---




SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




| |  | For the quarterly period ended March 31, 2002
| |  | ---------------------------------------------




OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




| |  | For the transition period from
 to
| |  | ----------------------------------




Commission File Number 1-9511





THE COAST
DISTRIBUTION SYSTEM, INC.


(Exact name of Registrant as specified in its charter)





DELAWARE

94-2490990(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification
Number)350 Woodview Avenue, Morgan Hill, California

95037(Address of principal executive offices)

(Zip Code)





(408) 782-6686


(Registrants telephone number, including area code)





Not Applicable


(Former name, former address and former fiscal year, if changed, since last year)





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  ̈





APPLICABLE ONLY TO CORPORATE ISSUERS:





Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest practicable date.





4,390,864 shares of Common Stock as of May 8, 2002





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PART IFINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





THE COAST DISTRIBUTION SYSTEM, INC. AND
SUBSIDIARIES





CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS


(Dollars in thousands)





March 31, 2002


December 31, 2001(unaudited)ASSETSCURRENT ASSETSCash

$
1,270


$
1,001Accounts receivable  net of allowances of $1,143 and $971, respectively


30,659



12,760Inventories


31,606



32,356Other current assets


2,485



1,980Total current assets


66,020



48,097PROPERTY, PLANT, AND EQUIPMENTNET


2,402



2,137OTHER ASSETS


9,152



10,002$
77,574


$
60,236LIABILITIESCURRENT LIABILITIESCurrent maturities of long-term obligations

$
34


$
26Accounts payable  trade


16,333



10,603Other current liabilities


2,170



2,241Total current liabilities


18,537



12,870LONG-TERM OBLIGATIONSSecured note payable to bank


32,672



21,785Other long-term liabilities


265



20632,937



21,991STOCKHOLDERS EQUITYPreferred stock, $.001 par value: 5,000,000 shares authorized: none issued and outstanding:






Common stock, $.001 par value: 20,000,000 shares authorized; 4,390,864 and 4,366,880 issued, respectively


16,837



16,823Accumulated comprehensive loss


(976
)


(968
)Retained earnings


10,239



9,52026,100



25,375$
77,574


$
60,236





The accompanying notes are an integral part of these statements.




2




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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS


(Dollars in thousands,
except per share data)


(Unaudited)





Three Months Ended March 31,2002


2001Net sales

$
38,197


$
37,855Cost of sales, including distribution costs


31,073



31,502Gross profit


7,124



6,353Selling, general and administrative expenses


5,346



5,782Operating income


1,778



571Other income (expense)Interest


(331
)


(662
)Other


1



15(330
)


(647
)Income (loss) before income taxes


1,448



(76
)Income tax provision (benefit)


729



(28
)NET INCOME (LOSS)

$
719


$
(48
)Net income (loss) per share:Basic

$
0.16


$
(0.01
)Diluted

$
0.16


$
(0.01
)Shares used in computing net income (loss) per share:Basic


4,375,141



4,339,823Diluted


4,418,986



4,339,823











The
accompanying notes are an integral part of these statements.




3




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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS


(Dollars in thousands)





Three months ended March 31,


(Unaudited)





2002


2001Cash flows from operating activities:Net income (loss)

$
719


$
(48
)Adjustments to reconcile net earnings to net cash used in operating activities:Depreciation and amortization


204



301Changes in assets and liabilities:Increase in accounts receivable


(17,899
)


(19,096
)Decrease in inventories


750



400Increase in prepaids and other current assets


(505
)


(73
)Increase in accounts payable


5,730



11,113Increase (decrease) in other current liabilities


(71
)


643Total adjustments


(11,791
)


(6,712
)Net cash used in operating activities


(11,072
)


(6,760
)Cash flows from investing activities:Capital expenditures


(451
)


(77
)Decrease in other assets


832



75Net cash provided by (used in) investing activities


381



(2
)Cash flows from financing activities:Net borrowings under line-of-credit agreement


10,887



7,370Net borrowings (repayments) of other long-term debt


67



(451
)Issuance of common stock pursuant to employee stock option and purchase plans


14



24Redemption of redeemable preferred stock of subsidiary






(48
)Net cash provided by financing activities


10,968



6,895Effect of exchange rate changes on cash


(8
)


(218
)NET INCREASE (DECREASE) IN CASH


269



(85
)Cash beginning of period


1,001



539Cash end of period

$
1,270


$
454





The accompanying notes are an integral part of these statements.




