Danier Leather Reports Fiscal 2008 Fourth Quarter and Year End Results


TSX SYMBOL: DL

Aug 20, 2008 - 14:45

TORONTO, ONTARIO--(Marketwire - Aug. 20, 2008) - Danier Leather Inc. (TSX:DL) today announced its consolidated financial results for the fourth quarter and fiscal year ended June 28, 2008.

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



-------------------------------------------------------
Quarter Ended Year Ended
---------------------------------------------------------------------------
Jun 28, 2008 Jun 30, 2007 Jun 28, 2008 Jun 30, 2007
---------------------------------------------------------------------------
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
---------------------------------------------------------------------------
Sales $27,497 $22,249 $163,550 $158,099
---------------------------------------------------------------------------
EBITDA(1) (2,467) (2,152) 18,477 8,757
---------------------------------------------------------------------------
Adjusted EBITDA(1) (2,467) (2,152) 3,757 8,757
---------------------------------------------------------------------------
Net Earnings (Loss) (3,022) (2,425) 12,892 1,653
---------------------------------------------------------------------------
Adjusted Net
Earnings (Loss)(2) (3,022) (2,425) (1,828) 1,653
---------------------------------------------------------------------------
EPS - Basic ($0.48) ($0.37) $2.04 $0.25
---------------------------------------------------------------------------
EPS - Diluted ($0.48) ($0.37) $2.03 $0.25
---------------------------------------------------------------------------
Number of Stores 91 90 91 90
---------------------------------------------------------------------------
Retail Square
Footage 348,504 347,224 348,504 347,224
---------------------------------------------------------------------------

 


Sales for the fourth quarter of 2008 increased 24% or $5.2 million to $27.5 million from $22.3 million in the fourth quarter of 2007. Comparable store sales in the fourth quarter increased 25%. The fourth quarter of 2008 contained 13 weeks whereas the fourth quarter of 2007 contained 14 weeks. On a comparable week basis, which compares the 13 week period ended June 28, 2008 to the comparable 13 week period ended June 30, 2007, sales increased 42% and comparable store sales increased 43%. Year-to-date sales increased 3% or $5.5 million to $163.6 million while comparable store sales increased 6%.

During the last half of the fiscal year, Danier adjusted its promotions, increased markdowns and offered attractive price points to customers. Although the average sale and gross margin decreased, the promotions generated a significant increase in sales and customer traffic and helped reduce inventory that had been built up during the first half of the fiscal year.

Danier finished its fiscal year with a $1.2 million reduction in inventory compared with the prior year and a strong cash balance of $19.9 million.

Gross profit dollars during the fourth quarter of 2008 increased by 2%. Gross profit as a percentage of revenue decreased to 45.1% compared with 54.5% during the fourth quarter of 2007. Year-to-date gross profit as a percentage of revenue decreased to 46.6% compared with 49.7% during fiscal 2007. The gross margin rate decline was to a greater extent due to management's decision to increase markdowns during the last half of the year to stimulate sales and convert inventory to cash and to a lesser extent, higher overseas sourcing costs including higher leather prices, a reduction of an export rebate in China and appreciation of the Chinese Yuan.

Net loss for the fourth quarter of 2008 was $3.0 million, or $0.48 loss per share, compared with a net loss of $2.4 million, or $0.37 loss per share, during the fourth quarter last year. Year-to-date net earnings were $12.9 million, or $2.03 per diluted share, compared with net earnings of $1.7 million or $0.25 per share last year. Excluding the reversal of the litigation provision of $18.0 million, recovery of legal and expert fees of $2.0 million and income taxes of $5.3 million, the year-to-date adjusted net loss(2) was $1.8 million or $0.29 loss per share.

Adjusted EBITDA(1) loss for the fourth quarter of 2008 was $2.5 million compared with an adjusted EBITDA loss of $2.2 million during the fourth quarter last year. Year-to-date adjusted EBITDA, which excludes the reversal of the litigation provision and recovery of legal and professional fees, was $3.8 million compared with $8.8 million last year.

Selling, general and administrative expenses ("SG&A") during the fourth quarter of 2008 increased by 3% or $0.5 million, on a $5.2 million sales increase. Year-to-date SG&A increased by 3% or $2.2 million to $78.6 million or 48.0% of sales compared with $76.4 million or 48.3% of sales last year.

Danier maintained a strong financial position at year-end with working capital $38.6 million compared with $26.1 million last year.

(1) EBITDA is defined as net earnings (loss) before interest expense (income), income taxes, and amortization. Adjusted EBITDA is defined as net earnings (loss) before interest expense (income), income taxes, amortization and litigation provision (recovery) and related expenses. EBITDA and Adjusted EBITDA are financial metrics used by management and some investors to compare companies on the basis of ongoing operating results before taxes, interest expense (income), amortization and litigation provision (recovery) and related expenses and its ability to incur and service debt. EBITDA and Adjusted EBITDA are not recognized measures for financial presentation under Canadian generally accepted accounting principles ("GAAP"). Non-GAAP earnings measures such as EBITDA and Adjusted EBITDA do not have any standardized meaning prescribed by Canadian GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with GAAP. EBITDA and Adjusted EBITDA are calculated as outlined in the following table:



For the Fourth
Quarter Ended For the Year Ended
--------------------------- ---------------------------
Jun 28, 2008 Jun 30, 2007 Jun 28, 2008 Jun 30, 2007
------------ ------------ ------------ ------------
13 weeks 14 weeks 52 weeks 53 weeks
Net earnings (loss) ($3,022) ($2,425) $12,892 $1,653
Income tax (1,070) (1,195) (650) 948
Interest income -
net (46) (306) 81 (427)
Amortization 1,671 1,774 6,154 6,583
--------------------------- ---------------------------
EBITDA (2,467) (2,152) 18,477 8,757
Litigation
provision (recovery)
and related
expenses - - (20,016) -
Income tax
provision related
to litigation
provision
(recovery) and
related expenses - - 5,296 -
-------------------------------------------------------
Adjusted EBITDA ($2,467) ($2,152) $3,757 $8,757
--------------------------- ---------------------------
--------------------------- ---------------------------

 


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



For the Fourth
Quarter Ended For the Year Ended
--------------------------- ---------------------------
Jun 28, 2008 Jun 30, 2007 Jun 28, 2008 Jun 30, 2007
------------ ------------ ------------ ------------
13 weeks 14 weeks 52 weeks 53 weeks
Net earnings (loss) ($3,022) ($2,425) $12,892 $1,653
Litigation
provision
(recovery) and
related expenses - - (20,016) -
Income tax
provision related
to litigation
provision
(recovery) and
related expenses - - 5,296 -
--------------------------- ---------------------------
Adjusted net
earnings (loss) ($3,022) ($2,425) ($1,828) $1,653
--------------------------- ---------------------------
--------------------------- ---------------------------

 


Note: This press release may contain forward-looking statements which reflect the current view of Danier with respect to the Company's objectives, plans, goals, strategies, future growth, results of operations, financial and operating performance and business prospects and opportunities. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved. Any statements in this press release containing forward-looking information are qualified by these cautionary statements.

