TORONTO, Sept. 9 /PRNewswire-FirstCall/ -- Harry Winston Diamond
Corporation (TSX: HW; NYSE: HWD) today reported second quarter
results for the period ending July 31, 2008. The Company
recorded an increase in consolidated sales for the quarter of 7%,
generating a 23% increase in gross margin and a 30% increase in
consolidated earnings from operations compared to the results of
the second quarter of the prior year. Consolidated quarterly sales
totalled $186.1 million with earnings from operations of $73.4
million compared to $173.3 million and $56.2 million, respectively,
for the comparable quarter of the prior year. Net earnings were
$49.9 million, or $0.81 per share, compared to net earnings of
$20.1 million, or $0.34 per share, respectively, in the second
quarter of the prior year. Net earnings for the comparable quarter
of the prior year were reduced by a net $11.8 million foreign
exchange loss, or $0.20 per share, as a result of the
strengthening of the Canadian dollar relative to the US dollar,
compared to a net $5.3 million foreign exchange gain in the current
quarter, or $0.09 per share. "The international cachet of the Harry
Winston brand has proven its strength despite difficult trading
conditions in both the US and Japanese markets. This expanded
market place has also delivered strong pricing for our rough
diamond sales in the face of lower than anticipated production from
the Diavik Mine as we work through the transition from one open pit
to the next and the uncertainty in production forecasting that this
entails. The construction program to develop the underground
portions of the ore bodies that add lifetime and operational
security to the project is well advanced and comfortably within
schedule and cost budgets," said Robert A. Gannicott, Chairman and
Chief Executive Officer. Thomas J. O'Neill, President of Harry
Winston Diamond Corporation added, "Our businesses in Asia, Europe
and the Middle East have been sufficient to offset the general
market softness in the US and Japan; this contributed to our strong
retail finish for second quarter. Together with solid results from
the first quarter, the first half of the year has put us on firm
footing into the second half of the year." Earnings from operations
for the mining segment increased 27% to $67.5 million compared
to the comparable quarter of the prior year. Rough diamond
production for the second calendar quarter was down 23% to 1.0
million carats produced versus 1.3 million for the comparable
quarter of the prior year resulting from the continuing grade
variation in the A-154 South pipe and the initial stripping of low
grade A-418 ore mixed with waste overburden material. Mining sales
of $105.0 million remained at a consistent level with the prior
year as higher diamond prices compensated for reduced volume. The
retail segment recorded a 19% increase in sales to $81.1 million
with earnings from operations of $5.9 million compared to earnings
from operations of $3.2 million in the comparable quarter of the
prior year. Retail segment SG&A as a percentage of sales
decreased to 42% in the second quarter from 43% in the comparable
quarter of the prior year. Second Quarter Fiscal 2009 Financial
Highlights (US$ in millions except Earnings per Share amounts)
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Three Three Six Six months months months months ended ended ended
ended Jul. 31, Jul. 31, Jul. 31, Jul. 30, 2008 2007 2008 2007
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Sales 186.1 173.3 342.2 314.6
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Earnings from operations 73.4 56.2 113.0 92.3
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Net earnings 49.9 20.1 71.2 23.3
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Earnings per share $0.81 $0.34 $1.17 $0.40
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Dividend Announcement Harry Winston Diamond Corporation is pleased
to declare an eligible quarterly dividend payment of US$0.05 per
share. Shareholders of record at the close of business on October
15, 2008, will be entitled to receive payment of this dividend on
October 29, 2008. Conference Call and Webcast As previously
announced, Harry Winston Diamond Corporation will host a conference
call for analysts, investors and other interested parties on
Wednesday, September 10, beginning at 10:00AM EDT. Listeners may
access a live broadcast of the conference call on the company's
investor relations web site at http://investor.harrywinston.com/ or
by dialing 866.713.8564 within North America or 617.597.5312 from
international locations and entering passcode 73778735. An online
archive of the broadcast will be available by accessing the
company's investor relations web site at
http://investor.harrywinston.com/. A telephone replay of the call
will be available one hour after the call through 11:00PM (EDT),
Wednesday, September 24, 2008, by dialing 888.286.8010 within North
America or 617.801.6888 from international locations and entering
passcode 16919976. Information in this news release that is not
current or historical factual information may constitute
forward-looking information or statements within the meaning of
applicable securities laws. Implicit in this information,
particularly in respect of statements as to future operating
results and economic performance of Harry Winston Diamond
Corporation and statements about the Diavik Diamond Mine, are
assumptions regarding world economic conditions, projected revenue
and expenses, diamond prices, construction timelines and budgets,
ore grades and the Canadian/US dollar exchange rate. These
assumptions, although considered reasonable by Harry Winston
Diamond Corporation at the time of preparation, may prove to be
incorrect. Forward-looking information is subject to certain
factors, including risks and uncertainties, which could cause
actual results to differ materially from what we currently expect.
These factors include, among other things, the uncertain nature of
mining and mine development activities, risks associated with
underground construction activities, risks associated with joint
venture operations, risks associated with the remote location of
the Diavik Diamond Mine site, risks associated with regulatory and
financing requirements, fluctuations in diamond prices, changes in
world economic conditions, increased competition from other luxury
goods retailers, changes in consumer preferences and tastes in
jewelry, and the risk of continued fluctuations in the Canadian/US
dollar exchange rate. About Harry Winston Diamond Corporation Harry
Winston Diamond Corporation (TSX: HW; NYSE: HWD) is a specialist
diamond enterprise with assets in the mining and retail segments of
the diamond industry. The company supplies rough diamonds to the
global market from its 40% interest in the Diavik Diamond Mine,
located in Canada's Northwest Territories. The company's retail
division, Harry Winston, Inc., is a premier jewelry and timepiece
retailer with salons in key locations including New York, Paris,
London, Beijing, Tokyo and Beverly Hills. For more information,
please go to http://www.harrywinston.com/ or for investor
information, visit investor.harrywinston.com. Highlights (All
figures are in United States dollars unless otherwise indicated)
The Company recorded an increase in consolidated sales for the
quarter of 7%, generating a 23% increase in gross margin and a 30%
increase in consolidated earnings from operations compared to the
results of the second quarter of the prior year. Consolidated
quarterly sales totalled $186.1 million with earnings from
operations of $73.4 million compared to $173.3 million and $56.2
million, respectively, for the comparable quarter of the prior
year. Net earnings were $49.9 million, or $0.81 per share, compared
to net earnings of $20.1 million, or $0.34 per share, respectively,
in the second quarter of the prior year. Net earnings for the
comparable quarter of the prior year were reduced by a net $11.8
million foreign exchange loss, or $0.20 per share, as a result
of the strengthening of the Canadian dollar relative to the US
dollar, compared to a net $5.3 million foreign exchange gain in the
current quarter, or $0.09 per share. Earnings from operations for
the mining segment increased 27% to $67.5 million compared to
the comparable quarter of the prior year. Rough diamond production
for the second calendar quarter was down 23% to 1.0 million carats
produced versus 1.3 million for the comparable quarter of the prior
year resulting from the continuing grade variation in the A-154
South pipe and the initial stripping of low grade A-418 ore mixed
with waste overburden material. Mining sales of $105.0 million
remained at a consistent level with the prior year as higher
diamond prices compensated for reduced volume. The retail segment
recorded a 19% increase in sales to $81.1 million, with earnings
from operations of $5.9 million compared to earnings from
operations of $3.2 million in the comparable quarter of the prior
year. Retail segment SG&A as a percentage of sales decreased to
42% in the second quarter from 43% in the comparable quarter of the
prior year. Management's Discussion and Analysis Prepared as of
September 9, 2008 (all figures are in United States dollars unless
otherwise indicated) The following is management's discussion and
analysis ("MD&A") of the results of operations for Harry
Winston Diamond Corporation (the "Company") for the three and six
months ended July 31, 2008, and its financial position as at July
31, 2008. This MD&A is based on the Company's consolidated
financial statements prepared in accordance with generally accepted
accounting principles in Canada ("Canadian GAAP") and should be
read in conjunction with the unaudited consolidated financial
statements and notes thereto for the three and six months ended
July 31, 2008 and the audited consolidated financial statements of
the Company and notes thereto for the year ended January 31, 2008.
Unless otherwise specified, all financial information is presented
in United States dollars. Unless otherwise indicated, all
references to "second quarter" refer to the three months ended July
31, 2008 and all references to "international" for the retail
segment refer to Europe and Asia. Certain comparative figures have
been reclassified to conform with the current year's presentation.
Caution Regarding Forward-Looking Information Certain information
included in this MD&A may constitute forward-looking
information within the meaning of Canadian and United States
securities laws. In some cases, forward-looking information can be
identified by the use of terms such as "may", "will", "should",
"expect", "plan", "anticipate", "believe", "intend", "estimate",
"predict", "potential", "continue" or other similar expressions
concerning matters that are not historical facts. Forward-looking
information may relate to management's future outlook and
anticipated events or results, and may include statements or
information regarding plans, timelines and targets for
construction, mining, development, production and exploration
activities at the Diavik Diamond Mine, future mining and processing
at the Diavik Diamond Mine, projected capital expenditure
requirements and the funding thereof, new salon openings, liquidity
and working capital requirements and sources, estimated reserves
and resources at, and production from, the Diavik Diamond Mine, the
number and timing of expected rough diamond sales, expected diamond
prices and expectations concerning the diamond industry, expected
cost of sales and gross margin trends in the mining segment, and
expected sales trends in the retail segment. Actual results may
vary. See "Risks and Uncertainties" on page 18. Forward-looking
information is based on certain factors and assumptions regarding,
among other things, mining, production, construction and
exploration activities at the Diavik Diamond Mine, credit market
conditions and the ability of the Company to refinance its existing
credit facilities, the level of worldwide diamond production and
world and US economic conditions. Specifically, in estimating Harry
Winston Diamond Corporation's projected share of the Diavik Diamond
Mine capital expenditure requirements over the next two years,
Harry Winston Diamond Corporation has used an average Canadian/US
dollar exchange rate of $0.99, and has assumed that construction
will continue on schedule and without undue disruption with respect
to current underground mining construction initiatives. In making
statements regarding estimated production at the Diavik Diamond
Mine and future mining activity and mine plans, including plans,
timelines and targets for construction, mining, development,
production and exploration activities at the Diavik Diamond Mine,
and future rough diamond sales, Harry Winston Diamond Corporation
has assumed, among other things, that mining operations and
construction and exploration activities will proceed in the
ordinary course according to schedule and consistent with past
results. In making statements regarding expected diamond prices and
expectations concerning the diamond industry and expected sales
trends in the retail segment, the Company has made assumptions
regarding, among other things, world and US economic conditions.
While Harry Winston Diamond Corporation considers these assumptions
to be reasonable based on the information currently available to
it, they may prove to be incorrect. See "Risks and Uncertainties"
on page 18. Forward-looking information is subject to certain
factors, including risks and uncertainties, which could cause
actual results to differ materially from what we currently expect.
These factors include, among other things, the uncertain nature of
mining activities, including risks associated with underground
construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of
and harsh climate at the Diavik Diamond Mine site, risks associated
with regulatory requirements, fluctuations in diamond prices and
changes in US and world economic conditions, the risk of
fluctuations in the Canadian/US dollar exchange rate, financing and
credit market risk, risks relating to the Company's salon expansion
strategy and the risks of competition in the luxury jewelry
segment. Please see page 18 of this Interim Report, as well as the
Company's Annual Report, available at http://www.sedar.com/, for a
discussion of these and other risks and uncertainties involved in
Harry Winston Diamond Corporation's operations. Readers are
cautioned not to place undue importance on forward-looking
information, which speaks only as of the date of this Management's
Discussion and Analysis, and should not rely upon this information
as of any other date. Due to assumptions, risks and uncertainties,
including the assumptions, risks and uncertainties identified above
and elsewhere in this Management's Discussion and Analysis, actual
events may differ materially from current expectations. While Harry
Winston Diamond Corporation may elect to, it is under no obligation
and does not undertake to update or revise any forward-looking
information, whether as a result of new information, future events
or otherwise at any particular time, except as required by law.
Additional information concerning factors that may cause actual
results to materially differ from those in such forward-looking
statements is contained in the Harry Winston Diamond Corporation's
filings with Canadian and United States securities regulatory
authorities and can be found at http://www.sedar.com/ and
http://www.sec.gov/, respectively. Summary Discussion Harry Winston
Diamond Corporation is a specialist diamond company focusing on the
mining and retail segments of the diamond industry. The Company
supplies rough diamonds to the global market from production
received from its 40% ownership interest in the Diavik Diamond
Mine, located off Lac de Gras in Canada's Northwest Territories.
