Leon's Furniture Limited - 2010 Second Quarter
TORONTO, Aug. 13 /CNW/ - For the three months ended June 30, 2010, total Leon's sales were $212,277,000 including $45,493,000 of franchise sales ($209,931,000 including $44,693,000 of franchise sales in 2009), an increase of 1.1%. Net income was $11,873,000, 17 cents per common share ($8,620,000, 12 cents per common share in 2009), an increase of 41.7% per common share.
For the six months ended June 30, 2010, total Leon's sales were $413,396,000 including $87,821,000 of franchise sales ($405,131,000 including $87,368,000 of franchise sales in 2009), an increase of 2.0% and net income was $23,843,000, 34 cents per common share ($17,191,000, 24 cents per common share in 2009), an increase of 41.7% per common share.
For the second quarter of 2010, we are pleased to report higher sales and a significant improvement in profits when compared to the second quarter of 2009. Higher sales reflect a general improvement in the economy. The profit improvement was mainly the result of three key factors: higher sales compared to the prior year's quarter; an improvement in our gross margin which was aided by the strengthening of the Canadian dollar along with a more favourable product mix; and the continuation of improved productivity and expense controls that were initiated in the prior year.
Although we are satisfied with the results year to date, we believe that we must remain vigilant for the balance of 2010 in order to continue to improve the performance of our Company. Pursuant to our robust expansion plans announced last quarter, construction is well on its way on a new 73,000 sq. ft. facility in Thunder Bay, Ontario which we plan to open before the end of this year. We will soon begin construction on a new 84,000 sq. ft. building in Regina, Saskatchewan that we plan to open by the spring of 2011. In addition, we have signed leases for a 76,000 sq. ft. store in Guelph, Ontario and a 46,700 sq. ft. store in Rosemère, Quebec. We anticipate the opening of these showrooms, which will be completely renovated, by the summer of 2011. We also plan major renovations and additions to be complete by the end of the year at our Sault St. Marie and Sudbury stores. Finally, we have just recently signed two new franchises; Collingwood and Fort Frances, Ontario with anticipated grand openings this fall.
In light of our strong financial performance year to date and excellent liquidity, the Directors are pleased to declare an increase in the quarterly dividend from 7 cents per common share to 9 cents per common share payable on the 8th day of October 2010 to shareholders of record at the close of business on the 8th day of September 2010. As of 2007, dividends paid by Leon's Furniture Limited are "eligible dividends" pursuant to the changes to the Income Tax Act under Bill C-28, Canada.
The Directors have also approved, subject to obtaining regulatory approvals, the continuation of the Company's ongoing Normal Course Issuer Bid, which expires on September 9, 2010. Pursuant to the continued bid, the Company intends, in the twelve months commencing September 10, 2010, to purchase up to the lesser of 4.99% of its Common Shares outstanding on August 30, 2010, and the amount equal to 4.99% of its Common Shares outstanding on the date the Toronto Stock Exchange accepts the notice of intention to make a normal course issuer bid.
Since September 10, 2009, the date on which Leon's current issuer bid commenced, the Company has purchased 413,317 Common Shares at an average price of $10.38 per share. The Company's Board of Directors believes that the purchase of its common shares is an appropriate use of its corporate funds, given its very strong liquidity position.
EARNINGS PER SHARE FOR EACH QUARTER
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MARCH 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- ------- -------- ------- ----
TOTAL
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2010 - Basic 17 cents 17 cents $0.34
- Fully Diluted 16 cents 16 cents $0.32
2009 - Basic 12 cents 12 cents 22 cents 34 cents $0.80
- Fully Diluted 12 cents 12 cents 21 cents 33 cents $0.78
2008 - Basic 16 cents 16 cents 25 cents 33 cents $0.90
- Fully Diluted 15 cents 16 cents 24 cents 32 cents $0.87
LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE
Mark J. Leon
Chairman of the Board
MANAGEMENT'S DISCUSSION AND ANALYSIS
August 13, 2010
Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the six months ended June 30, 2010, the MD&A for the year ended December 31, 2009, the audited consolidated financial statements for the year ended December 31, 2009 and the Company's Annual Information Form dated March 24, 2010.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles and the amounts expressed are in Canadian dollars.
This MD&A is intended to provide readers with the information that management believes is required to gain an understanding of Leon's Furniture Limited's current results and to assess the Company's future prospects. Accordingly, sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are effected by risks and uncertainties that could have a material impact on future prospects. Readers are cautioned that actual events and results will vary.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MD&A and the financial statements, and recommended that the Board of Directors approve them. Following review by the full Board of Directors, the financial statements and the MD&A were approved.
Introduction
Leon's Furniture Limited has been in the furniture retail business for over 100 years. The company's 38 corporate and 28 franchise stores can be found in every province except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.
