Leon's Furniture Limited - 2009 Third Quarter
For the nine months ended
We continue to experience lower sales and profits in the third quarter 2009 when compared to the prior year. We continue celebrating our 100th Anniversary with an active marketing campaign and excellent consumer value. At the same time we are pleased with the efforts put in place to keep expenses in check. As a result, we believe we are well positioned to take advantage of any improvements in general economic conditions. In the third quarter of 2009 we opened a new showroom store in downtown
The Directors have declared a quarterly dividend of 7 cents per common share payable on
During our 100th anniversary we have been able to give back to communities across
For further information, please consult the Company's Management Discussion & Analysis dated
EARNINGS PER SHARE FOR EACH QUARTER
-----------------------------------
YEAR
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL
-------- ------- -------- ------- -----
2009 - Basic 12 cents 12 cents 22 cents $0.46
- Fully Diluted 12 cents 12 cents 21 cents $0.45
2008 - Basic 16 cents 16 cents 25 cents 33 cents $0.90
- Fully Diluted 15 cents 16 cents 24 cents 32 cents $0.87
2007 - Basic 15 cents 14 cents 23 cents 31 cents $0.83
- Fully Diluted 15 cents 13 cents 22 cents 30 cents $0.80
LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE
Mark J. Leon
Chairman of the Board
MANAGEMENT'S DISCUSSION AND ANALYSIS
November 12, 2009
Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the three and nine months ended
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 may 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, the financial statements and MD&A were approved.
Introduction
Leon's Furniture Limited has been in the furniture retail business for 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
Leon's corporate sales of
During the quarter, the Company opened the first downtown
Leon's franchise sales of
Our gross margin of 39.5% for the third quarter 2009 increased by 1.5% from the third quarter 2008. The increase in the gross margin is mainly attributed to the decrease in costs of imported furniture as a result of the strengthening Canadian dollar. We also saw a slight increase in gross margins earned by our Appliance
Net operating expenses of
As a result of the above, net income for the third quarter 2009 was
For the nine months ended
Annual Financial Information
($ in thousands, except earnings
per share and dividends) 2008 2007 2006
Net corporate sales 740,376 637,456 591,286
Leon's franchise sales 209,848 195,925 177,167
Total Leon's sales 950,224 833,381 768,453
Net income 63,390 58,494 53,602
Earnings per share
Basic $0.90 $0.83 $0.76
Diluted $0.87 $0.80 $0.73
Total Assets 507,075 475,226 439,639
Common Share Dividends Declared $0.38 $0.2725 $0.375
Convertible, Non-Voting Shares
Dividends Declared $0.14 $0.14 $0.125
Liquidity and Financial Resources
($ in thousands, except dividends
per share)
Balances as at: Sept 30/09 Dec. 31/08 Sept 30/08
---------- ---------- ----------
Cash, cash equivalents and
marketable securities (including
restricted marketable securities) 145,761 139,275 136,805
Accounts receivable 19,659 30,291 23,815
Inventory 89,728 92,904 93,399
Total assets 507,075 513,408 506,445
Working capital 159,640 135,192 115,650
Current Prior Prior
Quarter Quarter Quarter
For the 3 months ended Sept 30/09 June 30/09 Mar. 31/09
---------- ---------- ----------
Cash flow provided by (used in)
operations 21,690 13,961 (3,166)
Purchase of property, plant
& equipment 2,337 5,180 1,903
Repurchase of common shares 403 384 707
Dividends paid 4,949 4,953 4,952
Dividends paid per share $0.07 $0.07 $0.07
Cash, cash equivalents and marketable securities (including restricted marketable securities) increased by
Marketable securities consist primarily of bonds with maturities not exceeding 11 years with an interest rate range of 2.5% to 7.7% and are stated at market value.
