TORONTO, May 12 /CNW/ - For the three months ended March 31, 2008, total Leon's sales (including Appliance Canada) were $196,441,000 including $41,864,000 of franchise sales ($179,797,000 including $41,054,000 of franchise sales in 2007), an increase of 9.3%. Net income was $11,068,000, 16 cents per common share ($10,793,000, 15 cents per common share in 2007), an increase of 6.7% per common share. Included in the first quarter 2008 was a $1,125,000, 1.6 cents per common share ($288,000, .4 cents per common share in 2007) after tax gain on sale of land.
We are pleased that our overall financial results in the first quarter of 2008 did improve compared to the first quarter 2007. Going forward we need to renew our emphasis on reducing expenses and improving store efficiencies. Renovations were completed at our existing stores in Calgary, Alberta and Kitchener, Ontario in the first quarter 2008 with successful grand re-openings occurring late in the quarter. Renovations have also commenced at our Nepean and London, Ontario stores and are scheduled to be completed by this fall. A major renovation to our Laval, Quebec showroom and warehouse store has just commenced and is scheduled to be complete by the spring of 2009. Progress is continuing with a new downtown Toronto, Ontario store known as the "Roundhouse" and we anticipate a grand opening in the late fall. We are pleased with the initial performance of Appliance Canada which was acquired effective January 1, 2008.
As previously announced, we paid a quarterly 7cents dividend on April 7, 2008 and a special 10 cents dividend on May 7, 2008. Today we are happy to announce that the Directors have declared a quarterly dividend of 7 cents per common share payable on the 7th day of July 2008 to shareholders of record at the close of business on the 6th day of June 2008.
EARNINGS PER SHARE FOR EACH QUARTER
-----------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 YEAR TOTAL
-------- ------- -------- ------- ---------
2008
- Basic 16 cents $0.16
- Fully Diluted 15 cents $0.15
2007
- Basic 15 cents 14 cents 23 cents 31 cents $0.83
- Fully Diluted 15 cents 13 cents 22 cents 30 cents $0.80
2006
- Basic 14 cents 12 cents 21 cents 29 cents $0.76
- Fully Diluted 14 cents 11 cents 20 cents 28 cents $0.73
LEON'S FURNITURE LIMITED
Terrence T. Leon
President & CEO
MANAGEMENT'S DISCUSSION AND ANALYSIS
May 12, 2008
Management's Discussion and Analysis should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the three months ended March 31, 2008, Management's Discussion and Analysis for the year ended December 31, 2007, the audited consolidated financial statements for the year ended December 31, 2007 and the Company's Annual Information Form dated March 14, 2008.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles and the amounts expressed are in Canadian dollars.
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. Accordingly, sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are effected by risks and uncertainties that could have a material impact on future prospects. Readers are cautioned that actual events and results will vary.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the Management's Discussion and Analysis ("MD&A") and the financial statements, and recommended the Board of Directors approve them. Following review by the full Board, the financial statements and MD&A were approved.
Introduction
Leon's Furniture Limited has been in the furniture retail business for close to 100 years. The Company's 35 corporate and 29 franchise stores can be found in every province across Canada. Main product lines sold at retail include furniture, appliances and electronics.
Revenues and Expenses
For the three months ended March 31, 2008, total Leon's sales were $196,441,000 including $41,864,000 of franchise sales ($179,797,000 including $41,054,000 of franchise sales in 2007), an increase of 9.3%.
Leon's corporate sales of $154,577,000 in the first quarter of 2008, increased by $15,834,000, or 11.4%, compared to the first quarter of 2007. The increase in sales in the first quarter compared to the prior year was the result of the business acquisition of Appliance Canada which took effect January 1, 2008. In the quarter we experienced slower sales across the country with same store corporate sales being down by 1.3% compared to the prior year. Major factors affecting retail sales in the first quarter were the severe weather we experienced in February, March 2008, the timing of Easter from the second quarter of 2007 to the first quarter of 2008 and the new Family Day holiday in Ontario which resulted in a majority of our stores closed an additional day this past February.
Leon's franchise sales of $41,864,000 in the first quarter of 2008, increased by $810,000 or 2.0%, compared to the first quarter of 2007. The franchise division experienced strong sales increases in Eastern Canada, a small decrease in Ontario and modest growth in Western Canada.
