TORONTO, June 4 /PRNewswire-FirstCall/ -- Harry Winston Diamond
Corporation (TSX: HW, NYSE: HWD) (the "Company") today reported
first quarter results for the period ending April 30, 2009. The
Company recorded a consolidated net loss of $45.1 million or $0.68
per share for the quarter, compared to net earnings of $21.3
million or $0.35 per share in the first quarter of the prior year.
Consolidated net loss for the quarter included a non-cash dilution
loss of $34.2 million or $0.52 per share as a result of the
investment by Kinross Gold Corporation in Harry Winston Diamond
Limited Partnership, which holds the Company's 40% interest in the
Diavik Diamond Mine. The consolidated net loss also includes a $5.8
million net foreign exchange loss or $0.09 per share, compared to a
$0.2 million net foreign exchange gain in the comparable quarter of
the prior year, and an after-tax gain on the insurance settlement
of $1.9 million or $0.03 per share. Excluding the impact of the
non-cash dilution loss, the net foreign exchange loss, and the
after-tax gain on the insurance settlement, the net loss would have
been $6.9 million or $0.10 per share for the quarter. Robert
Gannicott, Chairman and Chief Executive Officer commented: "We
began this quarter with a rough diamond market that could see no
bottom and retail sales effectively stalled. Rough diamond prices
fell to levels not seen since the inception of the Diavik Project,
seven years ago. We ended the quarter with consistent improvement
in rough diamond prices and the return of customers to our retail
stores. This improvement has continued through May in both of our
business segments." Consolidated sales were $109.6 million for the
quarter compared to $156.1 million for the comparable quarter of
the prior year, resulting in a 69% decrease in gross margin and a
loss from operations of $10.1 million. The mining segment recorded
sales of $57.7 million, a 29% decrease from $81.4 million in the
comparable quarter of the prior year. Rough diamond production for
the calendar quarter was 0.7 million carats, consistent with
production in the comparable quarter of the prior year. As a result
of lower sales, the mining segment recorded a loss from operations
for the quarter of $5.1 million compared to earnings from
operations of $42.0 million for the comparable quarter of the prior
year. The retail segment recorded a 30% decrease in sales to $51.9
million, with a loss from operations of $5.0 million compared to a
loss from operations of $2.4 million in the first quarter of the
prior year. Retail segment selling, general and administrative
expenses decreased by $5.8 million from $36.1 million in the
comparable quarter of the prior year. First Quarter Fiscal 2010
Financial Highlights (US$ in millions except Earnings per Share
amounts)
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Three Three Twelve months months months ended ended ended April 30,
April 30, January 31, 2009 2008 2009
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Sales 109.6 156.1 609.2
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Earnings from operations (loss) (10.1) 39.6 166.1
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Net earnings (loss) (45.1) 21.3 70.1
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Earnings (loss) per share ($0.68) $0.35 $1.15
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Annual General Meeting and Webcast Beginning at 10:00AM (EDT)
today, June 4, 2009, the Company will hold its Annual Meeting of
Shareholders at the Fairmont Royal York Hotel, 100 Front Street
West, Toronto, Ontario in the Imperial Room on the Lobby Level.
Interested parties unable to attend may listen to a webcast of the
meeting and a review of the first quarter results on the company's
website at http://investor.harrywinston.com/. An online archive of
the webcast will be available on the company's website at
http://investor.harrywinston.com/ later the same day. About Harry
Winston Diamond Corporation Harry Winston Diamond Corporation is a
specialist diamond enterprise with assets in the mining and retail
segments of the diamond industry. Harry Winston supplies rough
diamonds to the global market from its 40 per cent ownership
interest in the Diavik Diamond Mine (economic ownership of 31%).
The company's retail division is a premier diamond jeweler and
luxury timepiece retailer with salons in key locations, including
New York, Paris, London, Beijing, Tokyo, and Beverly Hills. The
Company focuses on the two most profitable segments of the diamond
industry, mining and retail, in which its expertise creates
shareholder value. This unique business model provides key
competitive advantages; rough diamond sales and polished diamond
purchases provide market intelligence that enhances the Company's
overall performance. For more information, please visit
http://www.harrywinston.com/. For investor information, visit
http://investor.harrywinston.com/ or call Investor Relations on
(416) 362-2237 ext 290. 2010 First Quarter Report HARRY WINSTON
DIAMOND CORPORATION Three Months Ended April 30, 2009 Highlights
(All figures are in United States dollars unless otherwise
indicated) Harry Winston Diamond Corporation recorded a
consolidated net loss of $45.1 million or $0.68 per share for the
quarter, compared to net earnings of $21.3 million or $0.35 per
share in the first quarter of the prior year. Consolidated net loss
for the quarter included a non-cash dilution loss of $34.2 million
or $0.52 per share as a result of the investment by Kinross Gold
Corporation in Harry Winston Diamond Limited Partnership, which
holds the Company's 40% interest in the Diavik Diamond Mine. The
consolidated net loss also includes a $5.8 million net foreign
exchange loss or $0.09 per share, compared to a $0.2 million net
foreign exchange gain in the comparable quarter of the prior year.
Consolidated sales were $109.6 million for the quarter compared to
$156.1 million for the comparable quarter of the prior year,
resulting in a 69% decrease in gross margin and a loss from
operations of $10.1 million. The mining segment recorded sales of
$57.7 million, a 29% decrease from $81.4 million in the comparable
quarter of the prior year. The decrease in sales resulted from
lower rough diamond prices in the first quarter. Rough diamond
production for the calendar quarter was 0.7 million carats,
consistent with production in the comparable quarter of the prior
year. As a result of lower sales, the mining segment recorded a
loss from operations for the quarter of $5.1 million compared to
earnings from operations of $42.0 million for the comparable
quarter of the prior year. The retail segment recorded a 30%
decrease in sales to $51.9 million, with a loss from operations of
$5.0 million compared to a loss from operations of $2.4 million in
the first quarter of the prior year. Retail segment selling,
general and administrative expenses decreased by $5.8 million from
$36.1 million in the comparable quarter of the prior year.