The Company also owns a 100% interest in Harry Winston Inc., the
premier fine jewelry and watch retailer. Harry Winston Diamond
Corporation's mission is to deliver shareholder value through the
enhanced earning power and longevity of the Diavik Diamond Mine
asset as the cornerstone of a profitable synergy with the Harry
Winston(R) brand. In a changing diamond market-place, Harry Winston
Diamond Corporation has charted a unique course to continue to
build shareholder value. The Company's most significant asset is a
40% interest in the Diavik group of mineral claims. The Diavik
Joint Venture (the "Joint Venture") is an unincorporated joint
arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and
Harry Winston Diamond Mines Ltd. (40%) where Harry Winston Diamond
Corporation owns an undivided 40% interest in the assets,
liabilities and expenses. DDMI is the operator of the Diavik
Diamond Mine. Both companies are headquartered in Yellowknife,
Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of
London, England, and Harry Winston Diamond Mines Ltd. is a wholly
owned subsidiary of Harry Winston Diamond Corporation of Toronto,
Canada. Market Commentary The Diamond Market The rough diamond
market has enjoyed strong price growth during the last six months
as purchases from the emerging market economies have more than
compensated for the US and Japanese softness in the higher quality
stones that are the key component of Harry Winston's rough diamond
sales. Lower quality diamonds have seen price declines in some
categories despite the price increases in better quality diamonds.
Looking forward, the strengthening US dollar is beginning to drive
local currency price increases internationally and a period of
gains can be expected in the short term. In the longer term, a
continuing shrinkage of mine supply coupled with expanded demand
from the BRIC (Brazil, Russia, India, China) economies is expected
to underpin further price increases, especially as the US and
Japan, historically the world's two largest diamond consumers,
return to economic health. The Retail Jewelry Market The global
luxury diamond jewelry market remains strong, especially in markets
outside of the US and Japan. The US and Japanese markets have been
negatively impacted, primarily in the lower and mid-range of the
retail market, by the challenging macroeconomic environment.
Emerging markets in the Asia Pacific region, Russia and the Middle
East continue to provide robust demand for luxury products. (R)
Harry Winston is a registered trademark of Harry Winston Inc.
Consolidated Financial Results Consolidated Financial Results The
following is a summary of the Company's consolidated quarterly
results for the eight quarters ended July 31, 2008 following the
basis of presentation utilized in the Company's Canadian GAAP
financial statements: (expressed in thousands of United States
dollars except per share amounts and where otherwise noted)
(quarterly results are unaudited)
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2009 2009 2008 2008 2008 Q2 Q1 Q4 Q3 Q2
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Sales $186,119 $156,079 $188,195 $176,478 $173,269 Cost of sales
73,542 73,149 83,637 74,591 81,827
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Gross margin 112,577 82,930 104,558 101,887 91,442 Gross margin (%)
60.5% 53.1% 55.6% 57.7% 52.8% Selling, general and administrative
expenses 39,194 43,285 45,494 35,539 35,201
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Earnings from operations 73,383 39,645 59,064 66,348 56,241
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Interest and financing expenses (5,366) (5,453) (7,082) (7,422)
(7,222) Other income (expense) 815 246 706 594 545 Insurance
settlement - - 13,488 - - Foreign exchange gain (loss) 5,301 155
22,270 (40,584) (11,785)
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Earnings before income taxes 74,133 34,593 88,446 18,936 37,779
Income taxes (recovery) 24,185 13,336 (1,968) 26,197 17,747
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Earnings (loss) before minority interest 49,948 21,257 90,414
(7,261) 20,032 Minority interest 1 1 (34) 90 (26)
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Net earnings (loss) $ 49,947 $ 21,256 $ 90,448 $ (7,351) $ 20,058
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Basic earnings (loss) per share $ 0.81 $ 0.35 $ 1.55 $ (0.13) $
0.34 Diluted earnings (loss) per share $ 0.81 $ 0.35 $ 1.54 $
(0.13) $ 0.33 Cash dividends declared per share $ 0.05 $ 0.05 $
0.05 $ 0.25 $ 0.25 Total assets(i) $ 1,637 $ 1,591 $ 1,494 $ 1,433
$ 1,367 Total long-term liabilities(i) $ 617 $ 634 $ 660 $ 530 $
486
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Six Six Months Months Ended Ended 2008 2007 2007 July 31, July 31,
Q1 Q4 Q3 2008 2007
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Sales $141,365 $154,328 $145,232 $342,198 $314,634 Cost of sales
71,132 78,559 74,636 146,691 152,959
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Gross margin 70,233 75,769 70,596 195,507 161,675 Gross margin (%)
49.7% 49.1% 48.6% 57.1% 51.4% Selling, general and administrative
expenses 34,211 38,590 33,480 82,479 69,412
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Earnings from operations 36,022 37,179 37,116 113,028 92,263
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Interest and financing expenses (6,132) (6,441) (5,570) (10,819)
(13,354) Other income (expense) 913 (111) 1,764 1,061 1,458
Insurance settlement - - - - - Foreign exchange gain (loss)
(13,292) 9,831 (1,560) 5,456 (25,077)
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Earnings before income taxes 17,511 40,458 31,750 108,726 55,290
Income taxes (recovery) 14,118 13,169 13,005 37,521 31,865
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Earnings (loss) before minority interest 3,393 27,289 18,745 71,205
23,425 Minority interest 140 (5) (86) 2 114
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Net earnings (loss) $ 3,253 $ 27,294 $ 18,831 $ 71,203 $ 23,311
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Basic earnings (loss) per share $ 0.06 $ 0.47 $ 0.32 $ 1.17 $ 0.40
Diluted earnings (loss) per share $ 0.05 $ 0.46 $ 0.32 $ 1.17 $
0.39 Cash dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.10
$ 0.50 Total assets(i) $ 1,315 $ 1,288 $ 1,246 $ 1,637 $ 1,367
Total long-term liabilities(i) $ 408 $ 536 $ 530 $ 617 $ 486
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(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars. The comparability of
quarter-over-quarter results is impacted by seasonality for both
the mining and retail segments. Harry Winston Diamond Corporation
expects that the quarterly results for its mining segment will
continue to fluctuate depending on the seasonality of production at
the Diavik Diamond Mine, the number of rough diamond sales events
conducted during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond
Mine in each quarter. The quarterly results for the retail segment
are also seasonal, with generally higher sales during the fourth
quarter due to the holiday season. See "Segmented Analysis" on page
8 for additional information. Three Months Ended July 31, 2008
Compared to Three Months Ended July 31, 2007 Consolidated Net
Earnings The second quarter net earnings of $49.9 million or $0.81
per share represent an increase of $29.9 million or $0.47 per share
as compared to the results of the second quarter of the prior year.
The increase is primarily due to improved operating performance in
the mining and retail segments and a net foreign exchange gain of
$5.3 million, or $0.09 per share, in the current quarter compared
to an $11.8 million net foreign exchange loss, or $0.20 per share,
recognized in the comparable quarter of the prior year related
principally to an unrealized non-cash loss on future income taxes
payable. For more detail on the impact of the foreign exchange gain
on future income taxes payable, see "Consolidated Income Taxes"
below. Consolidated Sales Sales for the second quarter totalled
$186.1 million, consisting of rough diamond sales of $105.0 million
and retail segment sales of $81.1 million. This compares to sales
of $173.3 million in the comparable quarter of the prior year
(rough diamond sales of $105.1 million and retail segment sales of
$68.2 million). The Company held two primary rough diamond sales in
the second quarter compared to three in the comparable quarter of
the prior year. Ongoing quarterly variations in revenues are
inherent in the Company's business, resulting from the seasonality
of the mining and retail activities as well as from the variability
of the rough diamond sales schedule. Consolidated Cost of Sales and
Gross Margin The Company's second quarter cost of sales was $73.5
million for a gross margin of 60.5% compared to $81.8 million cost
of sales and a gross margin of 52.8% for the comparable quarter of
the prior year. Included in the second quarter is a $4.3 million
insurance settlement relating to an excavator fire that occurred in
the fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The
settlement represents the recovery of the cost of the excavator
that was previously written off along with incremental operating
expenses relating to the procurement of a replacement excavator.
The Company's cost of sales includes costs associated with mining,
rough diamond sorting and retail sales activities. See "Segmented
Analysis" on page 8 for additional information. Consolidated
Selling, General and Administrative Expenses The principal
components of selling, general and administrative ("SG&A")
expenses include expenses for salaries and benefits, advertising,
professional fees, rent and building related costs. The Company
incurred SG&A expenses of $39.2 million for the second quarter,
compared to $35.2 million in the comparable quarter of the prior
year. Included in SG&A expenses for the second quarter are $5.2
million for the mining segment as compared to $5.9 million for the
comparable quarter of the prior year, and $34.0 million for the
retail segment as compared to $29.3 million for the comparable
quarter of the prior year. For the mining segment, the decrease in
SG&A expenses was primarily due to a mark-to-market reduction
in stock-based compensation. For the retail segment, the increase
in SG&A expenses was as a result of our continued investment in
the Harry Winston brand, and reflected an increase in salaries and
benefits, rent and building related expenses and depreciation and
amortization expense. See "Segmented Analysis" on page 8 for
additional information. Consolidated Income Taxes The Company
recorded a tax expense of $24.2 million during the second quarter,
compared to a tax expense of $17.7 million in the comparable
quarter of the prior year. The Company's effective income tax rate
for the quarter, excluding Harry Winston's retail segment, is 33%,
which is based on a statutory income tax rate of 31% adjusted for
various items including Northwest Territories mining royalty,
impact of foreign exchange, and earnings subject to tax different
than the statutory rate. The Company's functional and reporting
currency is US dollars; however, the calculation of income tax
expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves
against the US dollar. The weakening of the Canadian dollar during
the second quarter resulted in an unrealized foreign exchange gain
of $4.4 million on the revaluation of the Canadian denominated
future income tax liability, compared to an unrealized foreign
exchange loss of $9.6 million recorded in the comparable quarter of
the prior year. This unrealized foreign exchange gain is not
taxable for Canadian income tax purposes. The rate of income tax
payable by Harry Winston Inc. varies by jurisdiction. Net operating
losses are available in certain jurisdictions to offset future
income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027. The Company has
provided a table below summarizing the movement from the statutory
to the effective income tax rate as a percentage of earnings before
taxes: Three Three Months Months Ended Ended July 31, July 31, 2008
2007
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Statutory income tax rate 31% 34% Stock compensation -% (1)%
Northwest Territories mining royalty (net of income tax relief) 8%
12% Impact of change in future income tax rate -% (2)% Impact of
foreign exchange (4)% 6% Earnings subject to tax different than
statutory rate (3)% (2)% Changes in valuation allowance 1% -%
Benefits of losses recognized through reduction of goodwill -% 2%
Other items -% (2)% Effective income tax rate 33% 47%
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Consolidated Interest and Financing Expenses Interest and financing
expenses of $5.4 million were incurred during the second quarter
compared to $7.2 million during the comparable quarter of the prior
year. The reduction in interest and financing expenses relates
primarily to the reduction in debt levels in the mining segment.
Consolidated Other Income Other income of $0.8 million was recorded
during the quarter compared to other income of $0.5 million in the
comparable quarter of the prior year. Consolidated Foreign Exchange
Gain A net foreign exchange gain of $5.3 million was recognized
during the quarter compared to a net foreign exchange loss of $11.8
million in the comparable quarter of the prior year. The gain in
the current quarter relates principally to the revaluation of the
Company's Canadian dollar denominated long-term future income tax
liability as a result of the weakening of the Canadian dollar
against the US dollar at quarter end. The Company's ongoing
currency exposure relates primarily to expenses and obligations
incurred in Canadian dollars, as well as the revaluation of certain
Canadian monetary balance sheet amounts. The Company does not
currently have any significant derivative instruments outstanding.
Six Months Ended July 31, 2008 Compared to Six Months Ended July
31, 2007 Consolidated Net Earnings Net earnings for the six months
ended July 31, 2008 of $71.2 million or $1.17 per share compares to
$23.3 million or $0.40 per share for the six months ended July
31, 2007. The increase is due primarily to a net foreign exchange
gain of $5.5 million, or $0.09 per share, for the six months ended
July 31, 2008 compared to a $25.1 million net foreign exchange
loss, or $0.43 per share, recognized in the comparable period
of the prior year related principally to an unrealized non-cash
loss on future income taxes payable. Consolidated Sales Sales for
the six months ended July 31, 2008 were $342.2 million,
representing an increase of 9% over sales of $314.6 million for the
six months ended July 31, 2007. Rough diamond sales accounted for
$186.4 million of total sales compared to $187.8 million for the
comparable period of the prior year. Retail segment sales of $155.8
million accounted for the balance, compared to $126.8 million for
the comparable period of the prior year. Consolidated Cost of Sales
and Gross Margin The Company's cost of sales for the six months
ended July 31, 2008 was $146.7 million for a gross margin of 57.1%
compared to $153.0 million cost of sales and a gross margin of
51.4% for the comparable period of the prior year. Included in the
six months ended July 31, 2008 is a $4.3 million insurance
settlement relating to an excavator fire that occurred in the
fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The
settlement represents the recovery of the cost of the excavator
that was previously written off along with incremental operating
expenses relating to the procurement of a replacement excavator.
