ITEM 1. BUSINESS.
GENERAL
Coastcast Corporation is one of the largest manufacturers in the world of investment-cast titanium and stainless steel golf clubheads for high-quality, premium-priced metal woods, irons and putters. The Company believes it has manufactured more metal wood clubheads for high-quality, premium-priced golf clubs than any other manufacturer. Over the last fifteen years, golf clubs with perimeter-weighted heads have become increasingly popular among golfers because such clubs are more forgiving to off-center hits than other types of clubs. The investment-casting process has become the principal method for manufacturing clubheads because it facilitates the use of perimeter weighting designs and modern alloys and enhances manufacturing precision and uniformity. Manufacturing precision is particularly important in the manufacture of an oversized, thin-walled metal wood which can involve more than 200 separate manufacturing steps to produce a clubhead that meets strict standards for size, weight, strength and finish.
The Company also manufactures a variety of investment-cast orthopedic implants and surgical tools used principally in replacement of hip and knee joints in humans and small animals, which products accounted for less than 7% of the Company's total sales for the year ended December 31, 1997.
RECENT DEVELOPMENTS
In the past two years, golf clubs with titanium alloy heads have increased in popularity. The Company developed the capability of manufacturing titanium clubheads and began shipping titanium clubheads at the end of 1995. Titanium clubheads accounted for over 55% and approximately 50% of the Company's total sales in 1996 and 1997, respectively.
BUSINESS STRATEGY - GOLF
The Company recognizes that golf club companies are critical to its success and, accordingly, has designed its business strategy to engender customer satisfaction in order to maintain its industry leadership position. The Company's strategy consists of the following principal elements:
- MAINTAIN RELIABLE, HIGH-QUALITY MANUFACTURING. The Company believes its manufacturing expertise, quality control, scheduling flexibility, substantial production capacity and its ability to manufacture golf clubheads using stainless steel or titanium alloys differentiate it from others in the industry. The Company endeavors to respond quickly to customers' orders and deliver high-quality clubheads on a timely basis. This capability is particularly important to golf club companies which can experience rapid growth from the increasing popularity of a particular club or set of clubs.
- INTEGRATE OPERATIONS. The Company's operations are integrated, from the computer-aided manufacture of some of the tooling used to produce clubheads through foundry operations and finishing processes, including painting.
- FOSTER CLOSE CUSTOMER RELATIONSHIPS. The Company believes that its responsive service has been a significant element of its success. The Company endeavors to be a value-added supplier by offering consistently high levels of customer service and support.
The Company has a staff of 14 employees dedicated to sales and customer service. The Company maintains its own internal laboratory for testing of customers' products during the production process. The Company typically
delivers finished products to its customers within 12 weeks from receipt of the customer's order during peak production periods, within 8 to 10 weeks during other periods and within several weeks or even several days if necessary to accommodate a customer's need for more rapid delivery. With new products, depending on their complexity, a longer turnaround period may be expected.
GOLF PRODUCTS
The Company's golf products are generally used in golf clubs targeted at the high end of the market. These clubs must satisfy the requirements of highly-skilled amateur and professional golfers, including touring professionals. As such, golf clubs which incorporate clubheads manufactured by the Company are sometimes referred to in the industry as "tour-driven" golf clubs.
The Company's clubheads are included in a variety of leading metal woods, irons and putters, some of which are listed below:
GOLF PRODUCT CUSTOMERS
Over the past ten years, the Company has supplied investment-cast clubheads for metal woods, irons and putters to a majority of the top golf companies which produce high-quality, premium-priced golf clubs. Most golf club companies source the three principal components of a golf club--the clubhead, shaft, and grip--from independent suppliers which manufacture these components based on the golf club companies' designs and specifications. The Company currently is a major supplier of stainless steel and titanium clubheads to Callaway Golf Company, which is the producer of the Big Bertha line of steel metal woods and irons and the Great Big Bertha titanium metal woods and irons. In addition, the Company is a supplier of investment-cast steel and titanium clubheads for companies which market the Titleist, Odyssey, Taylor Made, Cleveland, Goldwin, Wilson, Cobra and Daiwa brands of golf clubs.
Substantially all of the clubheads manufactured by the Company are used in high-quality, premium-priced golf clubs. The Company believes that a very substantial portion of the clubheads manufactured by it are incorporated in clubs sold in North America, although some of the Company's clubheads are incorporated in clubs sold in parts of Asia, Europe and other parts of the world. Historically, a limited number of golf club companies have held a very substantial portion of the total market share for high-quality, premium-priced golf clubs in North America. Currently, some of the more popular high-quality, premium-priced clubs are Callaway metal woods and irons; Taylor Made metal woods and irons; Titleist metal woods, irons and putters; Odyssey putters; Wilson metal woods, irons and putters; and Cobra metal woods. Several of these golf clubheads are marketed by customers of the Company. Callaway (including Odyssey after its acquisition by Callaway in August 1997) accounted for 34%, 46% and 47% of the Company's total sales in 1997, 1996 and 1995, respectively. Taylor Made accounted for 23% and 18% of the Company's total sales in 1997 and 1996, respectively. Tommy Armour, including Odyssey until its divestiture in August 1997, accounted for 15%, 13% and 10% of the Company's total sales in 1997, 1996 and 1995, respectively. Fortune Brands (formerly American Brands; Titleist and Cobra) accounted for 12% and 13% of the Company's total sales in 1997 and 1995, respectively.
