Danier Leather Reports Fiscal 2009 First Quarter Results
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FINANCIAL HIGHLIGHTS ($000s, except earnings per share, square footage and number of stores):
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For the 13 Weeks Ended
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Sept. 27, Sept. 29,
2008 2007
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Sales $22,575 $22,087
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EBITDA(1) (4,779) (4,007)
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Net Earnings (Loss) (3,706) 9,820
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Adjusted Net Earnings (Loss)(2) (3,706) (3,563)
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EPS - Basic ($0.59) $1.54
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EPS - Diluted ($0.59) $1.53
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Number of Stores 91 91
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Retail Square Footage 348,504 349,248
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Sales for the first quarter increased by 2% or $0.5 million to $22.6 million from $22.1 million in the first quarter last year. Comparable store sales increased by 2%.
Net loss during the first quarter was $3.7 million ($0.59 loss per diluted share) compared with net earnings of $9.8 million ($1.53 per diluted share) during the first quarter last year. Excluding the reversal of the litigation provision of $18.0 million and related income taxes of $4.6 million, the adjusted net loss(2) during the first quarter of last year was $3.6 million ($0.56 loss per diluted share). The first quarter of last year included the reversal of the litigation provision as a result of the Supreme Court of Canada decision to uphold the unanimous Ontario Court of Appeal ruling that dismissed the class action against the Company and two of its Senior Officers.
Gross profit as a percentage of revenue during the first quarter of 2009 was 42.9% compared with 48.9% during the first quarter last year. Increased markdowns resulting from clearance of prior year fall merchandise contributed to the decrease.
Selling, general and administrative expenses ("SG&A") were $15.8 million during the first quarter of fiscal 2009 compared with $16.4 million during the first quarter last year.
Danier repurchased 100,000 subordinate voting shares for cancellation under its Normal Course Issuer Bid on September 26, 2008. Settlement of this repurchase occurred on October 1, 2008 and will be recorded during Danier's second quarter.
Danier continues to maintain a strong balance sheet with working capital of $35.4 million, no long-term debt and a book value of $9.03 per outstanding share.
Danier is holding its Annual General Meeting of Shareholders today, Tuesday, October 21, 2008 at 4:00 p.m. Eastern Time at Danier's corporate headquarters in Toronto. Shareholders are encouraged to attend. The meeting will also be webcast live at www.danier.com.
(1) EBITDA is defined as net earnings (loss) before interest expense - net, income taxes, amortization 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 taxes, interest expense - net, amortization 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 GAAP. EBITDA is calculated as outlined in the following table:
For the 13 Weeks Ended
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Sept 27, 2008 Sept 29, 2007
-------------- --------------
($000) ($000)
Net earnings (loss) ($3,706) $9,820
Income tax (2,373) 2,502
Interest expense - net 20 50
Amortization 1,280 1,621
Litigation provision and related expenses - (18,000)
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EBITDA ($4,779) ($4,007)
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(2) Adjusted net earnings (loss) is defined as net earnings (loss) before litigation provision and related expenses and income taxes related to the litigation provision and related expenses. 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 do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. Adjusted net earnings (loss) is calculated as outlined in the following table:
For the 13 Weeks Ended
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Sept 27, 2008 Sept 29, 2007
-------------- --------------
($000) ($000)
Net earnings (loss) ($3,706) $9,820
Litigation provision and related expenses - (18,000)
Income tax provision related to litigation
provision and related expenses - 4,617
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Adjusted net loss ($3,706) ($3,563)
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Note: This press release contains 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. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved. All of the statements in this press release containing forward-looking information are qualified by these cautionary statements.
