Leon's Furniture Limited - 2014 Third Quarter

TORONTO, Nov. 13, 2014 /CNW/ - The Board is pleased to announce the 2014 third quarter results of Leon's Furniture Limited. For the three months ended September 30, 2014, total Leon's system wide sales were $629,152,000 including $97,467,000 of franchise sales ($628,619,000 including $100,017,000 franchise sales in 2013). Same store sales were up 1% compared to the prior year third quarter. Net income was $27,287,000, 38¢ per common share ($21,760,000, 31¢ per common share in 2013), an increase of 23% per common share. We are pleased to announce that our earnings per share were a record high for a third quarter.

For the nine months ended September 30, 2014, total Leon's system wide sales were $1,698,991,000 including $266,780,000 of franchise sales ($1,405,555,000 including $233,936,000 of franchise sales in 2013) and net income was $45,611,000, 64¢ per common share ($42,058,000, 60¢ per common share in 2013), an increase of 7% per common share. These figures include The Brick Limited results since March 28, 2013.

Despite a difficult start in the first quarter of 2014, we are pleased by the increase in profits for the second and third quarter of 2014 versus the prior year.  We are also encouraged by the increase in same store sales in the third quarter 2014 compared to the prior year 2013. Integration and synergies between The Brick and Leon's divisions are progressing as planned. As well, we are making good progress on a new computer system to be implemented over the next 15 months that will result in improved efficiencies in the operations of both divisions.

As previously announced, we paid a quarterly 10¢ dividend on October 6^th, 2014. Today we are pleased to announce that the Board of Directors have declared a quarterly dividend of 10¢ per common share payable on the 5^th day of January 2015 to shareholders of record at the close of business on the 5^th day of December 2014. In addition, the annual dividend on the convertible non-voting preferred shares of 20¢ will be payable on January 5, 2015 to the shareholders of record at the close of business on December 5, 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.

For further information, please consult the Company's Management Discussion & Analysis dated November 13, 2014. Certain amounts and earnings per share figures contained in this press release have been restated.  Refer to note 5 in the third quarter interim condensed consolidated financial statements.

EARNINGS PER SHARE FOR EACH QUARTER

MARCH 31

JUNE 30

SEPT. 30

DEC. 31

YEAR TOTAL

2014

- -

Basic Fully Diluted

2¢ 2¢

24¢ 21¢

38¢ 34¢

$0.64 $0.58

2013

- -

Basic Fully Diluted

8¢ 7¢

21¢ 18¢

31¢ 28¢

37¢ 33¢

$0.97 $0.89

2012

- -

Basic Fully Diluted

12¢ 12¢

13¢ 12¢

19¢ 18¢

23¢ 22¢

$0.67 $0.65

LEON'S FURNITURE LIMITED / MEUBLES LEON LTEE

Mark J. Leon
Chairman of the Board

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three and nine months ended September 30, 2014 and 2013
Dated: November 13, 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 nine months ended September 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 slowdown in the Canadian economy; a 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 November 13, 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, Leon's now has approximately 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
Leon's banner franchise stores	35
Appliance Canada banner stores	3
The Brick banner corporate stores^1	111
The Brick banner franchise stores	67
Brick Clearance Centre banner stores	2
The Brick Mattress Store	24
United Furniture Warehouse banner stores	15
Total number of stores	301

¹Includes the Midnorthern Appliance banner

Revenues and Expenses

For the three months ended September 30, 2014, total system wide sales were $629,152,000, which includes $531,685,000 of corporate sales and $97,467,000 of franchise sales, ($628,619,000, which includes $528,602,000 of corporate sales and $100,017,000 of franchise sales for the three months ended September 30, 2013). Overall, same store corporate sales increased by 1%.

Our gross margin for the third quarter 2014 of 43.0% was up from the 42.9% gross margin experienced in the third quarter of 2013. The increase in gross margin was driven by the change in our sales mix as we saw a slight increase to furniture and appliance sales versus electronic sales.

Net operating expenses of $187,987,000 were down $3,700,000 from the third quarter of 2013. The decrease compared to the comparative period was mainly due to lower payroll costs at the Brick division and a reduction in marketing expenses in the Leon's division. Excluding these factors, operating expenses were in line with the prior comparative period.

As a result of the above, net income for the third quarter of 2014 was $27,287,000, $0.38 per common share ($21,760,000, $0.31 per common share in 2013), an increase of $0.07 per common share or 23% from the prior year quarter.

