Danier Leather Reports Fiscal 2010 Fourth Quarter and Year End Results


TSX SYMBOL: DL

Aug 12, 2010 - 06:00

TORONTO, ONTARIO--(Marketwire - Aug. 12, 2010) - Danier Leather Inc. (TSX:DL) today announced its consolidated financial results for the fourth quarter and fiscal year ended June 26, 2010.

FISCAL 2010 FULL YEAR HIGHLIGHTS

  • EBITDA more than tripled to $15.2 million from $4.3 million last year
  • Comparable store sales increased by 4%
  • Gross profit dollars increased by 18% on a 740 basis point increase in gross margin
  • Earnings per outstanding share of $1.58
  • Repurchased 1,352,700 Subordinate Voting Shares or 28.9% of the prior year's outstanding Subordinate Voting Shares

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

  Quarter Ended   Year Ended  
  Jun 26, 2010   Jun 27, 2009   Jun 26, 2010 Jun 27, 2009  
  (13 weeks)   (13 weeks)   (52 weeks) (52 weeks)  
Sales $ 26,777   $ 26,989   $ 164,217 $ 162,106  
EBITDA(1)   (440 )   (2,415 )   15,157   4,340  
Net Earnings (Loss)   (660 )   (2,768 )   7,219   (2,309 )
Adjusted Net Earnings (Loss)(2)   (660 )   (2,755 )   7,119   (989 )
EPS - Basic   ($0.14 )   ($0.45 ) $ 1.30   ($0.37 )
EPS - Diluted   ($0.14 )   ($0.45 ) $ 1.28   ($0.37 )
EPS – Per Outstanding Share   ($0.14 )   ($0.47 ) $ 1.58   ($0.39 )
Number of Stores   90     86     90   86  
Retail Square Footage   318,927     316,337     318,927   316,337  

Gross profit dollars increased by $1.6 million or 13% to $14.3 million compared with $12.7 million during the fourth quarter last year. Danier entered the seasonally slower fourth quarter with an improved inventory position compared with the prior year and, accordingly, management decided to reduce promotional activity and markdowns and focus on gross margin and gross profit dollar improvement. Fourth quarter sales decreased by 1% while comparable store sales decreased by 2%. Net loss for the fourth quarter of fiscal 2010 decreased by approximately $2.1 million to $0.7 million, or $0.14 loss per outstanding share, compared with a net loss of $2.8 million, or $0.47 loss per outstanding share, during the fourth quarter last year. EBITDA loss for the fourth quarter of fiscal 2010 was $0.4 million which represents a $2.0 million decrease from last year's EBITDA loss of $2.4 million. 

Selling, general and administrative expenses ("SG&A") during the fourth quarter of 2010 decreased by $1.1 million, mainly due to reduced head office and retail staff wages and administrative expenses and lower amortization. 

Year-to-date sales increased 1% or $2.1 million to $164.2 million, while comparable store sales increased by 4%. Year-to-date net earnings were $7.2 million ($1.28 per diluted share) and represent a $9.5 million increase as compared with a net loss of $2.3 million (or $0.37 loss per diluted share) last year. Year-to-date earnings per share based on outstanding shares at year-end were $1.58 compared with a $0.39 loss per share last year. Year-to-date EBITDA more than tripled to $15.2 million compared with $4.3 million last year. 

Year-to-date gross profit as a percentage of revenue increased by 740 basis points and was 52.8% compared with 45.4% during fiscal 2009. The year-to-date gross margin rate increase was mainly due to improved merchandise planning and purchasing, a stronger Canadian dollar and reduced markdowns as compared with last year. Year-to-date SG&A increased by 2% or $1.2 million to $75.9 million compared with $74.7 million last year. This increase was due primarily to higher performance-based compensation for store and head office staff and increased stock-based compensation primarily resulting from an increase in the Company's share price. Excluding the increase in performance-based and stock-based compensation, SG&A decreased by $3.2 million.

Danier currently has a total of 4,568,169 shares outstanding comprised of 3,343,840 Subordinate Voting Shares and 1,224,329 Multiple Voting Shares. During fiscal 2010, Danier repurchased a total of 1,352,700 Subordinate Voting Shares of which 1,120,000 Subordinate Voting Shares were repurchased during the third quarter of fiscal 2010 under a modified "Dutch Auction" substantial issuer bid and 232,700 Subordinate Voting Shares were repurchased under Danier's subsequent normal course issuer bid on the facilities of the TSX during the fourth quarter of fiscal 2010. During the prior fiscal year, an aggregate of 367,160 Subordinate Voting Shares were repurchased under two consecutive normal course issuer bids outstanding during that period. 

