Danier Leather Inc.
TSX : DL

Danier Leather Inc.

April 22, 2009 14:29 ET

Danier Leather Reports Fiscal 2009 Third Quarter Results

TORONTO, ONTARIO--(Marketwire - April 22, 2009) - Danier Leather Inc. (TSX:DL) today announced its unaudited interim consolidated financial results for the 13 week and 39 week periods ended March 28, 2009.

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



--------------------------------------------------
For the 13 Weeks Ended For the 39 Weeks Ended
----------------------------------------------------------------------------
Mar. 28, Mar. 29, Mar. 28, Mar. 29,
2009 2008 2009 2008
----------------------------------------------------------------------------
Sales $43,457 $42,431 $135,117 $136,053
----------------------------------------------------------------------------
EBITDA(1) 287 (889) 6,755 6,224
----------------------------------------------------------------------------
Net Earnings (Loss) (2,309) 116 459 15,914
----------------------------------------------------------------------------
Adjusted Net Earnings
(Loss)(2) (1,002) (1,154) 1,766 1,194
----------------------------------------------------------------------------
EPS - Basic ($0.37) $0.02 $0.07 $2.52
----------------------------------------------------------------------------
EPS - Diluted ($0.37) $0.02 $0.07 $2.50
----------------------------------------------------------------------------
Adjusted EPS - Diluted(2) ($0.16) ($0.18) $0.28 $0.19
----------------------------------------------------------------------------
Number of Stores 88 91 88 91
----------------------------------------------------------------------------
Retail Square Footage 324,837 348,504 324,837 348,504
----------------------------------------------------------------------------


Q3 HIGHLIGHTS

- Comparable store sales increased 3%

- Gross profit margin increased by 1.8% (or 180 basis points) to 41.4%

- EBITDA increased by $1.2 million

- Cash increased by $6.3 million to $24.6 million

- Credit facility with CIBC renewed and committed to June 28, 2010

Sales for the third quarter of fiscal 2009 increased by 2% to $43.5 million from $42.4 million in the third quarter last year. Comparable store sales increased by 3%. Favourable customer response to the Company's promotions contributed to the sales increase. Year-to-date sales decreased by 1% to $135.1 million and comparable store sales decreased 1% representing an improvement from the first half comparable store sales decrease of 2%.

Net loss during the third quarter of fiscal 2009 was $2.3 million ($0.37 loss per diluted share) and includes staff reduction costs of $1.4 million ($1.0 million after tax, or $0.16 per diluted share) and a goodwill impairment charge of $0.3 million ($0.05 per diluted share). This compares to net earnings of $0.1 million ($0.02 per diluted share) during the third quarter of fiscal 2008. The third quarter of fiscal 2008 included recovery of legal and expert fees of $1.9 million ($1.3 million after tax or $0.20 per diluted share). Adjusted net loss, which excludes staff reduction costs, the goodwill impairment charge and recovery of legal and expert fees, declined to $1.0 million ($0.16 loss per diluted share) during the third quarter of fiscal 2009 compared with an adjusted net loss of $1.2 million ($0.18 loss per diluted share) during the third quarter of fiscal 2008.

Year-to-date net earnings were $0.5 million ($0.07 per diluted share) and include staff reduction costs of $1.4 million ($1.0 million after tax or $0.16 per diluted share) and a goodwill impairment charge of $0.3 million ($0.05 per diluted share). Year-to-date earnings for the first nine months of fiscal 2008 were $15.9 million ($2.50 per diluted share) and included $20.0 million ($14.7 million after tax or $2.32 per diluted share) for the reversal of the litigation provision and recovery of legal and expert fees as a result of the Supreme Court of Canada's decision to uphold the unanimous Ontario Court of Appeal ruling that dismissed the class action against the Company and two of its Senior Officers. Adjusted net earnings(2), which exclude the items listed above, increased to $1.8 million ($0.28 per diluted share) for the 39 weeks ended March 28, 2009 compared with $1.2 million ($0.19 per diluted share) during the first nine months of fiscal 2008.

Gross profit as a percentage of revenue during the third quarter of fiscal 2009 was 41.4% compared with 39.6% during the third quarter of fiscal 2008. Both the third quarter of this year and the third quarter of last year were highly promotional. However, the third quarter of fiscal 2008 required higher than planned markdowns to clear excess inventory.

Year-to-date gross profit as a percentage of revenue was 45.0% compared with 46.9% during the corresponding period last year. The decrease in gross profit margin was mainly due to the decline in the Canadian dollar relative to the U.S. dollar, which resulted in higher merchandise costs to the Company.

