Danier Leather Inc.
TSX : DL

Danier Leather Inc.

August 15, 2006 15:30 ET

Danier Leather Reports Fiscal 2006 Fourth Quarter and Year End Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 15, 2006) - Danier Leather Inc. (TSX:DL) today announced its consolidated financial results for the fourth quarter and 52 weeks ended June 24, 2006.



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

----------------------------------------------------
For the 13 Weeks Ended For the Year Ended
------------------------------------------------------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
------------------------------------------------------------------------
Sales $22,028 $25,455 $148,351 $166,350
------------------------------------------------------------------------
Net Loss (4,615) (3,160) (5,503) (185)
------------------------------------------------------------------------
EPS - Basic ($0.70) ($0.48) ($0.84) ($0.03)
------------------------------------------------------------------------
EPS - Diluted ($0.70) ($0.48) ($0.84) ($0.03)
------------------------------------------------------------------------
Number of Stores 95 95 95 95
------------------------------------------------------------------------
Retail Square
Footage 375,557 371,954 375,557 371,954
------------------------------------------------------------------------


Sales for the fourth quarter decreased by 13% while comparable store sales decreased 15%. Year-to-date total sales and comparable store sales decreased 11%.

Net loss during the fourth quarter was $4.6 million, or $0.70 per share, compared with a net loss of $3.2 million, or $0.48 per share, in the fourth quarter last year. The fourth quarter of this year included $1.4 million of restructuring costs including $0.6 million for severance costs and outplacement counseling related to the head office downsizing that took place during the fourth quarter as well as $0.8 million of additional amortization to write off leasehold improvements and fixtures in connection with the closure of one street-front store, one power centre location and the reduction in size of one shopping mall store. The fourth quarter of last year included a $3.1 million litigation provision in connection with the class action lawsuit. Year-to-date net loss was $5.5 million, or $0.84 per share, compared with a net loss of $0.2 million, $0.03 per share in fiscal 2005.

Danier maintained a strong financial position at year-end with approximately $11.8 million in cash and a working capital balance of $36.4 million. Year-end inventory levels were approximately $3.3 million higher than last year as a result of earlier purchases of fall merchandise.

Two new stores have been opened during the year including one new shopping mall store at the Niagara Fallsview Casino in Ontario and a power centre location at Sunridge Mall in Calgary, Alberta. Two underperforming shopping mall stores whose leases expired were closed during the year.

For fiscal 2007 no new store openings are planned. One street-front store and one power centre location has been closed during Q1 2007 and two power centre locations are planned to be closed during the fourth quarter of 2007.

Action that has been taken for improved performance includes:

- Merchandise and marketing strategy is focused on our core customer

- Increased the number of newspaper flyer inserts to drive traffic to our stores during the key outerwear season of Q2 and Q3

- Narrower and deeper stock offering that will offer better size availability and still have considerable selection

- Reduced selling, general and administrative ("SG&A") expenses

Based on the Company's results for the year, the Board of Directors has resolved to suspend the payment of dividends. Danier has paid a dividend to its shareholders in each of the past eight quarters and intends to reinstate its dividend payment when financial conditions permit. However, the Board cannot determine at this time when a dividend resumption will occur.

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, and retailer of high-quality leather and suede clothing and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available only at its 93 shopping mall, street-front, and power centre stores, and through its corporate sales division.

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

Investors, analysts and the media are invited to participate in a conference call today at 4:00 PM Eastern Time to discuss the results. Please dial 416-695-7848 in the Toronto area or 1-877-888-4483 (rest of Canada and the U.S.) and quote the Danier Leather Inc. conference call with chairperson Jeffrey Wortsman at least five minutes prior to the call. The call will also be webcast at www.danier.com or at www.ccnmatthews.com.



