Danier Leather Inc.
TSX : DL

Danier Leather Inc.

January 22, 2008 15:06 ET

Danier Leather Reports Fiscal 2008 Second Quarter Results

TORONTO, ONTARIO--(Marketwire - Jan. 22, 2008) - Danier Leather Inc. (TSX:DL) today announced its unaudited consolidated financial results for the 13 week and 26 week periods ended December 29, 2007.

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



----------------------------------------------
For the 13 Weeks Ended For the 26 Weeks Ended
--------------------------------------------------------------------------
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2007 2006(i) 2007 2006(i)
--------------------------------------------------------------------------
Sales $71,535 $67,597 $93,622 $89,525
--------------------------------------------------------------------------
EBITDA(1) 11,187 13,094 20,563 9,092
--------------------------------------------------------------------------
Adjusted EBITDA(1) 11,120 13,094 7,113 9,092
--------------------------------------------------------------------------
Net Earnings 5,978 7,493 15,798 3,791
--------------------------------------------------------------------------
Adjusted Net Earnings(2) 5,911 7,493 2,348 3,791
--------------------------------------------------------------------------
EPS - Basic $0.95 $1.14 2.49 $0.58
--------------------------------------------------------------------------
EPS - Diluted $0.94 $1.14 2.47 $0.58
--------------------------------------------------------------------------
Number of Stores 91 93 91 93
--------------------------------------------------------------------------
Retail Square Footage 348,504 364,986 348,504 364,986
--------------------------------------------------------------------------
(i)restated


Sales for the second quarter increased by 6% or $3.9 million to $71.5 million from $67.6 million in the second quarter last year. Comparable store sales increased 8%. Boxing week sales were included in the second quarter this year whereas last year Boxing week sales were included in the third quarter. On a comparable week basis, which includes Boxing week in both periods and compares the 13 weeks ended December 29, 2007 to the 13 weeks ended December 30, 2006, sales decreased by 8% or $6.4 million while comparable store sales decreased by 7%. Customer traffic during the comparable period decreased 5% and the average sale decreased 3%. A difficult retail environment which included extreme customer price sensitivity, cross border shopping and warm weather early in the season resulted in the need for the Company to increase markdowns and become more promotional.

Year-to-date sales increased 5% or $4.1 million to $93.6 million while comparable store sales increased 7%. On a comparable week basis which is the 26 weeks ended December 29, 2007 compared to the 26 weeks ended December 30, 2006, sales decreased 8% and comparable store sales decreased 6%. Customer traffic during the comparable period decreased 6% and the average sale decreased 1%.

Net earnings during the second quarter decreased by $1.5 million to $6.0 million or $0.94 per diluted share compared with $7.5 million or $1.14 per diluted share in the second quarter last year. Year-to-date net earnings were $15.8 million ($2.47 per diluted share). Excluding the reversal of the litigation provision of $18.0 million, initial recovery of legal fees of $0.1 million and income taxes of $4.7 million, year-to-date adjusted net earnings(2) were $2.3 million ($0.37 per diluted share) compared with $3.8 million ($0.58 per diluted share) last year.

On October 12, 2007, the Supreme Court of Canada unanimously decided to uphold the unanimous Ontario Court of Appeal ruling that dismissed the class action against the Company and two of its Senior Officers. As a result of the ruling, the litigation provision of $18 million less future income taxes of $4.6 million was reversed in the first quarter of 2008. During the second quarter of 2008, $0.1 million of legal fees related to the Ontario Court of Appeal award were received and recorded. The costs awarded by the Ontario Court of Appeal for the trial and cost awarded by the Supreme Court of Canada will be recorded when the amounts are received.

EBITDA(1) excluding the reversal of the litigation provision for the second quarter decreased by $2.0 million to $11.1 million compared with $13.1 million during the second quarter last year. Year-to-date EBITDA(1) excluding the reversal of the litigation provision decreased by $2.0 million to $7.1 million compared with $9.1 million last year.

