YEARS OF PARTICIPATION. The number of complete Plan Years that the Participant has been a Participant in the Plan while employed by the Company, beginning with the first Plan Year in which the Participant commences participation in the Plan pursuant to Section 2.1 of the Plan. A Participant will be credited with one (1) Year of Participation for each Plan Year on or after the Effective Date during which the Participant completes twelve (12) months of continuous service for the Company and is a Participant in the Plan. Participants beginning participation on the original Effective Date of the Plan shall receive credit for a full Year of Participation for the initial short Plan Year. 1.28 YEARS OF SERVICE. (a) A Participant's years of service with the Company, including periods prior to the Effective Date. Only complete Years of Service will be taken into account under the Plan. (b) A Participant will be credited with one (1) Year of Service for each computation period during which the Participant completes twelve (12) months of continuous service for the Company. A computation period shall be the Plan Year. Except as otherwise set forth in resolutions of the Board: (i) Each Participant will receive credit for all Years of Service with the Company prior to commencing participation in the Plan, and (ii) A Participant will be credited with any time while he is on a leave of absence approved by the Company, including disability leave, up to a maximum of two (2) additional Years of Service. (c) Notwithstanding anything herein to the contrary, the Plan Administrator may in its sole discretion designate in writing for any participant the extent to which some or all service with a predecessor entity shall be treated as service with the Company. Any such designation shall be attached hereto as Exhibit A. ARTICLE II ELIGIBILITY FOR BENEFITS -7- II.1 ELIGIBILITY TO PARTICIPATE. (a) An individual shall become a Participant at the time, and on the conditions specified by the Plan Administrator. (b) The Participants in the Plan as of the Effective Date of this amendment and restatement are the individuals specified in Exhibit A attached hereto. Additional Participants may be added to Exhibit A by the Plan Administrator without requiring an amendment to the Plan. (c) If it is subsequently determined that the participation of any individual in the Plan is inconsistent with the Plan being exempt from the requirements of Parts II, III, and IV of Title I of ERISA, at the election of the Plan Administrator, the present value of the current accrued benefit payable to that individual shall be paid in a lump sum as soon as administratively possible after such determination is made. II.2 ENTITLEMENT TO BENEFITS. A Participant shall be entitled to the accrued benefit determined pursuant to Article III hereof in accordance with the following: (a) NORMAL OR EARLY RETIREMENT. A Participant who has a Termination of Employment on or after his Early Retirement Date or Normal Retirement Date will be eligible to retire and receive accrued benefits under this Plan at his Normal Retirement Date. Notwithstanding the foregoing, the Participant may elect up to thirteen (13) months prior to Termination of Employment to receive Actuarial Equivalent reduced benefits beginning on or after his Early Retirement Date. (b) TERMINATION OF EMPLOYMENT PRIOR TO RETIREMENT. A Participant who has a Termination of Employment for a reason other than death or Disability prior to attaining Early Retirement Date, but after completing five (5) Years of Participation, shall be entitled to receive a deferred vested accrued benefit at his Normal Retirement Date. (c) PRE-RETIREMENT DEATH BENEFIT. In the event of the Participant's death while still employed by the Company or an affiliate and after completing five (5) Years of Participation, the Participant's surviving spouse, if any, shall be entitled to receive a survivor benefit at the Participant's Normal Retirement Date. The amount of the benefit payable to the surviving spouse shall be determined as if: (i) The Participant had retired on the day before his death, and (ii) Elected to receive his benefit in the form of an Actuarial Equivalent one hundred percent (100%) joint and survivor annuity. The value of the joint and survivor annuity will be the Actuarial Equivalent of the accrued benefit to which the Participant would have become entitled based on his Years of Service at the time of his death. -8- (d) POST-RETIREMENT DEATH BENEFIT. In the event of the Participant's death after Termination of Employment, no further benefits shall be payable under the Plan unless the Participant has elected, pursuant to Section 3.2(b), to have benefits payable over the joint lives of the Participant and the Participant's spouse, in which case Actuarial Equivalent benefit payments shall continue over the life of the Participant's spouse or, if the Participant was entitled to deferred vested benefits at the time of death, shall commence on the Participant's Retirement Date. (e) DISABILITY RETIREMENT BENEFIT. In the event of a Participant's Termination of Employment on account of a Disability which is expected to continue until Retirement Date shall be entitled to receive a deferred vested accrued benefit at his Normal Retirement Date, without regard to Years of Participation. For purposes of determining the Participant's accrued benefit, the period of Disability prior to Retirement Date will be considered an approved leave of absence for which Participant may be entitled to up to a maximum of two (2) additional Years of Service credit. II.3 FORFEITURE OF BENEFITS. Notwithstanding anything herein to the contrary, the benefit payable hereunder to a Participant shall be forfeited if he: (a) Engages in competition with the Company (either before or after Retirement) without the Board's prior authorization in writing. Prohibited competition shall include the direct or indirect competition with the Company or any affiliate in connection with any prohibited business (including, without limitation, employment by, rendering advisory or consulting services to, service as a partner, shareholder, director, officer, employee, agent, representative or independent contractor of, or financial investment in a prohibited business). For purposes of this paragraph, "prohibited business" shall mean any business (and any branch office, location or operation thereof) which competes with any service or product line of the Company or any Affiliate in any standard metropolitan statistical areas in which the Company maintains current operations or has expansion plans to which Participant is privy and any business involved in casting golf club heads for manufacturers of premium price golf clubs; provided, however, that a Participant may hold for investment less than one percent (1%) of the outstanding common stock or debt securities of any corporation which is regularly traded on a recognized stock exchange; (b) Is discharged for Cause; or (c) Experiences a Termination of Employment prior to completing five (5) Years of Participation. ARTICLE III BENEFITS III.1 AMOUNT OF BENEFIT. A Participant retiring in accordance with Section 2.2 above will be eligible for a monthly retirement benefit equal to the greater of the Prior Plan Benefit (as of December 31, 1997) or the amount determined in Paragraph (a) below. -9- (a) The annual retirement benefit payable at a Participant's Normal Retirement Date will be two percent (2%) of his Average Earnings for each Year of Service, not to exceed twenty-five (25). However, in no event will a participant's years of Service in excess of twenty-five (25) be taken into account in determining the amount of his benefit. Furthermore, the Participant's benefit will be reduced by the following amounts: (i) His Estimated Social Security Benefit, and (ii) The amount of benefit payable as a straight life annuity at Normal Retirement Date, based on the Actuarial Equivalent value of the benefit funded by the Company payable pursuant to the terms of any tax-qualified defined benefit pension plan sponsored by the Company for the benefit of one or more Participants. (b) The annual retirement benefit payable to a Participant at an Early Retirement Date will equal the Actuarial Equivalent of his benefit determined in accordance with Paragraph (a) above (reduced for each month that the benefit payment begins before age sixty-five (65)). (c) The annual retirement benefit payable to a Participant at Postponed Retirement Date will equal his benefit determined in accordance with Paragraph (a) above based on his Years of Service and Average Earnings as of his Postponed Retirement Date. III.2 FORM OF BENEFIT. (a) The benefit determined under this Plan will be payable in the form of a straight life annuity over the life of the Participant. (b) In accordance with rules and procedures prescribed by the Plan Administrator, a Participant may elect at least thirteen (13) months prior to Termination of Employment that his benefit be paid in the form of a joint and (100%) survivor annuity payable over the joint lives of the Participant and the Participant's spouse that will be the Actuarial Equivalent of the amount of the Participant's benefit calculated pursuant to Paragraph (a) above. This election must be made prior to the year in which the benefit becomes payable. III.3 PAYMENT OF BENEFITS. (a) Participants are not entitled to receive a distribution of their benefits prior to Retirement. (b) Benefits will begin on the first day of the month coincident with or next following the Participant's Retirement Date. Benefits will continue to be paid on the first day of each succeeding month. -10- (c) The last payment will be on the first day of the month in which the retired Participant dies, unless the Participant has elected that his benefit be paid in an optional form in accordance with the provisions of Section 3.2(b) above. III.4 PAYEES UNDER LEGAL DISABILITY. (a) If the Plan Administrator believes that any payee is: (i) A minor, or (ii) Legally incapable of giving a valid receipt and discharge for any payment due him, the Plan Administrator may have the payment, or any part of it, made to the person(s) or institution that it believes is caring for or supporting the payee. (b) any payment under Paragraph (a) above shall be a payment for the benefit of the payee and shall, to the extent thereof, be a complete discharge of any liability under the Plan to the payee. III.5 WITHHOLDING FOR TAXES. Any payments out of the Plan may be subject to withholding for taxes as may be required by any