As part of the warranty reinsurance agreement with a subsidiary, the Company has pledged assets, which are part of the investment portfolio. The pledged assets are for the benefit of the primary insurance company for the purposes of insuring customer product warranty sales. The assets are in the form of a trust with a financial institution amounting to
Inventory decreased by
A new downtown
At the present time all funding for new store projects, renovations, dividends and working capital needs are scheduled to come from our existing cash resources. In the third quarter of 2009, the Company generated
Common Shares
At
For the nine-month period ending
Commitments
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($ in thousands) Payments Due by Period
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Less than 2-3 4-5 After
Contractual Obligations Total 1 year years years 5 years
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Operating Leases(1) 25,578 627 6,413 6,149 12,389
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Purchase Obligations -
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Total Contractual
Obligations 25,578 627 6,413 6,149 12,389
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(1) The Company is obligated under operating leases to future minimum
annual rental payments for various land and building sites across
Canada.
In addition, the Company has commitments related to redeemable shares as
follows:
As at As at
($ in thousands) September 30, 2009 December 31, 2008
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
999,251 series 2002 shares
(2008 - 1,168,745) 7,182 8,396
689,513 series 2005 shares
(2008 - 706,822) 6,511 6,511
1,207,000 series 2009 shares
(2008 - 0) 10,683 -
Less employees share purchase loans (23,993) (14,622)
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Redeemable share liability $383 $285
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Under the terms of its Management Share Purchase Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005 and 2009 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares and series 2009 shares, respectively, of the Company. These loans are repayable through the application against the loans of any dividends on the shares, with any remaining balance repayable on the date the shares are converted to common shares. Each issued and fully paid for series 2002, 2005 and 2009 share may be converted into one common share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. The series 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to the tenth anniversary of such issue. The series 2005 and 2009 shares are redeemable at the option of the holder for a period of one business day following the date of issue of such shares. The Company has the option to redeem the series 2005 and 2009 shares at any time after the fifth anniversary date of the issue of these shares and must redeem prior to the tenth anniversary of such issue. The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends. The purchase prices of the shares are
During the third quarter of 2009, no convertible, non-voting, series 1998 shares (2008 - 7,819) and 98,107 convertible, non-voting series 2002 shares (2008 - 20,424) were converted into common shares with a stated value of nil (2008 -
During the three month period ended
For the nine month period, the Company issued 1,207,000 series 2009 shares for proceeds of
Quarterly Results (2008, 2007, 2006)
Quarterly Income Statement ($ in thousands, except earnings per share)
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Quarter Ended Quarter Ended
September 30 June 30
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2009 2008 2009 2008
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Leon Corporate Sales 187,431 202,985 165,238 176,726
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Leon Franchise Sales 49,243 56,219 44,693 47,962
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Total Leon sales 236,674 259,204 209,931 224,688
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Net Income Per Share $0.22 $0.25 $0.12 $0.16
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Fully Diluted Per Share $0.21 $0.24 $0.12 $0.16
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Quarter Ended Quarter Ended
March 31 December 31
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2009 2008 2008 2007
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Leon Corporate Sales 152,525 154,577 206,088 185,922
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Leon Franchise Sales 42,675 41,864 63,803 60,931
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Total Leon sales 195,200 196,441 269,891 246,853
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Net Income Per Share $0.12 $0.16 $0.33 $0.31
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Fully Diluted Per Share $0.12 $0.15 $0.32 $0.30
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Critical Accounting Policies and Estimates
Our significant accounting policies are contained in Note 1 to the consolidated financial statements for the year ended
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 2009 have increased when compared to the same period for 2008. The cost increase is a result of the extended promotional terms in 2009 to coincide with the Company's 100th Anniversary.
Inventories
During the first quarter of 2008, the Company implemented Section 3031, "Inventories" ("Section 3031"), which replaced Section 3030 of the same title. Section 3031 establishes that inventories should be measured at the lower of cost and net realizable value, with guidance on the determination of cost. 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 nine month periods ended
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 2009 are
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 down 6.3% year to date for 2009 compared to 2008 which is in line with the decrease in franchise sales for the year.
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.
Changes in Accounting Policy
Accounting Standards Implemented in 2009
Section 3064 - Goodwill and Intangible Assets
Effective
Credit Risk and Fair Value of Financial Assets and Financial Liabilities
In
Pending Changes to Accounting Policy
International Financial Reporting Standards ("IFRS")
In
To meet these requirements, the Company has set up a conversion project that will be completed in two phases: (1) detailed impact analysis & development phase; and (2) solution development and implementation phase. These phases will often be in process simultaneously as they are applied to the individual standards. The Company has completed the diagnostic stage of the project and is currently working on the detailed impact analysis phase for all standards that affect the transition.
