Danier Leather Inc.
TSX : DL

Danier Leather Inc.

August 21, 2007 15:01 ET

Danier Leather Reports Fiscal 2007 Fourth Quarter and Year End Results

TORONTO, ONTARIO--(Marketwire - Aug. 21, 2007) - Danier Leather Inc. (TSX:DL) today announced its consolidated financial results for the fourth quarter and year ended June 30, 2007.



FISCAL 2007 HIGHLIGHTS
- Comparable store sales increased 9%
- Gross margin expansion of 160 basis points
- EBITDA increase of $10 million


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



-----------------------------------------------------------
Quarter Ended Year Ended
---------------------------------------------------------------------------
Jun 30, 2007 Jun 24, 2006 Jun 30, 2007 Jun 24, 2006
---------------------------------------------------------------------------
(14 weeks) (13 weeks) (53 weeks) (52 weeks)
---------------------------------------------------------------------------
Sales $22,249 $22,028 $158,099 $148,351
---------------------------------------------------------------------------
EBITDA(1) (2,152) (4,256) 8,757 (1,159)
---------------------------------------------------------------------------
Net Earnings (Loss) (2,425) (4,615) 1,653 (5,503)
---------------------------------------------------------------------------
EPS - Basic
and Diluted ($0.37) ($0.70) $0.25 ($0.84)
---------------------------------------------------------------------------
Number of Stores 90 95 90 95
---------------------------------------------------------------------------
Retail Square
Footage 347,224 375,557 347,224 375,557
---------------------------------------------------------------------------


Sales for the fourth quarter of 2007 increased 1% or $0.2 million to $22.2 million from $22.0 million in the fourth quarter of 2006. Comparable store sales in the fourth quarter increased 4%. The fourth quarter of 2007 contained 14 weeks whereas the fourth quarter of 2006 contained 13 weeks. Year-to-date sales increased 7% or $9.7 million to $158.1 million from $148.4 million in the prior year. Year-to-date comparable store sales increased 9%. During fiscal 2007, Danier began to realize the benefits of refocusing its merchandise offering and marketing programs on its core customer.

Gross profit as a percentage of revenue during the fourth quarter of 2007 expanded by 460 basis points or 4.6% to 54.5% compared with 49.9% during the fourth quarter last year. Year-to-date gross profit as a percentage of revenue expanded by 160 basis points or 1.6% to 49.7% compared with 48.1% during the same period last year. The expanded gross profit as a percentage of revenue resulted in gross profit dollars increased by 10% for both the fourth quarter and year-to-date.

Net loss for the fourth quarter of 2007 was reduced to $2.4 million, or $0.37 loss per share compared with $4.6 million or $0.70 loss per share during the fourth quarter last year. Year-to-date net earnings increased to $1.7 million, or $0.25 per share, compared with a net loss of $5.5 million or $0.84 loss per share last year.

Operating earnings before depreciation and amortization (EBITDA) for the fourth quarter of 2007 were a loss $2.2 million which represents a $2.1 million decrease from the $4.3 million EBITDA loss during the fourth quarter of 2006. The fourth quarter of last year included a $1.4 million restructuring charge. Year-to-date EBITDA was $8.8 million compared with an EBITDA loss of $1.2 million last year.

Selling, general and administrative expenses ("SG&A") during the fourth quarter of 2007 decreased by $0.8 million. Year-to-date SG&A decreased by $2.4 million on a $9.7 million sales increase.

Danier maintained a strong financial position at year-end with cash of $20.6 million compared with $11.8 million last year.

(1) EBITDA is defined as net earnings (loss) before interest expense (income), income taxes, depreciation and amortization and restructuring costs. EBITDA is a financial metric used by management and some investors to compare companies on the basis of operating results and its ability to generate cash flows to fund its cash requirements, including the Company's capital expenditure program. EBITDA is not a recognized measure for financial presentation under Canadian generally accepted accounting principles ("GAAP"). Non-GAAP earnings measures such as EBITDA do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other issuers. EBITDA is calculated as outlined in the following table:



For the Fourth Quarter Ended For the Year Ended
----------------------------- ------------------------------
June 30, 2007 June 24, 2006 June 30, 2007 June 24, 2006
------------- ------------- ------------- -------------

