Coast Wholesale Appliances Inc. (Coast) was established on January 1, 2011 with the conversion of Coast WholesaleAppliances Income Fund to a publicly traded, monthly dividend paying corporation. Shares of Coast began trading on theToronto Stock Exchange under the symbol “CWA” on January 6, 2011.Coast is a leading independent supplier of major household appliances and accessories. Founded in 1978, we originallyoperated mainly as a wholesale supplier to developers and builders in Western Canada, later broadening our focus to includethe retail market. In January 2009, we expanded geographically into the Greater Toronto Area (GTA) of Ontario.Today, we combine contract sales to developers and builders of multi-family and single-family housing with direct retail salesat 15 stores across the four western provinces and one store in the GTA. At each Coast location, we offer our customers theconvenience of one-stop shopping for all of their major household appliance needs featuring more than 35 brands.The exceptional stability our business has shown over the past 34 years is due in large part to the essential nature of the majorhome appliances we sell. New product innovations and a focus on home décor and energy efficiency have also contributed toour sales results.Our business strategy has three elements. To create value for our shareholders, we are working to:1. Build on our strong market position in Western Canada and explore growth opportunities in Western Canada and Ontarioas they arise;2. Increase sales from our existing stores; and3. Continue to enhance our profitability.Nanaimo1 storeVictoria1 storeVancouver1 storeBurnaby1 distribution warehouseCoquitlam1 storeSurry1 storeAbbotsford1 storeKelowna1 storeCalgary2 stores1 distributionwarehouseRed Deer1 storeEdmonton2 stores1 distributionwarehouseSaskatoon1 store Regina1 storeWinnpeg1 storeToronto1 store1 distributionwarehouse
[ 1 ]Performance HighlightsLetter to Shareholders: 02Management’s Discussion and Analysis: 04Unaudited Interim Condensed Financial Statements: 18Notes to the Unaudited Interim Condensed Financial Statements : 22Corporate Information: 25(in thousands of dollars except percentages and per-share amounts) 2013 2012 2011 Q1 Q1 Q1Sales 34,360 30,035 28,086Gross profit 7,418 6,883 6,752As a percentage of sales 21.6% 22.9% 24.0% Profit (loss) 359 (4) (487)Diluted net income (loss) per share 0.036 (0.000) (0.049) EBITDA 1,070 616 (43)EBITDA margin 3.1% 2.1% -0.2% EBITDA per share 0.107 0.061 (0.004)Dividends per share 0.075 0.105 0.070
[ 2 ]We are happy to report that Coast made a very solid start to2013. Our first quarter revenues exceeded our expectations,as we had a stronger than anticipated flow of sales to singleand multi-family homebuilders move through to completion.At the same time, we continued to drive up our grossprofit dollars. We also significantly improved our EBITDAperformance.Sustaining healthy revenue growthThe first three months of 2013 represented our seventhconsecutive quarter of year-over-year revenue growth.Overall sales for the seasonally slower winter periodimproved by $4.3 million, or 14.4%, to $34.4 million. Ourbuilder sales for the quarter increased by a very robust25.2% over 2012. In the retail segment, given the currentextremely cautious consumer spending climate, we werepleased to maintain our sales at just 0.4% below the 2012level. Our other revenues, which are generated by warrantysales, freight and installation, sales of glass products andcommission sales, were also up, increasing by 2.1% overlast year.As in the past three quarters, our revenues improved in all ofour geographic markets. Notably, we achieved double-digitsales increases in both the Greater Toronto Area (GTA) ofOntario and British Columbia.With the higher revenues, our first quarter gross profitincreased to $7.4 million from $6.9 million in 2012, a7.8% improvement. However, our gross margin percentagecontinued to be eroded by ongoing competitive pressure andthe resulting price compression in both the retail and buildersegments of our business. As a result, our gross margin forthe quarter declined to 21.6% from 22.9% last year. Despitethe increase in business, we were able to keep our selling,warehouse, facility, and general and administrative (SG&A)expenses in line with last year by strictly controlling operatingcosts. As a percentage of sales, SG&A expenses werereduced to 18.5% from 20.9% in Q1 2012.Our first quarter EBITDA of $1.1 million was up by $0.5million, or a healthy 74%, from the $0.6 million we reportedin 2012, while our EBITDA margin improved to 3.1% from2.1% last year. The increase in EBITDA was due mainly tothis year’s higher revenues and the resulting $0.5 milliongross profit gain. We recorded a net income of $0.4 millionfor the period, compared to a loss of $4,000 in 2012.Strategic measures to enhanceprofitabilityWhile keeping a tight rein on operating costs, we continuedto focus on improving our profitability by increasing salesfrom our existing stores. As ever, keeping our showroomscurrent in order to enhance Coast’s appeal to retailcustomers is a top priority. During the quarter, we movedforward with renovations to our Calgary South storein Alberta and began upgrade work at our Saskatoon,Saskatchewan location. We expect to complete both ofthese improvement projects by mid-year.We also continued to refine our product offering in order todrive increased same-store sales. During the quarter, buildingon our successful national roll-out of the KitchenAid®brand last year, we proceeded with plans to expand ourrange of Whirlpool® major appliances. We are increasingthe selection of Whirlpool products we market to retailcustomers and making this popular mid-to-higher-end lineavailable to our builder customers.We believe that having a wider range of Whirlpoolmodels will make Coast an even more attractive shoppingdestination for retail customers, and particularly thosediscerning consumers who seek a value-added purchaseexperience. We are not looking to attract customers whoshop on price alone. Our customers choose Coast becauseof our state-of-the-art designer showrooms and workingkitchens, our exceptional selection of mid-to-high-endbrands and models, our highly knowledgeable sales staff,and our outstanding after-sales service.As expected, our inventory levels increased during the firstquarter, due both to our higher sales volumes and ourWhirlpool expansion. At March 31, 2013, inventory stood at$27.0 million, compared to $25.8 million at December 31,2012. We continue to closely review and refine our productoffering in order to improve both our inventory turn rate andour gross margins.DividendsDuring the first quarter, we declared monthly dividends of$0.025 per share for each of January, February and March,payable on or about the fifth day of the month following.This dividend rate equates to $0.30 per share on anannualized basis, representing a yield of approximately 10%per annum at recent Coast share trading prices.To our Shareholders
[ 3 ]The Board of Directors closely monitors our dividend level ona continuous basis.Maintaining a cautious outlookThe following outlook discussion is qualified in its entiretyby the forward-looking statements proviso at the beginningof the Management’s Discussion and Analysis (MD&A)that follows this letter, and by the section on risks anduncertainties at the end of our MD&A.The outlook for Coast’s business in 2013 remains cautious.In the builder segment, we expect that our revenues willcontinue to grow as projects in our order backlog move intothe final stages of development, particularly in the multi-family sector, but at a slower rate than in the first quarter ofthe year. We anticipate that housing starts will soften slightlyin 2013 and that very competitive market conditions willcontinue to compress unit prices and hence margins on ourbuilder sales for the foreseeable future. On the retail side,we expect that market conditions and pricing will remainsimilarly competitive through 2013 as consumers continue tobe extremely cautious about making major purchases.We had an excellent start to the year from a salesperspective, thanks to our exceptionally robust builderbusiness. Going into the second quarter, while we have avery strong backlog of contract orders for future deliveryacross all of our markets, we recognize that plannedresidential development can be slowed by unfavourableeconomic conditions. The outlook for the British Columbiamarket is particularly cautious.Over the balance of the year, we will continue to focuson controlling costs, improving our margin performance,reducing our inventory and increasing inventory turns. To thisend, we will be implementing upgrades to our inventory andpricing management systems over the remainder of the year.We remain confident in our ability to deliver solid returnsto investors as we continue to grow our business. Over theshort-term, we believe that the current level of dividendswill allow us to maintain the balance sheet strength weneed to manage through the current difficult economy. Overthe longer-term, we look forward to capitalizing on Coast’sbalanced business model and proven growth strategy inorder to increase both our geographic coverage and ourmarket share.On behalf of Coast’s management and our Board ofDirectors, we offer our appreciation to all of our partnersin success – our employees across Western Canada and inOntario, our suppliers and our customers – and our gratitudeto you, our shareholders for your continued support of ourbusiness.We look forward to reporting back to you again after theend of the second quarter.Sincerely,Maurice E. PaquettePresident and CEO, DirectorCoast Wholesale Appliances Inc.Stephen T. BellringerChair of the Board of DirectorsCoast Wholesale Appliances Inc.
