Danier Leather Reports Fiscal 2006 Second Quarter Results


TSX SYMBOL: DL.SV

Jan 19, 2006 - 14:08

TORONTO, ONTARIO--(CCNMatthews - Jan. 19, 2006) - Danier Leather Inc. (TSX:DL.SV) today announced its consolidated financial results for the 13 and 26 weeks ended December 24, 2005.



FINANCIAL HIGHLIGHTS ($000s, except earnings per share):

-----------------------------------------------
For the 13 Weeks Ended For the 26 Weeks Ended
Dec. 24, Dec. 25, Dec. 24, Dec. 25,
2005 2004 2005 2004
---------------------------------------------------------------------
Sales $61,828 $70,091 $82,659 $94,368
---------------------------------------------------------------------
EBITDA 9,014 13,924 1,940 10,220
---------------------------------------------------------------------
Net Earnings (Loss) 4,595 7,182 (696) 3,769
---------------------------------------------------------------------
EPS - Basic $0.70 $1.06 ($0.11) $0.55
---------------------------------------------------------------------
EPS - Diluted $0.70 $1.04 ($0.11) $0.54
---------------------------------------------------------------------
Number of Stores 97 97 97 97
---------------------------------------------------------------------
Retail Square Footage 378,330 377,649 378,330 377,649
---------------------------------------------------------------------

 


HIGHLIGHTS

- Ontario Court of Appeal unanimously allowed Danier's appeal on three separate grounds from the May 2004 judgment of the Superior Court of Justice (Ontario) in the matter of a class action concerning the Company's initial public offering ("IPO") in 1998.

- Second quarter results impacted by a more promotional environment and lower traffic.

- Boxing week sales took place in third quarter. Sales for the week ended December 31, 2005 decreased by 9% over the same period last year.

- New point-of-sale system implemented and tested in 5 stores - full rollout to start in March 2006.

"Results were affected by a more promotional retail environment leading up to Christmas, customer preferences for lower price merchandise, the continued fashion trend for shorter length jackets which has a lower average price point, lower customer traffic and unseasonably warmer weather during the first quarter and early part of the second quarter" said Jeffrey Wortsman, President and CEO of Danier Leather.

Sales for the second quarter and year-to-date decreased 12% while comparable store sales decreased 12% during the second quarter and 13% year-to-date.

EBITDA(1) decreased to $9.0 million compared with $13.9 million in the same quarter last year. Year-to-date EBITDA was $1.9 million compared with $10.2 million during the same period last year. Net earnings during the second quarter were $4.6 million, or $0.70 per share, compared to $7.2 million, or $1.06 per share, in the second quarter last year. Year-to-date net loss was $0.7 million, or $0.11 per share, compared with net earnings of $3.8 million, or $0.55 per share, last year.

Gross profit margin decreased to 51.1% compared with 52.4% during the second quarter last year. The decrease was mainly experienced in the power centres as more discounts were offered to customers.

During the first half of the year, Danier opened one new shopping mall store at the Niagara Fallsview Casino and one power centre location at Sunridge Mall in Calgary, Alberta. Also during the quarter, Danier implemented a new point-of-sale system in 5 stores resulting in quicker transaction processing speed and reduced line-ups during busy periods. Full rollout to all stores is expected to begin in March 2006.

The second quarter is historically where Danier earns a majority of its profits and performance this year was below expectations. Sales during Boxing Week, which took place in the third quarter decreased by 9% over last year.

On December 15, 2005, the Ontario Court of Appeal unanimously allowed Danier's appeal on three separate grounds from the May 2004 judgment of the Superior Court of Justice (Ontario) in the matter of a class action concerning the Company's initial public offering in 1998. As a result, the Company and its Senior Officers are not required to pay any of the damages, interest or costs awarded by the trial judge. Although the Court of Appeal set aside the trial judge's decision, the accrued litigation provision and related expenses of $18 million will remain until the time for the Plaintiff's seeking leave to appeal to the Supreme Court of Canada has expired without an application for leave being made, the Supreme Court of Canada has rejected a leave application, or if leave is granted, any appeal is disposed of by the Supreme Court of Canada. Danier has filed with the Court of Appeal a submission requesting that Danier and its Senior Officers be entitled to costs for the trial and the appeal.