4




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THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS





|1. |  | The accompanying condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present the Companys financial position as of March 31, 2002 and the results of its operations and cash flows for the three months
ended March 31, 2002 and 2001. The accounting policies followed by the Company are set forth in Note A to the Companys financial statements in its Annual Report on Form 10-K for its fiscal year ended December 31, 2001.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|2. |  | The Companys business is seasonal and its results of operations for the three months ended March 31, 2002 and 2001 are not necessarily indicative of the results to be
expected for the full year. See Managements Discussion & Analysis of Financial Condition and Results of Operations  Seasonality and Inflation in Item 2 of Part I of this Report.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the
weighted average number of common and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock
method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. For the three month periods ended March 31, 2002 and 2001, 486,500 and 758,500 common shares, respectively, issuable on exercise of stock
options were excluded from the computation of diluted earnings per share, because their exercise prices were greater than the average market price of the Companys common stock during these periods.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Three Months Ended March 31,2002


2001(in thousands)Numerator:Net income (loss)

$
719

$
(48
)Denominator:Weighted average shares outstanding


4,375


4,340Dilutive effect of stock options


44


Denominator for diluted net income loss per share


4,419


4,340


|4. |  | The Company leases its corporate offices, warehouse facilities and data processing equipment. Those leases are classified as operating leases as they do not meet the
capitalization criteria of FASB Statement No. 13. The office and warehouse leases expire over the next ten years and the equipment leases expire over the next four years.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The minimum future rental commitments under noncancellable operating leases having an initial or remaining term in excess of one year as of December 31, 2001 are as follows:





Year Ending December 31,

Equipment

Facilities

Total(In thousands)2002

$319

$  2,989

$  3,3082003

200

2,908

3,1082004



2,077

2,0772005



1,173

1,1732006



1,141

1,141Thereafter



2,638

2,638$519

$12,926

$13,445




5




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|5. |  | The Company has one operating segment, the distribution of replacement parts, accessories and supplies for recreational vehicles and boats. Net sales, by region, for the three
months ended March 31 are as follows:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For the Three Months Ended March 31,2002

2001In ThousandsUSA

$
31,098

$
30,456Canada


7,078


7,390Other


21


9$
38,197

$
37,855





|6. |  | Goodwill and Other Intangible Assets. As of January 1, 2002, the Company has adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets. In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as of January 1, 2002. As a result, there is no charge for goodwill amortization expense contained in
the Companys statement of operations for the quarter ended March 31, 2002; whereas the Companys statement of operations for the quarter ended March 31, 2001 does contain the charge for goodwill amortization expense taken last year.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The following is the Companys disclosure of what reported net earnings and earnings per share would
have been in all periods presented, exclusive of amortization expenses (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized and changes to amortization periods for
intangible assets that will continue to be amortized.





Three Months Ended March 31,2002

2001Net income (loss), as reported

$
719,000

$
(48,000
)Amortization, net of tax





120,000Adjusted net income

$
719,000

$
72,000Basic income (loss) per share, as reported

$
0.16

$
(0.01
)Change in amortization expense





0.03Adjusted income per share

$
0.16

$
0.02Diluted income (loss) per share, as reported

$
0.16

$
(0.01
)Change in amortization expense





0.03Adjusted diluted income per share

$
0.16

$
0.02





SFAS 142 also requires the Company to perform a transitional impairment test to
determine whether there is an indication that goodwill currently recorded is impaired as of January 1, 2002. To make such a determination, the Company must identify its reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002.





The Company has until June 30, 2002 to determine the fair value of each reporting unit and compare it to the reporting units carrying amount. To the extent a reporting units carrying amount exceeds its
fair value, an indication exists that the reporting units goodwill may be impaired and the Company must perform the second step of the transitional impairment test.




6




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In the second step, the Company must compare the implied fair value of each reporting
units goodwill, determined by allocating the reporting units fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in a business combination, to its carrying amount, both of which would be
measured as of January 1, 2002. This second step is required to be completed as soon as possible, but no later than December 31, 2002. Any transitional impairment loss will be recognized as a cumulative effect of a change in accounting principle in
the Companys statement of operations.