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

For the 13 Weeks Ended For the Year Ended
------------------------ ----------------------
June 24, June 25, June 24, June 25,
2006 2005 2006 2005
------------------------ ----------------------
(unaudited) (unaudited)
Revenue $ 22,028 $ 25,455 $ 148,351 $ 166,350
Cost of sales (Note 9) 11,035 12,833 76,953 82,863
------------------------ ----------------------
Gross profit 10,993 12,622 71,398 83,487
Selling general and
administrative
expenses (Note 9) 16,799 15,313 78,796 77,215
Interest income (159) (131) (445) (340)
------------------------ ----------------------
Earnings (loss)
before income taxes
and undernoted items (5,647) (2,560) (6,953) 6,612
Restructuring costs
(Note 8 and 9) 1,389 - 1,389 -
Litigation provision
and related
expenses (Note 11) - 3,098 - 3,098
------------------------ ----------------------
Earnings (loss)
before discontinued
operations and
income taxes (7,036) (5,658) (8,342) 3,514
Provision for
(recovery of)
income taxes
(Note 10) (2,421) (2,476) (2,839) 931
------------------------ ----------------------
Net earnings (loss)
before discontinued
operations $ (4,615) $ (3,182) $ (5,503) $ 2,583
Income (loss) from
discontinued
operations (Note 2) - 22 - (2,768)
------------------------ ----------------------
Net loss $ (4,615) $ (3,160) $ (5,503) $ (185)
------------------------ ----------------------
------------------------ ----------------------

Retained earnings,
beginning of period $ 30,147 $ 35,767 $ 32,214 $ 36,902
Share purchases
(Note 7(d)) - - - (2,883)
Dividends (393) (393) (1,572) (1,620)
------------------------ ----------------------
Retained earnings,
end of period $ 25,139 $ 32,214 $ 25,139 $ 32,214
------------------------ ----------------------
------------------------ ----------------------

Net earnings (loss)
per share before
discontinued
operations:
Basic ($0.70) ($0.49) ($0.84) $0.38
Diluted ($0.70) ($0.49) ($0.84) $0.38

Net loss per share:
Basic ($0.70) ($0.48) ($0.84) ($0.03)
Diluted ($0.70) ($0.48) ($0.84) ($0.03)

Weighted average
number of shares
outstanding:
Basic 6,549,899 6,545,055 6,547,090 6,726,658
Diluted 6,572,738 6,590,567 6,583,540 6,790,056



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

June 24, June 25,
2006 2005
--------- ---------
ASSETS
Current Assets
Cash $ 11,833 $ 21,193
Accounts receivable 402 594
Income taxes recoverable 2,485 939
Inventories (Note 3) 32,348 29,031
Prepaid expenses 1,026 516
Assets of discontinued operations (Note 2) - 23
Future income tax asset (Note 10) 529 159
--------- ---------
48,623 52,455

Other Assets
Property and equipment (Note 4) 27,293 25,314
Goodwill 342 342
Future income tax asset (Note 10) 5,952 5,254
--------- ---------
$ 82,210 $ 83,365
--------- ---------
--------- ---------

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 10,708 $ 8,170
Current portion of capital lease obligation
(Note 6) 911 -
Future income tax liability (Note 10) 624 -
--------- ---------
12,243 8,170
Capital lease obligation (Note 6) 1,829 -
Accrued litigation provision and related
expenses (Note 11) 18,000 18,000
Deferred lease inducements and rent liability 2,125 1,838
Future income tax liability (Note 10) 57 420
--------- ---------
34,254 28,428
--------- ---------

SHAREHOLDERS' EQUITY
Share capital (Note 7) 22,542 22,493
Contributed surplus 275 230
Retained earnings 25,139 32,214
--------- ---------
47,956 54,937
--------- ---------
$ 82,210 $ 83,365
--------- ---------
--------- ---------



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

For the 13 Weeks Ended For the Year Ended
------------------------ ----------------------
June 24, June 25, June 24, June 25,
2006 2005 2006 2005
------------------------ ----------------------
(unaudited) (unaudited)

OPERATING ACTIVITIES
Net loss $ (4,615) $ (3,160) $ (5,503) $ (185)
Items not affecting
cash:
Amortization -
continuing operations
(Note 9) 2,366 1,323 7,055 6,216
Amortization
- discontinued
operations (Note 9) - - - 1,330
Amortization of
deferred lease
inducements (112) (150) (399) (445)
Straight line rent
expense 175 - 400 -
Stock based
compensation 11 11 45 11
Accrued litigation
provision and
related expenses - 2,777 - 2,550
Future income taxes (39) (788) (807) (622)
Net change in
non-cash working
capital items
(Note 12) (7,179) 962 (2,643) (2,205)
Discontinued
operations (Note 2) - 146 23 791
------------------------ ----------------------
Cash flows from
(used in) operating
activities (9,393) 1,121 (1,829) 7,441
------------------------ ----------------------

