Danier Leather Reports Fiscal 2009 Fourth Quarter and Year End Results


TSX SYMBOL: DL

Aug 13, 2009 - 14:02

TORONTO, ONTARIO--(Marketwire - Aug. 13, 2009) - Danier Leather Inc. (TSX:DL) today announced its consolidated financial results for the fourth quarter and fiscal year ended June 27, 2009.

Q4 HIGHLIGHTS

- Comparable store sales increased 2% and comparable store gross profit increased 4%

- Gross profit margin increased by 1.9% or (190 basis points) to 47.0%

- Q4 net loss decreased by approximately $254,000

- Cash increased by $4.7 million

- 267,160 shares repurchased under normal course issuer bid



FINANCIAL HIGHLIGHTS ($000s, except earnings per share, square footage and
number of stores):

-------------------------------------------------------
Quarter Ended Year Ended
---------------------------------------------------------------------------
Jun 27, 2009 Jun 28, 2008 Jun 27, 2009 Jun 28, 2008
---------------------------------------------------------------------------
(13 weeks) (13 weeks) (52 weeks) (52 weeks)
---------------------------------------------------------------------------
Sales $26,989 $27,497 $162,106 $163,550
---------------------------------------------------------------------------
EBITDA(1) (2,415) (2,467) 4,340 3,757
---------------------------------------------------------------------------
Net Earnings (Loss) (2,768) (3,022) (2,309) 12,892
---------------------------------------------------------------------------
Adjusted Net
Earnings (Loss)(2) (2,755) (3,022) (989) (1,828)
---------------------------------------------------------------------------
EPS - Basic ($0.45) ($0.48) ($0.37) $2.04
---------------------------------------------------------------------------
EPS - Diluted ($0.45) ($0.48) ($0.37) $2.03
---------------------------------------------------------------------------
Number of Stores 86 91 86 91
---------------------------------------------------------------------------
Retail Square
Footage 316,337 348,504 316,337 348,504
---------------------------------------------------------------------------

 


Fourth quarter comparable store sales increased 2% and comparable store gross profit increased 4%. With five fewer stores in operation, sales for the fourth quarter of 2009 decreased 2% or $0.5 million to $27.0 million from $27.5 million in the fourth quarter of 2008. Net loss for the fourth quarter of 2009 decreased by approximately $0.25 million to $2.8 million, or $0.45 loss per share, compared with a net loss of $3.0 million, or $0.48 loss per share, during the fourth quarter last year. EBITDA(1) loss for the fourth quarter of 2009 was $2.4 million compared with an EBITDA loss of $2.5 million during the fourth quarter last year.

Gross profit dollars during the fourth quarter of 2009 increased by $0.3 million. For the last half of the fiscal year gross profit dollars increased by $1.5 million or 5%. The increase was mainly due to less clearance activity resulting from management's decision to reduce inventory purchases during the last half of the fiscal year. Selling, general and administrative expenses ("SG&A") during the fourth quarter of 2009 decreased by $0.1 million.

Year-to-date sales decreased 1% or $1.4 million to $162.1 million while comparable store sales decreased 1%. Year-to-date net loss was $2.3 million, or $0.37 per diluted share, compared with net earnings of $12.9 million or $2.03 per diluted share last year. Year-to-date adjusted net loss(1) of $1.0 million ($0.15 loss per diluted share) was $0.8 million lower than the adjusted net loss of $1.8 million ($0.29 loss per diluted share) last year. Adjusted net loss excludes restructuring costs, goodwill impairment charge and recovery of litigation provision and related expenses. Year-to-date EBITDA was $4.3 million compared with $3.8 million last year.

Year-to-date gross profit as a percentage of revenue was 45.4% compared with 46.6% during 2008. The year-to-date gross margin rate decline was mainly due to a decline in the Canadian dollar relative to the U.S. dollar during the first half of the year, which resulted in higher merchandise costs to the Company. Year-to-date SG&A decreased by 5% or $3.9 million to $74.7 million or 46.1% of sales compared with $78.6 million or 48.0% of sales last year.

Danier repurchased 267,160 subordinate voting shares under its normal course issuer bid during the fourth quarter of 2009 and repurchased a total of 367,160 subordinate voting shares during the fiscal year.

Danier maintained a strong financial position at year-end with approximately $24.6 million in cash, a $6.4 million reduction in inventory compared with the prior year, no long-term debt and working capital of approximately $37.1 million. Book value per outstanding share at the end of the fourth quarter of fiscal 2009 was $9.59.

(1) Adjusted net earnings (loss) is defined as net earnings (loss) before litigation provision (recovery) and related expenses, restructuring costs, goodwill impairment charge and income taxes related to the litigation provision (recovery) and related expenses, goodwill impairment charge and restructuring costs. Adjusted net earnings (loss) is a financial metric used by management and some investors and allows for a more effective analysis of the ongoing operating performance of the Company. Adjusted net earnings (loss) is not a recognized measure for financial presentation under Canadian generally accepted accounting principles ("GAAP"). Non-GAAP earnings measures such as adjusted net earnings (loss) do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. Adjusted net earnings (loss) is calculated as outlined in the following table:



Fourth Quarter Ended Year Ended
--------------------- ------------------
Jun 27, Jun 28, Jun 27, Jun 28,
----------- -------- -------- --------
2009 2008 2009 2008
----------- -------- -------- --------
Net earnings (loss) ($2,768) ($3,022) ($2,309) $12,892
Litigation provision (recovery)
and related expenses - - - (20,016)
Restructuring costs 18 - 1,466 -
Goodwill impairment charge - - 342 -
Income tax provision related
to litigation provision
(recovery) and related
expenses, goodwill
impairment charge and
restructuring costs (5) - (488) 5,296
--------------------- ------------------
Adjusted net earnings (loss) ($2,755) ($3,022) ($989) ($1,828)
--------------------- ------------------
--------------------- ------------------

 