The Company's cost of sales includes costs associated with mining,
rough diamond sorting and retail sales activities. See "Segmented
Analysis" on page 8 for additional information. Consolidated
Selling, General and Administrative Expenses The Company incurred
SG&A expenses of $82.5 million for the six months ended July
31, 2008, compared to $69.4 million for the six months ended
July 31, 2007. Included in SG&A expenses for the six
months ended July 31, 2008 are $12.4 million for the mining segment
as compared to $10.9 million for the comparable period of the prior
year, and $70.1 million for the retail segment as compared to $58.5
million for the comparable period of the prior year. For the mining
segment, the increase of $1.4 million was primarily due to higher
salaries and benefits. For the retail segment, the increase was as
a result of our continued investment in the Harry Winston brand,
and reflected an increase in salaries and benefits, rent and
building related expenses and depreciation and amortization
expense. Retail segment SG&A expenses also included
approximately $2.0 million of non-recurring expenses related to
restructuring and improvements carried out at the Geneva watch
factory. See "Segmented Analysis" on page 8 for additional
information. Consolidated Income Taxes The Company recorded a tax
expense of $37.5 million during the six months ended July 31, 2008,
compared to a tax expense of $31.9 million in the comparable period
of the prior year. The Company's effective income tax rate for the
quarter, excluding Harry Winston's retail segment, is 35%, which is
based on a statutory income tax rate of 31% adjusted for various
items including Northwest Territories mining royalty, impact of
foreign exchange, and earnings subject to tax different than the
statutory rate. During the six months ended July 31, 2008, the
Company recorded an unrealized foreign exchange gain of $5.3
million on the revaluation of the Canadian denominated future
income tax liability, as compared to an unrealized foreign exchange
loss of $23.3 million recorded in the comparable period of the
prior year. This unrealized foreign exchange gain is not taxable
for Canadian income tax purposes. The rate of income tax payable by
Harry Winston Inc. varies by jurisdiction. Net operating losses are
available in certain jurisdictions to offset future income taxes
payable in such jurisdictions. The net operating losses are
scheduled to expire through 2027. The Company has provided a table
below summarizing the movement from the statutory to the effective
income tax rate as a percentage of earnings before taxes: Six Six
Months Months Ended Ended July 31, July 31, 2008 2007
-------------------------------------------------------------------------
Statutory income tax rate 31% 34% Northwest Territories mining
royalty (net of income tax relief) 10% 13% Impact of change in
future income tax rate -% (2)% Impact of foreign exchange (4)% 12%
Earnings subject to tax different than statutory rate (4)% (3)%
Changes in valuation allowance 1% -% Benefits of losses recognized
through reduction of goodwill -% 3% Assessments and adjustments 1%
-% Other items -% 1% Effective income tax rate 35% 58%
-------------------------------------------------------------------------
Consolidated Interest and Financing Expenses Interest and financing
expenses of $10.8 million were incurred during the six months ended
July 31, 2008 compared to $13.4 million for the comparable period
of the prior year. The reduction in interest and financing expenses
relates primarily to the reduction in debt levels in the mining
segment. Consolidated Other Income Other income, which includes
interest income on the Company's various bank balances, was $1.1
million during the six months ended July 31, 2008 compared to $1.5
million for the comparable period of the prior year. Consolidated
Foreign Exchange Gain A net foreign exchange gain of $5.5 million
was recognized during the six months ended July 31, 2008
compared to a net foreign exchange loss of $25.1 million recorded
during the six months ended July 31, 2007. The current year-to-date
gain relates principally to the revaluation of the Company's
Canadian dollar denominated long-term future income tax liability
as a result of the weakening of the Canadian dollar against the US
dollar at July 31, 2008. The Company's ongoing currency exposure
relates primarily to expenses and obligations incurred in Canadian
dollars, as well as the revaluation of certain Canadian monetary
balance sheet amounts. The Company does not currently have any
significant derivative instruments outstanding. Segmented Analysis
The operating segments of the Company include mining and retail
segments. Mining The mining segment includes the production and
sale of rough diamonds. (expressed in thousands of United States
dollars) (quarterly results are unaudited)
-------------------------------------------------------------------------
2009 2009 2008 2008 2008 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $105,014 $ 81,393 $103,238 $122,711 $105,071 Cost of sales
32,390 32,150 36,962 45,985 46,217
-------------------------------------------------------------------------
Gross margin 72,624 49,243 66,276 76,726 58,854 Gross margin (%)
69.2% 60.5% 64.2% 62.5% 56.0% Selling, general and administrative
expenses 5,151 7,208 5,663 6,748 5,861
-------------------------------------------------------------------------
Earnings from operations $ 67,473 $ 42,035 $ 60,613 $ 69,978 $
52,993
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six Months Months Ended Ended 2008 2007 2007 July 31, July 31,
Q1 Q4 Q3 2008 2007
-------------------------------------------------------------------------
Sales $ 82,752 $ 81,035 $ 90,754 $186,407 $187,823 Cost of sales
40,516 39,413 45,461 64,540 86,733
-------------------------------------------------------------------------
Gross margin 42,236 41,622 45,293 121,867 101,090 Gross margin (%)
51.0% 51.4% 49.9% 65.4% 53.8% Selling, general and administrative
expenses 5,087 7,397 4,665 12,359 10,948
-------------------------------------------------------------------------
Earnings from operations $ 37,149 $ 34,225 $ 40,628 $109,508 $
90,142
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2008 Compared to Three Months Ended
July 31, 2007 Mining Sales Rough diamond sales for the second
quarter totalled $105.0 million compared to $105.1 million in the
comparable quarter of the prior year resulting from lower carat
production offset by higher pricing. Rough diamond production
decreased 23% in the second calendar quarter from the prior year as
a result of the continuing grade variation in the A-154 South
kimberlite pipe combined with the initial stripping of low grade
A-418 ore mixed with waste overburden material. The Company held
two primary rough diamond sales in the second quarter compared to
three in the comparable quarter of the prior year. The Company
expects that results for its mining segment will continue to
fluctuate depending on the seasonality of production at the Diavik
Diamond Mine, the number of primary and secondary sales events
conducted at each sales location during the quarter, and the
volume, size and quality distribution of rough diamonds delivered
from the Diavik Diamond Mine in each quarter. Mining Cost of Sales
and Gross Margin The Company's second quarter cost of sales was
$32.4 million for a gross margin of 69.2% compared to a $46.2
million cost of sales and a gross margin of 56.0% in the comparable
quarter of the prior year. The reduction in cost of sales resulted
in part from a greater proportion of cost attributable to
development activity versus production activity. Also included in
the second quarter is a $4.3 million insurance settlement relating
to an excavator fire that occurred in the fourth quarter of fiscal
2006 at the Diavik Diamond Mine. The settlement represents the
recovery of the cost of the excavator that was previously written
off along with incremental operating expenses relating to the
procurement of a replacement excavator. Total proceeds of $5.0
million from the insurance settlement are expected to be received
in the third quarter, resulting in a gain of approximately $0.7
million. The mining gross margin is anticipated to fluctuate
between quarters, resulting from variations in the specific mix of
product sold during each quarter and the nature of the mining
activities. A substantial portion of cost of sales is mine
operating costs, which are incurred at the Diavik Diamond Mine.
Cost of sales also includes rough diamond sorting costs, which
consist of the Company's cost of handling and sorting product in
preparation for sales to third parties, and amortization and
depreciation, the majority of which is recorded using the
unit-of-production method over estimated proven and probable
reserves. Mining Selling, General and Administrative Expenses
SG&A expenses for the mining segment decreased by $0.7 million
from the comparable period of the prior year primarily due to a
mark-to-market reduction to stock-based compensation. Six Months
Ended July 31, 2008 Compared to Six Months Ended July 31, 2007
Mining Sales Rough diamond sales for the six months ended July 31,
2008 totalled $186.4 million compared to $187.8 million in the
comparable period of the prior year resulting from a combination of
lower carat production offset by higher pricing. Rough diamond
production decreased 27% during the first half of the calendar year
from the prior year as the result of the continuing grade variation
in the A-154 South kimberlite pipe combined with the initial
stripping of low grade A-418 ore mixed with waste overburden
material. The Company held four primary rough diamond sales, one of
which was an open-market tender, during the six months ended July
31, 2008, compared to five in the comparable period of the prior
year. Harry Winston Diamond Corporation expects that results for
its mining segment will continue to fluctuate depending on the
seasonality of production at the Diavik Mine, the number of primary
and secondary sales events conducted at each sales location during
the quarter, and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Mine in each quarter. Mining
Cost of Sales and Gross Margin For the six months ended July 31,
2008, cost of sales was $64.5 million for a gross margin of 65.4%
compared to $86.7 million cost of sales and a gross margin of 53.8%
in the comparable quarter of the prior year. The reduction in cost
of sales resulted primarily from a greater proportion of cost
attributable to development activity versus production activity.
Also included in the six months ended July 31, 2008, is a $4.3
million insurance settlement relating to an excavator fire that
occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond
Mine. The settlement represents the recovery of the cost of the
excavator that was previously written off along with incremental
operating expenses relating to the procurement of a replacement
excavator. Total proceeds of $5.0 million from the insurance
settlement are expected to be received in the third quarter,
resulting in a gain of approximately $0.7 million. The mining gross
margin is anticipated to fluctuate between quarters, resulting from
variations in the specific mix of product sold during each quarter
and the nature of the mining activities. A substantial portion of
cost of sales is mine operating costs, which are incurred at the
Diavik Diamond Mine. Cost of sales also includes rough diamond
sorting costs, which consist of the Company's cost of handling and
sorting product in preparation for sales to third parties, and
amortization and depreciation, the majority of which is recorded
using the unit-of-production method over estimated proven and
probable reserves. Mining Selling, General and Administrative
Expenses SG&A expenses for the mining segment increased by $1.4
million from the comparable period of the prior year primarily due
to an increase in salaries and benefits. Retail The retail segment
includes sales from Harry Winston's salons, which are located in
prime markets around the world including seven salons in the United
States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas,
Dallas and Chicago; five salons in Japan: Ginza, Roppongi Hills,
Osaka, Omotesando and Nagoya; three salons in Europe: Paris, London
and Geneva; and three salons in Asia outside of Japan: Beijing,
Taipei and Hong Kong. (expressed in thousands of United States
dollars) (quarterly results are unaudited)
-------------------------------------------------------------------------
2009 2009 2008 2008 2008 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 81,105 $ 74,686 $ 84,957 $ 53,767 $ 68,198 Cost of sales
41,152 40,999 46,675 28,606 35,610
-------------------------------------------------------------------------
Gross margin 39,953 33,687 38,282 25,161 32,588 Gross margin (%)
49.3% 45.1% 45.1% 46.8% 47.8% Selling, general and administrative
expenses 34,043 36,077 39,831 28,791 29,340
-------------------------------------------------------------------------
Earnings (loss) from operations $ 5,910 $ (2,390) $ (1,549) $
(3,630) $ 3,248
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six Months Months Ended Ended 2008 2007 2007 July 31, July 31,
Q1 Q4 Q3 2008 2007
-------------------------------------------------------------------------
Sales $ 58,613 $ 73,293 $ 54,478 $155,791 $126,811 Cost of sales
30,616 39,146 29,175 82,151 66,226
-------------------------------------------------------------------------
Gross margin 27,997 34,147 25,303 73,640 60,585 Gross margin (%)
47.8% 46.6% 46.4% 47.3% 47.8% Selling, general and administrative
expenses 29,124 31,193 28,815 70,120 58,464
-------------------------------------------------------------------------
Earnings (loss) from operations $ (1,127) $ 2,954 $ (3,512) $ 3,520
$ 2,121
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2008 Compared to Three Months Ended
July 31, 2007 Retail Sales Sales for the second quarter were $81.1
million compared to $68.2 million for the comparable quarter of the
prior year, an increase of 19%. Strong overall sales growth in the
US and international markets outside of Japan offset slower sales
in the Japan market. Sales in the European market increased 49% to
$31.6 million, US sales increased 31% to $29.0 million, and Asian
sales decreased 17% to $20.5 million. Retail Cost of Sales and
Gross Margin Cost of sales for Harry Winston Inc. for the second
quarter was $41.2 million compared to $35.6 million for the
comparable quarter of the prior year. Gross margin for the quarter
was $40.0 million or 49.3% compared to $32.6 million or 47.8% for
the second quarter of the prior year. Excluding the impact of sales
of Harry Winston Inc. pre-acquisition inventory, gross margin for
the second quarter and the comparable quarter of the prior year
would have been 51.3% and 51.1%, respectively. Retail Selling,
General and Administrative Expenses With the expansion of the new
international salon network, consistent with the Company's retail
growth strategy, SG&A expenses increased to $34.0 million
from $29.3 million in the comparable quarter of the prior year. The
increase, which was primarily due to the continued expansion of the
retail salon network, included an increase of $1.0 million in each
of rent and building related expenses, salaries and benefits, and
depreciation and amortization, an increase of $0.6 million in
advertising and selling expenses, an increase of $0.6 million in
professional fees and $0.5 million in other expenses. SG&A
expenses include depreciation and amortization expense of
$3.1 million compared to $2.1 million in the comparable
quarter of the prior year. SG&A as a percentage of sales
decreased to 42.0% in the second quarter from 43.0% in the
comparable quarter of the prior year. Six Months Ended July 31,
2008 Compared to Six Months Ended July 31, 2007 Retail Sales Sales
for the six months ended July 31, 2008 were $155.8 million compared
to $126.8 million for the comparable period of the prior year, an
increase of 23%. Strong overall sales growth in the US and
international markets outside of Japan offset slower sales in the
Japanese market. Sales in the European market increased 45% to
$63.3 million, US sales increased 16% to $53.9 million, and
Asian sales increased 5% to $38.6 million. Retail Cost of Sales and
Gross Margin Cost of sales for the six months ended July 31, 2008
was $82.2 million compared to $66.2 million for the six months
ended July 31, 2007. Gross margin for the six months ended July 31,
2008 was $73.6 million or 47.3% compared to $60.6 million or 47.8%
for the comparable period of the prior year. Excluding the impact
of sales of Harry Winston Inc. pre-acquisition inventory, gross
margin for the six months ended July 31, 2008 and the comparable
period of the prior year would have been 49.4% and 51.3%,
respectively. Gross margin for the six months ended July 31, 2008
was impacted by three factors related to the first quarter: an
increased contribution of high dollar value transactions, which
carry lower-than-average gross margins; an increase in costs
related to precious metals and gem stones; and an increase in
research and development costs to support the growing watch
business. Retail Selling, General and Administrative Expenses
SG&A expenses increased to $70.1 million for the six months
ended July 31, 2008 as compared to $58.6 million in the
comparable period of the prior year. However, SG&A as a
percentage of sales decreased to 45.0% for the six months ended
July 31, 2008 compared to 46.1% in the comparable period of the
prior year. The increase, which was primarily due to the continued
expansion of the retail salon network, included an increase of $3.3
million in rent and building related expenses, an increase of $2.6
million in salaries and benefits, and an increase of $2.3 million
in depreciation and amortization. These increases were partially
offset by a $0.5 million decrease in advertising and selling
expenses. Additionally, SG&A expenses included approximately
$2.0 million of non-recurring expenses related to restructuring and
improvements carried out at the Geneva watch factory. SG&A
expenses include depreciation and amortization expense of $6.3
million compared to $4.0 million in the comparable period of
the prior year. Operational Update Harry Winston Diamond
Corporation's results of operations include results from its mining
and retail operations. Mining Segment During the second calendar
quarter of 2008, the Diavik Diamond Mine produced 2.5 million
carats from 0.72 million tonnes of ore sourced predominantly from
the A-154 South kimberlite pipe, with small volumes sourced from
the A-154 North and A-418 kimberlite pipes. Rough diamond
production decreased 23% in the second calendar quarter from the
prior year as the result of the continuing grade variation in the
A-154 South kimberlite pipe combined with the initial stripping of
low grade A-418 ore mixed with waste overburden material. Ore was
recovered from the A-418 kimberlite pipe as part of the ongoing
pre-stripping of waste overburden to prepare the pipe for open pit
production. This initial ore is low grade, weathered kimberlite
capping the A-418 pipe, diluted with overlying glacial till.
