Danier Leather Reports Fiscal 2005 Fourth Quarter And Year-End Results


TSX SYMBOL: DL.SV

Aug 10, 2005 - 14:23

TORONTO, ONTARIO--(CCNMatthews - Aug. 10, 2005) - Danier Leather Inc. (TSX:DL.SV) today announced its consolidated financial results for the fourth quarter and 52 weeks ended June 25, 2005.



Highlights ($000s, expert per share data):
---------------------------------------------------------------------
13 Weeks Ended 52 Weeks Ended
------------------------------------------
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
---------------------------------------------------------------------
Sales $25,455 $28,918 $166,350 $175,270
---------------------------------------------------------------------
Net Earnings (Loss) ($3,160) ($12,504) ($185) ($7,097)
---------------------------------------------------------------------
Adjusted Net Earnings
(Loss)(1) ($916) ($757) $4,849 $5,466
---------------------------------------------------------------------
Litigation Provision and
Related Expenses $3,098 $15,450 $3,098 $15,450
---------------------------------------------------------------------
Loss (Profit) from
Discontinued Operations ($22) $371 $2,768 $1,187
---------------------------------------------------------------------
EPS Basic (loss) ($0.48) ($1.81) ($0.03) ($1.03)
---------------------------------------------------------------------
Weighted Average Number
of Shares Outstanding
(Basic) 6,545,055 6,923,125 6,726,658 6,920,447
---------------------------------------------------------------------
Number of Stores(a) 95 95 95 95
---------------------------------------------------------------------
Square Footage(a) 371,954 372,156 371,954 372,156
---------------------------------------------------------------------

(a)At fiscal year-end

 


HIGHLIGHTS

- Results impacted by additional litigation provision

- Results also impacted by costs related to discontinuance of U.S. operations

- Cash of $21.2 million and year-end and working capital of $44.3 million

"The results from our most recent quarter and fiscal 2005 were under plan," said Jeffrey Wortsman, President and CEO of Danier Leather. "We have, however, already begun to implement a number of operational changes that we believe will improve Danier's performance. The Company's operating and marketing plans for next fall will focus on elevating the Danier brand, better differentiate power centre stores from shopping mall stores, place less reliance on price promotions and further strengthen relationships with existing customers through relationship marketing."

A number of factors can be cited as affecting Danier's results over the past quarter and fiscal year. Among them are weaker consumer spending on leather outerwear, shifting consumer tastes to non-leather materials like microfibre and denim, unseasonably warm temperatures in the run-up to Christmas and Boxing Day, which are the most crucial sales periods of the year for the Company and weaker than expected response to the Company's promotions.

During March 2005, Danier announced that it would discontinue its U.S. operations which consisted of 3 stores. Financial results have been restated to reflect the discontinuance of the U.S. operations.

Revenues in the fourth quarter decreased by $3.5 million, or 12%, to $25.5 million. Comparable store sales decreased by 13% with both mall stores and power centre locations experiencing a 13% comparable store sales decrease. Results for the quarter were impacted by an increase in the litigation provision in connection with the class action lawsuit. The Company appealed the Trial Court's decision and the appeal was heard by the Ontario Court of Appeal during June 2005. The Court reserved its decision and it is not anticipated that the Court's determination will be made before the fall of 2005. The payment of any damages and costs awarded by the trial judge is stayed pending the determination of the appeal. Adjusted net loss for the fourth quarter of 2005 (before litigation provision and related expenses and loss from discontinued operations) was $0.9 million ($0.14 per share) compared with $0.8 million ($0.11 per share) during the fourth quarter of 2004.

Revenues for fiscal 2005 decreased by 5%, or $8.9 million, to $166.4 million. Comparable stores sales decreased by 6%. Mall stores comparable store sales decreased 4% and power centre location comparable store sales decreased 8%. Adjusted net earnings for fiscal 2005 (before litigation provision and related expense and loss from discontinued operations) were $4.8 million ($0.72 per share) compared with $5.5 million ($0.79 per share) during fiscal 2004. Net loss including discontinued operations and litigation provision and related expenses for fiscal 2005 was $0.2 million ($0.03 per share) compared with a net loss of $7.1 million ($1.03 per share) in fiscal 2004.

Gross profit as a percentage of revenue increased to 50.2% in 2005, compared with 49.4% in 2004, an increase due to the stronger Canadian dollar, which reduced the landed cost of merchandize imported from Asia.

Danier maintained a strong financial position at year-end with approximately $21.2 million in cash, compared with $22.6 in 2004, no long-term debt and a working capital balance of $44.3 million, compared with $44.2 million at the end of last year. Inventory of $29.0 million was similar to last year's level of $29.5 million.

Quarterly Dividend and Share Buyback

Danier continues to focus on creating shareholder value. During 2005, Danier initiated a quarterly cash dividend of 6-cents per share. Danier also used its strong cash position to purchase for cancellation 402,400 subordinate voting shares for cash consideration of approximately $4.6 million.

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, and retailer of high-quality leather and suede clothing and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available only at its 95 shopping mall, street-front, and power centre stores, or through its corporate sales division and online through its website, www.danier.com.

