TORONTO, May 13 /CNW/ - For the three months ended March 31, 2009, total Leon's sales were $195,200,000 including $42,675,000 of franchise sales ($196,441,000 including $41,864,000 of franchise sales in 2008), a decrease of 0.6%. Net income from operations for the first quarter 2009 was $8,571,000, 12 cents per common share ($9,933,000, 14 cents per common share in 2008), a decrease of 14.3% per common share. Total net income for the first quarter 2008 was $11,068,000 or 16 cents per common share when we include the after tax gain on sale of land ($1,135,000, 2 cents per common share).
In the first quarter of 2009, we experienced lower sales and profits when compared to the first quarter of 2008. This was somewhat anticipated in light of the economic slowdown that has taken place. We continue celebrating our 100th Anniversary with an active marketing campaign along with providing good consumer value. At the same time, we continue to look for ways to keep expenses in check. A major renovation to our Laval, Quebec showroom and warehouse store was just completed and a grand re-opening is scheduled for June 2009. Progress is well on its way at a new downtown Toronto, Ontario store known as the "Roundhouse" and we anticipate a grand opening this summer.
As previously announced, we paid a quarterly 7 cent dividend on April 6, 2009. Today we are happy to announce that the Directors have declared a quarterly dividend of 7 cents per common share payable on the 6th day of July 2009 to shareholders of record at the close of business on the 5th day of June 2009. As of 2007, dividends paid by Leon's Furniture Limited are "eligible dividends" pursuant to the changes to the Income Tax Act under Bill C-28, Canada.
EARNINGS PER SHARE FOR EACH QUARTER
-----------------------------------
YEAR
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL
-------- ------- -------- ------- -----
2009 - Basic 12 cents $0.12
- Fully Diluted 12 cents $0.12
2008 - Basic 16 cents 16 cents 25 cents 33 cents $0.90
- Fully Diluted 15 cents 16 cents 24 cents 32 cents $0.87
2007 - Basic 15 cents 14 cents 23 cents 31 cents $0.83
- Fully Diluted 15 cents 13 cents 22 cents 30 cents $0.80
LEON'S FURNITURE LIMITED
Mark J. Leon
Chairman of the Board
MANAGEMENT'S DISCUSSION AND ANALYSIS
May 13, 2009
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, 2009, Management's Discussion and Analysis for the year ended December 31, 2008, the audited consolidated financial statements for the year ended December 31, 2008 and the Company's Annual Information Form dated March 24, 2009.
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 100 years. The Company's 35 corporate and 28 franchise stores can be found in every province across Canada except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.
Revenues and Expenses
For the three months ended March 31, 2009, total Leon's sales were $195,200,000 including $42,675,000 of franchise sales ($196,441,000 including $41,864,000 of franchise sales in 2008), a decrease of 0.6%.
Leon's corporate sales of $152,525,000 in the first quarter of 2009, decreased by $2,052,000, or 1.3%, compared to the first quarter of 2008. The decrease in sales in the first quarter compared to the prior year was the result of a general economic slowdown which began in 2008. In order to offset declining consumer confidence, we ran a very active marketing campaign to coincide with the Company's 100th Anniversary. Although same store corporate sales were down by 1.3% compared to the prior year, we feel confident that we did increase our market share across the country.
Leon's franchise sales of $42,675,000 in the first quarter of 2009, increased by $811,000 or 1.9%, compared to the first quarter of 2008. The franchise division experienced strong sales increases in Eastern Canada, modest growth in Ontario and a significant decrease in Western Canada.
Our gross margin for the first quarter 2009 of 39.4% has decreased 1.1% from the first quarter 2008. We saw our gross margin on imported products lower in the quarter due to the weakening of the Canadian dollar resulting in higher product costs which were not all passed onto the consumer in light of a weakening economy.
Net operating expenses of $47,513,000 were up $216,000 or less than 1% for the first quarter 2009 compared to the first quarter 2008. Payroll and commission costs were down by 3.7% in the quarter compared to the prior year. The decrease was mainly the result of a planned effort to reduce payroll costs in response to our expectation of a slowdown in sales for 2009. Advertising expenses increased by $812,000 or 9.7% for the first quarter compared to the prior year. As previously mentioned, we are celebrating the Company's 100th Anniversary this year and as such have supported this celebration with an enhanced marketing campaign to capitalize on this once in a lifetime opportunity. In addition further marketing funds were employed in the quarter to help increase customer traffic given the economic slowdown. All other operating costs in the quarter were in line with the prior year first quarter.