Revenues and Expenses
For the three months ended June 30, 2010, total Leon's sales were $212,277,000 including $45,493,000 of franchise sales ($209,931,000 including $44,693,000 of franchise sales in 2009), an increase of 1.1%.
Leon's corporate sales of $166,784,000 in the second quarter of 2010, increased by $1,546,000 or 0.9%, compared to the second quarter of 2009. The increase in sales in the second quarter compared to the prior year was the result of the growth of new stores. Same store corporate sales were up marginally compared to the prior year.
Leon's franchise sales of $45,493,000 in the second quarter of 2010 increased by $800,000, or 1.8% compared to the second quarter of 2009.
Our gross margin for the second quarter of 2010 of 39.93% has increased 1.8% from the second quarter 2009. Similar to the first quarter 2010, we saw our product margin on imported goods increase in the quarter due to the appreciation of the Canadian dollar versus the US dollar which resulted in lower product costs. Higher margins were also experienced as a result of a more favorable product mix and a reduction in our sales finance expenses compared to the prior year second quarter.
Net operating expenses of $49,380,000 were down $884,000 or 1.8% for the second quarter of 2010 compared to the second quarter of 2009. Payroll and commission costs were up 0.9% in the quarter compared to the prior year. This slight increase was mainly the result of the yearly increase in salary and wage costs at the beginning of April 2010 and the increase in sales commissions. The significant decrease in net operating expenses for the second quarter of 2010 mainly relates to the decrease in advertising costs. Advertising expenses decreased $2,161,000 or 23.9% for the second quarter compared to the prior year. In 2009, the Company enhanced its marketing campaign to celebrate the Company's 100th Anniversary. For the most part, all other operating costs as a percentage of sales were basically flat as a percentage of sales compared to the prior year second quarter.
As a result of the above, net income for the second quarter of 2010 was $11,873,000, 17 cents per common share ($8,620,000, 12 cents per common share in 2009), an increase of 41.7% per common share.
For the six months ended June 30, 2010, total Leon's sales were $413,396,000 including $87,821,000 of franchise sales ($405,131,000 including $87,368,000 of franchise sales in 2009), an increase of 2.0% and net income was $23,843,000, 34 cents per common share ($17,191,000, 24 cents per common share in 2009), an increase of 41.7% per common share.
Annual Financial Information
($ in thousands, except earnings
per share and dividends) 2009 2008 2007
Net corporate sales 703,180 740,376 637,456
Leon franchise sales 194,290 209,848 195,925
Total Leon sales 897,470 950,224 833,381
Net income 56,864 63,390 58,494
Earnings per share
Basic $0.80 $0.90 $0.83
Diluted $0.78 $0.87 $0.80
Total Assets 529,156 513,408 475,226
Common Share Dividends Declared $0.48 $0.38 $0.2725
Convertible, Non-Voting Shares
Dividends Declared $0.14 $0.14 $0.14
Liquidity and Financial Resources
($ in thousands, except dividends
per share)
Balances as at: June 30/10 Dec. 31/09 June 30/09
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Cash, cash equivalents and
marketable securities (including
restricted marketable securities) 175,703 170,726 130,172
Accounts receivable 20,013 31,501 16,933
Inventory 92,925 83,957 96,473
Total assets 532,421 529,156 502,517
Working capital 178,527 164,759 142,889
Current Prior Prior
Quarter Quarter Quarter
For the 3 months ended June 30/10 Dec. 31/09 June 30/09
---------- ---------- ----------
Cash flow from operations 18,626 48,444 13,961
Purchase of capital assets 4,568 1,480 5,180
Repurchase of capital stock 814 3,023 384
Dividends paid 4,937 19,111 4,953
Dividends paid per share $0.07 $0.27 $0.07
Cash and marketable securities (including restricted marketable securities) increased by $7,445,000 in the quarter mainly as the result of the net income generated from operations.
Marketable securities consist primarily of bonds with maturities not exceeding 5 years with an interest rate range of 0.341% to 6.65% and are stated at market value.
As part of the warranty reinsurance agreement with a subsidiary, the Company has pledged assets, which are part of the investment portfolio. The pledged assets are for the benefit of the primary insurance company. The assets are in the form of a trust with a financial institution amounting to $19,319,000.
Inventory increased by $7,303,000 from the first quarter of 2010. The increase is the result of timing differences in receiving furniture from Asia. When compared to the prior year, June 30, 2009, inventory is down despite higher sales year to date.
