Leon's Furniture Limited - 2010 Second Quarter

TORONTO, Aug. 13 /CNW/ - For the three months ended June 30, 2010, total Leon's sales were $212,277,000 including $45,493,000 of franchise sales ($209,931,000 including $44,693,000 of franchise sales in 2009), an increase of 1.1%. Net income was $11,873,000, 17 cents per common share ($8,620,000, 12 cents per common share in 2009), an increase of 41.7% per common share.

For the six months ended June 30, 2010, total Leon's sales were $413,396,000 including $87,821,000 of franchise sales ($405,131,000 including $87,368,000 of franchise sales in 2009), an increase of 2.0% and net income was $23,843,000, 34 cents per common share ($17,191,000, 24 cents per common share in 2009), an increase of 41.7% per common share.

For the second quarter of 2010, we are pleased to report higher sales and a significant improvement in profits when compared to the second quarter of 2009. Higher sales reflect a general improvement in the economy. The profit improvement was mainly the result of three key factors: higher sales compared to the prior year's quarter; an improvement in our gross margin which was aided by the strengthening of the Canadian dollar along with a more favourable product mix; and the continuation of improved productivity and expense controls that were initiated in the prior year.

Although we are satisfied with the results year to date, we believe that we must remain vigilant for the balance of 2010 in order to continue to improve the performance of our Company. Pursuant to our robust expansion plans announced last quarter, construction is well on its way on a new 73,000 sq. ft. facility in Thunder Bay, Ontario which we plan to open before the end of this year. We will soon begin construction on a new 84,000 sq. ft. building in Regina, Saskatchewan that we plan to open by the spring of 2011. In addition, we have signed leases for a 76,000 sq. ft. store in Guelph, Ontario and a 46,700 sq. ft. store in Rosemère, Quebec. We anticipate the opening of these showrooms, which will be completely renovated, by the summer of 2011. We also plan major renovations and additions to be complete by the end of the year at our Sault St. Marie and Sudbury stores. Finally, we have just recently signed two new franchises; Collingwood and Fort Frances, Ontario with anticipated grand openings this fall.

In light of our strong financial performance year to date and excellent liquidity, the Directors are pleased to declare an increase in the quarterly dividend from 7 cents per common share to 9 cents per common share payable on the 8th day of October 2010 to shareholders of record at the close of business on the 8th day of September 2010. As of 2007, dividends paid by Leon's Furniture Limited are "eligible dividends" pursuant to the changes to the Income Tax Act under Bill C-28, Canada.

The Directors have also approved, subject to obtaining regulatory approvals, the continuation of the Company's ongoing Normal Course Issuer Bid, which expires on September 9, 2010. Pursuant to the continued bid, the Company intends, in the twelve months commencing September 10, 2010, to purchase up to the lesser of 4.99% of its Common Shares outstanding on August 30, 2010, and the amount equal to 4.99% of its Common Shares outstanding on the date the Toronto Stock Exchange accepts the notice of intention to make a normal course issuer bid.

Since September 10, 2009, the date on which Leon's current issuer bid commenced, the Company has purchased 413,317 Common Shares at an average price of $10.38 per share. The Company's Board of Directors believes that the purchase of its common shares is an appropriate use of its corporate funds, given its very strong liquidity position.

    
    EARNINGS PER SHARE FOR EACH QUARTER
    -----------------------------------

                             MARCH 31   JUNE 30  SEPT. 30   DEC. 31     YEAR
                             --------   -------  --------   -------     ----
                                                                       TOTAL
                                                                       -----

    2010  -  Basic           17 cents  17 cents                        $0.34
          -  Fully Diluted   16 cents  16 cents                        $0.32

    2009  -  Basic           12 cents  12 cents  22 cents  34 cents    $0.80
          -  Fully Diluted   12 cents  12 cents  21 cents  33 cents    $0.78

    2008  -  Basic           16 cents  16 cents  25 cents  33 cents    $0.90
          -  Fully Diluted   15 cents  16 cents  24 cents  32 cents    $0.87
    

LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE

Mark J. Leon

Chairman of the Board

    
                    MANAGEMENT'S DISCUSSION AND ANALYSIS
    

August 13, 2010

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the six months ended June 30, 2010, the MD&A for the year ended December 31, 2009, the audited consolidated financial statements for the year ended December 31, 2009 and the Company's Annual Information Form dated March 24, 2010.

Financial Statements Governance Practice

Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles and the amounts expressed are in Canadian dollars.

This 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. Accordingly, sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are effected by risks and uncertainties that could have a material impact on future prospects. Readers are cautioned that actual events and results will vary.

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

Introduction

Leon's Furniture Limited has been in the furniture retail business for over 100 years. The company's 38 corporate and 28 franchise stores can be found in every province except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.

Revenues and Expenses

For the three months ended June 30, 2010, total Leon's sales were $212,277,000 including $45,493,000 of franchise sales ($209,931,000 including $44,693,000 of franchise sales in 2009), an increase of 1.1%.

Leon's corporate sales of $166,784,000 in the second quarter of 2010, increased by $1,546,000 or 0.9%, compared to the second quarter of 2009. The increase in sales in the second quarter compared to the prior year was the result of the growth of new stores. Same store corporate sales were up marginally compared to the prior year.

Leon's franchise sales of $45,493,000 in the second quarter of 2010 increased by $800,000, or 1.8% compared to the second quarter of 2009.