A close working relationship typically exists between the Company and its principal golf club customers, and sales and marketing activities are conducted by a limited number of direct sales employees and senior executives of the Company.
MANUFACTURING - GOLF
INVESTMENT-CASTING PROCESS. Investment-casting is a highly specialized method of making metal products. It has become the principal method for the manufacture of golf clubheads. Previously, woods were made of wood and irons were produced by forging and machining. Greater flexibility in the shape and weight distribution of clubheads is possible with the investment-casting process. Investment-casting facilitates perimeter weighting and the use of modern alloys. It also enhances manufacturing precision and uniformity. The enhanced precision inherent in investment-casting is particularly important in the manufacture of metal woods which can involve more than 200 separate manufacturing steps.
The basic steps of investment-casting, in its simplest form, are as follows:
- - Produce a metal die (sometimes called a wax mold) based on specifications provided by the customer.
- - Inject wax into the die, producing a pattern the exact shape of the final casting.
- - Surround (or "invest") the pattern with a ceramic material which is allowed to dry to form a ceramic shell.
- - Remove the wax by heat, leaving a cavity in the ceramic shell in the shape of the desired casting.
- - Pour molten metal into the cavity in the ceramic shell and allow it to solidify.
- - Remove the ceramic material by mechanical and chemical action after the metal solidifies and clean the casting.
- - Finish and inspect the casting.
METAL ALLOYS. Most clubheads manufactured by the Company are made of titanium or stainless steel alloys. Titanium clubheads have similar tensile strength as stainless steel with approximately one-half the weight of steel.
Therefore, a larger oversized clubhead can be manufactured using titanium without increasing clubhead weight. The Company's Gardena facility is devoted to titanium operations.
POLISHING AND FINISHING. The Company conducts golf clubhead polishing and finishing operations in its facilities in Mexicali, Mexico. Finishing of the head for an iron or putter can require more than 50 separate steps and finishing of a head for a metal wood can involve as many as 100 separate steps. Most of the clubheads and substantially all of the metal woods manufactured by the Company are finished by it to customer specifications, although some of such clubheads--principally irons--are delivered to customers in an unfinished state. The Company, to assist its customers, at times also polishes and finishes limited quantities of investment-cast clubheads manufactured by other companies.
QUALITY CONTROL. The Company believes that its success as a leading supplier of golf clubheads is largely attributable to its quality control measures. The Company attempts to monitor every aspect of the engineering and manufacturing process to assure the quality of the clubheads manufactured by the Company. Particular attention is paid to the quality of raw materials (principally wax, ceramic and metal alloys), gating techniques employed in channeling the flow of molten metal in the ceramic shell in the casting process, and rigorous inspection standards to assure compliance with the customers' product specifications throughout the manufacturing process.
REGULATIONS. The Company uses hazardous substances and generates hazardous waste in the ordinary course of its business. The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials. Although the Company has not to date incurred any material liabilities under environmental laws and regulations and believes that its operations are in substantial compliance with applicable laws and regulations, environmental liabilities could arise in the future that may adversely affect the Company's business. See "Discontinued Operations" below.
COMPETITION - GOLF
The Company operates in a highly competitive environment. The Company competes against a number of manufacturers of investment-cast titanium clubheads for high-quality, premium-priced golf clubs, including but not limited to: Selmet, Inc., Sturm Ruger, Inc., and Cast Alloys, Inc. The Company competes principally against two significant U.S.-based manufacturers (Hitchner Manufacturing Co., Inc. and Cast Alloys, Inc.) of investment-cast steel clubheads. The Company also competes with several foreign manufacturers of investment-cast steel clubheads, including Worldmark Services Ltd. (formerly Fu-Sheng Industrial Co. Ltd.).
The Company believes that its position as a leading manufacturer of titanium and steel clubheads for high-quality, premium-priced golf clubs is due to its ability to produce quality clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs, its experience and expertise in manufacturing investment-cast golf clubheads, and its integrated manufacturing operations.
Although price is a factor, the Company does not compete solely on price. Quality and service are key success factors in the premium price golf clubhead market. The Company seeks to provide better products and service to its customers than its competitors in order to increase or retain market share.
Although the Company's foreign competitors (the principal ones of which are located in Asia) are typically able to offer prices below the Company's prices, the Company believes that it has some competitive advantages over foreign manufacturers, including its ability to deliver clubheads more quickly to its customers due to shorter shipping and lead times. Shipment of clubheads to the United States from Asia usually requires at least two weeks by ocean freight. In addition, the Company believes that its foreign competitors have not demonstrated the same willingness and ability as the
Company to commit sufficient resources to meet rapidly growing demand for popular golf clubs in a timely manner. Further, the Company believes that certain of its customers prefer products made in the United States.
