Leon's Furniture Limited - 2011 FIRST QUARTER

May 19, 2011 (Canada NewsWire Group) --

TORONTO, May 19 /CNW/ - For the three months ended March 31, 2011, total Leon's sales were $191,592,000 including $40,809,000 of franchise sales ($203,798,000 including $42,328,000 of franchise sales in 2010), a decrease of 6%. Net income from operations for the first quarter 2011 was $9,827,000, 14¢ per common share ($11,446,000, 16¢ per common share in 2010), a decrease of 12.5% per common share.

We ended up the first quarter of 2011 with lower sales and profits compared to the first quarter of 2010. The decrease in sales was due to both a reduction in the number of sales transactions but also a lower average sale than the prior year. We face a difficult economy, decreasing new housing starts and record consumer debt. We continue to look for innovations in order to help improve sales. At the same time, we are pleased with the efforts of our associates to improve productivity and control expenses.

We believe that we must become even more aggressive in the marketplace during 2011 in order to improve the performance of our Company going forward. Improved sales and productivity will be aided by the opening of four additional stores this year. We have begun construction on a new 84,000 sq. ft. facility in Regina, Saskatchewan with a scheduled grand opening for the fall of 2011. Leasehold improvements are well on their way for a new leased retail showroom and warehouse of 76,000 sq. ft. in Guelph, Ontario. In addition, leasing documents have been signed for a 40,000 sq. ft. retail store in Mississauga, Ontario and a 40,000 sq. ft. retail store in Rosemère, Quebec. We plan for grand openings of these new facilities in the fall of this year. Finally, we also plan to continue the renovation of our existing buildings with major renovations and additions to our Sault St. Marie and Sudbury stores later this year.

As previously announced, we paid a quarterly 9¢ dividend on April 4, 2011. Today we are happy to announce that the Directors have declared a quarterly dividend of 9¢ per common share payable on the 7^th day of July 2011 to shareholders of record at the close of business on the 7^th day of June 2011.  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

The quarter ended March 31, 2011 and all quarters for 2010 have been restated to IFRS while quarters reported for 2009 are as originally reported under Canadian GAAP.

LEON'S FURNITURE LIMITED

Mark J. Leon
Chairman of the Board

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three months ended March 31, 2011 and 2010

Dated: May 19, 2011

The following review and analysis of Leon's Furniture Limited's operations and financial position for the three months ended March 31, 2011 and 2010 should be read in conjunction with the audited consolidated financial statements of Leon's Furniture Limited for the year ended December 31, 2010, set forth in the Company's Annual Report for such year and incorporated by reference in the Company's Annual Information Form dated March 31, 2011.

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.

Financial Statements Governance Practice

Leon's Furniture Limited's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and the amounts expressed are in Canadian dollars. Per share amounts are calculated using the weighted average number of shares outstanding for the applicable period.

Leon's Furniture Limited 2010 financial results included in this Interim MD&A have been restated to an IFRS basis.

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 may 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 that 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 over 100 years. The Company's 39 corporate and 30 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, 2011, total Leon's sales were $191,592,000 including $40,809,000 of franchise sales ($203,798,000 including $42,328,000 of franchise sales in 2010), a decrease of 6%.

Leon's corporate sales of $150,783,000 in the first quarter of 2011, decreased by $10,687,000, or 6.6%, compared to the first quarter of 2010.  The decrease in sales in the first quarter compared to the prior year reflected a continuation of waning consumer confidence, a somewhat soft economy, decrease in housing starts and overall reduced consumer spending. Same store corporate sales decreased by 7.5% compared to the prior year.

Leon's franchise sales of $40,809,000 in the first quarter of 2011, decreased by $1,519,000 or 3.6%, compared to the first quarter of 2010. The franchise division experienced sales decreases in most regions of Canada.

Our gross margin for the first quarter 2011 of 41.6% decreased marginally from the first quarter 2010. Overall margins were down slightly in all major product categories compared to the first quarter of 2010.

