Bigger
and Better
Annual Report 2013
ABOUT US
Founded in 1909 by Ablan Leon, Leon’s Furniture Limited has grown into the largest home furnishing retailer in Canada, with a modern
network of 312 stores selling a wide range of furniture, major appliances and home electronics. Today, with annual total system-wide sales
of over $2 billion and over 8,600 associates across the country, Leon’s remains committed to the standards of service, integrity and trust
established by its founder more than 100 years ago.
Financial Highlights
($ in thousands, except per share amounts)
2013
2012
% Change
Revenue
Income before income taxes
Net income
Cash generated from operations
Dividends paid
Per common share
Net income
Cash flow generated from operations
Dividends declared
Shareholders’ equity at year end
$ 1,694,643 $
91,556
67,183
83,120
28,239
682,163
63,683
46,782
49,221
38,449
$
$
$
$
0.95 $
1.18 $
0.40 $
7.03 $
0.67
0.70
0.40
6.46
148.4%
43.8%
43.6%
68.9%
(26.6%)
41.8%
68.6%
–
8.8%
REVENUE
NET INCOME
SHAREHOLDERS’ EQUITY
PER SHARE
($ in thousands)
$1,694,643
($ in thousands)
$67,183
($ per share)
$7.03
2,000,000
1,750,000
1,500,000
1,250,000
1,000,000
750,000
500,000
250,000
0
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
7
6
5
4
3
2
1
0
09
10
11
12
13
09
10
11
12
13
09
10
11
12
13
Note: Leon’s 2013 results include operations of The Brick Ltd. from March 28, 2013.
Leon’s March 28, 2013 acquisition of The Brick Ltd. created the biggest
retailer of home furnishings, appliances and electronics in Canada.
This landmark combination of industry leaders has also made us a better
retailer, with significantly higher earnings per share in 2013 and abundant
opportunity to keep improving the profitability of our business over the
next several years.
President’s Message to Shareholders
A Remarkable Year
Of the many milestones Leon’s has achieved since 1909, none has
been greater than last year’s acquisition of The Brick Ltd. Today,
our two storied brands comprise the largest retail network for home
furnishings, appliances and electronics in Canada, but our plans to
realize the full potential of this historic combination have just begun.
TERRENCE T. LEON, President and Chief Executive Officer
THE IMPACT OF THE APPROXIMATELY $700 million purchase of
The Brick was most clearly visible in Leon’s 2013 financial
results. For the year, system-wide sales were $2,039
million including $344.8 million of franchise sales, compared
to
$880.2 million in system-wide sales and $198.1 million in
franchise sales in 2012.
Net income also increased significantly, rising in every
successive quarter of 2013 and ending the year at
$67.2 million or $0.95 per common share, an increase
of 41.8 percent. This improvement reflects the earnings
contribution from The Brick as of March 28, 2013 as well
as other factors.
Beyond the immediately positive effect the acquisition of
The Brick had on Leon’s financial results, its greatest value
is yet to be realized as we integrate and optimize
the core functions of our combined operations over the
next few years. In doing so, however, we will be careful
to preserve the hard-earned market positions of both
banners by managing The Brick and Leon’s as separate
operating divisions.
The Brick’s winning corporate culture helped make this
an easy decision. Similar to Leon’s, it is a successful, family-
founded business. The Brick’s greatest intangible asset is
the enormous goodwill that has come from treating its
customers, employees and communities with care and
respect over the past 43 years. As a result, our two
major banners serve surprisingly distinct customer
groups within the competitive landscape. Both also
command a position of relative strength in their original
markets. The acquisition of The Brick has significantly
strengthened Leon’s presence in Western Canada—the
country’s fastest growing region—while enhancing the
geographic diversification of our business.
Although Leon’s and The Brick will continue to operate
under separate banners, integration teams drawn from
both divisions have been working from day one to identify
operating synergies and leverage the best practices
throughout our core business processes. Our first order
of business has been information systems, where we have
already approved the development of a next-generation
platform that will allow us to standardize processes across
both divisions. It will also make it easier for customers
to choose when and how they wish to shop with us by
expanding our online retailing presence and adding the
capacity to incorporate emerging mobile technologies.
The acquisition of The Brick has also given us the
opportunity to improve the way we provide warranty
service to our customers. While Leon’s warranty work
was previously outsourced, we now own a separate service
company that is generating profit by handling the service
work of our combined operations as well as third-party clients.
02
LEON'S FURNITURE LIMITED Our combined team will have access to national
buying opportunities in merchandising and
marketing, and a national distribution network
that will enable us to greatly enhance our
online shopping capabilities.
We have significantly increased
earnings per share with abundant
opportunity for ongoing improvements
as fundamental business processes are
integrated and optimized.
While our greatest opportunities for income growth are within the walls of our
existing operations, we will also continue to pursue the expansion of both divisions
in selected markets. In 2013, we celebrated the grand openings of Leon’s corporate
stores in Orangeville and Brantford, Ontario, and Sherbrook, Quebec. We also
celebrated the grand openings of a new Leon’s franchise store in Saint-Georges,
Quebec and two new Brick franchise stores in Collingwood, Ontario and Swan River,
Manitoba. In addition, new Brick stores opened in Hamilton and Waterloo, Ontario.
Also, three Brick stores were remodeled in Hamilton, Kitchener and Scarborough,
Ontario. Finally, a brand new replacement store was opened in Brantford, Ontario
As you will see on pages 6 and 7 of this report, Leon’s is a bigger company
than ever before. Today, our retail network consists of 312 stores and six strong
banners from coast to coast. It is complemented by the industry’s most extensive
distribution network as well as in-house service capabilities that back up every
product we sell. These are the three pillars of success in our business and each
of them has been significantly strengthened during the course of the past year.
After 105 years in this business, we have also learned that opportunities to acquire
another industry leader don’t come along every day. Our ability to take advantage
of this opportunity was a function of Leon’s traditionally conservative approach
to financial management, including a balance sheet that was debt free at the end
of 2012.
Our financial strength made it possible to seize this compelling opportunity amid
the slow pace of growth in the Canadian retail sector. We took on a prudent amount
of debt to do so, in a relatively low interest rate environment, and are confident in
our ability to retire this amount from the cash flows of the business over the next
few years. In the meantime, we have significantly increased earnings per share with
abundant opportunity for ongoing improvement as fundamental business processes
are integrated and optimized.
As for the year ahead, we expect that the Canadian economy will continue to grow
at a modest pace, as consumers remain cautious about the prospects for a full
economic recovery. Generating growth within this environment has been a challenge
for Leon’s and most other Canadian retailers. We have been in business long enough
to know that pent-up demand will lead to stronger consumer spending in our
industry but do not expect this to happen until the latter half of 2014 at the earliest.
In closing, I would like to extend my sincere appreciation to all of the talented
executives, corporate and franchised store management teams and associates
throughout our operating divisions. Together, they have gone about the business
of serving our customers well, despite the distractions and demands of a truly
remarkable year. With their continued support, I am confident that we will continue
to improve Leon’s performance and successfully advance our growth initiatives in
the year ahead.
(signed)
TERRENCE T. LEON
President and Chief Executive Officer
The Brick’s Midnorthern
Appliance banner and Appliance
Canada make Leon’s the
country’s largest commercial
retailer of appliances to builders,
developers, hotels and property
management companies.
05
ANNUAL REPORT 2013
At-A-Glance
Coast to Coast
SINCE LEON’S WAS FOUNDED MORE than a century ago,
our history has been one of continuous expansion and
innovation. In 2013, we took the biggest step in our
evolution to date with the acquisition of The Brick Ltd.
This combination of industry leaders represents the largest
network of home furnishing, appliance and electronics
stores in Canada.
On March 28, 2013, Leon’s completed the acquisition
of The Brick Ltd. for approximately $700 million. This
landmark transaction created the largest retailer of home
furnishings, appliances and electronics in Canada, with a
national network of more than 300 stores that stretches
from coast to coast and strengthened our presence in the
fastest growing regions of the country. The Brick’s well-
known retail banners include: The Brick, United Furniture
Warehouse, The Brick Mattress Store, Brick Clearance
Centres, and Midnorthern Appliance. The Midnorthern
Appliance banner, in combination with Leon’s Appliance
Canada banner, has made us the country’s largest
commercial retailer of appliances to builders, developers,
hotels and property management companies.
Equally important, this transaction has brought together
two storied Canadian companies with complementary
geographic footprints that strengthen our position in the
home furnishings marketplace. We are also a great cultural
fit. Like Leon’s, The Brick was a family-founded company
that began with a single store. Over the past 43 years,
The Brick experienced rapid growth in Western Canada
and across the country, ultimately creating a national
retail network of 231 stores.
100+ Years of
Leon's History
1909
The A. Leon Co. opens for
business on King Street in
Welland, Ontario.
1973
Leon’s introduces
"big-box" retailing
to Canada with the
opening of our first
warehouse showroom
in Weston, Ontario.
1974
The opening of our 10th
store in Laval, Québec
marks Leon's expansion
beyond Ontario.
1983
Leon’s extends its presence
to smaller centres with
the introduction of the
first franchise store in
Kingston, Ontario.
06
LEON'S FURNITURE LIMITED Yukon
1
Northwest Territories
1
British
Columbia
Alberta
35
2
6
45
Saskatchewan
10
7
3
11
Manitoba
3
2
7
Ontario
3
45
60
14
8
3
1
Québec
10
17
312TOTAL STORES
NATIONWIDE
Labrador
1
Newfoundland
2
Prince Edward
Island
1
1
Nova Scotia
4
3
New Brunswick
4
2
78
Leon’s
Furniture
stores1
183
The Brick
stores2
24
The Brick
Mattress
stores
23
United
Furniture
Warehouse
stores
03
Appliance
Canada stores
01
Midnorthern
Appliance
stores
Includes 34 Leon's franchise stores
1)
2) Includes 69 The Brick franchise stores
Other corporate brands: First Oceans, Trans Global Service, Trans Global Insurance, Trans Global Warranty
1985
Leon’s opens its first
store in Atlantic Canada in
Saint John, New Brunswick.
2009
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.
2011
Leon’s opens four new
corporate stores, and two
new franchise locations,
including our first franchise
store in Québec.
2012
Leon’s secures sites for
four new corporate stores,
three of which opened
in 2013.
2013
Leon’s acquires
The Brick creating
Canada’s largest home
furnishing, appliance and
electronics retailer, with
a network of 312 stores
from coast to coast.
07
ANNUAL REPORT 2013
Building Strong Communities
A Vital Part of
Our Communities
Leon’s has always been committed to giving something back to
the Canadian communities that have welcomed our stores and
made us a prosperous and growing company for the past 105 years.
This proud tradition continued during the past year in the hundreds
of communities served by the retail store networks of Leon’s and
The Brick.
LEON’S AND THE BRICK SHARE a long-standing tradition of
supporting the communities in which we operate, both
corporately, and through the time and resources our stores
and associates contribute to important social causes each
year. To achieve the greatest possible impact, our divisions
share a similar focus on improving the health and well-being
of our communities.
The largest recipient of Leon’s support is The Boys & Girls
Clubs of Canada, a leading charitable organization that
provides programs to children and youth that support
the healthy physical, educational and social development
of 200,000 young people and their families each year.
In 700 locations across the country, dedicated staff and
volunteers offer access to affordable opportunities for
physical recreation, tutoring, technology learning, life and
leadership skills development, arts exploration and more.
Many Clubs also provide nutritious snacks and meals,
emergency shelter, family support programs and other
support to children, youth and family at risk.
Each Club creates a safe, supportive environment where
young people can experience new opportunities, develop
healthy attitudes and behaviours, overcome personal
challenges, build positive relationships and develop
confidence and skills for life. Boys & Girls Clubs have
been helping Canadians discover, develop and achieve
their potential for more than 100 years.
Leon’s has also traditionally supported the local hospitals
in each of the communities served by our retail network
across Canada. Our associates also continue to volunteer
for 100 hours in each community across Canada in where
we have stores.
The Brick’s charitable initiatives also continue to be focused
on the health and well-being of the communities that are
home to our stores. Among these is Habitat for Humanity
Canada, a non-profit organization working for a world
where everyone has a safe and decent place to live. With
the help of over 300,000 volunteers and 72 organizations
from coast to coast, their mission is to break the cycle of
poverty through affordable housing and the promotion
of home ownership. We are proud to support Habitat for
Humanity Canada in a Bronze level partnership that includes
fundraising, volunteering and championing the cause of
affordable housing in communities across the country.
The Brick is also a proud supporter of Breakfast for
Learning—a community of Canadians who believe that
children deserve the very best chance of success in life.
08
LEON'S FURNITURE LIMITED We continue to support our
communities on both a national
and local level.
This includes making sure they are well nourished and ready to learn throughout
the school day. In more than 2,200 school and community sites every year,
Breakfast for Learning brings concerned citizens together to engage local
expertise and resources to meet the needs of their child nutrition programs
and the students it serves. The Brick is proud to support Breakfast for Learning
through direct financial and marketing support and through the volunteer efforts
of associates across the country.