Net earnings (loss) ($2,425) ($4,615) $1,653 ($5,503)
Income tax (1,195) (2,421) 948 (2,839)
Interest
income - net (306) (159) (427) (445)
Amortization 1,774 1,550 6,583 6,239
Restructuring costs - 1,389 - 1,389
----------------------------- ------------------------------
EBITDA ($2,152) ($4,256) $8,757 ($1,159)
----------------------------- ------------------------------
----------------------------- ------------------------------


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, foreign currency fluctuations which result in increased costs, leather availability and prices, risks associated with foreign sourcing and manufacturing and existing and potential class action legal proceedings, among other factors.

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

For additional information with respect to certain of these and other risks or uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities, 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 90 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 416-695-5259 in the Toronto area or 1-877-888-8019 (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 RETAINED EARNINGS
(thousands of dollars, except per share amounts and number of shares)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Fourth Quarter Ended Year Ended
----------------------- ---------------------
June 30, June 24, June 30, June 24,
2007 2006 2007 2006
----------------------- ---------------------
(unaudited) (unaudited)
(14 weeks) (13 weeks) (53 weeks) (52 weeks)

Revenue $ 22,249 $ 22,028 $ 158,099 $ 148,351
Cost of sales (Note 8) 10,128 11,035 79,565 76,953
----------------------- ---------------------
Gross profit 12,121 10,993 78,534 71,398
Selling, general and
administrative expenses
(Note 8) 16,047 16,799 76,360 78,796
Restructuring costs
(Note 7) - 1,389 - 1,389
Interest income - net (306) (159) (427) (445)
----------------------- ---------------------
Earnings (loss) before
income taxes (3,620) (7,036) 2,601 (8,342)
Provision for (recovery
of) income taxes (Note 9) (1,195) (2,421) 948 (2,839)
----------------------- ---------------------
Net earnings (loss) $ (2,425) $ (4,615) $ 1,653 $ (5,503)
----------------------- ---------------------
----------------------- ---------------------
Retained earnings,
beginning of period $ 29,217 $ 30,147 $ 25,139 $ 32,214
Share repurchases (Note 6) (558) - (558) -
Dividends - (393) - (1,572)
----------------------- ---------------------

Retained earnings, end
of period $ 26,234 $ 25,139 $ 26,234 $ 25,139
----------------------- ---------------------
----------------------- ---------------------

Net Earnings (loss)
per share:
Basic ($0.37) ($0.70) $0.25 ($0.84)
Diluted ($0.37) ($0.70) $0.25 ($0.84)

Weighted average number
of shares outstanding:
Basic 6,475,367 6,549,899 6,532,680 6,547,090
Diluted 6,509,261 6,572,738 6,547,416 6,583,540
Number of shares
outstanding at period end 6,433,754 6,553,254 6,433,754 6,553,254



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

June 30, June 24,
2007 2006
------- -------

ASSETS
Current Assets
Cash $ 20,579 $ 11,833
Accounts receivable 724 402
Income taxes recoverable - 2,485
Inventories (Note 2) 28,561 32,348
Prepaid expenses 1,446 1,026
Future income tax asset 5,112 529
------- -------
56,422 48,623

Other Assets
Property and equipment (Note 3) 23,575 27,293
Goodwill 342 342
Future income tax asset (Note 9) 1,407 5,952
------- -------
$ 81,746 $ 82,210
------- -------
------- -------

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 9,387 $ 10,708
Income taxes payable 1,473 -
Current portion of capital lease obligation (Note 5) 971 911
Accrued litigation provision and related expenses
(Note 10) 18,000 -
Future income tax liability (Note 9) 444 624
------- -------
30,275 12,243
Capital lease obligation (Note 5) 858 1,829
Accrued litigation provision and related expenses
(Note 10) - 18,000
Deferred lease inducements and rent liability 1,849 2,125
Future income tax liability (Note 9) 55 57
------- -------
33,037 34,254
------- -------