applicable federal or state law. To the extent that the benefit under this Plan is considered wages for income or employment tax purposes during any period prior to the time benefits become payable hereunder, the Company may withhold such taxes from the Participant's current compensation as may be required by any applicable federal or state law. III.6 MAILING OF PAYMENTS. (a) All payments under the Plan shall be delivered in person or mailed to the last address of the Participant (or, in the case of the death of the Participant, to the last address of his surviving spouse). (b) Each Participant shall be responsible for furnishing the Plan Administrator with his current address. III.7 GRANTOR TRUST. Although the Company is responsible for the payment of all benefits under the Plan, the Company may, in its discretion, contribute funds or assets (including insurance policies on the life of any or all Participants) to a grantor trust for the purpose of paying benefits under this Plan. Such trust may be irrevocable, but assets of the trust shall be subject to the claims of creditors of the Company. To the extent any benefits provided under the terms of the Plan are actually paid from the trust, the Company shall have no further obligation with respect thereto. To the extent any benefits provided under the terms of the Plan are not paid from the trust, such benefits shall remain the obligation of and shall be paid by the Company. The Participants shall have the status of unsecured creditors insofar as their legal claim for -11- benefits under the Plan and the Participants shall have no security interest or preferred claim in or to the assets of any such grantor trust. III.8 PROTECTIVE PROVISIONS. Each Participant, as a condition of participation, shall be required to cooperate with the Company by furnishing any and all information requested by the Plan Administrator, to facilitate payment of benefits hereunder by taking such physical examinations as the Plan Administrator may deem necessary and by taking such other actions as may be requested by the Plan Administrator. If the Participant refuses to so cooperate, the Company shall have no further obligation to the Participant under the Plan. ARTICLE IV CHANGE OF CONTROL Notwithstanding anything in this Plan to the contrary, the provisions of this Article IV apply to those Participants whose employment is terminated within one (1) year following a Change of Control ("Affected Participants"), as expressly provided herein. IV.1 ENTITLEMENT TO BENEFITS. If the employment of an Affected Participant is terminated by the Company in an involuntary termination for any reason other than Cause (or the Affected Participant voluntarily resigns upon 30 days written notice for Good Reason), at any time within one (1) year following a Change of Control and prior to becoming entitled to Retirement under Section 2.2 above, he shall be entitled to receive a benefit at Normal Retirement Date computed according to Section 3.1 above as if the termination of employment date was the Affected Participant's Normal Retirement Date, provided that this shall not increase the Participant's Years of Service. Notwithstanding the foregoing, the Participant may elect up to thirteen (13) months prior to Termination of Employment to receive Actuarial Equivalent reduced benefits beginning on or after his Early Retirement Date. IV.2 FULL VESTING. An Affected Participant entitled to benefits under Section 4.1 shall be fully vested in his or her accrued benefit without regard to Years of Participation, but nothing herein shall increase the amount of the Participant's accrued benefit or accelerate the timing of payment thereof. ARTICLE V OPERATION AND ADMINISTRATION OF THE PLAN V.1 PLAN ADMINISTRATOR POWERS. The Plan Administrator shall have all powers necessary to supervise the administration of the Plan and control its operations. In addition to any powers and authority conferred on the Plan Administrator elsewhere in the Plan or by law, the Plan Administrator shall have the following powers and authority: (a) To designate agents to carry out responsibilities relating to the Plan; -12- (b) To employ such legal, actuarial, accounting, clerical, and other assistance as it may deem appropriate in administering this Plan; (c) To establish rules and procedures for the conduct of the Plan Administrator's business and the administration of this Plan; (d) To administer this Plan and to decide all questions which may arise under this Plan. All determinations by the Plan Administrator shall be binding upon all parties, to the maximum extent permitted by law. The Plan Administrator shall have discretionary authority in all aspects of the administration and interpretation of the Plan, including the interpretation and construction of the Plan and the ability to make determinations of disputed facts; and (e) To perform or cause to be performed such further acts as it may deem to be necessary or appropriate in the administration of the Plan. V.2 COMPOSITION OF PLAN ADMINISTRATOR. (a) The Plan Administrator (who need not be Participants or even employees of the Company) shall be appointed by the Board of the Company and shall continue until termination of such status in accordance with the provisions of this Article V. In the event the Board does not designate the Plan Administrator, the Plan Administrator shall be the Company and may the Company's authorized officers may act on its behalf in a representative capacity. Notwithstanding the foregoing, if the Company creates a trust as described in Section 3.7 hereof, and, if such trust provides for an Independent Plan Administrator, then, following a Change in Control of the Company, the Independent Plan Administrator (or any successor Independent Plan Administrator) under the trust shall serve as Plan Administrator of this Plan, so long as such entity is serving as Independent Plan Administrator under the trust. (b) The Plan Administrator or any individual member thereof may resign at any time by giving written notice to the Board, effective as the date stated in the notice. The Plan Administrator or any individual member thereof may be removed by the Board at any time. (c) In the case of a Plan Administrator or an individual member thereof who is also an employee of the Company, his Status as Plan Administrator shall terminate as of the effective date of the termination of his employment, except as otherwise provided in resolutions adopted by the Board. (d) Upon the death, resignation, or removal of the Plan Administrator, the Board may appoint a successor. Notice of the appointment of a successor member shall be given by the Company in writing to the other members of the Plan Administrator. V.3 PLAN ADMINISTRATOR PROCEDURE. -13- (a) In the event the Plan Administrator is a committee of two or more individuals, a majority of the members of the Plan Administrator shall constitute a quorum. Any action authorized by a majority of the members: (i) Present at any meeting, or (ii) In writing without a meeting, shall constitute the actions of the Plan Administrator. (b) The Plan Administrator may designate one or more individuals as authorized to execute any document or documents on behalf of the Plan Administrator. V.4 NOTICES AND COMMUNICATIONS. (a) All communications from Participants to the Plan Administrator shall be in writing, on forms prescribed by the Plan Administrator. These communications shall be mailed or delivered to the office designated by the Plan Administrator, and shall be deemed to have been given when received by the Plan Administrator. (b) Each communication from the Plan Administrator to a Participant or beneficiary shall be in writing and may be delivered in person or by mail. These communications shall be deemed to have been delivered and received by the Participant three (3) days after the date when it is deposited in the United States Mail with postage prepaid, addressed to the Participant or beneficiary at his last address of record with the Plan Administrator. V.5 REPORTING AND DISCLOSURE. The Company (and not the Plan Administrator) shall be responsible for the reporting and disclosure of information required to be reported or disclosed pursuant to ERISA or any other applicable law. V.6 CONFLICT OF INTEREST. Any member of the Plan Administrator who is also a Participant shall not be qualified to act or vote on any matter relating solely to himself. V.7 INDEMNIFICATION. To the extent permitted by law, the Certificate of Incorporation of the Company, the Bylaws of the Company and any indemnity agreements between the Company and its directors or employees, the Company shall indemnify each member of the Board and of the Plan Administrator, and any other employee of the Company with duties under the Plan, against expenses (including any amount paid in settlement) reasonably incurred by him in connection with any claims against him by reason of his conduct in the performance of his duties under the Plan. ARTICLE VI APPLICATION FOR BENEFITS -14- VI .1 APPLICATION FOR BENEFITS. (a) The Plan Administrator may require any person claiming benefits under the Plan ("Claimant") to submit an application therefor, together with such other documents and information as the Plan Administrator may require. (b) Within ninety (90) days following receipt of the application and all necessary documents and information, the Plan Administrator's authorized delegate reviewing the claim shall furnish the Claimant with written notice of the decision rendered with respect to the application. (c) Should special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the expiration of the initial ninety (90) day period. (i) The notice shall indicate the special circumstances requiring an extension of time and the date by which a final decision is expected to be rendered. (ii) In no event shall the period of the extension exceed ninety (90) days from the end of the initial ninety (90) day period. VI.2 CONTENT OF DENIAL. In the case of a denial of the Claimant's application, the written notice shall sat forth: (a) The specific reasons for the denial; (b) References to the Plan provisions upon which the denial is based; (c) A description of any additional information or material necessary for perfection of the application (together with an explanation of why the material or information is necessary); and (d) An explanation of the Plan's claims review procedure. VI.3 APPEALS. (a) In order to appeal the decision rendered with respect to his application for benefits or with respect to the amount of his benefits, the