Gross profit as a percentage of revenue during the second quarter of 2008 was 50.6% compared with 52.8% during the second quarter last year. Year-to-date gross profit as a percentage of revenue was 50.2% compared with 50.6% last year. The decrease in gross profit margin was due to the inclusion of Boxing Week, which is a highly promotional and lower margin period, in the second quarter this year compared with the third quarter last year. Gross profit margin was also negatively impacted by higher overseas sourcing costs including higher leather prices, a reduction of an export rebate in China and appreciation of the Chinese Yuan. In addition, the strengthened Canadian dollar and increased cross border shopping resulted in inventory build up and the need for the Company to increase markdowns and become more promotional in response to extreme customer price sensitivity.

Selling, general and administrative expenses ("SG&A") during the second quarter of 2008 were $26.5 million or 37.1% of sales compared with $24.2 million or 35.8% of sales during the second quarter last year. Year-to-date SG&A was $42.9 million or 45.9% of sales compared with $39.5 million or 44.0% of sales last year.

During the 26 week period ended December 29, 2007, Danier repurchased 169,000 subordinate voting shares for cancellation under the Normal Course Issuer Bid. Since the bid commenced on April 23, 2007, Danier has repurchased a total of 292,500 shares for cancellation.

(1) EBITDA is defined as net earnings before interest expense, income taxes, and amortization. Adjusted EBITDA is defined as net earnings before interest expense, income taxes, amortization and litigation provision 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, amortization and litigation provision 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 is calculated as outlined in the following table:



For the 13 Weeks Ended For the 26 Weeks Ended
-------------------------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
-------------------------------------------------
($000) ($000 - ($000) ($000 -
restated) restated)
Net earnings $5,978 $7,493 $15,798 $3,791
Income tax 3,626 3,905 1,511 1,945
Interest expense - net 152 93 202 150
Amortization 1,431 1,603 3,052 3,206
-------------------------------------------------
EBITDA 11,187 13,094 20,563 9,092
Litigation provision
and related expenses (107) - (18,107) -
Income tax provision
related to litigation
provision and
related expenses 40 - 4,657 -
-------------------------------------------------
Adjusted EBITDA $11,120 $13,094 $7,113 $9,092
-------------------------------------------------
-------------------------------------------------


(2) Adjusted net earnings is defined as net earnings before litigation provision and related expenses and income taxes related to the litigation provision and related expenses. Adjusted net earnings 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 is not a recognized measure for financial presentation under Canadian GAAP. Non-GAAP earnings measures such as adjusted net earnings do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. Adjusted net earnings is calculated as outlined in the following table:



For the 13 Weeks Ended For the 26 Weeks Ended
-------------------------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
-------------------------------------------------
($000) ($000 - ($000) ($000 -
restated) restated)
Net earnings $5,978 $7,493 $15,798 $3,791
Litigation provision
and related expenses (107) - (18,107) -
Income tax provision
related to litigation
provision and related
expenses 40 - 4,657 -
-------------------------------------------------
Adjusted net earnings $5,911 $7,493 $2,348 $3,791
-------------------------------------------------
-------------------------------------------------


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, change 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, domestic and foreign currency fluctuations which result in increased costs, leather availability and prices, risks associated with foreign sourcing and manufacturing and potential legal proceedings, 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 AND COMPREHENSIVE EARNINGS
(Unaudited)
(thousands of dollars, except per share amounts and number of shares)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

For the 13 Weeks Ended For the 26 Weeks Ended
----------------------------------------------
December December December December
29, 2007 23, 2006 29, 2007 23, 2006
----------------------------------------------
(restated) (restated)

Revenue $ 71,535 $ 67,597 $ 93,622 $ 89,525
Cost of sales (Note 7) 35,339 31,905 46,624 44,186
----------------------------------------------
Gross profit 36,196 35,692 46,998 45,339
Selling general and
administrative expenses
(Note 7) 26,507 24,201 42,937 39,453
Interest expense - net 152 93 202 150
----------------------------------------------
Earnings before undernoted
item and income taxes 9,537 11,398 3,859 5,736
Litigation provision and
related expenses (Note 8) (107) - (18,107) -
----------------------------------------------
Earnings before income taxes 9,644 11,398 21,966 5,736
Provision for income taxes
Current 3,541 3,864 1,419 1,927
Future 125 41 4,749 18
----------------------------------------------
3,666 3,905 6,168 1,945
----------------------------------------------
Net earnings and
comprehensive earnings $ 5,978 $ 7,493 $ 15,798 $ 3,791
----------------------------------------------
----------------------------------------------