Forward-looking statements are based on information available at the time they are made, underlying assumptions made by management and management's good faith belief with respect to future events, and are subject to inherent risks and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, fashion and apparel and leather industry risks that can affect demand for the Company's products and inventory markdowns, a real or perceived slowdown in the general economy which can result in a reduction in consumer spending and can affect demand for the Company's products, changes in consumer shopping patterns away from shopping malls and power centres, unseasonably hot weather or severe or unusual weather that prevents customers from going to the Company's stores, seasonality, heightened competition including new competitors and expansion of current competitors, foreign currency fluctuations which result in increased costs, leather availability and prices, consumer demand, disruptions in credit markets, risks associated with foreign sourcing and manufacturing, existing and potential legal proceedings, ability to successfully implement the Company's business strategy, war and acts of terrorism, higher utility and fuel prices which can result in increased costs, the ability of the Company to attract and retain key executives and key employees, the ability of vendors to maintain, support and upgrade management information systems, catastrophic or other events that impact the use of the Company's head office and distribution centre, increased inflation and interest rates, changes or disruptions in the securities markets, ability of the Company to obtain new locations or renew existing locations at existing or favourable lease terms, changes to the regulatory and economic environment in which the Company operates now and in the future, including changes in accounting policies or pronouncements introduced by regulatory authorities, changes in the Company's tax liabilities, either through changes in tax laws or future assessments, and performance of third party service providers, among other things.

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

For additional information with respect to certain of these and other risks or uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities, including the Company's annual information form and 2007 annual report, which are available on SEDAR at www.sedar.com and in the Investor Relations section of the Company's website at www.danier.com. Additional risks and uncertainties not presently known to the Company or that Danier currently believes to be less significant may also adversely affect the Company. Danier disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, and retailer of high-quality leather and suede clothing and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available only at its 91 shopping mall, street-front, and power centre stores, or through its corporate sales division. Danier's products are also available at Festival City Mall in Dubai. For more information about the Company and our products, see www.danier.com.

Investors and analysts are invited to participate in a conference call today at 4:00 PM Eastern Time to discuss the results. Please dial 416-695-6324 in the Toronto area or 1-877-323-2090 (rest of Canada and the U.S.) and quote the Danier Leather Inc. conference call with chairperson Jeffrey Wortsman at least five minutes prior to the call. The call will also be webcast at www.danier.com or at www.marketwire.com.



DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE
EARNINGS (LOSS)
(thousands of dollars, except per share amounts and number of shares)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Fourth Quarter Ended Year Ended
--------------------------- --------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------------- --------------------------
(unaudited) (unaudited)
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
Revenue $ 27,497 $ 22,249 $ 163,550 $ 158,099
Cost of sales
(Note 9) 15,092 10,128 87,365 79,565
--------------------------- --------------------------
Gross profit 12,405 12,121 76,185 78,534
Selling, general
and administrative
expenses (Note 9) 16,543 16,047 78,582 76,360
Interest expense
(income) - net (46) (306) 81 (427)
-------------------------- --------------------------
Earnings (loss)
before undernoted
item and
income taxes (4,092) (3,620) (2,478) 2,601
Litigation
provision (recovery)
and related
expenses (Note 11) - - (20,016) -
--------------------------- --------------------------
Earnings (loss)
before income taxes (4,092) (3,620) 17,538 2,601
Provision for
(recovery of)
income taxes
(Note 10)
Current (726) (1,056) 192 1,168
Future (344) (139) 4,454 (220)
--------------------------- --------------------------
(1,070) (1,195) 4,646 948
--------------------------- --------------------------
Net earnings (loss)
and comprehensive
earnings (loss) ($3,022) ($2,425) $ 12,892 $ 1,653
--------------------------- --------------------------
--------------------------- --------------------------

Net earnings (loss)
per share:
Basic ($0.48) ($0.37) $2.04 $0.25
Diluted ($0.48) ($0.37) $2.03 $0.25

Weighted average
number of
shares
outstanding:
Basic 6,276,429 6,475,367 6,313,583 6,532,680
Diluted 6,278,399 6,509,261 6,335,873 6,547,416
Number of shares
outstanding at
period end 6,276,429 6,433,754 6,276,429 6,433,754

See accompanying notes to the consolidated financial statements


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

June 28, June 30,
2008 2007
--------- ---------
ASSETS
Current Assets
Cash $ 19,882 $ 20,579
Accounts receivable 755 724
Income taxes recoverable 8 -
Inventories (Note 4) 27,404 28,561
Prepaid expenses 1,242 1,446
Future income tax asset (Note 10) 562 5,112
--------- ---------
49,853 56,422

Other Assets
Property and equipment (Note 5) 21,312 23,575
Goodwill 342 342
Future income tax asset (Note 10) 1,556 1,407
--------- ---------
$ 73,063 $ 81,746
--------- ---------
--------- ---------
LIABILITIES
Current Liabilities
Accounts payable and
accrued liabilities $ 9,845 $ 9,387
Income taxes payable - 1,473
Current portion of capital lease
obligation (Note 7) 858 971
Accrued litigation provision and
related expenses (Note 11) - 18,000
Future income tax liability (Note 10) 502 444
--------- ---------
11,205 30,275

Capital lease obligation (Note 7) - 858
Deferred lease inducements and
rent liability 1,675 1,849
Future income tax liability (Note 10) 50 55
--------- ---------
12,930 33,037
--------- ---------
SHAREHOLDERS' EQUITY
Share capital (Note 8) 21,409 22,044
Contributed surplus 548 431
Retained earnings 38,176 26,234
--------- ---------
60,133 48,709
--------- ---------
$ 73,063 $ 81,746
--------- ---------
--------- ---------

