-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EgTL1qS8O1Q/3jJYUR9s0kS41PP6s9z/pedU9PRj8sIWCdmgik7ffUBRfUwBa1gK QQirlAu4CSGKohe6AnBspQ== 0001047469-03-011160.txt : 20030331 0001047469-03-011160.hdr.sgml : 20030331 20030331130639 ACCESSION NUMBER: 0001047469-03-011160 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTCAST CORP CENTRAL INDEX KEY: 0000914479 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 953454926 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12676 FILM NUMBER: 03628739 BUSINESS ADDRESS: STREET 1: 3025 E VICTORIA ST CITY: RANCHO DOMINGUEZ STATE: CA ZIP: 90221 BUSINESS PHONE: 3106380595 MAIL ADDRESS: STREET 1: 3025 EAST VICTORIA ST CITY: RANCHO DOMINIQUEZ STATE: CA ZIP: 90221 10-K 1 a2106141z10-k.htm 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

ý	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-12676

COASTCAST CORPORATION
(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)		95-3454926 (I.R.S. Employer Identification No.)
3025 East Victoria Street Rancho Dominguez, California (Address of principal executive offices)		90221 (Zip Code)

Registrant's telephone number, including area code:
(310) 638-0595

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act:

Rights to Purchase Series A Preferred Stock, no par value
Common Stock, no par value

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 ý No o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yeso No ý

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Aggregate market value of the Registrant's voting and non-voting common stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange on June 30, 2002 ($2.10 per share): $13,644,000.

As of March 21, 2003, 7,635,042 shares of the Common Stock, no par value, of the Registrant were outstanding.

Documents Incorporated by Reference:

Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held June 12, 2003, are incorporated by reference into Part III of this Report.

COASTCAST CORPORATION

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

		PAGE
PART I
Item 1.	Business	3
Item 2.	Properties	9
Item 3.	Legal Proceedings	9
Item 4.	Submission of Matters to a Vote of Security Holders	9
PART II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	10
Item 6.	Selected Financial Data	12
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	13
Item 7a.	Quantitative and Qualitative Disclosure About Market Risk	19
Item 8.	Financial Statements and Supplementary Data	19
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	19
PART III
Item 10.	Directors and Executive Officers of the Registrant	19
Item 11.	Executive Compensation	20
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	20
Item 13.	Certain Relationships and Related Transactions	20
Item 14.	Controls and Procedures	21
PART IV
Item 15.	Exhibits, Financial Statement Schedule, and Reports on Form 8-K	21

PART I

Item 1. Business.

General

Coastcast Corporation was incorporated in California and commenced operations in 1980. Since its inception, the principal business of the Company has been the manufacture of investment-cast metal golf clubheads for high-quality, premium-priced metal woods, irons and putters. Until 1995, most of the clubheads manufactured by the Company were made of stainless steel. The Company manufactured and began shipping titanium clubheads at the end of 1995 shortly after oversized titanium drivers became popular. The average sale price and margin of titanium clubheads are typically much higher than the average sale price and gross margin of stainless steel clubheads. Titanium clubheads accounted for approximately 36% and 57% of the Company's total sales in 2002 and 2001, respectively.

The Company also manufactures a variety of investment-cast non-golf products which include orthopedic implants and surgical tools (used principally in replacement joints, such as hips and knees, as well as in heart and spinal implants), automotive and other commercial, industrial products. The non-golf products accounted for 14.7% and 9.7% of the Company's total sales in 2002 and 2001, respectively.

In December 2001, the Company ceased the operations of its subsidiary, California Precision Aluminum Castings, Inc. ("CPAC"), which manufactured aluminum compressor wheels for automotive applications. The Company acquired CPAC in 1999, while it was still in the development stage, began shipment of products in 2000, but was not able to generate sufficient sales to make CPAC a profitable operation. Even though the Company ceased manufacturing aluminum compressor wheels, the Company continues its efforts to develop and manufacture titanium compressor wheels.

The Company operates two business segments: golf and non-golf products. The golf segment manufactures and sells investment cast metal golf clubheads. The non-golf segment manufactures and sells other metal investment castings which include orthopedic implants and surgical tools, automotive, and other commercial and industrial products. See Note 13.

After many years of profitable operations, the Company incurred losses in the years ended December 31, 2002 and 2001. A significant contributing factor to the losses was the loss of market share in golf clubheads to lower-priced Chinese competitors. The products coming from China are at prices lower than those the Company, historically was able to offer. As a result of this loss in market share, for the year ended December 31, 2002, the Company's sales decreased significantly which resulted in excess idle capacity in headcount, facilities and machinery and equipment. The Company incurred significant restructuring and long-lived asset impairment charges for the year ended December 31, 2002. See "Competition-Golf" below.

As of December 31, 2002, the Company has substantially completed its plan to eliminate a significant portion of its excess capacity. The Company seeks to improve manufacturing performance and reduce costs in an effort to return to profitability on lower revenue. The Company continues working on improvements in its manufacturing processes to increase efficiency, reduce workforce, inventory, and costs, and shorten manufacturing lead times.

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 "pro-line" golf clubs. The Company's clubheads are included in a variety of leading metal woods, irons and putters.

Golf Product Customers

For over twenty years, the Company has supplied investment-cast clubheads for metal woods, irons and putters to many of the top golf companies which produce high-quality, premium-priced golf clubs. Most golf club companies source the three principal components of a golf club—the clubhead, shaft, and grip—from independent suppliers which manufacture these components based on the golf club companies' designs and specifications. The Company currently is a major supplier of stainless steel and titanium clubheads to Callaway Golf Company, which is the producer of the Big Bertha line of steel and titanium metal woods and irons and Odyssey putters. In addition, the Company is a supplier of investment-cast steel and titanium clubheads for companies which market the Titleist, Ping, Cleveland and Burrows 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 majority of the clubheads manufactured by it are incorporated in clubs sold in North America, although a substantial portion of the Company's clubheads are incorporated in clubs sold in parts of Asia, Europe and other parts of the world. Historically, a limited number of golf club companies have held a very substantial portion of the total market share for high-quality, premium-priced golf clubs. Several of these golf clubheads are marketed by customers of the Company. Callaway accounted for 47%, 50% and 50% of the Company's total sales in 2002, 2001 and 2000, respectively. Fortune Brands (formerly American Brands, owner of Titleist and Cobra) accounted for 19%, 33% and 26% of the Company's total sales in 2002, 2001 and 2000, respectively. Ping accounted for 16% of the Company's sales in 2002.

Manufacturing—Golf

Investment-Casting Process. Investment-casting is a highly specialized method of making metal products. It has become a principal method for the manufacture of golf clubheads. Previously, woods were made of wood and irons were produced by forging and machining. Greater flexibility in the shape and weight distribution of clubheads is possible with the investment-casting process. Investment-casting facilitates perimeter weighting and the use of modern alloys. It also enhances manufacturing precision and uniformity. The enhanced precision inherent in investment-casting is particularly important in the manufacture of metal woods which can involve a significant number of separate manufacturing steps.

The basic steps of investment-casting, in its simplest form, are as follows:

•: Produce a 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.

Polishing and Finishing. The Company conducts golf clubhead polishing and finishing operations in its facilities in Mexicali, Mexico. In addition, beginning in the last quarter of fiscal year 2000, steel iron clubheads were finished in the Company's Tijuana, Mexico facility, however, due to the significant decrease in sales in the fiscal year 2002, almost all golf clubhead finishing was moved back to Mexicali, Mexico. Finishing of the head for an iron or putter can require numerous separate steps and finishing of a head for a metal wood can involve many more separate steps. Most of the clubheads and substantially all of the metal woods manufactured by the Company are finished by it to customer specifications, although some of such clubheads—principally irons—are delivered to customers in an unfinished state. The Company, to assist its customers, at times also polishes and finishes limited quantities of clubheads cast by other companies.

Quality Control. The Company's success as a supplier of golf clubheads to leading manufacturers of high-quality golf clubs is dependent on effective 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.

Competition—Golf

The Company operates in a highly competitive global environment. A limited number of companies, including Coastcast, have a very substantial portion of the total market share for the production of stainless steel and titanium clubheads for high-quality, premium-priced golf clubs. For many years, the Company recognized several companies based in the North America as it principal competitors. That has changed in the last two years. The Company now recognizes many companies in China as its most formidable competitors. Included among the companies which Coastcast recognizes as its principal competitors are Worldmark Services Ltd. (formerly Fu-Sheng Industrial Co. Ltd.), O-ta Precision Casting Co. Ltd., Advanced Group International Co. Ltd., Dynamic Precision Casting Mfg. Co. Ltd., EverRing/Everland and Beijing International Aeronautical Materials in Taiwan or China.

Although the Company does not compete solely on price, that has become an increasingly important factor. The Company believes that its decline in sales which began in 2001 is substantially attributable to a loss of market share to lower-priced Chinese competitors which have significantly lower labor costs than the Company and other competitors in the United States and Mexico.

The Company continues to take action to improve manufacturing performance and reduce costs in an effort to compete more effectively with Chinese manufacturers. The Company is working on improvements in its manufacturing processes to reduce costs and shorten manufacturing lead times. The Company has substantially completed its plan to consolidate manufacturing operations into less space in fewer locations in order to reduce costs.

While the Company does not expect to be able to lower its costs to the levels of its Chinese competitors, the Company believes that a combination of prices which are closer to its competitors' prices and shorter manufacturing lead times will help stem market share loss and assist the Company in its efforts to return to profitability despite lower sales.

The Company also competes against golf club companies that internally produce clubheads for their clubs. The Company believes that one of the larger golf club companies, Ping Inc., which produces its own brand of clubs, manufactures much of the investment-cast steel iron clubheads for use in its own clubs. The Company believes that Ping produces clubheads for its own use only and does not currently compete with the Company for the business of other golf club companies.

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 and its competitors, 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 forged faces and fabricated bodies or of wood alone, some clubheads for irons are forged, some clubheads for putters are machined, and some clubheads are made of graphite or other composites. The Company believes that the investment-cast, metal clubhead has a greater share of the market for clubheads for high-quality, premium priced golf clubs than these alternate types of clubheads. Graphite and other composite clubheads have been available for several years, but to date have not become nearly as popular as investment-cast clubheads.

Orthopedic Implants and Specialty Products

The Company manufactures non-golf products, principally orthopedic implants and surgical tools (used principally in replacement joints, such as hips and knees, as well as in heart and spinal implants). Also, other non-golf products have included titanium and other alloy specialty products, automotive titanium products and aluminum compressor wheels (ceased operations in December 2001). Sales of these products accounted for 14.7% and 9.7% of total sales of the Company in 2002 and 2001, respectively.

The Company is endeavoring to expand its titanium and other alloy investment casting business to potential customers in other commercial and industrial businesses outside of the golf business. At this stage, the Company cannot predict which product opportunities will result in profitable sales, and whether volumes will be significant.

The Company believes that its principal investment casting competitors in the production of these non-golf products are Precision Castparts Corporation, Sturm Ruger, Inc., and PED Manufacturing.

Employees

As of December 31, 2002, the Company and its subsidiaries employed 1,258 persons on a full-time basis. Of these employees, 591 and 370 were employed by Coastcast Corporation, S.A. and Coastcast Tijuana S. de R. L. de C. V., respectively, the Mexican subsidiaries of the Company. The Company considers its employee relations to be good.

The production and maintenance employees in the Gardena, California facility are represented by the United Steelworkers of America. The Gardena facility was shutdown in August 2002 and almost all the union employees were terminated. The collective bargaining agreement for such employees was effective May 12, 2000, and will expire on June 11, 2003.

Business Risks

Customer Concentration. The Company's sales have been, and very likely will continue to be, concentrated among a very small number of customers. Sales to three customers accounted for 81% of sales during the year ended December 31, 2002 and sales to two customers accounted for 83% of sales during the years ended December 31, 2001. Sales to the Company's top customer, Callaway Golf Company, accounted for 47% and 50% of sales for the years ended December 31, 2002 and 2001, respectively.

The Company has no long-term contracts with, and, in almost all cases, is not the exclusive supplier to, any of its customers, which the Company believes is typical industry practice. Although the Company is 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, the loss of a significant customer or a substantial decrease in the sales of golf clubs by a significant customer would have a material adverse effect on the Company's business.

Competition. The Company operates in a highly competitive market and competition from Chinese manufacturers of investment-cast golf clubheads has become increasingly intense in the last two years. 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 price and its ability to produce consistently high-quality golf clubheads in quantities sufficient to its customer needs in a timely manner. Some of the Company's current and potential competitors may have greater resources than the Company. The Company's Chinese competitors are able to offer lower prices to customers than the Company because of their lower labor costs.

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 Manufacturing Plants in Mexico. A substantial portion of the golf clubheads manufactured by the Company, including clubheads cast by the Tijuana plant, and limited quantities of clubheads cast by other clubhead manufacturers, are polished and finished by the Company in its Mexicali facilities. The polishing and finishing processes used by the Company are highly labor intensive. The Company manufactures in Tijuana and Mexicali, Mexico pursuant to the "maquiladora" duty-free program established by the Mexican and U.S. governments. Such program enables the Company to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico or paying certain Mexican taxes. The Company pays certain expenses of the Mexico facilities in Mexican currency and thus is subject to fluctuations in currency value. The Company does not have any exchange rate hedging arrangements to protect against fluctuations in currency value. The Company is also subject to other customary risks of doing business outside the United States. There can be no assurance that the Mexican government will continue the "maquiladora" program or that the Company will continue to be able to take advantage of the benefits of the program. The loss of these benefits could have an adverse effect on the Company's business. The Company believes that the North American Free Trade Agreement has not had any adverse effect on its Mexican operations.

Hazardous Waste. In the ordinary course of its manufacturing process, the Company uses hazardous substances and generates hazardous waste. The Company has no material liabilities as of December 31, 2002 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.

Dependence on Discretionary Consumer Spending. Sales of golf equipment are dependent on discretionary spending by consumers, which may be adversely affected by general economic conditions. A decrease in consumer spending on premium-priced golf clubs could have an adverse effect on the Company's business.

Seasonality; Fluctuations in Operating Results. The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales during the six month period that include the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurance can be given, however, that these factors will mitigate the impact of seasonality in the future.

Reliance on Key Personnel. The success of the Company is dependent upon its senior management, and their ability to attract and retain qualified personnel. The Company does not have any non-competition agreements with any of its employees. There is no assurance that the Company will be able to retain its existing senior management personnel or be able to attract additional qualified personnel.

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.

Shareholder Rights Plan Could Discourage Acquisition Proposals. The Company's shareholder rights plan could make it more difficult for a third party to acquire the Company, even if doing so would be beneficial to the Company's shareholders. The shareholders rights plan is intended to encourage potential acquirers to negotiate with the Company and allow the Company's board of directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm the price for the Company's common stock.

Item 2. Properties.

The Company's principal executive offices, one of two steel investment casting manufacturing facilities and its titanium investment casting manufacturing facility 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, recently, the Company exercised its five-year option to extend the lease through October 2008.

The Company owns a complex of plants in Gardena, California (which is approximately five miles from the Rancho Dominguez facilities), comprising an aggregate of approximately 110,000 square feet of buildings on 3.75 acres of land. In addition, the Company owns a parking lot located across from these facilities consisting of 1.9 acres of land. In October 1994, the Company purchased 1.77 acres of land contiguous to its Gardena facility. In April 1996, the Company purchased another 1.76 acres of land next to the land purchased in October 1994. This entire complex of Gardena properties have been listed for sale since August 2002.

Almost all of the clubhead polishing and finishing operations are conducted in facilities leased by the Company's subsidiary in Mexicali, Mexico under two lease agreements, comprising an aggregate of approximately 77,000 square feet. The leases expire in December 2007. The leases have a five-year extension option.

The Company's main steel golf clubhead casting operations are conducted in a 186,000 square foot leased facility in Tijuana, Mexico. The Company is in the process of idling approximately 65,000 square feet of this facility. As of December 31, 2002, approximately 50,000 square feet has been idled and is available for sublease. The lease expires in April 2008 and the Company has two five-year extension options.

The Company has substantially completed its plans to consolidate the Company's manufacturing operations into fewer plants in fewer locations in an effort to reduce costs. See "Business-General" and "Business-Competition-Golf."

Item 3. Legal Proceedings.

The Company is a party to legal actions arising in the ordinary course of business, none of which, individually or in the aggregate, in the opinion of management, after consultation with counsel, will have a material adverse effect on the business or financial condition of the Company.

Item 4. Submission of Matters to a Vote of Security Holders.

Not Applicable.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Principal Market and Prices

The common stock of the Company was listed on the New York Stock Exchange (NYSE) under the symbol PAR until September 20, 2002 at which time the Company was delisted because the Company had fallen below the NYSE's minimum equity and capitalization standards. Beginning September 23, 2002, the common stock of the Company is listed on the Over-the-Counter Bulletin Board (OTCBB) under the symbol COCA. The following table sets forth the high and low sales prices per share for the common stock of the Company as reported by the NYSE and the OTCBB.

Fiscal Year		High		Low
2002
	First Quarter	$	6.25	$	4.10
	Second Quarter		4.59		2.08
	Third Quarter		2.55		1.50
	Fourth Quarter		2.27		1.80
2001
	First Quarter		17.63		10.50
	Second Quarter		10.95		7.00
	Third Quarter		8.00		4.25
	Fourth Quarter		6.90		4.00

The approximate number of record holders of common stock of the Company as of March 21, 2003 was 121.

Dividends

On October 27, 2000, the Board of Directors of the Company declared an extraordinary dividend of $5.00 per share to shareholders of record on December 19, 2000, and paid a total of $38.2 million to such shareholders on January 9, 2001. On April 27, 2001, the Board of Directors declared a cash dividend of $0.26 per share of common stock, paid on May 25, 2001 to shareholders of record as of May 4, 2001. No cash dividend was declared for the year ended December 31, 2002. The amount of future dividends, if any, will depend upon the Company's financial position, results of operations and the needs of the business.

Stock Repurchase

In December 1999, the Board of Directors authorized the repurchase of up to one million shares of Coastcast common stock from time to time in the open market or negotiated transactions. The Company has repurchased a total of 252,158 shares pursuant to this authorization. No shares were purchased during the year ended December 31, 2002.

Equity Compensation Plan Information

The following table gives information about the Company's common stock that may be issued upon the exercise of options, warrants and rights under all of the Company's equity compensation plans as of December 31, 2002. The table includes the following plans (1996 Amended and Restated

Employee Stock Option Plan, 1995 Amended and Restated Non-Employee Director Stock Option Plan and 2001 Non-Employee Director Stock Option Plan):

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities related in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders (1)	819,258	$	10.65	40,000
Equity compensation plans not approved by security holders (2)	30,000		22.25	—

Total	849,258	$	11.06	40,000

(1): Consists of 1996 Employee Stock Option Plan, 1995 Non-Employee Director Stock Option Plan and 2001 Non-Employee Director Stock Option Plan. No shares were available for future issuance under the 1996 Employee Stock Option Plan and 1995 Non-Employee Director Stock Option Plan.
(2): Consists of options granted in April 1996 to a non-employee and expires in April 2006.