In the months ahead, we will be reviewing our plans in order to achieve increased operating efficiencies and improvements to the merchandising and marketing programs," added Mr. Wortsman.

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 97 shopping mall, street-front, and power centre stores, or through its corporate sales division and online through its website, www.danier.com.

(1)EBITDA refers to earnings before interest expense, income tax, depreciation and amortization, and is a measure used by management to assess operating performance. EBITDA is a non-GAAP earnings measure and does not have a standardized meaning. It is therefore unlikely to be comparable to similar measures presented by other issuers.

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 intention or obligation to update or revise such forward-looking statements whether as a result of new information, future events or otherwise.

Investors, analysts and the media are invited to participate in a conference call today at 4:00 PM Eastern Time to discuss the results. Please dial 416-695-9741 in the Toronto area or 1-888-334-7880 (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 and number of shares)
--------------------------------------------------------------------
--------------------------------------------------------------------

For the 13 Weeks Ended For the 26 Weeks Ended
--------------------------------------------------
December December December December
24, 2005 25, 2004 24, 2005 25,2004
--------------------------------------------------

(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 61,828 $ 70,091 $ 82,659 $ 94,368
Cost of sales
(Note 7) 30,248 33,356 42,033 46,249
--------------------------------------------------
Gross profit 31,580 36,735 40,626 48,119
Selling general and
administrative
expenses (Note 7) 24,106 24,442 41,766 41,160
Interest (income) (23) (11) (104) (70)
--------------------------------------------------
Earnings before
discontinued operations
and income taxes 7,497 12,304 (1,036) 7,029
Provision for (recovery
of) income taxes 2,902 4,940 (340) 2,617
--------------------------------------------------
Net earnings (loss)
before discontinued
operations $ 4,595 $ 7,364 $ (696) $ 4,412
Loss from discontinued
operations (Note 3) - (182) - (643)
--------------------------------------------------
Net earnings (loss) $ 4,595 $ 7,182 $ (696) $ 3,769
--------------------------------------------------
--------------------------------------------------
Retained earnings,
beginning of period $ 26,530 $ 32,535 $ 32,214 $ 36,902
Share purchases
(Note 6(c)) - (1,409) - (1,946)
Dividends (393) (408) (786) (825)
--------------------------------------------------
Retained earnings,
end of period $ 30,732 $ 37,900 $ 30,732 $ 37,900
--------------------------------------------------
--------------------------------------------------

Earnings (loss) per
share before
discontinued

operations:
Basic $0.70 $1.08 ($0.11) $0.64
Diluted $0.70 $1.07 ($0.11) $0.64

Earnings (loss) per share:

Basic $0.70 $1.06 ($0.11) $0.55
Diluted $0.70 $1.04 ($0.11) $0.54

Weighted average number
of shares outstanding:

Basic 6,546,154 6,789,132 6,546,154 6,861,395
Diluted 6,593,898 6,895,777 6,590,333 6,938,375

Number of shares
outstanding at
period end 6,546,154 6,702,954 6,546,154 6,702,954



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

December December June
24, 2005 25, 2004 25, 2005
-------------------------------------
(unaudited) (unaudited)
ASSETS
Current Assets
Cash $ 16,491 $ 19,697 $ 21,193
Accounts receivable 2,090 1,134 594
Income taxes recoverable 699 - 939
Inventories (Note 4) 35,242 40,092 29,031
Prepaid expenses 109 592 516
Assets of discontinued
operations (Note 3) - 1,660 23
Future income tax asset 220 103 159
-------------------------------------
54,851 63,278 52,455

Other Assets
Capital assets (Note 5) 27,453 27,662 25,314
Goodwill 342 342 342
Assets of discontinued
operations (Note 3) - 1,160 -
Future income tax asset 5,604 4,633 5,254
-------------------------------------
$ 88,250 $ 97,075 $ 83,365
-------------------------------------
-------------------------------------

LIABILITIES
Current Liabilities
Accounts payable and accrued
liabilities $ 14,685 $ 16,251 $ 8,170
Income taxes payable - 1,500 -
Liabilities of discontinued
operations (Note 3) - 176 -
-------------------------------------
14,685 17,927 8,170
Accrued litigation provision
and related expenses (Note 9) 18,000 15,321 18,000
Deferred lease inducements and
rent liability 2,028 2,087 1,838
Future income tax liability 60 470 420
-------------------------------------
34,773 35,805 28,428
-------------------------------------

