Leon's Furniture Limited - 2011 Third Quarter

TORONTO, Nov. 14, 2011 /CNW/ - For the three months ended September 30, 2011, total Leon's sales were $223,646,000 including $49,273,000 of franchise sales ($231,546,000 including $49,421,000 franchise sales in 2010), a decrease of 3.4% from the third quarter 2010.  Net income was $16,956,000, 24¢ per common share ($17,837,000, 25¢ per common share in 2010), a decrease of 4.0% per common share. The third quarter 2010 includes an after tax gain of $1,050,000 on the sale of property (1.5¢ per common share).

For the nine months ended September 30, 2011, total Leon's sales were $624,572,000 including $135,559,000 of franchise sales ($649,789,000 including $137,242,000 of franchise sales in 2010), a decrease of 3.9% and net income was $37,927,000, 54¢ per common share ($41,583,000, 59¢ per common share in 2010), a decrease of 8.5% per common share.

We continue to face a difficult economy, with decreasing new housing starts and record consumer debt. That being said, we are pleased with the efforts of our associates to continue to find ways of improving productivity and controlling expenses.

In the third quarter of 2011, the Company celebrated the grand opening of a new corporate store in Guelph, Ontario. That was followed by grand openings in the fourth quarter of 2011 of three additional corporate stores in Mississauga, Ontario; Rosemère, Quebec; and Regina, Saskatchewan. As well, during the fourth quarter of 2011 new Leon's franchise locations had grand openings in Bathurst, New Brunswick; and Drummondville, Quebec, our first franchise located in Quebec.

In addition to these new locations, the Company and our existing franchisees continue to replace, renovate and expand existing stores in order to serve our customers better. Renovations are well underway in our Sudbury and Sault Ste. Marie, Ontario corporate stores. Our Trenton, Ontario franchise recently completed a renovation of their store and a renovation and expansion will commence shortly at our Simcoe, Ontario franchise. Our Kentville franchise has recently completed construction of a new and larger replacement store in Coldbrook, Nova Scotia. Finally, construction has started for a brand new franchise store to replace our existing St. John, New Brunswick store.

The Company continues to explore new opportunities across Canada. The Company has recently secured sites for four new corporate stores in: Orangeville and Brantford, Ontario; Sherbrooke, Quebec; and Rocky View County, which is just north of Calgary, Alberta. Our current plan is to open these locations during 2012 and 2013. All funding for new store projects and renovations is scheduled to come from our existing cash resources.

In light of our strong financial position, the Directors are pleased to declare an increase in the quarterly dividend from 9¢ per common share to 10¢ per common share payable on January 9, 2012 to the shareholders of record at the close of business on December 9, 2011. The Directors have also increased the annual dividend on the convertible non-voting series shares from 18¢ to 20¢, which will be payable on January 9, 2012 to the shareholders of record at the close of business on December 9, 2011. In addition, due to our positive cash position, the Directors are pleased to declare a special dividend of 15¢ per common share payable on January 9, 2012 to the shareholders of record at the close of business on December 9, 2011. As stated in our press release dated February 20, 2007, as of 2006, dividends paid by Leon's Furniture Limited are "eligible dividends" and for further clarification, all future dividends are eligible dividends unless otherwise stated.

For further information, please consult the Company's Management Discussion & Analysis dated November 14, 2011.

EARNINGS PER SHARE FOR EACH QUARTER

           
  MARCH 31 JUNE 30 SEPT. 30 DEC. 31 YEAR TOTAL
               
2011 -
-
Basic
Fully Diluted
14¢
14¢
16¢
15¢
24¢
23¢
  $0.54
$0.52
               
2010 -
-
Basic
Fully Diluted
16¢
16¢
17¢
17¢
25¢
24¢
30¢
29¢
$0.89
$0.86
               
2009 -
-
Basic
Fully Diluted
12¢
12¢
12¢
12¢
22¢
21¢
34¢
33¢
$0.80
$0.78

LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE

Mark J. Leon
Chairman of the Board


MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three months ended September 30, 2011 and 2010
Dated: November 14, 2011

The MD&A should be read in conjunction with i) the Company's 2010 audited consolidated financial statements and the related notes and MD&A, ii) the Company's unaudited interim consolidated financial statements for the three months ended March 31, 2011 and the related notes and MD&A and iii) the Company's unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2011 and the related notes.

Cautionary Statement Regarding Forward-Looking Statements

This Management's Discussion and Analysis ("MD&A") is intended to provide readers with the information that management believes is required to gain an understanding of Leon's Furniture Limited's current results and to assess the Company's future prospects. This MD&A, and in particular the section under heading "Outlook", includes forward-looking statements, which are based on certain assumptions and reflect Leon's Furniture Limited's current plans and expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results and future prospects to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: a continuing slowdown in the Canadian economy; a further drop in consumer confidence; and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Readers of this report are cautioned that actual events and results may vary.

Financial Statements Governance Practice

Leon's Furniture Limited's unaudited interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and incorporate the requirements of International Accounting Standards ("IAS") 34, Interim financial reporting and IFRS 1, First time adoption of IFRS. The amounts expressed are in Canadian dollars. Per share amounts are calculated using the weighted average number of shares outstanding for the applicable period.

Leon's Furniture Limited 2010 financial results included in this interim MD&A have been restated to be in accordance with IFRS.

The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MD&A and the unaudited interim condensed consolidated financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the unaudited interim condensed consolidated financial statements and MD&A were approved.

Introduction

Leon's Furniture Limited has been in the furniture retail business for over 100 years. The Company's 43 corporate and 32 franchise stores can be found in every province across Canada except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.

Revenues and Expenses

For the three months ended September 30, 2011, total Leon's sales were $223,646,000 including $49,273,000 of franchise sales ($231,546,000 including $49,421,000 of franchise sales in 2010), a decrease of 3.4%.

Leon's corporate sales of $174,373,000 in the third quarter of 2011, decreased by $7,752,000, or 4.3%, compared to the third quarter of 2010.  The decrease in sales in the third quarter compared to the prior year reflected a continuation of waning consumer confidence, a decrease in housing starts, and an overall increase in consumer debt resulting in reduced consumer spending. Same store corporate sales decreased by 6.2% compared to the prior year. Comparable store sales are defined as sales generated by stores that have been open or closed for more than 12 months on a yearly basis.

Leon's franchise sales of $49,273,000 in the third quarter of 2011 are virtually the same as the third quarter of 2010.

Our gross margin for the third quarter 2011 of 42.2% increased by 0.7% from the third quarter of 2010. We experienced some improvement in most product category margins aided by the reduction in import costs due to a strong Canadian dollar during most of the third quarter.

Net operating expenses of $50,930,000 were down $1,813,000 or 3.4% for the third quarter of 2011 compared to the third quarter of 2010. General and administrative expenses were down by 1.4% in the quarter compared to the prior year's quarter. The decrease was mainly the result of lower depreciation cost on buildings. Under IFRS, buildings are now depreciated over a useful life of 30 years which resulted in a depreciation expense reduction of approximately $700,000 compared to the same quarter 2010. Selling expenses are down 3.0% compared to the same quarter in 2010. The decrease is the result of lower commissions paid on reduced sales in comparison to the prior year. Actual marketing expenses were flat compared to the prior year quarter. Occupancy expenses were up 13.8% from the prior year quarter. The increase in expenses is mainly the result of our new store addition in Thunder Bay in the fourth quarter of 2010 along with an increase in repairs and maintenance related to roof repairs. Other operating expenses in the quarter decreased by $1,893,000 compared to the same quarter in 2010. The strength in the US dollar in comparison to the Canadian dollar at the end of the third quarter resulted in a $1,705,000 unrealized foreign exchange gain on investments, which is recorded in other operating expenses.