[ 4 ]MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITIONS AND OPERATIONSFor the period ended March 31, 2013This management’s discussion and analysis (MD&A) has been prepared by Coast Wholesale Appliances Inc. (Coast) as ofMay 2, 2013. The MD&A should be read in conjunction with Coast’s unaudited interim condensed financial statementsand accompanying notes for the period ended March 31, 2013 and Coast’s audited financial statements for the year endedDecember 31, 2012 (both available at www.sedar.com and www.coastwholesaleappliancesinc.com). The financial statementshave been prepared in accordance with International Financial Reporting Standards (IFRS) and are reported in Canadiandollars.This report presents our financial results for the period from January 1, 2013 to March 31, 2013, which represents the firstquarter of our 2013 fiscal year.Forward-looking StatementsThis report includes forward-looking statements, which involve known and unknown risks, uncertainties and other factors thatmay cause actual results, performance or achievements or industry results to be materially different from any future results,performance or achievements expressed or implied by such forward-looking statements. These forward-looking statementsare identified by the use of terms and phrases such as “anticipate”, “believe”, “estimate”, “expect”, “may”, “plan”, “will”and similar terms and phrases, including references to assumptions. Such statements may involve, but are not limited to,comments with respect to the sustainability of our dividends to shareholders, the performance of the Canadian economy andour sales expectations. Forward-looking statements are included in, but are not limited to, the sections entitled First Quarter2013 Summary, Economic and Industry Factors, Working capital and liquidity, Total assets, Dividends to shareholders andOutlook.These forward-looking statements reflect our current expectations regarding future events and operating performance asof the date of this report. Forward-looking statements involve significant risks and uncertainties, should not be read asguarantees of future performance or results and will not necessarily be accurate indications of whether or not such resultswill be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to: sensitivity to general economic conditions; changes in consumer confidencein the economy; maintenance of profitability and management of changes to our business; competition; increases to interestrates; reliance on suppliers and their ability to supply product for sale on a timely basis; changes in consumer preferences;changes in our mix of product sales; fluctuations in fuel and commodity pricing; usage of extended warranty programs andthe costs to deliver these services; changes to planning and supply chain processes; lack of long-term supplier agreements;reliance on key personnel; and foreign exchange rates as they relate to imported products.Although the forward-looking statements contained in this report are based upon what we believe to be reasonableassumptions, Coast cannot assure investors that actual results will be consistent with these forward-looking statements.The forward-looking statements reflect management’s current beliefs and are based on information currently available toCoast. They speak only as of the date of this report and reflect current assumptions regarding future events and operatingperformance. These assumptions include, without limitation: slow economic growth in 2013 in both Western Canada and theGreater Toronto Area (GTA), our current markets; continued fluctuations in exchange rates with the Canadian dollar tradingnear par with the US dollar; continued low interest rates; continuing relatively stable credit markets for our major buildercustomers; weak consumer confidence due to the slow economic recovery; and a slight softening of total housing starts in2013 compared to 2012. These forward-looking statements are made as of the date of this report and Coast assumes noobligation to update or revise them to reflect new events or circumstances, other than as required by law.
[ 5 ]COAST WHOLESALE APPLIANCES INC.First Quarter 2013 SummaryFinancial results• Sales of $34.4 million were up by 14.4% from the $30.0 million recorded in the first quarter of 2012.• Sales in the builder segment of our business increased by 25.2% year-over-year, sales to retail customers were down by0.4% and revenues from warranty sales, freight and installation, sales of glass products and commission sales improvedby 2.1%.• Gross profit of $7.4 million was up by $0.5 million over 2012, while gross margin percentage was eroded by competitivemarket conditions, decreasing to 21.6% from 22.9% in 2012.• Selling, warehouse, facility, and general and administrative expenses of $6.3 million were equal to the 2012 level but werereduced as a percentage of sales to 18.5% from 20.9% in 2012.• EBITDA of $1.1 million was up by $0.5 million, or 74%, over 2012 and EBITDA margin increased to 3.1% from 2.1%in 2012.• Inventory rose by $1.2 million from the 2012 year-end due to higher sales volumes and the introduction of new products.• Monthly dividends of $0.025 per share ($0.30 per annum) were paid during the quarter.Operating highlights• As part of our ongoing strategy to enhance profitability by increasing sales from our existing stores, we continued torefresh our locations, proceeding with significant upgrade work at our Calgary South, Alberta store and beginning majorrenovations at our Saskatoon, Saskatchewan store. These improvements are scheduled for completion by mid-2013.• Effective March 27, 2013, Stephen T. Bellringer was appointed to Coast’s Board of Directors and assumed the role ofChair.Business environment• The Canadian economy continued to exhibit only minimal growth.• The profitability of both our retail and builder business was negatively impacted by highly competitive market conditionsand the resulting compression of pricing.• Low interest rates persisted and credit markets remained relatively stable for our builder and developer customers,allowing reasonable access to financing for new housing projects.• Total housing starts in our markets remained at approximately the same levels recorded in 2012.• Steady development activity in both the multi-family and single-family sectors allowed us to strengthen our backlog oforders from builders and developers.Economic and Industry FactorsIn general, the economic and industry conditions impacting our business have not changed substantially from those discussedin our 2012 Annual Report. Moderate to slow economic growth rates persisted in Canada and elsewhere, and we expectthat economic growth will remain sluggish through the balance of 2013 and into 2014. The potential for further economicsetbacks remains a concern, particularly in the United States and Europe, and the global business environment continues tobe uncertain. However, on a positive note, Canadian credit markets have remained relatively stable, allowing our builder anddeveloper customers to finance both their current and future projects.Our builder business in the first quarter exceeded our expectations, improving significantly over the first three months of 2012as sales continued to flow from the contract orders logged over the past two years. However, as in the previous four quarters,our gross margins on builder sales were compressed by more competitive pricing as a result of the fiercely competitive businessclimate. We expect that total housing starts in Canada this year will decrease slightly from the level recorded in 2012, with acontinued shift from single-family to multi-family starts, and we are cautious in our outlook for our builder business over thebalance of 2013.In the retail segment, while we maintained our first quarter sales at just slightly below the prior year level, our margins werereduced by more competitive pricing. We anticipate that the retail pricing environment will remain very competitive through2013 as consumers continue to restrain their spending.