The Brick is also the founder and avid supporter of The Brick Super Novice Hockey
Tournament, a renowned international tournament held each summer at West
Edmonton Mall. The tournament gives nine- and 10-year old hockey players from
Western Canada a chance to skate with some of the best teams from the rest of the
country and the United States. Many charities are the beneficiaries from funds that
have been generously donated as a result of this tournament.
The Brick is also proud to sponsor the Sunshine Gala at Alberta Children’s Hospital,
an annual event that helps the hospital provide the highest possible level of care to
children in need throughout the province.
We also believe in helping out when the unexpected happens. This past summer,
Leon’s and The Brick teamed up to help victims of the extensive flooding in Calgary
and other parts of southern Alberta. Under the Leon’s/Brick Southern Alberta Flood
Relief Initiative, we matched contributions from our associates and customers to
raise funds for the Canadian Red Cross to aid flood relief work.
Founded in 1985, Habitat for
Humanity Canada is a national,
non-profit organization dedicated
to breaking the cycle of poverty
through affordable housing and
the promotion of home owner-
ship. The Brick is a proud supporter
of this vital organization through
a Bronze level partnership that
includes fundraising, volunteering
and championing the cause of
affordable housing in communities
across the country.
09
ANNUAL REPORT 2013 A Legacy of Trust
History
in the Making
Leon’s acquisition of The Brick in March 2013 marked the latest
step in a journey that began 105 years ago. It was then that a poor
but industrious Lebanese immigrant named Ablan Leon opened
a small dry goods store on King Street in Welland, Ontario and
founded the A. Leon Company.
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 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 capably writing
new chapters in Leon’s history of continuous improvement
and growth. In 2013, they took the largest step in Leon’s
history with the acquisition of The Brick, a transformational
event that has created the largest network of home
furnishing, appliance and electronics stores in Canada.
Founded in 1971 as a single store in Edmonton, Alberta, in
1982, The Brick opened stores in Calgary and Fort McMurray
and two years later began its expansion across Canada with
two new stores in the Toronto market. By 1999, the first of
The Brick’s franchise stores opened in Hinton, Alberta. In
the years that followed, The Brick would go on to purchase
United Furniture Warehouse and Midnorthern Appliance,
and ultimately create a retail store network with 231
locations across the country.
The combination of our two storied franchises represents
a landmark event in the retailing industry and a made-in-
Canada success story in a period of increasing globalization.
Together, we possess the largest network of home furnishing
stores in Canada and a shared commitment to create value
for all the customers, associates, communities and investors
who depend on our continued success.
For more than a century, Leon's has been committed to delivering the best combination
of service, selection and value in the business.
10
LEON'S FURNITURE LIMITED BOARD REPORTING GROUP
The senior executives who report to Leon’s Board of Director’s have been
together for more than 20 years with the exception of Jim Caldwell, who was
appointed President of The Brick in 2013. In conjunction with the rest of the senior
management teams at Leon’s and The Brick, these executives are responsible for
planning and executing the Company’s strategic planning, including the integration
and optimization of our newly combined operations.
Mark J. 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.
Terrence T. Leon: 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.
Dominic Scarangella: 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 F. Leon: 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.
Jim Caldwell: Jim joined The Brick in 2010 as Senior Vice President of Operations.
He was appointed President of The Brick Ltd. in September 2013.
We continue to
honour Ablan Leon’s
belief that business
is won through
fairness, integrity
and trust.
Our family of furniture leaders:
11
ANNUAL REPORT 2013 5-Year
Review
Leon’s 2013 results include operations
of The Brick Ltd. from March 28, 2013.
Income Statistics
($ in thousands, except earnings per share)
2013
2012
2011
2010
20091
Revenue
Cost of sales
Gross profit
Operating expenses net of finance income
and gain on sale of capital property
Income before income taxes
Provision for income taxes
$ 1,694,643 $
959,307
735,336
643,780
91,556
24,373
682,163
398,704
283,459
219,776
63,683
16,901
$
682,836 $
394,099
288,737
$
710,435
412,379
298,056
703,180
419,819
283,361
209,889
78,848
22,182
207,871
90,185
26,901
200,827
82,534
25,670
Net income
$
67,183 $
46,782
$
56,666 $
63,284 $
56,864
Common shares outstanding (’000)
Earnings per common share
Percent annual change in sales
Net income as a percentage of sales
70,612
70,033
69,969
70,372
$
0.95 $
148%
4.0%
0.67 $
(0.1%)
6.9%
0.81 $
(3.9%)
8.3%
0.90 $
1.0%
8.9%
70,714
0.80
(5.0%)
8.1%
Dividend declared
$
28,247 $
28,047
$
36,371 $
22,492 $
33,951
Balance Sheet Statistics
($ in thousands, except per share amounts)
2013
2012
2011
2010
20091
Shareholders’ equity
Total assets
Purchase of capital assets
Working capital
Shareholders’ equity per common share
Common share price range on the
Toronto Stock Exchange
$
$
496,555
1,682,174
18,984
(16,262)
7.03
452,187
588,178
17,897
226,208
6.46
$
425,461 $
584,411
24,999
204,649
6.08
410,286 $
566,674
13,567
200,826
5.83
375,138
529,156
10,545
163,626
5.31
High
Low
$
$
14.75 $
11.62 $
13.47
10.55
$
$
15.65 $
10.56 $
15.10 $
10.35 $
10.81
7.75
1Results reported under Canadian GAAP
Management’s
Discussion &
Analysis
Financial Review
The following Management’s Discussion and Analysis (“MD&A”) is prepared as at February 27, 2014 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, 2013 and for the year ended December 31, 2013. It should be read in conjunction with the fiscal year 2013
consolidated financial statements and the notes thereto. For additional detail and information relating to the Company,
readers are referred to the fiscal 2013 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; dependency on product
from third party suppliers and changes to the Canadian bank lending rates. Given these economic risks and uncertainties
and the integration risk associated with the acquisition of The Brick Ltd., 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 the International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The amounts expressed
are in Canadian dollars. Per share amounts are calculated using the weighted average number of shares outstanding, before
and after considering the potential dilutive effects of the convertible debentures for the applicable period.
The Audit Committee of the Board of Directors of Leon’s Furniture Limited reviewed the MD&A and the consolidated
financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the
fiscal year 2013 consolidated financial statements and MD&A were approved on February 27, 2014.
Introduction
On November 11, 2012, Leon’s Furniture Limited and The Brick Ltd. (“The Brick”) announced that they had entered into
a definitive agreement (the “Leon’s Arrangement”) that provided for Leon’s to acquire 100% of The Brick’s outstanding
common shares for $5.40 per outstanding common share, and to acquire for cancellation 100% of the outstanding
common share purchase warrants for $4.40 per common share purchase warrant.
13
ANNUAL REPORT 2013 Management’s Discussion & Analysis
Immediately upon completion of the Leon’s Arrangement, which occurred on March 28, 2013, all outstanding common
shares and common share purchase warrants were repurchased in accordance with the Leon’s Arrangement and are no
longer listed for trading on the Toronto Stock Exchange. The total consideration paid to shareholders and warrant holders
of The Brick was approximately $700 million. As a result of this transaction, 100% of The Brick’s common shares are owned
by Leon’s Furniture Limited.
With the acquisition of The Brick, Leon’s Furniture Limited is the largest network of home furnishings, mattresses,
appliances and electronics stores in Canada. The Brick’s retail banners include: The Brick, Brick Clearance Centres,
The Brick Mattress Store and United Furniture Warehouse. Finally, the addition of The Brick’s Midnorthern Appliance
banner alongside the Appliance Canada banner, makes the Company the country’s largest commercial retailer of
appliances to builders, developers, hotels and property management companies.
As a result of this major acquisition, Leon’s now has in excess of 300 retail stores from coast to coast in Canada under
the various banners indicated below, which also includes over 100 franchise locations.
Banner
Leon’s banner corporate stores
Leon’s banner franchise stores
Appliance Canada banner stores
The Brick banner corporate stores1
The Brick banner franchise stores
Brick Clearance Centres banner stores
The Brick Mattress Store
United Furniture Warehouse banner stores
Total number of stores
1Includes the Midnorthern Appliance banner
Revenues and Expenses
44
34
3
112
69
3
24
23
312
For the year ended December 31, 2013, total system wide sales were $2,039,428,000, which includes $1,694,643,000 of
corporate sales and $344,785,000 of franchise sales ($880,240,000 including $198,077,000 of franchise sales in 2012).
Overall, same store corporate sales decreased by 1.6%. The decrease in same store sales for the year, compared to the prior
year, reflected a continuation of weak consumer confidence, decrease in housing starts and increase in consumer debt.
These were among the factors that also resulted in downward pressure on retail pricing.
Our gross margin for the year increased from 41.6% to 43.4%, as compared to the prior year. The increase was mainly
attributable to the inclusion of The Brick’s gross margins and higher vendor rebates achieved in the appliance category
compared to the prior year.
For the year, net operating expenses of $623,850,000 were up $400,213,000 as compared to 2012. The increase compared
to the comparative period was mainly due to expenses relating to the inclusion of The Brick’s operations since its
acquisition on March 28, 2013. Excluding this factor, operating expenses were in line with the prior comparative period.
As a result of the above, net income for the year was $67,183,000, $0.95 per common share ($46,782,000, $0.67 per
common share in 2012), an increase of 41.8% per common share.
For the three months ended December 31, 2013, total system wide sales were $633,871,000, which includes $523,025,000
of corporate sales and $110,846,000 of franchise sales ($248,187,000 including $59,725,000 of franchise sales in 2012).
Similar to the yearly same store trend the same store corporate sales decreased by 2.1% for the fourth quarter. In addition
to the economic factors noted above, severe weather conditions in Eastern Canada impacted the sales during the fourth
quarter compared to the prior year’s quarter.
As well franchise sales decreased in the fourth quarter of 2013. The sales decrease is mainly attributable to the same
factors as noted for the corporate same store decrease.
Net income for the fourth quarter of 2013 was $26,034,000, $0.37 per common share ($16,121,000, $0.23 per common share
in 2012), an increase of 60.9% per common share. These figures include The Brick Ltd. results since March 28, 2013.
14
LEON'S FURNITURE LIMITED
Annual Financial Information
($ in thousands, except earnings per share and dividends)
2013
2012
2011
Corporate sales
Franchise sales
Total 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
For the 3 months ended
Cash flow (used in) provided by operations
Purchase of property, plant and equipment
Dividends paid
Dividends paid per share
Common Shares
$ 1,694,643
344,785
$ 2,039,428
$
$
$
67,183
0.95
0.87
$ 1,682,174
$
$
$
0.40
–
0.20
$
$
$
$
$
$
$
$
$
682,163
198,077
880,240
46,782
0.67
0.65
588,178
0.40
–
0.20
$
$
$
$
$
$
$
$
$
682,836
196,725
879,561
56,666
0.81
0.78
584,411
0.37
0.15
0.20
December 31 December 31
2012
2013
December 31
2011
$
$
$
43,272
104,275
277,656
1,682,174
(16,262)
221,684
27,961
86,057
588,178
226,208
221,823
28,937
87,830
584,411
204,649
Current Quarter
Prior Quarter
December 31 September 30
2013
2013
Prior Quarter
June 30
2013
$
$
(10,973) $
12,347
7,062
0.10
$
59,049
4,577
7,062
0.10
$
$
40,280
822
7,060
0.10
At December 31, 2013, there were 70,634,709 common shares issued and outstanding. During 2013, no shares were
repurchased and cancelled by the Company through its Normal Course Issuer Bid which has now expired. In addition,
during the year ended December 31, 2013, 69,804 convertible, non-voting series 2005 shares were converted into common
shares. There were 36,754 convertible, non-voting series 2009 shares, 12,792 convertible, non-voting series 2012 shares
and 35,000 convertible, non-voting series 2013 shares cancelled. For details on the Company’s commitments related to
its redeemable shares, please refer to Note 15 to the accompanying consolidated financial statements.
Commitments
($ in thousands)
Contractual obligations
Long term debt
Operating leases1
Trade and other payables
Finance lease liabilities
Payments Due by Period
$
$
Total
568,611
741,945
202,618
273,978
Less than
1 year
81,555
68,364
202,618
12,877
2–3 years
4–5 years
After 5 years
$
$
126,364
129,656
–
24,976
$
247,985
116,381
–
23,401
112,707
427,544
–
212,724
Total contractual obligations
$ 1,787,152
$
365,414
$
280,996
$
387,767
$
752,975
1The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada.
15
ANNUAL REPORT 2013
Management’s Discussion & Analysis
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 2 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.
Related Party Transactions
At December 31, 2013, we had no transactions with related parties as defined in IAS 24 – 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, 2014 available on www.sedar.com.