Danier maintained a strong financial position at the fiscal 2010 year-end with approximately $26.6 million in cash ($5.81 per outstanding share) compared with $24.6 million at the end of fiscal 2009. Inventory at the fiscal 2010 year-end was $26.5 million compared with $21.0 million last year. The increase in inventory is due mainly to early purchases of finished goods merchandise for the upcoming fall/winter season. Danier has no long-term debt and working capital of $36.9 million. Book value per outstanding share at the end of the fourth quarter of fiscal 2010 was $12.00 per outstanding share.

(1) EBITDA is defined as net earnings (loss) before net interest expense (income), income taxes, amortization, restructuring costs and goodwill impairment charge. 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 and goodwill impairment charge and its ability to incur and service debt. EBITDA is not a recognized measure for financial presentation under Canadian generally accepted accounting principles ("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 26, 2010   Jun 27, 2009     Jun 26, 2010   Jun 27, 2009  
Net earnings (loss)   ($660 )   ($2,768 )   $ 7,219     ($2,309 )
  Provision for (recovery of) income tax   (470 )   (1,035 )     3,730     (812 )
  Interest expense (income) - net   10     5       116     104  
  Amortization   680     1,365       4,245     5,549  
  Restructuring costs   -     18       (153 )   1,466  
  Goodwill impairment charge   -     -       -     342  
EBITDA   ($440 )   ($2,415 )   $ 15,157   $ 4,340  

(2) Adjusted net earnings (loss) ("Adjusted Net Earnings (Loss)") is defined as net earnings (loss) before restructuring costs, goodwill impairment charge and income taxes related to the 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 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 26, 2010   Jun 27, 2009     Jun 26, 2010   Jun 27, 2009  
Net earnings (loss)   ($660 )   ($2,768 )   $ 7,219     ($2,309 )
  Restructuring costs   -     18       (153 )   1,466  
  Goodwill impairment charge   -     -       -     342  
  Income tax provision related to goodwill impairment charge and restructuring costs   -     (5 )     53     (488 )
Adjusted Net Earnings (Loss)   ($660 )   ($2,755 )   $ 7,119     ($989 )
Weighted average number of shares outstanding - (diluted)   4,846,837     6,106,448       5,638,389     6,184,762  
Adjusted Net Earnings (Loss) per diluted share   ($0.14 )   ($0.45 )   $ 1.26     ($0.16 )

Note: This press release may contain 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, if any, 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, opinions and assumptions made by management and management's good faith belief with respect to future events, performance and results and are subject to inherent risks and uncertainties surrounding future expectations generally. For additional information with respect to Danier's inherent risks and uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with the Canadian Securities Regulatory Authorities, including the Company's annual information form, quarterly and annual reports and financial statements and notes thereto, 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 cautions readers that th list of factors and uncertainties is not exhaustive and that should certain risks or uncertainties materialize, or should underlying estimates or 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. 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, except as required by applicable law.

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, distributor and retailer of high-quality fashion-oriented 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 90 shopping mall, street-front and power centre stores. Corporations and other organizations can obtain Danier products for use as incentives and premiums for employees, suppliers and customers through Canada Sportswear Corp. 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 9:00 AM Eastern Time to discuss the results. Please dial 416-695-6616 in the Toronto area or 1-800-766-6630 (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 26,2010   June 27, 2009     June 26, 2010   June 27, 2009  
  (unaudited)   (unaudited)            
Revenue $ 26,777   $ 26,989     $ 164,217   $ 162,106  
Cost of sales (Note 8)   12,493     14,307       77,438     88,589  
Gross profit   14,284     12,682       86,779     73,517  
  Selling, general and administrative expenses (Note 8)   15,404     16,462       75,867     74,726  
  Interest expense (income) – net   10     5       116     104  
  Restructuring costs (Note 9)   -     18       (153 )   1,466  
  Goodwill impairment charge (Note 10)   -     -       -     342  
Earnings (loss) before income taxes   (1,130 )   (3,803 )     10,949     (3,121 )
Provision for (recovery of) income taxes (Note 11)                          
  Current   (460 )   (926 )     3,714     (842 )
  Future   (10 )   (109 )     16     30  
    (470 )   (1,035 )     3,730     (812 )
Net earnings (loss) and comprehensive earnings (loss)   ($660 )   ($2,768 )   $ 7,219     ($2,309 )
                           