The initial scoping and planning for the conversion to IFRS, which commenced in the second quarter of 2009, involved the assignment of an internal project leader along with the identification of other key team participants and development of the overall project plan.
The detailed impact analysis phase involves the in-depth review of IFRS versus Canadian GAAP to identify changes required as well as any areas involving choices or electives available to the Company. This phase will also result in the identification of the accounting policy changes that are required, the review and establishment of shell financial statements including new disclosure requirements, and additional staff training. This phase is well under way and will allow the Company to be in a position to determine the initial estimated impact on the financial statements. The estimated impact on the financial statements will be continually reassessed throughout 2010.
The next phase, solution development and implementation, will involve the rollout of required changes, as well as any system changes required to permit the compilation of financial statement data that is IFRS compliant. This phase will also involve updating the internal control over financial reporting. Certain attributes of this phase will continue throughout 2010. Post-implementation of the conversion to IFRS will involve monitoring to ensure that all financial data for fiscal 2011 and beyond continues to be IFRS compliant, as well as the testing of the internal control over financial reporting in an IFRS environment during 2011.
As at
Section 1582 - Business Combinations
In
Section 1601 - Consolidated Financial Statements
In
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
There have been no changes in the Company's internal control over financial reporting during the period ended on
Outlook
Similar to a trend that began in the latter part of 2008, we saw a decrease in same store sales from the prior year's quarter. At this point we do not see any clear signs as to when we will see an economic turnaround. However, we just opened a new store in the third quarter 2009 known as the "Roundhouse" which should help reinforce sales for the balance of this year. This will also be aided by a continuation of a robust marketing campaign to coincide with celebrating the Company's 100th Anniversary. However, even with these measures in place, growing sales and profits for the balance of this year will be very challenging. Despite these concerns, our strong financial position coupled with past experience in dealing with economic slowdowns should allow us to look to the future with cautious optimism.
Forward-Looking Statements
This MD&A, in particular the section under heading "Outlook", includes forward-looking statements, which are not historic facts, 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: sudden slow down 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 12th day of November, 2009.
Leon's Furniture Limited-Meubles Leon Ltee
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
September 30 December 31
($ in thousands) 2009 2008
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ASSETS
Current
Cash and cash equivalents 44,964 39,483
Marketable securities 83,634 83,194
Restricted marketable securities 17,163 16,598
Accounts receivable 19,659 30,291
Income taxes recoverable 7,111 2,037
Inventory 89,728 92,904
Future tax assets - 270
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Total current assets 262,259 264,777
Prepaid expenses 1,593 1,490
Goodwill 11,282 11,282
Intangibles 4,406 4,875
Other receivables - 419
Future tax assets 11,217 10,752
Property, plant & equipment net 216,318 219,813
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507,075 513,408
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 66,385 95,247
Customers' deposits 15,488 14,119
Dividends payable 4,955 4,952
Deferred warranty plan revenue 15,754 15,267
Future tax liabilities 37 -
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Total current liabilities 102,619 129,585
Deferred warranty plan revenue 21,586 21,712
Redeemable share liability 383 285
Future tax liabilities 9,494 8,468
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Total liabilities 134,082 160,050
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Shareholders' equity
Common shares 17,631 16,493
Retained earnings 355,519 338,960
Accumulated other comprehensive income (157) (2,095)
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Total shareholders' equity 372,993 353,358
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507,075 513,408
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended September 30th
($ in thousands) 3 months ended 9 months ended
2009 2008 2009 2008
Sales 187,431 202,985 505,194 534,288
Cost of sales 113,299 123,885 308,084 323,494
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Gross profit 74,132 79,100 197,110 210,794
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Operating expenses (income)
Salaries and commissions 27,497 29,780 77,811 83,388
Advertising 7,392 6,951 25,592 23,300
Rent and property taxes 3,381 2,649 8,982 8,404
Amortization 4,293 4,216 12,408 11,779
Employee profit-sharing plan 960 998 2,827 2,971
Other operating expenses 10,274 11,854 30,806 34,270
Interest income (751) (1,369) (2,369) (3,534)
Other income (1,875) (2,548) (7,109) (10,404)
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51,171 52,531 148,948 150,174
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Income before income taxes 22,961 26,569 48,162 60,620