Sustainable full-scale open pit production from A-418 is scheduled
to begin before the end of the calendar year. Work continued on
schedule and on budget to prepare the Diavik Diamond Mine site for
underground mining. Below surface, tunnelling work passed
8 kilometres, with tunnel advance rates accelerating during
the second calendar quarter. Construction progressed as planned on
the new crusher and paste backfill plant, on expansions to the
water treatment and power plants, and on additional permanent
accommodation facilities. Diamond production from underground
mining is scheduled to begin in calendar 2009, and is expected to
replace open pit mining by calendar 2012. A $50 million capital
expenditure for a small diamond recovery project was approved
during the second calendar quarter to make additions and
modifications to the ore processing plant to recover very small
diamonds, reflecting the demand for this product. The first
recovery of small diamonds is expected in calendar 2010. The
Company estimates its share of this capital expenditure to be
approximately $20 million. Harry Winston Diamond Corporation's 40%
Share of Diavik Diamond Mine Production (reported on a one-month
lag) Three Three Six Six Months Months Months Months Ended Ended
Ended Ended June 30, June 30, June 30, June 30, 2008 2007 2008 2007
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 1,009 1,317 1,723 2,351 Grade
(carats/tonne) 3.52 5.12 3.74 5.05
-------------------------------------------------------------------------
Retail Segment For the three months ended July 2008, the retail
segment recorded strong results despite the tough economic and
retail environment, a reflection of the strength of the Harry
Winston brand. Sales increased by 19% over the comparable quarter
of the prior year. Strong overall sales growth in the US and
international markets outside of Japan offset slower sales in the
Japanese market. Gross margin showed significant improvement from
the first quarter as a result of the mix of product sold as well as
selective price increases consistent with the direction of market
trends. Harry Winston Inc. operated a network of 18 retail salons
during the quarter compared to 15 salons in the comparable quarter
of the prior year. A new salon was opened in August 2008 in Costa
Mesa, California. Liquidity and Capital Resources Working Capital
As at July 31, 2008, the Company had unrestricted cash and cash
equivalents of $56.3 million and contingency cash collateral and
reserves of $25.3 million as required under the Company's debt
arrangements, compared to $49.6 million and $25.6 million,
respectively, at January 31, 2008. The Company had cash on hand and
balances with banks of $56.3 million and short-term investments of
$nil at July 31, 2008 compared to $33.0 million and
$16.6 million, respectively, at January 31, 2008. Short-term
investments are held in overnight deposits. Total cash resources at
July 31, 2008 were $81.6 million, $6.4 million higher than the
total cash resources of $75.2 million at January 31, 2008.
Working capital decreased to $212.7 million at July 31, 2008 from
$220.0 million at January 31, 2008. The Company's working
capital and working capital requirements fluctuate from quarter to
quarter depending on, among other factors, the seasonality of
production at the Diavik Diamond Mine, the number of sales events
conducted during the quarter and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond
Mine in each quarter, along with the seasonality and salon
expansion in the retail segment. The Company's principal working
capital needs include investments in inventory, prepaid expenses
and other current assets, and accounts payable and income taxes
payable. The Company's cash requirements are driven by differences
in the timing of cash receipts and the cash outflows. The Company
has the ability, under certain conditions, to draw on its various
credit facilities to finance these timing differences. Cash Flow
from Operations During the quarter ended July 31, 2008, the Company
generated $46.2 million in cash from operations, compared to
$29.8 million in the comparable quarter of the prior year. During
the second quarter, the Company increased accounts receivable by
$6.5 million, decreased prepaid expenses and other current assets
by $6.0 million, increased inventory by $4.4 million,
decreased accounts payable and accrued liabilities by $3.9 million,
and decreased income taxes payable by $2.9 million. The liquidity
and capital requirements of the Company vary by quarter depending
on the seasonal and production variability of its mining and retail
segments. Timing differences in cash flow are financed by drawing
down on the Company's credit facilities. Over the course of a
fiscal year, the Company does not expect the fluctuations to be
material. Over the next two fiscal years, capital requirements for
the mining segment are expected to increase significantly in
accordance with the expected investment program at the Diavik
Diamond Mine. Thereafter, capital requirements for the mining
segment are expected to moderate and the mining segment is expected
to generate sufficient cash flow to finance its operations and
capital expenditure requirements. The capital requirements for the
retail segment are ordinary in course and are not expected to
fluctuate materially over the next few years. The retail segment
will finance its operations and capital requirements during these
years from operating cash flow and its credit facilities. The
Company may, from time to time, supplement its liquidity by
financing in the capital markets. Financing Activities During the
second quarter, the Company repaid $14.7 million of its senior
secured term facilities. At July 31, 2008, the Company had $49.2
million outstanding on its senior secured term credit facilities
and $50.0 million outstanding on its senior secured revolving
credit facility. In comparison, at January 31, 2008, $76.4 million
was outstanding on the term credit facilities and $50.0 million was
outstanding on the secured revolving credit facility. As at July
31, 2008, Harry Winston Inc. had $166.1 million outstanding on its
$250.0 million secured five-year revolving credit facility, which
is used to fund salon inventory and capital expenditure
requirements. This represents an increase of $12.1 million from the
amount outstanding at January 31, 2008. Also included in long-term
debt of the Company's retail operations is a 25-year loan agreement
for 17.5 million CHF used to finance the construction of the new
watch factory in Geneva, Switzerland. At July 31, 2008,
$16.6 million had been drawn against the facility compared to
$16.1 million at January 31, 2008. The bank has a secured interest
in the factory building. On June 26, 2008, the bank further
extended a demand credit facility for 2.0 million CHF. The new
facility is supported by a $2.0 million standby letter of credit.
At July 31, 2008, $0.2 million was drawn against this demand credit
facility. Harry Winston Japan, K.K. maintains secured and unsecured
credit agreements with three banks amounting to (Yen)2,075 million.
At July 31, 2008, $19.2 million had been drawn against these
facilities, $4.6 million of which is long term, payable on June 28,
2010, with the balance of $14.6 million classified as bank
advances. At January 31, 2008, $19.4 million had been drawn against
these facilities, $4.7 million of which is long term with the
balance of $14.7 million classified as bank advances. At July 31,
2008, $22.6 million and $6.4 million were drawn under the Company's
revolving financing facilities relating to its Belgian subsidiary,
Harry Winston Diamond International N.V., and its Israeli
subsidiary, Harry Winston Diamond (Israel) Limited, respectively.
At January 31, 2008, $10.5 million and $9.4 million were drawn
under the Company's revolving financing facilities relating to
Harry Winston Diamond International N.V. and Harry Winston Diamond
(Israel) Limited, respectively. During the second quarter, the
Company made dividend payments of $3.1 million or $0.05 per
share to its shareholders. Investing Activities During the second
quarter, the Company purchased capital assets of
$67.7 million, of which $63.3 million were purchased for the
mining segment and $4.4 million for the retail segment. Contractual
Obligations The Company has contractual payment obligations with
respect to long-term debt and, through its participation in the
Joint Venture, future site restoration costs at the Diavik Diamond
Mine. Additionally, at the Joint Venture, contractual obligations
exist with respect to operating purchase obligations, as
administered by DDMI, the operator of the mine. In order to
maintain its 40% ownership interest in the Diavik Diamond Mine, the
Company is obligated to fund 40% of the Joint Venture's total
expenditures on a monthly basis. Based on the current mine plan,
the Company's current projected share of the planned capital
expenditures at the Diavik Diamond Mine, which are not reflected in
the table below, including capital expenditures for the fiscal
years 2009 to 2013, is approximately $340 million assuming, among
other factors, a Canadian/US average exchange rate of $0.96 for the
five years. The most significant contractual obligations for the
ensuing five-year period can be summarized as follows: Contractual
Obligations (expressed in thousands of United States Less than Year
Year After dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $356,974 $ 82,810 $ 63,278 $ 20,807 $190,079
Environmental and participation agreements incremental
commitments(c) 95,445 74,994 3,906 1,953 14,592 Operating lease
obligations(d) 119,637 17,267 28,325 18,185 55,860 Capital lease
obligations(e) 1,984 921 1,063 - -
-------------------------------------------------------------------------
Total contractual obligations $574,040 $175,992 $ 96,572 $ 40,945
$260,531
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. The mining segment's credit
agreements are comprised of two senior secured term credit
facilities and a senior secured revolving credit facility. The
existing facilities have a maturity date of December 15, 2009. At
July 31, 2008, $49.2 million in total was outstanding on the senior
secured term credit facilities, and $50.0 million was outstanding
on the senior secured revolving credit facility. Scheduled
repayments on the senior secured term credit facilities commenced
March 15, 2008 with $12.5 million in repayments due every quarter.
The maximum amount permitted to be drawn under the senior secured
revolving credit facility will be reduced by $12.5 million on a
quarterly basis commencing March 15, 2009. The Company's first
mortgage on real property has scheduled principal payments of
approximately $0.1 million quarterly, and may be prepaid after
2009. On July 31, 2008, $8.4 million was outstanding on the
mortgage payable. On February 22, 2008, Harry Winston Inc. entered
into a new credit agreement with a syndicate of banks for a $250.0
million, five-year revolving credit facility. There are no
scheduled repayments required before maturity. At July 31, 2008,
$166.1 million had been drawn against this secured credit facility
which expires on March 31, 2013. Also included in long-term debt of
Harry Winston Inc. is a 25-year loan agreement for 17.5 million CHF
used to finance the construction of the new watch factory in
Geneva, Switzerland. The bank has a secured interest in the factory
building. The loan agreement is comprised of a 3.5 million CHF loan
and a 14.0 million CHF loan. The 3.5 million CHF loan bears
interest at a rate of 3.9% and matures on April 22, 2010. The 14.0
million CHF loan bears interest at a rate of 3.55% and matures on
January 31, 2033, with quarterly payments commencing on June 30,
2008. At July 31, 2008, $16.6 million was outstanding on this loan
agreement. On June 26, 2008, the bank further extended a demand
credit facility for 2.0 million CHF. The new facility is supported
by a $2.0 million standby letter of credit and bears interest at a
rate of 5.0% per annum. (b) Interest on long-term debt is
calculated at various fixed and floating rates. Projected interest
payments on the current debt outstanding were based on interest
rates in effect at July 31, 2008 and have been included under
long-term debt in the table above. Interest payments for the next
12 months are estimated to be $13.7 million. (c) The Joint Venture,
under environmental and other agreements, must provide funding for
the Environmental Monitoring Advisory Board. These agreements also
state the Joint Venture must provide security deposits for the
performance by the Joint Venture of its reclamation and abandonment
obligations under all environmental laws and regulations. The Joint
Venture has fulfilled its obligations for the security deposits by
posting letters of credit of which the Company's share as at July
31, 2008 was $73.6 million. The requirement to post security for
the reclamation and abandonment obligations may be reduced to the
extent of amounts spent by the Joint Venture on those activities.