Claimant must follow the appeal procedures set forth in this Section 6.3. (b) The appeal must be made, in writing: (i) In the case where the claim is expressly rejected, within sixty (60) days after the date of notice of the decision with respect to the application, or -15- (ii) In the case where the claim has neither been approved nor denied within the applicable period provided in Section 6.1 above, within sixty (60) days after the expiration of the period. (c) The Claimant may request that his application be given full and fair review by the Plan Administrator. The Claimant may review all pertinent documents and submit issues and comments in writing in connection with the appeal. (d) The decision of the Plan Administrator shall be made promptly, and not later than sixty (60) days after the Plan Administrator's receipt of a request for review, unless special circumstances require an extension of time for processing. In such a case, a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. (e) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner designed to be understood by the Claimant, with specific references to the pertinent Plan provisions upon which the decision is based. VI.4 ARBITRATION. If the claim is denied after review, the Applicant shall submit the claim to binding arbitration. Such arbitration shall be binding and final. There shall be one arbitrator, who shall be a retired superior court or federal court judge. The arbitrator shall have the authority only to enforce the legal and contractual rights of the parties and shall not add to, modify, disregard or refuse to enforce any contractual provision. The arbitrator shall have no right, power or jurisdiction to award an Applicant any punitive or exemplary damages of any kind. THE PARTICIPANT AND THE COMPANY ACKNOWLEDGE AND AGREE THAT BY BECOMING A PARTICIPANT UNDER THE PLAN, THEY ARE AGREEING TO THIS ARBITRATION PROVISION AND ARE WAIVING ALL RIGHTS TO A TRIAL BY JURY. The prevailing party in any arbitration shall be entitled to recover his or its reasonable attorneys' fees and costs. The provisions of California Code of Civil Procedure Sections 1281, et seq. govern this arbitration provision. VI.5 EXHAUSTION OF REMEDIES. No legal action for benefits under the Plan may be brought unless and until the Claimant has exhausted his remedies under this Article VI. ARTICLE VII MISCELLANEOUS MATTERS VII.1 AMENDMENT OR TERMINATION. (a) The Board may, at its sole discretion, amend or terminate this Plan at any time or from time to time, in whole or in part by a duly adopted resolution, provided that, without the consent of each existing Participant, no amendment or termination may adversely affect that Participant's rights to receive accrued benefits as provided in the Plan, as in effect prior to such amendment or termination. -16- (b) The termination of the Plan will result in the immediate vesting of accrued benefits. (c) All benefits will be payable at the time the Participant would have otherwise been eligible to receive benefits under the provisions of this Plan in effect before Plan termination. However, the Board may elect to accelerate the payment of the benefits under the Plan, and to pay such benefits in the form of lump sum distributions. Any lump sum benefits paid under this Section 7.1(c) will be the Actuarial Equivalent of the benefits determined under Section 3.1 above. VII.2 EFFECT OF REORGANIZATION OR TRANSFER OF ASSETS. (a) In the event of a consolidation, merger, sale, liquidation, or other transfer of substantially all of the operating assets of the Company to any other company, the ultimate successor to the business of the Company shall automatically be deemed to have elected to continue this Plan in full force and effect, in the same manner as if the Plan had been adopted by resolution of its board of directors. (b) The presumption set forth in Paragraph (a) above shall not apply if the successor, by resolution of its board of directors, elects not to so continue this Plan in effect. In such a case, the Plan shall terminate as of the effective date set forth in the board resolution. VII.3 RIGHTS OF PARTICIPANTS. (a) Nothing contained herein will confer on any Participant the right to be retained in the service of the Company, nor will it interfere with the Company's right to discharge or otherwise deal with Participants without regard to the existence of this Plan. The Company reserves the right to terminate the employment of any Participant without any liability for any claim against the Company except to the extent provided herein. (b) The benefits under the Plan are unfunded. Accordingly, no Participant shall have a preferred claim on, or a beneficial ownership interest in, any assets of the Company prior to the time such assets are paid to him in the form of benefits. (c) All rights created under the Plan shall be mere unsecured contractual rights of Participants against the Company. However, nothing in this document shall in any way diminish any rights of a Participant to pursue his rights as a general creditor of Company with respect to his benefits under the Plan. VII.4 ASSIGNMENT OF BENEFITS. To the maximum extent permitted by law, no benefit under this Plan may be assigned or alienated. Any purported transfer, assignment, encumbrance, or attachment thereof shall be void and of no effect. In the event of a dispute involving any individual's right to receive the benefit hereunder, the Plan Administrator or the Company may enter an interpleader action. Payment of the benefit to a court of competent jurisdiction with proper notice to the appropriate parties in dispute shall be in full satisfaction of all claims against the -17- Plan Administrator and the Company as to the Plan, and shall be equivalent to a receipt and release pursuant to Section 7.7. VII.5 OTHER PLANS. This Plan shall not affect the right of any Participant to participate in and receive benefits under and in accordance with the provisions of any other employee benefit plans which are now or hereafter maintained by the Company, unless the terms of such other employee benefit plan or plans specifically provide otherwise. VII.6 INTERPRETATION. (a) The provisions of this Plan shall in all cases be interpreted in a manner that is consistent with this Plan satisfying the applicable requirements of ERISA. (b) If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan will be construed and enforced as if the provision had not been included in it. (c) Unless the context clearly indicates otherwise, the masculine gender shall include the feminine, the singular shall include the plural, and the plural shall include the singular. (d) Article and section headings are for convenience of reference only and shall not be deemed to be part of the substance of this instrument or in any way to enlarge or limit the contents of any Article or Section. VII.7 RECEIPT OR RELEASE. Any payment to a Participant in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan Administrator and the Company, and the Plan Administrator may require such Participant, as a condition precedent to such payment, to execute a receipt and release to such effect. VII.8 GOVERNING LAW. Except to the extent preempted by ERISA, this Plan shall be construed, administered, and governed in all respects in accordance with the laws of the State of California. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. IN WITNESS WHEREOF, Coastcast Corporation has caused this Plan document to be executed by its duly authorized officer as of the 18th day of December, 1998. COASTCAST CORPORATION By: /s/ Hans H. Buehler ------------------------------- Hans Buehler, Chairman & CEO -18- EX-10.29 12 EXHIBIT 10.29 COASTCAST CORPORATION GRANTOR TRUST THIS AGREEMENT is made as of the 18th day of December, 1998, by and between Coastcast Corporation("Company") and Imperial Trust Company ("Trustee") constitutes an amendment and restatement of the agreement entered into between the parties as of September 1, 1996 WHEREAS, Company has adopted the Coastcast Corporation Supplemental Executive Retirement Plan ("Plan"); and WHEREAS, Company has incurred or expects to incur liability under the terms of the Plan with respect to the individuals participating in such Plan; and WHEREAS, Company established a trust (hereinafter called "Trust") to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; and WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to accumulate the amounts necessary to satisfy its contractual liability to pay benefits under the Plan; NOW, THEREFORE, the parties do hereby amend and restate the Trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1. ESTABLISHMENT OF TRUST. (a) CONTRIBUTIONS. Company has deposited with Trustee in trust the cash, securities and/or individual life insurance policies specified in Appendix A, which constitute the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Except as provided in any Plan, the Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or Beneficiary shall have any right to compel such additional deposits. Trustee shall have no duty to determine or collect contributions under the Plan, to make premium payments on any individual life insurance policy held by the Trust (except to the extent the Company contributes funds for such purpose or the cash value of such policy is available for such purpose) and shall have no responsibility for any property until it is received and accepted by Trustee. Such responsibility and liability shall continue only for so long as such cash, securities, life insurance policies, or other property constitute part of the Trust. Company shall have the sole duty and responsibility for the determination of the accuracy or sufficiency of the contributions to be made under the Plan and Trustee shall have no obligation or responsibility in the event Company fails to (i) pay premiums on any individual life insurance policy held by the Trust, or (ii) contribute funds and direct Trustee to pay premiums on any individual life insurance policy held by the Trust. (b) IRREVOCABILITY. The Trust hereby established shall be irrevocable. (c) GRANTOR TRUST. The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) CREDITOR CLAIMS. The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 4(a) herein. (e) TRUST FUND. The Company may, from time to time, deposit in the Trust such cash, securities, life insurance policies or other property as shall be transferred to the Trustee by the Company. All cash, securities, life insurance policies or other property so received, together with the income therefrom and any increment thereon or charge thereto (the "Trust Fund"), shall be held, managed and administered by the Trustee pursuant to the terms of this Trust Agreement without distinction between principal and income. The Company may, from time to time, make additional deposits of cash, securities, life insurance policies or other property to the Trust to be held in the Trust Fund and administered and disbursed by the Trustee as provided in this Trust Agreement. (f) TOP HAT PLAN. Company represents and warrants to Trustee that the Plan covers, and will cover, only a select group of management or highly compensated employees as contemplated by Section 401(a) of ERISA and interpretations, opinions, and rulings of the Department of Labor thereunder. Company shall indemnify and hold harmless Trustee, its parent, subsidiaries and affiliates and each of their respective officers, directors, employees and agents from and against all liability, loss and expense, including reasonable attorneys' fees and expenses suffered or incurred by any of the foregoing indemnities as a result of a breach of the foregoing representation and warranty. The provisions of this subsection shall survive termination of this Trust Agreement. 