As a result of the above, net income for the third quarter of 2011 was $16,956,000, 24¢ per common share ($17,837,000, 25¢ per common share in 2010), a decrease of 4.0% per common share. The third quarter of 2010 includes an after tax gain on sale of property of 1.5 ¢ per common share.

For the nine months ended September 30, 2011, total Leon's sales were $624,572,000 including $135,559,000 of franchise sales ($649,789,000 including $137,242,000 of franchise sales in 2010), a decrease of 3.9% and net income was $37,927,000, 54¢ per common share ($41,583,000, 59¢ per common share in 2010), a decrease of 8.5% per common share.

       
       
Annual Financial Information
($ in thousands, except earnings per share and dividends)
2010 2009* 2008*
       
Net corporate sales 710,435 703,180 740,376
Leon franchise sales 197,062 194,290 209,848
       
Total Leon's sales 907,497 897,470 950,224
       
Net income 62,664 56,864 63,390
Earnings per share      
Basic $0.89 $0.80 $0.90
Diluted $0.86 $0.78 $0.87
       
Total assets 544,053 529,156 513,408
       
Common share dividends declared $0.32 $0.28 $0.28
Special common share dividends declared - $0.20 $0.10
Convertible, non-voting shares dividends declared $0.18 $0.14 $0.14

* The year ended 2010 has been restated to IFRS while years ended 2009 and 2008 are as originally reported under Canadian Generally Accepted Accounting Principles ("Canadian GAAP").

Liquidity and Financial Resources

       
       
($ in thousands, except dividends per share) Sept 30/11 Dec. 31/10 Sept 30/10
       
Cash, cash equivalents, available-for-sale financial assets 207,696 211,813 182,260
Trade and other accounts receivable 18,724 28,569 20,627
Inventory 85,872 85,423 97,852
Total assets 569,916 566,674 543,238
Working capital 200,499 200,826 186,727
       
For the 3 months ended Current Quarter
Sept 30/11
Prior Quarter
Dec. 31/10
Prior Quarter
Sept 30/10
       
Cash flow provided by operations 26,857 42,633 15,299
Purchase of property, plant and equipment 9,386 5,502 3,100
Repurchase of capital stock 1,615 1,800 5,419
Dividends paid 6,305 6,309 4,936
       
Dividends paid per share $0.09 $0.09 $0.07

In the third quarter of 2011, the Company celebrated a grand opening of a new corporate store in Guelph, Ontario. That was followed by grand openings in the fourth quarter of 2011 of three additional corporate stores in Mississauga, Ontario; Rosemère, Quebec; and Regina, Saskatchewan. As well, during the fourth quarter of 2011 new Leon's franchise locations had grand openings in Bathurst, New Brunswick; and Drummondville, Quebec, our first franchise located in Quebec.

In addition to these new locations, the Company and our existing franchisees continue to replace, renovate and expand existing stores in order to serve our customers better. Renovations are well underway in our Sudbury and Sault Ste. Marie, Ontario corporate stores. Our Trenton, Ontario franchise recently completed a renovation of their store and a renovation and expansion will commence shortly at our Simcoe, Ontario franchise. Our Kentville franchise has recently completed construction of a new and larger replacement store in Coldbrook, Nova Scotia. Finally, construction has started for a brand new franchise store to replace our existing St. John, New Brunswick store.

The Company continues to explore new opportunities across Canada. The Company has recently secured sites for four new corporate stores in: Orangeville and Brantford, Ontario; Sherbrooke, Quebec; and Rocky View County, which is just north of Calgary, Alberta. Our current plan is to open these locations during 2012 and 2013. All funding for new store projects and renovations are planned to come from our existing cash resources.

Quarterly Results (2011, 2010, 2009)
Quarterly Income Statement ($000) - except per share data

  Quarter Ended
September 30
Quarter Ended
June 30
Quarter Ended
March 31
Quarter Ended
December 31
  2011 2010 2011 2010 2011 2010 2010 2009
Leon's corporate sales 174,373 182,125 163,857 168,952 150,783 161,470 197,888 197,986
Leon's franchise sales 49,273 49,421 45,477 45,493 40,809 42,328 59,820 57,679
Total Leon's sales 223,646 231,546 209,334 214,445 191,592 203,798 257,168 255,665
Net income per share $0.24 $0.25 $0.16 $0.17 $0.14 $0.16 $0.30 $0.34
Fully diluted per share $0.23 $0.24 $0.15 $0.17 $0.14 $0.16 $0.29 $0.33

The quarters ended March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010 have been restated to IFRS while quarters reported for 2009 are as originally reported under Canadian GAAP.

Changes in Accounting Policies - Adoption of IFRS

Leon's Furniture Limited was required to prepare financial statements in accordance with IFRS starting with the unaudited interim condensed consolidated financial statements for the quarter ended March 31, 2011. These statements required the 2010 results to be restated in accordance with IFRS.

Detailed notes on the changes to previously reported amounts are included in the notes to the unaudited interim condensed consolidated financial statements for the period ended March 31, 2011, which have been filed on SEDAR.

The following table provides selected restated 2010 results by quarter.

Interim and Annual Consolidated Net Income

IFRS restated 2010 results by quarter          
           
           
 
 
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
2010
           
Revenue 161,470 168,952 182,125 197,888 710,435
Cost of sales 93,498 100,187 106,564 112,130 412,379
Gross profit 67,972 68,765 75,561 85,758 298,056
           
Operating expenses          
General and administrative expenses 23,293 25,432 24,484 25,475 98,684
Sales and marketing expenses 18,572 18,008 19,297 22,344 78,221
Occupancy expenses 7,630 7,490 7,214 7,217 29,551
Other operating expenses 2,167 785 1,748 1,934 6,634
  51,662 51,715 52,743 56,970 213,090
Operating profit 16,310 17,050 22,818 28,788 84,966
           
Gain on sale of capital property - 1,231 1,231
Finance income 691 663 789 991 3,134
Profit before income tax 17,001 17,713 24,838 29,779 89,331
           
Income tax expense 5,555 5,413 7,001 8,812 26,781
Profit for the period attributable to the
shareholders of the Company
 
11,446
 
12,300
 
17,837
 
20,967
 
62,550
           
Earnings per share          
Basic $ 0.16 $ 0.17 $ 0.25 $ 0.30 $ 0.89
Diluted $ 0.16 $ 0.17 $ 0.24 $ 0.29 $ 0.86

Disclosure Controls & Procedures

Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management, including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public disclosure.

Internal Controls over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.  All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Additionally, management is required to use judgment in evaluating controls and procedures.

Changes in Internal Control over Financial Reporting

Management has also evaluated whether there were changes in the Company's internal control over financial reporting that occurred during the period beginning on July 1, 2011 and ended on September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has determined that no material changes in internal controls have occurred during this period.

Outlook

In the third quarter of 2011, we experienced a reduction in same store sales from the prior year quarter. We continue to see a slowdown in new housing starts and a general slowdown in consumer spending that we noted in 2010. At this point, we do not see any clear signs pointing towards a strong economic turnaround. We expect that consumers will remain cautious about major purchases and as a result we anticipate a very competitive market moving forward. To help counter this, we plan an even more robust marketing and merchandising campaign for the balance of the year. Fourth quarter sales should be aided by the recent opening of four new stores. Even with these measures in place, growing profits for the balance of this year will be challenging. Despite this, our strong financial position coupled with our experience in adjusting to changing market conditions, provide us with the confidence to adapt to whatever economic conditions prevail.

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the company have been prepared by and are the responsibility of the company's management.

No auditor has performed a review of these financial statements.

