Leon's Furniture Ltd.
Annual Report 2015

Plain-text annual report

What’s in store 2015 Annual Report Leon’s Furniture Limited 106 Ye ars Yo u n g For more than a century, we have remained true to the conviction of founder Ablan Leon that business is won through fairness, integrity and trust. Over the past 106 years, Leon’s storied history has been one of continuous innovation and success. From the opening of the A. Leon Company’s first store in Welland, Ontario in 1909, we have grown into one of Canada’s largest and most successful retailers, building a network of 301 stores across the country and introducing many industry firsts along the way. These have included the extension of credit to new immigrants in the early 1900s, the introduction of “big box” retailing to Canada in 1973, and the creation of Canada’s largest furniture, appliance and home electronics retailer with the acquisition of The Brick in 2013. We believe this spirit of change and innovation will serve us well as we look forward to our future. 20 15 Fi nan c iaL H i g H Li g Hts For an extensive look at our 5-Year Review please see page 11. 2015 2014 2015 2014 2015 2014 Revenue Net Income Shareholders’ Equity 1.2% GROW TH 1.5% GROW TH 8.9% GROW TH (per share) ($ in thousands, except per share amounts) 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 2015 2014 % Change $ 2,031,718 101,419 76,629 58,483 28,465 $ 2,008,480 103,134 75,524 151,988 28,328 $ $ $ $ 1.08 $ 0.82 $ 0.40 $ 8.43 $ 1.07 2.14 0.40 7.74 1.2% (1.7%) 1.5% (61.5%) 0.5% 0.9% (61.7%) — 8.9% cover image by sabrina smelko an d M o re . Leon’s is Canada’s largest retailer of furniture, appliances and home electronics with $2.032 billion in annual sales, six leading banners and 301 stores from coast to coast. In 2015, we continued to strengthen this unmatched foundation while expanding our presence in online retailing, and building complementary businesses to augment growth. This year’s annual report takes a look at our progress. 3 Leon’s Furniture Limited | 2015 Annual ReportBright future. 4 Leon’s Furniture Limited | 2015 Annual ReportChief Executive Officer’s Message 2015 was a year of continued progress for the Leon Group of Companies as we strengthened the market-leading positions of our retail banners, completed the implementation of our new system-wide IT platform and continued to develop the complementary businesses that will help drive our growth in the years ahead. 2015 2014 We also managed to post record financial results in a challenging retail marketplace. System-wide sales reached $2.41 billion including $376 million of franchise sales, compared to $2.38 billion including $375 million of franchise sales in 2014. Same-store sales remained positive, increasing by 1.2 percent despite slow growth in the economy and persistent weakness in consumer spending, as we continued to grow market share. Leon’s also achieved record net income of $76.6 million or $1.08 per share. Meanwhile, we continued to strengthen the balance sheet, retiring $30 million in long-term debt associated with the acquisition of The Brick and we remain on track with our debt reduction schedule. 2015 in review Among the year’s most significant accomplishments was the completion in October 2015 of our new enterprise-wide information management platform. Two years in planning and execution, this highly complex project involved the migration of five legacy information systems from The Brick along with important upgrades to the functionality of our existing network. That we were able to complete this project without major disruption to our business is a testament to the skill and dedication of the entire IT integration team. As a result of this work, we now have a unified perspective on every aspect of the combined business and the foundation required to fully realize the operating synergies between the two divisions. This process has already started with the launch of a combined point-of-sale system for Leon’s and The Brick and the planned combination of core business functions such as procurement, finance, human resources, warranty and service. There is also significant potential to reduce cost and improve efficiencies in the optimization of our national distribution system. During the past year, we announced key changes to the senior management team that have helped strengthen our leadership for Leon’s next stage of growth. These included the appointment of Edward Leon, former Vice President of Merchandising, as President and Chief Operating Officer of the Leon’s Group of Companies where he has assumed responsibility for day-to-day operation of the Company and allowed me to spend more time on the strategic development of the Company. We were also very pleased to hire Mike Walsh, former Vice President of Canadian Tire, as President of the Leon’s Furniture division. In conjunction with Brick President Jim Caldwell, we now have seasoned industry veterans from outside the Leon family driving division-level performance for the first time in the organization’s history. This structure has advanced our efforts to differentiate the market position of our primary banners and allowed senior management more time to concentrate on the growth opportunities within our portfolio of complementary businesses. What’s in store, and more Leon’s is the largest retailer of furniture, appliances and home electronics in Canada. Yet together, our Leon’s and Brick divisions command only an estimated 17 percent of the total market share. Ours is still a highly fragmented industry that is likely to present market share growth opportunities as it consolidates over the next few years. We also have significant room to grow within our existing geographic footprint thanks to a distribution network that extends from coast to coast to coast. This includes the expansion of Leon’s in British Columbia and The Brick in Atlantic Canada. 5 Revenue 1.2% GROW TH CEO Terrence Leon (Opposite Page) At the same time we continue to invest in the value of these storied Canadian brands. Leon’s has adopted an increasingly aspirational positioning, as evidenced by its growing presence on social media and sponsorship of lifestyle television programming. We are also investing in the powerful Brick brand with reinvigorated advertising and a new tagline — saving you more — that reinforces the division’s promotional strengths. We also continue to expand our online retailing presence through the leons.ca and thebrick.com websites. They are part of an omni-channel marketing strategy aimed at serving customers, whenever and wherever they wish to deal with us. This combination of online and in-store retailing, with the support of the country’s largest distribution and service networks, represents a powerful competitive advantage in today’s marketplace. In 2016, we are also very excited as we are ready to launch furniture.com. Our newest online store offers everything available in our retail stores and so much more, including a wider range of price points in each category and a growing assortment of home décor and lighting products. We are also pleased by the performance and prospects of several less well-known but profitable businesses that complement our retail network. These include: › Appliance Canada and Midnorthern Appliance, which together are the largest provider of appliances to the builder, developer, property management and hotel industries. › TransGlobal Service, which was founded to service appliances sold by The Brick, is now providing factory service for many major manufacturers as well as a growing number of retail clients including the Leon’s division. Prospects for this business remain strong as manufacturers outsource service and the industry consolidates. › Trans Global Insurance, a major provider of life, disability and income protection insurance for credit customers. › King & State, which offers extended warranty protection for products sold through our retail channels including our stores. › First Oceans Trading Corporation, which sources furniture directly from East Asian manufacturers on behalf of both retail divisions from offices in China and Vietnam. There is significant potential to reduce costs and improve efficiencies in the optimization of our national distribution system, a process that is now underway. s n i k a y c u L 6 Leon’s Furniture Limited | 2015 Annual Report Chief Executive Officer’s Message Canada’s Number One Commercial Appliance Retailer together, appliance canada and Midnorthern appliance are the country’s largest commercial retailer of conventional and luxury appliances for the builder, development, property management and hotel industries. o k l e m s a n i r b a s 7 We’ll continue to do what we have done throughout other economic cycles by delivering the best All of these businesses are well positioned in their respective industries with the potential to make growing contributions to the Company’s earnings in the years ahead. Through our corporate entities including our subsidiaries Murlee Holdings Limited and Leon Holdings (1967) Limited, we also own a 4.2 million square foot portfolio of commercial real estate, much of it in prime urban locations, with unrealized value and development potential for adjacent properties. combination of service, The year ahead selection and value in the business. Canada’s economy sputtered between positive and negative territory in 2015 in the midst of declining oil prices, uncertain financial markets and weak consumer spending growth. These conditions are likely to persist throughout the year ahead. In response, we’ll continue to do what we have done throughout other economic cycles by delivering the best combination of service, selection and value in the business. By doing this well — in our stores and online — we will continue to outperform the industry while finding more ways to reduce the cost of doing business. In 2016, this will include the optimization of our distribution system and back office services, which should enable our earnings to show significant top line growth. In closing, I would like to thank our dedicated executives, corporate and franchise store management teams and all of the associates throughout our businesses for their valued contributions during another challenging but rewarding year. Sincerely, “Terrence T. Leon” Terrence T. Leon Chief Executive Officer 8 Leon’s Furniture Limited | 2015 Annual Report Chief Executive Officer’s Message n o s n e h p e t s y a s d n i L Making a great brand even better the increasingly aspirational positioning of the Leon’s brand can be seen in our growing presence on social media and through the sponsorship of popular lifestyle television programming. 9 Leon’s Furniture Limited | 2015 Annual Report 1 35 1 1 ac ros s tH e c o u ntrY 54 6 6 1 11 3 3 7 2 1 1 16 11 69 45 4 3 NaTiONW ide 301 sTOR es 3 1 1 3 4 3 5 201 The Brick 106 Years of History 1909 The A. Leon Co. opens for business on King Street in Welland, Ontario. 1973 Leon’s introduces “big-box” retailing to 2011 Leon’s opens four new corporate stores, and two new franchise locations, including our first franchise store in Québec. 80 Leon’s Furniture Canada with the opening of our first warehouse showroom in Weston, Ontario. 2012 Leon’s secures sites for four new corporate stores, three of which opened in 2013. 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. 1985 Leon’s opens its first store in Atlantic Canada in Saint John, New Brunswick. 2013 Leon’s acquires The Brick creating Canada’s largest home furnishing, appliance and electronics retailer, with a network of over 300 stores from coast to coast. 2014 Leon’s acquires minority interest in online commerce provider, Blueport Investors LLC, with exclusive rights to the tradename and URL furniture.com in Canada. 