Management Overview

We believe that we are one of the largest wholesale distributors of replacement parts, accessories and supplies for recreational vehicles ("RVs"), and boats in North America. We supply more than 12,000 products and serve more than 12,000 customers throughout the United States and Canada, from 13 regional distribution centers in the United States and 4 regional distribution centers in Canada. Our sales are made primarily to retail parts and supplies stores, service and repair establishments and new and used RV and boat dealers ("Aftermarket Customers"). Ours sales to our Aftermarket Customers are affected primarily by (i) the usage of RVs and boats by the consumers, because such usage affects their need for and their purchases of replacement parts, repair services and supplies from our Aftermarket Customers, and (ii) sales of new RVs and boats, because consumers often "accessorize" their RVs and boats at the time of purchase.

Factors Generally Affecting Sales of RV and Boating Products

Our sales and operating results are directly affected by the extent to which consumers purchase and use RVs and boats. Such purchases and usage, in turn, depend in large measure upon the extent of discretionary income available to them, their confidence about future economic conditions and the availability and cost of credit that consumers use to finance the purchase of RVs and boats, each of which can affect the willingness and ability of consumers to purchase and use RVs and boats. As a result, recessionary conditions or a tightening in the availability or increases in the costs of borrowings often lead consumers to reduce their purchases and, to a lesser extent, their usage, of RVs and boats and, therefore, their need for and their purchases of the products that we sell. Additionally, increases in the prices and shortages in the supply of gasoline can lead to declines in the usage and purchases of RVs and boats, because these conditions increase the costs and the difficulties of using RVs and boats. Weather conditions also can affect our operating results. Purchases and the usage of RVs and boats decline in the winter months and, as a result, our sales and operating results in the first and fourth quarters of the year generally are lower than in the second and third quarters of the year. See "Seasonality and Inflation" below. However, our sales and operating results can be adversely affected if unusually severe or winter weather conditions occur during the spring or summer months, because conditions of this nature will cause consumers to reduce their usage of RVs and boats, therefore, their purchases of the products we sell.

These same circumstances and conditions, in turn, affect the ability and willingness of Aftermarket Customers to purchase the products that we sell. Aftermarket Customers will reduce their purchases of products from us if consumer demand for those products declines, or Aftermarket Customers lose confidence about future economic conditions or encounter difficulties in obtaining or affording bank financing they use to fund their working capital requirements. Moreover, during the winter, as well as any other periods of the year that may encounter unusually adverse weather conditions, Aftermarket Customers also reduce their purchases of the products we sell due to declines, during such periods, in the usage and purchases of RVs and boats by consumers. By contrast, when the economy is strong and financing is readily available, Aftermarket Customers are more willing to increase their product purchases in order to be able to meet consumer demand.

As a result, our sales and operating results can be, and in the past have been, affected by recessionary economic conditions, tightening in the availability and increases in the costs of consumer and business financing, shortages in the supply and increases in the prices of gasoline and adverse weather conditions.

Overview of Operating Results - Three and Six months Ended June 30, 2009 and 2008

The following table provides a comparison of our results of operations in the three and six months ended June 30, 2009 and the same respective periods of 2008.

                                        Three Months Ended June 30,                Six Months Ended June 30,
                                          Amounts           % Change                Amounts           % Change
                                      2009       2008     2009 vs. 2008         2009       2008     2009 vs. 2008
                                                  (Dollars in thousands, except per share amounts)
Net Sales                           $ 33,138   $ 41,217           (19.6 )%    $ 56,336   $ 80,685           (30.2 )%
Gross Profit                           6,628      8,826           (24.9 )%      10,951     16,738           (34.6 )%
Selling, general and
administrative exp.                    4,551      6,299           (27.8 )%      10,087     14,497           (30.4 )%
Operating income                       2,077      2,527           (17.8 )%         864      2,241           (61.4 )%
Other Expense                            414        596           (30.5 )%         477      1,147           (58.4 )%
Earnings before income taxes           1,663      1,931           (13.9 )%         387      1,094           (64.6 )%
Net earnings                           1,162      1,561           (25.6 )%         274        711           (61.5 )%
Earnings per common share -
diluted                             $   0.26   $   0.35           (25.7 )%    $   0.06   $   0.16           (62.5 )%

As indicated in the table above, our sales and earnings declined in the three and six months ended June 30, 2009 as compared to the same three and six month periods of 2008. Those declines were primarily attributable to the worsening of both the economic recession and credit crisis in the United States and Canada which have caused a decline in consumer confidence and reductions in the availability of credit that, since June 30, 2008, have led to significant reductions in discretionary spending on which purchases and the usage of RVs and boats, and the demand for the products we sell, depend.

