2006 Annual Report - Danier

Transcription

ANNUAL REPORT 2006
FINANCIAL HIGHLIGHTS (in thousands of dollars, except earnings per share and shares outstanding)
2006
2005
2004
2003
2002
148,351
71,398
166,350
83,487
175,270
86,528
172,823
85,275
177,704
86,776
(6,953)
(1,159)
(5,503)
6,612
12,488
(185)
8,734
14,487
(7,097)
12,904
18,730
5,394
19,018
24,388
10,725
(0.84)
(0.84)
6,553,254
(0.03)
(0.03)
6,546,154
(1.03)
(1.03)
6,944,554
0.78
0.76
6,919,554
1.57
1.53
6,908,204
11,833
36,380
82,210
1,829
47,956
21,193
44,285
83,365
nil
54,937
22,576
44,202
89,869
nil
61,287
7,081
36,873
81,487
nil
67,994
3,581
33,602
75,695
nil
62,522
2006
2005
2004
2003
2002
(11%)
(6%)
(4%)
(8%)
1%
$ 72,397
75,954
$ 148,351
$ 81,280
85,070
$ 166,350
$ 83,283
91,987
$ 175,270
$ 79,720
93,103
$ 172,823
$ 84,592
93,112
$ 177,704
Retail square footage
Shopping Mall/Street-Front
Power Centre
Total
115,438
260,119
375,557
117,309
254,645
371,954
113,476
258,680
372,156
112,556
251,235
363,791
104,755
212,672
317,427
Number of stores
Power Centre
Total
55
40
95
56
39
95
55
40
95
56
39
95
54
33
87
Sales
Gross Profit
Earnings loss before income tax, restructuring
costs and litigation provision
Adjusted EBITDA(1)
Net Earnings (loss)
Earnings Per Share
Basic
Diluted
Shares Outstanding at year-end
Selected Balance Sheet Data
Cash
Working Capital
Total Assets
Long-term Debt
Shareholders’ Equity
(1)See
section entitled MD&A – Non-GAAP Measures
SELECTED FINANCIAL INFORMATION
Comparable store sales increase/(decrease)
Sales ($000)
Shopping Mall/Street-Front/Direct Sales
Power Centre
Total
TABLE OF CONTENTS
3 Letter to Shareholders
5 Review of Operations
9 Management’s Discussion and Analysis
28 Management’s Responsibility for Financial Statements
28 Auditors’ Report to Shareholders
29 Consolidated Financial Statements
32 Notes to Consolidated Financial Statements
44 Board of Directors
LETTER TO SHAREHOLDERS
Fiscal 2006 resulted in poor performance at Danier. Revenues stood at $148.4 million compared with $166.4 million in fiscal 2005, a
decrease of 11%. With revenues $18 million lower, Danier posted a loss of $5.5 million for the year, compared with a loss of $185,000
in fiscal 2005.
Poor results can create a sobering wake-up call and we came to realize many of the errors of our ways during fiscal 2006. I believe
what got us here was a loss of focus on our customer because over the past few years we were trying to be everything to everyone.
The saving grace is that we have a loyal following of customers who still believe in the brand. Our job is to focus on and to satisfy
our customers’ needs. We have already begun to implement changes that we believe will turn results around.
The Danier customer is looking for timeless and sophisticated merchandise at remarkable value. This focus makes decisions on what
to make for our customers much easier. More importantly it provides better guidance on what not to make. Similarly, focus on our
customer allows us to communicate to them in a more relevant way. No more should we hear statements such as 'that's for my
daughter, not for me’. Focused marketing can have a powerful impact on the business.
Furthermore, the investments we continue to make in information systems for improved forecasting, allocations, replenishment and
redistribution of merchandise will yield improved merchandise delivery and presentation performance. Making sure the right
merchandise is in the right store at the right time and presented in a way that our customers relate to will make a clear merchandise
statement to our customer and allow us to live up to our potential.
With respect to retail distribution channels we believe that we need to separate the offering between malls and power centre
outlets to better meet the needs of customers shopping those channels.
In addition, we have been able to institute cost reduction measures aimed at streamlining our performance and improving the
bottom line.
We remain committed to providing superior returns for the company and for shareholders.
I want to express my sincere thanks to our 1,200 employees for their commitment to Danier and their hard work throughout the
year and together we look forward to providing better results to you in fiscal 2007.
Jeffrey Wortsman
President and CEO
July 26, 2006
DANIER ANNUAL REPORT 2006
3
REVIEW OF OPERATIONS
Danier owns and operates 95 stores in Canada, making us the leading specialty leather retailer in the
country and among the largest in the world. The company operates 55 shopping mall and street front
stores and 40 larger format stores located in power centres. Danier also sells its merchandise directly to
corporate clients through its Corporate Sales Division.
THE DANIER BRAND
The Danier brand strongly resonates with consumers as a top-of-mind choice for those in search of leather and suede items. The
Danier brand represents an aspirational lifestyle choice, because Danier delivers the brand promise of timeless leather sophistication
at remarkable value. To reinforce our brand and deliver improved performance, we are continuing our work to align all elements of
what we offer to serve our target consumer and meet our brand promise.
FOCUS ON THE CUSTOMER
Danier’s most important relationship is with our core customers, who are sophisticated consumers looking for quality and style at
great value. To better meet our customer needs, we are making changes to how we communicate to our customers to emphasize that
Danier outerwear products can be associated with both warmth and style without any trade-off.
In addition, we are revising product lines and accessories to ensure that we do not detract from our core outerwear offering that
our customer is seeking.
FOCUS ON MERCHANDISE
In the recent past, we broadened our reach and appeal to try and capture a broader market and target a future customer base. We
have realized that our core customers were not being properly served through this strategy. To bring these customers back, our
efforts will be narrowed to our core strengths in outerwear and accessories.
Furthermore, we are ensuring that our procurement process begins earlier in the season to buy the best available leather at
competitive prices. This strategy, when effectively executed, will ensure that we have the best quality leather available and can offer
our products at remarkable value. In addition, we are heightening our inventory management systems to provide for early warning
when items need to be replenished so that they are available to meet customer demand. This approach will ensure that we have the
right product, in the right store, at the right time.
FOCUSING ON MARKETING
One of Danier’s most important assets is its solid brand identity – an identity that must be supported proactively. We have made
investments in building the brand over the past few years and we are leveraging that investment to increase store traffic and sales.
The store continues to be the quintessential expression of the Danier brand. We are enhancing the customer experience at store
level by revising our store layouts to ensure products are available on the floor, promote a better music system for shopping enjoyment,
and ensure that our windows and signage are inviting to potential customers.
5
The look and feel of our marketing communications will better reflect the identity and aspirations of our core customers. This will
ensure that we have a consistent voice in our stores, signage, brochures, web presence and promotional flyers.
In addition, we have continued to advance our customer relationship management capabilities to deliver effective and targeted
electronic communications which, can be achieved at a fraction of the cost of traditional mass advertising methods.
Furthermore, we are set to relaunch our Prestige customer loyalty program. This program will offer special events and promotions to
select VIP customers, who are among our most influential brand ambassadors.
ACCESSORIES’ GROWTH CONTINUES BUT OUTERWEAR SUCCESS IS KEY
Danier has been expanding its accessory business over the past several years and now offers a range of products, from belts to purses
to photo albums. In 1998, accessories accounted for 4% of total company revenue; in 2006, accessories represented 20% of the
company’s total revenue. While the accessories business is an important diversification of our revenue stream, it needs to be
emphasized that outerwear represents 60% of sales. Furthermore, outerwear is the first purchase made by 65% of our customers.
Clearly, a strong outerwear business is crucial to the company’s success and ability to attract a new generation of customers.
OPERATIONAL IMPROVEMENTS
In fiscal 2006, Danier made a significant investment in its Information Technology systems and has completed the replacement of
Danier’s point-of-sale (POS) system. This investment will reduce the time it takes to process a transaction while working compatibly
with our customer relationship manager system (CRM) to allow Danier to tailor offerings directly to individual customers. This marks
the first major upgrade in several years and is the largest capital expenditure for the year. Upgrading now makes sense given recent
advances in POS technology.
Two new locations – a shopping mall store at the Niagara Fallsview Casino and a power centre location at the Sunridge Mall in
Calgary – were opened during fiscal 2006. In the last half of the year, two underperforming shopping mall stores whose leases
expired were closed.
Danier does not plan to open any new stores in Fiscal 2007. Store closures in the coming year include one street-front store location and
three underperforming power centre locations. These measures demonstrate our consistent approach to make appropriate real
estate choices and ensure that we have the best footprint in key markets to best serve our customers.
Danier continues to focus on creating shareholder value. There is a positive appetite for change at Danier. Company
management understands that we must look forward but also remember our past as we return to the practices that made our
company Canada’s largest specialty leather goods retailer.
7
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at July 26, 2006
The following Management’s Discussion and Analysis (“MD&A”) is based upon and should be read in conjunction with Danier
Leather Inc.’s ("Danier" or the "Company") consolidated financial statements and notes thereto for the 52-week periods ended June
24, 2006 and June 25, 2005. The consolidated financial statements and notes were prepared in accordance with Canadian
generally accepted accounting principles (“GAAP”) and are reported in Canadian dollars. In the discussion that follows, “2006”
refers to the 52-week period ended June 24, 2006 and “2005” refers to the 52 week period ended June 25, 2005.
9
FORWARD LOOKING STATEMENTS
This Annual Report, including this MD&A, 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", "plan", "believe" and similar expressions identify forwardlooking 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 Annual Report
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 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, change in consumer shopping patterns away from shopping malls and power centres, unseasonably
hot weather or severe 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, risks
associated with foreign sourcing and manufacturing, existing and potential class action 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, ability of the Company to obtain new locations or renew existing locations at existing or favourable lease
terms, changes to the regulatory environment in which the Company operates now and in the future, changes in the Company’s tax liabilities, either
through changes in tax laws or future assessments, and performance of third party service providers.
Danier cautions that this list of factors is not exhaustive. Danier cautions readers 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 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.
10
BUSINESS OVERVIEW
Danier has been in the leather apparel and accessory business for over 30 years and is one of the largest publicly traded specialty-apparel leather
retailers in the world. As a vertically integrated designer, manufacturer and retailer, Danier is able to offer its customers high-quality, fashionable
leather clothing and accessories at exceptional value. Danier’s products are sold exclusively at its 95 shopping mall stores, street-front stores and
large format power centre locations that are located in every province across Canada, except Prince Edward Island. Danier’s products are also sold
through its corporate sales division.
STRATEGY
During the first half of 2006 Danier focused on elevating the Danier brand through increased distribution of fashion oriented brochures, increased
brand oriented advertising such as magazine, billboard and transit shelter, reduced distribution of promotional newspaper flyer inserts, and by
offering more fashion oriented merchandise including a new product line called New Label. The retail market however became more price
promotional, customers preferred merchandise at lower price points and the trend to shorter length jackets which have a lower average price point
continued.
During the third quarter Danier refocused its strategy on its core middle to upper income female customer between the age of 35 to 55 and
upgraded the quality and look of its newspaper flyer inserts. The upgraded newspaper inserts offered great merchandise at remarkable value and
these newspaper inserts performed well with sales and traffic increasing during these promotions.
During fiscal 2007, Danier will continue to focus on providing customers with timeless and sophisticated products at remarkable value while making
sure that the right sizes are in-stock when customers’ come to the store. In addition, advertising dollars will be focused on more frequent and better
quality newspaper inserts that emphasize great merchandise at remarkable value.
Danier also plans to reduce its selling, general and administrative expenses through reduced advertising expense, head office staff reductions which
have already been implemented, no longer processing transactions through Danier’s website and selective closure of under performing shopping
mall and street-front stores and power centre locations.
Danier’s business strategy over the next several years will continue to focus on:
1. ITS CORE BUSINESS OF LEATHER GARMENTS
As the leader in leather outerwear and sportswear, Danier will continue to focus on being the dominant destination for better leather outerwear
and sportswear. Outerwear represents approximately 60% of Danier’s total sales and sportswear represents another 20% of Danier’s total sales.
2. CONTINUED GROWTH OF ACCESSORIES
Accessory sales represented 20% of total Company revenue during 2006. Danier’s long-term objective is to continue to grow this line of business.
3. SELECTIVELY OPEN NEW STORE LOCATIONS
Danier operates 55 shopping mall and street-front stores and 40 power centre locations (large format stores). Shopping mall, street-front and
power centre locations will be selectively added where sales, store profit and return on investment criteria are met.
4. CORPORATE SALES
Sales of Danier products to corporations and other organizations for use as incentives and premiums for employees, suppliers and customers
offers an incremental sales opportunity. Danier believes incremental sales can be achieved by providing corporate customers with unique,
innovative and exciting merchandise. Danier's strong brand, expertise in leather design and manufacturing, and growing line of accessories
provide a solid foundation for the development of a successful corporate sales business.
5. INTERNATIONAL
Licensing opportunities for countries outside of North America will be explored.
11
SELECTED ANNUAL INFORMATION
The following table sets forth selected annual income statement and financial position data in thousands of dollars except per share amounts for each
of the last five years.
In March 2005, the Company announced that it would close all three of its stores in the United States. Financial results for all of the periods presented
below were restated to reflect the discontinuance of the U.S. operation.