Management's Discussion and Analysis Prepared as of June 3, 2009
(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 ("Harry Winston Diamond Corporation", or the "Company")
for the three months ended April 30, 2009 and its financial
position as at April 30, 2009. 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
months ended April 30, 2009 and the audited consolidated financial
statements of the Company and notes thereto for the year ended
January 31, 2009. Unless otherwise specified, all financial
information is presented in United States dollars. Unless otherwise
indicated, all references to "first quarter" refer to the three
months ended April 30, 2009 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 from the forward-looking
information. See "Risks and Uncertainties" on page 15 for material
risk factors that could cause actual results to differ materially
from the forward-looking information. 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, the level of worldwide diamond
production and world and US economic conditions and demand for
luxury goods. Specifically, in estimating the Company's projected
Diavik Diamond Mine capital expenditure requirements over the next
five years, the Company has used an average Canadian/US dollar
exchange rate of $0.90. 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 and demand for luxury goods. While the Company 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 15. 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 risk, risks relating to the Company's salon expansion
strategy and the risks of competition in the luxury jewelry
segment. Please see page 15 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
the Company'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. The Company uses
forward-looking statements because it believes such statements
provide useful information with respect to the expected future
operations and financial performance of the Company, and cautions
readers that the information may not be appropriate for other
purposes. While the Company 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 Company'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 (economic interest of
31%), 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 operating under the Harry
Winston(R) brand. The Company's most significant asset is an
ownership 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 Limited Partnership ("HWDLP") (40%) where
HWDLP holds an undivided 40% ownership interest in the assets,
liabilities and expenses. DDMI is the operator of the Diavik
Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife,
Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of
London, England. As a result of the strategic investment by Kinross
Gold Corporation ("Kinross") of Toronto, Canada, described below,
HWDLP is 77.5% owned by the Company and 22.5% owned by Kinross. On
March 31, 2009, Kinross made a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a
direct equity stake in the Company. Kinross subscribed for 15.2
million of the Company's treasury shares at a price of $3.00 per
share, being approximately 19.9% of the Company's issued equity
post the transaction. Kinross also subscribed for new partnership
units representing a 22.5% interest in HWDLP, for a net effective
subscription value of $104.4 million. With the closing of the
Kinross transaction, the Company's economic interest in the Diavik
Diamond Mine is 31%. Market Commentary The Diamond Market During
the quarter, the rough diamond market recovered slightly from the
low point reached at the beginning of the fiscal year. The diamond
processing and jewelry manufacturers are returning to the market as
positive demand from Asia coupled with the first signs of activity
from the US market have encouraged manufacturers to begin
restocking. This renewed activity in a market previously depleted
as the result of reductions in rough diamond production by the
mining industry has improved prices for both rough and polished
diamonds. The Retail Jewelry Market The global economic downturn
continues to negatively impact the luxury diamond jewelry market.
Although there have been very tentative indications that the U.S.
economy is stabilizing, the global retail environment remains very
challenging. (R) Harry Winston is a registered trademark of Harry
Winston Inc. Consolidated Financial Results The following is a
summary of the Company's consolidated quarterly results for the
eight quarters ended April 30, 2009 following the basis of
presentation utilized in its 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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2010 2009 2009 2009 2009 Q1 Q4 Q3 Q2 Q1
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Sales $109,643 $118,399 $148,623 $186,119 $156,079 Cost of sales
83,944 68,908 71,679 73,542 73,149
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Gross margin 25,699 49,491 76,944 112,577 82,930 Gross margin (%)
23.4% 41.8% 51.8% 60.5% 53.1% Selling, general and administrative
expenses 35,749 39,399 33,998 39,194 43,285
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Earnings (loss) from operations (10,050) 10,092 42,946 73,383
39,645
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Interest and financing expenses (3,699) (4,960) (4,678) (5,366)
(5,453) Other income 281 778 407 815 246 Insurance settlement 3,250
17,240 - - - Dilution loss (34,222) - - - - Impairment charge -
(93,780) - - - Foreign exchange gain (loss) (5,839) 4,649 48,982
5,301 155
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Earnings (loss) before income taxes (50,279) (65,981) 87,657 74,133
34,593 Income taxes (recovery) (3,120) 7,052 15,685 24,185 13,336
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Earnings (loss) before minority interest and non-controlling
interest (47,159) (73,033) 71,972 49,948 21,257 Minority interest 7
(58) 81 1 1 Non-controlling interest (2,082) - - - -
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Net earnings (loss) $(45,084) $(72,975) $ 71,891 $ 49,947 $ 21,256
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Basic earnings (loss) per share $ (0.68) $ (1.19) $ 1.17 $ 0.81 $
0.35 Diluted earnings (loss) per share $ (0.68) $ (1.19) $ 1.17 $
0.81 $ 0.35 Cash dividends declared per share $ 0.00 $ 0.05 $ 0.05
$ 0.05 $ 0.05 Total assets(i) $ 1,592 $ 1,567 $ 1,645 $ 1,637 $
1,591 Total long-term liabilities(i) $ 496 $ 550 $ 562 $ 617 $ 634
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Three Three months months ended ended 2008 2008 2008 April 30,
April 30, Q4 Q3 Q2 2009 2008
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Sales $188,195 $176,478 $173,269 $109,643 $156,079 Cost of sales
83,637 74,591 81,827 83,944 73,149
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Gross margin 104,558 101,887 91,442 25,699 82,930 Gross margin (%)
55.6% 57.7% 52.8% 23.4% 53.1% Selling, general and administrative
expenses 45,494 35,539 35,201 35,749 43,285
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Earnings (loss) from operations 59,064 66,348 56,241 (10,050)
39,645
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Interest and financing expenses (7,082) (7,422) (7,222) (3,699)
(5,453) Other income 706 594 545 281 246 Insurance settlement
13,488 - - 3,250 - Dilution loss - - - (34,222) - Impairment charge
- - - - - Foreign exchange gain (loss) 22,270 (40,584) (11,785)
(5,839) 155
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Earnings (loss) before income taxes 88,446 18,936 37,779 (50,279)
34,593 Income taxes (recovery) (1,968) 26,197 17,747 (3,120) 13,336
-------------------------------------------------------------------------
Earnings (loss) before minority interest and non-controlling
interest 90,414 (7,261) 20,032 (47,159) 21,257 Minority interest
(34) 90 (26) 7 1 Non-controlling interest - - - (2,082) -
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Net earnings (loss) $ 90,448 $ (7,351) $ 20,058 $(45,084) $ 21,256
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Basic earnings (loss) per share $ 1.55 $ (0.13) $ 0.34 $ (0.68) $
0.35 Diluted earnings (loss) per share $ 1.54 $ (0.13) $ 0.33 $
(0.68) $ 0.35 Cash dividends declared per share $ 0.05 $ 0.25 $
0.25 $ 0.00 $ 0.05 Total assets(i) $ 1,494 $ 1,433 $ 1,367 $ 1,592
$ 1,591 Total long-term liabilities(i) $ 660 $ 530 $ 486 $ 496 $
634
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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 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 7 for
additional information. Three Months Ended April 30, 2009 Compared
to Three Months Ended April 30, 2008 CONSOLIDATED NET EARNINGS The
Company recorded a first quarter loss of $45.1 million or $0.68 per
share compared to net earnings of $21.3 million or $0.35 per share
in the first quarter of the prior year. Consolidated net loss for
the quarter included a non-cash dilution loss of $34.2 million or
$0.52 per share as a result of the investment by Kinross Gold
Corporation in HWDLP, which holds the Company's 40% interest in the
Diavik Diamond Mine. The consolidated net loss also includes a $5.8
million net foreign exchange loss or $0.09 per share, compared to a
$0.2 million net foreign exchange gain in the comparable quarter of
the prior year. CONSOLIDATED SALES Sales for the first quarter
totalled $109.6 million, consisting of rough diamond sales of $57.7
million and retail segment sales of $51.9 million. This compares to
sales of $156.1 million in the comparable quarter of the prior year
(rough diamond sales of $81.4 million and retail segment sales of
$74.7 million). The Company held two primary rough diamond sales in
the first quarter, consistent with 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. See "Segmented Analysis" on page 7 for additional
information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The
Company's first quarter cost of sales was $83.9 million for a gross
margin of 23.4% compared to $73.1 million cost of sales and gross
margin of 53.1% for the comparable quarter of the prior year. The
Company's cost of sales includes costs associated with mining,
rough diamond sorting and retail sales activities. See "Segmented
Analysis" on page 7 for additional information. CONSOLIDATED
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The principal
components of selling, general and administrative expenses
("SG&A") expenses include expenses for salaries and benefits,
advertising, professional fees, rent and building related costs.
