BUILDING THE FOUNDATION
FOR TOMORROW’S
GROWTH
ANNUAL REPORT 2012
ABOUT US
Founded in 1909 by Ablan Leon, Leon’s Furniture
Limited has grown into one of Canada’s largest
home furnishing retailers, with a modern network
of 76 stores selling a wide range of furniture, major
appliances and home electronics. Today, with annual
total system-wide sales of nearly $900 million and
over 3,000 associates across the country, Leon’s
remains committed to the standards of service,
integrity and trust established by its founder more
than 100 years ago.
WE INTRODUCED THE WAREHOUSE
SHOWROOM CONCEPT TO CANADIAN
FURNITURE RETAILING IN 1973;
TODAY IT'S THE FOUNDATION OF
LEON'S 76-STORE NETWORK.
REVENUE
($ in thousands)
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
NET INCOME
SHAREHOLDERS’
EQUITY PER SHARE
$682,163
($ in thousands)
$46,782
$6.46
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
08
09
10
11
12
7
6
5
4
3
2
1
0
08
09
10
11
12
08
09
10
11
12
WHILE THE PERFORMANCE OF THE
CANADIAN ECONOMY HAS VARIED
OVER THE PAST 103 YEARS, LEON'S HAS
GROWN INTO ONE OF THE COUNTRY'S
LEADING HOME FURNISHING RETAILERS BY
CONSISTENTLY BUILDING THE FOUNDATION
FOR TOMORROW'S GROWTH.
FINANCIAL HIGHLIGHTS
($ in thousands, except per share amounts)
2012
2011
% Change
Income before income taxes
Revenue
Income before income taxes
Net income
Cash generated from operations
Dividends paid
Per common share
Net income
Cash flow generated from operations
Dividends paid
Shareholders’ equity at year end
$
$
$
$
$
$
682,163
63,683
46,782
47,904
38,449
682,836
78,848
56,666
65,170
25,224
0.67
0.68
0.55
6.46
$
$
$
$
0.81
0.93
0.36
6.08
(0.1%)
(19.2%)
(17.4%)
(26.5%)
52.4%
(17.3%)
(26.9%)
52.8%
6.3%
1
ANNUAL REPORT 2012
LEON’S FURNITURE LIMITED // President‘s Message to Shareholders
BUILDING THE FOUNDATION
FOR TOMORROW’S
GROWTH
2
LEON'S RETAIL NETWORK, WHICH
INCLUDES OUR URBAN CONCEPT STORE
IN TORONTO, HAS EVOLVED TO MEET
CHANGING CUSTOMER NEEDS.
The past year proved to be another challenging
one for Leon’s and most Canadian retailers.
Economic growth fell slightly from an
already slow pace in 2011 as consumers
concentrated on minimizing debt and
companies remained cautious with respect
to hiring and capital investment. Consumer
spending growth declined to 1.9 percent
from 2.4 percent in 2011, reflecting weak
discretionary spending in most categories,
including the home furnishings, electronics
and appliances sold in our stores. This was
compounded by continuing price deflation
in these categories, which, while beneficial
for consumers, has required us to achieve
higher volumes of unit sales over the
past five years to maintain, and grow,
our revenue.
Amid this environment, Leon’s posted a
respectable performance with system-wide
sales of $880.2 million, a slight increase
from $879.6 million in 2011. Included
in this amount were franchise sales
of $198.1 million, also up slightly from
$196.7 million recorded in 2011. For the
same period, net income was $46.8 million
or $0.67 per common share, a decrease of
17.3 percent from $56.7 million or $0.81 per
common share in 2011. Net earnings were
affected by a $5.1 million or 6.5 percent
increase in sales and marketing expenses
aimed at maximizing sales volumes
and market share in a difficult retailing
environment and $1.5 million in after-tax
expenses associated with our proposed
acquisition of The Brick.
3
ANNUAL REPORT 2012 TRUSTED
BRANDS
BUILDING THE FOUNDATION FOR
TOMORROW’S GROWTH
Leon’s has prospered over the past 103 years
by recognizing opportunity in a constantly
evolving Canadian marketplace. Innovation
has been in our blood from the opening of
Ablan Leon’s first store in Welland, Ontario
in 1909 to our introduction of “big-box”
retailing to Canada in 1973 to the opening
of our first urban concept store at Toronto’s
Roundhouse locomotive shop in 2009.
Our belief in Canada’s future has always
encouraged us to take a long-term view
of our business and our perspective
in today’s economic environment is no
different. Recent conditions have made it
more economical to acquire property in
target locations and improve the quality of
our existing assets. During 2012, we secured
sites for four new corporate stores in:
Orangeville and Brantford, Ontario; Sherbrooke,
Quebec; and Rocky View County, Alberta,
just north of Calgary. Our plan is to open
the majority of these stores in 2013. We also
celebrated the grand reopening of newly
renovated stores in Saulte Ste. Marie and
Sudbury, Ontario during the year, as well as
the opening of our third Appliance Canada
showroom in Toronto to meet growing
demand for premium-brand appliances
in the builder and consumer markets.
Of course, the year’s biggest news was
the announcement on November 11, 2012
of our proposed friendly acquisition of
The Brick, which has since received the
blessing of The Brick’s shareholders and
regulatory approval. The transaction is
scheduled to close on March 28, 2013.
Leon’s and The Brick will continue to be
managed under two legendary Canadian
banners, with combined access to national
buying opportunities in merchandising
and marketing and a national distribution
network that will enable greatly enhanced
online shopping capabilities. We are very
excited about these two companies coming
together and look forward to our future with
the many opportunities that lie ahead.
Our ability to invest in long-term growth
amid today’s challenging retail environment
is testament to another of Leon’s traditional
strengths – conservative financial manage-
ment. This can be seen in our ownership of
more than 78 percent of the properties that
comprise our corporate store network and a
strong balance sheet that contained no debt
and $222 million of cash and investments at
the end of 2012.
Originally established to
meet the demands of the
residential construction
industry, Appliance Canada
has become an increasingly
popular destination for
homeowners who want to
see the industry’s widest
selection of major brands
and premium appliances,
all in a convenient location.
4
LEON’S FURNITURE LIMITED APPLIANCE CANADA OPENED
ANOTHER SHOWROOM LOCATION
IN TORONTO IN 2012 TO KEEP PACE
WITH GROWING DEMAND.
IN THE HEART OF OUR COMMUNITIES
Leon’s has always believed in supporting
the communities that have made our
success possible. As a company, we focus
most of our resources on two primary
causes: the Boys & Girls Clubs of Canada
and community healthcare. In 2012, our
stores and associates gave generously of
their time and financial resources in support
of both organizations and we are proud of
the difference they continue to make in
their communities.
THE YEAR AHEAD
Canada’s nascent economic recovery began
to falter in 2012 with GDP growth declining
to 0.6 percent in the fourth quarter of 2012.
While the prospects for Canada’s economy
remain brighter than those of most developed
countries, we may find ourselves in a
relatively slow growth environment for some
time, as Canadians remain cautious in their
discretionary spending amid uncertainty
in the labour markets and historically high
amounts of consumer debt. In the mean-
time, we will continue to focus on the things
that lie within our control, successfully
executing our marketing campaigns,
enhancing the shopping experience of our
customers, improving the productivity
of our associates through ongoing
training and development, optimizing
our increasingly automated distribution
system and maintaining an unwavering
commitment to cost control in all
areas of the business. We will also
continue our expansion into selective
markets as opportunities present
themselves. In closing, I would
like to extend my sincere thanks to
Leon’s talented executives as well
as our corporate and franchise store
management teams and associates
for their effort and dedication during
the past year. I also wish to thank our
shareholders and our customers for
their ongoing support and look forward
to reporting on our progress in 2013.
Sincerely,
(Signed)
TERRENCE T. LEON
President and Chief Executive Officer
5
ANNUAL REPORT 2012 WE CONTINUED TO MODERNIZE
OUR RETAIL NETWORK WITH THE
ONGOING RENOVATION, RELOCATION
AND REOPENING OF OUR STORES.
LEON’S FURNITURE LIMITED // Our Growth
103 years of
innovation and
success and still
growing strong.
AN EXPANDING NATIONAL
PRESENCE
1909
1973
1974
1983
The A. Leon Company opens
for business on King Street in
Welland, Ontario.
Leon’s introduces “big-box”
retailing to Canada with the opening
of our first warehouse showroom in
Weston, Ontario.
The opening of our 10th store in
Laval, Québec, marks Leon’s
expansion beyond Ontario.
Leon’s extends its presence
to smaller centres with the
introduction of the first franchise
store in Kingston, Ontario.
6
LEON’S FURNITURE LIMITED
76 STORES
NATIONWIDE
Alberta
Calgary, Edmonton, Red Deer,
South Edmonton,
Lethbridge*, Medicine Hat*
Manitoba
Winnipeg, Brandon*
New Brunswick
Fredericton*, Moncton*,
Saint John*, Bathurst*
Newfoundland & Labrador
Gander*, Labrador City*,
St. John’s*
Nova Scotia
Dartmouth, Coldbrook*, Truro*
Ontario
Barrie, Brampton, Burlington,
Guelph, Hamilton,
Kitchener, London (2),
Mississauga (2), Newmarket,
Niagara-on-the-Lake, Ottawa (2),
Richmond Hill, Sarnia,
Sault Ste. Marie, Sudbury,
Thunder Bay,
Toronto (Castlefield),
Toronto (Danforth),
Toronto (Roundhouse),
Toronto (Scarborough),
Toronto (Western),
Welland, Whitby, Windsor,
Vaughan (2), Bancroft*,
Bracebridge*, Brockville*,
Chatham*, Collingwood*,
Cornwall*, Fort Frances*,
Huntsville*, Kapuskasing*,
Kingston*, North Bay*,
Orillia*, Owen Sound*,
Peterborough*, Simcoe*,
Trenton*, Woodstock*
Prince Edward Island
Charlottetown*
Quebec
Anjou, Beauport, Dorval,
Drummondville*, Laval,
Longueuil, Rosemere,
Quebec City
Saskatchewan
Saskatoon, Prince Albert*, Regina
*Franchise
Since the A. Leon Company was founded in
1909, we have grown into one of Canada’s
largest home furnishing, appliance and
electronics retailers, with a network of
warehouse showrooms across the country.