Forward-looking statements 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 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, 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 results may vary significantly from those expected. There can be no assurance that the actual results, 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 statements and are cautioned not to place undue reliance on any 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 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 91 shopping mall, street-front, and power centre stores, or through its corporate sales division. Danier's products are also available at 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
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For the 13 Weeks Ended
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September 27, September 29,
2008 2007
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Revenue $22,575 $ 22,087
Cost of sales (Note 7) 12,883 11,285
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Gross profit 9,692 10,802
Selling, general and administrative expenses
(Note 7) 15,751 16,430
Interest expense - net 20 50
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Loss before undernoted item and income taxes (6,079) (5,678)
Litigation provision and related expenses
(Note 8) - (18,000)
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Earnings (loss) before income taxes (6,079) 12,322
Provision for (recovery of) income taxes
Current (2,437) (2,122)
Future 64 4,624
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(2,373) 2,502
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Net earnings (loss) and comprehensive
earnings (loss) ($ 3,706) $ 9,820
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Net earnings (loss) per share:
Basic ($0.59) $1.54
Diluted ($0.59) $1.53
Weighted average number of shares
outstanding:
Basic 6,276,429 6,378,825
Diluted 6,276,447 6,410,263
Number of shares outstanding at period end 6,276,429 6,368,754
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED BALANCE SHEETS
(thousands of dollars) - unaudited
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September 27, September 29, June 28,
2008 2007 2008
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ASSETS
Current Assets
Cash $ 780 $ - $ 19,882
Accounts receivable 1,452 2,091 755
Income taxes recoverable 2,500 1,943 8
Inventories (Note 3) 41,251 46,021 27,404
Prepaid expenses 1,281 1,413 1,242
Future income tax asset 441 477 562
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47,705 51,945 49,853
Other Assets
Property and equipment (Note 4) 21,031 24,007 21,312
Goodwill 342 342 342
Future income tax asset 1,553 1,390 1,556
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$ 70,631 $ 77,684 $ 73,063
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LIABILITIES
Current Liabilities
Bank indebtedness $ - $ 3,465 $ -
Accounts payable and accrued liabilities 11,288 12,394 9,845
Current portion of capital lease
obligation (Note 5) 606 987 858
Future income tax liability 442 416 502
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12,336 17,262 11,205
Capital lease obligation (Note 5) - 606 -
Deferred lease inducements and rent
liability 1,592 1,799 1,675
Future income tax liability 50 55 50
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13,978 19,722 12,930
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SHAREHOLDERS' EQUITY
Share capital (Note 6) 21,409 21,769 21,409
Contributed surplus 584 458 548
Retained earnings 34,660 35,735 38,176
Accumulated other comprehensive income - - -
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56,653 57,962 60,133
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$ 70,631 $ 77,684 $ 73,063
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See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(thousands of dollars) - unaudited
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For the 13 Weeks Ended
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September 27, September 29,
2008 2007
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OPERATING ACTIVITIES
Net earnings (loss) ($ 3,706) $ 9,820
Items not affecting cash:
Amortization (Note 7) 1,280 1,621
Amortization of deferred lease inducements (94) (120)
Straight line rent expense 11 42
Stock based compensation 36 27
Accrued litigation provision and related
expenses (Note 8) - (18,000)
Future income taxes 64 4,624
Net change in non-cash working capital items
(Note 9) (15,442) (19,175)
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Cash flows used in operating activities (17,851) (21,161)
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FINANCING ACTIVITIES
Subordinate voting shares repurchased - (594)
Repayment of obligation under capital lease (252) (236)
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Cash flows used in financing activities (252) (830)
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INVESTING ACTIVITIES
Acquisition of capital assets (999) (2,053)
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Cash flows used in investing activities (999) (2,053)
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Decrease in cash (19,102) (24,044)
Cash, beginning of period 19,882 20,579
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Cash (bank indebtedness), end of period $ 780 ($ 3,465)
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Supplementary cash flow information:
Interest paid 163 273
Income taxes paid 322 1,295
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands of dollars) - unaudited
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For the 13 Weeks Ended
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September 27, September 29,
2008 2007
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SHARE CAPITAL
Balance, beginning of period $21,409 $22,044
Shares repurchased - (275)
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Balance, end of period $21,409 $21,769
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CONTRIBUTED SURPLUS
Balance, beginning of period $ 548 $ 431
Stock-based compensation related to stock options 36 27
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Balance, end of period $ 584 $ 458
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RETAINED EARNINGS
Balance, beginning of period $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) (3,706) 9,820
Share repurchases - (319)
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Balance, end of period $34,660 $35,735
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period $ - $ -
Adjustment to opening balance due to the new
accounting policies adopted regarding
financial instruments - -
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Balance, end of period $ - $ -
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TOTAL SHAREHOLDERS' EQUITY $56,653 $57,962
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----------------------------
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 week periods ended September 27, 2008 and September 29, 2007
(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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's historical experience, best knowledge of current events and actions that the Company may undertake in the future. Significant areas requiring the use of management estimates relate to the determination of inventory valuation, realizable value of property and equipment and goodwill, stock based compensation, future tax assets 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 consolidated 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, twelve 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) 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 are 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. The cost of inventory recognized as an expense is the amount shown as cost of sales in the consolidated statements of earnings (loss) and comprehensive earnings (loss) for the 13 weeks ended September 27, 2008. During the 13 weeks ended September 27, 2008, the Company recorded $150 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.