As a result of the above, net income from operations for the first quarter 2009 was $8,571,000, 12 cents per common share ($9,933,000, 14 cents per common share in 2008), a decrease of 14.3% per common share. Total net income for the first quarter 2008 was $11,068,000 or 16 cents per common share when we include the after tax gain on sale of land ($1,135,000, 2 cents per common share).
Annual Financial Information
($ in thousands, except earnings
per share and dividends) 2008 2007 2006
Net Corporate Sales 740,376 637,456 591,286
Leon Franchise Sales 209,848 195,925 177,167
Total Leon sales 950,224 833,381 768,453
Net Income 63,390 58,494 53,602
Earnings per Share
Basic $ .90 $ .83 $0.76
Diluted $ .87 $ .80 $0.73
Total Assets 513,408 475,226 439,639
Common Share Dividends Declared $0.38 $0.2725 $0.375
Convertible, Non-Voting Shares Dividends
Declared $0.14 $0.14 $0.125
Liquidity and Financial Resources
($ in thousands, except dividends Mar. Dec. Mar.
per share) 31/09 31/08 31/08
Cash and marketable securities 126,139 139,275 121,447
Accounts receivable 17,967 30,291 21,258
Inventory 87,738 92,904 81,997
Total assets 485,867 513,408 467,556
Working capital 139,047 135,192 115,462
For the 3 months ended Current Prior Prior
Quarter Quarter Quarter
Mar. Dec. Mar.
31/09 31/08 31/08
Cash flow (used in) provided by operations (3,166) 16,359 468
Purchase of property, plant & equipment 1,903 7,161 1,606
Repurchase of capital stock 707 - 1,992
Dividends paid 4,952 4,943 5,279
Dividends paid per share $0.07 $0.07 $0.07
Cash and marketable securities decreased by $13,136,000 in the quarter mainly as a result of the reduction in year-end trade payables.
Marketable securities consist primarily of bonds with maturities not exceeding nine years with an interest rate range of 0.62% to 7.7% 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 $18,070,000.
Inventory decreased by $5,166,000 from the last quarter 2008 as we made a concentrated effort to reduce investing in light of the economic slowdown.
Renovations have commenced at our Barrie and Whitby, Ontario stores and are scheduled to be completed by this fall. A major renovation to our Laval, Quebec showroom and warehouse store has just been completed and grand re-opening is scheduled for June 2009. Progress is well on its way at a new downtown Toronto, Ontario store known as the "Roundhouse" and we plan a grand opening this summer. All funding for new store projects and renovations is scheduled to come from our existing cash resources.
Common Shares
At March 31, 2009 there were 70,692,910 common shares issued and outstanding. During the first quarter of 2009, 31,471 convertible, non-voting series 2002 shares were converted to common shares, and 83,700 common shares were repurchased at an average cost of $8.45 and cancelled by the Company, through a normal course issuer bid.
Commitments
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($ in thousands) 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) 26,588 1,880 6,301 6,036 12,371
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Purchase Obligations(2) 2,608 2,608 - - -
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Total Contractual
Obligations 29,196 4,488 6,301 6,036 12,371
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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 two
locations in Canada.
In addition, the Company has commitments related to redeemable shares as
follows:
As at As at
($ in thousands) March 31, 2009 December 31, 2008
Authorized
2,284,000 convertible, non-voting,
series 2002 shares
806,000 convertible, non-voting,
series 2005 shares
Issued
1,136,674 series 2002 shares
(2008 - 1,168,145) $ 8,170 $ 8,396
689,513 series 2005 shares
(2007 - 689,513) 6,510 6,511
Less employees share purchase loans (14,297) (14,622)
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Redeemable share liability $ 383 $ 285
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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 2002 and 2005 to allow them to acquire convertible, non-voting, 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 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. The series 2002 shares may 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 $7.19 per series 2002 share and $9.44 per series 2005 share.