Net earnings (loss) per share:                          
  Basic   ($0.14 )   ($0.45 )   $ 1.30     ($0.37 )
  Diluted   ($0.14 )   ($0.45 )   $ 1.28     ($0.37 )
                           
Weighted average number of shares outstanding:                          
  Basic   4,681,470     6,105,645       5,545,918     6,184,557  
  Diluted   4,846,837     6,106,448       5,638,389     6,184,762  
Number of shares outstanding at period end   4,568,169     5,909,269       4,568,169     5,909,269  

See accompanying notes to the consolidated financial statements

DANIER LEATHER INC.
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
       
  June 26, 2010   June 27, 2009
ASSETS          
Current Assets          
  Cash $ 26,563   $ 24,628
  Accounts receivable   543     351
  Income taxes recoverable   -     631
  Inventories (Note 3)   26,539     21,045
  Prepaid expenses   1,140     1,156
  Future income tax asset (Note 11)   51     245
    54,836     48,056
Other Assets          
  Property and equipment (Note 4)   16,349     17,611
  Intangible assets (Note 5)   1,417     1,728
  Future income tax asset (Note 11)   1,522     1,657
  $ 74,124   $ 69,052
LIABILITIES          
Current Liabilities          
  Accounts payable and accrued liabilities $ 14,005   $ 10,601
  Income taxes payable   3,900     -
  Future income tax liability (Note 11)   53     366
    17,958     10,967
Deferred lease inducements and rent liability   1,345     1,389
    19,303     12,356
SHAREHOLDERS' EQUITY          
  Share capital (Note 7)   14,176     19,853
  Contributed surplus   1,106     823
  Retained earnings   39,539     36,020
    54,821     56,696
  $ 74,124   $ 69,052

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 26, 2010   June 27, 2009     June 26, 2010   June 27, 2009  
  (unaudited)   (unaudited)            
OPERATING ACTIVITIES                  
  Net earnings (loss)   ($660 )   ($2,768 )   $ 7,219     ($2,309 )
    Items not affecting cash:                          
    Amortization of property and equipment   612     1,093       3,677     4,853  
    Amortization of intangible assets   68     272       568     696  
    Amortization of deferred lease inducements   (61 )   (88 )     (234 )   (357 )
    Straight line rent expense   14     18       89     56  
    Stock-based compensation   56     82       302     275  
    Goodwill impairment charge (Note 10)   -     -       -     342  
    Future income taxes   (10 )   (109 )     16     30  
  Net change in non-cash working capital items (Note 12)   (3,230 )   4,194       2,265     7,172  
  Proceeds from deferred lease inducements   1     -       101     101  
  Repayment of deferred lease inducement   -     -       -     (86 )
Cash flows from operating activities   (3,210 )   2,694       14,003     10,773  
                           
FINANCING ACTIVITIES                          
  Subordinate voting shares issued (Note 7)   21     -       37     -  
  Subordinate voting shares repurchased (Note 7)   (1,975 )   (1,133 )     (9,433 )   (1,593 )
  Repayment of obligation under capital lease   -     (88 )     -     (858 )
Cash flows used in financing activities   (1,954 )   (1,221 )     (9,396 )   (2,451 )
                           
INVESTING ACTIVITIES                          
  Acquisition of property and equipment   (411 )   (1,298 )     (2,415 )   (3,145 )
  Acquisition of intangible assets   (169 )   (142 )     (257 )   (431 )
Cash flows used in investing activities   (580 )   (1,440 )     (2,672 )   (3,576 )
                           
Increase (decrease) in cash   (5,744 )   33       1,935     4,746  
Cash, beginning of period   32,307     24,595       24,628     19,882  
Cash, end of period $ 26,563   $ 24,628     $ 26,563   $ 24,628  
                           
Supplementary cash flow information:                          
  Interest paid   12     150       13     365  
  Income taxes paid   -     -       67     353  

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 26, 2010   June 27, 2009     June 26, 2010   June 27, 2009  
  (unaudited)   (unaudited)            
SHARE CAPITAL                  
  Balance, beginning of period $ 15,130   $ 20,985     $ 19,853   $ 21,409  
  Shares repurchased   (986 )   (1,132 )     (5,733 )   (1,556 )
  Shares issued on exercise of stock options   32     -       56     -  
  Balance, end of period $ 14,176   $ 19,853     $ 14,176   $ 19,853  
                           
CONTRIBUTED SURPLUS                          
  Balance, beginning of period $ 1,061   $ 741     $ 823   $ 548  
  Stock-based compensation related to stock options   56     82       302     275  
  Exercise of stock options   (11 )   -       (19 )   -  
  Balance, end of period $ 1,106   $ 823     $ 1,106   $ 823  
                           