FINANCING ACTIVITIES
Subordinate voting
shares issued
(Note 7) 49 13 49 27
Subordinate voting
shares repurchased
(Note 7) - - - (4,583)
Dividends (393) (393) (1,572) (1,620)
Proceeds from
capital lease
obligation 2,902 - 2,902 -
Repayment of
obligations under
capital lease (162) - (162) -
Proceeds from
lease inducements - - 286 -
------------------------ ----------------------
Cash flows from
(used in) financing
activities 2,396 (380) 1,503 (6,176)
------------------------ ----------------------

INVESTING ACTIVITIES
Acquisition of
property and
equipment (1,787) (213) (9,034) (2,648)
------------------------ ----------------------
Cash flows used in
investing activities (1,787) (213) (9,034) (2,648)
------------------------ ----------------------
Increase (decrease)
in cash (8,784) 528 (9,360) (1,383)
Cash, beginning of
period 20,617 20,665 21,193 22,576
------------------------ ----------------------
Cash, end of period $ 11,833 $ 21,193 $ 11,833 $ 21,193
------------------------ ----------------------
------------------------ ----------------------

Supplementary cash
flow information:
Interest paid 15 - 15 3
Income taxes paid - 826 277 3,846



DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 24, 2006 and June 25, 2006
(dollar amounts in thousands except per share amounts and where
otherwise indicated)


1. 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 financial statements presented is the 52-week period ended June 24, 2006, and comparably the 52-week period ended June 25, 2005.

(c) Revenue recognition:

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

(d) Cash:

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

(e) Inventories

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

(f) 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.

Amortization expense includes gains and losses on disposals of property and equipment.

Property and equipment are reviewed for impairment at least annually or when events or circumstances indicate their carrying value exceeds the sum of the undiscounted cash flows expected from their use and eventual disposal. For purposes of annually reviewing store assets for impairment, asset groups are reviewed at their lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. Therefore, store net cash flows are grouped together by regional areas where a number of store operate within close proximity to one another. An impairment loss is recognized when the carrying amount of property and equipment is not recoverable and exceeds its fair value.

(g) Goodwill:

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

(h) Deferred lease inducements 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) Income taxes:

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

(k) Earnings per share:

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 are exercised and the assumed proceeds are used to purchase the Company's shares at the average monthly market price during the fiscal year.

(l) 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 (other than amortization, which was translated at the same average rate as the capital assets) are translated at the rates in effect on the transaction dates or at the average rates of exchange for the reporting period. The resulting net gain or loss is included in the statement of earnings.

(m) Financial instruments:

From time-to-time the Company utilizes derivative financial instruments in the management of its foreign currency exposure. Derivative financial instruments are not used for trading purposes. During the fiscal years ended June 24, 2006 and June 25, 2005, the Company purchased its foreign exchange requirements on the spot market and did not enter into any foreign currency exchange contracts.

(n) Stock option plan:

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

In the year ended June 26, 2004 the Canadian Institute of Chartered Accountants (CICA) amended Handbook Section 3870 "Stock-based Compensation and Other Stock-based Payments", which provides guidance on accounting for stock-based compensation, to require the use of the fair value-based method to account for stock options. In accordance with the transitional provisions allowed under the revised accounting standard, the Company prospectively applied the fair value-based method to all stock options granted on or after June 29, 2003. Accordingly, compensation cost is measured at fair value at the date of grant using the Black-Scholes Option Pricing Model and is recognized as an expense over the vesting period of the stock option with an offsetting credit to contributed surplus. When employees subsequently exercise their stock options, share capital is increased by the sum of the consideration paid by employees 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. In accordance with the prospective method of adoption of the new standard, no compensation expense is recognized for options granted prior to fiscal 2004. Pro forma disclosures relating to net earnings per share figures, as if the fair value method had been used for awards granted during fiscal 2003, are presented in Note 7(e).

(o) Restricted Share Units and Deferred Share Units:

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

(p) Use of estimates:

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's 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 litigation award reserves, inventory valuation, realizable value of property and equipment, future tax assets, goods and services tax, provincial sales tax 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.

