TORONTO, ONTARIO -- 08/20/08 --
Danier Leather Inc. (TSX: DL) today announced its consolidated financial results for the fourth quarter and fiscal year ended June 28, 2008.
FINANCIAL HIGHLIGHTS ($000s, except earnings per share, square footage and number of stores):
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Quarter Ended Year Ended
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Jun 28, 2008 Jun 30, 2007 Jun 28, 2008 Jun 30, 2007
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(13 weeks) (14 weeks) (52 weeks) (53 weeks)
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Sales $27,497 $22,249 $163,550 $158,099
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EBITDA(1) (2,467) (2,152) 18,477 8,757
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Adjusted EBITDA(1) (2,467) (2,152) 3,757 8,757
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Net Earnings (Loss) (3,022) (2,425) 12,892 1,653
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Adjusted Net
Earnings (Loss)(2) (3,022) (2,425) (1,828) 1,653
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EPS - Basic ($0.48) ($0.37) $2.04 $0.25
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EPS - Diluted ($0.48) ($0.37) $2.03 $0.25
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Number of Stores 91 90 91 90
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Retail Square
Footage 348,504 347,224 348,504 347,224
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Sales for the fourth quarter of 2008 increased 24% or $5.2 million to $27.5 million from $22.3 million in the fourth quarter of 2007. Comparable store sales in the fourth quarter increased 25%. The fourth quarter of 2008 contained 13 weeks whereas the fourth quarter of 2007 contained 14 weeks. On a comparable week basis, which compares the 13 week period ended June 28, 2008 to the comparable 13 week period ended June 30, 2007, sales increased 42% and comparable store sales increased 43%. Year-to-date sales increased 3% or $5.5 million to $163.6 million while comparable store sales increased 6%.
During the last half of the fiscal year, Danier adjusted its promotions, increased markdowns and offered attractive price points to customers. Although the average sale and gross margin decreased, the promotions generated a significant increase in sales and customer traffic and helped reduce inventory that had been built up during the first half of the fiscal year.
Danier finished its fiscal year with a $1.2 million reduction in inventory compared with the prior year and a strong cash balance of $19.9 million.
Gross profit dollars during the fourth quarter of 2008 increased by 2%. Gross profit as a percentage of revenue decreased to 45.1% compared with 54.5% during the fourth quarter of 2007. Year-to-date gross profit as a percentage of revenue decreased to 46.6% compared with 49.7% during fiscal 2007. The gross margin rate decline was to a greater extent due to management's decision to increase markdowns during the last half of the year to stimulate sales and convert inventory to cash and to a lesser extent, higher overseas sourcing costs including higher leather prices, a reduction of an export rebate in China and appreciation of the Chinese Yuan.
Net loss for the fourth quarter of 2008 was $3.0 million, or $0.48 loss per share, compared with a net loss of $2.4 million, or $0.37 loss per share, during the fourth quarter last year. Year-to-date net earnings were $12.9 million, or $2.03 per diluted share, compared with net earnings of $1.7 million or $0.25 per share last year. Excluding the reversal of the litigation provision of $18.0 million, recovery of legal and expert fees of $2.0 million and income taxes of $5.3 million, the year-to-date adjusted net loss(2) was $1.8 million or $0.29 loss per share.
Adjusted EBITDA(1) loss for the fourth quarter of 2008 was $2.5 million compared with an adjusted EBITDA loss of $2.2 million during the fourth quarter last year. Year-to-date adjusted EBITDA, which excludes the reversal of the litigation provision and recovery of legal and professional fees, was $3.8 million compared with $8.8 million last year.
Selling, general and administrative expenses ("SG&A") during the fourth quarter of 2008 increased by 3% or $0.5 million, on a $5.2 million sales increase. Year-to-date SG&A increased by 3% or $2.2 million to $78.6 million or 48.0% of sales compared with $76.4 million or 48.3% of sales last year.
Danier maintained a strong financial position at year-end with working capital $38.6 million compared with $26.1 million last year.