RETAINED EARNINGS                          
  Balance, beginning of period $ 41,188   $ 38,789     $ 36,020   $ 38,176  
  Adjustment to opening retained earnings due to adoption of new inventory accounting standard (net of tax of $122) (Note 1)   -     -       -     190  
  Net earnings (loss)   (660 )   (2,768 )     7,219     (2,309 )
  Share repurchases   (989 )   (1 )     (3,700 )   (37 )
  Balance, end of period $ 39,539   $ 36,020     $ 39,539   $ 36,020  
                           
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 $ 54,821   $ 56,696     $ 54,821   $ 56,696  

See accompanying notes to the consolidated financial statements

DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 26, 2010 and June 27, 2009
(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, distributor and retailer of leather apparel and accessories. 

1. Implementation of New Accounting Standards:

Effective June 28, 2009, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"). 

CICA Section 3064 – Goodwill and Intangible Assets

This CICA Handbook section 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 and is applicable to fiscal years beginning on or after October 1, 2008. Under the new standard, computer software, which was previously included in property and equipment, is now required to be reported as an intangible asset. As computer software has a limited useful life, it continues to be amortized at an annual rate of 30% declining balance.

The impact of adopting this standard was to reclassify the net book value of computer software of $1,417 as at June 26, 2010 (June 27, 2009 - $1,728) from property and equipment to intangible assets. The adoption of this new standard had no impact on the Company's financial results.

CICA Section 3862 – Financial Instruments – Disclosures

In June 2009, the CICA amended Section 3862 – Financial Instruments – Disclosures to adopt the amendments recently issued by the IASB to International Financial Reporting Standard 7 – Financial Instruments – Disclosures ("IFRS 7"), in March 2009. This standard is applicable to fiscal years ending after September 30, 2009 and comparative information is not required in the first year of adoption. The amendments were made to enhance disclosures about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial instruments. The amendments establish a three level hierarchy that reflects the significance of the inputs used in fair value measurements on financial instruments as follows: 

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The adoption of this standard did not have any impact on the classification and measurement of the Company's financial instruments or the liquidity risk disclosures. See Note 15 for additional disclosures.

Effective June 29, 2008, the Company adopted the following accounting standards issued by the 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 as at June 29, 2008 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 as at June 29, 2008.

Emerging Issues Committee 173 – Credit Risk and the Fair Value of Financial Assets and Financial Liabilities ("EIC 173")

In January 2009, EIC 173 was issued concerning the measurement of financial assets and financial liabilities. The EIC reached a consensus that a company's credit risk and the credit risk of counterparties should be considered when determining the fair value of its financial assets and financial liabilities, including derivative instruments. The transitional provisions require retrospective application without restatement of prior periods. The implementation of EIC 173 did not have an impact on the Company's financial results or on the financial position of the Company.

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 26, 2010, and comparably the 52-week period ended June 27, 2009.

(c) Revenue recognition:

Revenue includes sales to customers through stores operated by the Company, sales of incentive and promotional product merchandise to a third party distributor 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 the third party distributor are recognized at the time the merchandise is shipped by the distributor to their customer and sales from 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. 

Effective as of the fiscal year beginning June 28, 2009, the Company centralized a significant portion of its alterations operation and now has alterations work performed by the Company's own employees rather than third party suppliers. As a result, the Company began to report alterations revenue as part of revenue and alterations expense as cost of sales. Warranty related repairs continue to be included in SG&A. In prior years, a significant portion of alterations work was performed by third party suppliers and alterations revenue and expense was therefore previously reported on a net basis and was included in SG&A in accordance with EIC 123 – Reporting Revenue Gross as a Principal versus Net as an Agent.

(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 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) Intangible assets:

Intangible assets consist of computer software and annual amortization is provided at a rate of 30% declining balance.

(h) 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 10).

(i) 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.

(j) Store opening costs:

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

(k) 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 $325 as at June 26, 2010 (June 27, 2009 - $123) and are included in prepaid expenses on the consolidated balance sheet. 

(l) 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.

(m) 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 7). 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 of the Subordinate Voting Shares on the Toronto Stock Exchange (the "TSX") are exercised and the assumed proceeds are used to purchase the Company's Subordinate Voting Shares at the average monthly market price on the TSX during the fiscal year. 

(n) 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).