[ 6 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisSeasonalityCoast establishes an annual dividend rate and the monthly dividends paid to shareholders are averaged through the year. Thispayment pattern may not correlate to our net income, on a monthly basis, as sales of our products are subject to seasonalfluctuations that follow our customers’ building activities and retail purchases. Historically, the first quarter has been ourslowest, accounting for approximately 21% to 23% of annual revenues. Sales are generally evenly distributed in the balanceof the year, with a somewhat softer fourth quarter in comparison to the second and third quarters. In 2012, the first quarteraccounted for 21% of annual sales, while the second, third and fourth quarters respectively represented 26%, 27% and 26%.Selected Financial InformationThe following selected financial information has been derived from Coast’s unaudited interim condensed financial statements forthe three-month period ended March 31, 2013. It should be read in conjunction with these statements and their accompanyingnotes (available at www.sedar.com or www.coastwholesaleappliancesinc.com). The 2013 unaudited interim condensed financialstatements have been prepared in accordance with IFRS in Canadian dollars, as were our 2012 financial statements.Operating Results(in thousands of dollars except percentages and per-share amounts) 3 months ended 3 months ended 3 month ended March 31, 2013 March 31, 2012 March 31, 2011 Sales 34,360 30,035 28,086Cost of sales 26,942 23,152 21,334Gross profit 7,418 6,883 6,752As a percentage of sales 21.6% 22.9% 24.0%Expenses (1) 6,348 6,267 5,990EBITDA before other costs (2) 1,070 616 762As a percentage of sales 3.1% 2.1% 2.7%Other costs - - 805EBITDA (2) 1,070 616 (43)As a percentage of sales 3.1% 2.1% -0.2% Interest 129 154 160Deferred income taxes (recovery) 66 (1) (175)Current income taxes 24 - -Depreciation 492 467 459Profit (loss) and comprehensive income ( loss) 359 (4) (487)As a percentage of sales 1.0% 0.0% -1.7% Basic and diluted net income (loss) per share 0.036 (0.000) (0.049)Dividends per share 0.075 0.105 0.070EBITDA per share (2) 0.107 0.061 (0.004) Total assets 98,516 94,812 126,941Total long-term liabilities 3,600 14,237 15,169(1) Expenses include selling, general and administrative, facilities and warehousing expenses.(2) See definition of EBITDA under Non-IFRS Measures.
[ 7 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisSalesSales revenues of $34.4 million for the three months ended March 31, 2013 were up by $4.3 million, or 14.4%, from the$30.0 million we reported for the first quarter of 2012. The sales growth was mainly due to the strength of our builderbusiness. As in the fourth quarter of 2012, we saw an increased flow of sales from our backlog of orders for multi-family andsingle-family housing projects as these projects moved to the final stages of development. First quarter sales to developers andbuilders improved by 25.2% year-over-year, while retail sales were maintained at near the 2012 level, dipping by a modest0.4%. Our other revenues, which include warranty sales, freight and installation, sales of glass products and commission sales,increased by 2.1% over 2012.Sales in all of our geographic areas improved significantly in the first quarter over 2012, with particularly strong growth in theGTA and British Columbia markets, and a healthy revenue gain in Alberta.Cost of sales and gross profitCost of sales for the three months ended March 31, 2013 was $26.9 million, or 78.4% of sales. This resulted in a gross profitof $7.4 million, or 21.6% of sales. By comparison, in the first quarter of 2012, cost of sales was $23.2 million, or 77.1% ofsales, providing a gross profit of $6.9 million, or 22.9% of sales. The $0.5 million, or 7.8%, increase in gross profit dollars wasdriven mainly by our builder sales growth. The 1.3% decrease in gross margin percentage was due to the very competitivebusiness environment that persisted in all of our markets.ExpensesSelling, warehouse, facility, and general and administrative expenses (SG&A expenses) for the three months ended March 31,2013 were maintained at the $6.3 million recorded in Q1 2012, despite this year’s higher revenues, as we continued to benefitfrom rigorous operating cost control. With the increase in revenues, SG&A expenses as a percentage of sales decreased to18.5% from 20.9% in 2012.First quarter selling costs were down slightly from last year, with higher wage and commission costs as a result of the improvedsales revenue and increased marketing costs more than offset by lower store refurbishment costs. Facility costs were upmodestly, primarily as a result of increased property taxes and common area costs related to our leased facilities. Administrativecosts were up by $0.1 million, due to increased wages, and higher benefit and legal expenses. Warehousing costs were downslightly from the 2012 level.EBITDAEBITDA and EBITDA margin are not recognized measures under IFRS and do not have standardized meanings prescribed byIFRS (see Non-IFRS Measures).First quarter EBITDA of $1.1 million was up by $0.5 million from the $0.6 million we reported in 2012. Our EBITDA margin forthe period improved to 3.1% from 2.1% in the prior year. The increases in EBITDA and EBITDA margin were mainly due to thehigher revenues and gross profit recorded in 2013.Table 1: Reconciliation of net income (loss) to EBITDA(in thousands of dollars except percentages) 3 months ended 3 months ended 3 months ended March 31, 2013 March 31, 2012 March 31, 2011Profit (loss) 359 (4) (487) Interest 129 154 160Deferred income taxes 66 (1) (175)Current income taxes 24 - -Depreciation 492 467 459 EBITDA (1) 1,070 616 (43)EBITDA margin (1) 3.1% 2.1% -0.2%(1) See definition of EBITDA and EBITDA margin under Non-IFRS Measures.