Note: This press release may contain forward-looking statements that involve risks, estimates, and uncertainties. Therefore, actual results may differ materially. Examples of such risks and uncertainties include those associated with product sales, demand for Danier's products, availability of raw materials, foreign sourcing and manufacturing, estimates of damages, costs and interest associated with the class action lawsuit, continued growth of the leather apparel industry, and competition and other associated risks with Danier's business. For an expanded discussion of risks and uncertainties, please see the documents filed by Danier Leather Inc. with the Ontario Securities Commission. Danier disclaims any responsibility to update or revise such forward-looking statements whether as a result of new information, future events or otherwise.

(1) Adjusted net earnings (loss) is net earnings (loss) before discontinued operations, litigation provision and related expenses and income tax recovery related to the litigation provision and related expenses and is calculated as outlined in the following table.



13 weeks ended Year Ended
----------------------------------------
Jun 25, Jun 26, Jun 25, Jun 26,
2005 2004 2005 2004

Net loss ($3,160) ($12,504) ($185) ($7,097)
Add: Loss from
discontinued operations (22) 371 2,768 1,187
Add: Litigation provision
and related expenses 3,098 15,450 3,098 15,450
Less: Income tax recovery
on litigation provision
and related expenses (832) (4,074) (832) (4,074)
----------------------------------------
Adjusted net earnings (loss) ($916) ($757) $4,849 $5,466
----------------------------------------

 


Investors, analysts and the media are invited to participate in a conference call today at 4:30 PM Eastern Time to discuss the results. Please dial 416-695-7896 in the Toronto area or 1-877-323-2093 (rest of Canada and the U.S.) and quote the Danier Leather Inc. conference call with chairperson Jeffrey Wortsman at least five minutes prior to the call. The call will also be webcast at www.danier.com or at www.ccnmatthews.com.



DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND RETAINED EARNINGS
(thousands of dollars, except per share amounts)
---------------------------------------------------------------------
---------------------------------------------------------------------

For the 13 Weeks Ended For the Year Ended
------------------------ -------------------
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
----------------------- -------------------
(unaudited)(unaudited)
Revenue $ 25,455 $ 28,918 $ 166,350 $ 175,270
Cost of sales (Note 8) 12,833 14,321 82,863 88,742
----------------------- -------------------
Gross profit 12,622 14,597 83,487 86,528
Selling general and
administrative expenses
(Note 8) 15,313 15,963 77,215 77,812
Interest (income) (131) (120) (340) (18)
----------------------- -------------------
Earnings (loss) before
income taxes and
undernoted item (2,560) (1,246) 6,612 8,734
Litigation provision and
related expenses (Note 10) 3,098 15,450 3,098 15,450
----------------------- -------------------
Earnings (loss) before
discontinued operations
and income taxes (5,658) (16,696) 3,514 (6,716)
Provision for income
taxes (Note 9) (2,476) (4,563) 931 (806)
----------------------- -------------------
Net earnings (loss)
before discontinued
operations $ (3,182) $ (12,133) $ 2,583 $ (5,910)
Income (loss) from
discontinued operations
(Note 2) 22 (371) (2,768) (1,187)
----------------------- -------------------
Net loss $ (3,160) $ (12,504) $ (185) $ (7,097)
----------------------- -------------------
----------------------- -------------------
Retained earnings,
beginning of period $ 35,767 $ 49,406 $ 36,902 $ 43,999
Share purchases (Note 7(c)) - - (2,883) -
Dividends (393) - (1,620) -
----------------------- -------------------
Retained earnings, end of
period $ 32,214 $ 36,902 $ 32,214 $ 36,902
----------------------- -------------------
----------------------- -------------------

Net earnings (loss) per
share before discontinued
operations:
Basic ($0.49) ($1.75) $0.38 ($0.85)
Diluted n/a n/a $0.38 n/a

Net earnings (loss) per
share:
Basic ($0.48) ($1.81) ($0.03) ($1.03)
Diluted n/a n/a n/a n/a

Weighted average number
of shares outstanding:
Basic 6,545,055 6,923,125 6,726,658 6,920,447
Diluted 6,590,567 6,971,507 6,790,056 6,978,904


DANIER LEATHER INC.
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------

June 25, June 26,
2005 2004
---------- -------------
ASSETS
Current Assets
Cash $ 21,193 $ 22,576
Accounts receivable 594 626
Income taxes recoverable 939 -
Inventories (Note 3) 29,031 29,483
Prepaid expenses 516 903
Assets of discontinued operations
(Note 2) 23 884
Future income tax asset (Note 9) 159 107
---------- -------------
52,455 54,579
Other Assets
Capital assets (Note 4) 25,314 28,891
Goodwill (Note 5) 342 342
Assets of discontinued operations
(Note 2) - 1,321
Future income tax asset (Note 9) 5,254 4,736
---------- -------------
$ 83,365 $ 89,869
---------- -------------
---------- -------------