(1) EBITDA is defined as net earnings (loss) before net interest expense (income), income taxes, amortization, restructuring costs, goodwill impairment charge and litigation provision (recovery) and related expenses. EBITDA is a financial metric used by management and some investors to compare companies on the basis of ongoing operating results before income taxes, net interest expense (income), amortization, restructuring costs, goodwill impairment charge and litigation provision (recovery) and related expenses and its ability to incur and service debt. EBITDA is not a recognized measure for financial presentation under Canadian GAAP. Non-GAAP earnings measures such as EBITDA do not have any standardized meaning prescribed by Canadian GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. EBITDA is calculated as outlined in the following table:



Fourth Quarter Ended Year Ended
------------------------------------------
Jun 27, Jun 28, Jun 27, Jun 28,
---------- -------- -------- --------
2009 2008 2009 2008
---------- -------- -------- --------
Net earnings (loss) ($2,768) ($3,022) ($2,309) $12,892
Provision for (recovery of)
income tax (1,035) (1,070) (812) 4,646
Interest expense (income)
- net 5 (46) 104 81
Amortization 1,365 1,671 5,549 6,154
Litigation provision (recovery)
and related expenses - - - (20,016)
Restructuring costs 18 - 1,466 -
Goodwill impairment charge - - 342 -
------------------------------------------
EBITDA ($2,415) ($2,467) $4,340 $3,757
------------------------------------------
------------------------------------------

 


Note: This press release contains forward-looking information and forward-looking statements which reflect the current view of Danier with respect to the Company's objectives, plans, goals, strategies, future growth, results of operations, financial and operating performance and business prospects and opportunities. Wherever used, the words "may", "will", "anticipate", "intend", "expect", "estimate", "plan", "believe" and similar expressions identify forward-looking statements and forward-looking information. Forward-looking statements and forward-looking information should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All of the statements in this press release containing forward-looking statements or forward-looking information are qualified by these cautionary statements.

Forward-looking statements and forward-looking information are based on information available at the time they are made, underlying estimates and assumptions made by management and management's good faith belief with respect to future events, and are subject to inherent risks and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, fashion and apparel and leather industry risks that can affect demand for the Company's products and inventory markdowns, a real or perceived slowdown in the general economy which can result in a reduction in consumer spending and can affect demand for the Company's products, changes in consumer shopping patterns, unseasonably hot weather or severe or unusual weather that prevents customers from going to the Company's stores, seasonality, heightened competition including new competitors and expansion of current competitors, foreign currency and interest rate fluctuations which result in increased costs, leather availability and prices, consumer demand, disruptions in the credit markets, risks associated with foreign sourcing and manufacturing, potential legal proceedings, ability to successfully implement the Company's business strategy, ability to realize anticipated cost savings, inability to renew or access or obtain replacement credit facilities, war and acts of terrorism, higher utility and fuel prices which can result in increased costs, the ability of the Company to attract and retain key executives and key employees, the ability of vendors to maintain, support and upgrade management information systems, catastrophic or other events that impact the use of the Company's head office and distribution centre, increased inflation and interest rates, changes or disruptions in the securities markets, the ability of the Company to obtain new locations or renew or relocate existing locations at existing or favourable lease terms, changes to the regulatory and economic environment in which the Company operates now and in the future, including changes in accounting policies or pronouncements introduced by regulatory authorities, changes in the Company's tax liabilities, either through changes in tax laws or future assessments, and performance of third party service providers, among other things.

Danier cautions readers that this list of factors is not exhaustive and that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual events, performance and results may vary significantly from those expected. There can be no assurance that the actual results, performance, events or activities anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Potential investors and other readers are urged to consider these factors carefully in evaluating forward-looking information and forward-looking statements and are cautioned not to place undue reliance on any forward-looking information or forward-looking statements.

For additional information with respect to certain of these and other risks or uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities, including the Company's annual information form, quarterly and annual reports, and supplementary information, which are available on SEDAR at www.sedar.com and in the Investor Relations section of the Company's website at www.danier.com. Additional risks and uncertainties not presently known to the Company or that Danier currently believes to be less significant may also adversely affect the Company. Danier disclaims any intention or obligation to update or revise any forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise.

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 at its 86 shopping mall, street-front, and power centre stores in Canada and at the Dubai Mall and the Festival City Mall in Dubai. Effective September 1, 2009, corporations and other organizations can obtain Danier products for use as incentives and premiums for employees, suppliers, and customers through Canada Sportswear. For more information about the Company and our products, see www.danier.com.

Investors and analysts are invited to participate in a conference call today at 4:00 PM Eastern Time to discuss the results. Please dial 416-340-8018 in the Toronto area or 1-866-223-7781 (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.marketwire.com.



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

Fourth Quarter Ended Year Ended
------------------------ --------------------
June 27, June 28, June 27, June 28,
2009 2008 2009 2008
------------------------ --------------------
(unaudited) (unaudited)
Revenue $ 26,989 $ 27,497 $ 162,106 $ 163,550
Cost of sales (Note 9) 14,307 15,092 88,589 87,365
------------------------ --------------------
Gross profit 12,682 12,405 73,517 76,185
Selling, general and
administrative expenses
(Note 9) 16,462 16,543 74,726 78,582
Interest expense (income)
- net 5 (46) 104 81
------------------------ --------------------
Earnings (loss) before
undernoted items and
income taxes (3,785) (4,092) (1,313) (2,478)
Restructuring costs (Note 10) 18 - 1,466 -
Goodwill impairment charge
(Note 6) - - 342 -
Litigation provision
(recovery) and related
expenses (Note 12) - - - (20,016)
------------------------ --------------------
Earnings (loss) before
income taxes (3,803) (4,092) (3,121) 17,538
Provision for (recovery of)
income taxes (Note 11)
Current (926) (726) (842) 192
Future (109) (344) 30 4,454
------------------------ --------------------
(1,035) (1,070) (812) 4,646
------------------------ --------------------
Net earnings (loss)
and comprehensive
earnings (loss) ($2,768) ($3,022) ($ 2,309) $ 12,892
------------------------ --------------------
------------------------ --------------------

Net earnings (loss)
per share:
Basic ($0.45) ($0.48) ($0.37) $2.04
Diluted ($0.45) ($0.48) ($0.37) $2.03

Weighted average number of
shares outstanding:
Basic 6,105,645 6,276,429 6,184,557 6,313,583
Diluted 6,106,448 6,278,399 6,184,762 6,335,873
Number of shares outstanding
at period end 5,909,269 6,276,429 5,909,269 6,276,429