Along the way, our success has come from
staying true to our founder’s beliefs of
fairness, integrity and trust while adapting
to meet the constantly changing needs of
our customers. This has included many
industry innovations, from extending credit
to hardworking immigrants in the early
1900s to the introduction of “big box”
retailing to Canada with the opening our
first warehouse showroom in 1973 to the
unveiling of our first urban concept store
at Toronto’s historic Roundhouse steam
locomotive shop in 2009. Today, we continue
to take a long-term view toward our expansion
despite the slow pace of growth in the
current economy. In fact, the past year
presented an attractive opportunity to
modernize and expand our store network.
We took advantage of it with the grand
reopening of renovated or replacement
stores in Sault Ste. Marie and Sudbury,
Ontario, Coldbrook, Nova Scotia and Saint
John, New Brunswick and by securing sites
for the construction of four new corporate
stores in 2013. We were also proud to open
our third Appliance Canada store in 2012 to
keep pace with strong builder and consumer
demand for premium brand appliances.
1985
2009
2011
2012
Leon’s opens its first store in
Atlantic Canada in Saint John,
New Brunswick.
The first urban concept store is
opened at the Roundhouse in
downtown Toronto, Ontario,
part of a multi-million dollar
investment to restore this historic
steam locomotive repair shop.
Leon’s opens four new corporate
stores, and two new franchise
locations, including our first
franchise store in Québec.
Leon’s secures sites for four new
corporate stores to be opened
in 2013.
7
ANNUAL REPORT 2012 LEON’S FURNITURE LIMITED // Strength in Leadership
OUR LEGACY OF
TRUST
An industrious Lebanese immigrant settled
in Welland, Ontario early in the past century
and began his career selling clothing door
to door. By 1909 Ablan Leon had earned
enough profit to buy a building on King St.
for a small dry goods store and the A. Leon
Company was born. As the business
prospered, Ablan and his wife Lena went
on to raise 11 children who all took part in
running the store. In the decades that have
passed since then, Leon’s has become a
true Canadian success story.
Following the death of Ablan in 1942, son
Lewie began his tenure as President and
CEO of the company. He was a natural leader
8
LEON’S FURNITURE LIMITED
whose vision and energy fuelled Leon’s
rapid expansion across Ontario and the
rest of the country. Lewie was succeeded
by another outstanding President and
CEO – Ablan’s son Tom Leon – who had the
foresight to introduce “big-box” retailing to
Canada in 1973 and create the Franchise
division in the early 1980s to accelerate
Leon’s growth.
Today, the mantle of leadership has been
taken up by a new generation of executives
who are writing new chapters in Leon’s
history of continuous improvement
and growth.
WE REMAIN TRUE TO ABLAN LEON’S
BELIEF THAT BUSINESS IS WON
THROUGH FAIRNESS, INTEGRITY
AND TRUST.
For more than a century,
Leon’s has been committed
to delivering the best
combination of service,
selection and value
in the business.
OUR MANAGEMENT TEAM:
DOMINIC SCARANGELLA
EDWARD F. LEON
Dominic obtained his CA designation in 1980 and
first joined the company as Controller in 1988.
He was appointed Treasurer in 1997 and became
Leon’s Vice President Finance and Chief Financial
Officer in 2002.
Edward is Vice President of Merchandising,
a position he has held since 2002, and has
been a Director of the company since 2001.
Previously, he was the company’s Director
of Merchandising.
TERRENCE LEON
ROBERT J. MACNELLY
Appointed a Director in 2009, Terry has served
as President and Chief Executive Officer of the
company since 2005. He was President and Chief
Operating Officer from 2002 to 2005 and Vice
President and Chief Financial Officer from 1989
to May 2002.
Bob joined Leon’s as National Marketing Manager
in 1992 following years of executive leadership in
consumer product marketing. He joined Leon’s
Executive Management Team as Vice President
of Marketing in 2002.
MARK LEON
Mark is Chairman of the Corporation and
has been a Director since 1994. He held the
position of Chief Executive Officer from 1993
to 2005, served as Vice Chairman from 2002
to 2005 and prior to that was the President
of Leon’s.
Leon’s remains a true
Canadian success story
in an increasingly
international retail
landscape.
CLOCKWISE FROM TOP LEFT:
Mark Leon, Chairman
and Director;
Edward F. Leon, Vice President
of Merchandising and Director;
Robert J. MacNelly,
Vice President of Marketing;
Dominic Scarangella,
Vice President Finance and
Chief Financial Officer; and
Terrence Leon, President
and Chief Executive Officer
and Director.
9
FIVE-YEAR
REVIEW
INCOME STATISTICS
($ in thousands, except earnings per share)
2012
2011
2010
2009(1)
2008(1)
Revenue
Cost of sales
Gross profit
$
682,163
398,704
$
682,836 $
394,099
283,459
288,737
Operating expenses net of finance income and
gain on sale of capital property
Income before income taxes
Provision for income taxes
219,776
63,683
16,901
209,889
78,848
22,182
710,435
412,379
298,056
207,871
90,185
26,901
$
703,180 $
419,819
740,376
440,360
283,361
300,016
200,827
82,534
25,670
205,880
94,136
30,746
Net income
$
46,782
$
56,666 $
63,284 $
56,864 $
63,390
Common shares outstanding (’000)
Earnings per common share
Percent annual change in sales
Net income as a percentage of sales
$
70,033
0.67
(0.1%)
6.9%
69,969
70,372
70,714
$
0.81 $
(3.9%)
8.3%
0.90 $
1.0%
8.9%
0.80 $
(5.0%)
8.1%
70,729
0.90
16.1%
8.6%
Dividend declared
$
28,047
$
36,371 $
22,492 $
33,951 $
26,873
BALANCE SHEET STATISTICS
($ in thousands, except per share amounts)
2012
2011
2010
2009(1)
2008(1)
Shareholders’ equity
Total assets
Purchase of capital assets
Working capital
Current ratio
Shareholders’ equity per common share
Common share price range on the
Toronto Stock Exchange
High
Low
(1) Results reported under Canadian GAAP
$
452,187
585,592
17,897
227,221
2.96:1
6.46
$
425,461 $
584,411
24,999
204,649
2.47:1
6.08
410,286 $
566,674
13,567
200,826
2.62:1
5.83
375,138 $
529,156
10,545
163,626
2.34:1
5.31
353,358
513,408
22,587
135,192
2.00:1
5.00
$
$
13.47
10.55
$
$
15.65 $
10.56 $
15.10 $
10.35 $
10.81 $
7.75 $
13.14
7.80
10
LEON’S FURNITURE LIMITED
MANAGEMENT’S
DISCUSSION & ANALYSIS
FINANCIAL REVIEW
The following Management’s Discussion and Analysis (“MD&A”) is prepared as at February 21, 2013 and is based on the consolidated
financial position and operating results of Leon’s Furniture Limited/Meubles Leon Ltée (the “Company”) as of December 31, 2012 and
for the year ended December 31, 2012. It should be read in conjunction with the fiscal year 2012 consolidated financial statements and
the notes thereto. For additional detail and information relating to the Company, readers are referred to the fiscal 2012 quarterly financial
statements and corresponding MD&As which are published separately and available at www.sedar.com.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This MD&A is intended to provide readers with the information that management believes is required to gain an understanding of Leon’s
Furniture Limited’s current results and to assess the Company’s future prospects. This MD&A, and in particular the section under heading
“Outlook”, includes forward-looking statements, which are based on certain assumptions and reflect Leon’s Furniture Limited’s current
plans and expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual
results and future prospects to differ materially from current expectations. Some of the factors that can cause actual results to differ
materially from current expectations are: a continuing slowdown in the Canadian economy; a further drop in consumer confidence;
and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. Readers of this report are cautioned that actual events and results may vary.
FINANCIAL STATEMENTS GOVERNANCE PRACTICE
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The Audit Committee of the Board of Directors of Leon’s Furniture Limited reviewed the MD&A and the consolidated financial statements,
and recommended them to the Board of Directors for approval. Following review by the full Board, the Fiscal 2012 consolidated financial
statements and MD&A were approved on February 21, 2013.
INTRODUCTION
Leon’s Furniture Limited has been in the furniture retail business for over 100 years. As of February 21, 2013, the Company has 46 corporate
and 32 franchise stores, which can be found in every province across Canada except British Columbia. Main product lines sold at retail
include furniture, appliances and electronics.
The Company’s business is seasonal in nature. Retail sales are traditionally higher in the third and fourth quarters.
REVENUES AND EXPENSES
For the year ended December 31, 2012, total Leon’s system wide sales were $880,240,000 including $198,077,000 of franchise sales
($879,561,000 including $196,725,000 of franchise sales in 2011), a slight increase.
Overall, same store sales decreased by 2.9%. The decrease in same store sales for the year, compared to the prior year, reflected
a continuation of weak consumer confidence and a decrease in housing starts. These were among the factors that also resulted in
downward pressure on retail pricing. The increase in total Leon’s system wide sales is the result of four new stores opening in 2011.
Leon’s franchise sales for 2012 increased 0.7% compared to 2011. The sales difference in 2012 was the result of the successful opening
of two new franchise stores in Bathurst, New Brunswick and Drummondville, Quebec. Overall, same store sales for franchises decreased
by 2.3%.
11
ANNUAL REPORT 2012 Our gross margin for the year decreased from 42.3% to 41.6%, as compared to the prior year. The decease was mainly attributable to
slightly lower margins in both the furniture and appliance category compared to the prior year.
For the year, net operating expenses of $223,126,000 were up $9,731,000 or 4.6% as compared to 2011. General and administrative
expenses increased $3,308,000 from the prior year. The increase was mainly the result of two factors: professional fees of approximately
$2,000,000 relating to the pending acquisition of The Brick Ltd. (“The Brick”) and higher depreciation costs on buildings. Sales and
marketing expenses increased by $5,092,000 compared to the prior year. Most of this increase relates to marketing dollars spent
resulting from having four new stores in 2012. Additional marketing dollars were also spent in an attempt to generate higher consumer
traffic into our stores. Occupancy expenses increased $1,558,000 from the prior year. The increase was the result of additional rental
costs relating to the new stores that opened in the fourth quarter of 2011 and therefore did not have a full year of rent expense as
compared to 2012.