Income Statement Data
Revenue
Earnings (loss) before income tax, restructuring costs
and litigation provision and related expenses
Restructuring costs
Litigation provision and related expenses
Net earnings (loss) before discounted operations
Discontinued operations
Net earnings (loss)
Net earnings (loss) per share
before discontinued operations:
Basic
Diluted
Net earnings (loss) per share:
Basic
Diluted
Dividends per share
Financial Position Data
Total assets
Long term debt
Shareholders equity
2006
2005
2004
$ 148,351
$ 166,350
$ 175,270
(6,953)
1,389
(5,503)
(5,503)
6,612
3,098
2,583
(2,768)
(185)
($0.84)
($0.84)
($0.84)
($0.84)
$0.24
$ 82,210
1,829
47,956
$
2003
2002
172,823
$ 177,704
8,734
15,450
(5,910)
(1,187)
(7,097)
12,904
2,773
6,282
(888)
5,394
19,018
11,589
(864)
10,725
$0.38
$0.38
($0.85)
($0.85)
$0.91
$0.89
$1.69
$1.65
($0.03)
($0.03)
$0.24
($1.03)
($1.03)
nil
$0.78
$0.76
nil
$1.57
$1.53
nil
83,365
nil
54,937
$
89,869
nil
61,287
$
$
81,487
nil
67,994
$
75,695
nil
62,522
Significant factors which have caused variations in the results of operations over the three most recently completed financial years include:
Revenue decreased 11% in 2006 and 5% in 2005 and is believed to have been affected by weak consumer spending on leather outerwear, a more
promotional retail environment leading up to Christmas, customer preference for lower price point merchandise, the continued fashion trend to
shorter length jackets which have a lower average price point, a weaker than expected response to the Company’s promotions, and unseasonably
hot weather during the first quarter of 2006 and the second quarter of 2005.
Net earnings (loss) from continuing operations have been affected by the decrease in revenue, a decrease in gross margin during 2006 and higher
advertising expenses. In addition, the Company incurred severance payments and outplacement counselling for 23 individuals that were part of the
head office reduction that took place during the fourth quarter of 2006. Annual savings of approximately $1 million are expected to result in fiscal
2007 from this staff reduction. Accelerated amortization of approximately $0.8 million related to the write off of leasehold improvements and
fixtures was also recorded in the fourth quarter in connection with the closure of one street-front store, one power centre location store and the
downsizing of one shopping mall store.
Net earnings (loss) were affected by the reasons outlined in the above paragraph and the discontinuance of the U.S. operation during 2005. During
March 2005, the Company announced that it would discontinue its U.S. operations which consisted of three shopping mall stores. The $2.8 million
loss in 2005 relates to operating losses, amortization of $1.1 million to bring the net book value of its U.S. fixed assets to zero and $0.4 million for
lease termination costs and employee severance costs.
12
Factors which have caused variations in the Company’s financial position over the three most recently completed financial years include:
•
•
•
•
Capital expenditures of $9.0 million in 2006 compared with $2.6 million in 2005 and $2.7 million in 2004. The increase during 2006 was due to
implementation of a new point-of-sale hardware, software and customer relationship management system, increase in the number of renovations
in 2006 and increased purchases of mannequins, bust forms and other visual display equipment. Capital lease proceeds of $2.9 million were
used to fund the point-of-sale hardware and software.
Net loss of $5.5 million during 2006.
Repurchase of 402,400 subordinate voting shares of the Company (“Subordinate Voting Shares”) in the 2005 fiscal year for $4.6 million under
the Company’s normal course issuer bid.
Implementation of a quarterly cash dividend of $0.06 per share ($0.24 per year) in 2005. The annual cash cost of the dividend was approximately $1.6 million.
RESULTS OF OPERATIONS
The following tables sets forth the Company’s consolidated statements of earnings (loss) and supplemental information in thousands of dollars
and as a percentage of revenue for each of the last five years.
Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Interest expense (income)
Earnings (loss) before undernoted item and income tax
Restructuring costs
Earnings (loss) before discontinued operations
and income taxes
Provision for (recovery of) income taxes
Net earnings (loss) before discontinued operations
Loss from discontinued operations, net of income taxes
Net earnings (loss)
Supplemental information:
Adjusted EBITDA(1)
Adjusted net earings (loss) (1)
Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Earnings (loss) before undernoted item and income tax
Restructuring costs
Earnings (loss) before discontinued operations
and income taxes
Loss from discontinued operations, net of income taxes
Net earnings (loss)
Supplemental information:
Adjusted EBITDA(1)
Adjusted net earings (loss)(1)
(1)See section entitled Non-GAAP Measures
2006
$ 148,351
2005
$ 166,350
2004
$ 175,270
2003
172,823
2002
$ 177,704
76,953
71,398
78,796
(445)
(6,953)
1,389
-
82,863
83,487
77,215
(340)
6,612
3,098
88,742
86,528
77,812
(18)
8,734
15,450
87,548
85,275
72,305
66
12,904
2,773
90,928
86,776
67,297
461
19,018
-
(8,342)
(2,839)
(5,503)
($5,503)
3,514
931
2,583
2,768
($185)
(6,716)
(806)
(5,910)
1,187
($7,097)
10,131
3,849
6,282
888
$5,394
19,018
7,429
11,589
864
$10,725
(1,159)
(4,586)
12,488
4,849
14,487
5,466
18,730
7,900
24,388
11,589
2006
100.0%
51.9%
48.1%
53.1%
(0.3%)
(4.7%)
0.9%
-
2005
100.0%
49.8%
50.2%
46.4%
(0.2%)
4.0%
1.9%
2004
100.0%
50.6%
49.4%
44.4%
5.0%
8.8%
2003
100.0%
50.7%
49.3%
41.8%
7.5%
1.6%
2002
100.0%
51.2%
48.8%
37.9%
0.2%
10.7%
-
(5.6%)
(1.9%)
(3.7%)
(3.7%)
2.1%
0.5%
1.6%
1.7%
(0.1%)
(3.8%)
(0.4%)
(3.4%)
0.7%
(4.1%)
5.9%
2.3%
3.6%
0.5%
3.1%
10.7%
4.2%
6.5%
0.5%
6.0%
(0.8%)
(3.1%)
7.5%
2.9%
8.3%
3.1%
10.8%
4.6%
13.7%
6.5%
$
13
The following summarized statistical data compare each of the last five fiscal years.
Comparable store sales increase/(decrease)
Sales ($000)
Shopping Mall/Street-Front/Direct Sales
Power Centre
Total
Retail square footage
Power Centre
Total
Number of stores
Power Centre
Total
2006
(11%)
2005
(6%)
$
2004
(4%)
$
$
2003
(8%)
2002
1%
79,720
93,103
172,823
$ 84,592
93,112
$ 177,704
$ 72,397
75,954
$ 148,351
81,280
85,070
$ 166,350
83,283
91,987
$ 175,270
115,438
260,119
375,557
117,309
254,645
371,954
113,476
258,680
372,156
112,556
251,235
363,791
104,755
212,672
317,427
55
40
95
56
39
95
55
40
95
56
39
95
54
33
87
$
Revenue decreased 11% or $18.0 million to $148.4 million in 2006 from $166.4 million in 2005. Comparable store sales decreased 11%. Average sale
decreased 8%, traffic decreased 5% and conversion (percentage of customers that come into the store and make a purchase) increased 3%. A more
promotional retail environment leading up to Christmas, customer preference for lower price point merchandise, the continued fashion trend to
shorter length jackets which have a lower average price point, a change in the marketing strategy placing more emphasis on elevating the Danier brand
and less reliance on price promotions, and hot weather during the first quarter are believed to have affected sales.
Fourth quarter revenues in 2006 decreased 13% or $3.5 million to $22.0 million from $25.5 million in the fourth quarter of 2005. Comparable store
sales decreased 15%. Average sale decreased 3%, traffic decreased 15% and conversion (percentage of customers that come into the store and make
a purchase) remained the same. The fourth quarter of 2005 included a newspaper insert promotion and other price oriented promotions whereas the
fourth quarter of 2006 did not contain any newspaper insert promotions and there was less inventory of basic items especially during the beginning
of the quarter. Inventory levels of basic items and next fall merchandise during the latter part of the quarter were increased as the Company started
purchasing for next fall earlier than past years.
Store openings during the first half of the year included one new shopping mall store at the Niagara Fallsview Casino and a power centre location at
Sunridge Mall in Calgary, Alberta. During the last half of the year two under performing shopping mall stores whose leases expired were closed.
During fiscal 2007, the Company does not plan to open any new stores. Store closures will include one street-front store during the first quarter, one
under performing power centre location during the first quarter and two under performing power centre locations during the 4th quarter.
Gross profit as a percentage of revenue decreased to 48.1% in 2006 compared with 50.2% in 2005. Gross profit dollars decreased $12.1 million or
14% to $71.4 million in 2006, compared with $83.5 million in 2005. The year-to-date decrease in gross margin was mainly experienced in the power
centre locations as more promotional activity and discounts were offered to maximize traffic and conversion rate. The Company purchases a
significant portion of its raw materials and finished goods in U.S. dollars. The benefit of the higher Canadian dollar during 2006 was mostly passed
on to customers through lower prices or discounts. The gross profit dollar decrease was due to an 11% decrease in revenue as well as the decrease
in gross margin.
Gross profit as a percentage of revenue increased to 49.9% during the fourth quarter of 2006 compared with 49.6% during the fourth quarter of
2005 as there were less price oriented promotions during the fourth quarter of 2006 compared with the same period last year. Gross profit dollars
decreased by $1.6 million or 13% to $11.0 million in the fourth quarter of 2006 compared with $12.6 million during the same period last year mainly
due to the 13% decrease in revenue.
Selling, general and administrative expenses increased by 2% or $1.6 million to $78.8 million in 2006, compared with $77.2 million in 2005.
Advertising expense increased by $1.5 million over the prior year due to more brand related advertising such as billboard, transit shelter and
magazine advertising as well as high quality fashion oriented brochures. Plans for Fiscal 2007 include a shift in promotional and advertising activities
14
to place a greater emphasis in favour of newspaper flyer inserts, and less transit shelter, billboard and magazine advertising. The Company expects
to achieve advertising expense reductions of about $2.5 million during Fiscal 2007.
SG&A for the fourth quarter of 2006 increased by 10% or $1.5 million to $16.8 million compared with $15.3 million during the same period last year.
The fourth quarter last year included a $0.6 million year-end estimate to actual adjustment reversing bonuses for head office staff, which were
estimated in the second quarter based on meeting certain financial targets which ultimately were not met in the second half of last year. The fourth
quarter of 2006 also included higher rent expense and higher legal and professional fees.
Restructuring costs for the fourth quarter and full year of 2006 represent approximately $0.6 million of severance payments and outplacement
counselling for the 23 individuals that were part of the head office reduction that took place during the fourth quarter of 2006. Annual savings of
approximately $1 million are expected to result in fiscal 2007 from this staff reduction. Accelerated amortization of approximately $0.8 million related
to the write off of leasehold improvements and fixtures was also recorded in the fourth quarter in connection with the closure of one street-front
store, one power centre location and the downsizing of one shopping mall store.
Litigation provision and related expenses relate to the class action litigation and were NIL in 2006 and $3.1 million in 2005.
In 2004 the Superior Court of Justice (Ontario) issued a judgment in favour of the Plaintiffs and awarded damages to Canadian shareholders who
purchased Subordinate Voting Shares in Danier’s initial public offering (“IPO”). The Company appealed this decision and in December 2005 the
Ontario Court of Appeal unanimously allowed the appeal on three separate grounds, set aside the trial decision and dismissed the class proceeding.
As a result, the Company and its Senior Officers are not required to pay any of the damages, interest or costs awarded by the trial judge. The Court
of Appeal's decision stated that the Company had met its disclosure obligations in the Prospectus and during the IPO process and the trial judge
erred in finding that any misrepresentation had occurred.
In February 2006, the plaintiffs filed an Application for Leave to Appeal to the Supreme Court of Canada. In June 2006, the Supreme Court of
Canada granted the plaintiff’s application. The Company expects the appeal to be heard by the Supreme Court of Canada during March 2007.
Although the Court of Appeal has set aside the trial judge’s decision, the provision will remain until the Supreme Court of Canada makes a final
determination.
Based solely on the information available at the time, if the damages, costs and interest awarded by the trial judge had been paid at the fiscal 2005
year-end, the Company estimated this amount to be approximately $18 million. During the fourth quarter of 2004, the Company recorded an
expense and set up a provision of $15 million to reflect the trial judge's decision. This provision was subsequently increased by $3 million to $18 million
during the fourth quarter of 2005 to take into account the trial judge's award of costs which was released in May 2005. The provision for recovery
of income taxes related to the trial judge's award was based on the entire $18 million provision and the provision did not take into account the
potential results of the appeal, any possible insurance recoveries or future tax adjustments. The provision for the damages award, costs and interest
and the income tax recovery were based on management's best estimate and is subject to adjustment when all facts are known and all issues are
resolved. The possible adjustment could be significant.
Interest income was $445,000 in 2006 compared with $340,000 in 2005. The increase in interest income is due to higher interest rates earned on
cash balances.
Effective income tax recovery was 34% in 2006 compared with effective income tax expense of 124.7% last year. The effective rate last year
included unutilized losses from the U.S. operation and differences between tax accounting and financial accounting for legal provisions.