Net earnings per share:
Basic $0.95 $1.14 $2.49 $0.58
Diluted $0.94 $1.14 $2.47 $0.58

Weighted average number of
shares outstanding:
Basic 6,323,126 6,553,254 6,350,976 6,553,254
Diluted 6,362,015 6,553,254 6,386,139 6,556,812
Number of shares outstanding
at period end 6,274,929 6,553,254 6,274,929 6,553,254



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

December 29, December 23, June 30,
2007 2006 2007
----------------------------------
ASSETS (restated)
Current Assets
Cash $ 16,080 $ 19,976 $ 20,579
Accounts receivable 2,119 3,323 724
Inventories (Note 3) 41,330 36,363 28,561
Prepaid expenses 631 988 1,446
Future income tax asset 449 5,152 5,112
----------------------------------
60,609 65,802 56,422
Other Assets
Property and equipment (Note 4) 23,443 25,818 23,575
Goodwill 342 342 342
Future income tax asset 1,204 1,131 1,407
----------------------------------
$ 85,598 $ 93,093 $ 81,746
----------------------------------
----------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued
liabilities $ 17,968 $ 16,927 $ 9,387
Income taxes payable 1,207 1,654 1,473
Current portion of capital lease
obligation (Note 5) 1,003 940 971
Future income tax liability 331 445 444
Accrued litigation provision and
related expenses (Note 8) - 18,000 18,000
----------------------------------
20,509 37,966 30,275

Capital lease obligation (Note 5) 349 1,352 858
Deferred lease inducements and rent
liability 1,723 1,949 1,849
Future income tax liability 51 56 55
----------------------------------
22,632 41,323 33,037
----------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 21,399 22,542 22,044
Contributed surplus 485 298 431
Retained earnings 41,082 28,930 26,234
Accumulated other comprehensive income - - -
----------------------------------
62,966 51,770 48,709
----------------------------------
$ 85,598 $ 93,093 $ 81,746
----------------------------------
----------------------------------



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

For the 13 Weeks Ended For the 26 Weeks Ended
-----------------------------------------------
December December December December
29, 2007 23, 2006 29, 2007 23, 2006
-----------------------------------------------
(restated) (restated)

OPERATING ACTIVITIES
Net earnings $ 5,978 $ 7,493 $ 15,798 $ 3,791
Items not affecting cash:
--------------------------
Amortization (Note 7) 1,431 1,603 3,052 3,206
Amortization of deferred
lease inducements
and other (119) (120) (239) (253)
Straight line rent expense 15 46 57 89
Stock based compensation 27 12 54 23
Accrued litigation
provision and
related expenses (Note 8) - - (18,000) -
Future income taxes 125 41 4,749 18
Net change in non-cash
working capital
items (Note 9) 14,197 21,119 (4,978) 3,347
Repayment of deferred
lease inducement - - - (59)
-----------------------------------------------
Cash flows from operating
activities 21,654 30,194 493 10,162
-----------------------------------------------

FINANCING ACTIVITIES
Subordinate voting
shares repurchased (1,071) - (1,665) -
Subordinate voting
shares issued 70 - 70 -
Repayment of obligation
under capital lease (241) (226) (477) (448)
-----------------------------------------------
Cash flows used in
financing activities (1,242) (226) (2,072) (448)
-----------------------------------------------

INVESTING ACTIVITIES
Acquisition of capital
assets (867) (690) (2,920) (1,731)
Proceeds from sublease - - - 160
-----------------------------------------------
Cash flows used in
investing activities (867) (690) (2,920) (1,571)
-----------------------------------------------

Increase (decrease) in cash 19,545 29,278 (4,499) 8,143
Cash (bank indebtedness),
beginning of period (3,465) (9,302) 20,579 11,833
-----------------------------------------------
Cash, end of period $ 16,080 $ 19,976 $ 16,080 $ 19,976
-----------------------------------------------
-----------------------------------------------