[ 8 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisInterestFirst quarter interest expense of $129,000 was down slightly year-over-year, due to the lower borrowing facility in 2013.DepreciationDepreciation for the three months ended March 31, 2013 was $0.5 million, up slightly from the first quarter of 2012.Income taxesIncome taxes for the first quarter of 2013 were $90,000, comprising $24,000 in current taxes and $66,000 in deferred taxes.This compares to a deferred income tax recovery of $1,400 for the first quarter of 2012. There were no current income taxesin 2012.Profit (loss)In the first quarter of 2013, we recorded a profit of $359K compared to a loss of $4K for the same period in 2012. Thechange was due mainly to our higher revenues and gross profit, and continued tight expense control in the first quarter in2013.Summary of Quarterly ResultsSee the section on seasonality above for a discussion of the impact of seasonality on our quarterly sales levels.Table 2: Summary of quarterly results(in thousands of dollars except percentages and per-share amounts) 2013 2012 2011 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1Sales 34,360 38,533 38,898 37,729 30,035 35,281 36,001 34,225 28,086Gross profit 7,418 9,300 8,804 8,505 6,884 8,667 8,840 8,349 6,752Gross margin percentage 21.6% 24.1% 22.6% 22.5% 22.9% 24.6% 24.6% 24.4% 24.0%Profit (loss) 359 1,701 1,374 1,124 (4) (28,907) 1,440 1,081 (487)Diluted net income (loss)per share (1) 0.036 0.169 0.137 0.112 (0.000) (2.881) 0.144 0.108 (0.049)Dividends per share 0.075 0.070 0.105 0.105 0.105 0.105 0.105 0.105 0.070(1) Diluted and non-diluted net income (loss) per share are equivalent
[ 9 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisLiquidity and Capital ResourcesCash flow from operating activitiesTable 3: Cash flow and movements in working capital (source (use) of cash)(in thousands of dollars) 3 months ended 3 months ended March 31, 2013 March 31, 2012Cash flow from operating activities 1,086 647Movements in working capital Trade and other receivables 864 2,998Inventory (1,172) 588Prepaid expenses (103) (160)Trade and other payables (651) (2,333)Customer deposits 843 908 (220) 2,001Cash generated from operations 866 2,648Interest paid (129) (154)Income taxes paid (570) (854)Net cash generated from operations 167 1,640Net cash flow from operations for the three months ended March 31, 2013 was $0.2 million, compared to $1.6 million for thefirst quarter of 2012. Net income and resulting cash flow before movements in working capital of $1.1 million was up by $0.5from last year. The movement in working capital changed to a $0.2 million use of cash in 2013 from a $2.0 million source ofcash in 2012.The most significant changes year-over-year were a $1.2 million increase in inventory, compared to a $0.6 million decrease in2012; a $0.9 million decrease in trade and other receivables, compared to a $3.0 million decrease in 2012; and a $0.7 milliondecrease in our trade and other payables, compared to a $2.3 million decrease in 2012.Capital expendituresTable 4: Capital expenditures(in thousands of dollars) 3months ended 3months ended March 31, 2013 March 31, 2012Total capital 114 257Less proceeds on disposal of assets - - 114 257Capital expenditures of $114,000 for the first quarter of 2013 related mainly to furniture, fixtures and leaseholdimprovements. This was down from $257,000 for the same period of 2012. We expect that annual capital expendituresfor 2013 will total approximately $1.0 million, allocated evenly to IT upgrades and store refurbishments.
[ 10 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisDividends to shareholdersTable 5: Dividends to shareholdersRecord date Payment date Per share $ Amount $January 25, 2013 February 5, 2013 $0.025 $250,854February 22, 2013 March 5, 2013 $0.025 250,854March 22, 2013 April 5, 2013 $0.025 250,854 $0.75 $752,562The current dividend rate equates to $0.30 per share on an annualized basis.Coast’s dividend policy is subject to the discretion of our Board of Directors, which takes into account our financialperformance, as well as our current and anticipated business needs, at the time a dividend is being considered. The amountand timing of any future dividends may vary depending on, among other things, Coast’s earnings and financial requirementsand the satisfaction of solvency tests imposed by the Canada Business Corporations Act for the declaration of dividends.Contractual obligations, commitments and financingTable 6: Payments due by period as at March 31, 2013(in thousands of dollars) Operating leases Less than one year 3,823One to three years 7,221Four to five years 5,468After five years 2,933 19,446In 2012, we renegotiated our financing arrangement with our existing lender, creating a new revolving loan and using fundsfrom the new facility to repay both our existing revolving loan and our term debt. In the first quarter of 2013, we amended thisfinancing arrangement and now have available an amount of up to $23.0 million with a three-year term maturing on June 26,2015. The revolving loan can be used for working capital requirements, capital expenditures and general corporate purposes. Thenew facility bears interest at the lender’s prime rate plus 0.50% (amounting to 3.5% at March 31, 2013) when borrowed directly,or at the banker’s acceptance rate plus 1.7% when a banker’s acceptance facility is utilized. Payments are monthly for interest only.A standby fee of 0.35% is charged on any unutilized portion of the loan facility. We believe that this asset-backed loan structure isbetter suited to our business and will give us greater flexibility in our ongoing borrowing requirements.The amount made available under the loan facility is limited to the sum of 85% of the book value of trade accounts receivable andthe lower of 65% of the book value, or 85% of the net orderly liquidation value of inventories. Certain identified trade accountsreceivable and inventories are excluded from the calculation of the amount available under the loan facility. As well, certaintrade accounts payable accounts, and a reserve for customer deposits reduce the amount available under the facility. The bankindebtedness is secured by a general security agreement covering all of our assets.We are required to maintain a fixed-charge coverage ratio of not less than one-to-one. The ratio is calculated as the ratio ofEBITDA plus operating lease payments, less cash taxes, less dividends paid, less capital expenditures, divided by cash interest paid,plus term loan repayments and operating lease payments. All amounts are based on a rolling 12-month calculation. Annual capitalexpenditures are limited to $1.5 million. At March 31, 2013, Coast was in compliance with the covenants of the loan.Operating leases are in place for all premises. We paid total basic rent of $1.0 million for the three-month period ended March 31,2013, compared to $0.9 million for the same period in 2012.
[ 11 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisWorking capital and liquidityTable 7: Working capital and liquidity(in thousands of dollars) Mar 31, 2013 Dec 31, 2012Working capital 3,562 3,511Total assets 98,516 98,431Total liabilities 41,252 40,773Total long-term liabilities 3,600 3,626In addition to working capital, we currently have available our $23.0 million revolving operating loan, of which $13.7 millionwas outstanding at March 31, 2013 and included in working capital.Our principal sources of liquidity are cash provided by operations and the revolving operating loan. In addition, we review ourcash flows on an ongoing basis and can adjust our annual dividend rate accordingly. At this time, we believe that such sourcesof liquidity will be sufficient to fund future working capital requirements, capital expenditures, dividends and our plannedgrowth.Total assetsTotal assets were $98.5 million at March 31, 2013, compared to $98.4 million at December 31, 2012.Inventory at March 31, 2013 was $27.0 million, compared to $25.8 million at December 31, 2012. We continue to closelyreview and refine our product offering in order to improve both our inventory turn rate and our gross margin.Table 8: Accounts receivable(in thousands of dollars) Mar 31, 2013 Dec 31, 2012Accounts receivable - trade 11,014 9,776Supplier rebates and other 2,435 4,537 13,449 14,313Our total accounts receivable of $13.4 million at March 31, 2013 was down by $0.9 million from the $14.3 million werecorded at December 31, 2012. Trade accounts receivable were up by $1.2 million, as our sales to builders grew significantlythrough the first quarter. Supplier rebates and other receivables were reduced by $2.1 million, as we collected the majority ofour 2012 year-end supplier charge-backs and rebates during the first quarter of 2013.Total liabilitiesTotal liabilities at March 31, 2013 were $41.3 million, compared to $40.8 million at December 31, 2012. The difference wasmainly due to increased customer deposits of $0.8 million and no income taxes payable at March 31, 2013.Trade and other payables at March 31, 2013 were $15.5 million, compared to $16.2 million at December 31, 2012. Customerdeposits at March 31, 2013 were $6.2 million, up by $0.8 million from $5.4 million at December 31, 2012, reflecting thegrowth of our business during the first quarter of 2013.Total deferred warranty revenue (combined current and non-current) at March 31, 2013 was $4.3 million, equivalent to thebalance at December 31, 2012.