For the nine months ended September 30, 2014, total system wide sales were $1,698,991,000 including $266,780,000 of franchise sales ($1,405,555,000 including $233,936,000 of franchise sales in 2013) and net income was $45,611,000, $0.64 per common share ($42,058,000, $0.60 per common share in 2013), an increase of $0.04 per common share or 7% from the prior comparative nine month period. These figures within the MD&A reflected these restated amounts which include The Brick results since March 28, 2013.

Subsequent to the finalization of the purchase price allocation for the March 28, 2013 acquisition of The Brick, as previously disclosed in the Company's interim condensed consolidated financial statements as of and for the three months ended March 31, 2014, management discovered that certain of the values allocated to property, plant and equipment, intangible assets and finance lease liabilities were incorrect, as further described in the third quarter interim condensed consolidated financial statements.   Accordingly, Management has restated the purchase price allocation and goodwill recognized on acquisition, and also disclosed the impact on the statements of financial position and income statements for the related periods in Note 5 of the third quarter interim condensed consolidated financial statements.   The figures within this MD&A reflected these restated amounts.

Annual Financial Information

($ in thousands, except earnings per share and dividends)	Restated 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	68,392	46,782	56,666
Earnings per share Basic Diluted	$0.97 $0.89	$0.67 $0.65	$0.81 $0.78
Total assets	1,565,356	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)	Sept 30, 2014	Restated Dec. 31, 2013	Restated Sept 30, 2013
Cash and cash equivalents and available-for-sale financial assets   Trade and other accounts receivable Inventory Total assets Working capital	51,041 95,317 272,393 1,546,423 4,709	43,272 104,275 277,656 1,565,356 (11,713)	95,552 95,766 247,717 1,576,710 (4,687)
For the 3 months ended	Sept 30, 2014	Dec. 31, 2013	Sept 30, 2013
Cash flow provided by operations Purchase of property, plant and equipment Dividends paid     Dividends paid per share	73,613 1,593 7,097     $0.10	(10,973) 12,347 7,062     $0.10	59,049 4,577 7,062     $0.10

Common Shares

At September 30, 2014, there were 71,019,540 common shares issued and outstanding. During the third quarter 2014, no shares were repurchased and cancelled by the Company through its Normal Course Issuer Bid which has now expired. In addition, during the quarter ended September 30, 2014, 122,883 convertible, non-voting series 2005 shares and 261,948 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	503,084	65,780	126,590	198,007	112,707
Operating Leases	549,934	83,269	159,115	135,424	172,126
Trade and other payables	207,587	207,587	-		-
Finance Leases	25,188	3,456	6,526	4,841	10,365
Total Contractual Obligations	1,285,793	360,092	292,231	338,272	295,198

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 September 30, 2014, the Company 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 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 September 30		Quarter Ended June 30		Quarter Ended March 31		Quarter Ended December 31
	2014	2013^*	2014^*	2013^*	2014^*	2013	2013^*	2012
Corporate sales	531,685	528,602	474,517	480,559	426,009	162,458	523,025	188,462
Franchise sales	97,467	100,017	86,921	92,822	82,393	41,097	110,846	59,725
Total system-wide sales	629,152	628,619	561,438	573,381	508,402	203,555	633,871	248,187
Basic earnings per share	$0.38	$0.31	$0.24	$0.21	$0.02	$0.08	$0.37	$0.23
Diluted earnings per share	$0.34	$0.28	$0.21	$0.18	$0.02	$0.07	$0.33	$0.22

The Company's quarterly results include the results of The Brick as of the date of acquisition on March 28, 2013.

* Restated earnings per share

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 September 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 September 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 increase in sales and  profit growth we have experienced with the purchase of The Brick. We are particularly encouraged by the results of our second and third quarters. Even though we continue to see soft economic growth, we expect to see continued improvement in profits 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  Sept 30, 2014	Quarter Ended  Sept 30, 2013
Revenue Adjustments for stores not in both fiscal periods^1	531,685 (2,294)	528,602 (3,661)
Comparable store sales	529,391	524,941

¹For the quarter ended September 30, 2013, there are six locations excluded for the adjustments for stores not in both fiscal periods.