2. Discontinued Operations:

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

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



13 Weeks Ended Year Ended
------------------------- -------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
------------------------- -------------------------
Revenue $- $87 $- $2,347
Operating loss - 39 - (1,288)
Write-down of fixed
assets - - - (1,075)
Lease and employee
termination costs - (17) - (405)
------------------------- -------------------------
Loss from
discontinued
operations $- $22 $- ($2,768)
------------------------- -------------------------



The net assets of discontinued operations are summarized as follows:

June 24, 2006 June 25, 2005
------------- -------------
Current assets $ - $ 23
Property and equipment - -
------------- -------------
- 23
Current liabilities - -
------------- -------------
Net assets from discontinued operations $ - $ 23
------------- -------------
------------- -------------



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

13 Weeks Ended Year Ended
-------------------------- --------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
-------------------------- --------------------------
Current assets $ - $ 505 $ 23 $ 861
Current liabilities - (359) - (70)
-------------------------- --------------------------
$ - $ 146 $ 23 $ 791
-------------------------- --------------------------


3. Inventories:

June 24, 2006 June 25, 2005
---------------- ----------------
Raw materials $ 1,738 $ 3,456
Work-in-process 1,000 634
Finished goods 29,610 24,941
---------------- ----------------
$ 32,348 $ 29,031
---------------- ----------------
---------------- ----------------



4. Property and Equipment:

June 24, 2006 June 25, 2005
----------------------------- -----------------------------
Accumulated Net Book Accumulated Net Book
Cost Amortization Value Cost Amortization Value
----------------------------- -----------------------------
Land $1,000 $- $ 1,000 $1,000 $- $1,000
Building 7,064 1,549 5,515 7,064 1,319 5,745
Leasehold
improve-
ments 25,996 15,489 10,507 25,566 13,710 11,856
Furniture
and
equipment 10,804 6,605 4,199 9,966 5,880 4,086
Computer
hardware
and
software 8,353 4,763 3,590 8,985 6,358 2,627
Computer
hardware
and
software
under
capital
lease 2,920 438 2,482 - - -
----------------------------- -----------------------------
$56,137 $28,844 $27,293 $52,581 $ 27,267 $ 25,314
----------------------------- -----------------------------
----------------------------- -----------------------------


5. Bank Facility:

During June 2006, the Company renegotiated its credit agreement. The new credit agreement provides for an operating facility for working capital and for general corporate purposes to a maximum amount of $35 million, bearing interest at prime plus 0.25%. Standby fees of 0.50% are paid on a quarterly basis on the unused portion of the facility. The operating facility is committed until June 30, 2007. The Company is required to comply with covenants regarding financial performance.

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

6. Obligations Under Capital Lease:

Future minimum lease payments required under capital leases which expire in fiscal 2009 are:



2007 $ 1,061
2008 1,061
2009 884
------------------------------------------------------------------------
$ 3,006
Amounts representing interest (at a weighted average
annual rate of 6.2%) 266
------------------------------------------------------------------------
$ 2,740
Current portion 911
------------------------------------------------------------------------
$ 1,829
------------------------------------------------------------------------
------------------------------------------------------------------------


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 26, 2004 1,224,329 Nominal
Balance June 25, 2005 1,224,329 Nominal
Balance June 24, 2006 1,224,329 Nominal

Subordinate Voting Shares
-------------------------
Number Consideration
-------------------------
Balance June 26, 2004 5,720,225 $24,166
Shares repurchased (402,400) (1,700)
Shares issued upon exercising of
stock options 4,000 27
-------------------------
Balance, June 25, 2005 5,321,825 $22,493
Shares issued upon exercising of
stock options 7,100 49
-------------------------
Balance, June 24, 2006 5,328,925 $22,542
-------------------------
-------------------------


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

(c) Earnings per share

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



June 24, 2006 June 25, 2005
-------------- --------------
Weighted average number of shares for
basic earnings per share calculations 6,547,090 6,726,658
Effect of dilutive options outstanding 36,450 63,398
-------------- --------------
Weighted average number of shares for
diluted earnings per share calculations 6,583,540 6,790,056
-------------- --------------
-------------- --------------


The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares during the period. The number of options excluded was 492,500 as at June 24, 2006 and 487,500 as at June 25, 2005.