(1) EBITDA is defined as net earnings (loss) before interest expense (income), income taxes, and amortization. Adjusted EBITDA is defined as net earnings (loss) before interest expense (income), income taxes, amortization and litigation provision (recovery) and related expenses. EBITDA and Adjusted EBITDA are financial metrics used by management and some investors to compare companies on the basis of ongoing operating results before taxes, interest expense (income), amortization and litigation provision (recovery) and related expenses and its ability to incur and service debt. EBITDA and Adjusted EBITDA are not recognized measures for financial presentation under Canadian generally accepted accounting principles ("GAAP"). Non-GAAP earnings measures such as EBITDA and Adjusted EBITDA do not have any standardized meaning prescribed by Canadian GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. EBITDA and Adjusted EBITDA are calculated as outlined in the following table:
For the Fourth
Quarter Ended For the Year Ended
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Jun 28, 2008 Jun 30, 2007 Jun 28, 2008 Jun 30, 2007
------------ ------------ ------------ ------------
13 weeks 14 weeks 52 weeks 53 weeks
Net earnings (loss) ($3,022) ($2,425) $12,892 $1,653
Income tax (1,070) (1,195) (650) 948
Interest income -
net (46) (306) 81 (427)
Amortization 1,671 1,774 6,154 6,583
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EBITDA (2,467) (2,152) 18,477 8,757
Litigation
provision (recovery)
and related
expenses - - (20,016) -
Income tax
provision related
to litigation
provision
(recovery) and
related expenses - - 5,296 -
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Adjusted EBITDA ($2,467) ($2,152) $3,757 $8,757
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(2) Adjusted net earnings (loss) is defined as net earnings (loss) before litigation provision (recovery) and related expenses and income taxes related to the litigation provision (recovery) and related expenses. Adjusted net earnings (loss) is a financial metric used by management and allows for a more effective analysis of the ongoing operating performance of the Company. Adjusted net earnings (loss) is not a recognized measure for financial presentation under Canadian GAAP. Non-GAAP earnings measures such as adjusted net earnings (loss) do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. Adjusted net earnings (loss) is calculated as outlined in the following table:
For the Fourth
Quarter Ended For the Year Ended
--------------------------- ---------------------------
Jun 28, 2008 Jun 30, 2007 Jun 28, 2008 Jun 30, 2007
------------ ------------ ------------ ------------
13 weeks 14 weeks 52 weeks 53 weeks
Net earnings (loss) ($3,022) ($2,425) $12,892 $1,653
Litigation
provision
(recovery) and
related expenses - - (20,016) -
Income tax
provision related
to litigation
provision
(recovery) and
related expenses - - 5,296 -
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Adjusted net
earnings (loss) ($3,022) ($2,425) ($1,828) $1,653
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Note: This press release may contain 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. 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. Any statements in this press release containing forward-looking information are qualified by these cautionary statements.
Forward-looking statements are based on information available at the time they are made, underlying assumptions made by management and management's good faith belief with respect to future events, and are subject to inherent risks and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, fashion and apparel and leather industry risks that can affect demand for the Company's products and inventory markdowns, a real or perceived slowdown in the general economy which can result in a reduction in consumer spending and can affect demand for the Company's products, changes in consumer shopping patterns away from shopping malls and power centres, unseasonably hot weather or severe or unusual weather that prevents customers from going to the Company's stores, seasonality, heightened competition including new competitors and expansion of current competitors, foreign currency fluctuations which result in increased costs, leather availability and prices, consumer demand, disruptions in credit markets, risks associated with foreign sourcing and manufacturing, existing and potential legal proceedings, ability to successfully implement the Company's business strategy, war and acts of terrorism, higher utility and fuel prices which can result in increased costs, the ability of the Company to attract and retain key executives and key employees, the ability of vendors to maintain, support and upgrade management information systems, catastrophic or other events that impact the use of the Company's head office and distribution centre, increased inflation and interest rates, changes or disruptions in the securities markets, ability of the Company to obtain new locations or renew existing locations at existing or favourable lease terms, changes to the regulatory and economic environment in which the Company operates now and in the future, including changes in accounting policies or pronouncements introduced by regulatory authorities, changes in the Company's tax liabilities, either through changes in tax laws or future assessments, and performance of third party service providers, among other things.
Danier cautions readers that this list of factors is not exhaustive and that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. There can be no assurance that the actual results, events or activities anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Potential investors and other readers are urged to consider these and other factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements.
For additional information with respect to certain of these and other risks or uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities, including the Company's annual information form and 2007 annual report, which are available on SEDAR at www.sedar.com and in the Investor Relations section of the Company's website at www.danier.com. Additional risks and uncertainties not presently known to the Company or that Danier currently believes to be less significant may also adversely affect the Company. Danier disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
About Danier
Danier Leather Inc. is a leading integrated designer, manufacturer, and retailer of high-quality leather and suede clothing and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available only at its 91 shopping mall, street-front, and power centre stores, or through its corporate sales division. Danier's products are also available at Festival City Mall in Dubai. For more information about the Company and our products, see www.danier.com.