Net operating expenses of $49,756,000 were down $1,906,000 or 3.7% for the first quarter 2011 compared to the first quarter 2010. General and Administrative expenses are down by 3.9% in the quarter compared to the prior year. The decrease was mainly the result of lower depreciation costs on buildings. Commencing with 2011, buildings are being depreciated over a useful life of 30 years which has resulted in a depreciation expense reduction of approximately $800,000 compared to the same quarter 2010. Selling and Marketing expenses were basically in line with the prior year. However, advertising expenses were up $750,000 compared to the prior year quarter, offset by lower commissions paid on less sales than the prior year. All other operating costs in the quarter were comparable with the prior year first quarter.

As a result of the above, net income from operations for the first quarter 2011 was $9,827,000, 14¢ per common share ($11,446,000, 16¢ per common share in 2010), a decrease of 12.5% per common share.

* The year ended 2010 has been restated to IFRS while years ended 2009 and 2008 are as originally reported under Canadian GAAP.

Liquidity and Financial Resources

This year, we have begun construction on a new 84,000 sq. ft. facility in Regina, Saskatchewan with a scheduled grand opening for the fall of 2011. Leasehold improvements are well on there way for a new leased premise of 76,000 sq. ft. in Guelph, Ontario. In addition, leasing documents have been signed for a 40,000 sq. ft. premise in Mississauga, Ontario and a 40,000 sq. ft. facility in Rosemère, Quebec. We plan for grand openings of these new facilities in the late fall of this year. Finally, we also plan to continue the renovation of our existing buildings with major renovations and additions to our Sault St. Marie and Sudbury stores later this year. At the present time, all funding for new store projects and renovations are scheduled to come from our existing cash resources.

Quarterly Results (2011, 2010, 2009)

Quarterly Income Statement ($000) - except per share data

The quarters ended March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010 have been restated to IFRS while quarters reported for 2009 are as originally reported under Canadian GAAP.

CHANGES IN ACCOUNTING POLICIES

Adoption of IFRS

Leon's Furniture Limited was required to prepare financial statements in accordance with IFRS starting with the interim financial statements for the quarter ended March 31, 2011. These statements required the 2010 results to be restated in accordance with IFRS.

Detailed notes on the changes to previously reported amounts are included in the notes to the unaudited condensed interim consolidated financial statements for the period ended March 31, 2011 which have been filed on SEDAR.

The following charts provide selected restated 2010 results by quarter.

Consolidated Net Income

CONTROLS AND PROCEDURES

Changes in Internal Control over Financial Reporting

There have been no changes in Leon's internal controls over financial reporting that occurred during the first quarter 2011, the most recent interim period, that materially affected, or are reasonably likely to materially affect, Leon's internal controls over financial reporting.

Outlook

In the first quarter of 2011 we saw a reduction in same store sales from the prior year quarter. We continue to see a slowdown in new housing starts and a general slowdown in consumer spending that we noted in 2010. At this point we do not see any clear signs as to when we will see a strong economic turnaround. However, to counter this, we continue to plan a very robust marketing and merchandising campaign for the balance of the year. In addition, we should see a boost in sales and improved productivity that will be aided by the opening of four additional stores this year. Even with these measures in place, growing profits for the balance of this year will be challenging. Despite this, our strong financial position coupled with our experience in adjusting to changing market conditions, provide us with the confidence to adapt to whatever economic conditions prevail.

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.

Dated as of the 19^th day of May, 2011.

Management's Responsibility for Financial Reporting

The accompanying condensed interim consolidated financial statements are the responsibility of management and have been approved by the Board of Directors.