This year, construction is well on its way on a new 73,000 sq. ft. facility in Thunder Bay, Ontario which we plan to open before the end of this year. We will soon begin construction on a new 84,000 sq. ft. building in Regina, Saskatchewan that we plan to open by the spring of 2011. We have also signed leases for a 76,000 sq. ft. store in Guelph, Ontario and a 46,700 sq. ft. store in Rosemère, Quebec. We anticipate the opening of these showrooms, which will be completely renovated, by the summer of 2011. We also plan major renovations and additions to be complete by the end of the year at our Sault St. Marie and Sudbury stores. In addition, we have just recently signed two new franchises; Collingwood and Fort Frances, Ontario with anticipated grand openings this fall. At the present time, all funding for new store projects and renovations are scheduled to come from our existing cash resources.
Common Shares
At June 30, 2010, there were 70,486,975 common shares issued and outstanding. During the second quarter of 2010, 18,840 (2009 - 39,316) convertible, non-voting series 2002 shares were converted to common shares. The Company repurchased 67,059 (2009 - 39,468) of its common shares on the open market at an average cost of $12.15 pursuant to the terms and conditions of our current Normal Course Issuer Bid. All shares repurchased by the Company have been cancelled.
For the six month period ending June 30, 2010, the Company repurchased 67,059 common shares at an average price of $12.15 (2009 - 123,168 at an average price of $8.82) and 76,423 (2009 - 70,787) convertible, non-voting series 2002 shares were converted to common shares.
Commitments
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($ 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) 33,391 1,733 7,932 6,610 17,116
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Purchase obligations(2) 4,190 4,190 - - -
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Total contractual
obligations 37,581 5,923 7,932 6,610 17,116
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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.
(2) The estimated cost to complete construction in progress at one
location in Canada.
In addition, the Company has commitments related to redeemable shares as follows:
As at As at
June 30, December 31,
($ in thousands) 2010 2009
Authorized
2,284,000 convertible, non-voting, series
2002 shares
806,000 convertible, non-voting, series
2005 shares
1,222,000 convertible, non-voting, series
2009 shares
Issued
892,610 series 2002 shares (2009 - 969,033) $ 6,416 $ 6,965
689,513 series 2005 shares (2009 - 689,513) 6,511 6,511
1,207,000 series 2009 shares (2009 - 1,207,000) 10,683 10,683
Less employees share purchase loans (23,363) (23,776)
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Redeemable share liability 247 285
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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 $7.19 per series 2002 share, $9.44 per series 2005 share and $8.85 per series 2009 share. Dividends paid to holders of series 2002, 2005 and 2009 shares of approximately $401,000 (2009 - $261,000) have been used to reduce the respective shareholder loans.
During the second quarter 2010, 18,840 convertible, non-voting series 2002 shares were converted into common shares with a stated value of $135,000 (2009 - 39,316 for a stated value of $283,000). For the six month period, 76,423 convertible non-voting series 2002 shares were converted into common shares with a stated value of $549,000 (2009 - 70,787 for a stated value of $509,000).
During the second quarter 2009, the Company issued 1,207,000 series 2009 shares for proceeds of $10,683,000. In addition, the Company advanced non-interest bearing loans in the amount of $10,683,000 to certain of its employees to acquire these shares.
Quarterly Results (2010, 2009, 2008)
Quarterly Income Statement ($ in thousands, except earnings per share)
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Quarter Ended Quarter Ended
June 30 March 31
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2010 2009 2010 2009
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Leon corporate sales 166,784 165,238 158,791 152,525
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Leon franchise sales 45,493 44,693 42,328 42,675
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Total Leon sales 212,277 209,931 201,119 195,200
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Net income per share $0.17 $0.12 $0.17 $0.12
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Fully diluted per share $0.16 $0.12 $0.16 $0.12
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Quarter Ended Quarter Ended
December 31 September 30
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2009 2008 2009 2008
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Leon corporate sales 197,986 206,088 187,431 202,985
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Leon franchise sales 57,679 63,803 49,243 56,219
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Total Leon sales 255,665 269,891 236,674 259,204
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Net income per share $0.34 $0.33 $0.22 $0.25
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Fully diluted per share $0.33 $0.32 $0.21 $0.24
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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 December 31, 2009. Certain of these policies involve critical accounting estimates because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.
Revenue Recognition
Sales are recognized as revenue for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customers' home.
The Company offers customers the option to finance purchases through various third party financing companies. In situations where a customer elects to take advantage of delayed payment terms, the costs of financing these sales are deducted from sales. Finance costs deducted from sales year to date for 2010 have decreased when compared to the same period for 2009. The cost decrease is a result of the fewer extended promotional terms offered in 2010.
During 2009, extended promotional terms were offered to coincide with the Company's 100th Anniversary.
Inventories
The Company measures inventories at the lower of cost, determined on a first-in, first-out basis, and net realizable value.
The Company estimates the net realizable value as the amount at which inventories are expected to be sold by taking into account fluctuations of retail prices due to prevailing market conditions. If required, inventories are written down to net realizable value when the cost of inventories is estimated to not be recoverable due to obsolescence, damage or declining selling prices.