Investors and analysts are invited to participate in a conference call today at 4:00 PM Eastern Time to discuss the results. Please dial 416-695-6324 in the Toronto area or 1-877-323-2090 (rest of Canada and the U.S.) and quote the Danier Leather Inc. conference call with chairperson Jeffrey Wortsman at least five minutes prior to the call. The call will also be webcast at www.danier.com or at www.marketwire.com.
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE
EARNINGS (LOSS)
(thousands of dollars, except per share amounts and number of shares)
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Fourth Quarter Ended Year Ended
--------------------------- --------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------------- --------------------------
(unaudited) (unaudited)
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
Revenue $ 27,497 $ 22,249 $ 163,550 $ 158,099
Cost of sales
(Note 9) 15,092 10,128 87,365 79,565
--------------------------- --------------------------
Gross profit 12,405 12,121 76,185 78,534
Selling, general
and administrative
expenses (Note 9) 16,543 16,047 78,582 76,360
Interest expense
(income) - net (46) (306) 81 (427)
-------------------------- --------------------------
Earnings (loss)
before undernoted
item and
income taxes (4,092) (3,620) (2,478) 2,601
Litigation
provision (recovery)
and related
expenses (Note 11) - - (20,016) -
--------------------------- --------------------------
Earnings (loss)
before income taxes (4,092) (3,620) 17,538 2,601
Provision for
(recovery of)
income taxes
(Note 10)
Current (726) (1,056) 192 1,168
Future (344) (139) 4,454 (220)
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(1,070) (1,195) 4,646 948
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Net earnings (loss)
and comprehensive
earnings (loss) ($3,022) ($2,425) $ 12,892 $ 1,653
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--------------------------- --------------------------
Net earnings (loss)
per share:
Basic ($0.48) ($0.37) $2.04 $0.25
Diluted ($0.48) ($0.37) $2.03 $0.25
Weighted average
number of
shares
outstanding:
Basic 6,276,429 6,475,367 6,313,583 6,532,680
Diluted 6,278,399 6,509,261 6,335,873 6,547,416
Number of shares
outstanding at
period end 6,276,429 6,433,754 6,276,429 6,433,754
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
---------------------------------------------------------------------------
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June 28, June 30,
2008 2007
--------- ---------
ASSETS
Current Assets
Cash $ 19,882 $ 20,579
Accounts receivable 755 724
Income taxes recoverable 8 -
Inventories (Note 4) 27,404 28,561
Prepaid expenses 1,242 1,446
Future income tax asset (Note 10) 562 5,112
--------- ---------
49,853 56,422
Other Assets
Property and equipment (Note 5) 21,312 23,575
Goodwill 342 342
Future income tax asset (Note 10) 1,556 1,407
--------- ---------
$ 73,063 $ 81,746
--------- ---------
--------- ---------
LIABILITIES
Current Liabilities
Accounts payable and
accrued liabilities $ 9,845 $ 9,387
Income taxes payable - 1,473
Current portion of capital lease
obligation (Note 7) 858 971
Accrued litigation provision and
related expenses (Note 11) - 18,000
Future income tax liability (Note 10) 502 444
--------- ---------
11,205 30,275
Capital lease obligation (Note 7) - 858
Deferred lease inducements and
rent liability 1,675 1,849
Future income tax liability (Note 10) 50 55
--------- ---------
12,930 33,037
--------- ---------
SHAREHOLDERS' EQUITY
Share capital (Note 8) 21,409 22,044
Contributed surplus 548 431
Retained earnings 38,176 26,234
--------- ---------
60,133 48,709
--------- ---------
$ 73,063 $ 81,746
--------- ---------
--------- ---------
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(thousands of dollars)
---------------------------------------------------------------------------
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Fourth Quarter Ended Year Ended
--------------------------- ------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------------- ------------------------
(unaudited) (unaudited)
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
OPERATING ACTIVITIES
Net earnings (loss) ($3,022) ($2,425) $12,892 $1,653
Items not
affecting cash:
Amortization (Note 9) 1,671 1,774 6,154 6,583
Amortization of
deferred lease
inducements and
other (123) (120) (453) (493)
Straight line
rent expense 35 36 116 172
Stock based
compensation 36 26 117 156
Accrued litigation
provision (recovery)
and related
expenses (Note 11) - - (18,000) -
Future income taxes (344) (139) 4,454 (220)
Net change in
non-cash working
capital items
(Note 12) 4,263 (7,702) 363 5,626
Proceeds from
deferred lease
inducements 107 - 107 -
Repayment of
deferred lease
inducement - - - (59)
--------------------------- ------------------------
Cash flows
from (used in)
operating activities 2,623 (8,550) 5,750 13,418
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FINANCING ACTIVITIES
Subordinate voting
shares issued
(Note 8) - 24 80 24
Subordinate voting
shares repurchased
