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Press release from CNW Group

Leon's Furniture Limited - 2014 Second Quarter

Thursday, August 14, 2014

Leon's Furniture Limited - 2014 Second Quarter

12:26 EDT Thursday, August 14, 2014

TORONTO, Aug. 14, 2014 /CNW/ - For the three months ended June 30, 2014, total system wide sales were $561,438,000 which includes $474,517,000 of corporate sales and $86,921,000 of franchise sales ($573,381,000 which includes $480,559,000 of corporate sales and $92,822,000 of franchise sales in 2013). Overall same store sales were down 1.3% from the prior year second quarter. Net income was $16,524,000, $0.23 per common share ($14,445,000, $0.20 per common share in 2013), an increase of 15.0% per common share. We are pleased to announce that our earnings per share were a record high for a second quarter.

For the six months ended June 30, 2014, total system wide sales were $1,069,840,000 which includes $900,526,000 of corporate sales and $169,314,000 of franchise sales ($776,936,000 which includes $643,017,000 of corporate sales and $133,919,000 of franchise sales in 2013) and net income was $17,342,000, $0.25 per common share ($19,869,000, $0.28 per common share in 2013), a decrease of 10.7% per common share. These prior year comparisons only include The Brick sales from the date of acquisition, being March 28, 2013.

Overall, we are pleased with the improvement in profits in the second quarter of 2014 when compared to the first quarter of 2014 and second quarter of 2013. The integration of e-commerce systems between The Brick and Leon's divisions is progressing as expected. As well, we are making good strides on a new computer system to be implemented over the next 18 months that will result in improved efficiencies in the operations of both divisions.

In the second quarter of 2014, we had grand openings at two new franchises; Bridgewater and Yarmouth, Nova Scotia. With respect to new stores, construction is scheduled to begin this year on a new 90,000 square foot Leon's Furniture warehouse and showroom in the Calgary area.

As previously announced, we paid a quarterly 10¢ dividend on July 7, 2014. Today we are happy to announce that the Directors have declared a quarterly dividend of 10¢ per common share payable on the 6th day of October 2014 to shareholders of record at the close of business on the 5th day of September 2014. 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.

EARNINGS PER SHARE FOR EACH QUARTER    

          MARCH 31     JUNE 30     SEPT. 30     DEC. 31     YEAR TOTAL
                                   
2014 -
-
Basic
Fully Diluted
   
    23¢
21¢
                $0.25
$0.23
                                   
2013 -
-
Basic
Fully Diluted
   
    20¢
19¢
    30¢
27¢
    37¢
33¢
    $0.95
$0.87
                                   
2012 -
-
Basic
Fully Diluted
    12¢
12¢
    13¢
12¢
    19¢
18¢
    23¢
22¢
    $0.67
$0.65


LEON'S FURNITURE LIMITED / MEUBLES LEON LTÉE

Mark J. Leon
Chairman of the Board

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three and six months ended June 30, 2014 and 2013
Dated: August 14, 2014

The Management's Discussion and Analysis ("MD&A") for Leon's Furniture Limited/Meubles Leon Ltée ("Leon's" or the "Company") should be read in conjunction with i) the Company's 2013 audited consolidated financial statements and the related notes and MD&A and ii) the Company's unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2014 and the related notes.

Cautionary Statement Regarding Forward-Looking Statements

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

Financial Statements Governance Practice

Leon's Furniture Limited's unaudited interim condensed consolidated financial statements have been prepared in accordance with the requirements of IAS 34, Interim Financial Reporting as issued by the International Accounting Standards Board. The amounts expressed are in Canadian dollars. Per share amounts are calculated using the weighted average number of shares outstanding for the applicable period.

The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MD&A and the unaudited interim condensed consolidated financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the unaudited interim condensed consolidated financial statements and MD&A were approved on August 14, 2014.

Introduction

On November 11, 2012, Leon's Furniture Limited and The Brick Ltd. ("The Brick") announced that they had entered into a definitive agreement (the "Leon's Arrangement") that provided for Leon's to acquire 100% of The Brick's outstanding common shares for $5.40 per outstanding common share, and to acquire for cancellation 100% of the outstanding common share purchase warrants for $4.40 per common share purchase warrant.

Immediately upon completion of the Leon's Arrangement, which occurred on March 28, 2013, all outstanding common shares and common share purchase warrants were repurchased in accordance with the Leon's Arrangement and are no longer listed for trading on the Toronto Stock Exchange ("TSX").  The total consideration paid to shareholders and warrant holders of The Brick was approximately $700 million. As a result of this transaction, 100% of The Brick's common shares are owned by Leon's Furniture Limited.

With The Brick acquisition, Leon's Furniture Limited is now the largest retailer of furniture, appliances and electronics in Canada. Our retail banners now include: Leon's, The Brick; United Furniture Warehouse; The Brick Mattress Store; and The Brick Clearance Centres. Finally, the addition of the Brick's Midnorthern Appliance banner alongside with Leon's Appliance Canada banner, makes the Company the country's largest commercial retailer of appliances to builders, developers, hotels and property management companies.

As a result of this major acquisition, Leons' now has in excess of 300 retail stores from coast to coast in Canada under the various banners indicated below which also includes over 100 franchise locations.

BANNER  NUMBER OF STORES
Leon's banner corporate stores  44
Leons' banner franchise stores  35
Appliance Canada banner stores  3
The Brick banner corporate stores1  111
The Brick banner franchise stores  67
Brick Clearance Centres banner stores  2
The Brick Mattress Store  24
United Furniture Warehouse banner stores  15
Total number of stores 301

1 Includes the Midnorthern Appliance banner


Revenues and Expenses

For the three months ended June 30, 2014, total system wide sales were $561,438,000, which includes $474,517,000 of corporate sales and $86,921,000 of franchise sales, ($573,381,000, which includes $480,559,000 of corporate sales and $92,822,000 of franchise sales for the three months ended June 30, 2013), a decrease of 2.1%. Overall, same store corporate sales decreased by 1.3%.

Our gross margin for the second quarter 2014 increased from 43.44% to 43.72% compared to the prior year's second quarter.  The increase in gross margin was driven by the change in our sales mix as we saw a slight increase to furniture sales vs. appliance and electronic sales.

Net operating expenses of $179,111,000 were down $3,870,000 from the second quarter of 2013. The decrease compared to the comparative period was mainly due to a reduction in general and administrative expenses. This is the result of cost efficiencies in combining the operations of Leon's and The Brick.

As a result of the above, net income for the second quarter of 2014 was $16,524,000, $0.23 per common share ($14,445,000, $0.20 per common share in 2013), an increase of $0.03 per common share or 15.0% from the comparative year quarter.