14 United Furniture Warehouse/Brick Clearance Centres 3 3 United Furniture Warehouse Appliance Canada 10 Leon’s Furniture Limited | 2015 Annual ReportThe Leon’s Group of Companies Leon’s is canada’s largest retailer of furniture, appliances and home electronics through six leading retail and commercial banners. they are supported by several complementary businesses that provide our divisions and third-party customers high-quality product sourcing services, after-sales repair and service, warranty protection, and credit insurance. At-A-Glance We are ready to build upon Leon’s heritage of success with veteran retail industry leaders from inside and outside the Company. re adY to g row Edward Leon, President & COO, Leon’s Furniture Limited Eddy is a third generation Leon who began working in the family business as a young man. Since 1976, he has held a number of management positions in store operations, human resources, and buying. In February 2001, Eddy was appointed a Director of the Company and in May 2002, became Vice President of Merchandising, a position he held until he assumed the position of President and Chief Operating Officer of Leon’s Furniture Limited in June 2015. Michael J. Walsh, President, Leon’s Furniture Jim Caldwell, President, The Brick Mike is a seasoned executive with over 25 years of retail experience. He has been a catalyst for positive change since his arrival at Leon’s in June 2015. Prior to joining the Company, Mike served as Vice President of Operations at Canadian Tire Corporation. Jim became President of The Brick in 2013 after serving as Senior Vice President of Store Operations for three years and prior to that held senior management positions at other leading retailers. Jim is Vice Chairman, Breakfast For Learning Canada. 11 Leon’s Furniture Limited | 2015 Annual Report stro n g co M M u n iti es Leon’s has always believed in giving something back to the Canadian communities that have welcomed our stores and continue to make us a prosperous and growing company. Our Leon’s and Brick divisions share a long-standing tradition of supporting the communities that are home to our operations, both corporately, and through the volunteer efforts, resources and financial contributions of our stores and associates across the country. The largest recipients of Leon’s support are health care facilities. Leon’s believes there are no better causes than the physical and mental welfare of our customers, friends and families. In this regard, several of the country’s outstanding hospitals receive significant contributions annually. Along with the hospitals, there are a number of health associations, children’s charities, societies and foundations that are supported. Leon’s also assists the local communities served by its store network with financial contributions, as well as the volunteer efforts of our associates who contribute hundreds of hours of service across this country each year. The Brick division shares a similar focus on improving the health and wellbeing of the communities that are home to its store network. This can be seen in the support of the Children’s Miracle Network®, which raises funds and awareness for 170 member hospitals, 14 of which are in Canada. Donations stay local to fund critical treatments and health care services, paediatric medical equipment and research. We are also proud to sponsor Breakfast for Learning, which works with schools across Canada to help them start and operate programs that have provided more than 500 million meals to more than three million Canadian children since the program started in 1992. You can learn more about our support for these and other important causes at leons.ca and thebrick.com. Lending our financial and voluntary support our Leon’s and the Brick divisions both focus their support on organizations that improve the health and wellbeing of the communities that are home to our retail stores. 12 Leon’s Furniture Limited | 2015 Annual ReportLeon’s results include operations of The Brick Ltd. from March 28, 2013. 5 -Ye ar r e vi e w $2,031,718 Revenue $76,629 Net Income $8.43 Shareholders’ Equity (per share) ($ in thousands) ($ in thousands) 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000,000 750,000 500,000 250,000 0 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 ($ per share) 9 8 7 6 5 4 3 2 1 0 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 Income Statistics ($ in thousands, except amounts per share) 2015 2014 2013 2012 2011 Revenue Cost of sales Gross profit Operating expenses Income before income taxes Income tax expense Net income Common shares outstanding (‘000s) Earnings per common share Percent annual change in sales Net income as a percentage of sales Dividend declared Balance Sheet Statistics $ 2,031,718 1,145,593 2,008,480 1,131,651 1,721,874 959,307 682,163 398,704 682,836 394,099 886,125 876,829 762,567 283,459 288,737 784,706 101,419 24,790 $ 76,629 $ 71,218 1.08 1.2% 3.8% $ 28,501 773,695 103,134 27,610 75,524 70,899 1.07 16.6% 3.8% 28,370 669,297 93,270 24,878 68,392 70,612 0.97 152.4% 4.0% 28,247 219,776 63,683 16,901 46,782 70,033 0.67 (0.1%) 6.9% 28,047 209,889 78,848 22,182 56,666 69,969 0.81 (3.9%) 8.3% 36,371 ($ in thousands, except amounts per share) 2015 2014 2013 2012 2011 Shareholders’ equity Total assets Purchase of capital assets Working capital Shareholders’ equity per common share Common share price range on the Toronto Stock Exchange High Low 600,402 $ 549,105 $ 497,764 $ $ 1,583,463 22,756 65,419 8.43 1,563,476 16,562 46,931 7.74 1,565,356 18,984 16,246 7.05 452,187 $ 588,178 17,897 226,208 6.46 425,461 584,411 24,999 204,649 6.08 $ $ 19.38 $ 12.61 $ 17.90 $ 13.41 $ 14.75 $ 11.62 $ 13.47 $ 10.55 $ 15.65 10.56 13 Leon’s Furniture Limited | 2015 Annual Report In more than 300 stores from coast to coast, and through a rapidly growing online presence, Leon’s Furniture Limited offers an unbeatable combination of service, selection and value to Canadian customers, no matter how, when or where they wish to find us. o k l e m s a n i r b a s y b s o t o h P 14 Leon’s Furniture Limited | 2015 Annual Report Manag eM ent’s D isc u s sio n & a nalys is For the quarters and years ended December 31, 2015 and 2014. The following Management’s Discussion and Analysis (“MD&A”) is prepared as at February 25, 2016 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, 2015 and for the year ended December 31, 2015. It should be read in conjunction with the fiscal year 2015 consolidated financial statements and the notes thereto. For additional detail and information relating to the Company, readers are referred to the fiscal 2015 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 further drop in consumer confidence; dependency on product from third party suppliers; further changes to the Canadian bank lending rates; and a further weakening of the Canadian dollar vs. the US dollar. Given these risks, uncertainties and the integration risk associated with the acquisition of The Brick Ltd. (“The Brick”), 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 and the management share purchase plan 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 2015 consolidated financial statements and MD&A were approved on February 25, 2016. 13 1. BUSINESS OVERVIEW 2. NON-IFRS FINANCIAL MEASURES Same Store Sales Same store sales are defined as sales generated by stores that have been open or closed for more than 12 months on a yearly basis. Same store sales is not an earnings measure recognized by IFRS, and 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. Same store sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers, however this measure is commonly used in the retail industry. We believe that disclosing this measure is meaningful to investors because it enables them to better understand the level of growth of our business. Total System Wide Sales Total system wide sales refer to the aggregation of revenue recognized in the Company’s consolidated financial statements plus the franchise sales occurring at franchise stores to their customers which are not included in the revenue figure presented in the Company’s consolidated financial statements. Total system wide sales is not a measure recognized by IFRS, and 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. Therefore, total system wide sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers. We believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company’s overall store network, which ultimately impacts financial performance. Franchise Sales Franchise sales figures refer to sales occurring at franchise stores to their customers which are not included in the revenue figures presented in the Company’s consolidated financial statements, or in the same store sales figures in this MD&A. Franchise sales is not a measure recognized by IFRS, and 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. Therefore, franchise sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers. Once again we believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company’s brands, which ultimately impacts financial performance. Leon’s Furniture Limited is the largest network of home furniture, appliances and electronics, and mattress stores in Canada. Our retail banners include: Leon’s; The Brick; The Brick Mattress Store; The Brick Clearance Centre; and United Furniture Warehouse (“UFW”). Finally, the addition of The Brick’s Midnorthern Appliance banner alongside with the Appliance Canada banner, makes the Company the country’s largest commercial retailer of appliances to builders, developers, hotels and property management companies. The Company’s repair service division, Trans Global Services, provides household furniture, electronics and appliance repair services to its customers. The repair services division has contracts to support several manufacturer’s warranty service work in addition to servicing a number of individual programs offered by other dealers. This division also performs work for products sold with extended warranties and is an integral part of the retail offering. These extended warranties, underwritten by the Company’s wholly-owned subsidiaries are offered on appliances, electronics and furniture to provide coverage that extends beyond the manufacturer’s warranty period by up to five years. The warranty contracts provide both repair and replacement service depending upon the nature of the warranty claim. The Company’s wholly-owned subsidiaries Trans Global Insurance Company (“TGI”) and its sister company, Trans Global Life Insurance Company (“TGLI”) also offer credit insurance on the customer’s outstanding financing balances. This credit insurance coverage includes life, dismemberment, disability, critical illness, involuntary unemployment, property, and family leave of absence. These credit insurance policies are underwritten by TGI and TGLI as they are licensed as insurance companies in all Canadian provinces and territories. The Company has foreign operations in Asia, through its subsidiary First Oceans Trading Corporation. These operations relate to the Company’s import and quality control program for sourcing products from Asia for resale in Canada through its retail operations. Leon’s has 301 retail stores from coast to coast in Canada under the various banners indicated below which also includes over 100 franchise locations. Banner Number of Stores Leon’s banner corporate stores Leon’s banner franchise stores Appliance Canada banner stores The Brick banner corporate stores1 The Brick banner franchise stores2 The Brick Mattress Store banner locations UFW banner stores UFW and The Brick Clearance Centre banner stores Total number of stores 1 Includes the Midnorthern Appliance banner 2 Includes one UFW franchise 44 36 3 113 67 22 2 14 301 14 Leon’s Furniture Limited | 2015 Annual Report 3. RESULTS OF OPERATION Consolidated operating results for the quarters ended December 31, 2015 and December 31, 2014 ($ in thousands, except % and per share amounts) 2015 2014 $ Increase (Decrease) % Increase (Decrease) For the three months ended December 31 $ 670,357 $ 110,128 Total system wide sales1 Franchise sales1 Revenue Cost of sales Gross profit Gross profit margin as a percentage of revenue Selling, general and administrative expenses SG&A as a percentage of revenue Income before net finance costs and income tax expense Net finance costs Income before income taxes Income tax expense Net income Net income as a percentage of revenue 5.39% $ 30,187 $ 560,229 311,428 248,801 44.41% 207,098 36.97% 41,703 4,243 37,460 7,273 660,120 108,065 552,055 308,158 243,897 44.18% 198,351 35.93% 45,546 3,836 41,710 11,796 29,914 5.42% 10,237 2,063 8,174 3,270 4,904 8,747 (3,843) 407 (4,250) (4,523) 273 1.6% 1.9% 1.5% 1.1% 2.0% 4.4% (8.4%) 10.6% (10.2%) (38.3%) 0.9% Basic weighted average number of common shares Basic earnings per share Diluted weighted average number of common shares Diluted earnings per share 71,215,941 $ 0.42 $ 71,040,021 0.42 82,363,520 $ 0.38 $ 82,332,550 0.38 Common share dividends declared $ Convertible, non-voting shares dividends declared $ 0.10 $ 0.20 $ 0.10 0.20 1 Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information. Same Store Sales1 ($ in thousands, except %) Same store sales1 For the three months ended December 31 2015 2014 $ Increase % Increase $ 558,672 $ 549,655 $ 9,017 1.6% 1 Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information. Fourth Quarter Overall Performance Revenue For the three months ended December 31, 2015, revenue was $560,229,000 compared to $552,055,000 in the prior year’s fourth quarter. Revenue increased $8,174,000 or 1.5% between the comparative quarters as we continued to see growth in most product categories. saMe s toRe s ales Overall, same store corporate sales increased 1.6%. gRoss PRofit The gross margin for the fourth quarter 2015 increased slightly from 44.18% to 44.41% compared to the prior year’s fourth quarter. selling, geneRal anD aDMinistRative exPenses Selling, general and administrative expenses of $207,098,000 increased $8,747,000 for the fourth quarter 2015 compared to the fourth quarter of 2014. Compared to the prior year quarter, the change is due to an increase in advertising expenditures in order to further promote our brands and increase sales, the net change of the impact of annual salary increases offset by delivery expense efficiencies and primarily due to an approximately $4,000,000 non-cash decrease in the unrealized value of the Company’s financial derivatives, comprised of foreign exchange forward contracts and a fixed interest rate swap. incoMe tax exPense Due to the adjustments in prior year periods, the income tax expense decreased by approximately $3,000,000. net incoMe anD eaRnings PeR shaRe As a result of the above, net income for the fourth quarter of 2015 was $30,187,000, $0.42 per common share ($29,914,000, $0.42 per common share in 2014). 15 Management’s Discussion & Analysis Consolidated operating results for the year ended December 31, 2015, 2014 and 2013 For the year ended December 31 ($ in thousands, except % and per share amounts) 2015 2014 $ Increase % Increase (Decrease) (Decrease) 2014 (Restated) 2013 $ Increase % Increase (Decrease) (Decrease) Total system wide sales1 Franchise sales1 $ 2,407,512 $ 2,383,324 374,844 375,794 Revenue2 Cost of sales2 Gross profit2 Gross profit margin as a 2,031,718 1,145,593 2,008,480 1,131,651 886,125 876,829 24,188 950 23,238 13,942 9,296 1.0% $ 2,383,324 $ 2,066,659 344,785 0.3% 374,844 2,008,480 1,131,651 1,721,874 959,307 316,665 30,059 286,606 172,344 876,829 762,567 114,262 1.2% 1.2% 1.1% 15.3% 8.7% 16.6% 18.0% 15.0% percentage of revenue 43.61% 43.66% 43.66% 44.29% Selling, general and administrative expenses2 767,079 756,936 10,143 1.3% 756,936 654,993 101,943 15.6% SG&A as a percentage of revenue Income before net finance costs and income tax expense2 Net finance costs2 Income before income taxes2 Income tax expense2 37.76% 37.69% 37.69% 38.04% 119,046 17,627 101,419 24,790 119,893 16,759 103,134 27,610 (847) 868 (1,715) (2,820) 1,105 (0.7%) 5.2% (1.7%) (10.2%) 119,893 16,759 103,134 27,610 107,574 14,304 93,270 24,878 1.5% $ 75,524 $ 68,392 12,319 2,455 9,864 2,732 7,132 11.5% 10.6% 11.0% 10.4% Net income2 $ 76,629 $ 75,524 Net income as a percentage of revenue 3.77% 3.76% 3.76% 3.97% Basic weighted average number of common shares Basic earnings per share2 Diluted weighted average 71,217,958 70,898,590 1.07 $ 1.08 $ number of common shares Diluted earnings per share2 82,364,539 82,177,519 0.96 $ 0.97 $ Common share 0.01 0.01 70,898,590 70,612,407 0.97 1.07 $ 0.9% $ 82,177,519 79,818,914 0.89 0.96 $ 1.0% $ 0.10 10.3% 0.07 7.9% dividends declared $ 0.40 $ 0.40 $ 0.40 $ 0.40 1 Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information. 2 The Company’s results for the year ended December 31, 2013 include the results of The Brick as of the date of acquisition on March 28, 2013. Same Store Sales1 ($ in thousands, except %) Same store sales1 2015 2014 $ Increase % Increase For the year ended December 31 $ 2,011,251 $ 1,988,241 $ 23,010 1.2% 1 Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information. Year to Date Overall Performance Revenue For the year ended December 31, 2015, revenue was $2,031,718,000 compared to $2,008,480,000 for the prior year. Revenue increased $23,238,000 or 1.2% for the comparative year. saMe s toRe s ales Overall, same store corporate sales increased 1.2%. gRoss PRofit The gross margin for the year ended December 31, 2015 decreased slightly from 43.66% to 43.61% compared to the prior year. Since the beginning of the fiscal year there has been a significant weakening of the Canadian dollar. Currency hedging helped to minimize the effect of this on our gross profit margin. selling, geneRal anD aDMinistRative exPenses For the year, selling, general and administrative expenses of $767,079,000 were up $10,143,000 or 1.3% as compared to 2014. The increase was mainly the result of incremental selling costs as SG&A expenses as a percentage of revenue in 2015 were 37.76% as compared to 37.69% in the prior year. Additional marketing dollars were also spent in an attempt to generate higher consumer traffic into our stores. net incoMe anD eaRnings PeR shaRe As a result of the above, net income for the year was $76,629,000, $1.08 per common share ($75,524,000, $1.07 per common share in 2014), an increase of $0.01 per common share. 16 Leon’s Furniture Limited | 2015 Annual Report 4. SUMMARY OF CONSOLIDATED QUARTERLY RESULTS The table below highlights the variability of quarterly results and the impact of seasonality on the Company’s results. The Company’s profitability is typically lower in the first half of the year, since retail sales are traditionally higher in the third and fourth quarters. ($ in thousands, except per share amounts) Quarter Ended December 31 Quarter Ended September 30 Quarter Ended June 30 Quarter Ended March 31 2015 2014 2015 20141 2015 20141 2015 20141 Total system wide sales2 Franchise sales2 Revenue Net income Net income per share Fully diluted per share 108,065 552,055 $ 670,357 $ 660,120 $ 635,347 $ 629,152 $ 572,113 $ 561,438 $ 503,653 $ 508,400 82,391 110,128 426,009 560,229 1,336 $ 30,187 $ 29,914 $ 27,340 $ 27,287 $ 14,996 $ 16,987 $ 0.02 0.24 $ $ 0.02 0.21 $ $ 4,106 $ 0.06 $ 0.06 $ 80,616 423,037 97,217 538,130 87,832 484,281 97,467 531,685 86,921 474,517 0.38 $ 0.34 $ 0.21 $ 0.19 $ 0.42 $ 0.38 $ 0.42 $ 0.38 $ 0.38 $ 0.34 $ 1 Restated net income and earnings per share 2 Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information. 5. FINANCIAL POSITION ($ in thousands) Total assets Total non-current liabilities 1 Restated December 31, December 31, December 31, 2015 2014 20131 $ 1,583,463 543,455 $ $ 1,563,476 590,055 $ $ 1,565,356 628,114 $ assets Total assets at December 31, 2015 of $1,583,463,000 were $19,987,000 higher than the $1,563,476,000 reported at December 31, 2014. The principal components of this net change are the following: › $38,041,000 decrease in cash and cash equivalents › $5,661,000 increase in trade receivables › $24,920,000 increase in income taxes receivable › $37,333,000 increase in inventory › $10,834,000 decrease in property, plant and equipment The increase is primarily the result of the net change in cash and non-cash working capital of income taxes receivable and inventory. As well, there was the decrease in property, plant and equipment as a result of the depreciation being greater than the purchases of fixed assets. non-cuRRent liabilities Non-current liabilities of $543,455,000 were $46,600,000 lower than the $590,055,000 reported at December 31, 2014. The reduction is primarily tied to the Company further reducing its loans and borrowings by an equivalent amount. 6. LIQUIDITY AND CAPITAL RESOURCES The following table provides a summarized statement of cash flows for the quarters and years ended December 31, 2015 and December 31, 2014. Source (Use) of Cash ($ in thousands) Cash provided by operating activities before changes in non-cash working capital items Changes in non-cash For the three months ended December 31 For the year ended December 31 2015 2014 $ Increase (Decrease) 2015 2014 $ Increase (Decrease) $ 47,275 $ 46,029 $ 1,246 $ 132,909 $ 132,808 $ 101 working capital items (20,600) 4,589 (25,189) (74,426) 19,180 (93,606) Cash provided by operating activities Investing activities Financing activities Increase (decrease) in cash 26,675 (9,508) (36,492) 50,618 (10,313) (32,090) (23,943) 805 (4,402) 58,483 (24,509) (72,015) 151,988 (19,963) (119,916) (93,505) (4,546) 47,901 and cash equivalents $ (19,325) $ 8,215 $ (27,540) $ (38,041) $ 12,109 $ (50,150) 17 Management’s Discussion & Analysis cash flow (useD in) financing activities Financing Activities consist primarily of cash used to pay dividends and the loans and borrowings used to acquire The Brick. In the fourth quarter of 2015 financing activities changed by $4,402,000 compared to the prior year’s quarter. The change relates to the reduction of the Company’s loans and borrowings. In fiscal 2014, cash used in financing activities of $72,015,000 decreased $47,901,000 from fiscal 2014. The change relates to the repayment of the $15,000,000 debenture in 2014 and the accelerated principal repayments of the term loan in 2014. aDequacy of financial ResouR ces At December 31, 2015, the Company’s current assets exceeded its current liabilities by $65,419,000 and its cash and cash equivalents and available-for-sale financial assets were $30,819,000 compared to $68,258,000 at December 31, 2014. Under the Company’s Senior Secured Credit Agreement we had unused borrowing capacity of $99.5 million as at the end of both reporting periods of December 31, 2015 and 2014. The Company believes that its financing resources together with its continuing profitable results from operations will provide a sound liquidity and working capital position throughout the next twelve months. cash flow fR oM oPeRating a ctivities Cash from operating activities consist primarily of net income adjusted for certain non-cash items, including depreciation and amortization and the effect of changes in non-cash working capital items, primarily receivables, inventories, deferred acquisition costs, accounts payable, income taxes payable, customer deposits and deferred rent liabilities and lease inducements. In the fourth quarter of 2015 cash flow from operating activities decreased $23,943,000 compared to the prior year’s quarter. The decrease is the result of the change in non-cash working capital, primarily as a result of the changes in trade receivables, inventories and customer deposits. In fiscal 2015 cash provided by operating activities decreased $93,505,000 from fiscal 2014. The decrease is the result of the change in non-cash working capital, primarily as a result of the changes in inventories, income taxes receivable and income taxes payable. cash useD in investing activities Investing Activities relate primarily to capital expenditures and the purchase and sale of available- for-sale financial assets. In the fourth quarter of 2015 investing activities decreased $805,000 compared to the prior year’s quarter. The decrease is the result of the net of decreased purchases of fixed assets and intangibles and proceeds from the sale of marketable securities. In fiscal 2015 cash used in investing activities increased by $4,546,000 from fiscal 2014. The change is primarily the result of increased purchases of fixed assets in the amount of $6,194,000, increased purchases of intangibles in the amount of $1,202,000 and the offset of the increase of $4,240,000 from the proceeds of the sale of fixed assets. contRactual coMMitMents ($ in thousands) Payments Due by Period Contractual Obligations Total Under 1 year 1–3 years 3–5 years Long term debt Operating leases1 Trade and other payables Finance lease liabilities $ 422,016 $ 501,868 206,076 17,061 61,480 $ 85,192 206,076 2,729 247,830 $ 154,382 — 3,933 6,000 $ 107,035 — 3,818 More than 5 years 106,706 155,259 — 6,581 Total Contractual Obligations $ 1,147,021 $ 355,477 $ 406,145 $ 116,853 $ 268,546 1 The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada 18 Leon’s Furniture Limited | 2015 Annual Report 7. OUTLOOK Even though the economy remains soft, we expect to see a continuation of consistent profits in 2016, by improving same store sales, enhancing e-commerce sales, maintaining gross margins and continuing to drive efficiencies that will result from the continued integration of The Brick. 