(Note 8) - (1,080) (1,665) (1,080)
Repayment of
obligation under
capital lease (249) (234) (971) (911)
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Cash flows used
in financing
activities (249) (1,290) (2,556) (1,967)
--------------------------- ------------------------
INVESTING ACTIVITIES
Acquisition of
capital assets (758) (920) (3,891) (2,865)
Proceeds from
sublease - - - 160
--------------------------- ------------------------
Cash flows used in
investing activities (758) (920) (3,891) (2,705)
--------------------------- ------------------------
Increase (decrease)
in cash 1,616 (10,760) (697) 8,746
Cash, beginning
of period 18,266 31,339 20,579 11,833
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Cash, end of period $19,882 $20,579 $19,882 $20,579
--------------------------- ------------------------
--------------------------- ------------------------
Supplementary cash
flow information:
Interest paid 17 32 414 280
Income taxes paid - - 1,679 -
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fourth Quarter Ended Year Ended
--------------------------- ------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------------- ------------------------
(unaudited) (unaudited)
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
SHARE CAPITAL
Balance, beginning
of period $21,409 $22,542 $22,044 $22,542
Shares repurchased - (522) (715) (522)
Shares issued on
exercise of
stock options - 24 80 24
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Balance, end
of period $21,409 $22,044 $21,409 $22,044
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CONTRIBUTED SURPLUS
Balance, beginning
of period $512 $405 $431 $275
Stock-based
compensation
related to
stock options 36 26 117 156
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Balance, end of
period $548 $431 $548 $431
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RETAINED EARNINGS
Balance, beginning
of period $41,198 $29,217 $26,234 $25,139
Net earnings (loss) (3,022) (2,425) 12,892 1,653
Share repurchases - (558) (950) (558)
--------------------------- ------------------------
Balance, end
of period $38,176 $26,234 $38,176 $26,234
--------------------------- ------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance, beginning
of period $- $- $- $-
Adjustment to
opening balance due
to the new
accounting policies
adopted regarding
financial instruments - - - -
--------------------------- ------------------------
Balance, end of
period $- $- $- $-
--------------------------- ------------------------
TOTAL SHAREHOLDERS'
EQUITY $60,133 $48,709 $60,133 $48,709
--------------------------- ------------------------
--------------------------- ------------------------
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 28, 2008 and June 30, 2007
(dollar amounts in thousands except per share amounts and where
otherwise indicated)
Danier Leather Inc. ("Danier" or "the Company") is incorporated under the Business Corporations Act (Ontario) and is a vertically integrated designer, manufacturer and retailer of leather apparel and accessories.
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 consolidated financial statements presented is the 52-week period ended June 28, 2008, and comparably the 53-week period ended June 30, 2007.
(c) Revenue recognition:
Revenue includes sales to customers through stores operated by the Company, sales to corporate customers through the Company's direct sales division and sales to third party licensees. Sales to customers through stores operated by the Company are recognized at the time the transaction is entered into the point-of-sale register net of returns. Sales to corporate customers and third party licensees are recognized at the time of shipment. Revenue from gift cards is recognized at the time of redemption. When a customer purchases a gift card a liability is recorded based on the dollar value of the gift card purchased. Unredeemed balances on gift cards that are more than two years old from the date of issuance (or "breakage") are recorded in the consolidated statement of earnings. Historically, breakage has not been material.
(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 raw materials, cost includes invoice cost, duties, freight and brokerage. For finished goods purchased from third party vendors, cost includes invoice cost, overhead, duties, freight and brokerage. For finished goods manufactured by the Company, cost includes raw materials, labour and overhead. For finished goods and work-in-process, market is defined as the expected selling price; for raw materials, market is defined as replacement cost. In addition, a provision is recorded to reduce the cost of inventories for obsolete, damaged and slow moving items to their estimated net realizable values.
(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.
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 within close proximity to one another. An impairment loss is recognized when the carrying amount of property and equipment is not recoverable and exceeds its estimated fair value.
