coast wholesale appliances third quarter report

COAST WHOLESALE APPLIANCES INC.

Third Quarter 2012

Coast Wholesale Appliances Inc. (Coast) was established on January 1, 2011 with the conversion of Coast Wholesale Appliances Income Fund to a publicly traded, monthly dividend paying corporation. Shares of Coast began trading on the Toronto 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 originally oper-ated mainly as a wholesale supplier to developers and builders in Western Canada, later broadening our focus to include the 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 sales at 15 stores across the four western provinces and one store in the GTA. At each Coast location, we offer our customers the convenience of one-stop shopping for all of their major household appliance need 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 major home appliances we sell. New product innovations and a focus on home décor and energy efficiency have also contributed to our 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 Ontario

as they arise;2. Increase sales from our existing stores; and 3. Continue to enhance our profitability.

Nanaimo1 store

Victoria1 store

Vancouver 1 store

Burnaby1 distribution warehouse

Coquitlam1 store

Surry1 store

Abbotsford1 store

Kelowna1 store

Calgary2 stores

1 distribution warehouse

Red Deer1 store

Edmonton2 stores

1 distribution warehouse

Saskatoon1 store Regina

1 storeWinnpeg1 store

Toronto1 store

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Performance Highlights

Letter to Shareholders: 02

Management’s Discussion and Analysis: 05

Unaudited Interim Condensed Financial Statements: 21

Notes to the Unaudited Interim Condensed Financial Statements : 25

Corporate Information: 28

(in thousands of dollars except percentages and per-share amounts)

2012 2011 2010 2012 2011 2010

Q3 Q3 Q3 YTD YTD YTD

Sales 38,898 36,001 34,947 106,663 98,313 102,461

Gross profit 8,804 8,840 8,575 24,193 23,941 25,421

As a percentage of sales 22.6% 24.6% 24.5% 22.7% 24.4% 24.8%

Profit (loss) 1,374 1,440 (3,749) 2,494 2,034 (451)

Basic and diluted net income per share 0.137 0.144 N/A 0.249 0.203 N/A

EBITDA before other costs 2,429 2,670 2,422 5,107 5,507 6,821

EBITDA margin before other costs 6.2% 7.4% 6.9% 4.8% 5.6% 6.7%

EBITDA 2,429 2,573 2,422 5,107 4,604 6,435

EBITDA margin 6.2% 7.1% 6.9% 4.8% 4.7% 6.3%

EBITDA per share 0.242 0.256 N/A 0.509 0.459 N/A

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The three months ended September 30, 2012 marked our fifth consecutive quarter of revenue growth. Once again, we improved our sales across all of our geographic markets. As in the past four quarters, our business benefited from a steady flow of development activity in both the multi-family and single-family builder sectors. Unfortunately, our percentage gross margin performance was again negatively impacted by the fiercely competitive business environment that persisted across Canada.

Robust Q3 builder sales growth complemented by strong retail salesOur sales revenue of $38.9 million was up by 8.0% from the third quarter of 2011. Sales to builders increased by 13.8%, while sales to retail customers improved by 2.4%. Our other revenues, which come from warranty sales, freight and installation, sales of glass products and commission sales, were down by 7.8% from the third quarter of last year. The decline in other revenues was mainly due to our discontinuation of glass sales at all but one of our BC stores in the second quarter.

During the third quarter, we achieved double-digit increases in our overall sales revenues in both Saskatchewan and Manitoba. Our recently-relocated GTA store again experienced healthy sales growth, and particularly in the builder segment. The ongoing strength of our builder sales across our stores shifted our business mix for the three months in favour of this segment.

With the higher revenues, we maintained our third quarter gross profit at the $8.8 million we recorded in 2011. However, our gross margin percentage decreased to 22.6% from 24.6% last year. The 2.0% decline in gross margin percentage was due mainly to ongoing competitive pressure and the resulting price compression in the builder segment of our business. These factors brought our contract sales gross margin down from historical levels.

Third quarter EBITDA of $2.4 million was below the $2.6 million we reported in Q3 2011 but improved over both the first and second quarters of 2012. The year-over-year reduction in our gross margin percentage reduced our EBITDA margin to 6.2% from 7.1% last year. After taxes, we recorded a profit of $1.4 million for Q3, which was consistent with the amount we reported after taxes in 2011.

Year-to-date sales results reflect strength of builder businessFor the year-to-date, our revenues of $106.7 million were up by 8.5% from the $98.3 million we reported for the first nine months of 2011. Our builder sales increased by 14.8% year-over-year and retail revenues improved by 1.1%, while our other revenues were down by 0.9%. As a result, our sales mix for the first three quarters also shifted in favour of the builder segment.

Our nine-month gross profit of $24.2 million was up slightly from the $23.9 million we reported in 2011, while our gross margin percentage dipped to 22.7% from 24.4% last year. As with the quarterly result, the 1.7% decrease in gross margin percentage was mainly due to more competitive pricing in the builder segment of our business.

Nine-month EBITDA of $5.1 million was up by $0.5 million from the $4.6 million we reported after other costs in 2011 ($5.5 million before other costs). Our EBITDA margin of 4.8% was also up modestly from the 4.7% reported last year (5.6% before other costs). We recorded an after-tax profit of $2.5 million for the nine months, compared to a $2.0 million after-tax profit in the same period of last year. The difference between the two years was mainly due to the $0.9 million in other costs we incurred in 2011.

Given the current highly competitive business environment, we are pleased with our sales results for the third quarter and year-to-date. However, we remain unhappy with our gross margin percentage, which continues to reflect the compression of pricing we have experienced in our core builder business since the beginning of the year. With the typical 18 to 24-month lag between when a contract sale to a builder is logged and when the appliances are delivered, we are now realizing sales that were negotiated in the second half of 2010 and in 2011 at unit prices that reflect the more challenging economic conditions that have prevailed since the beginning of the recession in 2008.

Despite the growing competitive pressure, we have maintained a very strong backlog of contract orders for future delivery across all of our markets. We are also happy to report that our addition of the KitchenAid® brand at our 12 BC and Alberta stores in January continued to generate sales in excess of our expectations.

To our Shareholders

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Continued focus on upgrading stores, reducing inventoryDuring the third quarter, as part of our ongoing strategy to enhance profitability by increasing sales from our existing stores, we completed improvements to our Coquitlam, BC store and moved forward with renovation work at our Calgary South store in Alberta. We expect to complete the Calgary South improvements by the end of the year. In Saskatoon, Saskatchewan, where we added new warehouse space adjacent to our store in Q2, we completed the planned conversion of our former in-store warehouse to a dedicated clearance centre. Refurbishments were also completed during the quarter at our Surrey, BC store, where we converted the space previously used for glass assembly and glass inventory storage to a clearance centre.

The store upgrades we have undertaken over the past 18 months have been extremely well received by our customers, generating increased traffic by enhancing Coast’s appeal as a shopping destination for retail buyers. The addition of the new clearance centres will support our focus on clearing out eliminated and discontinued products.

Reducing our inventory remains a priority. Unfortunately, we did not make as much progress toward this objective during the third quarter as we had planned. Our inventories have remained at higher than normal levels due to the increased product required to support both our sales growth and our introduction of KitchenAid® in BC and Alberta. We are continuing to closely review our product offering and we will be working with our key suppliers over the coming months to reduce the number of items we need to stock in our warehouses. We will also be eliminating additional marginal items and further refining our inventory ordering and control processes.

I am pleased to report that we successfully completed our search for a replacement for our retiring CFO, Jack Peck during the quarter. Gordon Howie joined Coast as CFO on September 1, 2012. A Chartered Accountant, Gordon has more than 25 years of financial and operational management experience with a focus on retail consumer products and supply chain management.

Sustaining our dividends to shareholdersIn the third quarter, we maintained our monthly dividends at the $0.035 per share rate we initiated in February 2011 following our conversion to a publicly-traded corporation. Subsequent to quarter-end, a dividend in the same amount was declared for the month of October. This monthly dividend equates to $0.42 per share per annum.