Our gross margin for the first quarter 2008 of 40.14% has decreased 1.8% from the first quarter 2007. The drop in gross margin was attributable to Appliance Canada sales whose margins are substantially lower than a typical Leon's store. Appliance Canada is involved in the wholesale of appliances to the building and apartment trade, as well as some retail of high end appliances to the public.
Net operating expenses of $46,717,000 were up $4,196,000 or 9.9% for the first quarter 2008 compared to the first quarter 2007. Payroll and commission costs were up 7.9% in the quarter compared to the prior year. The increase was the result of two key factors: the inclusion of Appliance Canada and the continuation of a trend started in 2007 where higher than normal wage cost increases continue in Western Canada where they have experienced a labour shortage due to the boom in the oil and gas industry. We saw advertising expenses increase by $ 770,000 or 10.2% for the first quarter compared to the prior year. Store for store advertising expenses were up slightly from the prior year and within budget. Additional advertising spending was the result of grand re-openings of newly renovated stores in Calgary, Alberta and Kitchener, Ontario in the first quarter 2008. All other operating costs in the quarter were in line with the prior year first quarter. Overall, operating costs as a percentage of sales were down slightly in the first quarter 2008 compared to the prior year.
As a result of the above, net income for the first quarter 2008 was $11,068,000, 16 cents per common share ($10,793,000, 15 cents per common share in 2007), an increase of 6.7% per common share. Included in the first quarter 2008 was a $1,125,000, 1.6 cents per common share ($288,000, .4 cents per common share in 2007) after tax gain on sale of land and building.
Annual Financial Information
($ in thousands, except earnings per share
and dividends) 2007 2006 2005
Net Corporate Sales 637,456 591,286 547,744
Leon Franchise Sales 195,925 177,167 173,043
Total Leon sales 833,381 768,453 720,787
Net Income 58,494 53,602 48,964
Earnings per Share
Basic $0.83 $0.76 $0.68
Diluted $0.80 $0.73 $0.65
Total Assets 475,226 439,639 381,702
Common Share Dividends Declared $0.2725 $0.375 $0.20
Convertible, Non-Voting Shares
Dividends Declared $0.14 $0.125 $0.10
Liquidity and Financial Resources
($ in thousands, except dividends
per share)
Mar. 31/08 Dec. 31/07 Mar. 31/07
Cash and marketable securities 121,447 142,279 96,726
Accounts receivable 21,258 33,684 13,471
Inventory 81,997 75,640 82,342
Total assets 467,556 475,226 414,462
Working capital 115,462 124,766 96,280
Current Prior Prior
Quarter Quarter Quarter
For the 3 months ended Mar. 31/08 Dec. 31/07 Mar. 31/07
Cash flow (used in) provided by
operations 468 26,974 (12,036)
Purchase of capital assets 1,606 4,221 7,827
Repurchase of capital stock 1,992 434 2,818
Dividends paid 5,279 5,602 4,427
Dividends paid per share $0.07 $0.07 $0.0625
Cash and marketable securities decreased by $20,832,000 in the quarter mainly as a result of the purchase of Appliance Canada.
Marketable securities consist primarily of bonds with maturities not exceeding ten years with an interest rate range of 3.36% to 7.6% and are stated at market value.
As part of the warranty reinsurance agreement with a subsidiary, the Company has pledged assets, which are part of the investment portfolio. The pledged assets are for the benefit of the primary insurance company for the purposes of insuring customer product warranty sales. The assets are in the form of a trust with a financial institution amounting to $15,360,000.
Inventory increased by $6,357,000 from the last quarter 2007. This is mainly the result of additional inventory associated with the acquisition of Appliance Canada.
Renovations were completed at our existing stores in Calgary, Alberta and Kitchener, Ontario in the first quarter 2008 with grand re-openings occurring late in the quarter for these two locations. Renovations have also commenced at our Nepean and London, Ontario stores and are scheduled to be completed by this fall. A major renovation to our Laval, Quebec showroom and warehouse store has just commenced and is scheduled to be complete by the spring of 2009. As previously mentioned, progress is continuing with a new downtown Toronto, Ontario store known as the "Roundhouse" and we anticipate a grand opening in the late fall. All funding for new store projects and renovations is scheduled to come from our existing cash resources.