See accompanying notes to the consolidated financial statements


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

Fourth Quarter Ended Year Ended
--------------------------- ------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------------- ------------------------
(unaudited) (unaudited)
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
OPERATING ACTIVITIES
Net earnings (loss) ($3,022) ($2,425) $12,892 $1,653
Items not
affecting cash:
Amortization (Note 9) 1,671 1,774 6,154 6,583
Amortization of
deferred lease
inducements and
other (123) (120) (453) (493)
Straight line
rent expense 35 36 116 172
Stock based
compensation 36 26 117 156
Accrued litigation
provision (recovery)
and related
expenses (Note 11) - - (18,000) -
Future income taxes (344) (139) 4,454 (220)
Net change in
non-cash working
capital items
(Note 12) 4,263 (7,702) 363 5,626
Proceeds from
deferred lease
inducements 107 - 107 -
Repayment of
deferred lease
inducement - - - (59)
--------------------------- ------------------------
Cash flows
from (used in)
operating activities 2,623 (8,550) 5,750 13,418
--------------------------- ------------------------

FINANCING ACTIVITIES
Subordinate voting
shares issued
(Note 8) - 24 80 24
Subordinate voting
shares repurchased
(Note 8) - (1,080) (1,665) (1,080)
Repayment of
obligation under
capital lease (249) (234) (971) (911)
--------------------------- ------------------------
Cash flows used
in financing
activities (249) (1,290) (2,556) (1,967)
--------------------------- ------------------------

INVESTING ACTIVITIES
Acquisition of
capital assets (758) (920) (3,891) (2,865)
Proceeds from
sublease - - - 160
--------------------------- ------------------------
Cash flows used in
investing activities (758) (920) (3,891) (2,705)
--------------------------- ------------------------

Increase (decrease)
in cash 1,616 (10,760) (697) 8,746
Cash, beginning
of period 18,266 31,339 20,579 11,833
--------------------------- ------------------------
Cash, end of period $19,882 $20,579 $19,882 $20,579
--------------------------- ------------------------
--------------------------- ------------------------

Supplementary cash
flow information:
Interest paid 17 32 414 280
Income taxes paid - - 1,679 -

See accompanying notes to the consolidated financial statements


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

Fourth Quarter Ended Year Ended
--------------------------- ------------------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
--------------------------- ------------------------
(unaudited) (unaudited)
(13 weeks) (14 weeks) (52 weeks) (53 weeks)
SHARE CAPITAL
Balance, beginning
of period $21,409 $22,542 $22,044 $22,542
Shares repurchased - (522) (715) (522)
Shares issued on
exercise of
stock options - 24 80 24
--------------------------- ------------------------
Balance, end
of period $21,409 $22,044 $21,409 $22,044
--------------------------- ------------------------

CONTRIBUTED SURPLUS
Balance, beginning
of period $512 $405 $431 $275
Stock-based
compensation
related to
stock options 36 26 117 156
--------------------------- ------------------------
Balance, end of
period $548 $431 $548 $431
--------------------------- ------------------------

RETAINED EARNINGS
Balance, beginning
of period $41,198 $29,217 $26,234 $25,139
Net earnings (loss) (3,022) (2,425) 12,892 1,653
Share repurchases - (558) (950) (558)
--------------------------- ------------------------
Balance, end
of period $38,176 $26,234 $38,176 $26,234
--------------------------- ------------------------

ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance, beginning
of period $- $- $- $-
Adjustment to
opening balance due
to the new
accounting policies
adopted regarding
financial instruments - - - -
--------------------------- ------------------------
Balance, end of
period $- $- $- $-
--------------------------- ------------------------
TOTAL SHAREHOLDERS'
EQUITY $60,133 $48,709 $60,133 $48,709
--------------------------- ------------------------
--------------------------- ------------------------

See accompanying notes to the consolidated financial statements


DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 28, 2008 and June 30, 2007
(dollar amounts in thousands except per share amounts and where
otherwise indicated)

 


Danier Leather Inc. ("Danier" or "the Company") is incorporated under the Business Corporations Act (Ontario) and is a vertically integrated designer, manufacturer and retailer of leather apparel and accessories.

1. Summary of Significant Accounting Policies:

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

(a) Basis of consolidation:

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

(b) Year-end:

The fiscal year end of the Company consists of a 52 or 53 week period ending on the last Saturday in June each year. The fiscal year for the consolidated financial statements presented is the 52-week period ended June 28, 2008, and comparably the 53-week period ended June 30, 2007.

(c) Revenue recognition:

Revenue includes sales to customers through stores operated by the Company, sales to corporate customers through the Company's direct sales division and sales to third party licensees. Sales to customers through stores operated by the Company are recognized at the time the transaction is entered into the point-of-sale register net of returns. Sales to corporate customers and third party licensees are recognized at the time of shipment. Revenue from gift cards is recognized at the time of redemption. When a customer purchases a gift card a liability is recorded based on the dollar value of the gift card purchased. Unredeemed balances on gift cards that are more than two years old from the date of issuance (or "breakage") are recorded in the consolidated statement of earnings. Historically, breakage has not been material.

(d) Cash:

Cash consists of cash on hand, bank balances, and money market investments with maturities of three months or less.

(e) Inventories:

Inventories are valued at the lower of cost or market. Cost is determined using the weighted average cost method. For raw materials, cost includes invoice cost, duties, freight and brokerage. For finished goods purchased from third party vendors, cost includes invoice cost, overhead, duties, freight and brokerage. For finished goods manufactured by the Company, cost includes raw materials, labour and overhead. For finished goods and work-in-process, market is defined as the expected selling price; for raw materials, market is defined as replacement cost. In addition, a provision is recorded to reduce the cost of inventories for obsolete, damaged and slow moving items to their estimated net realizable values.

(f) Property and equipment:

Property and equipment are recorded at cost and annual amortization is provided at the following rates:



Building 4% declining balance
Furniture and equipment 20% declining balance
Computer hardware and software 30% declining balance
Computer hardware and software under capital lease 30% declining balance
Visual merchandising equipment 2 years straight line

 


Leasehold improvements are amortized on a straight line basis over the term of the lease, unless the Company has decided to terminate the lease, at which time the unamortized balance is written off.