The Company incurred SG&A expenses of $35.7 million for the
first quarter, compared to $43.3 million in the comparable quarter
of the prior year. Included in SG&A expenses for the first
quarter are $5.5 million for the mining segment as compared to $7.2
million for the comparable quarter of the prior year and $30.2
million for the retail segment as compared to $36.1 million for the
comparable quarter of the prior year. For the mining segment, the
decrease was primarily due to an adjustment to incentive based
compensation and a reduction in discretionary spending. For the
retail segment, the decrease was due to a combination of an
adjustment to incentive based compensation and reduced advertising
and selling expenses. See "Segmented Analysis" on page 7 for
additional information. CONSOLIDATED INCOME TAXES The Company
recorded a net income tax recovery of $3.1 million during the first
quarter, compared to a net income tax expense of $13.3 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 4%, which is based on a statutory income tax rate of
30% adjusted for various items including Northwest Territories
mining royalty, impact of foreign exchange, earnings subject to tax
different than the statutory rate, impact of income allocated to
non-controlling interest and impact of dilution loss. 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. During the
first quarter, the Canadian dollar strengthened against the US
dollar. As a result, the Company recorded an unrealized foreign
exchange loss of $4.0 million on the revaluation of the Company's
Canadian dollar denominated future income tax liability. This
compares to an unrealized foreign exchange gain of $0.9 million in
the comparable quarter of the previous year. The unrealized foreign
exchange loss is not deductible for Canadian income tax purposes.
During the first quarter, the Company recorded a non-cash dilution
loss of $34.2 million as a result of the investment by Kinross in
HWDLP, which holds the Company's 40% interest in the Diavik Diamond
Mine. The dilution loss is not deductible for Canadian tax purposes
and hence no tax recovery was recorded against the dilution loss.
In addition, a certain portion of the Company's earnings and loss
before income taxes is allocated to Kinross as a result of its
investment of an indirect interest in the Diavik Diamond Mine. As a
result, the tax impact of the income allocated to non-controlling
interest is recorded as a reconciling item in the tax rate
reconciliation. 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 2029. 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 April 30, April 30, 2009 2008
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Statutory income tax rate 30 % 31 % Northwest Territories mining
royalty (net of income tax relief) - % 12 % Impact of foreign
exchange (1)% (3)% Earnings subject to tax different than statutory
rate 1 % (4)% Changes in valuation allowance (1)% 1 % Impact of
dilution loss (21)% - % Impact of income allocated to
non-controlling interest (1)% - % Assessments and adjustments - % 2
% Other items (1)% (1)% Effective income tax rate 6 % 38 %
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CONSOLIDATED INTEREST AND FINANCING EXPENSES Interest and financing
expenses of $3.7 million were incurred during the first quarter
compared to $5.5 million during the comparable quarter of the prior
year. During the quarter, the Company repaid $74.2 million of the
mining segment's senior secured term and revolving credit
facilities with the closing of the Kinross transaction.
CONSOLIDATED OTHER INCOME Other income of $0.3 million was recorded
during the quarter compared to other income of $0.2 million in the
comparable quarter of the prior year. CONSOLIDATED INSURANCE
SETTLEMENT During the quarter, the Company received the remaining
insurance settlement of $3.3 million related to the December 2008
robbery at the Harry Winston Paris salon. CONSOLIDATED DILUTION
LOSS During the quarter, the Company recorded a non-cash dilution
loss of $34.2 million or $0.52 per share as a result of the
investment by Kinross in HWDLP, which holds the Company's 40%
interest in the Diavik Diamond Mine. CONSOLIDATED FOREIGN EXCHANGE
GAIN A net foreign exchange loss of $5.8 million was recognized
during the quarter compared to a net foreign exchange gain of $0.2
million in the comparable quarter of the prior year. The loss
relates principally to the revaluation of the Company's Canadian
dollar denominated long-term future income tax liability as a
result of the strengthening of the Canadian dollar against the US
dollar at April 30, 2009. 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)
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2010 2009 2009 2009 2009 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 57,690 $ 51,100 $ 90,716 $105,014 $ 81,393 Cost of sales
57,256 34,612 40,617 32,390 32,150
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Gross margin 434 16,488 50,099 72,624 49,243 Gross margin (%) 0.8%
32.3% 55.2% 69.2% 60.5% Selling, general and administrative
expenses 5,503 4,430 3,114 5,151 7,208
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Earnings (loss) from operations $ (5,069) $ 12,058 $ 46,985 $
67,473 $ 42,035
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Three Three months months ended ended 2008 2008 2008 April 30,
April 30, Q4 Q3 Q2 2009 2008
-------------------------------------------------------------------------
Sales $103,238 $122,711 $105,071 $ 57,690 $ 81,393 Cost of sales
36,962 45,985 46,217 57,256 32,150
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Gross margin 66,276 76,726 58,854 434 49,243 Gross margin (%) 64.2%
62.5% 56.0% 0.8% 60.5% Selling, general and administrative expenses
5,663 6,748 5,861 5,503 7,208
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Earnings (loss) from operations $ 60,613 $ 69,978 $ 52,993 $
(5,069) $ 42,035
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Three Months Ended April 30, 2009 Compared to Three Months Ended
April 30, 2008 MINING SALES Rough diamond sales for the quarter
totalled $57.7 million compared to $81.4 million in the comparable
first quarter of the prior year resulting from lower rough diamond
prices. Rough diamond prices were at their lowest level since the
Diavik Diamond Mine began operation, and the Company's achieved
prices were particularly low in the first quarter as the sales mix
contained a significant proportion of lower value goods carried in
inventory from January 31, 2009. Rough diamond production during
the quarter was consistent with the comparable quarter of the prior
year. The Company held two primary rough diamond sales in the first
quarter, consistent with 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, rough
diamond prices 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 first
quarter cost of sales was $57.3 million resulting in a gross margin
of 0.8% compared to $32.2 million cost of sales and gross margin of
60.5% in the comparable quarter of the prior year. The increase in
cost of sales resulted from higher mining costs and from a greater
proportion of costs attributable to production activity versus
development activity. Also included in first quarter cost of sales
is $9.8 million related to goods carried in inventory at January