The Company also competes against golf club companies that internally produce clubheads for their clubs. The Company believes that one of the largest dozen golf club companies, Karsten Manufacturing Co., which produces the Ping brand of clubs, manufactures substantially all of the investment-cast steel clubheads for use in its own clubs. The Company believes that this golf club company produces clubheads for its own use only and does not currently compete with the Company for the business of other golf club companies. However, in 1996, Karsten Manufacturing Co. purchased some steel golf clubheads for its Ping brand from the Company.
The Company also faces potential competition from those golf club companies that currently purchase golf clubheads from outside suppliers but may, in the future, manufacture clubheads internally. If the Company's current customers begin manufacturing clubheads internally, the Company's sales would be adversely affected. The Company believes that as long as component suppliers, such as the Company, provide high-quality component golf club parts at competitive prices and reliably, it is unlikely that many golf club companies will commence their own manufacturing.
The Company experiences indirect competition from golf club companies that produce golf clubs with clubheads that are not investment-cast. For example, some clubheads for woods are made of wood, some clubheads for irons are forged, some clubheads for putters are machined, and some clubheads are made of graphite or other composites. The Company believes that the investment-cast, metal clubhead has a greater share of the market for clubheads for high-quality, premium priced golf clubs than these alternate types of clubheads. In particular, the metal wood has surpassed the wooden wood as the most popular wood and the investment-cast iron has surpassed the forged iron as the most popular type of iron. Graphite and other composite clubheads have been available for several years, but to date have not become nearly as popular as investment-cast clubheads.
EMPLOYEES
As of December 31, 1997, the Company employed 5,159 persons on a full-time basis. Of these employees, 3,837 were employed by Coastcast Corporation, S.A., the Mexican subsidiary of the Company. The Company considers its employee relations to be good.
The production and maintenance employees in the Gardena, California facility are represented by the United Steelworkers of America. There were 453 such employees as of December 31, 1997. The collective bargaining agreement for such employees was effective May 12, 1997, and will expire on May 11, 2000.
ORTHOPEDIC IMPLANTS
The Company also manufactures orthopedic implants and surgical tools used principally for replacement of hip and knee joints in humans and small animals. The Company believes that the engineering and manufacturing discipline required to manufacture these products has contributed to the Company's ability to manufacture golf products.
Approximately 70 of the Company's employees serve in the medical implant and surgical tools operations. Such operations are conducted in the Rancho Dominguez, California facility.
The Company believes that its principal competitors in this business are Precision Castparts Corporation and PED Manufacturing.
NEW MARKETS
The Company continues to explore marketing its steel, titanium, and other alloy investment casting capabilities to potential customers in other commercial and industrial businesses outside of the golf business. In 1997, the Company continued its efforts in this area; however, at this early stage, the Company cannot predict which product opportunities will result in profitable sales, and whether volumes will be significant.
DISCONTINUED OPERATIONS
The Company historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business because of declining sales and operating losses on this portion of its business. This business was essentially phased out by June 1994. The net current assets of discontinued operations as of December 31, 1997 were $911,000, principally consisting of the estimated net realizable value of the Wallingford, Connecticut property including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company is continuing to conduct further investigations to determine the source and extent of the contamination. The Company has recorded the net assets associated with its discontinued operations at the estimated net realizable value. However, since the precise source and extent of the contamination has not been identified at this time, no assurances can be given that the proceeds to be realized upon sale of this property less the cost of remediation will equal or exceed the estimated net realizable value.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's principal executive offices and one of two investment casting manufacturing facilities are located in a 120,000 square foot leased facility in Rancho Dominguez, California, a suburb of Los Angeles. The lease expires in October, 2003 and the Company has a five-year extension option.
The Company owns a complex of plants in Gardena, California (which is within approximately five miles of the Rancho Dominguez facilities), comprising an aggregate of approximately 110,000 square feet. These facilities are principally used for manufacturing titanium golf clubheads and tooling. In October 1994, the Company purchased approximately two acres of land contiguous to its Gardena facility. In April 1996, the Company purchased another approximately two acres of land next to the land purchased in October 1994. This land is available for future expansion if and when necessary.
Clubhead polishing and finishing operations are conducted in facilities leased by the Company's subsidiary in Mexicali, Mexico under four lease agreements, comprising an aggregate of approximately 141,000 square feet. Three of the leases expire in December 1998, and the other lease expires in June 2001.
The Company intends to move some of its steel casting operations to a 186,000 square foot leased investment casting facility for steel products in Tijuana, Mexico. The facility is currently under construction and is expected to be operational in 1998. The Company has options to lease sites contiguous to the property as needed for future growth.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to legal actions arising in the ordinary course of business, none of which, individually or in the aggregate, in the opinion of management, after consultation with counsel, will have a material adverse effect on the business or financial condition of the Company.
ITEM 4.