Net earnings (loss) before discontinued operations for 2006 was a loss of $5.5 million ($0.84 per basic share) compared with net earnings of $2.6
million ($0.38 per basic share) in 2005. The decrease in net earnings was due to a 11% revenue decrease, a 2.1% decrease in gross margin and higher
advertising expenses.
Net loss before discontinued operations for the fourth quarter of 2006 was a loss of $4.6 million ($0.70 per basic share) compared with $3.2 million
($0.49 per basic share) in the fourth quarter of 2005. The fourth quarter of 2006 included a 13% revenue decrease, higher SG&A and a $1.4 million
restructuring charge. The fourth quarter of 2005 included litigation provision and related expenses of $3.1 million.
15
Loss from discontinued operations, net of income taxes of $NIL in 2006 and $2.8 million in 2005 related to the closure of the U.S. operations in
2005. During March 2005, the Company announced that it would discontinue its U.S. operations which consisted of three shopping mall stores. The
$2.8 million loss in 2005 relates to operating losses, amortization of $1.1 million to bring the net book value of its U.S. fixed assets to zero and $0.4
million for lease termination costs and employee severance costs.
Net loss for 2006 was $5.5 million ($0.84 per basic share) compared with $0.2 million ($0.03 per basic share) in 2005. The increased loss was due to
a 11% revenue decrease, a 2.1% decrease in gross margin, higher advertising expenses and a $1.4 million restructuring charge.
Net loss for the fourth quarter of 2006 was $4.6 million ($0.70 per basic share) compared with $3.2 million ($0.49 per basic share) in the fourth
quarter of 2005. The fourth quarter of 2006 included a 13% revenue decrease, higher SG&A and a $1.4 million restructuring charge. The fourth
quarter of 2005 included litigation provision and related expenses of $3.1 million.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The business of the Company is seasonal and results of operations for any interim period are not necessarily indicative of the results of operations for the full
fiscal year. Generally, a significant portion of the Company’s sales and earnings are generated during the second quarter, which includes the holiday selling
season, and sales are lowest and losses are experienced in the period from April to September.
SUMMARY OF QUARTERLY RESULTS ($000, EXCEPT PER SHARE AMOUNTS)
FISCAL 2006
Revenue
Net earnings (loss) before discontinued operations:
Amount (dollars)
Basic (per share)
Diluted (per share)
Net earnings (loss):
Amount (dollars)
Basic (per share)
Diluted (per share)
Supplemental information(1):
Adjusted EBITDA
Adjusted net earings (loss)
FISCAL 2005
Revenue
Net earnings (loss) before discontinued operations:
Amount (dollars)
Basic (per share)
Diluted (per share)
Net earnings (loss):
Amount (dollars)
Basic (per share)
Diluted (per share)
Supplemental information(1):
Adjusted EBITDA
(1) See section entitled Non-GAAP Measures
16
Q1
Q2
Q3
Q4
$ 20,831
$ 61,828
$ 43,664
$ 22,028
($5,291)
($0.81)
($0.81)
$4,595
$0.70
$0.70
($192)
($0.03)
($0.03)
($4,615)
($0.70)
($0.70)
($5,291)
($0.81)
($0.81)
$4,595
$0.70
$0.70
($192)
($0.03)
($0.03)
($4,615)
($0.70)
($0.70)
($7,074)
($5,291)
$9,014
$4,595
$1,157
($192)
($4,256)
($3,698)
$ 24,277
$ 70,091
$ 46,527
$ 25,455
($2,952)
($0.43)
($0.43)
$7,364
$1.08
$1.07
$1,353
$0.20
$0.20
($3,182)
($0.49)
($0.49)
($3,413)
($0.49)
($0.49)
$7,182
$1.06
$1.04
($794)
($0.12)
($0.12)
($3,160)
($0.48)
($0.48)
($3,704)
($2,952)
$13,924
$7,364
$3,636
$1,353
($1,368)
($916)
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and bank borrowings have been the primary funding sources for working capital requirements and capital expenditures
over the last several years. The 2006 net loss combined with $9.0 million of capital expenditures resulted in a decrease in the Company’s cash
position versus the prior year. The Company’s financial position at the end of 2006 still continues to be strong with a working capital balance of
$36.4 million compared with $44.3 million at the end of 2005. The ratio of current assets to current liabilities was 4.0:1 as at the end of 2006
compared with 6.4:1 at the end of 2005.
Inventory at the end of 2006 was approximately $3.3 million higher than inventory at the end of 2005. Raw material and work-in-process inventory
decreased by $1.4 million compared with 2005. Finished goods inventory increased by approximately $4.7 million. This increase was due to early
purchases of fall outerwear and blazer merchandise.
Total liabilities excluding the litigation provision and related expenses at the end of 2006 were approximately $5.8 million higher than at the end of
2005. The increase is due to a $2.5 million increase in accounts payable and accrued liabilities related to earlier inventory purchases and a $2.7 million
capital lease obligation that was entered into during the fourth quarter of 2006 to fund point-of-sale equipment that was implemented during 2006.
Income taxes recoverable increased by $1.5 million at the end of 2006 due to the increased loss from operations.
LITIGATION PROVISION AND RELATED EXPENSES
The provision relating to the class action lawsuit and related expenses at the end of 2006 was equal to the provision at the end of 2005. During the
fourth quarter of 2004, the Company recorded an expense and set up a provision of approximately $15 million pursuant to a judgment issued by the
trial judge against the Company and two of its Senior Officers in favour of the plaintiffs in connection with the class action lawsuit. This provision
was subsequently increased by $3.0 million to $18 million in the fourth quarter of 2005.
The Company and two of its Senior Officers filed a Notice of Appeal from the trial judge's decision and the appeal was heard by the Ontario Court
of Appeal during the fourth quarter of 2005. During the second quarter of 2006, the Ontario Court of Appeal unanimously allowed the appeal on
three separate grounds, set aside the trial decision and dismissed the class action. As a result, the Company and its Senior Officers are not required
to pay any of the damages, interest or costs awarded by the trial judge. The Court of Appeal will determine the Company’s and its Senior Officers'
entitlement to costs for the trial and for the appeal at a later date.
During February 2006, the plaintiffs filed an Application for Leave to Appeal to the Supreme Court of Canada. In June 2006, the Supreme Court
of Canada granted the plaintiffs’ application. The Company expects the appeal to be heard by the Supreme Court of Canada during March 2007.
Although the Court of Appeal has set aside the trial judge’s decision, the provision will remain until the Supreme Court of Canada makes a final
determination
The provision for the damages award, costs and interest and the income tax recovery was based on management's best estimate and is subject to
adjustment when all facts are known and all issues are resolved. The possible adjustment could be significant. Although the Court of Appeal has now
set aside the trial judge's decision, the provision will remain until the Supreme Court of Canada makes a final determination. Further details of the
class action litigation are provided in Note 11 of the 2006 consolidated financial statements.
OPERATING ACTIVITIES
Cash flow from operating activities decreased by $9.3 million during 2006 to a use of $1.8 million compared with proceeds of $7.4 million during 2005.
Approximately $5.3 million of the decrease in cash resulted from a higher net loss and approximately $3.3 million of the decrease in cash was due to
higher year-end inventory balances as the Company began earlier purchases of inventory for next fall.
Cash flow from operating activities for the fourth quarter of 2006 was a use of $9.4 million compared with proceeds of $1.1 million for the fourth
quarter of 2005. A higher net loss and earlier fall inventory purchases as compared with the prior year were the primary uses of cash.
FINANCING ACTIVITIES
The Company’s business is seasonal with peak working capital needs expected to occur during the period from June to mid-December as inventory
levels are increased in advance of the peak selling season from October to March. The Company funds inventory expenditures during normal and
peak selling periods through a combination of cash flows provided by operations and bank credit facilities.
17
During June 2006, the Company renegotiated its credit agreement. The new credit agreement which became effective in July 2006 provides for an
operating facility for working capital and for general corporate purposes to a maximum amount of $35 million and is committed until June 30, 2007
and bears interest at prime plus 0.25%. Standby fees are paid for any unused portion of the credit facilities. The credit facility is subject to certain
covenants and other limitations that if breached could cause a default and may result in a requirement for immediate repayment of amounts
outstanding. Security provided includes a security interest over all personal property of the business and a mortgage over the land and building,
comprising the Company's head office/distribution facility.
During the fourth quarter of 2006, the Company entered into a three year capital lease facility to fund the point-of-sale hardware and software that
was implemented during 2006. The amount of the capital lease obligation at the end of 2006 was approximately $2.7 million.
The normal course issuer bid approved by the Toronto Stock Exchange in 2005 expired on February 6, 2006 and has not been renewed. The bid
permitted the Company to acquire up to 421,061 Subordinate Voting Shares, representing approximately 10% of the public float of the Subordinate
Voting Shares, during the period from February 7, 2005 to February 6, 2006. During 2006, no Subordinate Voting Shares were purchased under the
normal course issuer bid. During the 13 week and 52 week periods ended June 25, 2005, NIL and 402,400 Subordinate Voting Shares were
repurchased, respectively.
Proceeds from lease inducements were $286,000 during 2006 compared with NIL last year. Lease inducements have historically been received when
opening a location at a recently constructed power centre or shopping mall.
In 2005, the Company initiated a quarterly cash dividend. Cash dividends of $0.24 per share ($0.06 per quarter) were paid during each of 2006 and
2005. The dollar amount of the cash dividend was approximately $1.6 million per year ($0.4 million per quarter).
Based on the Company’s results for fiscal 2006, the Board of Directors has resolved to suspend the payment of dividends on Danier’s Subordinate
Voting Shares and Multiple Voting Shares commencing in the first quarter of 2007. The Board has determined that the suspension of dividends is in
the best interests of the Company given current results of operations. The Board will consider reinstating dividend payments on the Subordinate
Voting Shares and Multiple Voting Shares when financial conditions permit. However, the Board cannot determine at this time when a dividend
resumption will occur.
INVESTING ACTIVITIES
Capital expenditures were $9.0 million in 2006 compared with $2.6 million during 2005. The increase was mainly due to:
•
•
•
Implementation of a new point-of-sale hardware, software and customer relationship management system.
Increase in number of renovations in 2006 to six stores compared with three stores in 2005.
Increased purchases of mannequins, bust forms and other visual display equipment.
Capital expenditures in 2006 included: approximately $3.5 million towards the addition of one new power centre outlet, one new shopping mall
store, renovations at six existing shopping mall stores, purchase of mannequins, bust forms and fixtures and miscellaneous expenditures in the retail
division; $5.3 million towards information technology including implementation of new point-of-sale hardware, software and customer relationship
management system, upgrades to the sales audit system and upgrade of computer hardware and software at head office; and $0.2 million towards
the addition of production machinery and equipment.
For the full year of fiscal 2007, capital investments of approximately $3.6 million are planned. Approximately $2.2 million is anticipated to be used for
renovations at seven existing stores, visual display equipment and miscellaneous expenditures in the retail division; $1.1 million for information
technology including enhancement to the point-of-sale system and customer relationship management system, upgrading of merchandising and
merchandise planning systems, and upgrade of computer hardware and software at head office; and $0.3 million for manufacturing equipment and
building improvements. The Company intends to fund these capital investments from existing working capital, internally generated cash flow and
available credit facilities.
Based on the Company generating a moderate comparable store sales increase and reducing SG&A costs, management expects cash flows
generated from operations along with available borrowing capacity under the Company's credit facility to be sufficient to fund its working capital
needs and planned capital investment program for fiscal 2007.
18
A list of material factors that may result in the Company being unable to fund its working capital needs and planned capital investment program include:
•
•
•
•
•
Continued decreases in sales from existing stores.
A material default or breach of a bank covenant that results in the Company’s existing credit facility being withdrawn.
The Supreme Court of Canada overturning the unanimous decision by the Ontario Court of Appeal setting aside the trial decision and dismissing
the class proceeding and the Company being required to pay its portion of the trial judge’s total award of damages, costs and interest in
connection with the class action (see Risks and Uncertainties – Legal Proceedings).
Changes in consumer shopping patterns that results in lower traffic to the Company’s stores.
Any material disruption to the Company’s operations.
In addition, other factors not presently known to management could materially and adversely affect the Company’s future cash flow. In such events, the
Company would be required to obtain additional capital as is necessary to satisfy its working capital and planned capital investment program from other
sources. Alternative sources of capital could result in increased dilution to shareholders and may be on terms that are not favourable to the Company.
CONTRACTUAL OBLIGATIONS ($000)
Operating leases for stores and equipment excluding percentage rent and capital leases are listed below.
Payments Due By Period
Operating Leases
Capital Leases
2007
$11,615
$1,061
$12,676
2008
$10,263
$1,061
$11,324
2009
$8,675
$884
$9,559
2010
$6,469
-
$6,469
2011
$5,253
-
$5,253
After 2011
$8,084
-
$8,084
$50,359
$3,006
$53,365
Total
Total
In addition, the Company may be obligated to pay percentage rent under certain of the store operating leases.
As at June 24, 2006, the Company had open letters of credit for purchases of inventory of approximately $7,266 (June 25, 2005 - $4,839).
The Company sublet one location during fiscal 2004 and has provided the landlord with a guarantee in the event the subtenant defaults on its
obligation to pay rent. The remaining term on the guarantee is approximately 2.5 years and the Company’s maximum exposure is $102.