Supplementary cash flow
information:
Interest paid 100 100 373 128
Income taxes paid 384 - 1,679 -



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

For the 13 Weeks Ended For the 26 Weeks Ended
----------------------------------------------
December December December December
29, 2007 23, 2006 29, 2007 23, 2006
----------------------------------------------
(restated) (restated)
SHARE CAPITAL
Balance, beginning
of period $21,769 $22,542 $22,044 $22,542
Shares repurchased (440) - (715) -
Shares issued on exercise
of stock options 70 - 70 -
----------------------------------------------
Balance, end of period $21,399 $22,542 $21,399 $22,542
----------------------------------------------

CONTRIBUTED SURPLUS
Balance, beginning of
period $458 $286 $431 $275
Stock-based compensation
related to stock options 27 12 54 23
----------------------------------------------
Balance, end of period $485 $298 $485 $298
----------------------------------------------

RETAINED EARNINGS
Balance, beginning of
period $35,735 $21,437 $26,234 $25,139
Net earnings 5,978 7,493 15,798 3,791
Share repurchases (631) - (950) -
----------------------------------------------
Balance, end of period $41,082 $28,930 $41,082 $28,930
----------------------------------------------

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 $62,966 $51,770 $62,966 $51,770
----------------------------------------------
----------------------------------------------

See accompanying notes to the consolidated financial statements


DANIER LEATHER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the 13 week and 26 week periods ended December 29, 2007 and
December 23, 2006

(Thousands of dollars, except per share amounts and number of shares) - Unaudited

1. SIGNIFICANT ACCOUNTING POLICIES:

(a) Basis of Presentation:

These unaudited interim consolidated financial statements (the "financial statements") have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial information and include all normal and recurring entries that are necessary for a fair presentation of the statements. Accordingly, they do not include all of the information and footnotes required by Canadian GAAP for annual financial statements. These financial statements should be read in conjunction with the most recently prepared annual audited consolidated financial statements of Danier Leather Inc. (the "Company" or "Danier") for the 53 week period ended June 30, 2007 and the accompanying notes contained in the Company's 2007 Annual Report.

The financial statements follow the same accounting policies and methods of application as the most recent annual audited consolidated financial statements as at June 30, 2007, except as described below in Note 1(b). In addition, certain prior period balances have been reclassified to conform with the presentation adopted in the current year.

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 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 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 inventory valuation, realizable value of property and equipment, stock based compensation, future income tax assets and liabilities, and income tax provisions. By their nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods from changes in estimates could be material.

(b) Changes in Accounting Policies:

(i) 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 financial statements. Comprehensive income represents 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 adoption of this standard has had no impact on the financial statements of the Company. Since comprehensive earnings equal the net earnings for the 13 week and 26 week periods ended December 29, 2007, 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 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. Money market investments included in cash are marked-to-market through net earnings and recorded as interest income at each period end. This change had no impact on the Company's financial statements.

Accounts receivable is classified as "loans and receivables" and is recorded at cost, which at initial measurement corresponds to fair value. After initial fair value measurement, it is measured at amortized cost using the effective interest rate method. This change had no impact on the Company's 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 revaluations are recorded at amortized costs using the effective interest rate method. This change had no impact on the Company's 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 December 29, 2007, June 30, 2007, and December 23, 2006, 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, as such, only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives. As at December 29, 2007, June 30, 2007, and December 23, 2006, 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 December 29, 2007, June 30, 2007 and December 23, 2006.

(ii) Advertising production costs for newspaper flyer inserts and other media are generally incurred several months before the advertising occurs. Effective March 25, 2007, Danier changed its accounting policy for the treatment of advertising production costs and these expenses are now deferred and expensed the first time the advertising occurs. Previously, Danier's accounting policy was to expense advertising production costs during the period the invoice was received. Management believes the new accounting policy for advertising production costs is preferable as it provides more relevant financial reporting and better links advertising expenses with the revenues generated from the advertising campaign. This change had no material effect on the selling, general and administrative expenses ("SG&A") or net earnings for the 53 weeks ended June 30, 2007 but does affect the timing of SG&A expenses recorded during the first, second and third quarters of fiscal 2007. This change in accounting policy has been accounted for retrospectively, and the comparative unaudited interim consolidated financial statements for the 13 week and 26 week periods ended December 23, 2006 have been restated. The effect of the change on the first, second and third quarters of fiscal 2007 is tabulated below. Prepaid advertising production costs were $333 as at December 29, 2007 ($502 - December 23, 2006) and are included in prepaid expenses in the unaudited interim consolidated balance sheet.



