Leon's Furniture Limited - 2009 Third Quarter

TORONTO, Nov. 12 /CNW/ - For the three months ended September 30, 2009, total Leon's sales were $236,674,000 including $49,243,000 of franchise sales ($259,204,000 including $56,219,000 franchise sales in 2008), a decrease of 8.7% from the third quarter 2008. Net income was $15,643,000, 22 cents per common share ($17,499,000, 25 cents per common share in 2008), a decrease of 12% per common share.

For the nine months ended September 30, 2009, total Leon's sales were $641,805,000 including $136,611,000 of franchise sales ($680,333,000 including $146,045,000 of franchise sales in 2008), a decrease of 5.7% and net income was $32,834,000, 46 cents per common share ($40,185,000, 57 cents per common share in 2008), a decrease of 19.3% per common share.

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 Toronto, Ontario known as the "Roundhouse" and we are pleased with its performance to date. Renovations were also completed at our Barrie and Whitby, Ontario stores. We plan to begin construction on two new superstores in the spring of 2010; one in Thunder Bay, Ontario (75,000 sq ft.) and the other in Regina, Saskatchewan (85,000 sq. ft.).

The Directors have declared a quarterly dividend of 7 cents per common share payable on January 11, 2010 to shareholders of record at the close of business on December 11, 2009. In addition, the annual dividend on the convertible non-voting series shares of 14 cents, will be payable on January 11, 2010 to the shareholders of record at the close of business on December 11, 2009. As stated in our press release dated February 20, 2007, as of 2006, dividends paid by Leon's Furniture Limited are "eligible dividends" and for further clarification, all future dividends are eligible dividends unless otherwise stated.

During our 100th anniversary we have been able to give back to communities across Canada, including donations to many charities, special events for our customers, and gifts for all of our associates. We are pleased that our continuing success, positive cash position, and very strong balance sheet, allow us to include our shareholders in our 100th anniversary celebrations by declaring a special dividend of 20 cents, per common share, payable on December 16, 2009 to the shareholders of record at the close of business on November 30, 2009.

For further information, please consult the Company's Management Discussion & Analysis dated November 12, 2009.

    
    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 September 30, 2009, MD&A for the year ended December 31, 2008, the audited consolidated financial statements for the year ended December 31, 2008 and the Company's Annual Information Form dated March 24, 2009.

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 September 30, 2009, total Leon's sales were $236,674,000 including $49,243,000 of franchise sales ($259,204,000 including $56,219,000 of franchise sales in 2008), a decrease of 8.7% from the third quarter 2008.

Leon's corporate sales of $187,431,000 in the third quarter of 2009, decreased by $15,554,000 or 7.7%, compared to the third quarter of 2008. The decrease in sales in the third quarter compared to the prior year was the result of a continuation of the general economic slowdown that began in 2008. In order to help offset declining consumer confidence, we continued running a very active marketing campaign to coincide with the Company's 100th Anniversary. Same store corporate sales were down 8.1% compared to the prior year. (Same store sales are calculated for stores that have been open at least 12 months).

During the quarter, the Company opened the first downtown Toronto, Ontario showroom store known as the "Roundhouse" and is satisfied with results to date.

Leon's franchise sales of $49,243,000 in the third quarter of 2009, decreased by $6,976,000 or 12.4%, compared to the third quarter of 2008. The economic slowdown has impacted all regions of the country.

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 Canada division. Appliance Canada is involved in the wholesale of appliances to the building and apartment trades as well as some retail of high end appliances to the public.

Net operating expenses of $51,171,000 were down $1,360,000 or 2.6% for the third quarter 2009 compared to the third quarter 2008. Payroll and commission costs were down 7.7% in the third quarter compared to the prior year. This decrease was the result of lower sales and a planned effort to reduce payroll costs in response to our expectation of a slowdown in sales for 2009. As previously stated, the Company created an enhanced marketing campaign to celebrate the Company's 100th Anniversary. As a result, advertising expenses increased by $441,000 or 6.3% for the third quarter compared to the prior year, well within our budget. For the most part, all other operating costs were down compared to the prior year third quarter. We are pleased with the continued efforts of our Associates in helping reduce operating expenses in light of the economic slowdown.

