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

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.

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

Liquidity and Financial Resources

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

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

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:

Interim Condensed Consolidated Financial Statements

Interim Condensed Consolidated Financial Statements

Interim Condensed Consolidated Financial Statements

Interim Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

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:

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:

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

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

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

Consolidated income statement for the year ended December 31, 2013

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

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

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

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

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

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:

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:

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:

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, 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

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

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:

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:

December 31, 2013:

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:

16. 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:

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