[ 12 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisLong-term incentive planUnder the terms of our long-term incentive plan (LTIP), 10% to 20% of net income in excess of an established threshold is tobe paid to the plan trustee to purchase shares of Coast for the participants. The liability is to be accrued in the period whenthe net income exceeds the thresholds established for the LTIP, with the related cost amortized to expenses over the three-yearvesting period of the applicable participant awards. Benefits forfeited under the plan will be returned to Coast.At March 31, 2013, the prepaid compensation balance was nil. No amounts have been accrued under the LTIP to date thisyear and there are currently no funds held by the LTIP.Share capitalTable 9: Share capital(in thousands of dollars) Shares Amount $Balance December 31, 2012 and March 31, 2013 10,034,166 46,257At March 31, 2013, Coast had 10,034,166 common shares issued and outstanding, which was unchanged as of May 2, 2013,the date of this report, for an aggregate amount of $46.3 million.Financial InstrumentsFinancial instruments of Coast consist of cash and cash equivalents, accounts receivable, accounts payable and accruedliabilities, operating and term loans, customer deposits and dividends payable. These financial instruments are classified intoone of the following categories: fair value through profit or loss, held-to-maturity investments, loans and receivables, available-for-sale financial assets, and other financial liabilities. The classification determines the accounting treatment of the instrument.The classification is determined by Coast when the financial instrument is initially recorded, based on the underlying purposeof the instrument. These financial instruments are subject to credit risk, currency risk and concentration risk (a full descriptioncan be found in Note 21 to our audited financial statements for the year ended December 31, 2012).Table 10: Classification and measurement of financial assets and financial liabilitiesFinancial Instrument Category MeasurementCash Loans and receivables Amortized costTrade and other receivable Loans and receivables Amortized costBank Indebtedness Other financial liabilities Amortized costTerm loans Other financial liabilities Amortized costTrade and other payable Other financial liabilities Amortized costCustomer deposits Other financial liabilities Amortized costDividends payable Other financial liabilities Amortized costCheques issued in excess of funds on deposit Other financial liabilities Amortized costOff Balance Sheet ArrangementsCoast has not entered into any off balance sheet arrangements.
[ 13 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisCritical Accounting Policies and EstimatesWe have prepared our unaudited interim condensed financial statements in accordance with IFRS in Canadian dollars. IFRSrequires us to make estimates and judgments that affect the reported amount of assets and liabilities, and disclosure ofcontingencies at the date of the unaudited interim condensed financial statements and the reported amount of revenues andexpenses during the period. It is reasonably possible that circumstances may arise which cause actual results to differ from ourestimates. Areas requiring significant management estimates include valuation of goodwill, intangible assets and leaseholdsand equipment, allowance for doubtful accounts, inventory valuation, amounts for accrued liabilities, deferred warrantyrevenue, contingencies and accounting for income taxes. Actual results could differ from these estimates.The significant accounting policies of Coast are described in Note 2 of our financial statements for the year ended December31, 2012. The policies that we believe are the most critical in aiding a full understanding and evaluation of our reportedfinancial results are summarized below.Revenue recognitionCoast recognizes revenue from the sale of products when a sales arrangement is entered into, the sales price is fixed anddeterminable, the products are shipped and collection is reasonably assured.Cash received in advance of the product being shipped is recorded as customer deposits.Extended warranties are provided on certain products pursuant to warranty contracts. These warranty contracts are in additionto those provided by the manufacturers of the product and generally extend the life of the warranty to a five-year period. Therevenue received from the warranty contracts is initially recorded as deferred warranty revenue and is amortized to incomeover the life of the warranty contract. The costs associated with delivering the related warranty services are expensed as theyare incurred during the life of the contracts. The expenses incurred to sell the warranty contracts are initially recorded as otherassets and are amortized to income over the life of the warranty contracts.Valuation of goodwill and impairmentGoodwill is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carryingamount may be impaired. Coast compares goodwill to the fair value of the reporting unit to which the goodwill relates. Anyimpairment is charged to operations in the amount by which the carrying amount of the assets exceeds the fair value of thegoodwill.Goodwill has been allocated for impairment testing purposes to two cash-generating units. The first, Western Canada,represents the original market area for Coast. The second, Eastern Canada, represents the business unit related to our 2009acquisition in the Greater Toronto Area and additions to that business unit in Eastern Canada.The recoverable amount of the two cash-generating units is determined by a value in use calculation, which uses cash flowprojections based on the current year’s financial budget, forecasts for the next four years and strategic plans for the business.Beyond the five-year forecast period, a growth rate is used to predict the long-term growth of the business. The process ofdetermining these fair values requires us to make estimates and assumptions, including, but not limited to, projected futuresales, earnings and capital investment, discount rates and terminal growth rates.Goodwill was evaluated at December 31, 2012. No adjustments for impairment were required.Table 11: Goodwill(in thousands of dollars) Mar 31, 2013 Dec 31, 2012 $ $Western Canada 38,182 38,182Eastern Canada 2,211 2,211 40,393 40,393Valuation of intangible assets, leaseholds and equipmentWe review the valuation of our intangible assets, leaseholds and equipment for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable from the future undiscounted cash flowsfrom the asset’s expected use and eventual disposition. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assetsdesignated for disposal are valued at the lower of the carrying amount and the fair value, less costs to sell.Our long-lived assets and certain identified recorded intangibles were evaluated as at December 31, 2012. No adjustments forimpairment were required.
[ 14 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisInventory valuationInventory is valued at the lower of cost and net realizable value using the first-in, first-out method. Coast assesses netrealizable value of inventory at each reporting period based on sales patterns of inventory, expected selling prices and the levelof inventory on hand. Incentives received from suppliers and any provisions are accounted for as a reduction in the relatedinventory value and cost of sales.Income taxesCoast follows the asset and liability method of accounting for income taxes whereby future tax assets and liabilities arerecognized for differences between the bases of assets and liabilities used for financial statement and income tax purposes.Future income taxes will be determined according to these differences at the tax rate expected to be in place when thedifferences are expected to be reversed.Coast currently has an unused tax shield of approximately $39 million. The majority of this tax shield arose in the acquisitionof the business in June 2005 and can be utilized to reduce Coast’s taxable income at the rate of approximately $3.0 million to$4.0 million per year going forward.Related-Party TransactionsCoast leases six store locations from a company affiliated with CWAL Investments Ltd., a significant shareholder of thecompany. For the three-month period ended March 31, 2013, our lease payments to related parties totalled $0.3 million.Disclosure controls and procedures and internal control over financial reportingDisclosure controls and proceduresDisclosure controls and procedures are processes designed to provide reasonable assurance that information required to bedisclosed by Coast in annual, interim or other filings is collected and reported to Coast’s management in a timely manner thatfacilitates the required reporting. Due to the inherent limitations of control systems, an evaluation can only provide reasonableassurance over the effectiveness of the controls. Coast’s Chief Executive Officer (CEO) and our Chief Financial Officer (CFO)designed and evaluated, or had these functions completed under their direction, the effectiveness and operation of ourdisclosure controls and procedures. Based on that evaluation, the CEO and the CFO concluded that the design and operationof these disclosure controls and procedures were effective as at March 31, 2013.Internal control over financial reportingInternal control over financial reporting encompasses controls and processes designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith IFRS. As the management of Coast, we are responsible for establishing and maintaining these controls. Under thesupervision of and with the participation of the CEO and the CFO, management carries out, on an ongoing basis, anassessment of the design of these internal controls. This assessment uses the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). It includes a risk evaluation of internal controls and documentation,and testing of the key processes and controls. Due to the inherent limitations in any control system, an evaluation can onlyprovide reasonable assurance over the effectiveness of the controls, and internal controls are not expected to prevent anddetect all misstatements due to error or fraud. Based on our ongoing assessment, the CEO and the CFO have concluded thatCoast’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of unaudited interim condensed financial statements for external purposes as at March 31,2013.There were no changes in internal control over financial reporting during the quarter ended March 31, 2013 that havematerially affected, or are reasonably likely to materially affect, Coast’s internal control over financial reporting.