As a result of the above, net income for the third quarter 2009 was $15,643,000, 22 cents per common share (as compared to $17,499,000, 25 cents per common share in 2008), a decrease of 12% per common share.

For the nine months ended September 30, 2009, total Leon's sales were $641,805,000 including $136,611,000 of franchise sales ($680,333,000 including $146,045,000 of franchise sales in 2008), a decrease of 5.7% and net income was $32,834,000, 46 cents per common share ($40,185,000, 57 cents per common share in 2008), a decrease of 19.3% per common share. The first quarter 2008 includes an after tax gain on sale of land of $1,135,000 or 2 cents per common share.

    
    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 $15,589,000 in the quarter mainly as a result of net income and the reduction in working capital balances.

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 $17,163,000.

Inventory decreased by $6,745,000 from the second quarter 2009 due to a concentrated effort to lower inventory levels because of reduced sales.

A new downtown Toronto, Ontario showroom store known as the "Roundhouse" had a grand opening in the third quarter 2009. We are pleased with initial results from this most recent store addition. Renovations were also completed in the third quarter 2009 at our Barrie and Whitby, Ontario stores.

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 $21,690,000 cash from operating activities, contributing to the Company's strong liquidity position.

Common Shares

At September 30, 2009 there were 70,751,593 common shares issued and outstanding. 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. The Company repurchased 39,272 (2008 - 201,800) of its common shares in the open market at an average price of $10.02. Pursuant to the terms and conditions of Normal Course Issuer Bids, all shares repurchased by the Company have been cancelled.

For the nine-month period ending September 30, 2009, the Company repurchased 162,440 (2008 - 395,800) common shares at an average price of $9.20 and no convertible, non-voting series 1998 shares (2008 - 46,618) and 168,894 convertible, non-voting series 2002 shares (2007 - 228,827) 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)       25,578       627     6,413     6,149    12,389
    -------------------------------------------------------------------------
    Purchase Obligations           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Contractual
     Obligations              25,578       627     6,413     6,149    12,389
    -------------------------------------------------------------------------
    (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)
    -------------------------------------------------------------------------
    Redeemable share liability                      $383                $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 and 2005 shares of approximately $261,000 (2008 - $329,000) have been used to reduce the respective shareholder loans.

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 - $34,000) and $705,000 (2008 - $147,000) respectively. For the nine month period, no convertible, non-voting, series 1998 shares (2008 - 46,618) and 168,894 convertible, non-voting series 2002 shares (2008 - 228,827) were converted into common shares with a stated value of nil (2008 - 205,000) and $1,214,000 (2008 - $1,645,000) respectively.

During the three month period ended September 30, 2009, no convertible, non-voting series 2002 shares and series 2005 shares were cancelled (2008 - 11,538, series 2002) in the amount of nil (2008 - $109,000). For the nine month period, no convertible, non-voting series 2002 shares and series 2005 shares were cancelled (2008 - 49,992, series 2002) in the amount of nil (2008 - $472,000).

For the nine month period, 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 (2008, 2007, 2006)