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:
Mr. Buehler is one of the founders of the Company and has been Chairman of the Board since the Company's inception in 1980. Through December 31, 1997, he was also the Chief Executive Officer. Prior to founding the Company, he was President of the Rex Precision Products Division of Alco Standard Corporation, a competitor of the Company that was acquired by the Company in 1987. Mr. Buehler has more than 30 years of experience in the investment-casting business, including more than 20 years of experience in the manufacture of golf clubheads.
Mr. Mora joined the Company in May 1995. Effective January 1, 1998, he became the President and Chief Executive Officer of the Company. Prior to that time, he served as President and Chief Operating Officer. From 1992 to 1995, he was Chief Operating Officer of Pharmavite Corporation, a producer and marketer of nutritional supplements. From 1971 to 1992, Mr. Mora worked for Bergen Brunswig Corporation, starting as a member of the sales force and ending in the position of Group Vice President.
Mr. Bruning joined the Company in May 1996. From 1989 to 1996, he was Chief Financial Officer of Zacky Farms, Inc., a producer of poultry products. From 1986 to 1988, Mr. Bruning was a partner at Coopers & Lybrand, LLP. Prior to that time he worked for Arthur Andersen, LLP for 19 years, 10 of which he served as a partner.
Mr. Knartzer joined the Company in November 1996. From 1995 to 1996, he was Vice President of Operations of Enertech, a privately held manufacturer of products for the nuclear power industry. From 1992 to 1995, he served as Director of Operations for Accuride International, a manufacturer of precision ball bearing equipment. Prior to that time, he held various management positions in operations, engineering, and quality assurance.
Mr. Ibarra joined the Company in June 1981. Since 1989, he has served as Vice President, Manufacturing of the golf operations of the Company. Prior to such time, he served as the production manager for the Company with respect to all phases of its business and as the plant manager at the facility located in Rancho Dominguez, California.
Ms. Wainwright joined the Company in 1988. Since November 1996 she has served as Vice President, Sales. Prior to that time, she served the Company in various capacities, including plant manager at the facility located in Wallingford, Connecticut.
Each officer serves at the pleasure of the Board of Directors of the Company.
PART II
ITEM 5.
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.
The approximate number of record holders of common stock of the Company as of March 16, 1998 was 230.
DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable future. Any future determination as to payment of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors.
STOCK REPURCHASE
On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. The Company did not perform any such transactions during the year ended December 31, 1997. As of December 31, 1997, there were 596,400 shares remaining to be purchased under this authorization.
BUSINESS RISKS
CUSTOMER CONCENTRATION. The Company's sales have been and very likely will continue to be concentrated among a small number of customers. Sales to as few as four customers accounted for 84%, 84% and 76% of sales during the years ended December 31, 1997, 1996 and 1995, respectively. Sales to the Company's top customer, Callaway Golf Company (including Odyssey Golf after its acquisition in August 1997) accounted for 34% of sales for the year ended December 31, 1997.
The Company has no long-term contracts with, and is not the exclusive supplier to, any of its customers, which the Company believes is typical industry practice. Although the Company is now a principal supplier of steel and titanium clubheads to Callaway, there are other actual or potential sources of supply to Callaway and the level of future
orders is not known at this time. In the event Callaway increases purchases from other suppliers, the Company could be adversely affected. Although the Company believes that its relationships with its customers are good and its prices are competitive, the loss of a significant customer or a substantial decrease in the sales of golf clubs by a significant customer could have a material adverse effect on the Company's business.
COMPETITION. The Company operates in a highly competitive market. All of the Company's products are manufactured according to customers' designs and specifications. Accordingly, the Company competes against other independent domestic and foreign manufacturers which have the capability to manufacture investment-cast clubheads. The Company also experiences indirect competition from golf club companies that manufacture their own clubheads or make golf clubs with clubheads that are not investment-cast or are made of materials the Company is not currently capable of producing. Potential competition also exists from those golf club companies that currently purchase clubheads from the Company but may, in the future, manufacture clubheads internally. The Company believes that it competes principally on the basis of its ability to produce consistently high-quality golf clubheads in quantities sufficient to meet rapidly growing demand for popular golf clubs. Some of the Company's current and potential competitors may have greater resources than the Company.
NEW PRODUCTS. The Company's historical success has been attributable, in part, to its ability to supply clubheads for companies whose new products rapidly attained a significant portion of the market for high-quality, premium-priced golf clubs. In the future, the Company's success will depend upon its continued ability to manufacture golf clubheads for such companies. There are no assurances, however, of the Company's ability to do so. If a golf club having a head not manufactured by the Company gains significant market share from customers of the Company, the Company's business would be adversely affected.
NEW MATERIALS AND PROCESSES. The Company's future success is also dependent on continuing popularity of investment-cast clubheads. A significant loss of market share to golf clubs with heads made by other processes would have a material adverse impact on the Company's business. Similarly, the Company's future success is also dependent on continuing popularity of clubheads made of titanium or stainless steel alloys or other metal alloys which the Company is capable of casting.