Item 6. Selected Financial Data.

The following selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere herein.

		Years Ended December 31,
		2002			2001			2000		1999		1998
		(in thousands, except per share data)
Consolidated Statement of Operating Data:
	Sales	$	62,446		$	115,480		$	141,371	$	120,383	$	144,560
	Gross profit		1,907			3,214			18,621		21,773		22,365
	(Loss) income from operations		(10,616	)		(3,586	)		11,969		14,355		11,971
(Loss) Income from Continuing Operations Data:
	(Loss) income before income taxes		(10,477	)		(3,190	)		14,652		16,101		13,504
	Provision (benefit) for income taxes		83			(900	)		5,903		6,582		5,672
	(Loss) income from continuing operations		(10,560	)		(2,290	)		8,749		9,519		7,832
(Loss) Income from Continuing Operations Per Share
	Basic	$	(1.38	)	$	(0.30	)	$	1.15	$	1.21	$	0.91

(Loss) Income from Continuing Operations Per Share
	Diluted	$	(1.38	)	$	(0.30	)	$	1.12	$	1.20	$	0.89

Dividend Per Share		$	0.00		$	0.26		$	5.00	$	0.00	$	0.00

Weighted Average Shares Outstanding—Basic			7,635			7,661			7,613		7,892		8,638

Weighted Average Shares Outstanding—Diluted			7,635			7,661			7,795		7,924		8,837

		As of December 31,
		2002		2001		2000		1999		1998
		(in thousands)
Consolidated Balance Sheet Data:
	Working capital, excluding assets held for sale	$	23,477	$	24,953	$	27,640	$	57,755	$	46,717
	Total assets		44,249		57,431		99,350		92,316		83,673
	Long-term liabilities		1,817		1,629		828		541		295
	Shareholders' equity		37,309		48,255		52,739		83,290		77,142

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Results of Operations

The following table sets forth for the periods indicated operating results expressed in thousands of dollars and as a percentage of sales.

	Years Ended December 31,
	2002					2001					2000
	Amount			Percent		Amount			Percent		Amount		Percent
Sales	$	62,446		100.0		$	115,480		100.0		$	141,371	100.0
Cost of sales		60,539		96.9			112,266		97.2			122,750	86.8
Gross profit		1,907		3.1			3,214		2.8			18,621	13.2
Selling, general and administrative		5,211		8.4			6,800		5.9			6,652	4.7
Impairment of fixed assets		3,745		6.0			—		0.0			—	0.0
Restructuring charges		3,567		5.7			—		0.0			—	0.0
(Loss) income from continuing operations		(10,616	)	(17.0	)		(3,586	)	(3.1	)		11,969	8.5
Other income, net		139		0.2			396		0.3			2,683	1.9
(Loss) income from continuing operations before income taxes		(10,477	)	(16.8	)		(3,190	)	(2.8	)		14,652	10.4

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Sales decreased $53.1 million, or 46%, to $62.4 million for 2002 from $115.5 million for 2001. The decrease in sales was mainly due to a 49% decrease in golf clubhead sales. Golf clubhead unit sales decreased 28% coupled with a decrease in average selling price of 21%. The Company believes that this decrease in sales of clubheads resulted substantially from loss of market share to Chinese competitors which are able to offer lower prices because of their lower labor costs. Titanium clubhead sales represented 36% and 57% of total sales for 2002 and 2001, respectively. Sales to Callaway Golf Company were $29.1 million and $58.1 million in 2002 and 2001, respectively, representing 47% and 50% of total sales for 2002 and 2001, respectively. There is no assurance that sales to Callaway will represent similar percentages of total sales in the future. Sales of non-golf products decreased 18% mainly due to a decline in medical sales.

Gross profit decreased $1.3 million, or 41%, to $1.9 million for 2002 from $3.2 million for 2001. The gross profit margin was flat at 3% for both 2002 and 2001. The low gross margin in 2002 was mainly due to the significant decrease in sales and a shift in mix to proportionally more lower margin steel iron clubheads vs higher margin titanium golf clubheads. This compares to the low gross margin in 2001 which was due to decreased sales and increased costs, high titanium scrap rates in the first half of 2001, costs associated with the cessation of the aluminum compressor wheels operation and the abandonment of one of four facilities in Mexicali, Mexico. The significant decrease in sales for third and fourth quarter of 2002 in comparison to the first and second quarter of 2002 coupled with the shift in mix to lower margin steel iron clubheads and the development of new products for a new customer in the fourth quarter negatively impacted the gross margins for the third and fourth quarter of 2002 resulting in a gross loss for the third and fourth quarter of 2002 of $.3 million and $2.5 million, respectively.

Selling, general and administrative expenses decreased $1.6 million or 24%, to $5.2 million for 2002 from $6.8 million for 2001. The decrease in expense was mainly due to decrease in payroll and related benefits and the curtailment of the Company's supplemental executive retirement plan.

decreased the space used by its Tijuana operations. As a result, certain assets were written down to estimated fair value, designated as "Held for Sale" or abandoned. One of the closed facilities located in Gardena, California manufactured titanium golf clubheads. The Company still has the capability to produce titanium golf clubheads at its facility in Rancho Dominguez, California.

Impairment of Fixed Assets—The Company specifically identified fixed assets which were not in use and expected to be disposed of or held for sale. For the year ended December 31, 2002, the Company recorded impairment charges of $3.7 million, representing the difference between the carrying value of the assets and their estimated fair value less cost to sell in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Impairment or Disposal of Long Lived Assets" was effective January 1, 2002. Most of these assets were excess machinery and equipment resulting from the closing of the Gardena facility and two facilities in Mexicali, Mexico and the idling of approximately 65,000 square feet of the Tijuana facility.

Assets Held for Sale—As of December 31, 2002, the Company classified $5.2 million as assets held for sale from property, plant and equipment in accordance with SFAS No. 144. These assets are mainly the land and buildings of the Gardena facility and other fixed assets, primarily machinery and equipment, not in use and available for immediate sale. In August 2002, the Gardena facility was listed with a real estate agent. The other fixed assets held for sale are expected to be sold at auction in May 2003. The assets held for sale are stated at the lower of their carrying amount or estimated fair value less the estimated cost to sell. In accordance with the requirements of SFAS No. 144, the consolidated balance sheet as of December 31, 2001 has been restated to reclassify the assets held for sale for comparative purposes, at the carrying value of such assets as of that date.

Restructuring Charges—For the year ended December 31, 2002, restructuring charges totaled $3.6 million representing employee severance charges of $2.6 million and a charge for the estimated lease obligation, net of estimated sublease income, from the expected idling of approximately 65,000 square feet of the Tijuana, Mexico facility of $1.0 million. The Company involuntarily terminated 1,405 and 86 employees in the Company's facilities in Mexico and California, respectively. As of December 31, 2002, the accrued lease reserve for the Tijuana facility was approximately $1.0 million and the remaining severance accrual is not material.

Mexicali Leases—In December 2001, the Company decided to abandon one of the Company's four leased facilities in Mexicali, Mexico. An accrual of $.4 million representing the estimated total lease obligation, net of estimated sublease income, was recorded as of December 31, 2001. During the third quarter of 2002, the landlord agreed to cancel this lease commitment and the remaining lease commitment on one other facility in Mexicali, Mexico. In exchange, the Company entered into an agreement with the same landlord to extend the leases on the two other facilities through December 31, 2007. The remaining accrual of $.2 million was considered a lease incentive, which will be offset against future rent expense for these facilities, on a straight-line basis, over the life of the new leases.

CPAC Operations—In December 2001, the Company ceased the operations of its subsidiary, California Precision Aluminum Castings, Inc. ("CPAC"), which manufactured aluminum compressor wheels for automotive applications. An accrual of $.8 million for various exit activities was recorded as of December 31, 2001. During 2002, the Company used $.7 million of the initial accrual for the purpose intended and reversed $.1 million of the accrual mainly due to cash receipts on the equipment sale exceeding estimates. As of December 31, 2002, there was no remaining accrual.

The Company has substantially completed the current plan of consolidation and downsizing.

A full valuation allowance against the deferred tax asset balance of $3.8 million was charged to the provision for income taxes for the year ended December 31, 2002, representing the deferred tax asset

balance at the beginning of the year and the increase in the deferred tax asset for the year ended December 31, 2002.

The effective tax rate for 2002 was 35.9%, excluding the valuation allowance on the deferred tax assets, compared to 28.2% for 2001. The increase in effective tax rate was mainly due to permanent tax differences in Mexico and no goodwill amortization in fiscal 2002.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Sales decreased $25.9 million, or 18%, to $115.5 million for 2001 from $141.4 million for 2000. The decrease in sales was mainly due to a 40% decrease in sales of steel clubheads. The Company believes that this decrease in sales of steel clubheads resulted partly from loss of market share to Chinese competitors which are able to offer lower prices because of their lower labor costs. Titanium clubhead sales represented 57% and 45% of total sales for 2001 and 2000, respectively. Sales to Callaway Golf Company represented 50% of total sales for both 2001 and 2000. There is no assurance that sales to Callaway will represent similar percentages of total sales in the future.

Gross profit decreased $15.4 million, or 83%, to $3.2 million for 2001 from $18.6 million for 2000. The gross profit margin decreased to 3% in 2001 from 13% in 2000. The decrease in gross margin was mainly due to the decrease in sales of steel clubheads and increased costs, and high titanium clubhead scrap rates in the first half of 2001. In addition, gross margins were impacted by costs associated with the cessation of the aluminum compressor wheels operation and the abandonment of one of our four facilities in Mexicali, Mexico.

Non-operating income decreased $2.3 million, to $0.4 million for 2001 from $2.7 million in 2000. The decrease was due to lower cash and cash equivalent balances, coupled with lower interest rates, in 2001 compared to 2000.

The effective tax rate for 2001 was 28.2% compared to 40.3% for 2000. The decrease in effective tax rate was mainly due to non-deductible expenses for Mexico and non-deductible goodwill amortization in the U.S.

Critical Accounting Policies

The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgements of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates.

Fixed Asset Impairment—The Company specifically identified fixed assets which were not in use and expected to be disposed of or held for sale. For the year ended December 31, 2002, the Company recorded impairment charges of $3.7 million, representing the difference between the carrying value of the assets and their estimated fair value.

In deriving the impairment of fixed assets charge, estimates were made to determine the fair value. The Company obtained information from equipment brokers, auction houses and other third parties. The fair value of the fixed assets was reduced by the estimated cost to sell. No impairment charge was recorded for the listing for sale of the Gardena land and buildings since the carrying value was less than the estimated fair value based on sales of comparative properties for the area provided by the Company's real estate agent less cost to sell. Economic conditions may impact the value the Company receives on the sale of the equipment and land and buildings. The Company's ability to sell such fixed assets is based on market conditions and actual proceeds received could be higher or lower than the current estimated fair value which will affect the Company's impairment charge.

Accrued lease reserve—As of December 31, 2002, the Company accrued a lease reserve of approximately $1.0 million relating to the Tijuana facility representing the estimated lease obligation, net of the Company's best estimate of the future sublease income it expects to receive, resulting from the expected idling of approximately 65,000 square feet of the Tijuana, Mexico facility.

In calculating the reserve related to the Tijuana lease commitment, certain estimates were made including time to vacate a portion of the facility and sublease terms. In developing these estimates, the Company obtained information from its landlord and other third parties to estimate the anticipated third party sublease income. Market conditions will affect the Company's ability to sublease the available portion of the facility on terms consistent with its estimates. The Company's ability to vacate the portion of the facility and sublease the available space in accordance with its plan, or the negotiation of lease terms resulting in higher or lower sublease income than estimated, will affect the Company's accrual and the related restructuring charge.

Deferred Income Taxes—Deferred income taxes are recognized based on differences between the financial statement and the tax bases of assets and liabilities using presently enacted tax rates. The deferred tax asset balance is evaluated and reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets may not be realized. During the second quarter, the Company evaluated the need for a valuation allowance and determined that it was more likely than not that such assets would not be realized in the near future and, accordingly a valuation allowance was recorded equal to the balance of the deferred income taxes as of that date. Subsequent movements in the underlying gross deferred tax assets will change the valuation allowance recorded and as of December 31, 2002, the valuation allowance is equal to the deferred tax asset balance of $3.8 million. Due to uncertain economic conditions and the competitive environment, at this time, the Company is assuming that it will not be able to generate sufficient taxable income in the near future to realize the deferred tax asset. Should the Company determine that it will be able to realize all or part of this deferred tax asset in the future, the Company will reverse a portion or all of the valuation allowance and credit income tax expense in that period.

Revenue recognition—The Company recognizes revenue when the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. Generally, these criteria are met at the time products are shipped.

Inventories—The Company values inventories at the lower of cost (determined on a first-in, first-out basis) or market. In determining cost, the Company considers idle facility expense to be a period charge rather than as a component of the inventory cost. Inventory is written off when it is considered inactive (or it is more likely than not that such inventory will not be sold). During 2002, the Company was able to sell inventory, which had previously been written off at its partially completed cost during fiscal year 2001, for a sales equivalent estimated value of approximately $.5 million. Such an event is believed to be unusual and is not expected to occur to this level in the future.

Liquidity and Capital Resources

The Company's cash and cash equivalents position at December 31, 2002 was $15.7 million compared to $13.2 million on December 31, 2001, a increase of $2.5 million. Net cash provided by operating activities was $3.9 million for the year ended December 31, 2002. Depreciation and amortization of $3.8 million, and a decrease in receivables and inventories of $3.5 million and $4.1 million, respectively, impairment of fixed assets of $3.7 million and deferred tax assets of $2.6 million partially offset by the net loss of $10.6 million, an increase in prepaid expenses and other current assets of $1.5 million and a decrease in accounts payable and accrued liabilities of $2.0 million. Cash used in investing activities of $1.4 million consists primarily of $1.8 million of capital expenditures partially offset by proceeds from sale of fixed assets of $0.3 million.

The Company has a defined benefit plan covering 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 connection with the closing of the Company's Gardena facility during the third quarter of 2002, almost all of the employees represented by the union have been terminated. As a result, the plan is considered partially terminated and pension curtailment accounting adjustments have been reflected in income and in other comprehensive income for the year ended December 31, 2002. In addition, the board of directors approved an amendment to the plan to cease future plan benefit accruals, effective October 1, 2002.

The discount rate used for determining future pension obligation is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis has decreased from 7% at September 30, 2001 to 6¹/2% at September 30, 2002. As of December 31, 2002, the actuarially computed projected benefit obligation was $2.9 million.

The expected long term rate of return on plan assets was 6¹/2% per year beginning September 30, 2002. The determination of the long term rate of return was based on an asset allocation of up to a maximum of 75% of the portfolio in equities and the balance in fixed income or cash equivalents, softness in the equity markets over the past two years, consultation with our actuary and investment manager. The fair value of the plan assets at December 31, 2002 was $1.9 million.

The result is a pension obligation of $1.0 million. The Company's funding policy is to contribute the minimum required contribution as determined by the Company's outside independent actuary. The Company expects to fund, out of its cash position, $.4 million in contributions to the plan during the fiscal year ended December 31, 2003.

The Company has operating lease commitments arising in the ordinary course of business (see Note 10). As of December 31, 2002, the total gross operating lease commitments are $7.9 million: 2003—$1.2 million, 2004—$1.3 million, 2005—$1.5 million, 2006 and 2007—$1.6 million, and 2008 and thereafter—$.7 million. As of December 31, 2002, the Company has non-cancelable commitments to purchase raw materials totaling $.8 million.

The Company has no long term debt. In response to declining sales, the Company reduced its workforce and has taken other steps in an effort to maintain its current cash position and to improve the financial outlook based on lower sales. The Company plans to use its current cash position and cash flow from operations to meet its current financing requirements.

Quarterly Information and Seasonality

Set forth below is certain unaudited quarterly financial information. The Company believes that all other necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with accounting principles generally accepted

in the United States of America, the selected quarterly information when read in conjunction with the consolidated financial statements included elsewhere herein.

		Year Ended December 31, 2002											Year Ended December 31, 2001
		1^st Quarter		2^nd Quarter			3^rd Quarter			4^th Quarter			1^st Quarter			2^nd Quarter			3^rd Quarter		4^th Quarter
		(in thousands, except per share data)
Sales		$	21,956	$	19,945		$	12,436		$	8,109		$	27,303		$	32,184		$	31,197	$	24,796
Gross profit (loss)			2,892		1,773			(281	)		(2,477	)		527			1,636			3,255		(2,204	)
(Loss) income before taxes			1,323		(2,783	)		(5,400	)		(3,617	)		(1,132	)		(140	)		1,713		(3,631	)
(Benefit) provision for income taxes			600		1,360			(785	)		(1,092	)		(475	)		192			525		(1,142	)
Net (loss) income			723		(4,143	)		(4,615	)		(2,525	)		(657	)		(332	)		1,188		(2,489	)
Net (loss) income per share—
	Basic		.09		(.54	)		(.60	)		(.33	)		(.09	)		(.04	)		.16		(.33	)
Net (loss) income per share—
	Diluted		.09		(.54	)		(.60	)		(.33	)		(.09	)		(.04	)		.16		(.33	)

The significant decrease in sales for third and fourth quarter of 2002 in comparison to the first and second quarter of 2002 coupled with the shift in mix to lower margin steel iron clubheads and the development of new products for a new customer in the fourth quarter negatively impacted the gross margins for the third and fourth quarter of 2002 resulting in a gross loss for the third and fourth quarter of 2002 of $.3 million and $2.5 million, respectively.

The Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment. The Company's operating results have been impacted by seasonal demand for golf clubs, which generally results in higher sales during the six month period that include the second and third quarters. The timing of large new product orders from customers and fluctuations in demand due to a sudden increase or decrease in popularity of specific golf clubs have contributed to quarterly or other periodic fluctuations. No assurances can be given, however, that these factors will mitigate the impact of seasonality.

Backlog

As of December 31, 2002, the Company had a backlog of approximately $7.7 million as compared to a backlog of approximately $15.1 million as of December 31, 2001. The Company believes that its current backlog is scheduled to be shipped in the ensuing four months. Although many of the Company's customers release purchase orders months prior to the requested delivery date, these orders are generally cancelable without penalty provided that no production has commenced. If production has commenced, an order is cancelable upon payment of the cost of production. Historically, the Company's backlog generally has been the highest in the second and third quarters due principally to seasonal factors. Backlog is not necessarily indicative of future operating results.

Forward Looking Information

This report and other reports of the Company contain or may contain certain forward-looking statements and information that are based on beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions as they relate to the Company or the Company's management, are used to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by the Company, the costs of product development and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the

text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors, and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk.

The Company has investments and pension plan assets which are subject to market risk.

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 15 of Part IV of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this Item with respect to directors is incorporated herein by reference to the information contained under the caption "Nomination and Election of Directors" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 12, 2003, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2002.