Effect on Consolidated Statement of Earnings (Loss)
---------------------------------------------------------------
Earnings
Income Net per
(loss) Income earnings Earnings per share -
SG&A before tax Tax (loss) share - Basic Diluted
---------------------------------------------------------------
Q1 2007
-------
Restated $15,252 ($5,662) ($1,960) ($3,702) ($0.56) ($0.56)
As reported $15,977 ($6,387) ($2,211) ($4,176) ($0.64) ($0.64)
---------------------------------------------------------------
Effect ($725) $725 $251 $474 $0.08 $0.08

Q2 2007
-------
Restated $24,201 $11,398 $3,905 $7,493 $1.14 $1.14
As reported $23,978 $11,621 $3,982 $7,639 $1.17 $1.17
---------------------------------------------------------------
Effect $223 ($223) ($77) ($146) ($0.03) ($0.03)

Q3 2007
-------
Restated $20,860 $485 $198 $287 $0.04 $0.04
As reported $20,358 $987 $372 $615 $0.09 $0.09
---------------------------------------------------------------
Effect $502 ($502) ($174) ($328) ($0.05) ($0.05)



Effect on Consolidated Balance Sheet
-----------------------------------------------------
Prepaid Income taxes Income taxes Retained
expense recoverable payable Earnings
-----------------------------------------------------
Q1 2007
-------
Restated $1,656 $4,309 - $21,437
As reported $931 $4,560 - $20,963
-----------------------------------------------------
Effect $725 ($251) - $474

Q2 2007
-------
Restated $988 - $1,654 $28,930
As reported $486 - $1,480 $28,602
-----------------------------------------------------
Effect $502 - $174 $328

Q3 2007
-------
Restated $376 - $2,440 $29,217
As reported $376 - $2,440 $29,217
-----------------------------------------------------
Effect - - - -


2. SEASONALITY OF RETAIL OPERATIONS:

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

3. INVENTORIES:



December 29, December 23,
2007 2006 June 30, 2007
---------------------------------------
Raw materials $ 3,343 $ 2,817 $ 2,389
Work-in-process 1,055 928 989
Finished goods 36,932 32,618 25,183
---------------------------------------
$ 41,330 $ 36,363 $ 28,561
---------------------------------------
---------------------------------------


4. PROPERTY AND. EQUIPMENT:

December 29, 2007 December 23, 2006
-----------------------------------------------------------------
Accumulated Net Book Accumulated Net Book
Cost Amortization Value Cost Amortization Value
-----------------------------------------------------------------
Land $ 1,000 $ - $1,000 $ 1,000 $ - $ 1,000
Building 7,064 1,901 5,163 7,064 1,677 5,387
Leasehold
improve-
ments 25,688 16,038 9,650 26,695 17,043 9,652
Furniture
and
equipment 11,591 7,961 3,630 11,382 7,260 4,122
Computer
hardware
and soft-
ware 7,967 5,444 2,523 8,808 5,261 3,547
Computer
hardware
and
software
under
capital
lease 2,920 1,443 1,477 2,920 810 2,110
-----------------------------------------------------------------
$56,230 $32,787 $23,443 $57,869 $ 32,051 $25,818
-----------------------------------------------------------------
-----------------------------------------------------------------


June 30, 2007
-------------------------------
Accumulated Net Book
Cost Amortization Value
-------------------------------
Land $ 1,000 $ - $1,000
Building 7,064 1,769 5,295
Leasehold
improvements 24,013 14,980 9,033
Furniture and
equipment 10,736 7,192 3,544
Computer
hardware
and software 7,578 4,613 2,965
Computer
hardware
and software
under capital
lease 2,920 1,182 1,738
-------------------------------
$53,311 $29,736 $23,575
-------------------------------
-------------------------------