MANUFACTURING COST VARIATIONS. Consistent manufacture of high-quality products requires constant care in the manufacture and maintenance of tooling, monitoring of raw materials, and inspection for compliance with product specifications throughout the manufacturing process. Investment-casting is labor intensive, and numerous steps are required to produce a finished product. Variations in manufacturing costs and yields occur from time to time, especially with new products during the "learning curve" phase of production and products which are more difficult to manufacture such as titanium or oversized metal wood and iron golf clubheads. The length and extent of these variations are difficult to predict.
DEPENDENCE ON POLISHING AND FINISHING PLANT IN MEXICO. A substantial portion of the golf clubheads manufactured by the Company, and some clubheads produced by other clubhead manufacturers, are polished and finished by the Company. The polishing and finishing processes used by the Company are highly labor intensive. The Company performs substantially all of these processes in its facilities in Mexicali, Mexico pursuant to the "maquiladora" duty-free program established by the Mexican and U.S. governments. Such program enables the Company to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico or paying certain Mexican taxes. The Company pays certain expenses of the Mexico facility in Mexican currency and thus is subject to fluctuations in currency value. The Company does not have any exchange rate hedging arrangements to protect against fluctuations in currency value. The Company is also subject to other customary risks of doing business outside the United States. There can be no assurance that the Mexican government will continue the "maquiladora" program or that the Company will continue to be able to take advantage of the benefits of the program. The loss of these
benefits could have an adverse effect on the Company's business. The Company believes that the North American Free Trade Agreement has not had any adverse effect on its Mexican operations.
HAZARDOUS WASTE. In the ordinary course of its manufacturing process, the Company uses hazardous substances and generates hazardous waste. The Company has no material liabilities as of December 31, 1997 under environmental laws and regulations, and believes that its operations are in substantial compliance with applicable laws and regulations. Nevertheless, no assurance can be given that the Company will not encounter environmental problems or incur environmental liabilities in the future which could adversely affect its business. See also Item 1. Business - Discontinued Operations.
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment are dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions. A decrease in consumer spending on premium-priced golf clubs could have an adverse effect on the Company's business.
SEASONALITY; FLUCTUATIONS IN OPERATING RESULTS. The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales in the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurance can be given, however, that these factors will mitigate the impact of seasonality in the future.
RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon its senior management, and their ability to attract and retain qualified personnel. The Company does not have any non-competition agreements with any of its employees. There is no assurance that the Company will be able to retain its existing senior management personnel or be able to attract additional qualified personnel.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of common stock of the Company in the public market or the perception that such sales could occur may adversely affect prevailing market prices of such common stock.
FLUCTUATIONS IN CALLAWAY GOLF COMPANY SHARES. The Company's common stock value has from time to time fluctuated somewhat in relation to the share value of the Callaway Golf Company. The prevailing market price of the Company's common stock could be adversely impacted by a substantial fluctuation in the market price of Callaway common stock.
ITEM 6.
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.
(1) In October 1993, the Company announced its decision to discontinue its aerospace business. See Note 2 of Notes to Consolidated Financial Statements.
(2) The Company was taxed as an S corporation for federal and state income tax purposes from 1983 until December 15, 1993. Income taxes, income from continuing operations, and income from continuing operations per share reflect the pro forma effect of income taxes for the year ended December 31, 1993 as if the Company had been taxed as a C corporation.
(3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. For further discussion of earnings per share and the impact of Statement No. 128, see Notes 1 and 12 of Notes to Consolidated Financial Statements.
ITEM 7.
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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales increased $1.2 million, or 1%, to $149.5 million for 1997 from $148.3 million for 1996. Decreases in sales of titanium alloy and steel alloy metal wood clubheads were more than offset by increases in sales of titanium alloy iron clubheads, putter clubheads, and steel alloy iron clubheads, and an increase in medical implant sales. Titanium clubhead sales represented approximately 50% and over 55% of total sales for 1997 and 1996, respectively. Sales to Callaway Golf Company, including sales to Odyssey Golf after its acquisition by Callaway Golf Company in August 1997, represented 34% of total sales for 1997 compared to 46% in 1996. There is no assurance that sales to Callaway will represent similar percentages of total sales in the future.
Gross profit decreased $5.3 million, or 16%, to $28.5 million for 1997 from $33.8 million for 1996. The gross profit margin decreased to 19% in 1997 from 23% in 1996. The decrease in gross margin was due principally to a change in the product mix from a preponderance of metal woods to irons and putters.
Selling, general and administrative expense increased by $1.4 million, or 15%, to $10.8 million for 1997 from $9.4 million for 1996. The increase in selling, general and administrative expense was due primarily to increased payroll and related expenses, expenses related to the supplemental executive retirement program, and increased expenses associated with information systems, partially offset by a decrease in legal expenses.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales increased $72.3 million, or 95%, to $148.3 million for 1996 from $76.0 million for 1995. The increase was primarily due to sales of titanium alloy clubheads, which have significantly higher unit sales prices than steel-alloy clubheads. Sales of titanium alloy clubheads more than offset a decrease in sales of steel alloy clubheads. Titanium clubhead sales represented over 55% and over 6% of total sales for 1996 and 1995, respectively. For the year ended December 31, 1996, the majority of the Company's titanium sales were metal wood clubheads. Sales to Callaway Golf Company represented 46% of total sales for 1996 compared to 47% in 1995.