RELATED PARTY TRANSACTION
There were no related party transactions during 2006. During 2005, the Company expensed and paid fees of $28,000 to a corporation related to a
director and officer of the Company. The transaction was measured at the exchange amount, which is the amount of consideration established and
agreed to by the related parties.
DISCLOSURE CONTROLS
Based on an evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that these controls and procedures operated effectively as of July 26, 2006.
RISKS AND UNCERTAINTIES
Danier is subject to certain risks and uncertainties that are common in the leather and retail apparel industry and the market environment generally.
These risks and uncertainties may impact Danier’s ability to successfully execute its key strategies and may affect future performance. The risks
included here are not exhaustive. Danier operates in a very competitive and rapidly changing environment. New risk factors may emerge from time
to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on Danier’s business.
FASHION AND APPAREL AND LEATHER INDUSTRY RISKS
The Company’s success is based in part on its ability to identify and interpret fashion and product trends, as well as to anticipate, gauge and react
to changing consumer demands in a timely manner. If the Company is unable to identify new fashion trends and adjust the product mix in a timely
manner or if market preferences are misjudged, the Company could be faced with significant excess inventories for some products and missed
19
opportunities for other products. In response, additional markdowns or promotions may be required to reduce excess, slow-moving inventories,
which may have a material adverse effect on the business, financial condition and results of operations.
Historically, a large proportion of the Company’s merchandise was black and shades of brown. Current fashion trends are emphasizing more colour
and the ability of the Company to correctly identify and balance its inventories with these fashion colours increases fashion risk and can have a
material adverse effect on the business, financial condition and results of operations.
The apparel industry is cyclical and consumer purchases of the Company’s products are discretionary. Purchases of apparel and related merchandise
tend to decline during recessionary periods and may also decline at other times, particularly if the retail environment remains stagnant or declines.
Further, a recession in the general economy, increased interest rates, a change in the availability of consumer credit, increased taxation levels,
increased unemployment, or uncertainties regarding future economic prospects could affect consumers’ spending habits and have an adverse effect
on the Company’s results of operations.
In addition, consumer sentiment towards and demand for leather may change. Bovine Spongiform Encephalopathy (BSE or "mad-cow" disease) and
hoof-and-mouth disease may affect consumer demand for leather products. Although current scientific evidence suggests that such diseases cannot
be transmitted to humans through contact with leather products, demand for leather products could be affected as a result of the publicity regarding
these diseases.
CONSUMER SHOPPING PATTERNS
Changes in customer shopping patterns could affect sales. Most of the Company’s stores are located in enclosed shopping malls and power centres.
The ability to sustain or increase the level of sales depends in part on the continued popularity of malls and power centers as shopping destinations
and the ability of malls and power centres, tenants and other attractions to generate a high volume of customer traffic. Many factors that are beyond
the control of the Company may decrease mall and power centre traffic, including, economic downturns, closing of anchor department stores, weather,
concerns of terrorist attacks, construction and accessibility, alternative shopping formats such as e-commerce, discount stores and lifestyle centres,
among other factors. Any changes in consumer shopping patterns could adversely affect the Company’s financial condition and operating results.
WEATHER
Extreme changes in weather can affect the timing of consumer spending and may have an adverse effect upon the Company’s results of operations.
In particular, unseasonably warm weather, especially during Danier’s peak selling season, may have an adverse effect on the Company’s sales.
SEASONALITY
The Company’s business is seasonal, as are most retail businesses. Historically, approximately 45% or more of the Company’s total annual sales have been
generated during its second fiscal quarter, which includes the Christmas season. The Company’s results of operations depend significantly upon the sales
generated during this period. Any material decrease in sales for such period could have a material adverse effect upon the Company's profitability. The
Company’s quarterly results of operations may also fluctuate as a result of a variety of other factors, including the timing of new store openings and net
sales contributed by new stores, the impact of new stores on existing stores within the same trade area, the timing of redemption of gift cards or gift
certificates, the merchandise mix and the timing and level of markdowns, timing and level of markdowns and promotions by competitors and consumer
shopping patterns and preferences.
COMPETITION
The retail industry is highly competitive with price, quality, service, selection, fashion, location and store environment being the principal competitive
factors. The Company competes with numerous national and international mass merchandisers, discounters, department stores, specialty apparel
stores that supplement their product line with leather merchandise and accessories, leather and suede specialty stores and with designers and
manufacturers of apparel and accessory products, some of which are significantly larger and have substantially greater resources than the Company.
Increased competition may reduce sales, increase operating expenses, decrease profit margins and negatively affect the Company’s ability to obtain
site locations, sales associates and other employees.
FOREIGN CURRENCY
A significant portion of Danier’s raw material and imported finished goods purchases are denominated in U.S. dollars. Accordingly, the Company’s
foreign currency exposure is mainly related to fluctuations between the Canadian and U.S. dollar. From time to time, the Company may use forward
contracts to fix the exchange rate on a portion of its expected requirements for U.S. dollars. Forward contracts expose the Company to credit risk
20
representing the maximum potential accounting loss due to non-performance by counterparties under terms of their contracts. The Company
manages credit risk under its foreign exchange contracts by only dealing with major financial institutions. As at June 24, 2006, there were no forward
foreign exchange contracts outstanding.
A significant portion of Danier’s imported finished goods purchases are sourced in China. The Chinese currency (the Renminbi or Yuan (“RMB”), was
previously pegged to the U.S. dollar at US$1=8.28RMB but has recently been revalued and is being allowed to float against a basket of foreign
currencies. Fluctuations of the Renminbi could result in higher costs to the Company which may not be able to be passed on to customers and could
have a material adverse effect on cost of sales and decrease profitability.
LEATHER AVAILABILITY AND PRICES
Leather comprises approximately two-thirds of the garment cost of leather apparel and the availability and price of leather may fluctuate
significantly. A number of factors affect the price of leather, including the demand for leather in other industries such as shoe, furniture, and
automobile upholstery industries. Leather supply is influenced by a number of factors including wars, worldwide meat consumption and the
availability of hides. Certain leather-supplying countries have experienced highly publicized outbreaks of mad-cow disease and hoof-and-mouth
disease. The effect of these diseases cannot be determined but could affect leather supply and pricing. Fluctuations in leather supply and pricing,
which can be significant, may have a material adverse effect on the business and profitability of the Company.
FOREIGN SOURCING AND MANUFACTURING
Danier sources a majority of its garments from independent foreign contract manufacturers located primarily in the Far East. Risks associated with
foreign sourcing include economic and political instability, transportation delays and interruptions, restrictive actions by foreign governments,
inability to meet the Company’s quality standards, production delays, duties, trade and foreign tax laws, fluctuations in currency exchange rates and
restrictions on the transfer of funds, tariffs and quotas and boycotts or other actions prompted by domestic concerns regarding foreign labour
practices. Any event causing a sudden disruption of imports from the Far East, primarily China, including a disruption due to financial difficulties of
a supplier, could have a material adverse effect on the Company. The Company regularly seeks out new sources of supply and sub-contractors to
minimize the impact of potential disruptions. The Company has not historically experienced material adverse effects from foreign sourcing of
finished goods.
LEGAL PROCEEDINGS
In fiscal 1999, the Company and certain of its directors and officers were served with a Statement of Claim under the Class Proceedings Act (Ontario)
which made allegations about the accuracy and disclosure of certain information contained in a financial forecast issued by the Company and
contained in the Prospectus it issued dated May 6, 1998 for its initial public offering (“IPO”) which closed on May 20, 1998. The suit sought damages
to be paid equal to the alleged diminution in value of the Subordinate Voting Shares sold under the Prospectus.
In October 2001, a motion to certify the action as a class proceeding was granted. The trial commenced in the Superior Court of Justice (Ontario)
in May 2003 and was completed in January 2004. On May 7, 2004, the trial judge issued a judgment against the Company and two of its Senior
Officers in favour of the Plaintiffs and awarded damages to Canadian shareholders who purchased Subordinate Voting Shares under the Prospectus.
For those shareholders who sold their shares between June 4 and 9, 1998, the trial judge awarded the difference between the IPO price and the
price at which they sold their shares. For those shareholders who sold or still held their shares after June 9, 1998, the trial judge awarded $2.35 per
share. Although the trial judge concluded that at the date of the Prospectus the forecast was reasonable, and that at the time of closing of the IPO
the Company's CEO and CFO had an honest belief that the forecast could still be achieved, and although he held that the forecast was, in fact,
substantially achieved, the trial judge decided that management’s judgment that the forecast was still achievable at the time of closing was not
reasonable and that therefore the Prospectus contained a misrepresentation. Based solely on information available at the time, the Company
estimated that the trial judge’s award would have totaled approximately $15 million. As noted below, the Company and its Senior Officers have
successfully appealed this decision.
In May 2005, the trial judge awarded the plaintiffs a portion of the costs claimed for the action and referred for assessment the amount of costs to
be paid. Based solely on the information available at the time, the Company estimated that these costs would have amounted to approximately $3
million to $4 million.
A hearing to determine the awarding of costs related to the certification and summary judgment motion which was decided in 2000 and 2001 was
held in December 2004. In June 2005, partial indemnity costs were awarded to the plaintiffs for these motions in an amount to be assessed. The
Company has appealed this decision and the appeal is still waiting to be heard.
21
In June 2004, a Notice of Appeal was filed by the Company and two of its Senior Officers from the trial judge’s decision. The appeal was heard by
the Ontario Court of Appeal in June 2005 and in December 2005, the Court of Appeal unanimously allowed the appeal on three separate grounds,
set aside the trial decision and dismissed the class proceeding. As a result, the Company and its Senior Officers are not required to pay any of the
damages, interest or costs awarded by the trial judge. The Court of Appeal’s decision stated that the Company had met its disclosure obligations in
the Prospectus and during the IPO process and the trial judge erred in finding that any misrepresentation had occurred. The Court of Appeal will
determine the Company’s and its Senior Officers’ entitlement to costs for the trial and for the appeal at a later date.
In February 2006, the plaintiffs filed an Application for Leave to Appeal to the Supreme Court of Canada. In June 2006, the Supreme Court of
Canada granted the plaintiff’s application. The Company expects the appeal to be heard by the Supreme Court of Canada during March 2007.
expense and set up a provision of $15 million to reflect the trial judge’s decision. This provision was subsequently increased by $3 million to $18 million
during the fourth quarter of 2005 to take into account the trial judge’s award of costs which was released in May 2005. The provision for recovery
of income taxes related to the trial judge’s award was based on the entire $18 million provision and the provision did not take into account the
and the income tax recovery were based on management’s best estimate and is subject to adjustment when all facts are known and all issues are
resolved. The possible adjustment could be significant. Although the Court of Appeal has set aside the trial judge’s decision, the provision will remain
until the Supreme Court of Canada makes a final determination.
If the Supreme Court of Canada overturns the Ontario Court of Appeal’s decision and upholds the judgment awarded by the Superior Court of
Justice (Ontario) and if directors and officers insurance does not cover the two Senior Officers’ portion of the total award, then the Company may
be required to pay the total award and this could have a material adverse affect on the Company's financial condition and operations. Furthermore,
the amount of interest and costs are estimated as of June 25, 2005. Additional interest and costs will likely be required to be paid by the Company
should the trial judge’s award be reinstated.
RISKS OF BUSINESS STRATEGY
There can be no assurance that the Company’s business strategy will be successful or that the Company’s overall net revenue will increase as a result
of an increase in the number of retail stores or a change in the merchandising or marketing strategy. The Company's future growth and profitability
may be restricted if it is unable to open new stores on a profitable basis, increase sales at existing stores, identify, consummate and integrate strategic
acquisitions, identify, negotiate, lease and open stores in suitable locations on a profitable and timely basis, obtain necessary capital to operate the
business and hire, train and retain qualified personnel including management, executives and sales associates.
WAR AND ACTS OF TERRORISM
War and acts of terrorism, or if either is threatened, may negatively impact Danier’s ability to source leather and obtain and ship merchandise
available for sale. The majority of Danier’s stores are located in enclosed shopping malls and power centres. Any threat of terrorist attacks or actual
terrorist events could lead to lower customer traffic in shopping malls and power centres and could negatively affect consumer behaviour, spending
and shopping patterns which may result in an adverse effect upon the Company's results of operations.
UTILITY AND FUEL PRICES
The Company is a consumer of electricity, natural gas and fuel. Unanticipated cost increases in these items could increase the Company’s operating
costs and reduce profitability.
SENIOR MANAGEMENT
Danier’s success depends largely on the efforts and abilities of the current senior management team. Mr. Jeffrey Wortsman in particular has been
with the Company since 1986 and has been instrumental in defining and implementing the Company’s business strategy and providing direction on
merchandising and marketing strategy. The senior management team and Mr. Wortsman’s experience and worldwide contacts in the leather industry
significantly benefit the Company. If Danier were to lose the benefit of their experience and contacts, the Company could be adversely affected.
22
MANAGEMENT INFORMATION SYSTEMS
Danier relies on vendors to support, maintain and periodically upgrade merchandise, distribution, design, accounting and financial reporting
packages. The inability of these vendors to continue to maintain and upgrade these software programs could disrupt operations if Danier were
unable to convert to alternate systems in an efficient and timely manner.
CONCENTRATION OF HEAD OFFICE AND DISTRIBUTION CENTRE
Danier’s corporate office and main distribution centre are in one location. Operations could be materially and adversely affected if a catastrophic
or other event impacts the use of this facility.