For the six months ended June 30, 2014, total system wide sales were $1,069,840,000 which includes $900,526,000 of corporate sales and $169,314,000 of franchise sales ($776,936,000 which includes $643,017,000 of corporate sales and $133,919,000 of franchise sales in 2013).  Net income was $17,342,000, $0.25 per common share ($19,869,000, $0.28 per common share in 2013), a decrease of 10.7% per common share. The prior six month comparisons only included The Brick sales from the date of acquisition, being March 28, 2013.

Annual Financial Information

($ in thousands, except earnings per share and dividends) 2013 2012 2011
 
Corporate sales
Franchise sales
 
 
1,694,643
344,785
 
 
682,163
198,077
 
 
682,836
196,725
 
Total system-wide sales 2,039,428 880,240 879,561
       
Net income 67,183 46,782 56,666
Earnings per share
Basic
Diluted
 
 
$0.95
$0.87
 
 
$0.67
$0.65
 
 
$0.81
$0.78
 
Total assets 1,682,174 588,178 584,411
 
Common share dividends declared
Special common share dividends declared
Convertible, non-voting shares dividends declared
 
$0.40
-
$0.20
 
$0.40
-
$0.20
 
$0.37
$0.15
$0.20

Liquidity and Financial Resources

($ in thousands, except dividends per share) Jun 30, 2014 Dec. 31, 2013 Jun 30, 2013
 
Cash and cash equivalents and available-for-sale financial assets
Trade and other accounts receivable
Inventory
Total assets
Working capital
 
 
13,493
94,431
276,984
1,663,930
(16,204)
 
 
43,272
104,275
277,656
1,682,174
(16,262)
 
 
64,436
95,662
246,168
1,691,599
(16,805)
 
For the 3 months ended Current
Quarter
Jun 30, 2014
Current
Quarter
Dec. 31, 2013
Current
Quarter
Jun 30, 2013
 
Cash flow provided by (used in) operations
Purchase of property, plant and equipment and investment properties
Dividends paid
 
Dividends paid per share
 
26,912
2,009
7,067
 
$0.10
 
(10,973)
12,347
7,062
 
$0.10
 
40,280
822
7,060
 
$0.10

Common Shares

At June 30, 2014, there were 70,983,472 common shares issued and outstanding. During the quarter ended June 30, 2014, 45,260 convertible, non-voting series 2005 shares and 226,409 convertible, non-voting series 2009 shares were converted into common shares. For details on the Company's commitments related to its redeemable shares, please refer to note 10 of the unaudited interim condensed consolidated financial statements.

Commitments

($ in thousands) Payments Due by Period

Contractual Obligations
Total Less than
1 year
2-3 years 4-5 years After 5 years
Long term debt 531,109 55,496 126,416 237,990 111,207
Operating Leases 1 707,763 68,364 129,656 116,381 393,362
Outstanding purchase orders 179,213 179,213 - - -
Finance Leases 272,226 12,877 24,976 23,401 210,972
Total Contractual Obligations 1,690,311 315,950 281,048 377,772 715,541
1The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada.

Critical Accounting Estimates and Assumptions

Please refer to Note 2 of the 2013 annual consolidated financial statements for the Company's critical accounting estimates and assumptions.

Recent Accounting Pronouncements

Please refer to Note 3 to the accompanying unaudited interim condensed consolidated financial statements for the accounting standards and amendments issued but not yet adopted.

Related Party Transactions

At June 30, 2014, we had no transactions with related parties as defined in IAS24 - Related Party Disclosures, except those pertaining to transactions with key management personnel in the ordinary course of their employment.

Risks and Uncertainties

For a complete discussion of the risks and uncertainties which apply to the Company's business and operating results please refer to the Company's Annual Information Form dated March 28, 2014 available on www.sedar.com.

Quarterly Results (2014, 2013, 2012)

Quarterly Income Statement ($000) - except per share data

  Quarter Ended
June 30
Quarter Ended
March 31
Quarter Ended
December 31
Quarter Ended
September 30
  2014 1 2013 1 2014 1 2013 20131 2012 2013 1 2012
Corporate sales 474,517 480,559 426,009 162,458 523,025 188,462 528,602 174,175
Franchise sales 86,921 92,822 82,393 41,097 110,846 59,725 100,017 49,505
Total system-wide sales  561,438  573,381  508,402  203,555  633,871  248,187  628,619  223,680
Net income per share $0.23 $0.20 $0.01 $0.08 $0.37 $0.23 $0.30 $0.19
Fully diluted per share $0.21 $0.19 $0.01 $0.07 $0.33 $0.22 $0.27 $0.18
1The Company's quarterly results for the quarter ended June 30 and March 31, 2014, December 31, September 30, and June 30,
2013 include the results of The Brick from the acquisition date of March 28, 2013.

Disclosure Controls & Procedures

Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management, including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public disclosure. Based on the evaluation of disclosure controls and procedures, the CEO and CFO have concluded that the Company's disclosure controls and procedures were effective as at June 30, 2014.

Internal Controls over Financial Reporting

Management is also responsible for establishing  and  maintaining  disclosure  controls  and  procedures  and  internal  controls  over financial reporting for the Company. The control framework used in the design of disclosure controls  and  procedures  and  internal  control  over  financial  reporting  is  based on the framework established in the publications, Internal Control - Integrated Framework and specifically in Internal Control over Financial Reporting - Guidance for Smaller Public Companies published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management,  including  the  CEO  and  CFO,  does  not  expect  that  the  Company's  disclosure controls  or  internal  controls  over  financial  reporting  will  prevent  or  detect  all  errors  and  all fraud or will be effective under all potential future conditions. A control system is subject to inherent  limitations  and,  no  matter  how  well  designed  and  operated,  can  provide  only reasonable, not absolute, assurance that the control systems objectives will be met.

During the three months ended June 30, 2014, there have been no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Outlook

Overall we are very pleased with the improvement in profit growth we experienced in the second quarter compared to the prior year. Despite the challenging retail environment, we expect to see improved results for the balance of the year.

Non-IFRS Financial Measures

Same store sales does not have a standardized meaning prescribed by IFRS but it is a key indicator used by the Company to measure performance against prior period results. Comparable store sales are defined as sales generated by stores that have been open or closed for more than 12 months on a yearly basis. The reconciliation between revenue (an IFRS measure) and comparable store sales is provided below:


($ in thousands)
Quarter
Ended
June 30, 2014
Quarter
Ended
June 30, 2013
 
Revenue
Adjustments for stores not in both fiscal periods1
 
474,517
(2,873)
 
480,559
(2,491)
Comparable store sales 471,644 478,068
1  For the three month period ended June 30, 2014, there are six locations excluded from the adjustments for stores not in both periods.