See accompanying notes to the consolidated financial statements



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

June 27, June 28,
2009 2008
-------- --------

ASSETS
Current Assets
Cash $ 24,628 $ 19,882
Accounts receivable 351 755
Income taxes recoverable 631 8
Inventories (Note 4) 21,045 27,404
Prepaid expenses 1,156 1,242
Future income tax asset (Note 11) 245 562
-------- --------
48,056 49,853

Other Assets
Property and equipment (Note 5) 19,339 21,312
Goodwill (Note 6) - 342
Future income tax asset (Note 11) 1,657 1,556
-------- --------
$ 69,052 $ 73,063
-------- --------
-------- --------

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 10,601 $ 9,845
Current portion of capital lease obligation - 858
Future income tax liability (Note 11) 366 502
-------- --------
10,967 11,205
Deferred lease inducements and rent liability 1,389 1,675
Future income tax liability (Note 11) - 50
-------- --------
12,356 12,930
-------- --------

SHAREHOLDERS' EQUITY
Share capital (Note 8) 19,853 21,409
Contributed surplus 823 548
Retained earnings 36,020 38,176
-------- --------

56,696 60,133
-------- --------
$ 69,052 $ 73,063
-------- --------
-------- --------

See accompanying notes to the consolidated financial statements



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

Fourth Quarter Ended Year Ended
------------------------- -------------------
June 27, June 28, June 27, June 28,
2009 2008 2009 2008
------------------------- -------------------
(unaudited) (unaudited)

OPERATING ACTIVITIES
Net earnings (loss) ($2,768) ($3,022) ($2,309) $12,892
Items not affecting cash:
-------------------------
Amortization (Note 9) 1,365 1,671 5,549 6,154
Amortization of deferred
lease inducements (88) (123) (357) (453)
Goodwill impairment charge
(Note 6) - - 342 -
Straight line rent expense 18 35 56 116
Stock-based compensation 82 36 275 117
Accrued litigation provision
(recovery) and related
expenses (Note 12) - - - (18,000)
Future income taxes (109) (344) 30 4,454
Net change in non-cash working
capital items (Note 13) 4,194 4,263 7,172 363
Proceeds from deferred lease
inducements - 107 101 107
Repayment of deferred lease
inducement - - (86) -
------------------------- -------------------
Cash flows from operating
activities 2,694 2,623 10,773 5,750
------------------------- -------------------

FINANCING ACTIVITIES
Subordinate voting
shares issued (Note 8) - - - 80
Subordinate voting shares
repurchased (Note 8) (1,133) - (1,593) (1,665)
Repayment of obligation
under capital lease (88) (249) (858) (971)
------------------------- -------------------
Cash flows used in financing
activities (1,221) (249) (2,451) (2,556)
------------------------- -------------------

INVESTING ACTIVITIES
Acquisition of capital assets (1,440) (758) (3,576) (3,891)
------------------------- -------------------
Cash flows used in investing
activities (1,440) (758) (3,576) (3,891)
------------------------- -------------------

Increase (decrease) in cash 33 1,616 4,746 (697)
Cash, beginning of period 24,595 18,266 19,882 20,579
------------------------- -------------------
Cash, end of period $24,628 $19,882 $24,628 $19,882
------------------------- -------------------
------------------------- -------------------

Supplementary cash flow
information:
Interest paid 150 17 365 414
Income taxes paid - - 353 1,679

See accompanying notes to the consolidated financial statements



DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Fourth Quarter Ended Year Ended
----------------------- -------------------
June 27, June 28, June 27, June 28,
2009 2008 2009 2008
----------------------- -------------------
(unaudited) (unaudited)

SHARE CAPITAL
Balance, beginning of period $20,985 $21,409 $21,409 $22,044
Shares repurchased (1,132) - (1,556) (715)
Shares issued on exercise of
stock options - - - 80
----------------------- -------------------
Balance, end of period $19,853 $21,409 $19,853 $21,409
----------------------- -------------------

CONTRIBUTED SURPLUS
Balance, beginning of period $741 $512 $548 $431
Stock-based compensation
related to stock options 82 36 275 117
----------------------- -------------------
Balance, end of period $823 $548 $823 $548
----------------------- -------------------

RETAINED EARNINGS
Balance, beginning of period $38,789 $41,198 $38,176 $26,234
Adjustment to opening
retained earnings due to
adoption of new inventory
accounting standard (net of
tax of $122) (Note 1) - - 190 -
Net earnings (loss) (2,768) (3,022) (2,309) 12,892
Share repurchases (1) - (37) (950)
----------------------- -------------------
Balance, end of period $36,020 $38,176 $36,020 $38,176
----------------------- -------------------

ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Balance, beginning of period $- $- $- $-
Adjustment to opening balance
due to the new accounting
policies adopted regarding
financial instruments - - - -
----------------------- -------------------
Balance, end of period $- $- $- $-
----------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY $56,696 $60,133 $56,696 $60,133
----------------------- -------------------
----------------------- -------------------

See accompanying notes to the consolidated financial statements


DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 27, 2009 and June 28, 2008
(dollar amounts in thousands except per share amounts and where otherwise
indicated)

 


Danier Leather Inc. ("Danier" or "the Company") is incorporated under the Business Corporations Act (Ontario) and is a vertically integrated designer, manufacturer and retailer of leather apparel and accessories.

1. Implementation of New Accounting Standards:

Effective June 29, 2008, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA").

CICA Section 1400 - General Standards of Financial Statement Presentation

The CICA amended this Handbook section to include requirements to assess and disclose an entity's ability to continue as a going concern when preparing financial statements. In assessing whether the going concern assumption is appropriate, management must take into account all available information about the future, which is at least, but is not limited to, 12 months from the balance sheet date. This section relates to disclosure and presentation only and did not have an impact on the Company's financial results.

CICA Section 3031 - Inventories

This CICA Handbook section issued in June 2007 replaces Section 3030 of the same name and substantially harmonizes the Canadian standard related to inventories with International Financial Reporting Standards ("IFRS"). This section provides changes to the measurement and more extensive guidance on the determination of cost, including an allocation of the fixed and variable overheads; narrows the permitted cost formula; and expands the disclosure requirements to increase transparency.