Dividends paid to holders of series 2002 and 2005 shares of approximately $261,000 (2008 - $329,000) have been used to reduce the respective shareholder loans.
During the period, no convertible, non-voting series 1998 shares (2008 - 15,349) and 31,471 series 2002 shares (2008 - 110,047) were converted into common shares with a stated value of $nil and $226,000 (2008 - $67,000 and $794,000), respectively.
Quarterly Results (2009, 2008, 2007)
Quarterly Income Statement ($000) - except earnings per share
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Quarter Ended Quarter Ended
March 31 December 31
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2009 2008 2008 2007
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Leon's Corporate Sales 152,525 154,577 206,088 185,922
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Leon's Franchise sale 42,675 41,864 63,803 60,931
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Total Leon's sales 195,200 196,441 269,891 246,853
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Net Income Per Share $0.12 $0.16 $0.33 $0.31
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Fully Diluted Per Share $0.12 $0.15 $0.32 $0.30
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Quarter Ended Quarter Ended
September 30 June 30
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2008 2007 2008 2007
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Leon's Corporate Sales 202,985 165,791 176,726 147,000
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Leon's Franchise sale 56,219 50,434 47,962 43,437
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Total Leon's sales 259,204 216,225 224,688 190,437
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Net Income Per Share $0.25 $0.23 $0.16 $0.14
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Fully Diluted Per Share $0.24 $0.22 $0.16 $0.14
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Critical Accounting Policies and Estimates
Our significant accounting policies are contained in Note 1 to the consolidated financial statements for the year ended December 31, 2008. Certain of these policies involve critical accounting estimates because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.
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 2009 were basically flat when compared to the same period for 2008.
Inventories
During the first quarter of 2008, the Company implemented Section 3031, "Inventories" ("Section 3031"), which replaced Section 3030 of the same title. Section 3031 establishes that inventories should be measured at the lower of cost and net realizable value, with guidance on the determination of cost. The Company measures inventories at the lower of cost, determined on a first-in, first-out basis, and net realizable value.
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 selling prices.
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.
The Company's inventory amount encompasses one category which is goods purchased and held for resale in the ordinary course of business. The amount of inventory recognized as an expense of $90,151,000 (2008 - $89,938,000) is presented within cost of sales on the consolidated statements of income. There were inventory write-downs of $220,000 (2008 - $120,000) recognized as an expense during the period ended March 31, 2009. For the period ended March 31, 2009, the inventory markdown provision totalled $3,593,000 (2008 - $3,745,000). There were no reversals of any write-down for the period ended March 31, 2009. Furthermore none of the Company's inventory has been pledged as security for any liabilities of the Company.
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 2009 are $3,978,000 compared to $3,489,000 in 2008. Warranty expenses deducted through costs of goods sold year to date 2009 are $1,399,000 compared to $1,011,000 in 2008. The increase in warranty expenses over the prior period is related to the higher cost of electronic repairs.
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 2.2% for the first quarter 2009 compared to 2008 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.
Changes in Accounting Policy
(a) Accounting Standards Implemented in 2009
Section 3064 - Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted the new CICA accounting standard entitled, Section 3064 "Goodwill and Intangible Assets". Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of CICA 3064 had no impact on the Company's consolidated financial statements.
(b) Pending Changes to Accounting Policy
International Financial Reporting Standards ("IFRS")
The CICA has announced that Canadian GAAP for publicly accountable enterprises will be replaced with International Financial Reporting Standards (IFRS) over a transition period expected to end in 2011. We will begin reporting our financial statements in accordance with IFRS on January 1, 2011. We have begun planning our transition to IFRS. During 2009, the Company will be carrying out a diagnostic evaluation of all financial statement elements that would be impacted by the implementation of IFRS. The financial statement elements of the Company that can or will be impacted the most by the implementation of IFRS are property, plant and equipment, income taxes, stock-based compensation, business combinations and goodwill although we have not quantified that impact as at March 31, 2009. The Company anticipates completing this phase of its plan and implementing any changes required by this transition by December 31, 2009. The impact of the implementation of IFRS on the Company's information systems, internal control over financial reporting, disclosure controls and procedures or business activities has not been determined at this time.
