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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-12676
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COASTCAST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3454926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3025 EAST VICTORIA STREET 90221
RANCHO DOMINGUEZ, CALIFORNIA (ZIP CODE)
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 638-0595
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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RIGHTS TO PURCHASE SERIES A
PREFERRED STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 21, 2001 ($10.57 per share): $67,877,000.
As of March 21, 2001, 7,676,042 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 20, 2001, 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, 2000
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PART I PAGE
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Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6 Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7a. Quantitative and Qualitative Market Risk 18
Item 8 Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
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PART III
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Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 19
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
2
PART I
ITEM 1. BUSINESS.
GENERAL
Coastcast Corporation is one of the largest manufacturers in the world
of investment-cast titanium and stainless steel golf clubheads for high-quality,
premium-priced metal woods, irons and putters. The Company believes it is one of
the largest producers of metal wood clubheads for high-quality, premium-priced
golf clubs. Over the past two decades, golf clubs with perimeter-weighted heads
have become much more popular among golfers because such clubs are more
forgiving to off-center hits than other types of clubs. The investment-casting
process has become the principal method for manufacturing clubheads because it
facilitates the use of perimeter weighting designs and modern alloys and
enhances manufacturing precision and uniformity. Manufacturing precision is
particularly important in the manufacture of an oversized, thin-walled metal
wood which can involve a significant number of separate manufacturing steps to
produce a clubhead that meets strict standards for size, weight, strength and
finish.
The Company also manufactures a variety of investment-cast orthopedic
implants and surgical tools (used principally in replacement of hip and knee
joints in humans and small animals) and other specialty products, and aluminum
compressor wheels using the reusable investment pattern process, which products
accounted for approximately 9% of the Company's total sales for the year ended
December 31, 2000.
In the past several years, golf clubs with titanium alloy heads have
become popular. The Company developed the capability of manufacturing titanium
clubheads and began shipping titanium clubheads at the end of 1995. Titanium
clubheads accounted for approximately 42% and 45% of the Company's total sales
in 1999 and 2000, 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:
o 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.
o 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.
o FOSTER CLOSE CUSTOMER RELATIONSHIPS. The Company believes that
its responsive service has been a significant element of its
success. The Company endeavors to be a value-added supplier by
offering consistently high levels of customer service and
support.
The Company has a staff of 14 employees dedicated to sales and customer
service. The Company maintains its own internal laboratory for testing of
customers' products during the production process. The Company typically
delivers finished products to its customers within 10 weeks from receipt of the
customer's order during peak
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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
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BIG BERTHA HAWKEYE VFT TITANIUM METAL WOODS
BIG BERTHA STEELHEAD PLUS METAL WOODS
GREAT BIG BERTHA HAWKEYE TITANIUM IRONS
X14 STEELHEAD IRONS
ODYSSEY DUAL FORCE BLADE PUTTERS
ODYSSEY DF ROSSIE MALLET PUTTERS
CLEVELAND
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RTG WEDGES
588 WEDGES
691 WEDGES
485 WEDGES
COBRA
-----
CXI IRONS
CXI IRONS SILVER FOX
TITLEIST
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975J TITANIUM METAL WOODS
975D/976R TITANIUM METAL WOODS
975F TITANIUM METAL WOODS
PRO TRAJECTORY METAL WOODS
DCI 990 & 990B IRONS
DCI 981 & 981 SL IRONS
DCI 962 IRONS
BOB VOKEY WEDGES
PING
----
ISI TITANIUM METAL WOODS
I3 STEEL METAL WOODS
GOLF PRODUCT CUSTOMERS
For over twenty years, the Company has supplied investment-cast
clubheads for metal woods, irons and putters to many of the top golf companies
which produce high-quality, premium-priced golf clubs. Most golf club companies
source the three principal components of a golf club--the clubhead, shaft, and
grip--from independent suppliers which manufacture these components based on the
golf club companies' designs and specifications. The Company currently is a
major supplier of stainless steel and titanium clubheads to Callaway Golf
Company, which is the producer of the Big Bertha line of steel and titanium
metal woods and irons and Odyssey putters and wedges. In addition, the Company
is a supplier of investment-cast steel and titanium clubheads for companies
which market the Titleist, Cleveland, Cobra and Ping brands of golf clubs.
Substantially all of the clubheads manufactured by the Company are used
in high-quality, premium-priced golf clubs. The Company believes that a
substantial portion of the clubheads manufactured by it are incorporated in
clubs sold in North America, although many of the Company's clubheads are
incorporated in clubs sold in parts of Asia, Europe and other parts of the
world. Historically, a limited number of golf club companies have held a very
substantial portion of the total market share for high-quality, premium-priced
golf clubs in North America. Currently, some of the more popular high-quality,
premium-priced clubs are Callaway metal woods and irons; Titleist metal woods,
irons and putters; Odyssey putters; and Wilson metal woods, irons and putters.
Several of these golf
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clubheads are marketed by customers of the Company. Callaway (including Odyssey)
accounted for 50%, 47% and 49% of the Company's total sales in 2000, 1999 and
1998, respectively. Fortune Brands (formerly American Brands, owner of Titleist
and Cobra) accounted for 26%, 25% and 22% of the Company's total sales in 2000,
1999 and 1998, respectively. Taylor Made accounted for 12% and 14% of the
Company's total sales in 1999 and 1998, respectively.
A close working relationship typically exists between the Company and
its principal golf club customers, and sales and marketing activities are
conducted by a limited number of direct sales employees and senior executives of
the Company.
MANUFACTURING - GOLF
INVESTMENT-CASTING PROCESS. Investment-casting is a highly specialized
method of making metal products. It has become the principal method for the
manufacture of golf clubheads. Previously, woods were made of wood and irons
were produced by forging and machining. Greater flexibility in the shape and
weight distribution of clubheads is possible with the investment-casting
process. Investment-casting facilitates perimeter weighting and the use of
modern alloys. It also enhances manufacturing precision and uniformity. The
enhanced precision inherent in investment-casting is particularly important in
the manufacture of metal woods which can involve a significant number of
separate manufacturing steps.
The basic steps of investment-casting, in its simplest form, are as
follows:
o Produce a metal die (sometimes called a wax mold) based on
specifications provided by the customer.
o Inject wax into the die, producing a pattern the exact shape of
the final casting.
o Surround (or "invest") the pattern with a ceramic material which
is allowed to dry to form a ceramic shell.
o Remove the wax by heat, leaving a cavity in the ceramic shell in
the shape of the desired casting.
o Pour molten metal into the cavity in the ceramic shell and allow
it to solidify.
o Remove the ceramic material by mechanical and chemical action
after the metal solidifies and clean the casting.
o 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. In addition,
certain iron clubheads were finished in the Company's Tijuana facility during
the last quarter of fiscal year 2000. Finishing of the head for an iron or
putter can require numerous separate steps and finishing of a head for a metal
wood can involve many more separate steps. Most of the clubheads and
substantially all of the metal woods manufactured by the Company are finished by
it to customer specifications, although some of such clubheads--principally
irons--are delivered to customers in an unfinished state. The Company, to assist
its customers, at times also polishes and finishes limited quantities of
investment-cast clubheads manufactured by other companies.
5
QUALITY CONTROL. The Company believes that its success as a leading
supplier of golf clubheads is largely attributable to its quality control
measures. The Company attempts to monitor every aspect of the engineering and
manufacturing process to assure the quality of the clubheads manufactured by the
Company. Particular attention is paid to the quality of raw materials
(principally wax, ceramic and metal alloys), gating techniques employed in
channeling the flow of molten metal in the ceramic shell in the casting process,
and rigorous inspection standards to assure compliance with the customers'
product specifications throughout the manufacturing process.
REGULATIONS. The Company uses hazardous substances and generates
hazardous waste in the ordinary course of its business. The Company is subject
to various federal, state, local and foreign environmental laws and regulations,
including those governing the use, discharge and disposal of hazardous
materials. Although the Company has not to date incurred any material
liabilities under environmental laws and regulations and believes that its
operations are in substantial compliance with applicable laws and regulations,
environmental liabilities could arise in the future that may adversely affect
the Company's business. See "Discontinued Operations" below.