(o) Financial instruments:

Financial instruments are recognized depending on their classification with changes in subsequent measurements being recognized in net earnings or other comprehensive income. The Company's financial assets and liabilities are classified as follows:

Cash is classified as "held-for-trading" and is measured at fair value. This financial asset is marked-to-market through net earnings and recorded as interest income at each period end.

Accounts receivable are classified as "loans and receivables" and are recorded at cost, which at initial measurement corresponds to fair value. After their initial fair value measurement, they are measured at amortized cost using the effective interest method.

Accounts payable and accrued liabilities and bank indebtedness are classified as "other liabilities". They are initially measured at fair value and subsequent revaluations are recorded at amortized cost using the effective interest rate method. 

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.

Foreign currency option contracts, which are included in either accounts receivable or 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.

(p) Stock option plan:

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

(q) Restricted Share Units and Deferred Share Units:

The Company has restricted share unit ("RSU") and deferred share unit ("DSU") Plans, which are described in Note 7. 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 on the TSX are recorded as a charge to SG&A expense. Dividend equivalent grants, if any, are recorded as a charge to SG&A expense in the period the dividend is paid.

(r) 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. 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. Illiquid credit markets, volatile equity and foreign currency markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Significant areas requiring the use of management estimates relate to the determination of inventory valuation, realizable value of property and equipment and intangible assets, 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. Inventories:

  June 26, 2010   June 27, 2009
Raw materials $ 1,451   $ 2,202
Work-in-process   105     186
Finished goods   24,983     18,657
  $ 26,539   $ 21,045
           
  13 Weeks Ended   Year Ended
  June 26, 2010 June 27, 2009   June 26, 2010 June 27, 2009
Cost of inventory recognized as an expense $ 12,267 $ 14,307   $ 76,473 $ 88,589
Write-downs of inventory due to net realizable value being lower than cost $ 1,300 $ 173   $ 2,267 $ 1,742
Write-downs recognized in previous periods that were reversed $ - $ -   $ 25 $ 222

4. Property and Equipment:

  June 26, 2010   June 27, 2009
  Cost Accumulated Amortization Net
Book
Value
  Cost Accumulated Amortization Net
Book
Value
Land $ 1,000 $ - $ 1,000   $ 1,000 $ - $ 1,000
Building   7,064   2,380   4,684     7,064   2,185   4,879
Leasehold improvements   23,574   16,700   6,874     23,539   15,949   7,590
Furniture and equipment   8,504   5,671   2,833     8,786   5,884   2,902
Computer hardware   3,110   2,152   958     3,362   2,122   1,240
  $ 43,252 $ 26,903 $ 16,349   $ 43,751 $ 26,140 $ 17,611

5. Intangible Assets:

Intangible assets consist of computer software which was previously reported as property and equipment (see Note 1).

  June 26, 2010   June 27, 2009
Cost $ 4,169   $ 3,940
Accumulated amortization   2,752     2,212
Net book value $ 1,417   $ 1,728

6. 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 27, 2011 and bears interest at prime plus 0.75%. Standby fees of 0.50% 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 ($14 million between September 1, 2010 and December 15, 2010) and an uncommitted demand overdraft facility in the amount of $0.5 million 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.

7. 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 28, 2008 1,224,329     Nominal  
Balance June 27, 2009 1,224,329     Nominal  
Balance June 26, 2010 1,224,329     Nominal  
           
Subordinate Voting Shares        
  Number   Consideration  
Balance June 28, 2008 5,052,100   $ 21,409  
  Shares repurchased (367,160 )   (1,556 )
Balance June 27, 2009 4,684,940   $ 19,853  
  Shares repurchased (1,352,700 )   (5,733 )
  Shares issued upon exercising of stock options 11,600     56  
Balance June 26, 2010 3,343,840   $ 14,176  

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, among other things, 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 26, 2010   June 27, 2009
Weighted average number of shares for basic earnings per share calculations 5,545,918   6,184,557
Effect of dilutive options outstanding 92,471   205
Weighted average number of shares for diluted earnings per share calculations 5,638,389   6,184,762

The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares on the TSX during the period. The number of options excluded was 115,000 as at June 26, 2010 and 247,000 as at June 27, 2009.