Section 1582 - Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581, Business Combinations. This section establishes the standards for the accounting of business combinations, and states that all assets and liabilities of an acquired business will be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This new Section will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. The Company is currently assessing the future impact of this new standard on its financial statements.
Section 1601 - Consolidated Financial Statements
In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company is currently assessing the future impact of this new standard on its financial statements.
Disclosure Controls and Internal Control Over Financial Reporting
Based on the evaluation of disclosure controls and procedures, the CEO and the CFO have concluded that the Company's disclosure controls and procedures were effective as at March 31, 2009.
There have been no changes in the Company's internal control over financial reporting during the period ended on March 31, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Outlook
In the first quarter of 2009 we saw a slight decrease in same store sales from the prior year quarter. At this point we do not see any clear signs as to when we will see an economic turnaround. However, we plan to open our new "Roundhouse" store this year which should help reinforce sales. This will also be aided by a continuation of a robust marketing campaign to coincide with celebrating the Company's 100th Anniversary. However, even with these measures in place, growing sales and profits for the balance of this year will be very challenging. Despite these concerns, our strong financial position coupled with past experience in dealing with economic slowdowns allow us to look to the future with cautious optimism.
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: a continuing slowdown in the Canadian economy; a further drop in consumer confidence and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
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.
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Terrence T. Leon Dominic Scarangella
President & Chief Executive Vice President & Chief Financial
Officer Officer
Dated as of the 13th day of May, 2009.
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) 2009 2008
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ASSETS
Current
Cash and cash equivalents 32,393 39,483
Marketable securities 75,676 83,194
Restricted marketable securities 18,070 16,598
Accounts receivable 17,967 30,291
Income taxes recoverable 6,397 2,037
Inventory 87,738 92,904
Future tax assets 380 270
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Total current assets 238,621 264,777
Prepaid expenses 1,610 1,490
Goodwill 11,282 11,282
Intangibles 4,719 4,875
Other receivables 357 419
Future tax assets 10,892 10,752
Property, plant & equipment net 218,386 219,813
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485,867 513,408
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 64,622 95,247
Customers' deposits 14,523 14,119
Dividends payable 4,953 4,952
Deferred warranty plan revenue 15,476 15,267
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Total current liabilities 99,574 129,585
Deferred warranty plan revenue 21,561 21,712
Redeemable share liability 383 285
Future tax liabilities 8,818 8,468
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Total liabilities 130,336 160,050
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Shareholders' equity
Common shares 16,680 16,493
Retained earnings 341,910 338,960
Accumulated other comprehensive income (3,059) (2,095)
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Total shareholders' equity 355,531 353,358
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485,867 513,408
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended March 31st
($ in thousands) 3 months ended
2009 2008
Sales 152,525 154,577
Cost of sales 92,442 91,952
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Gross profit 60,083 62,625
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Operating expenses (income)
Salaries and commissions 24,244 25,170
Advertising 9,153 8,341
Rent and property taxes 2,844 2,977
Amortization 3,946 3,762
Employee profit-sharing plan 837 823
Other operating expenses 10,324 11,050
Interest income (852) (1,279)
Other income (2,983) (3,547)
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47,513 47,297
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Income before gain on sale of capital
property and income taxes 12,570 15,328
Gain on sale of capital property - 1,385
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Income before income taxes 12,570 16,713
Provision for income taxes 3,999 5,645
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Net income for the period 8,571 11,068
Retained earnings, beginning of the period 338,960 307,068
Dividends declared (4,953) (4,957)
Excess of cost of share repurchase
over carrying value of related shares (668) (1,972)
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Retained earnings, end of period 341,910 311,207
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Weighted average number of common
shares outstanding ('000's)
Basic 70,729 70,696
Diluted 71,871 72,219
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Earnings per share
Basic $0.12 $0.16
Diluted $0.12 $0.15
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Dividends declared per share
Common $0.07 $0.07
Convertible, non-voting - -
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended March 31th