COMPETITION - GOLF
The Company operates in a highly competitive environment. The Company
competes against a number of manufacturers of investment-cast titanium clubheads
for high-quality, premium-priced golf clubs, including but not limited to: Sturm
Ruger, Inc., Cast Alloys, Inc. and Worldmark Services Ltd. The Company competes
principally against two significant U.S.-based manufacturers (Hitchner
Manufacturing Co., Inc. and Cast Alloys, Inc.) of investment-cast steel
clubheads. The Company also competes with several foreign manufacturers of
investment-cast steel clubheads, including Worldmark Services Ltd. (formerly
Fu-Sheng Industrial Co. Ltd.), O-ta Precision Casting Co. Ltd., Dynamic
Precision Casting MFG. Co. Ltd. and Advanced Group International Co. Ltd.
The Company believes that its position as a leading manufacturer of
titanium and steel clubheads for high-quality, premium-priced golf clubs is due
to its ability to produce quality clubheads in quantities sufficient to meet
rapidly growing demand for popular golf clubs, its experience and expertise in
manufacturing investment-cast golf clubheads, and its integrated manufacturing
operations.
Price is increasingly becoming a factor but 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. Further, the Company believes that certain of its customers prefer
products made in the United States.
The Company also competes against golf club companies that internally
produce clubheads for their clubs. The Company believes that one of the larger
golf club companies, Ping Inc., which produces its own brand of clubs,
manufactures substantially all of the investment-cast steel iron 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, during the calendar year
2000, Ping Inc. purchased steel metal woods and titanium drivers 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.
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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 forged faces and fabricated bodies
or of wood alone, 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, 2000, the Company employed 3,828 persons on a
full-time basis. Of these employees, 2,549 and 571 were employed by Coastcast
Corporation, S.A. and Coastcast Tijuana S. de R. L. de C. V., respectively, the
Mexican subsidiaries of the Company. The Company considers its employee
relations to be good.
The production and maintenance employees in the Gardena, California
facility are represented by the United Steelworkers of America. There were 252
such employees as of December 31, 2000. The collective bargaining agreement for
such employees was effective May 12, 2000, and will expire on June 11, 2003.
ORTHOPEDIC IMPLANTS, SPECIALTY PRODUCTS AND AUTOMOTIVE PRODUCTS
The Company also manufactures non golf products including orthopedic
implants and surgical tools (used principally for replacement of hip and knee
joints in humans and small animals). Other non golf products include titanium
and other alloy specialty products, automotive titanium products and automotive
aluminum compressor wheels. The Company believes that its engineering and
manufacturing disciplines developed to manufacture these products has
contributed to the Company's ability to attract new non golf business and to its
ability to manufacture golf products.
The Company is endeavoring to expand its titanium and other alloy
investment casting business 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 investment casting competitors
in this business are Precision Castparts Corporation, Sturm Ruger, Inc., and PED
Manufacturing.
The Company also manufactures aluminum compressor wheels using the
reusable investment pattern process. This process utilizes plaster molds and
rubber patterns to produce complex, thin wall aluminum compressor wheels. The
Company believes that its principal competitors in this business is Ross
Aluminum Foundries.
DISCONTINUED OPERATIONS
In 1993, the Company announced its decision to discontinue its
aerospace business. This business was substantially phased out in 1994. In
connection with the offering for sale of the Wallingford, Connecticut property,
the Company had an environmental assessment performed, which identified the
presence of certain chemicals associated with chlorinated solvents in
groundwater beneath a portion of the property. The Company conducted
investigations to determine the source and extent of the contamination. In
addition, the Company determined that certain of the contaminates were present
prior to its ownership and entered into a remediation cost sharing agreement
with the previous owner of the property. In August 1998, the Company sold the
Wallingford, Connecticut property, under an agreement which stipulates that the
Company and the previous owner bear the liability to remediate the property. The
Company incurred a loss on the sale of the property. The loss on sale of the
property plus the Company's share of the estimated remediation costs were not
adequately covered by the original reserve. As a result,
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for the year ended December 31, 1998, the Company reported a $157,000 loss from
discontinued operations, net of income tax benefit, as shown on the Consolidated
Statements of Income.
ITEM 2. PROPERTIES.
The Company's principal executive offices and one of two steel
investment casting manufacturing facilities are located in a 120,000 square foot
leased facility in Rancho Dominguez, California, a suburb of Los Angeles.
Approximately 19,000 square feet of this facility has been allocated to the
Company's new aluminum compressor wheels business. The lease expires in October
2003 and the Company has a five-year extension option.
The Company owns a complex of plants in Gardena, California (which is
within approximately five miles of the Rancho Dominguez facilities), comprising
an aggregate of approximately 110,000 square feet. These facilities are
principally used for manufacturing titanium golf clubheads and tooling. In
October 1994, the Company purchased approximately two acres of land contiguous
to its Gardena facility. In April 1996, the Company purchased another
approximately two acres of land next to the land purchased in October 1994. This
land is available for future expansion if and when necessary.
The majority of clubhead polishing and finishing operations are
conducted in facilities leased by the Company's subsidiary in Mexicali, Mexico
under four lease agreements, comprising an aggregate of approximately 142,000
square feet. Three of the leases expire in December 2003, and the other lease
expires in June 2006. All four leases have a five-year extension option.
The Company has moved most of its steel golf clubhead casting
operations to a 186,000 square foot leased investment casting facility in
Tijuana, Mexico. The lease expires in April 2008 and the Company has two
five-year extension options. Also, the Company has exercised its option to lease
land adjacent to the facility. The Company has another option to lease a second
site 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.
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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 68 Chairman of the Board and Chief Executive Officer
Larry J. Cornelius 59 Vice President, Titanium Casting
Norman Fujitaki 46 Chief Financial Officer and Secretary
Ramon F. Ibarra 48 Vice President, Manufacturing
Bryan Rolfe 48 Vice President, Sales and Business Development
Roberto Roman 58 Vice President, Human Resources
Todd L. Smith 37 Executive Vice President, Operations
Kathleen H. Wainwright 36 Senior Vice President, Sales
K. Michael Wellman 56 Senior Vice President - Foundries
Mr. Buehler is one of the founders of the Company and has been Chairman
of the Board since the Company's inception in 1980. Prior to founding the
Company, he was President of the Rex Precision Products Division of Alco
Standard Corporation, a competitor of the Company that was acquired by the
Company in 1987. Mr. Buehler has more than 40 years of experience in the
investment-casting business, including more than 30 years of experience in the
manufacture of golf clubheads.
Mr. Cornelius joined the Company in March 1995. In July 1999, he was
promoted to Vice President - Titanium Casting. From 1995 to 1999, he was the
Director of the Titanium operations. From 1992 to 1995, he was the Engineering
Manager for IMI Titanium Inc. Mr. Cornelius has over 23 years of experience in
the titanium business.
Mr. Fujitaki joined the Company in 1994. He has served as Chief
Financial Officer since April 1999. From 1994 to March 1999, he served as
Corporate Controller. He previously was employed for eight years by Neutrogena
Corporation, a manufacturer and marketer of skin and hair care products, for
which he served as Corporate Controller from September 1988.
Mr. Ibarra joined the Company in 1981. Since 1989, he has served as
Vice President, Manufacturing of the Company. Prior to such time, he served as
the production manager for the Company with respect to all phases of its
business and as the plant manager at the facility located in Rancho Dominguez,
California.
Mr. Rolfe joined the Company in July 1998. From 1997 to June 1998, he
was a consultant and President of Slotline Golf Company. From 1995 to 1997, he
was the President and Chief Operating Officer of Cleveland Golf Company. Mr.
Rolfe worked 20 years at Salomon North America in a variety of management
positions, including Director of Operations and Finance from 1991 to 1995.