5. OBLIGATIONS UNDER CAPITAL LEASES:

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

For the 12 month period ending December 2008 1,061
For the 12 month period ending December 2009 354
-------------------------------------------------------------------
$ 1,415
Amounts representing interest (at a weighted
average annual rate of 6.2%) 63
-------------------------------------------------------------------
$ 1,352
Current portion 1,003
-------------------------------------------------------------------
$ 349
-------------------------------------------------------------------
-------------------------------------------------------------------



6. SHARE CAPITAL:

(a) Authorized

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

(b) Issued

Dec 29, Dec 23, June 30,
2007 2006 2007
---------------------------
1,224,329 Multiple Voting Shares (December 23,
2006 and June 30, 2007 - 1,224,329) (i) (i) (i)
5,050,600 Subordinate Voting Shares
(December 23, 2006 - 5,328,925 and
June 30, 2007 - 5,209,425) 21,399 22,542 22,044
---------------------------
$21,399 $22,542 $22,044
---------------------------
---------------------------
(i) Nominal


(c) Earnings per share

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

13 weeks ended 26 weeks ended
----------------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
----------------------------------------
Weighted average number of shares
for basic earnings per
share calculations 6,323,126 6,553,254 6,350,976 6,553,254
Effect of dilutive options
outstanding 38,889 - 35,163 3,558
----------------------------------------
Weighted average number of shares
for diluted earnings per
share calculations 6,362,015 6,553,254 6,386,139 6,556,812
----------------------------------------
----------------------------------------


The computation of dilutive options outstanding only includes those options
having exercise prices below the average market price of Subordinate Voting
Shares during the period. The number of options excluded was 386,000 as at
December 29, 2007 and 539,300 as at December 23, 2006.

On April 19, 2007, the Company received approval from The Toronto Stock
Exchange to commence a Normal Course Issuer Bid. The bid permits
the Company to acquire up to 320,320 Subordinate Voting Shares,
representing approximately 10% of the public float of the Subordinate
Voting Shares, during the period from April 23, 2007 to April 22, 2008.
Since the bid commenced on April 23, 2007, the Company has repurchased for
cancellation 292,500 Subordinate Voting Shares.


The following shares were repurchased during the 13 week and 26 week
periods ended December 29, 2007 and December 23, 2006:


13 weeks ended 26 weeks ended
-----------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
-----------------------------------
Number of shares repurchased 104,000 - 169,000 -
Amount charged to share capital $440 - $715 -
Amount charged to retained
earnings representing the
excess over the average
paid-in value $631 - $950 -
-----------------------------------
Total cash consideration $1,071 - $1,665 -
-----------------------------------
-----------------------------------


(d) Stock Option Plan

The Company maintains a Stock Option Plan for the benefit of directors,
officers and employees. As at December 29, 2007, the Company has reserved
890,000 Subordinate Voting Shares for issuance under its Stock Option Plan
and there were 524,125 options outstanding with exercise prices ranging
from $6.02 to $15.85.

The following transactions occurred during the 13 week and 26 week
periods ended December 29, 2007 and December 23, 2006 with respect
to the Stock Option Plan:


13 weeks ended 26 weeks ended
--------------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
--------------------------------------
Outstanding at beginning of period 554,300 593,300 605,300 618,300
Granted - - - -
Exercised (10,175) - (10,175) -
Forfeited (20,000) (54,000) (71,000) (79,000)
--------------------------------------
Outstanding at end of period 524,125 539,300 524,125 539,300
--------------------------------------
Options exercisable at end of period 461,625 519,300 461,625 519,300
--------------------------------------

Further details of the Stock Option Plan are contained in Note 6(e) of the
consolidated financial statements contained in the Company's 2007
Annual Report.