Our gross margin for the second quarter of 2010 of 39.93% has increased 1.8% from the second quarter 2009. Similar to the first quarter 2010, we saw our product margin on imported goods increase in the quarter due to the appreciation of the Canadian dollar versus the US dollar which resulted in lower product costs. Higher margins were also experienced as a result of a more favorable product mix and a reduction in our sales finance expenses compared to the prior year second quarter.

Net operating expenses of $49,380,000 were down $884,000 or 1.8% for the second quarter of 2010 compared to the second quarter of 2009. Payroll and commission costs were up 0.9% in the quarter compared to the prior year. This slight increase was mainly the result of the yearly increase in salary and wage costs at the beginning of April 2010 and the increase in sales commissions. The significant decrease in net operating expenses for the second quarter of 2010 mainly relates to the decrease in advertising costs. Advertising expenses decreased $2,161,000 or 23.9% for the second quarter compared to the prior year. In 2009, the Company enhanced its marketing campaign to celebrate the Company's 100th Anniversary. For the most part, all other operating costs as a percentage of sales were basically flat as a percentage of sales compared to the prior year second quarter.

As a result of the above, net income for the second quarter of 2010 was $11,873,000, 17 cents per common share ($8,620,000, 12 cents per common share in 2009), an increase of 41.7% per common share.

For the six months ended June 30, 2010, total Leon's sales were $413,396,000 including $87,821,000 of franchise sales ($405,131,000 including $87,368,000 of franchise sales in 2009), an increase of 2.0% and net income was $23,843,000, 34 cents per common share ($17,191,000, 24 cents per common share in 2009), an increase of 41.7% per common share.

    
    Annual Financial Information

    ($ in thousands, except earnings
     per share and dividends)                   2009        2008        2007

    Net corporate sales                      703,180     740,376     637,456
    Leon franchise sales                     194,290     209,848     195,925

    Total Leon sales                         897,470     950,224     833,381

    Net income                                56,864      63,390      58,494
    Earnings per share
    Basic                                      $0.80       $0.90       $0.83
    Diluted                                    $0.78       $0.87       $0.80

    Total Assets                             529,156     513,408     475,226

    Common Share Dividends Declared            $0.48       $0.38     $0.2725
    Convertible, Non-Voting Shares
     Dividends Declared                        $0.14       $0.14       $0.14


    Liquidity and Financial Resources

    ($ in thousands, except dividends
     per share)

    Balances as at:                       June 30/10  Dec. 31/09  June 30/09
                                          ----------  ----------  ----------

    Cash, cash equivalents and
     marketable securities (including
     restricted marketable securities)       175,703     170,726     130,172
    Accounts receivable                       20,013      31,501      16,933
    Inventory                                 92,925      83,957      96,473
    Total assets                             532,421     529,156     502,517
    Working capital                          178,527     164,759     142,889


                                             Current       Prior       Prior
                                             Quarter     Quarter     Quarter
    For the 3 months ended                June 30/10  Dec. 31/09  June 30/09
                                          ----------  ----------  ----------

    Cash flow from operations                 18,626      48,444      13,961
    Purchase of capital assets                 4,568       1,480       5,180
    Repurchase of capital stock                  814       3,023         384
    Dividends paid                             4,937      19,111       4,953

    Dividends paid per share                   $0.07       $0.27       $0.07
    

Cash and marketable securities (including restricted marketable securities) increased by $7,445,000 in the quarter mainly as the result of the net income generated from operations.

Marketable securities consist primarily of bonds with maturities not exceeding 5 years with an interest rate range of 0.341% to 6.65% and are stated at market value.

As part of the warranty reinsurance agreement with a subsidiary, the Company has pledged assets, which are part of the investment portfolio. The pledged assets are for the benefit of the primary insurance company. The assets are in the form of a trust with a financial institution amounting to $19,319,000.

Inventory increased by $7,303,000 from the first quarter of 2010. The increase is the result of timing differences in receiving furniture from Asia. When compared to the prior year, June 30, 2009, inventory is down despite higher sales year to date.

This year, construction is well on its way on a new 73,000 sq. ft. facility in Thunder Bay, Ontario which we plan to open before the end of this year. We will soon begin construction on a new 84,000 sq. ft. building in Regina, Saskatchewan that we plan to open by the spring of 2011. We have also signed leases for a 76,000 sq. ft. store in Guelph, Ontario and a 46,700 sq. ft. store in Rosemère, Quebec. We anticipate the opening of these showrooms, which will be completely renovated, by the summer of 2011. We also plan major renovations and additions to be complete by the end of the year at our Sault St. Marie and Sudbury stores. In addition, we have just recently signed two new franchises; Collingwood and Fort Frances, Ontario with anticipated grand openings this fall. At the present time, all funding for new store projects and renovations are scheduled to come from our existing cash resources.

Common Shares

At June 30, 2010, there were 70,486,975 common shares issued and outstanding. During the second quarter of 2010, 18,840 (2009 - 39,316) convertible, non-voting series 2002 shares were converted to common shares. The Company repurchased 67,059 (2009 - 39,468) of its common shares on the open market at an average cost of $12.15 pursuant to the terms and conditions of our current Normal Course Issuer Bid. All shares repurchased by the Company have been cancelled.

For the six month period ending June 30, 2010, the Company repurchased 67,059 common shares at an average price of $12.15 (2009 - 123,168 at an average price of $8.82) and 76,423 (2009 - 70,787) convertible, non-voting series 2002 shares were converted to common shares.