Mr. Roman joined the Company in 1986. In July 1999, he was promoted to
Vice President - Human Resources. Prior to this time, he served the Company in
various management capacities in the human resource area. Mr. Roman has over 30
years of human resources experience.
Mr. Smith joined the Company in 1981. In February 2000, he was promoted
to Executive Vice President - Operations. From July 1999 to January 2000, he was
the Vice President - Operations. Prior to this time, he served the
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Company in various management capacities in both the manufacturing and
administrative areas. Mr. Smith is the son of Hans H. Buehler.
Ms. Wainwright joined the Company in 1988. In February 2000, she was
promoted to Senior Vice President - Sales. From November 1996 to January 2000,
she served as Vice President, Sales. Prior to that time, she served the Company
in various capacities, including plant manager at the facility located in
Wallingford, Connecticut.
Mr. Wellman joined the Company in 2000. In February 2000, he became the
Senior Vice President - Foundries. From 1993 to 1999, he was the President and
owner of Commercial Titanium Casting, Inc. From 1989 to 1993, he was the Group
Vice President of Sturm Ruger Inc. Mr. Wellman has over 27 years of foundry
experience.
Each officer serves at the pleasure of the Board of Directors of the
Company.
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
----------- ---- ---
2000
First Quarter $ 17 1/8 $ 13 1/4
Second Quarter 20 7/16 14 7/8
Third Quarter 18 3/16 13
Fourth Quarter 18 7/16 14 1/4
1999
First Quarter 9 7/8 6 15/16
Second Quarter 12 3/4 8 7/8
Third Quarter 12 7/8 10 1/2
Fourth Quarter 16 13/16 10 11/16
The approximate number of record holders of common stock of the Company as of
March 21, 2001 was 145.
DIVIDENDS
On October 27, 2000, the Board of Directors of the Company declared an
extraordinary dividend of $5.00 per share payable on January 9, 2001 to
shareholders of record on December 19, 2000. On January 9, 2001, the Company
paid $38.2 million to shareholders of record on December 19, 2000. In addition,
the Board of Directors approved the adoption of a dividend policy pursuant to
which the Company intends to pay quarterly dividends. The amount of dividends
will depend upon the Company's financial position, results of operations and the
needs of the business. It is expected that the first quarterly dividend will be
paid in May 2001 and that the initial quarterly dividend rate will be $0.26 per
share.
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STOCK REPURCHASE
In December 1999, the Board of Directors authorized the repurchase of
an additional one million shares of Coastcast common stock from time to time in
the open market or negotiated transactions. For the year ended December 31,
2000, the Company purchased 375,658 shares at a cost of $5.5 million dollars,
completing the share repurchase under the original authorization, with 788,842
shares remaining to be purchased under the December 1999 authorization.
BUSINESS RISKS
CUSTOMER CONCENTRATION. The Company's sales have been and very likely
will continue to be concentrated among a small number of customers. Sales to two
customers accounted for 76% of sales during the year ended December 31, 2000 and
sales to three customers accounted for 84% of sales during the years ended
December 31, 1999 and 1998. Sales to the Company's top customer, Callaway Golf
Company (including Odyssey Golf) accounted for 50% of sales for the year ended
December 31, 2000.
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
11
required to produce a finished product. Variations in manufacturing costs and
yields occur from time to time, especially with new products during the
"learning curve" phase of production and products which are more difficult to
manufacture such as titanium or oversized metal wood and iron golf clubheads.
The length and extent of these variations are difficult to predict.
DEPENDENCE ON MANUFACTURING PLANTS IN MEXICO. A substantial portion of
the golf clubheads manufactured by the Company, including clubheads cast by the
Tijuana plant, and some clubheads produced by other clubhead manufacturers, are
polished and finished by the Company in its Mexicali facilities. The polishing
and finishing processes used by the Company are highly labor intensive. The
Company manufactures in Tijuana and Mexicali, Mexico pursuant to the
"maquiladora" duty-free program established by the Mexican and U.S. governments.
Such program enables the Company to take advantage of generally lower costs in
Mexico, without paying duty on inventory shipped into or out of Mexico or paying
certain Mexican taxes. The Company pays certain expenses of the Mexico
facilities in Mexican currency and thus is subject to fluctuations in currency
value. The Company does not have any exchange rate hedging arrangements to
protect against fluctuations in currency value. The Company is also subject to
other customary risks of doing business outside the United States. There can be
no assurance that the Mexican government will continue the "maquiladora" program
or that the Company will continue to be able to take advantage of the benefits
of the program. The loss of these benefits could have an adverse effect on the
Company's business. The Company believes that the North American Free Trade
Agreement has not had any adverse effect on its Mexican operations.
HAZARDOUS WASTE. In the ordinary course of its manufacturing process,
the Company uses hazardous substances and generates hazardous waste. The Company
has no material liabilities as of December 31, 2000 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 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 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. In February 2001, the Company's Chairman and Chief Executive Officer
had successful heart valve replacement surgery. Following a period of
convalescence at home, the Chairman and Chief Executive Officer is expected to
return full time to his responsibilities with the Company.
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.
12
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.
ADVERSE EFFECT OF INCREASED ENERGY COSTS. The Company has two
facilities located in Southern California which are experiencing increased
energy costs in electricity and natural gas. Depending on the severity of these
increased costs, the length of time the increased costs persist and the ability
of the Company to pass along these increased cost to its customers, the profits
of the Company may be adversely impacted.
SHAREHOLDER RIGHTS PLAN COULD DISCOURAGE ACQUISITION PROPOSALS. The
Company's shareholder rights plan could make it more difficult for a third party
to acquire the Company, even if doing so would be beneficial to the Company's
shareholders. The shareholders rights plan is intended to encourage potential
acquirers to negotiate with the Company and allow the Company's board of
directors the opportunity to consider alternative proposals in the interest of
maximizing shareholder value. However, such provisions may also discourage
acquisition proposals or delay or prevent a change in control, which could harm
the price for the Company's 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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
Consolidated Statement of
Income Data:
Sales $ 141,371 $ 120,383 $ 144,560 $ 149,515 $148,257
Gross profit 18,621 21,773 22,365 28,533 33,826
Income from operations 11,969 14,355 11,971 17,776 24,454
Income from Continuing
Operations Data:
Income before income taxes 14,652 16,101 13,504 18,751 25,496
Income taxes 5,903 6,582 5,672 7,875 10,430
Income from continuing operations 8,749 9,519 7,832 10,876 15,066
Income from Continuing Operations Per Share--
Basic $ 1.15 $ 1.21 $ 0.91 $ 1.24 $ 1.72
========= ========= ========= ========= ========
Income from Continuing Operations Per Share--
Diluted $ 1.12 $ 1.20 $ 0.89 $ 1.22 $ 1.67
========= ========= ========= ========= ========
Dividend Per Share $5.00 $0.00 $0.00 $0.00 $0.00
========= ========= ========= ========= ========
Weighted Average Shares Outstanding--Basic 7,613 7,892 8,638 8,798 8,773
========= ========= ========= ========= ========
Weighted Average Shares Outstanding--Diluted 7,795 7,924 8,837 8,924 9,038
========= ========= ========= ========= ========
AS OF DECEMBER 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
Consolidated Balance Sheet
Data:
Working Capital $ 27,640 $ 57,755 $ 46,717 $ 56,795 $ 44,800
Total Assets 99,350 92,316 83,673 90,025 76,100
Deferred compensation 828 541 295 1,614 438
Shareholders' equity 52,739 83,290 77,142 78,391 66,487
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,
--------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Sales $ 141,371 100.0 $ 120,383 100.0 $ 144,560 100.0
Cost of sales 122,750 86.8 98,610 81.9 122,195 84.5
Gross profit 18,621 13.2 21,773 18.1 22,365 15.5
Selling, general
and administrative 6,652 4.7 7,418 6.2 10,394 7.2
Income from continuing
operations 11,969 8.5 14,355 11.9 11,971 8.3
Other income, net 2,683 1.9 1,746 1.5 1,533 1.1
Income from continuing
operations before
income taxes 14,652 10.4 16,101 13.4 13,504 9.3
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Sales increased $21.0 million, or 17%, to $141.4 million for 2000 from
$120.4 million for 1999. The increase in sales was mainly due to an 18% increase
in sales volume of clubheads. Titanium clubhead sales represented 45% and 42% of
total sales for 2000 and 1999, respectively. Sales to Callaway Golf Company,
represented 50% of total sales for 2000 compared to 47% in 1999. There is no
assurance that sales to Callaway will represent similar percentages of total
sales in the future.