Common Shares
At March 31, 2008 there were 70,668,154 common shares issued and outstanding. During the first quarter of 2008, 15,349 convertible, non-voting series 1998 shares and 110,473 convertible, non-voting series 2002 shares were converted to common shares, and 171,200 common shares were repurchased at an average cost of $11.63 and cancelled by the Company, through a normal course issuer bid.
Commitments
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Payments Due by Period 000's
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Less than 2-3 4-5 After
Contractual Obligations Total 1 year Years years 5 years
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Operating Leases(1) 14,227 1,376 3,504 3,486 5,861
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Purchase Obligations(2) 7,550 7,550
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Total Contractual
Obligations 21,777 8,926 3,504 3,486 5,861
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(1) The Company is obligated under operating leases to future minimum
annual rental payments for various land and building sites across
Canada.
(2) The estimated cost to complete construction in progress at one
location in Canada.
In addition, the Company has commitments related to redeemable shares as
follows:
($ in thousands)
As at As at
March 31, December 31,
2008 2007
Authorized
1,400,000 convertible, non-voting,
series 1998 shares
2,284,000 convertible, non-voting,
series 2002 shares
806,000 convertible, non-voting,
series 2005 shares
Issued
182,631 series 1998 shares (2007 - 197,980) $ 804 $ 871
1,287,099 series 2002 shares (2007 - 1,397,572) 9,251 10,045
806,000 series 2005 shares (2007 - 756,814) 7,146 7,146
Less employees share purchase loans (16,914) (17,882)
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Redeemable Share Liability $ 287 $ 180
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Under the terms of its Management Share Purchase Plan, the Company advanced non-interest bearing loans to certain of its employees in 1998, 2002 and 2005 to allow them to acquire convertible, non-voting, series 1998 shares, series 2002 shares and series 2005 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 1998, 2002 and 2005 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 series 1998 and 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to the tenth anniversary of such issue. The series 2005 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 shares at any time after the fifth anniversary date of the issue of these shares and must redeem 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 $4.40 per series 1998 share, $7.19 per series 2002 share and $9.44 per series 2005 share.
Dividends paid to holders of series 1998, 2002, 2005 shares of approximately $329,000 (2007 - $365,000) have been used to reduce the respective shareholder loans.
During the period 15,349 convertible, non-voting, series 1998 shares and 110,473 convertible non-voting series 2002 shares were converted into common shares with a stated value of $67,000 and $794,000 respectively (2007 - 32,206 1998 series for a stated value of $567,000, nil 2002 series).
Quarterly Results (2008, 2007, 2006)
Quarterly Income Statement ($000) - except Per Share Data
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Quarter Ended Quarter Ended
March 31 December 31
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2008 2007 2007 2006
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Leon's Corporate Sales $154,577 $138,743 185,922 $180,108
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Leon's Franchise sale 41,864 41,054 60,931 56,658
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Total Leon's sales 196,441 179,797 246,853 236,766
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Net Income Per Share $0.16 $0.15 $0.31 $0.29
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Fully Diluted Per Share $0.15 $0.15 $0.30 $0.28
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Quarter Ended Quarter Ended
September 30 June 30
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2007 2006 2007 2006
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Leon's Corporate Sales 165,791 $157,132 147,000 $134,028
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Leon's Franchise sale 50,503 $46,500 43,437 $39,054
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Total Leon's sales 216,294 $203,632 190,437 $173,082
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Net Income Per Share $0.23 $0.21 $0.14 $0.12
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Fully Diluted Per Share $0.22 $0.20 $0.14 $0.11
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Revenue Recognition
Sales are recognized as revenue for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customers' home.
The Company offers customers the option to finance purchases through various third party financing companies. In situations where a customer elects to take advantage of delayed payment terms, the costs of financing these sales are deducted from sales. Finance costs deducted from sales for the first quarter 2008 are up $102,000 when compared to the same period for 2007. These additional costs were the result of increased sales and higher finance rates.
Warranty Revenue
Warranty revenues are deferred and taken into income on a straight-line basis over the life of the warranty period. Warranty revenues included in sales year to date 2008 are $3,489,000 compared to $3,166,000 in 2007. Warranty expenses deducted through costs of goods sold year to date 2008 are $1,011,000 compared to $1,035,000 in 2007.
Franchise Royalties
Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisees gross sales. This royalty income is recorded by the Company on an accrual basis under the heading, "other income" and is up 2.7% for the first quarter 2008 compared to 2007 which is in line with the increase in franchise sales for the quarter.