The Joint Venture has also signed participation agreements with
various native groups. These agreements are expected to contribute
to the social, economic and cultural well-being of area Aboriginal
bands. The amounts reflected as contractual obligations in the
table above represent obligations that are in addition to the $73.6
million in letters of credit posted. The actual cash outlay for the
Joint Venture's obligations under these agreements is not
anticipated to occur until later in the life of the Diavik Diamond
Mine. (d) Operating lease obligations represent future minimum
annual rentals under non-cancellable operating leases for Harry
Winston Inc. salons and office space. (e) Capital lease obligations
represent future minimum annual rentals under non-cancellable
capital leases for Harry Winston Inc. retail exhibit space. Outlook
Mining Production Rough diamond production decreased 27% in the
first half of the calendar year from the prior year as a result of
the continuing grade variation in the A-154 South kimberlite pipe
combined with the initial stripping of low grade A-418 production
of ore mixed with waste overburden material. The Company expects
the grade variation in the A-154 South kimberlite pipe to persist
for the balance of the year. Detailed sampling of the area already
mined shows sample grades ranging from as low as 2 carats per tonne
to over 9 carats per tonne, with an average of 4 carats per tonne.
This short-range grade variation within the longer range ore
reserve is a common feature of diamond mineralization due to the
size range and distribution of the diamonds within the host rock.
This shortfall is not expected to persist through the balance of
the A-154 South kimberlite pipe. A program of detailed drilling to
confirm the A-154 South underground reserve grade will be
undertaken from the pit floor after open pit mining finishes. Given
that it has been the active mining area, there has been less
definition drilling on this pipe than on A-154 North and A-418
kimberlite pipes that make up the bulk of the underground mining
reserve. Although the estimated rough diamond production for
calendar 2008 remains at approximately 10.0 million to 10.5 million
carats, the transition from mining the bottom of the A-154 pit to
the commencement of mining A-418 open pit has attendant risks to
achieving production goals. Third quarter production to date from
the A-154 South kimberlite pipe has been lower than anticipated due
to engineering challenges in mining the constricted final benches
of the A-154 open pit. Price increases achieved year to date
suggest that any potential production shortfall may be partially
mitigated. Pre-stripping of the A-418 kimberlite pipe continues,
with some commercial production from the A-418 open pit anticipated
by the end of the calendar year. The expected start date of 2009
for underground production from A-154 South, A-154 North and A-418
remains unchanged. These development programs remain on schedule
and on budget. The Company expects rough diamond prices to remain
robust with softness in the US being offset by strong demand in the
world economy, especially in the Far East. Cost of Sales The
continuation of pre-stripping of the A-418 kimberlite pipe is
expected to result in lower cost of sales in calendar 2008 than
previously anticipated. Cost of sales will also be impacted by any
reduction in production from current estimates. The Company
continues to expect cost of sales to peak in calendar 2009,
followed by an anticipated decline in cost of sales over the
following two years as the overlap between open pit and underground
mining diminishes. Capital Expenditures The surface and underground
capital programs remain on schedule and on budget. The Company
expects to make capital contributions of approximately $221 million
during fiscal 2009 and 2010 in support of the underground
development project. Financing for this capital contribution is
expected to be drawn from a combination of cash from operations,
proceeds from the March 2008 common share private placement and
refinancing of the Company's credit facility. Based on the current
mine plan, the Company's portion of planned capital expenditures at
the Diavik Diamond Mine for fiscal 2009 to 2013 is expected to be
approximately $340 million at a Canadian/US dollar average exchange
rate of $0.96. Included in this capital contribution is $20 million
relating to the small diamond project approved in the second
quarter of fiscal 2009. This project comprises additions and
modifications to the ore processing plant for the recovery of very
small diamonds. This project has commenced, with first recovery of
small diamonds expected in calendar 2010. Rough Diamond Sales Cycle
The Company is expecting to hold two primary rough diamond sales in
the third quarter and three in the fourth. Sales are now conducted
throughout the quarter in each of the Company's three selling
offices located in Belgium, Israel and India. Retail Harry Winston
Inc. expects sales in the luxury jewelry industry to remain robust.
The retail segment is strategically well positioned to withstand
regional economic disruptions as a result of its diverse global
distribution network. Continued strong demand for luxury diamond
jewelry and watches from markets in Asia, Russia and the Middle
East is expected to offset the difficult retail environment in the
US and Japanese markets. The sales performance in the first six
months of fiscal 2009 leaves us well positioned to achieve our
annual sales growth objective of in excess of 15%. Harry Winston
Inc. will continue its plan to strengthen its brand and expand its
retail salon network and product offering over the next several
years. One salon was opened in Costa Mesa, California during August
2008. Related Parties Transactions with related parties for the
three months ended July 31, 2008 include $0.3 million of rent ($0.7
million for the six months ended July 31, 2008) relating to
the New York salon, payable to a Harry Winston Inc. employee.
Critical Accounting Estimates Management is often required to make
judgments, assumptions and estimates in the application of Canadian
generally accepted accounting principles that have a significant
impact on the financial results of the Company. Certain policies
are more significant than others and are, therefore, considered
critical accounting policies. Accounting policies are considered
critical if they rely on a substantial amount of judgment (use of
estimates) in their application or if they result from a choice
between accounting alternatives and that choice has a material
impact on the Company's reported results or financial position.
There have been no changes to the Company's critical accounting
policies or estimates from those disclosed in the Company's
MD&A for its fiscal year ended January 31, 2008. Changes in
Accounting Policies Capital Disclosures Effective February 1, 2008,
the Company adopted new accounting recommendations from the
Canadian Institute of Chartered Accountants ("CICA"), Handbook
Section 1535, "Capital Disclosures". This new standard specifies
the requirements for disclosure of both qualitative and
quantitative information to enable users of financial statements to
evaluate the Company's objectives, policies and processes for
managing capital. This disclosure is contained in note 12 to the
interim consolidated financial statements. Inventories Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3031,
"Inventories", which supersedes the previously issued standard on
inventory. The new standard introduces significant changes to the
measurement and disclosure of inventory. The measurement changes
include: the elimination of LIFO, the requirement to measure
inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or
services produced for specific purposes, the requirement for an
entity to use a consistent cost formula for inventory of a similar
nature and use, and the reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value
of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an
expense, write-downs and the reversals of write-downs are required
to be disclosed. This standard has had no material impact on the
consolidated financial statements. Financial Instruments Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on
disclosure of risks associated with both recognized and
unrecognized financial instruments and how the Company manages
these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed
in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure is contained in notes 13 and 14 to
the interim consolidated financial statements. Recently Issued
Accounting Standards Goodwill and Intangibles On February 1, 2008
the CICA issued Handbook Section 3064, "Goodwill and Intangible
Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets. Concurrent with the introduction of this
standard, the CICA withdrew EIC 27, "Revenues and Expenses During
the Pre-operating Period," which eliminates the ability for
companies to defer costs and revenues incurred prior to commercial
production at new mine operations. The changes are effective for
interim and annual financial statements beginning January 1, 2009.
The Company is currently assessing the impact of this standard on
its consolidated financial statements. International Financial
Reporting Standards ("IFRS") The Company plans to report under
International Financial Reporting Standards ("IFRS") as of February
1, 2011. Changing from Canadian GAAP to IFRS could materially
affect the Company's reported financial position and results of
operations. During the second quarter of fiscal 2009, the Company
commenced preparation of its changeover plan. The Company intends
to engage a third party advisor to assist with the plan. Over the
next few months, specific actions include identifying the major
accounting differences between current Canadian GAAP and IFRS as
they affect the Company and determining resource requirements over
the next two years as the Company implements its transition plan.
Risks and Uncertainties Harry Winston Diamond Corporation is
subject to a number of risks and uncertainties as a result of its
operations. In addition to the other information contained in this
Management's Discussion and Analysis and the Company's other
publicly filed disclosure documents, readers should give careful
consideration to the following risks, each of which could have a
material adverse effect on the Company's business prospects or
financial condition: Nature of Mining The operation of the Diavik
Diamond Mine is subject to risks inherent in the mining industry,
including variations in grade and other geological differences,
unexpected problems associated with required water retention dikes,
water quality, surface and underground conditions, processing
problems, equipment performance, accidents, labour disputes, risks
relating to the physical security of the diamonds, force majeure
risks and natural disasters. Particularly with underground mining
operations, inherent risks include variations in rock structure and
strength as it impacts on mining method selection and performance,
de-watering and water handling requirements, achieving the required
paste backfill strengths, and unexpected local ground conditions.
Hazards, such as unusual or unexpected rock formations, rock
bursts, pressures, collapses, flooding or other conditions, may be
encountered during mining. Such risks could result in personal
injury or fatality; damage to or destruction of mining properties,
processing facilities or equipment; environmental damage; delays,
suspensions or permanent reductions in mining production; monetary
losses; and possible legal liability. The Diavik Diamond Mine,
because of its remote northern location and access only by winter
road or by air, is subject to special climate and transportation
risks. These risks include the inability to operate or to operate
efficiently during periods of extreme cold, the unavailability of
materials and equipment, and increased transportation costs due to
the late opening and/or early closure of the winter road. Such
factors can add to the cost of mine development, production and
operation and/or impair production and mining activities, thereby
affecting the Company's profitability. Nature of Joint Arrangement
with DDMI The Company owns an undivided 40% interest in the assets,
liabilities and expenses of the Diavik Diamond Mine and the Diavik
group of mineral claims. The Diavik Diamond Mine and the
exploration and development of the Diavik group of mineral claims
is a joint arrangement between DDMI (60%) and Harry Winston Diamond
Mines Ltd. (40%), and is subject to the risks normally associated
with the conduct of joint ventures and similar joint arrangements.
These risks include the inability to exert influence over strategic
decisions made in respect of the Diavik Diamond Mine and the Diavik
group of mineral claims. By virtue of DDMI's 60% interest in the
Diavik Diamond Mine, it has a controlling vote in virtually all
Joint Venture management decisions respecting the development and
operation of the Diavik Diamond Mine and the development of the
Diavik group of mineral claims. Accordingly, DDMI is able to
determine the timing and scope of future project capital
expenditures, and therefore is able to impose capital expenditure
requirements on the Company that the Company may not have
sufficient cash to meet. The Company's contribution to capital
requirements to complete the underground development and supporting
infrastructure contemplated by the new mine plan is estimated to be
$221 million during fiscal 2009 and 2010, with funding expected to
be provided in part from a CAD $75 million private placement
completed on March 14, 2008, cash flow from operations and a
refinancing of the Company's credit facilities. There can be no
assurance that the Company will be able to refinance its current
credit facilities on satisfactory terms and conditions, or at all.
A failure by the Company to meet capital expenditure requirements
imposed by DDMI could result in the Company's interest in the
Diavik Diamond Mine and the Diavik group of mineral claims being
diluted. Diamond Prices and Demand for Diamonds The profitability
of the Company is dependent upon production from the Diavik Diamond
Mine and on the results of the operations of its retail operations.
Each in turn is dependent in significant part upon the worldwide
demand for and price of diamonds. Diamond prices fluctuate and are
affected by numerous factors beyond the control of the Company,
including worldwide economic trends, particularly in the US, Japan,
China and India, worldwide levels of diamond discovery and
production and the level of demand for, and discretionary spending
on, luxury goods such as diamonds and jewelry. Low or negative
growth in the worldwide economy, prolonged credit market
disruptions or the occurrence of terrorist or similar activities
creating disruptions in economic growth could result in decreased
demand for luxury goods such as diamonds and jewelry, thereby
negatively affecting the price of diamonds and jewelry. Similarly,
a substantial increase in the worldwide level of diamond production
could also negatively affect the price of diamonds. In each case,
such developments could materially adversely affect the Company's
results of operations. Currency Risk Currency fluctuations may
affect the Company's financial performance. Diamonds are sold
throughout the world based principally on the US dollar price, and
although the Company reports its financial results in US dollars, a
majority of the costs and expenses of the Diavik Diamond Mine,
which are borne 40% by the Company, are incurred in Canadian
dollars. Further, the Company has a significant future income tax
liability that has been incurred and will be payable in Canadian
dollars. The Company's currency exposure relates primarily to
expenses and obligations incurred by it in Canadian dollars and,
secondarily, to revenues of Harry Winston Inc. in currencies other
than the US dollar. The appreciation of the Canadian dollar against
the US dollar, and the depreciation of such other currencies
against the US dollar, therefore, will increase the expenses of the
Diavik Diamond Mine and the amount of the Company's Canadian dollar
liabilities relative to the revenue the Company will receive from
diamond sales, and will decrease the US dollar revenues received by
Harry Winston Inc. From time to time, the Company may use a limited
number of derivative financial instruments to manage its foreign
currency exposure. Licenses and Permits The operation of the Diavik
Diamond Mine and exploration on the Diavik property require
licenses and permits from the Canadian government. Renewal of the
Diavik Diamond Mine Type "A" Water License was granted by the
regional Wek'eezhii Land and Water Board on November 1, 2007 for an
eight-year period. While the Company anticipates that DDMI, which
is also the operator of the Diavik Diamond Mine, will be able to
renew this license and other necessary permits in the future, there
can be no guarantee that DDMI will be able to do so or obtain or
maintain all other necessary licenses and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the Diavik property. Regulatory and
Environmental Risks The operation of the Diavik Diamond Mine,
exploration activities at the Diavik Project and the manufacturing
of jewelry and watches are subject to various laws and regulations
governing the protection of the environment, exploration,
development, production, taxes, labour standards, occupational
health, waste disposal, mine safety, manufacturing safety and other
matters. New laws and regulations, amendments to existing laws and
regulations, or more stringent implementation or changes in
enforcement policies under existing laws and regulations could have
a material adverse impact on the Company by increasing costs and/or
causing a reduction in levels of production from the Diavik Diamond
Mine and in the manufacture of jewelry and watches. As well, as the
Company's international operations expand, it or its subsidiaries
become subject to laws and regulatory regimes which differ
materially from those under which they operate in Canada and the
US. Mining and manufacturing are subject to potential risks and
liabilities associated with pollution of the environment and the
disposal of waste products occurring as a result of mining and
manufacturing operations. To the extent that the Company's
operations are subject to uninsured environmental liabilities, the
payment of such liabilities could have a material adverse effect on
the Company. Climate Change Canada ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change in late
2002 and the Kyoto Protocol came into effect in Canada in February
2005. The Canadian government is currently developing a number of
policy measures in order to meet its emission reduction guidelines.