(d) Substantial Issuer Bid and Normal Course Issuer Bids

On January 29, 2010, the Company commenced a substantial issuer bid ("SIB" or the "Offer") by filing and mailing a formal offer to purchase and accompanying circular dated January 26, 2010, pursuant to which the Company offered to purchase for cancellation up to $7 million in value of its Subordinate Voting Shares from shareholders by way of a modified "Dutch Auction" at a range of Offer prices between $6.10 and $6.45 per share. The minimum and maximum Offer prices corresponded with the fair market range of values per Subordinate Voting Share determined, as of January 20, 2010, by Deloitte and Touche LLP, the independent valuator engaged by the Special Committee of independent directors of the Board of Directors to prepare a formal valuation of the Subordinate Voting Shares. The Offer expired on March 8, 2010 and a total of 1,845,592 Subordinate Voting Shares were validly deposited and not withdrawn under the Offer. As the aggregate value of Subordinate Voting Shares deposited under the Offer exceeded the $7 million maximum value of consideration payable by the Corporation pursuant to the Offer, a pro-ration factor of 0.6088 was applied to deposited Subordinate Voting Shares (except for odd lot deposits, which were not subject to pro-ration), and the Corporation purchased for cancellation 1,120,000 Subordinate Voting Shares at a price of $6.25 per share.

During the past several years, the Company has received approval from the TSX to commence various normal course issuer bids ("NCIBs"). On May 4, 2010, the Company received approval from the TSX to commence its fourth normal course issuer bid (the "2010 NCIB"). The Company's previous normal course issuer bid expired on May 6, 2010 (the "2009 NCIB"). The 2010 NCIB permits the Company to acquire up to 232,792 Subordinate Voting Shares, representing approximately 10% of the "public float" of the Subordinate Voting Shares at the time of commencement, during the period from May 7, 2010 to May 6, 2011, or such earlier date as the Company may complete its purchases under the 2010 NCIB. For these purposes, the "public float" is the Company's then outstanding Subordinate Voting Shares less any shares held by the Company's senior officers and directors and by shareholders that own 10% or more of the Subordinate Voting Shares. During the fourth quarter of fiscal 2010, the Company repurchased 232,700 Subordinate Voting Shares for cancellation at a weighted average price of $8.49, leaving only 92 Subordinate Voting Shares available for repurchase by the Company under the 2010 NCIB.

The following Subordinate Voting Shares were repurchased for cancellation under the SIB and NCIBs then in effect during the fourth quarter and year ended June 26, 2010 and June 27, 2009:

  13 Weeks Ended   Year Ended
  June 26, 2010 June 27, 2009   June 26, 2010 June 27, 2009
Number of shares repurchased under SIB   -   -     1,120,000   -
Number of shares repurchased under NCIBs   232,700   267,160     232,700   367,160
Amount charged to share capital $ 986 $ 1,132   $ 5,733 $ 1,556
Amount charged to retained earnings representing the excess over the average paid-in value $ 989 $ 1   $ 3,700 $ 37
Total cash consideration $ 1,975 $ 1,133   $ 9,433 $ 1,593

(e) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers, employees and service providers, pursuant to which granted options are exercisable for Subordinate Voting Shares. As at June 26, 2010, the Company has reserved 823,900 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 (subject to extension in accordance with the Stock Option Plan if the options would otherwise expire during a black-out period). 

A summary of the status of the Company's Stock Option Plan as of June 26, 2010 and June 27, 2009 and changes during the years ended on those dates is presented below:

  June 26, 2010   June 27, 2009
Stock Options Shares   Weighted Average Exercise Price   Shares   Weighted Average Exercise Price
Outstanding at beginning of year 577,000   $ 6.13   293,000   $ 10.21
Granted -     -   330,000   $ 3.20
Exercised (11,600 ) $ 3.15   -     -
Forfeited (12,000 ) $ 6.02   (46,000 ) $ 11.13
Outstanding at end of year 553,400   $ 6.19   577,000   $ 6.13
Options exercisable at end of year 324,641   $ 8.18   199,500   $ 10.75

The following table summarizes the distribution of these options and the remaining contractual life as at June 26, 2010:

  Options Outstanding   Options Exercisable
Exercise Prices # Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price   # of Shares Exercisable Weighted Average Exercise Price
$3.15 298,400 8.3 years $ 3.15   91,725 $ 3.15
$3.97 20,000 8.8 years $ 3.97   6,666 $ 3.97
$6.25 50,000 8.0 years $ 6.25   50,000 $ 6.25
$7.80 55,000 6.6 years $ 7.80   46,250 $ 7.80
$8.68 15,000 6.8 years $ 8.68   15,000 $ 8.68
$10.40 20,000 0.1 years $ 10.40   20,000 $ 10.40
$10.96 21,000 3.1 years $ 10.96   21,000 $ 10.96
$11.20 16,000 1.1 years $ 11.20   16,000 $ 11.20
$15.85 58,000 2.1 years $ 15.85   58,000 $ 15.85
  553,400 6.4 years $ 6.19   324,641 $ 8.18
                 

During the year ended June 26, 2010, there were no stock options granted. 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. The weighted average estimated fair value at the date of grant for the options granted was $1.67 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 June 26, 2010 Year Ended June 27, 2009  
Risk-free interest rate - 3.7 %
Dividend yield - -  
Expected volatility - 34 %
Expected life of options - 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 26, 2010 in respect of stock options was $302 (June 27, 2009 - $275). The counterpart is recorded as contributed surplus. Any consideration paid by optionees 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 may 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, and if, 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 on the TSX.