Gross profit decreased $3.2 million, or 15%, to $18.6 million for 2000
from $21.8 million for 1999. The gross profit margin decreased to 13% in 2000
from 18% in 1999. The decrease in gross margin was mainly due to a significant
decrease in sales of steel clubheads during the last half of 2000 and increased
costs. In addition, gross margins were impacted by new product start up problems
and high scrap rates during the fourth quarter of 2000.
Selling, general and administrative expense decreased by $.7 million,
or 9%, to $6.7 million for 2000 from $7.4 million for 1999. The decrease in
selling, general and administrative expense was partially due to a decrease in
bad debt expense.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Sales decreased $24.2 million, or 17%, to $120.4 million for 1999 from
$144.6 million for 1998. The decline in sales was due to an over 34% decrease in
sales volume of clubheads during the first half of 1999 partially offset by an
increase in clubhead sales in the second half of 1999. Titanium clubhead sales
represented approximately 42% and 41% of total sales for 1999 and 1998,
respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf
after its acquisition by Callaway Golf Company in August 1997, represented 47%
of total sales for 1999 compared to 49% in 1998.
Gross profit decreased $.6 million, or 3%, to $21.8 million for 1999
from $22.4 million for 1998. The gross profit margin increased to 18% in 1999
from 16% in 1998. The improvement in gross margin was due principally to
15
higher costs incurred in the last half of 1998 associated with inventory
write-downs, new products and the start up of the Tijuana plant.
Selling, general and administrative expense decreased by $3.0 million,
or 29%, to $7.4 million for 1999 from $10.4 million for 1998. The decrease in
selling, general and administrative expense was due primarily to decreased
payroll and related expenses, legal expenses and life insurance expense
partially offset by an increase in deferred compensation expense principally
because the prior year included the forfeiture and curtailment of these benefits
which resulted in a large reduction in deferred compensation expense for the
year ended December 31, 1998.
DISCONTINUED OPERATIONS
In 1993, the Company announced its decision to discontinue its
aerospace business. This business was substantially phased out in 1994. In
connection with the offering for sale of the Wallingford, Connecticut property,
the Company had an environmental assessment performed, which identified the
presence of certain chemicals associated with chlorinated solvents in
groundwater beneath a portion of the property. The Company conducted
investigations to determine the source and extent of the contamination. In
addition, the Company determined that certain of the contaminates were present
prior to its ownership and entered into a remediation cost sharing agreement
with the previous owner of the property. In August 1998, the Company sold the
Wallingford, Connecticut property, under an agreement which stipulates that the
Company and the previous owner bear the liability to remediate the property. The
Company incurred a loss on the sale of the property. The loss on sale of the
property plus the Company's share of the estimated remediation costs were not
adequately covered by the original reserve. As a result, the Company reported a
$.2 million loss from discontinued operations, net of income tax benefit, as
shown on the Consolidated Statements of Income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at December 31, 2000
was $52.2 million compared to $42.7 million on December 31, 1999, an increase of
$9.5 million. Net cash provided by operating activities was $14.3 million for
the year ended December 31, 2000. Net income of $8.7 million, depreciation and
amortization of $4.4 million, and a decrease in accounts receivables and
inventories of $1.9 million and $1.5 million, respectively, were partially
offset by an increase in prepaid expenses and other current assets of $1.5
million. Cash used in investing activities of $3.8 million consists primarily of
$3.7 million of capital expenditures. Net cash used in financing activities of
$1.1 million consists of repurchase of common stock of $5.5 million offset by
proceeds from stock option exercises net of related tax benefit of $4.4 million.
The Company maintains an unsecured revolving line of credit which
allows the Company to borrow up to $5 million and which had no outstanding
balance at December 31, 2000. This line of credit, which expires on May 31,
2001, bears interest at the bank's prime rate or LIBOR plus 2%.
On October 27, 2000, the Board of Directors of the Company declared an
extraordinary dividend of $5.00 per share payable on January 9, 2001 to
shareholders of record on December 19, 2000. On January 9, 2001, the Company
paid $38.2 million to shareholders of record on December 19, 2000. In addition,
the Board of Directors approved the adoption of a dividend policy pursuant to
which the Company intends to pay quarterly dividends. The amount of dividends
will depend upon the Company's financial position, results of operations and the
needs of the business. It is expected that the first quarterly dividend will be
paid in May 2001 and that the initial quarterly dividend rate will be $0.26 per
share.
In December 1999, the Board of Directors authorized the repurchase of
an additional one million shares of Coastcast common stock from time to time in
the open market or negotiated transactions. For the year ended December 31,
2000, the Company purchased 375,658 shares at a cost of $5.5 million dollars,
completing the share repurchase
16
under the original authorization, with 788,842 shares remaining to be purchased
under the December 1999 authorization.
The Company believes that its current cash position, the working
capital generated by future operations and the ability to borrow should be
adequate to meet its financing requirements for current operations and the
foreseeable future.
QUARTERLY INFORMATION AND SEASONALITY
Set forth below is certain unaudited quarterly financial information.
The 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 accounting principles generally accepted
in the United States of America, the selected quarterly information when read in
conjunction with the consolidated financial statements included elsewhere
herein.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------------------------- --------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $37,230 $ 46,705 $ 32,539 $ 24,897 $ 27,091 $ 33,582 $ 31,957 $ 27,753
Gross profit (loss) 6,481 8,838 3,390 (88) 5,849 7,636 3,776 4,512
Income (loss) before taxes 5,075 7,052 2,751 (226) 3,976 5,796 2,603 3,726
Provision for income taxes 2,123 2,920 1,155 (295) 1,670 2,434 1,032 1,446
Net income 2,952 4,132 1,596 69 2,306 3,362 1,571 2,280
Net income per share - basic .38 .54 .21 .01 .29 .43 .20 .29
Net income per share-diluted .38 .52 .21 .01 .29 .42 .20 .29
The Company's customers have historically built inventory in
anticipation of purchases by golfers in the spring and summer, the principal
selling season for golf equipment. The Company's operating results have been
impacted by seasonal demand for golf clubs, which generally results in higher
sales during the six month period that include the second and third quarters.
The timing of large new product orders from customers and fluctuations in demand
due to a sudden increase or decrease in popularity of specific golf clubs have
contributed to quarterly or other periodic fluctuations. No assurances can be
given, however, that these factors will mitigate the impact of seasonality.
BACKLOG
As of December 31, 2000, the Company had a backlog of approximately
$23.1 million as compared to a backlog of approximately $34.5 million as of
December 31, 1999. 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.
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
17
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 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK.
Not applicable.
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 20, 2001, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 2000. 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 20, 2001, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31, 2000.
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 20, 2001, which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
year ended December 31, 2000.
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 20,
2001, which will be filed with the Securities and Exchange Commission no later
than 120 days after the close of the year ended December 31, 2000.
18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference to the information contained under the caption "Certain Transactions"
in the Proxy Statement relating to the Annual Meeting of Shareholders to be held
on June 20, 2001, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December 31,
2000.
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
On October 27, 2000, the Company filed a report on Form 8-K reporting
(a) the adoption of a shareholder rights plan by the Company, (b) the
declaration of an extraordinary cash dividend with respect to the shares of
common stock of the Company and (c) the adoption of a dividend policy by the
Company.
19
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 21, 2001 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 21, 2001.