OutlookThe following outlook discussion is qualified in its entirety by the forward-looking statements proviso at the beginning of the Management’s Discussion and Analysis (MD&A) that follows this letter, and by the section on risks and uncertainties at the end of our MD&A.

The outlook for our business remains very cautious. In the builder segment, we expect that our revenues will continue to grow in the fourth quarter of 2012 as projects in our order backlog move into the final stages of development, particularly in the multi-family sector. However, we anticipate that the rate of growth will slow as these projects are completed and that our revenues may be impacted by a softening of our single-family business, reflecting an ongoing downward trend in single-family housing starts. We also expect that very competitive market conditions will keep unit prices below historical levels and hence compress margins on our builder sales for the foreseeable future. On the retail side, while Coast’s retail sales were strong in Q3, we anticipate that consumers will remain careful about making major purchases and that extremely competitive retail pricing will persist into 2013, again putting downward pressure on sales and margins.

We expect that our financial performance will continue to be impacted by slow economic growth and fragile consumer confidence in our western Canadian and GTA markets for some time yet. However, we remain confident that the builder-focused business strategy we currently have in place is the right one to sustain us through the challenges we currently face, and that this strategy will enable us to grow our business over the longer term as economic conditions improve. Based on our strong sales performance in the GTA this year, we remain very optimistic about the potential for our expansion in the country’s most populous market.

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Over the balance of the year, in addition to completing renovations at our Calgary South store, we will be finalizing plans for a major upgrade to the retail showroom at our Saskatoon store. We expect to begin the Saskatoon upgrade by early 2013.

In closing, we extend our very best wishes and appreciation to Harlow Burrows, who resigned as a Director of Coast in mid-September to pursue personal interests. Harlow was one of three founders of Coast in 1978 and is a former Chief Executive Officer of the company. He served on Coast’s Board from its formation with our conversion from a privately held business to a publicly traded entity in 2005. As a principal of CWAL Investments Ltd., Harlow will remain a major shareholder of Coast. In his place, we are pleased to welcome Jack Peck, our former CFO, to our Board of Directors. Prior to joining Coast in 2005, Jack held senior financial management positions with both publicly traded and large privately held entities. He brings more than 30 years of financial and business operations experience to his new Board role and we believe he will be a strong addition.

On behalf of Coast’s management and our Board of Directors, we offer our appreciation to all of our partners in success – our employees across Western Canada and in Ontario, our suppliers and our customers – and our gratitude to you, our shareholders, for your continued support of our business.

We look forward to reporting back to you again after the end of the year.

Sincerely,

Maurice E. Paquette

President and CEO, Director

Coast Wholesale Appliances Inc.

Patrick B. Dennett

Chairman of the Board of Directors

Coast Wholesale Appliances Inc.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND OPERATIONS

For the period ended September 30, 2012

This management’s discussion and analysis (MD&A) has been prepared by Coast Wholesale Appliances Inc. (Coast) as of November 2, 2012. The MD&A should be read in conjunction with Coast’s unaudited interim condensed financial statements and accompanying notes for the period ended September 30, 2012 and Coast’s audited financial statements for the year ended December 31, 2011 (both available at www.sedar.com and www.coastwholesaleappliancesinc.com). The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and are reported in Canadian dollars.

This report presents our financial results for the period from January 1, 2012 to September 30, 2012.

Forward-looking Statements

This report includes forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may 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 statements are 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 and our sales expectations. Forward-looking statements are included in, but are not limited to, the sections titled Third Quarter 2012 Summary, Economic and Industry Factors, Dividends to shareholders, Working capital and liquidity, Total assets and Outlook.

These forward-looking statements reflect current expectations of management regarding future events and operating performance as of the date of this report. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will 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 confidence in the economy; maintenance of profitability and management of changes to our business; competition; increases to interest rates; reliance on suppliers and their ability to supply product for sale on a timely basis; changes in consumer preferences; changes in the mix of product sales; fluctuations in fuel and commodity pricing; usage of extended warranty programs and the 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 management believes to be reasonable assumptions, 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 to Coast. They speak only as of the date of this report, and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: slow economic growth through the balance of 2012 in both Western Canada and the Greater Toronto Area (GTA), our current markets; continued fluctuations in exchange rates with the Canadian dollar trading near par with the US dollar; continued low interest rates through 2012; continuing relatively stable credit markets for our major builder customers; weak consumer confidence due to the slow economic recovery; and no significant change to total housing starts in 2012 compared to 2011. These forward-looking statements are made as of the date of this report and Coast assumes no obligation to update or revise them to reflect new events or circumstances, other than as required by law.

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COAST WHOLESALE APPLIANCES INC. Management’s Discussion and Analysis

Third Quarter 2012 SummaryFinancial results

• Revenues of $38.9 million were up by 8.0% from the $36.0 million recorded in the third quarter of 2011.

• Sales in the builder segment of our business increased by 13.8%, sales to retail customers improved by 2.4% and revenues from warranty sales, freight and installation, sales of glass products and commission sales decreased by 7.8%.

• Gross margin of 22.6% was down from 24.6% in Q3 2011, due to the combined impact of tighter margins in the builder side of our business, changes in our sales mix, ongoing retail pricing pressure and discounted pricing to accommodate product changes and reduce clearance inventory.

• Selling, warehouse, facility and general and administrative expenses of $6.4 million were up by $0.2 million year-over-year but were reduced as a percentage of sales to 16.4% from 17.1% in 2011.

• EBITDA of $2.4 million, although down from $2.6 million in Q3 2011, was improved sequentially over both the first and second quarters of 2012.

• Monthly dividends of $0.035 per share ($0.42 per annum) were maintained during the quarter.

Operating highlights

• As part of our ongoing strategy to enhance profitability by increasing sales from our existing stores, we continued to refresh our locations, completing upgrade work at our Coquitlam, BC store, and proceeding with renovations to our Calgary South store in Alberta.

• In support of our continued focus on clearance of eliminated and discontinued products, we opened dedicated clearance centres at our Saskatoon, Saskatchewan and Surrey, BC stores.

• We marked the official opening of our newly relocated GTA store, which features expanded warehouse facilities and a state-of-the-art showroom, in July 2012.

• Gordon Howie was appointed CFO, effective September 1, 2012, replacing Jack Peck, who has retired from his management role.

• Effective September 19, 2012, Jack Peck was appointed to Coast’s Board of Directors, replacing business founder Harlow Burrows, who retired from the Board to pursue personal interests.

Business environment

• The Canadian economy continued to exhibit only moderate growth.

• Our retail business continued to be negatively impacted by low consumer confidence in the Canadian economy and highly competitive market conditions.

• Low interest rates persisted and credit markets remained relatively stable for our builder customers, allowing reasonable access to financing for new projects.

• Total housing starts remained at approximately the same level recorded in 2011.

• Steady development activity in both the multi-family and single-family sectors allowed us to strengthen our backlog of orders from builders and developers.

• The Canadian dollar continued to fluctuate but remained near par with the US dollar.

Economic and Industry FactorsIn general, the economic and industry conditions impacting our business during the third quarter did not change substantially from those discussed in our 2011 Annual Report and 2012 Second Quarter Report. Moderate to slow economic growth persisted in Canada and elsewhere, and we expect that economic growth rates will remain sluggish through the balance of 2012 and into 2013. The potential for further economic setbacks remains a concern, particularly in the United States and Europe, and the global business environment continues to be uncertain. However, on a positive note, Canadian credit markets have remained relatively stable, allowing our builder and developer customers to finance both their current and future projects. The Canadian dollar fluctuated throughout the third quarter of 2012 but, on average, remained near par with the US dollar.

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Our builder business improved significantly over the third quarter of 2011, as sales continued to flow from the contract orders logged over the past two years, driving revenues from this segment up by 13.8%. However, margins realized from these sales have been lower than historical levels due to the highly competitive market in which pricing was negotiated. We expect that this year’s total housing starts will remain in line with the level recorded in 2011, with a continued shift from single-family starts to multi-family starts, and that margins on our builder sales will be compressed by competitive market conditions for the foreseeable future.