The transitional adjustments resulting from the implementation of Section 3031 included transportation costs incurred to bring inventories from the distribution centre to stores which were previously expensed as part of selling, general and administrative ("SG&A") expenses and are now capitalized and included in cost of sales; storage costs and certain design costs which were previously capitalized and included in cost of sales are now recorded in SG&A expenses. The transitional adjustments were recognized in opening retained earnings and prior periods have not been restated. The implementation of this standard resulted in an increase in opening inventories of $312, a decrease in income taxes recoverable of $122 and an increase of $190 to opening retained earnings.

2. Summary of 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 consolidated financial statements presented is the 52-week period ended June 27, 2009, and comparably the 52-week period ended June 28, 2008.

(c) Revenue recognition:

Revenue includes sales to customers through stores operated by the Company, sales to corporate customers through the Company's direct sales division and sales to third party licensees. 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 and third party licensees are recognized at the time of shipment. Revenue from gift cards is recognized at the time of redemption. When a customer purchases a gift card a liability is recorded based on the dollar value of the gift card purchased. Unredeemed balances on gift cards that are more than two years old from the date of issuance (or "breakage") are recorded in the consolidated statement of earnings. Historically, breakage has not been material.

(d) Cash:

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

(e) Inventories:

Merchandise inventories are valued at the lower of cost, using the weighted average cost method, and net realizable value. For inventories manufactured by the Company, cost includes direct labour, raw materials, manufacturing and distribution centre costs related to inventories and transportation costs that are directly incurred to bring inventories to their present location and condition. For inventories purchased from third party vendors, cost includes the cost of purchase, duty and brokerage, quality assurance costs, distribution centre costs related to inventories and transportation costs that are directly incurred to bring inventories to their present location and condition. The Company estimates the net realizable value as the amount at which inventories are expected to be sold, taking into account fluctuations in retail prices due to seasonality, less estimated costs necessary to make the sale. Inventories are written down to net realizable value when the cost of inventories is not estimated to be recoverable due to obsolescence, damage or declining selling prices. When circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write- down previously recorded is reversed. Storage costs, administrative overheads and selling costs related to the inventories are expensed in the period the costs are incurred.

(f) Property and equipment:

Property and equipment are recorded at cost and annual amortization is provided at the following rates:



Building 4% declining balance
Furniture and equipment 20% declining balance
Computer hardware and software 30% declining balance
Computer hardware and software under capital lease 30% declining balance
Visual merchandising equipment 2 years straight line

 


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.

Property and equipment are reviewed for recoverability whenever events indicate an impairment may exist. An impairment loss is measured as the amount by which the carrying value of an asset or a group of assets exceeds its fair value. If such assets or group of assets are considered impaired, an impairment loss is recognized and the carrying value of the asset is adjusted.

(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, or more frequently should conditions that could affect fair value change significantly. During the third quarter of fiscal 2009, management completed a goodwill impairment test and determined the carrying value of goodwill was fully impaired. This resulted in a non-cash impairment charge of $342 that was recorded in the fiscal 2009 consolidated statements of earnings (loss) and comprehensive earnings (loss) (see Note 6).

(h) Deferred lease inducements and rent liability:

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.

Rent liability represents the difference between minimum rent as specified in the lease and rent calculated on a straight line basis.

(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) Prepaid advertising production costs:

Advertising production costs for newspaper flyer inserts and other media are generally incurred several months before the advertising occurs. These expenses are deferred and expensed the first time the advertising occurs. Prepaid advertising production costs were $123 as at June 27, 2009 (June 28, 2008 - $332) and are included in prepaid expenses on the consolidated balance sheet.

(k) 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 at the balance sheet date using the enacted or substantially enacted income tax rates and laws that are expected to apply when the asset is realized or the liability settled. The Company provides a valuation allowance for future tax assets when it is more likely than not that some or all of the future tax assets will not be realized.

(l) Earnings per share:

Basic earnings per share is calculated by dividing the net earnings available to shareholders by the weighted average number of shares outstanding during the year (see Note 8). Diluted earnings per share is calculated using the treasury stock method, which assumes that all outstanding stock options with an exercise price below the average monthly market price are exercised and the assumed proceeds are used to purchase the Company's shares at the average monthly market price during the fiscal year.

(m) Translation of foreign currencies:

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 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 consolidated statement of earnings (loss).

(n) Financial instruments:

Financial instruments are recognized depending on their classification with changes in subsequent measurements being recognized in net earnings or other comprehensive income. Classification choices for financial assets and liabilities include:

i) Held-for-trading - measured at fair value with changes in fair value recorded in net earnings;

ii) Held to maturity - recorded at amortized cost with gains and losses recognized in net earnings in the period the asset is derecognized or impaired;

iii) Available for sale - measured at fair value with changes in fair value recognized in other comprehensive income (loss) until realized through disposal or impairment;

iv) Loans and receivables - recorded at amortized cost with gains and losses recognized in net earnings in the period that the asset is derecognized or impaired; and

v) Other financial liabilities - measured at amortized cost with gains and losses recognized in net earnings in the period that the liability is derecognized.

Transaction costs other than those related to financial instruments classified as held-for-trading, which are expensed as incurred, are amortized using the effective interest method.



The Company's financial assets and liabilities are classified as follows:

Asset/Liability Category Measurement
---------------------------------------------------------------------------
Cash Held-for-trading Fair value
Accounts receivable Loans and receivables Amortized cost
Bank indebtedness Other financial liabilities Amortized cost
Accounts payable and accrued Other financial liabilities Amortized cost
liabilities

 


Foreign currency option contracts, which are included in accounts payable and accrued liabilities, have been classified as held-for-trading and are measured at fair value. Fair value estimates are made at a specific point in time, using published price quotations or other available information where published price quotations are not available. These estimates are subjective in nature and involve uncertainties and the exercise of significant judgement.

Embedded derivatives (elements of contracts whose cash flows move independently from the host contract) are required to be separated and measured at fair values if certain criteria are met. The Company selected June 30, 2002 as the transition date for embedded derivatives and, as such, only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives and it was concluded that the Company did not have any outstanding contracts or financial instruments with embedded derivatives.