SIGNATURE TITLE
--------- -----
/s/ HANS H. BUEHLER Chairman of the Board and Chief Executive
----------------------------- Officer (Principal Executive Officer)
Hans H. Buehler
/s/ NORMAN FUJITAKI Chief Financial Officer and Secretary
----------------------------- (Principal Financial and Accounting
Norman Fujitaki Officer)
/s/ ROBERT L. GATES Director
-----------------------------
Robert L. Gates
/s/ ROBERT H. GOON Director
-----------------------------
Robert H. Goon
/s/ EDWIN A. LEVY Director
-----------------------------
Edwin A. Levy
/s/ LEE E. MIKLES Director
-----------------------------
Lee E. Mikles
/s/ PAUL A. NOVELLY Director
-----------------------------
Paul A. Novelly
20
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER
--------------------------------- -----------
Independent Auditors' Report 22
Consolidated Balance Sheets as of December 31, 2000 and 1999 23
Consolidated Statements of Income for the years ended December 31, 2000, 1999
and 1998 24
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998, 1999 and 2000 25
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 26
Notes to Consolidated Financial Statements 27
SCHEDULES
---------
Independent Auditors' Report 38
Schedule II--Valuation and Qualifying Accounts for the years ended December 31,
1998, 1999 and 2000 39
21
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, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 6, 2001
22
COASTCAST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------------------
2000 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $52,168,000 $ 42,740,000
Trade accounts receivable, net of allowance for doubtful
accounts of $200,000 and $500,000 at December 31, 2000
and 1999, respectively (Note 13) 7,298,000 9,179,000
Inventories (Note 3) 9,538,000 11,059,000
Prepaid income taxes 2,093,000 336,000
Prepaid expenses and other current assets 1,437,000 1,627,000
Deferred income taxes (Note 8) 889,000 1,207,000
----------------- -----------------
Total current assets 73,423,000 66,148,000
Property, plant and equipment, net (Note 4) 23,434,000 24,170,000
Deferred income taxes (Note 8) 960,000 492,000
Investments 953,000 925,000
Other assets, net 580,000 581,000
----------------- -----------------
$ 99,350,000 $ 92,316,000
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,769,000 $ 4,949,000
Dividend payable 38,209,000 -
Accrued liabilities (Note 6) 3,805,000 3,536,000
----------------- -----------------
Total current liabilities 45,783,000 8,485,000
Deferred compensation (Note 7) 828,000 541,000
----------------- -----------------
Total liabilities 46,611,000 9,026,000
Commitments and contingencies (Notes 2 and 10)
Shareholders' equity (Notes 9 and 11):
Series A Preferred stock, no par value, 200,000 shares authorized;
none issued and outstanding
Preferred stock, no par value, 1,800,000 shares authorized;
none issued and outstanding
Common stock, no par value, 20,000,000 shares authorized;
7,641,769 and 7,701,571 shares issued and outstanding as of
December 31, 2000 and 1999, respectively 25,847,000 26,964,000
Retained earnings 26,892,000 56,352,000
Accumulated other comprehensive income (loss) - (26,000)
------------------ -----------------
Total shareholders' equity 52,739,000 83,290,000
------------------ -----------------
$99,350,000 $ 92,316,000
================== =================
See accompanying notes to consolidated financial statements.
23
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
----------------- ------------------ -----------------
Sales (Note 13) $ 141,371,000 $ 120,383,000 $144,560,000
Cost of sales 122,750,000 98,610,000 122,195,000
----------------- ------------------ -----------------
Gross profit 18,621,000 21,773,000 22,365,000
Selling, general and administrative 6,652,000 7,418,000 10,394,000
----------------- ------------------ -----------------
Income from operations 11,969,000 14,355,000 11,971,000
Other income, net 2,683,000 1,746,000 1,533,000
----------------- ------------------ -----------------
Income before income taxes 14,652,000 16,101,000 13,504,000
Provision for income taxes (Note 8) 5,903,000 6,582,000 5,672,000
----------------- ------------------ -----------------
Income from continuing operations 8,749,000 9,519,000 7,832,000
Loss from discontinued operations (net of
income tax benefit of $113,000 -Note 2) - - (157,000)
----------------- ------------------ -----------------
Net income $ 8,749,000 $ 9,519,000 $7,675,000
================= ================== =================
NET INCOME PER SHARE (Note 12)
Income from continuing operations per share -
basic $ 1.15 $ 1.21 $ .91
Discontinued operations per share - basic - - (.02)
----------------- ------------------ -----------------
Net income per share - basic $ 1.15 $ 1.21 $ .89
================= ================== =================
Weighted average shares outstanding 7,613,357 7,892,360 8,637,724
================= ================== =================
Income from continuing operations per share -
diluted $ 1.12 $ 1.20 $ .89
Discontinued operations per share - diluted - - (.02)
----------------- ------------------ -----------------
Net income per share - diluted $ 1.12 $ 1.20 $ .87
================= ================== =================
Diluted weighted average shares outstanding 7,794,854 7,923,957 8,837,304
================= ================== =================
See accompanying notes to consolidated financial statements.
24
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
COMMON STOCK
----------------------------------
NUMBER OF
SHARES AMOUNT
------------- -------------
BALANCE AT JANUARY 1, 1998 8,849,005 $39,233,000
Stock options exercised, including related
income tax benefit (Note 11) 205,199 3,184,000
Director compensatory stock options 269,000
Repurchase of common stock (1,064,800) (12,377,000)
Net income
------------- -------------
BALANCE AT DECEMBER 31, 1998 7,989,404 30,309,000
Stock options exercised, including related
income tax benefit (Note 11) 4,667 48,000
Repurchase of common stock (292,500) (3,393,000)
Unrealized loss on investments, net of
income tax benefit of $19,000
Net income
------------- -------------
BALANCE AT DECEMBER 31, 1999 7,701,571 26,964,000
Stock options exercised, including related
income tax benefit (Note 11) 315,856 4,426,000
Repurchase of common stock (375,658) (5,543,000)
Unrealized gain on investments, net of
income tax expense of $19,000
Cash dividend declared
Net income
------------- -------------
BALANCE AT DECEMBER 31, 2000 7,641,769 $25,847,000
============= =============
OTHER
RETAINED COMPREHENSIVE COMPREHENSIVE
EARNINGS INCOME TOTAL INCOME
------------- ------------- ------------- -------------
BALANCE AT JANUARY 1, 1998 $39,158,000 - $78,391,000 $ -
Stock options exercised, including related
income tax benefit (Note 11) 3,184,000
Director compensatory stock options 269,000
Repurchase of common stock (12,377,000)
Net income 7,675,000 7,675,000 7,675,000
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 46,833,000 - 77,142,000 $7,675,000
=============
Stock options exercised, including related
income tax benefit (Note 11) 48,000
Repurchase of common stock (3,393,000)
Unrealized loss on investments, net of
income tax benefit of $19,000 (26,000) (26,000) (26,000)
Net income 9,519,000 9,519,000 9,519,000
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 56,352,000 (26,000) 83,290,000 $9,493,000
=============
Stock options exercised, including related
income tax benefit (Note 11) 4,426,000
Repurchase of common stock (5,543,000)
Unrealized gain on investments, net of
income tax expense of $19,000 26,000 26,000 26,000
Cash dividend declared (38,209,000) (38,209,000)
Net income 8,749,000 8,749,000 8,749,000
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 $26,892,000 $ - $52,739,000 $8,775,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
25
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,749,000 $9,519,000 $7,675,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,428,000 4,089,000 3,375,000
Goodwill amortization 28,000 18,000 -
Loss on disposal of machinery and equipment 21,000 91,000 1,001,000
Loss on investments 50,000 20,000 -
Change in accrual for disposal of aerospace business - - (701,000)
Deferred compensation 287,000 246,000 (1,319,000)
Deferred income taxes (144,000) (469,000) 660,000
Non-employee director compensatory stock options - - 269,000
Changes in operating assets and liabilities:
Trade accounts receivable 1,881,000 (1,621,000) 5,337,000
Inventories 1,521,000 (728,000) 10,882,000
Prepaid expenses and other current assets (1,573,000) 4,331,000 (4,265,000)
Accounts payable and accrued liabilities (911,000) 2,127,000 (3,784,000)
------------ ------------ ------------
Net cash provided by operating activities 14,337,000 17,623,000 19,130,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,735,000) (4,247,000) (8,787,000)
Proceeds from disposal of machinery and equipment 22,000 80,000 687,000
Surrender (purchase) of life insurance policies - 6,215,000 (2,686,000)
Purchase of investments (794,000) (1,107,000) -
Sales/maturities of investments 742,000 136,000 -
Purchase of business, net of cash acquired - (233,000) -
Other assets (27,000) 67,000 213,000
------------ ------------ ------------
Net cash (used in) provided by investing activities (3,792,000) 911,000 (10,573,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of
options net of related tax benefit 4,426,000 48,000 3,184,000
Repurchase of common stock (5,543,000) (3,393,000) (12,377,000)
------------ ------------ ------------
Net cash used in financing activities (1,117,000) (3,345,000) (9,193,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,428,000 15,189,000 (636,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 42,740,000 27,551,000 28,187,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $52,168,000 $42,740,000 $27,551,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during year for income taxes $ 7,234,000 $ 3,436,000 $ 8,546,000
============ ============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash dividend declared $38,209,000 $ - $ -
============ ============ ============
See accompanying notes to consolidated financial statements.