Property and equipment are reviewed for impairment at least annually or when events or circumstances indicate their carrying value exceeds the sum of the undiscounted cash flows expected from their use and eventual disposal. For purposes of annually reviewing store assets for impairment, asset groups are reviewed at their lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. Therefore, store net cash flows are grouped together by regional areas where a number of stores operate within close proximity to one another. An impairment loss is recognized when the carrying amount of property and equipment is not recoverable and exceeds its estimated fair value.

(g) Goodwill:

Goodwill represents the excess of the cost of acquisition over the fair market value of the identifiable assets acquired. Goodwill is not amortized, but is tested for impairment at least annually at year-end. If required, any impairment in the value of goodwill would be written off against earnings.

(h) Deferred lease inducements and rent liability:

Deferred lease inducements represent cash benefits received from landlords pursuant to store lease agreements. These lease inducements are amortized against rent expense over the term of the lease, not exceeding 10.5 years.

Rent liability represents the difference between minimum rent as specified in the lease and rent calculated on a straight line basis.

(i) Store opening costs:

Expenditures associated with the opening of new stores, other than furniture and fixtures, equipment, and leasehold improvements are expensed as incurred.

(j) Prepaid advertising production costs:

Advertising production costs for newspaper flyer inserts and other media are generally incurred several months before the advertising occurs. These expenses are deferred and expensed the first time the advertising occurs. Prepaid advertising production costs were $332 as at June 28, 2008 (June 30, 2007 -$480) and are included in prepaid expenses on the consolidated balance sheet.

(k) Income taxes:

Income taxes are determined using the asset and liability method of accounting. This method recognizes future tax assets and liabilities that arise from differences between the accounting basis of the Company's assets and liabilities and their corresponding tax basis. Future taxes are measured at the balance sheet date using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The Company provides a valuation allowance for future tax assets when it is more likely than not that some or all of the future tax assets will not be realized.

(l) Earnings per share:

Basic earnings per share is calculated by dividing the net earnings available to shareholders by the weighted average number of shares outstanding during the year (see Note 8). Diluted earnings per share is calculated using the treasury stock method, which assumes that all outstanding stock options with an exercise price below the average monthly market price are exercised and the assumed proceeds are used to purchase the Company's shares at the average monthly market price during the fiscal year.

(m) Translation of foreign currencies:

Accounts in foreign currencies are translated into Canadian dollars. Monetary balance sheet items are translated at the rates of exchange in effect at year-end and non-monetary items are translated at historical exchange rates. Revenues and expenses are translated at the rates in effect on the transaction dates or at the average rates of exchange for the reporting period. The resulting net gain or loss is included in the consolidated statement of earnings.

(n) Stock option plan:

The Company has a Stock Option Plan which is described in Note 8 where options to purchase Subordinate Voting Shares are issued to directors, officers and employees. Effective with the commencement of its 2004 fiscal year, the Company accounts for stock-based compensation using the fair-value method. The fair value of options granted are estimated at the date of grant using the Black-Scholes Option Pricing Model and is recognized as an expense over the vesting period of the stock option with an offsetting credit to contributed surplus. When stock options are subsequently exercised, share capital is increased by the sum of the consideration paid together with the related portion previously added to contributed surplus when compensation costs were charged against income. The Company continues to use settlement accounting to account for stock options granted prior to June 29, 2003.

(o) Restricted Share Units and Deferred Share Units:

The Company has restricted share unit ("RSU") and deferred share unit ("DSU") Plans, which are described in Note 8. RSU and DSU Plans are settled in cash and are recorded as liabilities. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recorded as a charge to selling, general and administrative ("SG&A") expense over the vesting period of the award. At the end of each financial period, changes in the Company's payment obligation due to changes in the market value of the Subordinate Voting Shares are recorded as a charge to SG&A expense. Dividend equivalent grants are recorded as a charge to SG&A in the period the dividend is paid.

(p) Use of estimates:

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's historical experience, best knowledge of current events and actions that the Company may undertake in the future. Significant areas requiring the use of management estimates relate to the determination of inventory valuation, realizable value of property and equipment and goodwill, stock based compensation, future tax assets, goods and services tax, provincial sales tax, breakage of gift cards and income tax provisions. By their nature, these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements of future periods could differ materially from those estimated.

2. Implementation of New Accounting Standards:

On July 1, 2007, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"). As provided under the standards, the Company adopted these recommendations prospectively without restatement of the prior period financial statements. There were no transitional adjustments resulting from the adoption of these standards.

CICA Section 1530 - Comprehensive Income

This CICA Handbook section introduced a statement of comprehensive income which is included in the consolidated financial statements. Comprehensive income represents the change in equity during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity other than those resulting from investments by owners and distributions to owners. The adoption of this standard has had no impact on the financial results of the Company. Since comprehensive earnings equal the net earnings for the period ended June 28, 2008, the consolidated statement of comprehensive earnings has been combined with the consolidated statements of earnings.

CICA Section 3251 - Equity

This CICA Handbook section, which replaced Section 3250 - Surplus, establishes standards for the presentation of equity and changes in equity during the reporting period and requires the Company to present separately equity components and changes in equity arising from (i) net earnings; (ii) other comprehensive income; (iii) other changes in retained earnings; (iv) changes in contributed surplus; (v) changes in share capital; and (vi) changes in reserves. New consolidated statements of changes in shareholders' equity are included in these financial statements.

CICA Section 3855 - Financial Instruments - Recognition and Measurement and CICA Section 3861 - Financial Instruments - Disclosure and Presentation

These CICA Handbook sections establish standards for recognition and measurement as well as disclosure and presentation of financial assets, financial liabilities and non-financial derivatives. CICA Section 3855 requires that financial assets and financial liabilities, including derivatives, be recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of the financial instrument or non-financial derivative contract. It also requires that all financial instruments be classified into a defined category, namely (a) held-to-maturity, (b) held-for-trading, (c) available-for-sale, (d) loans and receivables and (e) other financial liabilities, depending on the Company's stated intention and/or historical practice.

All financial instruments are required to be measured at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at cost or amortized cost. Gains and losses on held-for-trading financial assets and liabilities are recognized in net earnings in the period in which they arise. Unrealized gains and losses, including changes in foreign exchange rates on available-for-sale financial assets are recognized in comprehensive income until the financial assets are derecognized or impaired, at which time any unrealized gains or losses are recorded in net earnings. Transaction costs for assets classified as "held-for-trading" are recognized in net earnings as incurred and transaction costs for other assets are added to the financial asset on initial recognition and are recognized in net earnings when the asset is derecognized or impaired.