31, 2009 and an inventory write-down of $4.1 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 rough diamond prices. A substantial portion
of cost of sales is mining operating costs, which are incurred at
the Diavik Diamond Mine. Cost of sales also includes 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 $1.7 million
from the comparable period of the prior year primarily due to an
adjustment to incentive based compensation and a reduction in
discretionary spending. Mining Segment Operational Update Ore
production for the first calendar quarter consisted of 1.1 million
carats produced from 0.17 million tonnes of ore from the A-154
South kimberlite pipe and 0.7 million carats produced from 0.26
million tonnes of ore from the A-418 kimberlite pipe. Rough diamond
production was consistent with the first calendar quarter from the
prior year as a result of a slight decrease in ore production
offset by a slight increase in average grade. The increase in
average grade was driven by a significant increase in the grade of
the ore from the A-154 South kimberlite pipe. HARRY WINSTON DIAMOND
LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION
(reported on a one-month lag)
-------------------------------------------------------------------------
Twelve Three Three months months months ended ended ended March 31,
March 31, December 31, 2009 2008 2008
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 714 714 3,690 Grade (carats/tonne)
4.18 4.08 3.82
-------------------------------------------------------------------------
Mining Segment Outlook A mine plan and revised budget for calendar
2009 was approved in the first quarter of calendar 2009 by both Rio
Tinto plc, the operator of the Diavik Diamond Mine, and the
Company. The updated plan incorporates various production options
that will enable the operation to adapt to changes in the diamond
market. The plan allows for changes to carat production by varying
the mix of ore that comes from the A-418 kimberlite pipe and the
higher grade A-154 South pit. The base plan for calendar year 2009
foresees Diavik Diamond Mine production of 5.4 million carats from
the processing of 1.3 million tonnes of ore, and contemplates two
six-week shutdown periods in mid-summer and at year end. A new
mining technique is under consideration for the potential mining of
the A-21 resource, and exploration work has identified extensions
at depth to the A-418 and A-154 North kimberlite pipes. PRODUCTION
In calendar 2009, it is estimated that 1.3 million tonnes of open
pit ore will be mined, the majority of which will come from the
A-418 kimberlite pipe, with the remaining production coming from
the A-154 South open pit. However, if market conditions improve,
additional carats can be produced by shifting the mix of ore from
A-418 kimberlite pipe to the higher grade A-154 South kimberlite
pipe. Total carat production is expected to be between 5 and 6
million carats on a 100% basis. In calendar 2010, the A-418
kimberlite open pit is expected to be the primary ore source
supplemented by A-154 South kimberlite pipe, where open pit mining
is planned to be complete by the second quarter. Total open pit ore
mined is expected to be 1.5 million tonnes. In addition,
underground mining is scheduled to commence on a limited scale with
approximately 0.5 million tonnes of ore during the year, sourced
mainly from the A-154 North kimberlite pipe. In calendar 2011,
underground mining is expected to ramp up to 0.9 million tonnes a
year, principally from the A-154 North and South kimberlite pipes.
Production from the A-418 open pit is expected to peak at 1.5
million tonnes as the strip ratio is reduced during the later
phases of open pit mining. In the absence of production from A-21,
calendar 2012 is expected to be the final year of open pit mining.
An amended pit plan for A-418 is expected to allow the open pit
depth to be extended by 10 meters to 9,200 elevation, reallocating
240,000 tonnes of A-418 ore from underground to open pit for a
total of 0.3 million tonnes from open pit in calendar 2012.
Underground mining in 2012 is expected to reach approximately 1.0
million tonnes. By 2013, underground mining is expected to reach
its ongoing capacity of 1.5 million tonnes a year with a blend of
ore from A-154 North, A-154 South and A-418 kimberlite pipes.
Additional production capacity beyond 1.5 million tonnes a year or
to extend production beyond 2022 will be dependent on, among other
things, bringing resources and exploratory tonnages into reserves.
COST OF SALES The summer and winter production shutdowns are
planned to last six weeks each, during which time diamond
production will temporarily cease and the mine will be placed on a
short-term care and maintenance schedule. The summer shutdown is
scheduled for July 14, 2009 to August 24, 2009 inclusive and will
reduce goods available for sale by the Company in the third quarter
of fiscal 2010. The winter shutdown is scheduled for December 1,
2009 to January 11, 2010 inclusive, and can be reversed should
market conditions improve. If this shutdown were to go ahead it
would reduce goods available for sale in the first quarter of
fiscal 2011. Cost of sales for the mining segment for fiscal 2009
included proceeds of an insurance settlement related to a Diavik
Diamond Mine shovel fire and significant costs attributable to
development activity versus production activity during the A-418
pre-production period. After adjusting for these factors, the
Company expects cost of sales for the mining segment to increase in
fiscal 2010 by an estimated 10% to approximately $185 million. The
10% increase is due in part to year-end operating costs that would
normally be carried over as cost of sales in the next fiscal year
being expensed in the current year due to the planned winter
shutdown, and costs associated with unsold inventory at the end of
fiscal 2009. The expected increase in cost of sales for fiscal 2010
is specific to the Company's mining segment and is not indicative
of the trend in operating costs at the Diavik Diamond Mine. On a
Canadian dollar basis, cash operating costs at the mine are
expected to be slightly lower in calendar 2009 compared with
calendar 2008. CAPITAL EXPENDITURES During the next three years,
HWDLP's 40% share of the planned capital expenditure is expected to
be approximately $130 million at an assumed average Canadian/US
dollar exchange rate of $0.86. HWDLP's portion of capital
expenditure for the fiscal year ending January 31, 2010 is expected
to be $47 million at an assumed average Canadian/US dollar exchange
rate of $0.85, the majority of which is related to underground
development. During the first quarter, HWDLP's share of underground
capital expenditures was $21.9 million. By August 2009, underground
development is expected to be at a stage when limited production
could commence, although further development work that will allow
for optimum production levels by use of different mining methods
will be deferred until calendar 2010 and 2011. The Company expects
to contribute $53 million over the following two years, assuming an
average Canadian/US dollar exchange rate of $0.86, in support of
this stage of underground development. The balance of capital
expenditures during this period represents sustaining requirements.