The accompanying condensed interim 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 maintains systems of internal accounting and administrative controls of high quality, 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 condensed interim consolidated financial statements; assesses the adequacy of the internal controls of the Company; 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 condensed interim consolidated financial statements for issuance to the shareholders.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Tabular amounts in thousands of Canadian dollars except shares outstanding and earnings per share

For the three month periods ended March 31, 2011 and 2010

1. GENERAL INFORMATION

Leon's Furniture Limited was incorporated by Articles of Incorporation under the Business Corporations Act on February 28, 1969. Leon's Furniture Limited and its subsidiaries (the Company or Leon's) is a public company with its common shares listed on the Toronto Stock Exchange and is incorporated and domiciled in Canada. The address of the Company's head and registered office is 45 Gordon Mackay Road, Weston, Ontario, M9N 3X3.

Leon's is a retailer of home furnishings across Canada from Alberta to Newfoundland and Labrador. The Company owns a chain of 39 retail furniture stores operating as Leon's Furniture Home Furnishings Super Stores and 2 retail stores under the brand Appliance Canada. The Company has 25 franchisees operating 30 franchise stores.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these condensed interim consolidated financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated.

Basis of preparation

The Company prepares its condensed interim consolidated financial statements in accordance with Canadian generally accepted accounting principles (Canadian GAAP) as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (IFRS), and required publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Company has commenced reporting on this basis in these condensed interim consolidated financial statements.  In these condensed interim consolidated financial statements, the term Canadian GAAP refers to Canadian GAAP before adoption of IFRS.

These condensed interim consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB, and incorporate the requirements of IAS 34, Interim financial reporting, and IFRS 1, First-time adoption of IFRS. Subject to certain transition elections disclosed in note 21, the Company has consistently applied the same accounting policies in its opening IFRS consolidated statement of financial position at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 21 discloses the impact of the transition to IFRS on the Company's reported consolidated statement of financial positions, consolidated income statements, consolidated statements of comprehensive income and consolidated statements of cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company's Canadian GAAP consolidated financial statements for the year ended December 31, 2010. Comparative figures in these condensed interim consolidated financial statements have been restated to give effect to these changes.

The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and outstanding as of May 19, 2011, the date the Directors approved and authorized for issuance the condensed interim consolidated financial statements. Any subsequent changes to IFRS that are given effect in the Company's annual consolidated financial statements for the year ending December 31, 2011 could result in a restatement of these condensed interim consolidated financial statements, including the transition adjustments recognized on changeover to IFRS.

These condensed interim consolidated financial statements should be read in conjunction with the Company's Canadian GAAP annual consolidated financial statements for the year ended December 31, 2010.

The condensed interim consolidated financial statements have been prepared using the historical cost convention, as modified by certain financial assets measured at fair value through profit or loss.

The preparation of condensed interim consolidated financial statements in conformity with IFRS requires use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the condensed interim consolidated financial statements are disclosed in note 3.

Future changes in accounting policy and disclosure

Standards that are not yet effective and have not been early adopted by the Company

IFRS 9, Financial Instruments (IFRS 9), was issued by the IASB in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39, Financial Instruments - Recognition and Measurement (IAS 39), for debt instruments with a new mixed measurement model having only two categories: Amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where such equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.

Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39 except that fair value changes due to credit risk for liabilities designated at fair value through profit or loss would generally be recorded in other comprehensive income. This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company is currently assessing the impact of the standard and has not determined whether it will adopt the standard early.

Consolidation

The condensed interim consolidated financial statements include the assets and liabilities of Leon's Furniture Limited and its wholly owned subsidiaries, Murlee Holdings Limited, Leon Holdings (1967) Limited and Ablan Insurance Corporation as at March 31, 2011 and the results of these subsidiaries for the three month period then ended.

Subsidiaries are all those entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealized gains/losses on transactions between group companies are eliminated.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the President and Chief Executive Officer. The Company operates in one geographical segment (Canada) and one industry (sale of home furnishings, appliances and electronics). Accordingly, no segment information has been provided in these condensed interim consolidated financial statements.