As a result of the above, net income for the year was $46,782,000, $0.67 per common share ($56,666,000, $0.81 per common share
in 2011), a decrease of 17.3% per common share.
For the three months ended December 31, 2012, total Leon’s system wide sales were $248,187,000 including $59,725,000 of franchise
sales ($254,989,000 including $61,166,000 of franchise sales in 2011), a decrease of 2.7%.
Leon’s corporate sales of $188,462,000 in the fourth quarter of 2012, decreased by $5,361,000, or 2.8%, compared to the fourth quarter
of 2011. Same store corporate sales decreased by 2.0% compared to the prior year’s quarter.
Leon’s franchise sales of $59,725,000 in the fourth quarter of 2012 decreased by $1,441,000 or 2.4% compared to 2011. The sales decrease
is mainly attributable to the same factors in Leon’s corporate sales.
Net income for the fourth quarter of 2012 was $16,121,000, $0.23 per common share ($19,872,000, $0.28 per common share in 2011),
a decrease of 17.9% per common share. The fourth quarter 2012 includes a net after tax cost of $1,470,000 or $0.02 per common share
for professional fees relating to the acquisition of The Brick, representing an adjusted $0.25 per common share as compared to the $0.28
per common share in the prior year.
ANNUAL FINANCIAL INFORMATION
($ in thousands, except earnings per share and dividends)
2012
2011
2010
Net corporate sales
Leon franchise sales
Total Leon’s system wide sales
Net income
Earnings per share
Basic
Diluted
Total assets
Common share dividends declared
Special common share dividends declared
Convertible, non-voting shares dividends declared
LIQUIDITY AND FINANCIAL RESOURCES
($ in thousands, except dividends per share)
Cash, cash equivalents, available-for-sale financial assets
Trade and other accounts receivable
Inventory
Total assets
Working capital
12
$
682,163
198,077
$
682,836
196,725
$
710,435
197,062
$
880,240
$
879,561
$
907,497
$
$
$
$
$
$
$
46,782
56,666
63,284
0.67
0.65
585,592
0.40
—
0.20
$
$
$
$
$
$
0.81
0.78
584,411
0.37
0.15
0.20
$
$
$
$
$
$
0.90
0.87
566,674
0.32
—
0.18
Dec. 31/12
Dec. 31/11
Dec. 31/10
$
$
221,684
30,245
86,057
585,592
227,221
221,823
28,937
87,830
584,411
204,649
211,813
28,569
85,423
566,674
200,826
MANAGEMENT'S DISCUSSION AND ANALYSISLEON’S FURNITURE LIMITED
For the 3 months ended
Cash flow provided by operations
Purchase of property, plant and equipment
Repurchase of capital stock
Dividends paid
Dividends paid per share
Current Quarter
Dec. 31, 2012
Prior Quarter
Sept. 30, 2012
Prior Quarter
June 30, 2012
$
$
22,926
3,678
—
7,001
0.10
$
$
31,519
3,733
—
6,998
0.10
$
$
1,040
6,900
54
6,993
0.10
In the third quarter of 2012, the Company celebrated grand openings of newly renovated stores in Sault Ste. Marie and Sudbury, Ontario,
as well as our third Appliance Canada showroom in Toronto, Ontario. In the fourth quarter of 2012, we celebrated the opening of a new
franchise store that replaced an existing store in Saint John, New Brunswick.
We plan to celebrate 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 first quarter of 2013. In the second quarter of 2013, we are planning the grand opening of a new 50,000 sq. ft. store in Sherbrooke,
Quebec. In addition, we have secured land for a new store in Rocky View County, Alberta, which is just north of Calgary.
COMMON SHARES
At December 31, 2012, there were 70,564,905 common shares issued and outstanding. During 2012, 23,506 shares were repurchased
at an average cost of $12.17 and then cancelled by the Company through its Normal Course Issuer Bid. In addition, during the year
ended December 31, 2012, 667,748 convertible, non-voting series 2002 shares, 84,931 convertible, non-voting series 2005 shares and
20,000 convertible, non-voting series 2009 shares were converted into common shares. There were 49,888 convertible, non-voting series
2009 shares and 25,000 convertible, non-voting series 2012 shares cancelled. For details on the Company’s commitments related to its
redeemable shares please refer to Note 12 to the accompanying consolidated financial statements.
COMMITMENTS
($ in thousands)
Contractual Obligations
Operating Leases(1)
Purchase Obligations
Total Contractual Obligations
Total Less than 1 Year
2-3 Years
4-5 Years
After 5 Years
Payments Due by Period
$
$
59,152
$
$
6,608
—
12,111
—
$
12,294
—
$
59,152
$
6,608
$
12,111
$
12,294
$
28,139
—
28,139
(1) The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 3 to the accompanying consolidated financial statements for the accounting standards and amendments issued but
not yet adopted.
CRITICAL ACCOUNTING ESTIMATES
Please refer to Note 4 to the accompanying consolidated financial statements for the Company’s critical accounting estimates
and assumptions.
SIGNIFICANT ACCOUNTING POLICIES
Please refer to Note 3 to the accompanying consolidated financial statements for the Company’s significant accounting policies.
13
ANNUAL REPORT 2012
RELATED PARTY TRANSACTIONS
At December 31, 2012, we had no transactions with related parties as defined in IAS24 – Related Party Disclosures, except those
pertaining to transactions with key management personnel in the ordinary course of their employment.
RISKS AND UNCERTAINTIES
For a complete discussion of the risks and uncertainties which apply to the Company’s business and operating results please refer to
the Company’s Annual Information Form dated March 28, 2013 available on www.sedar.com.
SUBSEQUENT EVENTS
On November 11, 2012, the Company announced that it had entered into definitive agreements to acquire all the outstanding shares of
The Brick, subject to approval by the Competition Bureau and other customary closing conditions. The total consideration for The Brick
is approximately $700 million.
The cash consideration of the purchase price along with the transaction costs will be funded with cash on hand, convertible debentures
and bank debt. This acquisition will be accounted for as a business combination with the Company as the acquirer of The Brick. The Company
expects the transaction to close in the first quarter of 2013. The purchase method of accounting will be used and the earnings will be
consolidated from the closing date.
Please refer to Note 21 to the accompanying consolidated financial statements for further details.
QUARTERLY RESULTS
QUARTERLY INCOME STATEMENT
($ in thousands – except per share data)
December 31
Quarter Ended
Quarter Ended
September 30
Quarter Ended
June 30
Quarter Ended
March 31
2012
2011
2012
2011
2012
2011
2012
2011
$ 188,462
Leon’s corporate sales
Leon’s franchise sales
59,725
Total Leon’s system wide sales 248,187
0.23
Net income per share
0.22
Fully diluted per share
$
$
$ 193,823
61,166
254,989
0.28
0.27
$
$
$ 174,175
49,505
223,680
0.19
0.18
$
$
$ 174,373
49,273
223,646
0.22
0.21
$
$
$ 162,095
45,627
207,722
0.13
0.12
$
$
$ 163,857
45,477
209,334
0.16
0.15
$
$
$ 157,431
43,220
200,651
0.12
0.12
$
$
$ 150,783
40,809
191,592
0.15
0.14
$
$
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 December 31, 2012.
14
MANAGEMENT'S DISCUSSION AND ANALYSISLEON’S FURNITURE LIMITED
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes
in accordance with IFRS. The Company’s internal control over financial reporting may not prevent or detect all misstatements because
of inherent limitations. The Company assessed the effectiveness of its internal control over financial reporting as of December 31, 2012,
based on the framework established in the publications, Internal Control – Integrated Framework and specifically in Internal Control over
Financial Reporting – Guidance for Smaller Public Companies published by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, the CEO and the CFO concluded that the Company maintained effective internal control over
financial reporting as of December 31, 2012.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Management has also evaluated whether there were changes in the Company’s internal control over financial reporting that occurred
during the period beginning on January 1, 2012 and ended on December 31, 2012 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting. The Company has determined that no material changes in
internal controls have occurred during this period.
OUTLOOK
We have been experiencing poor economic growth which began in 2009 and we don’t see any signs of any significant improvement
moving into 2013. As such, we anticipate that consumer discretionary spending will remain soft in 2013. However, we believe the opening
of three new stores during 2013 coupled with the purchase of The Brick will improve sales and profits in 2013.
NON-IFRS FINANCIAL MEASURES
In order to provide additional insight into the business, the Company has provided the measure of same store sales, in the revenue and
expenses section above. This measure does not have a standardized meaning prescribed by IFRS but it is a key indicator used by the
Company to measure performance against prior period results. Comparable store sales are defined as sales generated by stores that
have been open or closed for more than 12 months on a yearly basis. The reconciliation between total corporate sales (an IFRS measure)
and comparable store sales is provided below:
($ in thousands)
Net corporate sales
Adjustments for stores not in both fiscal periods
Comparable store sales
2012
2011
$
682,163
(30,895)
$
682,836
(12,345)
$
651,268
$
670,491
15
ANNUAL REPORT 2012
MANAGEMENT’S RESPONSIBILITY
FOR FINANCIAL REPORTING
The accompanying consolidated financial statements are the responsibility of management and have been approved by the
Board of Directors.
The accompanying consolidated financial statements have been prepared by management in accordance with International Financial
Reporting Standards (“IFRS”). Financial statements are not precise since they include certain amounts based upon estimates and
judgments. When alternative methods exist, management has chosen those it deems to be the most appropriate in the circumstances.
Leon’s Furniture Limited/Meubles Leon Ltée (“Leon’s” or the “Company”) maintains systems of internal accounting and administrative
controls, consistent with reasonable costs. Such systems are designed to provide reasonable assurance that the financial information
is relevant and reliable and that Leon’s assets are appropriately accounted for and adequately safeguarded.
The Board of Directors is responsible for ensuring that management fulfils its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board carries out this responsibility through its Audit Committee.
The Audit Committee is appointed by the Board and reviews these consolidated financial statements; considers the report of the
external auditors; assesses the adequacy of the internal controls of the Company; examines the fees and expenses for audit services;
and recommends to the Board the independent auditors for appointment by the shareholders. The Committee reports its findings to
the Board of Directors for consideration when approving these consolidated financial statements for issuance to the shareholders.