             
Terrence T. Leon                Dominic Scarangella
President & Chief Executive Officer              Vice President & Chief Financial Officer

Dated as of the 14th day of November, 2011.

Interim Condensed Consolidated Financial Statements    
     
     
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
     
  As at September 30 As at December 31
($ in thousands) 2011 2010
    [note 20]
ASSETS    
Current  assets    
Cash and cash equivalents [notes 4 and 6] 37,408 71,589
Available-for-sale financial assets [notes 4 and 18e] 170,288 140,224
Trade receivables [note 4] 18,724 28,569
Income taxes receivable 4,963
Inventory 85,872 85,423
Total current assets 317,255 325,805
Other assets 1,486 1,574
Property, plant and equipment [note 7] 214,203 201,492
Investment properties [note 8] 8,379 8,417
Intangible assets [note 9] 4,180 4,902
Goodwill 11,282 11,282
Deferred income tax assets 13,131 13,202
Total assets 569,916 566,674
     
LIABILITIES AND SHAREHOLDERS' EQUITY    
Current liabilities    
Trade and other payables [notes 4 and 10] 66,361 71,724
Provisions [note 11] 11,152 12,341
Income taxes payable 524
Customers' deposits 16,661 17,198
Dividends payable [note 13] 6,292 6,310
Deferred warranty plan revenue 16,290 16,882
Total current liabilities 116,756 124,979
Deferred warranty plan revenue  19,582 21,392
Redeemable share liability [notes 4 and 12] 382 172
Deferred income tax liabilities 10,434 9,845
Total liabilities 147,154 156,388
     
Shareholders' equity attributable to the shareholders of the Company    
Common shares [note 13] 20,871 19,177
Retained earnings 402,463 389,511
Accumulated other comprehensive income (572) 1,598
Total shareholders' equity 422,762 410,286
Total liabilities and shareholder's equity 569,916 566,674
     
Commitments and contingencies [note 18]    
     
The accompanying notes are an integral part of these interim condensed consolidated financial statements.    

Interim Condensed Consolidated Financial Statements        
         
         
Leon's Furniture Limited
INTERIM CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
         
  Three months ended September 30 Nine months ended September 30
($ in thousands) 2011 2010 2011 2010
    [note 20]   [note 20]
Revenue [note 14] 174,373 182,125 489,013 512,547
Cost of sales 100,854 106,564 286,089 300,249
Gross profit 73,519 75,561 202,924 212,298
Operating expenses [note 15]        
General and administrative expenses 24,147 24,484 71,700 73,209
Sales and marketing expenses 18,721 19,297 55,394 55,877
Occupancy expenses 8,207 7,214 22,803 22,334
Other operating expenses (145) 1,748 2,752 4,700
  50,930 52,743 152,649 156,120
Operating profit 22,589 22,818 50,275 56,178
Gain on sale of capital property 1,231 1,231
Finance income 794 789 2,418 2,143
Profit before income tax 23,383 24,838 52,693 59,552
Income tax expense [note 16] 6,427 7,001 14,766 17,969
Profit for the period attributable to the shareholders of the Company 16,956 17,837 37,927 41,583
         
Earnings per share  [note 17]        
Basic $0.24 $0.25 $0.54 $0.59
Diluted $0.23 $0.24 $0.52 $0.57
         
The accompanying notes are an integral part of these interim condensed consolidated financial statements.        

Interim Condensed Consolidated Financial Statements      
       
       
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
       
  Three months ended September 30
      Net of tax
($ in thousands) 2011 Tax effect 2011
       
Profit for the period 16,956 16,956
Other comprehensive income, net of tax      
   Unrealized (losses) on available-for-sale financial assets arising during the period (3,903) (546) (3,357)
   Reclassification adjustment for net gains and (losses) included in profit for the period 2 2
   Change in unrealized (losses) on available-for-sale financial
      assets arising during the period
 
(3,901)
 
(546)
 
(3,355)
Comprehensive income for the period attributable to the shareholders of the Company 13,055 (546) 13,601
       
      Net of tax
  2010 Tax effect 2010
  [note 20]   [note 20]
Profit for the period 17,837 17,837
Other comprehensive income, net of tax      
   Unrealized gains on available-for-sale financial assets arising during the period 2,304 343 1,961
   Reclassification adjustment for net gains and (losses) included in profit for the period (82) (12) (70)
   Change in unrealized gains on available-for-sale financial
      assets arising during the period
 
2,222
 
331
 
1,891
Comprehensive income for the period attributable to the shareholders of the Company 20,059 331 19,728
       
  Nine months ended September 30
      Net of tax
($ in thousands) 2011 Tax effect 2011
       
Profit for the period 37,927 37,927
Other comprehensive income, net of tax      
   Unrealized (losses) on available-for-sale financial assets arising during the period (2,513) (351) (2,162)
   Reclassification adjustment for net gains and (losses) included in profit for the period (9) (1) (8)
   Change in unrealized (losses) on available-for-sale financial
      assets arising during the period
 
(2,522)
 
(352)
 
(2,170)
Comprehensive income for the period attributable to the shareholders of the Company 35,405 (352) 35,757
       
      Net of tax
  2010 Tax effect 2010
  [note 20]   [note 20]
Profit for the period 41,583 41,583
Other comprehensive income, net of tax      
   Unrealized gains on available-for-sale financial assets arising during the period 1,151 173 978
   Reclassification adjustment for net gains and (losses) included in profit for the period (10) (2) (8)
   Change in unrealized gains on available-for-sale financial
      assets arising during the period
 
1,141
 
171
 
970
Comprehensive income for the period attributable to the shareholders of the Company 42,724 171 42,553
       
The accompanying notes are an integral part of these interim condensed consolidated financial statements.      

Interim Condensed Consolidated Financial Statements        
         
         
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
         
($ in thousands) Common shares Accumulated other
comprehensive income
Retained earnings Total
         
At January 1, 2010 17,704 242 357,192 375,138
         
Comprehensive income        
Profit for the period 41,583 41,583
Change in unrealized gains on available-for-sale
financial assets arising during the period
 
 
385
 
 
385
Total comprehensive income 385 41,583 41,968
         
Transactions with shareholders        
Dividends declared [note 13] (16,182) (16,182)
Management share purchase plan 831 831
Repurchase of common shares [note 13] (234) (5,999) (6,233)
Total transactions with shareholders 597 (22,181) (21,584)
         
At September 30, 2010 18,301 627 376,594 395,522
         
At January 1, 2011 19,177 1,598 389,511 410,286
         
Comprehensive income        
Profit for the period 37,927 37,927
Change in unrealized (losses) on available-for-sale
financial assets arising during the period
 
 
(2,170)
 
 
(2,170)
Total comprehensive income (2,170) 37,927 35,757
         
Transactions with shareholders        
Dividends declared [note 13] (18,914) (18,914)
Management share purchase plan 1,748 1,748
Repurchase of common shares [note 13] (54) (6,061) (6,115)
Total transactions with shareholders 1,694 (24,975) (23,281)
         
At September 30, 2011 20,871 (572) 402,463 422,762
         
The accompanying notes are an integral part of these interim condensed consolidated financial statements.        