SHAREHOLDERS' EQUITY
Share capital (Note 6) 22,044 22,542
Contributed surplus (Note 6) 431 275
Retained earnings 26,234 25,139
------- -------
48,709 47,956
------- -------
$ 81,746 $ 82,210
------- -------
------- -------




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

Fourth Quarter Ended Year Ended
----------------------- ---------------------
June 30, June 24, June 30, June 24,
2007 2006 2007 2006
----------------------- ---------------------
(unaudited) (unaudited)
14 weeks 13 weeks 53 weeks 52 weeks

OPERATING ACTIVITIES
Net earnings (loss) $ (2,425) $ (4,615) $ 1,653 $ (5,503)
Items not affecting cash:
-------------------------
Amortization (Note 8) 1,774 2,366 6,583 7,055
Amortization of deferred
lease inducements and
other (120) (112) (493) (399)
Straight line rent
expense 36 175 172 400
Stock based compensation 26 11 156 45
Future income taxes (139) (39) (220) (807)
Net change in non-cash
working capital items
(Note 11) (7,702) (7,202) 5,626 (2,643)
Proceeds from deferred
lease inducements - - - 286
Repayment of deferred
lease inducement - - (59) -
Discontinued operations - 23 - 23
----------------------- ---------------------
Cash flows from (used in)
operating activities (8,550) (9,393) 13,418 (1,543)
----------------------- ---------------------

FINANCING ACTIVITIES
Subordinate voting
shares issued (Note 6) 24 49 24 49
Subordinate voting shares
repurchased (Note 6) (1,080) - (1,080) -
Dividends - (393) - (1,572)
Proceeds from capital
lease obligation - 2,902 - 2,902
Repayment of obligation
under capital lease (234) (162) (911) (162)
----------------------- ---------------------
Cash flows (used in) from
financing activities (1,290) 2,396 (1,967) 1,217
----------------------- ---------------------

INVESTING ACTIVITIES
Acquisition of capital
assets (920) (1,787) (2,865) (9,034)
Proceeds from sublease - - 160 -
----------------------- ---------------------
Cash flows used in
investing activities (920) (1,787) (2,705) (9,034)
----------------------- ---------------------

Increase (decrease) in cash (10,760) (8,784) 8,746 (9,360)
Cash, beginning of period 31,339 20,617 11,833 21,193
----------------------- ---------------------
Cash, end of period $ 20,579 $ 11,833 $ 20,579 $ 11,833
----------------------- ---------------------
----------------------- ---------------------

Supplementary cash flow
information:
Interest paid 32 15 280 15
Income taxes paid - - - 277



DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2007 and June 24, 2006
(dollar amounts in thousands except per share amounts and where otherwise
indicated)


1. Summary of Significant Accounting Policies:

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

(a) Basis of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary companies. On consolidation, all intercompany transactions and balances have been eliminated.

(b) Year-end:

The fiscal year end of the Company consists of a 52 or 53 week period ending on the last Saturday in June each year. The fiscal year for the financial statements presented is the 53-week period ended June 30, 2007, and comparably the 52-week period ended June 24, 2006.

(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 2 years old from the date of issuance (or "breakage") are recorded in the consolidated statement of earnings (loss). 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 $480 as at June 30, 2007 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.

(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 6). 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 (loss).

(n) Financial instruments:

Cash, accounts receivable, accounts payable and accrued liabilities constitute financial instruments. In the normal course of business the Company also enters into real estate leases for its stores and has in the past entered into capital leases for point-of-sale equipment.

From time-to-time the Company utilizes derivative financial instruments in the management of its foreign currency exposure. Derivative financial instruments are not used for trading purposes. During the fiscal years ended June 30, 2007 and June 24, 2006, the Company purchased its foreign exchange requirements on the spot market and did not enter into any foreign currency exchange forward contracts.

(o) Stock option plan:

The Company has a Stock Option Plan which is described in Note 6 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.

(p) 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 6. 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.

(q) Use of estimates:

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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 litigation award reserves, inventory valuation, realizable value of property and equipment, stock based compensation, future tax assets, goods and services tax, provincial sales tax and income tax provisions. By their nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods could differ materially from those estimated.