Interim Condensed Consolidated Financial Statements      
       
       
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
       
  As at June 30   As at December 31
($ in thousands) 2014   2013
       
ASSETS      
Current assets      
Cash and cash equivalents [note 15] -   5,832
Restricted marketable securities [note 15] 20,599   20,104
Available-for-sale financial assets  20,000   17,336
Trade receivables [note 15] 94,481   104,275
Inventories [note 6] 276,984   277,656
Deferred acquisition costs  1,617   1,659
Deferred financing costs 1,087   903
Total current assets 414,768   427,765
Other assets 11,378   4,970
Deferred acquisition costs 10,475   7,250
Property, plant and equipment [note 7] 417,800   433,586
Investment properties [note 8] 22,111   22,304
Intangible assets [note 9] 341,425   343,221
Goodwill [notes 5 and 9] 435,634   435,634
Deferred income tax assets  10,339   7,444
Total assets 1,663,930   1,682,174
       
LIABILITIES AND SHAREHOLDERS' EQUITY      
Current liabilities      
Bank overdraft [note 11] 27,106   -
Trade and other payables  179,963   202,618
Provisions  5,620   4,769
Income taxes payable 16,851   12,135
Customers' deposits 86,571   93,609
Finance lease liability 4,302   4,302
Dividends payable 7,098   7,063
Deferred warranty plan revenue 53,461   54,028
Debentures [note 11] -   15,503
Loans and borrowings [note 11] 50,000   50,000
Total current liabilities 430,972   444,027
Loans and borrowings [note 11] 315,628   325,255
Convertible debentures [note 11] 91,359   90,952
Finance lease liability  135,815   137,887
Deferred warranty plan revenue 84,996   85,494
Redeemable share liability [note 10] 401   859
Deferred rent liabilities and lease inducements 4,042   2,377
Deferred income tax liabilities  97,419   98,768
Total liabilities 1,160,632   1,185,619
       
Shareholders' equity attributable to the shareholders of the Company      
Common shares [note 12] 30,511   27,352
Equity component of convertible debentures [note 11] 7,089   7,089
Retained earnings 465,213   462,035
Accumulated other comprehensive income  485   79
Total shareholders' equity 503,298   496,555
Total liabilities and shareholders' equity 1,663,930   1,682,174
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Interim Condensed Consolidated Financial Statements                  
                   
                   
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
                   
  Three months ended June 30   Six  months ended June 30
($ in thousands)   2014   2013     2014   2013
                   
Revenue    474,517   480,559     900,526   643,017
Cost of sales [note 6]   267,060   271,789     510,031   368,082
Gross profit   207,457   208,770     390,495   274,935
Operating expenses                   
General and administrative expenses   77,493   79,051     154,877   104,669
Sales and marketing expenses   59,763   60,803     112,693   80,858
Occupancy expenses   37,123   38,495     77,884   49,611
Other operating expenses   4,732   4,632     9,039   7,112
Total operating expenses   179,111   182,981     354,493   242,250
Operating profit   28,346   25,789     36,002   32,685
Finance costs    (6,662)   (7,444)     (14,192)   (7,761)
Finance income   661   496     1,113   1,232
Net income before income tax   22,345   18,841     22,923   26,156
Income tax expense [note 13]   5,821   4,396     5,581   6,287
Net income for the period   16,524   14,445     17,342   19,869
                   
Weighted average number of common shares outstanding                   
Basic   70,888,780   70,612,019     70,775,082   70,602,007
Diluted   82,357,232   81,699,319     82,019,353   77,937,724
                   
Earnings per share  [note 14]                  
Basic  $ 0.23  $ 0.20    $ 0.25  $ 0.28
Diluted  $ 0.21  $ 0.19   $ 0.23  $ 0.26
                   
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  

 

Interim Condensed Consolidated Financial Statements      
         
         
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
    Three months ended June 30
            Net of tax
($ in thousands)   2014    Tax effect    2014
             
Net income for the period   16,524   -   16,524
Other comprehensive income, net of tax            
Other comprehensive income to be reclassified to profit or loss in subsequent periods:            
  Unrealized gains on available-for-sale financial assets arising during the period   237   62   175
  Reclassification adjustment for net gains(losses)  included in profit for the period   (100)   (23)   (77)
  Change in unrealized gains on available-for-sale financial            
  assets arising during the period   137   39   98
Comprehensive income for the period   16,661   39   16,622
            Net of tax
    2013   Tax effect    2013
             
Net income for the period   14,445   -   14,445
Other comprehensive income, net of tax            
Other comprehensive income to be reclassified to profit or loss in subsequent periods:            
  Unrealized losses on available-for-sale financial assets arising during the period   (256)   (33)   (223)
  Reclassification adjustment for net gains(losses)  included in profit for the period   (101)   (13)   (88)
  Change in unrealized losses on available-for-sale financial            
  assets arising during the period   (357)   (46)   (311)
Comprehensive income for the period   14,088   (46)   14,134
             
       
    Six months ended June 30
            Net of tax
($ in thousands)   2014   Tax effect    2014
             
Net income for the period   17,342   -   17,342
Other comprehensive income, net of tax            
Other comprehensive income to be reclassified to profit or loss in subsequent periods:            
  Unrealized gains on available-for-sale financial assets arising during the period   690   160   530
  Reclassification adjustment for net gains(losses)  included in profit for the period   (163)   (39)   (124)
  Change in unrealized gains on available-for-sale financial            
  assets arising during the period   527   121   406
Comprehensive income for the period   17,869   121   17,748
            Net of tax
    2013    Tax effect    2013
             
Net income for the period   19,869   -   19,869
Other comprehensive income, net of tax            
Other comprehensive income to be reclassified to profit or loss in subsequent periods:            
  Unrealized losses on available-for-sale financial assets arising during the period   (306)   (77)   (229)
  Reclassification adjustment for net gains(losses)  included in profit for the period   (2,519)   (325)   (2,194)
  Change in unrealized losses on available-for-sale financial            
  assets arising during the period   (2,825)   (402)   (2,423)
Comprehensive income for the period   17,044   (402)   17,446
             
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  

 

Interim Condensed Consolidated Financial Statements          
           
           
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
                             
($ in thousands)   Equity component
of convertible
debentures
    Common shares     Accumulated other
comprehensive
income (loss)
    Retained
earnings
    Total
                             