Foreign currency translation

Foreign currency transactions

Foreign currency transactions are translated into the respective functional currencies of the Company's subsidiaries using the exchange rate at the dates of transactions. Merchandise imported from the United States and South East 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 income statement within cost of sales.

Changes in the fair value of available-for-sale financial assets denominated in foreign currencies are analyzed between translation differences resulting from changes in the amortized cost of the asset and other changes in the carrying amount of the asset. Translation differences related to changes in amortized cost are recognized in the consolidated income statement, and other changes in the carrying amount are recognized in other comprehensive income.

Functional and presentation currency

Items included in the condensed interim consolidated financial statements are measured using the currency of the primary economic environment in which the Company operates (the functional currency). These condensed interim 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.

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 income statement.

After initial recognition, financial assets are measured at their fair values except for loans and receivables which are measured at amortized cost using the effective interest method. After initial recognition, financial liabilities are measured at amortized cost except for financial liabilities at fair value through profit or loss which are measured at fair value.

The Company classifies its financial assets and liabilities according to their characteristics and management's choices and intentions related thereto for the purposes of ongoing measurement.

Classifications that the Company has used for financial assets include:

Classification choice that the Company has used for financial liabilities include:

Financial assets are derecognized if the Company's contractual rights to the cash flows from the financial assets expire or if the Company transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Financial liabilities are derecognized if the Company's obligations specified in the contract expire or are discharged or cancelled.

Impairment of financial assets

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The asset's carrying amount is reduced and the amount of the loss is recognized in the consolidated income statement.

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 income statement.

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.

Inventory

Inventory is 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 income statement, provided certain conditions are met.

Property, plant and equipment

Owned assets

Property, plant and equipment are initially recorded at cost.  Historical cost includes expenditure that is directly attributable to the acquisition of items. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the asset will flow to the Company and the cost can be measured reliably. Normal repair and maintenance expenditures are expensed as incurred.

Depreciation

Land and construction in progress are not depreciated. Depreciation on other assets is provided over the estimated useful lives of the assets using the following annual rates and methods:

The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. Residual values, method of depreciation and useful lives of items of property, plant and equipment are reviewed annually by the Company and adjusted if appropriate.

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other expenses in the consolidated income statement.

Leased assets - Leon's is the lessee

Leases that are not finance leases are classified as operating leases and the assets are not recognized on the Company's consolidated statement of financial position. Operating lease payments are recognized as an expense in the consolidated income statement on a straight line basis over the period of the lease.

Leased assets - Leon's is the lessor

Assets leased to third parties under operating leases are classified as investment property in the consolidated statement of financial position. They are depreciated over their expected useful lives on a basis consistent with similar owned investment property. Rental income (net of any incentives given to lessees) is recognized on a straight line basis over the period of the lease.

Investment property

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 property. Investment property is measured initially at its cost, including related transaction costs. After initial recognition, investment property is carried at cost and is depreciated over the estimated useful life of the property using the following annual rates and methods:

Land held by the Company and classified as investment property is not depreciated.

Subsequent expenditure on investment property is capitalized to the property's carrying amount only when it is probable that future economic benefits associated with the expenditure 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.

Intangible assets

Goodwill

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the tangible and intangible assets acquired, less liabilities assumed, based on their fair value.  Goodwill is assigned as of the date of the business acquisition. The Company assesses at least annually, or at any time if an indicator of impairment exists, whether there has been an impairment loss in the carrying value of goodwill and it is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units (CGUs), or groups of CGUs, that are expected to benefit from the business combination for the purpose of impairment testing. A group of CGUs represents the lowest level within the Company at which goodwill is monitored for internal management purposes.

Finite-lived intangible assets

Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives using the following annual rates:

The Company identifies and measures intangible assets acquired in business acquisitions and accounts for these assets separately from goodwill.