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
				As at September 30			As at December 31
($ in thousands)				2014			2013
							Restated
ASSETS							[note 5]
Current assets
Cash and cash equivalents [note 15]				9,726			5,832
Restricted marketable securities [note 15]				18,208			20,104
Available-for-sale financial assets				23,107			17,336
Trade receivables [note 15]				95,317			104,275
Inventories [note 6]				272,393			277,656
Deferred acquisition costs				1,600			1,659
Deferred financing costs				882			903
Total current assets				421,233			427,765
Other assets				8,783			4,970
Deferred acquisition costs				12,444			7,250
Property, plant and equipment [note 7]				331,648			352,707
Investment properties [note 8]				21,980			22,304
Intangible assets [note 9]				322,002			324,837
Goodwill [notes 5 and 9]				418,079			418,079
Deferred income tax assets				10,254			7,444
Total assets				1,546,423			1,565,356
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade and other payables				207,587			200,361
Provisions				5,790			4,769
Income taxes payable				25,917			12,135
Customers' deposits				79,857			93,609
Finance lease liability				1,946			2,010
Dividends payable				7,101			7,063
Deferred warranty plan revenue				53,326			54,028
Debentures [note 11]				-			15,503
Loans and borrowings [note 11]				35,000			50,000
Total current liabilities				416,524			439,478
Loans and borrowings [note 11]				300,450			325,255
Convertible debentures [note 11]				91,566			90,952
Finance lease liability				14,411			15,851
Deferred warranty plan revenue				87,679			85,494
Redeemable share liability [note 10]				401			859
Deferred rent liabilities and lease inducements				6,225			4,652
Deferred income tax liabilities				103,124			105,051
Total liabilities				1,020,380			1,067,592
Shareholders' equity attributable to the shareholders of the Company
Common shares [note 12]				30,831			27,352
Equity component of convertible debentures [note 11]				7,089			7,089
Retained earnings				487,590			463,244
Accumulated other comprehensive income				5330			79
Total shareholders' equity				526,043			497,764
Total liabilities and shareholders' equity				1,546,423			1,565,356

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 September 30						Nine months ended September 30
										Restated						Restated
										[note 5]						[note 5]
($ in thousands)							2014			2013			2014			2013
Revenue							531,685			528,602			1,432,211			1,171,619
Cost of sales [note 6]							302,900			301,981			812,931			670,063
Gross profit							228,785			226,621			619,280			501,556
Operating expenses
General and administrative expenses							78,720			80,988			227,994			184,720
Sales and marketing expenses							63,802			65,725			180,164			146,583
Occupancy expenses							41,585			42,289			123,855			94,114
Other operating expenses							3,880			2,667			12,919			9,779
Total operating expenses							187,987			191,669			544,932			435,196
Operating profit							40,798			34,952			74,348			66,360
Finance costs							(4,220)			(5,312)			(14,599)			(11,201)
Finance income							563			386			1,676			1,625
Net income before income tax							37,141			30,026			61,425			56,784
Income tax expense [note 13]							9,854			8,266			15,814			14,726
Net income for the period							27,287			21,760			45,611			42,058
Earnings per share [note 14]
Basic						$	0.38		$	0.31		$	0.64		$	0.60
Diluted						$	0.34		$	0.28		$	0.58		$	0.55

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 September 30
								Net of tax
($ in thousands)				2014			Tax effect	2014
Net income for the period				27,287			-	27,287
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				101			9	92
Reclassification adjustment for net gains(losses)  included in profit for the period				(52)			(8)	(44)
Change in unrealized gains on available-for-sale financial
assets arising during the period				49			1	48
Comprehensive income for the period				27,336			1	27,335
				Restated				Restated
				[note 5]				[note 5]
								Net of tax
				2013			Tax effect	2013
Net income for the period				21,760			-	21,760
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				77			8	69
Reclassification adjustment for net gains(losses)  included in profit for the period				(234)			(59)	(175)
Change in unrealized losses on available-for-sale financial
assets arising during the period				(157)			(51)	(106)
Comprehensive income for the period				21,603			(51)	21,654
				Nine months ended September 30
								Net of tax
($ in thousands)				2014			Tax effect	2014
Net income for the period				45,611			-	45,611
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				793			172	621
Reclassification adjustment for net gains(losses)  included in profit for the period				(214)			(47)	(167)
Change in unrealized gains on available-for-sale financial
assets arising during the period				579			125	454
Comprehensive income for the period				46,190			125	46,065
				Restated				Restated
				[note 5]				[note 5]
								Net of tax
				2013			Tax effect	2013
Net income for the period				42,058			-	42,058
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				(234)			(74)	(160)
Reclassification adjustment for net gains(losses)  included in profit for the period				(2,753)			(384)	(2,369)
Change in unrealized losses on available-for-sale financial
assets arising during the period				(2,987)			(458)	(2,529)
Comprehensive income for the period				39,071			(458)	39,529

