Leon's Furniture Limited - 2013 First Quarter

TORONTO, May 14, 2013 /CNW/ - For the three months ended March 31, 2013, total Leon's sales were $203,555,000 including $41,097,000 of franchise sales and $11,783,000 of The Brick Ltd ("The Brick") sales from the date of acquisition, being March 28, 2013, to March 31, 2013, ($200,651,000 including $43,220,000 of franchise sales in 2012), an increase of 1.45%. Same store sales were down 5.8% from the prior year first quarter. Net income was $5,424,000, $0.08 per common share ($8,599,000, $0.12 per common share in 2012).  The profit decrease in the quarter compared to the prior quarter was mainly due to lower same store sales, additional costs related to two new stores that were opened in the first quarter of 2013 and one time acquisition costs related to the purchase of The Brick.

2013 is proving to be another challenging year where we continue to see a soft economy with no clear signs of any major turnaround. Having said that, we are pleased that we have completed the purchase of The Brick at the end of the first quarter 2013 and had successful grand openings of three new stores so far this year being Brantford, Ontario; Orangeville, Ontario and Sherbrooke, Quebec. As we have indicated in earlier press releases, the branding of both the Leon's and Brick divisions will remain separate; however, we have already begun the process to integrate the best practices of each for the benefit of both. We expect the results will help improve the performance of Leon's Furniture Limited as a whole going forward.

As previously announced, we paid a quarterly 10¢ dividend on April 5, 2013. Today we are happy to announce that the Directors have declared a quarterly dividend of 10¢ per common share payable on the 5^th day of July 2013 to shareholders of record at the close of business on the 5^th day of June 2013. 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
2013	- -	Basic Fully Diluted	8¢ 7¢				$0.08 $0.07
2012	- -	Basic Fully Diluted	12¢ 12¢	13¢ 12¢	19¢ 18¢	23¢ 22¢	$0.67 $0.65
2011	- -	Basic Fully Diluted	15¢ 14¢	16¢ 15¢	22¢ 21¢	28¢ 27¢	$0.81 $0.78

LEON'S FURNITURE LIMITED / MEUBLES LEON LTÉE

Mark J. Leon
Chairman of the Board

LEON'S FURNITURE LIMITED

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three months ended March 31, 2013 and 2012
Dated: May 14, 2013

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 2012 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 months ended March 31, 2013, and 2012, 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 ("IASB"). 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 May 14, 2013.

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. Any Brick Debentures which remain outstanding will continue to be listed for trading on the TSX until their maturity on May 30, 2014.

With the Brick acquisition, Leon's Furniture Limited is now the largest retailer of furniture, appliances and electronics in Canada. The Brick's retail banners include The Brick; United Furniture Warehouse; The Brick Mattress Store; Brick Clearance Centres; and Urban Brick. The Urban Brick banner was launched in 2008 to provide condo and apartment dwellers and other metro market consumers with unique, stylish, high quality home furnishings at competitive prices. This concept is very similar to the Leon's Roundhouse which opened in downtown Toronto in 2009. Finally, the addition of the Brick's Midnorthern Appliance banner along side 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, etc.

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 Corporate	43
Leons' Franchise	32
Appliance Canada	3
The Brick	106
Urban Brick	2
Brick Clearance Centres	6
The Brick Mattress Store	24
United Furniture Warehouse	24
Brick Franchise	69
Total number of stores	309

Revenues and Expenses

For the three months ended March 31, 2013, total Leon's sales were $203,555,000 including $41,097,000 of franchise sales and $11,783,000 of The Brick sales from the March 28, 2013 date of acquisition until March 31, 2013, ($200,651,000 including $43,220,000 of franchise sales in 2012), an increase of 1.45%.

Leon's corporate sales, excluding The Brick, of $150,675,000 in the first quarter of 2013, decreased by $6,756,000, or 4.3%, compared to the first quarter of 2012. Same store sales decreased by 5.8% compared to the prior year.

Leon's banner franchise sales of $41,097,000 in the first quarter of 2013, decreased by $2,123,000 or 4.9%, compared to the first quarter of 2012. The decrease in sales in the first quarter compared to the same period in the prior year was very comparable to what we experienced with corporate stores in the first quarter.

Our gross margin for the first quarter 2013 of 40.73% was in line with the first quarter of 2012. We saw a slight increase in furniture margins offset by a slight decrease in our appliance and electronics margins when compared to the prior year first quarter.