As at  December 31, 2012   -     26,693     2,395     423,099     452,187
                             
Comprehensive income                            
Net income for the period   -     -     -     19,869     19,869
Change in unrealized losses on available-for-sale    -     -     (2,423)     -     (2,423)
financial assets arising during the period                             
Total comprehensive income   -     -     (2,423)     19,869     17,446
                             
Transactions with shareholders                            
Dividends declared    -     -     -     (14,122)     (14,122)
Issuance of equity component of convertible debt [note 11]   7,266     -     -     -     7,266
Management share purchase plan [note 10]   -     497     -     -     497
Total transactions with shareholders   7,266     497     -     (14,122)     (6,359)
                             
As at June 30, 2013   7,266     27,190     (28)     428,846     463,274
                             
As at December 31, 2013   7,089     27,352     79     462,035     496,555
                             
Comprehensive income                            
Net income for the period   -     -     -     17,342     17,342
Change in unrealized gains on available-for-sale    -     -     406     -     406
financial assets arising during the period                             
Total comprehensive income   -     -     406     17,342     17,748
                             
Transactions with shareholders                            
Dividends declared    -     -     -     (14,164)     (14,164)
Management share purchase plan [note 10]   -     3,159     -     -     3,159
Total transactions with shareholders   -     3,159     -     (14,164)     (11,005)
                             
As at June 30, 2014   7,089     30,511     485     465,213     503,298
                             
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.    

 

Interim Condensed Consolidated Financial Statements    
     
     
Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   Six months ended June 30 
($ in thousands) 2014 2013
     
OPERATING ACTIVITIES    
Net income for the period 17,342 19,869
Add (deduct) items not involving an outlay of cash    
  Depreciation of property, plant and equipment and investment properties 20,210 13,553
  Amortization of intangible assets 3,589 2,097
  Amortization of deferred warranty plan revenue (31,167) (26,192)
  Net finance costs 13,231 6,529
  Deferred income taxes (4,273) 3,649
  Gain on sale of property, plant and equipment 3 (8)
  Gain on sale of available-for-sale financial assets (19) (5,438)
  18,916 14,059
Net change in non-cash working capital balances related    
to operations [note 16] (22,243) (787)
  Cash received on warranty plan sales 30,102 23,272
Cash provided by operating activities 26,775 36,544
     
INVESTING ACTIVITIES    
Purchase of property, plant and equipment and investment properties [notes 7 & 8] (4,300) (2,060)
Purchase of intangible assets [note 9] (1,793) (1,726)
Proceeds on sale of property, plant and equipment 66 26
Purchase of available-for-sale financial assets (7,122) (105,573)
Proceeds on sale of available-for-sale financial assets 4,632 232,321
Interest received 708 1,257
Purchase of The Brick, net of cash acquired $31,069 [note 5] - (654,955)
Cash used in investing activities (7,809) (530,710)
     
FINANCING ACTIVITIES    
Repayment of finance leases (1,752) (905)
Dividends paid [note 12] (14,130) (14,115)
Repayment of employee loans-redeemable shares [note 10] 2,701 928
Issuance of term loan [note 11] - 400,000
Issuance of convertible debentures [note 11] - 100,000
Finance costs paid - (4,693)
Repayment of debentures [note 11] (15,000) (19,616)
Repayment of term loan [note 11] (10,000) -
Interest paid (13,723) (13,825)
Cash (used in) provided by financing activities (51,904) 447,774
Net decrease in cash and cash equivalents    
during the period (32,938) (46,392)
Cash and cash equivalents, beginning of period 5,832 74,949
Bank overdraft(cash and cash equivalents), end of period (27,106) 28,557
     
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

  

 


Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)
Leon's Furniture Limited

Amounts in thousands of Canadian dollars except shares outstanding and earnings per share

For the three and six month periods ended June 30, 2014 and 2013

1. REPORTING ENTITY

Leon's Furniture Limited ("Leon's" or the "Company") was incorporated by Articles of Incorporation under the Business Corporations Act on February 28, 1969. Leon's is a retailer of home furnishings, mattresses, appliances and electronics across Canada.  Leon's is a public company listed on the Toronto Stock Exchange (TSX - LNF, LNF.DB) and is incorporated and domiciled in Canada. The address of the Company's head office and registered office is 45 Gordon Mackay Road, Toronto, Ontario, M9N 3X3.

On November 11, 2012, the Company announced that it had entered into a definitive agreement (the "Arrangement Agreement") that provided for the acquisition of 100% of the outstanding common shares and common share purchase warrants of The Brick Ltd. ("The Brick" or "Brick division") by the Company by way of a plan of arrangement for $5.40 per outstanding common share and $4.40 per outstanding common share purchase warrant.  On March 28, 2013, the Company acquired 100% of the common shares and warrants of The Brick [note 5].  The operations of The Brick are included in the Company's results from operations and financial position commencing March 28, 2013.

The Company's business is seasonal in nature. Retail sales are traditionally higher in the third and fourth quarters.

2. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of the Company are prepared in accordance with IAS 34, Interim Financial Reporting. Accordingly, certain information and note disclosure normally included in the annual financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"), have been omitted or condensed. The financial statements of the Company include the financial results of Leon's Furniture Limited and its wholly owned subsidiaries.

These interim condensed consolidated financial statements were approved and authorized for issuance by the Board of Directors on August 14, 2014.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except for the adoption of the new, revised or amended accounting standards noted below, these interim condensed consolidated financial statements have been prepared using the same accounting policies and methods of computation as the annual consolidated financial statements of Leon's for the year ended December 31, 2013. The disclosure contained in these interim condensed consolidated financial statements does not include all requirements in IAS 1, Presentation of Financial Statements. Accordingly, the interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2013.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The Company operates in one geographical segment (Canada) and one industry (sale of home furnishings, appliances and electronics). Accordingly, no segment information has been provided in these interim condensed consolidated financial statements.

Accounting standards and amendments issued but not yet adopted

In July 2014, the IASB issued the final amendments to IFRS 9, Financial Instruments ("IFRS 9"), which provides guidance on the classification and measurement of financial assets and liabilities, impairment of financial assets, and general hedge accounting. The classification and measurement portion of the standard determines how financial assets and financial liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis.  The amended IFRS 9 introduced a new, expected-loss impairment model that will require more timely recognition of expected credit losses.  In addition, the amended IFRS 9 includes a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity.  The new standard is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is in the process of evaluating the impact of adopting these amendments on the Company's condensed consolidated financial statements.