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)
											Restated
											[note 5]
($ 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		-			-			-			42,058			42,058
Change in unrealized losses on available-for-sale		-			-			(2,529)			-			(2,529)
financial assets arising during the period
Total comprehensive income		-			-			(2,529)			42,058			39,529
Transactions with shareholders
Dividends declared		-			-			-			(21,184)			(21,184)
Issuance of equity component of convertible debt [note 11]		7,266			-			-			-			7,266
Management share purchase plan [note 10]		-			542			-			-			542
Total transactions with shareholders		7,266			542			-			(21,184)			(13,376)
As at September 30, 2013		7,266			27,235			(134)			443,973			478,340
As at December 31, 2013		7,089			27,352			79			463,244			497,764
Comprehensive income
Net income for the period		-			-			-			45,611			45,611
Change in unrealized gains on available-for-sale		-			-			454			-			454
financial assets arising during the period
Total comprehensive income		-			-			454			45,611			46,065
Transactions with shareholders
Dividends declared		-			-			-			(21,265)			(21,265)
Management share purchase plan [note 10]		-			3,479			-			-			3,479
Total transactions with shareholders		-			3,479			-			(21,265)			(17,786)
As at September 30, 2014		7,089			30,831			533			487,590			526,043

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)
		Nine months ended September 30
			Restated
			[note 5]
($ in thousands)		2014	2013
OPERATING ACTIVITIES
Net income for the period		45,611	42,058
Add (deduct) items not involving an outlay of cash
	Depreciation of property, plant and equipment and investment properties	27,188	21,413
	Amortization of intangible assets	5,350	4,100
	Amortization of deferred warranty plan revenue	(46,577)	(43,335)
	Net finance costs	12,173	9,576
	Deferred income taxes	(4,779)	(717)
	Gain on sale of property, plant and equipment	(96)	(77)
	Gain on sale of available-for-sale financial assets	(151)	(5,666)
		38,719	27,352
Net change in non-cash working capital balances related
to operations [note 16]		14,591	19,737
	Cash received on warranty plan sales	48,060	44,741
Cash provided by operating activities		101,370	91,830
INVESTING ACTIVITIES
Purchase of property, plant and equipment and investment properties [notes 7 & 8]		(5,893)	(6,637)
Purchase of intangible assets [note 9]		(2,515)	(3,932)
Proceeds on sale of property, plant and equipment		184	85
Purchase of available-for-sale financial assets		(10,980)	(109,098)
Proceeds on sale of available-for-sale financial assets		7,836	234,195
Interest received		1,718	1,617
Purchase of The Brick, net of cash acquired $31,069 [note 5]		-	(654,954)
Cash used in investing activities		(9,650)	(538,724)
FINANCING ACTIVITIES
Repayment of finance leases		(1,460)	(1,065)
Dividends paid [note 12]		(21,227)	(21,177)
Repayment of employee loans-redeemable shares [note 10]		3,020	973
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]		(40,000)	(10,000)
Interest paid		(13,159)	(14,521)
Cash (used in) provided by financing activities		(87,826)	429,901
Net increase (decrease) in cash and cash equivalents
during the period		3,894	(16,993)
Cash and cash equivalents, beginning of period		5,832	74,949
Cash and cash equivalents, end of period		9,726	57,956

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 nine month periods ended September 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 November 13, 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 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 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 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 September 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. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL RESULTS

Subsequent to the finalization of the purchase price allocation for the March 28, 2013 acquisition of the Brick as previously disclosed in the Company's interim condensed consolidated financial statements as of and for the three months ended March 31, 2014, management discovered that certain of the values allocated to property, plant and equipment, intangible assets and finance lease liabilities were incorrect.