Net operating expenses of $59,269,000 were up $5,963,000 or 11.2% for the first quarter 2013 compared to the first quarter of 2012. The increase in operating expenses compared to the prior year was mainly due to professional fees of approximately $5,942,000 relating to the acquisition of The Brick. Excluding this factor, operating expenses were in line with the prior year.

As a result of the above, net income for the first quarter of 2013 was $5,424,000, $0.08 per common share ($8,599,000, $0.12 per common share in 2012), a decrease of $0.04 per common share.

Annual Financial Information

($ in thousands, except earnings per share and dividends)	2012	2011	2010
Net corporate sales Leon's franchise sales	682,163 198,077	682,836 196,725	710,435 197,062
Total Leon's system-wide sales	880,240	879,561	907,497
Net income	46,782	56,666	63,284
Earnings per share Basic Diluted	$0.67 $0.65	$0.81 $0.78	$0.90 $0.87
Total assets	585,592	584,411	566,674
Common share dividends declared Special common share dividends declared Convertible, non-voting shares dividends declared	$0.40 - $0.20	$0.37 $0.15 $0.20	$0.32 - $0.18

Liquidity and Financial Resources

($ in thousands, except dividends per share)	Mar 31/13	Dec. 31/12	Mar 31/12
Cash, cash equivalents, available-for-sale financial assets Trade and other accounts receivable Inventory Total assets Working capital	68,158 83,800 240,083 1,672,874 35,242	221,684 30,245 86,057 585,592 227,221	195,931 17,315 91,694 563,793 208,154
For the 3 months ended	Current Quarter Mar 31, 2013	Current Quarter Dec. 31, 2012	Current Quarter Mar 31, 2012
Cash flow provided by (used in) operations Purchase of property, plant and equipment Repurchase of capital stock Dividends paid	(3,736) 1,565 - 7,055	22,926 3,678 - 7,001	(7,581) 3,586 232 17,457
Dividends paid per share	$0.10	$0.10	$0.25

Cash and cash equivalents, and available-for-sale financial assets decreased by $153,526,000 in the quarter as a result of the purchase of The Brick.

In the first quarter of 2013 we celebrated grand openings of a new 42,000 sq. ft. store in Orangeville, Ontario and a 36,000 sq. ft. store in Brantford, Ontario. In the second quarter of 2013, we just completed celebrating the grand opening of a new 50,000 sq, ft. store in Sherbrooke, Quebec. In addition, we have secured land for a new store in Rocky View County, Alberta, which is just north of Calgary.

Common Shares

At March 31, 2013, there were 70,606,486 common shares issued and outstanding. During the first quarter 2013, no shares were repurchased and cancelled by the Company through its Normal Course Issuer Bid. In addition, during the quarter ended March 31, 2013, 41,581 convertible, non-voting series 2005 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	538,219	3,940	34,279	400,000	100,000
Operating Leases ^1	737,528	68,002	116,715	116,898	435,913
Outstanding purchase orders	89,781	89,781	-	-	-
Finance Leases	282,311	11,941	23,826	23,075	223,469
Total Contractual Obligations	1,647,839	173,664	174,820	539,973	759,382

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 4 of the 2012 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 March 31, 2013, 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, 2013 available on www.sedar.com.

Quarterly Results (2013, 2012, 2011)

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

	Quarter Ended March 31		Quarter Ended December 31		Quarter Ended September 30		Quarter Ended June 30
	2013	2012	2012	2011	2012	2011	2012	2011
Leon's corporate sales	162,458	157,431	188,462	193,823	174,175	174,373	162,095	163,857
Leon's franchise sales	41,097	43,220	59,725	61,166	49,505	49,273	45,627	45,477
Total Leon's system-wide sales	203,555	200,651	248,187	254,989	223,680	223,646	207,722	209,334
Net income per share	$0.08	$0.12	$0.23	$0.28	$0.19	$0.22	$0.13	$0.16
Fully diluted per share	$0.07	$0.12	$0.22	$0.27	$0.18	$0.21	$0.12	$0.15

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 March 31, 2013.

Internal Controls over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.  The Company's internal control over financial reporting may not prevent or detect all misstatements because of inherent limitations. The Company assessed the effectiveness of its internal control over financial reporting as of March 31, 2013, 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. Based on this assessment, the CEO and the CFO concluded that the Company maintained effective internal control over financial reporting as of March 31, 2013.