Quarterly Results
QUARTERLY INCOME STATEMENT
($ in thousands,
except per share data)
Quarter Ended
Quarter Ended
Quarter Ended
Quarter Ended
Dec. 31
20131
Dec. 31,
2012
Sept. 30
20131
Sept. 30,
2012
June 30
20131
June 30
2012
March 31
20131
March 31
2012
Corporate sales
Franchise sales
Total system wide sales
Net income per share
Fully diluted per share
$ 523,025
110,846
633,871
0.37
$
0.33
$
$ 188,462
59,725
248,187
0.23
$
0.22
$
$ 528,602
100,017
628,619
0.30
$
0.27
$
$ 174,175
49,505
223,680
0.19
$
0.18
$
$ 480,559
92,822
573,381
0.20
$
0.18
$
$ 162,095
45,627
207,722
0.13
$
0.12
$
$ 162,458
41,097
203,555
0.08
$
0.07
$
$ 157,431
43,220
200,651
0.12
$
0.12
$
1The Company’s quarterly results for the quarter ended December 31, September 30, June 30, and March 31, 2013, include the results of
The Brick from the acquisition date of March 28, 2013.
Disclosure Controls and 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. Except for the limitation in scope and design of operating effectiveness
of the Company’s disclosure controls and procedures as noted below, 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, 2013.
Internal Controls over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal control over financial reporting to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with IFRS. The Company’s internal control over financial reporting may
not prevent or detect all misstatements because of inherent limitations. The Company assessed the effectiveness of its
16
LEON'S FURNITURE LIMITED
internal control over financial reporting as of December 31, 2013, based on the framework established in the publications,
Internal Control – Integrated Framework and specifically in Internal Control over Financial Reporting – Guidance for Smaller
Public Companies published by the Committee of Sponsoring Organizations of the Treadway Commission. Except for
the limitation in scope as noted below, based on this assessment, the CEO and the CFO concluded that the Company
maintained effective internal control over financial reporting as of December 31, 2013.
Changes in Internal Control over Financial Reporting
Management has also evaluated whether there were changes in the Company’s internal control over financial reporting that
occurred during the period beginning on January 1, 2013 and ended on December 31, 2013 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company has
determined that no material changes in internal controls have occurred during this period.
Limitation on Scope
The Company acquired The Brick Ltd. effective March 28, 2013, management has not fully completed its review of internal
controls over financial reporting for this newly acquired organization. Since this acquisition occurred within the 365 days
of the reporting period, management has limited the scope of design and subsequent evaluation of disclosure controls
and procedures and internal controls over financial reporting, as permitted under Section 3.3 of National Instrument 52-109,
Certification of Disclosure in Issuer‘s Annual and Interim Filings. For the period covered by this MD&A, management
has undertaken additional procedures to satisfy itself with respect to the accuracy and completeness of the acquired
operation’s financial information.
Outlook
Overall we are pleased with the significant increase in sales and solid profit growth we experienced with the purchase
of The Brick since the acquisition on March 28, 2013. Even though we anticipate continued poor economic growth going
forward, we expect to see a continuation of improved sales and profit growth in 2014, as a result of the acquisition of
The Brick.
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 (page 14). 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 revenue (an IFRS measure) and comparable store sales is provided below:
($ in thousands)
Revenue1
Adjustments for stores not in both fiscal periods2
Comparable store sales
2013
2012
$ 1,694,643 $ 1,640,399
–
(80,172)
$ 1,614,471 $ 1,640,399
1The corporate sales for the years ended December 31, 2013 and 2012 include The Brick results for comparative purposes.
2For the year ended December 31, 2013, there are sixteen locations excluded from the adjustments for stores not in both fiscal periods.
17
ANNUAL REPORT 2013
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
18
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, 2013 and 2012, 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 audit 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, 2013 and 2012, and its financial performance and its cash flows
for the years then ended in accordance with International Financial Reporting Standards.
(signed)
Chartered Accountants
Licensed Public Accountants
Toronto, Canada
February 27, 2014
19
ANNUAL REPORT 2013 Consolidated Statements of Financial Position
($ in thousands)
ASSETS
Current assets
Cash and cash equivalents [NOTES 5 AND 22]
Restricted marketable securities [NOTE 25]
Available-for-sale financial assets
Trade receivables [NOTE 22]
Income taxes receivable
Inventories [NOTE 6]
Deferred acquisition costs [NOTE 7]
Deferred financing costs
Total current assets
Other assets
Deferred acquisition costs [NOTE 7]
Property, plant and equipment [NOTE 8]
Investment properties [NOTE 9]
Intangible assets [NOTE 10]
Goodwill [NOTES 4 AND 10]
Deferred income tax assets [NOTE 20]
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other payables [NOTE 11]
Provisions [NOTE 12]
Income taxes payable
Customers’ deposits
Finance lease liabilities [NOTE 13]
Dividends payable [NOTE 16]
Deferred warranty plan revenue
Debentures [NOTE 14]
Loans and borrowings [NOTE 14]
Total current liabilities
Loans and borrowings [NOTE 14]
Convertible debentures [NOTE 14]
Finance lease liabilities [NOTE 13]
Deferred warranty plan revenue
Redeemable share liability [NOTE 15]
Deferred rent liabilities and lease inducements
Deferred income tax liabilities [NOTE 20]
Total liabilities
Shareholders’ equity attributable to the shareholders of the Company
Common shares [NOTE 16]
Equity component of convertible debentures [NOTE 14]
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and 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
20
As at December 31
2013
2012
$
5,832 $
20,104
17,336
104,275
–
277,656
1,659
903
74,949
20,980
125,755
27,961
3,644
86,057
1,271
1,317
$
427,765 $
341,934
4,970
7,250
433,586
22,304
343,221
435,634
7,444
761
1,525
218,146
8,315
3,101
11,282
3,114
$ 1,682,174 $
588,178
$
202,618 $
4,769
12,135
93,609
4,302
7,063
54,028
15,503
50,000
73,542
–
–
20,386
–
7,055
14,743
–
–
$
444,027 $
115,726
325,255
90,952
137,887
85,494
859
2,377
98,768
–
–
–
17,251
428
–
2,586
$ 1,185,619 $
135,991
$
27,352 $
7,089
462,035
79
26,693
–
423,099
2,395
$
496,555 $
452,187
$ 1,682,174 $
588,178
LEON'S FURNITURE LIMITED
Consolidated Statements of Income
($ in thousands)
Revenue [NOTE 17]
Cost of sales [NOTE 6]
Gross profit
Operating expenses [NOTE 18]
General and administrative expenses
Sales and marketing expenses
Occupancy expenses
Other operating expenses
Total operating expenses
Operating profit
Finance costs [NOTE 19]
Finance income
Net income before income tax
Income tax expense [NOTE 20]
Net income
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per share [NOTE 21]
Basic
Diluted
Dividends declared per share
Common
Convertible, non-voting
The accompanying notes are an integral part of these consolidated financial statements.
Years Ended December 31
2013
2012
$ 1,694,643 $
959,307
682,163
398,704
$
735,336 $
283,459
267,741
213,562
127,985
14,562
99,346
83,479
34,289
6,523
$
623,850 $
223,637
111,486
(22,424)
2,494
91,556
24,373
59,822
–
3,861
63,683
16,901
$
67,183 $
46,782
70,612,407
79,818,914
70,032,721
72,317,598
$
$
$
$
0.95 $
0.87 $
0.40 $
0.20 $
0.67
0.65
0.40
0.20
21
ANNUAL REPORT 2013
Consolidated Statements of Comprehensive Income
($ in thousands)
Year Ended December 31
2013
Tax effect Net of tax 2013
Net income for the year
$
67,183
$
– $
67,183
Other comprehensive income, net of tax
Other comprehensive income to be reclassified to profit or loss in
subsequent years:
Unrealized gains 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
276
(2,998)
44
(450)
232
(2,548)
assets arising during the year
Comprehensive income for the year
(2,722)
(406)
(2,316)
$
64,461 $
(406)
$
64,867
($ in thousands)
Net income for the year
Other comprehensive income, net of tax
Other comprehensive income to be reclassified to profit or loss in
subsequent years:
Unrealized gains 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 gains on available-for-sale financial
assets arising during the year
Comprehensive income for the year
Year Ended December 31
2012
Tax Effect Net of tax 2012
$
46,782 $
–
$
46,782
3,183
(311)
414
(41)
2,769
(270)
2,872
373
2,499
$
49,654 $
373 $
49,281
The accompanying notes are an integral part of these consolidated financial statements.
22
LEON'S FURNITURE LIMITED
Consolidated Statements of Changes in Shareholders’ Equity
($ in thousands)
As at December 31, 2012
Comprehensive income
Net income 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
Issuance of equity component
of convertible debt [NOTE 14]
Management share purchase plan [NOTE 15]
Repurchase of common shares [NOTE 16]
Total transactions with shareholders
Equity
Component of
Convertible
Debentures
Accumulated
Other
Common Comprehensive
Income (Loss)
Shares
Retained
Earnings
Total
$
– $
26,693 $
2,395
$
423,099 $
452,187
–
–
–
–
7,089
–
–
7,089
–
–
–
–
–
659
–
659
–
67,183
67,183
(2,316)
(2,316)
–
67,183
(2,316)
64,867
–
–
–
–
–
(28,247)
(28,247)
–
–
–
7,089
659
–
(28,247)
(20,499)
As at December 31, 2013
$
7,089 $
27,352 $
79 $
462,035 $
496,555
($ in thousands)
Equity
Component of
Convertible
Debentures
Accumulated
Other
Common Comprehensive
Income (Loss)
Shares
Retained
Earnings
Total
As at December 31, 2011
Comprehensive income
Net income 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 15]
Repurchase of common shares [NOTE 16]
Total transactions with shareholders
$
– $
20,918 $
(104) $
404,647 $
425,461
–
–
–
–
–
–
–
–
–
–
–
5,778
(3)
5,775
–
46,782
46,782
2,499
2,499
–
2,499
46,782
49,281
–
–
–
–
(28,047)
–
(283)
(28,330)
(28,047)
5,778
(286)
(22,555)
As at December 31, 2012
$
– $
26,693
$
2,395 $
423,099 $
452,187
The accompanying notes are an integral part of these consolidated financial statements.
23
ANNUAL REPORT 2013
Consolidated Statements of Cash Flows
($ in thousands)
OPERATING ACTIVITIES
Net income for the year
Adjustments for:
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Amortization of deferred warranty plan revenue
Net finance costs
Deferred income taxes
Gain on sale of property, plant and equipment
(Gain) loss on sale of available-for-sale financial assets
Net change in non-cash working capital balances related
to operations [NOTE 26(A)]
Cash received on warranty plan sales
Cash provided by operating activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment [NOTE 8]
Purchase of intangible assets [NOTE 10]
Proceeds on sale of property, plant and equipment
Purchase of available-for-sale financial assets
Proceeds on sale of available-for-sale financial assets
Interest received
Purchase of The Brick, net of cash acquired of $31,069 [NOTE 4]
Cash used in investing activities
FINANCING ACTIVITIES
Repayment of finance leases
Dividends paid
Repurchase of common shares [NOTE 16]
Repayment of employee loans-redeemable shares [NOTE 15]
Issuance of term loan [NOTE 14]
Issuance of convertible debentures [NOTE 14]
Finance costs paid
Repayment of debentures [NOTE 14]
Repayment of term loan [NOTE 14]
Interest paid
Cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Years Ended December 31
2013
2012
$
67,183
$
46,782
33,319
5,630
(60,664)
19,930
(1,273)
(32)
(5,462)
58,631
(39,363)
63,852
83,120
(18,984)
(6,669)
134
(109,674)
235,260
2,494
(654,954)
(552,393)
(2,613)
(28,239)
–
1,090
400,000
100,000
(4,693)
(19,616)
(20,000)
(25,773)
400,156
(69,117)
74,949
14,020
866
(16,543)
–
543
(15)
121
45,774
(9,493)
12,940
49,221
(17,897)
(9)
23
(467,939)
473,273
–
–
(12,549)
–
(38,449)
(286)
5,824
–
–
(1,317)
–
–
–
(34,228)
2,444
72,505
Cash and cash equivalents, end of year
$
5,832 $
74,949
The accompanying notes are an integral part of these consolidated financial statements.
24
LEON'S FURNITURE LIMITED
Notes to the
Consolidated
Financial Statements
[Amounts in thousands of Canadian dollars, except share amounts and earnings per share]
For the years ended December 31, 2013 and 2012
1. REPORTING ENTITY
Leon’s Furniture Limited (“Leon’s” or the “Company”) was incorporated by Articles of Incorporation under the Business
Corporations Act on February 28, 1969. Leon’s is a retailer of home furnishings, mattresses, appliances and electronics
across Canada. Leon’s is a public company listed on the Toronto Stock Exchange (TSX – LNF, LNF.DB) and is incorporated
and domiciled in Canada. The address of the Company’s head office and registered office is 45 Gordon Mackay Road,
Toronto, Ontario M9N 3X3.