LIABILITIES

Current Liabilities
Accounts payable and accrued
liabilities $ 8,170 $ 9,355
Income taxes payable - 952
Liabilities of discontinued operations
(Note 2) - 70
---------- -------------
8,170 10,377
Accrued litigation provision
and related expenses (Note 10) 18,000 15,450
Deferred lease inducements 1,838 2,283
Future income tax liability (Note 9) 420 472
---------- -------------
28,428 28,582
---------- -------------
SHAREHOLDERS' EQUITY
Share capital (Note 7) 22,493 24,166
Contributed surplus 230 219
Retained earnings 32,214 36,902
---------- -------------
54,937 61,287
---------- -------------
$ 83,365 $ 89,869
---------- -------------
---------- -------------


DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------

For the 13 Weeks Ended For the Year Ended
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
----------------------- -------------------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss $ (3,160) $ (12,504) $ (185) $ (7,097)
Items not affecting cash:
-------------------------
Amortization - continuing
operations (Note 8) 1,323 767 6,216 5,771
Amortization - discontinued
Operations (Note 8) - 61 1,330 316
Amortization of deferred
lease inducements (150) (124) (445) (404)
Loss on disposal of
capital assets - 696 - 696
Stock based compensation 11 219 11 219
Accrued litigation
provision and
related expenses 2,777 15,271 2,550 14,241
Future income taxes (788) (3,998) (622) (4,023)
Net change in non-cash
working capital items
(Note 11) 962 835 (2,205) 8,285
Discontinued operations
(Note 2) 146 188 791 (380)
----------------------- -------------------
Cash flows from operating
activities 1,121 1,411 7,441 17,624
----------------------- -------------------

FINANCING ACTIVITIES

Subordinate voting shares
issued 13 171 27 171
Subordinate voting shares
repurchased (Note 7) - - (4,583) -
Dividends (393) - (1,620) -
Proceeds from lease
inducements - 85 - 449
----------------------- -------------------
Cash flows from financing
activities (380) 256 (6,176) 620
----------------------- -------------------

INVESTING ACTIVITIES

Acquisition of capital
assets (213) (460) (2,648) (2,749)
----------------------- -------------------
Cash flows from investing
activities (213) (460) (2,648) (2,749)
----------------------- -------------------
Increase/(decrease)
in cash 528 1,207 (1,383) 15,495
Cash, beginning of period 20,665 21,369 22,576 7,081
----------------------- -------------------
Cash, end of period $ 21,193 $ 22,576 $21,193 $ 22,576
----------------------- -------------------
----------------------- -------------------

Supplementary cash flow
information:
Interest paid - - 3 223
Income taxes paid 826 333 3,846 2,376


DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 25, 2005 and June 26, 2004

 


1. Significant Accounting Policies:

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

(a) Basis of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary companies. On consolidation, all intercompany transactions and balances have been eliminated.

(b) Year-end:

The fiscal year end of the Company consists of a 52 or 53 week period ending on the last Saturday in June each year. The fiscal year for the financial statements presented is the 52-week period ended June 25, 2005, and comparably the 52-week period ended June 26, 2004.

(c) Revenue recognition:

Revenue includes sales to customers through stores operated by the Company and sales to corporate customers through the Company's direct sales division. Sales to customers through stores operated by the Company are recognized at the time the transaction is entered into the point-of-sale register net of returns. Sales to corporate customers are recognized at the time of shipment.

(d) Cash:

Cash consists of cash on hand, bank balances, and money market investments with maturities of three months or less.

(e) Inventories:

Inventories are valued at the lower of cost or market. Cost is determined using the weighted average cost method. For finished goods and work-in-process, market is defined as net realizable value; for raw materials, market is defined as replacement cost.

(f) Capital assets:

Capital assets are recorded at cost and annual amortization is provided using the declining balance method as follows:



Building 4%
Furniture and equipment 20%
Computer hardware and software 30%

 


Leasehold improvements are amortized on a straight-line basis over the term of the lease, unless the Company has decided to terminate the lease, at which time the unamortized balance is written off.

(g) Goodwill:

Goodwill represents the excess of the cost of acquisition over the fair market value of the identifiable assets acquired. Goodwill is not amortized, but is tested for impairment at least annually at year-end. If required, any impairment in the value of goodwill would be written off against earnings.

(h) Deferred lease inducements:

Deferred lease inducements represent cash benefits received from landlords pursuant to store lease agreements. These lease inducements are amortized against rent expense over the term of the lease, not exceeding 10.5 years.

(i) Store opening costs:

Expenditures associated with the opening of new stores, other than furniture and fixtures, equipment, and leasehold improvements are expensed as incurred.

(j) Income taxes:

Income taxes are determined using the asset and liability method of accounting. This method recognizes future tax assets and liabilities that arise from differences between the accounting basis of the Company's assets and liabilities and their corresponding tax basis. Future taxes are measured using tax rates expected to apply when the asset is realized or the liability settled.

(k) Earnings per share:

Earnings per share are calculated using the weighted average number of shares outstanding during the year (see Note 7). The treasury stock method is used to calculate diluted earnings per share. The treasury stock method computes the number of incremental shares by assuming the outstanding stock options exercisable at exercise prices below the average monthly market price are exercised during the fiscal year and then that number of incremental shares is reduced by the number of shares that could have been repurchased from the issuance proceeds, using the average monthly market price of the Company's shares during the fiscal year.

