TORONTO, Aug. 13 /CNW/ -- TORONTO, Aug. 13 /CNW/ - For the three
months ended June 30, 2010, total Leon's sales were $212,277,000
including $45,493,000 of franchise sales ($209,931,000 including
$44,693,000 of franchise sales in 2009), an increase of 1.1%. Net
income was $11,873,000, 17 cents per common share ($8,620,000, 12
cents per common share in 2009), an increase of 41.7% per common
share. For the six months ended June 30, 2010, total Leon's sales
were $413,396,000 including $87,821,000 of franchise sales
($405,131,000 including $87,368,000 of franchise sales in 2009), an
increase of 2.0% and net income was $23,843,000, 34 cents per
common share ($17,191,000, 24 cents per common share in 2009), an
increase of 41.7% per common share. For the second quarter of 2010,
we are pleased to report higher sales and a significant improvement
in profits when compared to the second quarter of 2009. Higher
sales reflect a general improvement in the economy. The profit
improvement was mainly the result of three key factors: higher
sales compared to the prior year's quarter; an improvement in our
gross margin which was aided by the strengthening of the Canadian
dollar along with a more favourable product mix; and the
continuation of improved productivity and expense controls that
were initiated in the prior year. Although we are satisfied with
the results year to date, we believe that we must remain vigilant
for the balance of 2010 in order to continue to improve the
performance of our Company. Pursuant to our robust expansion plans
announced last quarter, construction is well on its way on a new
73,000 sq. ft. facility in Thunder Bay, Ontario which we plan to
open before the end of this year. We will soon begin construction
on a new 84,000 sq. ft. building in Regina, Saskatchewan that we
plan to open by the spring of 2011. In addition, we have signed
leases for a 76,000 sq. ft. store in Guelph, Ontario and a 46,700
sq. ft. store in Rosemère, Quebec. We anticipate the opening of
these showrooms, which will be completely renovated, by the summer
of 2011. We also plan major renovations and additions to be
complete by the end of the year at our Sault St. Marie and Sudbury
stores. Finally, we have just recently signed two new franchises;
Collingwood and Fort Frances, Ontario with anticipated grand
openings this fall. In light of our strong financial performance
year to date and excellent liquidity, the Directors are pleased to
declare an increase in the quarterly dividend from 7 cents per
common share to 9 cents per common share payable on the 8th day of
October 2010 to shareholders of record at the close of business on
the 8th day of September 2010. As of 2007, dividends paid by Leon's
Furniture Limited are "eligible dividends" pursuant to the changes
to the Income Tax Act under Bill C-28, Canada. The Directors have
also approved, subject to obtaining regulatory approvals, the
continuation of the Company's ongoing Normal Course Issuer Bid,
which expires on September 9, 2010. Pursuant to the continued bid,
the Company intends, in the twelve months commencing September 10,
2010, to purchase up to the lesser of 4.99% of its Common Shares
outstanding on August 30, 2010, and the amount equal to 4.99% of
its Common Shares outstanding on the date the Toronto Stock
Exchange accepts the notice of intention to make a normal course
issuer bid. Since September 10, 2009, the date on which Leon's
current issuer bid commenced, the Company has purchased 413,317
Common Shares at an average price of $10.38 per share. The
Company's Board of Directors believes that the purchase of its
common shares is an appropriate use of its corporate funds, given
its very strong liquidity position. EARNINGS PER SHARE FOR EACH
QUARTER ----------------------------------- MARCH 31 JUNE 30 SEPT.