2. Inventories:

June 30, 2007 June 24, 2006
--------------- ---------------
Raw materials $ 2,389 $ 1,738
Work-in-process 989 1,000
Finished goods 25,183 29,610
--------------- ---------------
$ 28,561 $ 32,348
--------------- ---------------
--------------- ---------------



3. Property and Equipment:

June 30, 2007 June 24, 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 1,769 5,295 7,064 1,549 5,515
Leasehold
improve-
ments 24,013 14,980 9,033 25,996 15,489 10,507
Furniture
and
equipment 10,736 7,192 3,544 10,804 6,605 4,199
Computer
hardware
and
software 7,578 4,613 2,965 8,353 4,763 3,590
Computer
hardware
and
software
under
capital
lease 2,920 1,182 1,738 2,920 438 2,482
------------------------------- --------------------------------
$53,311 $29,736 $23,575 $56,137 $ 28,844 $ 27,293
------------------------------- --------------------------------
------------------------------- --------------------------------


4. Bank Facility:

Effective June 18, 2007, the Company 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 $35 million, bearing interest at prime plus 0.25%. 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 30, 2008. The Company is required to comply with covenants regarding financial performance.

Security provided includes a security interest over all personal property of the business and a mortgage over the land and building comprising the Company's head office/distribution facility.

5. Capital Lease Obligation:

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



2008 $ 1,061
2009 884
--------------------------------------------------------------------
$ 1,945
Amounts representing interest (at a weighted average annual
rate of 6.2%) 116
--------------------------------------------------------------------
$ 1,829
Current portion 971
--------------------------------------------------------------------
$ 858
--------------------------------------------------------------------
--------------------------------------------------------------------


6. 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 25, 2005 1,224,329 Nominal
Balance June 24, 2006 1,224,329 Nominal
Balance June 30, 2007 1,224,329 Nominal


Subordinate Voting Shares
-------------------------

Number Consideration
-------------------------
Balance June 25, 2005 5,321,825 $22,493
Shares issued upon exercising of stock options 7,100 49
-------------------------
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
-------------------------
-------------------------


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 30, 2007 June 24, 2006
-------------- --------------
Weighted average number of shares for basic
earnings per share calculations 6,532,680 6,547,090
Effect of dilutive options outstanding 14,736 36,450
-------------- --------------
Weighted average number of shares for diluted
earnings per share calculations 6,547,416 6,583,540
-------------- --------------
-------------- --------------


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 416,000 as at June 30, 2007 and 492,500 as at June 24, 2006.

(d) Normal course issuer bid

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. During the year ended June 30, 2007, 123,500 Subordinate Voting Shares were purchased at prevailing market prices for cash consideration of $1,080 and were cancelled. The excess of $558 over the average paid-in value of the shares was charged to retained earnings.

(e) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at June 30, 2007, the Company has reserved 900,175 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on The Toronto Stock Exchange for the five trading days preceding the effective date of the grant. In general, options granted under the Stock Option Plan vest over a period of one year from the grant date for options issued to directors and four years from the grant date for options issued to officers and employees and expire no later than the tenth anniversary of the date of grant. A summary of the status of the Company's Stock Option Plan as of June 30, 2007 and June 24, 2006 and changes during the years ended on those dates is presented below:



June 30, 2007 June 24, 2006
-------------------------- -------------------------
Weighted-average Weighted-average
Stock Options Shares exercise price Shares exercise price
------------------------------------------------ -------------------------

Outstanding at
beginning of year 618,300 $11.15 645,400 $11.13
Granted 70,000 $7.99 - -
Exercised (4,000) $6.02 (7,100) $6.85
Forfeited (79,000) $13.74 (20,000) $11.93
-------------------------- -------------------------
Outstanding at end
of year 605,300 $10.48 618,300 $11.15
-------------------------- -------------------------
Options exercisable
at end of year 541,550 $10.71 577,800 $11.03
-------------------------- -------------------------


The following table summarizes the distribution of these options and the remaining contractual life as at June 30, 2007:



Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Average Weighted
Remaining Average Weighted
Exercise # Contractual Exercise # of Shares Average
Prices Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------
$6.02 12,000 2.2 years $6.02 12,000 $6.02
$6.85 107,300 1.0 years $6.85 107,300 $6.85
$7.80 55,000 9.6 years $7.80 20,000 $7.80
$8.68 15,000 9.8 years $8.68 - $8.68
$10.10 25,000 7.8 years $10.10 12,500 $10.10
$10.40 24,000 3.1 years $10.40 24,000 $10.40
$10.96 25,000 6.1 years $10.96 23,750 $10.96
$11.20 20,000 4.1 years $11.20 20,000 $11.20
$11.25 245,000 0.9 years $11.25 245,000 $11.25
$15.85 77,000 5.1 years $15.85 77,000 $15.85
--------------------------------------- ---------------------
605,300 3.2 years $10.48 541,550 $10.71
--------------------------------------- ---------------------
--------------------------------------- ---------------------


During the year ended June 30, 2007, the Company granted 70,000 stock options with exercise prices ranging from $7.80 to $8.68. The weighted average estimated fair value at the date of grant for the options granted was $4.45 per stock option. There were no options granted during the year ended June 24, 2006. The fair value of each option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions:



Year Ended Year Ended
June 30, 2007 June 24, 2006
--------------------------------
Risk-free interest rate 4.2% -
Dividend yield - -
Expected volatility 37% -
Expected life of options 10 years -


The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes Option Pricing Model requires the use of subjective assumptions including the expected stock price volatility. As a result of the Company's Stock Option Plan having characteristics different from those of traded options, and because changes in the subjective assumptions can have a material effect on the fair value estimate, the Black-Scholes Option Pricing Model does not necessarily provide a reliable single measure of the fair value of options granted.

Prior to fiscal 2004, the Company used settlement accounting to account for its Stock Option Plan. No compensation cost was recorded when stock options were granted. When options were exercised, consideration paid by employees and directors was recorded in the consolidated financial statements as an increase of share capital based on the exercise price of the options.

In accordance with the transitional provisions of CICA Handbook Section 3870, the Company applied the fair value based method to account for stock options on a prospective basis. Therefore, stock options granted during the year ended June 28, 2003 continue to be accounted for using the settlement accounting method and the pro-forma effect on net earnings and earnings per share are disclosed below. Had compensation cost been determined using the fair value based method at the grant date of the stock options awarded to employees and directors during fiscal 2003, the net earnings and earnings per share for the years ended June 30, 2007 and June 24, 2006 would have been reduced to the pro forma amounts indicated in the following table:



Year Ended Year Ended
June 30, 2007 June 24, 2006
--------------------- -----------------------
As Reported Pro forma As Reported Pro forma
--------------------- -----------------------

Net earnings (loss) $1,653 $1,653 ($5,503) ($5,745)
Basic earnings (loss)
per share $0.25 $0.25 ($0.84) ($0.88)
Diluted earnings (loss)
per share $0.25 $0.25 ($0.84) ($0.88)


The pro forma effect on net earnings of the period is not representative of the pro forma effect on net earnings of future periods because it does not take into consideration the pro forma compensation cost related to options awarded prior to June 29, 2002.

The compensation expense recorded for the year ended June 30, 2007 in respect of stock options was $156 (June 24, 2006 - $45). The counterpart is recorded as contributed surplus. Any consideration paid by employees on exercise of stock options is credited to share capital.

(f) Contributed Surplus

Changes in contributed surplus were as follows:



Balance June 25, 2005 $230
Stock-based compensation related to stock options 45
-------
Balance, June 24, 2006 $275
Stock-based compensation related to stock options 156
-------
Balance, June 30, 2007 $431
-------
-------


(g) 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, 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 compensation expense recorded in SG&A for the year ended June 30, 2007 in respect of DSUs was $261 (June 24, 2006 - $44).



The following transactions occurred with respect to the DSU Plan:

Year Ended
----------------------------
Jun 30, 2007 Jun 24, 2006
----------------------------
(# of units) (# of units)

Outstanding at beginning of period 14,904 7,317
Granted 27,000 7,200
Issued as dividend equivalents - 387
Redeemed (2,484) -
----------------------------
Outstanding and redeemable at end of period 39,420 14,904
----------------------------
Danier stock price at end of period $9.17 $7.95
Liability at end of period $361 $118


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

Compensation expense recorded in SG&A for the year ended June 30, 2007 in respect of RSUs was $220 (June 24, 2006 - $14) and the liability was $234 (June 24, 2006 - $14).