2 (g) DISTRIBUTION OF EXCESS TRUST FUND TO EMPLOYERS. In the event that the Plan Administrator, prior to a Change in Control, or the Independent Plan Administrator in its sole and absolute discretion, after a Change in Control, determines that the Trust Fund exceeds 120 percent of the anticipated benefit obligations and administrative expenses that are to be paid under the Plan, the Trustee, at the direction of the Plan Administrator prior to a Change in Control, or the Independent Plan Administrator in its sole and absolute discretion after a Change in Control, shall distribute to the Company and the Subsidiaries such excess portion of the Trust Fund. SECTION 2. DEFINITIONS. Any capitalized terms used in this Trust Agreement that are not defined herein are defined under the terms of the Plan (all terms defined therein shall have the same meaning herein) and the Plan definitions are incorporated by reference herein. SECTION 3. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. (a) PAYMENT SCHEDULE PROVIDED BY PLAN ADMINISTRATOR. The Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control) shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. The Plan Administrator or the Independent Plan Administrator, as applicable, shall provide such Payment Schedule to the Trustee at least once each Plan Year. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. As directed by the Plan Administrator or the Independent Plan Administrator, as applicable, the Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities. (b) BENEFITS DETERMINED BY PLAN. The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control), and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. The Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control) shall notify Trustee of such determination and shall direct commencement of payments of such benefits. Such directive shall identify: (i) The participant; (ii) The amount of the benefit; 3 (iii) The participant's address; and (iv) The amount of tax withholdings as well as any other information necessary for the Trustee to effectuate the withholdings and to forward those amounts to the appropriate taxing authorities. (c) DIRECT PAYMENT BY COMPANY. Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee and the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control) of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the Trust Fund is not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where the Trust Fund is not sufficient. (d) TAX REPORTING AND WITHHOLDING. In the event payments are made by Company directly to Participants, Company shall have sole responsibility for the reporting and withholding of any federal, state, or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing authority. (e) LIMITATION WITH RESPECT TO TAX REPORTING AND WITHHOLDING. Trustee shall have not duty or responsibility with respect to the above stated reporting, withholding or payment of taxes and shall have no responsibility to determine that Company has provided for such reporting, withholding or payment of such taxes. (f) INDEMNIFICATION WITH RESPECT TO TAX REPORTING AND WITHHOLDING. Company shall indemnify and hold Trustee harmless from any and all losses, claims, penalties or damages which may occur as a result of Trustee following in good faith the written direction of the Company to reimburse Company for payments made hereunder to Participants and arising from Company's tax reporting, withholding and payment obligations hereunder. SECTION 4. TRUSTEE RESPONSIBILITY WHEN COMPANY IS INSOLVENT. (a) INSOLVENCY DEFINED. Trustee shall cease payment of benefits to Plan participants and their beneficiaries if Company becomes Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) ASSETS SUBJECT TO CLAIMS OF CREDITORS ON INSOLVENCY. At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the Trust Fund shall be subject to claims of general creditors of Company under federal and state law as set forth below. 4 (i) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. In all cases, Trustee shall be entitled to conclusively rely upon the written certification of the Board of Directors or the Chief Executive Officer of Company when determining whether Company is Insolvent. If Trustee is unable to obtain information sufficient to ascertain Insolvency, Trustee may seek instructions of a court of law or submit the matter for arbitration before the American Arbitration Association or interplead the Trust Assets at the expense of the Trust. (ii) Upon receipt of the aforesaid written notice of the Company's insolvency from a person claiming to be a creditor of Company, the Trustee shall notify the Company, and the Company, within thirty (30) days of receipt of such notice, shall engage an arbitrator (the "Arbitrator") acceptable to Trustee, from the American Arbitration Association to determine the Company's solvency or insolvency. The Company shall cooperate fully and assist the Arbitrator, as may be requested by the Arbitrator, in such determination and shall pay all costs relating to such determination. The Arbitrator shall notify the Company and Trustee separately by registered mail of its findings. If the Arbitrator determines that the Company is solvent or if once found insolvent the Company is no longer insolvent, the Trustee shall resume holding the Trust assets for the benefit of the Participants and may make any distributions called for under this Trust Agreement, including any amounts which should have been distributed during the period when the Trustee suspended distributions in response to a notice of the Company's insolvency, the Trustee shall continue to retain the assets of the Trust until the Company's status of solvency or insolvency is decided by a court of competent jurisdiction or it distributes all or a portion of the Trust assets to any duly appointed receiver, trustee in bankruptcy, custodian or to the Company's general creditors, but only as such distribution is ordered by a court of competent jurisdiction. The Trustee shall have no liability for relying upon the determination of the Arbitrator as to the Company's solvency or insolvency. (iii) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. (iv) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise. 5 (v) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 3 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) MAKE-UP OF SUSPENDED BENEFITS AFTER INSOLVENCY. Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 4(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. SECTION 5. PAYMENTS TO COMPANY. Except as provided in Section 1(g) and Section 4 hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan, as certified to Trustee by the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control). SECTION 6. INVESTMENT AUTHORITY. Prior to a Change in Control, the assets of the Trust shall be invested by Trustee pursuant to the direction of the Plan Administrator. On or after a Change in Control, the assets of the Trust shall be invested by Trustee pursuant to the direction of the Independent Plan Administrator. Unless the Plan Administrator, or Independent Plan Administrator, as applicable, and the Trustee have mutually agreed in a separate writing that the Trustee shall have and exercise investment discretion with respect to all or a portion of the assets of the Trust, the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control) shall have complete discretion with respect to the investment of such assets at all times and shall direct the Trustee accordingly. From time to time, the Trustee shall be notified in a writing signed by an officer of the Company of the person or persons authorized to act on behalf of the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control) for purposes of this Section and the Trust. In each such notice, the Company shall warrant that all directions given by the Plan Administrator (prior to a Change in Control) are proper. The Trustee shall have no responsibility to review or to consider the propriety of holding or selling investments directed by the Plan Administrator or the Independent Plan Administrator, including, without limitation, any life insurance, retirement income or annuity policies or contracts. The Company shall have the responsibility for establishing and carrying out a funding policy and method, consistent with the objectives of the Plan, taking into considerations the Plan's short-term and long-term financial needs. The Trustee's responsibility for investment and diversification of the assets in the portion of the Trust for which the Trustee has investment discretion shall be subject to, and is limited by, the investment guidelines issued to it by the Company. It is understood that, unless otherwise agreed in writing, the Company, rather than the Trustee, shall be responsible for the overall 6 diversification of Trust assets. In the exercise of its investment authority, Trustee shall have the powers described below. (a) To invest and reinvest the principal and income of the Trust and keep it invested, without distinction between principal and income, in any security, property or obligation, secured or unsecured, or in any combination of these; provided, however, that in no event mat Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company, other than a de minimis amount held in common investment vehicles in