The Company has determined that it has a single reporting unit which consists of
the distribution of replacement parts, accessories and supplies for recreational vehicles and boats. The Company not completed the first step in the transitional impairment test, which requires a determination of the fair value of that reporting
unit, and has not determined what the effect of adopting SFAS 142 will be on the Companys results of operations. As of January 1, 2002, the Company has $5,679,000 of net goodwill that is subject to the transitional impairment test.





|7. |  | Accounts Receivable. The majority of the Companys accounts receivable are due from RV dealers, recreational vehicle supply stores and independent boat dealers.
Credit is extended based on evaluation of the customers financial condition and, generally, collateral is not required. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to
make required payments. Management regularly evaluates the allowance for doubtful accounts. Estimated losses are based on the aging of accounts receivable balances, a review of significant past due accounts, and our historical write-off experience,
net of recoveries. If the financial condition of our customers were to deteriorate, whether due to deteriorating economic conditions generally or otherwise, resulting in an impairment of their ability to make payments, additional allowances would be
required.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|8. |  | Comprehensive Income (Loss).
|-- |  | ----------------------------




Three Months Ended March 31,2002



2001(In thousands)Net income (loss)

$
719


$
(48
)Change in accumulated foreign currency translation adjustment:


(8
)


(218
)Comprehensive income (loss)

$
711


$
(266
)




7




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Item 2.    MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





ACCOUNTING POLICIES AND ESTIMATES





General





In accordance with generally accepted accounting
principles, as applied in the United States (GAAP), we record assets at the lower of cost or fair value. In determining the fair value of such assets as accounts receivable, inventories, deferred income taxes and goodwill, we must make
judgments, estimates and assumptions regarding future events and circumstances that could affect the value of those assets. These include assumptions about such matters as future economic conditions that will affect our ability to collect our
accounts receivable or sell our inventories in future periods. Those estimates and assumptions are based on current information available to us at the time they are made. If there are material changes in future events and circumstances from those
anticipated at the time we made our estimates and assumptions, GAAP will require us to adjust the earlier estimates that are affected by those changes. Any downward adjustments are commonly referred to as write-downs of the assets
involved.





Additionally, decisions of when adjustments of this nature should be made also sometimes requires an assessment or
prediction of the effects on financial performance, or the duration, of new events or changes in circumstances. It is not uncommon for it to take some time, after the occurrence of an event or the onset of changes in economic circumstances, for
their effects to become recognizable or determinable.





It is our practice to establish reserves or allowances against which we
are able to charge any such downward adjustments or write-downs in the fair value of our assets. Examples include reserves or allowances established for uncollectible accounts receivable (sometimes referred to as bad debt
reserves) and reserves for inventory obsolescence. Such reserves or allowances are established, and such write-downs are effectuated, by charges to income or increases in expense in our statement of operations in the periods when those
reserves or allowances are established or those write-downs are recorded. As a result, our judgments, estimates and assumptions about future events and circumstances can and will affect not only the amounts at which we record these assets on our
balance sheet, but also our results of operations.





Under GAAP, most businesses also must make estimates or judgments regarding
the periods during which sales are recorded and also the amounts at which they are recorded. Those estimates and judgments will depend on such factors as the steps or actions that a business must take to complete a sale of products to or the
provision of services for a customer and the circumstances under which a customer would be entitled to return the products or reject or adjust the payment for services. Additionally, in the case of a company that grants its customers contractual
rights to return products sold to them, GAAP requires that the company establish a reserve or allowance for product returns by means of a reduction in the amount at which its sales are recorded primarily based on the nature, extensiveness and
duration of those rights and its historical return experience.





In making our estimates and assumptions we follow GAAP and
accounting practices applicable to our business that we believe, after consultation with our independent public accountants, will enable us to make fair and consistent estimates of the fair value of those assets and establish adequate reserves or
allowances. Additionally, as part of the audit of our annual financial statements, our independent public accountants examine, on a test basis, the evidence on which we rely, and assess the accounting principles that we use and the significant
estimates that we make, in determining the amounts at which we propose to record our assets and establish our reserves in our financial statements.





Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations that are discussed below.





Revenue Recognition and the Allowance for Product Returns.  We recognize revenue from the sale of a product upon its shipment to the
customer. We provide our customers with a limited right of return. We establish an allowance for potential returns which reduce the amounts of our reported sales, based on historical experience with returns of like products and current economic
data, which can affect the level at which customers submit product returns.