SHAREHOLDERS' EQUITY
Share capital (Note 6) 22,493 23,151 22,493
Contributed surplus 252 219 230
Retained earnings 30,732 37,900 32,214
-------------------------------------
53,477 61,270 54,937
-------------------------------------
$ 88,250 $ 97,075 $ 83,365
-------------------------------------
-------------------------------------



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

For the 13 Weeks Ended For the 26 Weeks Ended
-----------------------------------------------
December December December December
24, 2005 25, 2004 24, 2005 25,2004
---------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
OPERATING ACTIVITIES
Net earnings (loss) $ 4,595 $ 7,182 $ (696) $ 3,769
Items not affecting
cash:
Amortization
- continuing
operations (Note 7) 1,540 1,631 3,080 3,261
Amortization
- discontinued
operations (Note 7) - 85 - 170
Amortization of
deferred lease
inducements (95) (98) (187) (196)
Straight line rent
expense 75 - 150 -
Stock based
compensation 11 - 22 -
Future income taxes (116) 48 (771) 105
Net change in non-cash
working capital items
(Note 10) 9,360 14,612 (545) (3,491)
Discontinued
operations (Note 3) - (641) 23 (670)
-----------------------------------------------
Cash flows from
operating activities 15,370 22,819 1,076 2,948
-----------------------------------------------

FINANCING ACTIVITIES
Subordinate voting
shares issued - - - 14
Subordinate voting
shares repurchased - (2,103) - (2,975)
Dividends (393) (408) (786) (825)
Proceeds from lease
inducements 227 - 227 -
-----------------------------------------------
Cash flows from
financing activities (166) (2,511) (559) (3,786)
-----------------------------------------------

INVESTING ACTIVITIES
Acquisition of capital
assets (2,038) (795) (5,219) (2,041)
-----------------------------------------------
Cash flows from
investing activities (2,038) (795) (5,219) (2,041)
-----------------------------------------------

Increase (decrease)
in cash 13,166 19,513 (4,702) (2,879)
Cash, beginning of
period 3,325 184 21,193 22,576
-----------------------------------------------
Cash, end of period $ 16,491 $ 19,697 $ 16,491 $ 19,697
-----------------------------------------------
-----------------------------------------------

Supplementary cash flow
information:
Interest paid - 3 - 3
Income taxes paid 277 793 277 2,260



DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 week and 26 week periods ended December 24, 2005 and
December 25, 2004
(Unaudited)

 


1. SIGNIFICANT ACCOUNTING POLICIES:

(a) Basis of Presentation:

The interim financial statements presented herein have been prepared using the same accounting policies and their methods of application as those used in the 2005 annual financial statements. Generally accepted accounting policies ("GAAP") for interim financial statements do not conform in all respects to the disclosures required for annual financial statements, and accordingly, these interim financial statements should be read in conjunction with the audited consolidated financial statements of Danier Leather Inc. ("the "Company") and the accompanying notes contained in the Company's 2005 Annual Report.

The preparation of financial statements in conformity with Canadian GAAP 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 income 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.

(b) Comparative Figures:

Certain of the prior period's figures were reclassified to conform with the current year's financial statement presentation.

2. SEASONALITY OF RETAIL OPERATIONS:

Due to the seasonal nature of the retail business and the Company's product lines, the results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. Generally, a significant portion of the Company's sales and earnings are generated during the fiscal second quarter, which includes the holiday selling season. Sales are generally lowest and losses are experienced during the period from April to September.

3. 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 26 weeks ended
-------------------------------------------------------
Dec 24, 2005 Dec 25, 2004 Dec 25, 2005 Dec 24, 2004
-------------------------------------------------------
Revenue $- $1,200 $- $1,565
-------------------------------------------------------
Loss from
discontinued
operations $- ($182) $- ($643)
-------------------------------------------------------



The net assets of discontinued operations are summarized as follows:

Dec 24, 2005 Dec 25, 2004 June 25, 2005
------------------------------------------
Current assets $ - $ 1,660 $ 23
Capital assets - 1,160 -
------------------------------------------
- 2,820 23
Current liabilities - 176 -
------------------------------------------
Net assets from
discontinued operations $ - $ 2,644 $ 23
------------------------------------------
------------------------------------------