On November 11, 2012, the Company announced that it had entered into a definitive agreement (the “Arrangement
Agreement”) that provided for the acquisition of 100% of the outstanding common shares and common share purchase
warrants of The Brick Ltd. (“The Brick” or “Brick division”) by the Company by way of a plan of arrangement for $5.40 per
outstanding common share and $4.40 per outstanding common share purchase warrant. On March 28, 2013, the Company
acquired 100% of the common shares and warrants of The Brick [note 4]. The operations of The Brick are included in the
Company’s results from operations and financial position commencing March 28, 2013.
The Company’s business is seasonal in nature. Retail sales are traditionally higher in the third and fourth quarters.
2. BASIS OF PRESENTATION
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”).
These consolidated financial statements were approved by the Board of Directors for issuance on February 27, 2014.
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 and the initial recognition of assets acquired and liabilities assumed in
business combinations.
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.
25
ANNUAL REPORT 2013 Notes to the Consolidated Financial Statements
USE OF ESTIMATES AND JUDGMENTS
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 dates and the reported amounts of revenue and expenses during the reporting period. 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. Actual results could differ
from those estimates. 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
The Company 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.
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 cash-generating units (“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 of impairment 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 AND INTANGIBLE ASSETS
The Company tests goodwill and indefinite life intangible assets at least annually and reviews other long-lived intangible
assets for any indication that the asset might be impaired. Significant judgments are required in determining the CGUs or
groups of CGUs for purposes of assessing impairment. Significant judgments are also required in determining whether to
allocate goodwill to CGUs or groups of CGUs. When performing impairment tests, the Company estimates the recoverable
amount of the CGUs or groups of CGUs to which goodwill and indefinite life intangible assets have been allocated using
a discounted cash flow model that requires 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, income would be affected in a subsequent period.
PROVISIONS
The Company exercises judgment in the determination of recognizing a provision. The Company recognizes a provision
when it has a present legal or constructive obligation as a result of a past event and a reliable estimate of the obligation
can be made. Significant judgments are required to be made in determining what the probable outflow of resources will
be required to settle the obligation.
26
LEON'S FURNITURE LIMITED 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these consolidated financial statements are as follows:
BASIS OF CONSOLIDATION
The financial statements consolidate the accounts of Leon’s Furniture Limited and its wholly owned subsidiaries: Murlee
Holdings Limited, Leon Holdings (1967) Limited, Ablan Insurance Corporation, The Brick Ltd., The Brick Warehouse LP,
United Furniture Warehouse LP, First Oceans Trading Corporation, Trans Global Warranty Corp. and its subsidiaries:
Trans Global Life Insurance Company and Trans Global Insurance Company. Subsidiaries are all those entities over which
the Company has control. Control is achieved when the Company is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power over the investee. The
existence and effect of potential voting rights that are currently exercisable or convertible and rights arising from other
contractual arrangements 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. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that
there are changes to one or more of the three elements of control. All inter-company transactions and balances have been
appropriately eliminated.
BUSINESS COMBINATIONS
The Company applies the acquisition method in accounting for business combinations. The cost of an acquisition is
measured as the aggregate of the consideration transferred measured at the acquisition date fair value. Transaction costs
that the Company incurs in connection with a business combination are expensed in the period in which they are incurred.
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, mattresses, appliances and electronics).
Accordingly, no segment information has been provided in these consolidated financial statements.
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated into the respective functional currency of the Company’s subsidiaries using
the exchange rate at the dates of the 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.
FAIR VALUE MEASUREMENT
The Company measures certain financial instruments at fair value upon initial recognition, and at each balance sheet date.
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. The fair value measurement is based on the presumption that the transaction
to sell the asset or transfer the liability takes place either in the principal market for the asset or liability; or, in the absence
of a principal market, in the most advantageous market for the asset or liability that is accessible. The fair value of an asset
or liability is measured using the assumptions that market participants would use, assuming that market participants act in
their economic best interest.
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.
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ANNUAL REPORT 2013 Notes to the Consolidated Financial Statements
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.
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 year until realized through disposal or impairment; and
Loans and receivables – 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 asset expire
or if the Company transfers the financial asset to another party without retaining control or substantially all of the risks
and rewards of ownership of the asset. Financial liabilities are derecognized if the Company’s obligations specified in the
contract expire or are discharged or cancelled.
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 have 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.
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LEON'S FURNITURE LIMITED PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are initially recorded at cost. Historical cost includes expenditures that are 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 an item 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:
Buildings
Equipment
Vehicles
Computer hardware
Building improvements
30 to 50 years
3 to 30 years
5 to 20 years
5 years
Over the remaining lease term
Leased assets are depreciated over the shorter of the Lease Term and their useful lives unless it is reasonably certain that
the Company will obtain ownership by the end of the Lease Term.
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 disposal 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.
LEASES
Leases that transfer substantially all of the risks and rewards of ownership to the lessee are classified as finance leases.
All other leases are classified as operating leases. In determining whether a lease should be classified as an operating or
finance lease, management must consider specific criteria. The inputs to these classification criteria require judgment in
the following areas: assessing whether an option to purchase exists and if that option will be exercised, determining the
economic life of the leased asset, and determining whether the present value of minimum lease payments amounts to
at least substantially all of the fair value of the leased asset. This assessment is subject to a significant degree of
measurement uncertainty.
The Company as lessee
Finance lease
Assets held under finance leases are initially recognized as assets of the Company at the commencement of the lease at
the lower of their fair value or the present value of the minimum lease payments. Subsequent to initial recognition, the
asset is accounted for in accordance with the accounting policy applicable to that asset. A corresponding liability to the
lessor is included in the consolidated statements of financial position as a finance lease liability.
Minimum lease payments made under finance leases are apportioned between the finance costs and the reduction of
the outstanding finance lease liability using the effective interest method. The finance cost, net of lease inducements,
is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining
balance of the finance lease liability. Contingent lease payments arising under finance leases are recognized as an expense
in the period in which they are incurred.
Operating lease
For real estate operating leases where the Company expects to exercise lease renewal options, the additional periods
covered by the lease renewals are included in the lease term (“Lease Term”), and any related rent escalations are factored
into the determination of rent expense to be recognized over the term of the lease.
The total operating lease payments to be made over the Lease Term are recognized in income on a straight-line basis
over the Lease Term. Lease incentives received are recognized as an integral part of the total lease expense over the
Lease Term.
Contingent rental expenses arising under operating leases are recognized as an expense in the period in which they
are incurred.
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ANNUAL REPORT 2013 Notes to the Consolidated Financial Statements
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:
Buildings
Building improvements
30 to 50 years
Over the remaining lease term
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 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 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.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a
business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried
at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding
capitalized development costs, are not capitalized and the related expenditure is reflected in profit or loss in the period in
which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives as follows:
Customer relationships
Brand name (Appliance Canada)
Non-compete agreement
Computer software
Favourable lease agreements
8 years
10 years
8 years
3 to 7 years
Over the lease term including renewal options
IMPAIRMENT OF NON-FINANCIAL ASSETS
The Company considers at each reporting date whether there ia an indication that an asset may be impaired. If impairment
indicators are found to be present, or when annual impairment testing for an asset is required, the non-financial assets are
assessed for impairment.
Impairment losses are recognized immediately in income to the extent an asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value
in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash
flows have not been adjusted.
Goodwill and indefinite life intangible assets are tested annually in the fourth quarter of the year, or when circumstances
indicate that the carrying value may be impaired. The assessment of recoverable amount for goodwill and indefinite life
intangible assets involves assumptions about future conditions for the economy, capital markets, and specifically, the retail
sector. As such, the assessment is subject to a significant degree of measurement uncertainty.
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LEON'S FURNITURE LIMITED
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest
group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other
assets or groups of assets. For the Company, store-related CGUs are defined as individual stores or regional groups of
stores within a geographic market.
For the Company’s corporate assets that do not generate separate cash inflows, the recoverable amount is determined for
the CGU to which the corporate asset belongs. Where a reasonable and consistent basis of allocation can be identified,
corporate assets are allocated to an individual CGU; otherwise they are allocated to the smallest group of CGUs for which a
reasonable and consistent allocation basis can be identified. Impairment losses recognized in respect of CGUs are allocated
to reduce the carrying amounts of the assets in the CGUs on a pro rata basis.
Impairment losses recognized in prior periods are assessed at each reporting date for any indication that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine
the recoverable amount and the reversal is recognized in income. An impairment loss is reversed only to the extent that
the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized.
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 year 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.
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ANNUAL REPORT 2013 Notes to the Consolidated Financial Statements
Unpaid insurance claims
The provision for unpaid claims includes adjustment expenses and an estimate of the future settlement of claims, both
reported and unreported, that have occurred on or before the reporting date on the insurance contracts the Company has
underwritten. The provision is actuarially determined on an annual basis using assumptions of loss emergence, payment
rates, interest, and expected expenses associated with the adjustment and payment of such claims. The provision includes
appropriate charges for risk and uncertainty and is measured on a discounted basis. As this provision is an estimate, the
amount of actual claims may differ from the recorded amount. The provisions are derecognized when the obligation to pay
a claim no longer exists.
Unpaid warranty claims
Warranty repairs related to warranty plans sold separately are recorded as claims expense at the time the customer
reports a claim. For these warranties, a provision for unpaid warranty claims is established for unpaid reported claims.
The provision for unpaid claims is based on estimates, and may differ from actual claims paid.
The Company also provides a standard warranty for certain products. For these warranties, a provision for warranty claims
is recognized when the underlying products are sold. The amount of the provision is estimated using historical experience
and may differ from actual claims paid.
Product returns
The Company has a return policy allowing customers to return merchandise if not satisfied within seven days. The provision
for product returns is based on sales recognized prior to the year end. The amount of the provision is estimated using
historical experience and actual experience subsequent to the year end and may differ from the actual returns made.
LOANS AND BORROWINGS
Long-term debt is classified as current when the Company expects to settle the debt in its normal operating cycle or
the debt is due to be settled within 12 months after the date of the consolidated statement of financial position.
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 and related services
Revenue from the sale of goods and related services 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.
The Company records a provision for sales returns and price guarantees based on historical experience and actual
experience subsequent to the year end.
Franchise operations
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. The Company supplies inventory for amounts representing landed cost
plus a mark-up. The royalty income and sales to franchises, net of costs, is recorded by the Company on an accrual basis
and presented within revenue.
Insurance contracts and revenue
The Company issues insurance contracts through its subsidiaries: Trans Global Insurance Company and Trans Global Life
Insurance Company.
The Company provides credit insurance on balances that arise from customers’ use of their private label financing card.
The Company provides group coverage for losses as discussed in Note 23, thereby providing protection to many customers
who do not carry other similar insurance policies.
32
LEON'S FURNITURE LIMITED Insurance contracts are contracts where the Company (the insurer) has accepted significant insurance risk from another
party (the policyholders) by agreeing to compensate the policyholders if a specified uncertain future event (the insured
event) adversely affects the policyholders. As a general guideline, the Company determines whether it has significant
insurance risk by comparing benefits paid with benefits payable if the insured event did not occur.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its
term, even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished
or expire. Investment contracts can, however, be reclassified as insurance contracts after inception if insurance risk
becomes significant.
Premiums on insurance contracts are recognized as revenue over the term of the policies in accordance with the pattern of
insurance service provided under the contract.
Unearned insurance revenue
At each reporting period date, the insurance revenue received by the Company in regards to the unexpired portion
of policies in force is deferred as unearned insurance revenue.
The Company performs an unearned insurance revenue adequacy test on an annual basis to determine whether
the carrying amount of the unearned insurance revenue needs to be adjusted (or the carrying amount of deferred
acquisition costs adjusted), based upon a review of the expected future cash flows. If these estimates show that
the carrying amount of the unearned insurance revenue (less related deferred acquisition costs) is inadequate, the
deficiency is recognized in net income by setting up a provision for insurance revenue deficiency.
Unearned insurance revenue is calculated based on assumptions of loss emergence, payment rates, interest,
and expected expenses associated with the adjustment and payment of claims. Unearned insurance revenue is
derecognized when the obligation to pay no longer exists.
Deferred warranty plan revenue
Warranties, underwritten by the Company’s wholly-owned subsidiaries, Ablan Insurance Corporation and Trans Global
Warranty Corp., are offered on all products sold by the Company and franchisees to provide coverage that extends beyond
the manufacturer’s warranty period by up to five years. Warranties are sold to customers when they make their original
purchase and take effect immediately. The warranty contracts provide both repair and replacement services depending
upon the nature of the warranty claim.
The Company’s extended warranty plan revenues are deferred at the time of sale and are recognized as revenue over the
term of the warranty plan in a pattern matching the estimated future claims expense.
Deferred acquisition costs
Acquisition costs are comprised of commissions, premium taxes and other expenses that relate directly to the writing or
renewing of warranty and insurance contracts. These costs are deferred only to the extent that they are expected to be
recovered from unearned premiums and are amortized over the period in which the revenue from the policies is earned.