Commitments

    
    -------------------------------------------------------------------------
    ($ in thousands)           Payments Due by Period
                              -----------------------------------------------
                                     Less than       2-3       4-5     After
    Contractual Obligations    Total    1 year     years     years   5 years
    -------------------------------------------------------------------------
    Operating leases(1)       33,391     1,733     7,932     6,610    17,116
    -------------------------------------------------------------------------
    Purchase obligations(2)    4,190     4,190         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total contractual
     obligations              37,581     5,923     7,932     6,610    17,116
    -------------------------------------------------------------------------
    (1) The Company is obligated under operating leases to future minimum
        annual rental payments for various land and building sites across
        Canada.
    (2) The estimated cost to complete construction in progress at one
        location in Canada.
    

In addition, the Company has commitments related to redeemable shares as follows:

    
                                                         As at         As at
                                                       June 30,  December 31,
    ($ in thousands)                                      2010          2009

    Authorized

    2,284,000 convertible, non-voting, series
     2002 shares
    806,000 convertible, non-voting, series
     2005 shares
    1,222,000 convertible, non-voting, series
     2009 shares

    Issued

    892,610 series 2002 shares (2009 - 969,033)     $    6,416    $    6,965
    689,513 series 2005 shares (2009 - 689,513)          6,511         6,511
    1,207,000 series 2009 shares (2009 - 1,207,000)     10,683        10,683
    Less employees share purchase loans                (23,363)      (23,776)
    -------------------------------------------------------------------------
    Redeemable share liability                             247           285
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Under the terms of its Management Share Purchase 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. The 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 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 2009 shares at any time after the fifth anniversary date of the issue of these shares and must redeem 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 $401,000 (2009 - $261,000) have been used to reduce the respective shareholder loans.

During the second quarter 2010, 18,840 convertible, non-voting series 2002 shares were converted into common shares with a stated value of $135,000 (2009 - 39,316 for a stated value of $283,000). For the six month period, 76,423 convertible non-voting series 2002 shares were converted into common shares with a stated value of $549,000 (2009 - 70,787 for a stated value of $509,000).

During the second quarter 2009, the Company issued 1,207,000 series 2009 shares for proceeds of $10,683,000. In addition, the Company advanced non-interest bearing loans in the amount of $10,683,000 to certain of its employees to acquire these shares.

Quarterly Results (2010, 2009, 2008)

    
    Quarterly Income Statement ($ in thousands, except earnings per share)

    -------------------------------------------------------------------------
                                          Quarter Ended       Quarter Ended
                                             June 30             March 31
    -------------------------------------------------------------------------
                                          2010      2009      2010      2009
    -------------------------------------------------------------------------
    Leon corporate sales               166,784   165,238   158,791   152,525
    -------------------------------------------------------------------------
    Leon franchise sales                45,493    44,693    42,328    42,675
    -------------------------------------------------------------------------
    Total Leon sales                   212,277   209,931   201,119   195,200
    -------------------------------------------------------------------------
    Net income per share                 $0.17     $0.12     $0.17     $0.12
    -------------------------------------------------------------------------
    Fully diluted per share              $0.16     $0.12     $0.16     $0.12
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          Quarter Ended       Quarter Ended
                                            December 31        September 30
    -------------------------------------------------------------------------
                                          2009      2008      2009      2008
    -------------------------------------------------------------------------
    Leon corporate sales               197,986   206,088   187,431   202,985
    -------------------------------------------------------------------------
    Leon franchise sales                57,679    63,803    49,243    56,219
    -------------------------------------------------------------------------
    Total Leon sales                   255,665   269,891   236,674   259,204
    -------------------------------------------------------------------------
    Net income per share                 $0.34     $0.33     $0.22     $0.25
    -------------------------------------------------------------------------
    Fully diluted per share              $0.33     $0.32     $0.21     $0.24
    -------------------------------------------------------------------------
    

Critical Accounting Policies and Estimates

Our significant accounting policies are contained in Note 1 to the consolidated financial statements for the year ended December 31, 2009. Certain of these policies involve critical accounting estimates because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.

Revenue Recognition

Sales are recognized as revenue for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customers' home.

The Company offers customers 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 these sales are deducted from sales. Finance costs deducted from sales year to date for 2010 have decreased when compared to the same period for 2009. The cost decrease is a result of the fewer extended promotional terms offered in 2010.

During 2009, extended promotional terms were offered to coincide with the Company's 100th Anniversary.

Inventories

The Company measures inventories at the lower of cost, determined on a first-in, first-out basis, and net realizable value.

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 selling prices.

Reserves for slow moving and damaged inventory are deducted in our 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. Damaged inventory is coded as such and placed in specific locations. The amount of damaged reserve is determined by specific product categories.

The Company's inventory amount encompasses one category which is goods purchased and held for resale in the ordinary course of business. The amount of inventory recognized as an expense for the three and six month periods ended June 30, 2010 was $97,904,000 and $189,037,000 (2009 - $100,009,000 and $190,160,000) and is presented within cost of sales on the consolidated statements of income. There were inventory write-downs of $332,000 (2009 - $216,000) recognized as an expense during the period ended June 30, 2010. As at June 30, 2010, the inventory markdown provision totalled $4,000,000 (2009 - $3,419,000). There were no reversals of any write-down for the period ended June 30, 2010. Furthermore none of the Company's inventory has been pledged as security for any liabilities of the Company.