Changes in Internal Control over Financial Reporting

Management has also evaluated whether there were changes in the Company's internal control over financial reporting that occurred during the period beginning on January 1, 2013 and ended on March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has determined that no material changes in internal controls have occurred during this period.

Outlook

We have been experiencing poor economic growth which began in 2009 and we don't see any signs of any significant improvement so far in 2013. As such, we anticipate that consumer discretionary spending will remain soft for the balance of 2013. However, having opened three new stores in 2013, coupled with the completion of The Brick purchase at the end of March 2013, we should see improved sales and profitability for the balance of the year.

Non-IFRS Financial Measures

In order to provide additional insight into the business, the Company has provided the measure of same store sales, in the revenue and expenses section above.  This measure 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 total corporate sales (an IFRS measure) and comparable store sales is provided below:

($ in thousands)	Mar 31, 2013	Mar 31, 2012
Net corporate sales Adjustments for stores not in both fiscal periods	162,458 14,182	157,431 -
Comparable store sales	148,276	157,431

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
	As at March 31	As at December 31
($ in thousands)	2013	2012
ASSETS
Current  assets
Cash and cash equivalents	31,279	74,949
Restricted marketable securities	20,053	20,980
Available-for-sale financial assets	16,826	125,755
Trade receivables	83,800	30,245
Income taxes receivable	-	3,644
Inventories [note 6]	240,083	86,057
Deferred financing costs	1,036	1,317
Total current assets	393,077	342,947
Other assets	7,459	1,273
Property, plant and equipment [note 7]	460,295	218,146
Investment properties [note 8]	23,207	8,315
Intangible assets [note 9]	426,436	3,101
Goodwill [note 5]	362,400	11,282
Deferred income tax assets	-	528
Total assets	1,672,874	585,592
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade and other payables	215,999	73,542
Income taxes payable	2,794	-
Customers' deposits	71,649	20,386
Finance lease liability	8,234	-
Dividends payable [note 12]	7,061	7,055
Deferred warranty plan revenue	52,098	14,743
Total current liabilities	357,835	115,726
Loans and borrowings [note 11]	392,358	-
Debentures [note 11]	124,744	-
Finance lease liability	135,459	-
Deferred warranty plan revenue	83,276	17,251
Redeemable share liability [note 10]	859	428
Deferred income tax liabilities	119,411	-
Total liabilities	1,213,942	133,405
Shareholders' equity attributable to the shareholders of the Company
Common shares [note 12]	27,086	26,693
Equity component of convertible debentures [note 11]	9,885	-
Retained earnings	421,462	423,099
Accumulated other comprehensive income	499	2,395
Total shareholders' equity	458,932	452,187
Total liabilities and shareholder's equity	1,672,874	585,592
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited
INTERIM CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
	Three months ended March 31
($ in thousands)	2013	2012
Revenue	162,458	157,431
Cost of sales	96,293	93,218
Gross profit	66,165	64,213
Operating expenses
General and administrative expenses	25,618	22,854
Sales and marketing expenses	20,055	20,512
Occupancy expenses	11,116	8,629
Other operating expenses	2,480	1,311
	59,269	53,306
Operating profit	6,896	10,907
Finance costs	317	-
Finance income	736	749
Profit before income tax	7,315	11,656
Income tax expense [note 13]	1,891	3,057
Profit for the period attributable to the shareholders of the Company	5,424	8,599
Earnings per share  [note 14]
Basic	$ 0.08	$ 0.12
Diluted	$ 0.07	$ 0.12
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
			Three months ended March 31
					Net of tax
($ in thousands)			2013	Tax effect	2013
Profit for the period			5,424	-	5,424
Other comprehensive income, net of tax
	Unrealized gains on available-for-sale financial assets arising during the period		236	26	210
	Reclassification adjustment for net losses included in profit for the period		(2,418)	(312)	(2,106)
	Change in unrealized losses on available-for-sale financial
		assets arising during the period	(2,182)	(286)	(1,896)
Comprehensive income for the period attributable to the shareholders of the Company			3,242	(286)	3,528
					Net of tax
			2012	Tax effect	2012
Profit for the period			8,599	-	8,599
Other comprehensive income, net of tax
	Unrealized gains on available-for-sale financial assets arising during the period		1,735	227	1,508