IFRS 15, Revenue from Contracts with Customers ("IFRS 15"), was issued in May 2014, which will replace IAS 11, Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue - Barter Transactions Involving Advertising Services. IFRS 15 provides a single, principles based five-step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17, Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, Consolidated Financial Statements and IFRS 11, Joint Arrangements ("IFRS 11"). In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity expects to recover these costs. The standard's requirements will also apply to the recognition and measurement of gains and losses on the sale of some nonfinancial assets that are not an output of the entity's ordinary activities. IFRS 15 is required for annual periods beginning on or after January 1, 2017. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements.

In May 2014, the IASB issued amendments to IFRS 11 to address the accounting for acquisitions of interests in joint operations. The amendments address how a joint operator should account for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business.  IFRS 11, as amended, now requires that such transactions shall be accounted for using the principles related to business combinations accounting as outlined in IFRS 3, Business Combinations.  The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted.  The Company is in the process of evaluating the impact of adopting this amendment may have on the Company's condensed consolidated financial statements.

In May 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment ("IAS 16") and IAS 38, Intangible Assets ("IAS 38") to clarify acceptable methods of depreciation and amortization. The amended IAS 16 eliminates the use of a revenue-based depreciation method for items of property, plant and equipment.  Similarly, amendments to IAS 38 eliminate the use of a revenue-based amortization model for intangible assets except in certain specific circumstances. The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted.  The Company is in the process of evaluating the impact of adopting these amendments on the Company's condensed consolidated financial statements.

Adoption of new, revised or amended accounting standards

The following is a description of the adoption of new, revised or amended accounting standards that are relevant to the Company:

[i]   Effective January 1, 2014, the Company adopted amendments to IAS 32, Financial Instruments: Presentation ("IAS 32").  IAS 32 clarifies the meaning of "currently has a legally enforceable right to set-off" and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting.  The adoption of this new standard had no impact on the consolidated financial statements.

[ii]   Effective January 1, 2014, the Company adopted IFRIC Interpretation 21, Levies ("IFRIC 21"). IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs.  For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached.  The adoption of this new standard had no impact on the consolidated financial statements.

[iii]   IAS 36, Impairment of Assets ("IAS 36") - In May 29, 2013, IASB published amendments to IAS 36, which reduce the circumstances in which the recoverable amount of cash-generating units is required to be disclosed and clarifies the disclosures required when an impairment loss has been recognized or reversed in the period. This amendment is effective for annual periods beginning on or after January 1, 2014. The Company adopted the IAS 36 amendments in its consolidated financial statements for the annual period beginning on January 1, 2014. The adoption did not have a material impact on the consolidated financial statements.

4. CAPITAL RISK MANAGEMENT

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.

The capital structure includes finance lease liabilities, convertible debentures, term credit facility and borrowing capacity available under the revolving credit facilities (Note 11).

Under the Senior Secured Credit Agreement, the financial and non-financial covenants are reviewed on an ongoing basis by management to monitor compliance with the agreement.  The Company was in compliance with these covenants as at June 30, 2014.

The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as capital and operating budgets. Based on current funds available and expected cash flow from operating activities, management believes that the Company has sufficient funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or capital costs for projects exceed current estimates, or if the Company incurs major unanticipated expenses, it may be required to seek additional capital.

The Company is not subject to any externally imposed capital requirements, other than with respect to its insurance subsidiaries.

5. BUSINESS COMBINATIONS

Acquisition of The Brick

On March 28, 2013, the Company acquired control of The Brick by purchasing 100% of its issued and outstanding shares and warrants. The Brick is a retailer of home furnishings, mattresses, appliances and electronics that was founded in Edmonton, Alberta in 1971.  The Brick operates stores across Canada under the following corporate and franchise banners: The Brick, The Brick Mattress Stores, United Furniture Warehouse and Midnorthern Appliances, which is part of The Brick's Commercial Sales Division. This acquisition allows the Company to strengthen and enhance its existing retail operations, grow the Company's franchise network and to further expand its Canadian geographical footprint to more than 300 combined retail locations from coast to coast.

The acquisition date fair value of consideration transferred is as follows:

                 
Cash             $ 586,023
Convertible debenture               100,000
Total consideration transferred             $ 686,023

The allocation of the purchase price at fair value to the identifiable assets acquired and liabilities assumed at the acquisition date is as follows:

           
Cash        $ 31,069
Trade and other receivables1         55,986
Income taxes receivable         18
Inventories         162,138
Other assets         7,905
Available-for-sale financial assets         13,279
Property, plant and equipment         229,153
Investment properties         14,400
Intangible assets         339,081
Trade and other payables         (145,304)
Customers' deposits         (52,221)
Share-based compensation plans         (2,292)
Deferred warranty plan revenue and unearned insurance revenue         (104,342)
Provisions         (5,479)
Debentures         (36,156)
Finance lease liabilities         (143,693)
Income taxes payable         (10,994)
Deferred income tax liabilities         (90,877)
Total net identifiable assets       $ 261,671

1 Gross trade and other receivables acquired is $57,001, of which $1,015 was expected to be uncollectible as at the acquisition date.

The Company has finalized the valuations of all amounts included in the purchase price allocation.  The Company determined the above fair values based on discounted cash flows, market information, independent valuations and management's estimates.  During the measurement period, certain adjustments were made to the purchase price allocation reflecting updates to the estimated fair values of net assets acquired.  The adjustments primarily impacted leased property and franchise agreement intangible assets with a corresponding reduction in deferred income tax liabilities.  These adjustments resulted in a decrease to the total net identifiable assets of $73,234 and a corresponding increase to recognized goodwill.

Goodwill was recognized as a result of the acquisition as follows:

                 
Total consideration transferred             $ 686,023
Less: Total net identifiable assets               (261,671)
Goodwill             $ 424,352

The goodwill recognized on acquisition of The Brick is attributable mainly to the expected future growth potential of expanding the customer base of The Brick banners and efficiencies within the operations of The Brick.

None of the goodwill recognized is expected to be deductible for income tax purposes.

6. INVENTORIES

The amount of inventory recognized as an expense for the six month period ended June 30, 2014 was $501,978 (period ended June 30, 2013 - $364,415), which is presented within cost of sales on the interim consolidated statements of income.

During the three month period ended June 30, 2014, there was $303 in inventory write-downs (three month period ended June 30, 2013 - $81). As at June 30, 2014, the inventory markdown provision totalled $10,048 (as at December 31, 2013 - $9,122).