The adoption of these new standards resulted in the following changes in the classification and measurement of the Company's financial instruments, previously recorded at cost:

Cash is classified as "held-for-trading" and is measured at fair value which approximates cost. Money market investments included in cash are marked-to-market through net earnings and changes in fair value are recorded as interest income at each period end. This change had no impact on the Company's consolidated financial statements.

Accounts receivable are classified as "loans and receivables" and are recorded at cost, which at initial measurement corresponds to fair value. After initial fair value measurement, accounts receivable are measured at cost. This change had no impact on the Company's consolidated financial statements.

Bank indebtedness and accounts payable and accrued liabilities are classified as "other financial liabilities". They are initially measured at fair value and subsequent measurements are recorded at cost or amortized costs using the effective interest rate method. This change had no impact on the Company's consolidated financial statements.

From time-to-time the Company utilizes derivative financial instruments in the management of its foreign currency exposure. Derivative financial instruments are not used for trading purposes. As at June 28, 2008 and June 30, 2007, the Company did not have any outstanding foreign currency exchange forward contracts.

Embedded derivatives (elements of contracts whose cash flows move independently from the host contract) are required to be separated and measured at fair values if certain criteria are met. The Company selected June 30, 2002 as the transition date for embedded derivatives and, as such, only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives. As at June 28, 2008 and June 30, 2007, the Company did not have any outstanding contracts or financial instruments with embedded derivatives.

CICA Section 3865 - Hedges

This CICA Handbook section establishes criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of a net investment in a self-sustaining foreign operation. Treatment of changes in the fair value of each type of hedge is determined by its classification and the portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income. The determination of the effectiveness of each hedging relationship is required under the section with any ineffectiveness immediately recognized in income. The Company does not have any outstanding hedging contracts as at June 28, 2008 and June 30, 2007.

Effective for the fiscal year ended June 28, 2008, the Company has early adopted the CICA Handbook Section 1535 - Capital Disclosures, CICA Handbook Section 3862 - Financial Instruments - Disclosures, and CICA Handbook Section 3863 - Financial Instruments - Presentation, as described below:

CICA Section 1535 - Capital Disclosures

This CICA Handbook section establishes guidelines for the disclosure of information regarding a company's capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital are required. In addition, under this section a company is required to disclose whether during the period it complied with externally imposed capital requirements to which it is subject, and when the company has not complied with such externally imposed capital requirements, the consequences of such non-compliance. This section relates to disclosure and presentation only and did not have an impact on the Company's financial results. See Note 16.

CICA Section 3862 - Financial Instruments Disclosure and CICA Section 3863 - Financial Instruments Presentation

CICA Handbook Section 3862 revises the current standards on financial instrument disclosure and places an increased emphasis on disclosures regarding the risks associated with both recognized and unrecognized financial instruments and how these risks are managed. CICA Handbook Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives and provides additional guidance for classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. These sections relate to disclosure and presentation only and did not have an impact on the Company's financial results. See Note 15.

3. Recent Accounting Pronouncements:

CICA Section 1400 - General Standards of Financial Statement Presentation
The CICA amended this Handbook section to include requirements to assess and disclose an entity's ability to continue as a going concern when preparing financial statements. In assessing whether the going concern assumption is appropriate, management must take into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet. The Company will adopt this standard in the first quarter of its fiscal year ended June 27, 2009. The Company does not expect the implementation of this new section to have a significant impact on its consolidated financial statements.

CICA Section 3031 - Inventories

This CICA Handbook section issued in June 2007 replaces Section 3030 of the same name and harmonizes the Canadian standards related to inventories with International Financial Reporting Standards ("IFRS"). This section provides changes to the measurement and more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing; and expands the disclosure requirements to increase transparency. These recommendations are effective for fiscal years beginning on or after January 1, 2008. The Company will adopt this standard in the first quarter of its fiscal year ended June 27, 2009. The Company is currently assessing the impact of this new standard on its consolidated financial statements.

CICA Section 3064 - Goodwill and Intangible Assets

This CICA Handbook section issued in February 2008 replaces Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new standard also provides guidance for the recognition of internally developed intangible assets, including assets developed from research and development activities, ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. The new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has evaluated the new section and currently does not expect the implementation of this new section to have a significant impact on its consolidated financial statements.

International Financial Reporting Standards ("IFRS")

The Canadian Accounting Standards Board has confirmed that the use of IFRS will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canadian GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011 with comparative figures presented on the same basis. The Company is currently working on a conversion plan towards IFRS but it is too early to assess the financial impact of the conversion at this point.

4. Inventories:



June 28, 2008 June 30, 2007
------------- -------------
Raw materials $ 3,332 $ 2,389
Work-in-process 892 989
Finished goods 23,180 25,183
------------- -------------
$ 27,404 $ 28,561
------------- -------------
------------- -------------

5. Property and Equipment:

June 28, 2008 June 30, 2007
----------------------------- ------------------------------
Cost Accumulated Net Book Cost Accumulated Net Book
Amortization Value Amortization Value
----------------------------- ------------------------------
Land $ 1,000 $ - $ 1,000 $ 1,000 $ - $ 1,000
Building 7,064 1,981 5,083 7,064 1,769 5,295
Leasehold
improvements 24,315 15,861 8,454 24,013 14,980 9,033
Furniture and
equipment 10,415 6,994 3,421 10,736 7,192 3,544
Computer
hardware
and software 4,014 1,876 2,138 7,578 4,613 2,965
Computer
hardware
and software
under capital
lease 2,920 1,704 1,216 2,920 1,182 1,738
----------------------------- ------------------------------
$49,728 $28,416 $21,312 $53,311 $ 29,736 $ 23,575
----------------------------- ------------------------------
----------------------------- ------------------------------

 


6. Bank Facilities:

Effective June 27, 2008, the Company amended and renewed its credit agreement. The renewed credit agreement provides for an operating facility for working capital and for general corporate purposes to a maximum amount of $25 million, bearing interest at prime plus 0.75%. Standby fees of 0.50% are paid on a quarterly basis on the unused portion of the facility. The operating facility is committed until June 29, 2009. The Company is required to comply with covenants regarding financial performance.