Consumer confidence in the Canadian economy remained muted, resulting in cautious spending and fierce competition in the retail side of our business. Despite the generally difficult consumer sales environment, our retail revenues remained strong in the third quarter, improving by 2.4% over Q3 2011. We anticipate that the retail pricing environment will remain very competitive through the final quarter of 2012.

SeasonalityCoast establishes an annual dividend rate and the monthly dividends paid to shareholders are averaged through the year. This payment pattern may not correlate to our net income, on a monthly basis, as sales of our products are subject to seasonal fluctuations that follow our customers’ building activities. Historically, the first quarter has been our slowest, accounting for approximately 22% to 23% of annual revenues. Sales are generally evenly distributed in the balance of the year, with a somewhat softer fourth quarter in comparison to the second and third quarters. In 2011, we saw a slight shift in this historic seasonal pattern due to the significant growth we experienced in our second-half builder business. The first quarter of 2011 accounted for 21% of annual sales, while the second, third and fourth quarters represented 26%, 27% and 26% respectively.

Selected Financial InformationThe following selected financial information has been derived from Coast’s unaudited interim condensed financial statements for the period ended September 30, 2012. It should be read in conjunction with these statements and their accompanying notes (available at www.sedar.com or www.coastwholesaleappliancesinc.com). The 2012 unaudited interim condensed financial statements have been prepared in accordance with IFRS in Canadian dollars, as were our 2011 financial statements. The operating results for 2010 have been restated in accordance with the adoption of IFRS.

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Operating Results(in thousands of dollars except percentages and per-share amounts)

3 months ended 3 months ended 3 months ended 9 months ended 9 months ended 9 months ended

Sept 30, 2012 Sept 30, 2011 Sept 30, 2010 Sept 30, 2012 Sept 30, 2011 Sept 30, 2010

Sales 38,898 36,001 34,947 106,663 98,313 102,461

Cost of sales 30,094 27,161 26,372 82,470 74,371 77,040

Gross profit 8,804 8,840 8,575 24,193 23,941 25,421


Expenses (1) 6,376 6,170 6,153 19,086 18,434 18,600

EBITDA before other costs (2) 2,429 2,670 2,422 5,107 5,507 6,821


Other costs - 97 - 902 386

EBITDA (2) 2,429 2,573 2,422 5,107 4,604 6,435


Finance costs 133 143 205 422 443 759

Interest rate swap - - (47) - - (345)

Deferred income taxes 71 262 - 207 475 -

Current income taxes 361 259 - 537 259 -

Depreciation 490 469 447 1,447 1,393 1,612

Profit before unit items 1,374 1,440 1,817 2,494 2,034 4,409


Distributions to units - - 1,252 - - 3,757

Fair value change in units - - 4,314 - - 1,103

Profit (loss) 1,374 1,440 (3,749) 2,494 2,034 (451)

Basic and diluted net income (loss) per share (3) 0.137 0.144 N/A 0.249 0.203 N/A

Dividends per share (3) 0.105 0.105 N/A 0.210 0.175 N/A

EBITDA per share (2)(3) 0.242 0.256 N/A 0.509 0.459 N/A

Total assets 100,878 127,440 131,166 100,878 127,440 131,166

Total long-term liabilities 3,589 14,575 23,063 3,589 14,575 23,063

(1) Expenses include selling, general and administrative, facilities and warehousing expenses.

(2) See definition of EBITDA under Non-IFRS Measures.

(3) For 2010 under IFRS, there are no equity instruments outstanding and therefore no earnings or dividends per share measurements.

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SalesOver the past two years, we have faced an increasingly competitive sales environment, particularly in the retail segment of our business, where average unit pricing has decreased markedly, requiring additional unit sales to maintain comparable revenues year-over-year. Since the beginning of this year, we have also experienced a distinct compression of pricing in our builder business as the contract sales realized in the first nine months of 2012 were negotiated and logged in the second half of 2010 and in 2011 at prices reflecting the increasingly challenging economic climate.

Despite the generally lower average pricing across our business, we are pleased to report that our overall sales revenues of $38.9 million in the third quarter were up by $2.9 million, or 8.0%, from the $36.0 million we reported for the same period of 2011. The increase was mainly due to the strength of our builder business. As in the past two quarters, we saw an increased sales flow from our backlog of orders for multi-family and single-family housing projects as these projects moved to the final stages of development, when appliance packages are delivered and installed. We achieved a 13.8% year-over-year increase in our third quarter sales to developers and builders, compared to a more modest 2.4% increase in our retail sales. Our other revenues, which include warranty sales, freight and installation, sales of glass products and commission sales, decreased by 7.8% over 2011. The reduction in other revenues was mainly due to the discontinuation of sales of glass products at all but one of our BC stores in the second quarter of 2012. In addition, commission sales of products under an agency agreement were down somewhat from 2011. Our business mix for the three months continued to shift in favour of our builder business.

Third quarter revenues improved in all of our geographic markets, with double-digit sales growth in Saskatchewan and Manitoba. Our revenues in these two provinces continued to benefit from strong multi-family and single-family home construction activity, with exceptionally robust performance in the Manitoba market. In the GTA, builder business improved considerably over the third quarter of 2011.

For the nine months ended September 30, 2012, total revenues of $106.7 million were up by $8.4 million, or 8.5%, from the $98.3 million we reported in the first nine months of 2011. Builder sales for the nine months increased by 14.8% year-over-year, while retail revenues were relatively level, increasing by 1.1%. Other revenues decreased by 0.9% over 2011.

Cost of sales and gross marginCost of sales for the three months ended September 30, 2012 was $30.1 million, or 77.4% of sales. This resulted in a gross profit of $8.8 million, or 22.6% of sales. By comparison, in the third quarter of 2011, cost of sales was $27.2 million, or 75.4% of sales, providing a gross profit of $8.8 million, or 24.6% of sales. The 2% decline in our 2012 Q3 gross margin percentage was effectively offset by this year’s higher sales revenues, enabling us to maintain total gross profit at the 2011 level. The decrease in gross margin was primarily due to the extremely competitive pricing environment that has persisted in all of our markets, and particularly in the builder side of the business. In addition, the gross margin generated from our other revenues in Q3 was down year-over-year, due mainly to a reduction in our commission sales of products marketed under an agency agreement. Changes in our sales mix, ongoing retail pricing pressure, and discounted pricing to accommodate product changes and reduce clearance inventory also had a negative impact on gross margin percentage.

Cost of sales for the nine months ended September 30, 2012 was $82.5 million, or 77.3% of sales. This resulted in a gross profit of $24.2 million, or 22.7% of sales. By comparison, in the first nine months of 2011, cost of sales was $74.4 million, or 75.6% of sales, providing a gross profit of $23.9 million, or 24.4% of sales. The 1.7% decrease in our 2012 nine-month gross margin percentage was mainly due to more competitive pricing in the builder segment of our business. However, as with the quarterly result, the lower margin was offset by higher sales revenues in 2012, resulting in a $0.3 million increase in gross margin dollars.

Expenses Selling, warehouse, facility, and general and administrative expenses (SG&A expenses) for the three months ended September 30, 2012 were $6.4 million, up by a modest $0.2 million from $6.2 million in the third quarter of 2011. However, with this year’s higher sales revenues, SG&A expenses as a percentage of sales were reduced to 16.4% from 17.1% in 2011.

Third quarter selling costs of $2.9 million were flat to 2011, due mainly to greater selling efficiency. Facility costs were up by $0.1 million, primarily as a result of increased property taxes and common area costs related to our leased facilities. Administrative costs increased by $0.1 million, due mainly to an increase in wages and professional fees. Warehousing costs benefited from improved operating efficiency, decreasing somewhat from the 2011 level.

For the nine months ended September 30, 2012, SG&A expenses of $19.1 million were up by $0.7 million from $18.4 million in the same period of 2011 and SG&A expenses as a percentage of sales were reduced to 17.9% from 18.8% in 2011.

Selling costs for the nine months were up by $0.5 million, due mainly to increased commission costs and a year-over-year increase in marketing expenditures. Facility costs were up by $0.2 million, primarily as a result of the increases in property taxes

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and common area costs related to our leased facilities. Administrative costs were flat year-over-year and, as with the quarterly result, warehousing costs were down somewhat from the 2011 level.