The following transactions occurred with respect to the RSU Plan:

Year Ended
------------------------------
Jun 30, 2007 Jun 24, 2006
------------------------------
(# of units) (# of units)

Outstanding at beginning of period 15,238 5,030
Granted 40,000 10,000
Forfeited (5,037) -
Issued as dividend equivalents - 208
Redeemed - -
------------------------------
Outstanding at end of period 50,201 15,238
------------------------------


7. Restructuring costs

During the fourth quarter of 2006, the Company announced that it would reduce its head office staff by 23 individuals and review stores that did not generate acceptable profit levels. A restructuring charge of $1.4 million was recorded in the fourth quarter of 2006 and includes $0.6 million for severance payments and outplacement counselling for the 23 individuals that were part of the head office reduction and $0.8 million for accelerated amortization to write off leasehold improvements and fixtures in connection with the closure of one street-front store, one power centre location and the downsizing of one shopping mall store.

8. Amortization:

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



Year Ended
----------------------------
Jun 30, 2007 Jun 24, 2006
----------------------------
Cost of sales $ 509 $ 549
SG&A 6,074 5,690
Restructuring costs - 816
----------------------------
$ 6,583 $ 7,055
----------------------------
----------------------------


9. Income taxes:

Future income tax asset (liability) is summarized as follows:



June 30, 2007 June 24, 2006
-------------- ---------------
Amortization $ 18 $ (294)
Deferred lease inducements and rent liability 605 709
Capital lease obligation 611 928
Litigation provision and related expenses 4,617 4,504
Stock based compensation 194 -
Other (25) (47)
-------------- ---------------
$ 6,020 $ 5,800
-------------- ---------------
-------------- ---------------


Recorded in the consolidated balance sheets as follows:

June 30, 2007 June 24, 2006
-------------- ---------------
Future income tax asset - current portion 5,112 529
Future income tax asset - long term portion 1,407 5,952
Future income tax liability - current portion (444) (624)
Future income tax liability - long term portion (55) (57)
-------------- ---------------
Net future tax asset $ 6,020 $ 5,800
-------------- ---------------
-------------- ---------------


The Company's effective income tax rate consists of the following:

June 30, 2007 June 24, 2006
---------------- ---------------
Combined basic federal and provincial
average statutory rate 35.0% 35.0%
Non-deductible expenses 4.5% (1.0%)
Future federal and provincial rate changes (2.2%) (1.3%)
Tax rate differential on loss carryback - 2.7%
Other (0.9%) (1.4%)
---------------- ---------------
36.4% 34.0%
---------------- ---------------
---------------- ---------------


10. Litigation provision and related expenses:

June 30, 2007 June 24, 2006
------------- -------------
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 have successfully appealed this decision to the Court of Appeal for Ontario; a decision on a further appeal taken by the Plaintiffs to the Supreme Court of Canada is, as noted below, under reserve.

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

A hearing to determine the awarding of costs related to the certification and summary judgment motion which was decided in 2000 and 2001 was held in December 2004. In June 2005, partial indemnity costs were awarded to the Plaintiffs for these motions in an amount to be assessed. The Company has appealed this decision and the appeal is still waiting to be heard.

In June 2004, a Notice of Appeal was filed by the Company and two of its Senior Officers from the trial judge's decision. The appeal was heard by the Ontario Court of Appeal in June 2005 and in December 2005, the Court of Appeal unanimously allowed the appeal on three separate grounds, set aside the trial decision and dismissed the class proceeding. As a result, the Company and its Senior Officers are not required to pay any of the damages, interest or costs awarded by the trial judge. The Court of Appeal's decision stated that the Company had met its disclosure obligations in the Prospectus and during the IPO process and the trial judge erred in finding that any misrepresentation had occurred. 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 in March 2007. The Court reserved its decision. It is anticipated the decision will likely be released before the end of calendar 2007.

