Leon's Furniture Limited - 2013 Second Quarter

TORONTO, Aug. 13, 2013 /CNW/ - The Board is pleased to announce the 2013 second quarter results of Leon's Furniture Limited, which represents our first full quarter with The Brick Limited under the ownership of our Company. For the three months ended June 30, 2013, total system wide sales were $573,381,000 which includes $480,559,000 of corporate sales and $92,822,000 of franchise sales ($207,722,000 including $162,095,000 of corporate sales and $45,627,000 of franchise sales in 2012). Same store sales were basically flat compared to the prior year second quarter. Net income was $14,445,000, $0.20 per common share ($9,004,000, $0.13 per common share in 2012), an increase of 53.8% per common share.  The sales and income increase in the quarter compared to the prior quarter were mainly a result of the inclusion of the operating results of The Brick Limited.

For the six months ended June 30, 2013, total system wide sales were $776,936,000 including $133,919,000 of franchise sales ($408,373,000 including $88,847,000 of franchise sales in 2012) and net income was $19,869,000, 28¢ per common share ($17,603,000, 25¢ per common share in 2012), an increase of 12% per common share. These figures include The Brick Limited results since March 28, 2013.

This year is again proving to be a challenging one where we continue to see a soft economy with no clear signs of any major turnaround. Having said that, we are pleased that we completed the purchase of The Brick Limited at the end of the first quarter 2013. 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.

As previously announced, we paid a quarterly 10¢ dividend on July 5, 2013. Today we are happy to announce that the Directors have declared a quarterly dividend of 10¢ per common share payable on the 4^th day of October 2013 to shareholders of record at the close of business on the 4^th day of September 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.

  

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 and six months ended June 30, 2013 and 2012
Dated: August 13, 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 and six months ended June 30, 2013 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; dependency on product from third party suppliers and changes to the Canadian bank lending rates. Given these economic risks and uncertainties and the integration risk associated with the acquisition of The Brick Limited, 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, before and after considering the potential dilutive effects of the convertible debt for the applicable period.

The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MD&A and the unaudited interim condensed consolidated financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the unaudited interim condensed consolidated financial statements and MD&A were approved on August 13, 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.  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 acquisition of The Brick, 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 alongside with the 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 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.

Revenues and Expenses

For the three months ended June 30, 2013, total system wide sales were $573,381,000, which includes $480,559,000 of corporate sales and $92,822,000 of franchise sales, ($207,722,000, which includes $162,095,000 of corporate sales and $45,627,000 of franchise sales for the three months ended June 30, 2012), an increase of 276%.

Leon's second quarter 2013 same store sales, including The Brick banners, were basically flat compared to the prior year.

Leon's banner franchise sales of $45,275,000 in the second quarter of 2013, decreased by $352,000 or less than 1%, compared to the second quarter of 2012. The Brick banner franchise sales of $47,547,000 in the second quarter of 2013, increased by $4,947,000 or 11.6% compared to the second quarter of 2012. Most of the increase in sales is attributable to five new franchises added since the second quarter of 2012.

Gross margin for the second quarter 2013 of 43.4% was up from the 40.8% gross margin experienced in the second quarter of 2012. The increase in gross margin was driven by The Brick banners.

Net operating expenses of $182,981,000 were up $128,416,000 from the second quarter of 2012. The increase compared to the comparative period was mainly due to expenses relating to the acquisition of The Brick since its acquisition on March 28, 2013. Excluding this factor, operating expenses were in line with the prior comparative period.

As a result of the above, net income for the second quarter of 2013 was $14,445,000, $0.20 per common share ($9,004,000, $0.13 per common share in 2012), an increase of $0.07 per common share or 53.8% from the prior year quarter.

For the six months ended June 30, 2013, total system wide sales were $776,936,000 including $133,919,000 franchise sales ($408,373,000 including $88,847,000 of franchise sales in 2012) and net income was $19,869,000, 28¢ per common share ($17,603,000, 25¢ per common share in 2012), an increase of 12% per common share. These figures include The Brick Limited results since March 28, 2013.