Warranty Revenue

Warranty revenues are deferred and taken into income on a straight-line basis over the life of the warranty period. Warranty revenues included in sales year to date for 2010 are $8,238,000 compared to $8,008,000 in 2009. Warranty expenses deducted through costs of goods sold year to date for 2010 are $2,846,000 compared to $2,870,000 in 2009. Warranty repairs for particular electronic products have started to decrease due to the replacement of these products with newer technologically advanced products.

Franchise Royalties

Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisees' gross sales. This royalty income is recorded by the Company on an accrual basis under the heading "other income" and is up 0.3% year to date for 2010 compared to 2009 which is in line with the increase in franchise sales for the six month period ended June 30, 2010.

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 of cost of goods sold as sales occur.

Pending Changes to Accounting Policies

International Financial Reporting Standards ("IFRS")

In March 2009, the Accounting Standards Board ("AcSB") issued its exposure draft "Adopting IFRS in Canada, II" which reconfirmed that publicly accountable enterprises are required to adopt International Financial Reporting Standards, as issued by the International Accounting Standards Board ("IASB"), for fiscal years beginning on or after January 1, 2011. Accordingly, the Company will be required to adopt IFRS on January 1, 2011, including interim periods in fiscal 2011. Comparative interim and annual information will be required for the year ending December 31, 2010.

The Company has commenced the process to transition from current Canadian GAAP to IFRS. As previously stated, we have established an internal project leader that is led by executive management and includes key participants from various areas of the Company as necessary to plan and achieve a smooth transition to IFRS. Periodic progress reporting to the audit committee on the status of the IFRS implementation has been ongoing since fiscal year 2009.

The Company has mostly completed the detailed impact analysis phase of its conversion project for the standards that affect the transition to IFRS. The Company is currently focusing its efforts on the solutions development phase. To date, the project is progressing according to plan. The following table summarizes the key activities of the Company's IFRS conversion project:

    
    -------------------------------------------------------------------------
    Key Activities        Target Milestones          Current Status
    -------------------------------------------------------------------------
    Identify differences  Complete assessment of     Completed.
    between IFRS and      differences between IFRS
    Canadian GAAP.        and GAAP.
    -------------------------------------------------------------------------
    Select accounting     Review and approval of     Under management review.
    policy choices.       policy decisions by
                          Q3 2010.
    -------------------------------------------------------------------------
    Evaluate and select   Confirm selection of       Completed (see section
    which IFRS 1          exemptions by Q2 2010.     below).
    exemptions will be
    taken on transition
    to IFRS.
    -------------------------------------------------------------------------
    Prepare financial     Management approval and    In progress.
    statements and        audit committee review
    note disclosures      of preliminary pro forma
    in compliance with    financial statements
    IFRS.                 and note disclosures
                          during the second half
                          of fiscal 2010.
    -------------------------------------------------------------------------
    Quantify the effect   Quantification of the      In progress.
    of converting to      effect of the conversion
    IFRS.                 by beginning of Q4 2010.
    -------------------------------------------------------------------------
    Prepare first time    Reconciliation completed   Differences currently
    adoption              and approved by            being quantified.
    reconciliation        changeover date.           Reconciliation to be
    required under                                   developed during Q4 of
    IFRS 1.                                          2010.
    -------------------------------------------------------------------------
    Identify required     Complete a review of       Identification of
    changes to the        systems and process to     changes required to the
    financial system      address additional         financial systems was
    based on the          systems required to        preliminarily determined
    implementation        implement IFRS.            to be minimal.
    of IFRS.
    -------------------------------------------------------------------------
    

The table below provides a brief summary of select IFRS that may impact Leon's, their differences from Canadian Generally Accepted Accounting Principles ("GAAP") and their potential impact to the Company. The table is not comprehensive and does not include all of the differences from GAAP for the standards noted. Also, the table does not include all the standards that may require changes for the transition to IFRS. Although nothing has been identified to date, ongoing work relating to other standards not presented in the table may possibly have a significant impact on the Company's consolidated financial statements.

    
    -------------------------------------------------------------------------
    Standards             Difference from GAAP       Potential Impact
    -------------------------------------------------------------------------
    Presentation and      IFRS requires              This will be the most
    disclosure            significantly more         significant impact to
                          disclosure than GAAP for   the Company. The other
                          certain standards. In      differences and impacts
                          some cases, IFRS also      noted throughout this
                          requires different         table will cause
                          presentation on the        measurement differences,
                          balance sheet and income   but based on historical
                          statement. In addition,    analysis and current
                          a new statement entitled   future projections their
                          "Consolidated Statement    impact on the operating
                          of Changes in Equity"      profit is not expected
                          will be included upon      to be significant. The
                          the conversion to IFRS.    increased disclosure
                                                     requirements will
                                                     necessitate adjustments
                                                     to some current
                                                     processes and the
                                                     implementation of new
                                                     financial reporting
                                                     processes to ensure the
                                                     appropriate data is
                                                     collected for disclosure
                                                     purposes.
    -------------------------------------------------------------------------
    Property, plant and   Significant asset          The annual amortization
    equipment (PP&E)      components must be         expense may change to
                          depreciated separately.    reflect further
                          This accounting treatment  componentization of the
                          is commonly referred to    Company's PP&E.
                          as componentization
                          of PP&E.
    -------------------------------------------------------------------------
    First-time adoption   IFRS contains explicit     The Company has selected
                          guidance on first-time     the available elections
                          adoption of IFRS. There    the Company wishes to
                          are several elections      make and will apply them
                          available to ease the      in preparing the opening
                          transition to IFRS and     balance sheet under
                          some mandatory exemptions  IFRS. The following
                          from retrospective         elections will be made
                          application of IFRS.       under IFRS 1:

                                                     - The Company has
                                                       elected to use the
                                                       exemption to carry
                                                       forward our Canadian
                                                       GAAP accounting of the
                                                       Appliance Canada
                                                       business acquisition.