The following transactions occurred with respect to the DSU Plan:

  13 Weeks Ended   Year Ended  
  June 26, 2010 June 27, 2009   June 26, 2010 June 27, 2009  
Outstanding at beginning of period   103,920   78,920     78,920   58,920  
Granted   -   -     25,000   20,000  
Redeemed   -   -     -   -  
Outstanding at end of period   103,920   78,920     103,920   78,920  
Danier stock price at end of period $ 8.86 $ 4.75   $ 8.86 $ 4.75  
Liability at end of period $ 921 $ 375   $ 921 $ 375  
Compensation expense recorded in SG&A $ 246 $ 167   $ 546 $ (2 )

(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 eligible participants 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, and if, dividends are paid by the Company, an equivalent number of RSUs are added to the RSU account of the participant 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 participant. The value of the vested RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares on the TSX.

The following transactions occurred with respect to the RSU Plan:

  13 Weeks Ended   Year Ended
  June 26, 2010   June 27, 2009   June 26, 2010   June 27, 2009
Outstanding at beginning of period   120,890     133,300     133,300     133,300
Granted   -     -     -     -
Redeemed   (15,411 )   -     (27,821 )   -
Forfeited   -     -     -     -
Outstanding at end of period   105,479     133,300     105,479     133,300
Liability at end of period $ 836   $ 450   $ 836   $ 450
Compensation expense recorded in SG&A $ 290   $ 221   $ 597   $ 39

8. Amortization:

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

  13 Weeks Ended   Year Ended
  June 26, 2010 June 27, 2009   June 26, 2010 June 27, 2009
Cost of sales $ 53 $ 66   $ 183 $ 560
SG&A   627   1,299     4,062   4,989
  $ 680 $ 1,365   $ 4,245 $ 5,549

9. Restructuring Costs:

Restructuring costs of approximately $1.5 million were originally recorded during the last half of fiscal 2009 and represented 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 $1.3 million of the restructuring costs have been paid to date and $0.2 million of restructuring costs were reversed during fiscal 2010 as these costs are not expected to be incurred as all severances have been paid. As at June 26, 2010, there are no amounts remaining to be paid (June 27, 2009 - $0.5 million remained to be paid and was recorded in accounts payable and accrued liabilities).

10. Goodwill Impairment Charge:

Due to the uncertain economic environment and a sustained decrease in the market capitalization of the Company during the third quarter of fiscal 2009, management concluded that an indicator of goodwill impairment was present. Accordingly, management completed a goodwill impairment test using the two-step process prescribed in CICA Handbook Section 3062 – Goodwill and Other Intangible Assets and determined that 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).

11. Income Taxes:

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

  June 26, 2010   June 27, 2009
Amortization $ 710   $ 741
Deferred lease inducements and rent liability   354     406
Stock based compensation   456     236
Other   -     153
  $ 1,520   $ 1,536

Recorded in the consolidated balance sheets as follows:

  June 26, 2010     June 27, 2009  
Future income tax asset – current portion $ 51     $ 245  
Future income tax asset – long term portion   1,522       1,657  
Future income tax liability – current portion   (53 )     (366 )
Net future tax asset $ 1,520     $ 1,536  

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

  June 26, 2010     June 27, 2009  
Combined basic federal and provincial average statutory rate 31.5 %   32.2 %
Non-deductible expenses 1.3 %   (8.4 %)
Future federal and provincial rate changes 1.1 %   (1.6 %)
Impact of loss carry back -     2.7 %
Other 0.2 %   1.1 %
  34.1 %   26.0 %

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

  13 Weeks Ended     Year Ended  
  June 26, 2010   June 27, 2009     June 26, 2010   June 27, 2009  
Decrease (increase) in:                          
  Accounts receivable $ 566   $ 697       ($192 ) $ 404  
  Income taxes recoverable   -     (631 )     631     (745 )
  Inventories   (104 )   6,699       (5,494 )   6,671  
  Prepaid expenses   (705 )   (651 )     16     86  
Increase (decrease) in:                          
  Accounts payable and accrued liabilities   (2,518 )   (1,633 )     3,404     756  
  Income taxes payable   (469 )   (287 )     3,900     -  
    ($3,230 ) $ 4,194     $ 2,265   $ 7,172  

13. 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 non-inventory assets and services. 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.