7. PROPERTY, PLANT AND EQUIPMENT

                                 
    Land   Buildings   Equipment   Vehicles   Building
Improvements
  Leased
Property
  Leased
Equipment
  Total
As at June 30, 2014:                                
Opening net book value   83,987   122,077   41,399   4,288   86,295   92,657   2,883   433,586
Additions     262   1,667   1,548   759       4,236
Disposals       (46)   (19)   (4)       (69)
Depreciation     (3,009)   (3,957)   (633)   (9,374)   (2,470)   (510)   (19,953)
Closing net book value   83,987   119,330   39,063   5,184   77,676   90,187   2,373   417,800
As at June 30, 2014:                                
Cost   83,987   228,052   88,383   26,768   139,066   96,410   3,626   666,292
Accumulated depreciation     (108,722)   (49,320)   (21,584)   (61,390)   (6,223)   (1,253)   (248,492)
Net book value   83,987   119,330   39,063   5,184   77,676   90,187   2,373   417,800
                                 
                                 
    Land   Buildings   Equipment   Vehicles   Building
Improvements
  Leased
Property
  Leased
Equipment
  Total
As at December 31, 2013:                                
Opening net book value   55,381   84,383   16,476   3,900   58,006       218,146
Additions   5,315   420   4,609   627   8,326       19,297
Additions due to acquisition   23,291   42,776   27,824   1,177   33,931   96,410   3,744   229,153
Disposals       (76)   (18)       (8)   (102)
Depreciation     (5,502)   (7,434)   (1,398)   (13,968)   (3,753)   (853)   (32,908)
Closing net book value   83,987   122,077   41,399   4,288   86,295   92,657   2,883   433,586
As at December 31, 2013:                                
Cost   83,987   227,790   87,005   25,682   141,578   96,410   3,736   666,188
Accumulated depreciation     (105,713)   (45,606)   (21,394)   (55,283)   (3,753)   (853)   (232,602)
Net book value   83,987   122,077   41,399   4,288   86,295   92,657   2,883   433,586

Included in the above balances as at June 30, 2014 are assets not being amortized with a net book value of approximately $1,105 [as at December 31, 2013 - $459] being construction in progress.

8. INVESTMENT PROPERTIES

                         
      Land     Buildings     Building
improvements
    Total
As at June 30, 2014:                        
Opening net book value     12,519     9,273     512     22,304
Additions             64     64
Depreciation         (238)     (19)     (257)
Closing net book value     12,519     9,035     557     22,111
As at June 30, 2014:                        
Cost     12,519     17,694     2,033     32,246
Accumulated depreciation         (8,659)     (1,476)     (10,135)
Net book value     12,519     9,035     557     22,111
As at December 31, 2013:                        
Opening net book value     8,286         29     8,315
Additions due to acquisition     4,233     9,655     512     14,400
Depreciation         (382)     (29)     (411)
Closing net book value     12,519     9,273     512     22,304
As at December 31, 2013:                        
Cost     12,519     17,694     1,969     32,182
Accumulated depreciation         (8,421)     (1,457)     (9,878)
Net book value     12,519     9,273     512     22,304

The estimated fair value of the investment properties portfolio as at June 30, 2014 was approximately $47,940 [as at December 31, 2013 - $47,940].

9. INTANGIBLE ASSETS AND GOODWILL

                                   
    Customer
relationships
    Brand name
and franchise
agreements
    Non-compete
agreement
    Computer
software
    Favourable
lease
agreements
    Total
                                   
As at June 30, 2014:                                  
Opening net book value   5,031     286,000     251     9,996     41,943     343,221
Additions               1,793         1,793
Amortization   (437)     (125)     (64)     (854)     (2,109)     (3,589)
Closing net book value   4,594     285,875     187     10,935     39,834     341,425
                                   
As at June 30, 2014:                                  
Cost   7,000     287,500     1,012     16,403     45,339     357,254
Accumulated amortization   (2,406)     (1,625)     (825)     (5,468)     (5,505)     (15,829)
Net book value   4,594     285,875     187     10,935     39,834     341,425
                                   
As at December 31, 2013:                                  
Opening net book value   750     1,250     375     726         3,101
Additions               6,669         6,669
Additions due to acquisition   5,000     285,000     12     3,730     45,339     339,081
Amortization   (719)     (250)     (136)     (1,129)     (3,396)     (5,630)
Closing net book value   5,031     286,000     251     9,996     41,943     343,221
                                   
As at December 31, 2013:                                  
Cost   7,000     287,500     1,012     14,610     45,339     355,461
Accumulated amortization   (1,969)     (1,500)     (761)     (4,614)     (3,396)     (12,240)
Net book value   5,031     286,000     251     9,996     41,943     343,221

Amortization of intangible assets is included within general and administrative expenses on the consolidated statements of income.

The following table presents the details of the Company's indefinite-life intangible assets:

                 
        As at June
30, 2014
      As at December
31, 2013
The Brick brand name (allocated to Brick division)       245,000       245,000
The Brick franchise agreements (allocated to Brick division)       40,000       40,000
        285,000       285,000

The Company currently has no plans to change The Brick store banners and expects these assets to generate cash flows over an indefinite future period. Therefore, these intangible assets are considered to have indefinite useful lives for accounting purposes. The Brick franchise agreements have expiry dates with options to renew.  The Company's intention is to renew these agreements at each renewal date indefinitely.  The Company expects the franchise agreements and franchise locations will generate cash flows over an indefinite future period. Therefore, these assets are also considered to have indefinite useful lives.

The following table presents the details of the Company's finite-life intangible assets:

                 
        As at June
30, 2014
      As at December
31, 2013
Leon's division customer relationships       375       500
Leon's division brand name       875       1,000
Leon's division non-compete agreement       187       251
Brick division customer relationships       4,219       4,531
Brick division favourable lease agreements       39,834       41,943
Computer software       10,935       9,996
        56,425       58,221

The Company has assessed that these finite-life intangible assets have limited life terms.

The following table presents the details of the Company's goodwill:

                 
        As at June
30, 2014
      As at December
31, 2013
Balance, beginning of year       11,282       11,282
Acquisition through business combination (Note 5)       424,352       424,352
Balance, end of year       435,634       435,634

10. REDEEMABLE SHARE LIABILITY

                 
        As at
June 30,
2014
      As at
December 31,
2013
                 
Authorized                
806,000 convertible, non-voting, series 2005 shares                
1,224,000 convertible, non-voting, series 2009 shares                
306,500 convertible, non-voting, series 2012 shares                
1,485,000 convertible, non-voting, series 2013 shares                
740,000 convertible, non-voting, series 2014 shares                
                 
Issued and fully paid                
264,159 series 2005 shares [December 31, 2013 - 386,513]       2,495       3,650
775,334 series 2009 shares [December 31, 2013 - 1,008,465]       6,862       8,925
252,736 series 2012 shares [December 31, 2013 - 268,708]       3,136       3,334
1,406,772 series 2013 shares [December 31, 2013 - 1,450,000]       16,024       16,516
740,000 series 2014 shares [December 31, 2013 - Nil]       11,137      
Less employee share purchase loans       (39,253)       (31,566)
        401       859

Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2005, 2009, 2012, 2013 and 2014 to allow them to acquire convertible, non-voting series 2005 shares, series 2009 shares, series 2012 shares, series 2013 and series 2014 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 2005, series 2009 and series 2012 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. Each issued and fully paid for series 2013 and 2014 series share may be converted into one common share at any time after the third anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. The series 2005, series 2009, series 2012, series 2013 and 2014 series 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, series 2009 and series 2012 shares at any time after the fifth anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary of such issue. The Company has the option to redeem the series 2013 and 2014 series shares at any time after the third anniversary date of the issue of these shares and must redeem them 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 $9.44 per series 2005 share, $8.85 per series 2009 share, $12.41 per series 2012 share, $11.39 per series 2013 share and $15.05 per series 2014 share. Dividends paid to holders of series 2005, 2009, 2012 and 2013 shares of approximately $624 [2013 - $465] have been used to reduce the respective shareholder loans. The preferred dividends are paid once a year during the first quarter.

During the six month period ended June 30, 2014, 122,354 series 2005 shares [six month period ended June 30, 2013 - 52,599] and 226,409 series 2009 shares [six month period ended June 30, 2013 - nil] were converted into common shares with a stated value of approximately $1,155 and $2,004, respectively [six month period ended June 30, 2013 - $497 and nil].

During the six month period ended June 30, 2014, the Company cancelled 6,722 series 2009 shares [six month period ended June 30, 2013 - 18,378], 15,972 series 2012 shares [six month period ended June 30, 2013 - 4,920] and 43,228 series 2013 shares [six month period ended June 30, 2013 - 10,000] in the amount of $63, $198 and $492, respectively [six month period ended June 30, 2013 - $162, $61 and $114].

During the six month period ended June 30, 2014, the Company issued 740,000 series 2014 shares for proceeds of $11,137. In addition, the Company advanced non-interest bearing loans in the amount of $11,137 to certain of its employees to acquire these shares.

11. LOANS AND BORROWINGS

Convertible Debentures

On March 28, 2013 ("Issuance Date"), the Company closed an offering in which the shareholders of The Brick purchased $100,000 principal amount of 3% convertible unsecured debentures due on March 28, 2023 ("Maturity Date"). Interest is due semi-annually in arrears on June 30 and December 31 in each year. The convertible debentures are convertible, at the option of the holder, at any time during the period between the 90th day prior to the 4th anniversary of Issuance Date and the 3rd business day prior to the Maturity Date in whole or in multiples of one thousand dollars, into fully paid Common Shares of the Company at the conversion rate of 79.12707 Common Share per one thousand dollars principal amount of debentures subject to certain adjustments. The Company has the right to settle the convertible debentures in cash or shares during any time subsequent to the 4th anniversary of the Issuance Date and on Maturity Date. There are additional conversion options available to debenture holders in the event of an increase in the Company's dividend rate or in the event of a change in control of the Company. The convertible debentures are unsecured obligations of the Company and are subordinated in right of payment to all of the Company's senior indebtedness.

Brick Debentures

On March 11, 2013, in accordance with the terms of the Arrangement Agreement to acquire all the common shares and warrants of The Brick, The Brick issued a tender offer to all debenture holders to redeem their Debentures for a price of one hundred and ten dollars per one hundred dollars of principal value plus accrued and unpaid interest. The Brick received valid tenders for $17,833 aggregate principal amount of Debentures pursuant to the March 11, 2013 offer, which expired on April 11, 2013. Payment for the Debentures tendered in the amount of $20,191 comprised of $19,616 in respect of principal and the 10% premium on principal, and $575 in respect of accrued interest. The remaining principal amount of Debentures outstanding subsequent to the April 11, 2013 repurchase is $15,000 and bear interest at a fixed rate of 12% per annum payable in cash semi-annually in arrears on June 30 and December 31.

The Debentures matured on May 30, 2014.  Payment for the Debentures totaled $15,740 comprised of $15,000 in respect of principal and $740 in respect of accrued interest.

Bank Indebtedness

On January 31, 2013, a Senior Secured Credit Agreement was obtained to fund the acquisition of The Brick. The Senior Secured Credit Agreement includes a credit facility, with a syndicate of banks, with a term credit facility limit of $400,000 and revolving credit facility limit of $100,000. Under the terms of the Senior Secured Credit Agreement amounts borrowed must be repaid in full by March 28, 2017. Bank indebtedness bears interest based on Canadian prime, Bankers' Acceptance and LIBOR ("London Interbank Offered Rate") rates plus an applicable standby fee on undrawn amounts. Transaction costs in the amount of $5,193 have been deferred and are being amortized. The Company has the ability to choose the type of advance required. Interest is based on the market rate plus an applicable margin. Currently, the Company has entered into a 31-day Bankers' Acceptance with a cost of borrowing of 3.54% that was renewed on June 30, 2014. The term credit facility is repayable in quarterly amounts ranging from $5,000 to $15,000. The Company can prepay without penalty amounts outstanding under the facilities at any time. The agreement includes a general security agreement which constitutes a lien on all personal property of the Company. In addition to this, there are financial covenants related to the credit facility.

As at June 30, 2014 the Company is in full compliance of these financial and non-financial covenants.

12. COMMON SHARES

                 
        As at June 30,
2014
      As at December
31, 2013
                 
Authorized - Unlimited common shares                
                 
Issued                
70,983,472 common shares [2013 - 70,634,709]       30,511       27,352

During the six month period ended June 30, 2014, 122,354 series 2005 shares [six month period ended June 30, 2013 - 52,599] and 226,409 series 2009 shares [six month period ended June 30, 2013 - nil] were converted into common shares with a stated value of approximately $1,155 and $2,004, respectively [six month period ended June 30, 2013 - $497 and nil].

The dividends paid for the three month periods ended June 30, 2014 and June 30, 2013 were $7,067 [$0.10 per share] and $7,061 [$0.10 per share], respectively.  The dividends paid for the six month period ended June 30, 2014 and June 30, 2013 were $14,130 [$0.20 per share] and $14,115 [$0.20 per share], respectively.

13. INCOME TAX EXPENSE

                 
        Three month period ended
June 30, 2014
      Three month period ended
June 30, 2013
Current income tax expense       7,119       778
Deferred income tax recovery expense       (1,298)       3,618
        5,821       4,396
        Six month period ended
June 30, 2014
      Six month period ended
June 30, 2013
Current income tax expense       8,623       2,708
Deferred income tax recovery expense       (3,042)       3,579
        5,581       6,287

Income tax expense is recognized based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rates used for the three month periods ended June 30, 2014 and June 30, 2013 was 26.5%.