No “Other costs” were incurred in the first nine months of 2012. For the same period of 2011, other costs of $0.9 million comprised a one-time severance expense related to the departure of our former CEO in the first quarter of last year.

EBITDAEBITDA and EBITDA margin are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS (see Non-IFRS Measures).

EBITDA of $2.4 million for the third quarter of 2012 was down by $0.2 million from 2011, primarily due to this year’s higher SG&A expenses. Our EBITDA margin for the period decreased to 6.2% from 7.1% in 2011. The reduction was driven by the year-over-year reduction in our gross margin.

For the first nine months of the year, EBITDA of $5.1 million was up by $0.5 million from the $4.6 million we reported after other costs in 2011 ($5.5 million before other costs), while our EBITDA margin of 4.8% was in line with the 4.7% we reported last year (5.6% before other costs).

Table 1: Reconciliation of profit (loss) to EBITDA(in thousands of dollars except percentages)

3 months ended 3 months ended 3 months ended 9 months ended 9 months ended 9 months ended

Sept 30, 2012 Sept 30, 2011 Sept 30, 2010 Sept 30, 2012 Sept 30, 2011 Sept 30, 2010

Profit (loss) 1,374 1,440 (3,749) 2,494 2,034 (451)

Finance costs 133 143 205 422 443 759

Interest rate swap - - (47) - - (345)

Deferred income taxes 71 262 - 207 475 -

Current income taxes 361 259 - 537 259 -

Depreciation 490 469 447 1,447 1,393 1,612

Distributions to units - - 1,252 - - 3,757

Fair value change in units - - 4,314 - - 1,103

EBITDA (1) 2,429 2,573 2,422 5,107 4,604 6,435

EBITDA margin (1) 6.2% 7.1% 6.9% 4.8% 4.7% 6.3%

(1) See definition of EBITDA and EBITDA margin under Non-IFRS Measures.

Finance costsThird quarter finance costs of $133,000 were down slightly year-over-year.

Nine-month finance costs of $422,000 were also down slightly year-over-year.

Borrowings and interest rates for the first nine months of 2012 were comparable to 2011.

Depreciation Depreciation for the three months ended September 30, 2012 was $0.5 million, unchanged from Q3 2011.

Nine-month depreciation was $1.5 million, up from the $1.4 million we recorded in the same period of 2011.

Income taxes Total income taxes for the third quarter of 2012 were $432,000, comprising $361,000 in current income taxes and $71,000 in deferred income taxes. This compares to total income taxes of $521,000 for Q3 2011.

Income taxes for the first nine months of 2012 were $744,000, comprising $537,000 in current income taxes and $207,000 in deferred income taxes. In the first nine months of 2011, income taxes were $734,000.

ProfitIn the third quarter of 2012, we recorded a profit after taxes of $1.4 million, which was the same amount recorded last year.

For the nine-month period, we recorded a profit after taxes of $2.5 million in 2012, compared to a profit after taxes of $2.0 million in 2011. The year-over-year difference was mainly due to the $0.9 million in other costs recorded in 2011.

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Summary of Quarterly ResultsSee the section on seasonality above for a discussion of the impact of seasonality on our quarterly sales levels. Results for 2010 have been restated in accordance with IFRS.

Table 2: Summary of quarterly results(in thousands of dollars except percentages and per-share amounts)

2012 2011 2010

Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3

Sales 38,898 37,729 30,035 35,281 36,001 34,225 28,086 32,790 34,947

Gross profit 8,804 8,505 6,883 8,667 8,840 8,349 6,752 8,186 8,575

Gross margin percentage 22.6% 22.5% 22.9% 24.6% 24.6% 24.4% 24.0% 25.0% 24.5%

Profit (loss) 1,374 1,124 (4) (28,907) 1,440 1,081 (487) 1,966 (3,749)

Diluted net income (loss) per share (1) (2) 0.1370 0.112 0.000 (2.881) 0.144 0.108 (0.049) N/A N/A

Dividends per share (2) 0.105 0.105 0.105 0.105 0.105 0.105 0.070 N/A N/A

(1) Diluted and non-diluted net income (loss) per share are equivalent

(2) For 2010 under IFRS, there are no equity instruments outstanding and therefore no earnings or dividends per-unit measurements.

Liquidity and Capital ResourcesCash flow from operating activities

Table 3: Cash flow and movements in working capital (source (use) of cash)(in thousands of dollars)

3 months ended 3 months ended 9 months ended 9 months ended Sept 30, 2012 Sept 30, 2011 Sept 30, 2012 Sept 30, 2011

Cash flow from operating activities 2,512 2,655 5,297 4,818

Movements in working capital

Trade and other receivables (1,804) (1,423) (1,610) (2,045)

Inventory (1,267) 99 (1,385) (913)

Prepaid expenses 330 461 (163) (69)

Trade and other payables (1,000) 559 1,251 3,294

Customer deposits (490) 129 835 626

(4,231) (174) (1,072) 892

Cash generated from (used in) operations (1,719) 2,481 4,225 5,710

Interest paid (132) (143) (422) (443)

Income taxes paid (100) - (1,191) -

Net cash generated from (used in) operations (1,951) 2,338 2,612 5,267

Third quarter net cash flow from operating activities was $2.5 million, compared to $2.7 million for the same period of 2011 and after movements in working capital was ($1.7) million compared to $2.5 million in 2011.

The most significant changes in the quarter were a $1.3 million increase in inventory, compared to a $0.1 million decrease in 2011, and a $2.8 million increase in trade receivables and payables, compared to a $0.9 million increase in 2011.

For the nine months ended September 30, 2012, net cash flow from operations after paying $1.2 million in income taxes was $2.6 million, down from $5.3 million in the same period of 2011 when no income taxes were paid. Net income and resulting cash flow before movements in working capital improved to $5.3 million from $4.8 million in 2011. Movements in working capital were a $1.1 million use of cash in 2012, compared to a $0.9 million source of cash in 2011.

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Capital expenditures

Table 4: Capital expenditures(in thousands of dollars)

3 months ended 3 months ended 9 months ended 9 months ended Sept 30, 2012 Sept 30, 2011 Sept 30, 2012 Sept 30, 2011

Total capital 222 44 855 275

Less proceeds on disposal of assets - - - -

222 44 855 275

Capital expenditures of $222,000 for the third quarter of 2012 related mainly to the ongoing upgrading of our stores. Work was underway during the quarter at our locations in Coquitlam and Surrey, BC, our Calgary South store in Alberta and our Saskatoon, Saskatchewan location. Capital expenditures for Q3 of 2011 totalled $44,000.

For the nine months ended September 30, 2012, our capital expenditures totalled $855,000, compared to $275,000 in the first three quarters of 2011. For the balance of this year, capital expenditures will focus on continued store improvements and upgrades to our information technology. We expect that capital expenditures for the year will total approximately $1.0 million, compared to $449,000 in 2011.

Dividends to shareholders

Table 5: Dividends to shareholdersRecord date Payment date Per share $ Amount $

January 27, 2012 February 6, 2012 0.035 351,196 February 24, 2012 March 5, 2012 0.035 351,196

March 23, 2012 April 5, 2012 0.035 351,196

April 27, 2012 May 7, 2012 0.035 351,196

May 28, 2012 June 5, 2012 0.035 351,196

June 22, 2012 July 5, 2012 0.035 351,196

July 27, 2012 August 7, 2012 0.035 351,196

August 24, 2012 September 5, 2012 0.035 351,196

September 28, 2012 October 5, 2012 0.035 351,196

0.315 3,160,764

Since declaring our first dividend as a corporation on February 16, 2011, we have paid monthly dividends of $0.035 per share, equating to $0.42 per share on an annualized basis.

Coast’s dividend policy is subject to the discretion of our Board of Directors, who take into account our financial performance, as well as our current and anticipated business needs, at the time a dividend is being considered. The amount and timing of any future dividends may vary depending on, among other things, Coast’s earnings and financial requirements, and the satisfaction of solvency tests imposed by the Canada Business Corporations Act for the declaration of dividends.