Management has made the following adjustments as of March 28, 2013 to restate the purchase price allocation, and goodwill recognized on acquisition as follows:

	Originally reported	Adjustments	As restated
Cash	31,069	-	31,069
Trade and other receivables	55,986	-	55,986
Income taxes receivable	18	-	18
Inventories	162,138	-	162,138
Other assets	7,905	-	7,905
Available-for-sale financial assets	13,279	-	13,279
Property, plant and equipment	229,153	(83,737)	145,416
Investment properties	14,400	-	14,400
Intangible assets	339,081	(18,290)	320,791
Trade and other payables	(145,304)	-	(145,304)
Customers' deposits	(52,221)	-	(52,221)
Share-based compensation plans	(2,292)	-	(2,292)
Deferred warranty plan revenue and unearned insurance plan revenue	(104,342)	-	(104,342)
Provisions	(5,479)	-	(5,479)
Debentures	(36,156)	-	(36,156)
Finance lease liabilities	(143,693)	125,358	(18,335)
Income taxes payable	(10,994)	-	(10,994)
Deferred income tax liabilities	(90,877)	(5,776)	(96,653)
Total net identifiable assets	261,671	17,555	279,226
Total consideration transferred	686,023	-	686,023
Less: total net identifiable assets	(261,671)	(17,555)	(279,226)
Goodwill	424,352	(17,555)	406,797

The adjustments relate to the two following matters:

Franchise agreements

Subsequent to the finalization of the purchase price allocation, management of the Company discovered that the value allocated to franchise agreements was overstated by $19,000, due to the fact that all costs attributable to the franchise operations had not been considered in the initial valuation of the franchise agreements.  This reduction of these indefinite life intangibles had no impact to the Company's profitability.  Management has also adjusted deferred taxes associated with this adjustment in the revised purchase price allocation.

Finance and operating leases

Subsequent to the finalization of the purchase price allocation, management of the Company discovered that certain leases had been inappropriately classified as finance leases by the Brick. This error occurred because the determinations of the lease term as defined by IAS 17, Leases for the Brick's lease agreements had not been correctly made at lease inception.  Management undertook an exercise to re-assess the lease terms as of the date of inception, and reconsidered the impact of the revised assessment on the purchase price allocation.  As a result of this exercise, it was determined that the value allocated to property, plant and equipment and finance lease obligations in the purchase price allocation were overstated by $83,737 and $125,358, respectively.  As a result of the change in classification for certain leases from finance leases to operating leases, intangible assets were adjusted by $710 to account for previously unrecognized favourable lease intangible assets.  Management has also adjusted deferred taxes associated with this adjustment in the revised purchase price allocation.

Summary of restatement

The following tables summarize the impact of the restatement of the purchase price allocation as of March 28, 2013 on the consolidated statement of financial position as at December 31, 2013 and the interim consolidated statements of income for 6 month period ended June 30, 2013, 9 month period ending September 30, 2013, year ended December 31, 2013, 3 month period ended March 31, 2014 and 6 month period ended June 30, 2014.

Consolidated statement of financial position as at December 31, 2013

	Originally reported	Adjustments	As restated
ASSETS
Property, plant and equipment	433,586	(80,879)	352,707
Intangible assets	343,221	(18,384)	324,837
Goodwill	435,634	(17,555)	418,079
All other assets	469,733	-	469,733
	1,682,174	(116,818)	1,565,356
LIABILITIES
Trade and other payables	202,618	(2,257)	200,361
Finance lease liability - short term	4,302	(2,292)	2,010
Finance lease liability - long term	137,887	(122,036)	15,851
Deferred rent liabilities and lease inducements	2,377	2,275	4,652
Deferred income tax liabilities	98,768	6,283	105,051
All other liabilities	739,667	-	739,667
	1,185,619	(118,027)	1,067,592
SHAREHOLDERS' EQUITY
Retained earnings	462,035	1,209	463,244
All other shareholders' equity items	34,520	-	34,520
	496,555	1,209	497,764
	1,682,174	(116,818)	1,565,356

Interim consolidated income statement for the 6 months ended June 30, 2013

	Originally reported	Adjustments	As restated
General and administrative expenses	104,669	(937)	103,732
Occupancy expenses	49,611	2,214	51,825
Net Finance costs	6,529	(1,879)	4,650
Income tax expense	6,287	173	6,460
Profit for the period attributable to the shareholders of the Company	19,869	429	20,298
Earnings per share
Basic	$0.28	$0.01	$0.29
Diluted	$0.25	$0.01	$0.26

Interim consolidated income statement for the 9 months ended September 30, 2013

	Originally reported	Adjustments	As restated
General and administrative expenses	186,197	(1,477)	184,720
Occupancy expenses	90,179	3,935	94,114
Finance costs	14,940	(3,739)	11,201
Income tax expense	14,351	375	14,726
Profit for the period attributable to the shareholders of the Company	41,152	906	42,058
Earnings per share
Basic	$0.58	$0.02	$0.60
Diluted	$0.54	$0.01	$0.55