(o) Stock option plan:

The Company has a Stock Option Plan which is described in Note 8 where options to purchase Subordinate Voting Shares are issued to directors, officers, employees and service providers. Effective with the commencement of its 2004 fiscal year, the Company accounts for stock-based compensation using the fair-value method. The fair value of options granted are estimated 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 with an offsetting credit to contributed surplus. When stock options are subsequently exercised, share capital is increased by the sum of the consideration paid together with the related portion previously added to contributed surplus when compensation costs were charged against income. The Company continues to use settlement accounting to account for stock options granted prior to June 29, 2003.

(p) 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 8. RSUs and DSUs are settled in cash and are recorded as liabilities. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recorded as a charge to SG&A expense over the vesting period of the award. At the end of each financial period, changes in the Company's payment obligation due to changes in the market value of the Subordinate Voting Shares are recorded as a charge to SG&A expense. Dividend equivalent grants are recorded as a charge to SG&A expense in the period the dividend is paid.

(q) Use of estimates:

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 in the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's historical experience, 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 inventory valuation, realizable value of property and equipment and goodwill, stock based compensation, future tax assets, goods and services tax, provincial sales tax, gift card breakage 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.

3. Recent Accounting Pronouncements:

CICA Section 3064 - Goodwill and Intangible Assets

This CICA Handbook section issued in February 2008 replaces Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new standard also provides guidance for the recognition of intangible assets including computer software that is not an integral part of the related hardware. The new standard is applicable to fiscal years beginning on or after October 1, 2008 and will be implemented by the Company during the first quarter of fiscal 2010. Except for the reclassification of computer software to intangible assets, it is currently expected that the implementation of this new section will not have a significant impact on the Company's consolidated financial statements.

International Financial Reporting Standards ("IFRS")

The Canadian Accounting Standards Board has confirmed that public companies will be required to adopt IFRS for interim and annual reporting purposes, beginning on or after January 1, 2011. Companies will be required to provide IFRS comparative information for the previous fiscal year. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter ended September 24, 2011 when the Company will prepare both the current and comparative financial information using IFRS. The adoption of IFRS will have an impact on the financial statements of the Company.

4. Inventories:



June 27, 2009 June 28, 2008
------------- -------------
Raw materials $ 2,202 $ 3,332
Work-in-process 186 892
Finished goods 18,657 23,180
------------- -------------
$ 21,045 $ 27,404
------------- -------------
------------- -------------

The cost of inventory recognized as an expense is the amount shown as cost
of sales in the consolidated statements of earnings (loss) and
comprehensive earnings (loss). The Company recorded $1,742 of write-downs
of inventory as a result of net realizable value being lower than cost.

5. Property and Equipment:

June 27, 2009 June 28, 2008
------------------------------ ------------------------------
Net Net
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
------------------------------ ------------------------------
Land $ 1,000 $ - $ 1,000 $ 1,000 $ - $ 1,000
Building 7,064 2,185 4,879 7,064 1,981 5,083
Leasehold
improvements 23,539 15,949 7,590 24,315 15,861 8,454
Furniture and
equipment 8,786 5,884 2,902 10,415 6,994 3,421
Computer
hardware
and software 7,302 4,334 2,968 4,014 1,876 2,138
Computer
hardware
and software
under capital
lease - - - 2,920 1,704 1,216
------------------------------ ------------------------------
$47,691 $28,352 $19,339 $49,728 $28,416 $ 21,312
------------------------------ ------------------------------
------------------------------ ------------------------------

 


6. Goodwill:

The Company tests goodwill for impairment using the two-step process prescribed in CICA Handbook Section 3062 - Goodwill and Other Intangible Assets. The first step is a screen for potential impairment while the second step measures the amount of the impairment. Goodwill is tested for impairment at least annually at year-end, or more frequently should conditions that could affect fair value change significantly. With the uncertain economic environment and a sustained decrease in the market capitalization of the Company, management concluded that an indicator of impairment was present. Accordingly, management completed a goodwill impairment test during the third quarter of fiscal 2009 and determined the carrying value of goodwill of $342 was fully impaired. This resulted in a non-cash impairment charge of $342 that was recorded in the fiscal 2009 consolidated statements of earnings (loss) and comprehensive earnings (loss).

7. Bank Facilities:

The Company has an operating credit facility for working capital and for general corporate purposes to a maximum amount of $25 million that is committed until June 28, 2010 and bears interest at prime plus 1.25%. Standby fees of 0.75% are paid on a quarterly basis for any unused portion of the operating credit facility. The operating credit facility is subject to certain covenants and other limitations that, if breached, could cause a default and may result in a requirement for immediate repayment of amounts outstanding. Security provided includes a security interest over all personal property of the Company's business and a mortgage over the land and building comprising the Company's head office/distribution facility.

The Company also has an uncommitted letter of credit facility (the "LC Facility") to a maximum amount of $10 million and an uncommitted demand overdraft facility in the amount of $0.5 million (the "LC Facility") to be used exclusively for issuance of letters of credit for the purchase of inventory. Any amounts outstanding under the overdraft facility will bear interest at the bank's prime rate. The LC Facility is secured by the Company's personal property from time to time financed with the proceeds drawn thereunder.

8. Share Capital:



(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 30, 2007 1,224,329 Nominal
Balance June 28, 2008 1,224,329 Nominal
Balance June 27, 2009 1,224,329 Nominal

Subordinate Voting Shares
-------------------------

Number Consideration
----------------------------
Balance June 30, 2007 5,209,425 $22,044
Shares repurchased (169,000) (715)
Shares issued upon exercising
of stock options 11,675 80
----------------------------
Balance June 28, 2008 5,052,100 $21,409
Shares repurchased (367,160) (1,556)
----------------------------
Balance June 27, 2009 4,684,940 $19,853
----------------------------
----------------------------

 



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, President and Chief Executive Officer: (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) Earnings per share

Basic and diluted per share amounts are based on the following weighted average number of shares outstanding:



June 27, 2009 June 28, 2008
------------- -------------
Weighted average number of shares
for basic earnings per
share calculations 6,184,557 6,313,583
Effect of dilutive options outstanding 205 22,290
------------- -------------
Weighted average number of shares
for diluted earnings per
share calculations 6,184,762 6,335,873
------------- -------------
------------- -------------

 


The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares on The Toronto Stock Exchange (the "TSX") during the period. The number of options excluded was 247,000 as at June 27, 2009 and 231,000 as at June 28, 2008.