Reserves for slow moving and damaged inventory are deducted in our evaluation of inventories. The reserve for slow moving inventory is based on many years of historic retail experience. The reserve is calculated by analyzing all inventory on hand older than one year. Damaged inventory is coded as such and placed in specific locations. The amount of damaged reserve is determined by specific product categories.
The Company's inventory amount encompasses one category which is goods purchased and held for resale in the ordinary course of business. The amount of inventory recognized as an expense for the three and six month periods ended June 30, 2010 was $97,904,000 and $189,037,000 (2009 - $100,009,000 and $190,160,000) and is presented within cost of sales on the consolidated statements of income. There were inventory write-downs of $332,000 (2009 - $216,000) recognized as an expense during the period ended June 30, 2010. As at June 30, 2010, the inventory markdown provision totalled $4,000,000 (2009 - $3,419,000). There were no reversals of any write-down for the period ended June 30, 2010. Furthermore none of the Company's inventory has been pledged as security for any liabilities of the Company.
Warranty Revenue
Warranty revenues are deferred and taken into income on a straight-line basis over the life of the warranty period. Warranty revenues included in sales year to date for 2010 are $8,238,000 compared to $8,008,000 in 2009. Warranty expenses deducted through costs of goods sold year to date for 2010 are $2,846,000 compared to $2,870,000 in 2009. Warranty repairs for particular electronic products have started to decrease due to the replacement of these products with newer technologically advanced products.
Franchise Royalties
Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisees' gross sales. This royalty income is recorded by the Company on an accrual basis under the heading "other income" and is up 0.3% year to date for 2010 compared to 2009 which is in line with the increase in franchise sales for the six month period ended June 30, 2010.
Volume Rebates
The Company receives vendor rebates on certain products based on the volume of purchases made during specified periods. The rebates are deducted from the inventory value of goods received and are recognized as a reduction of cost of goods sold as sales occur.
Pending Changes to Accounting Policies
International Financial Reporting Standards ("IFRS")
In March 2009, the Accounting Standards Board ("AcSB") issued its exposure draft "Adopting IFRS in Canada, II" which reconfirmed that publicly accountable enterprises are required to adopt International Financial Reporting Standards, as issued by the International Accounting Standards Board ("IASB"), for fiscal years beginning on or after January 1, 2011. Accordingly, the Company will be required to adopt IFRS on January 1, 2011, including interim periods in fiscal 2011. Comparative interim and annual information will be required for the year ending December 31, 2010.
The Company has commenced the process to transition from current Canadian GAAP to IFRS. As previously stated, we have established an internal project leader that is led by executive management and includes key participants from various areas of the Company as necessary to plan and achieve a smooth transition to IFRS. Periodic progress reporting to the audit committee on the status of the IFRS implementation has been ongoing since fiscal year 2009.
The Company has mostly completed the detailed impact analysis phase of its conversion project for the standards that affect the transition to IFRS. The Company is currently focusing its efforts on the solutions development phase. To date, the project is progressing according to plan. The following table summarizes the key activities of the Company's IFRS conversion project:
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Key Activities Target Milestones Current Status
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Identify differences Complete assessment of Completed.
between IFRS and differences between IFRS
Canadian GAAP. and GAAP.
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Select accounting Review and approval of Under management review.
policy choices. policy decisions by
Q3 2010.
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Evaluate and select Confirm selection of Completed (see section
which IFRS 1 exemptions by Q2 2010. below).
exemptions will be
taken on transition
to IFRS.
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Prepare financial Management approval and In progress.
statements and audit committee review
note disclosures of preliminary pro forma
in compliance with financial statements
IFRS. and note disclosures
during the second half
of fiscal 2010.
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Quantify the effect Quantification of the In progress.
of converting to effect of the conversion
IFRS. by beginning of Q4 2010.
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Prepare first time Reconciliation completed Differences currently
adoption and approved by being quantified.
reconciliation changeover date. Reconciliation to be
required under developed during Q4 of
IFRS 1. 2010.
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Identify required Complete a review of Identification of
changes to the systems and process to changes required to the
financial system address additional financial systems was
based on the systems required to preliminarily determined
implementation implement IFRS. to be minimal.
of IFRS.
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The table below provides a brief summary of select IFRS that may impact Leon's, their differences from Canadian Generally Accepted Accounting Principles ("GAAP") and their potential impact to the Company. The table is not comprehensive and does not include all of the differences from GAAP for the standards noted. Also, the table does not include all the standards that may require changes for the transition to IFRS. Although nothing has been identified to date, ongoing work relating to other standards not presented in the table may possibly have a significant impact on the Company's consolidated financial statements.