30 DEC. 31 YEAR -------- ------- -------- ------- ---- TOTAL -----
2010 - Basic 17 cents 17 cents $0.34 - Fully Diluted 16 cents 16
cents $0.32 2009 - Basic 12 cents 12 cents 22 cents 34 cents $0.80
- Fully Diluted 12 cents 12 cents 21 cents 33 cents $0.78 2008 -
Basic 16 cents 16 cents 25 cents 33 cents $0.90 - Fully Diluted 15
cents 16 cents 24 cents 32 cents $0.87 LEON'S FURNITURE LIMITED -
MEUBLES LEON LTEE Mark J. Leon Chairman of the Board MANAGEMENT'S
DISCUSSION AND ANALYSIS August 13, 2010 Management's Discussion and
Analysis ("MD&A") should be read in conjunction with the
unaudited consolidated interim financial statements of the Company
for the six months ended June 30, 2010, the MD&A for the year
ended December 31, 2009, the audited consolidated financial
statements for the year ended December 31, 2009 and the Company's
Annual Information Form dated March 24, 2010. Financial Statements
Governance Practice Leon's Furniture Limited's financial statements
have been prepared in accordance with Canadian Generally Accepted
Accounting Principles and the amounts expressed are in Canadian
dollars. This MD&A is intended to provide readers with the
information that management believes is required to gain an
understanding of Leon's Furniture Limited's current results and to
assess the Company's future prospects. Accordingly, sections of
this report contain forward-looking statements that are based on
current plans and expectations. These forward-looking statements
are effected by risks and uncertainties that could have a material
impact on future prospects. Readers are cautioned that actual
events and results will vary. The Audit Committee of the Board of
Directors of Leon's Furniture Limited reviewed the MD&A and the
financial statements, and recommended that the Board of Directors
approve them. Following review by the full Board of Directors, the
financial statements and the MD&A were approved. Introduction
Leon's Furniture Limited has been in the furniture retail business
for over 100 years. The company's 38 corporate and 28 franchise
stores can be found in every province except British Columbia. Main
product lines sold at retail include furniture, appliances and
electronics. Revenues and Expenses For the three months ended June
30, 2010, total Leon's sales were $212,277,000 including
$45,493,000 of franchise sales ($209,931,000 including $44,693,000
of franchise sales in 2009), an increase of 1.1%. Leon's corporate
sales of $166,784,000 in the second quarter of 2010, increased by
$1,546,000 or 0.9%, compared to the second quarter of 2009. The
increase in sales in the second quarter compared to the prior year
was the result of the growth of new stores. Same store corporate
sales were up marginally compared to the prior year. Leon's
franchise sales of $45,493,000 in the second quarter of 2010
increased by $800,000, or 1.8% compared to the second quarter of
2009. Our gross margin for the second quarter of 2010 of 39.93% has
increased 1.8% from the second quarter 2009. Similar to the first
quarter 2010, we saw our product margin on imported goods increase
in the quarter due to the appreciation of the Canadian dollar
versus the US dollar which resulted in lower product costs. Higher
margins were also experienced as a result of a more favorable
product mix and a reduction in our sales finance expenses compared
to the prior year second quarter. Net operating expenses of
$49,380,000 were down $884,000 or 1.8% for the second quarter of
2010 compared to the second quarter of 2009. Payroll and commission
costs were up 0.9% in the quarter compared to the prior year. This
slight increase was mainly the result of the yearly increase in
salary and wage costs at the beginning of April 2010 and the
increase in sales commissions. The significant decrease in net
operating expenses for the second quarter of 2010 mainly relates to
the decrease in advertising costs. Advertising expenses decreased
$2,161,000 or 23.9% for the second quarter compared to the prior
year. In 2009, the Company enhanced its marketing campaign to
celebrate the Company's 100th Anniversary. For the most part, all
other operating costs as a percentage of sales were basically flat
as a percentage of sales compared to the prior year second quarter.
As a result of the above, net income for the second quarter of 2010
was $11,873,000, 17 cents per common share ($8,620,000, 12 cents
per common share in 2009), an increase of 41.7% per common share.