Interim Condensed Consolidated Financial Statements    
     
     
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
     
  Nine months ended September 30
($ in thousands) 2011 2010
    [note 20]
OPERATING ACTIVITIES    
Profit for the period 37,927 41,583
Add (deduct) items not involving an outlay of cash    
  Depreciation of property, plant and equipment and investment properties 9,306 11,419
  Amortization of intangible assets 658 577
  Amortization of deferred warranty plan revenue (12,943) (12,492)
  Gain on sale of property, plant and equipment (21) (1,238)
  Deferred income taxes 1,012 892
  Gain (loss) on sale of available-for-sale financial assets 19 (156)
  Unrealized foreign exchange (gain) loss (1,133) 397
  Cash received on warranty plan sales 10,541 12,079
  45,366 53,061
Net change in non-cash working capital balances related
to operations [note 19]
 
(6,426)
 
(16,265)
Cash provided by operating activities 38,940 36,796
     
INVESTING ACTIVITIES    
Purchase of property, plant & equipment (18,663) (8,066)
Purchase of intangible assets 64 (262)
Proceeds on sale of property, plant & equipment 39 2,113
Purchase of available-for-sale financial assets (403,621) (371,023)
Proceeds on sale of available-for-sale financial assets 372,149 357,140
Decrease in employee share purchase loans [note 12] 1,958 1,095
Cash used in investing activities (48,074) (19,003)
     
FINANCING ACTIVITIES    
Dividends paid  [note 13] (18,932) (14,811)
Repurchase of common shares [note 13] (6,115) (6,233)
Cash used in financing activities (25,047) (21,044)
Net decrease in cash and cash equivalents    
   during the period (34,181) (3,251)
Cash and cash equivalents, beginning of period 71,589 58,301
Cash and cash equivalents,end of period 37,408 55,050
     
The accompanying notes are an integral part of these interim condensed consolidated financial statements.    

Leon's Furniture Limited

Management's Responsibility for Financial Reporting

The accompanying interim condensed consolidated financial statements are the responsibility of management and have been approved by the Board of Directors.

The accompanying interim condensed consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards ("IFRS") and incorporate the requirements of International Accounting Standards ("IAS") 34, Interim financial reporting and IFRS 1, First time adoption of IFRS. Financial statements are not precise since they include certain amounts based upon estimates and judgments. When alternative methods exist, management has chosen those it deems to be the most appropriate in the circumstances.

Leon's Furniture Limited ("Leon's" or the "Company") maintains systems of internal accounting and administrative controls, consistent with reasonable costs. Such systems are designed to provide reasonable assurance that the financial information is relevant and reliable and that Leon's assets are appropriately accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfils its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility through its Audit Committee.

The Audit Committee is appointed by the Board and reviews these interim condensed consolidated financial statements; assesses the adequacy of the internal controls of the Company; and recommends to the Board the independent auditors for appointment by the shareholders. The Committee reports its findings to the Board of Directors for consideration when approving these interim condensed consolidated financial statements for issuance to the shareholders.

Terrence T. Leon   
President & CEO   
          Dominic Scarangella
Vice President & CFO

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited

Tabular amounts in thousands of Canadian dollars except shares outstanding and earnings per share

For the three and nine month periods ended September 30, 2011 and 2010

1. GENERAL INFORMATION

Leon's Furniture Limited was incorporated by Articles of Incorporation under the Business Corporations Act on February 28, 1969. Leon's Furniture Limited and its subsidiaries ("Leon's" or the "Company") is a public company with its common shares listed on the Toronto Stock Exchange and is incorporated and domiciled in Canada. The address of the Company's head and registered office is 45 Gordon Mackay Road, Toronto, Ontario, M9N 3X3.

Leon's is a retailer of home furnishings, electronics and appliances across Canada from Alberta to Newfoundland and Labrador. The Company owns a chain of thirty-eight retail stores operating as Leon's Home Furnishings Super Stores, two retail stores operating under the brand of Appliance Canada and operates an ecommerce internet site www.leons.ca. In addition, the Company has twenty-five franchisees operating thirty Leon's Furniture franchise stores.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The interim condensed consolidated financial statements for the three and nine month periods ended September 30, 2011 were prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting. The same accounting policies and methods of computation were followed in the preparation of these interim condensed consolidated financial statements as were followed in the preparation of the interim condensed consolidated financial statements for the three month period ended March 31, 2011. In addition, the interim condensed consolidated financial statements for the three month period ended March 31, 2011 contain certain incremental annual International Financial Reporting Standards ("IFRS") disclosures not included in the annual financial statements for the year ended December 31, 2010 prepared in accordance with previous Canadian Generally Accepted Accounting Principles ("CGAAP"). Accordingly, these interim condensed consolidated financial statements for the three and nine month periods ended September 30, 2011 should be read together with the annual consolidated financial statements for the year ended December 31, 2010 prepared in accordance with previous CGAAP as well as the interim condensed consolidated financial statements for the three month period ended March 31, 2011.

The policies applied in these interim condensed consolidated financial statements are based on IFRS issued and outstanding as of November 14, 2011, the date the Directors approved and authorized for issuance the interim condensed consolidated financial statements. Any subsequent changes to IFRS that are given effect in the Company's annual consolidated financial statements for the year ending December 31, 2011 could result in a restatement of these interim condensed consolidated financial statements, including the transition adjustments recognized on changeover to IFRS.

Basis of measurement

The interim condensed consolidated financial statements have been prepared using the historical cost convention, as modified by certain financial assets measured at fair value through profit or loss.

The preparation of interim condensed consolidated financial statements in conformity with IFRS requires use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company's accounting policies. The areas where assumptions and estimates are significant to the interim condensed consolidated financial statements are disclosed in note 3.

Future changes in accounting policy and disclosure

Standards issued but not yet effective

IFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure

The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Company's financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity's continuing involvement in those derecognized assets. The amendment becomes effective for annual periods beginning on or after July 1, 2011. The amendment would affect disclosure only but is not expected to impact on the Company's disclosures.

IFRS 9, Financial Instruments

IFRS 9 was issued by the IASB in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39, Financial Instruments - Recognition and Measurement ("IAS 39"), for debt instruments with a new mixed measurement model having only two categories: Amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where such equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.

Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39 except that fair value changes due to credit risk for liabilities designated at fair value through profit or loss would generally be recorded in other comprehensive income. This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company is currently assessing the impact of the standard and has not determined whether it will adopt the standard early.

IFRS 10, Consolidated Financial Statements

IFRS 10, Consolidated Financial Statements ("IFRS 10") is effective for annual periods beginning on or after January 1, 2013 and will replace portions of IAS 27 Consolidated and Separate Financial Statements ("IAS 27") and interpretation SIC-12 Consolidation — Special Purpose Entities. Under IFRS 10, consolidated financial statements include all controlled entities under a single control model that applies to all entities, including special purpose entities and structured entities. A group will still continue to consist of a parent and its subsidiaries; however IFRS 10 uses different terminology from IAS 27 in describing its control model. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. Early adoption of this standard is permitted. The Company has not fully assessed the impact of adopting IFRS 10; however, it anticipates that its impact will be limited.

IFRS 12, Disclosure of Interests in Other Entities

IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12") includes disclosure requirements about subsidiaries, joint ventures, and associates, as well as unconsolidated structured entities. Many of the disclosure requirements were previously included in IAS 27, IAS 1 and IAS 28 while others are new. This standard is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Company has not fully assessed the impact of adopting IFRS 12; however, it anticipates that its impact will be limited.

IFRS 13, Fair Value Measurement

IFRS 13, Fair Value Measurement ("IFRS 13") provides guidance on how to measure fair value of financial and nonfinancial assets and liabilities when fair value is required or permitted per IFRS. While many of the concepts in IFRS 13 are consistent with current practice, certain principles could have a significant effect on some entities adopting the standard. IFRS 13 is effective January 1, 2013 and will be adopted prospectively. The Company does not expect any impact on its financial position or performance.

Consolidation

The interim condensed consolidated financial statements include the assets and liabilities of Leon's Furniture Limited and its wholly owned subsidiaries, Murlee Holdings Limited, Leon Holdings (1967) Limited and Ablan Insurance Corporation as at September 30, 2011 and the results of these subsidiaries for the three and nine months period then ended.