26
COASTCAST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Coastcast Corporation (the "Company") and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in consolidation.
ORGANIZATION AND OPERATIONS--Coastcast Corporation is incorporated
under the laws of the State of California. The Company principal business is the
production of investment-cast golf clubheads, and precision investment castings
and related engineering for the medical industry. The Company sells its products
to customers of varying strength and financial resources, principally located in
the United States. The Company has three wholly-owned subsidiaries, two are
incorporated under the laws of the Mexican maquiladora program and their
principal activities are the production of golf clubheads, and the other is
incorporated in the State of California and manufactures aluminum compressor
wheels.
USE OF ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 13.
INVENTORIES--Inventories are stated at the lower of cost (determined on
a first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated
at cost. Depreciation and amortization are provided using primarily the
straight-line method over the estimated useful lives of the related assets as
follows:
Building and improvements 5-31 years
Machinery and equipment 5-7 years
Transportation 5-7 years
Furniture, fixtures and computers 3-7 years
27
IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of an asset, an impairment loss is recognized.
INVESTMENTS-- Investments are included in an irrevocable rabbi trust
and are considered available for sale and carried at fair value. Fair value for
fixed-maturity investments and equity securities is based on quoted market
prices. Unrealized appreciation or depreciation on fixed-maturity investments
and equity securities is included in accumulated other comprehensive income
(loss). Gains and losses on sales of investments are computed on the specific
identification method and are reflected in other income, net.
INCOME TAXES--Deferred income taxes are recognized based on differences
between the financial statement and tax 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 shares from stock options (using the
treasury stock method).
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value because of the short maturities of these instruments.
RECLASSIFICATIONS --Certain prior year balances have been reclassified
to reflect the current year presentation.
ACCOUNTING PRONOUNCEMENT - Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt SFAS 133 effective January 1, 2001.
Management does not expect the adoption of SFAS 133 to have a significant impact
on the financial position, results of operations, or cash flows of the Company.
2. DISCONTINUED OPERATIONS
The plan adopted in 1993 to phase out the aerospace business was
substantially completed in 1994. In connection with the offering for sale of the
Wallingford, Connecticut property, the Company had an environmental assessment
performed, which identified the presence of certain chemicals associated with
chlorinated solvents in groundwater beneath a portion of the property. The
Company conducted investigations to determine the source and extent of the
contamination. In addition, the Company determined that certain of the
contaminates were present prior to its ownership and entered into a remediation
cost sharing agreement with the previous owner of the property. In August 1998,
the Company sold the Wallingford, Connecticut property, under an agreement which
stipulates that the Company and the previous owner bear the liability to
remediate the property. The Company incurred a loss on the sale of the property.
The loss on sale of the property plus the Company's share of the estimated
remediation costs were not adequately covered by the original reserve. As a
result, the Company reported a $157,000 loss from discontinued operations, net
of income tax benefit, as shown on the Consolidated Statements of Income.
28
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
--------------------------------------------
2000 1999
------------------- -------------------
Raw materials and supplies $ 3,854,000 $ 4,771,000
Tooling 268,000 165,000
Work-in-process 5,038,000 5,698,000
Finished goods 378,000 425,000
------------------- -------------------
$ 9,538,000 $ 11,059,000
=================== ===================
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,
---------------------------------------------
2000 1999
-------------------- -------------------
Land $ 2,186,000 $ 2,186,000
Buildings and improvements 11,252,000 10,517,000
Machinery and equipment 31,560,000 29,115,000
Transportation 2,526,000 2,436,000
Furniture, fixtures and computers 3,972,000 3,659,000
-------------------- -------------------
51,496,000 47,913,000
Less accumulated depreciation and amortization 28,062,000 23,743,000
-------------------- -------------------
$ 23,434,000 $ 24,170,000
==================== ===================
Depreciation and amortization expense for 2000, 1999 and 1998 was
$4,428,000, $4,089,000 and $3,375,000, 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, 2000 and 1999. This line of credit, which expires on May
31, 2001, bears interest at the bank's prime rate or LIBOR plus 2%.
29
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
-----------------------------------------------
2000 1999
--------------------- --------------------
Accrued payroll and related expenses $ 1,460,000 $ 1,533,000
Accrued vacation 1,077,000 931,000
Accrued insurance 717,000 504,000
Other accrued expenses 551,000 568,000
--------------------- --------------------
$ 3,805,000 $ 3,536,000
===================== ====================
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.
30
The following table sets forth the plan's change in benefit obligation,
change in plan assets and components of net pension cost:
DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 2,154,000 $ 2,280,000
Service cost 55,000 48,000
Interest cost 146,000 140,000
Actuarial loss (gain) from change in assumptions 28,000 (207,000)
Actuarial loss - 39,000
Increase in plan benefits 40,000 -
Benefits paid (136,000) (146,000)
----------------- -----------------
Benefit obligation at end of year 2,287,000 2,154,000
================= =================
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 2,207,000 2,239,000
Actual return on plan assets 85,000 114,000
Benefits paid (136,000) (146,000)
----------------- -----------------
Fair value of plan assets at end of year 2,156,000 2,207,000
================= =================
Funded status (131,000) 53,000
Unrecognized actuarial loss (gain) 63,000 (29,000)
Unrecognized prior service cost 117,000 84,000
Unrecognized transition obligation (70,000) (96,000)
----------------- -----------------
(Accrued) prepaid benefit cost $ (21,000) $ 12,000
================= =================
COMPONENTS OF NET PENSION COST:
Service cost $ 55,000 $ 48,000 $ 75,000
Interest cost 146,000 140,000 139,000
Return on plan assets (85,000) (114,000) (115,000)
Amortization and deferral (83,000) (56,000) (44,000)
----------------- ----------------- -----------------
Net pension cost $ 33,000 $ 18,000 $ 55,000
================= ================= =================
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% in both 2000 and 1999.
The expected long-term rate of return on assets was 7% for both 2000 and 1999.
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 $112,000, $93,000 and $108,000
during 2000, 1999 and 1998, respectively.
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
31
plan, up to 10 years. In general, participants in the plan only become fully
vested with respect to their accrued benefits upon completion of 5 years of plan
participation. The benefits under this plan were frozen effective December 31,
1997, except for the Chairman and Chief Executive Officer who voluntarily
relinquished all of his rights under this plan. An amended and restated
supplemental executive retirement plan was approved effective January 1, 1998.
The amended plan revises the benefit formula for participants and provides
additional flexibility with respect to funding. Under the amended plan, benefits
generally accrues ratably over 25 years of service at 2% per year (up to a
maximum of 25 years of service) with the actual benefit being dependent on years
of service with Company subject to the social security offset.