	Reclassification adjustment for net losses included in profit for the period		(57)	(8)	(49)
	Change in unrealized gains on available-for-sale financial
		assets arising during the period	1,678	219	1,459
Comprehensive income for the period attributable to the shareholders of the Company			10,277	219	10,058
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
($ in thousands)		Equity component of convertible debenture	Common shares	Accumulated other comprehensive income	Retained earnings	Total
As at  January 1, 2012		—	20,918	(104)	404,647	425,461
Comprehensive income
Profit for the period		—	—	—	8,599	8,599
Change in unrealized gains on available-for-sale		—	—	1,459	—	1,459
	financial assets arising during the period
Total comprehensive income		—	—	1,459	8,599	10,058
Transactions with shareholders
Dividends declared		—	—	—	(6,993)	(6,993)
Management share purchase plan [note 10]		—	954	—	—	954
Repurchase of common shares [note 12]		—	(2)	—	(230)	(232)
Total transactions with shareholders		—	952	—	(7,223)	(6,271)
As at March 31, 2012		—	21,870	1,355	406,023	429,248
As at  January 1, 2013		—	26,693	2,395	423,099	452,187
Comprehensive income
Profit for the period		—	—	—	5,424	5,424
Change in unrealized gains on available-for-sale		—	—	(1,896)	—	(1,896)
	financial assets arising during the period
Total comprehensive income		—	—	(1,896)	5,424	3,528
Transactions with shareholders
Dividends declared		—	—	—	(7,061)	(7,061)
Issuance of equity component of convertible debt		9,885				9,885
Management share purchase plan [note 10]		—	393	—	—	393
Repurchase of common shares [note 12]		—	—	—	—	—
Total transactions with shareholders		9,885	393	—	(7,061)	3,217
As at March 31, 2013		9,885	27,086	499	421,462	458,932
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
		Three months ended March 31
($ in thousands)		2013	2012
OPERATING ACTIVITIES
Profit for the period		5,424	8,599
Add (deduct) items not involving an outlay of cash
	Depreciation of property, plant and equipment and investment properties	3,699	3,375
	Amortization of intangible assets	244	216
	Amortization of deferred warranty plan revenue	(4,626)	(4,167)
	Amortization of deferred financing costs	14	-
	Gain on sale of property, plant and equipment	-	(2)
	Deferred income taxes	114	50
	Gain on sale of available-for-sale financial assets	(5,361)	(115)
	Cash paid for deferred financing costs	(3,877)	-
	Cash received on warranty plan sales	3,664	3,095
		(705)	11,051
Net change in non-cash working capital balances related
	to operations [note 15]	(3,031)	(18,632)
Cash used in operating activities		(3,736)	(7,581)
INVESTING ACTIVITIES
Purchase of property, plant & equipment		(1,565)	(3,586)
Purchase of intangible assets		(2)	(9)
Proceeds on sale of property, plant and equipment		(1)	3
Purchase of available-for-sale financial assets		(100,263)	(129,990)
Proceeds on sale of available-for-sale financial assets		226,580	135,810
Issuance of series 2013 shares [note 10]		16,914	-
(Increase) decrease in employee share purchase loans [note 10]		(16,090)	1,177
Proceeds of cash due to acquisition of The Brick [note 5]		31,069	-
Purchase of The Brick [note 5]		(686,023)	-
Cash (used in) provided by investing activities		(529,381)	3,405
FINANCING ACTIVITIES
Dividends paid [note 12]		(7,055)	(17,457)
Repurchase of common shares [note 12]		-	(232)
Issuance of term loan, net of transaction costs [note 11]		396,502	-
Issuance of convertible debentures [note 11]		100,000	-
Cash provided by (used in) financing activities		489,447	(17,689)
Net decrease in cash and cash equivalents
	during the period	(43,670)	(21,865)
Cash and cash equivalents, beginning of period		74,949	72,505
Cash and cash equivalents, end of period		31,279	50,640
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements

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

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

For the three months period ended March 31, 2013 and 2012

1. GENERAL INFORMATION

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, electronics and appliances across Canada.  On March 28, 2013, the Company acquired 100% of the common shares and warrants of The Brick Ltd. ("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.  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 and registered office is 45 Gordon Mackay Road, Toronto, Ontario, M9N 3X3.

2. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of the Company are prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB").  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 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.