8. OUTSTANDING COMMON SHARES At December 31, 2015, there were 71,403,949 common shares issued and outstanding. During the year ended December 31, 2015, 251,080 convertible, non-voting series 2005 shares and 95,984 convertible non-voting series 2009 shares were converted into common shares. For details on the Company’s commitments related to its redeemable shares please refer to note 15 of the 2015 consolidated financial statements. 9. RELATED PARTY TRANSACTIONS At December 31, 2015, we had no transactions with related parties as defined in IAS24 – Related Party Disclosures, except those pertaining to transactions with key management personnel in the ordinary course of their employment. 10. CRITICAL ASSUMPTIONS 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 available-foR -sale financial assets anD MaRketable secuRities The Company exercises judgment in the determination of whether there are objective indicators of impairment with respect to its available-for-sale financial assets and 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 PR oPeR ty, 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 gooD will 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. 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. 19 Management’s Discussion & AnalysisMateriality In preparing this MD&A and the information contained herein, management considers the likelihood that a reasonable investor would be influenced to buy or not buy, or to sell or hold securities of the Company if such information were omitted or misstated. This concept of materiality is consistent with the notion of materiality applied to financial statements and contained in IFRS. Recent Accounting Pronouncements accounting stanDaRDs anD aMenDMents issueD but not yet aDoPteD In July 2014, the IASB issued the final amendments to IFRS 9, Financial Instruments (“IFRS 9”), which provides guidance on the classification and measurement of financial assets and liabilities, impairment of financial assets, and general hedge accounting. The classification and measurement portion of the standard determines how financial assets and financial liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis. The amended IFRS 9 introduced a new, expected-loss impairment model that will require more timely recognition of expected credit losses. In addition, the amended IFRS 9 includes a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new standard is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is in the process of evaluating the impact of adopting these amendments on the Company’s consolidated financial statements. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), was issued in May 2014, which will replace IAS 11, Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue – Barter Transactions Involving Advertising Services. IFRS 15 provides a single, principles based five- step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17, Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, Consolidated Financial Statements and IFRS 11, Joint Arrangements (“IFRS 11”). In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity’s ordinary activities. IFRS 15 is required for annual periods beginning on or after January 1, 2018. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. In May 2014, the IASB issued amendments to IFRS 11 to address the accounting for acquisitions of interests in joint operations. The amendments address how a joint operator should account for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now requires that such transactions shall be accounted for using the principles related to business combinations accounting as outlined in IFRS 3, Business Combinations. The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. The Company is in the process of evaluating the impact of adopting this amendment may have on the Company’s consolidated financial statements. In May 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment (“IAS 16”) and IAS 38, Intangible Assets (“IAS 38”) to clarify acceptable methods of depreciation and amortization. The amended IAS 16 eliminates the use of a revenue-based depreciation method for items of property, plant and equipment. Similarly, amendments to IAS 38 eliminate the use of a revenue-based amortization model for intangible assets except in certain specific circumstances. The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. The Company is in the process of evaluating the impact of adopting these amendments on the Company’s consolidated financial statements. IAS 1, Presentation of Financial Statements, was amended in December 2014 to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The Amendment is effective for years beginning on or after January 1, 2016. The Company is analyzing the new standard to determine its impact, if any, on the Company’s consolidated financial statements. In January 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases. The new standard will be effective for fiscal years beginning on or after January 1, 2019. Earlier application is permitted. Under the new standard, all leases will be on the balance sheet of lessees, except those that meet limited exception criteria. As the Company has significant contractual obligations in the form of operating leases (note 25) under the existing standard, there will be a material increase to both assets and liabilities upon adoption of the new standard. The Company is analyzing the new standard to determine its impact on the Company’s consolidated financial statements. aDoPtion of new, ReviseD oR aMenDeD accounting stanDaRDs The Company has adopted the amended International Financial Reporting Standards pronouncement listed below as at January 1, 2015, in accordance with the transitional provisions outlined in the respective standard. 20 Leon’s Furniture Limited | 2015 Annual ReportOperating Segments The Annual Improvements to IFRSs 2010–2012 included amendments to IFRS 8, Operating Segments. This standard has been amended to require (1) disclosure of judgments made by a company’s management in aggregating segments, and (ii) a reconciliation of segment assets to the entity’s assets when a measure of segment is reported to the Chief Operating Decision Maker. These amendments are effective for annual periods beginning on or after July 1, 2014. As at January 1, 2015, the Company adopted this pronouncement and there was no impact on the Company’s consolidated financial statements. through its retail stores, (v) the effectiveness of the Company’s marketing programs, (vi) the Company’s ability to successfully identify and respond to changes in fashion trends and consumer tastes in the household furniture, mattress, appliance and home electronics retailing industry, (vii) the Company’s ability to maintain cost effective delivery of its products, (viii) the Company’s ability to hire, train, manage and retain qualified retail store management and sales professionals, (ix) the Company’s ability to continuously improve its service to achieve new and enhanced customer benefits and better quality, and (x) general economic conditions and consumer confidence. 11. RISKS AND UNCERTAINTIES Careful consideration should be given to the following risk factors. These descriptions of risks are not the only ones facing the Company. Additional risks and uncertainties not presently known to Leon’s, or that the Company deems immaterial, may also impair the operations of the Company. If any of such risks actually occur, the business, financial condition, liquidity, and results of operations of the Company could be materially adversely affected. Readers of this MD&A are also encouraged to refer to Leon’s Annual Information Form (“AIF”) dated March 28, 2016 which provides information on the risk factors facing the Company. The March 28, 2016 AIF can be found online at www.sedar.com. Financial Condition of Commercial Sales Customers & Franchisees Through its commercial sales division, the Company sells products and extends credit to highrise and condominium builders who purchase large quantities of products. The Company also sells products and extends credit to its franchisees. Negative changes in the financial condition of a significant commercial sales customer or a franchisee could impact on the Company’s receivables and ultimately result in the Company having to take a bad-debt write-off in excess of allowance for bad debts. The occurrence of such an event could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations. Sensitivity to General Economic Conditions Competition The household furniture, mattress, appliance and home electronics retailing industry in Canada has historically been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. The Company’s sales are impacted by the health of the economy in Canada as a whole, and in the regional markets in which the Company operates. The Company’s sales and financial results are subject to numerous uncertainties, due to the last global economic crisis in 2008. Although the economy responded positively with a modest recovery in 2010 through to 2014, at present, the outlook for the retailing industry continues to remain uncertain, and weakness in sales or consumer confidence could continue resulting in an increasingly challenging operating environment. Maintaining Profitability & Managing Growth There can be no assurance that the Company’s business and growth strategy will enable it to sustain profitability in future periods. The Company’s future operating results will depend on a number of factors, including (i) the Company’s ability to continue to successfully execute its strategic initiatives, (ii) the level of competition in the household furniture, mattress, appliance and home electronics retailing industry in the markets in which the Company operates, (iii) the Company’s ability to remain a low-cost retailer, (iv) the Company’s ability to realize increased sales and greater levels of profitability The household furniture, mattress, appliance and home electronics retailing industry is highly competitive and highly fragmented. The Company faces competition in all regions in which its operations are located by existing stores that sell similar products and also by stores that may be opened in the future by existing or new competitors in such markets. The Company competes directly with many different types of retail stores that sell many of the products sold by the Company. Such competitors include (i) department stores, (ii) specialty stores (such as specialty electronics, appliance, or mattress retailers), (iii) other national or regional chains offering household furniture, mattresses, appliances and home electronics, and (iv) other independent retailers, particularly those associated with larger buying groups. The highly competitive nature of the industry means the Company is constantly subject to the risk of losing market share to its competitors. As a result, the Company may not be able to maintain or to raise the prices of its products in response to competitive pressures. In addition, the entrance of additional competitors to the markets in which the Company operates, particularly large furniture, appliance or electronics retailers from the United States could increase the competitive pressure on the Company and have a material adverse effect on the Company’s market share. The actions and strategies of the Company’s current and potential competitors could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations. 