(g) Goodwill:
Goodwill represents the excess of the cost of acquisition over the fair market value of the identifiable assets acquired. Goodwill is not amortized, but is tested for impairment at least annually at year-end. If required, any impairment in the value of goodwill would be written off against earnings.
(h) Deferred lease inducements and rent liability:
Deferred lease inducements represent cash benefits received from landlords pursuant to store lease agreements. These lease inducements are amortized against rent expense over the term of the lease, not exceeding 10.5 years.
Rent liability represents the difference between minimum rent as specified in the lease and rent calculated on a straight line basis.
(i) Store opening costs:
Expenditures associated with the opening of new stores, other than furniture and fixtures, equipment, and leasehold improvements are expensed as incurred.
(j) Prepaid advertising production costs:
Advertising production costs for newspaper flyer inserts and other media are generally incurred several months before the advertising occurs. These expenses are deferred and expensed the first time the advertising occurs. Prepaid advertising production costs were $332 as at June 28, 2008 (June 30, 2007 -$480) and are included in prepaid expenses on the consolidated balance sheet.
(k) Income taxes:
Income taxes are determined using the asset and liability method of accounting. This method recognizes future tax assets and liabilities that arise from differences between the accounting basis of the Company's assets and liabilities and their corresponding tax basis. Future taxes are measured at the balance sheet date using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The Company provides a valuation allowance for future tax assets when it is more likely than not that some or all of the future tax assets will not be realized.
(l) 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 8). 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.
(m) Translation of foreign currencies:
Accounts in foreign currencies are translated into Canadian dollars. Monetary balance sheet items are translated at the rates of exchange in effect at year-end and non-monetary items are translated at historical exchange rates. Revenues and expenses are translated at the rates in effect on the transaction dates or at the average rates of exchange for the reporting period. The resulting net gain or loss is included in the consolidated statement of earnings.
(n) Stock option plan:
The Company has a Stock Option Plan which is described in Note 8 where options to purchase Subordinate Voting Shares are issued to directors, officers and employees. Effective with the commencement of its 2004 fiscal year, the Company accounts for stock-based compensation using the fair-value method. The fair value of options granted are estimated at the date of grant using the Black-Scholes Option Pricing Model and is recognized as an expense over the vesting period of the stock option with an offsetting credit to contributed surplus. When stock options are subsequently exercised, share capital is increased by the sum of the consideration paid together with the related portion previously added to contributed surplus when compensation costs were charged against income. The Company continues to use settlement accounting to account for stock options granted prior to June 29, 2003.
(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 8. 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") expense over the vesting period of the award. At the end of each financial period, changes in the Company's payment obligation due to changes in the market value of the Subordinate Voting Shares are recorded as a charge to SG&A expense. Dividend equivalent grants are recorded as a charge to SG&A in the period the dividend is paid.
(p) Use of estimates:
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's historical experience, best knowledge of current events and actions that the Company may undertake in the future. Significant areas requiring the use of management estimates relate to the determination of inventory valuation, realizable value of property and equipment and goodwill, stock based compensation, future tax assets, goods and services tax, provincial sales tax, breakage of gift cards and income tax provisions. By their nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods could differ materially from those estimated.
2. Implementation of New Accounting Standards:
On July 1, 2007, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"). As provided under the standards, the Company adopted these recommendations prospectively without restatement of the prior period financial statements. There were no transitional adjustments resulting from the adoption of these standards.
CICA Section 1530 - Comprehensive Income
This CICA Handbook section introduced a statement of comprehensive income which is included in the consolidated financial statements. Comprehensive income represents the change in equity during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity other than those resulting from investments by owners and distributions to owners. The adoption of this standard has had no impact on the financial results of the Company. Since comprehensive earnings equal the net earnings for the period ended June 28, 2008, the consolidated statement of comprehensive earnings has been combined with the consolidated statements of earnings.
CICA Section 3251 - Equity
This CICA Handbook section, which replaced Section 3250 - Surplus, establishes standards for the presentation of equity and changes in equity during the reporting period and requires the Company to present separately equity components and changes in equity arising from (i) net earnings; (ii) other comprehensive income; (iii) other changes in retained earnings; (iv) changes in contributed surplus; (v) changes in share capital; and (vi) changes in reserves. New consolidated statements of changes in shareholders' equity are included in these financial statements.