The following table sets forth the plan's change in benefit obligation,
change in plan assets and components of net pension cost:
DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998
----------------- ------------------ -------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $1,351,000 $1,459,000
Service cost 134,000 94,000
Interest cost 94,000 83,000
Actuarial gain from change in assumptions - (162,000)
Amendment - 7,000
Actuarial gain (336,000) (130,000)
----------------- ------------------
Benefit obligation at end of year 1,243,000 1,351,000
================= ==================
CHANGE IN PLAN ASSETS: - -
================= ==================
Funded status (1,243,000) (1,351,000)
Unrecognized actuarial loss (187,000) 191,000
Unrecognized prior service cost 184,000 162,000
Unrecognized transition obligation 418,000 457,000
----------------- ------------------
Accrued benefit cost $(828,000) $(541,000)
================= ==================
COMPONENTS OF NET PENSION COST:
Service cost $134,000 $94,000 $81,000
Interest cost 94,000 83,000 83,000
Amortization and deferral 59,000 69,000 74,000
Curtailment/forfeitures - - (1,807,000)
1996 amortized expense - - 250,000
----------------- ------------------ -------------------
Net pension cost (income) $287,000 $246,000 $(1,319,000)
================= ================== ===================
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0% for both 2000 and
1999. To fund this plan, the Company prior to December 31, 1998 purchased
whole-life insurance contracts on certain participants. All the whole-life
insurance contracts were surrendered for cash during 1999. A portion of the cash
received from the surrender of the contracts is invested in marketable
securities in an irrevocable rabbi trust and is presented as an asset of the
Company in the accompanying consolidated balance sheets.
The Company does not provide any other post-retirement benefits to its
employees.
32
8. INCOME TAXES
The provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998
------------------ ------------------- ------------------
Current:
Federal $ 4,159,000 $ 5,553,000 $ 3,675,000
State 949,000 1,173,000 753,000
Foreign 958,000 306,000 251,000
------------------ ------------------- ------------------
6,066,000 7,032,000 4,679,000
------------------ ------------------- ------------------
Deferred:
Federal (74,000) (377,000) 844,000
State (29,000) (73,000) 149,000
Foreign (60,000) - -
------------------ ------------------- ------------------
(163,000) (450,000) 993,000
------------------ ------------------- ------------------
$ 5,903,000 $ 6,582,000 $ 5,672,000
================== =================== ==================
The actual provision on income before income taxes differs from the
statutory federal income tax rate due to the following:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998
---------------- ----------------- ----------------
Federal income taxes at the statutory rate $ 5,128,000 $ 5,635,000 $ 4,726,000
State income taxes, net of federal benefit 650,000 735,000 618,000
California investment tax credit (95,000) (18,000) (67,000)
Other items 220,000 230,000 395,000
---------------- ----------------- ----------------
$ 5,903,000 $ 6,582,000 $ 5,672,000
================ ================= ================
The tax effects of items comprising the Company's net deferred income
tax asset are as follows:
DECEMBER 31,
------------------------------------
2000 1999
---------------- -----------------
Allowance for doubtful accounts $ 84,000 $ 210,000
Deferred compensation 346,000 227,000
Accrued expenses 505,000 562,000
Inventory reserve 437,000 575,000
State income taxes 199,000 309,000
Depreciation 445,000 23,000
Other items (167,000) (201,000)
---------------- -----------------
$ 1,849,000 $ 1,705,000
================ =================
33
9. SHAREHOLDERS' RIGHTS PLAN
On October 27, 2000, the Board of Directors approved the adoption of a
Shareholders' Rights Plan (the Plan). In connection with the Plan, preferred
stock purchase rights were distributed as a dividend at the rate of one right
for each share of common stock. In general, the rights will not be exercisable
or transferable apart from the common stock, unless a person or group (i)
acquires beneficial ownership of 15% or more of the outstanding common stock, or
(ii) commences a tender offer or commences or files a registration statement
with respect to an exchange offer, to acquire beneficial ownership of 15% or
more of the outstanding stock. When exercisable, each right will entitle the
holder to buy at a $75 exercise price (the "Exercise Price") 1/100th of a share
of Series A Preferred Stock of the Company. Following an event described in (i)
or (ii) above, each right will entitle the holder to purchase from the Company,
at the Exercise Price, common stock (or under certain circumstances, other
securities or assets of the Company) having a value of twice the Exercise Price.
Further, if after the rights become exercisable the Company or a majority of its
assets or earning power are acquired by merger or otherwise, each right will
thereafter represent the right to purchase that number of shares of the
surviving corporation or (in certain circumstances) its parent having a market
value of twice the Exercise Price. In general, no acquiring person, nor the
person or group whose purchase transaction or tender or exchange offer triggers
the exercisability of the rights, nor any of that person or group's transferees
may exercise rights held by them.
At any time prior to the 10th day following an event described in (i)
or (ii) above, the Board of Directors may redeem all outstanding rights at a
price of $.01 per right, and may amend the Plan and the rights in any and all
respects. The rights will expire at the earlier date of their redemption or
October 27, 2010.
10. COMMITMENTS
OPERATING LEASES--The Company leases certain facilities under various
operating leases with terms ranging from five to ten years. The leases contain
renewal options for additional five 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, 2000 are as follows:
YEAR ENDING
DECEMBER 31,
--------------------------------------------------------------
2001 $ 1,806,000
2002 1,800,000
2003 1,675,000
2004 839,000
2005 839,000
Thereafter 1,738,000
------------------
$ 8,697,000
==================
Rent expense for 2000, 1999 and 1998 was approximately $1,816,000,
$1,710,000 and $1,669,000, respectively.
11. STOCK OPTION PLANS
Under the Company's 1996 Amended and Restated Employee Stock Option
Plan ("1996 Employee Stock Option Plan"), a maximum of 1,950,000 shares of
common stock may be issued pursuant to exercise of options granted
34
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, 2000, an aggregate of 858,549
shares had been purchased pursuant to the exercise of options granted under the
plan, options to purchase an aggregate of 570,583 shares were outstanding
(including options which were then exercisable to purchase 384,273 shares), and
520,868 shares were available for additional grants of options under the plan.
Under the Company's 1995 Amended and Restated Non-Employee Director
Stock Option Plan ("1995 Director Stock Option Plan"), a maximum of 200,000
shares of common stock may be issued pursuant to exercise of options granted
under the plan to certain non-employee directors. Options are granted under the
plan at prices equal to the fair market value of the shares at the date of
grant. The options generally become exercisable over a three-year period of time
and expire at the earlier of one year after the optionee ceases to be a director
or ten years from the date of grant. As of December 31, 2000, an aggregate of
86,666 shares had been purchased pursuant to the exercise of options granted
under the plan and options to purchase an aggregate of 113,334 shares were
outstanding (including options which were then exercisable to purchase 76,665
shares).
The following summarizes the Company's stock option activity under all
arrangements for the three years ended December 31, 2000:
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
--------------- ---------------
Balance, January 1, 1998 1,213,513 $13.57
Granted 530,230 14.68
Forfeited (454,727) 15.36
Exercised (205,199) 11.57
--------------- ---------------
Balance, December 31, 1998 1,083,817 $13.75
Granted 111,950 11.33
Forfeited (179,944) 12.92
Exercised (4,667) 10.25
--------------- ---------------
Balance, December 31, 1999 1,011,156 $13.86
Granted 54,500 15.41
Forfeited (35,883) 14.52
Exercised (315,856) 12.13
--------------- ---------------
Balance, December 31, 2000 713,917 $14.70
=============== ===============
35
The following table summarizes information about stock options
outstanding at December 31, 2000:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/00 CONTRACTUAL LIFE PRICE AT 12/31/00 PRICE
------------------- ----------------- ------------------- -------------- ------------------ -----------------
$7.31 - 10.00 62,041 7.5 $ 8.04 37,873 $ 8.21
10.38 - 13.63 181,460 6.8 13.05 111,455 12.97
14.13 324,452 5.5 14.13 264,569 14.13
14.50 - 22.25 105,964 7.7 18.27 37,041 21.83
27.00 - 30.00 40,000 4.9 27.75 40,000 27.75
----------------- ------------------- -------------- ------------------ -----------------
$7.31 - 30.00 713,917 6.3 $ 14.70 490,938 $ 15.10
================= =================== ============== ================== =================
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,
----------------------------------------------------------------
2000 1999 1998
------------------ ----------------- ------------------
Net income: As reported $ 8,749,000 $ 9,519,000 $ 7,675,000
Pro forma 8,368,000 9,184,000 6,869,000
Net income per share - basic: As reported $ 1 .15 $ 1.21 $ .89
Pro forma $ 1 .10 $ 1.16 $ .80
Net income per share - diluted: As reported $ 1.12 $ 1.20 $ .87
Pro forma $ 1.06 $ 1.14 $ .76
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 2000, 1999 and 1998, respectively:
dividend yield of 6.8%, 0% and 0%, expected volatility of 64.0%, 67.0% and
71.8%, risk-free interest rate of 6.3%, 5.7% and 4.3%, and expected term of 4.0,
4.0 and 4.0 years. The weighted average fair value per share of options granted
in 2000, 1999 and 1998 was $5.54, $5.86 and $8.33, respectively.