Provision for income taxes 7,318 9,070 15,328 20,435
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Net income for the period 15,643 17,499 32,834 40,185
Retained earnings, beginning
of the period 345,216 310,534 338,960 307,068
Dividends declared (4,955) (4,943) (14,857) (21,921)
Excess of cost of share
repurchase over carrying value
of related shares (385) (2,379) (1,418) (4,621)
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Retained earnings, end of period 355,519 320,711 355,519 320,711
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Weighted average number of common
shares outstanding ('000's)
Basic 70,687 70,694 70,666 70,583
Diluted 73,547 72,693 73,673 72,735
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Earnings per share
Basic $0.22 $0.25 $0.46 $0.57
Diluted $0.21 $0.24 $0.45 $0.55
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Dividends declared per share
Common $0.07 $0.07 $0.21 $0.31
Convertible, non-voting - - - -
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period ended September 30th
($ in thousands) 3 months ended 9 months ended
2009 2008 2009 2008
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OPERATING ACTIVITIES
Net income for the period 15,643 17,499 32,834 40,185
Add (deduct) items not involving
a current cash payment
Amortization of property,
plant & equipment 4,136 3,903 11,939 11,466
Amortization of intangible
assets 157 313 469 313
Amortization of deferred
warranty revenue (3,941) (3,810) (11,949) (10,827)
Loss (gain) on sale of
marketable securities 370 236 504 (476)
Future tax expense 179 94 479 160
Gain on sale of property,
plant & equipment (16) (267) (33) (1,665)
Cash received on warranty
sales 4,394 4,877 12,310 12,679
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20,922 22,845 46,553 51,835
Net change in non-cash working
capital balances related to
operations 768 7,096 (14,068) 1,530
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Cash provided by operating
activities 21,690 29,941 32,485 53,365
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INVESTING ACTIVITIES
Purchase of property, plant
& equipment (2,337) (9,105) (9,420) (15,507)
Proceeds on sale of property,
plant & equipment 26 312 48 2,775
Purchase of marketable
securities (2,847,355) (52,410) (2,966,193) (163,176)
Proceeds on sale of
marketable securities 2,847,019 48,274 2,967,011 162,706
Issuance of series 2009
redeemable share liability - - 10,683 -
Decrease(increase) in
employee share purchase
loans 705 509 (9,371) 1,956
Purchase of Appliance
Canada Ltd. (1,032) (1,608) (3,414) (18,722)
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Cash used in investing
activities (2,974) (14,028) (10,656) (29,968)
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FINANCING ACTIVITIES
Dividends paid (4,949) (4,625) (14,854) (21,927)
Repurchase of common shares (403) (2,403) (1,494) (4,668)
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Cash used in financing
activities (5,352) (7,028) (16,348) (26,595)
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Net (decrease) increase in
cash and cash equivalents
during the period 13,364 8,885 5,481 (3,198)
Cash and cash equivalents,
beginning of period 31,600 13,616 39,483 25,699
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Cash and cash equivalents,
end of period 44,964 22,501 44,964 22,501
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended September 30th
($ in thousands)
Net of tax
Tax
2009 effect 2009
Net income for the period 15,643 - 15,643
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during
the period 2,295 377 1,918
Reclassification adjustment for net gains
and (losses) included in net income (38) (6) (32)
Change in unrealized gains on
available-for-sale financial assets
arising during the period 2,257 371 1,886
-----------------------------
Comprehensive income for the period 17,900 371 17,529
-----------------------------
-----------------------------
Net of tax
Tax
2008 effect 2008
Net income for the period 17,499 - 17,499
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during
the period (1,516) (258) (1,258)
Reclassification adjustment for net gains
and (losses) included in net income (12) (2) (10)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,528) (260) (1,268)
-----------------------------
Comprehensive income for the period 15,971 (260) 16,231
-----------------------------
-----------------------------
Nine month period ended September 30th
($ in thousands)
Net of tax
Tax
2009 effect 2009
Net income for the period 32,834 32,834
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during
the period 2,310 385 1,925
Reclassification adjustment for net gains
and (losses) included in net income 15 2 13
Change in unrealized gains on
available-for-sale financial assets
arising during the period 2,325 387 1,938
-----------------------------
Comprehensive income for the period 35,159 387 34,772
-----------------------------
-----------------------------
Net of tax
Tax
2008 effect 2008
Net income for the period 40,185 - 40,185
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during
the period (2,247) (381) (1,866)
Reclassification adjustment for net gains
and (losses) included in net income (973) (165) (808)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (3,220) (546) (2,674)
-----------------------------
Comprehensive income for the period 36,965 (546) 37,511
-----------------------------
-----------------------------
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.