(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 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 has confirmed that the use of IFRS will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canadian GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011 with comparative figures presented on the same basis. The Company is currently working on a conversion plan towards IFRS but it is too early to assess the financial impact of the conversion at this point.
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 losses are experienced during the period from April to September.
3. INVENTORIES:
September 27, September 29, June 28,
2008 2007 2008
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Raw materials $ 3,065 $ 2,796 $ 3,332
Work-in-process 1,402 1,276 892
Finished goods 36,784 41,949 23,180
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$ 41,251 $ 46,021 $ 27,404
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4. PROPERTY AND EQUIPMENT:
September 27, 2008 September 29, 2007
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Net Net
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
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Land $ 1,000 $ - $ 1,000 $ 1,000 $ - $ 1,000
Building 7,064 2,032 5,032 7,064 1,836 5,228
Leasehold
improvements 24,891 16,543 8,348 25,315 15,604 9,711
Furniture and
equipment 10,759 7,230 3,529 11,282 7,576 3,706
Computer
hardware and
software 4,093 2,096 1,997 7,783 5,028 2,755
Computer
hardware and
software
under capital
lease 2,920 1,795 1,125 2,920 1,313 1,607
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$50,727 $29,696 $21,031 $55,364 $ 31,357 $24,007
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June 28, 2008
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Net
Accumulated Book
Cost Amortization Value
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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
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$49,728 $28,416 $21,312
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5. OBLIGATIONS UNDER CAPITAL LEASES:
Future minimum lease payments required under capital leases, which expire in April 2009 are $619 of which $13 represents interest at a weighted average annual rate of 6.2%.
6. SHARE CAPITAL:
(a) Authorized
1,224,329 Multiple Voting Shares
Unlimited Subordinate Voting Shares
Unlimited Class A and B Preference Shares
(b) Issued
Sept 27, Sept 29, June 28,
2008 2007 2008
--------- --------- ---------
1,224,329 Multiple Voting Shares (September
29, 2007 and June 28, 2008 - 1,224,329) (i) (i) (i)
5,052,100 Subordinate Voting Shares
(September 29, 2007 - 5,144,425 and June 28,
2008 - 5,052,100) 21,409 21,769 21,409
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$ 21,409 $ 21,769 $ 21,409
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(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
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Sept 27, Sept 29,
2008 2007
--------------------
Weighted average number of shares for basic
earnings per share calculations 6,276,429 6,378,825
Effect of dilutive options outstanding 18 31,438
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Weighted average number of shares for diluted earnings
per share calculations 6,276,447 6,410,263
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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 247,000 as at September 27, 2008 and 406,000 as at September 29, 2007.