14. Commitments:

(a) Operating leases:

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

2011 $ 10,781
2012 $ 8,941
2013 $ 6,923
2014 $ 5,502
2015 $ 3,625
Thereafter $ 8,614

(b) Letters of credit:

The Company had outstanding letters of credit in the amount of $11,118 (June 27, 2009 - $8,771) for the importation of finished goods inventories to be received.

15. Financial Instruments:

(a) Fair value disclosure

The following table presents the carrying amount and the fair value of the Company's financial instruments. 

    June 26, 2010   June 27, 2009
  Maturity Carrying value Fair value   Carrying value Fair value
Cash Short-term $ 26,563 $ 26,563   $ 24,628 $ 24,628
Accounts receivable Short-term $ 435 $ 435   $ 351 $ 351
Accounts payable and accrued liabilities Short-term $ 14,005 $ 14,005   $ 10,451 $ 10,451
Derivative financial instruments(1) Short-term $ 108 $ 108     ($150)   ($150)
(1) Included in accounts receivable for the fiscal year ended June 26, 2010 and included in accounts payable and accrued liabilities for the fiscal year ended June 27, 2009.

The fair value of a financial instrument is the estimated amount that the Company would receive or pay to settle the financial assets and financial liabilities as at the reporting date. These estimates are subjective in nature, often involve uncertainties and the exercise of significant judgment and are made at a specific point in time, using available information about the financial instrument and may not reflect fair value in the future. 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 derivative financial instruments, which consist of foreign exchange collar contracts, have been marked-to-market and are categorized as Level 2 in the fair value hierarchy. Factors included in the determination of fair value include the spot rate, forward rates, estimates of volatility, present value factor, strike prices, credit risk of the Company and credit risk of counterparties. As at June 26, 2010, a $108 gain was recorded in SG&A for the contracts outstanding at year-end.
  The fair value of cash is determined using Level 2 inputs in the fair value hierarchy which include interest rates for similar instruments which are obtained from independent publications and market exchanges.
  Given their short-term maturity, the fair value of cash, accounts receivable and accounts payable and accrued liabilities approximates their carrying values.

(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 26, 2010 included collars with notional amounts of US$15,000 expiring between July 2, 2010 and December 6, 2010. 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. As at June 27, 2009, there were outstanding foreign exchange contracts with notional amounts of US$9,000 that expired between July 2, 2009 and August 24, 2009.

As at June 26, 2010, a sensitivity analysis was performed on the Company's U.S. dollar denominated financial instruments which principally consist of US$0.4 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 $13 decrease or increase, respectively, in the Company's net earnings for the year ended June 26, 2010.

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 26, 2010, to determine how a change in interest rates would have impacted net earnings. As at June 26, 2010, the Company's cash balance available for investment was approximately $26.6 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 on the TSX. The Company has performed a sensitivity analysis on equity price risk as at June 26, 2010 to determine how a change in the price of the Company's Subordinate Voting Shares would have impacted net earnings. As at June 26, 2010, a total of 105,479 RSUs and 103,920 DSUs have been granted and are outstanding. 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 become 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 26, 2010, the Company had $26.6 million of cash; an operating credit facility of $25 million that is committed until June 27, 2011; and a $10 million ($14 million between September 1, 2010 to December 15, 2010) 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), accounts receivable and foreign exchange option contracts. 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, distributors 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, distributor, 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, distributors 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 26, 2010, the Company's exposure to credit risk for these financial instruments was cash of $26.6 million and accounts receivable of $0.5 million. Cash included $15.0 million of short-term deposits.

16. 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 ($14 million between September 1, 2010 and December 15, 2010) 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 26, 2010 and June 27, 2009. There has been no change with respect to the overall capital risk management strategy during the year ended June 26, 2010.

17. Segmented Information:

Management has determined that the Company operates in one dominant industry which involves the design, manufacture, distribution 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
leather@danier.com
or
Danier Leather Inc.
Bryan Tatoff
Senior Vice-President, Chief Financial Officer & Secretary
(416) 762-8175 ext. 328
bryan@danier.com
www.danier.com