(e) Deferred Share Unit Plan

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



The following transactions occurred during the 13 week and 26 week periods
ended December 29, 2007 and December 23, 2006 with respect to the Deferred
Share Unit Plan:


13 weeks ended 26 weeks ended
----------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
----------------------------------
Outstanding at beginning of period 46,420 21,904 39,420 14,904
Granted 12,500 - 19,500 7,000
Redeemed - - - -
----------------------------------
Outstanding at end of period 58,920 21,904 58,920 21,904
Danier stock price at end of period $10.18 $5.60 $10.18 $5.60
----------------------------------
Liability at end of period $600 $123 $600 $123
----------------------------------
Compensation expense recorded in SG&A $194 ($6) $239 $5
----------------------------------

(f) Restricted Share Unit Plan


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 generally vest over periods not exceeding three years as determined by the Committee. An RSU is a unit equivalent in value to one Subordinate Voting Share of the Company. When dividends are paid by the Company, an equivalent number of RSUs are added to the RSU account of the Senior Officer based on the number of RSUs in their account, the dividend paid per Subordinate Voting Share and the market value of the Subordinate Voting Shares on the date the dividend is paid. Upon the exercise of the vested RSUs, a cash payment equal to the market value of the exercised vested RSUs will be paid to the Senior Officer. The value of the vested RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares.

The following transactions occurred during the 13 week and 26 week periods ended December 29, 2007 and December 23, 2006 with respect to the Restricted Share Unit Plan:



13 weeks ended 26 weeks ended
--------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
-------------------------------
Outstanding at beginning of period 50,201 10,201 50,201 15,238
Granted - - - -
Forfeited - - - (5,037)
-------------------------------
Outstanding at end of period 50,201 10,201 50,201 10,201
Liability at end of period $366 $10 $366 $10
-------------------------------
Compensation expense recorded in SG&A $97 $- $132 $-
-------------------------------

7. AMORTIZATION:

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

13 weeks ended 26 weeks ended
----------------------------------------------------------
Dec 29, 2007 Dec 23, 2006 Dec 29, 2007 Dec 23, 2006
----------------------------------------------------------
Cost of sales $ 135 $ 132 $ 271 $ 264
SG&A 1,296 1,471 2,781 2,942
----------------------------------------------------------
$ 1,431 $ 1,603 $ 3,052 $ 3,206
----------------------------------------------------------
----------------------------------------------------------


8. LITIGATION PROVISION AND RELATED EXPENSES:

Dec 29, 2007 Dec 23, 2006 June 30, 2007
--------------------------------------------
Accrued litigation provision
and related expenses $ - $ 18,000 $ 18,000
--------------------------------------------
--------------------------------------------


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

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

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

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

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

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

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

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

During the second quarter of 2008, the Company received $0.1 million of partial indemnity costs related to the Ontario Court of Appeal award and recorded this recovery in the financial statements for the 13 week and 26 week periods ended December 29, 2007. The costs awarded by the Ontario Court of Appeal for the trial and the costs awarded by the Supreme Court of Canada will be recorded when the amounts are received and are expected to more than offset the costs awarded to the Plaintiffs for the certification and summary judgment motion.



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

13 weeks ended 26 weeks ended
------------------------------------
Dec 29, Dec 23, Dec 29, Dec 23,
2007 2006 2007 2006
------------------------------------
Decrease (increase) in:
Accounts receivable ($28) ($1,337) ($1,395) ($2,921)
Income taxes recoverable 1,943 4,309 - 2,485
Inventories 4,691 9,371 (12,769) (4,015)
Prepaid expenses 782 668 815 38
Increase (decrease) in:
Accounts payable and accrued
liabilities 5,602 6,454 8,637 6,106
Income taxes payable 1,207 1,654 (266) 1,654
------------------------------------
$14,197 $21,119 ($4,978) $3,347
------------------------------------
------------------------------------


10. CONTINGENCIES & GUARANTEES:

(a) Legal proceedings

In addition to the class action matter discussed in Note 8, 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 property and equipment 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 1.25 years and the Company's maximum exposure is less than $0.1 million.



11. COMMITMENTS:

(a) Operating and capital leases

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

Operating Capital
-----------------------
2008 $10,578 $1,061
2009 8,792 354
2010 7,189 -
2011 5,793 -
2012 3,965 -
Thereafter 7,384 -


(b) Letters of credit

The Company had outstanding letters of credit in the amount of $9,680 (December 23, 2006 - $4,982) for imports of finished goods inventories to be received.

12. SEGMENTED INFORMATION:

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

Contact Information

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