Consolidated income statement for the year ended December 31, 2013

	Originally reported	Adjustments	As restated
General and administrative expenses	267,741	(2,788)	264,953
Occupancy expenses	127,985	6,700	134,685
Finance costs	22,424	(5,626)	16,798
Income tax expense	24,373	505	24,878
Profit for the period attributable to the shareholders of the Company	67,183	1,209	68,392
Earnings per share
Basic	$0.95	$0.02	$0.97
Diluted	$0.87	$0.02	$0.89

Interim consolidated income statement for the 3 months ended March 31, 2014

	Originally reported	Adjustments	As restated
General and administrative expenses	73,936	(949)	72,987
Occupancy expenses	40,761	2,145	42,906
Finance costs	7,530	(1,910)	5,620
Income tax recovery	(240)	196	(44)
Profit for the period attributable to the shareholders of the Company	818	518	1,336
Earnings per share
Basic	$0.01	$0.01	$0.02
Diluted	$0.01	$0.01	$0.02

Interim consolidated income statement for the 6 months ended June 30, 2014

	Originally reported	Adjustments	As restated
General and administrative expenses	267,570	(1,933)	265,637
Occupancy expenses	77,884	4,386	82,270
Finance costs	14,192	(3,813)	10,379
Income tax expense	5,581	379	5,960
Profit for the period attributable to the shareholders of the Company	17,342	981	18,323
Earnings per share
Basic	$0.25	$0.01	$0.26
Diluted	$0.23	$0.01	$0.24

6. INVENTORIES

The amount of inventory recognized as an expense for the nine month period ended September 30, 2014 was $800,222 (period ended September 30, 2013 - $664,414), which is presented within cost of sales on the interim consolidated statements of income.

During the three month period ended September 30, 2014, there was $120 in inventory write-downs (three month period ended September 30, 2013 - $62). As at September 30, 2014, the inventory markdown provision totalled $10,168 (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 September 30, 2014: Opening net book value Additions Disposals Depreciation	83,987 — — —	122,077 393 — (4,515)	41,399 2,293 (58) (5,827)	4,288 2,192 (26) (974)	86,295 951 (4) (13,881)	11,778 — — (848)	2,883 — — (755)	352,707 5,829 (88) (26,800)
Closing net book value	83,987	117,955	37,807	5,480	73,361	10,930	2,128	331,648
As at September 30, 2014: Cost Accumulated depreciation	83,987 —	228,183 (110,228)	88,941 (51,134)	26,561 (21,081)	139,257 (65,896)	12,626 (1,696)	3,736 (1,608)	583,291 (251,643)
Net book value	83,987	117,955	37,807	5,480	73,361	10,930	2,128	331,648
Restated [note 5]	Land	Buildings	Equipment	Vehicles	Building Improvements	Leased Property	Leased Equipment	Total
As at December 31, 2013:
Opening net book value Additions Additions due to acquisition Disposals Depreciation	55,381 5,315 23,291 — —	84,383 420 42,776 — (5,502)	16,476 4,609 27,824 (76) (7,434)	3,900 627 1,177 (18) (1,398)	58,006 8,326 33,978 — (14,015)	— — 12,626 — (848)	— — 3,744 (8) (853)	218,146 19,297 145,416 (102) (30,050)
Closing net book value	83,987	122,077	41,399	4,288	86,295	11,778	2,883	352,707
As at December 31, 2013:
Cost Accumulated depreciation	83,987 —	227,790 (105,713)	87,005 (45,606)	25,682 (21,394)	141,578 (55,283)	12,626 (848)	3,736 (853)	582,404 (229,697)
Net book value	83,987	122,077	41,399	4,288	86,295	11,778	2,883	352,707

Included in the above balances as at September 30, 2014 are assets not being amortized with a net book value of approximately $2,251 [as at December 31, 2013 - $459] being construction in progress.