All other acquisition costs are recognized as an expense when incurred.
Costs incurred on warranty plan sales, including sales commissions and premium taxes, are recorded as deferred
acquisition costs. These costs are amortized to income in the same pattern as revenue from warranty plan sales
is recognized.
Changes in the expected pattern of consumption are accounted for by changing the amortization period and are treated
as a change in an accounting estimate. Deferred acquisition costs are derecognized when the related contracts are either
settled or disposed of.
Sale of gift cards
Revenue from the sale of gift cards is recognized when the gift cards are redeemed (the customer purchases merchandise).
Revenue from unredeemed gift cards is deferred and included in trade and other payables.
Rental income 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.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed as incurred.
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ANNUAL REPORT 2013 Notes to the Consolidated Financial Statements
BORROWING COSTS
Borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that
the Company incurs in connection with the borrowing of funds.
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
IFRS 9, Financial Instruments, 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 the classification and measurement of financial assets and
financial liabilities. IFRS 9, as issued, eliminates the existing IAS 39 categories of held to maturity, available-for-sale, and
loans and receivables. Financial assets will be classified into one of two categories on initial recognition: financial assets
measured at amortized cost, or financial assets measured at fair value. Gains and losses on remeasurement of financial
assets measured at fair value will be recognized in profit or loss. The mandatory effective date of IFRS 9, as issued, is
January 1, 2015. The Company has not yet assessed the impact of the standard or determined whether it will be
adopted early.
IAS 36, Impairment of Assets, has been amended to address the disclosure of information about the recoverable amount
of impaired assets if that amount is based on fair value less costs of disposal. In addition, the amendments require an entity
to disclose the discount rate that was used in a present value technique in order to determine the recoverable amount of
an impaired asset. The amendments are to be applied retrospectively for annual periods beginning on or after January 1,
2014. Earlier application is permitted. The Company does not expect the implementation of the amendment to have an
impact on its consolidated financial statements.
IAS 32, Financial Instruments: Presentation, has been amended to clarify the meaning of “currently has a legally enforceable
right to set-off” and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting.
These amendments are effective for annual periods beginning on or after January 1, 2014. These amendments are not
expected to be relevant to the Company.
IFRIC Interpretation 21, Levies (“IFRIC 21”), clarifies that an entity recognizes a liability for a levy when the activity that
triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum
threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is
reached. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014. The Company has not yet assessed
the impact of this interpretation.
ADOPTION OF NEW, REVISED OR AMENDED ACCOUNTING STANDARDS
The following is a description of the adoption of new, revised or amended accounting standards that are relevant to
the Company:
[i] Effective January 1, 2013, the Company adopted IFRS 10, Consolidated Financial Statements, which replaces SIC-12,
Consolidation – Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 10
requires an entity to consolidate an investee when it is exposed or has rights to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee. The adoption of IFRS 10
had no impact on the consolidated financial statements of the Company.
[ii] Effective January 1, 2013, the Company adopted IFRS 11, Joint Arrangements, which replaces SIC-13, Jointly Controlled
Entities – Non-Monetary Contributions by Venturers and IAS 31, Joint Ventures. IFRS 11 requires an entity to classify its
interest in a joint arrangement as a joint operation or joint venture. Joint ventures are accounted for using the equity
method of accounting, while for joint operations, the entity recognizes its share of the assets, liabilities, revenues
and expenses related to the joint operation. The adoption of IFRS 11 had no impact on the consolidated financial
statements of the Company.
[iii] Effective January 1, 2013, the Company adopted IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 establishes
disclosure requirements for interests in other entities such as subsidiaries, joint arrangements, associates and
unconsolidated structured entities. The standard carries forward existing disclosure requirements from other IFRSs
and also introduces significant additional disclosure that addresses the nature of, and risks associated with, an entity’s
interests in other entities. The adoption of IFRS 12 did not result in any additional disclosures in the consolidated
financial statements of the Company.
34
LEON'S FURNITURE LIMITED [iv] Effective January 1, 2013, the Company adopted IFRS 13, Fair Value Measurement. IFRS 13 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The adoption of IFRS 13 had no impact on the consolidated financial statements
of the Company, with the exception of relevant disclosures.
[v] Effective January 1, 2013, the Company adopted IAS 1, Presentation of Financial Statements. The IASB amended
IAS 1 by revising how certain items are presented in OCI. Items within OCI that may be reclassified to profit and loss
will be separated from items that will not. The consolidated financial statements reflect the impact of the adoption of
this amendment.
[vi] Effective January 1, 2013, the Company adopted IFRS 7, Financial Instruments: Disclosures. IFRS 7 sets out the
objective to enhance disclosures about offsetting of financial assets and financial liabilities. The adoption of this new
standard had no impact on the consolidated financial statements.
4. BUSINESS COMBINATIONS
ACQUISITION OF THE BRICK
On March 28, 2013, the Company acquired control of The Brick by purchasing 100% of its issued and outstanding shares
and warrants. The Brick is a retailer of home furnishings, mattresses, appliances and electronics that was founded in
Edmonton, Alberta in 1971. The Brick operates stores across Canada under the following corporate and franchise banners:
The Brick, Urban Brick, The Brick Mattress Stores, United Furniture Warehouse and Midnorthern Appliances, which is part
of The Brick’s Commercial Sales Division. This acquisition allows the Company to strengthen and enhance its existing retail
operations, grow the Company’s franchise network and further expand its Canadian geographical footprint to more than
300 combined retail locations from coast to coast.
For the year ended December 31, 2013, The Brick contributed revenue of $1,018,939 to the Company’s results from the date
of acquisition of March 28, 2013.
The acquisition date fair value of consideration transferred is as follows:
Cash
Convertible debenture
Total consideration transferred
$
586,023
100,000
$
686,023
The allocation of the purchase price at fair value to the identifiable assets acquired and liabilities assumed at the acquisition
date is as follows:
Cash
Trade and other receivables1
Income taxes receivable
Inventories
Other assets
Available-for-sale financial assets
Property, plant and equipment
Investment properties
Intangible assets
Trade and other payables
Customers’ deposits
Share-based compensation plans
Deferred warranty plan revenue and unearned insurance revenue
Provisions
Debentures
Finance lease liabilities
Income taxes payable
Deferred income tax liabilities
Total net identifiable assets
$
31,069
55,986
18
162,138
7,905
13,279
229,153
14,400
339,081
(145,304)
(52,221)
(2,292)
(104,342)
(5,479)
(36,156)
(143,693)
(10,994)
(90,877)
$
261,671
1Gross trade and other receivables acquired is $57,001, of which $1,015 was expected to be uncollectible as at the acquisition date.
35
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
Final valuations of certain items are not yet complete due to the inherent complexity associated with valuations. Therefore,
the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process and analysis of
resulting tax effects. The Company determined the above fair values based on discounted cash flows, market information,
independent valuations and management’s estimates. During the measurement period, certain adjustments were made
to the purchase price allocation reflecting updates to the estimated fair values of net assets acquired. The adjustments
primarily impacted leased property and franchise agreement intangible assets with a corresponding reduction in deferred
income tax liabilities. These adjustments resulted in a decrease to the total net identifiable assets of $73,234 and a
corresponding increase to recognized goodwill.
Goodwill was recognized as a result of the acquisition as follows:
Total consideration transferred
Less: Total net identifiable assets
Goodwill
$
686,023
(261,671)
$
424,352
The goodwill recognized on acquisition of The Brick is attributable mainly to the expected future growth potential of
expanding the customer base of The Brick banners and efficiencies within the operations of The Brick.
None of the goodwill recognized is expected to be deductible for income tax purposes.
The Company has incurred acquisition related costs of $10,326 for the year ended December 31, 2013, relating to external
legal fees, advisory fees and due diligence costs. These costs have been included in general and administrative expenses in
the consolidated statements of income. Total acquisition costs incurred to date as at December 31, 2013 by the Company
were $13,343.
5. CASH AND CASH EQUIVALENTS
Cash at bank and on hand
Short-term investments
Total
6. INVENTORIES
As at December 31
2013
5,832
–
$
5,832
$
2012
7,994
66,955
74,949
$
$
The amount of inventory recognized as an expense for the year ended December 31, 2013 was $934,976 [2012 – $391,160],
which is presented within cost of sales in the consolidated statements of income. There were $3,745 in inventory write-downs
[2012 – $806] recognized as an expense during 2013. No inventory write-downs recognized in prior periods were reversed.
As at December 31, 2013, the inventory mark-down provision totalled $9,122 [2012 – $5,652].
7. DEFERRED ACQUISITION COSTS
Balance at December 31, 2011
Costs of new policies sold
Policy sales costs recognized
Balance at December 31, 2012
Cost of new policies sold
Policy sales costs recognized
Balance at December 31, 2013
Reported as:
Current
Non-current
Balance at December 31, 2012
Current
Non-current
Balance at December 31, 2013
36
$
3,122
1,106
(1,432)
$
2,796
7,419
(1,306)
$
8,909
$
$
$
$
1,271
1,525
2,796
1,659
7,250
8,909
LEON'S FURNITURE LIMITED
8. PROPERTY, PLANT AND EQUIPMENT
Land
Buildings Equipment
Building
Vehicles Improvements Property Equipment
Leased
Leased
Total
As at December 31, 2013:
Opening net book value
Additions
Additions due
to acquisition
Disposals
Depreciation
$ 55,381
5,315
$ 84,383
420
$ 16,476
4,609
$
3,900
627
$
58,006 $
8,326
$
–
–
–
–
$ 218,146
19,297
Closing net book value
83,987
122,077
41,399
23,291
–
–
42,776
–
(5,502)
27,824
(76)
(7,434)
1,177
(18)
(1,398)
4,288
33,931
–
(13,968)
96,410
–
(3,753)
3,744
(8)
(853)
229,153
(102)
(32,908)
86,295
92,657
2,883
433,586
As at December 31, 2013:
Cost
Accumulated depreciation
83,987
–
227,790
(105,713)
87,005
(45,606)
25,682
(21,394)
141,578
(55,283)
96,410
(3,753)
3,736
(853)
666,188
(232,602)
Net book value
$ 83,987
$ 122,077
$ 41,399
$
4,288
$
86,295 $ 92,657
$
2,883
$ 433,586
Land
Buildings Equipment
Vehicles
Building
Leased
Improvements Property Equipment
Leased
As at December 31, 2012:
Opening net book value
Additions
Disposals
Depreciation
$ 55,431
(50)
–
–
$ 88,206
64
–
(3,887)
$ 14,178
5,076
–
(2,778)
$
Closing net book value
55,381
84,383
16,476
$
4,312
1,080
(8)
(1,484)
3,900
52,031 $
11,795
–
(5,820)
58,006
As at December 31, 2012:
Cost
Accumulated depreciation
55,381
–
184,594
(100,211)
54,647
(38,171)
23,896
(19,996)
99,321
(41,315)
Net book value
$ 55,381
$ 84,383
$ 16,476
$
3,900
$
58,006 $
–
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
–
Total
$ 214,158
17,965
(8)
(13,969)
218,146
417,839
(199,693)
$ 218,146
Included in the above balances as at December 31, 2013 are assets not being amortized with a net book value of
approximately $459 [2012 – $4,371] being construction in progress.
The Company assessed for an indicator of impairment of each CGU by comparing the 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 store’s property and equipment assets were written down.
For the years ended December 31, 2013 and 2012, there has been no impairment loss recognized.
9. INVESTMENT PROPERTIES
As at December 31, 2013:
Opening net book value
Additions due to acquisition
Depreciation
Closing net book value
As at December 31, 2013:
Cost
Accumulated depreciation
Net book value
Land
Buildings
Building
Improvements
$
8,286
4,233
–
12,519
12,519
–
$
$
–
9,655
(382)
9,273
$
29
512
(29)
512
17,694
(8,421)
1,969
(1,457)
Total
8,315
14,400
(411)
22,304
32,182
(9,878)
$
12,519
$
9,273
$
512
$
22,304
37
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
As at December 31, 2012:
Opening net book value
Depreciation
Closing net book value
As at December 31, 2012:
Cost
Accumulated depreciation
Net book value
Land
Buildings
Building
Improvements
$
–
–
–
$
80
(51)
29
Total
8,366
(51)
8,315
$
$
8,286
–
8,286
8,286
–
8,039
(8,039)
1,457
(1,428)
17,782
(9,467)
$
8,286
$
–
$
29
$
8,315
The estimated fair value of the investment properties portfolio as at December 31, 2013 was approximately $47,940
[2012 – $33,540]. This recurring fair value measurement is categorized within Level 3 of the fair value hierarchy (Note 22
for definition of levels). The Company used an independent valuation specialist to determine the fair value of The Brick
division’s investment properties of $14,400 that approximates its carrying value. The remaining disclosed fair value of
$33,540 was compiled internally by management based on available market evidence.