which Trustee invests; and provided, further, that in no event shall the assets of the Trust be invested in real estate. For this purpose, "real estate" includes, but is not limited to, real property, leaseholds, mineral interests and any form of asset which is secured by any of the foregoing. All rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee; (b) To acquire, sell and exercise options to buy securities ("call" options) and to acquire, sell and exercise options to sell securities ("put" options); (c) To buy, sell, assign, transfer, acquire, loan, lease (for any purpose, including beyond the life of this Trust), exchange and in any other manner to acquire, manage, deal with and dispose of all or any part of the Trust property, for cash or credit; (d) Subject to the Trustee's exercise of prudence and fulfilment of Trustee's fiduciary obligations, to retain all or any portion of the Trust in cash temporarily awaiting investment or for the purpose of making distributions or other payments, without liability for interest thereon, notwithstanding trustee's receipt of float; (e) To take all of the following actions: to vote proxies of any stocks, bonds or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to consent to or otherwise participate in corporate reorganizations or other changes affecting corporate securities and to delegate discretionary powers and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities or other property held in the Trust; (f) To pay or cause to be paid from the Trust any and all real or personal property taxes, income taxes or other taxes or assessments of any or all kinds levied or assessed upon or with respect to the Trust or the Plan; (g) To hold term or ordinary life insurance contracts or to acquire annuity contracts on the lives of Participants, except that Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee (or upon the direction of the Plan Administrator or Independent Plan Administrator to a named insured participant or family member), or to loan to any person the proceeds of any borrowing against such policy (but in the 7 case of conflict between any such contract and the Plan, the terms of the Plan shall prevail); to pay from the Trust the premiums on such contracts; to distribute, surrender or otherwise dispose of such contracts; to pay the proceeds, if any, of such contracts to the proper persons in the event of the death of the insured Participant; to enter into, modify, renew and terminate annuity contracts of deposit administration, of immediate participation or other group or individual type with one or more insurance companies and to pay or deposit all or any part of the Trust thereunder; to provide in any such contract for the investment of all or any part of funds so deposited with the insurance company in securities under separate accounts; to exercise and claim all rights and benefits granted to the contract holder by any such contracts. All payments of exercise of all powers with respect to insurance contracts shall be solely on the direction of the Plan Administrator or Independent Plan Administrator. (h) To exercise all the further rights, powers, options and privileges granted, provided for, or vested in trustees generally under applicable federal or state laws, as amended from time to time, it being intended that, except as otherwise provided in this Trust, the powers conferred upon the Trustee herein shall not be construed as being in limitation of any authority conferred by law, but shall be construed as in addition thereto; (i) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. (j) To invest funds in any type of interest-bearing account including, without limitation, time certificates of deposit or interest-bearing accounts issued by Trustee. To use other services or facilities provided by Trustee its subsidiaries or affiliates, to the extent allowed by applicable law and regulation. Such services may include but are not limited to (1) the placing of orders for the purchase, exchange, investment or reinvestment of securities through any brokerage service conducted by, and (2) the purchase of units of any registered investment company managed or advised by Trustee, its subsidiaries or affiliates and/or for which Trustee, or its subsidiaries or affiliates act as custodian or provide other services in addition to the fees payable under this Agreement. Fee schedules for additional services shall be delivered to the appropriate party in advance of the provision of such services. Independent fiduciary approval of compensation being paid to the Trustee will be sought in advance to the extent required under applicable law and regulation. If Trustee does not have investment discretion, the services referred to above, as well as any additional services, shall be utilized only upon the appropriate direction of an authorized party. (k) To cause all or any part of the Trust to be held in the name of the Trustee (which in such instance need not disclose its fiduciary capacity) or, as permitted by law, in the name of any nominees, including the nominee name of any depository, and to acquire for the Trust any investment in bearer form; but the books and records of the Trust shall at all times show that all such investments are a part of the Trust and the Trustee shall hold evidences of title to all such investments as are available; 8 (l) To serve as custodian with respect to the Trust assets, to hold assets or to hold eligible assets at the Depository Trust Company or other depository; (m) To employ such agents and counsel as may be reasonably necessary in administration and protection of the Trust assets and to pay them reasonable compensation; to employ any broker-dealer covered in the self-dealing section, and pay to such broker-dealer its standard commissions; to settle, compromise or abandon all claims and demands in favor of or against the Trust; and to charge any premium on bonds purchased at par value to the principal of the Trust without amortization from the Trust, regardless of any law relating thereto; (n) To abandon, compromise, contest arbitrate or settle claims or demands; to prosecute, compromise and defend lawsuits but without obligation to do so, all at the risk and expense of the Trust; (o) To permit such inspections of documents at the principal office of the Trustee as are required by law, subpoena or demand by United States or state agency during normal business hours of the Trustee; (p) To comply with all requirements imposed by law; (q) To seek written instructions from the Company or Plan Administrator on any matter and await written instructions without incurring any liability. If at any time the Trustee should fail to receive requested directions, the Trustee may act in the manner that in its discretion it deems advisable under the circumstances for carrying out the purposes of this Trust. Such actions shall be conclusive on the Company, the Plan Administrator and the Participants on any matter if written notice of the proposes action is given to the Company or Plan Administrator five (5) days prior to the action being taken, and the Trustee receives no response; (r) To compensate such executive, consultant, actuarial, accounting, investment, appraisal administrative, clerical secretarial, custodial, depository and legal firms, personnel and other employees or assistants as are engaged by the Company or the Plan Administrator in connection with the administration of the Plan and to pay from the Trust the necessary expenses of such firms, personnel and assistants, to the extent not paid by the Company; (s) To impose a reasonable charge to cover the cost of furnishing to Participants statements or documents; (t) To act upon proper written directions of the Company, Plan Administrator, or any Participant including directions given by photostatic teletransmission using facsimile signature. If oral instructions are given, to act upon those in Trustee's discretion prior to receipt of written instructions. Trustee's recording or lack of recording of any such oral instructions taken in Trustee's course of business shall constitute conclusive proof of Trustee's receipt or non-receipt of the oral instructions; 9 (u) To pay from the Trust the expenses reasonably incurred in the administration of the Trust; (v) To maintain insurance for such purposes, in such amounts and with such companies as the Plan Administrator shall elect, including insurance to cover liability or losses occurring by reason of the acts or omissions of fiduciaries (but only if such insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary); (w) As directed by the Plan Administrator, to cause the benefits provided under the Plans to be paid directly to the person entitled thereto under the Plans, and in the amounts and at the times and in the manner specified by the Plans, and to charge such payments against the Trust and Accounts with respect to which such benefits are payable. SECTION 7. DISPOSITION OF INCOME. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. SECTION 8. ACCOUNTING BY TRUSTEE. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within 90 days following the close of each calendar year and within 90 days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. The Company shall have sixty (60) days after the Trustee's mailing of each such quarterly or final account within which to file with the Trustee written objections to such account. Upon the expiration of each such period, the Trustee shall be forever released and discharged from all liability and accountability to the Company with respect to the propriety of its acts and transactions shown in such account except with respect to any such acts or transactions as to which the Company files written objections within such sixty-day period with the Trustee. Notwithstanding anything herein to the contrary, the Trustee shall have no duty or responsibility to obtain valuations of any assets of the Trust Fund, the value of which is not readily determinable on an established market. Company shall bear sole responsibility for determining said valuations and shall be responsible for providing said valuations to Trustee in a 10 timely manner. Trustee may conclusively rely on such valuations provided by Company and shall be indemnified and held harmless by Company with respect to such reliance. SECTION 9. RESPONSIBILITY OF TRUSTEE. (a) FIDUCIARY RESPONSIBILITY. Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Plan Administrator or the Independent Plan Administrator, as applicable, which is contemplated by, and in conformity with, the terms of the Plan (as certified to Trustee by the Plan Administrator or the Independent Plan Administrator, as applicable) or this Trust and is given in writing. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) LIMITATION ON TRUSTEE'S RESPONSIBILITY. Trustee is not a party to, and has no duties or responsibilities under, the Plan other than those that may be expressly contained in this Trust Agreement. In any case in which a provision of this Trust Agreement conflicts with any provision in the Plan, this Trust Agreement shall control. Trustee shall have no responsibility: (i) to administer the Plan, including, without limitation, to determine the eligibility of any individual to participate in the Plan, the amount of any participant's account balance under the Plan, issuing statements to participants of their interest in the Trust or the Plan, or the amount or timing of any benefit distributions under the Plan; (ii) to compute any amount to be transferred or paid to the Trust by the Company; (iii) to collect any contributions or transfers of assets to the Trust; (iv) to question any investment direction received from the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control); (v) to review any securities or property acquired at the direction of the Plan Administrator (prior to a Change in Control) or the Independent Plan Administrator (on or after a Change in Control); (vi) to make any suggestions to the Plan Administrator or the Independent Plan Administrator in connection with the investment of the Trust assets; (vii) to inquire into the acts or omissions of the Company, the Plan Administrator or the Independent Plan Administrator; 11 (viii) to satisfy the reporting and disclosure obligations of the Code and ERISA with respect to the Plan; or (ix) to determine whether the terms of the Plan document satisfy the requirements of applicable law. (c) TITLE. Trustee shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Trust Agreement and shall be held harmless in acting upon any notice, request, direction, instruction, consent, certification or other instrument believed by it to be genuine and delivered by the proper party or parties. (d) INDEMNIFICATION. The Company hereby agrees to indemnify and hold harmless the Trustee, its officers, directors, employees or agents, from and against any and all liabilities, claims for breach of fiduciary duty or otherwise, demands, damages, costs and expenses, including reasonable attorneys' fees arising from (i) any act taken or omitted by the Trustee in good faith in accordance with or due to the absence of directions from the Company, its agents, or any Plan Participant, (ii) any act taken or omitted by a Fiduciary other than the Trustee in breach of such Fiduciary responsibilities under the Plan or this Agreement, (iii) any failure by the Company to pay premiums on any individual life insurance policy held by the Trust, or contribute funds and direct Trustee to pay premiums on any individual life insurance policy held by the Trust, (iv) any action taken by the Trustee pursuant to a notification of an order to purchase or sell securities issued by Company or a Plan Participant directly to a broker or dealer or (v) any lawsuit or other proceeding involving the Plan or the Trust for any reason including, without limitation, an alleged breach by the Trustee of its responsibilities under this Agreement, unless a final judgment or determination entered in any such lawsuit or proceeding holds or determines that the Trustee is guilty of gross negligence, willful misconduct or a breach of fiduciary responsibility. If the final judgment or determination entered in any such lawsuit or proceeding holds or determines that the Trustee is guilty of gross negligence, willful misconduct or a breach of fiduciary responsibility, the Company's obligation to indemnify the Trustee hereunder shall be limited to liability in excess of the Trustee's allocable share of such liability. The Company shall have the right, but not the obligation, to conduct the defense of the Trustee in any legal proceeding covered by this section. However, any legal counsel selected to defend the Trustee must be acceptable to the Trustee, and the Trustee may elect to choose counsel, including in-house counsel, other than that selected by the Company. The Company may, but shall not be required to, satisfy all or any part of its obligations under this section through insurance arrangements acceptable to the Trustee. (e) DEFENSE COSTS. If Trustee, on behalf of the Trust, undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does 12 not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. (f) COUNSEL. Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (g) AUTHORITY. Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (h) LIMITATION WITH RESPECT TO INSURANCE POLICIES. Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust or to loan to any person other than Company the proceeds of any borrowing against such policy. (i) LIMITATION WITH RESPECT TO TRUST AS A BUSINESS. Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. (j) Trustee shall not be responsible or liable for any losses to the Trust resulting from nationalization, expropriation, devaluation, seizure, or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, levies or other charges affecting the Trust's property; or acts of war, terrorism, insurrection or revolution; or acts of God; or any other similar event beyond the control of Trustee or its agents. This Section shall survive the termination of this Trust Agreement. (k) In the event the Company attempts to enjoin any benefit payment that the Trustee has been directed to make under the terms of this Trust Agreement, the Trustee shall commence legal action to allow such payment. Subject to the Company's obligation to indemnify Trustee under Section 8(e) hereof for the expenses of any such action, the Trustee may withdraw from the Trust assets any amounts it deems necessary to pay legal expenses, including attorneys fees, incurred in the course of such legal action. Under no circumstances shall the Trustee be required to make such payments for benefits or expenses from any source other than the Trust. SECTION 10. PERSONS TO RECEIVE PAYMENT. (a) The Trustee shall, except as otherwise provided otherwise, pay all amounts payable hereunder to the person or persons designated under the Plans or deposit such amounts to the Participant's checking or savings account as directed by the Company and not to any other 13 person or corporation, and only to the extent of assets held in the Trust, and shall follow written instructions by the Company. The Company's written instructions, to the Trustee to make distributions or not to make distributions, and the amount thereof, shall be conclusive on all Participants. (b) Should any controversy arise as to the person or persons to whom any distribution or payment is to be made by the Trustee, or as to any other matter arising in the administration of the Plans or Trust, the Trustee may retain the amount in controversy pending resolution of the controversy or the Trustee may file an action seeking declaratory relief and/or may interplead the Trust assets in issue, and name as necessary parties the Company, the Participants and/or any or all persons making conflicting demands. (c) The Trustee shall not be liable for the payment of any interest or income, except for that earned as a Trust investment, on any amount withheld or interpleaded under subsection (b). (d) The expense of the Trustee for taking any action under subsection (b) shall be paid to the Trustee from the Trust. SECTION 11. COMPENSATION AND EXPENSES OF TRUSTEE. Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. Trustee shall be entitled to the fees listed on Appendix B attached hereto as reasonable compensation for the services rendered under this Trust Agreement. To the extent Trustee advances funds to the Trust for disbursements or to effect the settlement of purchase transactions, Trustee shall be entitled to collect from the Trust an amount equal to what would have been earned on the sums advanced (an amount approximating the "federal funds" interest rate). The Trustee reserves the right to alter this rate of compensation at any time by providing the Company with notice of such change of at least thirty (30) days prior to its effective date. Reasonable compensation shall include compensation for any extraordinary services or computations required, such as determination of valuation of assets when current market values are not published and interest on funds to cover overdrafts. The Trustee shall have a lien on the Trust for compensation and for any reasonable expenses including counsel, appraisal, or accounting fees, and if the Company fails to pay such amounts directly within 30 days of presentment of an invoice, these amounts may be withdrawn from the Trust and the Trust may be reimbursed by the Company. SECTION 12. RESIGNATION AND REMOVAL OF TRUSTEE. (a) Trustee may resign at any time by written notice to Company, which shall be effective 30 days after receipt of such notice unless Company and Trustee agree otherwise. 14 (b) Trustee may be removed by Company 30 days notice or upon shorter notice accepted by Trustee. (c) Upon a Change of Control, as defined herein, Trustee may not be removed by Company for six (6) months following the Change of Control. If Trustee resigns or is removed within six (6) months following the Change of Control, notwithstanding anything to the contrary in Section 11 hereof, the Independent Plan Administrator may appoint a successor Trustee according to the provisions of Section 11 hereof. (d) Upon resignation or removal of Trustee and appointment of a successor or Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 60 days after receipt of notice of resignation, removal or transfer, unless Company and Trustee agree to extend the time limit. (e) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Until a successor Trustee is appointed, the Trustee shall be entitled to be compensated for its service according to its published fee schedule then in effect for acting as Trustee. SECTION 13. APPOINTMENT OF SUCCESSOR. Except as provided in Section 12(c) hereof, if Trustee resigns or is removed in accordance with Section 12(a) or (b) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate Trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. SECTION 14. SIGNING AUTHORITY. The Company shall certify in writing to the Trustee the names and specimen signatures of all those who are authorized to act as or on behalf of the Company and those names and specimen signatures shall be updated as necessary by a duly authorized official of the Company. The Company shall promptly notify the Trustee if any person so designated is no longer authorized to act on behalf of the Company. Until the Trustee receives written notice that a person is no longer authorized to act on behalf of the Company, the Trustee may continue to rely on the Company's designation of such person. 