Gross profit increased $20.9 million, or 162%, to $33.8 million for 1996 from $12.9 million for 1995. The gross profit margin increased to 23% in 1996 from 17% in 1995. The increase in gross margin was primarily due to the shift in production to titanium clubheads. Gross profit increased $4.5 million to $4.9 million in the fourth quarter 1996 from $0.4 million in the fourth quarter 1995. The gross profit margin increased to 14% in the fourth quarter 1996 from 3% in the fourth quarter 1995. The increase in gross margins was primarily due to higher volume, mainly titanium, and the absence of start-up costs of the titanium operations which were present in the fourth quarter 1995. The gross margin for the fourth quarter 1996 was 9% lower than the gross margin for the full year 1996, primarily due to seasonality of product ordering and the increase in production costs related to the start-up of new products.
Selling, general and administrative expense increased by $2.4 million, or 34%, to $9.4 million for 1996 from $7.0 million for 1995 and decreased as a percentage of sales to 6% in 1996 from 9% in 1995. The increase in selling, general and administrative expense was due primarily to increased management bonus, increased payroll and related expenses, and expenses related to the supplemental executive retirement program.
Other income, principally interest income, was $1.0 million for 1996, compared to $1.5 million for 1995. The decrease was due to lower cash balances during most of 1996, coupled with lower average interest rates.
DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was essentially completed by June 1994. The net current assets of discontinued operations as of December 31, 1997 were $911,000, principally consisting of the estimated net realizable value of the Wallingford, Connecticut property including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company is continuing to conduct further investigations to determine the source and extent of the contamination. The Company has recorded the net assets associated with its discontinued operations at the estimated net realizable value. However, since the precise source and extent of the contamination has not been identified at this time, no assurances can be given that the proceeds to be realized upon sale of this property less the cost of remediation will equal or exceed the estimated net realizable value.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at December 31, 1997 was $28.2 million compared to $14.1 million on December 31, 1996, an increase of $14.1 million. Net cash provided by operating activities was $17.3 million for the year ended December 31, 1997. Net income of $10.9 million, depreciation and amortization of $2.8 million, a decrease in prepaid expenses of $2.8 million, an increase in deferred compensation of $1.2 million were partially offset by an increase in accounts receivable of $1.1 million. Investing activities of $4.2 million consist primarily of $2.1 million of net capital expenditures and the purchase of Company-owned cash surrender value life
insurance policies on certain key employees of $1.9 million. Net cash provided by financing activities of $1.0 million consists mainly of proceeds from exercise of stock options of $0.8 million including related tax benefits.
The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5 million and which had no outstanding balance at December 31, 1997. This line of credit, which expires on February 1, 1999, bears interest at the bank's prime rate or LIBOR, plus 2%.
On October 25, 1995, the Board of Directors authorized the Company to purchase up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. No such purchases were made during the year ended December 31, 1997. As of December 31, 1997, there were 596,400 shares remaining to be purchased under this authorization.
The Company believes that its current cash position, the working capital generated by future operations and the ability to borrow should be adequate to meet its financing requirements for current operations and the foreseeable future.
QUARTERLY INFORMATION AND SEASONALITY
Set forth below is certain unaudited quarterly financial information. The earnings per share amounts for periods ended prior to December 31, 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements. The Company believes that all other necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statements included elsewhere herein.
The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales in the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurances can be given, however, that these factors will mitigate the impact of seasonality.
BACKLOG
As of December 31, 1997, the Company had a backlog of approximately $52.2 million as compared to a backlog of approximately $28.5 million as of December 31, 1996. The Company believes that its current backlog is scheduled to be shipped in the ensuing four months. Although many of the Company's customers release purchase orders months prior to the requested delivery date, these orders are generally cancelable without penalty provided that no production has commenced. If production has commenced, an order is cancelable upon payment of the cost of production. Historically, the Company's backlog generally has been the highest in the second and third quarters due principally to seasonal factors. Backlog is not necessarily indicative of future operating results.
YEAR 2000 CONVERSION
The Company has identified and evaluated changes to computer systems and applications required to achieve a year 2000 date conversion with no disruption to business operations. Maintenance or modification costs will be expensed as incurred. The total cost of this effort is still being evaluated, but is not expected to be material to the Company. The Company plans to communicate with others with which it does significant business to determine their year 2000 compliance readiness and the extent to which the Company is vulnerable to any third party year 2000 issues.