While the impact of these measures cannot be quantified at this
time, the likely effect will be to increase costs for fossil fuels,
electricity and transportation, restrict industrial emission
levels, impose added costs for emissions in excess of permitted
levels and increase costs for monitoring and reporting. Compliance
with these initiatives could have a material adverse effect on the
Company's results of operations. Resource and Reserve Estimates The
Company's figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can
be given that the anticipated carats will be recovered. The
estimation of reserves is a subjective process. Forecasts are based
on engineering data, projected future rates of production and the
timing of future expenditures, all of which are subject to numerous
uncertainties and various interpretations. The Company expects that
its estimates of reserves will change to reflect updated
information. Reserve estimates may be revised upward or downward
based on the results of current and future drilling, testing or
production levels and on changes in mine design. In addition,
market fluctuations in the price of diamonds or increases in the
costs to recover diamonds from the Diavik Diamond Mine may render
the mining of ore reserves uneconomical. Mineral resources that are
not mineral reserves do not have demonstrated economic viability.
Due to the uncertainty that may attach to inferred mineral
resources, there is no assurance that mineral resources at the
Diavik property will be upgraded to proven and probable ore
reserves. Insurance The Company's business is subject to a number
of risks and hazards, including adverse environmental conditions,
industrial accidents, labour disputes, unusual or unexpected
geological conditions, risks relating to the physical security of
diamonds and jewelry held as inventory or in transit, changes in
the regulatory environment and natural phenomena such as inclement
weather conditions. Such occurrences could result in damage to the
Diavik Diamond Mine, personal injury or death, environmental damage
to the Diavik property, delays in mining, closing of Harry Winston
Inc.'s manufacturing facilities or salons, monetary losses and
possible legal liability. Although insurance is maintained to
protect against certain risks in connection with the Diavik Diamond
Mine and, the Company's operations, the insurance in place will not
cover all potential risks. It may not be possible to maintain
insurance to cover insurable risks at economically feasible
premiums. Fuel Costs The Diavik Diamond Mine's expected fuel needs
are purchased periodically during the year for storage, and
transported to the mine site by way of the winter road. These costs
will increase if transportation by air freight is required due to a
shortened "winter road season" or unexpectedly high fuel usage. The
cost of the fuel purchased is based on the then prevailing price
and expensed into operating costs on a usage basis. The Diavik
Diamond Mine currently has no hedges for its future anticipated
fuel consumption. Reliance on Skilled Employees Production at the
Diavik Diamond Mine is dependent upon the efforts of certain
skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled
employees may adversely affect the level of diamond production from
the Diavik Diamond Mine. Currently, there is significant
competition for skilled workers in remote northern operations due
to the significant number of large-scale construction projects
ongoing and planned in Canada's north, including the various
construction projects relating to the development of the oil sands
in northern Alberta. The Company's success at marketing rough
diamonds and in operating the business of Harry Winston Inc. is
dependent on the services of key executives and skilled employees,
as well as the continuance of key relationships with certain third
parties, such as diamantaires. The loss of these persons or the
Company's inability to attract and retain additional skilled
employees or to establish and maintain relationships with required
third parties may adversely affect its business and future
operations in marketing diamonds and in operating its retail
segment. Expansion of the Existing Salon Network A key component of
the Company's retail strategy is the expansion of its existing
salon network. This strategy requires the Company to make ongoing
capital expenditures to build and open new salons, to refurbish
existing salons from time to time, and to incur additional
operating expenses in order to operate the new salons. To date,
much of this expansion has been financed through borrowings by
Harry Winston Inc. There can be no assurance that the expansion of
the salon network will prove successful in increasing annual sales
or earnings from the retail segment, and the increased debt levels
resulting from this expansion could negatively impact the Company's
liquidity and its results from operations in the absence of
increased sales and earnings. Competition in the Luxury Jewelry
Segment The Company is exposed to competition in the retail diamond
market from other luxury goods, diamond, jewelry and watch
retailers. The ability of Harry Winston Inc. to successfully
compete with such luxury goods, diamond, jewelry and watch
retailers is dependent upon a number of factors, including the
ability to source high-end polished diamonds and protect and
promote its distinctive brand name and reputation. If Harry Winston
Inc. is unable to successfully compete in the luxury jewelry
segment, then the Company's results of operations will be adversely
affected. Outstanding Share Information As at July 31, 2008
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 61,372,091
Options outstanding 1,619,338 Fully diluted 62,991,429
-------------------------------------------------------------------------
Additional Information Additional information relating to the
Company, including the Company's most recently filed annual
information form, can be found on SEDAR at http://www.sedar.com/,
and is also available on the Company's website at
http://investor.harrywinston.com/. Consolidated Balance Sheets
(expressed in thousands of United States dollars) July 31, January
31, 2008 2008 (unaudited)
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 56,318
$ 49,628 Cash collateral and cash reserves (note 3) 25,303 25,615
Accounts receivable 30,152 25,505 Inventory and supplies (note 4)
345,213 322,228 Prepaid expenses and other current assets 59,609
58,617
-------------------------------------------------------------------------
516,595 481,593 Mining capital assets 765,996 658,200 Retail
capital assets 73,667 70,617 Intangible assets, net (note 6)
131,574 132,628 Goodwill 93,780 93,780 Other assets 16,603 16,167
Future income tax asset 38,302 40,963
-------------------------------------------------------------------------
$ 1,636,517 $ 1,493,948 ---------------------------
--------------------------- Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities $
137,069 $ 124,426 Income taxes payable 54,013 48,118 Bank advances
43,742 34,928 Current portion of long-term debt (note 7) 69,121
54,137
-------------------------------------------------------------------------
303,945 261,609 Long-term debt (note 7) 225,403 255,212 Future
income tax liability 356,079 370,500 Other long-term liability
2,015 1,730 Future site restoration costs 33,826 32,980 Minority
interest 257 255 Shareholders' equity: Share capital (note 8)
381,541 305,502 Contributed surplus 15,906 15,614 Retained earnings
290,398 225,334 Accumulated other comprehensive income 27,147
25,212
-------------------------------------------------------------------------
714,992 571,662 Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,636,517 $ 1,493,948 ---------------------------
--------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Earnings
(expressed in thousands of United States dollars, except per share
amounts) (unaudited) Three Months Three Months Six Months Six
Months Ended Ended Ended Ended July 31, July 31, July 31, July 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 186,119 $ 173,269 $ 342,198 $ 314,634 Cost of sales (note
15) 73,542 81,827 146,691 152,959
-------------------------------------------------------------------------
Gross margin 112,577 91,442 195,507 161,675 Selling, general and
administrative expenses 39,194 35,201 82,479 69,412
-------------------------------------------------------------------------
Earnings from operations 73,383 56,241 113,028 92,263
-------------------------------------------------------------------------
Interest and financing expenses (5,366) (7,222) (10,819) (13,354)
Other income 815 545 1,061 1,458 Foreign exchange gain (loss) 5,301
(11,785) 5,456 (25,077)
-------------------------------------------------------------------------
Earnings before income taxes 74,133 37,779 108,726 55,290 Income
tax expense - Current 27,589 25,091 49,089 42,531 Income tax
recovery - Future (3,404) (7,344) (11,568) (10,666)
-------------------------------------------------------------------------
Earnings before minority interest 49,948 20,032 71,205 23,425
Minority interest 1 (26) 2 114
-------------------------------------------------------------------------
Net earnings $ 49,947 $ 20,058 $ 71,203 $ 23,311
-------------------------------------------------------
------------------------------------------------------- Earnings
per share Basic $ 0.81 $ 0.34 $ 1.17 $ 0.40
-------------------------------------------------------
------------------------------------------------------- Fully
diluted $ 0.81 $ 0.33 $ 1.17 $ 0.39
-------------------------------------------------------
------------------------------------------------------- Weighted
average number of shares outstanding 61,372,091 58,371,004
60,655,424 58,366,574
-------------------------------------------------------
------------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (expressed in
thousands of United States dollars) (unaudited) Three Months Three
Months Six Months Six Months Ended Ended Ended Ended July 31, July
31, July 31, July 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings $ 49,947 $ 20,058 $ 71,203 $ 23,311 Other
comprehensive income Net gain on translation of foreign operations
(net of tax - nil) (654) 609 1,935 2,600
-------------------------------------------------------------------------
Total comprehensive income $ 49,293 $ 20,667 $ 73,138 $ 25,911
-------------------------------------------------------
------------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in thousands of United States dollars) (unaudited) Three
Months Three Months Six Months Six Months Ended Ended Ended Ended
July 31, July 31, July 31, July 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Common shares: Balance at beginning of period $ 381,541 $ 305,208 $
305,502 $ 305,165 Issued during the period - 294 76,039 337
-------------------------------------------------------------------------
Balance at end of period 381,541 305,502 381,541 305,502
-------------------------------------------------------------------------
Contributed surplus: Balance at beginning of period 15,769 15,107
15,614 14,922 Stock option expense 137 132 292 317
-------------------------------------------------------------------------
Balance at end of period 15,906 15,239 15,906 15,239
-------------------------------------------------------------------------
Retained earnings: Balance at beginning of period 243,521 154,285
225,334 165,625 Net earnings 49,947 20,058 71,203 23,311 Dividends
paid (3,070) (14,591) (6,139) (29,184)
-------------------------------------------------------------------------
Balance at end of period 290,398 159,752 290,398 159,752
-------------------------------------------------------------------------
Accumulated other comprehensive income: Balance at beginning of
period 27,801 18,007 25,212 16,016 Other comprehensive income Net
gain on translation of foreign operations (net of tax - nil) (654)
609 1,935 2,600
-------------------------------------------------------------------------
Balance at end of period 27,147 18,616 27,147 18,616
-------------------------------------------------------------------------
Total shareholders' equity $ 714,992 $ 499,109 $ 714,992 $ 499,109
-------------------------------------------------------
------------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (expressed in thousands of
United States dollars) (unaudited) Three Months Three Months Six
Months Six Months Ended Ended Ended Ended July 31, July 31, July
31, July 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings $ 49,947 $
20,058 $ 71,203 $ 23,311 Items not involving cash: Amortization and
accretion 16,778 20,054 30,733 39,657 Future income taxes (3,404)
(7,344) (11,568) (10,538) Stock-based compensation and pension
expense 222 132 579 1,405 Foreign exchange (5,677) 11,439 (6,251)
24,901 Loss on disposal of assets 19 - 489 - Minority interest 1
(26) 2 114 Change in non-cash operating working capital (11,679)
(14,507) (4,671) (34,726)
-------------------------------------------------------------------------
46,207 29,806 80,516 44,124
-------------------------------------------------------------------------
Financing Decrease in long- term debt (14,691) (5,368) (27,168)
(8,994) Increase in revolving credit 25,235 35,734 180,425 54,746
Repayment of Harry Winston Inc. revolving credit - (159,109)
Dividends paid (3,070) (14,591) (6,139) (29,184) Issue of common
shares - 294 76,039 337
-------------------------------------------------------------------------
7,474 16,069 64,048 16,905
-------------------------------------------------------------------------
Investing Cash collateral and cash reserve 8,635 13,679 312 25,938
Mining capital assets (63,284) (39,761) (129,908) (72,630) Retail
capital assets (4,413) (8,556) (7,656) (17,034) Other assets - 345
(1) (745)
-------------------------------------------------------------------------
(59,062) (34,293) (137,253) (64,471)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances (77) 538 (621) 916
Increase/(decrease) in cash and cash equivalents (5,458) 12,120
6,690 (2,526) Cash and cash equivalents, beginning of period (note
3) 61,776 39,528 49,628 54,174
-------------------------------------------------------------------------
Cash and cash equivalents, end of period (note 3) $ 56,318 $ 51,648
$ 56,318 $ 51,648
-------------------------------------------------------
------------------------------------------------------- Change in
non-cash operating working capital Accounts receivable (6,459)
(993) (4,727) (5,279) Prepaid expenses and other current assets
5,969 (15,646) 1,534 (14,135) Inventory and supplies (4,409)
(3,995) (22,986) (47,576) Accounts payable and accrued liabilities
(3,864) (11,744) 14,835 7,166 Income tax payable (2,916) 17,871
6,673 25,098
-------------------------------------------------------------------------
$ (11,679) $ (14,507) $ (4,671) $ (34,726)
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid $ 30,373 $ 2,305
$ 42,568 $ 3,041 Cash interest paid $ 4,390 $ 5,463 $ 8,798 $
11,206
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements July 31, 2008 with comparative
figures (tabular amounts in thousands of United States dollars,
except as otherwise noted) NOTE 1: Nature of Operations Harry
Winston Diamond Corporation (the "Company") is a specialist diamond
company focusing on the mining and retail segments of the diamond
industry. The Company's most significant asset is a 40% interest in
the Diavik group of mineral claims. The Diavik Joint Venture (the
"Joint Venture") is an unincorporated joint arrangement between
Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond
Mines Ltd. (40%). DDMI is the operator of the Diavik Diamond Mine.