($ in thousands)
Net
Tax of tax
2009 effect 2009
Net income for the period 8,571 - 8,571
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during the
period (1,130) (191) (939)
Reclassification adjustment for net gains
and (losses) included in net income (31) (6) (25)
Change in unrealized losses on
available-for-sale financial
assets arising during the period (1,161) (197) (964)
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Comprehensive income for the period 7,410 (197) 7,607
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Net
Tax of tax
2008 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
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three month period ended March 31st
($ in thousands) 3 months ended
2009 2008
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OPERATING ACTIVITIES
Net income for the period 8,571 11,068
Add (deduct) items not involving
a current cash payment
Amortization of property, plant
& equipment 3,790 3,762
Amortization of intangible assets 156 -
Amortization of deferred warranty
revenue (3,978) (3,489)
Loss (gain) on sale of marketable
securities 34 (568)
Future tax expense 298 1
Gain on sale of property, plant
& equipment (1) (1,387)
Cash received on warranty sales 4,036 3,692
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12,906 13,079
Net change in non-cash working capital
balances related to operations (16,072) (12,611)
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Cash (used in) provided by operating
activities (3,166) 468
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INVESTING ACTIVITIES
Purchase of property, plant & equipment (1,903) (1,606)
Proceeds on sale of property, plant
& equipment 2 2,425
Purchase of marketable securities (50,300) (38,799)
Proceeds on sale of marketable securities 55,152 47,148
Decrease in employee share purchase loans 324 640
Purchase of Appliance Canada Ltd. (1,540) (16,206)
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Cash provided by (used in) investing
activities 1,735 (6,398)
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FINANCING ACTIVITIES
Dividends paid (4,952) (5,279)
Repurchase of common shares (707) (1,992)
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Cash used in financing activities (5,659) (7,271)
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Net (decrease) in cash and cash equivalents
during the period (7,090) (13,201)
Cash and cash equivalents, beginning
of period 39,483 25,699
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Cash and cash equivalents,end of period 32,393 12,498
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PREPARATION
These unaudited interim consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles ("GAAP") for interim financial statements. They do
not include all of the disclosures required by Canadian generally
accepted accounting principles for annual financial statements and
accordingly, the interim financial information should be read in
conjunction with the Company's annual consolidated financial statements.
Except for the adoption of the accounting standards discussed in note 2
(a) below, the interim financial information has been prepared using the
same accounting policies as set out in note 1 to the consolidated
financial statements for the year ended December 31, 2008.
2. CHANGES IN ACCOUNTING POLICIES
(a) Accounting Standards Implemented in 2009
Section 3064 - Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted the new CICA accounting
standard entitled, Section 3064 "Goodwill and Intangible Assets". Section
3064 establishes standards for the recognition, measurement, presentation
and disclosure of goodwill and intangible assets. The adoption of CICA
3064 had no impact on the Company's consolidated financial statements.
(b) Pending Changes to Accounting Policy
International Financial Reporting Standards ("IFRS")
The CICA has announced that Canadian GAAP for publicly accountable
enterprises will be replaced with International Financial Reporting
Standards (IFRS) over a transition period expected to end in 2011. The
Company will begin reporting the financial statements in accordance with
IFRS on January 1, 2011. During 2009, the Company will be carrying out a
diagnostic evaluation of all financial statement elements that would be
impacted by the implementation of IFRS. The financial statement elements
of the Company that can or will be impacted the most by the
implementation of IFRS are property, plant and equipment, income taxes,
stock-based compensation, business combinations and goodwill although we
have not quantified that impact as at March 31, 2009. The Company
anticipates completing this phase of its plan and implementing any
changes required by this transition by December 31, 2009. The impact of
the implementation of IFRS on the Company's information systems, internal
control over financial reporting, disclosure controls and procedures or
business activities has not been determined at this time.
Section 1582 - Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations,
replacing Section 1581, Business Combinations. This section establishes
the standards for the accounting of business combinations, and states
that all assets and liabilities of an acquired business will be recorded
at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that
restructuring charges will be expensed in the periods after the
acquisition date. This new Section will be applicable to financial
statements relating to fiscal years beginning on or after January 1,
2011. The Company is currently assessing the future impact of this new
standard on its financial statements.