                                                     - The Company does not
                                                       elect to record
                                                       property, plant and
                                                       equipment at fair
                                                       value on transition.
                                                       The Company is
                                                       accounting for these
                                                       items at their
                                                       historical cost.
    -------------------------------------------------------------------------
    

The Company will continue to report throughout 2010 on its conclusions and accounting policy choices on the standards noted above. The Company's external auditors will commence their detailed review of the Company's accounting policy position papers during the third quarter of 2010. In addition to disclosing qualitative analysis on the impacts of the transition to IFRS, the Company still expects to be in a position to disclose quantitative information in the third quarter of 2010. While the Company believes it has performed an appropriate level of analysis in selecting its IFRS accounting policies, actual quantitative results may reveal additional impacts to the Company that were not anticipated. The IASB has several projects slated for completion in 2010 and 2011 that may impact the transition to IFRS and the financial statements of the Company. The Company continues to monitor the IASB's progress on these projects and their impact on the Company's transition to IFRS.

Impact on information systems and technology

The most significant information system challenge for the IFRS conversion is to ensure the Company has the ability to track its IFRS adjustments in the year of transition and that any new IFRS compliance reports can be produced to facilitate the preparation of IFRS financial statements. The Company is confident in its ability to track IFRS adjustments throughout 2010 to facilitate the preparation of the increased note disclosure required under IFRS. As of now, the transition is not expected to have a significant impact on the Company's other information systems.

Impact on internal controls over financial reporting and disclosure controls and procedures

As described further below, in accordance with its conversion plan the Company is continually reviewing its internal controls over financial reporting and its disclosure controls and procedures and will update these as required to ensure they are appropriate for reporting under IFRS.

As noted, the transition to IFRS for the Company mainly affects the presentation and disclosure of its financial statements. This may lead to process changes in order to facilitate the reporting of more detailed information in the notes to the financial statements, but it is not currently expected to lead to many measurement or fundamental differences in the accounting processes used by the Company. Also, the Company has implemented controls over its IFRS adjustment process, which primarily includes review by qualified members of Leon's head office finance and accounting department.

The conversion to IFRS exposes the Company to control risks when there are new or modified processes. To address these risks the Company has been designing controls for areas where increased judgment is required.

Financial reporting expertise

Over the past couple of years, the Company's key financial reporting managers have attended several IFRS training courses. The Company's IFRS project leader has also reviewed detailed technical accounting training internally on the differences between GAAP and IFRS as they apply to the Company.

Business Activities

The transition to IFRS is currently having a minimal impact on Leon's operational activities.

Disclosure Controls and Internal Control Over Financial Reporting

Based on the evaluation of disclosure controls and procedures, the CEO and the CFO have concluded that the Company's disclosure controls and procedures were effective as at June 30, 2010.

There have been no changes in the Company's internal control over financial reporting during the period ended on June 30, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Outlook

Similar to the first quarter of 2010, we saw a slight improvement in same store sales from the prior year quarter which was aided by the general improvement in consumer confidence. However, current trends are indicating that there may be a slight slowdown in the Canadian economy going forward. In addition, the new HST measures that went into place July 1, 2010 in Ontario, along with increasing interest rates, may slow down consumer spending going forward. To counter this, we plan a very robust marketing and merchandising campaign for the balance of the year. Even with these measures in place, growing sales and profits for the balance of this year will be very challenging. Despite this, our strong financial position coupled with our experience in adjusting to changing market conditions, allow us to look to the future with cautious optimism.

Financial Statements Governance Practice

Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian generally accepted accounting principles.

The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed Management's Discussion and Analysis and the financial statements, and recommended the Board of Directors approve them. Following review by the full Board of Directors, the financial statements and the MD&A were approved.

Forward-Looking Statements

This MD&A, in particular the section under the heading "Outlook", includes forward-looking statements, which are based on certain assumptions and reflect Leon's Furniture Limited's current expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: a further slowdown in the Canadian economy; 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.

    
                          Leon's Furniture Limited
                           P.O. Box 1100, Stn. "B"
                                 Weston, ON
                                   M9L 2R8
                  Phone: (416) 243-4073 Fax: (416) 243-7890
    

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             Vice President & Chief Financial
    Officer                                 Officer
    

Dated as of the 13th day of August, 2010

    
    Leon's Furniture Limited-Meubles Leon Ltee
    Incorporated under the laws of Ontario

                         CONSOLIDATED BALANCE SHEETS
                                 (UNAUDITED)

                                                         As at         As at
                                                       June 30   December 31
    ($ in thousands)                                      2010          2009
    -------------------------------------------------------------------------