Information with respect to executive officers is as follows:

Name	Age	Position
Hans H. Buehler	70	Chairman of the Board and Chief Executive Officer
Fernando J. Diaz	42	Senior Vice President, Mexico Operations
Norman Fujitaki	48	Chief Financial Officer and Secretary
Bryan Rolfe	50	Vice President, Sales and Marketing
Todd L. Smith	39	Executive Vice President, Operations

Mr. Buehler is one of the founders of the Company and has been Chairman of the Board since the Company's inception in 1980. Prior to founding the Company, he was President of the Rex Precision Products Division of Alco Standard Corporation, a competitor of the Company that was acquired by the Company in 1987. Mr. Buehler has more than 40 years of experience in the investment-casting business, including more than 30 years of experience in the manufacture of golf clubheads.

Mr. Diaz joined the Company in March 2001 as the General Manager—Mexicali facility. Mr. Diaz was promoted to Senior Vice President—Mexico Operations in January 2002. From 1995 to February 2001, Mr. Diaz worked in various management positions for a subsidiary of Robertshaw Controls Corp. in Mexicali, Mexico, culminating as the plant manager from 1997 to February 2001.

Mr. Fujitaki joined the Company in 1994. He has served as Chief Financial Officer since April 1999. From 1994 to March 1999, he served as Corporate Controller. He previously was employed

at Neutrogena Corporation, a manufacturer and marketer of skin and hair care products, for which he served as Corporate Controller from September 1988.

Mr. Rolfe joined the Company in July 1998. From 1997 to June 1998, he was a consultant and President of Slotline Golf Company. From 1995 to 1997, he was the President and Chief Operating Officer of Cleveland Golf Company. Mr. Rolfe worked 20 years at Salomon North America in a variety of management positions, including Director of Operations and Finance from 1991 to 1995.

Mr. Smith joined the Company in 1981. In February 2000, he was promoted to Executive Vice President—Operations. From July 1999 to January 2000, he was the Vice President—Operations. Prior to this time, he served the Company in various management capacities in both the manufacturing and administrative areas. Mr. Smith is the son of Hans H. Buehler.

Each officer serves at the pleasure of the Board of Directors of the Company.

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 12, 2003, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2002.

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 12, 2003, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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 12, 2003, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2002.

Item 13. Certain Relationships and Related Transactions.

The information required by this Item is incorporated herein by reference to the information contained under the caption "Certain Transactions" in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on June 12, 2003, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2002.

Item 14. Controls and Procedures.

The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of the Company's published financial statements and other disclosures included in this report. Within the 90-day period prior to the date of this report, the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14(c) and 15d-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the Securities and Exchange Commission within the required time periods.

Since the date of the most recent evaluation of the Company's internal controls by the Chief Executive Officer and Chief Financial Officer, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART IV

Item 15. 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

None.

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 26, 2003		COASTCAST CORPORATION
		By:		/s/ HANS H. BUEHLER Hans H. Buehler, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 26, 2003.

Signature		Title

/s/ HANS H. BUEHLER Hans H. Buehler		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ NORMAN FUJITAKI Norman Fujitaki		Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
/s/ ROBERT H. GOON Robert H. Goon		Director
/s/ EDWIN A. LEVY Edwin A. Levy		Director
/s/ GARY V. MELONI Gary V. Meloni		Director
/s/ LEE E. MIKLES Lee E. Mikles		Director
/s/ PAUL A. NOVELLY Paul A. Novelly		Director
/s/ LUANN G. SMITH Luann G. Smith		Director

CERTIFICATION

I, Hans H. Buehler, Chief Executive Officer of Coastcast Corporation, certify that:

1.

I have reviewed this annual report on Form 10-K of Coastcast Corporation;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c): presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ HANS H. BUEHLER

Hans H. Buehler
Chief Executive Officer

CERTIFICATION

I, Norman Fujitaki, Chief Financial Officer of Coastcast Corporation, certify that:

1.

I have reviewed this annual report on Form 10-K of Coastcast Corporation;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c): presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ NORMAN FUJITAKI

Norman Fujitaki
Chief Financial Officer

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

		Page Number
*Consolidated Financial Statements*
Independent Auditors' Report		26
Consolidated Balance Sheets as of December 31, 2002 and 2001		27
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000		28
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000		29
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000		30
Notes to Consolidated Financial Statements		31
*Schedule*
Independent Auditors' Report		46
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000		47

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Coastcast Corporation:

We have audited the accompanying consolidated balance sheets of Coastcast Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
February 28, 2003

COASTCAST CORPORATION

CONSOLIDATED BALANCE SHEETS

				December 31,
				2002			2001
A S S E T S
Current assets:
	Cash and cash equivalents			$	15,727,000		$	13,248,000
	Trade accounts receivable, net of allowance for doubtful accounts of $125,000 and $200,000 at December 31, 2002 and 2001, respectively (Note 1)				3,805,000			7,293,000
	Inventories (Note 2)				5,193,000			9,319,000
	Prepaid income taxes				2,788,000			951,000
	Prepaid expenses and other current assets				1,087,000			1,425,000
	Deferred income taxes (Note 8)				—			264,000
	Assets held for sale (Note 4)				5,178,000			7,437,000

		Total current assets			33,778,000			39,937,000
Property, plant and equipment, net (Note 3 and 4)					9,216,000			13,690,000
Deferred income taxes (Note 8)					—			2,346,000
Investments (Note 5)					948,000			981,000
Other assets					307,000			477,000

				$	44,249,000		$	57,431,000

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	1,812,000		$	3,196,000
	Accrued liabilities (Note 6)				3,311,000			4,351,000

		Total current liabilities			5,123,000			7,547,000
	Deferred compensation (Note 7)				1,014,000			1,097,000
	Pension liability (Note 7)				803,000			532,000

		Total liabilities			6,940,000			9,176,000
Commitments and contingencies (Notes 10)
Shareholders' equity (Notes 9 and 11):
		Series A Preferred stock, no par value, 200,000 shares authorized;
			None issued and outstanding
		Preferred stock, no par value, 1,800,000 shares authorized;
			None issued and outstanding
		Common stock, no par value, 20,000,000 shares authorized; 7,635,042 shares issued and outstanding as of December 31, 2002 and 2001			26,068,000			26,067,000
		Retained earnings			11,875,000			22,435,000
		Accumulated other comprehensive loss			(634,000	)		(247,000	)

			Total shareholders' equity		37,309,000			48,255,000

				$	44,249,000		$	57,431,000

See accompanying notes to consolidated financial statements.

COASTCAST CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2002			2001			2000
Sales (Note 13)	$	62,446,000		$	115,480,000		$	141,371,000
Cost of sales		60,539,000			112,266,000			122,750,000

Gross profit		1,907,000			3,214,000			18,621,000
Selling, general and administrative		5,211,000			6,800,000			6,652,000
Impairment of fixed assets (Note 4)		3,745,000			—			—
Restructuring charges (Note 4)		3,567,000			—			—

(Loss) income from operations		(10,616,000	)		(3,586,000	)		11,969,000
Other income, net		139,000			396,000			2,683,000

(Loss) income before income taxes		(10,477,000	)		(3,190,000	)		14,652,000
Provision (benefit) for income taxes (Note 8)		83,000			(900,000	)		5,903,000

Net (loss) income	$	(10,560,000	)	$	(2,290,000	)	$	8,749,000

NET (LOSS) INCOME PER SHARE (Note 12)
Net (loss) income per share—basic	$	(1.38	)	$	(0.30	)	$	1.15

Weighted average shares outstanding		7,635,042			7,661,496			7,613,357

Net (loss) income per share—diluted	$	(1.38	)	$	(0.30	)	$	1.12

Diluted weighted average shares outstanding		7,635,042			7,661,496			7,794,854

See accompanying notes to consolidated financial statements.

COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000

		Common Stock
		Common Stock								Accumulated Other Comprehensive Income (Loss)
		Number of Shares		Amount			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			Comprehensive Income (Loss)
BALANCE AT JANUARY 1, 2000		7,701,571		$	26,964,000		$	56,352,000		$	(26,000	)	$	83,290,000		$	—
	Stock options exercised, including related income tax benefit (Note 11)	315,856			4,426,000									4,426,000
	Repurchase of common stock	(375,658	)		(5,543,000	)								(5,543,000	)
	Unrealized gain on investments, net of income tax expense of $19,000										26,000			26,000			26,000
	Cash dividend declared							(38,209,000	)					(38,209,000	)
	Net income							8,749,000						8,749,000			8,749,000

BALANCE AT DECEMBER 31, 2000		7,641,769			25,847,000			26,892,000			—			52,739,000		$	8,775,000

	Stock options exercised, including related income tax benefit (Note 11)	34,273			443,000									443,000
	Repurchase of common stock	(41,000	)		(223,000	)								(223,000	)
	Unrealized gain on investments, net of income tax expense of $1,000										1,000			1,000		$	1,000
	Minimum pension liability adjustment, net of income tax benefit of $176,000										(248,000	)		(248,000	)		(248,000	)
	Cash dividend declared							(2,167,000	)					(2,167,000	)
	Net loss							(2,290,000	)					(2,290,000	)		(2,290,000	)

BALANCE AT DECEMBER 31, 2001		7,635,042			26,067,000			22,435,000			(247,000	)		48,255,000		$	(2,537,000	)

	Unrealized loss on investments										(8,000	)		(8,000	)	$	(8,000	)
	Minimum pension liability adjustment										(379,000	)		(379,000	)		(379,000	)
	Income tax benefit adjustment on stock options exercised during fiscal 2001				1,000									1,000
	Net loss							(10,560,000	)					(10,560,000	)		(10,560,000	)

BALANCE AT DECEMBER 31, 2002		7,635,042		$	26,068,000		$	11,875,000		$	(634,000	)	$	37,309,000		$	(10,947,000	)

See accompanying notes to consolidated financial statements.

COASTCAST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

					Years Ended December 31,
					2002			2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net (loss) income				$	(10,560,000	)	$	(2,290,000	)	$	8,749,000
	Adjustments to reconcile net (loss) income to net cash provided by operating activities:
		Depreciation and amortization				3,848,000			4,347,000			4,428,000
		Goodwill amortization and impairment				—			231,000			28,000
		Loss on disposal of machinery and equipment				35,000			487,000			21,000
		Impairment of fixed assets				3,745,000			—			—
		Loss (gain) on investments				28,000			(6,000	)		50,000
		Deferred compensation				(83,000	)		269,000			287,000
		Pension liability				172,000			99,000			—
		Deferred income taxes				2,610,000			(585,000	)		(144,000	)
		Changes in operating assets and liabilities:
			Trade accounts receivable, net			3,488,000			5,000			1,881,000
			Inventories			4,126,000			219,000			1,521,000
			Prepaid expenses and other current assets			(1,499,000	)		1,154,000			(1,573,000	)
			Accounts payable and accrued liabilities			(2,005,000	)		(126,000	)		(911,000	)

				Net cash provided by operating activities		3,905,000			3,804,000			14,337,000

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property, plant and equipment					(1,790,000	)		(3,589,000	)		(3,735,000	)
	Proceeds from disposal of machinery and equipment					77,000			1,062,000			22,000
	Proceeds from assets held for sale/impaired assets					226,000			—			—
	Purchase of investments					(187,000	)		(1,010,000	)		(794,000	)
	Proceeds from sales/maturities of investments					184,000			989,000			742,000
	Other assets					63,000			(20,000	)		(27,000	)

				Net cash used in investing activities		(1,427,000	)		(2,568,000	)		(3,792,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock upon exercise of options, net of tax benefit					1,000			443,000			4,426,000
	Dividends paid					—			(40,376,000	)		—
	Repurchase of common stock					—			(223,000	)		(5,543,000	)

				Net cash provided by (used in) financing activities		1,000			(40,156,000	)		(1,117,000	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						2,479,000			(38,920,000	)		9,428,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR						13,248,000			52,168,000			42,740,000

CASH AND CASH EQUIVALENTS AT END OF YEAR					$	15,727,000		$	13,248,000		$	52,168,000

SUPPLEMENTAL CASH FLOW INFORMATION:
	Cash refunded during year for income taxes				$	1,420,000		$	2,467,000		$	—

	Cash paid during year for income taxes				$	730,000		$	998,000		$	7,234,000

NON-CASH INVESTING AND FINANCING ACTIVITIES:
	Cash dividend declared				$	—		$	—		$	38,209,000

See accompanying notes to consolidated financial statements.

COASTCAST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Coastcast Corporation (the "Company") and its wholly owned subsidiaries. All material intercompany transactions have been eliminated in consolidation.

Organization and Operations—Coastcast Corporation is incorporated under the laws of the State of California. The Company's principal business is the production of investment-cast golf clubheads, precision investment castings and related engineering for the medical and other commercial and industrial product industries. The Company sells its products to customers of varying strength and financial resources, principally located in the United States. The Company has two wholly-owned operating subsidiaries, incorporated under the laws of the Mexican maquiladora program and their principal activities are the production of golf clubheads.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition—Revenue is recognized when goods are shipped and title has transferred 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. The Company's top two customers represented 46% and 77% of the accounts receivable balance as of December 31, 2002 and 2001, respectively. See also Note 13.

Inventories—The Company values inventories at the lower of cost (determined on a first-in, first-out basis) or market. In determining cost, the Company considers idle facility expense to be a period charge rather than as a component of the inventory cost. Inventory is written off when it is considered inactive (or it is more likely than not that such inventory will not be sold).

Property, Plant and Equipment—Property, plant and equipment are stated at cost. Depreciation and amortization are provided using primarily the straight-line method over the estimated useful lives of the related assets as follows:

Leasehold improvements		5-10 years
Machinery and equipment		5-7 years
Transportation		5-7 years
Furniture, fixtures and computers		3-7 years

Impairment of Long-Lived Assets—Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses accounting and reporting for all long-lived tangible assets that are either held and used or disposed of through sale or other means. 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 or when an asset will no longer be used. 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. In connection with its plan of restructuring, the Company recorded $3,745,000 in impairment charges. See Note 4.

Investments—The Company classifies its marketable securities as available-for-sale. The assets are held in a rabbi trust designated to fund the Company's long term obligation related to its Supplemental Executive Retirement Plan ("SERP") and the assets are therefore also classified as long term. As such assets are subject to the claims of general creditors, they are not considered plan assets of the SERP. The securities held in the rabbi trust consist of cash and cash equivalents and equity securities of publicly traded companies. Such securities are stated at fair value based on quoted market prices. Unrealized gains or losses on fixed-maturity investments and equity securities are included in accumulated other comprehensive income (loss). Interest and dividend income, and gains and losses on sales of investments (computed on the specific identification method) are reflected as a component of other income, net. The Company evaluates the securities for other-than-temporary impairments based on analysis and discussion with its outside investment manager. No such losses were recorded for the year ended December 31, 2002.

Income Taxes—Deferred income taxes are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. Classification of deferred tax assets and liabilities corresponds with the classification of the underlying assets and liabilities which give rise to the temporary differences, or the period of expected reversal, as applicable. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2002, the valuation allowance was $3,844,000 (see Note 8).

Earnings Per Share—Basic net (loss) income per share is based on the weighted average number of shares of common stock outstanding. Diluted net (loss) income per share is based on the weighted average number of shares of common stock outstanding and dilutive potential common shares from stock options (using the treasury stock method).

Fair Value of Financial Instruments—The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments.

Share-Based Compensation—As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company continues to account for its stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and its related interpretations. However, SFAS No. 123 requires the disclosure of the effect on operating results had the Company adopted the fair value method. On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Furthermore, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company has elected not to implement this voluntary change for the year ended December 31, 2002. This statement did not have any impact on the consolidated financial statements as the Company has adopted the "disclosure only" provisions of SFAS No. 123. See proforma application of SFAS No. 123 in Note 11. The additional interim disclosure requirements will be reflected in the Company's prospective interim financial reports.

The Company recognizes compensation expense on options granted with exercise prices greater than the market value of the shares on the date of grant. No compensation costs were recorded in the years ended December 31, 2002, 2001 and 2000, respectively.

Reclassification—Certain amounts in 2001 have been reclassified to conform to the 2002 presentation.

Recent Accounting Pronouncements—SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and other indefinite lived intangible assets will no longer be amortized but must be tested for impairment at least annually. This statement became effective in January 2002 and did not have any impact on the Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation clarifies the requirements of a guarantor in accounting for and disclosing certain guarantees issued and outstanding. This interpretation is effective for fiscal years ending after December 15, 2002. The Company does not expect the adoption of this interpretation to have a material impact on the Company's financial position or results of operations.

SFAS No. 143, "Accounting for Asset Retirement Obligations," which becomes effective for the Company on January 1, 2003, addresses the obligations and asset retirement costs associated with the retirement of tangible long-lived assets. It requires that the fair value of the liability for an asset retirement obligation be recorded when incurred instead of over the life of the asset. The asset retirement costs must be capitalized as part of the carrying value of the long-lived asset. If the liability is settled for an amount other than the recorded balance, either a gain or loss will be recognized at settlement. The Company is evaluating, but has not yet determined the impact of the adoption of this standard on its financial position or results of operations.

On July 30, 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS no. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not believe the adoption of this statement will have a material impact on its financial position or results of operations.

2. INVENTORIES

Inventories consist of the following:

	December 31,
	2002		2001
Raw materials and supplies	$	2,961,000	$	4,587,000
Tooling		73,000		245,000
Work-in-process		1,881,000		4,080,000
Finished goods		278,000		407,000

	$	5,193,000	$	9,319,000

Included above are costs incurred for the production of tooling which is subsequently sold to customers upon acceptance of the first production unit.

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	December 31,
	2002		2001
Leasehold improvements	$	6,537,000	$	6,873,000
Machinery and equipment		20,008,000		23,430,000
Transportation		963,000		1,197,000
Furniture, fixtures and computers		2,488,000		2,855,000

		29,996,000		34,355,000
Less: Accumulated depreciation and amortization		20,780,000		20,665,000

	$	9,216,000	$	13,690,000

Depreciation and amortization expense for 2002, 2001 and 2000 was $3,848,000, $4,347,000 and $4,428,000, respectively.

4. FIXED ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING CHARGES

The Company experienced a significant diminishment of its golf clubhead sales and market share due principally to the increasing use by our customers of suppliers in China. The products made in China are at prices lower than those the Company is able to offer. As a result, the Company implemented a plan which substantially reduced its workforce, closed certain facilities and significantly decreased the space used by its Tijuana operations. As a result, certain assets were written down to estimated fair value, designated as "Held for Sale" or abandoned. One of the closed facilities located in Gardena, California manufactured titanium golf clubheads. The Company still has the capability to produce titanium golf clubheads at its facility in Rancho Dominguez, California.

SFAS No. 144, "Impairment or Disposal of Long Lived Assets" was effective January 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long lived assets, balance sheet classification of long lived assets and provides guidance on implementation. See below "Fixed Asset Impairment" and "Assets Held for Sale" for the impact on the Company of SFAS No. 144 for the year ended December 31, 2002.

Fixed Asset Impairment—The Company specifically identified fixed assets which were not in use and expected to be disposed of or held for sale. For the year ended December 31, 2002, the Company recorded impairment charges of $3,745,000, representing the difference between the carrying value of the assets and their estimated fair value, less cost to sell in accordance with the requirements of SFAS No. 144.