FORWARD LOOKING INFORMATION
This report and other reports of the Company contain or may contain certain forward-looking statements and information that are based on beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions as they relate to the Company or the Company's management, are used to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by the Company, the costs of product development and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors, and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to directors is incorporated herein by reference to the information contained under the caption "Nomination and Election of Directors" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997. Information with respect to executive officers is included in Part I of this Report. The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information contained under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to the information contained under the caption "Executive Compensation and Other Information" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to the information contained under the captions "Voting Securities and Principal Shareholders" and "Stock Ownership of Management" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 22, 1998, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(1) LIST OF FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index to Financial Statements and Schedules are filed as part of this Report.
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULE
The financial statement schedule listed in the accompanying Index to Financial Statements and Schedule are filed as part of this Report.
(a)(3) LIST OF EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part of this Report.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 16, 1998 COASTCAST CORPORATION
By: /s/ RICHARD W. MORA --------------------------------- Richard W. Mora, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 16, 1998.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Coastcast Corporation:
We have audited the accompanying consolidated balance sheets of Coastcast Corporation and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Coastcast Corporation and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Long Beach, California February 3, 1998
COASTCAST CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
See accompanying notes to consolidated financial statements.
COASTCAST CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
COASTCAST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Coastcast Corporation (the "Company") and its wholly owned subsidiary. All material intercompany transactions have been eliminated in consolidation.
ORGANIZATION AND OPERATIONS--Coastcast Corporation is incorporated under the laws of the State of California. The Company's principal business is the production of investment-cast golf clubheads, and precision investment castings and related engineering for the medical industry. The Company sells its products to customers of varying strength and financial resources, principally located in the United States. The Company's wholly owned subsidiary is incorporated under the laws of the Mexican maquiladora program and its principal activities are the grinding, polishing and finishing of golf clubheads.
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS--The Company has historically manufactured investment-cast aerospace and other industrial products in addition to golf clubheads and orthopedic implant products. In October 1993, the Company announced its decision to discontinue its aerospace business, and as of June 1994 had essentially phased out this business (See Note 2).
REVENUE RECOGNITION--Revenue is recognized when goods are shipped to the customer.
CASH EQUIVALENTS--Cash equivalents consist of short-term investments with original maturities of three months or less.
CONCENTRATION OF CREDIT RISK--The Company's financial instruments that are exposed to credit risk consist primarily of accounts receivable. The Company grants credit to substantially all of its customers, performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for potential credit losses. See also Note 9.
INVENTORIES--Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation and amortization are provided using primarily straight-line methods over the estimated useful lives of the related assets as follows:
IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of an asset, an impairment loss is recognized.
INCOME TAXES--Deferred tax assets and liabilities are recognized based on differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates (see Note 8).
EARNINGS PER SHARE--In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated to conform to the SFAS No. 128 requirements. Basic net income per share is based on the weighted average number of shares of common stock outstanding. Diluted net income per share is based on the weighted average number of shares of common stock outstanding and dilutive potential common equivalent shares from stock options (using the treasury stock method).
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments.
ACCOUNTING PRONOUNCEMENTS--In June 1997, The Financial Accounting Standards Board (FASB) issued Statement No. 130, REPORTING COMPREHENSIVE INCOME, which requires companies to report comprehensive income and its components as part of a full set of financial statements for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company intends to adopt SFAS in 1998.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which requires operating segment disclosures using the "management approach" for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company intends to adopt SFAS No. 131 in 1998. The Company has not yet determined what its operating segments will be under SFAS No. 131.
2. DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was essentially completed by June 1994. The net current assets of discontinued operations as of December 31, 1997 were $911,000, principally consisting of the estimated net realizable value of the Wallingford, Connecticut property including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut property, the Company had an environmental assessment performed, which identified the presence of certain chemicals associated with chlorinated solvents in groundwater beneath a portion of the property. The Company is continuing to conduct further investigations to determine the source and extent of the contamination. The Company has recorded the net assets associated with its discontinued operations at the estimated net realizable value. However, since the precise source and extent of the contamination has not been identified at this time, no assurances can be given that the proceeds to be realized upon sale of this property less the cost of remediation will equal or exceed the estimated net realizable value.
3. INVENTORIES
Inventories consist of the following:
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:
Depreciation and amortization expense for 1997, 1996 and 1995 was $2,838,000, $2,479,000 and $1,862,000, respectively.
5. SHORT-TERM BORROWINGS
The Company maintains an unsecured revolving line of credit which allows the Company to borrow up to $5,000,000 and which had no outstanding balance at December 31, 1997 and 1996. This line of credit, which expires on February 1, 1999, bears interest at the bank's prime rate or LIBOR, plus 2%.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
7. RETIREMENT PLANS
The Company has a defined benefit plan which covers substantially all of its hourly union employees. The plan provides for a monthly benefit payable for the participant's lifetime commencing the first day of the month following the attainment of age sixty-five in an amount equal to $9.50 to $10.85 multiplied by the participant's credited service.
The following table sets forth the plan's funded status:
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7% in 1997 and 1996. The expected long-term rate of return on assets was 7% for 1997 and 1996.