Changes in current assets and current liabilities of discontinued
operations are summarized as follows:

13 weeks ended 26 weeks ended
-----------------------------------------------------
Dec 24, 2005 Dec 25, 2004 Dec 24, 2005 Dec 25, 2004
-----------------------------------------------------
Current assets $- ($725) $23 ($776)
Current
liabilities - 84 - 106
-----------------------------------------------------
$- ($641) $23 ($670)
-----------------------------------------------------


4. INVENTORIES (thousands of dollars):

December 24, December 25,
2005 2004 June 25, 2005
-----------------------------------------
Raw materials $ 2,703 $ 4,053 $ 3,456
Work-in-process 877 637 634
Finished goods 31,662 35,402 24,941
-----------------------------------------
$ 35,242 $ 40,092 $ 29,031
-----------------------------------------
-----------------------------------------


5. CAPITAL ASSETS (thousands of dollars):

December 24, 2005 December 25, 2004
---------------------------------------------------------
Net Net
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
---------------------------------------------------------
Land $ 1,000 $ - $1,000 $ 1,000 $ - $ 1,000
Building 7,064 1,448 5,616 7,064 1,245 5,819
Leasehold
improve-
ments 27,424 15,454 11,970 26,657 13,351 13,306
Furniture
and
equipment 11,153 6,318 4,835 12,245 7,617 4,628
Computer
hardware
and
software 11,158 7,126 4,032 9,258 6,349 2,909
---------------------------------------------------------
$57,799 $ 30,346 $27,453 $56,224 $ 28,562 $27,662
---------------------------------------------------------
---------------------------------------------------------


June 25, 2005
-----------------------------
Net
Accumulated Book
Cost Amortization Value
-----------------------------
Land $ 1,000 $ - $1,000
Building 7,064 1,319 5,745
Leasehold improvements 25,566 13,710 11,856
Furniture and equipment 9,966 5,880 4,086
Computer hardware and software 8,985 6,358 2,627
-----------------------------
$52,581 $27,267 $25,314
-----------------------------
-----------------------------


6. 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

Dec 24, Dec 25, June 25,
2005 2004 2005
-------------------------------
1,224,329 Multiple Voting Shares
(December 25, 2004 and
June 25, 2005 - 1,224,329) (i) (i) (i)
5,321,825 Subordinate Voting Shares
(December 25, 2004 - 5,478,625 and
June 25, 2005 - 5,321,825) $ 22,493 $ 23,151 $ 22,493
-------------------------------
$ 22,493 $ 23,151 $ 22,493
-------------------------------
-------------------------------
(i) Nominal


The following transactions occurred during the first 26 weeks of the
fiscal year with respect to the Subordinate Voting shares:

26 Weeks Ended 26 Weeks Ended
December 24, 2005 December 25, 2004
------------------------------------------
Number $ Number $
------------------------------------------
Shares outstanding at
beginning of the period 5,321,825 $22,493 5,720,225 $24,166
Issued - - 2,000 14
Repurchased - - (243,600) (1,029)
------------------------------------------
Shares outstanding at
end of the period 5,321,825 $22,493 5,478,625 $23,151
------------------------------------------
------------------------------------------
 


(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 13 week and 26 week periods ended December 24, 2005, no shares were repurchased under the Normal Course Issuer Bid (13 week and 26 week periods ended December 25, 2004 - 164,200 and 243,600 Subordinate Voting Shares were repurchased, respectively).

(d) Stock Option Plan

The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at December 24, 2005, the Company has reserved 911,275 Subordinate Voting Shares for issuance under its Stock Option Plan. As at December 24, 2005, there were 625,400 options outstanding with exercise prices ranging from $6.02 to $17.94. Of these outstanding options, 573,650 are exercisable. During the 13 week and 26 week periods ended December 24, 2005, no stock options were granted and 20,000 stock options were forfeited. Further details of the Stock Option Plan are contained in Note 7(d) of the consolidated financial statements contained in the Company's 2005 Annual Report.