Section 1601 - Consolidated Financial Statements
In January 2009, the CICA issued Section 1601, Consolidated Financial
Statements, which replaces the existing standards. This section
establishes the standards for preparing consolidated financial statements
and is effective for fiscal years beginning on or after January 1, 2011.
The Company is currently assessing the future impact of this new standard
on its financial statements.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
As at March 31, 2009 accumulated other comprehensive income was comprised
of the unrealized losses on marketable securities of $3,692,000
($3,059,000 net of tax)
2009 2008
Balance, beginning of period $ (2,095) $ 917
Changes in unrealized (losses) gains on
available-for-sale financial assets
arising during the period (964) 124
Balance, end of period $ (3,059) $ 1,041
4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three
month period ending March 31, 2009 were $8,619,000 (2008 - $10,580,000).
5. SHARE CAPITAL
During the quarter, 83,700 common shares were repurchased (2008 -
171,200) on the open market pursuant to the terms and conditions of
Normal Course Issuer Bids at a net cost of approximately $707,000 (2008 -
$ 1,992,000). 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 $39,000 (2008 - $20,000). The excess net cost over the
carrying value of the shares of approximately $668,000 (2008 -
$1,972,000) has been recorded as a reduction in retained earnings.
During the quarter ended March 31, 2009, no convertible, non-voting,
series 1998 shares (2008 - 15,349) and 31,471 series 2002 shares (2008 -
110,473) were converted into common shares with a stated value of
approximately $nil and $226,000 (2008 - $67,000 and $ 794,000)
respectively.
Subsequent to the period end, the Company issued to certain employees
1,207,000 convertible, non-voting series 2009 shares at a total value of
$10,683,050.
6. CLASSIFICATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
As March 31, 2009, the classification of the Company's financial
instruments is as follows:
March 31, 2009
Other
Loans Financ-
Avail- and ial
able Receiv- Liabil-
Held for for ables ities Total
Trading Sale (amort- (amort- Carry-
Financial (fair (fair ized ized ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 32,393 - - - 32,393 32,393
Accounts receivable - - 17,967 - 17,967 17,967
Marketable
securities - 75,676 - - 75,676 75,676
Restricted
marketable
securities - 18,070 - - 18,070 18,070
Income taxes
recoverable - - 6,397 - 6,397 6,397
Other receivables - - 357 - 357 357
Financial
Liabilities
Accounts payable
and accrued
liabilities - - - 64,622 64,622 64,622
Redeemable share
liability - - - 383 383 383
December 31, 2008
Other
Loans Financ-
Avail- and ial
able Receiv- Liabil-
Held for for ables ities Total
Trading Sale (amort- (amort- Carry-
Financial (fair (fair ized ized ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 39,483 - - - 39,483 39,483
Accounts receivable - - 30,291 - 30,291 30,291
Marketable
securities - 83,194 - - 83,194 83,194
Restricted
marketable
securities - 16,598 - - 16,598 16,598
Income taxes
recoverable - - 2,037 - 2,037 2,037
Other receivables - - 419 - 419 419
Financial Liabilities
Accounts payable and
accrued liabilities - - - 95,247 95,247 95,247
Redeemable share
liability - - - 285 285 285
RISK MANAGEMENT
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 at this point in time, it has some credit risk
associated to its accounts receivable as it relates to the Appliance
Canada division. The majority of the Company's sales are paid through
cash, credit card or third party finance. The Company relies on two
third party credit suppliers to supply financing alternatives to our
customers.
ii) Liquidity risk
The Company has no outstanding debt and does not rely upon available
credit facilities to finance operations or to finance committed
capital expenditures. The portfolio of marketable securities consists
primarily of Canadian and International bonds for which there is
minimum exposure to U.S. financial companies affected by the credit
crisis and corporate failures. There is no immediate need for cash
from our investment portfolio.
Working capital requirements are expected to increase. Terms with our
suppliers are being reviewed and when there is an opportunity to
increase the purchase discount, we are making the offer to secure the
inventory supply.
iii) Foreign currency risk
The Company is exposed to foreign currency exchange rate risk. Some
merchandise is paid for in U.S. 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 U.S. dollars.
iv) Market price risk
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 accumulated other comprehensive income (note 3).
The risk is managed by ensuring a relatively 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.