Contractual obligations, commitments and financing

Table 6: Payments due by period as at September 30, 2012(in thousands of dollars)

Operating leases Term debt

Less than one year 3,782 -

One to three years 7,200 -

Four to five years 5,638 -

After five years 4,040 -

20,660 -

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In the second quarter of 2012, we renegotiated our financing arrangement with our existing lender, creating a new revolving loan and using funds from the new facility to repay both our existing revolving loan and our term debt. We now have available an amount of up to $20,000,000 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. The new facility bears interest at the lender’s prime rate plus 0.50% (amounting to 3.5% at September 30, 2012) when borrowed directly, or at the banker’s acceptance rate plus 1.70% 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 is better 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 and the lower of 65% of the book value or 85% of the net orderly liquidation value of inventories, to a maximum of $13,000,000 of the total amount to be available. Certain identified trade accounts receivable and inventories are excluded from the calculation of the amount available under the loan facility. As well, certain trade accounts payable accounts, including those with a priority security interest, 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 of our assets, subject to the priority security positions held by suppliers.

We are required to maintain a fixed-charge coverage ratio of not less than one to one. The ratio is calculated as the ratio of EBITDA 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 capital expenditures are limited to $1,500,000. At September 30, 2012, Coast was in compliance with the covenants of the loan.

Operating leases are in place for all premises. We paid total basic rent of $0.9 million and $2.8 million for the three and nine-month periods ended September 30, 2012, respectively. This is approximately equivalent to the amounts paid for the same periods of 2011.

Working capital and liquidity

Table 7: Working capital and liquidity(in thousands of dollars)

Sept 30, 2012 Dec 31, 2011

Working capital 1,995 12,782

Total assets 100,878 98,317

Total liabilities 44,218 40,991

Total long-term liabilities 3,589 14,582

Working capital was $2.0 million at September 30, 2012, down from $12.8 million at December 31, 2011. The reduction in our working capital is a result of the change to our bank indebtedness. Under our new loan facility, the entire amount of the bank debt is treated as a current liability. If the term debt was included as a current liability in last year’s result, working capital at December 31, 2011 would have been $1.7 million.

In addition to working capital, we currently have available our $20.0 million revolving loan which may be used for working capital requirements, capital expenditures and general corporate purposes. The interest rates and security are detailed above.

Our principal sources of liquidity are cash provided by operations and our revolving loan. In addition, we review our cash flows on an ongoing basis and can adjust our annual dividend rate accordingly. At this time, we believe that such sources of liquidity will be sufficient to fund future working capital requirements, capital expenditures and our planned growth.

Total assets

Total assets at September 30, 2012 were $100.9 million, compared to total assets at December 31, 2011 of $98.3 million. The $2.6 million increase in our total assets was mainly due to a $1.6 million increase in accounts receivable and a $1.3 million increase in inventory.

Inventory at September 30, 2012 was $27.3 million, compared to $26.0 million at June 30, 2012 and $25.9 million at December 31, 2011. Our inventories have remained at higher than normal levels due to the increased product required to support both our sales growth and the introduction of the KitchenAid® brand at our 12 stores in BC and Alberta at the beginning of 2012. Reducing our inventory remains a priority. We are continuing to closely review our product offering. Over the coming months, we will be decreasing the number of items we stock in our warehouses and further refining our inventory ordering and control processes. We will also continue to focus on eliminating marginal products and clearing out discontinued products.

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Table 8: Accounts receivable(in thousands of dollars)

Sept 30, 2012 Dec 31, 2011

Accounts receivable - trade 10,900 8,974

Supplier rebates and other 3,539 3,856

14,440 12,830

Our total accounts receivable of $14.4 million at September 30, 2012 was up by $1.6 million from the $12.8 million we recorded at December 31, 2011. Trade accounts receivable were up by $1.9 million, as our sales to builders increased through the third quarter. Supplier rebates and other receivables were reduced by $0.3 million, as we collected the majority of our year-end supplier charge-backs and rebates during the first quarter.

Total liabilities

Total liabilities at September 30, 2012 were $44.2 million, compared to $41.0 million at December 31, 2011. The difference was mainly due to the $1.2 million increase in our trade and other payables and a $1.7 million increase in our bank facility.

Trade and other payables at September 30, 2012 were $16.5 million, compared to $15.3 million at December 31, 2011. Customer deposits at September 30, 2012 were $5.7 million, up by $0.8 million from $4.9 million at December 31, 2011, reflecting the relative stability of our retail business during the third quarter of this year.

Total deferred warranty revenue (combined current and non-current) at September 30, 2012 was $4.3 million, equivalent to the balance at December 31, 2011.

Long-term incentive plan

Under the terms of our long-term incentive plan (LTIP), 10% to 20% of net income in excess of an established threshold is to be paid to the plan trustee to purchase shares of Coast for the participants. The liability is to be accrued in the period when the net income exceeds the thresholds established for the LTIP, with the related cost amortized to expenses over the three-year vesting period of the applicable participant awards. Benefits forfeited under the plan will be returned to Coast.

At September 30, 2012, the prepaid compensation balance was nil. No amounts have been accrued under the LTIP to date this year and there are currently no funds held by the LTIP.

Share capital

Table 9: Share capital(in thousands of dollars except share quantities)

Shares Amount

Balance September 30, 2012 and December 31, 2011 10,034,166 46,257

At September 30, 2012, Coast had 10,034,166 common shares issued and outstanding, which was unchanged as of November 2, 2012, 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 accrued liabilities, bank indebtedness, term loans, customer deposits and dividends payable. These financial instruments are classified into one 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 purpose of the instrument. These financial instruments are subject to credit risk, currency risk and concentration risk (a full description can be found in Note 22 to our financial statements for the year ended December 31, 2011).

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Table 10: Classification and measurement of financial assets and financial liabilities

Financial Instrument Category Measurement

Cash Loans and receivables Amortized cost

Accounts receivable Loans and receivables Amortized cost

Operating loan Other financial liabilities Amortized cost

Term loans Other financial liabilities Amortized cost

Accounts payable Other financial liabilities Amortized cost

Customer deposits Other financial liabilities Amortized cost

Dividends payable Other financial liabilities Amortized cost

Exchangeable units Fair value through profit or loss Fair value

Off Balance Sheet ArrangementsCoast has not entered into any off balance sheet arrangements.

Critical Accounting Policies and EstimatesWe have prepared our unaudited interim condensed financial statements in accordance with IFRS in Canadian dollars. IFRS requires us to make estimates and judgments that affect the reported amount of assets and liabilities, and disclosure of contingencies at the date of the unaudited interim condensed financial statements and the reported amount of revenues and expenses during the period. It is reasonably possible that circumstances may arise which cause actual results to differ from our estimates. Areas requiring significant management estimates include valuation of goodwill, intangible assets and leaseholds and equipment, allowance for doubtful accounts, inventory valuation, amounts for accrued liabilities, deferred warranty revenue, 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 audited financial statements for the year ended December 31, 2011. The policies that we believe are the most critical in aiding a full understanding and evaluation of our reported financial results are summarized below.

Revenue recognition

Coast recognizes revenue from the sale of products when a sales arrangement is entered into, the sales price is fixed and determinable, 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 addition to those provided by the manufacturers of the product and generally extend the life of the warranty to a five-year period. The revenue received from the warranty contracts is initially recorded as deferred warranty revenue and is amortized to income over the life of the warranty contract. The costs associated with delivering the related warranty services are expensed as they are incurred during the life of the contracts. The expenses incurred to sell the warranty contracts are initially recorded as other assets and are amortized to expense over the life of the warranty contracts.

Valuation of goodwill and impairment

Goodwill is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. Coast compares goodwill to the fair value of the reporting unit to which the goodwill relates. Any impairment is charged to operations in the amount by which the carrying amount of the assets exceeds the fair value of the goodwill.

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 2009 acquisition 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 flow projections based on current financial budgets, four-year forecasts beyond the budget period and strategic plans for the business. Beyond the five-year forecast period, a growth rate is used to forecast the long-term growth of the business. The process of determining these fair values requires us to make estimates and assumptions, including, but not limited to, projected future sales, earnings and capital investment, discount rates and terminal growth rates.