(d) Normal course issuer bid

On February 2, 2005, the Company received approval from the Toronto Stock Exchange to renew its Normal Course Issuer Bid. The bid permits the Company to acquire up to 421,061 Subordinate Voting Shares, representing approximately 10% of the public float of the Subordinate Voting Shares, during the period from February 7, 2005 to February 6, 2006. The Normal Course Issuer Bid has not been renewed. During the year ended June 24, 2006, no shares were repurchased under the Normal Course Issuer Bid. During the prior year ended June 25, 2005, 402,400 Subordinate Voting Shares were purchased for cancellation at prevailing market prices for cash consideration of $4,583. The excess of $2,883 over the average paid-in value of the shares was charged to retained earnings.

(e) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at June 24, 2006, the Company has reserved 904,175 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on The Toronto Stock Exchange for the five trading days preceding the effective date of the grant. In general, options granted under the Stock Option Plan vest over a period of one year from the grant date for options issued to directors and four years from the grant date for options issued to officers and employees and expire no later than the tenth anniversary of the date of grant. A summary of the status of the Company's Stock Option Plan as of June 24, 2006 and June 25, 2005 and changes during the years ended on those dates is presented below:



June 24, 2006 June 25, 2005
-------------------------- ---------------------------
Weighted-average Weighted-average
Stock Options Shares exercise price Shares exercise price
-------------------------------------------- ---------------------------
Outstanding at
beginning of
year 645,400 $11.13 649,400 $11.21
Granted - - 25,000 $10.10
Exercised (7,100) $6.85 (4,000) $6.85
Forfeited (20,000) $11.93 (25,000) $12.92
-------------------------- ---------------------------
Outstanding at
end of year 618,300 $11.15 645,400 $11.13
-------------------------- ---------------------------
Options
exercisable at
end of year 577,800 $11.03 573,150 $10.80
-------------------------- ---------------------------



The following table summarizes the distribution of these options and
the remaining contractual life as at June 24, 2006:


Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise # Contractual Exercise # of Shares Exercise
Prices Outstanding Life Price Exercisable Price
---------------------------------------------- -------------------------
$6.02 18,500 3.2 years $6.02 18,500 $6.02
$6.85 107,300 2.0 years $6.85 107,300 $6.85
$10.10 25,000 8.8 years $10.10 6,250 $10.10
$10.40 29,250 4.1 years $10.40 29,250 $10.40
$10.50 15,000 4.3 years $10.50 15,000 $10.50
$10.96 25,000 7.1 years $10.96 22,500 $10.96
$11.20 20,000 5.1 years $11.20 20,000 $11.20
$11.25 261,250 1.9 years $11.25 261,250 $11.25
$15.85 97,000 6.1 years $15.85 77,750 $15.85
$17.94 20,000 5.8 years $17.94 20,000 $17.94
--------------------------------------------------------------
618,300 3.5 years $11.15 577,800 $11.03
--------------------------------------------------------------
--------------------------------------------------------------


There were no options granted during the year ended June 24, 2006. During the prior year ended June 25, 2005, the weighted average estimated fair value at the date of grant for options was $7.18. The fair value of each option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following assumptions:



June 24, 2006 June 25, 2005
-------------------------------
Risk-free interest rate n/a 4.11%
Dividend yield n/a 2.4%
Expected volatility n/a 58%
Expected life of options n/a 10 years


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

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

In accordance with the transitional provisions of CICA Handbook Section 3870, the Company applied the fair value based method to account for stock options on a prospective basis. Therefore, stock options granted during the year ended June 28, 2003 continue to be accounted for using the settlement accounting method and the pro-forma effect on net earnings and earnings per share are disclosed below. Had compensation cost been determined using the fair value-based method at the grant date of the stock options awarded to employees and directors during fiscal 2003, the net earnings and earnings per share for the years ended June 24, 2006 and June 25, 2005 would have been reduced to the pro forma amounts indicated in the following table:



13 Weeks Ended 13 Weeks Ended
June 24, 2006 June 25, 2005
------------------------- -------------------------
As Reported Pro-forma As Reported Pro-forma
------------------------- -------------------------
Net loss ($4,615) ($4,675) ($3,160) ($3,220)
Basic loss per
share ($0.70) ($0.71) ($0.48) ($0.49)
Diluted loss per
share ($0.70) ($0.71) ($0.48) ($0.49)