INFLATION
Inflation has not had a material impact on Danier’s results of operations during the past several years, however, there can be no assurance that
Danier's business will not be affected by inflation in the future.
REAL ESTATE
With the exception of the head office store, all of Danier’s store locations are leased. Competition for prime locations within shopping malls, power
centres and for street-front locations is intense and there can be no assurance that Danier will be able to obtain new locations or renew existing
locations at existing or favourable terms.
CRITICAL ACCOUNTING ESTIMATES
The Company’s significant accounting policies are described in Note 1 of the 2006 consolidated financial statements. The preparation of these
consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Some of the Company’s significant accounting policies involve a higher degree of judgment or complexity than
its other accounting policies. The policies described below are considered to be critical accounting estimates, as they require significant estimation
or judgment.
LITIGATION PROVISION AND RELATED EXPENSES
The amount of damages, costs and interest were estimated based on various judgments issued by the Superior Court of Justice (Ontario). The Court
awarded a portion of the costs claimed by the plaintiffs but referred the matter for assessment to determine the amount of costs to be paid. The quantum
of the costs award will not be known until the Supreme Court makes a final determination on the Court of Appeal’s decision and a final assessment
ordered by the Superior Court of Justice (Ontario) has been conducted. The amount of damages, interest and costs were estimated by management as
of June 25, 2005 and do not include any potential interest and costs that could be awarded from June 25, 2005 to the date the decision is received from
the Supreme Court of Canada. Any change in the amount of costs determined by an assessment officer appointed by the Court or any change in
damages, costs and interest by the Supreme Court of Canada could have a significant impact on operating results and cash flows. In addition, the amount
of the provision could change as a result of the amount of directors and officers insurance recovered, the amounts of which cannot be reasonably
determined at this time. Proceeds from directors and officers insurance could have a significant impact on operating results and cash flows.
INVENTORY VALUATION
Inventory is valued at the lower of cost or market. For finished goods and work-in-process, market is defined as net realizable value and for raw
materials, market is defined as replacement cost. Cost is determined using the weighted average cost method and includes standard costs, estimates
and averages for domestic labour, exchange rates for U.S. dollar purchases of leather and finished goods purchased from foreign vendors, freight,
duty, brokerage and overhead. In addition, a provision is recorded to reduce the cost of inventories for loss due to theft (shrinkage), obsolete,
damaged and slow moving items to their estimated net realizable values. Any significant unanticipated changes in consumer demand, fashion trends,
retail markdowns, or in any of the standard costs, estimates and averages could have a significant impact on the value of inventories and operating
results including cost of sales and gross profit.
PROPERTY AND EQUIPMENT AND AMORTIZATION
Property and equipment consist of store leasehold improvements, furniture and fixtures, computer equipment and manufacturing equipment in
addition to the Company's building. These assets are recorded at cost and are amortized over their estimated useful lives. Property and equipment
are reviewed for impairment whenever events such as a decision to close a store or changes in circumstances indicate that the carrying value of an
asset may not be recoverable in which case accelerated amortization over the revised useful life or a write-down is recorded in the financial statements.
23
INCOME TAXES
Income taxes are provided for using the asset and liability method of accounting. This method recognizes future tax assets and liabilities that arise from
differences between the accounting basis of the Company’s assets and liabilities and their corresponding tax basis. Future taxes are measured using
tax rates expected to apply when the asset is realized or the liability is settled. The calculation of current and future income taxes requires management
to make estimates and assumptions and to exercise judgment regarding the financial statement carrying values of assets and liabilities which are
subject to accounting estimates inherent in those balances, the interpretation of income tax legislation across various jurisdictions, expectations about
future operating results and the timing of reversal of temporary differences and possible audits of tax filings by the regulatory authorities.
The Company is audited regularly by federal and provincial authorities in the areas of income taxes and the remittance of sales taxes. These audits
consider the timing and amount of deductions and compliance with federal and provincial tax laws. To the extent that the Company’s filing positions
are challenged, the Company’s effective tax rate in a given financial statement period could be materially affected.
The provision for recovery of income taxes related to the class action award is based on the entire $18 million provision and does not take account
of the potential decision of the Supreme Court, any possible insurance recoveries or future tax adjustments. The income tax recovery related to the
class action provision is subject to adjustment when all facts are known and all issues are resolved. The possible adjustment for any of the factors
noted could be significant.
FUTURE ACCOUNTING STANDARDS
The Company monitors new accounting standards to assess the impact, if any, on its consolidated financial statements. The CICA has issued the
following accounting standards that may be applicable to the Company:
CICA Section 3855, Financial Instruments - Recognition and Measurement establishes standards for recognizing and measuring financial assets,
financial liabilities and non-financial derivatives. All financial instruments must be classified into a defined category, namely, held-to-maturity
investments, held for trading, loans and receivables, available-for-sale financial assets, and other liabilities. This classification will determine how each
instrument is measured and how gains and losses are recognized. In addition, the recommendations define derivatives to include non financial
derivatives and embedded derivatives which meet certain criteria. All such derivatives must be classified as held for trading and therefore recorded
at fair values unless they are designated in a hedging relationship. This standard is effective for interim and annual financial statements for fiscal
years beginning on or after October 1, 2006. The Company is currently assessing the impact of this standard and the impact on the Company’s
consolidated financial statements has not been determined. The Company will adopt this new section for its fiscal year beginning July 1, 2007.
CICA Section 3865, Hedges replaces AcG 13 Hedging Relationships. This section establish standards for the accounting treatment of qualifying
hedge relationships and the necessary disclosures. The recommendations of this section are optional and are only required if the entity is applying
hedge accounting.
CICA Section 1530, Comprehensive Income introduces a statement of comprehensive income which will be included in the full set of interim and annual
financial statements. Comprehensive income will represent the change in equity during a period from transactions and other events and circumstances
from non-owner sources and will include all changes in equity other than those resulting from investments by owners and distributions to owners.
The Company is currently reviewing the above standards and the impact, if any, on its consolidated financial statements has not been determined.
The Company will adopt these new sections for its fiscal year beginning July 1, 2007.
The Accounting Standards Board finalized its strategic plan for financial reporting in Canada whereby Canadian GAAP will converge with
International Financial Reporting Standards over a several year period. After this transitional period, Canadian GAAP will cease to exist as a
separate, distinct basis of financial reporting. The Company will continue to monitor the changes resulting from this transition.
OUTSTANDING SHARE DATA
As of the date hereof, 5,328,925 Subordinate Voting Shares and 1,224,329 Multiple Voting Shares of the Company were issued and outstanding. Each
Subordinate Voting Share entitles the holder to one vote and each Multiple Voting Share entitles the holder to 10 votes at meetings of shareholders
of the Company.
24
OUTLOOK
A more price promotional retail environment, increased customer preferences for lower price point merchandise and the continued fashion trend
to shorter length jackets which have a lower average price point negatively impacted Danier’s performance during 2006. We expect Danier’s business
environment during 2007, especially during the first quarter to remain challenging and competitive. To improve performance during 2007, Danier
plans to focus on its core customer who wants quality outerwear with a sophisticated look and classic styling at remarkable value. Danier also plans
to improve merchandise planning processes and has started to purchase fall merchandise earlier so that sufficient quantities and sizes of
merchandise are in-stock when the customer comes to the store. In addition, advertising dollars will be focussed on more frequent and better quality
newspaper inserts that emphasize great product at excellent value.
Danier also plans to reduce its selling, general and administrative expenses through reduced advertising expense, head office staff reductions which
have already been implemented, no longer processing transactions through Danier’s website and selective closure of under performing stores and
power centre locations.
Capital investments of approximately $3.6 million are planned for fiscal 2007. Approximately $2.2 million is anticipated to be used for renovations at
seven existing stores, visual display equipment and miscellaneous expenditures in the retail division; $1.1 million for information technology including
enhancement to the point-of-sale system and customer relationship management system, upgrading of merchandising and merchandise planning
systems, and upgrade of computer hardware and software at head office; and $0.3 million for manufacturing equipment and building improvements.
NON-GAAP MEASURES
The Company reports its financial results in accordance with Canadian GAAP. However, the Company has included certain non-GAAP financial
measures and ratios which it believes provides useful information to both management and readers of this Annual Report, including this MD&A, in
measuring the financial performance of the Company for the reasons set out below. These measures do not have a 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 from Continuing Operations and Adjusted EBITDA - The following table reconciles net earnings (loss) before interest, incomes taxes,
amortization, loss from discontinued operations, restructuring costs and litigation provision and related expenses (“Adjusted EBITDA”) to Canadian
GAAP measures reported in the consolidated statements of net earnings (loss) for the fiscal years 2002 to 2006 as well as the quarterly periods for
2005 and 2006. Adjusted EBITDA is useful to management in assessing the Company’s performance of its ongoing operations and its ability to
generate cash flows to fund its cash requirements, including the Company's capital expenditure program.
Net earnings (loss)
Add (deduct) impact of the following:
Amortization
Loss from discontinued operations
Restructuring costs
Adjusted EBITDA
2006
($5,503)
2005
($185)
2004
($7,097)
2003
$5,394
2002
$10,725
(2,839)
(445)
6,239
1,389
($1,159)
931
(340)
6,216
2,768
3,098
$12,488
(806)
(18)
5,771
1,187
15,450
$14,487
3,849
66
5,760
888
2,773
$18,730
7,429
461
4,909
864
$24,388
25
Q1
Net earnings (loss)
Interest income
Amortization
Restructuring costs
Adjusted EBITDA
Q2
2006
($5,291)
2005
($3,413)
2006
$4,595
2005
$7,182
(3,242)
(81)
1,540
($7,074)
(2,323)
(59)
1,630
461
($3,704)
2,902
(23)
1,540
$9,014
4,940
(11)
1,631
182
$13,924
Q3
Net earnings (loss)
Interest income
Amortization
Restructuring costs
Adjusted EBITDA
Q4
2006
($192)
2005
($794)
2006
($4,615)
2005
($3,160)
(78)
(182)
1,609
-
790
(139)
1,632
2,147
-
(2,421)
(159)
1,550
1,389
-
(2,476)
(131)
1,323
(22)
3,098
$1,157
$3,636
($4,256)
($1,368)
Adjusted Net Earnings (Loss) - The following table reconciles net earnings (loss) before loss from continuing operations, litigation provision and
related expenses and restructuring costs (“Adjusted Net Earnings (Loss)”) to Canadian GAAP measures reported in the consolidated statements of
earnings (loss) for the fiscal years 2002 to 2006 as well as the quarterly periods for 2005 and 2006. Items listed in the reconciliation below are
excluded because the Company believes this allows for a more effective analysis of the operating performance of the Company. In addition, they
affect the comparability of the financial results and could potentially distort the analysis of trends. The exclusion of these items does not imply they
are non-recurring. Adjusted Net Earnings (Loss) is useful to management in assessing the Company's performance and in making decisions regarding
the ongoing operations of its business.
Net earnings (loss)
Restructuring costs
Income tax recovery
26
2006
($5,503)
2005
($185)
2004
($7,097)
2003
$5,394
2002
$10,725
1,389
(472)
($4,586)
2,768
3,098
(832)
$4,849
1,187
15,450
(4,074)
$5,466
888
864
$11,589
2,773
(1,155)
$7,900
Q1
Net earnings (loss)
Restructuring costs
Income tax recovery
Adjusted net earnings (loss)
Q2
2006
($5,291)
2005
($3,413)
2006
$4,595
2005
$7,182
($5,291)
461
($2,952)
$4,595
182
$7,364
Q3
Net earnings (loss)
Restructuring costs
Income tax recovery
Adjusted net earnings (loss)
Q4
2006
($192)
2005
($794)
2006
($4,615)
2005
($3,160)
-
2,147
-
1,389
(472)
(22)
3,098
(832)
($192)
$1,353
($3,698)
($916)
ADDITIONAL INFORMATION
Additional information, including the Company’s annual information form, quarterly and annual reports, and supplementary information is available
on SEDAR at www.sedar.com. Press releases and other information are also available in the Investor Relations section of the Company’s website at
www.danier.com.
27
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying financial statements and other financial information contained in this annual report are the responsibility of management. The
financial statements have been prepared in conformity with Canadian generally accepted accounting principles using management’s best estimates
and judgements based on currently available information, where appropriate. The financial information contained elsewhere in this annual report
has been reviewed to ensure consistency with that in the financial statements.
Management is also responsible for a system of internal controls which is designed to provide reasonable assurance that assets are safeguarded,
liabilities are recognized and that financial records are properly maintained to provide timely and accurate financial reports.
The Board of Directors is responsible for ensuring that management fulfills its responsibility in respect of financial reporting and internal control.
The Audit Committee of the Board, which is comprised solely of unrelated and outside directors, meets regularly to review significant accounting
and auditing matters with management and the independent auditors and to review the interim and annual financial statements.
The financial statements have been audited by PricewaterhouseCoopers LLP, the independent auditors, in accordance with generally accepted auditing
standards on behalf of the shareholders. The Auditors’ Report outlines the nature of their examination and their opinion on the financial statements.
PricewaterhouseCoopers LLP have full and unrestricted access to the Audit Committee to discuss their audit and related findings as to the integrity of
the financial reporting.
Jeffrey Wortsman
President and CEO
Bryan Tatoff, C.A.