Assets Held for Sale—As of December 31, 2002, the Company classified $5,178,000 as assets held for sale from property, plant and equipment in accordance with SFAS No. 144. These assets are mainly the land and buildings of the Gardena facility and other fixed assets, primarily machinery and equipment, not in use and available for immediate sale. In August 2002, the Gardena facility was listed with a real estate agent. The other fixed assets are expected to be sold at auction in May 2003. The assets held for sale are stated at the lower of their carrying amount or estimated fair value less the estimated cost to sell. In accordance with the requirements of SFAS No. 144, the consolidated balance sheet as of December 31, 2001 has been restated to reclassify the assets held for sale for comparative purposes, at the carrying value of such assets as of that date.

Restructuring Charges—For the year ended December 31, 2002, restructuring charges totaled $3,567,000 representing employee severance charges of $2,593,000 and a charge for the estimated lease

obligation, net of estimated sublease income, from the expected idling of approximately 65,000 square feet of the Tijuana, Mexico facility of $974,000, of which $24,000 was used during the fourth quarter of 2002. The Company involuntarily terminated 1,405 and 86 employees in the Company's facilities in Mexico and California, respectively. As of December 31, 2002, the accrued lease reserve for the Tijuana facility was $950,000, and the remaining severance accrual is not material.

Mexicali Lease—In December 2001, the Company decided to abandon one of the Company's four leased facilities in Mexicali, Mexico. An accrual of $375,000 representing the estimated total lease obligation, net of estimated sublease income, was recorded as of December 31, 2001. During the third quarter of 2002, the landlord agreed to cancel this lease commitment and the remaining lease commitment on one other facility in Mexicali, Mexico. In exchange, the Company entered into an agreement with the same landlord to extend the leases on the two other facilities through December 31, 2007. The remaining accrual of $225,000 was considered a lease incentive, which will be offset against future rent expense for these facilities, on a straight-line basis, over the life of the new leases.

CPAC Operations—In December 2001, the Company ceased the operations of its subsidiary, California Precision Aluminum Castings, Inc. ("CPAC"), which manufactured aluminum compressor wheels for automotive applications. An accrual of $775,000 for various exit activities was recorded as of December 31, 2001. During 2002, the Company used $657,000 of the initial accrual for the purpose intended and reversed $118,000 of the accrual mainly due to cash receipts on the equipment sale exceeding estimates. As of December 31, 2002, there was no remaining accrual.

The Company has substantially completed the current plan of consolidation and downsizing.

5. INVESTMENTS

Investments as of December 31, 2002 consist of common stock investments in corporations with publicly quoted market prices and cash equivalents, both of which are classified as available for sale securities. The investments are held in a rabbi trust designated to fund the Company's long term obligation related to its Supplemental Executive Retirement Plan ("SERP"). Such investments are subject to the claims of general creditors. A summary of the investments is as follows:

	December 31,
	2002				2001
	Aggregate Fair Value		Cost Basis		Aggregate Fair Value		Cost Basis
Available for sale—equity	$	688,000	$	695,000	$	728,000	$	725,000
Available for sale—debt		—		—		36,000		38,000
Cash equivalents		260,000		260,000		217,000		217,000

	$	948,000	$	955,000	$	981,000	$	980,000

As of December 31, 2002, the Company had gross unrealized holding gains from available for sale securities of $58,000 and gross unrealized holding losses from available for sale securities of $65,000. The Company has evaluated such unrealized losses for other-than-temporary impairment and, as of

December 31, 2002, does not believe such impairment exists, thus no impairment charge was recorded for the year ended December 31, 2002. Investment income is summarized as follows:

	Year Ended December 31,
	2002			2001			2000
Gross realized gains from sale—debt	$	9,000		$	4,000		$	—
Gross realized losses from sale—debt		—			(1,000	)		(4,000	)
Gross realized gains from sale—equity		2,000			26,000			3,000
Gross realized losses from sale—equity		(39,000	)		(24,000	)		(68,000	)
Accrued loss on trading securities held at year end		—			—			(8,000	)
Investment income		14,000			21,000			60,000

	$	(14,000	)	$	26,000		$	(17,000	)

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

	December 31,
	2002		2001
Accrued payroll and related expenses	$	782,000	$	1,518,000
Accrued vacation		460,000		839,000
Accrued insurance		170,000		375,000
Accrued restructuring reserve (Note 4)		1,175,000		1,150,000
Other accrued expenses		724,000		469,000

	$	3,311,000	$	4,351,000

7. RETIREMENT PLANS

Pension Plan—The Company has a defined benefit plan covering 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 $11.40 multiplied by the participant's credited service. In connection with the closing of the Company's Gardena facility during the third quarter of 2002, almost all of the employees represented by the union were terminated. As a result, the Company recorded a loss related to the remaining unrecognized prior service cost, as of the curtailment date, and reclassified the minimum pension intangible asset to other comprehensive income. Effective October 1, 2002, the board of directors approved an amendment to the plan to cease future plan benefit accruals.

The following table sets forth the plan's change in benefit obligation, change in plan assets and components of net pension cost:

	December 31,
	2002			2001
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	2,535,000		$	2,287,000
Service cost		69,000			88,000
Interest cost		172,000			157,000
Actuarial loss from change in assumptions		225,000			97,000
Benefits paid		(146,000	)		(94,000	)

Benefit obligation at end of year	$	2,855,000		$	2,535,000

Change in Plan Assets:
Fair value of plan assets at beginning of year	$	1,904,000		$	2,156,000
Actual return on plan assets		(4,000	)		(158,000	)
Employer contribution		140,000			—
Benefits paid		(146,000	)		(94,000	)

Fair value of plan assets at end of year	$	1,894,000		$	1,904,000

Funded Status Reconciliation:
Funded status	$	(961,000	)	$	(631,000	)
Unrecognized actuarial loss		822,000			469,000
Unrecognized prior service cost		—			108,000
Unrecognized transition obligation		(19,000	)		(45,000	)

Accrued benefit cost	$	(158,000	)	$	(99,000	)

Amounts Recognized in the Consolidated Balance Sheet:
Accrued benefit liability	$	(158,000	)	$	(99,000	)
Intangible asset		—			108,000
Minimum pension liability		(803,000	)		(532,000	)

Net amount recognized	$	(961,000	)	$	(523,000	)

	Year Ended December 31,
	2002			2001			2000
Components of Net Pension Cost:
Service cost	$	69,000		$	88,000		$	55,000
Interest cost		172,000			157,000			146,000
Expected return on plan assets		136,000			150,000			150,000
Amortization and deferral		(277,000	)		(317,000	)		(318,000	)
Plan curtailment loss		99,000			—			—

Net pension cost	$	199,000		$	78,000		$	33,000

The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6¹/2% and 7% in 2002 and 2001, respectively. The expected long-term rate of return on assets was 6¹/2% and 7% in 2002 and 2001, respectively. The discount rate used for determining future pension obligation is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The determination of the long term rate of return was based on an asset allocation of up to a maximum of 75% of the portfolio in equities and the balance in fixed income or cash equivalents, softness in the equity markets over the past two years and

consultation with the Company's investment manager. The accumulated benefit obligation was $2,855,000 and $2,535,000 as of December 31, 2002 and 2001, respectively.

401(k) Plan—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 $59,000, $101,000 and $112,000 during 2002, 2001 and 2000, respectively.

Supplemental Executive Retirement Plan—On September 1, 1996, the Company adopted a supplemental executive retirement plan (the "SERP") for certain key employees. Effective January 1, 1998, the SERP plan was amended and restated. The amended plan revised the benefit formula for participants and provided additional flexibility with respect to funding. Under the amended plan, benefits generally accrue ratably over 25 years of service at 2% per year (up to a maximum of 25 years of service) with the actual benefit being dependent on years of service with Company subject to the social security offset.

As a result of the restructuring plan, the Company terminated a significant number of participants in the plan which resulted in curtailment of benefits. As a result, a net plan curtailment gain of $287,000 was recorded in selling, general and administrative expense for the year ended December 31, 2002.

The following table sets forth the plan's change in benefit obligation, change in plan assets and components of net pension cost:

	December 31,
	2002			2001
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,361,000		$	1,243,000
Service cost		85,000			130,000
Interest cost		90,000			87,000
Actuarial gain		(85,000	)		(99,000	)
Curtailment gain		(718,000	)		—
Benefits paid		(10,000	)		—

Benefit obligation at end of year	$	723,000		$	1,361,000

Funded Status Reconciliation:
Funded status	$	(723,000	)	$	(1,361,000	)
Unrecognized actuarial loss		(358,000	)		(279,000	)
Unrecognized prior service cost		67,000			165,000
Unrecognized transition obligation		—			378,000

Accrued benefit cost	$	(1,014,000	)	$	(1,097,000	)

	Year Ended December 31,
	2002			2001		2000
Components of Net Pension Cost:
Service cost	$	85,000		$	130,000	$	134,000
Interest cost		90,000			87,000		94,000
Amortization and deferral		40,000			53,000		59,000
Curtailment gain		(287,000	)		—		—

Net pension cost	$	(72,000	)	$	270,000	$	287,000

The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6¹/2% and 7% for 2002 and 2001, respectively. The Company established an irrevocable rabbi trust with its assets designated to partially fund the Company's long term obligation under this plan. However, such assets are subject to the claims of general creditors of the Company (See Note 1). The funds in the trust are invested in marketable securities and are presented as an asset of the Company in the accompanying consolidated balance sheets. The accumulated benefit obligation as of December 31, 2002 and 2001 was $542,000 and $585,000, respectively.

The pension plan assets and the investments in the rabbi trust are managed by a corporation which is partially owned by a director of the Company. For the year ended December 31, 2002, 2001 and 2000, the Company paid $31,000, $33,000 and $0, respectively, to the corporation for investment management services rendered.

The Company does not provide any other post-retirement benefits to its employees.

8. INCOME TAXES

The provision (benefit) for income taxes is as follows:

		Years Ended December 31,
		2002			2001			2000
Current:
	Federal	$	(2,860,000	)	$	(1,523,000	)	$	4,159,000
	State		(36,000	)		175,000			949,000
	Foreign		369,000			984,000			958,000

			(2,527,000	)		(364,000	)		6,066,000

Deferred:
	Federal		1,590,000			123,000			(74,000	)
	State		469,000			(174,000	)		(29,000	)
	Foreign		551,000			(485,000	)		(60,000	)

			2,610,000			(536,000	)		(163,000	)

		$	83,000		$	(900,000	)	$	5,903,000

The actual provision (benefit) on income before income taxes differs from the statutory federal income tax rate due to the following:

	Years Ended December 31,
	2002			2001			2000
Federal income taxes at the statutory rate	$	(3,667,000	)	$	(1,117,000	)	$	5,128,000
State income taxes, net of federal benefit		(265,000	)		(74,000	)		650,000
California investment tax credit		—			(59,000	)		(95,000	)
Mexico permanent differences		(140,000	)		237,000			202,000
Valuation allowance		3,844,000			—			—
Other items		311,000			113,000			18,000

	$	83,000		$	(900,000	)	$	5,903,000

The tax effects of items comprising the Company's net deferred income tax asset are as follows:

	December 31,
	2002			2001
Allowance for doubtful accounts	$	52,000		$	83,000
Deferred compensation		421,000			455,000
Accrued expenses		711,000			673,000
Inventory reserve		296,000			225,000
State income taxes		(319,000	)		(154,000	)
Depreciation		2,288,000			1,295,000
Other items		395,000			33,000

		3,844,000			2,610,000
Valuation allowance		(3,844,000	)		—

	$	—		$	2,610,000

During the second quarter of fiscal 2002, the Company evaluated the need for a valuation allowance and determined that it was more likely than not that such assets would not be realized and, accordingly a valuation allowance was recorded equal to the balance of the deferred income taxes as of that date. Subsequent movements in the underlying gross deferred tax assets will change the valuation allowance recorded and as of December 31, 2002, the valuation allowance is equal to the deferred tax asset balance of $3,844,000. Due to uncertain economic conditions and the competitive environment, at this time, the Company is assuming that it will not be able to generate sufficient taxable income in the near future to realize the deferred tax asset. Should the Company determine that it will be able to realize all or part of this deferred tax asset in the future, the Company will reverse a portion or all of the valuation allowance and credit income tax expense in that period.

9. SHAREHOLDERS' RIGHTS PLAN

On October 27, 2000, the Board of Directors approved the adoption of a Shareholders' Rights Plan ("the Plan"). In connection with the Plan, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of common stock. In general, the rights will not be exercisable or transferable apart from the common stock, unless a person or group (i) acquires beneficial ownership of 15% or more of the outstanding common stock, or (ii) commences a tender offer or commences or files a registration statement with respect to an exchange offer, to acquire beneficial ownership of 15% or more of the outstanding stock. When exercisable, each right will entitle the holder to buy at a $75 exercise price (the "Exercise Price") 1/100^th of a share of Series A Preferred Stock of the Company. Following an event described in (i) or (ii) above, each right will entitle the holder to purchase from the Company, at the Exercise Price, common stock (or under certain circumstances, other securities or assets of the Company) having a value of twice the Exercise Price. Further, if after the rights become exercisable the Company or a majority of its assets or earning power are acquired by merger or otherwise, each right will thereafter represent the right to purchase that number of shares of the surviving corporation or (in certain circumstances) its parent having a market value of twice the Exercise Price. In general, no acquiring person, nor the person or group whose purchase transaction or tender or exchange offer triggers the exercisability of the rights, nor any of that person or group's transferees may exercise rights held by them.

At any time prior to the 10^th day following an event described in (i) or (ii) above, the Board of Directors may redeem all outstanding rights at a price of $.01 per right, and may amend the Plan and the rights in any and all respects. The rights will expire at the earlier date of their redemption or October 27, 2010.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases—The Company leases certain facilities under various operating leases with terms ranging from five to ten years. The leases contain renewal options for additional five or ten year periods which have not been included in the rental commitment schedule below. In general, these leases provide for payment of property taxes, maintenance and insurance by the Company and include rental increases based on the Consumer Price Index.

The future minimum lease payments required under these leases as of December 31, 2002 are as follows:

Year Ending December 31,	Gross		Estimated Sublease Income		Net
2003	$	1,259,000	$	—	$	1,259,000
2004		1,289,000		—		1,289,000
2005		1,551,000		131,000		1,420,000
2006		1,551,000		131,000		1,420,000
2007		1,551,000		131,000		1,420,000
Thereafter		732,000		44,000		688,000

	$	7,933,000	$	437,000	$	7,496,000

In developing the estimates for sublease income, the Company obtained information from its landlord and other third parties. Market conditions will affect the Company's ability to sublease the available portion of the facility on terms consistent with its estimates. The Company's ability to sublease the available space in accordance with its plan, or the negotiation of lease terms resulting in higher or lower sublease income than estimated, will affect the Company's future minimum lease obligation.

Rent expense for 2002, 2001 and 2000 was $2,519,000, $2,234,000 and $1,816,000, respectively. As of December 31, 2002, the Company has non-cancelable commitments to purchase raw materials totaling $844,000.

Litigation—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, is expected to have a material adverse effect on the financial position or results of operations of the Company.

A member of the board of directors provides legal services to the Company. For the year ended December 31, 2002, 2001 and 2000, the Company paid $29,000, $19,000, and $52,000, respectively to this director for legal services rendered.

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, 2002, an aggregate of 869,489 shares had been purchased pursuant to the exercise of options granted under the plan, options to purchase an aggregate of 599,257 shares were outstanding (including options which were then exercisable to purchase 391,656 shares), and no shares were available for additional grants of options under the plan since plan expiration on December 31, 2001.

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, 2002, an aggregate of 109,999 shares had been purchased pursuant to the exercise of options granted under the plan and options to purchase an aggregate of 60,001 shares were outstanding and exercisable, and no shares were available for additional grants of options under the plan, since on June 20, 2001, the Company shareholders approved the 2001 Non-Employee Director Stock Option Plan ("2001 Director Stock Option Plan").

On June 20, 2001, the shareholders approved the 2001 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. 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, 2002, no shares had been purchased pursuant to the exercise of options granted under the plan and options to purchase an aggregate of 160,000 shares were outstanding (including options which were then exercisable to purchase 49,999 shares), and 40,000 shares were available for additional grants of options under the plan.

The following summarizes the Company's stock option activity under all arrangements for the three years ended December 31, 2002:

		Number of Options		Weighted Average Exercise Price
Balance, January 1, 2000		1,011,156		$	13.86
	Granted	54,500			15.41
	Forfeited	(35,883	)		14.52
	Exercised	(315,856	)		12.13

Balance, December 31, 2000		713,917			14.70
	Granted	577,700			7.56
	Forfeited	(122,571	)		13.68
	Exercised	(34,273	)		9.00

Balance, December 31, 2001		1,134,773			11.35
	Granted	70,000			3.28
	Forfeited	(355,515	)		10.44
	Exercised	—			—

Balance, December 31, 2002		849,258			11.06

The following table summarizes information about stock options outstanding at December 31, 2002:

Range of Exercise Prices	Number Outstanding at 12/31/02	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable At 12/31/02	Weighted Average Exercise Price
$1.91—7.49	250,101	8.7	$	5.90	10,001	$	7.31
7.57—11.00	215,600	8.4		7.88	154,999		7.60
11.25—14.13	292,027	3.7		13.97	284,460		13.99
14.50—22.25	51,530	4.7		19.98	42,196		21.00
27.00—30.00	40,000	2.9		27.75	40,000		27.75

$1.91—30.00	849,258	6.4		11.06	531,656		13.60

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 and 2001 Director Stock Option Plan. However, in April 1996 the Company, outside of the foregoing option plans, granted 30,000 shares to a non-employee at an exercise price of $22.25 which expires in April 2006. An expense was recorded in 1996 for this non-employee stock option grant. 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 (loss) income and (loss) earnings per share would have been changed to the pro forma amounts indicated below:

			Years Ended December 31,
			2002			2001			2000
Net (loss) income:		As reported	$	(10,560,000	)	$	(2,290,000	)	$	8,749,000
Adjust for: Total stock-based compensation expense determined under the fair value method for all awards, net of tax				430,000			375,000			381,000

		Pro forma	$	(10,990,000	)	$	(2,665,000	)	$	8,368,000

Net (loss) income per share—
	basic	As reported	$	(1.38	)	$	(0.30	)	$	1.15
		Pro forma	$	(1.44	)	$	(0.35	)	$	1.10
Net (loss) income per share—
	diluted	As reported	$	(1.38	)	$	(0.30	)	$	1.12
		Pro forma	$	(1.44	)	$	(0.35	)	$	1.06

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 2002, 2001 and 2000, respectively: dividend yield of 0%, 0% and 6.8%, expected volatility of 63%, 63% and 64%, risk-free interest rate of 3.8%, 4.8% and 6.3%, and expected term of 4.0, 4.0 and 4.0 years. The weighted average fair value per share of options granted in 2002, 2001 and 2000 was $1.67, $3.93 and $5.54, respectively.