Retail The retail segment includes sales from Harry Winston salons,
which are located in prime markets around the world including eight
salons in the United States: New York, Beverly Hills, Bal Harbour,
Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in
Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two
salons in Europe: Paris and London; and three salons in Asia
outside of Japan: Beijing, Taipei and Hong Kong. (expressed in
thousands of United States dollars) (quarterly results are
unaudited)
-------------------------------------------------------------------------
2010 2009 2009 2009 2009 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 51,953 $ 67,299 $ 57,907 $ 81,105 $ 74,686 Cost of sales
26,688 34,296 31,062 41,152 40,999
-------------------------------------------------------------------------
Gross margin 25,265 33,003 26,845 39,953 33,687 Gross margin (%)
48.6% 49.0% 46.4% 49.3% 45.1% Selling, general and administrative
expenses 30,246 34,969 30,884 34,043 36,077
-------------------------------------------------------------------------
Earnings (loss) from operations $ (4,981) $ (1,966) $ (4,039) $
5,910 $ (2,390)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three months months ended ended 2008 2008 2008 April 30,
April 30, Q4 Q3 Q2 2009 2008
-------------------------------------------------------------------------
Sales $ 84,957 $ 53,767 $ 68,198 $ 51,953 $ 74,686 Cost of sales
46,675 28,606 35,610 26,688 40,999
-------------------------------------------------------------------------
Gross margin 38,282 25,161 32,588 25,265 33,687 Gross margin (%)
45.1% 46.8% 47.8% 48.6% 45.1% Selling, general and administrative
expenses 39,831 28,791 29,340 30,246 36,077
-------------------------------------------------------------------------
Earnings (loss) from operations $ (1,549) $ (3,630) $ 3,248 $
(4,981) $ (2,390)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended April 30, 2009 Compared to Three Months Ended
April 30, 2008 RETAIL SALES Sales for the first quarter were $51.9
million compared to $74.7 million for the comparable quarter of the
prior year, a decrease of 30%. Sales in the European market
decreased 39% to $19.3 million, US sales decreased 25% to $18.8
million, and Asian sales decreased 24% to $13.8 million. RETAIL
COST OF SALES AND GROSS MARGIN Cost of sales for Harry Winston Inc.
for the first quarter was $26.7 million compared to $41.0 million
for the comparable quarter of the prior year. Gross margin for the
quarter was $25.3 million or 48.6% compared to $33.7 million or
45.1% for the first quarter of the prior year. Excluding the impact
of sales of Harry Winston Inc. pre-acquisition inventory, gross
margin for the first quarter and the comparable quarter of the
prior year would have been 49.6% and 47.3%, respectively. Gross
margin for the first quarter of the prior year was impacted
primarily by three factors: an increased contribution of high
dollar value transactions, which carried lower-than-average gross
margins; an increase in costs relating to precious metals and gem
stones; and an increase in research and development costs to
support the watch business. RETAIL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES SG&A expenses decreased to $30.2
million from $36.1 million in the comparable quarter of the prior
year. The decrease was due to a combination of an adjustment to
incentive based compensation and reduced advertising and selling
expenses. SG&A expenses include depreciation and amortization
expense of $3.1 million, consistent with the comparable quarter of
the prior year. SG&A as a percentage of sales increased to 58%
compared to 48% in the comparable quarter of the prior year. Retail
Segment Operational Update During the first quarter, the retail
segment recorded a 30% decline in sales over the comparable quarter
of the prior year, which were particularly high due to strong
momentum in Asia and Russia. Sales were generally weaker throughout
the retail salon network. In response to the continuing global
recession, the retail segment has implemented tight controls over
operating expenses, capital expenditures and inventory purchases.
Harry Winston Inc. operated a network of 18 retail salons during
the quarter. Retail Segment Outlook Harry Winston Inc. expects
sales in the luxury diamond jewelry industry to be negatively
impacted by a weak global economy for the remainder of the year.
The Company has implemented a series of cost-control initiatives in
light of the current economic environment, including expense and
staff reductions, close monitoring of inventory levels and
reductions in capital expenditures. In addition, the Company is
limiting its current year expansion of the retail salon
distribution network to one new salon in Singapore during the
second quarter. Harry Winston Inc. continues to focus on providing
customers with the highest level of service and product quality in
the industry. The strength of the Harry Winston brand, combined
with our global distribution network and high-quality product,
provides the Company with a solid platform to withstand the current
economic downturn and position the Company for long-term success.
Liquidity and Capital Resources Working Capital As at April 30,
2009, the Company had unrestricted cash and cash equivalents of
$122.0 million and contingency cash collateral and reserves of $0.3
million, compared to $16.7 million and $30.1 million, respectively,
at January 31, 2009. The Company had cash on hand and balances with
banks of $121.2 million and short-term investments of $0.8 million
at April 30, 2009. The short-term investments were held in
overnight deposits. During the quarter, total cash resources were
impacted by the $150.0 million net investment by Kinross and the
subsequent repayment by the Company of the mining segment's $74.2
million senior secured term and revolving credit facilities. During
the quarter ended April 30, 2009, the Company generated $38.8
million in cash from operations, compared to $34.3 million in the
comparable quarter of the prior year. Working capital increased to
$327.2 million at April 30, 2009 from $195.1 million at January 31,
2009. During the quarter, the Company decreased accounts receivable
by $50.0 million; increased prepaid expenses and other current
assets by $4.1 million; decreased inventory by $6.8 million;
decreased accounts payable and accrued liabilities by $12.1
million; and decreased income taxes payable by $11.8 million. The
decrease in accounts receivable resulted from the receipt of $51.7
million for the insurance settlement of the Harry Winston Paris
salon robbery that occurred in December 2008. The Company's
liquidity requirements fluctuate from quarter to quarter depending
on, among other factors, the seasonality of production at the
Diavik Diamond Mine, seasonality of mine operating expenses,
capital expenditure programs, 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 of sales 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 mining and retail segments maintain separate financing
arrangements. Accordingly, the Company assesses liquidity and
capital resources on a segmented basis. The retail segment's cash
requirements are for cash operating expenses, working capital and
capital expenditures, including salon expansion. The Company
believes that cash on hand, cash generated from operations and
access to credit facilities will be sufficient to meet anticipated
cash requirements for the retail segment for the next 12 months.