Selling, general and administrative expenses ("SG&A") were $19.3 million during the third quarter of fiscal 2009 compared with $19.1 million during the third quarter of last year. Year-to-date SG&A was $58.3 million compared with $62.0 million last year, a decrease of approximately $3.7 million.

Danier maintained a strong financial position at the end of the third quarter of fiscal 2009 with approximately $24.6 million in cash, no long-term debt and working capital of $41.3 million. Danier's credit facility with CIBC to a maximum amount of $25 million was recently renewed and is committed until June 28, 2010. Inventory at the end of the third quarter of fiscal 2009 decreased by $6.1 million to $27.7 million compared with $33.8 million last year. Book value per outstanding share at the end of the third quarter of fiscal 2009 was $9.80.

Historically during difficult economic times, Danier has been able to capitalize on customer shifts towards merchandise that offers good value. Danier's high quality and exciting merchandise offers both fashionable and classic styling at great prices. Danier believes it is well positioned to continue offering the great value customers have come to know and to expect.

(1) EBITDA is defined as net earnings (loss) before net interest expense (income), income taxes, amortization, restructuring costs, goodwill impairment charge and litigation provision and related expenses. EBITDA is a financial metric used by management and some investors to compare companies on the basis of ongoing operating results before income taxes, net interest expense (income), amortization, restructuring costs, goodwill impairment charge and litigation provision and related expenses 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 Canadian GAAP. EBITDA is calculated as outlined in the following table:



For the 13 Weeks Ended For the 39 Weeks Ended
---------------------------- ----------------------------
Mar 28, 2009 Mar 29, 2008 Mar 28, 2009 Mar 29, 2008
-------------- ------------- -------------- -------------
($000) ($000) ($000) ($000)

Net earnings (loss) ($2,309) $116 $459 $15,914
Income tax (795) (452) 223 5,716
Interest expense
(income) - net (11) (75) 99 127
Amortization 1,612 1,431 4,184 4,483
Litigation
provision and
related expenses - (1,909) - (20,016)
Restructuring costs 1,448 - 1,448 -
Goodwill impairment
charge 342 - 342 -
---------------------------- ----------------------------
EBITDA $287 ($889) $6,755 $6,224
---------------------------- ----------------------------
---------------------------- ----------------------------


(2) Adjusted net earnings (loss) is defined as net earnings (loss) before litigation provision and related expenses, restructuring costs, goodwill impairment charge and income taxes related to the litigation provision and related expenses, goodwill impairment charge and restructuring costs. Adjusted net earnings (loss) is a financial metric used by management and some investors and allows for a more effective analysis of the ongoing operating performance of the Company. Adjusted net earnings (loss) is not a recognized measure for financial presentation under Canadian 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 Canadian GAAP. Adjusted net earnings (loss) is calculated as outlined in the following table:



For the 13 Weeks Ended For the 39 Weeks Ended
---------------------------- ----------------------------
Mar 28, 2009 Mar 29, 2008 Mar 28, 2009 Mar 29, 2008
-------------- ------------- -------------- -------------
($000) ($000) ($000) ($000)

Net earnings (loss) ($2,309) $116 $459 $15,914
Litigation
provision and
related expenses - (1,909) - (20,016)
Restructuring costs 1,448 - 1,448 -
Goodwill
impairment charge 342 - 342 -
Income tax
provision
(recovery) related
to litigation
provision and
related expenses,
goodwill impairment
charge and
restructuring costs (483) 639 (483) 5,296
---------------------------- ----------------------------
Adjusted net
earnings (loss) ($1,002) ($1,154) $1,766 $1,194
Weighted average
number of shares
outstanding
- (diluted) 6,176,429 6,292,813 6,210,867 6,355,030
Adjusted earnings
(loss) per diluted
share ($0.16) ($0.18) $0.28 $0.19


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

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

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

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

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, and retailer of high-quality leather and suede clothing and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available only at its 89 shopping mall, street-front, and power centre stores, or through its corporate sales division. Danier's products are also available at the Dubai Mall and the Festival City Mall in Dubai. For more information about the Company and our products, see www.danier.com.