(l) Translation of foreign currencies:

Subsidiary accounts and accounts in foreign currencies are translated into Canadian dollars. Monetary balance sheet items are translated at the rates of exchange in effect at year-end and non-monetary items are translated at historical exchange rates. Revenues and expenses (other than amortization, which is translated at the same average rate as the capital assets) are translated at the rates in effect on the transaction dates or at the average rates of exchange for the reporting period. The resulting net gain or loss is included in the statement of earnings.

(m) Financial instruments:

From time-to-time the Company utilizes derivative financial instruments in the management of its foreign currency exposure. Derivative financial instruments are not used for trading purposes. Accounting guideline (AcG 13) was implemented June 29, 2003 on a prospective basis. There was no impact on the current year.

(n) Stock option plan:

The Company has a Stock Option Plan which is described in Note 7 where options to purchase Subordinate Voting Shares are issued to directors, officers and employees.

In the year ended June 26, 2004 the Canadian Institute of Chartered Accountants (CICA) amended Handbook Section 3870 "Stock-based Compensation and Other Stock-based Payments", which provides guidance on accounting for stock-based compensation, to require the use of the fair value-based method to account for stock options. In accordance with the transitional provisions allowed under the revised accounting standard, the Company has prospectively applied the fair value-based method to all stock options granted on or after June 29, 2003. Accordingly, compensation cost is measured at fair value at the date of grant using the Black-Scholes Option Pricing Model and is recognized as an expense over the vesting period of the stock option.

The Company continues to use settlement accounting to account for stock options granted prior to June 29, 2003. In accordance with the prospective method of adoption of the new standard, no compensation expense is recognized for options granted prior to fiscal 2004. Pro forma disclosures relating to net earnings per share figures, as if the fair value method had been used for awards granted during fiscal 2003, are presented in Note 7(d).

(o) Restricted Share Units and Deferred Share Units:

The Company has restricted share unit ("RSU") and deferred share unit ("DSU") Plans, which are described in Note 7. RSU and DSU Plans are settled in cash and are recorded as liabilities. The measurement of the liability and compensation expense for these awards is based on the fair value of the award, and is recorded as a charge to selling, general and administrative ("SG&A") expenses over the vesting period of the award. Changes in the Company's payment obligation subsequent to vesting of the award and prior to the settlement date are recorded as a charge to SG&A expenses in the period incurred.

(p) Use of estimates:

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's best knowledge of current events and actions that the Company may undertake in the future. Significant areas requiring the use of management estimates relate to the determination of litigation award reserves, inventory valuation, realizable value of capital assets, future tax assets, and income tax provisions. By their nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods could differ materially from those estimated.

(q) Comparative figures:

Certain amounts included in the June 26, 2004 comparative figures were reclassified to conform with the current year's financial statement presentation. Reclassification of these amounts had no effect on previously reported shareholders' equity or net earnings.

2. Discontinued Operations (thousands of dollars):

In March 2005 the Company announced that it would discontinue its U.S. operations, which consisted of 3 shopping mall stores. On March 31, 2005, two of the U.S. shopping mall locations located on Long Island, New York were closed. The third store located in Paramus, New Jersey was closed in April 2005.

Financial results for the periods presented were restated to reflect the discontinuance of the U.S. operations. The results of discontinued operations were as follows:



13 weeks ended Year Ended
------------------- -------------------
Jun 25, Jun 26, Jun 25, Jun 26,
2005 2004 2005 2004
------------------- -------------------
Sales ($3,160) $429 $2,347 $2,845
------------------- -------------------
Operating profit (loss) 39 (371) (1,288) (1,187)
Write-down of capital assets - - (1,075) -
Lease and employee
termination costs (17) - (405) -
------------------- -------------------
Profit (loss) from
discontinued operations $22 ($371) ($2,768) ($1,187)
------------------- -------------------
------------------- -------------------

The net assets of discontinued operations are summarized as follows:

June 25, 2005 June 26, 2004
-------------- --------------
Current assets $ 23 $ 884
Capital assets - 1,321
-------------- --------------
23 2,205
Current liabilities - 70
-------------- --------------
Net assets from discontinued
operations $ 23 $ 2,135
-------------- --------------
-------------- --------------

Changes in operating working capital items of discontinued operations
are summarized as follows:

13 weeks ended Year Ended
-------------------- ------------------
Jun 25, Jun 26, Jun 25, Jun 26,
2005 2004 2005 2004
-------------------- ------------------
Current assets $505 $271 $861 ($312)
Current liabilities (359) (83) (70) (68)
-------------------- ------------------
$146 $188 $791 ($380)
-------------------- ------------------
-------------------- ------------------

3. Inventories (thousands of dollars):

June 25, 2005 June 26, 2004
-------------- --------------

Raw materials $ 3,456 $ 4,043
Work-in-process 634 1,363
Finished goods 24,941 24,077
-------------- --------------
$ 29,031 $ 29,483
-------------- --------------
-------------- --------------