12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

				2002			2001			2000
Numerator:
	Net (loss) income			$	(10,560,000	)	$	(2,290,000	)	$	8,749,000

Denominator:
		Denominator for basic (loss) earnings per share— weighted average shares			7,635,042			7,661,496			7,613,357
	Effect of dilutive securities:
			Stock options		—			—			181,497

		Denominator for diluted (loss) earnings per share— weighted average shares and assumed conversions			7,635,042			7,661,496			7,794,854

Basic (loss) earnings per share				$	(1.38	)	$	(0.30	)	$	1.15

Diluted (loss) earnings per share				$	(1.38	)	$	(0.30	)	$	1.12

The anti-dilutive options as of December 31, 2002, 2001 and 2000 were 849,258, 1,134,773 and 95,930, respectively.

13. BUSINESS SEGMENTS

FASB No. 131 "Disclosures about Segments of an Enterprise and Related Information," requires companies to provide certain information about their operating segments. The Company's principal businesses are the production of precision investment-cast titanium and stainless steel golf products and precision investment-cast titanium and stainless steel non-golf products. The golf segment manufactures and sells golf clubheads. The non-golf segment sells other investment castings which include orthopedic implants and surgical tools, automotive, and other commercial and industrial products.

The Company evaluates performance and allocates resources, in part, based on net sales or (loss) income from operations. The accounting policies of the reportable segments are generally the same as those described in the summary of significant accounting policies (Note 1).

The Company's assets are located in the United States and Mexico. Export sales are not significant.

The Company derived 47%, 19% and 16% of sales from its three top customers in 2002, 50% and 33% of sales from its two top customers in 2001, and 50% and 26% of sales from its two top customers in 2000.

Summarized financial information concerning the Company's reportable segments is shown in the following table:

		Year Ended December 31,
		2002			2001			2000
Net sales:
	Golf	$	53,255,000		$	104,283,000		$	128,154,000
	Non-golf		9,191,000			11,197,000			13,217,000

Total net sales		$	62,446,000		$	115,480,000		$	141,371,000

(Loss) income from operations:
	Golf	$	(9,773,000	)	$	(1,900,000	)	$	9,535,000
	Non-golf		(843,000	)		(1,686,000	)		2,434,000

Total (loss) income from operations		$	(10,616,000	)	$	(3,586,000	)	$	11,969,000

Depreciation expense:
	Golf	$	3,332,000		$	3,976,000		$	4,275,000
	Non-golf		516,000			371,000			153,000

Total depreciation expense		$	3,848,000		$	4,347,000		$	4,428,000

Capital expenditures:
	Golf	$	1,668,000		$	3,434,000		$	2,791,000
	Non-golf		122,000			155,000			944,000

Total capital expenditures		$	1,790,000		$	3,589,000		$	3,735,000

		December 31,
		2002		2001
Identifiable assets:
	Golf	$	15,327,000	$	26,620,000
	Non-golf		4,314,000		5,484,000
	Corporate		24,608,000		25,327,000

Total identifiable assets		$	44,249,000	$	57,431,000

Assets were allocated on a specific identification basis. Cash, assets held for sale, prepaid income taxes, deferred tax assets and investments are all classified as Corporate.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Coastcast Corporation:

We have audited the consolidated financial statements of Coastcast Corporation and subsidiaries as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated February 28, 2003; 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 15. 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 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
February 28, 2003

COASTCAST CORPORATION

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Classification		Balance at Beginning of Period			(Charged)/ Credited to Costs and Expenses	Deductions	Balance at End of Period
Allowance for doubtful accounts:
	Year ended December 31, 2002	$	(200,000	)	54,000	21,000	$	(125,000	)
	Year ended December 31, 2001		(200,000	)				(200,000	)
	Year ended December 31, 2000		(500,000	)	300,000			(200,000	)

EXHIBIT INDEX

Exhibit Number		Description
3.1.1		Articles of Incorporation of the Company, as amended (1)
3.1.2		Certificate of Amendment of Articles of Incorporation filed with the California Secretary of State on December 6, 1993 (1)
3.2		Bylaws of the Company, as amended April 19, 2001 (12)
3.3		Certificate of Determination Series A Preferred Stock (10)
3.4		Rights Agreement, dated October 27, 2000 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (11)
4		Specimen Stock Certificate of the Company (1)
10.1*		1993 Amended and Restated Employee Stock Option Plan ("Employee Plan") (1)
10.2*		1996 Amended and Restated Employee Stock Option Plan ("Employee Plan") (4)
10.3*		1995 Amended and Restated Non-Employee Director Stock Option Plan ("Director Plan"), together with form of notice of grant and grant summary (2)
10.4*		2001 Non-Employee Director Stock Option Plan (12)
10.5		Agreement, dated June 12, 2000, between the Company and United Steelworkers of America (9)
10.6		Lease Agreement, dated December 20, 2002, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Mercurio #30 in Mexicali, Mexico
10.7		Lease Agreement, dated December 20, 2002, between Coastcast Corporation, S.A. and Parque Industrial Mexicali, S.A. de C.V. for the facilities known as Avenue Galaxia #50 in Mexicali, Mexico
10.8		Lease Agreement, dated September 1, 1997, between the Company and Watson Land Company for the facilities in Rancho Dominguez, California (5)
10.9		Lease Agreement, dated January 5, 1998, between Coastcast Tijuana, S. De R.L. De C.V. and Frederick Clarke Sanders, Jr., Frederick Sanders Flourie, Monique Sanders Flourie, Scott Michael Sanders Flourie and Carlo E. Muzquiz Davila for real estate in Tijuana, Baja California, Mexico (6)
10.10		Lease Guaranty Agreement, dated August 18, 1998, by the Company for the lease of the Tijuana facility (6)
10.11		Form of Indemnification Agreement (1)
10.12*		Amended and Restated Coastcast Corporation Selected Employees Pension Plan, as of October 1, 1997 (13)
10.13*		Coastcast Corporation 401(k) Retirement Plan, effective January 1, 1996 (2)
10.14*		Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3)
10.15*		First Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, effective September 1, 1996 (3)
10.16*		Second Amendment to Coastcast Corporation Supplemental Executive Retirement Plan, dated February 18, 1997 (4)

10.17*		Coastcast Corporation Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 1998 (6)
10.18*		Coastcast Corporation Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 1999 (8)
10.19*		Amended and Restated Trust Agreement by and between Coastcast Corporation and Imperial Trust Company, dated December 18, 1998 (6)
10.20*		Second Amendment to the Coastcast Corporation Grantor Trust (7)
21		Subsidiaries of the Company
23		Consent of Independent Auditors
99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbenes-Oxley Act of 2002

*: Management contract or compensating plan or arrangement.
(1): Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (Registration No. 33-71294) filed on November 4, 1993, as amended by Amendment No. 1 filed on November 17, 1993, Amendment No. 2 filed on December 1, 1993, and Amendment No. 3 filed on December 9, 1993.
(2): Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1995.
(3): Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1996.
(4): Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1996.
(5): Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1997.
(6): Incorporated by reference to the exhibits to Form 10-K for the fiscal year ended December 31, 1998.
(7): Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 1999.
(8): Incorporated by reference to the exhibits to Form 10-K for the year ended December 31, 1999.
(9): Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 2000.
(10): Incorporated by reference to the exhibits to Form 8-A filed on November 1, 2000.
(11): Incorporated by reference to the exhibits to Form 8-K filed on November 1, 2000.
(12): Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended June 30, 2001.
(13): Incorporated by reference to the exhibits to Form 10-Q for the fiscal quarter ended September 30, 2002.

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COASTCAST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
PART I
PART II
PART III
PART IV
SIGNATURES
CERTIFICATION
CERTIFICATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
INDEPENDENT AUDITORS' REPORT
COASTCAST CORPORATION CONSOLIDATED BALANCE SHEETS
COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000
COASTCAST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
COASTCAST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
COASTCAST CORPORATION SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX
EX-10.6 3 a2106141zex-10_6.htm EX-10.6
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Exhibit 10.6

LEASE AGREEMENT entered into by and between PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., (hereinafter referred to as PIMSA), herein represented by MR. EDUARDO MANUEL MARTINEZ PALOMERA, Party of the First Part, and by COASTCAST CORPORATION, S.A., (hereinafter referred to as COMPANY), herein represented by MR. FERNANDO DIAZ CASTILLO, Party of the Second Part, pursuant to the following RECITALS and CLAUSES:

R E C I T A L S

I. PIMSA hereby declares that:

A. It is a company organized and existing under the Mexican General Corporation Law, as per Public Instrument Number 20,032, executed before Attorney Fernando Diaz Ceballos, Notary Public Number Four of the City of Mexicali, Baja California, Mexico.

B. Mr. Eduardo Manuel Martinez Palomera is its Attorney-In-Fact, as it appears in Public Instrument Number 31,019, Volume 569, executed on November 26, 1997, before Attorney Fernando Diaz Ceballos, Notary Public Number Four of the City of Mexicali, Baja California, Mexico.

C. PIMSA's registration number at the Federal Registry of Taxpayers is: PIM-790807-D96.

D. The address at which it has its principal place of business is Avenida Galaxia Number 18-B, Mexicali Industrial Park I, Mexicali, Baja California, Mexico.

E. PIMSA has developed the Mexicali Industrial Park I, Mexicali Industrial Park II, Mexicali Industrial Park III and the Mexicali Industrial Park IV. The Mexicali Industrial Park I, hereinafter referred to as the Industrial Park, is more specifically shown and described on Exhibit "A", which is attached hereto and made a part hereof.

F. The parties desire to enter into a Lease of Lots 1, 2, 3, 4, 5, 6, 7, 8 and a portion of Lot 9 of Block 2, the size of which is 92,530.00 Square Feet (8,689.15 Square Meters, approximately), located in the Mexicali Industrial Park I, at Calle Mercurio Number 30, and of certain improvements constructed on the land. The land and PIMSA's Improvements together shall hereinafter be referred to as the Leased Property.

G. That it has previously applied for and obtained financial loans through Mexican and Foreign Banking and Lending Institutions, with which funds, buildings and improvements located in the Industrial Parks have been, are being and will be constructed.

II. COMPANY hereby declares that:

A. It is a company organized under the Mexican General Corporation Law as per Public Instrument Number 28,658, Volume 478, executed on January 26, 1994, before Attorney Fernando Diaz Ceballos, Notary Public Number Four of the City of Mexicali, Baja California, Mexico.

B. Mr. Fernando Diaz Castillo verifies his capacity as General Director of Operations and General Manager of COMPANY as per Public Instrument Number 32,873, Volume 623, executed on August 07, 2001, before Attorney Fernando Diaz Ceballos R., Notary Public Number Four of the City of Mexicali, Baja California, Mexico.

C. COMPANY's registration number at the Federal Registry of Taxpayers is: CCO-821123-QA1.

D. The address at which it has its principal place of business is Calle Mercurio Number 30, Mexicali Industrial Park I, Mexicali, Baja California, Mexico.

Pursuant to the above, the parties agree as follows:

C L A U S E S

I. SCOPE OF LEASE AGREEMENT.

On the express terms and conditions set forth hereinafter, the scope of this Lease Agreement is as follows: PIMSA hereby leases to COMPANY and COMPANY hereby leases from PIMSA the land located in the Industrial Park as described on Exhibit "B", which is attached hereto and made a part hereof, and PIMSA's Improvements as more specifically described hereinafter in this Lease Agreement.

II. CONSTRUCTION BY PIMSA.

A. PIMSA has, at its expense, constructed on the land a Shell Building the size of which is 40,523.55 Square Feet (3,764.73 Square Meters, approximately) which shall hereinafter be referred to as PIMSA's Improvements. Said PIMSA's Improvements have been constructed in accordance with plans and specifications which have been approved by PIMSA and COMPANY and such approval is hereby acknowledged by the parties.

B. PIMSA has constructed all PIMSA's Improvements in accordance with all laws, ordinances, regulations, and orders of governmental authorities, and Industrial Park Regulations which are attached hereto as Exhibit "C". The term "Improvements" shall, depending on the context, refer to either "PIMSA's Improvements", "COMPANY's Improvements" or both. The term "COMPANY's Improvements" shall refer to those improvements identified in Clause III.A. below.

C. The Leased Property is considered Ready for Occupancy.

D. Upon prior written consent of PIMSA, COMPANY may at any time prior to the commencement of the term hereof, at its sole risk, enter upon and install such trade fixtures and equipment in the Leased Property as it may elect; provided, however that COMPANY shall provide evidence of insurance satisfactory to PIMSA.

III. INSTALLATIONS BY COMPANY.

A. COMPANY may, at its expense, install on the Leased Property, such trade fixtures, equipment and furniture as it may deem necessary; provided that such items are installed and are removable without damage to the structural integrity of PIMSA's Improvements. Said trade fixtures, equipment and furniture shall remain COMPANY's property and unless COMPANY is in default hereunder, shall be removed by COMPANY on or before the expiration date of the term hereof. COMPANY may also install temporary improvements in the interior of PIMSA's Improvements upon the Leased Property provided that such COMPANY's Improvements are installed and are removable without damage to the structure of the PIMSA's Improvements. Such COMPANY's Improvements shall remain property of COMPANY and, unless COMPANY is in default hereunder, shall be removed by COMPANY upon expiration of the term hereof or earlier termination of this Lease. COMPANY shall repair, at its sole expense, all damage caused by the installation or removal of trade fixtures, equipment, furniture or temporary COMPANY's Improvements, reasonable wear and tear excepted.

B. COMPANY shall perform all installations in accordance with all laws, ordinances, regulations, orders of governmental authorities, and the Industrial Park Regulations which are attached hereto as Exhibit "C".

IV. LEASE TERM AND COMMENCEMENT DATE.

A. Lease Agreement. This Lease Agreement shall be effective from the Commencement Date until the same is terminated as provided hereinafter, the complete period of tenancy being referred to herein as the "Lease Term".

B. Initial Lease Term. The initial term of this Lease ("Initial Term") shall commence on January 01, 2003, ("Commencement Date") and shall end on the last day of the fifth (5th) consecutive full Lease Year, as said term is hereinafter defined.

C. Lease Year. The term "Lease Year" as used herein, shall mean a period of twelve (12) consecutive full calendar months. The First Lease Year shall begin on the Commencement Date of the term hereof, if the Commencement Date of the term hereof shall occur on the first (1st.) day of a calendar month; if not then the First Lease Year shall commence upon the first (1st.) day of the next calendar month following the Commencement Date of the term hereof. Each succeeding Lease Year shall commence upon the anniversary date of the First Lease Year.

D. Option to Renew. COMPANY shall have the right to extend the term of this Lease Agreement upon the terms, conditions and rentals set forth herein, for one (1) additional period of five (5) years, ("Extended Term"), by giving written notice to PIMSA not less than six (6) months prior to the expiration of the Initial Term of this Lease Agreement, so long as COMPANY is not then in default in payment of any installment on "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, hereunder or of any other obligation hereunder.

V. RENT

A. Initial Term. As minimum payment for the Lease of the Leased Property during the Initial Term hereof, COMPANY shall pay to PIMSA at the address of PIMSA stated above, as minimum rent ("Payment for Initial Term") the amount of US$680,820.00 Dollars (Six Hundred Eighty Thousand Eight Hundred Twenty 00/100 Dollars, Currency of the United States of America), plus ten percent (10%) of Value Added Tax, to be paid in full at the execution of this Agreement. However, COMPANY may, exclusively for the purpose of facilitating such payment, pay the referred amount in sixty (60) consecutive and successive monthly installments as follows:

1. US$34,041.00 Dollars (Thirty Four Thousand Forty One Dollars 00/100, Currency of the United States of America), plus ten percent (10%) of Value Added Tax, upon the execution of this Contract which sum shall be applied to the last three (3) installments of the "Payment for the Initial Term".

2. Fifty Seven (57) equal, consecutive and successive installments in the amount of US$11,347.00 Dollars (Eleven Thousand Three Hundred Forty Seven Dollars 00/100, Currency of the United States of America), plus ten percent (10%) of Value Added Tax, each installment payable in advance on the first (1st.) day of each month during the Initial Term, commencing on the first (1st.) month of the Initial Term.

3. Annual Inflationary Adjustment of the installments of the minimum rent in the event the Payment for the Initial Term is performed in installments. As of the first (1st.) day of the Second, Third, Fourth and Fifth Lease Years the amount of the monthly installment of the "Payment for the Initial Term" shall be increased for inflation and in accordance with the following arithmetical formula:

a) The "Payment for the Initial Term", multiplied by

b) The factor, expressed in percentage, composed by the sum of one hundred (100) percentage points plus the percentage increase in the "Index" (as defined hereinafter) occurring between the first (1st.) day of the Initial Term and the last day of the Lease Year just then ending. For example, when calculating the rent for the Third Lease Year of the Initial Term one would compute the percentage increase occurring in the index between the first (1st.) day of the First Lease Year and the last day of the Second Lease Year (or the respective dates closest to those days) increased by one hundred (100) percentage points. If the index has risen six percent (6%) in that time, the "Payment for the Initial Term" shall be multiplied by one hundred and six percent (106%).

c) The product shall be divided by sixty (60) and the result shall be the amount of the monthly installment due for the Lease Year for which the calculation is performed. The rent for each succeeding Lease Year shall be computed in accordance with the provisions of this Paragraph 3.

d) In no event shall the monthly installment for any Lease Year of the Initial Term be decreased below the monthly installment for the immediately preceding Lease Year of the Initial Term.

4. Index Definition and Maximum Inflationary Increase of the "Payment for the Initial Term". The term "Index" shall mean the United States Bureau of Labor Statistics Consumer Price Index For All Urban Consumers (All Items, Los Angeles-Riverside-Orange County, California area, 1982-1984=100) with an annual CAP of ten percent (10%).

If the compilation or publication of the Index is transferred to any other department, bureau or agency of the United States government or is discontinued, then the index most similar to the Index shall be used to calculate the increases of the monthly installments of the "Payment for the Initial Term" provided for herein. If PIMSA and COMPANY cannot agree on a similar alternate index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the rules of such Association then in force, and the decision of the arbitrators shall be binding upon the parties. The cost of such arbitration shall be divided equally between PIMSA and COMPANY.

B. Additional Payment to the "Payment for the Initial Term" or the "Payment for the Extended Term" as this later term is hereinafter defined. With the exception of the income tax imposed upon PIMSA, and any tax associated with the Sale or Transfer of the Leased Property or PIMSA's Improvements, which shall be borne by PIMSA, COMPANY will pay to PIMSA, as additional rent, an amount equal to the sum of all taxes and assessments of every kind which are or may be at any time during the Initial Term or Extended Term, levied against the Leased Property or the Lease Agreement, including but not limited to value added tax, property tax and all such taxes and assessments levied by any federal, state or municipal government, or any governmental authority. All such taxes and assessments shall be paid by PIMSA and reimbursed by COMPANY within ten (10) calendar days after the receipt showing the payment thereof is presented to COMPANY by PIMSA.