The mining segment's cash requirements are for cash operating
expenses, working capital and capital expenditures. With the
closing of the Kinross transaction, the Company believes that cash
on hand and cash generated from the sale of rough diamonds will be
sufficient to meet anticipated cash requirements for the next 12
months. Financing Activities On March 31, 2009, the Company issued
15.2 million of treasury shares at a price of $3.00 per share to
Kinross, being approximately 19.9% of the Company's issued equity
post the transaction. This transaction generated net proceeds of
$44.8 million, net of transaction costs. During the quarter, the
Company repaid $74.2 million of the mining segment's senior secured
term and revolving credit facilities with the closing of the
Kinross transaction. As at April 30, 2009, Harry Winston Inc. had
$159.5 million outstanding on its $250.0 million secured five-year
revolving credit facility, which is used to fund operating and
capital expenditure requirements. This represents a decrease of
$20.1 million from the amount outstanding at January 31, 2009. Also
included in long-term debt of the Company's retail operations is a
25-year loan agreement for $15.2 million (17.5 million CHF) used to
finance the construction of the Company's watch factory in Geneva,
Switzerland, and a demand credit facility of 2.0 million CHF,
supported by a $2.0 million standby letter of credit. At April 30,
2009, $15.2 million had been drawn against the facilities compared
to the same amount at January 31, 2009. The bank has a secured
interest in the factory building. Harry Winston Japan, K.K.
maintains secured and unsecured credit agreements with three banks
amounting to $21.4 million ((Yen)2,075 million). At April 30, 2009,
$21.4 million had been drawn against these facilities, $5.2 million
of which is long term, payable on June 28, 2010, with the balance
of $16.2 million classified as bank advances. At April 30, 2009,
$5.8 million, $1.3 million and $0.3 million were drawn under the
Company's revolving financing facilities relating to its Belgian
subsidiary, Harry Winston Diamond International N.V., its Indian
subsidiary, Harry Winston Diamond (India) Private Limited and its
Israeli subsidiary, Harry Winston Diamond (Israel) Limited,
respectively. At January 31, 2009, $18.4 million, $4.7 million and
$1.5 million were drawn under the Company's revolving financing
facilities relating to Harry Winston Diamond International N.V.,
Harry Winston Diamond (Israel) Limited and Harry Winston Diamond
(India) Private Limited, respectively. Investing Activities Kinross
also subscribed for new partnership units representing a 22.5%
interest in HWDLP, for a subscription value of $125.8 million.
During the quarter, the Company purchased capital assets of $22.5
million, of which $22.1 million were purchased for the mining
segment and $0.4 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 level. Additionally, at the Joint Venture level, 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. Harry Winston Diamond
Corporation'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 calendar
years 2009 to 2013, is approximately $150 million assuming a
Canadian/US average exchange rate of $0.90 for the five years. The
most significant contractual obligations for the ensuing five-year
period can be summarized as follows: CONTRACTUAL OBLIGATIONS
(expressed in Less thousands of United than Year Year After States
dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $219,075 $ 11,650 $ 21,775 $169,105 $ 16,545
Environmental and participation agreements incremental
commitments(c) 79,517 66,047 2,682 1,040 9,748 Operating lease
obligations(d) 109,184 18,713 27,427 18,973 44,071 Capital lease
obligations(e) 1,174 760 414 - -
-------------------------------------------------------------------------
Total contractual obligations $408,950 $ 97,170 $ 52,298 $189,118 $
70,364
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. 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 April 30,
2009, $6.8 million was outstanding on the mortgage payable. Harry
Winston Inc. maintains a 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 April 30,
2009, $159.5 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 $15.2 million (17.5 million CHF) used to finance the
construction of the Company's watch factory in Geneva, Switzerland,
and a demand credit facility for 2.0 million CHF, supported by a
$2.0 million standby letter of credit. 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. The demand credit
facility bears interest at a rate of 5.0% per annum. Quarterly
payments on the loan began on June 30, 2008. At April 30, 2009,
$15.2 million was outstanding on these loan agreements. Harry
Winston Japan, K.K. maintains unsecured credit agreements with two
banks each amounting to $7.7 million ((Yen)750 million). At April
30, 2009, $15.5 million had been drawn against these facilities,
$5.2 million of which is long term, with the balance of $10.3
million classified as bank advances. The short-term portion of the
credit facilities bear interest at 1.98% and expire on June 1, 2009
and July 30, 2009, respectively. The long-term portion bears
interest at 2.38% and expires on June 28, 2010. Harry Winston
Japan, K.K. also maintains a secured credit agreement amounting to
$5.9 million ((Yen)575 million). The facility is secured by
inventory owned by Harry Winston Japan, K.K., bears interest at
2.25% and expires on June 19, 2009. (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 April 30, 2009, and have been included
under long-term debt in the table above. Interest payments for the
next 12 months are approximated to be $7.6 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 operator of the Joint Venture has
fulfilled such obligations for the security deposits by posting
letters of credit of which Harry Winston Diamond Corporation's
share as at April 30, 2009 was $64.8 million based on the Company's
40% ownership interest in the Diavik Diamond Mine. Following the
closing of the transaction with Kinross of an indirect interest in
the Diavik Diamond Mine, the Company will effectively have a 31%
economic interest in the Diavik Diamond Mine. 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 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 salons, office space and long-term leases for property,
land, office premises and a fuel tank farm at the Diavik Diamond
Mine. Harry Winston Inc.'s New York salon lease expires on December
17, 2010 with an option to renew. (e) Capital lease obligations
represent future minimum annual rentals under non-cancellable
capital leases for Harry Winston Inc. retail exhibit space.
Dividend On March 19, 2009, the Company announced that it has
suspended its dividend for the time being. 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 Harry Winston Diamond Limited Partnership holds an
undivided 40% interest in the assets, liabilities and expenses of
the Diavik Diamond Mine and the Diavik group of mineral claims.
Harry Winston Diamond Limited Partnership is owned 77.5% by the
Company and 22.5% by Kinross Gold Corporation. The Diavik Diamond
Mine and the exploration and development of the Diavik group of
mineral claims is a joint arrangement between DDMI (60%) and HWDLP
(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 HWDLP that the Company and Kinross may not have
sufficient cash to meet. A failure to meet capital expenditure
requirements imposed by DDMI could result in HWDLP's interest in
the Diavik Diamond Mine and the Diavik group of mineral claims
being diluted. Agreement with Kinross Under the amended partnership
agreement of HWDLP, the general partner is entitled to request that
the partners in the partnership advance funds to the partnership
pro rata based on their holdings of partnership units for the
purpose of satisfying the partnership's obligations under various
contractual commitments, including those deriving from the joint
arrangement between DDMI and the partnership. The partners may
unanimously determine to fund any cash call by way of a loan rather
than equity contribution. If a partner fails to contribute its
proportion of funds with respect to a cash call, the non-defaulting
partner or partners will have the option, but not the obligation,
to fund the defaulting partner's portion of the cash call by way of
equity contribution or loan or a combination of the two; provided
that if any equity contribution is made, the non-defaulting
partner's interest in the partnership will be increased
proportionately through the issuance of additional partnership
units. As DDMI, under the joint arrangement between DDMI and the
partnership, is able to determine the timing and scope of future
project capital expenditures and to impose capital expenditure
requirements on the Company that the Company may not have
sufficient cash to meet, the Company's interest in the partnership
could be diluted under the amended partnership agreement as a
failure by the Company to meet cash call requirements imposed by
the amended partnership agreement. 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.