(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 periods ended September 27, 2008 and September 29, 2007:
13 weeks ended
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Sept 27, Sept 29,
2008 2007
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Number of shares repurchased - 65,000
Amount charged to share capital - 275
Amount charged to retained earnings representing the
excess over the average paid-in value - 319
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Total cash consideration - 594
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On September 26, 2008, the Company repurchased 100,000 Subordinate Voting Shares for cancellation for cash consideration of approximately $460. This purchase was settled on October 1, 2008 and will be recorded in the unaudited interim consolidated financial statements for the second quarter of fiscal 2009.
(e) Stock Option Plan
The Company maintains a Stock Option Plan, as amended, for the benefit of directors, officers and employees. As at September 27, 2008, the Company has reserved 835,500 Subordinate Voting Shares for issuance under its Stock Option Plan and there were 247,000 options outstanding with exercise prices ranging from $6.02 to $15.85 per option.
The following transactions occurred during the 13 week periods ended September 27, 2008 and September 29, 2007 with respect to the Stock Option Plan:
13 weeks ended
-------------------
Sept 27, Sept 29,
2008 2007
-------------------
Outstanding at beginning of period 293,000 605,300
Granted - -
Exercised - -
Forfeited (46,000) (51,000)
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Outstanding at end of period 247,000 554,300
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Options exercisable at end of period 160,750 491,800
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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 periods ended September 27, 2008 and September 29, 2007 with respect to the DSU Plan:
13 weeks ended
------------------
Sept 27, Sept 29,
2008 2007
------------------
Outstanding at beginning of period 58,920 39,420
Granted 20,000 7,000
Redeemed - -
------------------
Outstanding at end of period 78,920 46,420
Danier stock price at end of period $4.64 $8.75
------------------
Liability at end of period $366 $406
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Compensation expense recorded in SG&A ($11) $45
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(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 periods ended September 27, 2008 and September 29, 2007 with respect to the RSU Plan:
13 weeks ended
------------------
Sept 27, Sept 29,
2008 2007
------------------
Outstanding at beginning of period 133,300 50,201
Granted - -
Redeemed - -
Forfeited - -
------------------
Outstanding at end of period 133,300 50,201
------------------
Liability at end of period $333 $269
------------------
Compensation expense recorded in SG&A ($78) $35
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7. AMORTIZATION:
Amortization included in cost of sales and SG&A is summarized as follows:
13 weeks ended
----------------------------
Sept 27, 2008 Sept 29, 2007
----------------------------
Cost of sales $ 72 $ 136
SG&A 1,208 1,485
----------------------------
$ 1,280 $ 1,621
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8. 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.
9. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS:
13 weeks ended
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Sept 27, Sept 29,
2008 2007
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Decrease (increase) in:
Accounts receivable ($697) ($1,367)
Income taxes recoverable (2,614) (1,943)
Inventories (13,535) (17,460)
Prepaid expenses (39) 33
Increase (decrease) in:
Accounts payable and accrued liabilities 1,443 3,035
Income taxes payable - (1,473)
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($15,442) ($19,175)
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10. 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
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2009 $10,539 $606
2010 8,427 -
2011 7,211 -
2012 5,387 -
2013 3,459 -
Thereafter 7,827 -
(b) Letters of credit
The Company had outstanding letters of credit in the amount of $17,160 (September 29, 2007 - $16,714) for imports of finished goods inventories to be received.
11. 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. With the exception of the Company entering into options to purchase U.S. dollars as discussed below, there have been no other significant changes in the Company's risk exposures for the 13 week period ended September 27, 2008.
A significant portion of the Company's leather and finished goods inventory is purchased from foreign vendors with payment terms in U.S. dollars. In order to reduce the Company's exposure to a decline in the value of the Canadian dollar relative to the U.S. dollar, during the 13 weeks ended September 27, 2008, the Company purchased options that enable it to purchase up to US$4 million at an exchange rate of US$1 = CDN$1.10. The range of maturity of these contracts is from October 15, 2008 to November 3, 2008. As at September 27, 2008, the fair value of these contracts was not significant. Transaction costs associated with these options were recorded in SG&A expenses.
12. 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.