Impairment of non-financial assets

Property, plant and equipment and finite lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated recoverable amount of an asset is less than its carrying amount, the asset is written down to its estimated recoverable amount and an impairment loss is recognized in the consolidated income statement. The recoverable amount of an asset is the higher of its fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash inflows (cash-generating units).

Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

Income taxes

Income tax expense for the period comprises current and deferred income tax. Income tax is recognized in the consolidated income statement except to the extent it relates to items recognized in other comprehensive income or directly in equity in which case the related tax is recognized in equity. Levies other than income taxes, such as taxes on real estate, are included in occupancy expenses.

Current income tax

Current income tax expense is based on the results of the period as adjusted for items that are not taxable or not deductible. Current 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 statement 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 date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority where there is an intention to settle the balances on a net basis.

Trade and other payables

Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade and other payables are classified as current liabilities if payment is due within one year or less.

Provisions

Provisions are recognized only in those circumstances where the Company has a present legal or constructive obligation as a result of a past event, when it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation.

Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issuance of new shares are shown in equity as a deduction, net of income tax, from the proceeds.

Revenue recognition

Revenue comprises the fair value of consideration received or receivable for the sale of goods and services in the ordinary course of the Company's activities. Revenue is shown net of sales tax and financing charges. The Company recognizes revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Company.

In addition to the above general principles, the Company applies the following specific revenue recognition policies:

Sale of goods

Revenue from the sale of goods is recognized either when the customer picks up the merchandise ordered or when merchandise is delivered to the customer's home. Any payments received in advance of delivery are deferred and recorded as customers' deposits.

Extended warranty

The Company recognizes extended warranty plan revenue and costs on a straight-line basis over the contract period. The service costs associated with the warranty obligations are expensed as incurred.

Franchise fees

Leon's franchisees operate principally as independent owners. The Company charges each franchisee a royalty fee based on a percentage of the franchisee's gross revenue. This royalty income is recorded by the Company on an accrual basis and presented within revenue.

Rent on investment properties

Rental income arising on investment properties is accounted for on a straight-line basis over the lease term and is presented within revenue.

Sale of gift cards

Revenue from the sale of gift cards is recognized when the gift cards are redeemed and the customer purchases merchandise, or when the gift cards are no longer expected to be redeemed, based on an analysis of historical redemption rates. Payment received in advance of revenue recognition are deferred and recorded in a separate bank account.

Store pre-opening costs

Store pre-opening costs are expensed as incurred.

Earnings per share

Basic earnings per share have been calculated using the weighted average number of common shares outstanding during the period. 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 profit for the period. 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.

3. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are addressed below:

Revenue recognition

Revenue is recognized for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customer's home.

The Company offers the option to finance purchases through various third party financing companies. In situations where a customer elects to take advantage of delayed payment terms, the costs of financing this revenue is deducted from 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 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. The amount of reserve for damaged inventory is determined by specific product categories.

The amount of inventory recognized as an expense for the period ended March 31, 2011 was $85,873,000 (period ended March 31, 2010 - $91,134,000) which is presented within cost of sales on the consolidated income statements.

During the three month period ended March 31, 2011 there was $149,000 in inventory write-downs (period ended March 31, 2010 - $170,000). At March 31, 2011, the inventory markdown provision totaled $4,185,000 (At March 31, 2010 - $3,668,000). There were no reversals of any write-down for the period ended March 31, 2011 (period ended March 31, 2010 - nil). None of the Company's inventory has been pledged as security for any liabilities of the Company.

Extended warranty Revenue

Extended warranty revenue is deferred and taken into revenue on a straight-line basis over the life of the extended warranty period. Extended warranty revenue included in revenue for the three month period ended March 31, 2011 was $4,297,000 (For the three month period ended March 31, 2010 - $4,105,000). Extended warranty expenses deducted through cost of sales for the three month period ended March 31, 2011 were $1,307,000 (For the three month period ended March 31, 2010 - $1,376,000).