CICA Section 3855 - Financial Instruments - Recognition and Measurement and CICA Section 3861 - Financial Instruments - Disclosure and Presentation
These CICA Handbook sections establish standards for recognition and measurement as well as disclosure and presentation of financial assets, financial liabilities and non-financial derivatives. CICA Section 3855 requires that financial assets and financial liabilities, including derivatives, be recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of the financial instrument or non-financial derivative contract. It also requires that all financial instruments be classified into a defined category, namely (a) held-to-maturity, (b) held-for-trading, (c) available-for-sale, (d) loans and receivables and (e) other financial liabilities, depending on the Company's stated intention and/or historical practice.
All financial instruments are required to be measured at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at cost or amortized cost. Gains and losses on held-for-trading financial assets and liabilities are recognized in net earnings in the period in which they arise. Unrealized gains and losses, including changes in foreign exchange rates on available-for-sale financial assets are recognized in comprehensive income until the financial assets are derecognized or impaired, at which time any unrealized gains or losses are recorded in net earnings. Transaction costs for assets classified as "held-for-trading" are recognized in net earnings as incurred and transaction costs for other assets are added to the financial asset on initial recognition and are recognized in net earnings when the asset is derecognized or impaired.
The adoption of these new standards resulted in the following changes in the classification and measurement of the Company's financial instruments, previously recorded at cost:
Cash is classified as "held-for-trading" and is measured at fair value which approximates cost. Money market investments included in cash are marked-to-market through net earnings and changes in fair value are recorded as interest income at each period end. This change had no impact on the Company's consolidated financial statements.
Accounts receivable are classified as "loans and receivables" and are recorded at cost, which at initial measurement corresponds to fair value. After initial fair value measurement, accounts receivable are measured at cost. This change had no impact on the Company's consolidated financial statements.
Bank indebtedness and accounts payable and accrued liabilities are classified as "other financial liabilities". They are initially measured at fair value and subsequent measurements are recorded at cost or amortized costs using the effective interest rate method. This change had no impact on the Company's consolidated financial statements.
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. As at June 28, 2008 and June 30, 2007, the Company did not have any outstanding foreign currency exchange forward contracts.
Embedded derivatives (elements of contracts whose cash flows move independently from the host contract) are required to be separated and measured at fair values if certain criteria are met. The Company selected June 30, 2002 as the transition date for embedded derivatives and, as such, only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives. As at June 28, 2008 and June 30, 2007, the Company did not have any outstanding contracts or financial instruments with embedded derivatives.
CICA Section 3865 - Hedges
This CICA Handbook section establishes criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of a net investment in a self-sustaining foreign operation. Treatment of changes in the fair value of each type of hedge is determined by its classification and the portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income. The determination of the effectiveness of each hedging relationship is required under the section with any ineffectiveness immediately recognized in income. The Company does not have any outstanding hedging contracts as at June 28, 2008 and June 30, 2007.
Effective for the fiscal year ended June 28, 2008, the Company has early adopted the CICA Handbook Section 1535 - Capital Disclosures, CICA Handbook Section 3862 - Financial Instruments - Disclosures, and CICA Handbook Section 3863 - Financial Instruments - Presentation, as described below:
CICA Section 1535 - Capital Disclosures
This CICA Handbook section establishes guidelines for the disclosure of information regarding a company's capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital are required. In addition, under this section a company is required to disclose whether during the period it complied with externally imposed capital requirements to which it is subject, and when the company has not complied with such externally imposed capital requirements, the consequences of such non-compliance. This section relates to disclosure and presentation only and did not have an impact on the Company's financial results. See Note 16.
CICA Section 3862 - Financial Instruments Disclosure and CICA Section 3863 - Financial Instruments Presentation
CICA Handbook Section 3862 revises the current standards on financial instrument disclosure and places an increased emphasis on disclosures regarding the risks associated with both recognized and unrecognized financial instruments and how these risks are managed. CICA Handbook Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives and provides additional guidance for classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. These sections relate to disclosure and presentation only and did not have an impact on the Company's financial results. See Note 15.
3. Recent Accounting Pronouncements:
CICA Section 1400 - General Standards of Financial Statement Presentation
The CICA amended this Handbook section to include requirements to assess and disclose an entity's ability to continue as a going concern when preparing financial statements. In assessing whether the going concern assumption is appropriate, management must take into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet. The Company will adopt this standard in the first quarter of its fiscal year ended June 27, 2009. The Company does not expect the implementation of this new section to have a significant impact on its consolidated financial statements.