15 SECTION 15. INFORMATION TO BE PROVIDED TO TRUSTEE. The Company shall maintain and furnish the Trustee with all reports, documents and information as shall be required by the Trustee to perform its duties and discharge its responsibilities under this Trust Agreement, including without limitation a certified copy of each of the Plans and all amendments thereto. The Trustee shall be entitled to rely on the most recent reports, documents and information furnished to it by the Company. The Company shall be required to notify the Trustee as to the termination of employment of any Participant by death, retirement or otherwise. The Company shall arrange for each insurance company issuing contracts held by the Trustee pursuant to Section 20, to furnish the Trustee with such valuations and reports as are necessary to enable the Trustee to fulfill its obligations under this Trust Agreement, and the Trustee shall be fully protected in relying upon such valuations and reports. SECTION 16. MEDIATION AND ARBITRATION OF DISPUTES. If a dispute arises under this Trust Agreement between or among the Company and Trustee, except as otherwise provided, the parties agree first to try in good faith to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association. Thereafter, any remaining unresolved controversy or claim arising out of or relating to this Agreement, or the performance or breach thereof, shall be decided by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title 9 of California Code of Civil Procedure Section 1280 et seq. The sole arbitrator shall be a retired or former Judge associated with the American Arbitration Association. Judgment upon any award rendered by the arbitrator shall be final and may be entered in any court having jurisdiction. Each party shall bear its own costs, attorneys' fees and its share of arbitration fees. The Alternate Dispute Resolution provision in this Agreement does not constitute a waiver of the parties' rights to a judicial forum in instances where arbitration would be void under applicable law, and does not preclude Trustee from exercising its rights to interplead the funds of the Account at the cost of the Account. SECTION 17. AMENDMENT OR TERMINATION. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan (as certified to Trustee by Company) or shall make the Trust revocable. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan (as certified to Trustee by Company). Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. 16 (c) Upon written approval of participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan, Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to Company. SECTION 18. MISCELLANEOUS. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) Notwithstanding anything to the contrary contained elsewhere in this Trust Agreement, any reference to the Plan or Plan provisions which require knowledge or interpretation of the Plan shall impose a duty upon the Company, Plan Administrator or Independent Plan Administrator, as applicable, to communicate such knowledge or interpretation to Trustee. Trustee shall have no obligation to know or interpret any portion of the Plan and shall in no way be liable for any proper action taken contrary to the Plan. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 19. CHANGE IN CONTROL PROVISIONS. (a) For purposes of this Trust, a "Change in Control" shall be deemed to have occurred only if: (i) the Company is merged or consolidated or reorganized into or with another corporation and less than a majority of the combined voting power of the then-outstanding securities of the surviving corporation immediately thereafter is held in the aggregate by the holders of Voting Stock (as defined below) of the Company immediately prior to such transaction; (ii) the Company sells or otherwise transfers all or substantially all of its assets to any other corporation, if less than a majority of the combined voting power of the then-outstanding voting securities of such corporation immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (iii) as a result of, or in connection with, any cash tender or exchange offer, merger, reorganization or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the 17 individuals who were members of the Board immediately prior to the Transaction cease to constitute a majority of the members of the Board or of the board of directors of any successor to the Company, unless the election or nomination for election by the holders of the Voting Stock of the Company was approved by a vote of the majority of Board members then still in office who were members of the Board immediately prior to the Transaction; or (iv) in connection with a transfer or assignment of Voting Stock by the current beneficial owners of Voting Stock, the beneficial ownership of Voting Stock changes such that less than a majority of the Voting Stock outstanding immediately after such assignment or transfer is held by the current beneficial owners of Voting Stock. For purposes of this Section, (A) "Voting Stock" shall mean shares of the Company representing the combined voting power of the then outstanding securities entitled to vote generally in the election of the Board, and (B) "beneficial ownership" and "beneficial owners" shall have the meaning ascribed to it under Rule 13d-3 or any successor rule or regulation promulgated under the Securities Exchange Act of 1934, as amended, as well as any person or entity who, directly or indirectly, controls, is controlled by or under common control with such beneficial owner. (b) The Trustee shall have no independent duty to determine that a Change in Control has occurred and shall not be required to take any action or refrain from taking any actions hereunder which are based on a Change in Control having occurred prior to the time it receives written notice from the Company or a Participant that a Change in Control has occurred or will occur and has had a reasonable opportunity to determine whether a Change in Control, in fact, has occurred. At the Trustee's request, the Company shall furnish such evidence as may be necessary to enable the Trustee to determine whether a Change in Control has occurred. In taking or refraining from any action under this Trust Agreement, the Trustee may rely on its determination, including an opinion of counsel (who may be counsel for the Company or the Trustee), that a Change in Control has occurred. The Trustee's determination as to whether a Change in control has occurred shall be binding and conclusive on all persons. SECTION 20. INSURANCE POLICIES AND CONTRACTS. Prior to a Change in Control, the Company, with the consent of the Plan Administrator, reserves the right to transfer life insurance, retirement income or annuity policies or contracts to the Trust, regardless of the nature or type of such contract and regardless of the Company's interest in or power to direct the investments under such policies or contracts. Prior to a Change in Control, the Plan Administrator may direct the Trustee to purchase any such policies or contracts and, following a Change in Control, the Independent Plan Administrator shall have the same powers regarding such insurance policies or contracts. Any such policy or contract shall be an asset of the Trust subject to the claims of the Company's creditors in the event of insolvency, as specified in this Trust Agreement. The proceeds of any life insurance policy shall, upon the death of the insured, be paid to the Trust. The Trustee shall be under no duty to question any direction of the Plan Administrator or the Independent Plan Administrator, to review the form of any such policies or contracts or the 18 selection of the issuer thereof, or to make suggestions to the Plan Administrator, the Independent Plan Administrator or to the issuer thereof with respect to the form of such policies or contracts prior to or following a Change in Control. Prior to a Change in Control, the Plan Administrator may direct the Trustee to exercise the powers of the contract holder under any such policies or contracts and, following a Change in Control, the Independent Plan Administrator shall have the same powers regarding such insurance policies or contracts. The Trustee shall exercise such powers only upon the direction of the Plan Administrator or the Independent Plan Administrator, as applicable. Notwithstanding anything to the contrary in the Plan or this Trust Agreement, the Trustee shall be fully protected in acting in accordance with a proper written direction of the Plan Administrator or Independent Plan Administrator and shall not be liable for any loss of any kind that may result by reason of any action taken or omitted by it in accordance with any such direction, or by reason of inaction in the absence of any such written directions. No insurance carrier shall for any purpose be deemed a party to this Trust Agreement or be responsible for the validity or sufficiency hereof. Notwithstanding the fact that it may have knowledge of the terms of this Trust, the obligations of such insurance carrier shall be determined solely by reference to the terms and conditions of the policies or contracts issued by it. SECTION 21. INDEPENDENT PLAN ADMINISTRATOR. Various provisions of this Trust Agreement refer to the term "Independent Plan Administrator" which shall mean a committee of three (3) participants established after a Change in Control to establish the investment policy and direct Trustee pursuant to the terms of this Trust Agreement. The members of the committee shall be appointed by the Company prior to a Change in Control. In the event of a Change in Control, the Independent Plan Administrator shall assume the duties and authority of the Administrator under the terms of the Plan and the duties of the Independent Plan Administrator specified in this Trust Agreement. After a Change in Control, the designation of the Independent Plan Administrator may not be changed without the unanimous written consent of the designated Independent Plan Administrator. In the event the Independent Plan Administrator fails to act or resigns after a Change in Control, the Company and all Participants may jointly agree to the designation of a successor Independent Plan Administrator. Alternatively, the Company, the Trustee or any Participant may (but shall not be required to) petition a court of competent jurisdiction or bring an arbitration proceeding to appoint a successor Independent Plan Administrator, which shall be an entity which is unrelated to, and unaffiliated with, the Company. The Trustee shall be entitled to rely on the determinations and directions of a qualified Independent Plan Administrator. 