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

Subsequent to June 28, 2008, the Company also obtained an uncommitted letter of credit facility (the "LC Facility") in the amount of $10 million to be used exclusively for issuance of letters of credit for the purchase of inventory and an uncommitted demand overdraft facility in the amount of $0.5 million related thereto. Amounts outstanding under the overdraft facility will bear interest at the bank's prime rate. The LC Facility is secured by the Company's personal property from time to time financed with the proceeds drawn thereunder.

7. Capital Lease Obligation:



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

Fiscal 2009 minimum lease payments $ 884
Amounts representing interest (at a weighted average
annual rate of 6.2%) 26
-----
$ 858

8. Share Capital:

(a) Authorized

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

(b) Issued

Multiple Voting Shares
----------------------
Number Consideration
-------------------------
Balance June 24, 2006 1,224,329 Nominal
Balance June 30, 2007 1,224,329 Nominal
Balance June 28, 2008 1,224,329 Nominal

Subordinate Voting Shares
-------------------------
Number Consideration
-------------------------
Balance June 24, 2006 5,328,925 $22,542
Shares repurchased (123,500) (522)
Shares issued upon exercising
of stock options 4,000 24
-------------------------
Balance June 30, 2007 5,209,425 $22,044
Shares repurchased 169,000) (715)
Shares issued upon exercising of
stock options 11,675 80
-------------------------
Balance June 28, 2008 5,052,100 $21,409
-------------------------
-------------------------

 


The Multiple Voting Shares and Subordinate Voting Shares have identical attributes except that the Multiple Voting Shares entitle the holder to ten votes per share and the Subordinate Voting Shares entitle the holder to one vote per share. Each Multiple Voting Share is convertible at any time, at the holder's option, into one fully paid and non-assessable Subordinate Voting Share. The Multiple Voting Shares are subject to provisions whereby, if a triggering event occurs then each Multiple Voting Share is converted into one fully paid and non-assessable Subordinate Voting Share. A triggering event may occur if Mr. Jeffrey Wortsman, President and Chief Executive Officer: (i) dies; (ii) ceases to be a Senior Officer of the Company; (iii) ceases to own 5% or more of the aggregate number of Multiple Voting Shares and Subordinate Voting Shares outstanding; or (iv) owns less than 918,247 Multiple Voting Shares and Subordinate Voting Shares combined.

(c) Earnings per share

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



June 28, 2008 June 30, 2007
------------- -------------

Weighted average number of shares for
basic earnings per share calculations 6,313,583 6,532,680
Effect of dilutive options outstanding 22,290 14,736
------------- -------------
Weighted average number of shares for
diluted earnings per share calculations 6,335,873 6,547,416
------------- -------------
------------- -------------

 


The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares on The Toronto Stock Exchange (the "TSX") during the period. The number of options excluded was 231,000 as at June 28, 2008 and 416,000 as at June 30, 2007.

(d) Normal course issuer bids

On April 19, 2007, the Company announced that the TSX had accepted a notice of its intention to proceed with a normal course issuer bid (the "2007 NCIB"). Pursuant to the 2007 NCIB, the Company was entitled to purchase for cancellation up to a maximum of 320,320 Subordinate Voting Shares.

On May 2, 2008, the Company received approval from the TSX to commence its second normal course issuer bid (the "2008 NCIB"). The 2008 NCIB permits the Company to acquire up to 292,638 Subordinate Voting Shares, representing approximately 10% of the "public float" of the Subordinate Voting Shares, during the period from May 6, 2008 to May 5, 2009. Under the 2007 NCIB which expired on April 22, 2008, the Company repurchased 292,500 Subordinate Voting Shares for cancellation. As of June 28, 2008, no Subordinate Voting Shares had been purchased under the 2008 NCIB.

The following Subordinate Voting Shares were repurchased for cancellation during the fourth quarter and year ended June 28, 2008 and June 30, 2007:



Fourth Quarter Ended Year Ended
-------------------- ----------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
-------------------- ----------------
Number of shares repurchased - 123,500 169,000 123,500
Amount charged to share capital - $ 522 $ 715 $ 522
Amount charged to retained
earnings representing the excess
over the average paid-in value - $ 558 $ 950 $ 558
-------------------- ----------------
Total cash consideration - $ 1,080 $ 1,665 $ 1,080
-------------------- ----------------
-------------------- ----------------

 


(e) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers and employees. As at June 28, 2008, the Company has reserved 835,500 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors, on the advice of the Governance, Compensation, Human Resources and Nominating Committee of the Board (the "Committee") at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on the TSX for the five trading days preceding the effective date of the grant. In general, options granted under the Stock Option Plan vest over a period of one year from the grant date for options issued to directors and between two years and four years from the grant date for options issued to officers and employees and expire no later than the tenth anniversary of the date of grant.

A summary of the status of the Company's Stock Option Plan as of June 28, 2008 and June 30, 2007 and changes during the years ended on those dates is presented below:



June 28, 2008 June 30, 2007
----------------------- -----------------------
Weighted Average Weighted Average
Stock Options Shares Exercise Price Shares Exercise Price
------------------------------------------------- -----------------------
Outstanding at
Beginning of year 605,300 $ 10.48 618,300 $ 11.15
Granted 50,000 $ 6.25 70,000 $ 7.99
Exercised (64,675) $ 6.85 (4,000) $ 6.02
Forfeited (297,625) $ 10.82 (79,000) $ 13.74
------------------------- -----------------------
Outstanding at end
of year 293,000 $ 10.21 605,300 $ 10.48
------------------------- -----------------------
Options exercisable at
end of year 200,500 $ 11.60 541,550 $ 10.71
------------------------- -----------------------

 


The following table summarizes the distribution of these options and the remaining contractual life as at June 28, 2008:



Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise # of Shares Exercise
Prices # Outstanding Life Price Exercisable Price
----------------------------------------------- ---------------------
$ 6.02 12,000 1.2 years $ 6.02 12,000 $ 6.02
$ 6.25 50,000 10.0 years $ 6.25 - $ 6.25
$ 7.80 55,000 8.6 years $ 7.80 28,750 $ 7.80
$ 8.68 15,000 8.8 years $ 8.68 5,000 $ 8.68
$10.10 25,000 6.8 years $10.10 18,750 $10.10
$10.40 20,000 2.1 years $10.40 20,000 $10.40
$10.96 21,000 5.1 years $10.96 21,000 $10.96
$11.20 16,000 3.1 years $11.20 16,000 $11.20
$11.25 16,000 0.1 years $11.25 16,000 $11.25
$15.85 63,000 4.1 years $15.85 63,000 $15.85
----------------------------------- ---------------------
293,000 6.0 years $10.21 200,500 $11.60
----------------------------------- ---------------------
----------------------------------- ---------------------

 


During the year ended June 28, 2008, the Company granted 50,000 stock options with an exercise price of $6.25 per stock option (June 30, 2007 - 70,000 stock options with exercise prices ranging from $7.80 to $8.68 per stock option). The weighted average estimated fair value at the date of grant for the options granted was $3.30 per stock option (June 30, 2007 - $4.45 per stock option). 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 28, 2008 June 30, 2007
------------------------------
Risk-free interest rate 3.7% 4.2%
Dividend yield - -
Expected volatility 35% 37%
Expected life of options 10 years 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.