10. INTANGIBLE ASSETS AND GOODWILL
Brand Name
Customer and Franchise Non-Compete
Agreement
Agreements
Relationships
Computer
Software
Favourable
Lease
Agreements
Total
As at December 31, 2013:
Opening net book value
Additions
Additions due to acquisition
Amortization for the year
Closing net book value
As at December 31, 2013:
Cost
Accumulated amortization
$
$
750
–
5,000
(719)
5,031
$
1,250
–
285,000
(250)
286,000
$
375
–
12
(136)
251
$
726
6,669
3,730
(1,129)
9,996
$
–
–
45,339
(3,396)
41,943
3,101
6,669
339,081
(5,630)
343,221
7,000
(1,969)
287,500
(1,500)
1,012
(761)
14,610
(4,614)
45,339
(3,396)
355,461
(12,240)
Net book value
$
5,031
$
286,000
$
251
$
9,996
$
41,943
$
343,221
Brand Name
Customer
Relationships
and Franchise Non-compete
Agreement
Agreements
Computer
Software
Favourable
Lease
Agreements
As at December 31, 2012:
Opening net book value
Additions
Amortization for the year
Closing net book value
As at December 31, 2012:
Cost
Accumulated amortization
$
$
1,000
–
(250)
750
$
1,500
–
(250)
1,250
$
500
–
(125)
375
$
958
9
(241)
726
2,000
(1,250)
2,500
(1,250)
1,000
(625)
4,211
(3,485)
Net book value
$
750
$
1,250
$
375
$
726
$
–
–
–
–
–
–
–
$
Total
3,958
9
(866)
3,101
9,711
(6,610)
$
3,101
Amortization of intangible assets is included within general and administrative expenses on the consolidated statements
of income.
38
LEON'S FURNITURE LIMITED
The following table presents the details of the Company’s indefinite-life intangible assets:
The Brick brand name (allocated to Brick division)
The Brick franchise agreements (allocated to Brick division)
As at December 31
2013
2012
$
245,000
40,000
$
$
285,000
$
–
–
–
The Company currently has no plans to change The Brick store banners and expects these assets to generate cash flows in
perpetuity. Therefore, these intangible assets are considered to have indefinite useful lives. The Brick franchise agreements
have expiry dates with options to renew. The Company’s intention is to renew these agreements at each renewal date
indefinitely. The Company expects the franchise agreements and franchise locations will generate cash flows in perpetuity.
Therefore, these assets are also considered to have indefinite useful lives.
The following table presents the details of the Company’s finite-life intangible assets:
Leon’s division customer relationships
Leon’s division brand name
Leon’s division non-compete agreement
Brick division customer relationships
Brick division favourable lease agreements
Computer software
The Company has assessed that these finite-life intangible assets have limited life terms.
The following table presents the details of the Company’s goodwill:
Balance, beginning of year
Acquisition through business combination (NOTE 4)
Balance, end of year
As at December 31
$
$
2013
500
1,000
251
4,531
41,943
9,996
$
58,221
$
2012
750
1,250
375
–
–
726
3,101
As at December 31
2013
$
11,282
424,352
$
$
435,634
$
2012
11,282
–
11,282
For the purpose of the annual impairment testing, goodwill is allocated to the following CGU groups, which are the
groups expected to benefit from the synergies of the business combinations and to which the goodwill is monitored by
the Company:
Appliance Canada (included within the Leon’s division)
Brick division
Total goodwill
As at December 31
2013
$
11,282
424,352
$
$
435,634
$
2012
11,282
–
11,282
39
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
IMPAIRMENT TESTS
The Company performed impairment tests of goodwill as at December 31, 2013 and December 31, 2012 in accordance with
the accounting policy as described in Note 3. The recoverable amount of the CGUs 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, 2013 and December 31, 2012 were as follows:
Growth rate
Pre-tax discount rate
2013
2.0%
8.3%
2012
2.0%
10.8%
The impairment tests performed resulted in no impairment of the goodwill as at December 31, 2013 and December 31, 2012.
11. TRADE AND OTHER PAYABLES
Trade payables
Other payables
12. PROVISIONS
Balance as at December 31, 2012
Provisions made due to acquisition
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
As at December 31
2013
$
179,255
23,363
$
$
202,618
$
2012
52,681
20,861
73,542
Unpaid
Insurance
Claims
Unpaid
Warranty
Claims
$
$
–
2,301
865
(996)
–
$
–
243
47
–
–
$
Product
Returns
–
1,716
478
–
–
$
Other
–
1,219
91
(272)
(923)
Total
–
5,479
1,481
(1,268)
(923)
Balance as at December 31, 2013
$
2,170
$
290
$
2,194
$
115
$
4,769
UNPAID INSURANCE CLAIMS
The provision for unpaid insurance claims represents the estimated amounts necessary to settle all outstanding claims,
as well as claims that are incurred but not reported, as of the reporting date. Unpaid claims are determined using
generally accepted actuarial practices, according to the standards established by the Canadian Institute of Actuaries.
The establishment of the provision for unpaid claims, measured on a discounted basis, relies on the judgment and
estimates of the Company based on historical precedent and trends, on prevailing legal, economic, social and regulatory
trends and on expectations as to future developments. The process of determining the provisions necessarily involves
risks that the actual results will deviate, perhaps materially, from the best estimates made.
UNPAID WARRANTY CLAIMS
The provision for unpaid warranty claims represents the estimated amounts necessary to settle unpaid reported claims
for warranty plans sold and all outstanding claims for certain products where the Company provides a standard warranty.
The estimates are necessarily subject to uncertainty and are selected from a range of possible outcomes. The provisions
are increased or decreased as additional information affecting the estimates becomes known during the course of claims
settlement. All changes in estimates are recorded in cost of sales in the current year.
PRODUCT RETURNS
The provision for product returns represents the Company’s estimate of amounts the Company expects to incur regarding
its product return policies. The estimate is based on sales recognized prior to the end of the reporting period, historical
information, management judgment and actual experience subsequent to the end of the reporting period.
40
LEON'S FURNITURE LIMITED
13. FINANCE LEASE LIABILITIES
LEASING ARRANGEMENTS
The Company leases certain stores, distribution centres and vehicles under a number of finance lease agreements.
The lease terms on the stores and distribution centres range from 6 to 40 years and include those extension options
management considers likely to be exercised. For vehicles, the lease terms do not exceed 8 years. The Company’s
obligations under finance leases are secured by the leased assets.
FINANCE LEASE LIABILITIES
Finance lease liabilities are payable as follows:
Future
Minimum
Lease
Payments
Interest
Less than one year
Between one and five years
More than five years
$
$
$
12,877
48,377
212,724
273,978
8,575
31,326
91,888
131,789
Present
Value of
Minimum
Lease
Payments
2013
4,302
17,051
120,836
142,189
$
Reported as:
Current
Non-current
4,302
137,887
$
142,189
Future
Minimum
Lease
Payments
Interest
$
–
–
–
–
$
–
–
–
–
$
Present
Value of
Minimum
Lease
Payments
2012
–
–
–
–
–
–
–
The majority of the Company’s real estate leases have renewal and escalation clauses as part of the general lease
conditions. Those renewal periods and escalations reasonably expected to occur have been included in the determination
of the finance lease liabilities and lease term of each lease.
14. LOANS AND BORROWINGS
CONVERTIBLE DEBENTURES
On March 28, 2013 (“Issuance Date”), the Company closed an offering in which the shareholders of The Brick purchased
$100,000 principal amount of 3% convertible unsecured debentures due on March 28, 2023 (“Maturity Date”). Interest is
due semi-annually in arrears on June 30 and December 31 in each year. The convertible debentures are convertible, at the
option of the holder, at any time during the period between the ninetieth day prior to the fourth anniversary of the Issuance
Date and the third business day prior to the Maturity Date in whole or in multiples of one thousand dollars, into fully paid
common shares of the Company at the conversion rate of 79.12707 common shares per one thousand dollars principal
amount of debentures subject to certain adjustments. The Company has the right to settle the convertible debentures in
cash or shares during any time subsequent to the fourth anniversary of the Issuance Date and on the Maturity Date. There
are additional conversion options available to debenture holders in the event of an increase in the Company’s dividend
rate or in the event of a change in control of the Company. The convertible debentures are unsecured obligations of the
Company and are subordinated in right of payment to all of the Company’s senior indebtedness.
The Company will accrete the carrying value of the convertible debentures of $90,952 to their contractual face value of
$100,000 through a charge to net income over their term. This charge will be included in finance costs.
Principal amount of convertible debentures issued on March 28, 2013
Less equity component of convertible debentures
Accretion expense
Carrying value of convertible debentures as at December 31, 2013
$
100,000
(9,645)
597
$
90,952
The effective interest rate for the convertible debentures is 4.2% and includes accretion expense and semi-annual
coupon payments.
41
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
BRICK DEBENTURES
On March 11, 2013, in accordance with the terms of the Arrangement Agreement to acquire all the common shares and
warrants of The Brick, The Brick issued a tender offer to all debenture holders to redeem their Debentures for a price of
one hundred and ten dollars per one hundred dollars of principal value plus accrued and unpaid interest. The Brick received
valid tenders for $17,833 aggregate principal amount of Debentures pursuant to the March 11, 2013 offer, which expired on
April 11, 2013. Payment for the Debentures tendered in the amount of $20,191 comprised of $19,616 in respect of principal
and the 10% premium on principal, and $575 in respect of accrued interest. The remaining principal amount of Debentures
outstanding subsequent to the April 11, 2013 repurchase is $15,000. The Debentures mature on May 30, 2014 and bear
interest at a fixed rate of 12% per annum payable in cash semi-annually in arrears on June 30 and December 31.
BANK INDEBTEDNESS
On January 31, 2013, a Senior Secured Credit Agreement was obtained to fund the acquisition of The Brick. The Senior
Secured Credit Agreement includes a credit facility, with a syndicate of banks, with a term credit facility limit of $400,000
and revolving credit facility limit of $100,000. Under the terms of the Senior Secured Credit Agreement amounts borrowed
must be repaid in full by March 28, 2017. Bank indebtedness bears interest based on Canadian prime, Bankers’ Acceptance
and LIBOR (“London Interbank Offered Rate”) rates plus an applicable standby fee on undrawn amounts. Transaction costs
in the amount of $5,193 have been deferred and are being amortized. The Company has the ability to choose the type of
advance required. Interest is based on the market rate plus an applicable margin. Currently, the Company has entered into
a 31-day Bankers’ Acceptance with a cost of borrowing of 3.47% that is due for renewal on January 30, 2014. The term
credit facility is repayable in quarterly amounts ranging from $5,000 to $15,000. The Company has made the scheduled
repayments of $10,000 and has made further optional prepayments of $10,000, thereby reducing the term credit facility
limit to $380,000. As at December 31, 2013, the Company had not drawn on the revolving credit facility. The Company
can prepay without penalty amounts outstanding under the facilities at any time. The agreement includes a general
security agreement which constitutes a lien on all personal property of the Company. In addition to this, there are financial
covenants related to the credit facility as follows:
(1)
Maintain a ratio of Total Debt to Consolidated EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
of not more than (i) 3.5:1 up to and including June 30, 2014; and (ii) 3.0:1 from and after July 1, 2014.
(2) Maintain a ratio of Total Adjusted Debt to Consolidated EBITDAR (Earnings Before Interest, Taxes, Depreciation,
Amortization and Rent Expense) of not more than (i) 4.75:1 up to and including June 30, 2013; and (ii) 4.5:1 from and
after July 1, 2014.
(3) Maintain a Fixed Charge Coverage Ratio of not less than 1.10:1.00.
As at December 31, 2013, the Company is in full compliance of these financial and non-financial covenants.
15. REDEEMABLE SHARE LIABILITY
Authorized
806,000 convertible, non-voting, series 2005 shares
1,224,000 convertible, non-voting, series 2009 shares
306,500 convertible, non-voting, series 2012 shares
1,485,000 convertible, non-voting, series 2013 shares
Issued and fully paid
386,513 series 2005 shares [2012 – 456,317]
1,008,465 series 2009 shares [2012 – 1,045,219]
268,708 series 2012 shares [2012 – 281,500]
1,450,000 series 2013 shares [2012 – nil]
Less employee share purchase loans
As at December 31
2013
2012
$
$
3,650
8,925
3,334
16,516
(31,566)
4,309
9,250
3,493
–
(16,624)
$
859
$
428
42
LEON'S FURNITURE LIMITED
Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2005, 2009,
2012 and 2013 to allow them to acquire convertible, non-voting series 2005 shares, series 2009 shares, series 2012 shares
and series 2013 shares, respectively, of the Company. These loans are repayable through the application against the loans
of any dividends on the shares with any remaining balance repayable on the date the shares are converted to common
shares. Each issued and fully paid for series 2005, series 2009 and series 2012 share may be converted into one common
share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such
issue. Each issued and fully paid for series 2013 share may be converted into one common share at any time after the third
anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. The series 2005, series 2009,
series 2012 and series 2013 shares are redeemable at the option of the holder for a period of one business day following the
date of issue of such shares. The Company has the option to redeem the series 2005, series 2009 and series 2012 shares at
any time after the fifth anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary
of such issue. The Company has the option to redeem the series 2013 shares at any time after the third anniversary date of
the issue of these shares and must redeem them prior to the tenth anniversary of such issue. The redemption price is equal
to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends.