4. Capital Assets (thousands of dollars):

June 25, 2005 June 26, 2004
---------------------------- -------------------------
Accumul- Accumul-
ated Net ated Net
Cost Amortiza- Book Amortiza- Book
tion Value Cost tion Value
---------------------------- --------------------------
Land $ 1,000 $ - $1,000 $ 1,000 $ - $ 1,000
Building 7,064 1,319 5,745 7,066 1,080 5,986
Leasehold
improvements 25,566 13,710 11,856 25,174 11,887 13,287
Furniture and
equipment 9,966 5,880 4,086 12,070 7,017 5,053
Computer
hardware and
software 8,985 6,358 2,627 8,883 5,318 3,565
---------------------------- -------------------------
$52,581 $27,267 $25,314 $54,193 $ 25,302 $28,891
---------------------------- -------------------------
---------------------------- -------------------------

 


5. Goodwill (thousands of dollars):

Goodwill of $342 (June 26, 2004 - $342) is stated at cost less accumulated amortization of $205 (June 26, 2004 - $205).

6. Bank Overdraft:

As at June 25, 2005, the Company had credit facilities available to a maximum amount of $69.0 million. The credit facilities consist of an operating facility for working capital and for general corporate purposes to a maximum amount of $65 million, bearing interest at prime plus 0.25% and a $4.0 million revolving capital expenditure loan facility bearing interest at prime plus 0.75%. The maximum amount available under the revolving capital expenditure loan facility reduces by $1.0 million on each of June 30, 2005 and June 30, 2006 and by $2.0 million on June 30, 2007. The operating facility is committed until July 28, 2006 and the revolving capital expenditure loan facility matures on June 30, 2007. The Company is required to comply with covenants regarding financial performance.

Security provided includes a security interest over all personal property of the business and a mortgage over the land and building, comprising the Company's head office/distribution facility.



7. Share Capital (thousands of dollars, except per share amounts):

(a) Authorized

1,224,329 Multiple Voting Shares
Unlimited Subordinate Voting Shares
Unlimited Class A and B Preference Shares

(b) Issued

Multiple Voting Shares
----------------------
Number Consideration
-------------------------------
Balance June 28, 2003 1,224,329 Nominal
Balance June 26, 2004 1,224,329 Nominal
Balance June 25, 2005 1,224,329 Nominal


Subordinate Voting Shares
-------------------------
Number Consideration
-------------------------------
Balance June 28, 2003 5,695,225 $23,995
Shares issued upon exercising
of stock options 25,000 171
-------------------------------
Balance, June 26, 2004 5,720,225 $24,166
Shares repurchased (402,400) (1,700)
Shares issued upon exercising
of stock options 4,000 27
-------------------------------
Balance, June 25, 2005 5,321,825 $22,493
-------------------------------
-------------------------------

 


The Multiple Voting Shares and Subordinate Voting Shares have identical attributes except that the Multiple Voting Shares entitle the holder to ten votes per share and the Subordinate Voting Shares entitle the holder to one vote per share. Each Multiple Voting Share is convertible at any time, at the holder's option, into one fully paid and non-assessable Subordinate Voting Share. The Multiple Voting Shares are subject to provisions whereby, if a triggering event occurs then each Multiple Voting Share is converted into one fully paid and non-assessable Subordinate Voting Share. A triggering event may occur if Mr. Jeffrey Wortsman: (i) dies; (ii) ceases to be a Senior Officer of the Company; (iii) ceases to own 5% or more of the aggregate number of Multiple Voting Shares and Subordinate Voting Shares outstanding; or (iv) owns less than 918,247 Multiple Voting Shares and Subordinate Voting Shares combined.

(c) Normal course issuer bid

On February 2, 2005, the Company received approval from the Toronto Stock Exchange to renew its Normal Course Issuer Bid. The bid permits the Company to acquire up to 421,061 Subordinate Voting Shares, representing approximately 10% of the public float of the Subordinate Voting Shares, during the period from February 7, 2005 to February 6, 2006. During the year ended June 25, 2005, 402,400 Subordinate Voting Shares were purchased for cancellation at prevailing market prices for cash consideration of $4,583. The excess of $2,883 over the average paid-in value of the shares was charged to retained earnings. During the year ended June 26, 2004 no shares were repurchased under the Normal Course Issuer Bid.

(d) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at June 25, 2005, the Company has reserved 911,275 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on The Toronto Stock Exchange for the five trading days preceding the effective date of the grant. In general, options granted under the Stock Option Plan vest over a period of one year from the grant date for options issued to directors and four years from the grant date for options issued to officers and employees and expire no later than the tenth anniversary of the date of grant. A summary of the status of the Company's Stock Option Plan as of June 25, 2005 and June 26, 2004 and changes during the years ended on those dates is presented below:



June 25, 2005 June 26, 2004
-------------------------- -----------------------
Weighted- Weighted-
average average
exercise exercise
Stock Options Shares price Shares price
---------------------------------------------------------------------
Outstanding at
beginning of
year 649,400 $11.21 730,400 $11.16
Granted 25,000 $10.10 44,000 $10.96
Exercised (4,000) $6.85 (25,000) $6.85
Forfeited (25,000) $12.92 (100,000) $11.80
-----------------------------------------------------
Outstanding at
end of year 645,400 $11.13 649,400 $11.21
-----------------------------------------------------
Options
exercisable at
end of year 573,150 $10.80 523,650 $10.53
-----------------------------------------------------