Volume Rebates
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 goods sold as sales occur.
Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and
Presentation
In December 2006, the Canadian Institute of Chartered Accountants ("CICA") issued three new accounting standards: Section 1535, "Capital Disclosures" ("Section 1535"), Section 3862, "Financial Instruments - Disclosures" ("Section 3862") and Section 3863, "Financial Instruments - Presentation" (Section 3863").
Section 1535 establishes guidelines for the disclosure of information regarding a company's capital and how it is managed. The adoption of Section 1535 did not have an impact on the Company's results of operations or financial condition.
Section 3862 and Section 3863 replaced Section 3861, "Financial Instruments - Disclosure and Presentation". Section 3862 requires increased disclosures regarding the risks associated with financial instruments and how these risks are managed. Section 3863 carried forward standards for presentation of financial instruments and provides additional guidance for the classification of financial instruments, from the perspective of the issuer, between liabilities and equity. Comparative information about the nature and extent of risks arising from financial instruments is not required in the year Section 3862 is adopted. The adoption of Section 3862 and Section 3863 did not have an impact on the Company's results of operations or financial condition.
Inventories
During the first quarter of 2008, the Company also implemented Section 3031, "Inventories" ("Section 3031"), which replaced Section 3030 of the same title. Section 3031 provides guidance with respect to the determination of cost and requires inventories to be measured at the lower of cost and net realizable value. Costs such as storage costs and administrative overhead that do not contribute to bringing inventories to their present location and condition are specifically excluded from the cost of inventories and expensed in the period incurred. Reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories is now required. The cost of the inventories should be based on a first-in, first-out or a weighted average cost formula. Techniques used for the measurement of cost of inventories, such as the retail method may be used if the results approximate cost. The new standard also requires additional disclosures including the accounting policies used in measuring inventories, the carrying amount of the inventories, amounts recognized as an expense during the period, write-downs and the amount of any reversal of any write-downs recognized as a reduction in expenses. This new standard was adopted by the Company for its fiscal year starting on January 1, 2008 and had no impact on its financial position or results of operation.
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board will require all public companies to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Companies will be required to provide IFRS comparative information for the previous fiscal year. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter of 2011 when the Company will prepare both the current and comparative financial information using IFRS. The Company expects the transition to IFRS to impact financial reporting, business processes and information systems. The Company will assess the impact of the transition to IFRS and will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.
Accounting Estimates
Reserves for slow moving and damaged inventory are deducted in our evaluation of inventories. The reserve for slow moving inventory is based on many years of historic retail experience. The reserve is calculated by analyzing all inventory on hand older than one year. Damaged inventory is coded as such and placed in specific locations. The amount of damaged reserve is determined by specific product categories.
Disclosure Controls and Procedures
Leon's management evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as defined under Multilateral Instrument 52-109. The evaluation was performed under the supervision of Leon's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with Canadian securities regulatory authorities are recorded, summarized and reported in a timely fashion. The disclosure controls and procedures are designed to ensure that information required to be disclosed by Leon's in such reports is then accumulated and communicated to the CEO and the CFO, as appropriate, to allow timely decisions regarding required 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 March 31, 2008.
Internal Control Over Financial Reporting
Leon's management, under the supervision of the CEO and the CFO, has designed internal controls over financial reporting, as defined under Multilateral Instrument 52-109.
The purpose of internal controls over financial reporting is to provide reasonable assurance regarding the reliability of financial reporting, in accordance with GAAP, focusing in particular on controls over information contained in the annual and interim financial statements. The internal controls are not expected to prevent and detect all misstatements due to error or fraud.
There have been no changes in Leon's internal controls over financial reporting during the first quarter ended March 31, 2008, that have materially affected or are reasonably likely to materially affect Leon's internal control over financial reporting.
Outlook
In the first quarter of 2008 we saw a slight decrease in same store sales from the prior year quarter. However, overall sales did increase as a result of the Appliance Canada acquisition. Looking forward, we are concerned about the impact that a general slow down in the economy will have on our retail environment. That being said, we feel confident in our ability to increase sales for the balance of the year although at a somewhat reduced rate compared to the sales growth we experienced in 2007.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian generally accepted accounting principles.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the Management's Discussion and Analysis and the financial statements, and recommended the Board of Directors approve them. Following review by the full Board, the financial statements and MD&A were approved.