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 13 week and 26 week periods ended December 24, 2005 and December 25, 2004 would have been reduced to the pro-forma amounts indicated in the following table:



13 Weeks Ended 13 Weeks Ended
December 24, 2005 December 25, 2004
-----------------------------------------------
As Reported Pro-forma As Reported Pro-forma
-----------------------------------------------
Net earnings $4,595 $4,535 $7,182 $7,122
Basic earnings
per share $0.70 $0.69 $1.06 $1.05
Diluted earnings
per share $0.70 $0.69 $1.04 $1.03



26 Weeks Ended 26 Weeks Ended
December 24, 2005 December 25, 2004
-----------------------------------------------
As Reported Pro-forma As Reported Pro-forma
-----------------------------------------------
Net earnings
(loss) ($696) ($817) $3,769 $3,648
Basic earnings
(loss) per share ($0.11) ($0.12) $0.55 $0.53
Diluted earnings
(loss) per share ($0.11) ($0.12) $0.54 $0.52

 


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 DSUs and can also elect to receive their annual retainers and meeting fees in DSUs. 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 DSUs are added to the DSU account of the non-management director based on the number of DSUs 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 DSUs in their account.

The following transactions occurred during the first 26 weeks of the fiscal year with respect to the Deferred Share Unit Plan:



26 Weeks Ended 26 Weeks Ended
December 24, 2005 December 25, 2004
------------------------------------
Number Number
------------------------------------
Outstanding at beginning
of the period 7,317 -
Granted 7,200 7,200
Issued as dividend
equivalents 178 31
------------------------------------
Outstanding at end
of the period 14,695 7,231
------------------------------------
------------------------------------

 


(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 RSUs 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 RSUs are added to the RSU account of the Senior Officer based on the number of RSUs 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 RSUs, a cash payment equal to the market value of the exercised vested RSUs will be paid to the senior officer.

The following transactions occurred during the first 26 weeks of the fiscal year with respect to the Restricted Share Unit Plan:



26 Weeks Ended
December 24, 2005
---------------------
Outstanding Vested
---------------------
Outstanding at beginning
of the period 5,030 -
Granted - -
Issued as dividend equivalents 62 -
---------------------
Outstanding at end of the period 5,092 -
---------------------
---------------------


7. 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 26 weeks ended
---------------------------------------------------
Dec 24, 2005 Dec 25, 2004 Dec 24, 2005 Dec 25, 2004
---------------------------------------------------

Cost of sales $ 147 $ 195 $ 293 $ 390
SG&A of
continuing
operations 1,393 1,436 2,787 2,871
---------------------------------------------------
Continuing
operations 1,540 1,631 3,080 3,261
SG&A of
discontinued
operations - 85 - 170
---------------------------------------------------
$ 1,540 $ 1,716 $ 3,080 $ 3,431
---------------------------------------------------
---------------------------------------------------


8. INCOME TAXES:

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

26 weeks ended
----------------------------
Dec 24, 2005 Dec 25, 2004
----------------------------
Combined basic federal and
provincial average statutory rate (35.4%) 36.1%
Effect of foreign operating losses - 2.8%
Other 2.6% 1.6%
----------------------------
(32.8%) 40.5%
----------------------------
----------------------------


9. LITIGATION PROVISION AND RELATED EXPENSES (thousands of dollars):

Dec 24, 2005 Dec 25, 2004 June 25, 2005
------------------------------------------
Provision for damages,
costs and interest $ 18,000 $ 15,000 $ 18,000
Legal and
professional fees - 321 -
------------------------------------------
Accrued litigation
provision and
related expenses $ 18,000 $ 15,321 $ 18,000
------------------------------------------
------------------------------------------

 


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) which made allegations about the accuracy and disclosure of certain information contained in a financial forecast issued by the Company and contained in the Prospectus it issued dated May 6, 1998 for its initial public offering ("IPO") which closed on May 20, 1998. The suit sought damages to be paid equal to the alleged diminution in value of the Subordinate Voting Shares sold under the Prospectus.