The following table summarizes the distribution of these options and
the remaining contractual life as at June 25, 2005:


Options Outstanding Options Exercisable
------------------------------------ ---------------------
Exercise # Weighted Weighted Weighted
Prices Outstanding Average Average # of Average
Remaining Exercise Shares Exercise
Contractual Price Exercisable Price
Life
---------------------------------------------------------------------
$6.02 18,500 4.2 years $6.02 18,500 $6.02
$6.85 114,400 3.0 years $6.85 114,400 $6.85
$10.10 25,000 9.8 years $10.10 - -
$10.40 33,250 5.1 years $10.40 33,250 $10.40
$10.50 15,000 5.3 years $10.50 15,000 $10.50
$10.96 29,000 8.1 years $10.96 25,250 $10.96
$11.20 24,000 6.1 years $11.20 24,000 $11.20
$11.25 265,250 2.9 years $11.25 265,250 $11.25
$15.85 101,000 7.1 years $15.85 62,500 $15.85
$17.94 20,000 6.8 years $17.94 15,000 $17.94
------------------------------------ ---------------------
645,400 4.5 years $11.13 573,150 $10.80
------------------------------------ ---------------------
------------------------------------ ---------------------

 


The weighted average estimated fair values at the date of grant for options granted during the year ended June 25, 2005 was $7.18 per share (June 26, 2004 - $7.54 per share). The fair value of each option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following assumptions:



June 25, 2005 June 26, 2004
-----------------------------------
Risk-free interest rate 4.11% 5.25%
Dividend yield 2.4% 0.0%
Expected volatility 58% 54%
Expected life of options 10 years 10 years

 


The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes Option Pricing Model requires the use of subjective assumptions including the expected stock price volatility. As a result, the Company's Stock Option Plan having characteristics different from those of traded options, and because changes in the subjective assumptions can have a material effect on the fair value estimate, the Black-Scholes Option Pricing Model does not necessarily provide a reliable single measure of the fair value of options granted.

Prior to fiscal 2004, the Company used settlement accounting to account for its Stock Option Plan. No compensation cost was recorded when stock options were granted. When options were exercised, consideration paid by employees and directors was recorded in the financial statements as an increase of share capital based on the exercise price of the options.

In accordance with the transitional provisions of CICA Handbook Section 3870, the Company applied the fair value based method to account for stock options on a prospective basis. Therefore, stock options granted during the year ended June 28, 2003 continue to be accounted for using the settlement accounting method and the pro-forma effect on net earnings and earnings per share are disclosed below. Had compensation cost been determined using the fair value-based method at the grant date of the stock options awarded to employees and directors during fiscal 2003, the net earnings and earnings per share for the years ended June 25, 2005 and June 26, 2004 would have been reduced to the pro forma amounts indicated in the following table:



Year Ended Year Ended
June 25, 2005 June 26, 2004
------------------------- -------------------------
As Reported Pro-forma As Reported Pro-forma
------------------------- -------------------------
Net loss ($185) ($427) ($7,097) ($7,339)
Basic loss
per share ($0.03) ($0.06) ($1.03) ($1.06)
Diluted loss
per share n/a n/a n/a n/a


13 Weeks Ended 13 Weeks Ended
June 25, 2005 June 26, 2004
------------------------- -------------------------
As Reported Pro-forma As Reported Pro-forma
------------------------- -------------------------
Net loss ($3,160) ($3,220) ($12,504) ($12,564)
Basic loss
per share ($0.48) ($0.49) ($1.81) ($1.82)
Diluted loss
per share n/a n/a n/a n/a

 


The pro forma effect on net earnings of the period is not representative of the pro forma effect on net earnings of future periods because it does not take into consideration the pro forma compensation cost related to options awarded prior to June 29, 2002.

(e) Deferred Share Unit Plan

Effective October 19, 2004, the Company established a Deferred Share Unit ("DSU") Plan for non-management directors. The DSU Plan is administered by the Board of Directors, with the advice of the Human Resources and Governance Committee. Under this plan, non-management directors of the Company receive an annual grant of DSU's and can also elect to receive their annual retainers and meeting fees in DSU's. A DSU is a unit equivalent in value to one Subordinate Voting Share of the Company based on the five-day average trading price of the Company's Subordinate Voting Shares on The Toronto Stock Exchange immediately prior to the date on which the value of the DSU is determined. When dividends are paid by the Company, an equivalent number of DSU's are added to the DSU account of the non-management director based on the number of DSU's in their account and the market value of the Subordinate Voting Shares on the date the dividend is paid. After retirement from the board, a participant in the DSU Plan receives a cash payment equal to the market value of the accumulated DSU's in their account.

During the year ended June 25, 2005, each non-management director was issued 1,200 DSU's. A total of 7,317 DSU's were outstanding as at June 25, 2005 and compensation cost of $74 was included in selling, general and administrative expenses and a corresponding liability on the Company's consolidated balance sheet has been recorded. The value of the DSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares.