Senior Vice-President, CFO and Secretary
AUDITORS’ REPORT TO SHAREHOLDERS
To the Shareholders of Danier Leather Inc.
We have audited the consolidated balance sheets of Danier Leather Inc. as at June 24, 2006 and June 25, 2005 and the consolidated statements
of loss, retained earnings and cash flow for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 24,
2006 and June 25, 2005 and the results of its operations and its cash flow for the years then ended in accordance with Canadian generally accepted
accounting principles.
Chartered Accountants
Toronto, Ontario
July 26, 2006
28
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 24, 2006 and June 25, 2005
CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
June 24, 2006
June 25, 2005
ASSETS
Current Assets
Cash
Accounts receivable
Income taxes recoverable
Inventories (Note 3)
$
Prepaid expenses
Assets of discontinued operations (Note 2)
Future income tax asset (Note 10)
Other Assets
Property and equipment (Note 4)
Goodwill
Future income taxes asset (Note 10)
$
11,833
402
2,485
32,348
$
21,193
594
939
29,031
1,026
529
48,623
516
23
159
52,455
27,293
342
5,952
82,210
25,314
342
5,254
83,365
$
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities
Current portion of capital lease obligation (Note 6)
Future income tax liability (Note 10)
$
Capital lease obligation (Note 6)
Accured litigation provision and related expenses (Note 11)
Deferred lease inducements and rent liability
Future income tax liability (Note 10)
10,708
911
624
12,243
1,829
18,000
2,125
57
34,254
$
8,170
8,170
18,000
1,838
420
28,428
SHAREHOLDERS’ EQUITY
Share capital (Note 7)
Contributed surplus
Retained earnings
$
22,542
275
25,139
47,956
82,210
$
22,493
230
32,214
54,937
83,365
See accompanying notes to the consolidated financial statements.
Approved by the Board
Edwin F. Hawken, Director
Jeffrey Wortsman, Director
29
CONSOLIDATED STATEMENTS LOSS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
For the Year Ended
Revenue
Cost of sales (Note 9)
Gross profit
Selling, general and administrative expenses (Note 9)
Interest income
Earnings (loss) before undernoted items and income taxes
Restructuring costs (Note 8 and 9)
Litigation provision and related expenses (Note 11)
Earnings (loss) before discontinued operations and income taxes
Provision for (recovery of) income taxes (Note 10)
Current
Future
Loss from discontinued operations, net of income taxes (Note 2)
Net loss
Net earnings (loss) per share before discontinued operations:
Basic
Diluted
Net earnings (loss) per share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
June 24, 2006
$
148,351
76,953
71,398
78,796
(445)
(6,953)
1,389
(8,342)
June 25, 2005
$
166,350
82,863
83,487
77,215
(340)
6,612
3,098
3,514
(2,032)
(807)
(2,839)
(5,503)
(5,503)
1,553
(622)
931
2,583
(2,768)
(185)
$
$
$
$
($0.84)
($0.84)
$0.38
0.38
($0.84)
($0.84)
($0.03)
($0.03)
6,547,090
6,583,540
6,726,658
6,790,056
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (THOUSANDS OF DOLLARS)
Retained earnings, beginning of year
Net loss
Share purchases (Note 7 (d) )
Dividends
Retained earnings, end of year
30
June 24, 2006
$
32,214
(5,503)
(1,572)
$
25,139
For the Year Ended
June 25, 2005
$
36,902
(185)
(2,883)
(1,620)
$
32,214
CONSOLIDATED STATEMENTS OF CASH FLOW (THOUSANDS OF DOLLARS)
For the Years Ended
OPERATING ACTIVITIES
Net loss
Items not affecting cash:
Amortization - continuing operations (Note 9)
Amortization - discontinued operations (Note 9)
Amortization of deferred lease inducements
Straight line rent expense
Stock based compensation
Accrued litigation provision and related expenses
Future income taxes
Net change in non-cash working capital items (Note 12)
Discontinued operations (Note 2)
Cash flows from (used in) operating activities
June 24, 2006
June 25, 2005
$
(5,503)
$
(185)
$
7,055
(399)
400
45
(807)
(2,643)
23
(1,829)
$
6,216
1,330
(445)
11
2,550
(622)
(2,205)
791
7,441
FINANCING ACTIVITIES
Subordinate voting shares issued (Note 7)
Subordinate voting shares repurchased (Note 7)
Dividends
Proceeds from capital lease obligation
Repayment of obligations under capital lease
Proceeds from lease inducements
Cash flows from (used in) financing activities
49
(1,572)
2,902
(162)
286
1,503
27
(4,583)
(1,620)
(6,176)
INVESTING ACTIVITIES
Acquisition of capital assets
Cash flows used in investing activities
(9,034)
(9,034)
(2,648)
(2,648)
Decrease in cash
Cash, beginning of year
Cash, end of year
(9,360)
21,193
11,833
(1,383)
22,576
21,193
Supplementary cash flow information:
Interest paid
Income taxes paid
$
15
277
$
3
3,846
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 24, 2006 and June 25, 2005 (dollar amounts in thousands except per share amounts
and where otherwise indicated)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).
(a) Basis of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary companies. On consolidation, all
intercompany transactions and balances have been eliminated.
(b) Year-end:
The fiscal year end of the Company consists of a 52 or 53 week period ending on the last Saturday in June each year. The fiscal year for the
financial statements presented is the 52-week period ended June 24, 2006, and comparably the 52-week period ended June 25, 2005.
(c) Revenue recognition:
Revenue includes sales to customers through stores operated by the Company and sales to corporate customers through the Company’s direct
sales division. Sales to customers through stores operated by the Company are recognized at the time the transaction is entered into the pointof-sale register net of returns. Sales to corporate customers are recognized at the time of shipment. Revenue from gift cards or gift certificates
is recognized at the time of redemption. When a customer purchases a gift card or gift certificate a liability is recorded based on the dollar value
of the gift card or gift certificate purchased. One year following the expiry date of the gift card or gift certificate, any unredeemed portion (or
“breakage”) is recorded as income. Historically, breakage has not been material.
(d) Cash:
Cash consists of cash on hand, bank balances, and money market investments with maturities of three months or less.
(e) Inventories:
Inventories are valued at the lower of cost or market. Cost is determined using the weighted average cost method. For finished goods and workin-process, market is defined as net realizable value; for raw materials, market is defined as replacement cost.
(f) Property and equipment:
Property and equipment are recorded at cost and annual amortization is provided at the following rates:
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4% declining balance
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20% declining balance
Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . .30% declining balance
Computer hardware and software under capital lease . . . . . . . . . .30% declining balance
Visual merchandising equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 years straight line
Leasehold improvements are amortized on a straight-line basis over the term of the lease, unless the Company has decided to terminate the
lease, at which time the unamortized balance is written off.
Amortization expense includes gains and losses on disposals of property and equipment.
Property and equipment are reviewed for impairment at least annually or when events or circumstances indicate their carrying value exceeds
the sum of the undiscounted cash flows expected from their use and eventual disposal. For purposes of annually reviewing store assets for
impairment, asset groups are reviewed at their lowest level for which identifiable cash flows are largely independent of cash flows of other
assets and liabilities. Therefore, store net cash flows are grouped together by regional areas where a number of stores operate in close
proximity to one another. An impairment loss is recognized when the carrying amount of property and equipment is not recoverable and exceeds
its fair value.
32
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Goodwill:
Goodwill represents the excess of the cost of acquisition over the fair market value of the identifiable assets acquired. Goodwill is not amortized,
but is tested for impairment at least annually at year-end. If required, any impairment in the value of goodwill would be written off against
earnings.
(h) Deferred lease inducements and rent liability:
Deferred lease inducements represent cash benefits received from landlords pursuant to store lease agreements. These lease inducements are
amortized against rent expense over the term of the lease, not exceeding 10.5 years. Rent liability represents the difference between minimum
rent as specified in the lease and rent calculated on a straight line basis.
(i) Store opening costs:
Expenditures associated with the opening of new stores, other than furniture and fixtures, equipment, and leasehold improvements are
expensed as incurred.
(j) Income taxes:
Income taxes are determined using the asset and liability method of accounting. This method recognizes future tax assets and liabilities that arise
from differences between the accounting basis of the Company’s assets and liabilities and their corresponding tax basis. Future taxes are
measured using tax rates expected to apply when the asset is realized or the liability settled.
(k) Earnings per share:
Basic earnings per share is calculated by dividing the net earnings available to shareholders by the weighted average number of shares
outstanding during the year (see Note 7). Diluted earnings per share is calculated using the treasury stock method, which assumes that all
outstanding stock options with an exercise price below the average monthly market price are exercised and the assumed proceeds are used to
purchase the Company's shares at the average monthly market price during the fiscal year.
(l) Translation of foreign currencies:
Accounts in foreign currencies are translated into Canadian dollars. Monetary balance sheet items are translated at the rates of exchange in effect
at year-end and non-monetary items are translated at historical exchange rates. Revenues and expenses (other than amortization, which was
translated at the same average rate as the capital assets) are translated at the rates in effect on the transaction dates or at the average rates of
exchange for the reporting period. The resulting net gain or loss is included in the statement of earnings.
(m) Financial instruments:
From time-to-time the Company utilizes derivative financial instruments in the management of its foreign currency exposure. Derivative financial
instruments are not used for trading purposes. During the fiscal years ended June 24, 2006 and June 25, 2005, the Company purchased its
foreign exchange requirements on the spot market and did not enter into any foreign currency exchange contracts.
(n) Stock option plan:
The Company has a stock option plan which is described in Note 7 where options to purchase Subordinate Voting Shares are issued to directors,
officers and employees.
In the year ended June 26, 2004 the Canadian Institute of Chartered Accountants (CICA) amended Handbook Section 3870 “Stock-based
Compensation and Other Stock-based Payments”, which provides guidance on accounting for stock-based compensation, to require the use of
the fair value-based method to account for stock options. In accordance with the transitional provisions allowed under the revised accounting
standard, the Company prospectively applied the fair value-based method to all stock options granted on or after June 29, 2003. Accordingly,
compensation cost is measured at fair value at the date of grant using the Black-Scholes Option Pricing Model and is recognized as an expense
over the vesting period of the stock option with an offsetting credit to contributed surplus. When employees subsequently exercise their stock
options, share capital is increased by the sum of consideration paid by employees together with the related portion previously added to
contributed surplus when compensation costs were charged against income.
33
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company continues to use settlement accounting to account for stock options granted prior to June 29, 2003. In accordance with the
prospective method of adoption of the new standard, no compensation expense is recognized for options granted prior to fiscal 2004. Pro
forma disclosures relating to net earnings per share figures, as if the fair value method had been used for awards granted during fiscal 2003,
are presented in Note 7 (e).
(o) Restricted Share Units and Deferred Share Units:
The Company has restricted share unit (“RSU”) and deferred share unit (“DSU”) Plans, which are described in Note 7. RSU and DSU Plans are
settled in cash and are recorded as liabilities. The measurement of the compensation expense and corresponding liability for these awards is
based on the fair value of the award, and is recorded as a charge to selling, general and administrative (“SG&A”) expenses over the vesting period
of the award. Changes in the Company's payment obligation subsequent to vesting of the award and prior to the settlement date are recorded
as a charge to SG&A expenses in the period incurred.
(p) Use of estimates:
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions
are based on management's historical experience, best knowledge of current events and actions that the Company may undertake in the future.
Significant areas requiring the use of management estimates relate to the determination of litigation award reserves, inventory valuation,
realizable value of property and equipment, future tax assets, goods and services tax, provincial sales tax and income tax provisions. By their
nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods
could differ materially from those estimated.
NOTE 2: DISCONTINUED OPERATIONS
In March 2005 the Company announced that it would discontinue its U.S. operations which consisted of three shopping mall stores. On March 31, 2005, two
of the U.S. shopping mall locations located on Long Island, New York were closed. The third store located in Paramus, New Jersey was closed in April 2005.
Financial results for the periods presented were restated to reflect the discontinuance of the U.S. operations. The results of discontinued operations
were as follows:
June 24, 2006
$
$
-
Year Ended
June 25, 2005
$
2,347
(1,288)
(1,075)
(405)
($2,768)
Current liabilities
June 24, 2006
$
-
June 25, 2005
$
23
23
-
Net assets from discontinued operations
$
$
Revenue
Operating loss
Write-down of capital assets
Lease and employee termination costs
The net assets of discontinued operations are summarized as follows:
Current assets
Capital assets
34
-
23
Changes in current assets and liabilities of discontinued operations are summarized as follows:
Year Ended
June 24, 2006
June 25, 2005
$
23
$
861
(70)
$
23
$
791
Current assets
Current liabilities
NOTE 3: INVENTORIES
June 24, 2006
$
1,738
1,000
29,610
$
32,348
Raw materials
Work-in-process
Finished goods
June 25, 2005
$
3,456
634
24,941
$
29,031
NOTE 4: PROPERTY AND EQUIPMENT
Land
Building
Leasehold improvements
Furniture and equipment
Computer hardware and software
Computer hardware and software
under capital lease
Cost
$ 1,000
7,064
25,996
10,804
8,353
$
2,920
56,137
June 24, 2006
Accumulated Net Book
Amortization
Value
$
$ 1,000
1,549
5,515
15,489
10,507
6,605
4,199
4,763
3,590
Cost
$ 1,000
7,064
25,566
9,966
8,985
438
$ 28,844
$
$
2,482
27,293
52,581
June 25, 2005
Accumulated
Amortization
$
1,319
13,710
5,880
6,358
Net Book
Value
$ 1,000
5,745
11,856
4,086
2,627
27,267
$ 25,314
$
NOTE 5: BANK FACILITY
During June 2006, the Company renegotiated its credit agreement. The new credit agreement provides for an operating facility for working capital
and for general corporate purposes to a maximum amount of $35 million, bearing interest at prime plus 0.25%. Standby fees of 0.50% are paid quarterly
on the unused portion of the facility. The operating facility is committed until June 30, 2007. The Company is required to comply with covenants
regarding financial performance.