These consolidated financial statements have been audited by Ernst & Young, the external auditors, in accordance with Canadian generally
accepted auditing standards on behalf of the shareholders. Ernst & Young has full and free access to the Audit Committee.
(Signed)
(Signed)
Terrence T. Leon
President and CEO
Dominic Scarangella
Vice President and CFO
16
LEON’S FURNITURE LIMITED INDEPENDENT
AUDITORS’ REPORT
To the Shareholders of Leon’s Furniture Limited/Meubles Leon Ltée
We have audited the accompanying consolidated financial statements of Leon’s Furniture Limited/Meubles Leon Ltée, which
comprise the consolidated statements of financial position as at December 31, 2012 and 2011, and the consolidated statements of
income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and a summary of
significant accounting policies and other explanatory information.
MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
AUDITORS’ RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Leon’s Furniture
Limited/Meubles Leon Ltée as at December 31, 2012 and 2011, and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards.
(Signed)
Ernst & Young LLP
Chartered Accountants
Licensed Public Accountants
Toronto, Canada,
February 21, 2013
17
ANNUAL REPORT 2012 CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION
($ in thousands)
ASSETS
Current
Cash and cash equivalents [notes 5 and 7]
Available-for-sale financial assets [notes 5 and 18[e]]
Trade receivables [note 5]
Income taxes recoverable
Inventories [note 4]
Deferred financing costs [note 21]
Total current assets
Other assets
Property, plant and equipment, net [note 8]
Investment properties [note 9]
Intangible assets, net [note 10]
Goodwill [note 10]
Deferred income tax assets [note 16]
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Trade and other payables [notes 5 and 11]
Customers’ deposits
Dividends payable [note 13]
Deferred warranty plan revenue
Total current liabilities
Deferred warranty plan revenue
Redeemable share liability [notes 5 and 12]
Total liabilities
Commitments and contingencies [note 18]
Shareholders’ equity
Common shares [note 13]
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
(Signed)
(Signed)
Mark J. Leon
Director
Peter Eby
Director
18
As at
December 31
As at
December 31
2012
2011
$
74,949 $
146,735
30,245
3,644
86,057
1,317
72,505
149,318
28,937
5,182
87,830
—
$
342,947 $
343,772
1,273
218,146
8,315
3,101
11,282
528
1,431
214,158
8,366
3,958
11,282
1,444
$
585,592 $
584,411
$
73,542 $
20,386
7,055
14,743
86,357
19,157
17,457
16,152
$
115,726 $
139,123
17,251
428
19,445
382
$
133,405 $
158,950
$
$
$
26,693 $
2,395
423,099
20,918
(104)
404,647
452,187 $
425,461
585,592 $
584,411
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
CONSOLIDATED STATEMENTS OF
INCOME
($ in thousands, except shares outstanding and per share amounts)
Revenue [note 14]
Cost of sales
Gross profit
Operating expenses [note 15]
General and administrative
Sales and marketing
Occupancy
Other
Operating profit
Finance income
Profit before income taxes
Income tax expense [note 16]
Years Ended December 31
2012
2011
$
682,163 $
398,704
682,836
394,099
$
283,459 $
288,737
99,346
83,479
34,289
6,012
96,038
78,387
32,731
6,239
$
223,126 $
213,395
60,333
3,350
63,683
16,901
75,342
3,506
78,848
22,182
Profit for the year attributable to the shareholders of the Company
$
46,782 $
56,666
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per share [note 17]
Basic
Diluted
Dividends declared per share
Common
Convertible, non-voting
The accompanying notes are an integral part of these consolidated financial statements.
70,032,721
72,317,598
69,969,417
72,305,424
$
$
$
$
0.67
0.65
0.40
0.20
$
$
$
$
0.81
0.78
0.52
0.20
19
ANNUAL REPORT 2012
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
($ in thousands)
Profit for the year
Years Ended December 31
2012
2012
Tax Effect
2012
$
46,782
$
— $
46,782
Other comprehensive income, net of tax
Unrealized gains on available-for-sale financial assets arising during the year
Reclassification adjustment for net gains (losses) included in income for the year
3,183
(311)
Change in unrealized gains on available-for-sale financial assets arising during the year
2,872
414
(41)
373
2,769
(270)
2,499
Total comprehensive income for the year attributable to the shareholders
of the Company
$
49,654
$
373 $
49,281
($ in thousands)
Profit for the year
Other comprehensive income, net of tax
Unrealized losses on available-for-sale financial assets arising during the year
Reclassification adjustment for net gains (losses) included in income for the year
Change in unrealized losses on available-for-sale financial assets arising during
the year
Total comprehensive income for the year attributable to the shareholders
of the Company
The accompanying notes are an integral part of these consolidated financial statements.
Years Ended December 31
2011
2011
Tax Effect
2011
$
56,666
$
— $
56,666
(621)
(58)
(87)
(8)
(534)
(50)
(679)
(95)
(584)
$
55,987
$
(95) $
56,082
20
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
($ in thousands)
At January 1, 2012
Comprehensive income
Profit for the year
Change in unrealized gains on available-for-sale
financial assets arising during the year
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share purchase plan [note 12]
Repurchase of common shares [note 13]
Total transactions with shareholders
At December 31, 2012
($ in thousands)
At January 1, 2011
Comprehensive income
Profit for the year
Change in unrealized losses on available-for-sale
financial assets arising during the year
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share purchase plan [note 12]
Repurchase of common shares [note 13]
Total transactions with shareholders
At December 31, 2011
Accumulated
Other
Common Comprehensive
Income (Loss)
Shares
Retained
Earnings
Total
$
20,918 $
(104) $
404,647 $
425,461
—
—
—
—
5,778
(3)
5,775
—
46,782
46,782
2,499
2,499
—
46,782
2,499
49,281
—
—
—
—
(28,047)
—
(283)
(28,330)
(28,047)
5,778
(286)
(22,555)
$
26,693 $
2,395 $
423,099 $
452,187
Accumulated
Other
Common Comprehensive
Income (Loss)
Shares
Retained
Earnings
Total
$
19,177 $
480 $
390,629 $
410,286
—
—
—
—
1,798
(57)
1,741
—
56,666
56,666
(584)
(584)
—
56,666
(584)
56,082
—
—
—
—
(36,371)
—
(6,277)
(42,648)
(36,371)
1,798
(6,334)
(40,907)
$
20,918 $
(104) $
404,647 $
425,461
The accompanying notes are an integral part of these consolidated financial statements.
21
ANNUAL REPORT 2012
CONSOLIDATED STATEMENTS OF
CASH FLOWS
($ in thousands)
OPERATING ACTIVITIES
Profit for the year
Add (deduct) non-cash items
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Amortization of deferred warranty plan revenue
Gain on sale of property, plant and equipment
Deferred income taxes
Loss on sale of available-for-sale financial assets
Cash paid for deferred financing costs [note 21]
Cash received on warranty plan sales
Net change in non-cash working capital balances related to operations [note 19[a]]
Cash provided by operating activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds on sale of property, plant and equipment
Purchase of available-for-sale financial assets
Proceeds on sale of available-for-sale financial assets
Issuance of series 2012 shares [note 12]
Decrease in employee share purchase loans [note 12]
Cash used in investing activities
FINANCING ACTIVITIES
Dividends paid
Repurchase of common shares [note 13]
Cash used in financing activities
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Income taxes paid
Interest paid
The accompanying notes are an integral part of these consolidated financial statements.
22
Years Ended December 31
2012
2011
$
46,782 $
56,666
14,020
866
(16,543)
(15)
543
121
(1,317)
12,940
57,397
(9,493)
47,904
12,705
880
(17,271)
(21)
2,008
35
—
14,594
69,596
(4,426)
65,170
(17,897)
(9)
23
(467,939)
473,273
3,804
2,020
(24,999)
64
39
(569,050)
559,242
—
2,008
(6,725)
(32,696)
(38,449)
(286)
(38,735)
(25,224)
(6,334)
(31,558)
2,444
72,505
916
71,589
$
74,949 $
72,505
14,826
12
26,076
—
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
(Tabular amounts in thousands of Canadian dollars, except shares outstanding and per share amounts)
1. GENERAL INFORMATION
Leon’s Furniture Limited was incorporated by Articles of Incorporation under the Business Corporations Act on February 28, 1969.
Leon’s Furniture Limited and its subsidiaries (“Leon’s” or the “Company”) is a public company with its common shares listed on
the Toronto Stock Exchange 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.
Leon’s is a retailer of home furnishings, electronics and appliances across Canada from Alberta to Newfoundland and Labrador.
The Company owns a chain of forty-two retail stores operating as Leon’s Home Furnishings Super Stores, three retail stores operating
under the brand of Appliance Canada and operates an ecommerce internet site (www.leons.ca). In addition, the Company has
twenty-seven franchisees operating thirty-two Leon’s Furniture franchise stores.
The Company’s business is seasonal in nature. Retail sales are traditionally higher in the third and fourth quarters.
2. BASIS OF PRESENTATION
STATEMENT OF COMPLIANCE
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”). The accounting policies were consistently applied to all periods
presented unless otherwise noted.
USE OF JUDGMENT AND ESTIMATES
Management has exercised judgment in the process of applying the Company’s accounting policies. The preparation of consolidated
financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated balance sheet date and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Refer to note 4 for
details regarding key estimates and judgments.
These consolidated financial statements were approved by the Board of Directors for issuance on February 21, 2013.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these consolidated financial statements are as follows:
BASIS OF MEASUREMENT
The consolidated financial statements have been prepared under the historical cost convention, except for available-for-sale financial
assets which are measured at fair value.
CONSOLIDATION
The financial statements consolidate the accounts of Leon’s Furniture Limited and its wholly owned subsidiaries, Murlee Holdings
Limited, Leon Holdings (1967) Limited and Ablan Insurance Corporation. Subsidiaries are all those entities over which the Company
23
ANNUAL REPORT 2012 has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting
rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing
whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the
Company and de-consolidated from the date that control ceases. Intercompany transactions, balances, income, expenses, profits and
losses are eliminated.