Subsidiaries are all those entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealized gains/losses on transactions between group companies are eliminated.

3. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are addressed below:

Revenue recognition

Revenue is recognized for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customer's home.

The Company offers the option to finance purchases through various third party financing companies. In situations where a customer elects to take advantage of delayed payment terms, the costs of financing this revenue is deducted from revenue.

Inventories

The Company estimates the net realizable value as the amount at which inventories are expected to be sold by taking into account fluctuations of retail prices due to prevailing market conditions. If required, inventories are written down to net realizable value when the cost of inventories is estimated to not be recoverable due to obsolescence, damage or declining sales prices.

Reserves for slow moving and damaged inventory are deducted in the Company's evaluation of inventories. The reserve for slow moving inventory is based on many years of historic retail experience. The reserve is calculated by analyzing all inventory on hand older than one year. The amount of reserve for damaged inventory is determined by specific product categories.

The amount of inventory recognized as an expense for the nine month period ended September 30, 2011 was $279,796,000 (period ended September 30, 2010 - $292,989,000) which is presented within cost of sales in the interim consolidated income statements.

During the three month period ended September 30, 2011, there was $443,000 in inventory write-downs (three month period ended September 30, 2010 - $Nil). At September 30, 2011, the inventory markdown provision totaled $4,473,000 (September 30, 2010 - $3,862,000). There were no reversals of any write-down for the three month period ended September 30, 2011 (three month period ended September 30, 2010 - $138,000). None of the Company's inventory has been pledged as security for any liabilities of the Company.

Extended warranty Revenue

Extended warranty revenue is deferred and taken into revenue on a straight-line basis over the life of the extended warranty period. Extended warranty revenue included in revenue for the three month period ended September 30, 2011 was $4,331,000 (three month period ended September 30, 2010 - $4,254,000). Extended warranty expenses deducted through cost of sales for the three month period ended September 30, 2011 were $1,195,000 (three month period ended September 30, 2010 - $1,593,000).

Franchise Royalties

Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisee's gross revenues. This royalty revenue is recorded by the Company on an accruals basis and is classified as revenue within the interim consolidated income statements.

Volume Rebates

The Company receives vendor rebates on certain products based on the volume of purchases made during specified periods. The rebates are deducted from the inventory value of goods received and are recognized as a reduction in cost of goods sold as revenue is recognized.

Income taxes

The Company computes an income tax provision. However, actual amounts of income tax expense only become final upon filing and acceptance of the tax return by the relevant taxation authorities, which occur subsequent to the issuance of the annual consolidated financial statements and the interim consolidated financial statements. Additionally, estimation of income taxes includes evaluating the recoverability of deferred income tax assets based on an assessment of the ability to use the underlying future tax deductions before they expire against future taxable income. The assessment is based upon existing tax laws and estimates of future taxable income. To the extent estimates differ from the final tax return, earnings would be affected in a subsequent period.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value-in-use of the cash generating unit that the goodwill is included in. The value-in-use calculation requires the Company to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value.

4. FINANCIAL RISK MANAGEMENT

Classification of financial instruments and fair value

The classification of the Company's financial instruments, as well as, their carrying amounts and fair values are disclosed in the table below.

September 30, 2011

           
           
  Available-for-
sale [fair value]
Loans and
receivables
[amortized cost]
Other financial
liabilities
[amortized cost]
Total carrying
amount
Fair value
Financial Assets          
Cash and cash equivalents 37,408 37,408 37,408
Available-for-sale financial assets 170,288 170,288 170,288
Trade receivables 18,724 18,724 18,724
Total 207,696 18,724 226,420 226,420
Financial Liabilities          
Trade and other payables 66,361 66,361 66,361
Redeemable share liability 382 382 382
Total 66,743 66,743 66,743

December 31, 2010

           
  Available-for-
sale [fair value]
Loans and
receivables
[amortized cost]
Other financial
liabilities
[amortized cost]
Total carrying
amount
Fair value
Financial Assets          
Cash and cash equivalents 71,589 71,589 71,589
Available-for-sale financial assets 140,224 140,224 140,224
Trade receivables 28,569 28,569 28,569
Total 211,813 28,569 240,382 240,382
Financial Liabilities          
Trade and other payables 71,724 71,724 71,724
Redeemable share liability 172 172 172
Total 71,896 71,896 71,896

For financial instruments recognized in the interim consolidated statements of financial position at fair value, the Company is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Fair Values are assessed as:

  • Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis;
  • Level 2 - Observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
  • Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents the Company's financial instruments recognized in the interim consolidated statements of financial position at fair value:

 
Financial Instruments at Fair Value
  Fair value measurement at September 30, 2011
  Level 1 Level 2 Level 3
Cash and cash equivalents 37,408
Available-for-sale financial assets - Bonds 140,648
Available-for-sale financial assets - Equities 29,640
  67,048 140,648

   
  Fair value measurement at December 31, 2010
  Level 1 Level 2 Level 3
Cash and cash equivalents 71,589 - -
Available-for-sale financial assets - Bonds - 117,817 -
Available-for-sale financial assets - Equities 22,407 - -
  93,996 117,817 -

 

Risk management

The Company is exposed to various risks associated with its financial instruments.  These risks are summarized as credit risk, liquidity risk, foreign currency risk, interest rate risk and other price risk.  The significant risks for the Company's financial instruments are:

[i]  Credit risk
  Credit risk arises from cash and cash equivalents, available-for-sale financial assets and trade receivables. The Company places its cash and cash equivalents and available-for-sale financial assets with institutions of high credit worthiness. Maximum credit risk exposure represents the loss that would be incurred if all of the Company's counterparties were to default at the same time.
   
  The Company has some credit risk associated with its trade receivables as it relates to the Appliance Canada division that is partly mitigated by the Company's credit management practices.
   
  The Company's trade receivables total $18,724,000 as at September 30, 2011 [as at December 31, 2010 - $28,569,000]. The amount of trade receivables that the Company has determined to be past due [which is defined as a balance that is more than 90 days past due] is $113,000 as at September 30, 2011 [as at December 31, 2010 - $158,000] which relates entirely to the Appliance Canada division. The Company's provision for impairment of trade receivables, established through on-going monitoring of individual customer accounts, was $500,000 as at September 30, 2011 [as at December 31, 2010 - $470,000].
   
  The majority of the Company's sales are paid through cash, credit card or non-recourse third-party finance.  The Company relies on one third-party credit supplier to supply financing to its customers.
   
[ii]  Liquidity risk
   
  The Company has no outstanding borrowings and does not rely upon available credit facilities to finance operations or to finance committed capital expenditures.  The portfolio of available-for-sale financial assets consists primarily of actively traded Canadian and international bonds.  There is no immediate need for cash by the Company from its investment portfolio.
   
  The Company expects to settle its trade and other payables within 30 days of the period end date. The redeemable share liability does not have any fixed terms of repayment.
   
[iii]  Foreign currency risk
   
  The Company is exposed to foreign currency exchange rate risk.  Some merchandise is paid for in U.S. dollars.  The foreign currency cost is included in the inventory cost.  The Company does not believe it has significant foreign currency risk with respect to its trade payable in U.S. dollars.
   
  The Company is also exposed to foreign currency exchange rate risk on its foreign currency denominated portfolio of available-for-sale financial assets, primarily related to actively traded international equities. As at September 30, 2011, the Company's investment portfolio included 9% of foreign currency denominated assets [as at December 31, 2010 - 8%]. This risk is monitored by the Company's investment managers in an effort to reduce the Company's exposure to foreign currency exchange rate risk.
   