36
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
------------------ ----------------- ------------------
Numerator:
Net income $8,749,000 $9,519,000 $7,675,000
------------------ ----------------- ------------------
Numerator for basic and diluted earnings per share--
income available to common stockholders 8,749,000 9,519,000 7,675,000
Denominator:
Denominator for basic earnings per share--
weighted-average shares 7,613,357 7,892,360 8,637,724
Effect of dilutive securities:
Stock options 181,497 31,597 199,580
------------------ ----------------- ------------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 7,794,854 7,923,957 8,837,304
================== ================= ==================
Basic earnings per share $1.15 $1.21 $0.89
================== ================= ==================
Diluted earnings per share $1.12 $1.20 $0.87
================== ================= ==================
The anti-dilutive options as of December 31, 2000, 1999 and 1998 were
95,930, 758,639 and 1,023,817, respectively.
13. BUSINESS SEGMENTS
The Company is engaged principally in the business of manufacturing
precision investment-cast titanium and stainless steel golf clubheads,
representing 91%, 91% and 93% of sales for the years ended December 31, 2000,
1999 and 1998, respectively. The Company has determined that it has one
reportable business segment.
The Company derived 50% and 26% of sales from its two top customers in
2000, 47% and 25% and 12% of sales from its three top customers in 1999,and 49%,
22% and 14% of sales from its three top customers in 1998.
14. SUBSEQUENT EVENT
On October 27, 2000, the Board of Directors of the Company declared an
extraordinary dividend of $5.00 per share payable on January 9, 2001. The
ex-dividend date set by the New York Stock Exchange was January 10, 2001. In
January 2001 and prior to the ex-dividend date of January 10, 2001, 34,273 stock
options were exercised. The options exercised prior to the ex-dividend date were
entitled to the $5.00 per share dividend equal to $171,365. The $171,365 was not
reflected in the consolidated balance sheet as of December 31, 2000.
37
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, 2000 and 1999, and for each of the three
years in the period ended December 31, 2000, and have issued our report thereon
dated February 6, 2001; 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.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 6, 2001
38
COASTCAST CORPORATION
SCHEDULE EVALUATION AND QUALIFYING ACCOUNTS
(CHARGED)/
BALANCE AT CREDITED TO CHARGED TO BALANCED
BEGINNING COST AND OTHER AT END
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
-------------- ---------- ----------- --------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1998 (500,000) (100,000) (600,000)
Year ended December 31, 1999 (600,000) 100,000 (500,000)
Year ended December 31, 2000 (500,000) 300,000 (200,000)
39
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)
3.3 Certificate of Determination Series A Preferred Stock(13)
3.4 Rights Agreement, dated October 27, 2000 between the Company
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent(14)
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, dated June 12, 2000, between the Company and United
Steelworkers of America(12)
10.6 Lease Agreement, dated December 16, 1998, between Coastcast
Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V.
for the facilities known as Mercurio #70 in Mexicali, Mexico(7)
10.7 Lease Agreement, dated December 16, 1998, between Coastcast
Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V.
for the facilities known as Avenue Galaxia #50 in Mexicali,
Mexico(7)
10.8 Lease Agreement, dated December 16, 1998, between Coastcast
Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V.
for the facilities known as Mercurio #30 in Mexicali, Mexico(7)
10.9 Lease Agreement, dated December 10, 1999, 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(10)
10.10 Guaranty, dated January 26, 1999, by the Company for the lease
of the Mexicali, Mexico facilities known as Mercurio #70(7)
40
10.11 Guaranty, dated January 26, 1999, by the Company for the lease
of the Mexicali, Mexico facilities known as Avenue Galaxia #50(7)
10.12 Guaranty, dated January 26, 1999, by the Company for the lease
of the Mexicali, Mexico facilities known as Mercurio #30(7)
10.13 Guaranty, dated December 10, 1999, by the Company for the
lease, dated December 10, 1999(10)
10.14 Lease Agreement, dated September 1, 1997, between the Company
and Watson Land Company for the facilities in Rancho
Dominguez, California(5)
10.15 Lease Agreement, dated January 5, 1998, between Coastcast
Tijuana, S. De R.L. De C.V. and Frederick Clarke Sanders, Jr.,
Frederick Sanders Flourie, Monique Sanders Flourie, Scott
Michael Sanders Flourie and Carlo E. Muzquiz Davila for real
estate in Tijuana, Baja California, Mexico(7)
10.16 Lease Guaranty Agreement, dated August 18, 1998, by the
Company for the lease of the Tijuana facility(7)
10.17 Form of Indemnification Agreement(1)
10.18 Revolving Line of Credit Note, effective June 1, 2000, between
the Company and Imperial Bank(11)
10.19* Amended and Restated Coastcast Corporation Selected Employees
Pension Plan, dated October 1, 1987(1)
10.20* Amendment to the Coastcast Corporation Selected Employees
Pension Plan, effective May 12, 1997(6)
10.21* Coastcast Corporation 401(k) Retirement Plan, effective
January 1, 1996(2)
10.22 Coastcast Corporation S Corporation Termination, Tax
Allocation and Indemnification Agreement dated December 1,
1993, between the Company and certain Shareholders(1)
10.23* Coastcast Corporation Supplemental Executive Retirement Plan,
effective September 1, 1996(3)
10.24* First Amendment to Coastcast Corporation Supplemental
Executive Retirement Plan, effective September 1, 1996(3)
10.25* Second Amendment to Coastcast Corporation Supplemental
Executive Retirement Plan, dated February 18, 1997(4)
10.26* Coastcast Corporation Amended and Restated Supplemental
Executive Retirement Plan, effective January 1, 1998(7)
10.27* Coastcast Corporation Amended and Restated Supplemental
Executive Retirement Plan, effective January 1, 1999(10)
41
10.28* Amended and Restated Trust Agreement by and between Coastcast
Corporation and Imperial Trust Company, dated December 18,
1998(7)
10.29* Second Amendment to the Coastcast Corporation Grantor Trust(9)
10.30 Stock Purchase Agreement, dated April 22, 1999 between the
Company and the selling shareholders of California Precision
Aluminum Casting, Inc.(8)
21 Subsidiaries of the Company 43
23 Consent of Independent Auditors 44
----------
* 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-Q for the fiscal
quarter 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-K for the fiscal
year ended December 31, 1998.
(8) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended June 30, 1999.
(9) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended September 30, 1999.
(10) Incorporated by reference to the exhibits to Form 10-K for the year
ended December 31, 1999.
(11) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended June 30, 2000.
(12) Incorporated by reference to the exhibits to Form 10-Q for the fiscal
quarter ended September 30, 2000.
(13) Incorporated by reference to the exhibits to Form 8-A filed on November
1, 2000.
(14) Incorporated by reference to the exhibits to Form 8-K filed on November
1, 2000.
42