Based solely on the information available at the time, if the damages, costs and interest awarded by the trial judge had been paid at the fiscal 2005 year-end, the Company estimated this amount to be approximately $18 million. During the fourth quarter of 2004, the Company recorded an expense and set up a provision of $15 million to reflect the trial judge's decision. This provision was subsequently increased by $3 million to $18 million during the fourth quarter of 2005 to take into account the trial judge's award of costs which was released in May, 2005. The provision for recovery of income taxes related to the trial judge's award was based on the entire $18 million provision and the provision did not take into account the potential results of the appeal, any possible insurance recoveries or future tax adjustments. The provision for the damages award, costs and interest and the income tax recovery were based on management's best estimate and is subject to adjustment when all facts are known and all issues are resolved. The possible adjustment could be significant. Although the Court of Appeal has set aside the trial judge's decision, the provision will remain until the Supreme Court of Canada makes a final determination.

11. Changes in non-cash operating working capital items:



Year Ended
-----------------------------
Jun 30, 2007 Jun 24, 2006
-----------------------------

Decrease (increase) in:
Accounts receivable ($322) $192
Inventories 3,787 (3,317)
Prepaid expenses (420) (510)
Income taxes recoverable 2,485 (1,546)
Increase (decrease) in:
Accounts payable and accrued liabilities (1,377) 2,538
Income taxes payable 1,473 -
-----------------------------
$5,626 ($2,643)
-----------------------------
-----------------------------


12. Contingencies & Guarantees:

(a) Legal proceedings

In addition to the class action matter discussed in Note 10, 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 consolidated financial statements for these guarantees:

(i) In the ordinary course of business, the Company has agreed to indemnify its lenders under its credit facility against certain costs or losses resulting from changes in laws and regulations or from a default in repaying a borrowing. These indemnifications extend for the term of the credit facility and do not provide any limit on the maximum potential liability. Historically, the Company has not made any indemnification payments under such agreements.

(ii) In the ordinary course of business, the Company has provided indemnification commitments to certain counterparties in matters such as real estate leasing transactions, director and officer indemnification agreements and certain purchases of fixed assets such as computer software. These indemnification agreements generally require the Company to compensate the counterparties for costs or losses resulting from legal action brought against the counterparties related to the actions of the Company. The terms of these indemnification agreements will vary based on the contract and generally do not provide any limit on the maximum potential liability.

(iii) The Company sublet one location during the first quarter of fiscal 2007 and one location during fiscal 2004 and has provided the landlords with guarantees in the event the sub-tenants default on their obligation to pay rent. The remaining terms of the guarantees are between 0.5 and 1.75 years and the Company's maximum exposure is $314.

13. Commitments:

(a) Operating and capital leases:

Minimum rentals for the next five fiscal years and thereafter, excluding rentals based upon revenue are as follows:



Operating Capital
---------- --------
2008 $10,745 $1,061
2009 9,528 884
2010 7,493 -
2011 6,361 -
2012 4,733 -
Thereafter 8,197 -


(b) Letters of credit:

The Company had outstanding letters of credit in the amount of $10,389 (June 24, 2006 - $7,266) for the importation of finished goods inventories to be received.

14. Financial Instruments:

Fair value estimates are made at a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision.

The carrying value of the Company's cash, accounts receivable and accounts payable and accrued liabilities approximates their fair value due to their short term maturities. Based on available market information, the fair value of the capital lease obligation approximates its carrying value.

The Company is exposed to credit risk on its accounts receivable from licensees and to corporate customers through sales made by the direct sales division. Accounts receivable are net of applicable allowance for doubtful accounts, which is established based on the specific credit risks associated with the licensee, each corporate customer and other relevant information.

The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. From time-to-time the Company may enter into foreign exchange forward contracts to manage foreign exchange risk associated with these purchases. As at June 30, 2007, and as at June 24, 2006 the Company did not have any outstanding foreign exchange forward contracts to purchase U.S. dollars.

The Company is exposed to interest rate risk based on the use of the credit facilities which bears interest at floating rates.

15. Segmented information:

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

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
    and Chief Financial Officer
    (416) 762-8175 ext. 328
    (416) 762-7408 (FAX)
    Email: bryan@danier.com
    Website: www.danier.com