In calculating the amount of COMPANY's reimbursement, all taxes which shall become due for the first and last years of the Lease Term shall be apportioned prorata between PIMSA and COMPANY in accordance with the respective number of months during which each party shall be in possession of the Leased Property.

C. Renewal Terms.

1. Grant and Manner of Exercise the Option to Renew. COMPANY shall have the option to extend the term of this Lease for one (1) additional period of five (5) years, (the "Extended Term"). COMPANY shall give written notice to PIMSA not less than six (6) months prior to the expiration of the Initial Term, if COMPANY elects to exercise the option to extend granted herein.

2. Rent. As minimum payment for the Lease of the Leased Property during the Extended Term of this Agreement, COMPANY shall pay to PIMSA at the address of PIMSA stated above, as minimum rent, the amount equal to the result of the following arithmetical formula:

a) The "Payment for the Initial Term", multiplied by

b) The factor, expressed in percentage, composed by the sum of one hundred (100) percentage points plus the percentage increase in the Index during all the preceding Lease Years of the Initial Term, this is, as of the commencement of the Lease Term up to the last day of the Fifth Lease Year.

c) The product shall be the amount of the "Payment for the Extended Term".

3. Payment Form. Such "Payment for the Extended Term" shall be paid in full on the first (1st.) day of the Extended Term. However, COMPANY may, exclusively for the purpose of facilitating such payment, pay the "Payment for the Extended Term" as follows:

a) Last three (3) monthly installments of the "Payment for the Extended Term" shall be paid in advance upon the execution of the new Contract, and

b) Fifty Seven (57) equal, consecutive and successive monthly installments each one of them in an amount equal to the result of dividing the "Payment for the Extended Term" by sixty (60). Each installment shall be paid in advance on the first (1st.) day of each month during the Extended Term, commencing on the first (1st.) month of the Extended Term.

4. Annual Inflationary Adjustment of the minimum "Payment for the Extended Term", during the Extended Term in the event COMPANY performs such payment in installments. As of the first (1st.) day of the First, Second, Third, Fourth and Fifth Lease Years of the Extended Term, the amount of the monthly installment of the "Payment for the Extended Term" shall be increased for inflation and in accordance with the following arithmetical formula:

a) The "Payment for the Extended Term", multiplied by:

b) The factor, expressed in percentage, composed by the sum of one hundred (100) percentage points plus the percentage increase in the "Index" (as defined hereinafter) occurring between the first (1st.) day of the Extended Term and the last day of the Lease Year just then ending. For example, if calculating the rent for the Third Lease Year of the Extended Term one would compute the percentage increase occurring in the index between the first (1st.) day of the First Lease Year of the Extended Term and the last of the Second Lease Year of the Extended Term (or the respective dates closest to those days) increased by one hundred (100) percentage points. If the index has risen six percent (6%) in that time, the "Payment for the Extended Term" shall be multiplied by one hundred and six percent (106%).

c) The product shall be divided by sixty (60) and the result shall be the amount of the monthly installment due for the Lease Year for which the calculation is performed. The rent for each succeeding Lease Year of the Extended Term shall be computed in accordance with the provisions of this Paragraph 4.

Notwithstanding anything herein contained to the contrary, in the event COMPANY chooses to pay the "Payment for the Extended Term" in installments, the monthly installments for each Lease Year of the Extended Term shall not be increased by an amount greater than ten percent (10%) of the monthly installment for the immediately preceding Lease Year. In no event shall the monthly installment for any Lease Year of the Extended Term be decreased below the monthly installment for the immediately preceding Lease Year.

D. Currency. COMPANY will pay the rent provided for in the above Paragraphs A and C in Dollars, Currency of the United States of America, or in Pesos, Mexican Currency, at the sale rate of

exchange that Banco Nacional de Mexico, S.A. has in effect on the date such sums are paid, as PIMSA may elect.

The foregoing will not be considered to impede or hinder PIMSA's possibilities and rights under Clause XII to negotiate or assign this Agreement to Mexican or Foreign Banking and Lending Institutions.

E. Proration. The installment for any partial month shall be prorated.

F. Damages. In the event this Lease Agreement is terminated by PIMSA due to a default of COMPANY, PIMSA shall be entitled to keep and retain as damages, all sums paid or deposited by COMPANY, as "Payment for the Initial Term", or as the case may be, as "Payment for the Extended Term" if such Payments were paid in full, and in the event COMPANY has chosen to pay the "Payment for the Initial Term" or the "Payment for the Extended Term" in monthly installments, to demand the payment in full of the main obligation consisting in the "Payment for the Initial Term", or, as the case may be, the "Payment for the Extended Term", in addition to any other remedy available to PIMSA under the terms of this Agreement.

G. Setoff. The payment of any "Payment for the Initial Term" or "Payment for the Extended Term", or the payment of any monthly installment thereof under this Lease, shall not be withheld or reduced for any reason whatsoever, and COMPANY agrees to assert any claim, demand, or other right against PIMSA only by an independent proceeding.

VI. USE.

The Leased Property shall be used and occupied for any lawful industrial purpose not in violation of the Industrial Park Regulations attached hereto as Exhibit "C". COMPANY shall promptly and adequately comply with all laws, ordinances and orders of all governmental authorities affecting the Leased Property, and its cleanliness, safety and labor facilities applicable to the COMPANY's use of the Leased Property. COMPANY shall not perform or omit any acts that may damage the Leased Property, or be a nuisance, or menace to other occupants of the Industrial Park.

VII. INSURANCE.

A. Comprehensive Liability Insurance. During the Lease Term, COMPANY shall, at its own expense, obtain and maintain in full force a policy of comprehensive liability insurance including property damage, that insures COMPANY and PIMSA (and such other agents or employees of PIMSA, PIMSA's subsidiaries or affiliates, or PIMSA's assignees or any nominee of PIMSA holding any interest in the Leased Property, including without limitation, the holder of any mortgage encumbering the Leased Property) against liability for damage or injury to persons and property and for death of any persons occurring in or about the Leased Property. The liability to such insurance shall be in the amount of US$100,000.00 Dollars (One Hundred Thousand Dollars 00/100, Currency of the United States of America).

B. Fire and Other Insurance. During the Lease Term, COMPANY at its sole expense, shall obtain and maintain in full force, in the amount of US$1,160,000.00 Dollars (One Million One Hundred Sixty Thousand Dollars 00/100, Currency of the United States of America), or as modified herein, a policy or policies of insurance, at replacement value, for fire, lightning, explosion, falling aircraft, smoke, windstorm, earthquake, hail, vehicle damage, volcanic eruption, strikes, civil commotion, vandalism, riots, malicious mischief, debris removal, steam boiler or pressure object or machinery breakage if applicable, and flood insurance, on all the Leased Property, including but not limited to the Shell Building, PIMSA's Improvements and COMPANY's Improvements. COMPANY shall also obtain and maintain annual rental insurance in the amount of the annual rent provided for herein in favor of PIMSA. COMPANY shall be responsible for maintaining insurance on all of COMPANY's own property. Except for insurance upon COMPANY's property, PIMSA or its appointee shall be named the COMPANY's beneficiary of any and all proceeds from any such policy or policies, such as their interests may appear.

C. Form and Delivery of Policies. Each insurance policy referred to in the preceding paragraphs shall be in a form approved by the Department of Finance and Public Credit and written with one or more companies licensed to do insurance in Mexicali, Baja California, Mexico, and shall provide that it shall not be subject to cancellation or change except after at least thirty (30) days prior written notice to PIMSA and prior written approval from PIMSA. The policies, or duly executed certificates for them, together with copies of receipts for payment of the premiums thereof, shall be delivered to PIMSA prior to the Commencement Date of the Lease Term, as provided in Clause IV hereof; all documents verifying the renewal of such policies shall be delivered to PIMSA at least thirty (30) days prior to the expiration of the term of such coverage. Prior to the Commencement Date of the Lease Term, each party shall procure and maintain such insurance covering its own liability and property as each deems appropriate.

D. Additional Insurance. COMPANY shall obtain and maintain in full force and effect such additional amounts of insurance as may be required by PIMSA, from time to time, in accordance with the provisions of this Clause VII, and in order to adequately and properly insure PIMSA of and for the then current replacement value of the Leased Property.

E. Waiver of Subrogation. The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the premises and to the fixtures, personal property, tenant's improvements, and alterations of either PIMSA or COMPANY in or on the premises that are caused by or result from risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. If either party purchases insurance, the policy shall provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. If a party hereto cannot obtain such waiver of subrogation through reasonable efforts, it shall obtain insurance naming the other party as a coinsured under its policy in order to accomplish the intent of this provision.

VIII. TAXES AND ASSESSMENTS.

COMPANY agrees to pay all taxes and assessments of every kind levied upon any and all personal property of COMPANY, its successors and assigns, whether same shall be or may become a lien upon the Leased Property. All such taxes and assessments shall be paid by COMPANY before the same become delinquent. In the event that this Contract is recorded at the Public Registry of Property, COMPANY shall pay all costs of such recordation, including, but not limited to, notary fees, charges and taxes required in connection therewith.

IX. REPAIRS, ALTERATIONS, AND IMPROVEMENTS.

A. PIMSA.

1. After receipt of written notice from COMPANY, PIMSA at its expense, shall with the minimum interference with COMPANY's normal use of the Leased Property, diligently proceed to repair any structural defects in the roof or exterior bearing walls, excepting normal use, wear and damage. PIMSA shall not be liable for any damages, and shall not be obligated to make any repairs, caused by any negligent act or omissions of COMPANY, its employees, agents, invitees, or contractors. PIMSA shall have no other obligation to maintain or repair any other portion of the Leased Property. PIMSA shall not be liable to COMPANY for any damage resulting from PIMSA's failure to make any repairs, unless COMPANY has notified PIMSA in writing of the need for such repairs, and PIMSA has failed to commence such repairs within ten (10) days after said notice has been given and failed to complete the same in a diligent manner.

2. If PIMSA fails to make the repairs described in Clause IX.A., COMPANY may, but shall not be required to, make or cause such repairs, to be made, and PIMSA shall, on demand, immediately pay to COMPANY the actual cost of the repairs.

B. COMPANY.

1. COMPANY, at its expense, shall keep and maintain in good order and repair, except for normal use and wear, all of the Leased Property, except for those obligations of PIMSA stated in Paragraph A.1., of this Clause, including but not limited to, all plumbing, sewage and other utility facilities that are within the Leased Property, as well as fixtures, partitions, walls (interior and exterior, including painting as often as necessary), floors, ceilings, signs, all air conditioning, heating and similar equipment, electrical substation, doors, window, plate glass, 1" polyurethane insulation and the elastomeric coating on the roof, and all other repairs of every kind and character to the Leased Property. COMPANY at its expense, shall repair all leaks except those caused by structural defects. The plumbing facilities shall not be used for any other purpose than that for which they were constructed. The expense of any breakage, stoppage or damage resulting from a violation of this provision, shall be borne by COMPANY. COMPANY, at its expense, shall be responsible for the maintenance of the landscaping and the sweeping of the streets and sidewalks, adjacent to the Leased Property. COMPANY shall store all trash only temporarily within the Leased Property, and shall arrange for the regular pick up of trash at COMPANY's expense. COMPANY shall not burn any trash of any kind in or about the Leased Property or the Industrial Park.

2. COMPANY shall require written consent from PIMSA to make any alteration, improvement or addition to the exterior walls and roof of the Leased Property with a cost exceeding US$5,000.00 Dollars (Five Thousand Dollars 00/100, Currency of the United States of America); and COMPANY shall not damage any floors, walls, ceilings, partitions, or any wood, stone or ironwork on or about the Leased Property.

3. COMPANY shall keep the Leased Property free and clear of all encumbrances and liens arising out of acts or omissions of COMPANY, including those arising out of acts or construction done or ordered by COMPANY. However, if by reason of any work performed, materials furnished or obligations incurred by COMPANY with any third party, or any other act or omission by COMPANY, PIMSA is made liable or involved in litigation, COMPANY shall hold harmless and indemnify PIMSA including any costs and expenses, and attorneys' fees incurred by reason thereof. Should COMPANY fail fully to discharge any such encumbrances or liens within thirty (30) days after the date it has been instituted, or fail to provide a bond acceptable to PIMSA in the event of contest, PIMSA, at its option, may pay all or any part thereof. If PIMSA pays any such lien or encumbrances or any part thereof, COMPANY shall, on demand, immediately pay PIMSA the amount so paid, together with interest at the rate of twenty percent (20%) per annum from the date of payment. No lien or encumbrance of any character whatsoever created by an act or omission by COMPANY shall in any way attach or affect the rights of PIMSA on the Leased Property.

X. UTILITY SERVICES.

During the term of this Lease Agreement, COMPANY shall promptly pay for any and all public and other utilities and related services furnished to the Leased Property, including but not limited to, water, gas, electricity and telephone charges.

In order for the COMPANY to be able to use the electrical capacity existing in the Leased Property as described in RIDER NUMBER I, COMPANY must execute jointly with PIMSA and the Federal Electrical Commission (Comision Federal de Electricidad and/or CFE), an agreement by means of which all three (3) signature parties acknowledge that COMPANY will be allowed to use the KVA capacity available in the Leased Property, as mentioned in RIDER NUMBER I, for its use while COMPANY possesses the Leased Property as Lessee. This, as stated in this Clause, is not to be misinterpreted as the possibility of COMPANY receiving electricity up to the referred KVA free of charge from the CFE. COMPANY will sign a similar agreement at the end of the term of the Lease Agreement whereby the referred available capacity is returned to PIMSA, without any compensation due by PIMSA.

XI. RIGHT-OF-WAY.

PIMSA is hereby granted a right-of-way upon, across, over and under the Leased Property for ingress, egress, installations, replacing, repairing and maintaining all utilities, including but not limited to water, gas, telephones and all electricity and any television or radio antenna system serving the Leased Property. By virtue of this right-of-way it shall be expressly permissible for the providing electrical and/or telephone company to erect and maintain the necessary poles and other necessary equipment on the Leased Property; provided that in exercising any right PIMSA may have under this Clause XI, PIMSA agrees to cause only a minimum interference with COMPANY's use and possession of the Leased Property.

XII. ASSIGNMENT AND SUBLETTING.

A. COMPANY shall have the right, upon prior written notice to PIMSA, to assign or transfer this Lease Agreement, or any interest therein, or permit the use of the Leased Property by any individual, corporation, or entity, or sublease all or part of the Leased Property, provided, however, that in the event of any such assignment, transfer or sublease, COMPANY and its GUARANTOR shall remain liable for all its obligations under this Lease Agreement.

consent, provided that no such assignment or reassignment shall impair any of the rights of COMPANY herein, and provided further, that PIMSA shall remain liable for all of its obligations under this Lease Agreement. In the event of an assignment or reassignment, COMPANY shall not diminish or withhold any of the rents payable hereunder by asserting against such assignee any defense, setoff, or counterclaims which COMPANY may have against PIMSA or any other person. COMPANY hereby specifically waives, with respect to withholding of rent, any preventative measures to guarantee payment of a claim, as provided by the Civil Code.

XIII. SUBORDINATION.

During the term of this Lease Agreement, PIMSA shall have the right to encumber its interest in the Leased Property or in this Lease Agreement for any purpose it deems convenient, and COMPANY shall and hereby does subordinate its interest in this Lease Agreement and in the Leased Property to such encumbrance. However, in the event such encumbrance is foreclosed or judicially enforced, the one who holds the encumbrance shall agree to honor this Lease Agreement and accept the performance by COMPANY of its obligations hereunder. COMPANY shall execute any agreement which may be required by PIMSA in confirmation of such subordination and submit whatever public financial data may normally be requested by any trust, insurance company, bank or other recognized lending institution.

Once PIMSA shall have notified COMPANY in writing that it has assigned its interest in this Lease Agreement to any lending institution as security for a debt or other obligation of PIMSA, PIMSA shall not have the power to amend this Lease Agreement so as to reduce the rent, decrease the term or modify or negate any substantial obligation of COMPANY hereunder, or to accept a rescission of this Contract, without the written consent of such lending institution. Such obligation shall continue until the lending institution shall have notified COMPANY in writing that such assignment has been terminated, on the understanding that if PIMSA fails to obtain such lending institution's approval to carry out the foregoing, the amendment of the term above mentioned shall have no effect whatsoever as against such lending institution.

In addition, if the lending institution should notify COMPANY in writing requiring the payment of rents hereunder directly to such lending institution or its representative, then COMPANY shall be obligated to pay to such lending institution or its representative in the event the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, is being paid in installments, each subsequent installment on rent, coming due under this Lease Agreement (together with any unpaid installment then past due), until the date on which such lending institution notifies COMPANY authorizing payment of rent to PIMSA or other party entitled thereto. COMPANY understands and agrees that PIMSA may not collect any rent more than one (1) month in advance and COMPANY, at the request of PIMSA, shall provide a statement that no such advanced payment has been made; such document shall be binding upon COMPANY as against the lending institution to which this Lease Agreement may be assigned. In addition, the lending institution shall not be bound to recognize those payments made to PIMSA after the COMPANY has received notice requiring payments to be made to such lending institution.

XIV. ACCESS TO LEASED PROPERTY.

Without undue interference to COMPANY's operation, PIMSA or its authorized representative shall have the right to enter the Leased Property during all COMPANY business hours, and in emergencies at all times, to inspect the Leased Property and to make repairs, additions, or alterations to the Leased Property. For a period commencing ninety (90) days prior to the termination of this Lease Agreement, PIMSA shall have access to the Leased Property for the purpose of exhibiting it to prospective clients and may post usual for sale or for lease signs upon the Leased Property. Except in case of emergency, PIMSA shall give notice to COMPANY before entering the Leased Property, and COMPANY shall have the right to accompany any representatives of PIMSA and prospective clients.

XV. DAMAGE OR DESTRUCTION.

A. Total. In the event that the whole or a substantial part of the Leased Property is damaged or destroyed by fire, act of nature, or any other cause, so as to make COMPANY unable to continue the operation of its business, PIMSA shall, within fifteen (15) days from the date of release of the Leased Property by the corresponding authorities, determine whether the Leased Property can be restored within six (6) months from the date of termination of the debris removal, which shall not exceed forty five (45) days as of the referred date of release, and notify COMPANY of said determination. If PIMSA determines that the Leased Property cannot be restored within six (6) months, either PIMSA or COMPANY shall have the right and option to immediately terminate this Lease Agreement, by advising the other thereof by written notice, in which event PIMSA will reimburse COMPANY the amount of the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, in the event these concepts were paid in full and are not being paid in installments. If PIMSA determines that the Leased Property can be restored within said six (6) months, PIMSA shall, at its own expense, to the extent of the funds awarded to PIMSA from the proceeds of the insurance required under Clause VII hereinabove, proceed diligently to reconstruct PIMSA's Improvements, and in such event, PIMSA shall accept in the event the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, is being paid in installments, in lieu of the installment on rent payable during the period when COMPANY is substantially deprived of the use of the Leased Property, any rental insurance proceeds which may be payable pursuant to rental insurance provided for hereinabove.

