Leon's Furniture Limited - 2011 Second Quarter

TORONTO, Aug. 12, 2011 /CNW/ - For the three months ended June 30, 2011, total Leon's sales were $209,334,000 including $45,477,000 of franchise sales ($214,445,000 including $45,493,000 of franchise sales in 2010), a decrease of 2.4%. Net income was $11,144,000, 16¢ per common share ($12,300,000, 17¢ per common share in 2010), a decrease of 5.9% per common share.

For the six months ended June 30, 2011, total Leon's sales were $400,926,000 including $86,286,000 of franchise sales ($418,243,000 including $87,821,000 of franchise sales in 2010), a decrease of 4.1% and net income was $20,971,000, 30¢ per common share ($23,746,000, 33¢ per common share in 2010), a decrease of 9.1% per common share.

We closed out the second quarter of 2011 with lower sales and profits compared to the second quarter of 2010. The decrease in sales was mainly due to a lower average selling price than the prior year. We continue to face a difficult economy, with decreasing new housing starts and record consumer debt. We are pleased with the efforts of our associates to continue to find ways of improving productivity.

Sales and productivity will be aided by the opening of four additional stores this year. Leasehold improvements have just been completed on a new leased premises of 76,000 sq. ft. in Guelph, Ontario with a grand opening scheduled for late August 2011. Construction is well on its way on a new 84,000 sq. ft. facility in Regina, Saskatchewan with a scheduled grand opening for the fourth quarter of 2011. We are planning grand openings of new 40,000 sq. ft. stores in Mississauga, Ontario and Rosemère, Quebec scheduled to open in the fall of this year. We also plan to continue the renovation of our existing buildings with major renovations and additions to our Sault Ste. Marie and Sudbury stores later this year with work scheduled to be completed by the summer of 2012. Finally, we have signed a new Franchisee in Bathurst, New Brunswick which is scheduled to open under the Leon's banner in the fourth quarter of 2011.

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

The Directors have also approved, subject to obtaining regulatory approvals, the continuation of the Company's ongoing Normal Course Issuer Bid, which expires on September 9, 2011. Pursuant to the continued bid, the Company intends, in the twelve months commencing September 10, 2011, to purchase up to the lesser of 4.99% of its Common Shares outstanding on August 31, 2011, and the amount equal to 4.99% of its Common Shares outstanding on the date the Toronto Stock Exchange accepts the notice of intention to make a normal course issuer bid.

Since September 10, 2010, the date on which Leon's current issuer bid commenced, the Company has purchased 475,452 common shares at an average price of $13.71 per share.  The Company's Board of Directors believes that the purchase of its common shares is an appropriate use of its corporate funds, given its very strong financial position.

EARNINGS PER SHARE FOR EACH QUARTER

LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE

Mark J. Leon
Chairman of the Board

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three months ended June 30, 2011 and 2010

Dated: August 12, 2011

The following review and analysis of Leon's Furniture Limited's (the "Company") operations and financial position for the three months ended June 30, 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 June 30, 2011.

Cautionary Statement Regarding Forward-Looking Statements

This Management's Discussion and Analysis ("MDA") is intended to provide readers with the information that management believes is required to gain an understanding of Leon's Furniture Limited's current results and to assess the Company's future prospects. This MDA, and in particular the section under heading "Outlook", includes forward-looking statements, which are based on certain assumptions and reflect Leon's Furniture Limited's current plans and expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results and future prospects to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: a continuing slowdown in the Canadian economy; a further drop in consumer confidence; 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. Readers of this report are cautioned that actual events and results may vary.

Financial Statements Governance Practice

Leon's Furniture Limited's unaudited interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and incorporate the requirements of International Accounting Standards ("IAS") 34, Interim financial reporting and IFRS 1, First time adoption of IFRS. 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 MDA have been restated to an IFRS basis.

The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MDA and the unaudited interim condensed consolidated financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the unaudited interim condensed consolidated financial statements and MDA 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 June 30, 2011, total Leon's sales were $209,334,000 including $45,477,000 of franchise sales ($214,445,000 including $45,493,000 of franchise sales in 2010), a decrease of 2.4%.

Leon's corporate sales of $163,857,000 in the second quarter of 2011, decreased by $5,095,000, or 3.0%, compared to the second quarter of 2010.  The decrease in sales in the second quarter compared to the prior year reflected a continuation of waning consumer confidence, a decrease in housing starts, and an overall increase in consumer debt resulting in reduced consumer spending. Same store corporate sales decreased by 4.1% compared to the prior year. Comparable store sales are defined as sales generated by stores that have been open or closed for more than 12 months on a yearly basis.