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

    -------------------------------------------------------------------------
                                          Quarter Ended       Quarter Ended
                                           September 30          June 30
    -------------------------------------------------------------------------
                                          2009      2008      2009      2008
    -------------------------------------------------------------------------
    Leon Corporate Sales               187,431   202,985   165,238   176,726
    -------------------------------------------------------------------------
    Leon Franchise Sales                49,243    56,219    44,693    47,962
    -------------------------------------------------------------------------
    Total Leon sales                   236,674   259,204   209,931   224,688
    -------------------------------------------------------------------------
    Net Income Per Share                 $0.22     $0.25     $0.12     $0.16
    -------------------------------------------------------------------------
    Fully Diluted Per Share              $0.21     $0.24     $0.12     $0.16
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                          Quarter Ended       Quarter Ended
                                             March 31          December 31
    -------------------------------------------------------------------------
                                          2009      2008      2008      2007
    -------------------------------------------------------------------------
    Leon Corporate Sales               152,525   154,577   206,088   185,922
    -------------------------------------------------------------------------
    Leon Franchise Sales                42,675    41,864    63,803    60,931
    -------------------------------------------------------------------------
    Total Leon sales                   195,200   196,441   269,891   246,853
    -------------------------------------------------------------------------
    Net Income Per Share                 $0.12     $0.16     $0.33     $0.31
    -------------------------------------------------------------------------
    Fully Diluted Per Share              $0.12     $0.15     $0.32     $0.30
    -------------------------------------------------------------------------
    

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, 2008. 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 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 September 30, 2009 was $110,555,000 and $300,715,000 (2008 - $122,615,000 and $319,216,000) is presented within cost of sales on the consolidated statements of income. There were inventory write-downs of $23,000 (2008 - $143,000) recognized as an expense during the three months ended September 30, 2009. As at September 30, 2009, the inventory markdown provision totaled $3,832,000 (2008 - $3,984,000). There were no reversals of any write-down for the period ended September 30, 2009. 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 2009 are $11,949,000 compared to $10,827,000 in 2008. Warranty expenses deducted through costs of goods sold year to date 2009 are $4,609,000 compared to $3,864,000 in 2008. The cost of warranty repairs in particular for electronics continues to increase but we anticipate it will level off in the very near future.

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 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.

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 September 30, 2009.

There have been no changes in the Company's internal control over financial reporting during the period ended on September 30, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
                                                 507,075             513,408
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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                   -
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
    Total liabilities                            134,082             160,050
    -------------------------------------------------------------------------

    Shareholders' equity
    Common shares                                 17,631              16,493
    Retained earnings                            355,519             338,960
    Accumulated other comprehensive income          (157)             (2,095)
    -------------------------------------------------------------------------
    Total shareholders' equity                   372,993             353,358
    -------------------------------------------------------------------------
                                                 507,075             513,408
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    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
    -------------------------------------------------------------------------
    Gross profit                        74,132    79,100   197,110   210,794
    -------------------------------------------------------------------------
    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)
    -------------------------------------------------------------------------
                                        51,171    52,531   148,948   150,174
    -------------------------------------------------------------------------
    Income before income taxes          22,961    26,569    48,162    60,620
    Provision for income taxes           7,318     9,070    15,328    20,435
    -------------------------------------------------------------------------
    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)
    -------------------------------------------------------------------------
    Retained earnings, end of period   355,519   320,711   355,519   320,711
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings per share
    Basic                                $0.22     $0.25     $0.46     $0.57
    Diluted                              $0.21     $0.24     $0.45     $0.55
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Dividends declared per share
    Common                               $0.07     $0.07     $0.21     $0.31
    Convertible, non-voting                  -         -         -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    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
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
                                      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
    -------------------------------------------------------------------------
    Cash provided by operating
     activities                       21,690    29,941      32,485    53,365
    -------------------------------------------------------------------------

    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)
    -------------------------------------------------------------------------
    Cash used in investing
     activities                       (2,974)  (14,028)    (10,656)  (29,968)
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Dividends paid                    (4,949)   (4,625)    (14,854)  (21,927)
    Repurchase of common shares         (403)   (2,403)     (1,494)   (4,668)
    -------------------------------------------------------------------------
    Cash used in financing
     activities                       (5,352)   (7,028)    (16,348)  (26,595)
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                    44,964    22,501      44,964    22,501
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    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.
    

SOURCE Leon's Furniture Limited

For further information: For further information: Dominic Scarangella, tel: (416) 243-4073


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