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Standards Difference from GAAP Potential Impact
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Presentation and IFRS requires This will be the most
disclosure significantly more significant impact to
disclosure than GAAP for the Company. The other
certain standards. In differences and impacts
some cases, IFRS also noted throughout this
requires different table will cause
presentation on the measurement differences,
balance sheet and income but based on historical
statement. In addition, analysis and current
a new statement entitled future projections their
"Consolidated Statement impact on the operating
of Changes in Equity" profit is not expected
will be included upon to be significant. The
the conversion to IFRS. increased disclosure
requirements will
necessitate adjustments
to some current
processes and the
implementation of new
financial reporting
processes to ensure the
appropriate data is
collected for disclosure
purposes.
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Property, plant and Significant asset The annual amortization
equipment (PP&E) components must be expense may change to
depreciated separately. reflect further
This accounting treatment componentization of the
is commonly referred to Company's PP&E.
as componentization
of PP&E.
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First-time adoption IFRS contains explicit The Company has selected
guidance on first-time the available elections
adoption of IFRS. There the Company wishes to
are several elections make and will apply them
available to ease the in preparing the opening
transition to IFRS and balance sheet under
some mandatory exemptions IFRS. The following
from retrospective elections will be made
application of IFRS. under IFRS 1:
- The Company has
elected to use the
exemption to carry
forward our Canadian
GAAP accounting of the
Appliance Canada
business acquisition.
- The Company does not
elect to record
property, plant and
equipment at fair
value on transition.
The Company is
accounting for these
items at their
historical cost.
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The Company will continue to report throughout 2010 on its conclusions and accounting policy choices on the standards noted above. The Company's external auditors will commence their detailed review of the Company's accounting policy position papers during the third quarter of 2010. In addition to disclosing qualitative analysis on the impacts of the transition to IFRS, the Company still expects to be in a position to disclose quantitative information in the third quarter of 2010. While the Company believes it has performed an appropriate level of analysis in selecting its IFRS accounting policies, actual quantitative results may reveal additional impacts to the Company that were not anticipated. The IASB has several projects slated for completion in 2010 and 2011 that may impact the transition to IFRS and the financial statements of the Company. The Company continues to monitor the IASB's progress on these projects and their impact on the Company's transition to IFRS.
Impact on information systems and technology
The most significant information system challenge for the IFRS conversion is to ensure the Company has the ability to track its IFRS adjustments in the year of transition and that any new IFRS compliance reports can be produced to facilitate the preparation of IFRS financial statements. The Company is confident in its ability to track IFRS adjustments throughout 2010 to facilitate the preparation of the increased note disclosure required under IFRS. As of now, the transition is not expected to have a significant impact on the Company's other information systems.
Impact on internal controls over financial reporting and disclosure controls and procedures
As described further below, in accordance with its conversion plan the Company is continually reviewing its internal controls over financial reporting and its disclosure controls and procedures and will update these as required to ensure they are appropriate for reporting under IFRS.
As noted, the transition to IFRS for the Company mainly affects the presentation and disclosure of its financial statements. This may lead to process changes in order to facilitate the reporting of more detailed information in the notes to the financial statements, but it is not currently expected to lead to many measurement or fundamental differences in the accounting processes used by the Company. Also, the Company has implemented controls over its IFRS adjustment process, which primarily includes review by qualified members of Leon's head office finance and accounting department.
The conversion to IFRS exposes the Company to control risks when there are new or modified processes. To address these risks the Company has been designing controls for areas where increased judgment is required.
Financial reporting expertise
Over the past couple of years, the Company's key financial reporting managers have attended several IFRS training courses. The Company's IFRS project leader has also reviewed detailed technical accounting training internally on the differences between GAAP and IFRS as they apply to the Company.
Business Activities
The transition to IFRS is currently having a minimal impact on Leon's operational activities.
Disclosure Controls and Internal Control Over Financial Reporting
Based on the evaluation of disclosure controls and procedures, the CEO and the CFO have concluded that the Company's disclosure controls and procedures were effective as at June 30, 2010.
There have been no changes in the Company's internal control over financial reporting during the period ended on June 30, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Outlook
Similar to the first quarter of 2010, we saw a slight improvement in same store sales from the prior year quarter which was aided by the general improvement in consumer confidence. However, current trends are indicating that there may be a slight slowdown in the Canadian economy going forward. In addition, the new HST measures that went into place July 1, 2010 in Ontario, along with increasing interest rates, may slow down consumer spending going forward. To counter this, we plan a very robust marketing and merchandising campaign for the balance of the year. Even with these measures in place, growing sales and profits for the balance of this year will be very challenging. Despite this, our strong financial position coupled with our experience in adjusting to changing market conditions, allow us to look to the future with cautious optimism.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian generally accepted accounting principles.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed Management's Discussion and Analysis and the financial statements, and recommended the Board of Directors approve them. Following review by the full Board of Directors, the financial statements and the MD&A were approved.