[iv]  Interest rate risk
   
   
  The Company is exposed to interest rate risk through its portfolio of available-for-sale financial assets by holding actively traded Canadian and international Bonds. At September 30, 2011, 86% of the Company's investment portfolio was made up of Canadian and international Bonds [as at December 31, 2010 - 89%]. This risk is monitored by the Company's investment managers in an effort to reduce the Company's exposure to interest rate risk. The exposure to this risk is minimal due to the short-term maturities of the bonds held. The Company is not subject to any other interest rate risk.
   
[v]  Other price risk
   
  The Company is exposed to fluctuations in the market prices of its portfolio of available-for-sale financial assets. Changes in the fair value of the available-for-sale financial assets are recorded, net of income taxes, in accumulated other comprehensive incomeThe risk is managed by the Company and its investment managers by ensuring a conservative asset allocation of bonds and equities.

5. CAPITAL RISK MANAGEMENT

The Company defines capital as shareholders' equity.  The Company's objectives when managing capital are to:

  • ensure sufficient liquidity to support its financial obligations and execute its operating and strategic plans; and
  • utilize working capital to negotiate favourable supplier agreements both in respect of early payment discounts and overall payment terms.

The Company is not subject to any externally imposed capital requirements.

6. CASH AND CASH EQUIVALENTS

  As at September 30, 2011 As at December 31, 2010
Cash at bank or on hand
Short-term investments
3,575
33,833
19,642
51,947
  37,408 71,589

7. PROPERTY, PLANT AND EQUIPMENT

  Land Buildings Equipment Vehicles Computer
hardware
Building
improvements
Total
As at December 31, 2010:
Opening net book value
Additions
Disposals
Depreciation
 
56,156
45
870
 
77,943
11,685

7,024
 
11,078
1,323

1,340
 
4,127
484
437
826
 
1,307
347

537
 
53,042
98

5,109
 
203,653
13,982
1,307
14,836
Closing net book value 55,331 82,604 11,061 3,348 1,117 48,031 201,492
As at December 31, 2010
Cost
Accumulated depreciation
 
55,331
 
175,365
92,761
 
36,053
24,992
 
20,900
17,552
 
8,951
7,834
 
78,273
30,242
 
374,873
173,381
Closing net book value 55,331 82,604 11,061 3,348 1,117 48,031 201,492
As at September 30, 2011:
Opening net book value
Additions
Disposals
Depreciation
 
55,331


 
82,604
9,853

2,627
 
11,061
2,824

1,387
 
3,348
1,833
17
943
 
1,117
157

396
 
48,031
7,329

3,915
 
201,492
21,996
17
9,268
Closing net book value 55,331 89,830 12,498 4,221 878 51,445 214,203
As at September 30, 2011
Cost
Accumulated depreciation
 
55,331
 
185,218
95,388
 
38,877
26,379
 
22,631
18,410
 
9,108
8,230
 
85,602
34,157
 
396,767
182,564
Closing net book value 55,331 89,830 12,498 4,221 878 51,445 214,203

Included in the above balances at September 30, 2011 are assets not being amortized with a net book value of approximately $16,396,000 [December 31, 2010 - $2,400,000] being construction-in-progress.

8. INVESTMENT PROPERTIES

  Land Buildings Building
improvements
Total
As at December 31, 2010:
Opening net book value
Additions
Disposals
Depreciation charge
 
8,286


 



 
259

37
91
 
8,545

37
91
Closing net book value 8,286 131 8,417
As at December 31, 2010
Cost
Accumulated depreciation
 
8,286
 
8,039
8,039
 
1,457
1,326
 
17,782
9,365
Closing net book value 8,286 131 8,417
As at September 30, 2011:
Opening net book value
Additions
Disposals
Depreciation charge
 
8,286


 



 
131


38
 
8,417


38
Closing net book value 8,286 93 8,379
As at September 30, 2011
Cost
Accumulated depreciation
 
8,286
 
8,039
8,039
 
1,457
1,364
 
17,782
9,403
Closing net book value 8,286 93 8,379

The fair value of the investment property portfolio as at September 30, 2011 was $29,700,000 [as at December 31, 2010 - $29,700,000]. The fair value was determined internally by management based on available market evidence.

9. INTANGIBLE ASSETS

  Customer
relationships
Brand
name
Non-compete
Agreement
Computer
software
Total
As at December 31, 2010:
Opening net book value
Additions
Disposals
Amortization charge
 
1,500


250
 
2,000


250
 
750


125
 
1,084
370

177
 
5,334
370

802
Closing net book value 1,250 1,750 625 1,277 4,902
As at December 31, 2010
Cost
Accumulated amortization
 
2,000
750
 
2,500
750
 
1,000
375
 
4,266
2,989
 
9,766
4,864
Closing net book value 1,250 1,750 625 1,277 4,902
As at September 30, 2011:
Opening net book value
Additions
Disposals
Amortization charge
 
1,250


188
 
1,750


188
 
625


94
 
1,277

64
188
 
4,902

64
658
Closing net book value 1,062 1,562 531 1,025 4,180
As at September 30, 2011
Cost
Accumulated amortization
 
2,000
938
 
2,500
938
 
1,000
469
 
4,202
3,177
 
9,702
5,522
Closing net book value 1,062 1,562 531 1,025 4,180

10. TRADE AND OTHER PAYABLES

  As at September 30, 2011 As at December 31, 2010
Trade payables
Other payables
54,815
11,546
60,127
11,597
  66,361 71,724

11. PROVISIONS

  Profit sharing and bonuses Vacation pay Totals
As at December 31, 2010 12,000 341 12,341
Charged to the consolidated income statement
  Additional provisions
  Unused amounts reversed
  Used during the nine month period
 
9,460
(1,007)
(10,981)
 
2,862

(1,523)
 
12,322
(1,007)
(12,504)
As at September 30, 2011 9,472 1,680 11,152

Profit sharing and bonuses

The provision for profit sharing and bonuses is payable within the first half of the following fiscal year.

Vacation pay

The provision for vacation pay represents employee entitlements to untaken vacation at the interim consolidated statement of financial position date.

12. REDEEMABLE SHARE LIABILITY

  As at
September 30,
2011
As at
December 31,
2010
 
Authorized
2,284,000 convertible, non-voting, series 2002 shares
806,000 convertible, non-voting, series 2005
1,224,000 convertible, non-voting, series 2009 shares
 
Issued
674,589 series 2002 shares [December 31, 2010 - 813,331]
541,248 series 2005 shares [December 31, 2010 - 620,793]
1,115,107 series 2009 shares [December 31, 2010 - 1,168,124]
Less employee share purchase loans
 
 
 
 
 
 
 
4,849
5,111
9,869
(19,447)
 
 
 
 
 
 
 
5,846
5,862
10,339
(21,875)
  382 172

Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005 and 2009 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares and series 2009 shares, respectively, of the Company.  These loans are repayable through the application against the loans of any dividends on the shares, with any remaining balance repayable on the date the shares are converted to common shares.  Each issued and fully paid for series 2002, 2005 and 2009 share may be converted into one common share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue.   Series 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to the tenth anniversary of such issue.  The series 2005 and series 2009 shares are redeemable at the option of the holder for a period of one business day following the date of issue of such shares.  The Company has the option to redeem the series 2005 and series 2009 shares at any time after the fifth anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary of such issue.  The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends.  The purchase prices of the shares are $7.19 per series 2002 share, $9.44 per series 2005 share and $8.85 per series 2009 share.

Dividends paid to holders of series 2002, 2005 and 2009 shares of approximately $470,000 [2010 - $401,000] have been used to reduce the respective shareholder loans.

During the nine month period ended September 30, 2011, 138,742 series 2002 shares [nine month period ended September 30, 2010 - 115,719] and 79,545 series 2005 shares [nine month period ended September 30, 2010 - Nil] were converted into common shares with a stated value of approximately $997,000 [nine month period ended September 30, 2010 - $751,000] and $832,000 [nine month period ended September 30, 2010 - Nil], respectively.