The compensation expense recorded for the year ended June 28, 2008 in respect of stock options was $117 (June 30, 2007 - $156). 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 24, 2006 $275
Stock-based compensation related to stock options 156
------
Balance June 30, 2007 $431
Stock-based compensation related to stock options 117
------
Balance June 28, 2008 $548
------
------

 


(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 TSX immediately prior to the date on which the value of the DSU is determined. When dividends are paid by the Company, an equivalent number of DSUs are added to the DSU account of the non-management director based on the number of DSUs in their account and the market value of the Subordinate Voting Shares on the date the dividend is paid. After retirement from the Board, a participant in the DSU Plan receives a cash payment equal to the market value of the accumulated DSUs in their account. The value of the DSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares.

The following transactions occurred with respect to the DSU Plan:



Fourth Quarter Ended Year Ended
-------------------- ----------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
-------------------- ----------------
Outstanding at beginning of period 58,920 39,420 39,420 14,904
Granted - - 19,500 27,000
Redeemed - - - (2,484)
-------------------- ----------------
Outstanding at end of period 58,920 39,420 58,920 39,420
Danier stock price at end of period $ 6.40 $ 9.17 $ 6.40 $ 9.17
-------------------- ----------------
Liability at end of period $ 377 $ 361 $ 377 $ 361
-------------------- ----------------
Compensation expense recorded
in SG&A $ (42) $ 38 $ 16 $ 261
-------------------- ----------------

 


(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 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. 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 with respect to the RSU Plan:



Fourth Quarter Ended Year Ended
-------------------- ----------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
-------------------- ----------------
Outstanding at beginning of period 80,201 50,201 50,201 15,238
Granted 63,300 - 123,300 40,000
Redeemed (8,534) - (38,534) -
Forfeited (1,667) - (1,667) (5,037)
-------------------- ----------------
Outstanding at end of period 133,300 50,201 133,300 50,201
Liability at end of period $ 411 $ 234 $ 411 $ 234
-------------------- ----------------
Compensation expense recorded
in SG&A $ (18) $ 113 $ 512 $ 220
-------------------- ----------------

 


9. Amortization:

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



Fourth Quarter Ended Year Ended
---------------------------- ----------------------------
June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007
---------------------------- ----------------------------
Cost of sales $ 176 $ 113 $ 583 $ 509
SG&A 1,495 1,661 5,571 6,074
---------------------------- ----------------------------
$1,671 $1,774 $6,154 $6,583
---------------------------- ----------------------------
---------------------------- ----------------------------

 


10. Income taxes:

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



June 28, 2008 June 30, 2007
------------- -------------
Amortization $ 395 $ 18
Deferred lease inducements and rent liability 504 605
Capital lease obligation 276 611
Litigation provision and related expenses - 4,617
Stock based compensation 233 194
Other 158 (25)
------------- -------------
$ 1,566 $ 6,020
------------- -------------
------------- -------------

Recorded in the consolidated balance sheets as follows:

June 28, 2008 June 30, 2007
------------- -------------
Future income tax asset - current portion $ 562 $ 5,112
Future income tax asset - long term portion 1,556 1,407
Future income tax liability -
current portion (502) (444)
Future income tax liability -
long term portion (50) (55)
------------- -------------
Net future tax asset $ 1,566 $ 6,020
------------- -------------
------------- -------------

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

June 28, 2008 June 30, 2007
------------- -------------
Combined basic federal and provincial
average statutory rate 33.8% 35.0%
Non-deductible expenses 0.5% 4.5%
Future federal and provincial rate changes 1.1% (2.2%)
Litigation provision and related expenses (8.8%) -
Other (0.1%) (0.9%)
------------- -------------
26.5% 36.4%
------------- -------------
------------- -------------

11. Litigation provision and related expenses:

June 28, 2008 June 30, 2007
------------- -------------
Accrued litigation provision and
related expenses $ - $ 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 a prospectus it issued dated May 6, 1998 (the "Prospectus") for its initial public offering ("IPO") which closed on May 20, 1998. The suit sought damages to be paid equal to the alleged diminution in value of the Subordinate Voting Shares sold under the Prospectus.

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

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

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

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

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

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

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

During the third quarter of fiscal 2008, the Company and the Plaintiffs agreed to a settlement of the amount of costs awarded to the Company for the trial and the Supreme Court of Canada hearing and costs awarded to the Plaintiffs for the certification and summary judgment motions. In addition, the Company reached an agreement with its directors' and officers' insurance provider for reimbursement of certain expert and professional fees previously paid by the Company in connection with the trial and appeal. As a result of these agreements, the Company recorded a $1.9 million recovery in the unaudited interim consolidated financial statements for the 13 week period ended March 29, 2008. As a result of the Supreme Court of Canada's final determination as well as the agreement on recovery of costs having now been finalized, no further recoveries are expected.

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



Fourth Quarter Ended Year Ended
-------------------- ----------------
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
-------------------- ----------------
Decrease (increase) in:
Accounts receivable $1,114 $ 786 $ (31) $ (322)
Income taxes recoverable (8) - (8) 2,485
Inventories 6,420 (4,217) 1,157 3,787
Prepaid expenses (767) (1,070) 204 (420)
Increase (decrease) in:
Accounts payable and accrued
liabilities (1,768) (2,234) 514 (1,377)
Income taxes payable (728) (967) (1,473) 1,473
-------------------- ----------------
$4,263 $(7,702) $ 363 $ 5,626
-------------------- ----------------
-------------------- ----------------

 


13. Contingencies & Guarantees:

(a) Legal proceedings

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 fiscal 2004 and has provided the landlord with a guarantee in the event the sub-tenant defaults on its obligation to pay rent. The remaining term of the guarantee is less than 1 year and the Company's maximum exposure is $23.