As a result, our net sales declined by $8.1 million, or 19.6%, and $24.3 million, or 30.2%, in the three and six months ended June 30, 2009, respectively, as compared to the same respective periods in 2008, which predated the full onset of the adverse effects caused by the economic recession and credit crisis. In anticipation of the adverse effects that these conditions were likely to have on our net sales in the coming quarters, in the third quarter of 2008 we began implementing a cost reduction program designed to reduce our costs of sales and our selling, general and administrative (SG&A) expenses. As a result of that program, which included workforce reductions and reductions in compensation and in selling and other operating expenses, we were able to reduce our SG&A expenses by $1.7 million, or 27.8%, in the three months, and $4.4 million, or 30.4%, in the six months, ended June 30, 2009 as compared to the same respective periods in 2008. However, those cost savings were not sufficient to fully offset the effects of the decline in net sales on our results of operations. Consequently, our operating income and net earnings declined by $450,000, or 17.8%, and $399,000, or 25.6%, respectively, in the three months ended June 30, 2009, as compared to the same three months of 2008. For these same reasons, in the six months ended June 30, 2009 our operating income and net earnings declined by $1,377,000, or 61.4%, and $437,000, or 61.5%, respectively, as compared to the six months ended June 30, 2008. Diluted earnings per share declined to $0.26 and $0.06, respectively, in the three and six months ended June 30, 2009 from $0.35 and $0.16, respectively, in the same three and six month periods of 2008.

Notwithstanding those declines, in the three months ended June 30, 2009 we achieved significant improvements in operating income and net income to $2,077,000 and $1,162,000, respectively, from an operating loss of $1,213,000 and a net loss of $888,000 in the first three months of 2009. While some of that improvement was attributable to the seasonality of our business, the implementation of our cost reduction program also contributed to that improvement.

We also saw a modest improvement in sales during the second half, as compared to the first half, of this year's second quarter which we believe was primarily the result of our Aftermarket Customers replenishing their inventories of parts, supplies and accessories for the spring and upcoming summer months. However, due to the inherent uncertainties regarding the ultimate severity and continued duration of the recession and credit crisis, and concerns that unemployment and home foreclosures could increase, it is not possible to predict with any assurance whether or not this improvement in our sales in this year's second quarter represents the beginning of a positive trend that will continue during the remainder of 2009. As a result, we plan to continue our efforts to achieve further reductions in our costs of sales and SG&A expenses during the coming months.

Accounting Policies and Estimates

General

In accordance with accounting principles generally accepted in the United States of America ("GAAP"), we record most of our assets at the lower of cost or fair value. In the case of some of our assets, principally accounts receivable, inventories and deferred income taxes, we make adjustments to their costs or fair values to arrive at what we expect to be able to collect on outstanding accounts receivables, the amounts at which we expect to be able to sell our inventories and the amounts of available income tax benefits that we will be able to use to reduce our future income tax liability. Those adjustments are made on the basis of a number of different factors, including judgments or assumptions we make regarding economic and market conditions and trends and their impact on our financial performance, and those judgments and assumptions are, in turn, based on current information available to us. If those conditions or trends were to change in ways that we did not expect, then based on our assessment of how those changes will affect the prospects for realizing the values at which we have recorded these assets, we may be required, pursuant to GAAP, to further adjust the carrying values at which we record these assets for financial reporting purposes. Any resulting downward adjustments are commonly referred to as "write-downs" in the carrying values of the assets affected by the changed conditions.

It is our practice to establish reserves or allowances against which we are able to charge any downward adjustments or "write-downs" to these assets. Examples include an allowance established for uncollectible accounts receivable (sometimes referred to as "bad debt reserves") and an allowance for inventory obsolescence. The amounts at which those allowances are established and maintained are based on our historical experience and also on our assumptions and judgments about economic or market conditions or trends or any other factors that could affect the values at which we had recorded such assets. We periodically increase or replenish the allowances following write-downs of uncollectible accounts or to take account of increased risks due to adverse changes in economic or market conditions or trends. Increases in the allowances are effectuated by charges to income or increases in expense in the periods when those allowances are increased. As a result, our judgments and assumptions about market or economic conditions or trends and about their effects on our financial performance can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.