21 Management’s Discussion & Analysis12. CONTROLS AND PROCEDURES Disclosure Controls & Procedures Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management, including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public disclosure. Based on the evaluation of disclosure controls and procedures, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as at December 31, 2015. 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. As required by National Instrument 52-109 (“NI 52-109”), management, including the CEO and CFO, evaluated the design and operation of the Company’s internal control over financial reporting as defined in NI 52-109 as at December 31, 2015. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, the CEO and the CFO concluded that the Company maintained effective internal control over financial reporting as of December 31, 2015. Changes in Internal Controls 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, 2015 and ended on December 31, 2015 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. 22 Leon’s Furniture Limited | 2015 Annual ReportManag eM ent’s res p o n si b i lit y fo r fi nan c ial rep o rti n g 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. 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. “Terrence T. Leon” “Dominic Scarangella” Terrence T. Leon CEO Dominic Scarangella Executive Vice President and CFO 23 i n d epen d ent au d ito rs ’ rep o rt 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, 2015 and 2014, 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, 2015 and 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. “Ernst & Young LLP” Chartered Professional Accountants Licensed Public Accountants Toronto, Canada February 25, 2016 24 As at December 31 As at December 31 2015 2014 $ $ 7,859 18,691 22,960 117,832 24,920 303,961 8,329 473 45,900 18,310 22,358 112,171 — 266,628 4,957 923 $ 505,025 $ 471,247 6,214 13,093 323,218 18,496 318,214 390,120 9,083 6,192 11,093 334,052 21,992 321,302 390,120 7,478 $ 1,583,463 $ 1,563,476 $ 206,076 5,343 7,266 112,446 1,954 7,141 49,380 50,000 $ 197,044 4,576 34,773 97,705 2,002 7,105 51,111 30,000 $ 439,606 $ 424,316 237,357 92,628 11,895 95,775 880 8,858 96,062 285,363 91,773 13,849 92,254 401 6,794 99,621 $ 983,061 $ 1,014,371 $ $ 34,389 7,089 558,526 398 31,169 7,089 510,398 449 $ 600,402 $ 549,105 $ 1,583,463 $ 1,563,476 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($ in thousands) ASSETS Current assets Cash and cash equivalents [nOTES 5 AnD 22] Restricted marketable securities [nOTE 22] Available-for-sale financial assets [nOTE 22] 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 [nOTE 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 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: “Mark J. Leon” Mark J. Leon Director “Peter Eby” Peter Eby Director 25 CONSOLIDATED STATEMENTS OF INCOME ($ in thousands) Revenue [nOTE 17] Cost of sales [nOTE 6] Gross profit Selling, general and administrative expenses [nOTE 18] net finance costs [nOTE 19] 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 2015 2014 $ 2,031,718 1,145,593 $ 2,008,480 1,131,651 $ $ $ $ 886,125 767,079 119,046 (17,627) 101,419 24,790 876,829 756,936 119,893 (16,759) 103,134 27,610 $ 76,629 $ 75,524 71,217,958 82,364,539 70,898,590 82,177,519 $ $ $ $ 1.08 0.97 0.40 0.20 $ $ $ $ 1.07 0.96 0.40 0.20 26  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ in thousands) Years ended December 31 2015 Tax effect Net of tax 2015 Net income for the year $ 76,629 $ — $ 76,629 Other comprehensive income, net of tax Other comprehensive income to be reclassified to profit or loss in subsequent years: Unrealized losses on available-for-sale financial assets arising during the year Reclassification adjustment for net gains included in profit for the year Change in unrealized losses on available-for-sale financial assets arising during the year (77) 5 (72) (22) 1 (21) (55) 4 (51) Comprehensive income for the year $ 76,557 $ (21) $ 76,578 ($ in thousands) Years ended December 31 2014 Tax effect net of tax 2014 Net income for the year $ 75,524 $ — $ 75,524 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 losses included in profit for the year Change in unrealized gains on available-for-sale financial assets arising during the year 908 (453) 455 Comprehensive income for the year $ 75,979 $ The accompanying notes are an integral part of these consolidated financial statements. 175 (90) 85 85 733 (363) 370 $ 75,894 27  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY ($ in thousands) As at December 31, 2014 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] Total transactions with shareholders Equity component of convertible debentures Accumulated other Common comprehensive income (loss) shares Retained earnings Total $ 7,089 $ 31,169 $ 449 $ 510,398 $ 549,105 — — — — — — — — — — 3,220 3,220 — 76,629 76,629 (51) (51) — (51) 76,629 76,578 — — — (28,501) (28,501) — 3,220 (28,501) (25,281) As at December 31, 2015 $ 7,089 $ 34,389 $ 398 $ 558,526 $ 600,402 ($ in thousands) As at December 31, 2013 Comprehensive income net income for the year Change in unrealized gains on available-for-sale financial assets arising during the year Total comprehensive income Transactions with shareholders Dividends declared Management share purchase plan [nOTE 15] Total transactions with shareholders Equity component of convertible debentures Accumulated other comprehensive income (loss) Common shares Retained earnings Total $ 7,089 $ 27,352 $ 79 $ 463,244 $ 497,764 — — — — — — — — — — 3,817 3,817 — 75,524 75,524 370 370 — 75,524 370 75,894 — — — (28,370) (28,370) — 3,817 (28,370) (24,553) As at December 31, 2014 $ 7,089 $ 31,169 $ 449 $ 510,398 $ 549,105 The accompanying notes are an integral part of these consolidated financial statements. 28  CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) OPERATING ACTIVITIES net income for the year Add (deduct) items not involving an outlay of cash 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 and investment properties Loss (gain) on sale of available-for-sale financial assets net change in non-cash working capital balances related to operations [nOTE 26] Cash received on warranty plan sales Years ended December 31 2015 2014 $ 76,629 $ 75,524 33,694 8,044 (55,180) 17,627 (5,317) (1,072) 1,514 75,939 (74,426) 56,970 $ 35,431 7,289 (61,974) 16,759 (5,513) (126) (399) 66,991 19,180 65,817 $ Cash provided by operating activities $ 58,483 $ 151,988 INVESTING ACTIVITIES Purchase of property, plant and equipment and investment properties [nOTES 8 AnD 9] Purchase of intangible assets [nOTE 10] Proceeds on sale of property, plant and equipment and investment properties Purchase of available-for-sale financial assets Proceeds on sale of available-for-sale financial assets Interest received (22,756) (4,956) 4,464 (8,093) 5,524 1,308 (16,562) (3,754) 224 (12,801) 10,429 2,501 Cash used in investing activities $ (24,509) $ (19,963) FINANCING ACTIVITIES Repayment of finance leases Dividends paid Decrease of employee loans-redeemable shares [nOTE 15] Repayment of debenture [nOTE 14] Repayment of term loan [nOTE 14] Interest paid (1,936) (28,465) 3,699 — (30,000) (15,313) (1,949) (28,328) 3,358 (15,000) (60,000) (17,997) Cash used in financing activities $ (72,015) $ (119,916) Net (decrease) increase in cash and cash equivalents (bank overdraft) during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (38,041) 45,900 12,109 33,791 $ 7,859 $ 45,900 The accompanying notes are an integral part of these consolidated financial statements. 29 n otes to th e c o n so li dated fi nan c ial s tateM ents [Amounts in thousands of Canadian dollars, except share amounts and earnings per share] For the years ended December 31, 2015 and 2014 1. REPORTING ENTITY Functional and presentation currency 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. 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 25, 2016. Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for available- for-sale financial assets and derivative instruments and the initial recognition of assets acquired and liabilities assumed in business combinations, which are measured at fair value. 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. 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. 30 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. 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. 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, King and State Limited, Ablan Insurance Corporation, The Brick Ltd., The Brick Warehouse LP, United Furniture Warehouse LP, First Oceans Trading Corporation, and Trans Global Warranty Corporation. 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 The Company has two operating segments, Leon’s and The Brick, both in the business of the sale of home furnishings, mattresses, appliances and electronics in Canada. The Company’s chief operating decision- maker, identified as the Chief Executive Officer, monitors the results of operating segments for the purpose of allocating resources and assessing performance. Leon’s and The Brick operating segments are aggregated into a single reportable segment because they show a similar long-term economic performance, have comparable products, customers and distribution channels, operate in the same regulatory environment, and are steered and monitored together. Accordingly, there is no reportable segment information to provide in these consolidated financial statements. 31 Notes to the 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. 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 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; 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; and c) derivative instruments – financial assets which are classified as fair value through profit and loss. Classifications that the Company has used for financial liabilities include: 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; and b) derivative instruments – financial liabilities which are classified as fair value through profit and loss. 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. 32 Leon’s Furniture Limited | 2015 Annual Report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. Derivative instruments Financial derivative instruments in the form of interest rate swaps and foreign exchange forwards are recorded at fair value on the consolidated balance sheets. Fair values are based on quoted market prices where available from active markets, otherwise fair values are estimated using valuation methodologies, primarily discounted cash flows taking into account external market inputs. Derivative instruments are recorded in current or non-current assets and liabilities based on their remaining terms to maturity. All changes in fair value of the derivative instruments are recorded in net 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. 