For the six months ended June 30, 2010, total Leon's sales were
$413,396,000 including $87,821,000 of franchise sales ($405,131,000
including $87,368,000 of franchise sales in 2009), an increase of
2.0% and net income was $23,843,000, 34 cents per common share
($17,191,000, 24 cents per common share in 2009), an increase of
41.7% per common share. Annual Financial Information ($ in
thousands, except earnings per share and dividends) 2009 2008 2007
Net corporate sales 703,180 740,376 637,456 Leon franchise sales
194,290 209,848 195,925 Total Leon sales 897,470 950,224 833,381
Net income 56,864 63,390 58,494 Earnings per share Basic $0.80
$0.90 $0.83 Diluted $0.78 $0.87 $0.80 Total Assets 529,156 513,408
475,226 Common Share Dividends Declared $0.48 $0.38 $0.2725
Convertible, Non-Voting Shares Dividends Declared $0.14 $0.14 $0.14
Liquidity and Financial Resources ($ in thousands, except dividends
per share) Balances as at: June 30/10 Dec. 31/09 June 30/09
---------- ---------- ---------- Cash, cash equivalents and
marketable securities (including restricted marketable securities)
175,703 170,726 130,172 Accounts receivable 20,013 31,501 16,933
Inventory 92,925 83,957 96,473 Total assets 532,421 529,156 502,517
Working capital 178,527 164,759 142,889 Current Prior Prior Quarter
Quarter Quarter For the 3 months ended June 30/10 Dec. 31/09 June
30/09 ---------- ---------- ---------- Cash flow from operations
18,626 48,444 13,961 Purchase of capital assets 4,568 1,480 5,180
Repurchase of capital stock 814 3,023 384 Dividends paid 4,937
19,111 4,953 Dividends paid per share $0.07 $0.27 $0.07 Cash and
marketable securities (including restricted marketable securities)
increased by $7,445,000 in the quarter mainly as the result of the
net income generated from operations. Marketable securities consist
primarily of bonds with maturities not exceeding 5 years with an
interest rate range of 0.341% to 6.65% and are stated at market
value. As part of the warranty reinsurance agreement with a
subsidiary, the Company has pledged assets, which are part of the
investment portfolio. The pledged assets are for the benefit of the
primary insurance company. The assets are in the form of a trust
with a financial institution amounting to $19,319,000. Inventory
increased by $7,303,000 from the first quarter of 2010. The
increase is the result of timing differences in receiving furniture
from Asia. When compared to the prior year, June 30, 2009,
inventory is down despite higher sales year to date. This year,
construction is well on its way on a new 73,000 sq. ft. facility in
Thunder Bay, Ontario which we plan to open before the end of this
year. We will soon begin construction on a new 84,000 sq. ft.
building in Regina, Saskatchewan that we plan to open by the spring
of 2011. We have also signed leases for a 76,000 sq. ft. store in
Guelph, Ontario and a 46,700 sq. ft. store in Rosemère, Quebec. We
anticipate the opening of these showrooms, which will be completely
renovated, by the summer of 2011. We also plan major renovations
and additions to be complete by the end of the year at our Sault
St. Marie and Sudbury stores. In addition, we have just recently
signed two new franchises; Collingwood and Fort Frances, Ontario
with anticipated grand openings this fall. At the present time, all
funding for new store projects and renovations are scheduled to
come from our existing cash resources. Common Shares At June 30,
2010, there were 70,486,975 common shares issued and outstanding.
During the second quarter of 2010, 18,840 (2009 - 39,316)
convertible, non-voting series 2002 shares were converted to common
shares. The Company repurchased 67,059 (2009 - 39,468) of its
common shares on the open market at an average cost of $12.15
pursuant to the terms and conditions of our current Normal Course
Issuer Bid. All shares repurchased by the Company have been
cancelled. For the six month period ending June 30, 2010, the
Company repurchased 67,059 common shares at an average price of
$12.15 (2009 - 123,168 at an average price of $8.82) and 76,423
(2009 - 70,787) convertible, non-voting series 2002 shares were
converted to common shares. Commitments
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($ in thousands) Payments Due by Period
----------------------------------------------- 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.