Except for the adoption of the accounting standards discussed in note 2
below, 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, 2008.
2. CHANGES IN ACCOUNTING POLICIES
Accounting Standards Implemented in 2009
Section 3064 - Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted the new CICA accounting
standard entitled, Section 3064 "Goodwill and Intangible Assets". Section
3064 establishes standards for the recognition, measurement, presentation
and disclosure of goodwill and intangible assets. The adoption of CICA
3064 had no impact on the Company's consolidated financial statements.
Credit Risk and Fair Value of Financial Assets and Financial Liabilities
In January 2009, the CICA issued Emerging Issues Committee Abstract 173,
"Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities" ("EIC-173"), effective for interim and annual financial
statements ending on or after January 2009. EIC-173 provides further
information on the determination of the fair value of financial assets
and financial liabilities under Handbook Section 3855, "Financial
Instruments - Recognition and Measurement." It states that an entity's
own credit and the credit risk of the counterparty should be taken into
account in determining the fair value of financial assets and financial
liabilities, including derivative instruments. The adoption of this
standard did not have any impact on the Company's results of operations
or financial position.
Pending Changes to Accounting Policy
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 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.
To meet these requirements, the Company has set up a conversion project
that will be completed in two phases: (1) detailed impact analysis &
development phase; and (2) solution development and implementation phase.
These phases will often be in process simultaneously as they are applied
to the individual standards. The Company has completed the diagnostic
stage of the project and is currently working on the detailed impact
analysis phase for all standards that affect the transition.
The initial scoping and planning for the conversion to IFRS, which
commenced in the second quarter of 2009, involved the assignment of an
internal project leader along with the identification of other key team
participants and development of the overall project plan.
The detailed impact analysis phase involves the in-depth review of IFRS
versus Canadian GAAP to identify changes required as well as any areas
involving choices or electives available to the Company. This phase will
also result in the identification of the accounting policy changes that
are required, the review and establishment of shell financial statements
including new disclosure requirements, and additional staff training.
This phase is well under way and will allow the Company to be in a
position to determine the initial estimated impact on the financial
statements. The estimated impact on the financial statements will be
continually reassessed throughout 2010.
The next phase, solution development and implementation, will involve the
rollout of required changes, as well as any system changes required to
permit the compilation of financial statement data that is IFRS
compliant. This phase will also involve updating the internal control
over financial reporting. Certain attributes of this phase will continue
throughout 2010. Post-implementation of the conversion to IFRS will
involve monitoring to ensure that all financial data for fiscal 2011 and
beyond continues to be IFRS compliant, as well as the testing of the
internal control over financial reporting in an IFRS environment during
2011.
As at September 30, 2009, the Company is not in a reasonable position to
determine the financial impact that adopting IFRS will have on its
financial statements. These disclosures reflect the Company's
expectations based on information available as at September 30, 2009. The
timing and completion of certain aspects of the conversion project may
require adjustment as the project moves forward, due to changes in the
standards between now and January 1, 2011, and variations in the actual
length of time to complete each task in the project plan. However, the
Company believes that the appropriate level of resources have been
assigned to the project to fulfill the overall project timelines. Further
detailed information about the conversion to IFRS will be provided in the
annual 2009 MD&A.
Section 1582 - Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations,
replacing Section 1581, Business Combinations. This section establishes
the standards for the accounting of business combinations, and states
that all assets and liabilities of an acquired business will be recorded
at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that
restructuring charges will be expensed in the periods after the
acquisition date. This new Section will be applicable to financial
statements relating to fiscal years beginning on or after January 1,
2011. The Company is currently assessing the future impact of this new
standard on its financial statements.