(d) Normal course issuer bids

On May 5, 2009, the Company received approval from The Toronto Stock Exchange (the "TSX") to commence a normal course issuer bid (the "2009 NCIB"). The Company had a previous Normal Course Issuer Bid that expired on May 5, 2009 (the "2008 NCIB"). The 2009 NCIB permits the Company to acquire up to 267,183 Subordinate Voting Shares, representing approximately 10% of the "public float" of the Subordinate Voting Shares, during the period from May 7, 2009 to May 6, 2010. Under the 2008 NCIB which expired on May 5, 2009, the Company repurchased 100,000 Subordinate Voting Shares for cancellation at weighted average price per share of $4.60. Under the 2009 NCIB, the Company repurchased 267,160 Subordinate Voting Shares for cancellation at a weighted average price per share of $4.24.

The following Subordinate Voting Shares were repurchased for cancellation during the fourth quarter and year ended June 27, 2009 and June 28, 2008:



Fourth Quarter Ended Year Ended
-------------------- ------------------
June 27, June 27, June 27, June 28,
2009 2008 2009 2008
-------------------- ------------------
Number of shares repurchased 267,160 - 367,160 169,000
Amount charged to share capital $1,132 - $1,556 $715
Amount charged to retained
earnings representing the excess
over the average paid-in value 1 - 37 950
-------------------- ------------------
Total cash consideration $1,133 $- $1,593 $1,665
-------------------- ------------------
-------------------- ------------------

 


(e) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers, employees and service providers. As at June 27, 2009, the Company has reserved 835,500 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, on the advice of the Governance, Compensation, Human Resources and Nominating Committee of the Board (the "Committee") at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on the TSX 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 between two years and four years from the grant date for options issued to officers, employees and service providers 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 27, 2009 and June 28, 2008 and changes during the years ended on those dates is presented below:



June 27, 2009 June 28, 2008
------------------------ -------------------------
Weighted Average Weighted Average
Stock Options Shares Exercise Price Shares Exercise Price
------------------------------------------------ ------------------------
Outstanding at
beginning of year 293,000 $10.21 605,300 $10.48
Granted 330,000 $3.20 50,000 $6.25
Exercised - - (64,675) $6.85
Forfeited (46,000) $11.13 (297,625) $10.82
------------------------ -------------------------
Outstanding at end
of year 577,000 $6.13 293,000 $10.21
------------------------ -------------------------
Options exercisable at
end of year 199,500 $10.75 200,500 $11.60
------------------------ -------------------------

The following table summarizes the distribution of these options and the
remaining contractual life as at June 27, 2009:

Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise # Contractual Exercise # of Shares Exercise
Prices Outstanding Life Price Exercisable Price
------------------------------------------------- -----------------------
$3.15 310,000 9.3 years $3.15 - $3.15
$3.97 20,000 9.8 years $3.97 - $3.97
$6.02 12,000 0.2 years $6.02 12,000 $6.02
$6.25 50,000 9.0 years $6.25 25,000 $6.25
$7.80 55,000 7.6 years $7.80 37,500 $7.80
$8.68 15,000 7.8 years $8.68 10,000 $8.68
$10.40 20,000 1.1 years $10.40 20,000 $10.40
$10.96 21,000 4.1 years $10.96 21,000 $10.96
$11.20 16,000 2.1 years $11.20 16,000 $11.20
$15.85 58,000 3.1 years $15.85 58,000 $15.85
--------------------------------------- -----------------------

577,000 7.3 years $6.13 199,500 $10.75
--------------------------------------- -----------------------
--------------------------------------- -----------------------

 


During the year ended June 27, 2009, the Company granted 330,000 stock options with exercise prices ranging from $3.15 to $3.97 per stock option (June 28, 2008 - 50,000 stock options with an exercise price of $6.25 per stock option). The weighted average estimated fair value at the date of grant for the options granted was $1.67 per stock option (June 28, 2008 - $3.30 per stock option). The fair value of each option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions:



Year Ended Year Ended
June 27, 2009 June 28, 2008
-------------------------------
Risk-free interest rate 3.7% 3.7%
Dividend yield - -
Expected volatility 34% 35%
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 of 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 consolidated financial statements as an increase of share capital based on the exercise price of the options.

The compensation expense recorded for the year ended June 27, 2009 in respect of stock options was $275 (June 28, 2008 - $117). The counterpart is recorded as contributed surplus. Any consideration paid by employees on exercise of stock options is credited to share capital.

(f) Deferred Share Unit Plan

The Deferred Share Unit ("DSU") Plan was established for non-management directors. 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 TSX 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 value of the DSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares.

The following transactions occurred with respect to the DSU Plan:



Fourth Quarter Ended Year Ended
-------------------- -------------------
June 27, June 28, June 27, June 28,
2009 2008 2009 2008
-------------------- -------------------
Outstanding at beginning
of period 78,920 58,920 58,920 39,420
Granted - - 20,000 19,500
Redeemed - - - -
-------------------- -------------------
Outstanding at end of period 78,920 58,920 78,920 58,920
Danier stock price at end of
period $4.75 $6.40 $4.75 $6.40
-------------------- -------------------
Liability at end of period $375 $377 $375 $377
-------------------- -------------------
Compensation expense recorded
in SG&A $167 ($42) ($2) $16
-------------------- -------------------

 


(g) Restricted Share Unit Plan

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 Committee. Under this plan, certain employees of the Company are eligible to receive a grant of RSUs that vest over periods not exceeding three years as determined by the Committee. An 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 employee 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 employee. The value of the vested RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares.