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

For the 13 Weeks Ended For the 39 Weeks Ended
------------------------ ------------------------
March 28, March 29, March 28, March 29,
2009 2008 2009 2008
------------------------ ------------------------

Revenue $ 43,457 $ 42,431 $ 135,117 $ 136,053
Cost of sales (Note 8) 25,471 25,649 74,282 72,273
------------------------ ------------------------
Gross profit 17,986 16,782 60,835 63,780
Selling, general and
administrative expenses
(Note 8) 19,311 19,102 58,264 62,039
Interest expense (income)
- net (11) (75) 99 127
------------------------ ------------------------
Earnings (loss) before
undernoted items and
income taxes (1,314) (2,245) 2,472 1,614
Restructuring costs
(Note 9) 1,448 - 1,448 -
Goodwill impairment charge
(Note 5) 342 - 342 -
Litigation provision and
related expenses (Note 10) - (1,909) - (20,016)
------------------------ ------------------------
Earnings (loss) before
income taxes (3,104) (336) 682 21,630
Provision for (recovery
of) income taxes (Note 11)
Current (809) (501) 84 918
Future 14 49 139 4,798
------------------------ ------------------------
(795) (452) 223 5,716
------------------------ ------------------------
Net earnings (loss) and
comprehensive earnings
(loss) ($ 2,309) $ 116 $ 459 $ 15,914
------------------------ ------------------------
------------------------ ------------------------

Net earnings (loss) per
share:
Basic ($0.37) $0.02 $0.07 $2.52
Diluted ($0.37) $0.02 $0.07 $2.50

Weighted average number
of shares outstanding:
Basic 6,176,429 6,275,951 6,210,861 6,325,968
Diluted 6,176,429 6,292,813 6,210,867 6,355,030
Number of shares
outstanding at period
end 6,176,429 6,276,429 6,176,429 6,276,429

See accompanying notes to the consolidated financial statements



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

March 28, March 29, June 28,
2009 2008 2008
-----------------------------------

ASSETS
Current Assets
Cash $ 24,595 $ 18,266 $ 19,882
Accounts receivable 1,048 1,869 755
Income taxes recoverable - - 8
Inventories (Note 3) 27,744 33,824 27,404
Prepaid expenses 505 475 1,242
Future income tax asset 313 429 562
---------- ---------- ----------
54,205 54,863 49,853

Other Assets
Property and equipment (Note 4) 19,264 22,225 21,312
Goodwill (Note 5) - 342 342
Future income tax asset 1,435 1,121 1,556
---------- ---------- ----------
$ 74,904 $ 78,551 $ 73,063
---------- ---------- ----------
---------- ---------- ----------

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 12,234 $ 11,613 $ 9,845
Income taxes payable 287 728 -
Current portion of capital lease
obligation (Note 6) 88 1,019 858
Future income tax liability 321 278 502
---------- ---------- ----------
12,930 13,638 11,205

Capital lease obligation (Note 6) - 88 -
Deferred lease inducements and rent
liability 1,459 1,656 1,675
Future income tax liability - 50 50
---------- ---------- ----------
14,389 15,432 12,930
---------- ---------- ----------

SHAREHOLDERS' EQUITY
Share capital (Note 7) 20,985 21,409 21,409
Contributed surplus 741 512 548
Retained earnings 38,789 41,198 38,176
Accumulated other comprehensive income - - -
---------- ---------- ----------
60,515 63,119 60,133
---------- ---------- ----------
$ 74,904 $ 78,551 $ 73,063
---------- ---------- ----------
---------- ---------- ----------

See accompanying notes to the consolidated financial statements



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

For the 13 Weeks Ended For the 39 Weeks Ended
----------------------- -----------------------
March 28, March 29, March 28, March 29,
2009 2008 2009 2008
----------------------- -----------------------

OPERATING ACTIVITIES
Net earnings (loss) $ (2,309) $ 116 $ 459 $ 15,914
Items not affecting cash:
-------------------------
Amortization (Note 8) 1,612 1,431 4,184 4,483
Amortization of deferred
lease inducements (85) (91) (269) (330)
Straight line rent expense 15 24 38 81
Stock-based compensation 78 27 193 81
Goodwill impairment charge
(Note 5) 342 - 342 -
Accrued litigation
provision and related
expenses (Note 10) - - - (18,000)
Future income taxes 14 49 139 4,798
Net change in non-cash
operating working capital
items (Note 12) 14,647 1,078 2,978 (3,900)
Proceeds from deferred
lease inducements 101 - 101 -
Repayment of deferred
lease inducement - - (86) -
----------------------- -----------------------
Cash flows from operating
activities 14,415 2,634 8,079 3,127
----------------------- -----------------------