--------------------------- --------------------------------
Terrence T. Leon Dominic Scarangella President & Chief
Executive Vice President & Chief Financial Officer Officer
Dated as of the 13th day of August, 2010 Leon's Furniture
Limited-Meubles Leon Ltee Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS (UNAUDITED) As at As at June 30
December 31 ($ in thousands) 2010 2009
-------------------------------------------------------------------------
ASSETS Current Cash and cash equivalents 65,497 58,301 Marketable
securities 90,887 94,337 Restricted marketable securities 19,319
18,088 Accounts receivable 20,013 31,501 Income taxes recoverable
3,139 - Inventory 92,925 83,957 Future tax assets 824 1,133
-------------------------------------------------------------------------
Total current assets 292,604 287,317 Prepaid expenses 1,438 1,560
Goodwill 11,282 11,282 Intangibles 5,215 5,334 Future tax assets
11,777 11,465 Property, plant & equipment net 210,105 212,198
-------------------------------------------------------------------------
532,421 529,156
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities 73,817 83,880 Income taxes payable - 1,958
Customers' deposits 18,270 15,632 Dividends payable 4,936 4,938
Deferred warranty plan revenue 17,054 16,150
-------------------------------------------------------------------------
Total current liabilities 114,077 122,558 Deferred warranty plan
revenue 20,958 22,248 Redeemable share liability 247 383 Future tax
liabilities 9,316 8,829
-------------------------------------------------------------------------
Total liabilities 144,598 154,018
-------------------------------------------------------------------------
Shareholders' equity Common shares 18,222 17,704 Retained earnings
370,763 357,576 Accumulated other comprehensive income (1,162)
(142)
-------------------------------------------------------------------------
Total shareholders' equity 387,823 375,138
-------------------------------------------------------------------------
532,421 529,156
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Leon's Furniture Limited-Meubles Leon Ltee CONSOLIDATED STATEMENTS
OF INCOME AND RETAINED EARNINGS (UNAUDITED) Period ended June 30th
3 months 6 months ($ in thousands) ended ended 2010 2009 2010 2009
Sales 166,784 165,238 325,575 317,763 Cost of sales 100,187 102,343
193,685 194,785
-------------------------------------------------------------------------
Gross profit 66,597 62,895 131,890 122,978
-------------------------------------------------------------------------
Operating expenses (income) Salaries and commissions 26,305 26,070
51,028 50,314 Advertising 6,886 9,047 14,476 18,200 Rent and
property taxes 3,547 2,757 7,035 5,601 Amortization 3,975 4,169
7,943 8,115 Employee profit-sharing plan 1,212 1,030 2,374 1,867
Other operating expenses 10,487 10,208 20,810 20,532 Interest
income (663) (766) (1,354) (1,618) Other income (2,369) (2,251)
(5,249) (5,234)
-------------------------------------------------------------------------
49,380 50,264 97,063 97,777
-------------------------------------------------------------------------
Income before income taxes 17,217 12,631 34,827 25,201 Provision
for income taxes 5,344 4,011 10,984 8,010
-------------------------------------------------------------------------
Net income for the period 11,873 8,620 23,843 17,191 Retained
earnings, beginning of the period 364,609 341,910 357,576 338,960
Dividends declared (4,936) (4,949) (9,873) (9,902) Excess of cost
of share repurchase over carrying value of related shares (783)
(365) (783) (1,033)
-------------------------------------------------------------------------
Retained earnings, end of period 370,763 345,216 370,763 345,216
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of common shares outstanding ('000's) Basic
70,525 70,696 70,520 70,725 Diluted 73,323 71,831 73,299 71,739
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share Basic $0.17 $0.12 $0.34 $0.24 Diluted $0.16
$0.12 $0.32 $0.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dividends declared per share Common $0.07 $0.07 $0.14 $0.14
Convertible, non-voting - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Leon's Furniture Limited-Meubles Leon Ltee CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED) Period ended June 30th 3 months 6 months
($ in thousands) ended ended 2010 2009 2010 2009
-------------------------------------------------------------------------
OPERATING ACTIVITIES Net income for the period 11,873 8,620 23,843
17,191 Add (deduct) items not involving a current cash payment
Amortization of property, plant & equipment 3,786 3,981 7,565
7,803 Amortization of intangible assets 189 188 378 312