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Coast’s goodwill was evaluated at December 31, 2011 and an impairment was recognized and charged to income in the fourth quarter of 2011 (see Note 12 to the December 31, 2011 financial statements). There has been no subsequent change to goodwill.

Table 11: Goodwill(in thousands of dollars)

Sept 30, 2012 Dec 31, 2011

Western Canada 38,182 38,182

Eastern Canada 2,211 2,211

40,393 40,393

Valuation of intangible assets, leaseholds and equipment

We review the valuation of our intangible assets, leaseholds and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from the future undiscounted cash flows from the asset’s expected use and eventual disposition. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets designated 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, 2011. No adjustments for impairment were required.

Inventory valuation

Inventory is valued at the lower of cost and net realizable value using the first-in, first-out method. Coast assesses net realizable value of inventory at each reporting period based on sales patterns of inventory, expected selling prices and the level of inventory on hand. Incentives received from suppliers and any provisions are accounted for as a reduction in the related inventory value and cost of sales.

Income taxes

Coast follows the asset and liability method of accounting for income taxes whereby future tax assets and liabilities are recognized for differences between the bases of assets and liabilities used for financial statement and income tax purposes. Deferred income taxes are determined according to these differences at the tax rate expected to be in place when the differences 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 acquisition of 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., the former owner of the business. For the nine-month period ended September 30, 2012, our lease payments to related parties totaled $0.9 million.

Disclosure controls and procedures and internal control over financial reportingDisclosure controls and procedures

Disclosure controls and procedures are processes designed to provide reasonable assurance that information required to be disclosed by Coast in annual, interim or other filings is collected and reported to Coast’s management in a timely manner that facilitates the required reporting. Due to the inherent limitations of control systems, an evaluation can only provide reasonable assurance over the effectiveness of the controls. Coast’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) designed and evaluated, or had these functions completed under their direction, the effectiveness and operation of our disclosure controls and procedures. Based on that evaluation, the CEO and the CFO concluded that the design and operation of these disclosure controls and procedures were effective as at September 30, 2012.

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Internal control over financial reporting

Internal control over financial reporting encompasses controls and processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. As the management of Coast, we are responsible for establishing and maintaining these controls. Under the supervision of and with the participation of the CEO and the CFO, management carries out, on an ongoing basis, an assessment of the design of these internal controls. This assessment uses the criteria set forth by the Committee of Sponsoring Organizations 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 only provide reasonable assurance over the effectiveness of the controls, and internal controls are not expected to prevent and detect all misstatements due to error or fraud. Based on our ongoing assessment, the CEO and the CFO have concluded that Coast’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of unaudited interim condensed financial statements for external purposes as at September 30, 2012.

There were no changes in internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, Coast’s internal control over financial reporting.

Outlook The following discussion is qualified in its entirety by the Forward-looking Statements proviso at the beginning of this management’s discussion and analysis, and by the section entitled Risks and Uncertainties that follows this Outlook section.

A very cautious outlook persists for our business. As we expected, the Canadian economy exhibited only moderate growth in the first nine months of 2012 and we anticipate that economic growth in our western Canadian and GTA markets will remain sluggish through the balance of 2012 and into 2013. The current low growth rate of the US economy and the ongoing debt and fiscal problems in the European economies continue to put the Canadian economy at risk. Any significant negative events in these regions would have a considerable negative impact on the Canadian economy.

In the builder segment of our business, we expect that our revenues will continue to grow in the fourth quarter of this year as projects in our order backlog move into the final stages of development, particularly in the multi-family sector. However, we expect that the rate of growth will slow from the 14.8% year-over-year sales increase achieved in the first nine months of 2012. The improvement in our builder sales may be tempered somewhat by a softening of our single-family business, reflecting a shifting of building permits from single family homes to multi-family structures that began in 2011 and continued to present. Overall, we do not anticipate that total housing starts for 2012 will be significantly different from 2011. As discussed earlier in this report, we expect competitive market conditions will continue to compress unit prices, and hence margins, on our builder sales for the foreseeable future.

We also continue to enjoy success in the retail segment, with a 1.1% increase in our year-to-date retail sales. However, consumer confidence remains muted and we anticipate that our customers will continue to be careful about making major purchases. We expect that the very competitive retail pricing environment we have experienced since mid-2010 will persist through the end of 2012, putting continuing downward pressure on our sales and margins.

As with the first two quarters of 2012, our Q3 sales performance was particularly strong in the GTA market, with considerable year-over-year revenue gains in both the retail and builder segments. Based on our growing backlog of contract sales to builders and developers, we expect that our revenues in this market will continue to increase through the balance of the year. We also believe that the recently completed relocation of our GTA store will significantly enhance our ability to expand our business in the region over the longer term. The new facility features a state-of-the-art showroom and adjoining warehouse providing sufficient space to accommodate the future addition of new stores in the GTA.

Our extension of the popular, higher-end KitchenAid® brand to our 12 stores in BC and Alberta at the beginning of 2012 also contributed significantly to our strong third quarter sales performance. KitchenAid sales in these two provinces continued to exceed our expectations and we anticipate that we will benefit from significant incremental revenue gains for the foreseeable future.

Building on the comprehensive review of our product offerings we completed in Q3 2011, which paved the way for the KitchenAid extension, we are now in the process of conducting a second, more in-depth review of our offerings. In addition to reducing the number of items we stock in our warehouses, we will continue to eliminate marginal products from our offerings. We also plan to implement further refinements to our inventory ordering and management processes. Finally, our ongoing focus on clearance of eliminated and discontinued products will help to decrease inventory across our store network. To this end, we have converted the section of our Surrey, BC store formerly utilized for glass assembly and glass inventory storage to a dedicated clearance centre. Glass products have now been discontinued at our stores in the BC Lower Mainland locations and will now only be sold at our Kelowna, BC store.

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We continue to refresh our existing stores as part of our ongoing strategy to enhance profitability by increasing sales. Final cosmetic work was completed at our Victoria, BC store early in the third quarter and our Coquitlam, BC store upgrade was completed in September, as planned. In Alberta, improvements at our Calgary South store proceeded through the quarter and are expected to be completed by year-end. In Saskatoon, Saskatchewan, where we added new warehouse space adjacent to our store in Q2, we converted the existing in-store warehouse space to a dedicated clearance centre in Q3, as planned. A significant upgrade to the store’s retail showroom is slated to begin by early next year. The store upgrades we have undertaken over the past 18 months have been extremely well received by our customers, generating increased traffic by enhancing our stores’ appeal as a shopping destination for retail buyers. At the same time, the addition of the new clearance centres in Surrey and Saskatoon will support our focus on clearing out eliminated and discontinued products.

During the third quarter, we successfully completed the search for a replacement for our retiring CFO Jack Peck. Gordon Howie joined Coast as CFO on September 1,2012. A Chartered Accountant, he has more than 25 years of financial and operational management experience with a focus on retail consumer products and supply chain management. Jack has been working with Gordon in a consulting capacity to ensure a smooth and orderly transition.

Effective September 19, 2012, Harlow Burrows resigned as a director of Coast in order to pursue personal interests and Jack Peck was appointed to our Board of Directors. Mr. Peck is a Chartered Accountant who brings the Board the benefit of more than 30 years of financial and business operations experience.In addition to his role with Coast, he has held senior management positions with Gray Beverage Inc., Leading Brands Inc. and Surfwood Supply. Mr. Burrows was one of three founders of Coast in 1978 and is a former Chief Executive Officer of the company. He served on Coast’s Board from its formation with our conversion from a privately held business to a publicly traded entity in 2005. As a principal of CWAL Investments Ltd., Mr. Burrows will remain a major shareholder of Coast.

Going forward, we believe that our current credit facilities and ongoing cash flow from operations will be sufficient to allow us to meet ongoing requirements for capital expenditures, including investments in working capital. However, Coast’s needs may change. In such an event, our ability to satisfy our obligations will be dependent upon future financial performance, which in turn will be subject to financial, tax, business and other factors, including elements beyond our control.