The following transactions occurred with respect to the RSU Plan:



Fourth Quarter Ended Year Ended
--------------------- -------------------
June 27, June 28, June 27, June 28,
2009 2008 2009 2008
--------------------- -------------------
Outstanding at beginning
of period 133,300 80,201 133,300 50,201
Granted - 63,300 - 123,300
Redeemed - (8,534) - (38,534)
Forfeited - (1,667) - (1,667)
--------------------- -------------------
Outstanding at end of period 133,300 133,300 133,300 133,300
Liability at end of period $450 $411 $450 $411
--------------------- -------------------
Compensation expense recorded in
SG&A $221 ($18) $39 $512
--------------------- -------------------

9. Amortization:

Amortization included in cost of sales and SG&A is summarized as follows:

Fourth Quarter Ended Year Ended
---------------------------- ----------------------------
June 27, 2009 June 28, 2008 June 27, 2009 June 28, 2008
---------------------------- ----------------------------
Cost of sales $ 66 $ 176 $ 560 $ 583
SG&A 1,299 1,495 4,989 5,571
---------------------------- ----------------------------
$ 1,365 $ 1,671 $ 5,549 $ 6,154
---------------------------- ----------------------------
---------------------------- ----------------------------

 


10. Restructuring Costs:

Restructuring costs represent approximately $1.5 million of severance costs in connection with the Toronto manufacturing facility workforce reduction of approximately 56 employees and head office staff reduction of more than 20 employees. Approximately $1.0 million of the severance charge was paid prior to June 27, 2009 and approximately $0.5 million has been recorded in accounts payable and accrued liabilities and will be paid over the next year.

11. Income Taxes:



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

June 27, 2009 June 28, 2008
------------- -------------
Amortization $ 741 $ 395
Deferred lease inducements and
rent liability 406 504
Capital lease obligation - 276
Stock based compensation 236 233
Other 153 158
------------- -------------
$ 1,536 $ 1,566
------------- -------------
------------- -------------

Recorded in the consolidated balance
sheets as follows:

June 27, 2009 June 28, 2008
-------------- --------------
Future income tax asset
- current portion $ 245 $ 562
Future income tax asset
- long term portion 1,657 1,556
Future income tax liability
- current portion (366) (502)
Future income tax liability
- long term portion - (50)
-------------- --------------
Net future tax asset $ 1,536 $ 1,566
-------------- --------------
-------------- --------------

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

June 27, 2009 June 28, 2008
-------------- --------------
Combined basic federal and provincial
average statutory rate 32.2% 33.8%
Non-deductible expenses (8.4%) 0.5%
Future federal and provincial rate changes (1.6%) 1.1%
Litigation provision and related expenses - (8.8%)
Impact of loss carry back 2.7% -
Other 1.1% (0.1%)
-------------- --------------
26.0% 26.5%
-------------- --------------
-------------- --------------

 


12. Litigation Provision and Related Expenses:

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 a prospectus it issued dated May 6, 1998 (the "Prospectus") 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 successfully appealed this decision to the Court of Appeal for Ontario and a decision on a further appeal taken by the Plaintiffs to the Supreme Court of Canada was dismissed with costs, as discussed further below.

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.

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. 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. In September 2006, partial indemnity costs were awarded to the Company for the appeal in the amount of $0.1 million. The Court of Appeal also awarded costs to the Company for the trial on a partial indemnity basis in an amount to be determined.

In February 2006, the Plaintiffs filed an application for leave to appeal from the Court of Appeal's decision to the Supreme Court of Canada. In June 2006, the Supreme Court of Canada granted leave to appeal to the Plaintiffs. The appeal was heard by the Supreme Court of Canada on March 20, 2007. On October 12, 2007, the Supreme Court released its decision and unanimously dismissed the Plaintiffs' appeal. As a result, the Company and its Senior Officers were not required to pay any of the damages, interest or costs awarded by the trial judge. The Supreme Court of Canada also awarded costs to the Company.

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. The provision for the damages award, costs and interest and the related future income tax recovery were based on management's best estimate and was subject to adjustment when all facts were known and all issues were resolved. As a result of the final determination by the Supreme Court of Canada, the Company reversed the $18 million litigation provision and related future income tax recovery in the unaudited interim consolidated financial statements during the first quarter of fiscal 2008.

During the third quarter of fiscal 2008, the Company and the Plaintiffs agreed to a settlement of the amount of costs awarded to the Company for the trial and the Supreme Court of Canada hearing and costs awarded to the Plaintiffs for the certification and summary judgment motions. In addition, the Company reached an agreement with its directors' and officers' insurance provider for reimbursement of certain expert and professional fees previously paid by the Company in connection with the trial and appeal. As a result of these agreements, the Company recorded a $1.9 million recovery in the unaudited interim consolidated financial statements for the 13 week period ended March 29, 2008. As a result of the Supreme Court of Canada's final determination as well as the agreement on recovery of costs having now been finalized, no further recoveries are expected.



13. Changes in non-cash operating working capital items:

Fourth Quarter Ended Year Ended
--------------------- --------------------
June 27, June 28, June 27, June 28,
2009 2008 2009 2008
--------------------- --------------------

Decrease (increase) in:
Accounts receivable $697 $1,114 $404 ($31)
Income taxes recoverable (631) (8) (745) (8)
Inventories 6,699 6,420 6,671 1,157
Prepaid expenses (651) (767) 86 204
Increase (decrease) in:
Accounts payable and
accrued liabilities (1,633) (1,768) 756 514
Income taxes payable (287) (728) - (1,473)
--------------------- --------------------
$4,194 $4,263 $7,172 $363
--------------------- --------------------
--------------------- --------------------

 


14. Contingencies & Guarantees:

(a) Legal proceedings

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 consolidated financial statements for these guarantees:

(i) In the ordinary course of business, the Company has agreed to indemnify its lenders under its credit facilities 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 facilities 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.

15. Commitments:

(a) Operating leases:

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



2010 $ 10,483
2011 $ 9,168
2012 $ 7,395
2013 $ 5,503
2014 $ 4,130
Thereafter $ 7,926

 


(b) Letters of credit:

The Company had outstanding letters of credit in the amount of $8,771 (June 28, 2008 - $6,830) for the importation of finished goods inventories to be received.

16. Financial Instruments:

(a) Fair value disclosure

The following table presents the carrying amount and the fair value of the Company's financial instruments. Amortized cost is calculated using the effective interest rate method.