Forward-Looking Statements
This MD&A, in particular the section under the heading "Outlook", includes forward-looking statements, which are based on certain assumptions and reflect Leon's Furniture Limited's current expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: a further slowdown in the Canadian economy; drop in consumer confidence and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Leon's Furniture Limited
P.O. Box 1100, Stn. "B"
Weston, ON
M9L 2R8
Phone: (416) 243-4073 Fax: (416) 243-7890
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim financial statements of the company have been prepared by and are the responsibility of the company's management.
No auditor has performed a review of these financial statements.
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Terrence T. Leon Dominic Scarangella
President & Chief Executive Vice President & Chief Financial
Officer Officer
Dated as of the 13th day of August, 2010
Leon's Furniture Limited-Meubles Leon Ltee
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
June 30 December 31
($ in thousands) 2010 2009
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ASSETS
Current
Cash and cash equivalents 65,497 58,301
Marketable securities 90,887 94,337
Restricted marketable securities 19,319 18,088
Accounts receivable 20,013 31,501
Income taxes recoverable 3,139 -
Inventory 92,925 83,957
Future tax assets 824 1,133
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Total current assets 292,604 287,317
Prepaid expenses 1,438 1,560
Goodwill 11,282 11,282
Intangibles 5,215 5,334
Future tax assets 11,777 11,465
Property, plant & equipment net 210,105 212,198
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532,421 529,156
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 73,817 83,880
Income taxes payable - 1,958
Customers' deposits 18,270 15,632
Dividends payable 4,936 4,938
Deferred warranty plan revenue 17,054 16,150
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Total current liabilities 114,077 122,558
Deferred warranty plan revenue 20,958 22,248
Redeemable share liability 247 383
Future tax liabilities 9,316 8,829
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Total liabilities 144,598 154,018
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Shareholders' equity
Common shares 18,222 17,704
Retained earnings 370,763 357,576
Accumulated other comprehensive income (1,162) (142)
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Total shareholders' equity 387,823 375,138
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532,421 529,156
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended June 30th 3 months 6 months
($ in thousands) ended ended
2010 2009 2010 2009
Sales 166,784 165,238 325,575 317,763
Cost of sales 100,187 102,343 193,685 194,785
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Gross profit 66,597 62,895 131,890 122,978
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Operating expenses (income)
Salaries and commissions 26,305 26,070 51,028 50,314
Advertising 6,886 9,047 14,476 18,200
Rent and property taxes 3,547 2,757 7,035 5,601
Amortization 3,975 4,169 7,943 8,115
Employee profit-sharing plan 1,212 1,030 2,374 1,867
Other operating expenses 10,487 10,208 20,810 20,532
Interest income (663) (766) (1,354) (1,618)
Other income (2,369) (2,251) (5,249) (5,234)
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49,380 50,264 97,063 97,777
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Income before income taxes 17,217 12,631 34,827 25,201
Provision for income taxes 5,344 4,011 10,984 8,010
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Net income for the period 11,873 8,620 23,843 17,191
Retained earnings, beginning
of the period 364,609 341,910 357,576 338,960
Dividends declared (4,936) (4,949) (9,873) (9,902)
Excess of cost of share
repurchase over carrying value
of related shares (783) (365) (783) (1,033)
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Retained earnings, end of period 370,763 345,216 370,763 345,216
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Weighted average number of common
shares outstanding ('000's)
Basic 70,525 70,696 70,520 70,725
Diluted 73,323 71,831 73,299 71,739
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Earnings per share
Basic $0.17 $0.12 $0.34 $0.24
Diluted $0.16 $0.12 $0.32 $0.24
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Dividends declared per share
Common $0.07 $0.07 $0.14 $0.14
Convertible, non-voting - - - -
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period ended June 30th 3 months 6 months
($ in thousands) ended ended
2010 2009 2010 2009
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OPERATING ACTIVITIES
Net income for the period 11,873 8,620 23,843 17,191
Add (deduct) items not involving
a current cash payment
Amortization of property,
plant & equipment 3,786 3,981 7,565 7,803
Amortization of intangible
assets 189 188 378 312
Amortization of deferred
warranty revenue (4,133) (4,030) (8,238) (8,008)
Loss (gain) on sale of
marketable securities (43) 100 (164) 134
Future tax expense 225 2 659 300
Gain on sale of property,
plant & equipment (2) (16) (6) (17)
Cash received on warranty sales 3,928 3,880 7,852 7,916
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15,823 12,725 31,889 25,631
Net change in non-cash working
capital balances related to
operations 2,803 1,236 (10,392) (14,836)
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Cash provided by operating
activities 18,626 13,961 21,497 10,795
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INVESTING ACTIVITIES
Purchase of property, plant
& equipment (4,568) (5,180) (4,966) (7,083)
Purchase of intangibles - - (259) -
Proceeds on sale of property,
plant & equipment 3 20 11 22
Purchase of marketable
securities (125,853) (68,538) (198,588) (118,838)
Proceeds on sale of marketable
securities 143,263 64,840 199,777 119,992
Issuance of series 2009
redeemable share liability - 10,683 - 10,683