Risks and UncertaintiesCoast is subject to a number of risks in addition to the normal business risks associated with supply companies operating within the major home appliances market in Canada. Demand for the products we sell is particularly sensitive to the health of the economy in Canada as a whole, and especially in our western Canadian and GTA marketplaces. A number of factors could have 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 could negatively impact our sales to both retail customers, who may defer or cancel purchase plans, and builder customers, who may defer or cancel housing 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 meet their obligations to us on a timely basis. Slower collection of our trade receivables could result in bad debts in excess of our historical patterns.

• Increases in interest rates and changes to borrowing terms, which would increase Coast’s and our customers’ costs, and the resultant impact on the availability of credit to both builders and purchasers of homes, which may impact the housing market and may reduce new home construction and renovation work.

• Fluctuations in fuel prices, which may drive up inbound and outbound freight costs, as well as other related costs. Higher fuel prices can have a dramatic and rapid impact on our gross margin from freight revenue if our rates are not adequately adjusted.

• Any significant change in competition from one or more competitors, as well as competition directly from suppliers, which may impact our sales and margins.

• Fluctuations in the Canadian / US dollar exchange rate, which may impact product costs from our major suppliers, as well as 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 on a timely basis. These processes are currently contracted to outside transportation suppliers and alternate suppliers are available.

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• 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. Increased demand may cause costs to increase beyond historical patterns, resulting in a degradation of gross margin from this component 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 at the beginning of this MD&A.

Non-IFRS Measures References to EBITDA are to earnings before distributions to exchangeable units, fair value changes in exchangeable units, interest, taxes, depreciation and amortization. The term EBITDA margin refers to the percentage that EBITDA represents in relation to sales. Since many investors use EBITDA to compare issuers on the basis of the 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 that EBITDA should not be construed as an alternative to profit or loss determined in accordance with IFRS as an indicator of Coast’s operating performance. Similarly, EBITDA should not be seen as an alternative to cash flows from operating, investing and financing activities as measures of liquidity and cash flows. For a reconciliation of EBITDA to profit presented in accordance 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 SEDAR at www.sedar.com and on Coast’s website at www.coastwholesaleappliancesinc.com.

[ 20 ]


Notice of No Auditor ReviewThese unaudited interim condensed financial statements have been prepared by and are the responsibility of the management of Coast Wholesale Appliances Inc. An independent auditor has not audited or performed a review of these unaudited interim condensed financial statements.

[ 21 ]


Condensed statements of financial position (Unaudited)

Notes Sept 30, 2012 Dec 31, 2011

CDN$ CDN$

Assets

Current assets

Cash 301,589 -

Trade and other receivables 14,439,795 12,829,955

Inventory 27,282,776 25,897,256

Prepaid expenses 403,709 240,506

Other assets 196,830 223,778

Total current assets 42,624,699 39,191,495

Non-current assets

Leaseholds and equipment 3,382,084 3,136,273

Intangible assets 10,783,083 11,710,074

Goodwill 40,392,968 40,392,968

Other assets 304,775 288,970

Deferred income taxes 3,390,000 3,597,000

Total non - current assets 58,252,910 59,125,285

Total assets 100,877,609 98,316,780

Liabilities

Current liabilities

Bank indebtedness 5 16,532,761 1,677,574

Cheques issued in excess of funds on deposit - 800,113

Trade and other payables 16,536,965 15,285,681

Dividends payable 351,196 351,196

Customer deposits 5,742,973 4,907,912

Current portion of deferred warranty revenue 1,436,281 1,403,219

Income taxes payable 29,216 683,000

Current portion of term debt 5 - 1,300,000

Total current liabilites 40,629,392 26,408,695

Non-current liabilities

Term debt 5 - 11,050,000

Deferred warranty revenue 2,844,714 2,800,559

Other liabilities 744,071 731,584

Total non-current liabilites 3,588,785 14,582,143

Total liabilities 44,218,177 40,990,838

Equity

Share capital 6 46,257,505 46,257,505

Retained earnings 10,401,927 11,068,437

Total equity 56,659,432 57,325,942

Total equity and liabilities 100,877,609 98,316,780

Subsequent events 9

Approved on behalf of the Board of Directors, November 2, 2012

Patrick Dennett Anthony Soda

Director Director

See accompanying notes to the unaudited interim condensed financial statements

[ 22 ]


Condensed statements of comprehensive income (Unaudited) Notes 3 months ended 3 months ended 9 months ended 9 months ended

Sept 30, 2012 Sept 30, 2011 Sept 30, 2012 Sept 30, 2011

CDN$ CDN$ CDN$ CDN$

Sales 3 38,898,335 36,001,343 106,663,238 98,312,684

Cost of sales 3 30,093,839 27,161,255 82,470,461 74,371,455

Gross profit 8,804,496 8,840,088 24,192,777 23,941,229

Expenses

Selling 2,872,559 2,885,833 8,698,893 8,188,643

General and administrative 1,492,707 1,338,135 4,287,396 4,314,907

Facilities 1,507,470 1,420,491 4,565,779 4,322,132

Warehousing 503,245 525,154 1,533,888 1,608,800

6,375,981 6,169,613 19,085,956 18,434,482

Profit before other costs, depreciation, finance costs and income tax 2,428,515 2,670,475 5,106,821 5,506,747

Other costs - 97,310 - 902,310

Depreciation

Lease inducements (29,674) (29,674) (89,023) (89,023)

Leaseholds and equipment 210,747 183,275 608,702 535,450

Intangible assets 308,997 315,615 926,991 946,845

Finance costs 132,498 142,870 421,900 442,862

Profit before income tax 1,805,947 1,961,079 3,238,251 2,768,303

Current income tax expense 361,000 259,000 537,000 259,000

Deferred income tax expense 71,000 262,000 207,000 475,000

Income tax expense 432,000 521,000 744,000 734,000

Profit and comprehensive income 1,373,947 1,440,079 2,494,251 2,034,303

Basic and diluted net income per share 0.137 0.144 0.249 0.203

Basic and diluted weighted average

number of shares outstanding 10,034,166 10,034,166 10,034,166 10,034,166


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Condensed statements of changes in equity (Unaudited) Notes Share capital Retained earnings Total equity CDN$ CDN$ CDN$

Balance, January 1, 2011 46,257,505 41,804,449 88,061,954

Profit and comprehensive income - 2,034,303 2,034,303

Dividends - (2,809,568) (2,809,568)

Balance, September 30, 2011 46,257,505 41,029,184 87,286,689

Profit (loss) and comprehensive income (loss) - (28,907,159) (28,907,159)

Dividends - (1,053,588) (1,053,588)

Balance, December 31, 2011 46,257,505 11,068,437 57,325,942

Profit and comprehensive income - 2,494,251 2,494,251

Dividends 7 - (3,160,761) (3,160,761)

Balance, September 30, 2012 46,257,505 10,401,927 56,659,432


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Condensed statements of cash flows (unaudited)

3 months ended 3 months ended 9 months ended 9 months ended


CDN$ CDN$ CDN$ CDN$

Cash flows from operating activities

Profit 1,373,947 1,440,079 2,494,251 2,034,303

Items not involving cash

Depreciation 490,070 469,216 1,446,670 1,393,272

Income taxes 432,000 521,000 744,000 734,000

Finance costs 132,498 142,870 421,900 442,862

Deferred lease increment 35,438 37,900 101,511 118,366

Deferred warranty revenue 51,406 (16,160) 77,217 (82,882)

Other assets (3,388) 60,820 11,143 177,779

2,511,971 2,655,725 5,296,692 4,817,700

Movements in working capital

Trade and other receivables (1,804,251) (1,423,151) (1,609,840) (2,045,136)

Inventory (1,267,242) 99,984 (1,385,520) 913,268)

Prepaid expenses 330,048 460,709 (163,203) (69,050)

Trade and other payables (1,000,031) 559,314 1,251,287 3,294,045

Customer deposits (489,702) 128,649 835,061 625,889

(4,231,178) (174,495) (1,072,215) 892,480

(1,719,207) 2,481,230 4,224,477 5,710,180

Interest paid (132,498) (142,870) (421,900) (442,862)

Income taxes paid (99,723) - (1,190,784) -

Net cash generated from (used in) operating activities (1,951,428) 2,338,360 2,611,793 5,267,318