Franchise Royalties

Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisee's gross revenue. This royalty revenue is recorded by the Company on an accruals basis and is classified as revenue within the consolidated income statement.

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 in cost of goods sold as revenue is recognized.

Income taxes

The Company computes an income tax provision. 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 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 upon existing tax laws and estimates of future taxable income. To the extent estimates differ from the final tax return, earnings would be affected in a subsequent period.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value-in-use of the cash generating unit that the goodwill is included in. The value-in-use calculation requires the Company to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value. The significant estimates and assumptions used in the goodwill impairment tests performed at December 31, 2010 and January 1, 2010 are disclosed in note 9.

4. FINANCIAL RISK MANAGEMENT

Classification of financial instruments and fair value

The classification of the Company's financial instruments as well as their carrying amounts and fair values are disclosed in the table below.

For financial instruments recognized in the consolidated statement of financial position at fair value, the Company is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Fair Values are assessed as:

• Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis;
  
  
• Level 2 - Observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market date for substantially the full term of the assets or liabilities; and
  
  
• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents the Company's financial instruments recognized in the consolidated statement of financial position at fair value:

Risk management

The Company is exposed to various risks associated with its financial instruments. These risks are summarized as credit risk, liquidity risk, foreign currency risk, interest rate risk and other price risk. The significant risks for the Company's financial instruments are:

5. CAPITAL RISK MANAGEMENT

The Company defines capital as shareholders' equity. The Company's objectives when managing capital are to:

• ensure sufficient liquidity to support its financial obligations and execute its operating and strategic plans; and
• utilize working capital to negotiate favourable supplier agreements both in respect of early payment discounts and overall payment terms.

The Company is not subject to any externally imposed capital requirements.

6. CASH AND CASH EQUIVALENTS

7. PROPERTY, PLANT AND EQUIPMENT

All assets relating to March 31, 2011 are being depreciated. Included in the above balances for December 31, 2010 are assets not being amortized with a net book value of approximately $2,400,000 being construction-in-progress.

8. INVESTMENT PROPERTIES

Investment properties consist of the following:

The fair value of the Company's investment property portfolio as at March 31, 2011 was $29,748,701 [as at December 31, 2010 - $29,748,701]. The fair value was determined internally by management based on available market evidence.

9. INTANGIBLE ASSETS

Impairment test of goodwill

The Company performed impairment tests of goodwill at December 31, 2010 and January 1, 2010 in accordance with the accounting policy as described in note 2 and IFRS transitional provisions. The recoverable amount of the Appliance Canada cash generating unit (CGU), where all goodwill is allocated, was determined based on value-in-use calculations. These calculations used cash flow projections based on financial budgets approved by management covering a one year period. Cash flows beyond the one year period are extrapolated using the estimated growth rates stated below. The key assumptions used for the value-in-use calculation at December 31, 2010 and January 1, 2010 were as follows:

The impairment test performed resulted in no impairment of the goodwill at December 31, 2010 or January 1, 2010.

10. TRADE AND OTHER PAYABLES

11. PROVISIONS

Profit sharing and bonuses

The provision for profit sharing and bonuses is payable within four months of the finalization of the annual audited consolidated financial statements.

Vacation pay

The provision for vacation pay represents employee entitlements to untaken vacation at the consolidated statement of financial position date.

12. REDEEMABLE SHARE LIABILITY

Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005 and 2009 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares and series 2009 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, 2005 and 2009 share may be converted into one common share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. Series 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to the tenth anniversary of such issue. The series 2005 and series 2009 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 and series 2009 shares at any time after the fifth anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary of such issue. The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends. The purchase prices of the shares are $7.19 per series 2002 share, $9.44 per series 2005 share and $8.85 per series 2009 share.

Dividends paid to holders of series 2002, 2005 and 2009 shares of approximately $471,000 [2010 - $401,000] have been used to reduce the respective shareholder loans.