Year Ended Year Ended
June 24, 2006 June 25, 2005
------------------------- -------------------------
As Reported Pro-forma As Reported Pro-forma
------------------------- -------------------------
Net loss ($5,503) ($5,745) ($185) ($427)
Basic loss per
share ($0.84) ($0.88) ($0.03) ($0.06)
Diluted loss per
share ($0.84) ($0.88) ($0.03) ($0.06)


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

The compensation expense recorded for the year ended June 24, 2006 in respect of stock options granted on or after June 29, 2003 was $45 (June 25, 2005 - $11). 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

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



13 Weeks Ended Year Ended
----------------------------- -----------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
----------------------------- -----------------------------
(# of units) (# of units) (# of units) (# of units)

Outstanding
at beginning
of period 14,795 7,274 7,317 -
Granted - - 7,200 7,200
Issued as
dividend
equivalents 109 43 387 117
Redeemed - - - -
----------------------------- -----------------------------
Outstanding
at end of
period 14,904 7,317 14,904 7,317
----------------------------- -----------------------------

Danier stock
price at
end of
period $7.95 $10.17 $7.95 $10.17
Liability
at end of
period
($000) $118 $74 $118 $74


(g) Restricted Share Unit Plan

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


13 Weeks Ended Year Ended
----------------------------- -----------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
----------------------------- -----------------------------
(# of units) (# of units) (# of units) (# of units)

Outstanding
at beginning
of period 5,126 - 5,030 -
Granted 10,000 5,000 10,000 5,000
Issued as
dividend
equivalents 112 30 208 30
Redeemed - - - -
----------------------------- -----------------------------
Outstanding
at end of
period 15,238 5,030 15,238 5,030
----------------------------- -----------------------------
RSUs vested
at end of
period 1,721 - 1,721 -
----------------------------- -----------------------------

Danier stock
price at
end of
period $7.95 $10.17 $7.95 $10.17
Liability
at end of
period
($000) $14 $- $14 $-


8. Restructuring Costs

During the fourth quarter of 2006, the Company announced that it would reduce its head office staff by 23 individuals and review stores that did not generate acceptable profit levels. The restructuring charge of $1.4 million includes $0.6 million for severance payments and outplacement counselling for the 23 individuals that were part of the head office reduction that took place during the fourth quarter of 2006. Accelerated amortization of approximately $0.8 million represents the write off of leasehold improvements and fixtures in connection with the closure of one street-front store, one power centre location and the downsizing of one shopping mall store.

9. Amortization:

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



13 Weeks Ended Year Ended
----------------------------- -----------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
----------------------------- -----------------------------
Cost of
sales $ 110 $ 257 $ 549 $ 842
SG&A 1,440 1,066 5,690 5,374
Restruc-
turing
costs 816 - 816 -
----------------------------- -----------------------------
2,366 1,323 7,055 6,216
Discontinued
operations - - - 1,330
----------------------------- -----------------------------
$ 2,366 $ 1,323 $ 7,055 $ 7,546
----------------------------- -----------------------------
----------------------------- -----------------------------



10. Income taxes:

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

June 24, 2006 June 25, 2005
--------------- ---------------
Amortization $ (294) $ (420)
Deferred lease inducements and rent
liability 709 645
Capital lease obligation 928 -
Litigation provision and related
expenses 4,504 4,738
Other (47) 30
--------------- ---------------
$ 5,800 $ 4,993
--------------- ---------------
--------------- ---------------

Recorded in the consolidated balance
sheets as follows:

Future income tax asset
- current portion 529 159
Future income tax asset
- long-term portion 5,952 5,254
Future income tax liability
- current portion (624) -
Future income tax liability
- long term portion (57) (420)
--------------- ---------------
Net future tax asset $ 5,800 $ 4,993
--------------- ---------------
--------------- ---------------

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


June 24, 2006 June 25, 2005
--------------- ---------------
Combined basic federal and provincial
average statutory rate 35.0% 35.4%
Litigation provision and related
expenses, manufacturing and processing
credit and other (1.0%) 21.7%
Effect of foreign operating losses -% 67.6%
--------------- ---------------
34.0% 124.7%
--------------- ---------------
--------------- ---------------