Leon's franchise sales of $45,477,000 in the second quarter of 2011 are virtually the same as the second quarter of 2010. The franchise division experienced modest growth in Western and Eastern Canada and a decrease in Ontario.  

Our gross margin for the second quarter 2011 of 40.7% remained unchanged from the second quarter 2010.

Net operating expenses of $51,963,000 were up $248,000 or 0.5% for the second quarter 2011 compared to the second quarter 2010. General and administrative expenses were down by 1.1% in the quarter compared to the prior year's quarter. The decrease was mainly the result of lower depreciation costs on buildings. Commencing at the beginning of 2011, buildings are being depreciated over a useful life of 30 years which resulted in a depreciation expense reduction of approximately $700,000 compared to the same quarter 2010. Selling and marketing expenses were basically in line with the prior year. However, advertising expenses were up $300,000 compared to the prior year quarter, offset by lower commissions paid on reduced sales in comparison to the prior year. All other operating costs in the quarter were comparable with the prior year second quarter. 

As a result of the above, net income for the second quarter 2011 was $11,144,000, 16¢ per common share ($12,300,000, 17¢ per common share in 2010), a decrease of 5.9% per common share.

For the six months ended June 30, 2011, total Leon's sales were $400,926,000 including $86,286,000 of franchise sales ($418,243,000 including $87,821,000 of franchise sales in 2010), a decrease of 4.1% and net income was $20,971,000, 30¢ per common share ($23,746,000, 33¢ per common share in 2010), a decrease of 9.1% per common share.

* The year ended 2010 has been restated to IFRS while years ended 2009 and 2008 are as originally reported under Canadian Generally Accepted Accounting Principles ("Canadian GAAP").

Liquidity and Financial Resources

Leasehold improvements have just been completed on a new leased premises of 76,000 sq. ft. in Guelph, Ontario with a grand opening scheduled for late August 2011. Construction is well on its way on a new 84,000 sq. ft. facility in Regina, Saskatchewan with a scheduled grand opening for the fourth quarter of 2011. We are planning grand openings of new 40,000 sq. ft. stores in Mississauga, Ontario and Rosemère, Quebec scheduled to open 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 Ste. Marie and Sudbury stores later this year with work scheduled to be completed by the summer of 2012. At the present time, all funding for new store projects and renovations are planned 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 unaudited interim condensed consolidated 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 interim condensed consolidated financial statements for the period ended March 31, 2011 which have been filed on SEDAR.

The following table provides selected restated 2010 results by quarter.

Interim and Annual Consolidated Net Income

IFRS Restated 2010 results by quarter

Disclosure Controls Procedures

Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management, including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public disclosure.

Internal Controls over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.  All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Additionally, management is required to use judgment in evaluating controls and procedures.

Changes in Internal Control over Financial Reporting

Management has also evaluated whether there were changes in the Company's internal control over financial reporting that occurred during the period beginning on April 1, 2011 and ended on June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has determined that no material changes in internal controls have occurred during this period.

Outlook

In the second quarter of 2011 we saw a reduction in same store sales from the prior year quarter. Although we saw a slight improvement from the first quarter of 2011, 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 pointing towards a strong economic turnaround. However, to counter this, we plan an even more robust marketing and merchandising campaign for the balance of the year. In addition, we should see an increase in sales and improved productivity that will be aided by the opening of four new stores in the second half of 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 12^th day of August, 2011.

Interim Condensed Consolidated Financial Statements

Commitments and contingencies [note 18] 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Leon's Furniture Limited

Management's Responsibility for Financial Reporting

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

The accompanying interim condensed consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards ("IFRS") and incorporate the requirements of International Accounting Standards ("IAS") 34, Interim financial reporting and IFRS 1, First time adoption of IFRS. Financial statements are not precise since they include certain amounts based upon estimates and judgments. When alternative methods exist, management has chosen those it deems to be the most appropriate in the circumstances.

Leon's Furniture Limited ("Leon's" or the "Company") maintains systems of internal accounting and administrative controls, consistent with reasonable costs. Such systems are designed to provide reasonable assurance that the financial information is relevant and reliable and that Leon's assets are appropriately accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfils its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility through its Audit Committee.