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 President and 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.
FOREIGN CURRENCY TRANSLATION
Functional and Presentation Currency
Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which
the Company operates (the functional currency). These consolidated financial statements are presented in Canadian dollars, which is the
Company’s functional and presentation currency and is also the functional currency of each of the Company’s subsidiaries.
Foreign Currency Transactions
Foreign currency transactions are translated into the respective functional currencies of the Company’s subsidiaries using the exchange
rate at the dates of transactions. Merchandise imported from the United States and Southeast Asia, paid for in U.S. dollars, is recorded
at its equivalent Canadian dollar value upon receipt. U.S. dollar trade payables are translated at the year-end exchange rate. The Company
is subject to gains and losses due to fluctuations in the U.S. dollar. Foreign exchange gains and losses resulting from translation of
U.S. dollar accounts payable are included in the consolidated statements of income within cost of sales.
Any foreign exchange gains and losses on monetary available-for-sale financial assets are recognized in the consolidated statements of
income, and other changes in the carrying amounts are recognized in other comprehensive income. For available-for-sale assets that are
not monetary items, the gain or loss that is recognized in other comprehensive income includes any related foreign exchange component.
FINANCIAL ASSETS AND LIABILITIES
A financial asset or liability is recognized if the Company becomes a party to the contractual provisions of the asset or liability. A financial
asset or liability is recognized initially (at trade date) at its fair value plus, in the case of a financial asset or liability not at fair value through
profit or loss, transaction costs that are directly attributable to the acquisition or issue of the instrument. Financial assets and liabilities
carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the consolidated
statements of income.
After initial recognition, financial assets are measured at their fair values except for loans and receivables, which are measured at
amortized cost using the effective interest method. After initial recognition, financial liabilities are measured at amortized cost except
for financial liabilities at fair value through profit or loss that are measured at fair value.
The Company classifies its financial assets and liabilities according to their characteristics and management’s choices and intentions
related thereto for the purposes of ongoing measurement.
Classifications that the Company has used for financial assets include:
a)
b)
Available-for-sale – financial assets that are non-derivatives that are either designated in this category or not classified in any
other category and include cash and marketable securities, which consist primarily of quoted bonds, equities and debentures.
These assets are measured at fair value with the changes in fair value recognized in other comprehensive income for the current
period until realized through disposal or impairment; and
Loans and receivables – are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. Loans and receivables include trade receivables and are recorded at amortized cost with gains and losses recognized in
the consolidated statements of income in the period that the asset is no longer recognized or impaired.
Classification choice that the Company has used for financial liabilities includes:
a)
Other financial liabilities – measured at amortized cost with gains and losses recognized in the consolidated statements of income
in the period that the liability is no longer recognized.
Financial assets are derecognized if the Company’s contractual rights to the cash flows from the financial assets expire or if the Company
transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Financial liabilities
are derecognized if the Company’s obligations specified in the contract expire or are discharged or cancelled.
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED IMPAIRMENT OF FINANCIAL ASSETS
The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial
assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective
evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss
event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future
cash flows discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced and the amount of
the loss is recognized in the consolidated statements of income.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring
after the impairment was recognized, the reversal of the previously recognized impairment is recognized in the consolidated statements
of income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, balances with banks and short-term market investments with a remaining term to
maturity of less than 90 days from the date of purchase.
TRADE RECEIVABLES
Trade receivables are amounts due for goods sold in the ordinary course of business. If collection is expected in one year or less, they are
classified as current assets. If not, they are presented as non-current assets.
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method,
less provision for impairment.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value.
The Company receives vendor rebates on certain products based on the volume of purchases made during specified periods. The rebates
are deducted from the inventory value of goods received and are recognized as a reduction of cost of sales upon sale of the goods.
Incentives received for a direct reimbursement of costs incurred to sell the vendor’s products such as marketing and advertising funds,
are recorded as a reduction of those related costs in the consolidated statements of income, provided certain conditions are met.
OTHER ASSETS
The Company pays commissions related to its extended warranty plan. These costs are amortized on a straight-line basis over
the contract period.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are initially recorded at cost. Historical cost includes expenditure that is directly attributable to the
acquisition of items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate,
only when it is probable that future economic benefits associated with the asset will flow to the Company and the cost can be
measured reliably. When significant parts of property, plant and equipment are required to be replaced at intervals, the Company
derecognizes the replaced part and recognizes the new part with its own associated useful life and depreciation. Normal repair and
maintenance expenditures are expensed as incurred.
Land and construction in progress are not depreciated. Depreciation on other assets is provided over the estimated useful lives of
the assets using the following annual rates and methods:
Buildings
Equipment
Vehicles
Computer hardware
Building improvements
30 years straight-line
20% to 30% declining balance
30% declining balance
5 years straight-line
Over the estimated useful life to a maximum of 15 years
The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and
depreciates separately each such part. Residual values, method of depreciation and useful lives of items of property, plant and equipment
are reviewed annually by the Company and adjusted, if appropriate.
Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount
of the asset and are included as part of other expenses in the consolidated statements of income.
25
ANNUAL REPORT 2012 LEASES
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date,
whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use
the asset, even if that right is not explicitly specified in an arrangement.
Leased Assets – Leon’s is the Lessee
Leases that are not finance leases are classified as operating leases and the assets are not recognized on the Company’s consolidated
statements of financial position. Operating lease payments are recognized as an expense in the consolidated statements of income on
a straight-line basis over the period of the lease.
Leased Assets – Leon’s is the Lessor
Assets leased to third parties under operating leases are classified as investment property in the consolidated statements of financial
position. They are depreciated over their expected useful lives on a basis consistent with similar owned investment property. Rental
income (net of any incentives given to lessees) is recognized on a straight-line basis over the period of the lease.
INVESTMENT PROPERTIES
Assets that are held for long-term rental yields or for capital appreciation or both, and that are not occupied by either the Company or
any of its subsidiaries, are classified as investment properties. Investment properties are measured initially at cost, including related
transaction costs. Subsequent to initial recognition, investment properties are carried at cost and depreciated over the estimated useful
lives of the properties using the following methods:
Buildings
Building improvements
30 years straight-line
Over the estimated useful life to a maximum of 15 years
Land held by the Company and classified as investment property is not depreciated.
Subsequent expenditures on investment properties are capitalized to the properties’ carrying amount only when it is probable that future
economic benefits associated with the expenditures will flow to the Company and the cost of the item can be measured reliably. All other
repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of the
replaced part is derecognized.
If an investment property becomes owner occupied, it is reclassified as property, plant and equipment.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated
to the tangible and intangible assets acquired, less liabilities assumed, based on their fair value. Goodwill is assigned as at the date of the
business acquisition. The Company assesses at least annually, or at any time if an indicator of impairment exists, whether there has been
an impairment loss in the carrying value of goodwill and it is carried at cost less accumulated impairment losses. Impairment losses on
goodwill are not reversed.
Goodwill is allocated to cash-generating units (“CGUs”) or groups of CGUs, that are expected to benefit from the business combination
for the purpose of impairment testing. A group of CGUs represents the lowest level within the Company at which goodwill is monitored
for internal management purposes.
Finite-Lived Intangible Assets
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives using the following
annual rates:
Customer relationships
Brand name
Non-compete agreement
Computer software
8 years
10 years
8 years
7 years
The Company identifies and measures intangible assets acquired in business acquisitions and accounts for these assets separately
from goodwill.
IMPAIRMENT OF NON-FINANCIAL ASSETS
Property, plant and equipment and finite-lived intangible assets are reviewed quarterly for impairment and whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If the estimated recoverable amount of an asset is less than
its carrying amount, the asset is written down to its estimated recoverable amount and an impairment loss is recognized. The recoverable
amount of an asset is the higher of its fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are
26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED grouped at the lowest level for which there are separately identifiable cash inflows (CGU). The Company has identified the CGU to be at
the store level. Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment
at each reporting date.
INCOME TAXES
Income tax expense for the period comprises current and deferred income tax. Income tax is recognized in the consolidated statements
of income except to the extent it relates to items recognized in other comprehensive income or directly in equity, in which case the
related tax is recognized in equity. Levies other than income taxes, such as taxes on real estate, are included in occupancy expenses.
Current Income Tax
Current income tax expense is based on the results of the period as adjusted for items that are not taxable or not deductible. Current
income tax is calculated using tax rates and laws that were substantively enacted at the end of the reporting period. Management
periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.
It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred Income Tax
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated statements of financial position. Deferred income tax is determined using
tax rates and laws that have been enacted or substantively enacted by the consolidated statement of financial position dates and are
expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against
current income tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation
authority where there is an intention to settle the balances on a net basis.
TRADE AND OTHER PAYABLES
Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from
suppliers. Trade and other payables are classified as current liabilities if payment is due within one year or less.
PROVISIONS
Provisions are recognized only in those circumstances where the Company has a present legal or constructive obligation as a result of
a past event, when it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the
amount can be made.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the obligation.
SHARE CAPITAL
Common shares are classified as equity. Incremental costs directly attributable to the issuance of new shares are shown in equity as
a deduction, net of income tax, from the proceeds.
REVENUE RECOGNITION
Revenue comprises the fair value of consideration received or receivable for the sale of goods and services in the ordinary course of
the Company’s activities. Revenue is shown net of sales tax and financing charges. The Company recognizes revenue when the amount
of revenue can be reliably measured and it is probable that future economic benefits will flow to the Company.
In addition to the above general principles, the Company applies the following specific revenue recognition policies:
Sale of Goods
Revenue from the sale of goods is recognized either when the customer picks up the merchandise ordered or when merchandise is
delivered to the customer’s home. Any payments received in advance of delivery are deferred and recorded as customers’ deposits.
Extended Warranty
The Company recognizes extended warranty plan revenue on a straight-line basis over the contract period. The service costs associated
with the warranty obligations are expensed as incurred.
Franchise Fees
Leon’s franchisees operate principally as independent owners. The Company charges each franchisee a royalty fee based on a percentage
of the franchisee’s gross revenue. This royalty income is recorded by the Company on an accrual basis and presented within revenue.
27
ANNUAL REPORT 2012 Rent on Investment Properties
Rental income arising on investment properties is accounted for on a straight-line basis over the lease term and is presented within revenue.