Both companies are headquartered in Yellowknife, Canada. DDMI is a
wholly owned subsidiary of Rio Tinto plc of London, England, and
Harry Winston Diamond Mines Ltd. is a wholly owned subsidiary of
Harry Winston Diamond Corporation of Toronto, Canada. The Diavik
Diamond Mine is located 300 kilometres northeast of Yellowknife in
the Northwest Territories. The Company records its proportionate
interest in the assets, liabilities and expenses of the Joint
Venture in the Company's financial statements with a one-month lag.
The Company also owns a 100% interest in Harry Winston Inc., the
premier fine jewelry and watch retailer. The results of Harry
Winston Inc., located in New York City, US, are consolidated in the
financial statements of the Company. Certain comparative figures
have been reclassified to conform with the current year's
presentation. NOTE 2: Significant Accounting Policies The interim
consolidated financial statements are prepared by management in
accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts
of the Company and all of its subsidiaries as well as its
proportionate interest in the assets, liabilities and expenses of
joint arrangements. Intercompany transactions and balances have
been eliminated. The interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's Annual Report for
the year ended January 31, 2008, since these interim financial
statements do not include all disclosures required by Canadian
generally accepted accounting principles ("GAAP"). Excluding
adoption of the new accounting standards described below, these
statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the year ended January 31, 2008. Adoption of New
Accounting Standards and Developments Capital Disclosures Effective
February 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered
Accountants ("CICA"), Handbook Section 1535, "Capital Disclosures".
This new standard specifies the requirements for disclosure of both
qualitative and quantitative information to enable users of
financial statements to evaluate the Company's objectives, policies
and processes for managing capital. This disclosure is contained in
note 12 to the interim consolidated financial statements.
Inventories Effective February 1, 2008, the Company adopted new
accounting recommendations from the CICA, Handbook Section 3031,
"Inventories", which supersedes the previously issued standard on
inventory. The new standard introduces significant changes to the
measurement and disclosure of inventory. The measurement changes
include: the elimination of LIFO, the requirement to measure
inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or
services produced for specific purposes, the requirement for an
entity to use a consistent cost formula for inventory of a similar
nature and use, and the reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value
of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an
expense, write-downs and the reversals of write-downs are required
to be disclosed. This standard has had no material impact on the
consolidated financial statements. Financial Instruments Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on
disclosure of risks associated with both recognized and
unrecognized financial instruments and how the Company manages
these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed
in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure is contained in notes 13 and 14 to
the interim consolidated financial statements. Recently Issued
Accounting Standards Goodwill and Intangibles On February 1, 2008
the CICA issued Handbook Section 3064, "Goodwill and Intangible
Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets. Concurrent with the introduction of this
standard, the CICA withdrew EIC 27, "Revenues and Expenses During
the Pre-operating Period," which eliminates the ability for
companies to defer costs and revenues incurred prior to commercial
production at new mine operations. The changes are effective for
interim and annual financial statements beginning January 1, 2009.
The Company is currently assessing the impact of this standard on
its consolidated financial statements. International Financial
Reporting Standards ("IFRS") The Company plans to report under
International Financial Reporting Standards ("IFRS") as of February
1, 2011. Changing from Canadian GAAP to IFRS could materially
affect the Company's reported financial position and results of
operations. During the second quarter of fiscal 2009, the Company
commenced preparation of its changeover plan. The Company intends
to engage a third party advisor to assist with the plan. Over the
next few months, specific actions include identifying the major
accounting differences between current Canadian GAAP and IFRS as
they affect the Company and determining resource requirements over
the next two years as the Company implements its transition plan.
NOTE 3: Cash Resources July 31, January 31, 2008 2008
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 56,318 $ 33,028 Short-term
investments(a) - 16,600
-------------------------------------------------------------------------
Total cash and cash equivalents 56,318 49,628 Cash collateral and
cash reserves 25,303 25,615
-------------------------------------------------------------------------
Total cash resources $ 81,621 $ 75,243 ---------------------------
--------------------------- (a) Short-term investments are held in
overnight deposits. NOTE 4: Inventory and Supplies July 31, January
31, 2008 2008
-------------------------------------------------------------------------
Rough diamond inventory $ 13,169 $ 17,097 Merchandise inventory
260,202 254,101 Supplies inventory 71,842 51,030
-------------------------------------------------------------------------
Total inventory and supplies $ 345,213 $ 322,228
--------------------------- --------------------------- NOTE 5:
Diavik Joint Venture The following represents Harry Winston Diamond
Corporation's 40% proportionate interest in the Joint Venture as at
June 30, 2008 and December 31, 2007: July 31, January 31, 2008 2008
-------------------------------------------------------------------------
Current assets $ 123,496 $ 110,199 Long-term assets 714,708 605,300
Current liabilities 48,504 40,631 Long-term liabilities and
participant's account 789,700 674,868
-------------------------------------------------------------------------
Three Three Six Six Months Months Months Months Ended Ended Ended
Ended July 31, July 31, July 31, July 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Expenses net of interest income of $0.1 million (2007 - $0.1
million) (a)(b) 43,671 47,609 77,630 87,710 Cash flows resulting
from (used in) operating activities (33,830) (39,941) (61,221)
(83,983) Cash flows resulting from financing activities 86,377
79,454 175,501 143,726 Cash flows resulting from (used in)
investing activities (50,181) (38,191) (114,973) (67,813)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income. (b) Expenses net
of interest income for the six months ended July 31, 2008 of $0.2
million (2007 - $0.2 million). The Company is contingently liable
for the other participant's portion of the liabilities of the Joint
Venture and to the extent the Company's participating interest has
increased because of the failure of the other participant to make a
cash contribution when required, the Company would have access to
an increased portion of the assets of the Joint Venture to settle
these liabilities. NOTE 6: Intangible Assets Accum- ulated July
January Amortization Amorti- 31, 31, Period Cost zation 2008 net
2008 net
-------------------------------------------------------------------------
Trademark indefinite life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite life 12,365 - 12,365 12,365 Wholesale
distribution network 120 months 5,575 (1,647) 3,928 4,206 Store
leases 65 to 105 months 5,639 (3,353) 2,286 3,062
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ (5,000) $ 131,574 $ 132,628
-------------------------------------------
------------------------------------------- Amortization expense
for the six months ended July 31, 2008 was $1.1 million (2007 -
$0.8 million). NOTE 7: Long-Term Debt July 31, January 31, 2008
2008
-------------------------------------------------------------------------
Mining credit facilities $ 98,790 $ 125,677 Retail credit
facilities and loans 187,351 174,850 First mortgage on real
property 8,383 8,822
-------------------------------------------------------------------------
Total long-term debt 294,524 309,349
-------------------------------------------------------------------------
Less current portion (69,121) (54,137)
-------------------------------------------------------------------------
$ 225,403 $ 255,212 ---------------------------
--------------------------- On February 22, 2008, Harry Winston
Inc. entered into a new credit agreement with a syndicate of banks
for a $250.0 million, five-year revolving credit facility. There
are no scheduled repayments required before maturity. At July 31,
2008, $166.1 million had been drawn against this secured credit
facility, which expires on March 31, 2013. NOTE 8: Share Capital
(a) Authorized Unlimited common shares without par value. (b)
Issued Number of Shares Amount
---------------------------------------------------------------------
Balance, January 31, 2008 58,372,091 $ 305,502 Shares issued for:
Cash 3,000,000 76,039
---------------------------------------------------------------------
Balance, July 31, 2008 61,372,091 $ 381,541 -----------------------
----------------------- (c) RSU and DSU Plans RSU Number of Units
---------------------------------------------------------------------
Balance, January 31, 2008 143,715 Awards and payouts during the
period (net): RSU awards (net of forfeitures) (4,805) RSU payouts
(32,616)
---------------------------------------------------------------------
Balance, July 31, 2008 106,294 -----------------------
----------------------- DSU Number of Units
---------------------------------------------------------------------
Balance, January 31, 2008 72,198 Awards during the period (net):
DSU awards 20,715
---------------------------------------------------------------------
Balance, July 31, 2008 92,913 -----------------------
----------------------- Three Three Six Six Months Months Months
Months Ended Ended Ended Ended July 31, July 31, July 31, July 31,
Expense for the Period 2008 2007 2008 2007
---------------------------------------------------------------------
RSU $ (174) $ 295 $ 335 $ 460 DSU (330) 76 237 3
---------------------------------------------------------------------
$ (504) $ 371 $ 572 $ 463
-----------------------------------------------
----------------------------------------------- During the six
months ended July 31, 2008, the Company granted (4,805) RSUs (net
of forfeitures) and 20,715 DSUs under an employee and director
incentive compensation program, respectively. The RSU and DSU Plans
are full value phantom shares that mirror the value of Harry
Winston Diamond Corporation's publicly traded common shares. In
addition, 32,616 RSUs vested during the six months ended July 31,
2008, resulting in a payout of $0.8 million. Grants under the RSU
Plan are on a discretionary basis to employees of the Company
subject to Board of Director approval. Each RSU grant vests on the
third anniversary of the grant date, subject to special rules for
death and disability. The Company anticipates paying out cash on
maturity of RSUs and DSUs. Only non-executive directors of the
Company are eligible for grants under the DSU Plan. Each DSU grant
vests immediately on the grant date. The expenses related to RSUs
and DSUs are accrued based on the price of Harry Winston Diamond
Corporation's common shares at the end of the period and on the
probability of vesting. This expense is recognized on a
straight-line basis over the term of vesting. NOTE 9: Commitments
and Guarantees (a) Environmental Agreement Through negotiations of
environmental and other agreements, the Joint Venture must provide
funding for the Environmental Monitoring Advisory Board. The
Company's share of this funding requirement was $0.2 million for
calendar 2008. Further funding will be required in future years;
however, specific amounts have not yet been determined. These
agreements also state that the Joint Venture must provide security
deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental
laws and regulations. The Company's share of the Joint Venture's
letters of credit outstanding with respect to the environmental
agreements as at July 31, 2008 was $73.6 million. The agreement
specifically provides that these funding obligations will be
reduced by amounts incurred by the Joint Venture on reclamation and
abandonment activities. (b) Participation Agreements The Joint
Venture has signed participation agreements with various native
groups. These agreements are expected to contribute to the social,
economic and cultural well-being of the Aboriginal bands. The
agreements are each for an initial term of twelve years and shall
be automatically renewed on terms to be agreed for successive
periods of six years thereafter until termination. The agreements
terminate in the event the mine permanently ceases to operate. (c)
Commitments Commitments include the cumulative maximum funding
commitments secured by letters of credit of the Joint Venture's
environmental and participation agreements at the Company's 40%
share, before any reduction of future reclamation activities, and
future minimum annual rentals under non-cancellable operating and
capital leases for retail salons and corporate office space, and
are as follows: 2009 $ 93,182 2010 93,974 2011 91,261 2012 89,961
2013 89,149 Thereafter 151,305
---------------------------------------------------------------------
NOTE 10: Employee Benefit Plans Three Three Six Six Months Months
Months Months Ended Ended Ended Ended July 31, July 31, July 31,
July 31, Expenses for the Period 2008 2007 2008 2007
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston retail segment $ 403 $
6 $ 814 $ 12 Defined contribution plan - Harry Winston retail
segment 235 390 469 600 Defined contribution plan - Diavik Diamond
Mine 285 238 497 401
-------------------------------------------------------------------------
$ 923 $ 634 $ 1,780 $ 1,013
-----------------------------------------------
----------------------------------------------- NOTE 11: Related
Parties Transactions with related parties for the six months ended
July 31, 2008 include $0.7 million payable of rent ($0.9 million
for the six months ended July 31, 2007) relating to the New York
salon, payable to a Harry Winston Inc. employee. NOTE 12: Capital
Management The Company's capital includes cash and cash
equivalents, short-term debt, long-term debt and equity, which
includes issued common shares, contributed surplus and retained
earnings. The Company's primary objective with respect to its
capital management is to ensure that it has sufficient cash
resources to maintain its ongoing operations, to provide returns to
shareholders and benefits for other stakeholders, and to pursue
growth opportunities. To meet these needs, the Company may from
time to time raise additional funds through borrowing and/or the
issuance of equity or debt or by securing strategic partners, upon
approval by the Board of Directors. The Board of Directors reviews
and approves any material transactions out of the ordinary course
of business, including proposals on acquisitions or other major
investments or divestitures, as well as annual capital and
operating budgets. The Company is subject to externally imposed
capital requirements related to its senior secured term and
revolving credit facilities, whereby it is required to maintain a
consolidated tangible net worth in excess of $250 million. There
has been no change with respect to the Company's overall capital
risk management strategy. At July 31, 2008, the Company is in
compliance with this covenant. NOTE 13: Financial Instruments The
Company has various financial instruments comprised of cash and
cash equivalents, cash collateral and cash reserves, accounts
receivable, accounts payable and accrued liabilities, bank advances
and long-term debt. Cash and cash equivalents consist of cash on
hand and balances with banks and short-term investments held in
overnight deposits with a maturity on acquisition of less than 90
days. Cash and cash equivalents are designated as held-for-trading
and are carried at fair value. The fair value of accounts
receivable is determined by the amount of cash anticipated to be
received in the normal course of business from the financial asset.