The Audit Committee is appointed by the Board and reviews these interim condensed 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 interim condensed consolidated financial statements for issuance to the shareholders.

Interim Condensed Consolidated Financial Statements

Leon's Furniture Limited

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

For the three and six month periods ended June 30, 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 ("Leon's" or the "Company") 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, Toronto, Ontario, M9N 3X3.

Leon's is a retailer of home furnishings, electronics and appliances across Canada from Alberta to Newfoundland and Labrador. The Company owns a chain of thirty-seven retail stores operating as Leon's Home Furnishings Super Stores and two retail stores operating under the brand of Appliance Canada. The Company has twenty-five franchisees operating thirty Leon's Furniture franchise stores.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The interim condensed consolidated financial statements for the three and six month periods ended June 30, 2011 were prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting. The same accounting policies and methods of computation were followed in the preparation of these interim condensed consolidated financial statements as were followed in the preparation of the interim condensed consolidated financial statements for the three month period ended March 31, 2011. In addition, the interim condensed consolidated financial statements for the three month period ended March 31, 2011 contain certain incremental annual International Financial Reporting Standards ("IFRS") disclosures not included in the annual financial statements for the year ended December 31, 2010 prepared in accordance with previous Canadian Generally Accepted Accounting Principles ("CGAAP"). Accordingly, these interim condensed consolidated financial statements for the three and six month periods ended June 30, 2011 should be read together with the annual consolidated financial statements for the year ended December 31, 2010 prepared in accordance with previous CGAAP as well as the interim condensed consolidated financial statements for the three month period ended March 31, 2011.

The policies applied in these interim condensed consolidated financial statements are based on IFRS issued and outstanding as of August 12, 2011, the date the Directors approved and authorized for issuance the interim condensed 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 interim condensed consolidated financial statements, including the transition adjustments recognized on changeover to IFRS.

Basis of measurement

The interim condensed 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 interim condensed 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 interim condensed consolidated financial statements are disclosed in note 3.

Future changes in accounting policy and disclosure

Standards issued but not yet effective

IFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure

The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Company's financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity's continuing involvement in those derecognized assets. The amendment becomes effective for annual periods beginning on or after July 1, 2011. The amendment would affect disclosure only but is not expected to impact on the Company's disclosures.

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.

IFRS 10, Consolidated Financial Statements

IFRS 10, Consolidated Financial Statements ("IFRS 10") is effective for annual periods beginning on or after January 1, 2013 and will replace portions of IAS 27 Consolidated and Separate Financial Statements ("IAS 27") and interpretation SIC-12 Consolidation — Special Purpose Entities. Under IFRS 10, consolidated financial statements include all controlled entities under a single control model that applies to all entities, including special purpose entities and structured entities. A group will still continue to consist of a parent and its subsidiaries; however IFRS 10 uses different terminology from IAS 27 in describing its control model. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. Early adoption of this standard is permitted. The Company has not fully assessed the impact of adopting IFRS 10; however, it anticipates that its impact will be limited.

IFRS 12, Disclosure of Interests in Other Entities

IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12") includes disclosure requirements about subsidiaries, joint ventures, and associates, as well as unconsolidated structured entities. Many of the disclosure requirements were previously included in IAS 27, IAS 1 and IAS 28 while others are new. This standard is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Company has not fully assessed the impact of adopting IFRS 12; however, it anticipates that its impact will be limited.

IFRS 13, Fair Value Measurement

IFRS 13, Fair Value Measurement ("IFRS 13") provides guidance on how to measure fair value of financial and nonfinancial assets and liabilities when fair value is required or permitted per IFRS. While many of the concepts in IFRS 13 are consistent with current practice, certain principles could have a significant effect on some entities adopting the standard. IFRS 13 is effective January 1, 2013 and will be adopted prospectively. The Company does not expect any impact on its financial position or performance.

Consolidation

The interim condensed 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 June 30, 2011 and the results of these subsidiaries for the three and six months 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.

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 six month period ended June 30, 2011 was $181,095,000 (period ended June 30, 2010 - $189,037,000) which is presented within cost of sales on the interim consolidated income statements.