8




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Accounts Receivable and the Allowance for Doubtful Accounts.  In the normal
course of business we extend 30 day payment terms to our customers and, due to the seasonality of our business, during late fall and winter we grant extended payment terms to those of our customers that have good credit records. We regularly review
our customers accounts and estimate the amount of and establish an allowance for uncollectible amounts or receivables. The amount of the allowance is based on several factors, including the age of unpaid amounts, a review of
significant past due accounts and current economic trends, which affect the ability of customers to keep their accounts current. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known.
For example, if the financial condition of the Companys customers or economic conditions were to deteriorate, adversely affecting their ability to make payments, increases in the allowance may be required. Since the allowance is created by
recording a charge against income, an increase in the allowance will cause a decline in our operating results in the period when the increase is recorded.





Reserve for Excess and Obsolete Inventory.  Inventories are valued at the lower of cost (first-in, first-out) or market and are reduced by an allowance for excess and slowing moving or obsolete
inventories. The amount of the allowance is determined on the basis of historical experience with different product lines, estimates concerning future economic conditions and estimates of future sales. If there is an economic downturn or a decline
in sales, causing inventories of some product lines to accumulate, it may become necessary to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new
or competitive products by manufacturers; however, due to the relative maturity of the markets in which the Company operates, usually these are not significant factors. Increases in this allowance also will cause a decline in operating results as
such increases are effectuated by charges against income.





Allowance for Deferred Income Taxes.  We record as a
deferred tax asset on our balance sheet tax loss and tax credit carryforwards, to the extent they are available to offset or reduce our future income tax liability. At March 31, 2002 the amount of that asset totaled approximately $3
million, net of a valuation allowance of $120,000. Under applicable federal and state income tax laws and regulations, deferred tax assets relating to tax loss and tax credit carryforwards will expire if not used within specified time periods.
Accordingly, the ability to use such assets depends on generating taxable income during those time periods. As a result, we establish a valuation allowance, which is applied as a reduction of the gross amount of that deferred tax asset, to take
account of the possibility that we will not generate sufficient taxable income in the future to fully utilize this asset. In determining the amount of that allowance, we consider current operating and economic trends as they may affect the amounts
and timing of future taxable income that we currently believe we can generate. Currently available evidence leads us to believe that it is more likely than not that we will be able to utilize the deferred tax asset that is recorded in our financial
statements. However, if due to future events or circumstances, such as an economic downturn that would adversely affect our operating results, we subsequently come to a different conclusion regarding our future taxable income and, hence, our ability
to fully utilize this asset, we would increase the allowance and thereby reduce the amount at which we record the deferred tax asset. That reduction would be effectuated by an increase in the provision (or a reduction in the credit) for income taxes
in our statement of operations, which would have the effect of causing a decline in our operating results.





Long-Lived
Assets.  Long-lived assets such as goodwill and intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may be not be recoverable. Estimated undiscounted expected future cash
flows are used to determine if an asset is impaired, in which case the carrying value of the asset would be reduced to fair value. Any resulting impairment would be recorded as a charge against income in the period in which the impairment was
recorded. Beginning with our fiscal year ending December 31, 2002, however, we will be required to assess our goodwill for impairment based on the new standards established by SFAS No. 142. See Note 6 to our Condensed Consolidated Financial
Statements included elsewhere in this Report. We will not be able to determine the full effect of these new standards on our financial position or our results of operations until we are able to complete our impairment analysis using the new
standards. Under existing accounting standards, our assessment of goodwill indicated that no impairment existed as of December 31, 2001. In the event our analysis under the new standards indicates this goodwill is impaired, we will be required to
record a charge to our earnings in fiscal 2002, the amount of which is not presently determinable.





Foreign Currency
Translation.  The financial position and results of operations of our foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of each foreign subsidiary are translated into U.S. dollars
at the rate of exchange in effect at the end of each reporting period. Revenues and expenses are translated into U.S. dollars at the average exchange rate for the reporting period. Foreign currency translation gains and losses not impacting cash
flows are credited to or charged against other comprehensive income (loss). Foreign currency translation gains and losses arising from cash transactions are credited to or charged against current earnings.




9




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RESULTS OF OPERATIONS





Factors Generally Affecting Sales of RV and Boating Products





We believe that we are one
of the largest wholesale distributor of replacement parts, accessories and supplies for recreational vehicles (RVs), and one of the largest distributors of replacement parts, accessories and supplies for boats, in North America. Our
sales are made to retail parts and supplies stores, service and repair establishments and new and used RV and boat dealers (After-Market Customers). Our sales are affected primarily by (i) usage of RVs and boats which affects the
consumers needs for and purchases of replacement parts, repair services and supplies, and (ii) sales of new RVs and boats, because consumers often accessorize their RVs and boats at the time of purchase.