Cash Flow and Liquidity The Company's liquidity requirements
fluctuate from quarter to quarter depending on, among other
factors, the seasonality of production at the Diavik Diamond Mine,
seasonality of mine operating expenses, capital expenditure
programs, 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 of sales 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. There can be no
assurance that the Company will be able to meet each or all of its
liquidity requirements. A failure by the Company to meet its
liquidity requirements could result in the Company failing to meet
its planned development objectives, or in the Company being in
default of a contractual obligation, each of which could have a
material adverse effect on the Company's business prospects or
financial condition. Economic Environment The Company's financial
results are tied to the global economic environment. The global
markets are experiencing the impact of a significant US and
international economic downturn. This could restrict the Company's
growth opportunities both domestically and internationally. Should
economic conditions not improve or further deteriorate, the Company
could experience revenue pressure across both its business segments
and a decrease in the availability of credit, which could have a
material adverse effect on the Company's business prospects or
financial condition. 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 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 requires
licenses and permits from the Canadian government. The Diavik
Diamond Mine Type "A" Water License was renewed by the regional
Wek'eezhii Land and Water Board to October 31, 2015. 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. 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 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. 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, 2009.
Changes in Accounting Policies Goodwill and Intangibles Assets 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. The Company adopted the new
standard effective February 1, 2009. This standard has had no
material impact on the consolidated financial statements. Recently
Issued Accounting Standards Credit Risk and the Fair Value of
Financial Assets and Liabilities In January 2009, the CICA issued
EIC-173, "Credit Risk and the Fair Value of Financial Assets and
Liabilities". This abstract requires companies to take both
counterparty's credit risk into account when measuring the fair
value of financial assets and liabilities, including derivatives.
The Company applied this EIC for the quarter ended April 30, 2009.
This abstract has had no material impact on the consolidated
financial statements. Mining Exploration Costs In March 2009, the
CICA issued EIC-174, "Mining Exploration Costs", which provides
guidance on the capitalization of exploration costs related to
mining properties and the subsequent impairment review of
capitalized exploration costs. The Company applied this EIC for the
quarter ended April 30, 2009. This abstract has had no material
impact on the consolidated financial statements. International
Financial Reporting Standards ("IFRS") In February 2008, the
Canadian Accounting Standards Board confirmed that publicly
accountable enterprises will be required to adopt IFRS in place of
Canadian Generally Accepted Accounting Principles (GAAP) for
financial periods beginning on or after January 1, 2011.
Accordingly, commencing February 1, 2011, the Company will convert
over to IFRS and prepare its first financial statements in
accordance with IFRS for the three-month period ended April 30,
2011, with comparative information also prepared under IFRS. The
conversion project from Canadian GAAP to IFRS is led by finance
management, and includes representatives from various areas of the
Company as necessary to plan for and achieve a smooth transition.
The Company has engaged the services of a third party expert
advisor to assist. Regular progress reporting to senior management
and to the Audit Committee on the status of the IFRS conversion
project is in place. The conversion project consists of three
phases: Assessment Phase - This phase involves a review of
accounting differences between Canadian GAAP and IFRS; an
evaluation of IFRS 1 exemptions for first time IFRS adopters; and a
high level impact assessment on systems and business processes.
Design Phase - This phase involves prioritizing and resolving
accounting treatment issues; quantifying the impact of converting
to IFRS; reviewing and approving accounting policy choices;
performing a detailed impact assessment on systems and processes;
designing system and business process changes; developing IFRS
training material; and drafting IFRS financial statement content.
Implementation Phase - This phase involves changes to systems and
business processes; determining the opening IFRS transition balance
sheet; dual accounting under both Canadian GAAP and IFRS; and
preparing detailed reconciliations of Canadian GAAP to IFRS
financial statements. The Company is on schedule to complete the
assessment phase of its IFRS conversion project during the second
quarter of fiscal 2010. The Company cannot at this time reasonably
estimate the impact of adopting IFRS on its consolidated financial
statements. Outstanding Share Information As at April 30, 2009
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 76,572,092
Options outstanding 3,250,679 Fully diluted 79,822,771
-------------------------------------------------------------------------
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) April 30, January
31, 2009 2009 (unaudited)
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 121,997
$ 16,735 Cash collateral and cash reserves (note 3) 260 30,145
Accounts receivable (note 13) 16,961 66,980 Inventory and supplies
(note 4) 339,459 346,235 Prepaid expenses and other current assets
51,423 48,130
-------------------------------------------------------------------------
530,100 508,225 Mining capital assets 809,197 800,358 Retail
capital assets 65,112 68,258 Intangible assets, net (note 6)
130,341 130,752 Other assets 14,897 15,644 Future income tax asset
42,726 43,338
-------------------------------------------------------------------------
$ 1,592,373 $ 1,566,575 --------------------------
-------------------------- Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities $
107,992 $ 118,390 Income taxes payable 66,677 76,987 Bank advances
24,230 42,621 Current portion of long-term debt (note 7) 4,051
75,097
-------------------------------------------------------------------------
202,950 313,095 Long-term debt (note 7) 182,109 205,625 Future
income tax liability 272,606 303,284 Other long-term liability
1,936 1,946 Future site restoration costs 39,680 39,506 Minority
interest 287 280 Non-controlling interest (note 1) 189,131 -
Shareholders' equity: Share capital (note 8) 426,299 381,541
Contributed surplus 17,154 16,079 Retained earnings 238,093 283,177
Accumulated other comprehensive income 22,128 22,042
-------------------------------------------------------------------------
703,674 702,839 Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,592,373 $ 1,566,575 --------------------------
-------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Earnings
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS) Three Three months months ended ended April 30, April 30,
2009 2008
-------------------------------------------------------------------------
Sales $ 109,643 $ 156,079 Cost of sales 83,944 73,149
-------------------------------------------------------------------------
Gross margin 25,699 82,930 Selling, general and administrative
expenses 35,749 43,285
-------------------------------------------------------------------------
Earnings (loss) from operations (10,050) 39,645
-------------------------------------------------------------------------
Interest and financing expenses (3,699) (5,453) Other income 281