Cash flows used in investing activities

Purchase of leaseholds and equipment (222,267) (43,600) (854,512) (274,702)

Proceeds from sale of leaseholds and equipment - - - -

Net cash used in investing activities (222,267) (43,600) (854,512) (274,702)

Cash flows from financing activities

Operating loan 3,081,600 22,497 14,855,187 286,209

Term debt - (325,000) (12,350,000) (5,325,000)

Dividends paid (1,053,588) (1,053,588) (3,160,766) (2,458,372)

Net cash generated from (used in) financing activities 2,028,012 (1,356,091) (655,579) (7,497,163)

Net increase (decrease) in cash (145,683) 938,669 1,101,702 (2,504,547)

Cash (cheques issued in excess of funds

on deposit), beginning of period 447,272 (1,665,690) (800,113) 1,777,526

Cash (cheques issued in excess of funds on deposit), end of period 301,589 (727,021) 301,589 (727,021)


[ 25 ]


Notes to the Interim Condensed Financial StatementsNine-month period ended September 30, 2012(Unaudited)

1. General information

Coast 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 compliance

These unaudited interim condensed financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board. These unaudited interim condensed financial statements follow the same accounting policies and methods of their application as set out in, and therefore should be read in conjunction with Coast’s annual financial statements for the year ended December 31, 2011.

(b) Basis of preparation

The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The financial statements are presented in Canadian dollars.

(c) Other accounting policies

For a complete list of significant accounting policies, refer to the financial statements for the year ended December 31, 2011.

3. Revenue and cost of sales 3 months ended 3 months ended 9 months ended 9 months ended


$ $ $ $

Sales of appliances and accessories 36,562,432 33,468,391 99,751,768 91,336,832

Cost of sales 28,240,668 25,196,926 77,064,594 69,152,974

8,321,764 8,271,465 22,687,174 22,183,858

Other revenue 2,335,903 2,532,952 6,911,470 6,975,852

Other cost of sales 1,853,171 1,964,329 5,405,867 5,218,481

482,732 568,623 1,505,603 1,757,371

Total sales 38,898,335 36,001,343 106,663,238 98,312,684

Total cost of sales 30,093,839 27,161,255 82,470,461 74,371,455

Total gross profit 8,804,496 8,840,088 24,192,777 23,941,229

Other revenue includes warranty sales, freight and installation revenue, sales of glass products and commission income from sales of appliances where Coast acts as a sales agent. Other cost of sales relate to the costs to provide these services.

COAST WHOLESALE APPLIANCES INC. Notes to the Interm Condensed Financial Statements

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4. Segment information

Coast operates in one industry segment, that is, the sale and distribution of major household appliances. Coast’s chief operating decision-makers review Coast’s operating results on a company-wide basis and manage resource allocations and operations as a single operating segment.

5. Borrowings

Sept 30, 2012 Dec 31, 2011

$ $

Bank indebtedness (a) 16,531,761 1,677,574

Current portion of term debt - 1,300,000

Long-term portion of term debt - 11,050,000

Term debt (b) - 12,350,000

a) During the second quarter of 2012 Coast renegotiated its financing arrangement with its existing lender, creating a new revolving loan and used the funds to repay the existing revolving loan and term debt. Coast now has available an amount of up to $20,000,000 as a revolving loan (the “Bank Indebtedness”). The Bank Indebtedness is available for a three-year term maturing on June 26, 2015 and can be used for working capital requirements, capital expenditures and general corporate purposes. The Bank Indebtedness bears interest at the lender’s prime rate plus 0.50% (at September 30, 2012, this rate was 3.5%), when borrowed directly, or at the banker’s acceptance rate plus 1.70% 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 Bank Indebtedness.

The amount made available under the Bank Indebtedness is limited to 85% of the book value of trade accounts receivable and the lower of 65% of the book value or 85% of the net orderly liquidation value of inventories, not to exceed $13,000,000 of the total amount to be available. Certain identified trade accounts receivable and inventories are excluded from the calculation of the amount available under the facility. As well, certain trade accounts payable accounts, including the third-party security interest noted below, 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, subject to the security provided to a major supplier, as noted below.

Coast is required to maintain a fixed-charge coverage ratio of not less than one to one. The ratio is calculated as the ratio of EBITDA plus operating lease payments, less cash taxes, less dividends paid, less capital expenditures divided by cash interest paid, 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 September 30, 2012, Coast was in compliance with the covenants of the 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 year one, a fee of 1% in year two and a fee of 0.5% in year three.

b) During the second quarter of 2012, Coast repaid its existing term debt from funds advanced under the Bank Indebtedness described above. The non-revolving loan (the “Term Loan”) was made available for the financing of working capital, leaseholds and equipment. Advances bore interest at the lender’s prime rate plus 0.25% to 0.50% when borrowed directly, or at the banker’s acceptance rate plus 1.75% to 2.00% when a banker’s acceptance facility was utilized, based on the ratio of senior debt to earnings before interest, taxes, depreciation and amortization, calculated on a quarterly basis. The Term Loan was secured by a general security agreement covering all assets of Coast, subject to the security provided to a major supplier as noted below. Interest payments were monthly. Quarterly principal payments in the amount of $325,000 commenced on September 30, 2011, based on a 10-year amortization. There were no early payment fees or penalties.

Third-party security interest

Accounts payable, net of rebates receivable, due to a major supplier are secured by inventory on hand that was acquired from that supplier and totaled $3,283,804 (December 31, 2011 - $3,720,978). See subsequent event Note 9.

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COAST WHOLESALE APPLIANCES INC.Notes to the Interm Condensed Financial Statements

6. Share capital

Shares Amount

$

Balance, September 30, 2012 and December 31, 2011 10,034,166 46,257,505

The authorized capital of Coast consists of an unlimited number of common shares, of which 10,034,166 are issued and outstanding, and an unlimited number of preferred shares, none of which have been issued or are outstanding, as at September 30, 2012.

7. Dividends

Dividends of $0.035 per share were paid on a monthly basis in the first nine months of 2012. Dividends for the three and nine-month periods ended September 30, 2012 totaled $1,053,588 and $3,160,761, respectively (2011 - $1,053,588 and $2,809,568, respectively). At September 30, 2012, dividends payable to shareholders totaled $351,196 (September 30, 2011 - $351,196).

8. Related-party transactions

Coast leases six of its store locations from a company owned by shareholders who own approximately 37% of the issued and outstanding shares of Coast. The total rent paid to this related party for the three and nine months ended September 30, 2012 was $301,713 and $905,139, respectively (2011 - $301,713 and $905,139, respectively). The amounts paid are based upon lease agreements between the two parties and were in accordance with market rates at the time of the agreements.

9. Subsequent events

On October 17, 2012, Coast declared a dividend in the amount of $0.035 per share, payable to shareholders of record on October 26, 2012, to be paid November 5, 2012.

On October 22, 2012, the third-party security interest in our inventory was extinguished.

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BOARD OF DIRECTORS

Patrick B. Dennett

Chairman of the Board of Directors

Maurice E. Paquette

Jack G. Peck, CA

Donald J.A. Smith, CA

Chair of Governance, Nominating and Corporate Matters Committee and Chair of Compensation Committee

Anthony L. Soda, CA

Chair of Audit, Finance and Risk Committee

SHAREHOLDER INFORMATION

Investor Relations

604.301.3400invest@coastappliances.comwww.coastwholesaleappliancesinc.com

Auditors

Deloitte & Touche LLP Vancouver, BC

Shares Listed

Toronto Stock Exchange Trading Symbol: CWA

Registrar and Transfer Agent

Computershare Investor Services Inc.

MANAGEMENT

Maurice E. Paquette

President and Chief Executive Officer

Gordon Howie, CA

Chief Financial Officer

Stephen J. Raben

Senior Vice President, Sales and Marketing

Michael Fiorini

Vice President, Multi-Family Sales, Eastern Canada

Bradley S. Romo

Vice President, Multi-Family Sales, British Columbia

Jamie Willoughby

Vice President, Multi-Family Sales, Prairies

Head Office

8488 Main Street

Vancouver, BC

V5X 4W8