11. Litigation provision and related
expenses:

June 24, 2006 June 25, 2005
--------------- ---------------
Provision for damages, costs and
interest $ 18,000 $ 18,000
Legal and professional fees - -
--------------- ---------------
Accrued litigation provision and
related expenses $ 18,000 $ 18,000
--------------- ---------------
--------------- ---------------


In fiscal 1999, the Company and certain of its directors and officers were served with a Statement of Claim under the Class Proceedings Act (Ontario) which made allegations about the accuracy and disclosure of certain information contained in a financial forecast issued by the Company and contained in the Prospectus it issued dated May 6, 1998 for its initial public offering ("IPO") which closed on May 20, 1998. The suit sought damages to be paid equal to the alleged diminution in value of the Subordinate Voting Shares sold under the Prospectus.

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

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

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

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

In February 2006, the Plaintiffs filed an Application for Leave to Appeal to the Supreme Court of Canada. In June 2006, the Supreme Court of Canada granted the Plaintiff's application. The Company expects the appeal to be heard by the Supreme Court of Canada during March 2007.

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 approximately $18 million. During the fourth quarter of 2004, the Company recorded an expense and set up a provision of $15 million to reflect the trial judge's decision. This provision was subsequently increased by $3 million to $18 million during the fourth quarter of 2005 to take into account the trial judge's award of costs which was released in May 2005. The provision for recovery of income taxes related to the trial judge's award was based on the entire $18 million provision and the provision did not take into account the potential results of the appeal, any possible insurance recoveries or future tax adjustments. The provision for the damages award, costs and interest and the income tax recovery were based on management's best estimate and is subject to adjustment when all facts are known and all issues are resolved. The possible adjustment could be significant. Although the Court of Appeal has set aside the trial judge's decision, the provision will remain until the Supreme Court of Canada makes a final determination.



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


13 weeks ended Year Ended
--------------------------- ----------------------------
Jun 24, 2006 Jun 25, 2005 Jun 24, 2006 Jun 25, 2005
--------------------------- ----------------------------
(unaudited) (unaudited)
Accounts
receivable $789 $1,005 $192 $32
Inventories (4,223) 4,664 (3,317) 452
Prepaid expenses (422) 281 (510) 387
Accounts payable
and accrued
liabilities (959) (2,685) 2,538 (1,185)
Income taxes
recoverable (2,364) (2,303) (1,546) (1,891)
--------------------------- ----------------------------
($7,179) $962 ($2,643) ($2,205)
--------------------------- ----------------------------
--------------------------- ----------------------------


13. Contingencies & Guarantees:

(a) Legal proceedings

In addition to the class action matter discussed in Note 11, in the course of its business, the Company from time to time becomes involved in various claims and legal proceedings. In the opinion of management, all such claims and suits are adequately covered by insurance, or if not so covered, the results are not expected to materially affect the Company's financial position.

(b) Guarantees

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

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

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

(iii) The Company sublet one location during fiscal 2004 and has provided the landlord with a guarantee in the event the sub-tenant defaults on its obligation to pay rent. The remaining term of the guarantee is approximately 2.5 years and the Company's maximum exposure is $102.

14. Commitments:

(a) Operating and capital leases:

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



Operating Capital
----------- --------
2007 $11,615 $1,061
2008 10,263 1,061
2009 8,675 884
2010 6,469 -
2011 5,253 -
Thereafter 8,084 -


(b) Letters of credit:

The Company had outstanding letters of credit in the amount of $7,266 (June 25, 2005 - $4,839) for imports of finished goods inventories to be received.

15. Related Party Transaction:

There were no related party transactions during the year ended June 24, 2006. During fiscal 2005, the Company expensed and paid fees of $28 to a corporation related to a director and officer of the Company. This transaction was measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

16. Financial Instruments:

The carrying value of the Company's cash, accounts receivable and accounts payable and accrued liabilities approximates their fair value due to their short-term maturities.

Based on available market information, the fair value of the capital lease obligation approximates its carrying value.

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

The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. From time-to-time the Company may enter into foreign exchange forward contracts to manage foreign exchange risk associated with these purchases. As at June 24, 2006, and as at June 25, 2005 the Company did not have any outstanding foreign exchange forward contracts to purchase U.S. dollars.

The Company is exposed to interest rate risk based on the use of the credit facilities which bears interest at floating rates.

17. Segmented information:

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

Contact Information

  • 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