[ 15 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisOutlookThe following discussion is qualified in its entirety by the Forward-looking Statements proviso at the beginning of this MD&Aand by the section entitled Risks and Uncertainties that follows this Outlook section.While our first quarter sales results exceeded our expectations, a cautious outlook persists for our business. We anticipate thateconomic growth in our western Canadian and Greater Toronto Area (“GTA”) markets will remain sluggish through 2013. Thecurrent growth rate of the US economy and the ongoing debt and fiscal problems in the European economies continue to putthe Canadian economy at risk. Any significant negative events in these regions would have a considerable negative impact onthe Canadian economy. In light of the ongoing uncertainty that pervades the Canadian economy, we are continuing to focuson strict cost control and enhancing our margins.In the builder segment of our business, we expect that our revenues will continue to grow through 2013 as projects in ourorder backlog move into the final stages of development, particularly in the multi-family sector. However, we expect thatthe rate of growth will slow from the 25.2% year-over-year sales increase achieved in the first quarter of 2013. While weanticipate a slight softening of housing starts in 2013, we do not anticipate that total housing starts for the year will besignificantly different from 2012 levels. We expect competitive market conditions will continue to compress margins on ourbuilder sales for the foreseeable future.In the retail segment, given the difficult business climate, we were pleased to maintain our first quarter comparable storesales at just 0.4% below the 2012 level. With the addition of several upscale lines over the last few years, we have expandedCoast’s appeal to a broader range of customers seeking a value-added purchase experience . However, Canadian consumersremain uncertain about the economy and we anticipate that our customers will continue to be careful about making majorpurchases. Accordingly, we expect that the current very competitive retail pricing environment will persist through the end of2013, continuing to put downward pressure on our sales and margins.Our sales performance in the first three months of the year was particularly strong in the GTA and British Columbia markets,with very healthy revenue growth in Alberta as well. Based on our current order backlogs, we expect that our revenue growthover the balance of 2013 will be concentrated in these regions, but with a softening in the BC market.Building on our success with our national roll-out of the KitchenAid brand in 2012, we are now in the process of significantlyexpanding our current retail offering of Whirlpool®major appliances and making this popular mid-to-higher-end productline available to our builder customers. We expect that the broadening of our Whirlpool offering will enhance Coast’s appealto discerning retail customers who seek a value-added purchase experience characterized by the highly knowledgeablesales staff, designer showrooms, wide selection of mid-to-high-end brands and models, and exceptional after-sales servicethat distinguish Coast from other major home appliance retailers. We also anticipate that the new line will help to generatesignificant incremental revenue gains in our builder business.At the same time, we are continuing to review our product offerings with a view to increasing our gross margins, improvinginventory turns and reducing inventory levels. To date, we have focussed on trimming the number of items we stock in ourwarehouses and eliminating marginal products. In the second half of this year, we will be implementing upgrades to ourinventory and pricing management systems, which should be up and running by year-end. In addition to helping us bettermanage our margins and increase inventory turns, these systems will enable us to monitor how pricing can be used to createmore effective marketing programs, primarily in the retail segment of our business. Finally, our ongoing focus on the clearanceof eliminated, damaged and discontinued products will help to decrease inventory levels across our store network.We also continue to refresh our existing stores as part of our ongoing strategy to enhance profitability by increasing sales,particularly to retail customers. Improvements at our Calgary South store in Alberta proceeded through the first quarter andare expected to be completed by mid-2013. In Saskatoon, Saskatchewan, a significant upgrade to our store’s retail showroombegan in the first quarter, with completion also targeted for the middle of the year. The store upgrades we have undertakenover the past two years have been extremely well received by our customers, generating increased traffic by enhancing ourstores’ appeal as shopping destinations for retail buyers.During the first quarter of the year, we successfully concluded our search for a new director. Stephen T. Bellringer, MBA, LL.D(Hon) was appointed as a member and Chair of our Board of Directors, effective March 27, 2013. Mr. Bellringer took over theleadership of Coast’s board from director Donald J.A. Smith, CA, MBA who assumed the role on an interim basis at the end ofNovember 2012. Mr. Smith remains as a director.Going forward, we believe that our current credit facilities and ongoing cash flow from operations will be sufficient to allow usto meet ongoing requirements for capital expenditures, including investments in working capital. However, Coast’s needs maychange. In such an event, our ability to satisfy our obligations will be dependent upon future financial performance, which inturn will be subject to financial, tax, business and other factors, including elements beyond our control.
[ 16 ]COAST WHOLESALE APPLIANCES INC. Management’s Discussion and AnalysisRisks and UncertaintiesCoast is subject to a number of risks in addition to the normal business risks associated with supply companies operatingwithin the major home appliances market in Canada. Demand for the products we sell is particularly sensitive to the health ofthe economy in Canada as a whole, and especially in our western Canadian and GTA marketplaces. A number of factors couldhave a material effect on Coast’s financial performance. These include but are not limited to the following:• The continuing fragile nature of the current Canadian and global economic recovery. Any significant setbacks couldnegatively impact our sales to both retail customers, who may defer or cancel purchase plans, and builder customers, whomay defer or cancel projects.• Slowing of housing starts, either single-family or multi-family, which could negatively impact our builder sales.• The impact of current economic conditions on the credit worthiness of our builder customers, and their ability to meettheir obligations to us on a timely basis. Slower collection of our trade receivables could result in bad debts in excess ofour historical patterns.• Increases in interest rates, which would increase Coast’s and our customers’ costs, and the resultant impact on theavailability of credit to both builders and purchasers of homes, which may impact the housing market and may reducenew home construction and renovation work.• Fluctuations in fuel prices, which may drive up inbound and outbound freight costs, as well as other related costs. Higherfuel prices can have a dramatic and rapid impact on our gross margin from freight revenue if our rates are not adequatelyadjusted.• Any significant change in competition from one or more competitors, as well as competition directly from suppliers, whichmay impact our sales results and margins.• Fluctuations in the Canadian / US dollar exchange rate, which may impact product costs from our major suppliers, as wellas our gross margins, if we are unable to react with appropriate price adjustments.• Changes to our product distribution processes, which may impact our ability to both receive and deliver our products ona timely basis. These processes are currently contracted to outside transportation suppliers and alternate suppliers areavailable.• Changes in labour costs, labour relations or key personnel, which may impact our overall cost structure.• Customer service demands on our extended warranty programs. These programs are managed in-house. Increaseddemand may cause costs to increase beyond historical patterns, resulting in a degradation of gross margin from thiscomponent of our business.• Future changes in tax legislation, which may impact certain aspects of our business model and our shareholders’investment in Coast.• Other factors as described under Forward-looking Statements.Non-IFRS MeasuresReferences to EBITDA are to earnings before interest, taxes, depreciation and amortization. The term EBITDA margin refers tothe percentage that EBITDA represents in relation to sales. Since many investors use EBITDA to compare issuers on the basis ofthe ability to generate cash from operations, we believe that, in addition to net income or loss and statements of cash flow,EBITDA is a useful supplemental measure.EBITDA is not an earnings measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS.Therefore, EBITDA may not be comparable to similar measures presented by other entities. Readers are cautioned thatEBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as an indicator ofCoast’s operating performance. Similarly, EBITDA should not be seen as an alternative to cash flows from operating, investingand financing activities as measures of liquidity and cash flows. For a reconciliation of EBITDA to net income presented inaccordance with IFRS, see the section on EBITDA.Additional InformationAdditional information relating to Coast, including our Annual Information Form and other public filings, is available on SEDARat www.sedar.com and on Coast’s website at www.coastwholesaleappliancesinc.com.