14. EARNINGS PER SHARE 

Earnings per share are calculated using the weighted average number of shares outstanding. The weighted average number of shares used in the basic earnings per share calculations amounted to 70,888,780 for the three month period ended June 30, 2014 [three month period ended June 30, 2013 - 70,612,019].

The following table reconciles the profit for the period and the number of shares for the basic and diluted earnings per share calculations:

                 
         Three month period ended
June 30, 2014
      Three month period ended
June 30, 2013
Profit for the period for basic earnings per share       16,524       14,445
Profit for the period for diluted earnings per share       17,227       15,138
Weighted average common shares outstanding       70,888,780       70,612,019
Dilutive effect       11,468,452       11,087,300
Diluted weighted average common shares outstanding       82,357,232       81,699,319
Basic earnings per share       0.23       0.20
Diluted earnings per share       0.21       0.19
         Six month period ended
June 30, 2014
      Six month period ended
June 30, 2013
Profit for the period for basic earnings per share       17,342       19,869
Profit for the period for diluted earnings per share       18,743       20,586
Weighted average common shares outstanding       70,775,082       70,602,007
Dilutive effect       11,244,271       7,335,717
Diluted weighted average common shares outstanding       82,019,353       77,937,724
Basic earnings per share       0.25       0.28
Diluted earnings per share       0.23       0.26

15. FINANCIAL INSTRUMENTS

Classification of financial instruments and fair value

The classification of the Company's financial instruments, as well as their carrying amounts and fair values, are disclosed in the tables below.

June 30, 2014:                        
      Measurement     Total Carrying
Amount
    Fair Value     Fair Value
Hierarchy
Loans and receivables                        
  Trade receivables     Amortized cost     94,481     94,481     Level 2
Available-for-sale                        
  Restricted marketable securities     Fair value     20,599     20,599     Level 1
  Available-for-sale financial assets     Fair value     20,000     20,000     Level 1
  Investment properties     Amortized cost     22,111     47,940     Level 3
Other financial liabilities                        
  Bank overdraft     Fair value     27,106     27,106     Level 1
  Trade and other payables     Amortized cost     179,963     179,963     Level 2
  Provisions     Amortized cost     5,620     5,620     Level 2
  Finance lease liabilities     Amortized cost     140,117     140,117     Level 2
  Loans and borrowings     Amortized cost     365,628     365,628     Level 2
  Convertible debentures     Amortized cost     91,359     111,970     Level 2
  Redeemable share liability     Amortized cost     401     401     Level 2
                         
                         
December 31, 2013:                        
      Measurement     Total Carrying
Amount
    Fair Value     Fair Value
Hierarchy
Loans and receivables                        
  Cash and cash equivalents     Fair value     5,832     5,832     Level 1
  Trade receivables     Amortized cost     104,275     104,275     Level 2
Available-for-sale                        
  Restricted marketable securities     Fair value     20,104     20,104     Level 1
  Available-for-sale financial assets     Fair value     17,336     17,336     Level 1
  Investment properties     Amortized cost     22,304     47,940     Level 3
Other financial liabilities                        
  Trade and other payables     Amortized cost     202,618     202,618     Level 2
  Provisions     Amortized cost     4,769     4,769     Level 2
  Finance lease liabilities     Amortized cost     142,189     142,189     Level 2
  Debentures     Amortized cost     15,503     15,503     Level 2
  Loans and borrowings     Amortized cost     375,255     375,255     Level 2
  Convertible debentures     Amortized cost     90,952     112,970     Level 2
  Redeemable share liability     Amortized cost     859     859     Level 2

The fair value hierarchy of financial instruments measured at fair value, as at June 30, 2014, includes financial assets of $40,599, $94,481 and $47,940 for Levels 1, 2 and 3 respectively, and financial liabilities of $27,106, $803,699 and nil for Levels 1, 2 and 3, respectively.

The carrying amounts of the Company's trade receivables, trade and other payables and debentures approximate their fair values due to their short-term nature.

The carrying amounts of the Company's finance lease liabilities approximate their fair values because the interest rate applied to measure their carrying amount approximates current market interest rates.

The carrying amounts of the Company's loans and borrowings approximate their fair values since they bear interest at rates comparable to market rates at the end of the reporting period.

The fair values of available-for-sale financial assets and restricted marketable securities that are traded in active markets are determined by reference to their quoted closing price or dealer price quotations at the reporting date.  For financial instruments that are not traded in active markets, the Company determines fair values using a combination of discounted cash flow models and comparison to similar instruments for which market observable prices exist.

As at June 30, 2014, the fair value of the convertible debentures was determined using their closing quoted market price (not in thousands of dollars) of $111.97 per $100.00 of face value.  For the convertible debentures at June 30, 2014, fair value is calculated based on the face value of the convertible debentures of $100,000.

Fair values of financial instruments reflect the credit risk of the Company and counterparties when appropriate.

Fair value hierarchy

The Company uses a fair value hierarchy to categorize the inputs used to measure the fair value of financial assets and financial liabilities, the levels of which are as follows:

Level 1:   Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:   Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
Level 3:   Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

16. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

[a] The net change in non-cash working capital balances related to operations consists of the following:

                 
        Six month period ended
June 30, 2014
      Six month period ended
June 30, 2013
Trade receivables       9,925       (9,431)
Income taxes receivable             (12,853)
Inventories       673       2,027
Deferred financing costs             817
Other assets       (6,408)       (1,694)
Trade and other payables       (23,351)       5,730
Income taxes payable       4,623      
Customers' deposits       (7,038)       13,542
Provisions       851      
Deferred acquisition costs       (3,183)       1,075
Deferred rent liabilities and lease inducements       1,665      
        (22,243)       (787)

[b] Supplemental cash flow information:

                 
        Six month period ended
June 30, 2014
      Six month period ended
June 30, 2013
Income taxes paid       5,225       15,482

[c]  During the six month period, property, plant and equipment were acquired at an aggregate cost of $4,236 [period ended June 30, 2013 - $1,556], of which $25 [as at December 31, 2013 - $53] is included in trade and other payables as at June 30, 2014.

17. COMPARATIVE FINANCIAL INFORMATION

The comparative Interim Condensed Consolidated Financial Statements have been reclassified from statements previously presented to conform to the presentation of the second quarter 2014 Interim Condensed Consolidated Financial Statements.

SOURCE Leon's Furniture Limited

For further information:

Dominic Scarangella, Tel: 416.243.4073

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