During the nine month period ended September 30, 2011, the Company cancelled 53,017 series 2009 shares [nine month period ended September 30, 2010 - 31,494] in the amount of $469,000 [nine month period ended September 30, 2010 - $279,000].

13. COMMON SHARES

  As at
September 30, 2011
As at
December 31, 2010
Authorized
Unlimited common shares
 
 
 
 
Issued
69,826,595 common shares
[December 31, 2010 - 70,075,333]
 
20,871
 
19,177

During the three month period ended September 30, 2011, 8,063 series 2002 shares [three month period ended September 30, 2010 - 39,296] and 18,799 series 2005 shares [three month period ended September 30, 2010 - Nil] were converted into common shares with a stated value of approximately $58,000 [three month period ended September 30, 2010 - $282,000] and $177,000 [three month period ended September 30, 2010 - $Nil], respectively.

During the nine month period ended September 30, 2011, the Company repurchased 467,025 [nine month period ended September 30, 2010 - 498,896] of its common shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bids at a net cost of approximately $6,115,000 [nine month period ended September 30, 2010 - $6,233,000].  All shares repurchased by the Company pursuant to its Normal Course Issuer Bids have been cancelled.  The repurchase of common shares resulted in a reduction of share capital in the amount of approximately $54,000 [nine month period ended September 30, 2010 - $234,000].  The excess net cost over the average carrying value of the shares of approximately $6,061,000 [nine month period ended September 30, 2010 - $5,999,000] has been recorded as a reduction in retained earnings.

The dividends paid for the three month periods ended September 30, 2011 and September 30, 2010 were $6,305,000 [$0.09 per share] and $4,936,000 [$0.07 per share], respectively.

14. REVENUE

  Three month period ended
September 30, 2011
Three month period ended
September 30, 2010
Sale of goods by corporate stores
Royalty income from franchisees
Extended warranty revenue
Rental income from investment property
169,818
2,358
2,014
183
177,320
2,625
2,002
178
  174,373 182,125
  Nine month period ended
September 30, 2011
Nine month period ended
September 30, 2010
Sale of goods by corporate stores
Royalty income from franchisees
Extended warranty revenue
Rental income from investment property
475,146
7,275
6,041
551
498,563
7,472
6,006
506
  489,013 512,547

15. OPERATING EXPENSES BY NATURE

  Three month period ended
September 30, 2011
Three month period ended
September 30, 2010
Depreciation of property, plant and equipment and investment properties 3,276 3,854
Amortization of intangible assets 214 199
Operating lease payments 880 811
Unrealized foreign exchange gains (losses) 1,679 (284)
Gain on sale of property, plant and equipment
  Nine month period ended
September 30, 2011
Nine month period ended
September 30, 2010
Depreciation of property, plant and equipment and investment properties 9,306 11,419
Amortization of intangible assets 658 577
Operating lease payments 2,497 2,438
Unrealized foreign exchange gains (losses) 1,133 (397)
Gain on sale of property, plant and equipment 21 1,238

16. INCOME TAX EXPENSE

  Three month period ended
September 30, 2011
Three month period ended
September 30, 2010
Current income tax expense
Deferred income tax (recovery) expense
6,594
(167)
7,476
(475)
  6,427 7,001
  Nine month period ended
September 30, 2011
Nine month period ended
September 30, 2010
Current income tax expense
Deferred income tax (recovery) expense
14,848
(82)
17,925
44
  14,766 17,969

Income tax expense is recognized based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rates used for the three month periods ended September 30, 2011 and September 30, 2010 were 28.2% and 30.1%, respectively.

17. EARNINGS PER SHARE

Earnings per share are calculated using the weighted average number of shares outstanding. The weighted average number of shares used in the basic earnings per share calculations amounted to 69,913,255 for the three month period ended September 30, 2011 (three month period ended September 30, 2010 - 70,330,309).

The following table reconciles the profit for the period and the number of shares for the basic and diluted earnings per share calculations:

Three month period ended
September 30, 2011
Profit for the period attributed to common shareholders Weighted average number of shares Per share amount
Basic 16,956 69,913,255 0.24
Diluted 16,956 72,289,387 0.23

Three month period ended
September 30, 2010
Profit for the period attributed to common shareholders Weighted average number of shares Per share amount
Basic 17,837 70,330,309 0.25
Diluted 17,837 73,098,337 0.24

Nine month period ended
September 30, 2011
Profit for the period attributed to common shareholders Weighted average number of shares Per share amount
Basic 37,927 70,023,150 0.54
Diluted 37,927 72,472,227 0.52

Nine month period ended
September 30, 2010
Profit for the period attributed to common shareholders Weighted average number of shares Per share amount
Basic 41,583 70,454,674 0.59
Diluted 41,583 73,246,633 0.57

18. COMMITMENTS AND CONTINGENCIES

[a]  The cost to complete all construction-in-progress as at September 30, 2011 totals $6,687,000 at five locations [December 31, 2010 - to complete at two locations at an approximate cost of $9,609,000].
[b]  The Company is obligated under operating leases for future minimum annual rental payments for certain land and buildings as follows:

No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
5,860
19,989
18,282
  44,131

[c]  The future minimum lease payments receivable under non-cancellable operating leases for certain land and buildings classified as investment property are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
712
2,027
427
  3,166

[d]   The Company has issued approximately $255,000 in letters of credit primarily with respect to buildings under construction which were completed during the year ended December 31, 2010.
[e]  Pursuant to a reinsurance agreement relating to the extended warranty sales, the Company has pledged available-for-sale financial assets amounting to $20,301,000 [as at December 31, 2010 - $19,498,000] and provided a letter of credit of $1,500,000 [as at December 31, 2010 - $1,500,000] for the benefit of the insurance company.

19. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

[a]  The net change in non-cash working capital balances related to operations consists of the following:


  Nine month period ended
September 30, 2011
Nine month period ended
September 30, 2010
Trade receivables
Inventory
Prepaid expenses
Trade and other payables
Provisions
Income taxes payable
Customers' deposits
9,845
(449)
88
(8,697)
(1,189)
(5,487)
(537)
10,874
(13,895)
112
(8,674)
(81)
(4,428)
(173)
  (6,426) (16,265)

[b] Supplemental cash flow information:

  Nine month period ended
September 30, 2011
Nine month period ended
September 30, 2010
Income taxes paid 19,459 22,007

[c]  During the nine month period, property, plant and equipment were acquired at an aggregate cost of $21,995,000 [2010 - $10,594,000], of which $3,868,000 [2010 - $536,000] is included in trade and other payables as at December 31, 2010.