FINANCING ACTIVITIES
Subordinate voting shares
repurchased - - (460) (1,665)
Subordinate voting shares
issued - 10 - 80
Repayment of obligation
under capital lease (261) (245) (770) (722)
----------------------- -----------------------
Cash flows used in financing
activities (261) (235) (1,230) (2,307)
----------------------- -----------------------

INVESTING ACTIVITIES
Acquisition of capital
assets (733) (213) (2,136) (3,133)
----------------------- -----------------------
Cash flows used in investing
activities (733) (213) (2,136) (3,133)
----------------------- -----------------------

Increase (decrease) in cash 13,421 2,186 4,713 (2,313)
Cash, beginning of period 11,174 16,080 19,882 20,579
----------------------- -----------------------
Cash, end of period $ 24,595 $ 18,266 $ 24,595 $ 18,266
----------------------- -----------------------
----------------------- -----------------------

Supplementary cash flow
information:
Interest paid 5 24 215 397
Income taxes paid - - 353 1,679

See accompanying notes to the consolidated financial statements



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

For the 13 Weeks Ended For the 39 Weeks Ended
----------------------- -----------------------
March 28, March 29, March 28, March 29,
2009 2008 2009 2008
----------------------- -----------------------

SHARE CAPITAL
Balance, beginning of period $20,985 $21,399 $21,409 $22,044
Shares repurchased - - (424) (715)
Shares issued on exercise
of stock options - 10 - 80
----------------------- -----------------------
Balance, end of period $20,985 $21,409 $20,985 $21,409
----------------------- -----------------------

CONTRIBUTED SURPLUS
Balance, beginning of period $ 663 $ 485 $ 548 $ 431
Stock-based compensation
related to stock options 78 27 193 81
----------------------- -----------------------
Balance, end of period $ 741 $ 512 $ 741 $ 512
----------------------- -----------------------

RETAINED EARNINGS
Balance, beginning of period $41,098 $41,082 $38,176 $26,234
Adjustment to opening
retained earnings due to
adoption of new inventory
accounting standard (net
of tax of $122) (Note 1) - - 190 -
Net earnings (loss) (2,309) 116 459 15,914
Share repurchases - - (36) (950)
----------------------- -----------------------
Balance, end of period $38,789 $41,198 $38,789 $41,198
----------------------- -----------------------

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 $60,515 $63,119 $60,515 $63,119
----------------------- -----------------------
----------------------- -----------------------

See accompanying notes to the consolidated financial statements




DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 week and 39 week periods ended March 28, 2009 and March 29, 2008
(Thousands of dollars, except per share amounts and number of shares)
- Unaudited


1. SIGNIFICANT ACCOUNTING POLICIES:

(a) Basis of Presentation:

These unaudited interim consolidated financial statements (the "financial statements") have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial information and include all normal and recurring entries that are necessary for a fair presentation of the financial statements. Accordingly, they do not include all of the information and footnotes required by Canadian GAAP for annual financial statements. These financial statements should be read in conjunction with the most recently prepared annual audited consolidated financial statements of Danier Leather Inc. (the "Company" or "Danier") for the 52 week period ended June 28, 2008 and the accompanying notes contained in the Company's 2008 Annual Report.

The financial statements follow the same accounting policies and methods of application as the most recent annual audited consolidated financial statements as at June 28, 2008, except as described below in Note 1(b).

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 financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's historical experience, best knowledge of current events and actions that the Company may undertake in the future. Significant areas requiring the use of management estimates relate to the determination of inventory valuation, realizable value of property and equipment and goodwill, stock-based compensation, future tax assets and liabilities, goods and services tax, provincial sales tax, breakage of gift cards and income tax provisions. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements of future periods from changes in estimates could differ materially from those estimated.

(b) Implementation of New Accounting Standards:

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

CICA Section 1400 - General Standards of Financial Statement Presentation

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

CICA Section 3031 - Inventories

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

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 for, taking into account fluctuations of 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.

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 expenses ("SG&A") 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. The transitional adjustments were recognized in the first quarter of fiscal 2009 in opening retained earnings and prior periods have not been restated. The implementation of this standard resulted in an increase in opening inventories of $312, a decrease in income taxes recoverable of $122 and an increase of $190 to opening retained earnings.