Decrease (increase) in employee
share purchase loans 142 (10,400) 413 (10,076)
Purchase of Appliance Canada Ltd. - (842) - (2,382)
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Cash provided by (used in)
investing activities 12,987 (9,417) (3,612) (7,682)
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FINANCING ACTIVITIES
Dividends paid (4,937) (4,953) (9,875) (9,905)
Repurchase of common shares (814) (384) (814) (1,091)
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Cash used in financing activities (5,751) (5,337) (10,689) (10,996)
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Net increase (decrease) in cash
and cash equivalents during
the period 25,862 (793) 7,196 (7,883)
Cash and cash equivalents,
beginning of period 39,635 32,393 58,301 39,483
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Cash and cash equivalents,
end of period 65,497 31,600 65,497 31,600
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended June 30th
($ in thousands)
Net
Tax of tax
2010 effect 2010
Net income for the period 11,873 - 11,873
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during
the period (981) (147) (834)
Reclassification adjustment for net
gains and (losses) included in net
income (69) (11) (58)
---------------------------------
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,050) (158) (892)
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Comprehensive income for the period 10,823 (158) 10,981
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Net
Tax of tax
2009 effect 2009
Net income for the period 8,620 - 8,620
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during
the period 1,145 199 946
Reclassification adjustment for net
gains and (losses) included in net
income 84 14 70
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Change in unrealized gains on
available-for-sale financial assets
arising during the period 1,229 213 1,016
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Comprehensive income for the period 9,849 213 9,636
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Six month period ended June 30th
($ in thousands)
Net
Tax of tax
2010 effect 2010
Net income for the period 23,843 23,843
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during
the period (1,266) (184) (1,082)
Reclassification adjustment for net
gains and (losses) included in net
income 72 10 62
---------------------------------
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,194) (174) (1,020)
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Comprehensive income for the period 22,649 (174) 22,823
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Net
Tax of tax
2009 effect 2009
Net income for the period 17,191 - 17,191
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during
the period 15 8 7
Reclassification adjustment for net
gains and (losses) included in net
income 53 8 45
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Change in unrealized gains on
available-for-sale financial assets
arising during the period 68 16 52
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Comprehensive income for the period 17,259 16 17,243
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PREPARATION
These unaudited interim consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles ("GAAP") for interim financial statements. They do
not include all of the disclosures required by Canadian generally
accepted accounting principles for annual financial statements and
accordingly, the interim financial information should be read in
conjunction with the Company's annual consolidated financial statements.
The interim financial information has been prepared using the same
accounting policies as set out in note 1 to the consolidated financial
statements for the year ended December 31, 2009.
2. PENDING CHANGES IN ACCOUNTING POLICIES
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In March 2009, the Accounting Standards Board ("AcSB") issued its
exposure draft "Adopting IFRS in Canada, II" which reconfirmed that
publicly accountable enterprises are required to adopt International
Financial Reporting Standards (IFRS) for fiscal years beginning on or
after January 1, 2011. Accordingly, the Company will be required to adopt
IFRS on January 1, 2011, including interim periods in fiscal 2011.
Comparative interim and annual information will be required for the year
ending December 31, 2010. As part of its transition to IFRS, the Company
has developed an implementation plan which includes an extensive analysis
of accounting differences between Canadian GAAP and IFRS and the
assessment of the expected impact of the accounting differences on its
consolidated financial statements. The Company is in the process of
transitioning its financial statement reporting, presentation and
disclosure to IFRS in time to meet the January 1, 2011 deadline. The
process will be ongoing as new standards and recommendations are issued
by the International Accounting Standards Board and AcSB. Further details
regarding the Company's transition to IFRS are included in the Company's
June 30, 2010 Management's Discussion and Analysis filed on The System
for Electronic Document Analysis and Retrieval ("SEDAR").
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
As at June 30, 2010 accumulated other comprehensive income was comprised
of the unrealized losses on marketable securities of $1,378,000
($1,162,000 net of tax).
2010 2009
Balance, beginning of period $ (142) $ (2,095)
Changes in unrealized (losses) gains on
available-for-sale financial assets arising
during the period (1,020) 52
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Balance, end of period $ (1,162) $ (2,043)
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4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three
month period ending June 30, 2010 were $6,912,000 (2009 - $8,064,000) and
for the six month period were $15,783,000 (2009 - $16,684,000).