Sale of Gift Cards
Revenue from the sale of gift cards is recognized when the gift cards are redeemed (the customer purchases merchandise) or when
the gift cards are no longer expected to be redeemed, based on an analysis of historical redemption rates, if any. Revenue from
unredeemed gift cards is deferred and included in trade and other payables.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed as incurred.
EARNINGS PER SHARE
Basic earnings per share have been calculated using the weighted average number of common shares outstanding during the year.
Diluted earnings per share are calculated using the “if converted” method. The dividends declared on the redeemable share liability
under the Company’s Management Share Purchase Plan (the “Plan”) are included in net income for the year. The redeemable shares
convertible under the Plan are included in the calculation of diluted number of common shares to the extent the redemption price was
less than the average annual market price of the Company’s common shares.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after
January 1, 2013 with earlier application permitted. The Company has not yet assessed the impact of these standards and amendments
or determined whether it will early adopt them.
i.
ii.
iii.
iv.
v.
vi.
vii.
IFRS 9, Financial Instruments: Classification and Measurement, as issued, reflects the first phase of the IASB’s work on the
replacement of IAS 39, Financial Instruments: Recognition and Measurement and applies to classification and measurement
of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning
on or after January 1, 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued
in December 2011, moved the mandatory effective date to January 1, 2015. In subsequent phases, the IASB will address hedge
accounting and impairment.
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has power over the investee, is
exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12, Consolidation – Special Purpose
Entities and parts of IAS 27, Consolidated and Separate Financial Statements.
IFRS 11, Joint Arrangements, requires an entity to classify its interest in a joint arrangement as a joint operation or a joint venture.
The standard eliminates the use of the proportionate consolidation method to account for joint ventures. Joint ventures will be
accounted for using the equity method of accounting while for a joint operation the entity will recognize its share of the assets,
liabilities, revenues and expenses of the joint operation. IFRS 11 supersedes SIC-13, Jointly Controlled Entities – Non-Monetary
Contributions by Venturers and IAS 31, Joint Ventures.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities, such as
subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard carries forward existing disclosures
and also introduces significant additional disclosure that address the nature of, and risks associated with, an entity’s interests in
other entities.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure for use across all IFRS
standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability
in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and
disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear
measurement basis or consistent disclosures.
IFRS 7, Financial Instruments Disclosures
In October 2010, the IASB issued amendments to IFRS 7, that increase the disclosure requirements for transactions involving
transfers of financial assets. The Company does not expect implementation of these amendments to have a significant impact
on its disclosures or presentation.
IAS 32, Offsetting Financial Assets and Financial Liabilities
IAS 32, Financial Instruments: Presentation and IFRS 7, Financial Instruments: Disclosures
In December 2011, the IASB published IAS 32 and issued new disclosure requirements in IFRS 7. The effective date for the
amendments to IAS 32 is for annual periods beginning on or after January 1, 2014.
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
4. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements requires management to use judgment in applying its accounting policies and
estimates and assumptions about the future. Estimates and other judgments are continuously evaluated and are based on management’s
experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances.
The following discusses the most significant accounting judgments and estimates that the Company has made in the preparation of
the consolidated financial statements:
REVENUE RECOGNITION
Revenue is recognized for accounting purposes upon the customer either picking up the merchandise or when merchandise is
delivered to the customer’s home. The Company offers the option to finance purchases through various third-party financing companies.
In situations where a customer elects to take advantage of delayed payment terms, the costs of financing this revenue are deducted
from revenue.
The Company also offers extended warranties on certain merchandise. Management has applied judgment in determining the basis upon
and period over which to recognize deferred warranty revenue.
INVENTORIES
The Company estimates the net realizable value as the amount at which inventories are expected to be sold by taking into account
fluctuations of retail prices due to prevailing market conditions. If required, inventories are written down to net realizable value when
the cost of inventories is estimated to not be recoverable due to obsolescence, damage or declining sales prices.
Reserves for slow moving and damaged inventory are deducted in the Company’s valuation of inventories. Management has estimated
the amount of reserve for slow moving inventory based on the Company’s historic retail experience. The reserve is calculated by analyzing
all inventory on hand older than one year. The amount of reserve for damaged inventory is determined by specific product categories.
The amount of inventory recognized as an expense for the year ended December 31, 2012 was $391,160,000 [year ended December 31,
2011 – $385,495,000], which is presented within cost of sales in the consolidated statements of income. There were $806,000 in
inventory write-downs [2011 – $535,000] recognized as an expense during 2012. No inventory write-downs recognized in prior periods
were reversed.
As at December 31, 2012, the inventory mark-down provision totalled $5,652,000 [as at December 31, 2011 – $4,846,000]. None of the
Company’s inventory has been pledged as security for any liabilities of the Company.
IMPAIRMENT OF MARKETABLE SECURITIES
The Company exercises judgment in the determination of whether there are objective indicators of impairment with respect to its
marketable securities. This includes making judgments as to whether a potential impairment is either significant or prolonged with
respect to equity securities held.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
The Company exercises judgment in the determination of CGUs for purposes of assessing any impairment of property, plant and
equipment, as well as in determining whether there are indicators of impairment present. Should indicators be present, management
estimates the recoverable amount of the relevant CGU. This estimation requires assumptions about future cash flows, margins and
discount rates.
IMPAIRMENT OF GOODWILL
The Company reviews goodwill at least annually and other non-financial assets when there is any indication that the asset might
be impaired. The Company has estimated the recoverable amount of Appliance Canada, a division of the Company, to which goodwill
is allocated using a discounted cash flow model that required assumptions about future cash flows, margins and discount rates.
INCOME TAXES
The Company computes an income tax expense. However, actual amounts of income tax expense only become final upon filing and
acceptance of the tax return by the relevant taxation authorities, which occur subsequent to the issuance of the annual consolidated
financial statements. Additionally estimation of income taxes includes evaluating the recoverability of deferred income tax assets
based on an assessment of the ability to use the underlying future tax deductions before they expire against future taxable income.
The assessment is based on existing tax laws and estimates of future taxable income. To the extent estimates differ from the final
tax return, profit would be affected in a subsequent period.
29
ANNUAL REPORT 2012 5. FINANCIAL RISK MANAGEMENT
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 table below.
Financial Instrument
Designation
Measurement
December 31
2012
December 31
2011
Cash and cash equivalents
Available-for-sale financial assets
Trade receivables
Trade and other payables
Redeemable share liability
Available-for-sale
Available-for-sale
Loans and receivables
Other financial liabilities
Other financial liabilities
$
Fair value
Fair value
$
Amortized cost $
Amortized cost $
Amortized cost $
74,949
146,735
30,245
73,542
428
$
$
$
$
$
72,505
149,318
28,937
86,357
382
FAIR VALUE HIERARCHY
The following table classifies financial assets and liabilities that are recognized on the consolidated statements of financial position at fair
value in a hierarchy that is based on significance of the inputs used in making the measurements. The levels in the hierarchy are:
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).
Financial Instruments at Fair Value
Hierarchy Level
December 31
2012
December 31
2011
Cash and cash equivalents
Available-for-sale financial assets – Equities
Available-for-sale financial assets – Bonds and Mutual Funds
1
1
2
$
$
$
74,949
16,590
130,145
$
$
$
72,505
15,923
133,393
FINANCIAL RISK FACTORS
The Company’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, interest rate risk, and other
price risk), credit risk and liquidity risk. Risk management is carried out by the Company by identifying and evaluating the financial risks
inherent within its operations. The Company’s overall risk management activities seek to minimize potential adverse effects on the
Company’s financial performance.
(a) Market Risk
(i)
Foreign currency risk – The Company is exposed to foreign currency risk. Certain merchandise is paid for in U.S. dollars. This foreign
exchange cost is included in the inventory cost. The Company does not believe it has significant foreign currency risk with respect
to its trade payables in U.S. dollars.
The Company is also exposed to foreign currency risk on its foreign-currency-denominated portfolio of available-for-sale financial
assets, primarily related to actively traded international equities. As at December 31, 2012, the Company’s investment portfolio
included 11% of foreign-currency-denominated assets [as at December 31, 2011 – 10%]. This risk is monitored by the Company’s
investment managers in an effort to reduce the Company’s exposure to foreign currency exchange rate risk.
(ii)
Interest rate risk – The Company is exposed to interest rate risk through its portfolio of available-for-sale financial assets by holding
cash, cash equivalents and actively traded Canadian and international bonds. At December 31, 2012, 85% of the Company’s
investment portfolio was made up of cash, cash equivalents and Canadian and international bonds [as at December 31, 2011 – 86%].
This risk is monitored by the Company’s investment managers in an effort to reduce the Company’s exposure to interest rate risk.
The exposure to this risk is minimal due to the short-term maturities of the bonds held. The Company is not subject to any other
interest rate risk.
(iii)
Price risk – The Company is exposed to fluctuations in the market prices of its portfolio of available-for-sale financial assets.
Changes in the fair value of the available-for-sale financial assets are recorded, net of income taxes, in accumulated other
comprehensive income as it relates to unrecognized gains and losses. The risk is managed by the Company and its investment
managers by ensuring a conservative asset allocation of bonds and equities.
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
(b) Credit Risk
Credit risk arises from cash and cash equivalents, available-for-sale financial assets and trade receivables. The Company places its cash
and cash equivalents and available-for-sale financial assets with institutions of high creditworthiness. Maximum credit risk exposure
represents the loss that would be incurred if all of the Company’s counterparties were to default at the same time.
The Company has some credit risk associated with its trade receivables as it relates to the Appliance Canada division that is partially
mitigated by the Company’s credit management practices.
The Company’s trade receivables total $30,245,000 as at December 31, 2012 [as at December 31, 2011 – $28,937,000]. The amount of
trade receivables that the Company has determined to be past due [which is defined as a balance that is more than 90 days past due]
is $646,000 as at December 31, 2012 [as at December 31, 2011 – $191,000] that relates entirely to the Appliance Canada division.
The Company’s provision for impairment of trade receivables, established through on-going monitoring of individual customer accounts,
was $500,000 as at December 31, 2012 [as at December 31, 2011 – $500,000].