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 judgment. 33 Notes to the Consolidated Financial Statements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, any related rent escalations are factored into the determination of rent expense to be recognized over the lease term. 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. 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 is 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. 34 Leon’s Furniture Limited | 2015 Annual Report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. 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 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. 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. 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. 35 Notes to the Consolidated Financial StatementsProvisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of new shares are shown in equity as a deduction, net of income tax, from the proceeds. 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 7 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. 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. 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. 36 Leon’s Furniture Limited | 2015 Annual Report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. Any amount of unearned insurance revenue is included in the consolidated statements of financial position within deferred warranty plan 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, 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. 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. 37 Notes to the Consolidated Financial Statements4. ADOPTION OF ACCOUNTING STANDARDS AND AMENDMENTS Accounting standards and amendments issued but not yet adopted In July 2014, the IASB issued the final amendments to IFRS 9, Financial Instruments (“IFRS 9”), which provides guidance on the classification and measurement of financial assets and liabilities, impairment of financial assets, and general hedge accounting. The classification and measurement portion of the standard determines how financial assets and financial liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis. The amended IFRS 9 introduced a new, expected-loss impairment model that will require more timely recognition of expected credit losses. In addition, the amended IFRS 9 includes a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new standard is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is in the process of evaluating the impact of adopting these amendments on the Company’s consolidated financial statements. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), was issued in May 2014, which will replace IAS 11, Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue – Barter Transactions Involving Advertising Services. IFRS 15 provides a single, principles based five- step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17, Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, Consolidated Financial Statements and IFRS 11, Joint Arrangements (“IFRS 11”). In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity’s ordinary activities. IFRS 15 is required for annual periods beginning on or after January 1, 2018. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. In May 2014, the IASB issued amendments to IFRS 11 to address the accounting for acquisitions of interests in joint operations. The amendments address how a joint operator should account for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now requires that such transactions shall be accounted for using the principles related to business combinations accounting as outlined in IFRS 3, Business Combinations. The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. The Company is in the process of evaluating the impact of adopting this amendment may have on the Company’s consolidated financial statements. In May 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment (“IAS 16”) and IAS 38, Intangible Assets (“IAS 38”) to clarify acceptable methods of depreciation and amortization. The amended IAS 16 eliminates the use of a revenue-based depreciation method for items of property, plant and equipment. Similarly, amendments to IAS 38 eliminate the use of a revenue-based amortization model for intangible assets except in certain specific circumstances. The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. The Company is in the process of evaluating the impact of adopting these amendments on the Company’s consolidated financial statements. IAS 1, Presentation of Financial Statements, was amended in December 2014 to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The Amendment is effective for years beginning on or after January 1, 2016. The Company is analyzing the new standard to determine its impact, if any, on the Company’s consolidated financial statements. In January 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases. The new standard will be effective for fiscal years beginning on or after January 1, 2019. Earlier application is permitted. Under the new standard, all leases will be on the balance sheet of lessees, except those that meet limited exception criteria. As the Company has significant contractual obligations in the form of operating leases (note 25) under the existing standard, there will be a material increase to both assets and liabilities upon adoption of the new standard. The Company is analyzing the new standard to determine its impact on the Company’s consolidated financial statements. Adoption of new, revised or amended accounting standards The Company has adopted the amended International Financial Reporting Standards pronouncement listed below as at January 1, 2015, in accordance with the transitional provisions outlined in the respective standard. operating segMents The Annual Improvements to IFRSs 2010–2012 included amendments to IFRS 8, Operating Segments. This standard has been amended to require (i) disclosure of judgments made by a company’s management in aggregating segments, and (ii) a reconciliation of segment assets to the entity’s assets when a measure of segment is reported to the Chief Operating Decision Maker. These amendments are effective for annual periods beginning on or after July 1, 2014. As at January 1, 2015, the Company adopted this pronouncement and there was no impact on the consolidated financial statements. 38 Leon’s Furniture Limited | 2015 Annual Report5. CASH AND CASH EQUIVALENTS 7. DEFERRED ACQUISITION COSTS Cash at bank As at December 31 2015 2014 Balance at December 31, 2013 Costs of new policies sold Policy sales costs recognized $ 8,909 9,042 (1,901) and on hand $ 7,859 $ 45,900 Balance at December 31, 2014 $ 16,050 Cost of new policies sold Policy sales costs recognized 10,070 (4,698) Balance at December 31, 2015 $ 21,422 Reported as: Current non-current Balance at December 31, 2014 Current non-current Balance at December 31, 2015 $ $ $ $ 4,957 11,093 16,050 8,329 13,093 21,422 6. INVENTORIES The amount of inventory recognized as an expense for the year ended December 31, 2015 was $1,107,166 [2014 – $1,100,145], which is presented within cost of sales in the consolidated statements of income. There were no inventory write-downs [2014 – $717] recognized as an expense during 2015. There were $2,396 of inventory write- downs recognized in prior periods reversed [2014 – nil]. As at December 31, 2015, the inventory mark-down provision totalled $7,443 [2014 – $9,839]. 8. PROPERTY, PLANT AND EQUIPMENT Land Buildings Equipment Vehicles Building Improvements Leased Property Leased Equipment Total As at December 31, 2015: Opening net book value Additions Disposals Depreciation $ 84,133 $ 116,722 $ 41,904 $ 944 (26) — 416 (2) (6,140) 9,055 (41) (9,100) 8,379 $ 70,370 $ 10,647 $ 8,591 (62) (2,170) 3,440 — (13,744) — — (1,131) 1,897 $ 334,052 22,446 (131) (33,149) — — (864) Closing net book value 85,051 110,996 41,818 14,738 60,066 9,516 1,033 323,218 As at December 31, 2015: Cost Accumulated depreciation 85,051 — 228,864 (117,868) 103,640 (61,822) 36,663 (21,925) 142,776 (82,710) 12,626 (3,110) 2,954 (1,921) 612,574 (289,356) Net book value $ 85,051 $ 110,996 $ 41,818 $ 14,738 $ 60,066 $ 9,516 $ 1,033 $ 323,218 Land Buildings Equipment Vehicles Building Improvements Leased Property Leased Equipment Total As at December 31, 2014: Opening net book value Additions Disposals Depreciation $ 83,987 $ 122,077 $ 41,399 $ 146 — — 662 — (6,017) 8,612 (63) (8,044) 4,288 $ 86,295 $ 11,778 $ 5,453 1,477 — — (1,131) 2,883 $ 352,707 16,350 (98) (34,907) — — (986) (31) (1,331) (4) (17,398) Closing net book value 84,133 116,722 41,904 8,379 70,370 10,647 1,897 334,052 As at December 31, 2014: Cost Accumulated depreciation 84,133 — 228,452 (111,730) 95,026 (53,122) 29,565 (21,186) 139,779 (69,409) 12,626 (1,979) 2,954 592,535 (1,057) (258,483) Net book value $ 84,133 $ 116,722 $ 41,904 $ 8,379 $ 70,370 $ 10,647 $ 1,897 $ 334,052 Included in the above balances as at December 31, 2015 are assets not being amortized with a net book value of approximately $1,464 [2014 – $5,741], being construction in progress. Also included are fully depreciated assets still in use with a cost of $167,033 [2014 – $152,285]. 39 Notes to the Consolidated Financial Statements 9. INVESTMENT PROPERTIES As at December 31, 2015: Opening net book value Additions Disposal Depreciation Closing net book value As at December 31, 2015: Cost Accumulated depreciation net book value As at December 31, 2014: Opening net book value Additions due to acquisition Depreciation Closing net book value As at December 31, 2014: Cost Accumulated depreciation net book value Land Buildings Building Improvements Total $ $ 12,519 — (1,573) — 10,946 $ 8,798 — (1,625) (481) 6,692 $ 675 310 (63) (64) 858 21,992 310 (3,261) (545) 18,496 10,946 — 17,333 (10,641) 2,554 (1,696) 30,833 (12,337) $ 10,946 $ 6,692 $ 858 $ 18,496 $ $ 12,519 — — 12,519 $ 9,273 — (475) 8,798 $ 512 212 (49) 675 22,304 212 (524) 21,992 12,519 — 19,773 (10,975) 2,344 (1,669) 34,636 (12,644) $ 12,519 $ 8,798 $ 675 $ 21,992 The estimated fair value of the investment properties portfolio as at December 31, 2015 was approximately $44,800 [2014 – $47,696]. 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 $11,200. The remaining disclosed fair value of $33,600 was compiled internally by management based on available market evidence. 10. INTANGIBLE ASSETS AND GOODWILL Brand name Customer relationships and franchise non-compete agreement agreements Computer software Favourable lease agreements Total As at December 31, 2015: Opening net book value Additions Amortization $ 4,156 — (875) $ 266,750 — (250) $ 125 — (125) $ 11,946 4,956 (2,945) $ 38,325 — (3,849) $ 321,302 4,956 (8,044) Closing net book value 3,281 266,500 — 13,957 34,476 318,214 As at December 31, 2015: Cost Accumulated amortization 7,000 (3,719) 268,500 (2,000) 1,012 (1,012) 23,319 (9,362) 46,049 (11,573) 345,880 (27,666) net book value $ 3,281 $ 266,500 $ — $ 13,957 $ 34,476 $ 318,214 As at December 31, 2014: Opening net book value Additions Amortization $ 5,031 — (875) $ 267,000 — (250) $ Closing net book value 4,156 266,750 251 — (126) 125 $ 9,996 3,754 (1,804) $ 42,559 — (4,234) $ 324,837 3,754 (7,289) 11,946 38,325 321,302 As at December 31, 2014: Cost Accumulated amortization 7,000 (2,844) 268,500 (1,750) 1,012 (887) 18,363 (6,417) 46,049 (7,724) 340,924 (19,622) net book value $ 4,156 $ 266,750 $ 125 $ 11,946 $ 38,325 $ 321,302 Amortization of intangible assets is included within selling, general and administrative expenses on the consolidated statements of income. 