CICA Section 3031 - Inventories
This CICA Handbook section issued in June 2007 replaces Section 3030 of the same name and harmonizes the Canadian standards related to inventories with International Financial Reporting Standards ("IFRS"). This section provides changes to the measurement and more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing; and expands the disclosure requirements to increase transparency. These recommendations are effective for fiscal years beginning on or after January 1, 2008. The Company will adopt this standard in the first quarter of its fiscal year ended June 27, 2009. The Company is currently assessing the impact of this new standard on its consolidated financial statements.
CICA Section 3064 - Goodwill and Intangible Assets
This CICA Handbook section issued in February 2008 replaces Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new standard also provides guidance for the recognition of internally developed intangible assets, including assets developed from research and development activities, ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. The new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has evaluated the new section and currently does not expect the implementation of this new section to have a significant impact on its consolidated financial statements.
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board has confirmed that the use of IFRS will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canadian GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011 with comparative figures presented on the same basis. The Company is currently working on a conversion plan towards IFRS but it is too early to assess the financial impact of the conversion at this point.
4. Inventories:
June 28, 2008 June 30, 2007
------------- -------------
Raw materials $ 3,332 $ 2,389
Work-in-process 892 989
Finished goods 23,180 25,183
------------- -------------
$ 27,404 $ 28,561
------------- -------------
------------- -------------
5. Property and Equipment:
June 28, 2008 June 30, 2007
----------------------------- ------------------------------
Cost Accumulated Net Book Cost Accumulated Net Book
Amortization Value Amortization Value
----------------------------- ------------------------------
Land $ 1,000 $ - $ 1,000 $ 1,000 $ - $ 1,000
Building 7,064 1,981 5,083 7,064 1,769 5,295
Leasehold
improvements 24,315 15,861 8,454 24,013 14,980 9,033
Furniture and
equipment 10,415 6,994 3,421 10,736 7,192 3,544
Computer
hardware
and software 4,014 1,876 2,138 7,578 4,613 2,965
Computer
hardware
and software
under capital
lease 2,920 1,704 1,216 2,920 1,182 1,738
----------------------------- ------------------------------
$49,728 $28,416 $21,312 $53,311 $ 29,736 $ 23,575
----------------------------- ------------------------------
----------------------------- ------------------------------
6. Bank Facilities:
Effective June 27, 2008, the Company amended and renewed its credit agreement. The renewed credit agreement provides for an operating facility for working capital and for general corporate purposes to a maximum amount of $25 million, bearing interest at prime plus 0.75%. Standby fees of 0.50% are paid on a quarterly basis on the unused portion of the facility. The operating facility is committed until June 29, 2009. The Company is required to comply with covenants regarding financial performance.
Security provided includes a security interest over all personal property of the Company's business and a mortgage over the land and building comprising the Company's head office/distribution facility.
Subsequent to June 28, 2008, the Company also obtained an uncommitted letter of credit facility (the "LC Facility") in the amount of $10 million to be used exclusively for issuance of letters of credit for the purchase of inventory and an uncommitted demand overdraft facility in the amount of $0.5 million related thereto. Amounts outstanding under the overdraft facility will bear interest at the bank's prime rate. The LC Facility is secured by the Company's personal property from time to time financed with the proceeds drawn thereunder.
7. Capital Lease Obligation:
Future minimum lease payments required under capital leases which expire in
fiscal 2009 are:
Fiscal 2009 minimum lease payments $ 884
Amounts representing interest (at a weighted average
annual rate of 6.2%) 26
-----
$ 858
8. Share Capital:
(a) Authorized
1,224,329 Multiple Voting Shares
Unlimited Subordinate Voting Shares
Unlimited Class A and B Preference Shares
(b) Issued
Multiple Voting Shares
----------------------
Number Consideration
-------------------------
Balance June 24, 2006 1,224,329 Nominal
Balance June 30, 2007 1,224,329 Nominal
Balance June 28, 2008 1,224,329 Nominal
Subordinate Voting Shares
-------------------------
Number Consideration
-------------------------
Balance June 24, 2006 5,328,925 $22,542
Shares repurchased (123,500) (522)
Shares issued upon exercising
of stock options 4,000 24
-------------------------
Balance June 30, 2007 5,209,425 $22,044
Shares repurchased 169,000) (715)
Shares issued upon exercising of
stock options 11,675 80
-------------------------
Balance June 28, 2008 5,052,100 $21,409
-------------------------
-------------------------
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, President and Chief Executive Officer: (i) dies; (ii) ceases to be a Senior Officer of the Company; (iii) ceases to own 5% or more of the aggregate number of Multiple Voting Shares and Subordinate Voting Shares outstanding; or (iv) owns less than 918,247 Multiple Voting Shares and Subordinate Voting Shares combined.