The majority of the Company’s sales are paid through cash, credit card or non-recourse third-party finance. The Company relies on one
third-party credit supplier to supply financing to its customers.
(c) Liquidity Risk
The Company has no outstanding borrowings and does not rely upon available credit facilities to finance operations or to finance
committed capital expenditures. The portfolio of available-for-sale financial assets consists primarily of actively traded Canadian and
international bonds. As a result of the pending acquisition of The Brick Ltd. [note 21], the Company intends to sell its investment
portfolio in order to have sufficient cash on hand to fund the acquisition.
The Company expects to settle its trade and other payables within 30 days of the period end date. The redeemable share liability does
not have any fixed terms of repayment.
6. CAPITAL RISK MANAGEMENT
The Company defines capital as shareholders’ equity. 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 Company is not subject to any externally imposed capital requirements.
7. CASH AND CASH EQUIVALENTS
Cash at bank and on hand
Short-term investments
Totals
As at
December 31
2012
As at
December 31
2011
$
$
7,994
66,955
$
74,949
$
2,181
70,324
72,505
31
ANNUAL REPORT 2012
8. PROPERTY, PLANT AND EQUIPMENT
Land
Buildings
Equipment
Vehicles
Computer
Hardware
Building
Improvements
Total
As at December 31, 2012
Opening net book value
Additions
Disposals
Depreciation
$ 55,431 $ 88,206 $ 13,435 $
(50)
—
—
64
—
3,887
4,993
—
2,325
4,312 $
1,080
8
1,484
Closing net book value
55,381
84,383
16,103
3,900
743 $
83
—
453
373
52,031 $ 214,158
17,965
11,795
8
—
13,969
5,820
58,006
218,146
As at December 31, 2012
Cost
Accumulated depreciation
55,381
—
184,594
100,211
45,449
29,346
23,896
19,996
9,198
8,825
99,321
41,315
417,839
199,693
Net book value
$ 55,381 $ 84,383 $ 16,103 $
3,900 $
373 $
58,006 $ 218,146
As at December 31, 2011
Opening net book value
Additions
Disposals
Depreciation
$ 55,331 $ 82,604 $ 11,061 $
9,165
—
3,563
4,403
—
2,029
100
—
—
3,348 $
2,253
18
1,271
Closing net book value
55,431
88,206
13,435
4,312
1,117 $
164
—
538
743
48,031 $ 201,492
25,338
18
12,654
9,253
—
5,253
52,031
214,158
As at December 31, 2011
Cost
Accumulated depreciation
55,431
—
184,530
96,324
40,456
27,021
23,051
18,739
9,115
8,372
87,526
35,495
400,109
185,951
Net book value
$ 55,431 $ 88,206 $ 13,435 $
4,312 $
743 $
52,031 $ 214,158
Included in the above balances as at December 31, 2012 are assets not being amortized with a net book value of approximately
$4,371,000 [as at December 31, 2011 – $2,638,000] being construction in progress.
The Company assessed for an indicator of impairment of each CGU by comparing the CV (carrying value)/EBITDA (earnings before
interest, depreciation and amortization) multiple to that of comparable public companies. Where the impairment indicator existed, the
carrying value of the assets within a CGU was compared with its estimated recoverable value, which was generally considered to be
the CGU’s value-in-use.
When determining the CGU’s value-in-use, the Company estimated the future cash flows and discounted them at an appropriate pre-tax
rate for the individual CGU. Where the carrying value of the CGU’s assets exceeded the recoverable amounts, as represented by the
CGU’s value-in-use, the stores property and equipment assets were written down.
For the year ended December 31, 2012 and 2011, there has been no impairment loss recognized.
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
9. INVESTMENT PROPERTIES
As at December 31, 2012
Opening net book value
Additions
Disposals
Depreciation
Closing net book value
As at December 31, 2012
Cost
Accumulated depreciation
Net book value
As at December 31, 2011
Opening net book value
Additions
Disposals
Depreciation
Closing net book value
As at December 31, 2011
Cost
Accumulated depreciation
Net book value
Land
Buildings
Building
improvements
$
8,286 $
—
—
—
$
8,286 $
— $
—
—
—
— $
80 $
—
—
51
29 $
Total
8,366
—
—
51
8,315
8,286
—
8,039
8,039
1,457
1,428
17,782
9,467
$
8,286 $
— $
29 $
8,315
$
8,286 $
—
—
—
$
8,286 $
— $
—
—
—
— $
131 $
—
—
51
80 $
8,417
—
—
51
8,366
8,286
—
8,039
8,039
1,457
1,377
17,782
9,416
$
8,286 $
— $
80 $
8,366
The fair value of the investment property portfolio as at December 31, 2012 was approximately $33,540,000 [as at December 31, 2011 –
$29,750,000]. The fair value was compiled internally by management based on available market evidence.
33
ANNUAL REPORT 2012
10. INTANGIBLE ASSETS AND GOODWILL
As at December 31, 2012
Opening net book value
Additions
Disposals
Amortization for the year
Closing net book value
As at December 31, 2012
Cost
Accumulated amortization
Net book value
As at December 31, 2011
Opening net book value
Additions
Disposals
Amortization for the year
Net book value
As at December 31, 2011
Cost
Accumulated amortization
Net book value
Customer
Relationships
Brand Name
Non-compete
Agreement
Computer
Software
$
1,000 $
—
—
250
1,500 $
—
—
250
750
1,250
500 $
958 $
—
—
125
375
9
—
241
726
2,000
1,250
2,500
1,250
1,000
625
4,211
3,485
$
750 $
1,250 $
375 $
726 $
$
1,250 $
—
—
250
1,750 $
—
—
250
1,000
1,500
625 $
—
—
125
500
1,277 $
(64)
—
255
958
2,000
1,000
2,500
1,000
1,000
500
4,202
3,244
$
1,000 $
1,500 $
500 $
958 $
Total
3,958
9
—
866
3,101
9,711
6,610
3,101
4,902
(64)
—
880
3,958
9,702
5,744
3,958
IMPAIRMENT TEST OF GOODWILL
The Company performed impairment tests of goodwill as at December 31, 2012 and December 31, 2011 in accordance with the accounting
policy as described in note 3. The recoverable amount of the Appliance Canada CGU, where all goodwill is allocated, was determined
based on value-in-use calculations. These calculations used cash flow projections based on financial budgets approved by management
covering a one year period. Cash flows beyond the one year period are extrapolated using the estimated growth rates stated below.
The key assumptions used for the value-in-use calculation as at December 31, 2012 and December 31, 2011 were as follows:
2012
2011
Growth Rate
%
Pre-tax
Discount Rate
%
2.0
3.0
10.8
13.4
The impairment tests performed resulted in no impairment of the goodwill as at December 31, 2012 and December 31, 2011.
11. TRADE AND OTHER PAYABLES
Trade payables
Other payables
34
As at
December 31
2012
As at
December 31
2011
$ 52,681
20,861
$
62,485
23,872
$ 73,542
$
86,357
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
12. REDEEMABLE SHARE LIABILITY
Authorized
2,284,000 convertible, non-voting, series 2002 shares
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
Issued and fully paid
Nil series 2002 shares [December 31, 2011 – 667,748]
456,317 series 2005 shares [December 31, 2011 – 541,248]
1,045,219 series 2009 shares [December 31, 2011 – 1,115,107]
281,500 series 2012 shares [December 31, 2011 – nil]
Less employee share purchase loans
As at
December 31
2012
As at
December 31
2011
$
—
4,309
9,250
3,493
(16,624)
$
4,799
5,111
9,869
—
(19,397)
$
428
$
382
Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005, 2009 and
2012 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares, series 2009 shares and series 2012 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 2002,
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. Series 2002 shares may also be redeemed at the option
of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to
the tenth anniversary of such issue. The series 2005, series 2009 and series 2012 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 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 $7.19 per series 2002 share, $9.44
per series 2005 share, $8.85 per series 2009 share and $12.41 per series 2012 share.
Dividends paid to holders of series 2002, series 2005, series 2009 and series 2012 shares totalling approximately $465,000 [2011 –
$470,000] have been used to reduce the respective shareholder loans.
During the year ended December 31, 2012, 667,748 series 2002 shares [year ended December 31, 2011 – 145,583], 84,931 series 2005
shares [year ended December 31, 2011 – 79,545] and 20,000 series 2009 shares [year ended December 31, 2011 – nil] were converted
into common shares with a stated value of approximately $4,799,000 [year ended December 31, 2011 – $1,047,000], $802,000 [year
ended December 31, 2011 – $751,000] and $177,000 [year ended December 31, 2011 – nil], respectively.
During the year ended December 31, 2012, the Company cancelled 49,888 series 2009 shares [year ended December 31, 2011 – 53,017]
and 25,000 series 2012 shares [year ended December 31, 2011 – nil] in the amount of $442,000 [year ended December 31, 2011 –
$470,000] and $310,000 [year ended December 31, 2011 – nil], respectively.
Employee share purchase loans have been netted against the redeemable share liability, as the Company has the legally enforceable
right of offset and the positive intent to settle on a net basis.
During the year ended December 31, 2012, the Company issued 306,500 series 2012 shares for proceeds of $3,804,000. In addition,
the Company advanced non-interest-bearing loans in the amount of $3,804,000 to certain of its employees to acquire these shares.
35
ANNUAL REPORT 2012
13. COMMON SHARES
Authorized
Unlimited common shares
Issued
70,564,905 common shares [December 31, 2011 – 69,815,734]
As at
December 31
2012
As at
December 31
2011
$
26,693
$
20,918
During the year ended December 31, 2012, 667,748 series 2002 shares [year ended December 31, 2011 – 145,583], 84,931 series 2005
shares [year ended December 31, 2011 – 79,545] and 20,000 series 2009 shares [year ended December 31, 2011 – nil] were converted
into common shares with a stated value of approximately $4,799,000 [year ended December 31, 2011 – $1,047,000], $802,000 [year
ended December 31, 2011 – $751,000] and $177,000 [year ended December 31, 2011 – nil], respectively.