Effective January 1, 1996, the Company adopted a retirement savings plan (the "401(k) Plan") pursuant to which all U.S. employees who satisfy the age and service requirements under the plan and who are not covered by collective bargaining agreements may defer compensation for income tax purposes under section 401(k) of the Internal Revenue Code of 1986. Participants may contribute up to 15% of their compensation up to the maximum permitted under federal law. The Company is obligated to contribute annually an amount equal to 25% of each participant's contribution up to 6% of that participant's annual compensation. In accordance with the provisions of the 401(k) Plan, the Company matched employee contributions in the amount of $78,000 and $102,000 during 1997 and 1996, respectively.
On September 1, 1996, the Company adopted a supplemental executive retirement plan (the "SERP") for certain key employees. Benefits generally accrue at a rate of 7% of final average salary per year of participation in the plan, up to 10 years. In general, participants in the plan only become fully vested with respect to their accrued benefits upon completion of 5 years of plan participation. To partially fund this plan, the Company purchases whole-life insurance contracts on the related participants. The cash surrender value of these policies is in an irrevocable rabbi trust and is presented as an asset of the Company, in "other assets" in the accompanying consolidated balance sheets. Deferred compensation expense under the SERP was $1,176,000 and $438,000 in 1997 and 1996, respectively.
The Company does not provide any other post-retirement benefits to its employees.
8. INCOME TAXES
The provision for income taxes is as follows:
The actual provision on income before income taxes differs from the statutory federal income tax rate due to the following:
The tax effects of items comprising the Company's net deferred tax asset are as follows:
9. MAJOR CUSTOMERS
The Company derived 34%, 23%, 15% and 12% of sales from four top customers in 1997; 46%, 18% and 13% of sales from three top customers in 1996; and 47%, 13% and 10% of sales from three top customers in 1995.
10. COMMITMENTS
OPERATING LEASES--The Company leases certain facilities under various operating leases with terms ranging from five to ten years. The leases contain renewal options for additional five year periods which have not been included in the rental commitment schedule below. In general, these leases provide for payment of property taxes, maintenance and insurance by the Company and include rental increases based on the Consumer Price Index.
The future minimum lease payments required under these leases as of December 31, 1997 are as follows:
Rent expense for 1997, 1996 and 1995 was approximately $1,106,000, $1,355,000 and $1,273,000, respectively.
11. STOCK OPTION PLANS
Under the Company's 1996 Amended and Restated Employee Stock Option Plan ("1996 Employee Stock Option Plan"), a maximum of 1,950,000 shares of common stock may be issued pursuant to exercise of options granted to officers and key employees under the plan. Options may be granted under the plan at prices which are equal to or
greater than the fair market value of the shares at the date of grant. The options become exercisable over a period of time as determined by the Board of Directors or a committee of directors and generally expire ten years from the date of grant or earlier following termination of employment. As of December 31, 1997, an aggregate of 445,493 shares had been purchased pursuant to exercise of options granted under the plan, options to purchase an aggregate of 1,033,513 shares were outstanding (including options which were then exercisable to purchase 408,659 shares), and 470,994 shares were available for additional grants of options under the plan.
Under the Company's 1995 Amended and Restated Non-Employee Director Stock Option Plan ("1995 Director Stock Option Plan"), a maximum of 200,000 shares of common stock may be issued pursuant to exercise of options granted under the plan to certain non-employee directors. Options are granted under the plan at prices equal to the fair market value of the shares at the date of grant. The options generally become exercisable over a three-year period of time and expire at the earlier of one year after the optionee ceases to be a director or ten years from the date of grant. As of December 31, 1997, no shares had been purchased under the plan, options to purchase an aggregate of 150,000 shares were outstanding under the plan, including 86,667 shares as to which such options were then exercisable, and 50,000 shares were available for additional grants of options under the plan .
In April 1996, the Board of Directors granted to a non-employee options to purchase 30,000 shares of common stock, all of which were outstanding as of December 31, 1997, including 10,000 shares as to which such options were then exercisable. These options were not issued under the foregoing option plans.
In September 1997, the Board of Directors approved the repricing of all employee stock options having exercise prices above the fair market value as of the repricing date. A total of 591,783 shares were repriced.
The following summarizes the Company's stock option activity under all arrangements for the three years ended December 31, 1997:
The following table summarizes information about stock options outstanding at December 31, 1997:
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:
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used in 1997, 1996 and 1995, respectively: no dividend yield, expected volatility of 67.0%, 61.8% and 61.8%, risk-free interest rate of 5.8%, 5.9% and 5.9%, and expected term of 4.6, 4.0 and 4.0 years. The weighted average fair value per share of options granted in 1997, 1996 and 1995 was $7.42, $8.25 and $5.40, respectively.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Coastcast Corporation:
We have audited the consolidated financial statements of Coastcast Corporation and subsidiary as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 3, 1998; such report is included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule of Coastcast Corporation, listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Long Beach, California February 3, 1998
COASTCAST CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX
- ---------------------- * 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, 1993.
(3) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1994.
(4) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1995.
(5) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1996.
(6) Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1996.
(7) Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1997.