The purchase prices of the shares are $9.44 per series 2005 share, $8.85 per series 2009 share, $12.41 per series 2012 share
and $11.39 per series 2013 share. The convertible, non-voting shares of the Company are recorded as a financial liability as
the Company is contractually obligated to, at or prior to the tenth anniversary of the issue of any convertible non-voting
shares, redeem the convertible non-voting shares by delivering cash.
Dividends paid to holders of series 2005, 2009 and 2012 shares of approximately $360 [2012 – $465] have been used
to reduce the respective shareholder loans. The preferred dividends are paid once a year during the first quarter.
During the year ended December 31, 2013, 69,804 series 2005 shares [2012 – 84,931] and Nil series 2009 shares
[year ended December 31, 2012 – 20,000] were converted into common shares with a stated value of approximately
$659 [2012 – $802] and nil [2012 – $177], respectively.
During the year ended December 31, 2013, the Company cancelled 36,754 series 2009 shares [2012 – 49,888],
12,792 series 2012 shares [2012 – 25,000] and 35,000 series 2013 shares [2012 – nil] in the amount of $325 [2012 – $442],
$159 [2012 – $310] and $399 [2012 – nil], respectively.
Employee share purchase loans have been netted against the redeemable share liability, as the Company has the legally
enforceable right of set off and the positive intent to settle on a net basis.
During the year ended December 31, 2013, the Company issued 1,485,000 series 2013 shares for proceeds of $16,914. In
addition, the Company advanced non-interest bearing loans in the amount of $16,914 to certain of its employees to acquire
these shares.
43
ANNUAL REPORT 2013 Notes to the Consolidated Financial Statements
16. COMMON SHARES
Authorized
Unlimited common shares
Issued
70,634,709 common shares [2012 – 70,564,905]
As at December 31
2013
2012
27,352
26,693
During the year ended December 31, 2013, 69,804 series 2005 shares [2012 – 84,931] and Nil series 2009 shares
[2012 – 20,000] were converted into common shares with a stated value of approximately $659 [2012 – $802] and nil
[2012 – $177], respectively.
During the year ended December 31, 2013, the Company repurchased no [2012 – 23,506] common shares on the
open market pursuant to the terms and conditions of the Normal Course Issuer Bid at a net cost of approximately nil
[2012 – $286]. All shares repurchased by the Company pursuant to the Normal Course Issuer Bid have been cancelled. The
repurchase of common shares resulted in a reduction of share capital in the amount of approximately nil [2012 – $3]. The
excess net cost over the average carrying value of the shares of approximately nil [2012 – $283] has been recorded as a
reduction in retained earnings.
As at December 31, 2013, the dividends payable were $7,063 [$0.10 per share] and as at December 31, 2012 were $7,055
[$0.10 per share].
17. REVENUE
Sale of goods by corporate stores
Income from franchise operations
Extended warranty revenue
Insurance sales revenue
Rental income from investment property
Total
18. EXPENSES BY NATURE
Years Ended December 31
2013
2012
$
$ 1,624,618
16,391
37,241
15,015
1,378
663,350
10,426
7,594
–
793
$ 1,694,643
$
682,163
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Operating lease payments
(Gain) on sale of property, plant and equipment
19. FINANCE COSTS
Premium paid and accelerated accretion on redemption of debentures
Interest expense on finance lease obligations
Interest expense on term credit facilities and revolving credit facilities
Interest expense on convertible debentures
$
$
$
$
$
Total
$
22,424 $
44
Years Ended December 31
2013
2012
33,319
5,630
63,042
$
$
$
(32) $
14,020
866
5,488
(15)
Years Ended December 31
2013
2012
$
2,530
4,277
11,745
3,872
–
–
–
–
–
LEON'S FURNITURE LIMITED
20. INCOME TAX EXPENSE
(A) THE MAJOR COMPONENTS OF INCOME TAX EXPENSE FOR THE YEARS ENDED ARE AS FOLLOWS:
Consolidated 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
consolidated statements of income
Consolidated Statements of Changes in Shareholders’ Equity
Deferred income tax:
Movement in convertible debentures
Consolidated Statements of Other Comprehensive Income
Deferred income tax:
Unrealized gain (loss) on available-for-sale financial assets
Total deferred income tax expense
Total income tax expense
December 31
2013
$
25,616
30
25,646
(1,273)
–
(1,273)
24,373
(63)
(308)
(1,644)
December 31
2012
$
16,358
–
16,358
504
39
543
16,901
–
373
916
$
24,002
$
17,274
(B) RECONCILIATION OF THE EFFECTIVE TAX RATES ARE AS FOLLOWS:
Income before income taxes
$
91,556
$
63,683
2013
2012
Income tax expense based on statutory tax 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
Other
Income tax expense reported in the consolidated
statements of income
24,262
26.50%
16,882
26.51%
24
0.03%
88
0.14%
(195)
282
(0.21%)
0.30%
39
(108)
0.06%
(0.17%)
$
24,373
26.62%
$
16,901
26.54%
(C) DEFERRED INCOME TAX BALANCES AND RECONCILIATION ARE AS FOLLOWS:
(i) Deferred income tax relates to the following:
Deferred income tax assets (liabilities)
Deferred Tax Assets
Deferred Tax Liabilities
Total deferred income tax assets (liabilities)
December 31
2013
$
7,444
(98,768)
$
(91,324)
December 31
2012
$
$
3,114
(2,586)
528
45
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
(ii) Deferred income tax movements are as follows:
Deferred warranty plan
Deferred financing fees
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Deferred rent liabilities
Finance lease liabilities
Transition for partnership deferral
Unused tax losses
Other
Net deferred income tax expense – Statements of income
Movement in convertible debenture
Net deferred income tax expense (benefit) – Equity
Unrealized gain (loss) on available-for-sale financial assets
Net deferred income tax expense (benefit) – Other
comprehensive income
Balance,
Beginning
of Year
Due to
Acquisition
Expense
(Benefit)
Balance,
End of Year
$
$
3,014
–
–
(2,114)
(57)
–
–
–
–
(150)
693
–
–
(165)
(165)
$
–
–
8,376
(41,017)
(76,531)
(6,550)
37,966
(10,859)
120
(2,382)
(90,877)
(2,619)
(2,619)
–
–
(46) $
(93)
(1,649)
2,656
(3,233)
1,164
(1,002)
3,389
–
87
1,273
63
63
308
308
2013
2,968
(93)
6,727
(40,475)
(79,821)
(5,386)
36,964
(7,470)
120
(2,445)
(88,911)
(2,556)
(2,556)
143
143
Total deferred income tax expense (benefit)
$
528
$
(93,496) $
1,644
$
(91,324)
Balance,
Beginning
of Year
Due to
Acquisition
Expense
(Benefit)
Balance,
End of Year
Deferred warranty plan
Property, plant and equipment
Intangible assets
Other
Net deferred income tax expense – Statements of income
Unrealized gain (loss) on available-for-sale financial assets
Net deferred income tax expense (benefit) – Other
comprehensive income
$
$
3,538
(2,079)
(57)
(166)
1,236
208
208
Total deferred income tax expense
$
1,444
$
–
–
–
–
–
–
–
–
$
(524) $
(35)
–
16
(543)
(373)
(373)
$
(916) $
2012
3,014
(2,114)
(57)
(150)
693
(165)
(165)
528
21. EARNINGS PER SHARE
Earnings per share are calculated using the weighted average number of common shares outstanding. The weighted
average number of common shares used in the basic earnings per share calculations amounted to 70,612,407 for the year
ended December 31, 2013 [2012 – 70,032,721]. The following table reconciles the net income for the year and the number of
shares for the basic and diluted earnings per share calculations:
Net income for the year for basic earnings per share
Net income for the year for diluted earnings per share
Weighted average number of common shares outstanding
Dilutive effect
Diluted weighted average number of common shares outstanding
Basic earnings per share
Diluted earnings per share
Years Ended December 31
2013
$
67,183
$
69,556
2012
46,782
47,124
70,612,407
70,032,721
9,206,507
2,284,877
79,818,914
72,317,598
0.95
0.87
0.67
0.65
46
LEON'S FURNITURE LIMITED
22. FINANCIAL INSTRUMENTS AND 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 tables below.
December 31, 2013:
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Investment properties
Other financial liabilities
Trade and other payables
Provisions
Finance lease liabilities
Debentures
Loans and borrowings
Convertible debentures
Redeemable share liability
December 31, 2012:
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Investment properties
Other financial liabilities
Trade and other payables
Provisions
Finance lease liabilities
Debentures
Loans and borrowings
Convertible debentures
Redeemable share liability
Measurement
Total Carrying
Amount
Fair Value
Fair Value
Hierarchy
$
$
$
$
$
$
Fair value
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
5,832
104,275
20,104
17,336
22,304
202,618
4,769
142,189
15,503
375,255
90,952
859
5,832
104,275
20,104
17,336
47,940
202,618
4,769
142,189
15,503
375,255
112,970
859
Level 1
Level 2
Level 1
Level 1
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Measurement
Total Carrying
Amount
Fair Value
Fair Value
Hierarchy
$
$
$
Fair value
Amortized cost
$
74,949
27,961
Fair value
Fair value
Amortized cost
$
20,980
125,755
8,315
Amortized cost $
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
73,542
–
–
–
–
–
428
74,949
27,961
20,980
125,755
33,540
73,542
–
–
–
–
–
428
Level 1
Level 2
Level 1
Level 1
Level 3
Level 2
–
–
–
–
–
Level 2
The fair value hierarchy of financial instruments measured at fair value, as at December 31, 2013, includes financial assets of
$43,272, $104,275 and $47,940 for Levels 1, 2 and 3, respectively, and financial liabilities of nil, $854,163 and nil for Levels 1, 2
and 3, respectively.
The carrying amounts of the Company’s trade receivables, trade and other payables and debentures approximate their fair
values due to their short-term nature.
The carrying amounts of the Company’s finance lease liabilities approximate their fair values because the interest rate
applied to measure their carrying amount approximates current market interest rates.
The carrying amounts of the Company’s loans and borrowings approximate their fair values since they bear interest at rates
comparable to market rates at the end of the reporting period.
The fair values of available-for-sale financial assets and restricted marketable securities that are traded in active markets
are determined by reference to their quoted closing price or dealer price quotations at the reporting date. For financial
instruments that are not traded in active markets, the Company determines fair values using a combination of discounted
cash flow models and comparison to similar instruments for which market observable prices exist.
47
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
As at December 31, 2013, the fair value of the convertible debentures was determined using their closing quoted market
price (not in thousands of dollars) of $112.97 per $100.00 of face value. For the convertible debentures at December 31,
2013, fair value is calculated based on the face value of the convertible debentures of $100,000.
Fair values of financial instruments reflect the credit risk of the Company and counterparties when appropriate.
FAIR VALUE HIERARCHY
The Company uses a fair value hierarchy to categorize the inputs used to measure the fair value of financial assets and
financial liabilities, the levels of which are as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (including interest
rate risk, currency risk and other price 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.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet
its contractual obligations.
The following table summarizes the Company’s maximum exposure to credit risk related to financial instruments. The
maximum credit exposure is the carrying value of the asset, net of any allowances for impairment.
Cash and cash equivalents
Restricted marketable securities
Available-for-sale financial assets
Trade receivables
Carrying Amount
2013
2012
$
$
5,832
20,104
17,336
104,275
74,949
20,980
125,755
27,961
$
147,547
$
249,645
Generally, the carrying amount on the consolidated statements of financial position of the Company’s financial assets
exposed to credit risk represents the Company’s maximum exposure to credit risk. No additional credit risk disclosure is
provided, unless the maximum potential loss exposure to credit risk for certain financial assets differs significantly from
their carrying amount. The Company’s main credit risk exposure is from its trade receivables. For the Company, trade
receivables are comprised principally of amounts related to its commercial sales division, to its franchise operations, and
to vendor rebate programs.
For commercial trade and other receivables, credit risk is mitigated through customer agreements specifying payment
terms and credit limits. For franchise trade receivables, personal guarantees are obtained. As well, liens are placed against
the goods and the Company may repossess goods for non-payment. Credit risk is also limited due to the large number
of customers and their dispersion across geographic areas and market sectors (i.e. retail, commercial, and franchise).
Accordingly, the Company believes it has no significant concentrations of credit risk related to trade receivables. In
addition, trade receivables are managed and analyzed on an ongoing basis to control the Company’s exposure to bad
debts. The Company assesses the adequacy of the allowance for impairment quarterly, taking into account historical
experience, current collection trends, the age of receivables, and when warranted and available, the financial condition
of specific counterparties. The Company focuses on receivables outstanding for greater than 90 days in assessing the
Company’s credit risk and records a reserve, when required, to mitigate that risk. When collection efforts have been
exhausted, specific balances are written off.