The interim condensed consolidated financial statements have been prepared using the historical cost convention, as modified by certain financial assets measured at fair value through profit or loss. These interim condensed consolidated financial statements were approved and authorized for issuance by the Board of Directors on May 14, 2013.

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, 2012. 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, 2012.

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, 2013, the Company adopted IFRS 10, Consolidated Financial Statements which replaces SIC-12, Consolidation - Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements.  IFRS 10 requires an entity to consolidate an investee when it is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.  The adoption of IFRS 10 had no impact on the interim condensed consolidated financial statements of the Company.
[ii]	Effective January 1, 2013, the Company adopted IFRS 11, Joint Arrangements which replaces SIC-13, Jointly Controlled Entities - Non-Monetary Contributions be Venturers and IAS 31, Joint Ventures.  IFRS 11 requires an entity to classify its interest in a joint arrangement as a joint operation or joint venture.  Joint ventures are accounted for using the equity method of accounting, while for joint operations, the entity recognizes its share of the assets, liabilities, revenues and expenses related of the joint operation.  The adoption of IFRS 11 had no impact on the interim condensed consolidated financial statements of the Company.
[iii]	Effective January 1, 2013, the Company adopted IFRS 12, Disclosure of Interests in Other Entities.  IFRS 12 establishes disclosure requirements for interests in other entities, such as subsidiaries, joint arrangements, associates and unconsolidated structured entities.  The standard carries forward existing disclosure requirements from other IFRSs and also introduces significant additional disclosure that addresses the nature of, and risks associate with, an entity's interests in other entities.  The adoption of IFRS 12 had no impact on the interim condensed consolidated financial statements of the Company.
[iv]	Effective January 1, 2013, the Company adopted IFRS 13, Fair Value Measurement.  IFRS 13 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The adoption of IFRS 13 had no impact on the interim condensed consolidated financial statements of the Company.

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;
• utilize working capital to negotiate favourable supplier agreements both in respect of early payment discounts and overall payment terms; and
• to maintain a capital structure that supports keeping capital costs to a minimum.

The capital structure of the Company has changed from the prior reporting period.  It now includes shareholders' equity, loans and borrowings, and borrowing capacity available under the revolving credit facilities (Note 11).  The revolving credit facilities remain undrawn at March 31, 2013.

Under the senior secured credit agreement, the financial covenants are reviewed on an ongoing basis by management to monitor compliance with the agreement.  The Company was in compliance with these key covenants as at March 31, 2013.

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 The Brick's issued and outstanding shares and warrants, 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, Urban 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.

For the quarter ended March 31, 2013, The Brick contributed revenue of $11,783,000 and net loss of $45,000 to the Company's results during the stub period March 28, 2013 to March 31, 2013.  If the acquisition had occurred on January 1, 2013, management estimates that consolidated revenue would have been approximately $450,006,000 and consolidated net income would have been approximately $6,752,000 for the quarter ended March 31, 2013, excluding any fair value adjustments related to the purchase equation.  In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same as if the acquisition had occurred on January 1, 2013.  In addition, change in control costs and acquisition-related costs incurred by The Brick have been excluded from the calculation of consolidated net income.

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

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

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

Cash	31,069
Trade and other receivables	55,986
Income taxes receivable	18
Inventories	162,138
Other assets	7,905
Available for sale financial assets	13,279
Property, plant and equipment	245,098
Investment properties	14,900
Deferred income tax assets	2,450
Intangible assets	423,579
Trade and other payables	145,309
Income taxes payable - current	9,936
Customer deposits	52,221
Provisions - current	4,981
Deferred warranty plan revenue and unearned insurance revenue - current	37,709
Finance lease liability - current	8,234
Share based compensation plans	2,292
Deferred warranty plan revenue and unearned insurance revenue - non-current	66,633
Provisions - non-current	498
Debentures	34,629
Finance lease liability - non-current	135,459
Income taxes payable - non-current	1,058
Deferred income tax liabilities	122,557
Total net identifiable assets	334,905

Final valuations of certain items are not yet complete due to the inherent complexity associated with valuations.  Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process and analysis of resulting tax effects. Trade and other receivables include gross contractual amounts receivable of $57,001,000, net of an allowance of $1,015,000, which represents management's best estimate of the contractual cash flows not expected to be collected. The Company determined the fair values based on discounted cash flows, market information, independent valuations and management's estimates.