The decisions as to the timing of (i) adjustments or write-downs of this nature and (ii) the increases we make to our reserves, also require subjective evaluations or assessments about the effects and duration of changes in economic or market conditions or trends. For example, it is difficult to predict whether events or changes in economic or market conditions, such as increasing gasoline prices or interest rates or economic slowdowns, will be of short or long-term duration, and it is not uncommon for it to take some time after the onset of such changes for their full effects on our business to be recognized. Therefore, we make such estimates based on the information available to us at that time and reevaluate and adjust the reserves and allowances for potential write-downs on a quarterly basis.

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

In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the carrying values of those assets and to establish adequate reserves or allowances for downward adjustments in those values that we may have to make in future periods.

Our Critical Accounting Policies

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

Revenue Recognition and the Allowance for Product Returns. We recognize revenue from the sale of a product upon its shipment to the customer. Shipping and handling costs that are billed to our customers are included in revenue in accordance with EITF No. 00-10. We provide our customers with limited rights to return products that we sell to them. We establish an allowance for potential returns which reduces the amounts of our reported sales. We estimate the allowance based on historical experience with returns of like products and current economic and market conditions and trends, which can affect the level at which customers submit products for return.

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of business we extend 30 day payment terms to our customers and, due to the seasonality of our business, during late fall and winter we sometimes grant payment terms of longer duration to those of our customers that have good credit records. We regularly review our customers' accounts and estimate the amount of, and establish an allowance for, uncollectible accounts receivables in each reporting period. The amount of the allowance changes from time to time based on several factors, including the age of unpaid accounts receivable, a review of significant past due accounts, our application of amounts from the allowance to offset write-downs of specific accounts that we conclude are no longer recoverable in full and economic and market trends that can affect the ability of our customers to keep their accounts current. Estimates of uncollectible amounts are reviewed periodically to determine if the allowance should be increased, and any increases are recorded in the accounting period in which the events or circumstances that require such increases become known. For example, if economic or market conditions were to deteriorate further, adversely affecting the ability of customers to make payments to us on a timely basis, it may become necessary for us to increase the allowance for uncollectible accounts. Since the allowance is increased or replenished by recording a charge which is included in, and has the effect of increasing, selling, general and administrative expenses, an increase in the allowance will reduce income in the period when the increase is recorded.

Reserve for Excess, Slow-Moving and Obsolete Inventory. We are a wholesale distributor, and not a manufacturer, of products and all of our inventory consists of finished goods. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value and that value is reduced by an allowance that we maintain for excess and slowing-moving or obsolete inventories. The amount of the allowance is determined on the basis of historical experience with different product lines and estimates or assumptions concerning economic and market conditions and trends. If there is an economic downturn or a decline in sales, causing inventories of some product lines to accumulate, it may become necessary for us to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new or competitive products by manufacturers; however, due to the relative maturity of the markets in which we operate, usually these are not significant factors. Increases in this allowance also will cause a decline in operating results as such increases are effectuated by charges against income. Our reserve for excess and obsolete inventory was $1,981,000 and $2,029,000 at June 30, 2009 and 2008, respectively. That reduction in the amount of the inventory allowance was attributable to inventory reductions we made at our distribution centers in response to the decline in sales that has resulted from the economic recession and credit crisis.

Allowance for Deferred Income Taxes. We record as a "deferred tax asset" on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions ("tax benefits") that we believe will be available to us to offset or reduce our income tax liability in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to use our deferred tax asset depends on the taxable income that we generate during those time periods. At least once a year, we make estimates of our future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the aggregate amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the aggregate amount and duration of the tax benefits available to us that it has become more likely that we will not be able to utilize those tax benefits in their entirety prior to their expiration, then, we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount that we believe we will be able to utilize. That reduction is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that would be recorded in our income statement. At June 30, 2009, the aggregate amount of our net deferred tax asset was approximately $3,350,000.

Long-Lived Assts and Intangible Assets. Long-lived assets are reviewed for possible impairment at least annually or if and when events or changes in circumstances indicate that the carrying value of those assets may not be recoverable in full, based on standards established by SFAS No. 142, by comparing the fair value of the long-lived asset to its carrying amount.