B. Partial. In the event the said damage caused to the Leased Property does not prevent COMPANY from continuing the normal operation of its business on the Leased Property, PIMSA and COMPANY shall repair said damage, each party reconstructing that portion of the building and interior installations for which it was responsible during the original construction; provided that excluding damage or destruction to the parking lot during the period required for such repair work of PIMSA's Improvements or the tenant improvements, rental payable hereunder by COMPANY shall be equitably prorated to the proportioned interference with COMPANY's use and possession of the Leased Property occasioned by such damage and repair, and in such event, PIMSA, in the event the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, is being paid in installments, shall accept in lieu of the pertinent installments to the rent payable hereunder, during the period when COMPANY is partially deprived of the use and possession of the Leased Property, any rental insurance proceeds attributable to rent which may be payable pursuant to said insurance provided for hereinabove.

XVI. LIMITATION OF LIABILITY.

Except for intentional or negligent acts or omissions of PIMSA, its agents or employees, PIMSA shall not be liable to COMPANY or to any other person whatsoever for any loss or damage of any kind or nature caused by the intentional or negligent acts or omissions of COMPANY or other occupants of the Industrial Park or of adjacent property, or the public, or other causes beyond the control of PIMSA, including but not limited to, any failure to furnish, or any interruption of any utility or other services in or about the Leased Property. COMPANY recognizes that additions, replacements, and repairs to the Industrial Park will be made from time to time, provided that the same shall not substantially interfere with COMPANY's use and enjoyment of the Leased Property.

XVII. INDEMNIFICATION.

COMPANY agrees to indemnify and save PIMSA harmless from any and all claims for damages or losses of any nature whatsoever, arising from negligent act or omission of COMPANY or its contractors, licensees, agents, invitees, or employees, or arising from any accident, injury or damage whatsoever caused to any person or property occurring in or about the Leased Property, or the areas adjoining the Leased Property and from and against all costs and expenses, including attorneys' fees, incurred thereby.

PIMSA agrees to indemnify and save COMPANY harmless from any and all claims for damages or losses of any nature whatsoever, arising from negligent act or omission of PIMSA or its contractors, licensees, agents, invitees, or employees, or arising from any accident, injury or damage whatsoever caused to any person or property occurring in or about the Leased Property, or the areas adjoining the Leased Property and from and against all costs and expenses, including attorneys' fees, incurred thereby.

XVIII. NOTICES.

All notices under this Lease Agreement shall be forwarded to the addresses mentioned in the RECITALS above, with a copy to the GUARANTOR of this Lease Agreement, or such other addresses as may from time to time be furnished by the parties hereto. Said notices shall be in writing and if mailed, shall be deemed given ten (10) days after the date of mailing thereof. Duplicate notices shall be sent by certified airmail, postage prepaid, to such additional addresses as may from time to time be requested in writing by the parties hereto.

XIX. COMPANY'S DEFAULT.

A. Each of the following shall be a default of COMPANY:

1. Vacation or abandonment of Leased Property, without written notice to PIMSA.

2. Failure to pay any installment of rent due and payable hereunder upon the date when said payment is due, said failure continuing for a period of ten (10) days.

3. Default in the performance of any of COMPANY's covenants, agreements or obligations hereunder, said default, except default in the payment of any installment of rent, continuing for fifteen (15) days after written notice thereof is delivered from PIMSA to COMPANY;

4. A general assignment by COMPANY for the benefit of creditors;

5. The filing of a voluntary petition in bankruptcy by COMPANY or the filing of an involuntary petition by COMPANY's creditors, said petition remaining undischarged for a period of ninety (90) days;

6. The appointment of a Receiver to take possession of substantially all of COMPANY's assets, said Receivership remaining undischarged for a period of ninety (90) days;

7. Attachment, execution or other judicial seizure of substantially all of COMPANY's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy thereof.

B. In addition to the above, each of the following shall be considered a default of the COMPANY, if there is in respect to GUARANTOR:

1. A general assignment by GUARANTOR for the benefit of creditors;

2. The filing of a voluntary petition in bankruptcy by GUARANTOR or the filing of an involuntary petition by GUARANTOR's creditors, said petition remaining undischarged for a period of ninety (90) days;

3. The appointment of a Receiver to take possession of substantially all of GUARANTOR's assets or of this leasehold, said Receivership remaining undissolved for a period of ninety (90) days or;

4. Attachment, execution or other judicial seizure of substantially all of GUARANTOR's assets or this leasehold, such attachment, execution or other seizure remaining undismissed or undischarged for a period of ninety (90) days after the levy thereof.

C. Upon occurrence of any one of the foregoing defaults, PIMSA shall have the right, at its option, and in addition to other rights or remedies granted by law, including the right to claim damage, to do either of the following:

1. Immediately rescind this Lease Agreement and eject COMPANY from the Leased Property.

2. Claim Specific Performance. In the case of default as specified above, PIMSA shall, in addition to all other remedies, have the right to declare in the event the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, is being paid in installments, the entire unpaid balance of the installments on rent to the end of the Five (5) Year Lease Term then in effect, and all other sums due to PIMSA, immediately due and payable, plus interest at the rate of twenty percent (20%) per annum of said sums from the date of such declaration until payment in full, provided that PIMSA shall diligently proceed to lease the Leased Property to another tenant or otherwise make beneficial use thereof in mitigation of damages, rent and all other sums due or payable to PIMSA.

In the event the Leased Property is leased to another tenant during the aforesaid Five (5) Year Lease Term or otherwise used in a beneficial manner:

a. PIMSA shall promptly refund to COMPANY that portion of rent and interest paid by COMPANY pursuant to this Paragraph 2 which is allocable to the period of the Lease Term during which the Leased Property was leased to another tenant or otherwise used in a beneficial manner as well as any other allocable sums paid by COMPANY to PIMSA, less any loss or damage incurred by PIMSA as a result of COMPANY's default, or;

b. If such rent or other sums have not been paid by COMPANY to PIMSA, PIMSA shall credit such amount(s) to COMPANY.

XX. RIGHT TO CURE DEFAULTS.

In the event of COMPANY's breach or default of any term or provision herein, PIMSA may, without any obligation to do so, at any time after ten (10) days written notice, cure such breach or default, or make repairs to the Leased Property, for the account and at the expense of COMPANY. If PIMSA, by reason of such breach or default, pays any money, or is compelled to incur any expense, including attorneys' fees, the sums so paid or incurred by PIMSA with all interest, costs, and damages, shall be paid by COMPANY to PIMSA on the first (1st.) day of the month following the incurring of such expenses. If any installment of rent or any other payment is not promptly paid when due, it shall bear interest of twenty percent (20%) per annum from the date on which it becomes due until paid; but this provision is not intended to relieve the COMPANY from fulfilling its obligations hereunder in the time and in the manner specified in this Agreement. The foregoing interest, expenses and damages shall be referable from COMPANY by exercise of PIMSA's remedies hereinabove set forth. Efforts by PIMSA to mitigate the damages caused by COMPANY's breach of this Lease shall not be constructed to be a waiver of PIMSA's right to recover damages under this Clause XX. Nothing in this Clause XX affects the right of PIMSA to indemnification by COMPANY in accordance with Clause XVII hereinabove for liability arising prior to the termination of this Lease for personal injuries or property damage.

XXI. WAIVER.

In the event PIMSA or COMPANY does not compel the other to comply with any of the obligations hereunder, such action or omission shall not be construed as a waiver of a subsequent breach of the same or any other provision. Any consent or approval shall not be deemed to waive or render unnecessary the consent or approval of any subsequent or similar act by COMPANY or PIMSA.

XXII. CERTIFICATES.

COMPANY shall, within ten (10) days of receipt of a written request made by PIMSA, deliver to PIMSA a statement in writing certifying that this Lease Agreement is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified); the dates to which the rent and any other charges have been paid, and that PIMSA's Improvements have

been satisfactorily completed. It is intended that any such statement may be relied upon by any person, prospective purchaser, or lending institution interested in the Leased Property.

XXIII. HOLDING OVER.

If COMPANY should remain in possession of the Leased Property after the expiration of this Lease, COMPANY shall pay a minimum monthly rent equal to twice the then installment on rent then paid, in the event the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, was paid in installments, until COMPANY has delivered to PIMSA the Leased Property, or executed a new Lease Agreement. This provision shall not be construed as granting any right to COMPANY to remain in possession of the Leased Property after the expiration of the Lease Term. COMPANY shall indemnify PIMSA against any loss or liability resulting from delay by COMPANY in surrendering the Leased Property, if such loss or liability is founded on said delay. The parties agree that COMPANY shall quit and surrender the Leased Property at the expiration of this Lease Agreement, waiving the right provided by law.

XXIV. SURRENDER.

On the last day of the term of this Lease Agreement, or the sooner termination thereof pursuant to other provisions hereof, COMPANY shall quit and surrender the Leased Property in the same conditions as received by COMPANY, and restore the premises to a clean and good condition (normal wear and tear excepted) together with PIMSA's Improvements that may have been made in the same. Prior to termination of this Lease Agreement, COMPANY shall have removed all of its property in accordance with Clause III hereof and all property not removed shall be deemed abandoned by COMPANY and if COMPANY abandoned or is hereby deemed to have abandoned its property, PIMSA, at its option, but at COMPANY's expense, shall proceed to remove all of the COMPANY's property, and its case, warehouse, also at COMPANY's expense, such removed property with a third party supplier of such warehousing services. COMPANY shall repair and restore the Leased Property to a good and clean condition, normal wear and tear excepted, while removing the COMPANY's property.

XXV. QUIET ENJOYMENT.

PIMSA agrees that COMPANY, upon paying the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, and all other charges provided for herein and upon complying with all of the terms and provisions of this Lease Agreement, shall lawfully and quietly occupy and enjoy the Leased Property during the Lease Term.

XXVI. ATTORNMENT.

COMPANY shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust made by PIMSA, its successors or assigns, encumbering the Leased Property, or any part thereof, if so requested, attorn to the purchaser upon such foreclosure or sale and recognize such purchaser as the Lessor under this Lease.

XXVII. ENVIRONMENTAL PROTECTION LAW.

PIMSA hereby states that the Leased Property, its soil and underground are free and clear of any hazardous materials, wastes or contaminants. Nevertheless, PIMSA shall indemnify and save the COMPANY harmless from and against losses, demands, claims, payments, suits, actions and judgments of any nature and description brought against it by reason of the fact that contaminants existed on the Leased Property, soil and/or underground, or were deposited there, prior to January 01, 1994. The COMPANY will be responsible for any losses, damages or injuries caused by the contaminants which were deposited by the COMPANY on the Leased Property, soil or underground after January 01, 1994.

It will be the sole responsibility of the COMPANY to comply with all Federal, State or Municipal environmental laws, rules and dispositions, which must be complied with by the COMPANY pursuant with the industrial activities it will perform in the Leased Property and therefore, must obtain the required licenses, authorizations, permits and any other document that it must possess pursuant with the aforestated environmental rules.

Furthermore, the COMPANY will be solely and exclusively responsible for any demand, claim, or proceeding initiated against PIMSA, and which results from acts or omissions by the COMPANY, or its employees, agents, invitees, or contractors, regarding the handling of hazardous or toxic materials or wastes located in or moved to, from or through the Leased Property. The COMPANY in these cases, shall indemnify and save PIMSA harmless from and against losses, demands, claims, payments, suits and actions, including judgments of any competent environmental authority.

XXVIII. MISCELLANEOUS.

A. This document contains all of the agreements and conditions made between the parties, and may not be modified orally in any manner other than by a written agreement signed by the authorized representative of the parties.

B. If any term, covenant, condition or provision of this Lease Agreement, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction, to be invalid, void or unenforceable, the remainder of the terms, covenants, conditions or provisions of this Lease Agreement, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

C. In the event that either party should bring an action against the other party for the possession of the Leased Property, or for the recovery of any sum due hereunder, or because of the breach or default of any covenant in this Lease Agreement, the prevailing party shall have the right to collect from the other party its costs and expenses, including attorneys' fees.

D. Every payment and performance required by this Lease Agreement, shall be paid and performed precisely on the date specified for such payment or performance and no delay or extension thereof shall be permitted.

E. The titles and subtitles in these Clauses of this document shall have no effect on the interpretation of the terms and provisions contained in this Lease Agreement.

F. The parties agree that this Lease Agreement will be governed by the Laws of the State of Baja California, Mexico. For everything pertaining to the interpretation and compliance of this Lease Agreement the parties thereby expressly submit to the jurisdiction of the Civil Courts of the City of Mexicali, State of Baja California, Mexico, waiving any other jurisdiction which might be applicable by reason of their present or future domiciles or otherwise.

G. This Lease Agreement shall be executed in Spanish and English. However, in the event a dispute or other inconsistency should arise regarding interpretation or meaning of this Lease Agreement, the English version shall control.

H. Whenever the prior consent of either party, written or otherwise, is required as a condition for any act by the other party under this Lease Agreement, such party agrees not to arbitrarily or unreasonably withhold such consent.

I. Each party shall execute such further documents as shall be requested by the other party, but only to the extent that the effect of said documents is to give legal effect to rights set forth in this Lease Agreement.

J. COMPANY hereby covenants to PIMSA, and PIMSA relies upon said covenant as a material inducement to enter into this Lease, that the COMPANY will deliver to PIMSA, concurrently with the execution and delivery hereof a Guaranty of this Lease in the form attached hereto as Exhibit "D", executed by COASTCAST CORPORATION, or by such other GUARANTOR as may be acceptable to PIMSA.

K. Submission of this instrument for examination or signature by COMPANY does not constitute a reservation of or option to Lease, and it is not effective as a Lease or otherwise until execution and delivery by both PIMSA and COMPANY.

L. This Lease and each of its covenants and conditions shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, subject to the provisions hereof. Whenever in this Lease Agreement a reference is made to PIMSA, such reference shall be deemed to refer to the person in whom the interest of the Lessor hereunder shall be vested. Any successor or assignee of COMPANY who accepts an assignment or the benefit of this Lease Agreement and enters into possession or enjoyment hereunder shall thereby assume and agree to perform and be bound by the covenants and conditions hereof.

M. In the event the Government of Mexico or any subdivision thereof appropriates, forcibly buys or in any other way takes over the assets or business of the Lessee, and without due cause by COMPANY prevents COMPANY from doing business in Mexico, the COMPANY may upon written notice to PIMSA terminate this Lease Agreement without liability or penalty for such termination and without further liability for rental payments due under this Lease Agreement by without prejudice to the rights of PIMSA and COMPANY to claim from the corresponding authority the damages caused.

XXIX. RIDER NUMBER I, PIMSA'S IMPROVEMENTS.

Attached hereto as RIDER NUMBER I, is a description of PIMSA's Improvements and by this reference are made a part hereof.

XXX. The parties agree that the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, are the amounts so defined in this Lease, regardless if COMPANY was granted option to pay in installments.

XXXI. This Lease Agreement is in lieu of Lease Agreement dated December 16, 1998.

IN WITNESS WHEREOF, the parties have executed this Lease Agreement as of the twentieth day of december of two thousand and two.

PIMSA:		COMPANY:
PARQUE INDUSTRIAL MEXICALI, S . A . D E C . V .		COASTCAST CORPORATION, S.A.
By:	/s/ Eduardo Manuel Mr. Eduardo Manuel Martinez Palomera Executive Vice President	By:	/s/ Fernando Diaz Castillo Mr. Fernando Diaz Castillo General Director Of Operations And General Manager
W I T N E S S E S
By:	/s/ Francisco Fiorentini Mr. Francisco Fiorentini Manager	By:	/s/ C. P. Norma Martinez Miguel C. P. Norma Martinez Miguel Controller

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Exhibit 10.6
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Exhibit 10.7

LEASE AGREEMENT entered into by and between PARQUE INDUSTRIAL MEXICALI, S.A. DE C.V., (hereinafter referred to as PIMSA), herein represented by MR. EDUARDO MANUEL MARTINEZ PALOMERA, Party of the First Part, and by COASTCAST CORPORATION, S.A., (hereinafter referred to as COMPANY), herein represented by MR. FERNANDO DIAZ CASTILLO, Party of the Second Part, pursuant to the following RECITALS and CLAUSES:

R E C I T A L S

I. PIMSA hereby declares that:

C. PIMSA's registration number at the Federal Registry of Taxpayers is: PIM-790807-D96.

D. The address at which it has its principal place of business is Avenida Galaxia Number 18-B, Mexicali Industrial Park I, Mexicali, Baja California, Mexico.

E. PIMSA has developed the Mexicali Industrial Park I, Mexicali Industrial Park II, Mexicali Industrial Park III and the Mexicali Industrial Park IV. The Mexicali Industrial Park I, hereinafter referred to as the Industrial Park, is more specifically shown and described on Exhibit "A", which is attached hereto and made a part hereof.

F. The parties desire to enter into a Lease of Lots 5, 6, 7, 8, and a portion of Lots 4 and 9 of Block 5, the size of which is 65,220.58 Square Feet (6,059.14 Square Meters, approximately), located in the Mexicali Industrial Park I, at Avenida Galaxia Number 50, and of certain improvements constructed on the land. The land and PIMSA's Improvements together shall hereinafter be referred to as the Leased Property.

II. COMPANY hereby declares that:

C. COMPANY's registration number at the Federal Registry of Taxpayers is: CCO-821123-QA1.

D. The address at which it has its principal place of business is Calle Mercurio Number 30, Mexicali Industrial Park I, Mexicali, Baja California, Mexico.

Pursuant to the above, the parties agree as follows:

C L A U S E S

I. SCOPE OF LEASE AGREEMENT.

On the express terms and conditions set forth hereinafter, the scope of this Lease Agreement is as follows: PIMSA hereby leases to COMPANY and COMPANY hereby leases from PIMSA the land located in the Industrial Park as described on Exhibit "B", which is attached hereto and made a part hereof, and PIMSA's Improvements as more specifically described hereinafter in this Lease Agreement.

II. CONSTRUCTION BY PIMSA.

A. PIMSA has, at its expense, constructed on the land a Shell Building the size of which is 36,520.53 Square Feet (3,392.84 Square Meters, approximately) which shall hereinafter be referred to as PIMSA's Improvements. Said PIMSA's Improvements have been constructed in accordance with plans and specifications which have been approved by PIMSA and COMPANY and such approval is hereby acknowledged by the parties.

B. PIMSA has constructed all PIMSA's Improvements in accordance with all laws, ordinances, regulations, and orders of governmental authorities, and Industrial Park Regulations which are attached hereto as Exhibit "C". The term "Improvements" shall, depending on the context, refer to either "PIMSA's Improvements", "COMPANY's Improvements" or both. The term "COMPANY's Improvements" shall refer to those improvements identified in Clause III.A. below.

C. The Leased Property is considered Ready for Occupancy.

D. Upon prior written consent of PIMSA, COMPANY may at any time prior to the commencement of the term hereof, at its sole risk, enter upon and install such trade fixtures and equipment in the Leased Property as it may elect; provided, however that COMPANY shall provide evidence of insurance satisfactory to PIMSA.