19 SECTION 22. EFFECTIVE DATE. The effective date of this amended Trust Agreement shall be December 18, 1998. IN WITNESS WHEREOF, Company and Trustee have caused their duly authorized officers to execute this Trust Agreement on the date first written above. "Company" "Trustee" Coastcast Corporation Imperial Trust Company By /s/ Hans H. Buehler By /s/ Cathy Leider --------------------------------- ------------------------------- Hans Buehler, Chairman and CEO Name: Cathy Leider Title: Vice President The undersigned hereby accept the duties and obligations of the Independent Plan Administrator under the terms of the Plan and this Trust Agreement this 21 day of December, 1998. /s/ Hans H. Buehler /s/ Robert C. Bruning - ---------------------------------- ----------------------------------- Hans Buehler Robert C. Bruning /s/ Robert L. Gates - ---------------------------------- Robert Gates 20 EX-10.32 13 EXHIBIT 10.32 January 15, 1999 Mr. Richard W. Mora 2500 Wavecrest Drive Corona del Mar, CA 92625 Dear Mr. Mora: This letter ("this Amendment") confirms the following amendments to that certain severance agreement dated November 6, 1998 (the "Agreement") between you and Coastcast Corporation ("Coastcast"): 1. SEVERANCE PAYMENT. Paragraph 2 of the Agreement is deleted and superseded in its entirety by this Paragraph 1. In lieu of the severance payments previously contemplated by Paragraph 2(a) of the Agreement, Coastcast will pay to you upon execution of this Amendment the gross sum of $425,000, less deductions and withholdings from such gross sum for applicable federal, state, and local income and employment taxes, FICA, etc. 2. NO RETIREMENT BENEFITS. Paragraph 3 of the Agreement is deleted and superseded in its entirety by this Paragraph 2 in consideration of the release of claims by Coastcast pursuant to Paragraph 5 of this Amendment and the other promises and agreements of Coastcast under this Amendment. You hereby acknowledge and agree that any and all rights you might otherwise have under or in respect of the Coastcast Supplemental Executive Retirement Plan (the "SERP") have been released by you pursuant to Paragraph 10 of the Agreement and any and all rights you might otherwise have to retirement benefits under Paragraph 3 of the Agreement have been released by you pursuant to Paragraph 4 of this Amendment. 3. YOUR REPRESENTATIONS. To induce Coastcast to execute and deliver this Amendment and to induce Coastcast to release claims against you pursuant to Paragraph 5 of this Amendment, you hereby represent and warrant to Coastcast that: (a) You have never received, directly or indirectly, any personal remuneration in connection with or as a result of the delivery of any golf clubheads manufactured by Coastcast or any golf clubs including clubheads manufactured by Coastcast to any person or entity. (b) You have never received, directly or indirectly, any personal remuneration in connection with or as a result of any loans by Coastcast to Green Golf Finishing, Inc. Mr. Richard W. Mora January 15, 1999 Page 2 (c) You have never received, directly or indirectly, any personal remuneration in connection with or as a result of the SERP or purchase of life insurance in connection with the SERP. As used in this Paragraph 3, the term "personal remuneration" does not include remuneration paid or benefits provided to you by Coastcast in connection with your employment with Coastcast and does not include $3,000 which you have disclosed was paid to you by The Roberson Company for attending three meetings of the advisory board of that firm in the fall of 1996 and January 1998. You hereby acknowledge that, in entering into this Amendment, Coastcast is relying on, and that the obligations of Coastcast under this Amendment and the effectiveness of the release of claims by Coastcast pursuant to Paragraph 5 of this Amendment are all conditioned on, the truthfulness of the foregoing representations and warranties. 4. RELEASE OF COASTCAS. Except as provided below in this Paragraph 4, you hereby forever release and discharge Coastcast, all of its respective subsidiaries, and all of their successors, affiliates, assigns, employees, former employees, attorneys, agents, officers, directors, and shareholders from any and all causes of actions, judgments, liens, indebtedness, damages, losses, claims, liabilities, and demands of every kind and character, known or unknown, suspected, or unsuspected, absolute or contingent, which existed immediately prior to the execution of this Amendment, including, but not limited to, claims arising out of or in any manner relating to (i) your employment with Coastcast and/or termination of such employment; (ii) any restrictions on the right of Coastcast or any of the released parties to terminate employees; (iii) any common law claims or actions; (iv) any statements made by any of the released parties; (v) the SERP; (vi) the failure of Coastcast to make the payment contemplated by Paragraph 2(a) of the Agreement to you on January 6, 1999; or (vii) any federal, state, or governmental statute, regulation, or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964 and the Civil Rights Act of 1991, the Americans with Disabilities Act, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act, the California Fair Employment and Housing Act, and claims with any division of the California Department of Industrial Relations or Department of Fair Employment and Housing. You hereby waive any and all rights you may have under California Civil Code Section 1542 (or any analogous state law or federal law or regulation) which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Mr. Richard W. Mora January 15, 1999 Page 3 The foregoing release does not apply to any of the obligations of Coastcast under the Agreement as amended by this Amendment, your employee stock option agreement(s), the Coastcast retirement savings plan (which is not the SERP), any rights which you may have under directors and officers liability insurance policies maintained by Coastcast, or the indemnification agreement between you and Coastcast which was executed in 1995 (the "Indemnification Agreement"). 5. RELEASE OF YOU. Except as provided below in this Paragraph 5, Coastcast hereby forever releases and discharges you and your heirs, successors and assigns from any and all causes of actions, judgments, liens, indebtedness, damages, losses, claims, liabilities, and demands of every kind and character, known or unknown, suspected, or unsuspected, absolute or contingent, which existed immediately prior to the execution of this Amendment, including, but not limited to, claims arising out of or in any manner relating to (i) your employment with Coastcast; (ii) the SERP; (iii) purchase of life insurance in connection with the SERP; (iv) loans by Coastcast to Green Golf Finishing, Inc.; (v) delivery of golf clubs including clubheads manufactured by Coastcast to any person or entity; (vi) your position as an officer, director and employee of Coastcast; or (vii) claims arising out of or resulting from misappropriation of funds or property, fraud, gross negligence, or wilful misconduct, provided that your representations and warranties in Paragraph 3 above are truthful. Coastcast hereby waives any and all rights it may have under California Civil Code Section 1542 (or any analogous state law or federal law or regulation) which provides as set forth in paragraph 4 above. The foregoing release does not apply to any of your representations and warranties or other obligations under the Agreement as amended by this Amendment, your employee stock option agreements(s), the Coastcast retirement savings plan, or the Indemnification Agreement. 6. ENTIRE AGREEMENT. It is understood and agreed that the Agreement as amended by this Amendment is fully integrated, represents the entire understanding of the parties with respect to the subject matter, and there are no other agreements, representations, promises, or negotiations which have not been expressly set forth herein with respect to the subject of the Agreement as amended by this Amendment. Nothing contained herein shall constitute or imply any admission of liability or wrongdoing by any party. The Agreement as amended by this Amendment can be further amended, modified, or terminated only by an instrument in writing executed by you and the chief executive officer of Coastcast. 7. AGREEMENT REMAINS IN EFFECT. The Agreement, as amended by this Amendment, shall remain in full force and effect without any other change. Mr. Richard W. Mora January 15, 1999 Page 4 Please confirm your agreement to the foregoing by dating and signing this amendment where indicated below and returning a signed copy to Coastcast. Sincerely, COASTCAST CORPORATION By: /s/ Hans H. Buehler -------------------------- Hans H. Buehler Chairman and Chief Executive Officer Agreed this 15th day of January 1999. /s/ Richard W. Mora - ------------------------------ Richard W. Mora APPROVAL OF COUNSEL: SCOTT, REILLY & WHITEHEAD Attorneys for Richard W. Mora By:____________________________ R. Craig Scott, Partner JEFFER, MANGELS, BUTLER & MARMARO, LLP Attorneys for Coastcast Corporation By: /s/ Robert H. Goon ----------------------------- Robert H. Goon, Partner EX-21 14 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES Coastcast Corporation, S.A. a Mexico corporation Coastcast Tijuana, S. de R.L. de C.V., a Mexico corporation EX-23 15 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-77540 of Coastcast Corporation on Form S-8 of our reports, dated February 9, 1999, appearing in this Annual Report on Form 10-K of Coastcast Corporation for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Los Angeles, California March 15, 1999 EX-27 16 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1998 DEC-31-1998 27,551 0 8,156 600 10,326 52,953 43,927 19,811 83,673 6,236 0 0 0 30,309 46,833 83,673 144,560 144,560 122,195 122,195 10,394 0 0 13,504 5,672 7,832 157 0 0 7,675 .89 .87
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