Section 1601 - Consolidated Financial Statements
In January 2009, the CICA issued Section 1601, Consolidated Financial
Statements, which replaces the existing standards. This section
establishes the standards for preparing consolidated financial statements
and is effective for fiscal years beginning on or after January 1, 2011.
The Company is currently assessing the future impact of this new standard
on its financial statements.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
As at September 30, 2009 accumulated other comprehensive income was
comprised of the unrealized losses on marketable securities of $205,000
($157,000 net of tax)
2009 2008
Balance, beginning of period $ (2,095) $ 917
Changes in unrealized gains (losses)
on available-for-sale financial
assets arising during the period 1,938 (2,674)
Balance, end of period $ (157) $ (1,757)
4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three
month period ending September 30, 2009 were $3,800,000 (2008 -
$7,596,000) and for the nine month period were $20,484,000 (2008 -
$26,348,000).
5. SHARE CAPITAL
During the quarter, 39,272 common shares were repurchased (2008 -
201,800) on the open market pursuant to the terms and conditions of
Normal Course Issuer Bids at a net cost of approximately $403,000 (2008 -
$2,403,000). For the nine month period, the Company repurchased 162,440
(2008 - 395,800) common shares at a net cost of approximately $1,494,000
(2008 - $4,668,000). 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 $76,000 (2008 - $46,000). The excess net cost over the
carrying value of the shares of approximately $1,418,000 (2008 -
$4,621,000) has been recorded as a reduction in retained earnings.
During the quarter ended September 30, 2009, no convertible, non-voting,
series 1998 shares (2008 - 7,819) and 98,107 series 2002 shares (2008 -
20,424) were converted to common shares with a stated value of
approximately $nil and $705,000 (2008 - $34,000 and $147,000)
respectively. For the nine month period, no convertible, non-voting,
series 1998 shares (2008 - 46,618) and 168,894 series 2002 shares (2008 -
228,827) were converted to common shares with a stated value of
approximately $nil and $1,214,000 (2008 - $205,000 and $1,645,000)
respectively.
For the nine month period 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 September 30, 2009, the classification of the Company's financial
instruments is as follows:
September 30, 2009
Other
Loans Financ-
Avail- and ial
able Receiv- Liabil-
Held for for ables ities Total
Trading Sale (amort- (amort- Carry-
Financial (fair (fair ized ized ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 44,964 - - - 44,964 44,964
Accounts
receivable - - 19,659 - 19,659 19,659
Marketable
securities - 83,634 - - 83,634 83,634
Restricted
marketable
securities - 17,163 - - 17,163 17,163
Income taxes
recoverable - - 7,111 - 7,111 7,111
Other receivables - - - - - -
Financial
Liabilities
Accounts payable
and accrued
liabilities - - - 66,697 66,697 66,697
Redeemable share
liability - - - 383 383 383
December 31, 2008
Other
Loans Financ-
Avail- and ial
able Receiv- Liabil-
Held for for ables ities Total
Trading Sale (amort- (amort- Carry-
Financial (fair (fair ized ized ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 39,483 - - - 39,483 39,483
Accounts
receivable - - 30,291 - 30,291 30,291
Marketable
securities - 83,194 - - 83,194 83,194
Restricted
marketable
securities - 16,598 - - 16,598 16,598
Income taxes
recoverable - - 2,037 - 2,037 2,037
Other receivables - - 419 - 419 419
Financial
Liabilities
Accounts payable
and accrued
liabilities - - - 95,247 95,247 95,247
Redeemable share
liability - - - 285 285 285
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. 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 for which
there is minimum exposure to U.S. financial companies affected by
the credit crisis and corporate failures. There is no immediate need
for cash from our investment portfolio.
Working capital requirements are expected to increase. Terms with
our suppliers are being reviewed and when there is an opportunity to
increase the purchase discount, we are making the offer to secure
the inventory supply.
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;
- maintain financial capacity and access to capital to support future
development of the business while taking into consideration current
and future industry, market and economic risks and conditions; and
- utilize short term funding sources to manage its working capital
requirements.
For further information: Dominic Scarangella, tel: (416) 243-4073
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