    ASSETS
    Current
    Cash and cash equivalents                           65,497        58,301
    Marketable securities                               90,887        94,337
    Restricted marketable securities                    19,319        18,088
    Accounts receivable                                 20,013        31,501
    Income taxes recoverable                             3,139             -
    Inventory                                           92,925        83,957
    Future tax assets                                      824         1,133
    -------------------------------------------------------------------------
    Total current assets                               292,604       287,317
    Prepaid expenses                                     1,438         1,560
    Goodwill                                            11,282        11,282
    Intangibles                                          5,215         5,334
    Future tax assets                                   11,777        11,465
    Property, plant & equipment net                    210,105       212,198
    -------------------------------------------------------------------------
                                                       532,421       529,156
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Accounts payable and accrued liabilities            73,817        83,880
    Income taxes payable                                     -         1,958
    Customers' deposits                                 18,270        15,632
    Dividends payable                                    4,936         4,938
    Deferred warranty plan revenue                      17,054        16,150
    -------------------------------------------------------------------------
    Total current liabilities                          114,077       122,558
    Deferred warranty plan revenue                      20,958        22,248
    Redeemable share liability                             247           383
    Future tax liabilities                               9,316         8,829
    -------------------------------------------------------------------------
    Total liabilities                                  144,598       154,018
    -------------------------------------------------------------------------

    Shareholders' equity
    Common shares                                       18,222        17,704
    Retained earnings                                  370,763       357,576
    Accumulated other comprehensive income              (1,162)         (142)
    -------------------------------------------------------------------------
    Total shareholders' equity                         387,823       375,138
    -------------------------------------------------------------------------
                                                       532,421       529,156
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Leon's Furniture Limited-Meubles Leon Ltee

                    CONSOLIDATED STATEMENTS OF INCOME AND
                              RETAINED EARNINGS
                                 (UNAUDITED)

    Period ended June 30th                      3 months            6 months
    ($ in thousands)                               ended               ended
                                          2010      2009      2010      2009

    Sales                              166,784   165,238   325,575   317,763
    Cost of sales                      100,187   102,343   193,685   194,785
    -------------------------------------------------------------------------
    Gross profit                        66,597    62,895   131,890   122,978
    -------------------------------------------------------------------------
    Operating expenses (income)
    Salaries and commissions            26,305    26,070    51,028    50,314
    Advertising                          6,886     9,047    14,476    18,200
    Rent and property taxes              3,547     2,757     7,035     5,601
    Amortization                         3,975     4,169     7,943     8,115
    Employee profit-sharing plan         1,212     1,030     2,374     1,867
    Other operating expenses            10,487    10,208    20,810    20,532
    Interest income                       (663)     (766)   (1,354)   (1,618)
    Other income                        (2,369)   (2,251)   (5,249)   (5,234)
    -------------------------------------------------------------------------
                                        49,380    50,264    97,063    97,777
    -------------------------------------------------------------------------
    Income before income taxes          17,217    12,631    34,827    25,201
    Provision for income taxes           5,344     4,011    10,984     8,010
    -------------------------------------------------------------------------
    Net income for the period           11,873     8,620    23,843    17,191
    Retained earnings, beginning
     of the period                     364,609   341,910   357,576   338,960
    Dividends declared                  (4,936)   (4,949)   (9,873)   (9,902)
    Excess of cost of share
     repurchase over carrying value
     of related shares                    (783)     (365)     (783)   (1,033)
    -------------------------------------------------------------------------
    Retained earnings, end of period   370,763   345,216   370,763   345,216
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Weighted average number of common
     shares outstanding ('000's)
    Basic                               70,525    70,696    70,520    70,725
    Diluted                             73,323    71,831    73,299    71,739
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings per share
    Basic                                $0.17     $0.12     $0.34     $0.24
    Diluted                              $0.16     $0.12     $0.32     $0.24
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Dividends declared per share
    Common                               $0.07     $0.07     $0.14     $0.14
    Convertible, non-voting                  -         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Leon's Furniture Limited-Meubles Leon Ltee

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (UNAUDITED)

    Period ended June 30th                      3 months            6 months
    ($ in thousands)                               ended               ended
                                          2010      2009      2010      2009
    -------------------------------------------------------------------------

    OPERATING ACTIVITIES
    Net income for the period           11,873     8,620    23,843    17,191
    Add (deduct) items not involving
     a current cash payment
      Amortization of property,
       plant & equipment                 3,786     3,981     7,565     7,803
      Amortization of intangible
       assets                              189       188       378       312
      Amortization of deferred
       warranty revenue                 (4,133)   (4,030)   (8,238)   (8,008)
      Loss (gain) on sale of
       marketable securities               (43)      100      (164)      134
      Future tax expense                   225         2       659       300
      Gain on sale of property,
       plant & equipment                    (2)      (16)       (6)      (17)
      Cash received on warranty sales    3,928     3,880     7,852     7,916
    -------------------------------------------------------------------------
                                        15,823    12,725    31,889    25,631
    Net change in non-cash working
     capital balances related to
     operations                          2,803     1,236   (10,392)  (14,836)
    -------------------------------------------------------------------------
    Cash provided by operating
     activities                         18,626    13,961    21,497    10,795
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Purchase of property, plant
     & equipment                        (4,568)   (5,180)   (4,966)   (7,083)
    Purchase of intangibles                  -         -      (259)        -
    Proceeds on sale of property,
     plant & equipment                       3        20        11        22
    Purchase of marketable
     securities                       (125,853)  (68,538) (198,588) (118,838)
    Proceeds on sale of marketable
     securities                        143,263    64,840   199,777   119,992
    Issuance of series 2009
     redeemable share liability              -    10,683         -    10,683
    Decrease (increase) in employee
     share purchase loans                  142   (10,400)      413   (10,076)
    Purchase of Appliance Canada Ltd.        -      (842)        -    (2,382)
    -------------------------------------------------------------------------
    Cash provided by (used in)
     investing activities               12,987    (9,417)   (3,612)   (7,682)
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Dividends paid                      (4,937)   (4,953)   (9,875)   (9,905)
    Repurchase of common shares           (814)     (384)     (814)   (1,091)
    -------------------------------------------------------------------------
    Cash used in financing activities   (5,751)   (5,337)  (10,689)  (10,996)
    -------------------------------------------------------------------------
    Net increase (decrease) in cash
     and cash equivalents during
     the period                         25,862      (793)    7,196    (7,883)
    Cash and cash equivalents,
     beginning of period                39,635    32,393    58,301    39,483
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                      65,497    31,600    65,497    31,600
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Leon's Furniture Limited-Meubles Leon Ltee

               CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                 (UNAUDITED)

    Three month period ended June 30th
    ($ in thousands)

                                                                         Net
                                                             Tax      of tax
                                                2010      effect        2010

    Net income for the period                 11,873           -      11,873
    Other comprehensive income, net of tax
      Unrealized losses on available-for-sale
       financial assets arising during
       the period                               (981)       (147)       (834)
      Reclassification adjustment for net
       gains and (losses) included in net
       income                                    (69)        (11)        (58)
                                            ---------------------------------
      Change in unrealized losses on
       available-for-sale financial assets
       arising during the period              (1,050)       (158)       (892)
                                            ---------------------------------
    Comprehensive income for the period       10,823        (158)     10,981
                                            ---------------------------------
                                            ---------------------------------


                                                                         Net
                                                             Tax      of tax
                                                2009      effect        2009

    Net income for the period                  8,620           -       8,620
    Other comprehensive income, net of tax
      Unrealized gains on available-for-sale
       financial assets arising during
       the period                              1,145         199         946
      Reclassification adjustment for net
       gains and (losses) included in net
       income                                     84          14          70
                                            ---------------------------------
      Change in unrealized gains on
       available-for-sale financial assets
       arising during the period               1,229         213       1,016
                                            ---------------------------------
    Comprehensive income for the period        9,849         213       9,636
                                            ---------------------------------
                                            ---------------------------------


    Six month period ended June 30th
    ($ in thousands)

                                                                         Net
                                                             Tax      of tax
                                                2010      effect        2010

    Net income for the period                 23,843                  23,843
    Other comprehensive income, net of tax
      Unrealized losses on available-for-sale
       financial assets arising during
       the period                             (1,266)       (184)     (1,082)
      Reclassification adjustment for net
       gains and (losses) included in net
       income                                     72          10          62
                                            ---------------------------------
      Change in unrealized losses on
       available-for-sale financial assets
       arising during the period              (1,194)       (174)     (1,020)
                                            ---------------------------------
    Comprehensive income for the period       22,649        (174)     22,823
                                            ---------------------------------
                                            ---------------------------------


                                                                         Net
                                                             Tax      of tax
                                                2009      effect        2009

    Net income for the period                 17,191           -      17,191
    Other comprehensive income, net of tax
      Unrealized gains on available-for-sale
       financial assets arising during
       the period                                 15           8           7
      Reclassification adjustment for net
       gains and (losses) included in net
       income                                     53           8          45
                                            ---------------------------------
      Change in unrealized gains on
       available-for-sale financial assets
       arising during the period                  68          16          52
                                            ---------------------------------
    Comprehensive income for the period       17,259          16      17,243
                                            ---------------------------------
                                            ---------------------------------


    NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    UNAUDITED

    1.  BASIS OF PREPARATION

    These unaudited interim consolidated financial statements have been
    prepared by management in accordance with Canadian generally accepted
    accounting principles ("GAAP") for interim financial statements. They do
    not include all of the disclosures required by Canadian generally
    accepted accounting principles for annual financial statements and
    accordingly, the interim financial information should be read in
    conjunction with the Company's annual consolidated financial statements.
    The interim financial information has been prepared using the same
    accounting policies as set out in note 1 to the consolidated financial
    statements for the year ended December 31, 2009.

    2.  PENDING CHANGES IN ACCOUNTING POLICIES

    INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

    In March 2009, the Accounting Standards Board ("AcSB") issued its
    exposure draft "Adopting IFRS in Canada, II" which reconfirmed that
    publicly accountable enterprises are required to adopt International
    Financial Reporting Standards (IFRS) for fiscal years beginning on or
    after January 1, 2011. Accordingly, the Company will be required to adopt
    IFRS on January 1, 2011, including interim periods in fiscal 2011.
    Comparative interim and annual information will be required for the year
    ending December 31, 2010. As part of its transition to IFRS, the Company
    has developed an implementation plan which includes an extensive analysis
    of accounting differences between Canadian GAAP and IFRS and the
    assessment of the expected impact of the accounting differences on its
    consolidated financial statements. The Company is in the process of
    transitioning its financial statement reporting, presentation and
    disclosure to IFRS in time to meet the January 1, 2011 deadline. The
    process will be ongoing as new standards and recommendations are issued
    by the International Accounting Standards Board and AcSB. Further details
    regarding the Company's transition to IFRS are included in the Company's
    June 30, 2010 Management's Discussion and Analysis filed on The System
    for Electronic Document Analysis and Retrieval ("SEDAR").