The usage and the purchase, by consumers, of RVs and boats depend, in large measure, upon the extent of discretionary income available to consumers and
their confidence about economic conditions. Weather conditions also affect the usage of RVs and boats. Additionally, shortages in the supply and increases in the prices of gasoline also can lead to declines in the usage and purchases of RVs and
boats. As a result, our sales and operating results can be, and in the past have been, adversely affected by recessionary economic conditions, increases in interest rates, which affect the availability and affordability of financing for purchases of
RVs and boats, increases in gasoline prices which adversely affect the costs of using RVs and boats, and unusually adverse weather conditions.





Net Sales.  Net sales increased by $342,000 or 0.9% in the first quarter of 2002 as compared to the corresponding period in 2001. We believe that this increase reflects both an improvement in consumer
confidence and our progress in implementing our inventory management and deployment program, which has enabled us to improve our service levels to our customers.





Gross Margin.  Our gross margin increased to 18.7% of net sales in the three months ended March 31, 2002 from 16.8% in comparable quarter of 2001. This increase was due
to (i) an overall reduction in the prices that we paid for the purchase of products from our suppliers and (ii) a reduction in freight-in costs, net of supplier allowances, associated with receiving product from our suppliers and redistributing it
to our regional distribution centers. Those reductions, both in the prices we pay for products and in freight-in costs are largely attributable to cost savings from our inventory management and deployment system.





Selling, General and Administrative Expenses.  Our selling, general and administrative expenses decreased 7.6% or $438,000 to
$5,346,000 in the first quarter of 2002 from $5,784,000 in the first quarter of 2001. As a percentage of net sales such expenses declined to 14.0% in the quarter ended March 31, 2002 from 15.3% in the same quarter of 2001. This decrease was due
primarily to our continuing cost containment efforts, including reductions in labor costs that resulted from reductions in both the number of employees and in salaries. Also contributing to the reduction in SG & A expenses was a reduction in
marketing and computer expenses.





Operating Income.  The increase in operating income in 2002 was due to
the combined effects of the increases in sales and gross margin and the reductions in selling, general and administrative expenses.





Interest Expense. During the first quarter of 2002, interest expense declined by $331,000, or 50%, as compared to 2001. This decrease was the result of declines in the rate of interest charged due to declining market rates of
interest since the end of the first quarter of 2001 and decreases in average long-term borrowings during the quarter ended March 31, 2002.





Income Taxes. Our effective tax rate is affected by the amount of our expenses that are not deductible for income tax purposes and by varying tax rates on income generated by our foreign subsidiaries. We expect
our effective tax rate to remain at these levels during the foreseeable future.




10




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Liquidity and Capital Resources





We finance our working capital requirements for our operations primarily with borrowings under a long-term revolving bank credit facility and internally generated funds. Under the terms
of the revolving credit facility, which expires in May 2003, we may borrow up to the lesser of (i) $40,000,000 with seasonal reductions ranging from $30,000,000 to $35,000,000 between August 1 and February 28 of each year, or (ii) an amount equal to
80% of eligible accounts receivable and between 50% to 60% of eligible inventory. Interest on the revolving credit facility is payable at the banks prime rate plus 1.25% or, at the Companys option but subject to certain limitations, at
the banks LIBOR rate, plus 3.0 percent.





At April 30, 2002, outstanding bank borrowings totaled $32,600,000. Our bank
borrowings are secured by substantially all of our assets, and rank senior in priority to other indebtedness of the Company. Our revolving credit facility expires on May 31, 2003. As a result, commencing in the second quarter of 2002, our bank
borrowings, which are currently classified as a long term liability, will have to be reclassified as a short term liability until such time as we are able to obtain a new long term credit facility.





We believe that we have good relations with our bank lender and we believe we will be able to obtain a renewal or extension of our existing credit
agreement with our current lender or obtain a new credit facility with a new lender. If, however, our operating results should deteriorate, or economic conditions or conditions in the credit markets were to worsen, our costs of borrowings could
increase in 2003, or we could experience difficulties renewing our existing or obtaining a new credit facility.