Forward-Looking Statements
This MD&A, in particular the section under heading "Outlook", includes forward-looking statements, which are not historic facts based on certain assumptions and reflect Leon's Furniture Limited's current expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: sudden slow down in the Canadian economy; drop in consumer confidence and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Leon's Furniture Limited
P.O. Box 1100, Stn. "B"
Weston, ON
M9L 2R8
Phone: (416) 243-4073 Fax: (416) 243-7890
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim financial statements of the company have been prepared by and are the responsibility of the company's management.
No auditor has performed a review of these financial statements.
--------------------------- --------------------------------
Terrence T. Leon Dominic Scarangella
President & Chief Executive Vice President & Chief Financial
Officer Officer
Dated as of the 12th day of May, 2008.
Leon's Furniture Limited-Meubles Leon Ltee
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
March 31 December 31
($ in thousands) 2008 2007
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ASSETS
Current
Cash and cash equivalents 12,498 25,699
Marketable securities 93,589 102,013
Restricted marketable securities 15,360 14,567
Accounts receivable 21,258 33,684
Income taxes recoverable 2,131 -
Inventory 81,997 75,640
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Total current assets 226,833 251,603
Prepaid expenses 1,437 1,282
Goodwill 16,782 -
Other receivables 635 -
Future tax assets 11,219 10,722
Capital assets, net 210,650 211,619
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467,556 475,226
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 77,361 92,051
Income taxes payable - 2,137
Customers' deposits 15,996 13,533
Dividends payable 4,957 4,949
Deferred warranty plan revenue 12,435 13,812
Future tax liabilities 622 355
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Total current liabilities 111,371 126,837
Deferred warranty plan revenue 20,645 19,124
Redeemable share liability 287 180
Future tax liabilities 8,144 7,080
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Total liabilities 140,447 153,221
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Shareholders' equity
Common shares 14,861 14,020
Retained earnings 311,207 307,068
Accumulated other comprehensive income 1,041 917
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Total shareholders' equity 327,109 322,005
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467,556 475,226
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CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended March 31st 3
($ in thousands) months ended
2008 2007
Sales 154,577 138,743
Cost of sales 92,532 80,501
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Gross profit 62,045 58,242
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Operating expenses (income)
Salaries and commissions 25,170 23,317
Advertising 8,341 7,571
Rent and property taxes 2,977 2,730
Amortization 3,762 3,377
Employee profit-sharing plan 823 913
Other operating expenses 10,470 9,603
Interest income (1,279) (1,251)
Other income (3,547) (3,739)
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46,717 42,521
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Income before gain on sale of capital property
and income taxes 15,328 15,721
Gain on sale of capital property 1,385 443
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Income before income taxes 16,713 16,164
Provision for income taxes 5,645 5,371
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Net income for the period 11,068 10,793
Retained earnings, beginning of the period 307,068 276,037
Dividends declared (4,957) (4,963)
Excess of cost of share repurchase over carrying
value of related shares (note 5) (1,972) (2,792)
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Retained earnings, end of period 311,207 279,075
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Weighted average number of common shares
outstanding ('000's) (note 7)
Basic 70,696 70,816
Diluted 72,219 73,604
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Earnings per share
Basic $0.16 $0.15
Diluted $0.15 $0.15
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Dividends declared per share
Common $0.07 $0.0625
Convertible, non-voting - -
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended March 31st
($ in thousands)
Net of tax
2008 Tax effect 2008
Net income for the period 11,068 11,068
Other comprehensive income, net of tax
Unrealized gains on available-for-
sale financial assets arising
during the period 775 132 643
Reclassification adjustment for net
gains and losses included in
net income (625) (106) (519)
Change in unrealized gains on
available-for-sale financial
assets arising during the period 150 26 124
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Comprehensive income for the period 11,218 26 11,192
-----------------------------------
-----------------------------------
Net of tax
2007 Tax effect 2007
Net income for the period 10,793 10,793
Other comprehensive income, net of tax
Unrealized gains on available-for-
sale financial assets arising
during the period 121 21 100
Reclassification adjustment for
net gains and losses included
in net income (1,266) (217) (1,049)
Change in unrealized (losses) on
available-for-sale financial
assets arising during the period (1,145) (196) (949)
-----------------------------------
Comprehensive income for the period 9,648 (196) 9,844
-----------------------------------
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three month period ended March 31st 3
($ in thousands) months ended
2008 2007
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OPERATING ACTIVITIES