14. Commitments:

(a) Operating and capital leases:

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



Operating Capital
--------- -------
2009 $10,850 $884
2010 8,544 -
2011 7,343 -
2012 5,609 -
2013 3,693 -
Thereafter 7,981 -

 


(b) Letters of credit:

The Company had outstanding letters of credit in the amount of $6,830 (June 30, 2007 - $10,389) for the importation of finished goods inventories to be received.

15. Financial Instruments:

(a) Fair value disclosure

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 involve uncertainties and the exercise of significant judgment.

The carrying value of the Company's short-term financial assets which includes cash and accounts receivable and short-term financial liabilities which includes accounts payable and accrued liabilities approximates their fair value due to their short term maturities. The fair value of the capital lease obligation approximates its carrying value due to its short term to maturity.

(b) Risk management

For the year ended June 28, 2008, the Company has early adopted the requirements of CICA Handbook Section 3862 - Financial Instruments - Disclosures, which apply to fiscal years beginning on or after October 1, 2007. This new Handbook section requires disclosures to enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of an entity's exposure to risks arising from financial instruments, including how the entity manages those risks. Disclosures relating to exposure to risks, particularly credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk are provided below:

Credit Risk

Credit risk is the risk that a customer or counterparty to a financial instrument will cause a financial loss to the Company by failing to meet its obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash (which includes cash and money market investments with maturities of three months or less) and accounts receivable. The Company limits its exposure to credit risk with respect to cash and money market investments by investing in short-term deposits and bankers acceptances with major Canadian financial institutions and Government of Canada treasury bills. The Company's accounts receivable consist primarily of credit card receivables from the last few days of the fiscal period end, which are settled within the first days of the new fiscal period. Accounts receivable also consist of accounts receivable from licensees and corporate customers. 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 allowance for doubtful accounts is assessed on a quarterly basis. Concentration of credit risk with respect to accounts receivable from licensees and corporate customers is limited due to the non significant balances outstanding and the number of different customers comprising the Company's customer base.

As at June 28, 2008, the Company's exposure to credit risk for these financial instruments was cash of $19.9 million and accounts receivable of $0.8 million. Cash included $18.1 million of short-term deposits.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due. As at June 28, 2008, the Company had $19.9 million of cash and a credit facility of $25 million that is committed until June 29, 2009. The credit facility is used to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company expects that the majority of its accounts payable and accrued liabilities will be discharged within 90 days. The Company also has a capital lease obligation that matures in April 2009. As at June 28, 2008, the remaining minimum payment under the capital lease obligation is $0.9 million.

Subsequent to June 28, 2008, the Company also obtained a $10 million uncommitted letter of credit facility and an uncommitted demand overdraft facility in the amount of $0.5 million related thereto.

Foreign Currency Risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. 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 28, 2008 and as at June 30, 2007, the Company did not have any outstanding foreign exchange forward contracts to purchase U.S. dollars.

As at June 28, 2008, a sensitivity analysis was performed on the Company's U.S. dollar denominated financial instruments which principally consist of US$10 million of short-term deposits issued by major Canadian financial institutions to determine how a change in the U.S. dollar exchange rate would impact net earnings. On June 28, 2008, a 100 basis point rise or fall in the Canadian dollar against the U.S. dollar, assuming that all other variables, in particular interest rates, remained the same, would have resulted in a $0.1 million decrease or increase, respectively, in the Company's net earnings for the year ended June 28, 2008.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's exposure to interest rate fluctuations is primarily related to cash borrowings under its existing credit facility which bears interest at floating rates and interest earned on its cash balances. The Company has performed a sensitivity analysis on interest rate risk at June 28, 2008, to determine how a change in interest rates would have impacted net earnings. As at June 28, 2008, the Company's cash balance available for investment was approximately $19.9 million and an increase or decrease of 100 basis points in interest rates would have increased or decreased net earnings by approximately $0.1 million. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

Equity Price Risk

Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market equity prices. The Company's exposure to equity price fluctuations is primarily related to the RSU and DSU liability included in accounts payable and accrued liabilities. The value of the vested DSU and RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares. The Company has performed a sensitivity analysis on equity price risk as at June 28, 2008, to determine how a change in the price of the Company's Subordinate Voting Shares would have impacted net earnings. As at June 28, 2008, a total of 133,300 RSUs have been granted and 58,920 DSUs have been granted. An increase or decrease of $1.00 in the market price of the Company's Subordinate Voting Shares would have increased or decreased net earnings by approximately $0.1 million. This analysis assumes that all RSUs and DSUs were fully vested and other variables remain constant.

16. Capital Disclosure:

The Company defines its capital as capital lease obligation, including the current portion and shareholders' equity. The Company's objectives in managing capital are to:

- Ensure sufficient liquidity to support its current operations and execute its business plans;

- Enable the internal financing of capital projects; and

- Maintain a strong capital base so as to maintain investor, creditor and market confidence.

The Company's primary uses of capital are to finance non-cash working capital along with capital expenditures for new store additions, existing store renovation projects, information technology software and hardware purchases and production machinery and equipment purchases. The Company currently funds these requirements out of its internally-generated cash flows. The Company's capital lease obligation relates to point-of-sale equipment and it matures in fiscal 2009. The Company maintains a $25 million credit facility that it uses to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company does not have any long-term debt and therefore net earnings generated from operations are available for reinvestment in the Company. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year over year sustainable profitable growth. On a quarterly basis, the Board of Directors monitors share repurchase program activities. Decisions on whether to repurchase shares are made on a specific transaction basis and depend on the Company's cash position, estimates of future cash requirements, market prices and regulatory restrictions. The Company does not currently pay dividends.

The Company is not subject to any externally imposed capital requirements. There has been no change with respect to the overall capital risk management strategy during the year ended June 28, 2008.

17. 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.



FOR FURTHER INFORMATION PLEASE CONTACT:
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
Vice-President and Chief Financial Officer
(416) 762-8175 ext. 328
(416) 762-7408 (FAX)
Email: bryan@danier.com
Website: www.danier.com