Amortization of deferred warranty revenue (4,133) (4,030) (8,238)
(8,008) Loss (gain) on sale of marketable securities (43) 100 (164)
134 Future tax expense 225 2 659 300 Gain on sale of property,
plant & equipment (2) (16) (6) (17) Cash received on warranty
sales 3,928 3,880 7,852 7,916
-------------------------------------------------------------------------
15,823 12,725 31,889 25,631 Net change in non-cash working capital
balances related to operations 2,803 1,236 (10,392) (14,836)
-------------------------------------------------------------------------
Cash provided by operating activities 18,626 13,961 21,497 10,795
-------------------------------------------------------------------------
INVESTING ACTIVITIES Purchase of property, plant & equipment
(4,568) (5,180) (4,966) (7,083) Purchase of intangibles - - (259) -
Proceeds on sale of property, plant & equipment 3 20 11 22
Purchase of marketable securities (125,853) (68,538) (198,588)
(118,838) Proceeds on sale of marketable securities 143,263 64,840
199,777 119,992 Issuance of series 2009 redeemable share liability
- 10,683 - 10,683 Decrease (increase) in employee share purchase
loans 142 (10,400) 413 (10,076) Purchase of Appliance Canada Ltd. -
(842) - (2,382)
-------------------------------------------------------------------------
Cash provided by (used in) investing activities 12,987 (9,417)
(3,612) (7,682)
-------------------------------------------------------------------------
FINANCING ACTIVITIES Dividends paid (4,937) (4,953) (9,875) (9,905)
Repurchase of common shares (814) (384) (814) (1,091)
-------------------------------------------------------------------------
Cash used in financing activities (5,751) (5,337) (10,689) (10,996)
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the
period 25,862 (793) 7,196 (7,883) Cash and cash equivalents,
beginning of period 39,635 32,393 58,301 39,483
-------------------------------------------------------------------------
Cash and cash equivalents, end of period 65,497 31,600 65,497
31,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Leon's Furniture Limited-Meubles Leon Ltee CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME (UNAUDITED) Three month period ended June
30th ($ in thousands) Net Tax of tax 2010 effect 2010 Net income
for the period 11,873 - 11,873 Other comprehensive income, net of
tax Unrealized losses on available-for-sale financial assets
arising during the period (981) (147) (834) Reclassification
adjustment for net gains and (losses) included in net income (69)
(11) (58) --------------------------------- Change in unrealized
losses on available-for-sale financial assets arising during the
period (1,050) (158) (892) ---------------------------------
Comprehensive income for the period 10,823 (158) 10,981
--------------------------------- ---------------------------------
Net Tax of tax 2009 effect 2009 Net income for the period 8,620 -
8,620 Other comprehensive income, net of tax Unrealized gains on
available-for-sale financial assets arising during the period 1,145
199 946 Reclassification adjustment for net gains and (losses)
included in net income 84 14 70 ---------------------------------
Change in unrealized gains on available-for-sale financial assets
arising during the period 1,229 213 1,016
--------------------------------- Comprehensive income for the
period 9,849 213 9,636 ---------------------------------
--------------------------------- Six month period ended June 30th
($ in thousands) Net Tax of tax 2010 effect 2010 Net income for the
period 23,843 23,843 Other comprehensive income, net of tax
Unrealized losses on available-for-sale financial assets arising
during the period (1,266) (184) (1,082) Reclassification adjustment
for net gains and (losses) included in net income 72 10 62
--------------------------------- Change in unrealized losses on
available-for-sale financial assets arising during the period
(1,194) (174) (1,020) ---------------------------------
Comprehensive income for the period 22,649 (174) 22,823
--------------------------------- ---------------------------------
Net Tax of tax 2009 effect 2009 Net income for the period 17,191 -
17,191 Other comprehensive income, net of tax Unrealized gains on
available-for-sale financial assets arising during the period 15 8
7 Reclassification adjustment for net gains and (losses) included
in net income 53 8 45 --------------------------------- Change in
unrealized gains on available-for-sale financial assets arising
during the period 68 16 52 ---------------------------------
Comprehensive income for the period 17,259 16 17,243
--------------------------------- ---------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1.