We generally
use cash for, rather than generate cash from, operations in the first half of the year, because we build inventories, and accounts receivables increase, as our customers begin increasing their product purchases for the spring and summer selling
seasons. See Seasonality and Inflation below.





The implementation of our inventory management program has
allowed us to reduce our inventory and accounts payable and borrowings at March 31, 2002 as compared to March 31, 2001.





Capital expenditures, primarily for computer enhancements and warehouse equipment, were $451,000 in the first quarter of 2002 and $77,000 in the corresponding quarter of 2001. We currently anticipate that we will be making additional
capital expenditures during the balance of this year primarily for warehouse improvements as part of our new inventory management system.





We lease the majority of our facilities and certain of our equipment under non-cancelable operating leases. Our future lease commitments are described in Note 4 of Notes to the Companys Interim Condensed
Consolidated Financial Statements included elsewhere in this report.





Seasonality and Inflation





Seasonality.  Sales of recreational vehicle and boating parts, supplies and accessories are seasonal. We have significantly higher
sales during the six-month period from April through September than we do during the remainder of the year. Because a substantial portion of our expenses are fixed, operating income declines and the Company sometimes incurs losses and must rely more
heavily on borrowings to fund operating requirements in the months when sales are lower.





Inflation.  Generally, we have been able to pass inflationary price increases on to our customers. However, inflation also may cause or may be accompanied by increases in gasoline prices and interest rates. Such increases,
or even the prospect of increases in the price or shortages in the supply of gasoline, can adversely affect the purchase and usage of RVs and boats, which can result in a decline in the demand for our products.





Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Our exposure to market risk with respect to financial instruments is primarily related to changes in interest rates with respect to borrowing activities, which may adversely affect our
financial position, results of operations and cash flows. To a lesser degree, we are exposed to market risk from foreign currency fluctuations associated




11




---

with our Canadian operations and our Canadian currency denominated debt. We do not use financial instruments for trading or other speculative purposes and are
not party to any derivative financial instruments.





In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities. The fair value of borrowings under our revolving credit facility approximate the carrying value of such obligations. As of March 31, 2002, we had outstanding $32.7 million under our
revolving credit facility.





We sometimes enter into forward exchange agreements to reduce the effect of foreign currency
fluctuations on a portion of our inventory purchases in Canada for our Canadian operations. The gains and losses on these contracts are reflected in earnings in the period during which the transactions being hedged are recognized. We believe that
these agreements do not subject us to significant market risk from exchange rate movements because the agreements offset gains and losses on the balances and transactions being hedged. As of March 31, 2002, there were no such agreements outstanding.





Approximately 25% of our debt is denominated in Canadian currency, which also exposes us to market risk associated with
exchange rate movements. Historically, we have not used derivative financial instruments to manage our exposure to foreign currency rate fluctuations since the market risk associated with our foreign currency denominated debt has not been considered
significant.





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Forward Looking Information





This Report contains forward-looking information which reflects our current views of future financial performance. The forward-looking information is
subject to certain risks and uncertainties, including, but not limited to, the effect on future performance of changing product supply relationships in our markets and the uncertainties created by those changes; the potential for increased price
competition; possible changes in economic conditions, prevailing interest rates or gasoline prices, or the occurrence of unusually severe weather conditions, that can affect both the purchase and usage of RVs and boats and which, in turn, affects
purchases by consumers of the products that the Company sells. Due largely to the current political uncertainties in the Middle East, gasoline prices have risen somewhat in the past several weeks and the possibility exists that gasoline prices could
increase even more. Based on past experience, should that occur, the usage of RVs and boats could decline significantly and that would have a particularly adverse effect on our operating results. For information concerning these and other factors
and risks, see the foregoing discussion in this section of this Report titled, Managements Discussion and Analysis of Financial Condition and Results of Operation and our Annual Report on Form 10K for the fiscal year ended December
31, 2001. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to update or revise the
forward-looking statements, whether as a result of new information, future events or otherwise.




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PART IIOTHER INFORMATION





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K AND EXHIBITS





(a)    Exhibits.





None





(b)    Reports on Form 8-K.





None




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SIGNATURES





Pursuant to the requirements 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.





THE COAST DISTRIBUTION SYSTEM, INC.Dated: May 14, 2002



By:

/s/    SANDRA A. KNELLSandra A. Knell Executive Vice President and Chief Financial Officer




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