(c) Recent Accounting Pronouncements:

CICA Section 3064 - Goodwill and Intangible Assets

This CICA Handbook section issued in February 2008 replaces Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new standard also provides guidance for the recognition of internally developed intangible assets, including assets developed from research and development activities, ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. The new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has evaluated the new section and currently does not expect the implementation of this new section to have a significant impact on its consolidated financial statements.

International Financial Reporting Standards ("IFRS")

The Canadian Accounting Standards Board will require all public companies to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Companies will be required to provide IFRS comparative information for the previous fiscal year. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter beginning June 26, 2011 when the Company will prepare both the current and comparative financial information using IFRS. The adoption of IFRS will have an impact on the financial statements of the Company. The Company has completed an initial diagnostic impact assessment of the major differences between Canadian GAAP and IFRS accounting policies and choices.

To facilitate a timely conversion, the Company will be assessing the impact of IFRS on the consolidated financial statements and disclosures as well as the impact on information systems and internal controls over financial reporting. It is too early at this point to assess the financial impact of the conversion.

2. SEASONALITY OF RETAIL OPERATIONS:

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



3. INVENTORIES:

March 28, 2009 March 29, 2008 June 28, 2008
---------------- ---------------- ---------------
Raw materials $ 2,693 $ 3,520 $ 3,332
Work-in-process 331 132 892
Finished goods 24,720 30,172 23,180
---------------- ---------------- ---------------
$ 27,744 $ 33,824 $ 27,404
---------------- ---------------- ---------------
---------------- ---------------- ---------------


The cost of inventory recognized as an expense is the amount shown as cost of sales in the consolidated statements of earnings and comprehensive earnings for the 13 weeks and 39 weeks ended March 28, 2009. During the 13 weeks ended March 28, 2009, the Company recorded $1,285 of write-downs of inventory as a result of net realizable value being lower than cost and $NIL of inventory write-downs recognized in previous years was reversed. During the 39 weeks ended March 28, 2009, the Company recorded $1,569 of write-downs of inventory as a result of net realizable value being lower than cost and $222 of inventory write-downs recognized in previous years was reversed.



4. PROPERTY AND EQUIPMENT:

March 28, 2009 March 29, 2008
----------------------------- -----------------------------
Net Net
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
----------------------------- -----------------------------
Land $ 1,000 $ - $ 1,000 $ 1,000 $ - $ 1,000
Building 7,064 2,134 4,930 7,064 1,928 5,136
Leasehold
improvements 25,469 17,925 7,544 25,745 17,128 8,617
Furniture and
equipment 10,936 7,991 2,945 11,611 8,011 3,600
Computer hardware
and software 4,475 2,572 1,903 8,103 5,578 2,525
Computer hardware
and software
under capital
lease 2,920 1,978 942 2,920 1,573 1,347
----------------------------- -----------------------------
$51,864 $32,600 $19,264 $56,443 $ 34,218 $22,225
----------------------------- -----------------------------
----------------------------- -----------------------------



June 28, 2008
--------------------------------
Net
Accumulated Book
Cost Amortization Value
--------------------------------
Land $ 1,000 $ - $ 1,000
Building 7,064 1,981 5,083
Leasehold improvements 24,315 15,861 8,454
Furniture and equipment 10,415 6,994 3,421
Computer hardware and software 4,014 1,876 2,138
Computer hardware and software under
capital lease 2,920 1,704 1,216
--------------------------------
$ 49,728 $ 28,416 $ 21,312
--------------------------------
--------------------------------


5. GOODWILL:

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

6. OBLIGATIONS UNDER CAPITAL LEASES:

Future minimum lease payments required under capital leases, which expire in April 2009 are $88 of which less than $1 represents interest at a weighted average annual rate of 6.2%.



7. SHARE CAPITAL:

(a) Authorized

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

(b) Issued

Mar 28, Mar 29, June 28,
2009 2008 2008
-------- --------- ---------
1,224,329 Multiple Voting Shares (March 29,
2008 and June 28, 2008 - 1,224,329) (i) (i) (i)
4,952,100 Subordinate Voting Shares (March
29, 2008 and June 28, 2008 - 5,052,100) 20,985 21,409 21,409
-------- --------- ---------
$ 20,985 $ 21,409 $ 21,409
-------- --------- ---------
-------- --------- ---------

(i) Nominal


(c) Earnings per share

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



13 weeks ended 39 weeks ended
---------------------- ----------------------
Mar 28, Mar 29, Mar 28, Mar 29,
2009 2008 2009 2008
---------------------- ----------------------
Weighted average number of
shares for basic earnings
per share calculations 6,176,429 6,275,951 6,210,861 6,325,968
Effect of dilutive options
outstanding - 16,862 6 29,062
---------------------- ----------------------
Weighted average number of
shares for diluted earnings
per share calculations 6,176,429 6,292,813 6,210,867 6,355,030
---------------------- ----------------------
---------------------- ----------------------


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 557,000 as at March 28, 2009 and 456,000 as at March 29, 2008.