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 celebrated 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.

Annual Financial Information

Liquidity and Financial Resources

As at June 30, 2013, cash and cash equivalents, and available-for-sale financial assets decreased by $157,248,000 as compared to December 31, 2012, as a result of the purchase of The Brick. The Company also has an undrawn $100 million credit facility, as of June 30, 2013, to fund its operations if required.

Common Shares

At June 30, 2013, there were 70,617,504 common shares issued and outstanding. During the second quarter 2013, no shares were repurchased and cancelled by the Company through its Normal Course Issuer Bid. In addition, during the quarter ended June 30, 2013, 11,018 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

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.   In May 2013, amendments were made to IAS 36 - Impairment of Assets.  This narrow scope amendment addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The amendments are to be applied retrospectively for annual periods beginning on or after January 1, 2014. Earlier application is permitted for periods when the entity has already applied IFRS 13 - Fair Value Measurement.

Related Party Transactions

At June 30, 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 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

¹The Company's quarterly results for the quarter ended June 30 and March 31, 2013, include the results of The Brick from the acquisition date of March 28, 2013.

Disclosure Controls & Procedures

Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management, including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public disclosure. Based on the evaluation of disclosure controls and procedures, the CEO and CFO have concluded that the Company's disclosure controls and procedures were effective as at June 30, 2013.

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  the  internal  control integrated framework issued 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 and six  months  ended  June 30, 2013,  other than as  noted  below,  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.

The Company acquired The Brick Limited on March 28, 2013. Management has not yet assessed the design or operating effectiveness of the Brick's disclosure controls and procedures and the procedures and internal controls over financial reporting.

Outlook

Overall we are very pleased with the significant increase in sales and solid profit growth we have experienced with the purchase of The Brick at the end of the first quarter 2013. Even though we continue to see poor economic growth which began in 2009 and we do not see any signs of any significant improvement so far in 2013, we expect to see improved sales and profits 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 International Financial Reporting Standards ("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:

¹The corporate sales for the quarter ended June 30, 2012 include The Brick results for comparative purposes.
²For the quarter ended June 30, 2013, there are six locations excluded for the adjustments for stores not in both fiscal periods.

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 and six month periods ended June 30, 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.

These interim condensed consolidated financial statements were approved and authorized for issuance by the Board of Directors on August 13, 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.

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 consolidated financial statements.

Amendments issued but not yet adopted

IAS 36, Impairment of Assets has been amended to address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal.  In addition, the amendments require an entity to disclose the discount rate that was used in a present value technique in order to determine the recoverable amount of an impaired asset.  The amendments are to be applied retrospectively for annual periods beginning on our after January 1, 2014.  Earlier application is permitted.

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:

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 fiscal year.  The capital structure now includes shareholders' equity, finance lease liabilities, loans and borrowings, and borrowing capacity available under the revolving credit facilities (Note 11).  The revolving credit facilities remain undrawn at June 30, 2013.

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 key covenants as at June 30, 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 its issued and outstanding shares and warrants. The Brick is a retailer of home furnishings, mattresses, appliances and electronics that was founded in Edmonton, Alberta in 1971. The Brick operates stores across Canada under the following corporate and franchise banners: The Brick, 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 six months ended June 30, 2013, The Brick contributed revenue of $330,511,000 to the Company's results from the date of acquisition of March 28, 2013.

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

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

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 above fair values based on discounted cash flows, market information, independent valuations and management's estimates.

During the measurement period, certain adjustments were made to the preliminary purchase price allocation reflecting updates to the estimated fair values of net assets acquired.  The adjustments primarily impacted property, plant and equipment and intangible assets.

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

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

The Company has incurred acquisition-related costs of $6,759,000 for the six months ended 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 June 30, 2013, by the Company were $13,144,000.