June 27, 2009 June 28, 2008
----------------- -----------------
Carrying Fair Carrying Fair
Maturity value value value value
-------------------------------------------------------- -----------------
Cash Short-term $24,628 $24,628 $19,882 $19,882
Accounts receivable Short-term $351 $351 $755 $755
Accounts payable and Short-term
accrued liabilities $10,451 $10,451 $9,845 $9,845
Capital lease obligation Short-term - - $858 $858
Derivative financial Short-term
instruments(1) $150 $150 - -
---------------------------------------------------------------------------

(1)Included in accounts payable and accrued liabilities on the consolidated
balance sheet

 


Fair value estimates are made at a specific point in time, using available information about the financial instrument and may not reflect fair value in the future. These estimates are subjective in nature and often involve uncertainties and the exercise of significant judgment. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies.

The methods and assumption used in estimating the fair value of the Company's financial instruments are as follows:

- The fair value of short-term financial instruments approximates their carrying values due to their short-term period to maturity.

- The derivative financial instruments, which consist of foreign exchange collar contracts, have been marked to market using values prepared by the financial institution which is the counterparty to these contracts. Factors included in the determination of fair value include the spot rate, forward rates, estimates of volatility, present value factor, strike prices and credit risk of counterparties.

(b) Financial instrument risk management

Exposure to foreign currency risk, interest rate risk, equity price risk, liquidity risk and credit risk arise in the normal course of the Company's business and are discussed further below:

Foreign Currency Risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. The Company uses a combination of foreign exchange option contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. A foreign exchange option contract represents an option with a counterparty to buy or sell a foreign currency to meet its obligations. Credit risk exists in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties such as major Canadian financial institutions.

The outstanding foreign exchange contracts as at June 27, 2009 included collars with notional amounts of US$9,000 expiring between July 2, 2009 and August 24, 2009. A collar is the simultaneous sale of a put option and purchase of a call option designed to provide protection against foreign exchange fluctuations within a defined range of exchange rates. There were no outstanding foreign exchange contracts as at June 28, 2008.

As at June 27, 2009, a sensitivity analysis was performed on the Company's U.S. dollar denominated financial instruments which principally consist of US$1.2 million of cash to determine how a change in the U.S. dollar exchange rate would impact net earnings. A 500 basis point rise or fall in the Canadian dollar against the U.S. dollar, assuming that all other variables, in particular interest rates, remained the same, would have resulted in a $40 decrease or increase, respectively, in the Company's net earnings for the year ended June 27, 2009.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's exposure to interest rate fluctuations is primarily related to cash borrowings under its existing credit facility which bears interest at floating rates and interest earned on its cash balances. The Company has performed a sensitivity analysis on interest rate risk at June 27, 2009, to determine how a change in interest rates would have impacted net earnings. As at June 27, 2009, the Company's cash balance available for investment was approximately $24.6 million and an increase or decrease of 100 basis points in interest rates would have increased or decreased net earnings by approximately $0.2 million. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

Equity Price Risk

Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market equity prices. The Company's exposure to equity price fluctuations is primarily related to the RSU and DSU liability included in accounts payable and accrued liabilities. The value of the vested DSU and RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares. The Company has performed a sensitivity analysis on equity price risk as at June 27, 2009, to determine how a change in the price of the Company's Subordinate Voting Shares would have impacted net earnings. As at June 27, 2009, a total of 133,300 RSUs have been granted and 78,920 DSUs have been granted. An increase or decrease of $1.00 in the market price of the Company's Subordinate Voting Shares would have increased or decreased net earnings by approximately $0.1 million. This analysis assumes that all RSUs and DSUs were fully vested and other variables remain constant.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due. As at June 27, 2009, the Company had $24.6 million of cash; an operating credit facility of $25 million that is committed until June 28, 2010; and a $10 million uncommitted letter of credit facility which includes an uncommitted demand overdraft facility in the amount of $0.5 million related thereto. The credit facilities are used to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company expects that the majority of its accounts payable and accrued liabilities will be discharged within 90 days.

Credit Risk

Credit risk is the risk that a customer or counterparty to a financial instrument will cause a financial loss to the Company by failing to meet its obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash (which includes cash and money market investments with maturities of three months or less) and accounts receivable. The Company limits its exposure to credit risk with respect to cash and money market investments by investing in short-term deposits and bankers acceptances with major Canadian financial institutions and Government of Canada treasury bills. The Company's accounts receivable consist primarily of credit card receivables from the last few days of the fiscal period end, which are settled within the first few days of the new fiscal period. Accounts receivable also consist of accounts receivable from licensees and corporate customers. Accounts receivable are net of applicable allowance for doubtful accounts, which is established based on the specific credit risks associated with the licensee, each corporate customer and other relevant information. The allowance for doubtful accounts is assessed on a quarterly basis. Concentration of credit risk with respect to accounts receivable from licensees and corporate customers is limited due to the relatively insignificant balances outstanding and the number of different customers comprising the Company's customer base.

As at June 27, 2009, the Company's exposure to credit risk for these financial instruments was cash of $24.6 million and accounts receivable of $0.4 million. Cash included $22.4 million of short-term deposits.

17. Capital Disclosure:

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

- Ensure sufficient liquidity to support its current operations and execute its business plans;

- Enable the internal financing of capital projects; and

- Maintain a strong capital base so as to maintain investor, creditor and market confidence.

The Company's primary uses of capital are to finance non-cash working capital along with capital expenditures for new store additions, existing store renovation or relocation projects, information technology software and hardware purchases and production machinery and equipment purchases. The Company maintains a $25 million operating credit facility and a $10 million uncommitted letter of credit facility that it uses to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company does not have any long-term debt and therefore net earnings generated from operations are available for reinvestment in the Company. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year-over-year sustainable profitable growth. On a quarterly basis, the Board of Directors monitors share repurchase program activities. Decisions on whether to repurchase shares are made on a specific transaction basis and depend on the Company's cash position, estimates of future cash requirements, market prices and regulatory restrictions. The Company does not currently pay dividends.

Externally imposed capital requirements include a debt-to-equity ratio covenant as part of the operating credit facility. The Company was in compliance with this covenant as at June 27, 2009 and June 28, 2008. There has been no change with respect to the overall capital risk management strategy during the year ended June 27, 2009.

18. Segmented Information:

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



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
www.danier.com