During the year ended December 31, 2012, the Company repurchased 23,506 [year ended December 31, 2011 – 484,727] of its common
shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bid at a net cost of approximately $286,000
[year ended December 31, 2011 – $6,334,000]. 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 $3,000 [year
ended December 31, 2011 – $57,000]. The excess net cost over the average carrying value of the shares of approximately $283,000
[year ended December 31, 2011 – $6,277,000] has been recorded as a reduction in retained earnings.
As at December 31, 2012, the dividends payable were $7,055,000 [$0.10 per share] and as at December 31, 2011 were $17,457,000
[$0.25 per share].
14. REVENUE
Sale of goods by corporate stores
Income from franchise operations
Extended warranty revenue
Rental income from investment property
15. EXPENSES BY NATURE
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Operating lease payments
Gain on sale of property, plant and equipment
Year Ended
December 31
2012
Year Ended
December 31
2011
$ 663,350
10,426
7,594
793
$ 663,607
10,434
8,055
740
$ 682,163
$ 682,836
Year Ended
December 31
2012
Year Ended
December 31
2011
$
$
$
$
14,020
866
5,488
15
$
$
$
$
12,705
880
3,631
21
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
16. INCOME TAX EXPENSE
(A) THE MAJOR COMPONENTS OF INCOME TAX EXPENSES FOR THE YEAR ENDED ARE AS FOLLOWS:
Statements of Income
Current income tax expense
Based on taxable income of the current year
Adjustments in respect of prior years
Deferred income tax expense
Origination and reversal of temporary differences
Impact of change in tax rates/new tax laws
Income tax expense reported in the statements of income
Statements of Other Comprehensive Income
Deferred income tax
Unrealized gain/(loss) on available-for-sale financial assets
Total income tax expense
(B) RECONCILIATION OF THE EFFECTIVE TAX RATES ARE AS FOLLOWS:
Income before income taxes
Income tax expense based on statutory rate
Increase (decrease) in income taxes resulting
from non-taxable items or adjustments of prior year taxes
Non-deductible items
Rate differences related to origination and reversal of
temporary differences
Remeasurement of deferred tax asset for rate changes
Other
December 31
2012
December 31
2011
$
16,358
—
16,358
$
20,636
(462)
20,174
504
39
543
1,852
156
2,008
16,901
22,182
373
(95)
$
17,274
$
22,087
2012
2011
$
63,683
16,882
26.51%
$
78,848
22,219
28.18%
88
0.14%
86
0.11%
39
—
(108)
0.06%
—
(0.17%)
156
66
(345)
0.20%
0.08%
(0.44%)
Income tax expense reported in the statements of income
$
16,901
26.54%
$
22,182
28.13%
(C) DEFERRED INCOME TAX BALANCES AND RECONCILIATION ARE AS FOLLOWS:
(i) Deferred income taxes relates to the following:
Deferred income tax assets
Deferred warranty plan
Unrealized gains/(losses) on available-for-sale investments
Property, plant and equipment
Total deferred income tax assets
December 31
2012
December 31
2011
$
$
3,114
(316)
(2,270)
3,628
(57)
(2,241)
$
528
$
1,444
(ii) Deferred income tax movements are as follows:
2012
2011
Expense (benefit)
Deferred warranty plan
Property, plant and equipment
Net deferred income tax expense – Statement of income
Unrealized gains/(losses) on available-for-sale investments
Net deferred income tax expense (benefit) – Other comprehensive income
Total deferred income tax expense
$
$
513
30
543
373
373
916
$
1,111
897
2,008
(95)
(95)
$
1,913
37
ANNUAL REPORT 2012
(iii) Reconciliation of net deferred tax asset is as follows:
2012
2011
Balance, beginning of year
Tax expense during the period recognized in profit or loss
Tax (expense) benefit during the period recognized in other comprehensive income
Balance, end of year
17. EARNINGS PER SHARE
$
$
1,444
(543)
(373)
3,357
(2,008)
95
$
528
$
1,444
Earnings per share are calculated using the weighted average number of shares outstanding. The weighted average number of common
shares used in the basic earnings per share calculations amounted to 70,032,721 for the year ended December 31, 2012 [year ended
December 31, 2011 – 69,969,417]. The following table reconciles the profit for the period and the number of shares for the basic and
diluted earnings per share calculations:
Profit for the year for basic earnings per share
Profit for the year for diluted earnings per share
Weighted average common shares outstanding
Dilutive effect [note 13]
Diluted weighted average common shares outstanding
Basic earnings per share
Diluted earnings per share
18. COMMITMENTS AND CONTINGENCIES
Year Ended
December 31
2012
Year Ended
December 31
2011
$
46,782
$
56,666
46,782
56,666
70,032,721
69,969,417
2,284,877
2,336,007
72,317,598
72,305,424
0.67
0.65
0.81
0.78
[a]
[b]
There were no outstanding commitments to complete any construction projects as at December 31, 2012 [December 31, 2011 –
to complete at two locations at an approximate cost of $4,407,000].
The Company is obligated under operating leases for future minimum annual rental payments for certain land and buildings
as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
6,608
24,405
28,139
$
59,152
[c]
The future minimum lease payments receivable under non-cancellable operating leases for certain land and buildings classified as
investment property are as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
$
754
2,312
1,185
4,251
[d]
[e]
[f]
The Company has issued approximately $255,000 in letters of credit primarily with respect to buildings under construction or being
completed [as at December 31, 2011 – $255,000].
Pursuant to a reinsurance agreement relating to the extended warranty sales, the Company has pledged available-for-sale financial
assets amounting to $20,980,000 [as at December 31, 2011 – $20,257,000] and provided a letter of credit of $1,500,000 [as at
December 31, 2011 – $1,500,000] for the benefit of the insurance company.
In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Accruals are made in
instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated. Although
it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that
the ultimate outcome of these matters will have a material impact on its consolidated financial position.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
19. CONSOLIDATED STATEMENTS OF CASH FLOWS
[a] The net change in non-cash working capital balances related to operations consists of the following:
Trade receivables
Inventories
Income taxes recoverable
Other assets
Trade and other payables
Customers’ deposits
Year Ended
December 31
2012
Year Ended
December 31
2011
$
$
(1,308)
1,773
1,538
158
(12,883)
1,229
(368)
(2,407)
(5,706)
143
1,953
1,959
$
(9,493)
$
(4,426)
[b]
During the year, property, plant and equipment were acquired at an aggregate cost of $17,965,000 [2011 – $25,338,000], of which
$942,000 [2011 – $874,000] is included in trade and other payables as at December 31, 2012.
20. RELATED PARTY TRANSACTIONS
Key Management Compensation
Key management includes the Directors and the five senior executives of the Company. The compensation expense paid to key
management for employee services during each year is shown below:
Year Ended
December 31
2012
Year Ended
December 31
2011
Salaries and other short-term employee benefits
$
3,056
$
3,416
21. SUBSEQUENT EVENT
On November 11, 2012, the Company announced that it had entered into definitive agreements to acquire all the outstanding shares
of The Brick Ltd. (“The Brick”), subject to approval by the Competition Bureau and other customary closing conditions. The total
consideration for The Brick is approximately $700 million.
The cash consideration of the purchase price along with the transaction costs will be funded with cash on hand, convertible debentures and
bank debt. This acquisition will be accounted for as a business combination. The Company expects the transaction to close in the first quarter
of 2013. The purchase method of accounting will be used and the results of operations will be consolidated from the date of acquisition.
During the fourth quarter of 2012, the Company incurred total acquisition costs of $3,317,000, of which $1.3 million have been capitalized
related to the pending issuance of debt. The remaining amount of $2.0 million has been expensed as incurred in accordance with IFRS 3,
Business Combinations.
In connection with the acquisition, on January 31, 2013, the Company entered into a senior secured credit agreement that is effective
upon The Brick acquisition being consummated. The available credit facilities include:
[a] a term credit facility of $400 million; and
[b] a revolving credit facility of up to $100 million
The facilities bear interest at floating rates based on Canadian prime, Bankers Acceptance and LIBOR rates plus an applicable standby fee
on undrawn amounts. The issuances of any letters of credit constitute utilization of the revolving credit facility. The term credit facility is
repayable in quarterly amounts ranging from $5,000,000 to $15,000,000 beginning September 30, 2013 and ending four years after the
closing date of the acquisition. The revolving credit facility expires four years after the closing date of the acquisition. The Company can
prepay without penalty amounts outstanding under the facilities at any time.
22. COMPARATIVE FINANCIAL STATEMENTS
The comparative financial statements have been reclassified from statements previously presented to confirm to the presentation of the
2012 financial statements.
39
ANNUAL REPORT 2012
CORPORATE AND SHAREHOLDER
INFORMATION
BOARD OF DIRECTORS
Joseph M. Leon
Doctor of Medicine, Welland
CORPORATE OFFICE
45 Gordon Mackay Road
Toronto, Ontario M9N 3X3
(416) 243-7880
Mark J. Leon
Toronto
Terrence T. Leon
Toronto
Edward F. Leon
King City
Peter B. Eby
Private Investor, Toronto
Alan J. Lenczner
Barrister, Partner in
Lenczner Slaght Griffin, Toronto
Mary Ann Leon
Financial Executive, Toronto
Frank Gagliano
Vice Chairman,
St. Joseph Communications, Toronto
OFFICERS
Mark J. Leon
Chairman of the Board
Terrence T. Leon
President and CEO
Dominic Scarangella
Vice President and CFO
Edward F. Leon
Vice President, Merchandising
Robert J. MacNelly
Vice President, Marketing
John A. Cooney
Corporate Secretary
40
AUDITORS
Ernst & Young LLP
Toronto
REGISTRAR AND TRANSFER AGENT
CIBC Mellon Trust Company
Toronto
Canadian Stock Transfer Company, Inc.
acts as the Administrative Agent for
CIBC Mellon Trust Company.
LISTING
Leon’s shares are listed on the
Toronto Stock Exchange
Ticker Symbol is LNF
ANNUAL GENERAL MEETING
May 14, 2013 2:00 PM
Library Room, Fairmont Royal York
100 Front Street West,
Toronto, Ontario
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LEON’S FURNITURE LIMITED
PROVIDING CANADIAN CONSUMERS
WITH THE BEST COMBINATION OF
SERVICE, SELECTION AND VALUE
FOR MORE THAN A CENTURY.
Visit us online!
WWW.LEONS.CA