During the period ended March 31, 2011, 71,198 series 2002 shares [period ended March 31, 2010 - 57,583] and 45,986 series 2005 shares [period ended March 31, 2010 - nil] were converted into common shares with a stated value of approximately $512,000 [period ended March 31, 2010 - $414,000] and $434,000 [period ended March 31, 2010 - nil], respectively.

13. COMMON SHARES

During the three month period ended March 31, 2011, 71,198 series 2002 shares [period ended March 31, 2010 - 57,583] and 45,986 series 2005 shares [period ended March 31, 2010 - nil] were converted into common shares with a stated value of approximately $512,000 [period ended March 31, 2010 - $414,000] and $434,000 [period ended March 31, 2010 - $nil], respectively.

During the three month period ended March 31, 2011, the Company repurchased 51,274 [period ended March 31, 2010 - nil] of its common shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bids at a net cost of approximately $715,000 [period ended March 31, 2010 - nil]. 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 $6,000 [period ended March 31, 2010 - nil]. The excess net cost over the average carrying value of the shares of approximately $709,000 [period ended March 31, 2010 - nil] has been recorded as a reduction in retained earnings.

The dividends paid for the three month periods ended March 31, 2011 and March 31, 2010 were $6,310,000 [$0.09 per share] and $4,938,000 [$0.07 per share] respectively.

Income tax expense is recognized based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rates used for the three month periods ended March 31, 2011 and March 31, 2010 were 28.5% and 30.5%, respectively.

17. EARNINGS PER SHARE

Earnings per share are calculated using the weighted average number of shares outstanding. The weighted average number of shares used in the basic earnings per share calculations amounted to 70,148,298 for the three month period ended March 31, 2011 (three month period ended March 31, 2010 - 70,514,424).

The following table reconciles the profit for the period and the number of shares for the basic and diluted earnings per share calculations:

18. COMMITMENTS AND CONTINGENCIES

19. CONSOLIDATED STATEMENTS OF CASH FLOWS

20. RELATED PARTY TRANSACTIONS

Key management compensation

Key management includes the Directors and the five senior executives of the Company. The compensation expense paid to key management for employee services during each period is shown below:

21. TRANSITION TO IFRS

The Company's financial statements for the year ending December 31, 2011 will be the first annual financial statements that comply with IFRS and these condensed interim consolidated financial statements were prepared as described in note 2, including the application of IFRS 1. IFRS 1 requires an entity to adopt IFRS in its first annual financial statements prepared under IFRS by making an explicit and unreserved statement in those financial statements of compliance with IFRS. The Company will make this statement when it issues its 2011 annual financial statements.

IFRS 1 also requires that comparative financial information be provided. As a result, the first date at which the Company has applied IFRS was January 1, 2010 (the "Transition Date"). IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS standards as of the reporting date, which for the Company will be December 31, 2011. However, it also provides for certain optional exemptions and certain mandatory exceptions for first time IFRS adopters.

The effect of the Company's transition to IFRS is summarized in this note as follows:

The Company has applied the following transition exceptions and exemptions to full retrospective application of IFRS:

Business Combinations - In accordance with IFRS transitional provisions, the Company elected to apply IFRS relating to business combinations prospectively from January 1, 2010. As such, Canadian GAAP balances relating to the acquisition of Appliance Canada Ltd. on January 2, 2008, including goodwill, have been carried forward without adjustment.

Share-based Payments - In accordance with IFRS transitional provisions, the Company elected not to apply IFRS 2, Share-based Payments, to convertible shares issued under the Management Share Purchase Plan that were still outstanding at January 1, 2010 but had fully vested.

Estimates - Hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies.

21. APPROVAL OF THE FINANCIAL STATEMENTS

The condensed consolidated financial statements for the three months ended March 31, 2011 were approved and authorized for issuance by the Board of Directors on May 19, 2011.

Dominic Scarangella, Tel: 416.243.4073.