Security provided includes a security interest over all personal property of the business and a mortgage over the land and building, comprising the
Company's head office/distribution facility.
NOTE 6: OBLIGATIONS UNDER CAPITAL LEASE
Future minimum lease payments required under capital leases which expire in fiscal 2009 are:
2007
2008
2009
$
$
$
Amounts representing interest (at a weighted average annual rate of 6.2%)
$
Current portion
$
1,061
1,061
884
3,006
266
2,740
911
1,829
35
NOTE 7: SHARE CAPITAL
(a) Authorized
1,224,329 Multiple Voting Shares
Unlimited Subordinate Voting Shares
Unlimited Class A and B Preference Shares
(b) Issued
Multiple Voting Shares
Balance June 26, 2004
Subordinate Voting Shares
Shares repurchased
Shares issued upon exercising of stock options
Shares issued upon exercising of stock options
Number
1,224,329
1,224,329
1,224,329
Number
5,720,225
(402,400)
4,000
5,321,825
7,100
5,328,925
Consideration
Nominal
Nominal
Nominal
$
$
$
Consideration
24,166
(1,700)
27
22,493
49
22,542
The Multiple Voting Shares and Subordinate Voting Shares have identical attributes except that the Multiple Voting Shares entitle the holder to
ten votes per share and the Subordinate Voting Shares entitle the holder to one vote per share. Each Multiple Voting Share is convertible at any
time, at the holder's option, into one fully paid and non-assessable Subordinate Voting Share. The Multiple Voting Shares are subject to
provisions whereby, if a triggering event occurs then each Multiple Voting Share is converted into one fully paid and non-assessable Subordinate
Voting Share. A triggering event may occur if Mr. Jeffrey Wortsman: (i) dies; (ii) ceases to be a Senior Officer of the Company; (iii) ceases to own
5% or more of the aggregate number of Multiple Voting Shares and Subordinate Voting Shares outstanding; or (iv) owns less than 918,247
Multiple Voting Shares and Subordinate Voting Shares combined.
(c) Earnings per share
Basic and diluted per share amounts are based on the following weighted average number of shares outstanding:
Weighted average number of shares for basic earnings per share calculations
Effect of dilutive options outstanding
Weighted average number of shares for diluted earnings per share calculations
June 24, 2006
6,547,090
June 25, 2005
6,726,658
36,450
6,583,540
63,398
6,790,056
The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of the
Subordinate Voting Shares during the period. The number of options excluded was 492,500 as at June 24, 2006 and 487,500 as at June 25, 2005.
(d) Normal course issuer bid
On February 2, 2005, the Company received approval from the Toronto Stock Exchange to renew its Normal Course Issuer Bid. The bid permits
the Company to acquire up to 421,061 Subordinate Voting Shares, representing approximately 10% of the public float of the Subordinate Voting
Shares, during the period from February 7, 2005 to February 6, 2006. The Normal Course Issuer Bid has not been renewed. During the year
ended June 24, 2006, no shares were repurchased under the Normal Course Issuer Bid. During the prior year ended June 25, 2005, 402,400
Subordinate Voting Shares were purchased for cancellation at prevailing market prices for cash consideration of $4,583. The excess of $2,883
over the average paid-in value of the shares was charged to retained earnings.
36
NOTE 7: SHARE CAPITAL (CONTINUED)
(e) Stock option plan
The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at June 24, 2006, the Company has
reserved 904,175 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods
are at the discretion of the Board of Directors at exercise prices determined as the weighted average of the trading prices of the Company’s
Subordinate Voting Shares on The Toronto Stock Exchange for the five trading days preceding the effective date of the grant. In general, options
granted under the Stock Option Plan vest over a period of one year from the grant date for options issued to directors and four years from the
grant date for options issued to officers and employees and expire no later than the tenth anniversary of the date of grant. A summary of the
status of the Company’s Stock Option Plan as of June 24, 2006 and June 25, 2005 and changes during the years ended on those dates is
presented below:
Stock Options
Shares
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Options exercisable at end of year
645,400
(7,100)
(20,000)
618,300
577,800
June 24, 2006
June 25, 2005
Weighted-average
exercise price
Weighted-average
exercise price
$
$
$
$
$
11.13
6.85
11.93
11.15
11.03
Shares
649,400
25,000
(4,000)
(25,000)
645,400
573,150
$
$
$
$
$
$
11.21
10.10
6.85
12.92
11.13
10.80
The following table summarizes the distribution of these options and the remaining contractual life as at June 24, 2006:
Exercise
Prices
$ 6.02
$ 6.85
$ 10.10
$ 10.40
$ 10.50
$ 10.96
$ 11.20
$ $11.25
$ 15.85
$ 17.94
#
Outstanding
18,500
107,300
25,000
29,250
15,000
25,000
20,000
261,250
97,000
20,000
618,300
Options Outstanding
Weighted Average
Remaining
Contractual Life
3.2 years
2.0 years
8.8 years
4.1 years
4.3 years
7.1 years
5.1 years
1.9 years
6.1 years
5.8 years
3.5 years
Options Exercisable
Weighted
Average
Exercise Price
$
6.02
$
6.85
$
10.10
$
10.40
$
10.50
$
10.96
$
11.20
$
11.25
$
15.85
$
17.94
$
11.15
# of Shares
Exercisable
18,500
107,300
6,250
29,250
15,000
22,500
20,000
261,250
77,750
20,000
577,800
Weighted
Average
Exercise Price
$
6.02
$
6.85
$
10.10
$ 10.40
$ 10.50
$ 10.96
$
11.20
$
11.25
$
15.85
$
17.94
$
11.03
There were no options granted during the year ended June 24, 2006. During the prior year ended June 25, 2005, the weighted average estimated
fair value at the date of grant for options was $7.18. The fair value of each option granted was estimated on the date of grant using the Black-Scholes
Option Pricing Model with the following assumptions:
Risk-free interest rate
Dividend yield
Expected volatility
Expected life of options
June 24, 2006
n/a
n/a
n/a
n/a
June 25, 2005
4.11 %
2.4 %
58 %
10 years
37
The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, the Black-Scholes Option Pricing Model requires the use of subjective assumptions including the expected stock
price volatility. As a result, the Company’s Stock Option Plan having characteristics different from those of traded options, and because changes in
the subjective assumptions can have a material effect on the fair value estimate, the Black-Scholes Option Pricing Model does not necessarily
provide a reliable single measure of the fair value of options granted.
Prior to fiscal 2004, the Company used settlement accounting to account for its Stock Option Plan. No compensation cost was recorded when stock
options were granted. When options were exercised, consideration paid by employees and directors was recorded in the financial statements as an
increase of share capital based on the exercise price of the options.
In accordance with the transitional provisions of CICA Handbook Section 3870, the Company applied the fair value based method to account for
stock options on a prospective basis. Therefore, stock options granted during the year ended June 28, 2003 continue to be accounted for using the
settlement accounting method and the pro-forma effect on net earnings and earnings per share are disclosed below. Had compensation cost been
determined using the fair value-based method at the grant date of the stock options awarded to employees and directors during fiscal 2003, the net
earnings and earnings per share for the years ended June 24, 2006 and June 25, 2005 would have been reduced to the pro forma amounts indicated
in the following table:
Net loss
Basic loss per share
Diluted loss per share
Year Ended June 24, 2006
As Reported
Pro forma
($5,503)
($5,745)
($0.84)
($0.88)
($0.84)
($0.88)
Year Ended June 25, 2005
As Reported
Pro forma
($185)
($427)
($0.03)
($0.06)
($0.03)
($0.06)
The pro forma effect on net earnings of the period is not representative of the pro forma effect on net earnings of future periods because it does
not take into consideration the pro forma compensation cost related to options awarded prior to June 29, 2002.
The compensation expense recorded for the year ended June 24, 2006 in respect of stock options granted on or after June 29, 2003 was $45 (June 25,
2005 – $11). The counterpart is recorded as contributed surplus. Any consideration paid by employees on exercise of stock options is credited to share capital.
(f) Deferred Share Unit Plan
Effective October 19, 2004, the Company established a Deferred Share Unit (“DSU”) Plan for non-management directors. The DSU Plan is
administered by the Board of Directors, with the advice of the Governance, Compensation, Human Resources and Nominating Committee.
Under this plan, non-management directors of the Company receive an annual grant of DSU's and can also elect to receive their annual retainers
and meeting fees in DSUs. A DSU is a unit equivalent in value to one Subordinate Voting Share of the Company based on the five-day average
trading price of the Company's Subordinate Voting Shares on The Toronto Stock Exchange immediately prior to the date on which the value of
the DSU is determined. When dividends are paid by the Company, an equivalent number of DSUs are added to the DSU account of the nonmanagement director based on the number of DSUs in their account and the market value of the Subordinate Voting Shares on the date the
dividend is paid. After retirement from the board, a participant in the DSU Plan receives a cash payment equal to the market value of the
accumulated DSUs in their account. The value of the DSU liability is adjusted to reflect changes in the market value of the Company’s
Subordinate Voting Shares.
The following transactions occurred with respect to the DSU Plan:
Outstanding at beginning of period
Granted
Issued as dividend equivalents
Redeemed
Outstanding at end of period
Danier stock price at end of period
Liability at end of period ($000)
38
June 24, 2006
(# of units)
7,317
7,200
387
14,904
$7.95
$118
Year Ended
June 25, 2005
(# of units)
7,200
117
7,317
$10.17
$74
(g) Restricted Share Unit Plan
Effective April 20, 2005, the Company established a Restricted Share Unit (“RSU”) Plan as part of its overall executive compensation plan. The
RSU Plan is administered by the Board of Directors, with the advice of the Governance, Compensation, Human Resources and Nominating
Committee. Under this plan, Senior Officers of the Company are eligible to receive a grant of RSUs that vest on each anniversary of the grant
in equal one-third installments over a vesting period of three years. A RSU is a unit equivalent in value to one Subordinate Voting Share of the
Company. When dividends are paid by the Company, an equivalent number of RSUs are added to the RSU account of the Senior Officer based
on the number of RSUs in their account, the dividend paid per Subordinate Voting Share and the market value of the Subordinate Voting Shares
on the date the dividend is paid. Upon the exercise of the vested RSUs, a cash payment equal to the market value of the exercised vested RSUs
will be paid to the senior officer. The value of the vested RSU liability is adjusted to reflect changes in the market value of the Company’s
Subordinate Voting Shares.
The following transactions occurred with respect to the RSU Plan:
Year Ended
Outstanding at beginning of period
Granted
Issued as dividend equivalents
Redeemed
Outstanding at end of period
Danier stock price at end of period
Liability at end of period ($000)
June 24, 2006
(# of units)
5,030
10,000
208
15,238
$7.95
$14
June 25, 2005
(# of units)
5,000
30
5,030
$10.17
$-
NOTE 8: RESTRUCTURING COSTS
During the fourth quarter of 2006 the Company announced that it would reduce its head office staff by 23 individuals and review stores that did
not generate acceptable profit levels. The restructuring charge of $1.4 million includes $0.6 million for severance payments and outplacement
counselling for the 23 individuals that were part of the head office reduction that took place during the fourth quarter of 2006. Approximately $0.3
million of the $0.6 million severance charge was paid prior to June 24, 2006 and approximately $0.3 million has been recorded as a liability and will
be paid over the next fiscal year. There are no further costs expected to be incurred in connection with the 23 staff reductions.
Accelerated amortization of approximately $0.8 million represents the write off of leasehold improvements and fixtures in connection with the
closure of one street-front store, one power centre location and the downsizing of one shopping mall store. There are no further costs expected to
be incurred in connection with the closure and downsizing of these stores.
NOTE 9: AMORTIZATION
Amortization included in cost of sales and selling, general and administrative expenses (“SG&A”) and restructuring costs is summarized as follows:
Cost of sales
SG&A
Restructuring costs
Discontinued operations
June 24, 2006
$549
5,690
816
7,055
$7,055
Year Ended
June 25, 2005
$842
5,374
6,216
1,330
$7,546
39
NOTE 10: INCOME TAXES
Future income tax asset (liability) is summarized as follows:
Amortization
Deferred lease inducements
Capital lease obligation
Other
June 24, 2006
$
(294)
709
928
4,504
(47)
$
5,800
June 25, 2005
$
(420)
645
4,738
30
$
4,993
529
5,952
(624)
159
5,254
-
Recorded in the consolidated balance sheets as follows:
Future income tax asset – current portion
Future income tax asset – long term portion
Future income tax liability – current portion
Future income tax liability – long term portion
Net future tax asset
$
(57)
5,800
$
(420)
4,993
The Company’s effective income tax rate consists of the following:
Combined basic federal and provincial average statutory rate
Litigation provision and related expenses,
manufacturing and processing credit and other
Effect of foreign operating losses
June 24, 2006
35.0%
June 25, 2005
35.4%
(1.0%)
-%
34.0%
21.7%
67.6%
124.7%
June 24, 2006
$ 18,000
-
June 25, 2005
$ 18,000
-
NOTE 11: LITIGATION PROVISION AND RELATED EXPENSES
Provision for damages, costs and interest
Legal and professional fees
Accrued litigation provision and related expenses
$
18,000
$
18,000
In fiscal 1999, the Company and certain of its directors and officers were served with a Statement of Claim under the Class Proceedings Act (Ontario)
which made allegations about the accuracy and disclosure of certain information contained in a financial forecast issued by the Company and
contained in the Prospectus it issued dated May 6, 1998 for its initial public offering (“IPO”) which closed on May 20, 1998. The suit sought damages
to be paid equal to the alleged diminution in value of the Subordinate Voting Shares sold under the Prospectus.