The carrying values of these financial instruments are as follows:
July 31, 2008 January 31, 2008 Estimated Carrying Estimated
Carrying Fair Value Value Fair Value Value
-------------------------------------------------------------------------
Financial Assets: Cash and cash equivalents $ 56,318 $ 56,318 $
49,628 $ 49,628 Cash collateral and cash reserves 25,303 25,303
25,615 25,615 Accounts receivable 30,152 30,152 25,505 25,505
-------------------------------------------------------------------------
$ 111,773 $ 111,773 $ 100,748 $ 100,748
---------------------------------------------------
--------------------------------------------------- Financial
Liabilities: Accounts payable and accrued liabilities $ 137,069 $
137,069 $ 124,426 $ 124,426 Bank advances 43,742 43,742 34,928
34,928 Long-term debt 294,524 294,524 309,349 309,349
-------------------------------------------------------------------------
$ 475,335 $ 475,335 $ 468,703 $ 468,703
---------------------------------------------------
--------------------------------------------------- NOTE 14:
Financial Risk Exposure and Risk Management The Company is exposed,
in varying degrees, to a variety of financial instrument related
risks by virtue of its activities. The Company's overall financial
risk management program focuses on the preservation of capital and
protecting current and future Company assets and cash flows by
minimizing exposure to risks posed by the uncertainties and
volatilities of financial markets. The Company's Audit Committee
has responsibility to review and discuss significant financial
risks or exposures and to assess the steps management has taken to
monitor, control, report and mitigate such risks to the Company.
Financial risk management is carried out by the Finance department,
which identifies and evaluates financial risks and establishes
controls and procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are
managed are as follows: i) Currency Risk The Company's sales are
predominately denominated in US dollars. As the Company operates in
an international environment, some of the Company's financial
instruments and transactions are denominated in currencies other
than the US dollar. The results of the Company's operations are
subject to currency transaction risk and currency translation risk.
The operating results and financial position of the Company are
reported in US dollars in the Company's consolidated financial
statements. The Company's primary foreign exchange exposure
impacting pre-tax earnings arises from the following sources: Net
Canadian dollar denominated monetary assets and liabilities. The
most significant exposure relates to its Canadian dollar future
income tax liability. The Company's functional and reporting
currency is US dollars; however, the calculation of income tax
expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves
against the US dollar. The weakening/strengthening of the Canadian
dollar versus the US dollar results in an unrealized foreign
exchange gain/loss on the revaluation of the Canadian dollar
denominated future income tax liability. Committed or anticipated
foreign currency denominated transactions, primarily Canadian
dollar costs at the Diavik Diamond Mine. Based on the Company's net
exposure to Canadian dollar monetary assets and liabilities at July
31, 2008, a one-cent change in the exchange rate would have
impacted pre-tax net earnings for the quarter by $2.9 million. ii)
Interest Rate Risk Interest rate risk is the risk borne by an
interest-bearing asset or liability as a result of fluctuations in
interest rates. Financial assets and financial liabilities with
variable interest rates expose the Company to cash flow interest
rate risk. The Company's most significant interest rate risk arises
from its various credit facilities which bear variable interest
based on LIBOR. iii) Concentration of Credit Risk Credit risk is
the risk of a financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligation. Financial instruments that potentially
subject the company to credit risk consist of trade receivables
from retail segment clients. While economic factors can affect
credit risk, the Company manages risk by providing credit terms on
a case-by-case basis only after a review of the client's financial
position and past credit history. The Company has not experienced
significant losses in the past from its customers. The Company's
exposure to credit risk in the mining segment is minimized by its
sales policy, which requires receipt of cash prior to the delivery
of rough diamonds to its customers. The Company manages credit
risk, in respect of short-term investments, by maintaining bank
accounts with Tier 1 banks and investing only in term deposits or
banker's acceptances with highly rated financial institutions that
are capable of prompt liquidation. The Company monitors and manages
its concentration of counterparty credit risk on an ongoing basis.
At July 31, 2008, the Company's maximum counterparty credit
exposure consists of the carrying amount of cash and cash
equivalents and accounts receivable, which approximates fair value.
iv) 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 manages its liquidity by ensuring that there is sufficient
capital to meet short and long-term business requirements, after
taking into account cash flows from operations and the Company's
holdings of cash and cash equivalents. The Company also strives to
maintain sufficient financial liquidity at all times in order to
participate in investment opportunities as they arise, as well as
to withstand sudden adverse changes in economic circumstances.
Management forecasts cash flows for its current and subsequent
fiscal years to predict future financing requirements. Future
requirements are met through a combination of committed credit
facilities and access to capital markets. At July 31, 2008, the
Company had $56.3 million of cash and cash equivalents and $41.7
million available under credit facilities. The following table
summarizes the aggregate amount of contractual future cash outflows
for the Company's financial liabilities: (expressed in thousands of
United Less than Year Year After States dollars) Total 1 year 2-3
4-5 5 years
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $137,069 $137,069 $ - $ -
$ - Income taxes payable 54,013 54,013 - - - Bank advances 43,742
43,742 - - - Long-term debt(a) 356,974 82,810 63,278 20,807 190,079
Environmental and participation agreements incremental commitments
95,445 74,994 3,906 1,953 14,592 Operating lease obligations
119,637 17,267 28,325 18,185 55,860 Capital lease obligations 1,984
921 1,063 - -
-------------------------------------------------------------------------
(a) Includes projected interest payments on the current debt
outstanding based on interest rates in effect at July 31, 2008.
NOTE 15: Insurance Claim Included in cost of sales for the mining
segment is a $4.3 million insurance settlement relating to an
excavator fire that occurred in the fourth quarter of fiscal 2006
at the Diavik Diamond Mine. The settlement represents the recovery
of the cost of the excavator that was previously written off along
with incremental operating expenses relating to the procurement of
a replacement excavator. Total proceeds of $5.0 million from the
insurance settlement are expected to be received in the third
quarter, resulting in a gain of approximately $0.7 million. NOTE
16: Segmented Information The Company operates in two segments
within the diamond industry, mining and retail, for the three
months ended July 31, 2008. The mining segment consists of the
Company's rough diamond business. This business includes the 40%
interest in the Diavik group of mineral claims and the sale of
rough diamonds in the market-place. The retail segment consists of
the Company's ownership in Harry Winston Inc. This segment consists
of the marketing of fine jewelry and watches on a worldwide basis.
For the three months ended July 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 105,014 $ - $ 105,014 United States - 28,984 28,984
Europe - 31,636 31,636 Asia - 20,485 20,485 Cost of sales 32,390
41,152 73,542
-------------------------------------------------------------------------
Gross margin 72,624 39,953 112,577 Gross margin (%) 69.2% 49.3%
60.5% Selling, general and administrative expenses 5,151 34,043
39,194
-------------------------------------------------------------------------
Earnings from operations 67,473 5,910 73,383
-------------------------------------------------------------------------
Interest and financing expenses (2,648) (2,718) (5,366) Other
income (expense) 816 (1) 815 Foreign exchange gain 5,187 114 5,301
-------------------------------------------------------------------------
Segmented earnings before income taxes $ 70,828 $ 3,305 $ 74,133
-----------------------------------------
----------------------------------------- Segmented assets as at
July 31, 2008 Canada $ 969,164 $ - $ 969,164 United States -
464,792 464,792 Other foreign countries 35,200 167,361 202,561
-------------------------------------------------------------------------
$ 1,004,364 $ 632,153 $ 1,636,517
-------------------------------------------------------------------------
Goodwill as at July 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 63,284 $ 4,413 $ 67,697 Other significant non-cash
items: Income tax recovery - Future $ (3,111) $ (293) $ (3,404)
Amortization and accretion $ 13,689 $ 3,089 $ 16,778
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $6.7 million
for the three months ended July 31, 2008 ($8.1 million for the
three months ended July 31, 2007). For the three months ended July
31, 2007 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 105,071 $ - $ 105,071 United States - 22,162 22,162
Europe - 21,248 21,248 Asia - 24,788 24,788 Cost of sales 46,217
35,610 81,827
-------------------------------------------------------------------------
Gross margin 58,854 32,588 91,442 Gross margin (%) 56.0% 47.8%
52.8% Selling, general and administrative expenses 5,861 29,340
35,201
-------------------------------------------------------------------------
Earnings from operations 52,993 3,248 56,241
-------------------------------------------------------------------------
Interest and financing expenses (3,982) (3,240) (7,222) Other
income 356 189 545 Foreign exchange gain (loss) (11,985) 200
(11,785)
-------------------------------------------------------------------------
Segmented earnings before income taxes $ 37,382 $ 397 $ 37,779
-----------------------------------------
----------------------------------------- Segmented assets as at
July 31, 2007 Canada $ 761,976 $ - $ 761,976 United States -
470,233 470,233 Other foreign countries 8,284 126,773 135,057
-------------------------------------------------------------------------
$ 770,260 $ 597,006 $ 1,367,266
-------------------------------------------------------------------------
Goodwill as at July 31, 2007 $ - $ 96,575 $ 96,575 Capital
expenditures $ 39,761 $ 8,556 $ 48,317 Other significant non-cash
items: Income tax recovery - Future $ (7,122) $ (222) $ (7,344)
Amortization and accretion $ 17,969 $ 2,086 $ 20,054
-------------------------------------------------------------------------
For the six months ended July 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 186,407 $ - $ 186,407 United States - 53,910 53,910
Europe - 63,266 63,266 Asia - 38,615 38,615 Cost of sales 64,540
82,151 146,691
-------------------------------------------------------------------------
Gross margin 121,867 73,640 195,507 Gross margin (%) 65.4% 47.3%
57.1% Selling, general and administrative expenses 12,359 70,120
82,479
-------------------------------------------------------------------------
Earnings from operations 109,508 3,520 113,028
-------------------------------------------------------------------------
Interest and financing expenses (5,127) (5,692) (10,819) Other
income (expense) 1,448 (387) 1,061 Foreign exchange gain 5,261 195
5,456
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 111,090 $ (2,364) $
108,726 -----------------------------------------
----------------------------------------- Segmented assets as at
July 31, 2008 Canada $ 969,164 $ - $ 969,164 United States -
464,792 464,792 Other foreign countries 35,200 167,361 202,561
-------------------------------------------------------------------------
$ 1,004,364 $ 632,153 $ 1,636,517
-------------------------------------------------------------------------
Goodwill as at July 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 129,908 $ 7,656 $ 137,564 Other significant non-cash
items: Income tax recovery - Future $ (9,739) $ (1,829) $ (11,568)
Amortization and accretion $ 24,428 $ 6,305 $ 30,733
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $10.3 million
for the six months ended July 31, 2008 ($12.7 million for the six
months ended July 31, 2007). For the six months ended July 31, 2007
Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 187,823 $ - $ 187,823 United States - 46,503 46,503
Europe - 43,595 43,595 Asia - 36,713 36,713 Cost of sales 86,733
66,226 152,959
-------------------------------------------------------------------------
Gross margin 101,090 60,585 161,675 Gross margin (%) 53.8% 47.8%
51.4% Selling, general and administrative expenses 10,948 58,464
69,412
-------------------------------------------------------------------------
Earnings from operations 90,142 2,121 92,263
-------------------------------------------------------------------------
Interest and financing expenses (7,657) (5,697) (13,354) Other
income 1,122 336 1,458 Foreign exchange gain (loss) (25,296) 219
(25,077)
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 58,311 $ (3,021) $
55,290 -----------------------------------------
----------------------------------------- Segmented assets as at
July 31, 2007 Canada $ 761,976 $ - $ 761,976 United States -
470,233 470,233 Other foreign countries 8,284 126,773 135,057
-------------------------------------------------------------------------
$ 770,260 $ 597,006 $ 1,367,266
-------------------------------------------------------------------------
Goodwill as at July 31, 2007 $ - $ 96,575 $ 96,575 Capital
expenditures $ 72,630 $ 17,034 $ 89,664 Other significant non-cash
items: Income tax recovery - Future $ (9,805) $ (861) $ (10,666)
Amortization and accretion $ 35,659 $ 3,998 $ 39,657
-------------------------------------------------------------------------
DATASOURCE: Harry Winston Diamond Corporation CONTACT: Kelley
Stamm, , (416) 362-2237 ext.223
Copyright