[ 17 ]COAST WHOLESALE APPLIANCES INC.Notice of No Auditor ReviewThese unaudited interim condensed financial statements have been prepared by and are the responsibility of the managementof Coast Wholesale Appliances Inc. An independent auditor has not audited nor performed a review of these unaudited interimcondensed financial statements.
[ 18 ]COAST WHOLESALE APPLIANCES INC.Condensed statements of financial position(Unaudited) March 31, 2013 Dec 31, 2012 Notes CDN$ CDN$Assets Current assets Trade and other receivables 13,449,075 14,313,035Inventory 26,999,692 25,827,920Prepaid expenses 426,960 323,972Prepaid income taxes 148,535 -Other assets 189,002 192,664Total current assets 41,213,264 40,657,591Non-current assets Leaseholds and equipment 3,147,920 3,246,893Intangible assets 10,165,089 10,474,086Goodwill 40,392,968 40,392,968Other assets 319,255 315,200Deferred income taxes 3,278,000 3,344,000Total non - current assets 57,303,232 57,773,147Total assets 98,516,496 98,430,738 Liabilities Current liabilities Bank indebtedness 5 13,650,152 13,753,392Cheques issued in excess of funds on deposit 569,094 17,961Trade and other payables 15,515,537 16,166,924Dividends payable 250,854 -Customer deposits 6,203,149 5,360,511Current portion of deferred warranty revenue 1,462,868 1,450,514Income taxes payable - 397,523Total current liabilites 37,651,654 37,146,825Non-current liabilities Deferred warranty revenue 2,861,304 2,884,789Other liabilities 739,034 741,552Total non-current liabilites 3,600,338 3,626,341Total liabilities 41,251,992 40,773,166 Equity Share capital 6 46,257,505 46,257,505Retained earnings 11,006,999 11,400,067Total equity 57,264,504 57,657,572Total equity and liabilities 98,516,496 98,430,738 Approved on behalf of the Board of Directors, May 2, 2013 Stephen T. Bellringer Anthony Soda Director Director See accompanying notes to the unaudited interim condensed financial statements
[ 19 ]COAST WHOLESALE APPLIANCES INC.Condensed statements of comprehensive income (Unaudited) 3 months ended 3 months ended March 31, 2013 March 31, 2012 Notes CDN$ CDN$Sales 3 34,360,232 30,035,445Cost of sales 3 26,942,228 23,151,835Gross profit 7,418,004 6,883,610 Expenses Selling 2,797,544 2,811,116General and administrative 1,444,631 1,377,525Facilities 1,580,178 1,536,581Warehousing 525,388 541,919 6,347,741 6,267,141Profit before depreciation, finance costs and income tax 1,070,263 616,469 Depreciation Lease inducements (29,675) (29,675)Leaseholds and equipment 212,566 188,084Intangible assets 308,997 308,997Finance costs 128,881 154,460Profit (loss) before income tax 449,494 (5,397) Current income tax expense 24,000 -Deferred income tax expense (recovery) 66,000 (1,400)Income tax expense (recovery) 90,000 (1,400)Profit (loss) and comprehensive income (loss) 359,494 (3,997) Basic and diluted net income (loss) per share 0.04 (0.00)Basic and diluted weighted average number of shares outstanding 10,034,166 10,034,166 See accompanying notes to the unaudited interim condensed financial statements
[ 20 ]COAST WHOLESALE APPLIANCES INC.Condensed statements of changes in equity (Unaudited) Notes Share capital Retained earnings Total equity CDN$ CDN$ CDN$Balance, January 1, 2012 46,257,505 11,068,437 57,325,942Profit (loss) and comprehensive income (loss) - (3,997) (3,997)Dividends - (1,053,586) (1,053,586)Balance, March 31, 2012 46,257,505 10,010,854 56,268,359Profit and comprehensive income - 4,198,780 4,198,780Dividends - (2,809,567) (2,809,567)Balance, December 31, 2012 46,257,505 11,400,067 57,657,572Profit and comprehensive income - 359,494 359,494Dividends 7 - (752,562) (752,562)Balance, March 31, 2013 46,257,505 11,006,999 57,264,504See accompanying notes to the unaudited interim condensed financial statements
[ 21 ]COAST WHOLESALE APPLIANCES INC.Condensed statements of cash flows(unaudited)3 months ended 3 months ended March 31, 2013 March 31, 2012 CDN$ CDN$ Cash flows from operating activities Profit (loss ) 359,494 (3,997)Items not involving cash Depreciation 491,888 467,406Income taxes 90,000 (1,400)Finance costs 128,881 154,460Deferred lease increment 27,156 34,251Deferred warranty revenue (11,131) (15,278)Other assets (393) 11,897 1,085,895 647,339Movements in working capital Trade and other receivables 863,960 2,998,011Inventory (1,171,772) 588,154Prepaid expenses (102,988) (160,627)Trade and other payables (651,388) (2,332,759)Customer deposits 842,638 908,311 (219,550) 2,001,090 866,345 2,648,429 Interest paid (128,881) (154,460)Income taxes paid (570,058) (854,000)Net cash generated from operating activities 167,406 1,639,969 Cash flows used in investing activities Purchase of leaseholds and equipment (113,591) (257,294)Proceeds from sale of leaseholds and equipment - -Net cash used in investing activities (113,591) (257,294) Cash flows (used in) from financing activities Operating loan (103,240) 568,117Term debt - (325,000)Dividends paid (501,708) (1,053,586)Net cash used in financing activities (604,948) (810,469)Net increase (decrease) in cash (551,133) 572,206Cheques issued in excess of funds on deposit, beginning of period (17,961) (800,113)Cheques issued in excess of funds on deposit, end of period (569,094) (227,907)See accompanying notes to the unaudited interim condensed financial statements
[ 22 ]COAST WHOLESALE APPLIANCES INC.Notes to the Interim Condensed Financial StatementsThree-month period ended March 31, 2013(Unaudited)1. General informationCoast Wholesale Appliances Inc. (“Coast”) is a federally incorporated company, incorporated on April 30, 2010.Coast is a leading independent supplier of major household appliances to developers and builders of multi-family and single-family housing, and to retail customers in Western Canada and the Greater Toronto Area of Ontario.The head office is located at 8488 Main Street, Vancouver, BC and the registered office is 700 West Georgia Street, Vancouver,BC.2. Significant accounting policies(a) Statement of complianceThese unaudited interim condensed financial statements have been prepared in accordance with International FinancialReporting Standards (“IFRS”) and International Accounting Standard (“IAS”) 34, Interim Financial Reporting, as issued by theInternational Accounting Standards Board (“IASB”).These unaudited interim condensed financial statements do not includeall of the information required of a full annual financial report and is intended to provide users with an update in relation toevents and transactions that are significant to an understanding of the changes in financial position and performance of theCompany since the end of the last annual reporting period. These financial statements should be read in conjunction with theaudited financial statements of the Company for the year ended December 31, 2012.The accounting policies applied in preparation of these unaudited interim condensed financial statements are consistent withthose applied and disclosed in the Company’s audited financial statements for the year ended December 31, 2012, except forthe following;.(i) Presentation of Financial StatementsThe Company has applied the amendments to IAS 1, Presentation of Financial Statements. The amendments require thatelements of other comprehensive income that may subsequently be reclassified through profit and loss be differentiated fromthose items that will not be reclassified. The adoption of this new standard had no impact.(ii) Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other EntitiesThe Company has applied IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure ofInterests in Other Entities, and consequential revisions to IAS 27, Separate Financial Statements, and IAS 28, Investments inAssociates and Joint Ventures. The new standards provide revised guidance on the accounting treatment and associateddisclosure requirements for joint arrangements and associates, and a revised definition of ‘control’ for identifying entitieswhich are to be consolidated. The adoption of these new standards had no impact.(iii) Fair Value MeasurementThe Company has applied IFRS 13, Fair Value Measurement. The new standard provides guidance of fair value measurementand disclosure requirements. The adoption of this new standard had no impact.3. Future Accounting StandardsThe Company has not applied the following new and revised IFRS that have been issued but are not yet effective:IFRS 9, Financial Instruments (effective January 1, 2015) introduces new requirements for the classification and measurementof financial assets and financial liabilities. This is not expected to have a significant effect on the Company’s accountingpolicies or financial statements.Amendments to IAS 32, Financial Instruments: Presentation (effective January 1, 2014) clarifies existing application issuesrelating to offsetting requirements. This is not expected to have a significant effect on the Company’s accounting policies orfinancial statements.