Net income for the period 11,068 10,793
Add (deduct) items not involving a current
cash payment
Amortization of capital assets 3,762 3,377
Amortization of deferred warranty revenue (3,489) (3,166)
Loss (gain) on sale of marketable securities (568) (1,282)
Future tax expense 1 80
Loss (gain) on sale of capital assets (1,387) -
Cash received on warranty sales 3,692 3,389
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13,079 13,191
Net change in non-cash working capital balances
related to operations (12,611) (25,227)
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Cash provided by operating activities 468 (12,036)
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INVESTING ACTIVITIES
Purchase of capital assets (1,606) (7,827)
Proceeds on sale of capital assets 2,425 20
Purchase of marketable securities (38,799) (39,196)
Proceeds on sale of marketable securities 47,148 48,322
Decrease in employee share purchase loans 640 567
Purchase of Appliance Canada (16,206) -
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Cash used in investing activities (6,398) 1,886
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FINANCING ACTIVITIES
Dividends paid (5,279) (4,427)
Repurchase of capital stock (1,992) (2,818)
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Cash used in financing activities (7,271) (7,245)
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Net increase (decrease) in cash and cash
equivalents during the period (13,201) (17,395)
Cash and cash equivalents, beginning of period 25,699 28,172
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Cash and cash equivalents,end of period 12,498 10,777
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PREPARATION
The Company prepares its financial statements in accordance with
accounting principles generally accepted in Canada. The disclosures
contained in these unaudited interim consolidated financial statements do
not include all requirements of generally accepted accounting principles
for annual financial statements. The unaudited interim consolidated
financial statements should be read in conjunction with the annual
consolidated financial statements for the year ended December 31, 2007.
These interim consolidated financial statements were prepared following
the same policies and standards as in the most recent annual consolidated
financial statements.
2. Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure
and Presentation
In December 2006, the Canadian Institute of Chartered Accountants
("CICA") issued three new accounting standards: Section 1535, "Capital
Disclosures" ("Section 1535"), Section 3862, "Financial Instruments -
Disclosures" ("Section 3862") and Section 3863, "Financial Instruments -
Presentation" (Section 3863").
Section 1535 establishes guidelines for the disclosure of information
regarding a company's capital and how it is managed. The adoption of
Section 1535 did not have an impact on the Company's results of
operations or financial condition.
Section 3862 and Section 3863 replaced Section 3861, "Financial
Instruments - Disclosure and Presentation". Section 3862 requires
increased disclosures regarding the risks associated with financial
instruments and how these risks are managed. Section 3863 carried forward
standards for presentation of financial instruments and provides
additional guidance for the classification of financial instruments, from
the perspective of the issuer, between liabilities and equity.
Comparative information about the nature and extent of risks arising from
financial instruments is not required in the year Section 3862 is
adopted. The adoption of Section 3862 and Section 3863 did not have an
impact on the Company's results of operations or financial condition.
Inventories
During the first quarter of 2008, the Company also implemented Section
3031, "Inventories" ("Section 3031"), which replaced Section 3030 of the
same title. Section 3031 provides guidance with respect to the
determination of cost and requires inventories to be measured at the
lower of cost and net realizable value. Costs such as storage costs and
administrative overhead that do not contribute to bringing inventories to
their present location and condition are specifically excluded from the
cost of inventories and expensed in the period incurred. Reversal of
previous write-downs to net realizable value when there is a subsequent
increase in the value of inventories is now required. The cost of the
inventories should be based on a first-in, first-out or a weighted
average cost formula. Techniques used for the measurement of cost of
inventories, such as the retail method may be used if the results
approximate cost. The new standard also requires additional disclosures
including the accounting policies used in measuring inventories, the
carrying amount of the inventories, amounts recognized as an expense
during the period, write-downs and the amount of any reversal of any
write-downs recognized as a reduction in expenses. This new standard was
adopted by the Company for its fiscal year starting on January 1, 2008
and had no impact on its financial position or results of operation.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
As at March 31, 2008 accumulated other comprehensive income was comprised
of the unrealized gain on marketable securities of $1,248,000 ($1,041,000
net of tax)
2008 2007
Balance, beginning of period $ 917 $ -
Cumulative impact of implementing new accounting
standards (net of income taxes $491,000) 2,392
Changes in unrealized gains on available-for-sale
financial assets arising during the period 124 (949)
Balance, end of $ 1,041 $ 1,443
4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three
month period ending March 31, 2008 were $10,580,061 (2007-$10,411,000).