6. INVENTORIES

The amount of inventory recognized as an expense for the six month period ended June 30, 2013 was $364,415,000 (period ended June 30, 2012 - $185,240,000) which is presented within cost of sales on the interim consolidated income statements.

During the three month period ended June 30, 2013, there was $81,000 in inventory write-downs (three month period ended June 30, 2012 - $161,000). As at June 30, 2013, the inventory markdown provision totaled $9,214,000 (as at December 31, 2012 - $5,652,000). There were no reversals of any write-down for the period ended June 30, 2013 (period ended June 30, 2012 - $nil).

7. PROPERTY, PLANT AND EQUIPMENT

Included in the above balances at June 30, 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

The fair value of the investment properties portfolio as at June 30, 2013 was approximately $47,940,000 [as at December 31, 2012 - $33,540,000]. The fair value was compiled by management based on available market evidence.

9. INTANGIBLE ASSETS

¹ This comprises $245,000,000 for The Brick brand name and $119,000,000 for The Brick franchise agreements.

10. REDEEMABLE SHARE LIABILITY

Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2005, 2009, 2012 and 2013 to allow them to acquire convertible, non-voting, 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 six month period ended June 30, 2013, 52,599 series 2005 shares [six month period ended June 30, 2012 - 51,558] were converted into common shares with a stated value of approximately $497,000 [six month period ended June 30, 2012 - $487,000].

During the six month period ended June 30, 2013, the Company cancelled 18,378 series 2009 shares [six month period ended June 30, 2012 - 12,237], 4,920 series 2012 shares [six month period ended June 30, 2012 - nil] and 10,000 series 2013 shares [six month period ended June 30, 2012 - nil] in the amount of $162,000, $61,000 and $114,000, respectively [six month period ended June 30, 2012 - $108,000 and nil].

During the six month period ended June 30, 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 $100,000,000 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.

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 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 of $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.  The Debentures mature on May 30, 2014 and bear interest at a fixed rate of 12% per annum, payable in cash semi-annually in arrears on June 30 and December 31.

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 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 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 94 day Bankers Acceptance with a cost of borrowing of 3.57% and is due for renewal on Sept 30, 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 at June 30, 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:

At June 30, 2013 the Company is in full compliance of these financial and non-financial covenants. The Company can prepay without penalty amounts outstanding under the facilities at any time.

12. COMMON SHARES

During the six month period ended June 30, 2013, 52,599 series 2005 shares [six month period ended June 30, 2012 - 51,558] were converted into common shares with a stated value of approximately $497,000 [six month period ended June 30, 2012 - $487,000], respectively.

During the six month period ended June 30, 2013, the Company repurchased nil [six month period ended June 30, 2012 - 23,506] common shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bid at a net cost of approximately $nil [six month period ended June 30, 2012 - $286,000].  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 [six month period ended June 30, 2012 - $3,000].  The excess net cost over the average carrying value of the shares of approximately $nil [six month period ended June 30, 2012 - $283,000] has been recorded as a reduction in retained earnings.

The dividends paid for the three month periods ended June 30, 2013 and June 30, 2012 were $7,061,000 [$0.10 per share] and $6,993,000 [$0.10 per share], respectively.  The dividends paid for the six month period ended June 30, 2013 and June 30, 2012 were $14,115,000 [$0.20 per share] and $24,450,000 [$0.35 per share], respectively.

13. INCOME TAX EXPENSE

Income tax expense is recognized based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rates used for the three month periods ended June 30, 2013 and June 30, 2012 were 26.5% and 26.8%, 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 70,612,019 for the three month period ended June 30, 2013 [three month period ended June 30, 2012 - 69,945,113].

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

15. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

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

[b] Supplemental cash flow information:

[c]  During the six month period, property, plant and equipment were acquired at an aggregate cost of $1,556,000 [period ended June 30, 2012 - $10,661,000], of which $98,000 [2012 - $942,000] 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.

SOURCE: Leon's Furniture Limited