40 Leon’s Furniture Limited | 2015 Annual Report 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 2015 2014 $ 245,000 21,000 $ 245,000 21,000 $ 266,000 $ 266,000 The Company currently has no plans to change The Brick store banners and expects these assets to generate cash flows over an indefinite future period. Therefore, these intangible assets are considered to have indefinite useful lives for accounting purposes. The Brick franchise agreements have expiry dates with options to renew. The Company’s intention is to renew these agreements at each renewal date indefinitely. The Company expects the franchise agreements and franchise locations will generate cash flows over an indefinite future period. Therefore, this asset is also considered to have an indefinite useful life. 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 $ As at December 31 2015 2014 $ — 500 — 3,281 34,476 13,957 250 750 125 3,906 38,325 11,946 $ 52,214 $ 55,302 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 Impairment tests As at December 31 2015 2014 $ 11,282 378,838 $ 11,282 378,838 $ 390,120 $ 390,120 The Company performed impairment tests of goodwill, brand and franchise agreements intangible as at December 31, 2015 and December 31, 2014 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, 2015 and December 31, 2014 were as follows: Growth rate Pre-tax discount rate 2015 2.0% 9.3% 2014 2.0% 9.5% The impairment tests performed resulted in no impairment of the goodwill as at December 31, 2015 and December 31, 2014. 41 Notes to the Consolidated Financial Statements 11. TRADE AND OTHER PAYABLES Trade payables Other payables 12. PROVISIONS As at December 31 2015 2014 $ 175,933 30,143 $ 117,666 79,378 $ 206,076 $ 197,044 Unpaid insurance claims Unpaid warranty claims Balance as at December 31, 2014 Provisions made during the year Provisions used during the year $ 1,662 217 (183) $ Balance as at December 31, 2015 $ 1,696 $ 101 99 — 200 $ Product returns 2,228 270 (590) $ Other 585 961 (7) $ Total 4,576 1,547 (780) $ 1,908 $ 1,539 $ 5,343 Unpaid insurance claims Product returns 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. 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. 13. FINANCE LEASE LIABILITIES Leasing arrangements The Company leases a distribution centre and vehicles under a number of finance lease agreements. The lease terms on the distribution centre and vehicles do not exceed 20 years and 8 years, respectively. The Company’s obligations under finance leases are secured by the leased assets. The Company’s distribution centre lease has renewal and escalation clauses as part of the general lease conditions. The escalation clauses expected to occur have been included in the determination of this finance lease liability. 42 Leon’s Furniture Limited | 2015 Annual Report Finance lease liabilities Finance lease liabilities are payable as follows: Future minimum lease payments 2,729 7,751 6,581 17,061 $ Interest 775 2,083 354 3,212 2015 Present value of minimum lease payments Future minimum lease payments $ $ 1,954 5,668 6,227 $ 2,893 8,552 8,508 13,849 19,953 $ Interest 891 2,488 723 4,102 1,954 11,895 $ 13,849 2014 Present value of minimum lease payments 2,002 6,064 7,785 15,851 2,002 13,849 $ 15,851 Less than one year Between one and five years More than five years $ Reported as: Current non-current 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 $92,628 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. Carrying value of convertible debentures as at December 31, 2013 Accretion expense for the year ended December 31, 2014 Carrying value of convertible debentures as at December 31, 2014 Accretion expense for the year ended December 31, 2015 Carrying value of convertible debentures as at December 31, 2015 $ 90,952 821 91,773 855 $ 92,628 The effective interest rate for the convertible debentures is 4.2% and includes accretion expense and semi-annual coupon payments. 43 Notes to the Consolidated Financial Statements Bank indebtedness On January 31, 2013, a Senior Secured Credit Agreement (“SSCA”) was obtained to fund the acquisition of The Brick. The SSCA 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, which includes a swing-line of $20,000. Under the terms of the SSCA amounts borrowed must be repaid in full by March 28, 2017. Bank indebtedness bears interest based on Canadian prime, London Interbank Offered Rate (“LIBOR”) and Bankers’ Acceptance (“BA”) 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 30-day Bankers’ Acceptance with a cost of borrowing of 3.17% that was renewed on December 31, 2015. The term credit facility is repayable in quarterly amounts ranging from $10,000 to $15,000. The Company can prepay without penalty amounts outstanding under the facilities at any time. The agreement includes a general security agreement which constitutes a lien on all personal property of the Company. In addition to this, there are financial covenants related to the credit facility. As at December 31, 2015 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 740,000 convertible, non-voting, series 2014 shares 880,000 convertible, non-voting, series 2015 shares Issued and fully paid nil series 2005 shares [December 31, 2014 – 251,080] 619,016 series 2009 shares [December 31, 2014 – 715,000] 233,616 series 2012 shares [December 31, 2014 – 247,896] 1,406,772 series 2013 shares [December 31, 2014 – 1,406,772] 740,000 series 2014 shares [December 31, 2014 – 740,000] 880,000 series 2015 shares [December 31, 2014 – nil] Less employee share purchase loans As at December 31 2015 2014 $ $ — 5,478 2,899 16,024 11,137 11,845 (46,503) 2,371 6,328 3,076 16,024 11,137 — (38,535) $ 880 $ 401 Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2005, 2009, 2012, 2013, 2014 and 2015 to allow them to acquire convertible, non-voting series 2005 shares, series 2009 shares, series 2012 shares, series 2013, series 2014 shares and series 2015 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, series 2014 and 2015 series share may be converted into one common share at any time after the third anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. The series 2005, series 2009, series 2012, series 2013, series 2014 and 2015 series shares are redeemable at the option of the holder for a period of one business day following the date of issue of such shares. The Company has the option to redeem the series 2005, series 2009 and series 2012 shares at any time after the fifth anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary of such issue. The Company has the option to redeem the series 2013, series 2014 and 2015 series shares at any time after the third anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary of such issue. The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends. The purchase prices of the shares are $9.44 per series 2005 share, $8.85 per series 2009 share, $12.41 per series 2012 share, $11.39 per series 2013 share, $15.05 per series 2014 share and $13.46 per series 2015 share. Dividends paid to holders of series 2005, 2009, 2012, 2013 and 2014 shares of approximately $676 [2014 – $624] have been used to reduce the respective shareholder loans. The preferred dividends are paid once a year during the first quarter. 44 Leon’s Furniture Limited | 2015 Annual Report During the year ended December 31, 2015, 251,080 series 2005 shares [2014 – 135,433] and 95,984 series 2009 shares [2014 – 286,743] were converted into common shares with a stated value of approximately $2,371 [2014 – $1,279] and $850 [2014 – $2,538], respectively. During the year ended December 31, 2015, the Company cancelled nil series 2009 shares [2014 – 6,722], 14,280 series 2012 shares [2014 – 20,812] and nil series 2013 shares [2014 – 43,228] in the amount of $nil [2014 – $59], $177 [2014 – $258] and $nil [2014 – $492], 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, 2015, the Company issued 880,000 series 2015 shares for proceeds of $11,845. In addition, the Company advanced non-interest bearing loans in the amount of $11,845 to certain of its employees to acquire these shares. 16. COMMON SHARES Authorized Unlimited common shares Issued 71,403,949 common shares [2014 – 71,056,885] As at December 31 2015 2014 34,389 31,169 During the year ended December 31, 2015, 251,080 series 2005 shares [2014 – 135,433] and 95,984 series 2009 shares [2014 – 286,743] were converted into common shares with a stated value of approximately $2,371 [2014 – $1,279] and $850 [2014 – $2,538], respectively. As at December 31, 2015, the dividends payable were $7,140 [$0.10 per share] and as at December 31, 2014 were $7,105 [$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 Year ended December 31 2015 2014 $ 1,955,264 20,233 43,335 11,461 1,425 $ 1,935,092 17,323 42,071 12,338 1,656 $ 2,031,718 $ 2,008,480 Year ended December 31 2015 2014 Depreciation of property, plant and equipment and investment properties Amortization of intangible assets Operating lease payments $ $ $ 33,694 8,044 91,945 $ $ $ 35,431 7,289 90,420 45 Notes to the Consolidated Financial Statements 19. NET FINANCE COSTS Interest expense on finance lease obligations Interest expense on term credit facilities and revolving credit facilities Interest expense on convertible debentures Finance income Total Year ended December 31 2015 2014 $ $ 925 14,247 3,855 (1,400) 1,017 13,387 4,443 (2,088) $ 17,627 $ 16,759 20. INCOME TAX EXPENSE (a) The major components of income tax expense for the years ended December 31 are as follows: Consolidated statements of income 2015 2014 Current income tax expense: Based on taxable income of the current year $ 30,107 $ 31,899 Deferred income tax expense: Origination and reversal of temporary differences Impact of change in tax rates/new tax laws (5,317) — (5,317) (3,702) (587) (4,289) Income tax expense reported in the consolidated statements of income $ 24,790 $ 27,610 (b) Reconciliation of the effective tax rates are as follows: Income before income taxes $ 101,420 $ 103,134 2015 2014 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 Tax expense relating to deferred rate reductions File/provided differences Remeasurement of deferred tax asset for rate changes Other Income tax expense reported in the 26,998 26.62% 27,331 26.50% 115 577 (620) 104 (2,384) 0.11% 0.57% (0.61%) 0.11% (2.35%) 437 — — (587) 429 0.42% — — (0.57%) 0.42% consolidated statements of income $ 24,790 24.45% $ 27,610 26.77% (c) Deferred income tax balances and reconciliation are as follows: (i) deferred income tax relates to the following: December 31 2015 December 31 2014 Deferred income tax assets (liabilities) Deferred tax assets Deferred tax liabilities $ 9,083 (96,062) Total deferred income tax assets (liabilities) $ (86,979) $ 7,478 (99,621) $ (92,143) 46 Leon’s Furniture Limited | 2015 Annual Report (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 Mark to market Net deferred income tax expense – Statements of income Movement in convertible debenture Net deferred income tax expense (benefit) – Equity $ $ Balance, beginning of year 1,285 (397) 4,528 (22,825) (74,506) 1,095 4,110 (5,387) 104 2,451 (45) (89,587) (2,556) (2,556) 2015 Expense (benefit) Consolidated Balance, end of year $ Other — — — — — — — — — (154) — $ 239 317 (1,860) 4,306 (3,078) 537 (418) 5,387 (25) 11 (98) (154) 5,318 — — — — 1,524 (80) 2,668 (18,519) (77,584) 1,632 3,692 — 79 2,308 (143) (84,423) (2,556) (2,556) Total deferred income tax expense (benefit) $ (92,143) $ (154) $ 5,318 $ (86,979) 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 Mark to market Net deferred income tax expense – Statements of income Movement in convertible debenture Net deferred income tax expense (benefit) – Equity Balance, beginning of year $ (484) $ (93) 6,727 (25,410) (74,933) 505 4,796 (7,470) 120 1,191 — (95,051) (2,556) (2,556) $ Other — — — — — — — — — 1,175 — Expense (benefit) 1,769 (304) (2,199) 2,585 427 590 (686) 2,083 (16) 85 (45) 1,175 4,289 — — — — 2014 Consolidated Balance, end of year $ 1,285 (397) 4,528 (22,825) (74,506) 1,095 