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

Total consideration transferred	686,023
Less: Total net identifiable assets	334,905
Goodwill	351,118

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

The Company has incurred acquisition-related costs of $5,942,000 to date relating to external legal, advisory fees and due diligence costs. These costs have been included in general and administrative expenses in the interim condensed consolidated income statement. Total acquisition costs incurred to date as at March 31, 2013, by the Company were $12,835,000.

6. INVENTORIES

The amount of inventory recognized as an expense for the three month period ended March 31, 2013 was $94,555,000 (period ended March 31, 2012 - $91,301,000) which is presented within cost of sales on the interim consolidated income statements.

During the three month period ended March 31, 2013, there was $193,000 in inventory write-downs (three month period ended March 31, 2012 - $125,000). At March 31, 2013, the inventory markdown provision totaled $9,133,000 (as at December 31, 2012 - $5,652,000). There were no reversals of any write-down for the period ended March 31, 2013 (period ended March 31, 2012 - $nil).

7. PROPERTY, PLANT AND EQUIPMENT

	Land	Buildings	Equipment	Vehicles	Building improvements	Leased Property	Leased Equipment	Total
As at March 31, 2013: Opening net book value Additions Additions due to acquisition Disposals Depreciation	55,381 — 24,665 — —	84,383 4 41,241 — (973)	16,476 395 28,314 — (679)	3,900 313 1,502 — (317)	58,006 30 30,888 — (1,675)	— — 113,567 — (47)	— — 4,921 — —	218,146 742 245,098 — (3,691)
Closing net book value	80,046	124,655	44,506	5,398	87,249	113,520	4,921	460,295
As at March 31, 2013: Cost Accumulated depreciation	80,046 —	225,839 (101,185)	83,356 (38,850)	25,711 (20,313)	130,239 (42,990)	113,567 (47)	4,921 —	663,679 (203,384)
Net book value	80,046	124,654	44,506	5,398	87,249	113,520	4,921	460,295
As at December 31, 2012: Opening net book value Additions Disposals Depreciation	55,431 (50) — —	88,206 64 — (3,887)	14,178 5,076 — (2,778)	4,312 1,080 8 (1,484)	52,031 11,795 — (5,820)	— — — —	— — — —	214,158 17,965 8 (13,969)
Closing net book value	55,381	84,383	16,476	3,900	58,006	—	—	218,146
As at December 31, 2012: Cost Accumulated depreciation	55,381 —	184,594 (100,211)	54,647 (38,171)	23,896 (19,996)	99,321 (41,315)	— —	— —	417,839 (199,693)
Net book value	55,381	84,383	16,476	3,900	58,006	—	—	218,146

Included in the above balances at March 31, 2013 are assets not being amortized with a net book value of approximately $nil [as at December 31, 2012 - $4,371,000] being construction-in-progress.

8. INVESTMENT PROPERTIES

	Land	Buildings	Building improvements	Total
As at March 31, 2013: Opening net book value Additions Additions due to acquisition Disposals Depreciation	8,286 — 5,215 — —	— — 9,685 — (1)	29 — — — (7)	8,315 — 14,900 — (8)
Closing net book value	13,501	9,684	22	23,207
As at March 31, 2013: Cost Accumulated depreciation	13,501 —	17,724 (8,040)	1,457 (1,435)	32,682 (9,475)
Net book value	13,501	9,684	22	23,207
As at December 31, 2012: Opening net book value Additions Disposals Depreciation	8,286 — — —	— — — —	80 — — 51	8,366 — — 51
Closing net book value	8,286	—	29	8,315
As at December 31, 2012: Cost Accumulated depreciation	8,286 —	8,039 (8,039)	1,457 (1,428)	17,782 (9,467)
Net book value	8,286	—	29	8,315

The fair value of the investment property portfolio as at March 31, 2013 was approximately $48,440,000 [as at December 31, 2012 - $33,540,000]. The fair value was compiled by management based on available market evidence.