20. TRANSITION TO IFRS

In preparing the opening IFRS consolidated statements of financial position, the Company has adjusted amounts previously reported that have been prepared in accordance with CGAAP. An explanation of how the transition from CGAAP to IFRS has affected the Company's financial position and financial performance on the Transition Date, for the three months ended March 31, 2010, for the year ended December 31, 2010, as at January 1, 2010 and December 31, 2010 are set out in the tables and notes in the Company's interim condensed consolidated financial statements for the first quarter ended March 31, 2011. The Company has also selected certain transition exemptions on the Transition Date, the details of which are also in the notes to the March 31, 2011 interim condensed consolidated financial statements.  An explanation of how the transition from CGAAP to IFRS has affected the Company's consolidated statements of financial position as of September 30, 2010, the consolidated income statements for the three and nine months period ended September 30, 2010, the consolidated statements of comprehensive income for the three and nine months period ended September 30, 2010 and the consolidated statements of cash flows are set out in the following tables and the notes that accompany the tables below.

i.     Consolidated Statement of Financial Position

  As at September 30, 2010
  Cdn. GAAP Adj. IFRS
ASSETS      
Current
Cash and cash equivalents
Available-for-sale financial assets
Trade receivables
Income taxes receivable
Inventory
Deferred income tax assets [note a]
 
55,050
127,210
20,627
2,470
97,852
400
 





(400)
 
55,050
127,210
20,627
2,470
97,852
Total current assets 303,609 (400) 303,209
Other assets
Property, plant and equipment [note b]
Investment properties [note b]
Intangible assets
Goodwill
Deferred income tax assets [note a]
1,448
210,498

5,018
11,282
11,383

(8,457)
8,457


400
1,448
202,041
8,457
5,018
11,282
11,783
Total assets 543,238 543,238
LIABILITIES AND SHAREHOLDERS' EQUITY      
Current
Trade and other payables [note c]
Provisions [note c]
Customers' deposits
Dividends payable
Deferred warranty plan revenue
 
77,654

15,459
6,308
17,061
 
(11,358)
11,358


 
66,296
11,358
15,459
6,308
17,061
Total current liabilities 116,482         — 116,482
Deferred warranty plan revenue
Redeemable share liability
Deferred income tax liabilities [notes a and d]
20,924
647
9,078
      —

20,924
647
9,078
Total liabilities 147,131 147,131
Shareholders' equity attributable to the shareholders of the Company      
Common shares
Retained earnings [note d]
Accumulated other comprehensive loss [note d]
18,301
377,319
487

(725)
725
18,301
376,594
1,212
Total shareholders' equity 396,107 396,107
Total liabilities and shareholder's equity 543,238         — 543,238

ii.     Consolidated Income Statements

  Three months ended September 30, 2010 Nine months ended September 30, 2010
  Cdn. GAAP Adj. Reclasses IFRS Cdn. GAAP Adj. Reclasses IFRS
 
Revenue [note e]
Cost of sales
 
179,500
106,564
 

 
2,625
 
182,125
106,564
 
505,075
300,249
 

 
7,472
 
512,547
300,249
Gross profit 72,936 2,625 75,561 204,826 7,472 212,298
 
Operating expenses [note f]
General and administrative expenses
Sales and marketing expenses
Occupancy expenses
Other operating expenses [note d]
Salaries and commissions
Advertising
Rent and property taxes
Amortization
Employee profit-sharing plan
Other operating expenses
Interest income
Other income
 
 




27,166
7,246
3,427
4,053
1,097
9,677
(789)
(2,832)
 
 



284







 
 
24,484
19,297
7,214
1,464
(27,166)
(7,246)
(3,427)
(4,053)
(1,097)
(9,677)
789
2,832
 
 
24,484
19,297
7,214
1,748







 
 




78,194
21,722
10,462
11,996
3,471
30,487
(2,143)
(8,081)
 
 



397







 
 
73,209
55,877
22,334
4,303
(78,194)
(21,722)
(10,462)
(11,996)
(3,471)
(30,487)
2,143
8,081
 
 
73,209
55,877
22,334
4,700







  49,045 284 3,414 52,743 146,108 397 9,615 156,120
Operating profit 23,891 (284) (789) 22,818 58,718 (397) (2,143) 56,178
Gain on sale of capital property
Finance income
1,231


789
1,231
789
1,231


2,143
1,231
2,143
Profit before income tax
Income tax expense [note d]
25,122
7,041
(284)
40

24,838
7,001
59,949
18,025
(397)
56

59,552
17,969
Profit for the period attributable to the shareholders of the Company 18,081 (244) 17,837 41,924 (341) 41,583

iii.     Consolidated Statements of Comprehensive Income

  Three months ended
September 30, 2010
Nine months ended
September 30, 2010
  Cdn.
GAAP
Adj. IFRS Cdn. GAAP Adj. IFRS
 
Profit for the period
 
18,081
 
(244)
 
17,837
 
41,924
 
(341)
 
41,583
 
Other comprehensive income, net of tax
Unrealized losses on available-for-sale financial
 assets arising during the period [note d]
Reclassification adjustment for net gains and losses
 included in profit for the period
 
 
1,717
 
(70)
 
 
 
244
 

 
 
 
1,961
  
(70)
 
 
 
637
 
(8)
 
 
 
341
 

 
 
 
978
  
(8)
 
Change in unrealized losses on available-for-sale
 financial assets arising during the period
1,647
 
244
 
1,891
 
629
 
341
 
970
 
Comprehensive income for the period attributable to the Shareholders of the Company 19,728 19,728 42,553 42,553

iv.     Explanatory notes

a.      Classification of deferred income tax - Under IFRS, it is not appropriate to classify deferred income tax balances as current, irrespective of the classification of the financial assets or financial liabilities to which the deferred income tax relates or the expected timing of reversal. Under CGAAP, deferred income tax relating to current assets or current liabilities must be classified as current. Accordingly, current deferred income tax reported under CGAAP of $400,000 at September 30, 2010 has been reclassified to non-current assets under IFRS.
b.      Investment properties - Under IFRS, where items of property, plant and equipment are held to earn rental income or for capital appreciation or both, they are classified separately on the consolidated statement of financial position as investment property. The Company has reclassified certain items of its land, buildings and building improvements to investment property on transition to IFRS. The Company has chosen to account for its investment property under the cost model with information on fair value being disclosed in the notes to the consolidated financial statements. This adjustment resulted in $8,457,000 of net book value being reclassified from property plant and equipment to investment property at September 30, 2010.
c.      Provisions - Under IFRS, provisions are required to be disclosed on the face of the consolidated statement of financial position with a more detailed breakdown included in the notes. Under CGAAP, contingencies were included within trade and other payables. Trade and other payables have been decreased and provisions increased by $11,358,000 at September 30, 2010 in relation to profit sharing, bonuses and vacation pay provided for. These are further disclosed in note 11.
d.      Available-for-sale financial assets - Under IFRS, changes in the fair value of available-for-sale financial assets are bi-furcated with foreign exchange gains and losses arising on translation being recorded through the consolidated income statement and changes in the underlying prices being recorded through other comprehensive income. Under CGAAP, all changes in the fair value of available-for-sale financial assets (including foreign exchange gains or losses) are recognized directly in other comprehensive income. At September 30, 2010 this resulted in a reclassification between accumulated other comprehensive income and retained earnings of $725,000. For the three month period ended September 30, 2010 this resulted in a change of $244,000 in other comprehensive income and a foreign exchange loss within other operating expenses of $284,000 and for the nine month period ended September 30, 2010 this resulted in a change of $341,000 in other comprehensive income and an increase in foreign exchange losses within other operating expenses of $397,000.
e.      Franchisee royalty revenue - Under IFRS, royalties received from the Company's franchisees meets the definition of revenue under IAS 18 - Revenue. Under CGAAP this royalty revenue was classified as other income on the consolidated income statement. The Company has reclassified the royalties received from other income to revenue on transition to IFRS. This adjustment resulted in a reclassification of $2,625,000 and $7,472,000 for the three and nine month period ended September 30, 2010, respectively.
f.      Operating expenses - These expense categories have been reclassified to meet the function of expense presentation under IFRS.

v.     Consolidated Statements of Cash Flows

The transition from CGAAP to IFRS had no significant impact on the cash flows generated by the Company.

21. APPROVAL OF THE FINANCIAL STATEMENTS

The interim condensed consolidated financial statements for the three and nine months ended September 30, 2011 were approved and authorized for issuance by the Board of Directors on November 14, 2011.

 

 

SOURCE Leon's Furniture Limited

For further information:

Dominic Scarangella, Tel: 416.243.4073


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