5. SHARE CAPITAL
During the quarter, 67,059 common shares were repurchased (2009 - 39,468)
on the open market pursuant to the terms and conditions of the current
Normal Course Issuer Bid at a net cost of approximately $814,000 (2009 -
net cost of approximately $384,000). For the six month period, the
Company repurchased 67,059 (2009 - 123,168) common shares at a net cost
of approximately $814,000 (2009 - $1,091,000). All shares repurchased by
the Company pursuant to its Normal Course Issuer Bids have been
cancelled. The repurchase of common shares resulted in a reduction of
share capital in the amount of approximately $31,000 (2009 - $58,000).
The excess net cost over the carrying value of the shares of
approximately $783,000 (2009 - $1,033,000) has been recorded as a
reduction in retained earnings.
During the quarter ended June 30, 2010, 18,840 convertible non-voting
series 2002 shares (2009 - 39,316) were converted into common shares with
a stated value of approximately $135,000 (2009 - $283,000). For the six
month period, 76,423 convertible non-voting series 2002 shares (2009 -
70,787) were converted to common shares with a stated value of
approximately $549,000 (2009 - $509,000).
During the second quarter of 2009, the Company issued $1,207,000 series
2009 shares for proceeds of $10,683,000. In addition, the Company
advanced non-interest bearing loans in the amount of $10,683,000 to
certain of its employees to acquire these shares.
6. CLASSIFICATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
As at June 30, 2010, the classification of the Company's financial
instruments is as follows:
June 30, 2010
Other
Loans Finan-
and cial
Avail- Receiv- Liabil-
Held for able ables ities
Trading for Sale (amort- (amort- Total
Financial (fair (fair ized ized Carrying Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 65,497 - - - 65,497 65,497
Accounts
receivable - - 20,013 - 20,013 20,013
Marketable
securities - 90,887 - - 90,887 90,887
Restricted
marketable
securities - 19,319 - - 19,319 19,319
Income taxes
recoverable - - 3,139 - 3,139 3,139
Financial
Liabilities
Accounts
payable and
accrued
liabilities - - - 73,817 73,817 73,817
Redeemable
share
liability - - - 247 247 247
December 31, 2009
Other
Loans Finan-
and cial
Avail- Receiv- Liabil-
Held for able ables ities
Trading for Sale (amort- (amort- Total
Financial (fair (fair ized ized Carrying Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 58,301 - - - 58,301 58,301
Accounts
receivable - - 31,501 - 31,501 31,501
Marketable
securities - 94,337 - - 94,337 94,337
Restricted
marketable
securities - 18,088 - - 18,088 18,088
Financial
Liabilities
Accounts
payable and
accrued
liabilities - - - 83,880 83,880 83,880
Income taxes
payable - - - 1,958 1,958 1,958
Redeemable
share
liability - - - 383 383 383
The Company's fair value measurements of financial instruments within the
fair value hierarchy, as at June 30, 2010 and December 31, 2009 consists
primarily of investments valued using Level 1 inputs.
RISK MANAGEMENT
The Company is exposed to various risks associated with its financial
instruments. These risks are summarized as credit risk, liquidity risk
and market risk. The significant risks for the Company's financial
instruments are:
i) Credit risk
The Company believes at this point in time, it has some credit risk
associated to its accounts receivable as it relates to the Appliance
Canada division that is partly mitigated by the Company's credit
management practices. The majority of the Company's sales are paid
through cash, credit card or third party finance. The Company relies
on two third party credit suppliers to supply financing alternatives
to our customers.
ii) Liquidity risk
The Company has no outstanding debt and does not rely upon available
credit facilities to finance operations or to finance committed
capital expenditures. The portfolio of marketable securities
consists primarily of Canadian and International bonds. There is no
immediate need for cash from our investment portfolio.
iii) Foreign currency risk
The Company is exposed to foreign currency exchange rate risk. Some
merchandise is paid for in U.S. dollars. The foreign currency cost
is included in the inventory cost. The Company does not believe it
has significant foreign currency risk with respect to its accounts
payable in U.S. dollars.
iv) Market price risk
The Company is exposed to fluctuations in the market prices of its
marketable securities that are classified as available for sale.
Changes in the fair value of marketable securities are recorded, net
of income taxes, in accumulated other comprehensive income (note 3).
The risk is managed by ensuring a relatively conservative asset
allocation of bonds and equities.
7. CAPITAL MANAGEMENT
The Company defines capital as shareholders' equity. The Company's
objectives when managing capital are to:
- ensure sufficient liquidity to support its financial obligations and
execute its operating and strategic plans; and
- utilize working capital to negotiate favourable supplier agreements
both in respect of early payment discounts and overall payment terms.
For further information: Dominic Scarangella, Tel: 416.243.4073
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