9. INTANGIBLE ASSETS

	Customer relationships	Brand name	Non-compete Agreement	Computer software	Leasehold Interests	Total
As at March 31, 2013: Opening net book value Additions Additions due to acquisition Disposals Amortization for the period	750 — 5,000 — (62)	1,250 — 362,000 — (62)	375 — — — (31)	726 2 11,579 — (89)	— — 45,000 — —	3,101 2 423,579 — (244)
Closing net book value	5,686	363,188	344	12,218	45,000	426,436
As at March 31, 2013: Cost Accumulated amortization	7,000 (1,312)	364,500 (1,312)	1,000 (656)	15,792 (3,574)	45,000 —	433,292 (6,854)
Net book value	5,686	363,188	344	12,218	45,000	426,436
As at December 31, 2012: Opening net book value Additions Disposals Amortization for the year	1,000 — — (250)	1,500 — — (250)	500 — — (125)	958 9 — (241)	— — — —	3,958 9 — (866)
Closing net book value	750	1,250	375	726	—	3,101
As at December 31, 2012: Cost Accumulated amortization	2,000 (1,250)	2,500 (1,250)	1,000 (625)	4,211 (3,485)	— —	9,711 (6,610)
Net book value	750	1,250	375	726	—	3,101

10. REDEEMABLE SHARE LIABILITY

	As at March 31, 2013	As at December 31, 2012
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   Issued and fully paid 414,736 series 2005 shares [December 31, 2012 - 456,317] 1,031,436 series 2009 shares [December 31, 2012 - 1,045,219] 276,580 series 2012 shares [December 31, 2012 - 281,500] 1,485,000 series 2013 shares [December 31, 2012 - nil]   Less employee share purchase loans	3,916 9,128 3,432 16,914   (32,531)	4,309 9,250 3,493 —   (16,624)
	859	428

Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005, 2009, 2012 and 2013 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares, series 2009 shares, series 2012 shares and series 2013 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 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 and series 2013 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 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 and $11.39 per series 2013 share.  Dividends paid to holders of series 2005, 2009 and 2012 shares of approximately $360,000 [2012 - $465,000] have been used to reduce the respective shareholder loans. The preferred dividends are paid once a year during the first quarter.

During the three month period ended March 31, 2013, 41,581 series 2005 shares [three month period ended March 31, 2012 - 32,822] were converted into common shares with a stated value of approximately $393,000 [three month period ended March 31, 2012 - $310,000], respectively.

During the three month period ended March 31, 2013, the Company cancelled 13,783 series 2009 shares [three month period ended March 31, 2012 - 12,237] and 4,920 series 2012 shares [three month period ended March 31, 2012 - nil] in the amount of $122,000 and $61,000, respectively [three month period ended March 31, 2012 - $108,000 and nil].

During the three month period ended March 31, 2013, the Company issued 1,485,000 series 2013 shares for proceeds of $16,914,000. In addition, the Company advanced non-interest bearing loans in the amount of $16,914,000 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 $1,000, into fully paid Common Shares of the Company at the conversion rate of 79.12707 Common Share per $1,000 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.

At March 31, 2013, $90,115,000 of the convertible debentures has been attributed to the debt component and $9,885,000 has been attributed to the equity component of the instrument. The difference between the carrying value and the face value of the convertible debentures will be accreted using the effective interest rate method.

Debentures

As discussed in Note 17, the Debentures of The Brick mature on May 30, 2014 and bear interest at a fixed rate of 12% per annum, payable in cash semi-annually in arrears on December 31^st and June 30^th of each year.

Bank Indebtedness

On January 31, 2013, a Senior Secured Credit Agreement was obtained to fund the acquisition of the Brick. The Company obtained a credit facility, with a syndicate of banks, with a term credit facility limit of $400,000,000 and revolving credit facility limit of $100,000,000. Under the terms of this agreement, these amounts must be repaid in full by March 28, 2017. Bank indebtedness as of March 31, 2013 of $400,000,000 bears interest based on Canadian prime, Bankers Acceptance and LIBOR rates plus an applicable standby fee on undrawn amounts. Transaction costs in the amount of $5,193,000 have been deferred. 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 92 day Bankers Acceptance with a cost of borrowing of 3.574% and is due for renewal on June 28, 2013. The term credit facility is repayable in quarterly amounts ranging from $5,000,000 to $15,000,000 starting in the Company's third quarter of 2013. As of March 31, 2013, the Company had not drawn on the revolving credit facility. The agreement includes a general security agreement which constitutes of a lien on all personal property of Leon's Furniture Limited. In addition to this, there are financial covenants related to the credit facility as follows:

					(1)	Total Debt to Consolidated EBITDA Ratio: Maintain a ratio of Total Debt to Consolidated EBITDA of not more than (i) 3.5:1 up to and including June 30, 2014; and (ii) 3.0:1 from and after July 1, 2014.
					(2)	Total Adjusted Debt to Consolidated Earnings Before Interest, Taxes, Depreciation, Ammortization, and Rent Expense (EBITDAR) Ratio: Maintain a ratio of Total Adjusted Debt to Consolidated EBITDAR of not more than (i) 4.75:1 up to and including June 30, 2013; and (ii) 4.5:1 from and after July 1, 2014.
					(3)	Fixed Charge Coverage Ratio: Maintain a Fixed Charge Coverage Ratio of not less than 1.10:1.00.