(f) Restricted Share Unit Plan

Effective April 20, 2005, the Company established a Restricted Share Unit ("RSU") Plan as part of its overall executive compensation plan. The RSU Plan is administered by the Board of Directors, with the advice of the Human Resources and Governance Committee. Under this plan, Senior Officers of the Company are eligible to receive a grant of RSU's that vest on each anniversary of the grant in equal one-third instalments over a vesting period of three years. A RSU is a unit equivalent in value to one Subordinate Voting Share of the Company. When dividends are paid by the Company, an equivalent number of RSU's are added to the RSU account of the Senior Officer based on the number of RSU's in their account, the dividend paid per Subordinate Voting Share and the market value of the Subordinate Voting Shares on the date the dividend is paid. Upon the exercise of the vested RSU's, a cash payment equal to the market value of the exercised vested RSU's will be paid to the senior officer.

During year ended June 25, 2005, 5,030 RSU's were awarded and outstanding of which none were vested.

8. Amortization (thousands of dollars):

Amortization included in cost of sales and selling, general and administrative expenses ("SG&A") is summarized as follows:



13 weeks ended Year Ended
-------------------------- -----------------------
Jun 25, Jun 26, Jun 25, Jun 26,
2005 2004 2005 2004
--------------------------------------------------
(unaudited) (unaudited)

Cost of sales $257 $219 $842 $773
SG&A of continuing
operations 1,066 548 5,374 4,998
-------------------------- -----------------------
Continuing
operations 1,323 767 6,216 5,771
SG&A of discontinued
operations - 61 1,330 316
-------------------------- -----------------------

$1,323 $828 $7,546 $6,087
-------------------------- -----------------------
-------------------------- -----------------------


9. Income taxes (thousands of dollars):

Future income tax asset (liability) is summarized as follows:

June 25, 2005 June 26, 2004
------------------ -----------------
Amortization $ (420) $ (505)
Deferred lease inducements 645 803
Litigation provision and
related expenses 4,738 4,074
Other 30 (1)
------------------ -----------------
$ 4,993 $ 4,371
Future income tax asset 5,413 4,843
------------------ -----------------
Future income tax liability $ (420) $ (472)
------------------ -----------------
------------------ -----------------

 


Furthermore, the U.S. subsidiary has unutilized non-capital loss carry forwards available to reduce future year's income taxes, the potential benefit of which have not been recognized in these financial statements. These losses can be utilized in future years up to 2020.



The Company's effective income tax rate consists of the following:

June 25, 2005 June 26, 2004
------------------ -----------------
Combined basic federal and
provincial average
statutory rate 35.4% (36.1%)
Litigation provision and related
expenses, manufacturing and
processing credit and other 21.7% 20.5%
Effect of foreign
operating losses 67.6% 5.4%
------------------ -----------------
124.7% (10.2%)
------------------ -----------------
------------------ -----------------


10. Litigation provision and related expenses:

June 25, 2005 June 26, 2004
------------------ -----------------
Provision for damages,
costs and interest $ 18,000 $ 15,000
Legal and professional fees - 450
------------------ -----------------
Accrued litigation provision
and related expenses $ 18,000 $ 15,450
------------------ -----------------
------------------ -----------------

 


In fiscal 1999, the Company and certain of its directors and officers were served with a Statement of Claim under the Class Proceedings Act (Ontario) concerning the accuracy and disclosure of certain information contained in a financial forecast issued by the Company during its initial public offering ("IPO") in 1998. The suit sought damages be paid equal to the alleged diminution in value of the shares.

In October 2001, a motion to certify the action as a class action was granted. The trial commenced in the Superior Court of Justice (Ontario) during May 2003 and was completed in January 2004. On May 7, 2004 the Judge issued a judgment in favour of the Plaintiffs and awarded damages to Canadian shareholders who purchased Subordinate Voting Shares in the IPO. The Judge concluded that at the time of pricing of the IPO, which was two weeks before the closing, the forecast was reasonable and that the Company's CEO and CFO had an honest belief at the time the IPO closed that the forecast could be achieved. The Judge further held that the forecast was, in fact, substantially achieved. Despite these findings, the Court decided that management's judgement that the forecast was still achievable at the time of closing was not reasonable. The Company has appealed this decision as discussed below.

For those shareholders who sold their shares between June 4 and 9, 1998, the Court awarded them the difference between the IPO price and the price at which they sold their shares. For those shareholders who sold or still hold those shares after June 9, 1998, the Court awarded $2.35 per share.

A hearing to determine the awarding of costs was held in April 2005. In May 2005, the Court awarded a portion of the costs claimed by the plaintiffs but referred the matter for assessment to determine the amount of costs to be paid. The quantum of the costs award will not be known until the final assessment ordered by the Court has been conducted. Based solely on the information available as of year-end, the Company estimates that this award, if unchanged on appeal, would amount to approximately $3 million to $4 million.