8. INVESTMENT PROPERTIES

	Land	Buildings	Building Improvements	Total
As at September 30, 2014: Opening net book value Additions Depreciation	12,519 — —	9,273 — (357)	512 64 (31)	22,304 64 (388)
Closing net book value	12,519	8,916	545	21,980
As at September 30, 2014: Cost Accumulated depreciation	12,519 —	17,694 (8,778)	2,033 (1,488)	32,246 (10,266)
Net book value	12,519	8,916	545	21,980
As at December 31, 2013: Opening net book value Additions due to acquisition Depreciation	8,286 4,233 —	— 9,655 (382)	29 512 (29)	8,315 14,400 (411)
Closing net book value	12,519	9,273	512	22,304
As at December 31, 2013: Cost Accumulated depreciation	12,519 —	17,694 (8,421)	1,969 (1,457)	32,182 (9,878)
Net book value	12,519	9,273	512	22,304

The estimated fair value of the investment properties portfolio as at September 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 September 30, 2014: Opening net book value Additions Amortization	5,031 — (656)	267,000 — (188)	251 — (95)	9,996 2,515 (1,327)	42,559 — (3,084)	324,837 2,515 (5,350)
Closing net book value	4,375	266,812	156	11,184	39,475	322,002
As at September 30, 2014: Cost Accumulated amortization	7,000 (2,625)	268,500 (1,688)	1,012 (856)	17,125 (5,941)	46,049 (6,574)	339,686 (17,684)
Net book value	4,375	266,812	156	11,184	39,475	322,002
Restated [note 5] As at December 31, 2013:
Opening net book value Additions Additions due to acquisition Amortization	750 — 5,000 (719)	1,250 — 266,000 (250)	375 — 12 (136)	726 6,669 3,730 (1,129)	— — 46,049 (3,490)	3,101 6,669 320,791 (5,724)
Closing net book value	5,031	267,000	251	9,996	42,559	324,837
As at December 31, 2013: Cost Accumulated amortization	7,000 (1,969)	268,500 (1,500)	1,012 (761)	14,610 (4,614)	46,049 (3,490)	337,171 (12,334)
Net book value	5,031	267,000	251	9,996	42,559	324,837

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 September 30, 2014	Restated [note 5]   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)	21,000	21,000
	266,000	266,000

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 September 30, 2014	Restated [note 5] As at December 31, 2013
Leon's division customer relationships Leon's division brand name Leon's division non-compete agreement Brick division customer relationships Brick division favourable lease agreements Computer software	312 812 156 4,063 39,475 11,184	500 1,000 251 4,531 42,559 9,996
	56,002	58,837

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 September 30, 2014	Restated [note 5]   As at December 31, 2013
Balance, beginning of year Acquisition through business combination	11,282 406,797	11,282 406,797
Balance, end of year	418,079	418,079

10. REDEEMABLE SHARE LIABILITY

	As at September 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 263,630 series 2005 shares [December 31, 2013 - 386,513] 739,795 series 2009 shares [December 31, 2013 - 1,008,465] 252,736 series 2012 shares [December 31, 2013 - 268,708] 1,406,772 series 2013 shares [December 31, 2013 - 1,450,000] 740,000 series 2014 shares [December 31, 2013 - Nil]	2,489 6,548 3,136 16,023 11,137	3,650 8,925 3,334 16,516 —
Less employee share purchase loans	(38,932)	(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 nine month period ended September 30, 2014, 122,883 series 2005 shares [nine month period ended September 30, 2013 - 57,369] and 261,948 series 2009 shares [nine month period ended September 30, 2013 - nil] were converted into common shares with a stated value of approximately $1,160 and $2,318, respectively [nine month period ended September 30, 2013 - $542 and nil].

During the nine month period ended September 30, 2014, the Company cancelled 6,722 series 2009 shares [nine month period ended September 30, 2013 - 32,159], 15,972 series 2012 shares [nine month period ended September 30, 2013 - 4,920] and 43,228 series 2013 shares [nine month period ended September 30, 2013 - 35,000] in the amount of $59, $198 and $492, respectively [nine month period ended September 30, 2013 - $285, $61 and $399].

During the nine month period ended September 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 3.55% that was renewed on September 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 September 30, 2014 the Company is in full compliance of these financial and non-financial covenants.

12. COMMON SHARES

	As at September 30, 2014	As at December 31, 2013
Authorized - Unlimited common shares
Issued 71,019,540 common shares [2013 - 70,634,709]	30,831	27,352

During the nine month period ended September 30, 2014, 122,883 series 2005 shares [nine month period ended September 30, 2013 - 57,369] and 261,948 series 2009 shares [nine month period ended September 30, 2013 - nil] were converted into common shares with a stated value of approximately $1,160 and $2,318, respectively [nine month period ended September 30, 2013 - $542 and nil].

The dividends paid for the three month periods ended September 30, 2014 and September 30, 2013 were $7,097 [$0.10 per share] and $7,062 [$0.10 per share], respectively.  The dividends paid for the nine month period ended September 30, 2014 and September 30, 2013 were $21,227 [$0.30 per share] and $21,177 [$0.30 per share], respectively.