At March 31, 2013 the Company is in full compliance of these financial covenants. The Company can prepay without penalty amounts outstanding under the facilities at any time.

12. COMMON SHARES

	As at March 31, 2013	As at December 31, 2012
Authorized - Unlimited common shares
Issued 70,606,486 common shares [December 31, 2012 - 70,564,905]	27,086	26,693

During the three month period ended March 31, 2013, 41,581 series 2005 shares [three month period ended March 31, 2012 - 32,822] were converted into common shares with a stated value of approximately $393,000 [three month period ended March 31, 2012 - $310,000], respectively.

During the three month period ended March 31, 2013, the Company repurchased nil [three month period ended March 31, 2012 - 19,104] common shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bid at a net cost of approximately $nil [three month period ended March 31, 2012 - $232,000].  All shares repurchased by the Company pursuant to its Normal Course Issuer Bid have been cancelled.  The repurchase of common shares resulted in a reduction of share capital in the amount of approximately $nil [three month period ended March 31, 2012 - $2,000].  The excess net cost over the average carrying value of the shares of approximately $nil [three month period ended March 31, 2012 - $230,000] has been recorded as a reduction in retained earnings.

The dividends paid for the three month periods ended March 31, 2013 and March 31, 2012 were $7,055,000 [$0.10 per share] and $17,457,000 [$0.25 per share] respectively.

13. INCOME TAX EXPENSE

	Three month period ended March 31, 2013	Three month period ended March 31, 2012
Current income tax expense Deferred income tax (recovery) expense	1,938 (47)	3,118 (61)
	1,891	3,057

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 March 31, 2013 and March 31, 2012 were 26.5% and 26.75%, respectively.

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 70,591,587 for the three month period ended March 31, 2013 [three month period ended March 31, 2012 - 69,870,782].

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

		Profit for the period attributed to common shareholders	Weighted average number of shares	Per share amount
Three month period ended March 31, 2013	Basic	5,424	70,591,587	0.08
	Dilutive effect	—	3,528,625	—
	Diluted	5,424	74,120,212	0.07
Three month period ended March 31, 2012	Basic	8,599	69,870,782	0.12
	Dilutive effect	—	2,256,893	—
	Diluted	8,599	72,127,675	0.12

15. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

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

	Three month period ended March 31, 2013	Three month period ended March 31, 2012
Trade receivables Inventories Other assets Trade and other payables Income taxes payable Customers' deposits	2,431 8,112 1,719 (9,797) (4,538) (958)	11,622 (3,864) (11) (23,713) (2,245) (421)
	(3,031)	(18,632)

[b] Supplemental cash flow information:

	Three month period ended March 31, 2013	Three month period ended March 31, 2012
Income taxes paid	6,283	5,257

[c]  During the three month period, property, plant and equipment were acquired at an aggregate cost of $742,000 [period ended March 31, 2012 - $3,621,000], of which $823,000 [2012 - $909,000] is included in trade and other payables as at December 31, 2012.

16. SEASONAL NATURE OF BUSINESS

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

17. SUBSEQUENT EVENT

The 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 $110 per $100 of principal value (not in thousands of dollars) plus accrued and unpaid interest. The Brick received valid tenders for $17,833,000 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 $20,191,000 comprised $19,616,000 in respect of principal and the 10% premium on principal, and $575,000 in respect of accrued interest. The remaining principal amount of Debentures outstanding subsequent to the April 11, 2013 repurchase is $15,000,000.

18. COMPARATIVE FINANCIAL INFORMATION

The comparative Interim Condensed Consolidated Financial Statements have been reclassified from statements previously presented to conform to the presentation of the first quarter 2013 Interim Condensed Consolidated Financial Statements.

 

SOURCE: Leon's Furniture Limited

Dominic Scarangella, Tel: [phone]