(d) Normal Course Issuer Bid

On May 2, 2008, the Company received approval from The Toronto Stock Exchange (the "TSX") to commence a second Normal Course Issuer Bid (the "2008 NCIB"). The Company had a previous Normal Course Issuer Bid that expired on April 22, 2008. The 2008 NCIB permits the Company to acquire up to 292,638 Subordinate Voting Shares, representing approximately 10% of the public float of the Subordinate Voting Shares, during the period from May 6, 2008 to May 5, 2009.

The following Subordinate Voting Shares were repurchased for cancellation during the 13 week and 39 week periods ended March 28, 2009 and March 29, 2008 under the 2008 NCIB:



13 weeks ended 39 weeks ended
---------------------- ----------------------
Mar 28, Mar 29, Mar 28, Mar 29,
2009 2008 2009 2008
---------------------- ----------------------
Number of shares repurchased - - 100,000 169,000
Amount charged to share
capital - - $424 $715
Amount charged to retained
earnings representing the
excess over the average
paid-in value - - $36 $950
---------------------- ----------------------
Total cash consideration - - $460 $1,665
---------------------- ----------------------
---------------------- ----------------------


(e) Stock Option Plan

The Company maintains a Stock Option Plan, as amended, for the benefit of directors, officers and employees. As at March 28, 2009, the Company has reserved 835,500 Subordinate Voting Shares for issuance under its Stock Option Plan and there were 557,000 options outstanding with exercise prices ranging from $3.15 to $15.85 per option.

The following transactions occurred during the 13 week and 39 week periods ended March 28, 2009 and March 29, 2008 with respect to the Stock Option Plan:



13 weeks ended 39 weeks ended
---------------------- ----------------------
Mar 28, Mar 29, Mar 28, Mar 29,
2009 2008 2009 2008
---------------------- ----------------------
Outstanding at beginning of
period 557,000 524,125 293,000 605,300
Granted - - 310,000 -
Exercised - (1,500) - (11,675)
Forfeited - - (46,000) (71,000)
---------------------- ----------------------
Outstanding at end of period 557,000 522,625 557,000 522,625
---------------------- ----------------------
Options exercisable at end
of period 169,500 468,875 169,500 468,875
---------------------- ----------------------


Further details of the Stock Option Plan are contained in Note 8(e) of the consolidated financial statements contained in the Company's 2008 Annual Report.

(f) Deferred Share Unit Plan

The Deferred Share Unit ("DSU") Plan, as amended, was established for non-management directors. Under this plan, non-management directors of the Company receive an annual grant of DSUs and can also elect to receive their annual retainers and meeting fees in DSUs. A DSU is a unit equivalent in value to one Subordinate Voting Share of the Company based on the five-day average trading price of the Company's Subordinate Voting Shares on the TSX immediately prior to the date on which the value of the DSU is determined. When dividends are paid by the Company, an equivalent number of DSUs are added to the DSU account of the non-management director based on the number of DSUs in their account and the market value of the Subordinate Voting Shares on the date the dividend is paid.

After retirement from the Board of Directors, 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 during the 13 week and 39 week periods ended March 28, 2009 and March 29, 2008 with respect to the DSU Plan:



13 weeks ended 39 weeks ended
---------------------- ----------------------
Mar 28, Mar 29, Mar 28, Mar 29,
2009 2008 2009 2008
---------------------- ----------------------
Outstanding at beginning
of period 78,920 58,920 58,920 39,420
Granted - - 20,000 19,500
Redeemed - - - -
---------------------- ----------------------
Outstanding at end of period 78,920 58,920 78,920 58,920
Danier stock price at end
of period $2.63 $7.11 $2.63 $7.11
---------------------- ----------------------
Liability at end of period $208 $419 $208 $419
---------------------- ----------------------
Compensation expense
(recovery) in SG&A $9 ($181) ($169) $58
---------------------- ----------------------