(c) Earnings per share
Basic and diluted per share amounts are based on the following weighted average number of shares outstanding:
June 28, 2008 June 30, 2007
------------- -------------
Weighted average number of shares for
basic earnings per share calculations 6,313,583 6,532,680
Effect of dilutive options outstanding 22,290 14,736
------------- -------------
Weighted average number of shares for
diluted earnings per share calculations 6,335,873 6,547,416
------------- -------------
------------- -------------
The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares on The Toronto Stock Exchange (the "TSX") during the period. The number of options excluded was 231,000 as at June 28, 2008 and 416,000 as at June 30, 2007.
(d) Normal course issuer bids
On April 19, 2007, the Company announced that the TSX had accepted a notice of its intention to proceed with a normal course issuer bid (the "2007 NCIB"). Pursuant to the 2007 NCIB, the Company was entitled to purchase for cancellation up to a maximum of 320,320 Subordinate Voting Shares.
On May 2, 2008, the Company received approval from the TSX to commence its second normal course issuer bid (the "2008 NCIB"). The 2008 NCIB permits the Company to acquire up to 292,638 Subordinate Voting Shares, representing approximately 10% of the "public float" of the Subordinate Voting Shares, during the period from May 6, 2008 to May 5, 2009. Under the 2007 NCIB which expired on April 22, 2008, the Company repurchased 292,500 Subordinate Voting Shares for cancellation. As of June 28, 2008, no Subordinate Voting Shares had been purchased under the 2008 NCIB.
The following Subordinate Voting Shares were repurchased for cancellation during the fourth quarter and year ended June 28, 2008 and June 30, 2007:
Fourth Quarter Ended Year Ended
-------------------- ----------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
-------------------- ----------------
Number of shares repurchased - 123,500 169,000 123,500
Amount charged to share capital - $ 522 $ 715 $ 522
Amount charged to retained
earnings representing the excess
over the average paid-in value - $ 558 $ 950 $ 558
-------------------- ----------------
Total cash consideration - $ 1,080 $ 1,665 $ 1,080
-------------------- ----------------
-------------------- ----------------
(e) Stock option plan
The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at June 28, 2008, the Company has reserved 835,500 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors, on the advice of the Governance, Compensation, Human Resources and Nominating Committee of the Board (the "Committee") at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on the TSX for the five trading days preceding the effective date of the grant. In general, options granted under the Stock Option Plan vest over a period of one year from the grant date for options issued to directors and between two years and four years from the grant date for options issued to officers 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 28, 2008 and June 30, 2007 and changes during the years ended on those dates is presented below:
June 28, 2008 June 30, 2007
----------------------- -----------------------
Weighted Average Weighted Average
Stock Options Shares Exercise Price Shares Exercise Price
------------------------------------------------- -----------------------
Outstanding at
Beginning of year 605,300 $ 10.48 618,300 $ 11.15
Granted 50,000 $ 6.25 70,000 $ 7.99
Exercised (64,675) $ 6.85 (4,000) $ 6.02
Forfeited (297,625) $ 10.82 (79,000) $ 13.74
------------------------- -----------------------
Outstanding at end
of year 293,000 $ 10.21 605,300 $ 10.48
------------------------- -----------------------
Options exercisable at
end of year 200,500 $ 11.60 541,550 $ 10.71
------------------------- -----------------------
The following table summarizes the distribution of these options and the remaining contractual life as at June 28, 2008:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise # of Shares Exercise
Prices # Outstanding Life Price Exercisable Price
----------------------------------------------- ---------------------
$ 6.02 12,000 1.2 years $ 6.02 12,000 $ 6.02
$ 6.25 50,000 10.0 years $ 6.25 - $ 6.25
$ 7.80 55,000 8.6 years $ 7.80 28,750 $ 7.80
$ 8.68 15,000 8.8 years $ 8.68 5,000 $ 8.68
$10.10 25,000 6.8 years $10.10 18,750 $10.10
$10.40 20,000 2.1 years $10.40 20,000 $10.40
$10.96 21,000 5.1 years $10.96 21,000 $10.96
$11.20 16,000 3.1 years $11.20 16,000 $11.20
$11.25 16,000 0.1 years $11.25 16,000 $11.25
$15.85 63,000 4.1 years $15.85 63,000 $15.85
----------------------------------- ---------------------
293,000 6.0 years $10.21 200,500 $11.60
----------------------------------- ---------------------
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