BASIS OF PREPARATION These unaudited interim consolidated financial
statements have been prepared by management in accordance with
Canadian generally accepted accounting principles ("GAAP") for
interim financial statements. They do not include all of the
disclosures required by Canadian generally accepted accounting
principles for annual financial statements and accordingly, the
interim financial information should be read in conjunction with
the Company's annual consolidated financial statements. The interim
financial information has been prepared using the same accounting
policies as set out in note 1 to the consolidated financial
statements for the year ended December 31, 2009. 2. PENDING CHANGES
IN ACCOUNTING POLICIES INTERNATIONAL FINANCIAL REPORTING STANDARDS
("IFRS") In March 2009, the Accounting Standards Board ("AcSB")
issued its exposure draft "Adopting IFRS in Canada, II" which
reconfirmed that publicly accountable enterprises are required to
adopt International Financial Reporting Standards (IFRS) for fiscal
years beginning on or after January 1, 2011. Accordingly, the
Company will be required to adopt IFRS on January 1, 2011,
including interim periods in fiscal 2011. Comparative interim and
annual information will be required for the year ending December
31, 2010. As part of its transition to IFRS, the Company has
developed an implementation plan which includes an extensive
analysis of accounting differences between Canadian GAAP and IFRS
and the assessment of the expected impact of the accounting
differences on its consolidated financial statements. The Company
is in the process of transitioning its financial statement
reporting, presentation and disclosure to IFRS in time to meet the
January 1, 2011 deadline. The process will be ongoing as new
standards and recommendations are issued by the International
Accounting Standards Board and AcSB. Further details regarding the
Company's transition to IFRS are included in the Company's June 30,
2010 Management's Discussion and Analysis filed on The System for
Electronic Document Analysis and Retrieval ("SEDAR"). 3.
ACCUMULATED OTHER COMPREHENSIVE INCOME As at June 30, 2010
accumulated other comprehensive income was comprised of the
unrealized losses on marketable securities of $1,378,000
($1,162,000 net of tax). 2010 2009 Balance, beginning of period $
(142) $ (2,095) Changes in unrealized (losses) gains on
available-for-sale financial assets arising during the period
(1,020) 52 ---------- ---------- Balance, end of period $ (1,162) $
(2,043) ---------- ---------- ---------- ---------- 4. INCOME TAXES
The Company's total cash payments for income taxes paid in the
three month period ending June 30, 2010 were $6,912,000 (2009 -
$8,064,000) and for the six month period were $15,783,000 (2009 -
$16,684,000). 5. SHARE CAPITAL During the quarter, 67,059 common
shares were repurchased (2009 - 39,468) on the open market pursuant
to the terms and conditions of the current Normal Course Issuer Bid
at a net cost of approximately $814,000 (2009 - net cost of
approximately $384,000). For the six month period, the Company
repurchased 67,059 (2009 - 123,168) common shares at a net cost of
approximately $814,000 (2009 - $1,091,000). All shares repurchased
by the Company pursuant to its Normal Course Issuer Bids have been
cancelled. The repurchase of common shares resulted in a reduction
of share capital in the amount of approximately $31,000 (2009 -
$58,000). The excess net cost over the carrying value of the shares
of approximately $783,000 (2009 - $1,033,000) has been recorded as
a reduction in retained earnings. During the quarter ended June 30,
2010, 18,840 convertible non-voting series 2002 shares (2009 -
39,316) were converted into common shares with a stated value of
approximately $135,000 (2009 - $283,000). For the six month period,
76,423 convertible non-voting series 2002 shares (2009 - 70,787)
were converted to common shares with a stated value of
approximately $549,000 (2009 - $509,000). During the second quarter