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

Derivative Financial Instruments. We have substantial business operations in Canada and as a result, our sales, earnings, cash flows and financial position can be affected by movements in the Canadian dollar exchange rate. Therefore, it is our policy to hedge the net investment of our operations in Canada by sometimes purchasing foreign exchange derivatives, such as purchased put option contracts, to mitigate or "hedge" the risk of changes in the value of our net investment in our Canadian subsidiary that can occur as a result of changes in currency exchange rates. We account for such derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). Accordingly, such contracts are held at fair value on our balance sheet with the effective portion of the hedge recorded in Accumulated Other Comprehensive Income. As of June 30, 2009, we held one foreign currency derivative with an average weighted maturity, as of June 30, 2009, of two months. On the other hand, we do not use financial instruments for trading or other speculative purposes. Additional information regarding that foreign currency derivative and our related currency hedging practices is contained in Item 3 - "Quantitative and Qualitative Disclosures About Market Risk" below in this Report.

Stock Based Compensation. We adopted the provisions of Financial Accounting Standards Board Statement ("SFAS") No. 123R, Share-Based Payment ("SFAS 123R") effective January 1, 2006. This statement establishes accounting standards for recording, in a company's financial statements, transactions in which an entity exchanges its equity instruments for goods or services. In the case of the Company, SFAS 123R applies primarily to transaction in which we obtain employee services for share-based payments, such as options issued under our stock incentive plans. SFAS 123R provides for, and we elected to adopt, the modified prospective method for applying SFAS 123R. Under that method, since January 1, 2006 we have been recognizing compensation expense for the fair values of
(i) all share based awards made on or after such date, based on the grant-date fair values of those awards calculated in accordance with SFAS 123R, and
(ii) the portion of pre-existing share based awards for which requisite service had not been rendered as of January 1, 2006, based on the grant-date fair values of those awards calculated in accordance with SFAS 123 for pro forma disclosures. Our stock based compensation expense, which is a non-cash expense, was $57,000 and $65,000 for the quarters ended June 30, 2009 and 2008, respectively, and $120,000 and $130,000 for the six months ended June 30, 2009 and 2008, respectively.

Warranty Costs. We generally do not independently warrant the products that we distribute. Instead, in almost all cases, the manufacturers of the products that we distribute warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However we sell a line of portable and standby generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. The duration of the warranty for these products is a period of 24 months following the sale of the product to a retail customer. We established warranty reserves for these products of $412,000 and $506,000 at June 30, 2009 and 2008, respectively. Those amounts were determined on the basis of a number of factors, including our estimates of future sales of the products that we warrant and our historical and expected future warranty claims experience. In the event changes occur in the conditions or circumstances upon which those assumptions and estimates were made, it could become necessary for us to increase the reserve by means of a charge to our income.

Results of Operations

Net Sales

The following table sets forth and compares our net sales (in thousands of
dollars) for the three and six months ended June 30, 2009 and 2008:



             Three Months Ended June 30,           Six Months Ended June 30,
               Amounts           % Change           Amounts          % Change
            2009      2008     2009 vs. 2008    2009      2008     2009 vs. 2008
                                             (Unaudited)

The declines in net sales during the three and six months ended June 30, 2009 were due primarily to declines in purchases and the usage of RVs and boats. Those declines were primarily attributable to the worsening of the economic recession and the credit crisis in the United States and Canada subsequent to June 30, 2008. The economic recession and the credit crisis have combined to reduce disposable income and the confidence of consumers about the future which, in turn, have caused consumers to reduce discretionary spending on which the purchase and the usage of RVs and boats depend. As a result, consumers have reduced their purchases of the products we sell and those reductions, together with the credit crisis, have caused Aftermarket Customers to reduce their product purchases from us.

Gross Profit and Gross Margin

Gross profit is calculated by subtracting the costs of products sold from net sales. Costs of products sold consists primarily of the amounts paid to manufacturers and suppliers for the products that we purchase for resale, and warehouse and distribution costs, including warehouse labor costs and freight charges. Gross margin is gross profits stated as a percentage of net sales.

The following table compares our gross profits (in thousands of dollars) and our gross margin in the three and six months ended June 30, 2009 and 2008.

                              Three Months Ended            Six Months Ended
                                   June 30,                     June 30,
                              2009           2008          2009          2008
             Gross profit   $   6,628       $ 8,826      $ 10,951      $ 16,738
             Gross margin        20.0 %        21.4 %        19.4 %        20.8 %

The decreases in our gross profits and gross margin in the three and six months ended June 30, 2009, as compared to the same three and six month periods of 2008, were primarily due to the decline in our net sales during the first six months of 2009, as compared to the corresponding six months of 2008. In response to declining sales, during the past nine months we have introduced and begun selling additional higher margin Coast branded products and have implemented a number of measures to reduce our costs of sales, including (i) workforce . . .