4,110 (5,387) 104 2,451 (45) (89,587) (2,556) (2,556) Total deferred income tax expense (benefit) $ (97,607) $ 1,175 $ 4,289 $ (92,143) 47 Notes to the Consolidated Financial Statements 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 71,217,958 for the year ended December 31, 2015 [2014 – 70,898,590]. The following table reconciles the net income for the year and the number of shares for the basic and diluted earnings per share calculations: Year ended December 31 2015 2014 $ 76,629 $ 79,899 75,524 79,007 71,217,958 70,898,590 11,146,581 11,278,929 82,364,539 82,177,519 1.08 0.97 1.07 0.96 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 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. As at December 31, 2015: Measurement Total Carrying Amount Fair Value Fair Value Hierarchy Loans and receivables Cash and cash equivalents Trade receivables Available-for-sale Restricted marketable securities Available-for-sale financial assets Investment properties Derivative instruments Other assets Other financial liabilities Trade and other payables Provisions Finance lease liabilities Loans and borrowings Convertible debentures Redeemable share liability As at December 31, 2014: Loans and receivables Cash and cash equivalents Trade receivables Available-for-sale Restricted marketable securities Available-for-sale financial assets Investment properties Derivative instruments Other assets Other financial liabilities Trade and other payables Provisions Finance lease liabilities Loans and borrowings Convertible debentures Redeemable share liability Fair value Amortized cost Fair value Fair value Amortized cost $ $ $ $ 7,859 117,832 18,691 22,960 18,496 7,859 117,832 18,691 22,960 44,800 Level 1 Level 2 Level 1 Level 2 Level 3 Fair value 539 539 Level 2 $ Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost 206,076 5,343 13,849 287,357 92,628 880 Measurement Total Carrying Amount Fair value Amortized cost Fair value Fair value Amortized cost $ $ 45,900 112,171 18,310 22,358 21,992 $ $ $ 206,076 5,343 13,849 287,357 125,000 880 Fair Value 45,900 112,171 18,310 22,358 47,696 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Fair Value Hierarchy Level 1 Level 2 Level 1 Level 2 Level 3 Fair value 171 171 Level 2 Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost $ 197,044 4,576 15,851 315,363 91,773 401 $ 197,044 4,576 15,851 315,363 138,000 401 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 48 Leon’s Furniture Limited | 2015 Annual Report The fair value hierarchy of financial instruments measured at fair value, as at December 31, 2015, includes financial assets of $26,550, $141,331 and $44,800 for Levels 1, 2 and 3 respectively, and financial liabilities of nil, $638,505 and nil for Levels 1, 2 and 3, respectively. The carrying amounts of the Company’s trade receivables and trade and other payables approximate their fair values due to their short-term nature. The carrying amounts of the Company’s finance lease liabilities approximate their fair values because the interest rate applied to measure their carrying amount approximates current market interest rates. The carrying amounts of the Company’s loans and borrowings approximate their fair values since they bear interest at rates comparable to market rates at the end of the reporting period. The fair values of available-for-sale financial assets and restricted marketable securities that are traded in active markets are determined by reference to their quoted closing price or dealer price quotations at the reporting date. For financial instruments that are not traded in active markets, the Company determines fair values using a combination of discounted cash flow models and comparison to similar instruments for which market observable prices exist. As at December 31, 2015, the fair value of the convertible debentures was determined using their closing quoted market price (not in thousands of dollars) of $125.00 per $100.00 of face value [2014 – $138.00 per $100.00 of face value]. For the convertible debentures at December 31, 2015, fair value is calculated based on the face value of the convertible debentures of $100,000. The fair values of derivative assets and liabilities are estimated using industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market based observable inputs including interest rate curves, foreign exchange rates and forward and spot prices for currencies. The Company maintains a notional $100,000 [2014 – $100,000] in interest rate swaps that mature by the fourth quarter of 2019 on which it pays a fixed rate of 1.895% and currently receives 1 month BA rate. The Company also maintains other financial derivatives which comprise of foreign exchange contracts, with maturities that do not exceed past the fourth quarter of 2017. At December 31, 2015, a $539 [2014 – $171] unrealized receivable was recorded in other assets. 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 risks, 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. 49 Notes to the Consolidated Financial Statements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 2015 2014 $ $ 7,859 18,691 22,960 117,832 45,900 18,310 22,358 112,171 $ 167,342 $ 198,739 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, 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. As at December 31, 2015, 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 totaled $117,832 as at December 31, 2015 [2014 – $112,171]. 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 $4,827 as at December 31, 2015 [2014 – $2,950]. The Company’s provision for impairment of trade receivables, established through ongoing monitoring of individual customer accounts, was $1,959 as at December 31, 2015 [2014 – $1,969]. 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. 50 Leon’s Furniture Limited | 2015 Annual Report The following tables summarize the Company’s contractual maturity for its financial liabilities, including both principal and interest payments: Carrying Amount Contractual Cash Flows Under 1 Year 1–3 Years 3–5 Years More than 5 Years Remaining term to maturity As at December 31, 2015: Trade and other payables Finance lease liabilities Loans and borrowings Convertible debentures Redeemable share liability $ 206,076 13,849 287,357 92,628 880 $ 206,076 17,061 300,311 121,707 880 $ 206,076 2,729 58,480 3,000 — $ — 3,933 241,831 6,000 — $ — 3,818 — 6,000 — $ — 6,581 — 106,707 880 $ 600,790 $ 646,035 $ 270,285 $ 251,764 $ 9,818 $ 114,168 Carrying Amount Contractual Cash Flows Under 1 Year 1–3 Years 3–5 Years More than 5 Years Remaining term to maturity As at December 31, 2014: Trade and other payables Finance lease liabilities Loans and borrowings Convertible debentures Redeemable share liability $ 197,044 15,851 315,363 91,773 401 $ 197,044 19,953 341,247 124,707 401 $ 197,044 2,893 60,591 3,000 — $ — 4,814 280,656 6,000 — $ — 3,738 — 6,000 — $ — 8,508 — 109,707 401 $ 620,432 $ 683,352 $ 263,528 $ 291,470 $ 9,738 $ 118,616 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, 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. The Company’s 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 and convertible debentures due to fluctuations in interest rates. Fair value risk related to the finance lease liabilities 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. (i) interest rate sensitivity analysis 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, 2015, the Company’s average indebtedness under the term credit facility was $305,000 [2014 – $350,000] and under the revolving credit facility was $10,500 [2014 – nil]. Accordingly, a change during the year ended December 31, 2015 of a one percentage point increase or decrease in the applicable interest rate would have impacted the Company’s net income by approximately $2,385 [2014 – $2,573]. (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. 51 Notes to the Consolidated Financial Statements (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 (“TGLI”) 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 (“TGI”) 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 Current portion of finance lease liabilities Current portion of loans and borrowings Convertible debentures Finance lease liabilities Loans and borrowings Total shareholders’ equity Total capital under management (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. 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 not changed from the prior fiscal year. The capital structure currently includes finance lease liabilities, convertible debentures, term credit facility and borrowing capacity available under the revolving credit facilities (note 14). As at December 31, 2015, $99,514 is available to draw on under our $100,000 revolving credit facility, as the borrowing capacity is reduced by ordinary letters of credit of $486 primarily with respect to buildings under construction or being completed [2014 – $525]. $ 2015 2014 $ 1,954 50,000 92,628 11,895 237,357 600,402 2,002 30,000 91,773 13,849 285,363 549,105 $ 994,236 $ 972,092 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, 2015. 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 and Trans Global Life Insurance Company 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. 52 Leon’s Furniture Limited | 2015 Annual Report 26. CONSOLIDATED STATEMENTS OF CASH FLOWS The net change in non-cash working capital balances related to operations consists of the following: Year ended December 31 2015 2014 $ (5,661) $ (37,333) (22) (8,528) 11,028 (1,222) Trade receivables Inventories Other assets Deferred acquisition costs (5,372) (7,141) Trade and other payables Provisions Income taxes payable/receivable Customers’ deposits Deferred rent liabilities and lease inducements 8,643 767 (52,253) 14,741 (3,603) (193) 22,601 4,096 2,064 2,142 $ (74,426) $ 19,180 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: Year ended December 31 2015 2014 Salaries and other short-term employee benefits $ 5,665 $ 5,280 28. COMPARATIVE FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2015 consolidated financial statements. 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, 2015, TGI’s Minimum Capital Test ratio was 472% [2014 – 634%], which is in compliance with the requirements of The Office of the Superintendent of Insurance of Alberta and the Act. As at December 31, 2015, TGLI’s Minimum Continuing Capital and Surplus Requirements ratio was 501% [2014 – 579%], which is in compliance with the requirements of The Office of the Superintendent of Insurance of Alberta and the Act. 25. COMMITMENTS AND CONTINGENCIES (a) The Company leases a number of retail stores and trucks under operating leases. Generally, the retail store 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 $ 85,192 261,417 155,259 $ 501,868 (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 $ 2,384 3,705 3,489 9,578 $ (c) (d) Pursuant to a reinsurance agreement relating to the extended warranty sales, the Company has pledged available-for-sale financial assets amounting to $18,691 [2014 – $18,310]. 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. 53 Notes to the Consolidated Financial Statements c o rp o r ate & s hareh o ld er i n fo rMati o n Board of Directors Officers Mark J. Leon Chairman of the Board Terrence T. Leon CEO Edward F. Leon President and COO Dominic Scarangella Executive Vice President and CFO John A. Cooney Vice President, Legal and Corporate Secretary 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 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 12, 2016 2:00 PM St. Andrew’s Club & Conference Centre 150 King St. W. 27th Floor Toronto, Ontario 54 Our customers can find everything we offer at our stores and more, including the same high standards for delivery, service and guaranteed pricing, through our growing online stores. leons.ca | thebrick.com | furniture.com 

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