During the three month period ended June 30, 2011, there was $288,000 in inventory write-downs (three month period ended June 30, 2010 - $332,000). At June 30, 2011, the inventory markdown provision totaled $4,474,000 (As of June 30, 2010 - $4,000,000). There were no reversals of any write-down for the period ended June 30, 2011 (period ended June 30, 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 June 30, 2011 was $4,315,000 (three month period ended June 30, 2010 - $4,133,000). Extended warranty expenses deducted through cost of sales for the three month period ended June 30, 2011 were $1,153,000 (three month period ended June 30, 2010 - $1,469,000).

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 revenues. This royalty revenue is recorded by the Company on an accruals basis and is classified as revenue within the interim consolidated income statements.

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 annual and interim 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.

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 interim consolidated statements 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 data 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 interim consolidated statements 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

Included in the above balances at June 30, 2011 are assets not being amortized with a net book value of approximately $10,137,000 [At December 31, 2010 - $2,400,000] being construction-in-progress.

8. INVESTMENT PROPERTIES

The fair value of the investment property portfolio as at June 30, 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

10. TRADE AND OTHER PAYABLES

11. PROVISIONS

Profit sharing and bonuses

The provision for profit sharing and bonuses is payable within the first half of the following fiscal year.

Vacation pay

The provision for vacation pay represents employee entitlements to untaken vacation at the interim 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 six month period ended June 30, 2011, 130,679 series 2002 shares [six month period ended June 30, 2010 - 76,423] and 60,746 series 2005 shares [six month period ended June 30, 2010 - Nil] were converted into common shares with a stated value of approximately $939,000 [six month period ended June 30, 2010 - $549,000] and $574,000 [six month period ended June 30, 2010 - Nil], respectively.

During the six month period ended June 30, 2011, the Company cancelled 4,820 series 2009 shares [six month period ended June 30, 2010 - Nil] in the amount of $43,000 [six month period ended June 30, 2010 - Nil].

13. COMMON SHARES

During the three month period ended June 30, 2011, 59,481 series 2002 shares [three month period ended June 30, 2010 - 18,840] and 14,760 series 2005 shares [three month period ended June 30, 2010 - Nil] were converted into common shares with a stated value of approximately $427,000 [three month period ended June 30, 2010 - $135,000] and $139,000 [three month period ended June 30, 2010 - $Nil], respectively.

During the six month period ended June 30, 2011, the Company repurchased 330,843 [six month period ended June 30, 2010 - 67,059] 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 $4,500,000 [six month period ended June 30, 2010 - $814,000].  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 [six month period ended June 30, 2010 - $31,000].  The excess net cost over the average carrying value of the shares of approximately $4,461,000 [six month period ended June 30, 2010 - $783,000] has been recorded as a reduction in retained earnings.

The dividends paid for the three month periods ended June 30, 2011 and June 30, 2010 were $6,317,000 [$0.09 per share] and $4,937,000 [$0.07 per share] respectively.

14. REVENUE

15. OPERATING EXPENSES BY NATURE

16. INCOME TAX EXPENSE

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 June 30, 2011 and June 30, 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 69,962,673 for the three month period ended June 30, 2011 (three month period ended June 30, 2010 - 70,524,951).

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. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

[a] The net change in non-cash working capital balances related to operations consists of the following:

[b] Supplemental cash flow information:

20. TRANSITION TO IFRS

In preparing its opening IFRS consolidated statements of financial position, the Company has adjusted amounts previously reported that have been prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Company's financial position and financial performance on the Transition Date, for the three months ended March 31, 2010, for the year ended December 31, 2010, as at January 1, 2010 and December 31, 2010 are set out in the tables and notes in the Company's interim condensed consolidated financial statements for the first quarter ended March 31, 2011. The Company has also selected certain transition exemptions on the Transition Date, the details of which are also in the notes to the March 31, 2011 interim condensed consolidated financial statements.  An explanation of how the transition from Canadian GAAP to IFRS has affected the Company's consolidated statements of financial position as of June 30, 2010, the consolidated income statements for the three and six months period ended June 30, 2010, the consolidated statements of comprehensive income for the three and six months period ended June 30, 2010 and the consolidated statements of cash flows are set out in the following tables and the notes that accompany the tables below.

i.     Consolidated Statement of Financial Position

ii.     Consolidated Income Statements

iii.     Consolidated Statements of Comprehensive Income

iv.     Explanatory notes

21. APPROVAL OF THE FINANCIAL STATEMENTS

The interim condensed consolidated financial statements for the three months ended June 30, 2011 were approved and authorized for issuance by the Board of Directors on August 12, 2011.