5. COMMON SHARES
During the period, 171,200 common shares were repurchased (2007-222,800)
on the open market pursuant to the terms and conditions of Normal Course
Issuer Bids at a net cost of approximately $1,992,000 (2007-$2,818,000).
All shares repurchased by the Company pursuant to its Normal Course
Issuer Bids have been cancelled. The repurchase of common shares resulted
in a reduction of share capital in the amount of approximately $20,000
(2007-$26,000). The excess net cost over the carrying value of the shares
of approximately $1,972,000 (2007-$2,792,000) has been recorded as a
reduction in retained earnings.
During the quarter ended March 31, 2008, 15,349 convertible, non-voting,
series 1998 shares (2007- 128,824) and 110,473 convertible, non-voting,
series 2002 shares (2007-nil) were converted into common shares with
stated values of approximately $67,000 and $794,000 (2007- $567,000 and
nil) respectively.
6. CLASSIFICATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
As at March 31, 2008, the classification of the Company's financial
instruments is as follows:
March 31, 2008
Other
Finan-
Loans and cial
Avail- Receiv- Liabili-
Held able ables ties Total
for Trading for Sale (amorti- (amorti- Carry-
Financial (fair (fair zed zed ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 12,498 - - - 12,498 12,498
Accounts receivable - - 21,258 - 21,258 21,258
Marketable securities - 93,589 - - 93,589 93,589
Restricted marketable
securities - 15,360 - - 15,360 15,360
Income taxes
recoverable - - 2,131 - 2,131 2,131
Other receivables - - 635 - 635 635
Financial Liabilities
Accounts payable and
accrued liabilities - - - 77,361 77,361 77,361
Income taxes payable - - - - - -
Redeemable share
liability - - - 287 287 287
December 31, 2007
Other
Finan-
Loans and cial
Avail- Receiv- Liabili-
Held able ables ties Total
for Trading for Sale (amorti- (amorti- Carry-
Financial (fair (fair zed zed ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 25,699 - - - 25,699 25,699
Accounts receivable - - 33,684 - 33,684 33,684
Marketable securities - 102,013 - - 102,013 102,013
Restricted marketable
securities - 14,567 - - 14,567 14,567
Income taxes
recoverable - - - - - -
Other receivables - - - - - -
Financial Liabilities
Accounts payable and
accrued liabilities - - - 92,051 92,051 92,051
Income taxes payable - - - 2,137 2,137 2,137
Redeemable share
liability - - - 180 180 180
Risk of Management of Financial Instruments
The Company is exposed to various risks associated with its financial
instruments. These risks are summarized as credit risk, liquidity risk
and market risk. The significant risks for the Company's financial
instruments are:
i) Credit risk
The Company believes it has no significant credit risk associated to its
accounts receivable. The majority of the Company's sales are paid through
cash, credit card or third party finance.
ii) Liquidity risk
The Company has no outstanding debt and the accounts payable and accrued
liabilities are all current. As a result, the Company believes it has no
significant liquidity risk.
iii) Market risk
The Company is exposed to foreign currency exchange rate risk. Some
merchandise is paid for in United States dollars. The foreign currency
cost is included in the inventory cost. The Company does not believe it
has significant foreign currency risk with respect to its accounts
payable in United States dollars.
The Company is exposed to fluctuations in the market prices of its
marketable securities that are classified as available for sale. Changes
in the fair value of marketable securities are recorded, net of income
taxes, in other comprehensive income (note 3). The risk is managed by
ensuring a conservative asset allocation of bonds and equities.
7. CAPITAL MANAGEMENT
The Company defines capital as shareholders' equity. The Company's
objectives when managing capital are to:
- ensure sufficient liquidity to support its financial obligations and
execute its operating and strategic plans;
- maintain financial capacity and access to capital to support future
development of the business while taking into consideration current
and future industry, market and economic risks and conditions; and
- utilize short term funding sources to manage its working capital
requirements.