48
LEON'S FURNITURE LIMITED
At December 31, 2013, there are no financial assets that the Company deems to be impaired or that are past due according
to their terms and conditions, for which allowances have not been recorded. The Company’s trade receivables totalled
$104,275 as at December 31, 2013 [2012 – $27,961]. 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 $2,359 as at December 31, 2013
[2012 – $646]. The Company’s provision for impairment of trade receivables, established through ongoing monitoring
of individual customer accounts, was $1,658 as at December 31, 2013 [2012 – $500].
The majority of the Company’s retail sales are funded through cash, traditional credit cards and private label credit cards
carried on a non-recourse basis by third parties. Accordingly, fluctuations in the availability and cost of credit may have an
impact on the Company’s retail sales and profitability.
The Company manages credit risk for its cash and cash equivalents by maintaining bank accounts with major Canadian
banks and investing only in highly rated Canadian and U.S. securities that are traded on active markets and are capable of
prompt liquidation.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The
purpose of liquidity risk management is to maintain sufficient amounts of cash and cash equivalents, and authorized credit
facilities, to fulfill obligations associated with financial liabilities. To manage liquidity risk, the Company prepares budgets
and cash forecasts, and monitors its performance against these. Management also monitors cash and working capital
efficiency given current sales levels and seasonal variability. The Company measures and monitors liquidity risk by regularly
evaluating its cash inflows and outflows under expected conditions through cash flow reporting such that it anticipates
certain funding mismatches and ensures the cash management of the business within certain tolerable levels. These cash
flow forecasts are reviewed on a weekly basis by management. The Company mitigates liquidity risk through continuous
monitoring of its credit facilities and the diversification of its funding sources, both in the short term as well as the long term.
The following tables summarize the Company’s contractual maturity for its financial liabilities, including both principal and
interest payments:
December 31, 2013:
Trade and other payables
Finance lease liabilities
Debentures
Loans and borrowings
Convertible debentures
Redeemable share liability
December 31, 2012:
Trade and other payables
Finance lease liabilities
Debentures
Loans and borrowings
Convertible debentures
Redeemable share liability
Carrying
Amount
Contractual
Cash Flows
Under 1 Year
1–3 Years
3–5 Years
More than
5 Years
Remaining Term to Maturity
$
$
$
202,618
142,189
15,503
375,255
90,952
859
202,618
273,978
15,740
425,164
127,707
859
$
202,618
12,877
15,740
62,815
3,000
–
–
24,976
–
120,364
6,000
–
$
$
–
23,401
–
241,985
6,000
–
–
212,724
–
–
112,707
859
$
827,376
$ 1,046,066
$
297,050
$
151,340
$
271,386
$
326,290
Carrying
Amount
Contractual
Cash Flows
Under 1 Year
1–3 Years
3–5 Years
More than
5 Years
Remaining Term to Maturity
$
$
73,542
–
–
–
–
428
$
73,542
–
–
–
–
428
$
73,542
–
–
–
–
–
$
73,970
$
73,970
$
73,542
$
–
–
–
–
–
–
–
$
$
–
–
–
–
–
–
–
$
$
–
–
–
–
–
428
428
The contractual cash flows have been included in the tables above based on the contractual arrangements that exist at the
reporting date and do not factor in any assumptions for early repayment. The amount and timing of actual payments may
be materially different. Contractual cash flows presented in the above maturity analysis table for finance lease liabilities,
debentures, loans and borrowings and convertible debentures include principal repayments, interest payments, and other
related cash payments. As the carrying amounts of these liabilities are measured at amortized cost, the future contractual
cash flows do not agree to the carrying amounts.
49
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
The Company’s debentures, credit facilities and convertible debentures are further discussed in Note 14.
The Company’s future obligations under operating leases are discussed in Note 25.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices. Market risk is comprised of three types of risk: interest rate risk, currency risk, and other price risk.
(a) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market interest rates.
The Company is exposed to cash flow risk on the term credit facility and the revolving credit facility, and to fair value risk
on the finance lease liabilities, debentures, and convertible debentures due to fluctuations in interest rates. Fair value risk
related to the finance lease liabilities, debentures and convertible debentures impacts disclosure only as these items are
carried at amortized cost on the consolidated statements of financial position.
As well, the Company’s revenues depend, in part, on supplying financing alternatives to its customers through third party
credit providers. The terms of these financing alternatives are affected by changes in interest rates. Therefore, interest
rate fluctuations may impact the Company’s financing costs for retail sales financed using these alternatives, and may also
impact the Company’s revenues where customers’ buying decisions are impacted by their ability or desire to use these
financing alternatives.
Interest rate sensitivity analysis
(i)
The Company’s net income is sensitive to the impact of a change in interest rates on the average indebtedness under
the term credit facility and the revolving credit facility during the year. For the year ended December 31, 2013, the
Company’s average indebtedness under the term credit facility was $390,000 [2012 – nil] and under the revolving credit
facility was nil [2012 – nil]. Accordingly, a change during the year ended December 31, 2013 of a one percentage point
increase or decrease in the applicable interest rate would have impacted the Company’s net income by approximately
$2,867 [2012 – nil].
(b) Currency risk
The Company is exposed to foreign currency fluctuations since certain merchandise is paid for in U.S. dollars. This risk
is offset to the extent that foreign currency costs are included in product costs when setting retail prices. Accordingly,
the Company does not believe it has significant foreign currency risk with respect to its inventory purchases made in
U.S. dollars.
(c) Other price risk
The Company is exposed to fluctuations in the market prices of its portfolio of restricted marketable securities that are
classified as available-for-sale financial assets. Changes in the fair value of these 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.
23. INSURANCE CONTRACT RISK
Certain subsidiaries of the Company are responsible for the insurance business and monitoring and managing the financial
risks related to the Company’s insurance operations. This is done through internal risk assessment reporting and by
compliance with regulatory requirements. Trans Global Life Insurance Company provides group insurance coverage for
life, accident and sickness covering personal credit card debt; and group coverage for life, accident and sickness covering
other personal short-term debt. Trans Global Insurance Company provides group coverage for loss of income and property
covering personal credit card debt; group coverage for loss of income and property covering other personal short-term
debt; and four- and five-year term commercial property coverage. The principal risks faced under insurance contracts are
that (i) the actual claims and benefit payments or the timing thereof, differ from expectations. This risk is influenced by
the frequency of claims, severity of claims, actual benefits paid and subsequent development of claims; (ii) the risk of loss
arising from expense experience being different than expected; and (iii) the risk arising due to policyholder experiences
(lapses) being different than expected. The Company’s objective with respect to this risk is to ensure that sufficient
reserves are available to cover these liabilities.
The overall risk of the insurance operations is managed by diversifying across a large portfolio of insurance contracts and
limiting the benefits that the policyholder stands to receive. The Company, therefore, has a defined maximum exposure
which enables it to effectively manage the overall risk. These maximum benefits are limited to $25,000 per occurrence.
50
LEON'S FURNITURE LIMITED
24. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are to:
• ensure sufficient liquidity to support its financial obligations and execute its operating and strategic plans; and
• utilize working capital to negotiate favourable supplier agreements both in respect of early payment discounts and
overall payment terms.
The capital structure of the Company has changed from the prior fiscal year. The capital structure now includes
debentures, finance lease liabilities, convertible debentures, term credit facility and borrowing capacity available under
the revolving credit facilities (Note 14). The revolving credit facilities remain undrawn as at December 31, 2013.
Current portion of finance lease liabilities
Debentures
Current portion of loans and borrowings
Convertible debentures
Finance lease liabilities
Loans and borrowings
Total shareholders’ equity
Total capital under management
$
2013
2012
$
4,302
15,503
50,000
90,952
137,887
325,255
496,555
–
–
–
–
–
–
452,187
$ 1,120,454
$
452,187
Under the Senior Secured Credit Agreement, the financial and non-financial covenants are reviewed on an ongoing basis by
management to monitor compliance with the agreement. The Company was in compliance with these key covenants as at
December 31, 2013.
The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including
proposals on acquisitions or other major investments or divestitures, as well as capital and operating budgets. Based on
current funds available and expected cash flow from operating activities, management believes that the Company has
sufficient funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities
is lower than expected or capital costs for projects exceed current estimates, or if the Company incurs major unanticipated
expenses, it may be required to seek additional capital.
The Company is not subject to any externally imposed capital requirements, other than with respect to its insurance subsidiaries.
Restriction on the distribution of capital from Trans Global Insurance Company (“TGI”) and Trans Global Life Insurance
Company (“TGLI”)
For purposes of regulatory requirements for TGI and TGLI, capital is considered to be equivalent to their respective
statement of financial position equity. Regulatory requirements stipulate that TGI must maintain minimum capital of
at least $3,000 and TGLI must maintain minimum capital of at least $5,000.
In addition, the Company is subject to the regulatory capital requirements defined by The Office of the Superintendent
of Insurance of Alberta and the Insurance Act of Alberta (the “Act”). Notwithstanding that a company may meet the
supervisory target standard, The Office of the Superintendent of Insurance of Alberta may direct a company to increase
its capital under the Act. As at December 31, 2013, TGI’s Minimum Capital Test ratio was 537% [2012 – nil], which is in
compliance with the requirements of The Office of the Superintendent of Insurance of Alberta and the Act. As at
December 31, 2013, TGLI’s Minimum Continuing Capital and Surplus Requirements ratio was 396% [2012 – nil], which is
in compliance with the requirements of The Office of the Superintendent of Insurance of Alberta and the Act.
51
ANNUAL REPORT 2013
Notes to the Consolidated Financial Statements
25. COMMITMENTS AND CONTINGENCIES
(a) The Company leases a number of retail stores under operating leases. Generally, the leases have rent escalation terms
and renewal options to extend. The Company is obligated under these operating leases for future minimum annual
rental payments as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
68,364
246,037
427,544
$
741,945
(b) 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
$
2,583
6,766
922
$
10,271
(c) The Company has issued approximately $525 in letters of credit primarily with respect to buildings under construction
or being completed [2012 – $255].
(d) Pursuant to a reinsurance agreement relating to the extended warranty sales, the Company has pledged available-for-
sale financial assets amounting to $20,104 [2012 – $20,980] and provided a letter of credit of $1,500 [2012 – $1,500]
for the benefit of the insurance company.
(e) 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 financial position.
26. CONSOLIDATED STATEMENTS OF CASH FLOWS
(a) The net change in non-cash working capital balances related to operations consists of the following:
Trade receivables
Income taxes receivable
Inventories
Deferred financing costs
Other assets
Trade and other payables
Customers’ deposits
Provisions
Deferred acquisition costs
Deferred rent liabilities and lease inducements
$
Years Ended December 31
2013
2012
(20,328) $
4,903
(29,461)
817
3,696
(16,945)
21,002
(710)
(6,113)
3,776
(1,308)
1,538
1,773
–
158
(12,883)
1,229
–
–
–
$
(39,363) $
(9,493)
(b) During the year, property, plant and equipment were acquired at an aggregate cost of $19,297 [2012 – $17,965], of
which $53 [2012 – $942] is included in trade and other payables as at December 31, 2013.
52
LEON'S FURNITURE LIMITED
27. RELATED PARTY TRANSACTIONS
Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been
eliminated on consolidation.
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:
Salaries and other short-term employee benefits
Years Ended December 31
2013
2012
$
12,521
$
3,056
28. COMPARATIVE FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously presented to
conform to the presentation of the 2013 consolidated financial statements.
53
ANNUAL REPORT 2013
Corporate and Shareholder Information
CORPORATE OFFICE
45 Gordon Mackay Road
Toronto, Ontario M9N 3X3
(416) 243-7880
AUDITORS
Ernst & Young LLP
Toronto
REGISTRAR AND TRANSFER AGENT
CST Trust Company
LISTING
Leon’s shares are listed on the
Toronto Stock Exchange
Ticker Symbol is LNF
ANNUAL GENERAL MEETING
May 13, 2014 2:00 PM
Terrritories Room, Fairmont Royal York
100 Front Street West,
Toronto, Ontario
BOARD OF DIRECTORS
Mark J. Leon
Toronto
Terrence T. Leon
Toronto
Edward F. Leon
King City
Joseph M. Leon II
Mississauga
Peter B. Eby
Private Investor, Toronto
Alan J. Lenczner
Barrister, Partner in
Lenczner Slaght, 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
54
LEON'S FURNITURE LIMITED .
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Of the many milestones Leon’s has achieved
since 1909, none has been greater than last year’s
acquisition of The Brick Ltd. Today, our two storied
brands comprise the largest retail network for home
furnishings, appliances and electronics in Canada,
but our plans to realize the full potential of this
historic combination have just begun.
www.leons.ca | www.thebrick.com