(g) Restricted Share Unit Plan

The Company established a Restricted Share Unit ("RSU") Plan, as amended, 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 (the "Committee"). Under this Plan, Senior Officers of the Company are eligible to receive a grant of RSUs that generally vest over periods not exceeding three years as determined by the Committee. An RSU is a unit equivalent in value to one Subordinate Voting Share of the Company. When dividends are paid by the Company, an equivalent number of RSUs are added to the RSU account of the 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 during the 13 week and 39 week periods ended March 28, 2009 and March 29, 2008 with respect to the RSU Plan:



13 weeks ended 39 weeks ended
---------------------- ----------------------
Mar 28, Mar 29, Mar 28, Mar 29,
2009 2008 2009 2008
---------------------- ----------------------
Outstanding at beginning of
period 133,300 50,201 133,300 50,201
Granted - 60,000 - 60,000
Forfeited - (30,000) - (30,000)
---------------------- ----------------------
Outstanding at end of period 133,300 80,201 133,300 80,201
Liability at end of period $229 $491 $229 $491
---------------------- ----------------------
Compensation expense
(recovery) in SG&A $29 $398 ($182) $530
---------------------- ----------------------



8. AMORTIZATION:

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

13 weeks ended 39 weeks ended
---------------------------- ----------------------------
Mar 28, 2009 Mar 29, 2008 Mar 28, 2009 Mar 29, 2008
---------------------------- ----------------------------
Cost of sales $ 352 $ 136 $ 494 $ 407
SG&A 1,260 1,295 3,690 4,076
---------------------------- ----------------------------
$ 1,612 $ 1,431 $ 4,184 $ 4,483
---------------------------- ----------------------------
---------------------------- ----------------------------


9. RESTRUCTURING COSTS:

Restructuring costs represent approximately $1.4 million of severance costs in connection with the Toronto manufacturing facility workforce reduction of approximately 56 employees and head office staff reduction of approximately 22 employees. Approximately $0.8 million of the severance charge was paid prior to March 28, 2009 and approximately $0.6 million has been recorded in accounts payable and accrued liabilities and will be paid over the next year.

10. LITIGATION PROVISION AND RELATED EXPENSES:

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

In October 2001, a motion to certify the action as a class proceeding was granted. The trial commenced in the Superior Court of Justice (Ontario) in May 2003 and was completed in January 2004. On May 7, 2004, the trial judge issued a judgment against the Company and two of its Senior Officers in favour of the Plaintiffs and awarded damages to Canadian shareholders who purchased Subordinate Voting Shares under the Prospectus. For those shareholders who sold their shares between June 4 and 9, 1998, the trial judge awarded the difference between the IPO price and the price at which they sold their shares. For those shareholders who sold or still held their shares after June 9, 1998, the trial judge awarded $2.35 per share.

Although the trial judge concluded that at the date of the Prospectus the forecast was reasonable, and that at the time of closing of the IPO the Company's CEO and CFO had an honest belief that the forecast could still be achieved, and although he held that the forecast was, in fact, substantially achieved, the trial judge decided that management's judgment that the forecast was still achievable at the time of closing was not reasonable and that therefore the Prospectus contained a misrepresentation. Based solely on information available at the time, the Company estimated that the trial judge's award would have totaled approximately $15 million. As noted below, the Company and its Senior Officers successfully appealed this decision to the Court of Appeal for Ontario and a decision on a further appeal taken by the Plaintiffs to the Supreme Court of Canada was dismissed with costs, as discussed further below.

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

A hearing to determine the awarding of costs related to the certification and summary judgment motion which was decided in 2000 and 2001 was held in December 2004. In June 2005, partial indemnity costs were awarded to the Plaintiffs for these motions in an amount to be assessed.

In June 2004, a Notice of Appeal was filed by the Company and two of its Senior Officers from the trial judge's decision. The appeal was heard by the Ontario Court of Appeal in June 2005 and in December 2005, the Court of Appeal unanimously allowed the appeal on three separate grounds, set aside the trial decision and dismissed the class proceeding. The Court of Appeal's decision stated that the Company had met its disclosure obligations in the Prospectus and during the IPO process and the trial judge erred in finding that any misrepresentation had occurred. In September 2006, partial indemnity costs were awarded to the Company for the appeal in the amount of $0.1 million. The Court of Appeal also awarded costs to the Company for the trial on a partial indemnity basis in an amount to be determined.