    3.  ACCUMULATED OTHER COMPREHENSIVE INCOME

    As at June 30, 2010 accumulated other comprehensive income was comprised
    of the unrealized losses on marketable securities of $1,378,000
    ($1,162,000 net of tax).

                                                          2010          2009

    Balance, beginning of period                      $   (142)     $ (2,095)
    Changes in unrealized (losses) gains on
     available-for-sale financial assets arising
     during the period                                  (1,020)           52
                                                     ----------    ----------

    Balance, end of period                            $ (1,162)     $ (2,043)
                                                     ----------    ----------
                                                     ----------    ----------

    4.  INCOME TAXES

    The Company's total cash payments for income taxes paid in the three
    month period ending June 30, 2010 were $6,912,000 (2009 - $8,064,000) and
    for the six month period were $15,783,000 (2009 - $16,684,000).

    5.  SHARE CAPITAL

    During the quarter, 67,059 common shares were repurchased (2009 - 39,468)
    on the open market pursuant to the terms and conditions of the current
    Normal Course Issuer Bid at a net cost of approximately $814,000 (2009 -
    net cost of approximately $384,000). For the six month period, the
    Company repurchased 67,059 (2009 - 123,168) common shares at a net cost
    of approximately $814,000 (2009 - $1,091,000). 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 $31,000 (2009 - $58,000).
    The excess net cost over the carrying value of the shares of
    approximately $783,000 (2009 - $1,033,000) has been recorded as a
    reduction in retained earnings.

    During the quarter ended June 30, 2010, 18,840 convertible non-voting
    series 2002 shares (2009 - 39,316) were converted into common shares with
    a stated value of approximately $135,000 (2009 - $283,000). For the six
    month period, 76,423 convertible non-voting series 2002 shares (2009 -
    70,787) were converted to common shares with a stated value of
    approximately $549,000 (2009 - $509,000).

    During the second quarter of 2009, the Company issued $1,207,000 series
    2009 shares for proceeds of $10,683,000. In addition, the Company
    advanced non-interest bearing loans in the amount of $10,683,000 to
    certain of its employees to acquire these shares.

    6.  CLASSIFICATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS

    As at June 30, 2010, the classification of the Company's financial
    instruments is as follows:

    June 30, 2010
                                                   Other
                                         Loans     Finan-
                                           and      cial
                               Avail-   Receiv-   Liabil-
                  Held for      able     ables     ities
                   Trading  for Sale    (amort-   (amort-    Total
    Financial        (fair     (fair      ized      ized  Carrying      Fair
     Assets          value)    value)     cost)     cost)   Amount     Value
    Cash and cash
     equivalents    65,497         -         -         -    65,497    65,497
    Accounts
     receivable          -         -    20,013         -    20,013    20,013
    Marketable
     securities          -    90,887         -         -    90,887    90,887
    Restricted
     marketable
     securities          -    19,319         -         -    19,319    19,319
    Income taxes
     recoverable         -         -     3,139         -     3,139     3,139

    Financial
     Liabilities
    Accounts
     payable and
     accrued
     liabilities         -         -         -    73,817    73,817    73,817
    Redeemable
     share
     liability           -         -         -       247       247       247


    December 31, 2009
                                                   Other
                                         Loans     Finan-
                                           and      cial
                               Avail-   Receiv-   Liabil-
                  Held for      able     ables     ities
                   Trading  for Sale    (amort-   (amort-    Total
    Financial        (fair     (fair      ized      ized  Carrying      Fair
     Assets          value)    value)     cost)     cost)   Amount     Value
    Cash and cash
     equivalents    58,301         -         -         -    58,301    58,301
    Accounts
     receivable          -         -    31,501         -    31,501    31,501
    Marketable
     securities          -    94,337         -         -    94,337    94,337
    Restricted
     marketable
     securities          -    18,088         -         -    18,088    18,088

    Financial
     Liabilities
    Accounts
     payable and
     accrued
     liabilities         -         -         -    83,880    83,880    83,880
    Income taxes
     payable             -         -         -     1,958     1,958     1,958
    Redeemable
     share
     liability           -         -         -       383       383       383

    The Company's fair value measurements of financial instruments within the
    fair value hierarchy, as at June 30, 2010 and December 31, 2009 consists
    primarily of investments valued using Level 1 inputs.

    RISK MANAGEMENT

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

    i)   Credit risk

         The Company believes at this point in time, it has some credit risk
         associated to its accounts receivable as it relates to the Appliance
         Canada division that is partly mitigated by the Company's credit
         management practices. The majority of the Company's sales are paid
         through cash, credit card or third party finance. The Company relies
         on two third party credit suppliers to supply financing alternatives
         to our customers.

    ii)  Liquidity risk

         The Company has no outstanding debt and does not rely upon available
         credit facilities to finance operations or to finance committed
         capital expenditures. The portfolio of marketable securities
         consists primarily of Canadian and International bonds. There is no
         immediate need for cash from our investment portfolio.

    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 accounts
         payable in U.S. dollars.

    iv)  Market price risk

         The Company is exposed to fluctuations in the market prices of its
         marketable securities that are classified as available for sale.
         Changes in the fair value of marketable securities are recorded, net
         of income taxes, in accumulated other comprehensive income (note 3).
         The risk is managed by ensuring a relatively conservative asset
         allocation of bonds and equities.

    7.  CAPITAL 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.
    

SOURCE Leon's Furniture Limited

For further information: For further information: Dominic Scarangella, Tel: 416.243.4073


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