COAST WHOLESALE APPLIANCES INC. Notes to the Interm Condensed Financial Statements[ 23 ]4. Sales and cost of sales 3 months ended 3 months ended March 31, 2013 March 31, 2012 $ $Sales of appliances & accessories 32,198,350 27,917,147Cost of sales 25,215,980 21,470,108 6,982,370 6,447,039 Other revenue 2,161,882 2,118,298Other cost of sales 1,726,248 1,681,727 435,634 436,571Total sales 34,360,232 30,035,445Total cost of sales 26,942,228 23,151,835Total gross profit 7,418,004 6,883,610Other revenue includes warranty sales, freight and installation revenue, sales of glass products and commission income fromsales of appliances where Coast acts as a sales agent. Other cost of sales relate to the costs to provide these services.5. Segment informationCoast operates in one industry segment, that is, the sale and distribution of major household appliances. Coast’s chiefoperating decision-makers review Coast’s operating results on a company-wide basis and manage resource allocations andoperations as a single operating segment.6. Borrowings Mar 31, 2013 Dec 31, 2012 $ $Bank indebtedness (a) 13,650,152 13,753,392In 2012, Coast renegotiated its financing arrangement with its existing lender, creating a new revolving loan and used thefunds to repay the existing revolving loan and term debt. This loan was amended in the first quarter of 2013 and Coastnow has available an amount of up to $23,000,000 as a revolving loan (the “Bank Indebtedness”). The Bank Indebtednessis available for a three-year term maturing on June 26, 2015 and can be used for working capital requirements, capitalexpenditures and general corporate purposes. The Bank Indebtedness bears interest at the lender’s prime rate plus 0.50% (atMarch 31, 2013, this rate was 3.5%), when borrowed directly, or at the banker’s acceptance rate plus 1.70% when a banker’sacceptance facility is utilized. Payments are monthly for interest only. A standby fee of 0.35% is charged on any unutilizedportion of the Bank Indebtedness.The amount made available under the Bank Indebtedness is limited to 85% of the book value of trade accounts receivableand the lower of 65% of the book value or 85% of the net orderly liquidation value of inventories. Certain identified tradeaccounts receivable and inventories are excluded from the calculation of the amount available under the facility. As well,certain trade accounts payable accounts, and a reserve for customer deposits, reduce the amount available under the facility.The Bank Indebtedness is secured by a general security agreement covering all assets of Coast.Coast is required to maintain a fixed-charge coverage ratio of not less than one to one. The ratio is calculated as the ratio ofEBITDA plus operating lease payments, less cash taxes, less dividends paid, less capital expenditures divided by cash interestpaid, plus term loan repayments, plus operating lease payments. All amounts are calculated on a rolling 12-month basis.Annual capital expenditures are limited to $1,500,000. At March 31, 2013, Coast was in compliance with the covenants ofthe loan.In the event that the Bank Indebtedness arrangement is terminated by Coast prior to the initial maturity date of June 26,2015, there are certain prepayment fees. A prepayment fee of 1.5% of the total Bank Indebtedness availability applies in yearone, a fee of 1% in year two and a fee of 0.5% in year three.
[ 24 ]COAST WHOLESALE APPLIANCES INC. Notes to the Financial Statements7. Share capital Shares Amount $Balance, March 31, 2013 and December 31, 2012 10,034,166 46,257,505The authorized capital of Coast consists of an unlimited number of common shares, of which 10,034,166 are issued andoutstanding, and an unlimited number of preferred shares, none of which have been issued or are outstanding, as at March31, 2013.8. DividendsDividends of $0.025 per share were paid on a monthly basis in the first three months of 2013. Dividends for the three monthstotaled $752,562 (2012 - $1,053,586). At March 31, 2013, dividends payable to shareholders totaled $250,854 (March 31,2012 - $351,196).9. Related-party transactionsCoast leases six of its store locations from a company owned by shareholders who own approximately 37% of the issuedand outstanding shares of Coast. The total rent paid to this related party for the three months ended March 31, 2013 was$301,716 (2012 - $301,716). The amounts paid are based upon lease agreements between the two parties which were inaccordance with market rates at the time of the agreements.10. Subsequent eventsOn April 17, 2013, Coast declared a dividend in the amount of $0.025 per share, payable to shareholders of record on April26, 2013, to be paid May 6, 2013.
[ 25 ]]BOARD OF DIRECTORSStephen T. BellringerChair of the Board of DirectorsMaurice E. PaquetteJack G. PeckDonald J.A. Smith, CAChair of Governance, Nominating andCorporate matters Committee andChair of Compensation CommitteeAnthony L. Soda, CAChair of Audit, Finance and Risk CommitteeSHAREHOLDER INFORMATIONInvestor Relations604.firstname.lastname@example.orgAuditorsDeloitte & Touche LLPVancouver, BCShares ListedToronto Stock ExchangeTrading Symbol: CWARegistrar and Transfer AgentComputershare Investor Services Inc.MANAGEMENTMaurice E. PaquettePresident andChief Executive OfficerGordon Howie, CAChief Financial OfficerStephen J. RabenSenior Vice President,Sales and MarketingMichael FioriniVice President,Multi-Family Sales, Eastern CanadaBradley S. RomoVice President,Multi-Family Sales, British ColumbiaJamie WilloughbyVice President,Multi-Family Sales, PrairiesHead Office8488 Main StreetVancouver, BCV5X 4W8