13. INCOME TAX EXPENSE

	Three month period ended September 30, 2014	Restated [note 5]  Three month period ended September 30, 2013
Current income tax expense Deferred income tax recovery expense	10,745 (891)	16,531 (8,265)
	9,854	8,266
	Nine month period ended September 30, 2014	Nine month period ended September 30, 2013
Current income tax expense Deferred income tax recovery expense	19,368 (3,554)	19,280 (4,554)
	15,814	14,726

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 September 30, 2014 and September 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 71,001,666 for the three month period ended September 30, 2014 [three month period ended September 30, 2013 - 70,618,713]. 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 September 30, 2014	Restated [note 5]  Three month period ended September 30, 2013
Profit for the period for basic earnings per share Profit for the period for diluted earnings per share Weighted average common shares outstanding Dilutive effect Diluted weighted average common shares outstanding Basic earnings per share Diluted earnings per share	27,287 27,990 71,001,666 11,333,514 82,335,180 $0.38 $0.34	21,760 22,444 70,618,713 11,056,121 81,674,834 $0.31 $0.28
	Nine month period ended September 30, 2014	Nine month period ended September 30, 2013
Profit for the period for basic earnings per share Profit for the period for diluted earnings per share Weighted average common shares outstanding Dilutive effect Diluted weighted average common shares outstanding Basic earnings per share Diluted earnings per share	45,611 47,716 70,851,440 11,274,346 82,125,786 $0.64 $0.58	42,058 43,460 70,607,637 8,589,479 79,197,116 $0.60 $0.55

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.

September 30, 2014:

	Measurement	Total Carrying Amount	Fair Value	Fair Value Hierarchy
Loans and receivables
Cash and cash equivalents	Fair value	9,726	9,726	Level 1
Trade receivables	Amortized cost	95,317	95,317	Level 2
Available-for-sale
Restricted marketable securities   Available-for-sale financial assets   Investment properties	Fair value Fair value Amortized cost	18,208 23,107 21,980	18,208 23,107 47,940	Level 1 Level 1 Level 3
Other financial liabilities
Trade and other payables   Provisions   Finance lease liabilities   Loans and borrowings   Convertible debentures   Redeemable share liability	Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost	207,587 5,790 16,357 335,450 91,566 401	207,587 5,790 16,357 335,450 113,590 401	Level 2 Level 2 Level 2 Level 2 Level 2 Level 2

December 31, 2013:

Restated [note 5]	Measurement	Total Carrying Amount	Fair Value	Fair Value Hierarchy
Loans and receivables
Cash and cash equivalents   Trade receivables	Fair value Amortized cost	5,832 104,275	5,832 104,275	Level 1 Level 2
Available-for-sale
Restricted marketable securities   Available-for-sale financial assets   Investment properties	Fair value Fair value Amortized cost	20,104 17,336 22,304	20,104 17,336 47,940	Level 1 Level 1 Level 3
Other financial liabilities
Trade and other payables   Provisions   Finance lease liabilities   Debentures   Loans and borrowings   Convertible debentures   Redeemable share liability	Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost	200,361 4,769 17,861 15,503 375,255 90,952 859	200,361 4,769 17,861 15,503 375,255 112,970 859	Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2

The fair value hierarchy of financial instruments measured at fair value, as at September 30, 2014, includes financial assets of $51,041 $95,317 and $47,940 for Levels 1, 2 and 3 respectively, and financial liabilities of $nil, $679,175 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 September 30, 2014, the fair value of the convertible debentures was determined using their closing quoted market price (not in thousands of dollars) of $113.59 per $100.00 of face value.  For the convertible debentures at September 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:

	Nine month period ended September 30, 2014	Restated [note 5] Nine month period ended September 30, 2013
Trade receivables Income taxes receivable Inventories Deferred financing costs Other assets Trade and other payables Income taxes payable Customers' deposits Provisions Deferred acquisition costs Deferred rent liabilities and lease inducements	8,788 — 5,264 — (3,813) 6,945 13,700 (13,752) 1,021 (5,134) 1,572	(11,819) (978) 478 817 (1,223) 25,112 — 8,743 — (1,393) —
	14,591	19,737

[b] Supplemental cash flow information:

	Nine month period ended September 30, 2014	Nine month period ended September 30, 2013
Income taxes paid	7,333	16,219

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

Dominic Scarangella, Tel: [phone]