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

Based solely on the information available at the time, if the damages, costs and interest awarded by the trial judge had been paid at the fiscal 2005 year-end, the Company estimated this amount to be about $18 million. The provision for the damages award, costs and interest and the related future income tax recovery were based on management's best estimate and was subject to adjustment when all facts were known and all issues were resolved. As a result of the final determination by the Supreme Court of Canada, the Company reversed the $18 million litigation provision and related future income tax recovery in the unaudited interim consolidated financial statements during the first quarter of fiscal 2008.

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

11. INCOME TAXES:

The estimated average annual effective income tax rate was 32.7% during the 39 weeks ended March 28, 2009 compared with a 26.4% effective income tax rate for the 39 weeks ended March 29, 2008 and a 26.5% effective income tax rate for the fiscal year ended June 28, 2008. The effective income tax rate for the 39 week period ended March 29, 2008 and the fiscal year ended June 28, 2008 included a reversal of future income taxes associated with the litigation provision. Excluding the effect of the reversal of the litigation provision, the effective income tax rate was 30.3% for the 39 weeks ended March 29, 2008 and was 6.3% for the fiscal year ended June 28, 2008. The difference between the rate for the 39 weeks ended March 28, 2009 and the rate excluding the effect of the reversal of the litigation provision for the 39 weeks ended March 29, 2008 and the fiscal year ended June 28, 2008 is due to the effect of non-deductible expenses on estimated earnings and the effect of changes in future federal and provincial rates on future taxes. The difference between the rate for the 39 weeks ended March 28, 2009 and the rate for the 26 weeks ended December 27, 2008 is due to a change in estimated earnings.



12. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS:

13 weeks ended 39 weeks ended
---------------------- ----------------------
Mar 28, Mar 29, Mar 28, Mar 29,
2009 2008 2009 2008
---------------------- ----------------------
Decrease (increase) in:
Accounts receivable $6,654 $250 ($293) ($1,145)
Income taxes recoverable - - 8 -
Inventories 13,093 7,506 (28) (5,263)
Prepaid expenses 51 156 737 971
Increase (decrease) in:
Accounts payable and
accrued liabilities (4,650) (6,355) 2,389 2,282
Income taxes payable (501) (479) 165 (745)
---------------------- ----------------------
$14,647 $1,078 $2,978 ($3,900)
---------------------- ----------------------
---------------------- ----------------------


13. COMMITMENTS:

(a) Operating and capital leases

Minimum rentals for the next five 12 month periods and thereafter, excluding rentals based upon revenue, are as follows:



Operating Capital
--------- -------
2010 $10,031 $88
2011 8,592 -
2012 6,921 -
2013 5,152 -
2014 3,563 -
Thereafter 7,078 -


(b) Letters of credit

The Company had outstanding letters of credit in the amount of $3,273 (March 29, 2008 - $2,163) for imports of finished goods inventories to be received.

14. FINANCIAL INSTRUMENTS:

Fair value estimates are made at a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and involve uncertainties and the exercise of significant judgement.

The carrying value of the Company's short-term financial assets which includes cash and accounts receivable and short-term financial liabilities which includes accounts payable and accrued liabilities approximates their fair value due to their short-term maturities. The fair value of the capital lease obligation approximates its carrying value due to its short-term maturity.

For the year ended June 28, 2008, the Company early adopted the requirements of the CICA Handbook Section 3862 - Financial Instruments - Disclosures which apply to fiscal years beginning on or after October 1, 2007. This new Handbook section requires disclosures to enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of an entity's exposure to risks arising from financial instruments, including how the entity manages those risks. Disclosures relating to exposure to risks, particularly credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided in the Company's Annual Report for the year ended June 28, 2008. The volatility of the Canadian dollar impacts earnings and while the Company considers a variety of strategies, such as entering into foreign exchange option contracts, designed to fix the cost of its U.S. dollar commitments, this unpredictability can result in exposure to risk. There have been no other significant changes in the Company's risk exposures for the 13 and 39 week periods ended March 28, 2009. As at March 28, 2009, the Company did not have any outstanding options to purchase foreign exchange or forward contracts to purchase U.S. dollars.

15. SEGMENTED INFORMATION:

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

Contact Information

  • Investor Relations Contact
    Danier Leather Inc.
    Jeffrey Wortsman, President and Chief Executive Officer
    (416) 762-8175 ext. 302
    (416) 762-7408 (FAX)
    Email: leather@danier.com
    or
    Danier Leather Inc.
    Bryan Tatoff, Senior Vice-President, Chief Financial Officer
    & Secretary
    (416) 762-8175 ext. 328
    (416) 762-7408 (FAX)
    Email: bryan@danier.com
    Website: www.danier.com