Based solely on the information available at year-end, if the damages award, costs and interest had been paid at the fiscal 2005 year-end, the Company estimates this amount to be about $18 million. During the fourth quarter of 2004, the Company recorded an expense and set up a provision of $15 million pursuant to this judgment. This provision was subsequently increased by $3 million to $18 million during the fourth quarter of 2005. The judgment is a joint and several responsibility of the Company and two of its Senior Officers. The Company carries directors and officers insurance and it expects that the insurance will cover the two Senior Officers' portion of the total award but the amount of insurance is not reasonably determinable at this time. The provision for recovery of income taxes related to the award is based on the entire $18 million provision and does not take account of the potential results of the appeal discussed in the next paragraph, any possible insurance recoveries or future tax adjustments. The damages award and income tax recovery is based on management's best estimate and is subject to adjustment when all facts are known and all issues are resolved. The possible adjustment could be significant.

In June 2004, a Notice of Appeal was filed by the Company and two of its Senior Officers. The appeal was heard by the Ontario Court of Appeal during June 2005. The Court reserved its decision and it is not anticipated that the Court's determination will be made before the fall of 2005. The payment of any damages and costs awarded by the trial judge is stayed pending the determination of the appeal.



11. Changes in non-cash operating working capital items
(thousands of dollars):

June 25, 2005 June 26, 2004
------------------ -----------------
Accounts receivable $ 32 $ (33)
Inventories 452 7,155
Prepaid expenses 387 (15)
Accounts payable and accrued
Liabilities (1,185) 143
Income taxes recoverable/payable (1,891) 1,035
------------------ -----------------
$ (2,205) $ 8,285
------------------ -----------------
------------------ -----------------

 


12. Contingencies & Guarantees - (thousands of dollars):

(a) Legal proceedings

In addition to the class action matter discussed in Note 10, in the course of its business, the Company from time to time becomes involved in various claims and legal proceedings. In the opinion of management, all such claims and suits are adequately covered by insurance, or if not so covered, the results are not expected to materially affect the Company's financial position.

(b) Guarantees

The Company has provided the following guarantees to third parties and no amounts have been accrued in the financial statements for these guarantees:

(i) In the ordinary course of business, the Company has agreed to indemnify its lenders under its credit facility against certain costs or losses resulting from changes in laws and regulations or from a default in repaying a borrowing. These indemnifications extend for the term of the credit facility and do not provide any limit on the maximum potential liability. Historically, the Company has not made any indemnification payments under such agreements.

(ii) In the ordinary course of business, the Company has provided indemnification commitments to certain counterparties in matters such as real estate leasing transactions, director and officer indemnification agreements and certain purchases of fixed assets such as computer software. These indemnification agreements generally require the Company to compensate the counterparties for costs or losses resulting from legal action brought against the counterparties related to the actions of the Company. The terms of these indemnification agreements will vary based on the contract and generally do not provide any limit on the maximum potential liability.

(iii) The Company sublet one location during fiscal 2004 and has provided the landlord with a guarantee in the event the sub-tenant defaults on its obligation to pay rent. The term of the guarantee is approximately 3.5 years and the Company's maximum exposure is $140.

13. Commitments - (thousands of dollars):

(a) Operating leases

Minimum rentals for the next five fiscal years and thereafter, excluding rentals based upon revenue are as follows:



2006 $ 11,234
2007 $ 10,627
2008 $ 9,226
2009 $ 7,630
2010 $ 5,432
Thereafter $ 10,579

 


(b) Letters of credit

The Company had outstanding letters of credit in the amount of $4,839 (June 26, 2004 - $6,804) for imports of finished goods inventories to be received.

14. Related Party Transaction - (thousands of dollars):

During fiscal 2005, the Company expensed and paid fees of $28 to a corporation related to a director and officer of the Company. This transaction was measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

15. Financial Instruments (thousands of dollars):

The carrying value of the Company's accounts receivable and accounts payable and accrued liabilities approximates their fair value.

The Company is exposed to credit risk on its accounts receivable from corporate customers through sales made by the direct sales division. Accounts receivable are net of applicable allowance for doubtful accounts, which is established based on the specific credit risks associated with each corporate customer and other relevant information.

The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. From time-to-time the Company may enter into foreign exchange forward contracts to manage foreign exchange risk associated with these purchases. As at June 25, 2005, and as at June 26, 2004 the Company did not have any outstanding foreign exchange forward contracts to purchase U.S. dollars.

The Company is exposed to interest rate risk based on the use of the credit facilities, which bears interest at floating rates. For fiscal 2005, a /-1% change in interest rates would change interest expense by /- $NIL (June 26, 2004 /-$52) since the Company only incurred approximately $3 of interest expense.

16. Segmented information:

Management has determined that the Company operates in one dominant industry and geographic segment, which involves the design, manufacture and retail of fashion leather and suede apparel in Canada.



FOR FURTHER INFORMATION PLEASE CONTACT:
Danier Leather Inc.
Investor Relations Contact: Jeffrey Wortsman
President and Chief Executive Officer
(416) 762-8175 ext. 302
(416) 762-7408 (FAX)
leather@danier.com

or

Danier Leather Inc.
Bryan Tatoff
Senior Vice-President and Chief Financial Officer
(416) 762-8175 ext. 328
(416) 762-6072 (FAX)
bryan@danier.com