of 2009, the Company issued $1,207,000 series 2009 shares for
proceeds of $10,683,000. In addition, the Company advanced
non-interest bearing loans in the amount of $10,683,000 to certain
of its employees to acquire these shares. 6. CLASSIFICATION AND
FAIR VALUE OF FINANCIAL INSTRUMENTS As at June 30, 2010, the
classification of the Company's financial instruments is as
follows: June 30, 2010 Other Loans Finan- and cial Avail- Receiv-
Liabil- Held for able ables ities Trading for Sale (amort- (amort-
Total Financial (fair (fair ized ized Carrying Fair Assets value)
value) cost) cost) Amount Value Cash and cash equivalents 65,497 -
- - 65,497 65,497 Accounts receivable - - 20,013 - 20,013 20,013
Marketable securities - 90,887 - - 90,887 90,887 Restricted
marketable securities - 19,319 - - 19,319 19,319 Income taxes
recoverable - - 3,139 - 3,139 3,139 Financial Liabilities Accounts
payable and accrued liabilities - - - 73,817 73,817 73,817
Redeemable share liability - - - 247 247 247 December 31, 2009
Other Loans Finan- and cial Avail- Receiv- Liabil- Held for able
ables ities Trading for Sale (amort- (amort- Total Financial (fair
(fair ized ized Carrying Fair Assets value) value) cost) cost)
Amount Value Cash and cash equivalents 58,301 - - - 58,301 58,301
Accounts receivable - - 31,501 - 31,501 31,501 Marketable
securities - 94,337 - - 94,337 94,337 Restricted marketable
securities - 18,088 - - 18,088 18,088 Financial Liabilities
Accounts payable and accrued liabilities - - - 83,880 83,880 83,880
Income taxes payable - - - 1,958 1,958 1,958 Redeemable share
liability - - - 383 383 383 The Company's fair value measurements
of financial instruments within the fair value hierarchy, as at
June 30, 2010 and December 31, 2009 consists primarily of
investments valued using Level 1 inputs. RISK MANAGEMENT The
Company is exposed to various risks associated with its financial
instruments. These risks are summarized as credit risk, liquidity
risk and market risk. The significant risks for the Company's
financial instruments are: i) Credit risk The Company believes at
this point in time, it has some credit risk associated to its
accounts receivable as it relates to the Appliance Canada division
that is partly mitigated by the Company's credit management
practices. The majority of the Company's sales are paid through
cash, credit card or third party finance. The Company relies on two
third party credit suppliers to supply financing alternatives to
our customers. ii) Liquidity risk The Company has no outstanding
debt and does not rely upon available credit facilities to finance
operations or to finance committed capital expenditures. The
portfolio of marketable securities consists primarily of Canadian
and International bonds. There is no immediate need for cash from
our investment portfolio. iii) Foreign currency risk The Company is
exposed to foreign currency exchange rate risk. Some merchandise is
paid for in U.S. dollars. The foreign currency cost is included in
the inventory cost. The Company does not believe it has significant
foreign currency risk with respect to its accounts payable in U.S.
dollars. iv) Market price risk The Company is exposed to
fluctuations in the market prices of its marketable securities that
are classified as available for sale. Changes in the fair value of
marketable securities are recorded, net of income taxes, in
accumulated other comprehensive income (note 3). The risk is
managed by ensuring a relatively conservative asset allocation of
bonds and equities. 7. CAPITAL MANAGEMENT The Company defines
capital as shareholders' equity. The Company's objectives when
managing capital are to: - ensure sufficient liquidity to support
its financial obligations and execute its operating and strategic
plans; and - utilize working capital to negotiate favourable
supplier agreements both in respect of early payment discounts and
overall payment terms. Dominic Scarangella, Tel: 416.243.4073
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