In October 2001, a motion to certify the action as a class proceeding was granted. The trial commenced in the Superior Court of Justice (Ontario) in May 2003 and was completed in January 2004. On May 7, 2004, the trial judge issued a judgment against the Company and two of its Senior Officers in favour of the Plaintiffs and awarded damages to Canadian shareholders who purchased Subordinate Voting Shares under the Prospectus. For those shareholders who sold their shares between June 4 and 9, 1998, the trial judge awarded the difference between the IPO price and the price at which they sold their shares. For those shareholders who sold or still held their shares after June 9, 1998, the trial judge awarded $2.35 per share. Although the trial judge concluded that at the date of the Prospectus the forecast was reasonable, and that at the time of closing of the IPO the Company's CEO and CFO had an honest belief that the forecast could still be achieved, and although he held that the forecast was, in fact, substantially achieved, the trial judge decided that management's judgment that the forecast was still achievable at the time of closing was not reasonable and that therefore the Prospectus contained a misrepresentation. Based solely on information available at the time, the Company estimated that the trial judge's award would have totaled approximately $15 million. As noted below, the Company and its Senior Officers have successfully appealed this decision.

In May 2005, the trial judge awarded the plaintiffs a portion of the costs claimed for the action and referred for assessment the amount of costs to be paid. Based solely on the information available at the time, the Company estimated that these costs would have amounted to approximately $3 million to $4 million.

A hearing to determine the awarding of costs related to the certification and summary judgment motion which was decided in 2000 and 2001 was held in December 2004. In June 2005, partial indemnity costs were awarded to the plaintiffs for these motions in an amount to be assessed. The Company has appealed this decision and the appeal is still waiting to be heard.

In June 2004, a Notice of Appeal was filed by the Company and two of its Senior Officers from the trial judge's decision. The appeal was heard by the Ontario Court of Appeal in June 2005 and in December 2005, the Court of Appeal unanimously allowed the appeal on three separate grounds, set aside the trial decision and dismissed the class proceeding. As a result, the Company and its Senior Officers are not required to pay any of the damages, interest or costs awarded by the trial judge. The Court of Appeal's decision stated that the Company had met its disclosure obligations in the Prospectus and during the IPO process and the trial judge erred in finding that any misrepresentation had occurred. The Court of Appeal will determine the Company's and its Senior Officers' entitlement to costs for the trial and for the appeal at a later date. The Plaintiffs may seek leave to appeal to the Supreme Court of Canada from the Court of Appeal's decision within 60 days of December 15, 2005.

Based solely on the information available at the time, if the damages, costs and interest awarded by the trial judge had been paid at the fiscal 2005 year-end, the Company estimated 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 to reflect the trial judge's decision. This provision was subsequently increased by $3 million to $18 million during the fourth quarter of 2005 to take into account the trial judge's award of costs. The provision for recovery of income taxes related to the trial judge's award was based on the entire $18 million provision and the provision did not take into account the potential results of the appeal, any possible insurance recoveries or future tax adjustments. The provision for the damages award, costs and interest and the income tax recovery were 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. Although the Court of Appeal has now set aside the trial judge's decision, the provision will remain until the time for the Plaintiff's seeking leave to appeal to the Supreme Court of Canada has expired without an application for leave being made, the Supreme Court of Canada has rejected a leave application, or if leave is granted, any appeal is disposed of by the Supreme Court of Canada.



10. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
(thousands of dollars):

13 weeks ended 26 weeks ended
----------------------------------------------------
Dec 24, 2005 Dec 25, 2004 Dec 24, 2005 Dec 25, 2004
----------------------------------------------------
Accounts
receivable ($1,088) $25 ($1,496) ($508)
Inventories 2,582 3,678 ($6,211) ($10,609)
Prepaid expenses 551 113 407 311
Accounts payable
and accrued
liabilities 4,489 6,600 6,515 6,767
Income taxes
recoverable/
payable 2,826 4,196 240 548
----------------------------------------------------
$9,360 $14,612 ($545) ($3,491)
----------------------------------------------------
----------------------------------------------------

 


11. CONTINGENCIES & GUARANTEES - (thousands of dollars):

(a) Legal proceedings

In addition to the class action matter discussed in Note 9, 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 years and the Company's maximum exposure is $121.

12. 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 $ 11,444
2007 $ 10,600
2008 $ 8,782
2009 $ 7,056
2010 $ 5,286
Thereafter $ 9,714

 


(b) Letters of credit

The Company had outstanding letters of credit in the amount of $6,931 (December 25, 2004 - $4,298) for imports of finished goods inventories to be received.

13. 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:
Investor Relations Contact:
Danier Leather Inc.
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) 762-7408 (FAX)
bryan@danier.com