In October 2001, a motion to certify the action as a class proceeding was granted. The trial commenced in the Superior Court of Justice (Ontario)
in May 2003 and was completed in January 2004. On May 7, 2004, the trial judge issued a judgment against the Company and two of its Senior
Officers in favour of the Plaintiffs and awarded damages to Canadian shareholders who purchased Subordinate Voting Shares under the Prospectus.
For those shareholders who sold their shares between June 4 and 9, 1998, the trial judge awarded the difference between the IPO price and the
price at which they sold their shares. For those shareholders who sold or still held their shares after June 9, 1998, the trial judge awarded $2.35 per
share. Although the trial judge concluded that at the date of the Prospectus the forecast was reasonable, and that at the time of closing of the IPO
the Company’s CEO and CFO had an honest belief that the forecast could still be achieved, and although he held that the forecast was, in fact,
substantially achieved, the trial judge decided that management's judgment that the forecast was still achievable at the time of closing was not
40
NOTE 11: LITIGATION PROVISION AND RELATED EXPENSES (CONTINUED)
reasonable and that therefore the Prospectus contained a misrepresentation. Based solely on information available at the time, the Company
estimated that the trial judge’s award would have totaled approximately $15 million. As noted below, the Company and its Senior Officers have
successfully appealed this decision.
In May 2005, the trial judge awarded the Plaintiffs a portion of the costs claimed for the action and referred for assessment the amount of costs to
be paid. Based solely on the information available at the time, the Company estimated that these costs would have amounted to approximately $3
million to $4 million.
A hearing to determine the awarding of costs related to the certification and summary judgment motion which was decided in 2000 and 2001 was
held in December 2004. In June 2005, partial indemnity costs were awarded to the Plaintiffs for these motions in an amount to be assessed. The
Company has appealed this decision and the appeal is still waiting to be heard.
In June 2004, a Notice of Appeal was filed by the Company and two of its Senior Officers from the trial judge’s decision. The appeal was heard by
the Ontario Court of Appeal in June 2005 and in December 2005, the Court of Appeal unanimously allowed the appeal on three separate grounds,
set aside the trial decision and dismissed the class proceeding. As a result, the Company and its Senior Officers are not required to pay any of the
damages, interest or costs awarded by the trial judge. The Court of Appeal’s decision stated that the Company had met its disclosure obligations in
the Prospectus and during the IPO process and the trial judge erred in finding that any misrepresentation had occurred. The Court of Appeal will
determine the Company’s and its Senior Officers' entitlement to costs for the trial and for the appeal at a later date.
In February 2006, the Plaintiffs filed an Application for Leave to Appeal to the Supreme Court of Canada. In June 2006, the Supreme Court of
Canada granted the Plaintiff's application. The Company expects the appeal to be heard by the Supreme Court of Canada during March 2007.
expense and set up a provision of $15 million to reflect the trial judge’s decision. This provision was subsequently increased by $3 million to $18 million
during the fourth quarter of 2005 to take into account the trial judge’s award of costs which was released in May 2005. The provision for recovery
of income taxes related to the trial judge's award was based on the entire $18 million provision and the provision did not take into account the
and the income tax recovery were based on management’s best estimate and is subject to adjustment when all facts are known and all issues are
resolved. The possible adjustment could be significant. Although the Court of Appeal has set aside the trial judge's decision, the provision will remain
until the Supreme Court of Canada makes a final determination.
NOTE 12: CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Income tax recoverable
June 24, 2006
Year Ended
June 25, 2005
$192
(3,317)
(510)
2,538
(1,546)
($2,643)
$32
452
387
(1,185)
(1,891)
($2,205)
41
NOTE 13: CONTINGENCIES & GUARANTEES
(a) Legal proceedings
In addition to the class action matter discussed in Note 11, in the course of its business, the Company from time to time becomes involved in
various claims and legal proceedings. In the opinion of management, all such claims and suits are adequately covered by insurance, or if not so
covered, the results are not expected to materially affect the Company’s financial position.
(b) Guarantees
The Company has provided the following guarantees to third parties and no amounts have been accrued in the financial statements for these
guarantees:
(i)
In the ordinary course of business, the Company has agreed to indemnify its lenders under its credit facility against certain costs or losses
resulting from changes in laws and regulations or from a default in repaying a borrowing. These indemnifications extend for the term of
the credit facility and do not provide any limit on the maximum potential liability. Historically, the Company has not made any
indemnification payments under such agreements.
(ii)
In the ordinary course of business, the Company has provided indemnification commitments to certain counterparties in matters such as
real estate leasing transactions, director and officer indemnification agreements and certain purchases of fixed assets such as computer
software. These indemnification agreements generally require the Company to compensate the counterparties for costs or losses
resulting from legal action brought against the counterparties related to the actions of the Company. The terms of these indemnification
agreements will vary based on the contract and generally do not provide any limit on the maximum potential liability.
(iii)
The Company sublet one location during fiscal 2004 and has provided the landlord with a guarantee in the event the sub-tenant defaults
on its obligation to pay rent. The remaining term of the guarantee is approximately 2.5 years and the Company’s maximum exposure is $102.
NOTE 14: COMMITMENTS
(a) Operating and capital leases
Minimum rentals for the next five fiscal years and thereafter, excluding rentals based upon revenue are as follows:
Operating
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 11,615
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 10,263
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 8,675
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 6,469
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 5,253
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 8,084
$
$
Capital
1,061
1,061
884
-
(b) Letters of credit
The Company had outstanding letters of credit in the amount of $7,266 (June 25, 2005 - $4,839) for imports of finished goods inventories to be received.
18
42
NOTE 15: RELATED PARTY TRANSACTIONS
There were no related party transactions during the year ended June 24, 2006. During fiscal 2005, the Company expensed and paid fees of $28 to
a corporation related to a director and officer of the Company. This transaction was measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties.
NOTE 16: FINANCIAL INSTRUMENTS
The carrying value of the Company’s cash, accounts receivable and accounts payable and accrued liabilities approximates its carrying value. Based
on available market information, the fair value of the capital lease obligation approximates its carrying value.
The Company is exposed to credit risk on its accounts receivable from corporate customers through sales made by the direct sales division.
Accounts receivable are net of applicable allowance for doubtful accounts, which is established based on the specific credit risks associated with
each corporate customer and other relevant information.
The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars.
From time-to-time the Company may enter into foreign exchange forward contracts to manage foreign exchange risk associated with these
purchases. As at June 24, 2006, and as at June 25, 2005 the Company did not have any outstanding foreign exchange forward contracts to purchase
U.S. dollars.
The Company is exposed to interest rate risk based on the use of the credit facilities which bears interest at floating rates.
NOTE 17: SEGMENTED INFORMATION
Management has determined that the Company operates in one dominant industry and geographic segment which involves the design, manufacture
and retail of fashion leather and suede apparel in Canada.
43
EDWIN F. HAWKEN
DOUG MURPHY
Mr. Hawken is Chairman of the Board of Directors and Chairman
of the Audit Committee. Prior to joining Danier’s board of
directors in May 1998, he held the positions of Vice Chairman of
Newcourt Credit Group Inc. and President and Chief Executive
Officer of Commcorp Financial Services Inc.
Mr. Murphy joined the board of Danier in January 2004 and is also
a member of Danier’s Governance, Compensation, Human
Resources and Nominating Committee. Mr. Murphy is currently
Executive Vice-President, Business Development for Nelvana
Limited, a division of Corus Entertainment, where he oversees all
sales, marketing and merchandising activities. Mr. Murphy has
significant retail experience, including more than 10 years in senior
positions with The Walt Disney Company, where he led the
development of Disney’s international growth strategy for the
Parks and Resorts segment and managed the growth of The
Disney Stores in North America and Japan.
JEFFREY WORTSMAN
Mr. Wortsman joined Danier in 1986 and was appointed President
in 1994 and Chief Executive Officer in 1997. Prior to joining the
company, Mr. Wortsman was employed by a prominent Canadian
investment firm. Mr. Wortsman received a Masters Degree in
Business Administration and a Bachelor of Laws Degree from York
University and a Bachelor of Arts Degree in Economics from the
University of Western Ontario. He was called to the Ontario Bar in
1985. Mr. Wortsman is also a director of Chesswood Income Fund,
an online retailer of automobiles.
BOARD OF DIRECTORS
As of July 2006
CLARE COPELAND
HOWARD STOTLAND
Mr. Copeland joined the board of Danier in May 1998 and is also
Chairman of Danier’s Governance, Compensation, Human Resources
and Nominating Committee and a member of the Audit Committee.
For the past 35 years, Mr. Copeland has held senior executive
positions with major corporations such as, Peoples Jewellers, Zale
Corporation, Granada Canada and Drake International. Mr.
Copeland is also CEO of Falls Management Company and holds
directorships with Rio Can and several other Canadian companies.
Mr. Copeland is also on the Advisory Board for the Richard Ivey
School of Business and the Molson Indy Foundation.
Mr. Stotland joined the board of Danier in May 1998 and is also a
member of Danier’s Governance, Compensation, Human
Resources and Nominating Committee. He is the founder of STS
Systems, a leading information systems company for the retail
industry, which was acquired by NSB Retail Systems PLC in
December 2000. Mr. Stotland is also a director of Reitmans.
STEPHEN KAHN
Mr. Kahn was recently Chairman, CEO and Founder of dELiA*s, a
NASDAQ listed retailer of apparel, accessories, and home furnishings
focused on the teen market. Mr. Kahn joined the board of Danier in
May 1998 and is also a member of Danier’s Audit Committee and
Governance, Compensation, Human Resources and Nominating
Committee.
44
IRVING WORTSMAN
Mr. Wortsman is the founder of Danier Leather Inc. and was
instrumental in growing the company from a manufacturer and
wholesaler to department stores to a multichannel national retailer.
COMPANY OFFICERS
Jeffrey Wortsman
President and CEO
Olga E. Koel
Executive Vice-President and Chief Merchandise Officer
Bryan Tatoff, C.A.
Philip J. Cutter
Vice-President, Information Technology and CIO
Bruce Aitken
Vice-President, Planning and Allocation
Karen J. Marshall
Vice-President, Logistics and Distribution
George Miltenburg
Vice-President, Manufacturing
HEAD OFFICE
INVESTOR RELATIONS
2650 St. Clair Avenue West
Toronto, Ontario M6N 1M2
Telephone: (416) 762-8175
Fax: (416) 762-4570
www.danier.com
Bryan Tatoff
Telephone: (416) 762-8175 ext.328
[email protected]
AUDITORS
S TOCK TRADING
PricewaterhouseCoopers LLP, Toronto
SYMBOL
DL
Toronto Stock Exchange
LEGAL COUNSEL
Davies Ward Phillips & Vineberg LLP,
Toronto
BANKERS
REGISTRAR AND
TRANSFER AGENT
Computershare Trust
Company of Canada
Canadian Imperial Bank of Commerce,
Toronto
Royal Bank of Canada,
Toronto
Cris Ruivo
Vice-President, Store Operations
Sandra Sanderson
Vice-President and Chief Marketing Officer
ANNUAL MEETING
Cheryl Sproul
Vice-President, Human Resources
Wednesday, October 18th, 2006 • 4pm (Eastern Daylight Time)
Danier Leather Head Office
CORPORATE GOVERNANCE
Danier Leather treats its fiduciary responsibility to shareholders with the utmost importance. The Company’s Board of Directors is charged with overseeing
the proper management of the Company’s affairs with the objective of maximizing the long-term value of the Company for its shareholders. The Company’s
directors are experienced businesspersons representing varied professional backgrounds. On behalf of Danier’s shareholders, the Board of Directors is
responsible for stewardship of the corporation, establishing overall policies, reviewing strategic plans and holding accountable management to whom it delegates
day-to-day operations. Further information on Danier’s corporate governance is available from the Company’s regulatory filings.
CORPORATE SALES
Danier’s Corporate Sales division offers a wide variety of quality, customized leather goods for gifts, incentives, promotions and other special occasions. Whether
you want to motivate, thank or reward one person or an entire group, we have the product selection and customer service to help you choose wisely and make a
lasting impression.
For more information, or a catalogue and pricing, please contact the professionals in our corporate sales group at 1-877-9danier or e-mail us at
[email protected].
Danier Leather is proud to sponsor
145 children through Foster Parents Plan.
2650 St. Clair Avenue West Toronto, ON M6N 1M2 • www.danier.com

2006 Annual Report - Danier

Transcription

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