III. INSTALLATIONS BY COMPANY.

A. COMPANY may, at its expense, install on the Leased Property, such trade fixtures, equipment and furniture as it may deem necessary; provided that such items are installed and are removable without damage to the structural integrity of PIMSA's Improvements. Said trade fixtures, equipment and furniture shall remain COMPANY's property and unless COMPANY is in default hereunder, shall be removed by COMPANY on or before the expiration date of the term hereof. COMPANY may also install temporary improvements in the interior of PIMSA's Improvements upon the Leased Property provided that such COMPANY's Improvements are installed and are removable without damage to the structure of the PIMSA's Improvements. Such COMPANY's Improvements shall remain property of COMPANY and, unless COMPANY is in default hereunder, shall be removed by COMPANY upon expiration of the term hereof or earlier termination of this Lease. COMPANY shall repair, at its sole expense, all damage caused by the installation or removal of trade fixtures, equipment, furniture or temporary COMPANY's Improvements, reasonable wear and tear excepted.

IV. LEASE TERM AND COMMENCEMENT DATE.

D. Option to Renew. COMPANY shall have the right to extend the term of this Lease Agreement upon the terms, conditions and rentals set forth herein, for one (1) additional period of five (5) years, ("Extended term"), by giving written notice to PIMSA not less than six (6) months prior to the expiration of the Initial Term of this Lease Agreement, so long as COMPANY is not then in default in payment of any installment on "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, hereunder or of any other obligation hereunder.

V. RENT.

A. Initial Term. As minimum payment for the Lease of the Leased Property during the Initial Term hereof, COMPANY shall pay to PIMSA at the address of PIMSA stated above, as minimum rent ("Payment for the Initial Term") the amount of US$613,560.00 Dollars (Six Hundred Thirteen Thousand Five Hundred Sixty 00/100 Dollars, Currency of the United States of America), plus ten percent (10%) of Value Added Tax, to be paid in full at the execution of this Agreement. However, COMPANY may, exclusively for the purpose of facilitating such payment, pay the referred amount in sixty (60) consecutive and successive monthly installments as follows:

1. US$30,678.00 Dollars (Thirty Thousand Six Hundred Seventy Eight Dollars 00/100, Currency of the United States of America), plus ten percent (10%) of Value Added Tax, upon the execution of this Contract which sum shall be applied to the last three (3) installments of the "Payment for the Initial Term".

2. Fifty Seven (57) equal, consecutive and successive installments in the amount of US$10,226.00 Dollars (Ten Thousand Two Hundred Twenty Six Dollars 00/100, Currency of the United States of America), plus ten percent (10%) of Value Added Tax, each installment payable in advance on the first (1st.) day of each month during the Initial Term, commencing on the first (1st.) month of the Initial Term.

a) The "Payment for the Initial Term", multiplied by

d) In no event shall the monthly installment for any Lease Year of the Initial Term be decreased below the monthly installment for the immediately preceding Lease Year of the Initial Term.

B. Additional Payment to the "Payment for the Initial Term" or the "Payment for the Extended Term" as this later term is hereinafter defined. With the exception of the income tax imposed upon PIMSA, and any tax associated with the Sale or Transfer of the Leased Property or PIMSA's Improvements, which shall be borne by PIMSA, COMPANY will pay to PIMSA, as additional rent, an amount equal to the sum of all taxes and assessments of every kind which are or may be at any time during the Initial Term or Extended Term, levied against the Leased Property or the Lease Agreement, including but not limited to value added tax, property tax and all such taxes and assessments levied by any federal, state or municipal government, or any government authority. All such taxes and assessments shall be paid by PIMSA and reimbursed by COMPANY within ten (10) calendar days after the receipt showing the payment thereof is presented to COMPANY by PIMSA.

In calculating the amount of COMPANY's reimbursement, all taxes which shall become due for the first and last years of the Lease Term shall be apportioned prorata between PIMSA and COMPANY in accordance with the respective number of months during which each party shall be in possession of the Leased Property.

C. Renewal Terms.

a) The "Payment for the Initial Term", multiplied by

c) The product shall be the amount of the "Payment for the Extended Term".

a) Last three (3) monthly installments of the "Payment for the Extended Term" shall be paid in advance upon the execution of the new Contract, and

4. Annual Inflationary Adjustment of the minimum "Payment for the Extended Term", during the Extended Term in the event COMPANY performs such payment in installments. As of the first (1st.) day of the First, Second, Third, Fourth, and Fifth Lease Years of the Extended Term, the amount of the monthly installment of the "Payment for the Extended Term" shall be increased for inflation and in accordance with the following arithmetical formula:

a) The "Payment for the Extended Term", multiplied by:

b) The factor, expressed in percentage, composed by the sum of one hundred (100) percentage points plus the percentage increase in the "Index" (as defined hereinafter) occurring between the first (1st.) day of the Extended Term and the last day of the Lease Year just then ending. For example, if calculating the rent for the Third Lease Year of the Extended Term one would compute the percentage increase occurring in the index between the first (1st.) day of the First Lease Year of the Extended Term and the last of the Second Lease Year of the Extended Term (or the respective dates closest to those days) increased by one hundred (100) percentage points. If the index has risen six percent (6%) in that time, the "Payment for the Extended Term" shall be multiplied by one hundred and six percent (106%).

c) The product shall be divided by sixty (60) and the result shall be the amount of the monthly installment due for the Lease Year for which the calculation is performed. The rent for each succeeding Lease Year of the Extended Term shall be computed in accordance with the provisions of this Paragraph 4.

D. Currency. COMPANY will pay the rent provided for in the above Paragraphs A and C in Dollars, Currency of the United States of America, or in Pesos, Mexican Currency, at the sale rate of

exchange that Banco Nacional de Mexico, S. A. has in effect on the date such sums are paid, as PIMSA may elect.

The foregoing will not be considered to impede or hinder PIMSA's possibilities and rights under Clause XII to negotiate or assign this Agreement to Mexican or Foreign Banking and Lending Institutions.

E. Proration. The installment for any partial month shall be prorated.

F. Damages. In the event this Lease Agreement is terminated by PIMSA due to a default of COMPANY, PIMSA shall be entitled to keep and retain as damages, all sums paid or deposited by COMPANY, as "Payment for the Initial Term", or as the case may be, as "Payment for the Extended Term" if such Payments were paid in full, and in the event COMPANY has chosen to pay the "Payment for the Initial Term" or the "Payment for the Extended Term" in monthly installments, to demand the payment in full of the main obligation consisting in the "Payment for the Initial Term", or, as the case may be, the "Payment for the Extended Term", in addition to any other remedy available to PIMSA under the terms of this Agreement.

VI. USE.

The Leased Property shall be used and occupied for any lawful industrial purpose not in violation of the Industrial Park Regulations attached hereto as Exhibit "C". COMPANY shall promptly and adequately comply with all laws, ordinances and orders of all governmental authorities affecting the Leased Property, and its cleanliness, safety and labor facilities applicable to the COMPANY's use of the Leased Property. COMPANY shall not perform or omit any acts that may damage the Leased Property, or be a nuisance, or menace to other occupants of the Industrial Park.

VII. INSURANCE.

B. Fire and Other Insurance. During the Lease Term, COMPANY at its sole expense, shall obtain and maintain in full force, in the amount of US$1'045,000.00 Dollars (One Million Forty Five Thousand Dollars 00/100, Currency of the United States of America), or as modified herein , a policy or policies of insurance, at replacement value, for fire, lightning, explosion, falling aircraft, smoke, windstorm, earthquake, hail, vehicle damage, volcanic eruption, strikes, civil commotion, vandalism, riots, malicious mischief, debris removal, steam boiler or pressure object or machinery breakage if applicable, and flood insurance, on all the Leased Property, including but not limited to the Shell Building, PIMSA's Improvements and COMPANY's Improvements. COMPANY shall also obtain and maintain annual rental insurance in the amount of the annual rent provided for herein in favor of PIMSA. COMPANY shall be responsible for maintaining insurance on all of COMPANY's own property. Except for insurance upon COMPANY's property, PIMSA or its appointee shall be named the COMPANY's beneficiary of any and all proceeds from any such policy or policies, as their interests may appear.

C. Form and Delivery of Policies. Each insurance policy referred to in the preceding paragraph shall be in a form approved by the Department of Finance and Public Credit and written with one or more companies licensed to do insurance in Mexicali, Baja California, Mexico, and shall provide that it shall not be subject to cancellation or change except after at least thirty (30) days prior written notice to PIMSA and prior written approval from PIMSA. The policies, or duly executed certificates for them, together with copies of receipts for payment of the premiums thereof, shall be delivered to PIMSA prior to the Commencement Date of the Lease Term, as provided in Clause IV hereof; all documents verifying the renewal of such policies shall be delivered to PIMSA at least thirty (30) days prior to the expiration of the term of such coverage. Prior to the Commencement Date of the Lease Term, each party shall procure and maintain such insurance covering its own liability and property as each deems appropriate.

E. Waiver of Subrogation. The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the premises and to the fixtures, personal property, tenant's improvements, and alterations of either PIMSA or COMPANY in or on the premises that are caused by or result from risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. If either party purchases insurance, the policy shall provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. If a party hereto cannot obtain such waiver of subrogation through reasonable efforts, it shall obain insurance naming the other party as a coinsured under its policy in order to accomplish the intent of this provision.

VIII. TAXES AND ASSESSMENTS.

COMPANY agrees to pay all taxes and assesments of every kind levied upon any and all personal property of COMPANY, its successors and assigns, whether same shall be or may become a lien upon the Leased Property. All such taxes and assessments shall be paid by COMPANY before the same become delinquent. In the event that this Contract is recorded at the Public Registry of Property, COMPANY shall pay all costs of such recordation, including, but not limited to, notary fees, charges and taxes required in connection therewith.

IX. REPAIRS, ALTERATIONS AND IMPROVEMENTS.

A. PIMSA.

2. If PIMSA fails to make the repairs described in Clause IX. A., COMPANY may, but shall not be required to, make or cause such repairs, to be made, and PIMSA shall, on demand, immediately pay to COMPANY the actual cost of the repairs.

B. COMPANY.

X. UTILITY SERVICES.

XI. RIGHT-OF-WAY.

XII. ASSIGNMENT AND SUBLETTING.

B. PIMSA shall have the right to assign and reassign, from time to time, any or all of the rights and obligations of PIMSA in this Lease Agreement, or any interest therein, without COMPANY's consent, provided that no such assignment or reassignment shall impair any of the rights of COMPANY

herein, and provided further, that PIMSA shall remain liable for all of its obligations under this Lease Agreement. In the event of an assignment or reassignment, COMPANY shall not diminish or withhold any of the rents payable hereunder by asserting against such assignee any defense, setoff, or counterclaims which COMPANY may have against PIMSA or any other person. COMPANY hereby specifically waives, with respect to withholding of rent, any preventative measures to guarantee payment of a claim, as provided by the Civil Code.

XIII. SUBORDINATION.

In addition, if the lending institution should notify COMPANY in writing requiring the payment of rents hereunder directly to such lending institution or its representative, then COMPANY shall be obligated to pay to such lending institution or its representative in the event the "Rent for the Initial Term", or "Rent for the Extended Term", as applicable, is being paid in installments, each subsequent installment on rent, coming due under this Lease Agreement (together with any unpaid installment then past due), until the date on which such lending institution notifies COMPANY authorizing payment of rent to PIMSA or other party entitled thereto. COMPANY understands and agrees that PIMSA may not collect any rent more than one (1) month in advance and COMPANY, at the request of PIMSA, shall provide a statement that no such advanced payment has been made; such document shall be binding upon COMPANY as against the lending institution to which this Lease Agreement may be assigned. In addition, the lending instutution shall not be bound to recognize those payments made to PIMSA after the COMPANY has received notice requiring payments to be made to such lending institution.

XIV. ACCESS TO LEASED PROPERTY.

XV. DAMAGE OR DESTRUCTION.

XVI. LIMITATION OF LIABILITY.

XVII. INDEMNIFICATION.

XXIII. NOTICES.

XIX. COMPANY'S DEFAULT.

A. Each of the following shall be a default of COMPANY:

1. Vacation or abandonment of Leased Property, without written notice to PIMSA.

2. Failure to pay any installment of rent due and payable hereunder upon the date when said payment is due, said failure continuing for a period of ten (10) days.

4. A general assignment by COMPANY for the benefit of creditors;

6. The appointment of a Receiver to take possession of substantially all of COMPANY's assets, said Receivership remaining undischarged for a period of ninety (90) days;

B. In addition to the above, each of the following shall be considered a default of the COMPANY, if there is in respect to GUARANTOR:

1. A general assignment by GUARANTOR for the benefit of creditors;

3. The appointment of a Receiver to take possession of substantially all of GUARANTOR's assets or of this leasehold, said Receivership remaining undissolved for a period of ninety (90) days or;

1. Immediately rescind this Lease Agreement and eject COMPANY from the Leased Property.

In the event the Leased Property is leased to another tenant during the aforesaid Five (5) Year Lease Term or otherwise used in a beneficial manner:

b. If such rent or other sums have not been paid by COMPANY to PIMSA, PIMSA shall credit such amount(s) to COMPANY.

XX. RIGHT TO CURE DEFAULTS.

In the event of COMPANY's breach or default of any term or provision herein, PIMSA may, without any obligation to do so, at any time after ten (10) days written notice, cure such breach or default, or make repairs to the Leased Property, for the account and at the expense of COMPANY. If PIMSA, by reason of such breach or default, pays any money, or is compelled to incur any expense, including attorney's fees, the sums so paid or incurred by PIMSA with all interest, costs, and damages, shall be paid by COMPANY to PIMSA on the first (1st.) day of the month following the incurring of such expenses. If any installment of rent or any other payment is not promptly paid when due, it shall bear interest of twenty percent (20%) per annum from the date on which it becomes due until paid; but this provision is not intended to relieve the COMPANY from fulfilling its obligations hereunder in the time and in the manner specified in this Agreement. The foregoing interest, expenses and damages shall be recoverable from COMPANY by exercise of PIMSA's remedies hereinabove set forth. Efforts by PIMSA to mitigate the damages caused by COMPANY's breach of this Lease shall not be construed to be a waiver of PIMSA's right to recover damages under this Clause XX. Nothing in this Clause XX affects the right of PIMSA to indemnification by COMPANY in accordance with Clause XVII hereinabove for liability arising prior to the termination of this Lease for personal injuries or property damage.

XXI. WAIVER.

XXII. CERTIFICATES.

been satisfactorily completed. It is intended that any such statement may be relied upon by any person, prospective purchaser, or lending institution interested in the Leased Property.

XXIII. HOLDING OVER.

XXIV. SURRENDER.

On the last day of the term of this Lease Agreement, or the sooner termination thereof pursuant to other provisions hereof, COMPANY shall quit and surrender the Leased Property in the same conditions as received by COMPANY, and restore the premises to a clean and good condition (normal wear and tear excepted) together with PIMSA's Improvements that may have been made in the same. Prior to termination of this Lease Agreement, COMPANY shall have removed all of its property in accordance with Clause III hereof and all property not removed shall be deemed abandoned by COMPANY and if COMPANY abandoned or is hereby deemed to have abandoned its property, PIMSA, at its option, but at COMPANY's expense, shall proceed to remove all of the COMPANY's property, and its case, warehouse, also at COMPANY's expense, such removed property with a third party supplier of such warehousing services. COMPANY shall repair and restore the Leased Property to a good and clean condition, normal wear and tear excepted, while removing the COMPANY's property.

XXV. QUIET ENJOYMENT.

XXVI. ATTORNMENT.

XXVII. ENVIRONMENTAL PROTECTION LAW.

PIMSA hereby states that the Leased Property, its soil and underground are free and clear of any hazardous materials, wastes or contaminants. Nevertheless, PIMSA shall indemnify and save the COMPANY harmless from and against losses, demands, claims, payments, suits, actions and judgments of any nature and description brought against it by reason of the fact that contaminants existed on the Leased Property, soil and/or underground, or were deposited there, prior to November 01, 1988. The COMPANY will be responsible for any losses, damages or injuries caused by the contaminants which were deposited by the COMPANY on the Leased Property, soil or underground after November 01, 1988.

XXVIII. MISCELLANEOUS.

E. The titles and subtitles in these Clauses of this document shall have no effect on the interpretation of the terms and provisions contained in this Lease Agreement.

J. COMPANY hereby covenants to PIMSA, and PIMSA relies upon said covenant as a material inducement to enter into this Lease, that COMPANY will deliver to PIMSA, concurrently with the execution and delivery hereof a Guaranty of this Lease in the form attached hereto as Exhibit "D", executed by COASTCAST CORPORATION, or by such other GUARANTOR as may be acceptable to PIMSA.

XXIX. RIDER NUMBER I, PIMSA'S IMPROVEMENTS.

Attached hereto as RIDER NUMBER I, is a description of PIMSA's Improvements and by this reference are made a part hereof.

XXXI. This Lease Agreement is in lieu of Lease Agreement dated December 16, 1998.

IN WITNESS WHEREOF, the parties have executed this Lease Agreement as of the twentieth day of december of two thousand and two.

PIMSA:		COMPANY:
PARQUE INDUSTRIAL MEXICALI, S . A . D E C . V .		COASTCAST CORPORATION, S.A.
By:	/s/ Eduardo Manuel Mr. Eduardo Manuel Martinez Palomera Executive Vice President	By:	/s/ Fernando Diaz Castillo Mr. Fernando Diaz Castillo General Director Of Operations And General Manager
W I T N E S S E S
By:	/s/ Francisco Fiorentini Mr. Francisco Fiorentini Manager	By:	/s/ C. P. Norma Martinez Miguel C. P. Norma Martinez Miguel

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Exhibit 10.7
R E C I T A L S
C L A U S E S
EX-21 5 a2106141zex-21.htm EXHIBIT 21
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EXHIBIT 21

SUBSIDIARIES

Coastcast Corporation, S.A. a Mexico corporation

Coastcast Tijuana, S. de R.L. de C.V., a Mexico corporation

California Precision Aluminum Casting, Inc., a California corporation

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EXHIBIT 21
SUBSIDIARIES
EX-23 6 a2106141zex-23.htm EXHIBIT 23
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Exhibit 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No. 333-102148 of Coastcast Corporation on Form S-8 of our reports dated February 28, 2003, appearing in this Annual Report on Form 10-K of Coastcast Corporation for the year ended December 31, 2002.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
March 21, 2003

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Exhibit 23
INDEPENDENT AUDITORS' CONSENT
EX-99.1 7 a2106141zex-99_1.htm EXHIBIT 99.1
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Exhibit 99.1

COASTCAST CORPORATION

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Coastcast Corporation (the "Company") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Hans H. Buehler, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1): The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ HANS H. BUEHLER

Hans H. Buehler
Chief Executive Officer

March 26, 2003

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Coastcast Corporation (the "Company") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Norman Fujitaki, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1): The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ NORMAN FUJITAKI

Norman Fujitaki
Chief Financial Officer

March 26, 2003

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Exhibit 99.1
COASTCAST CORPORATION
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