246 Insurance settlement (note 13) 3,250 - Dilution loss (note 14)
(34,222) - Foreign exchange gain (loss) (5,839) 155
-------------------------------------------------------------------------
Earnings (loss) before income taxes (50,279) 34,593 Income tax
expense (recovery) - Current (825) 21,501 Income tax recovery -
Future (2,295) (8,165)
-------------------------------------------------------------------------
Earnings (loss) before minority interest and non-controlling
interest (47,159) 21,257 Minority interest 7 1 Non-controlling
interest (note 1) (2,082) -
-------------------------------------------------------------------------
Net earnings (loss) $ (45,084) $ 21,256 --------------------------
-------------------------- Earnings (loss) per share Basic $ (0.68)
$ 0.35 -------------------------- -------------------------- Fully
diluted $ (0.68) $ 0.35 --------------------------
-------------------------- Weighted average number of shares
outstanding 66,438,667 59,905,424 --------------------------
-------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Comprehensive
Income (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) Three
Three months months ended ended April 30, April 30, 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (45,084) $ 21,256 Other comprehensive income
Net gain on translation of net foreign operations (net of tax -
nil) 86 2,589
-------------------------------------------------------------------------
Total comprehensive income $ (44,998) $ 23,845
-------------------------- -------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED) Three
Three months months ended ended April 30, April 30, 2009 2008
-------------------------------------------------------------------------
COMMON SHARES: Balance at beginning of period $ 381,541 $ 305,502
Issued during the period 44,758 76,039
-------------------------------------------------------------------------
Balance at end of period 426,299 381,541
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS: Balance at beginning of period 16,079 15,614
Stock option expense 1,075 155
-------------------------------------------------------------------------
Balance at end of period 17,154 15,769
-------------------------------------------------------------------------
RETAINED EARNINGS: Balance at beginning of period 283,177 225,334
Net earnings (loss) (45,084) 21,256 Dividends paid - (3,069)
-------------------------------------------------------------------------
Balance at end of period 238,093 243,521
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance at beginning of
period 22,042 25,212 Other comprehensive income Net gain on
translation of net foreign operations (net of tax - nil) 86 2,589
-------------------------------------------------------------------------
Balance at end of period 22,128 27,801
-------------------------------------------------------------------------
Total shareholders' equity $ 703,674 $ 668,632
-------------------------- -------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (EXPRESSED IN THOUSANDS OF
UNITED STATES DOLLARS) (UNAUDITED) Three Three months months ended
ended April 30, April 30, 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings (loss) $
(45,084) $ 21,256 Items not involving cash: Amortization and
accretion 17,675 13,955 Future income tax recovery (2,295) (8,165)
Stock-based compensation and pension expense 1,065 357 Foreign
exchange loss (gain) 6,494 (574) Loss on disposal of assets - 469
Minority interest 7 1 Non-controlling interest (2,082) - Dilution
loss 34,222 - Change in non-cash operating working capital 28,795
7,008
-------------------------------------------------------------------------
38,797 34,307
-------------------------------------------------------------------------
Financing Decrease in long-term debt (48) (12,477)
Increase/(decrease) in revolving credit (38,916) 155,190 Repayment
of mining segment senior secured term and revolving credit
facilities (74,160) - Repayment of Harry Winston Inc. 2008
revolving credit facility - (159,109) Dividends paid - (3,069)
Issue of common shares, net of issue costs 44,758 76,039
-------------------------------------------------------------------------
(68,366) 56,574
-------------------------------------------------------------------------
Investing Subscription of partnership units 125,791 - Cash
collateral and cash reserve 29,885 (8,323) Mining capital assets
(22,128) (66,623) Retail capital assets (439) (3,243) Other assets
218 -
-------------------------------------------------------------------------
133,327 (78,189)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 1,504 (544)
Increase/decrease in cash and cash equivalents 105,262 12,148 Cash
and cash equivalents, beginning of period (note 3) 16,735 49,628
-------------------------------------------------------------------------
Cash and cash equivalents, end of period (note 3) $ 121,997 $
61,776 -------------------------- -------------------------- Change
in non-cash operating working capital Accounts receivable 50,036
1,732 Prepaid expenses and other current assets (4,101) (4,435)
Inventory and supplies 6,776 (18,577) Accounts payable and accrued
liabilities (12,107) 18,699 Income taxes payable (11,809) 9,589
-------------------------------------------------------------------------
$ 28,795 $ 7,008
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid $ 10,816 $
12,195 Cash interest paid $ 3,747 $ 4,408
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements APRIL 30, 2009 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 an
ownership 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 Limited Partnership ("HWDLP") (40%) where
HWDLP holds an undivided 40% ownership interest in the assets,
liabilities and expenses. DDMI is the operator of the Diavik
Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife,
Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of
London, England. As a result of the strategic investment by Kinross
Gold Corporation ("Kinross") of Toronto, Canada, described below,
HWDLP is 77.5% owned by the Company and 22.5% owned by Kinross.
Kinross's 22.5% ownership is reported as non-controlling interest.
On March 31, 2009, Kinross made a net investment of $150.0 million
to acquire an indirect interest in the Diavik Diamond Mine and a
direct equity stake in the Company. Kinross subscribed for 15.2
million of the Company's treasury shares at a price of $3.00 per
share, being approximately 19.9% of the Company's issued equity
post the transaction. Kinross also subscribed for new partnership
units representing a 22.5% interest in HWDLP, for a net effective
subscription value of $104.4 million. With the closing of the
Kinross transaction, the Company's economic interest in the Diavik
Diamond Mine is 31%. 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, 2009, 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, 2009. Adoption of New
Accounting Standards and Developments GOODWILL AND INTANGIBLE
ASSETS 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. The Company adopted
the new standard effective February 1, 2009. This standard has had
no material impact on the consolidated financial statements.
Recently Issued Accounting Standards CREDIT RISK AND THE FAIR VALUE
OF FINANCIAL ASSETS AND LIABILITIES In January 2009, the CICA
issued EIC-173, "Credit Risk and the Fair Value of Financial Assets
and Liabilities". This abstract requires companies to take both
counterparty's credit risk into account when measuring the fair
value of financial assets and liabilities, including derivatives.
The Company applied this EIC for the quarter ended April 30, 2009.
This abstract has had no material impact on the consolidated
financial statements. MINING EXPLORATION COSTS In March 2009, the
CICA issued EIC-174, "Mining Exploration Costs", which provides
guidance on the capitalization of exploration costs related to
mining properties and the subsequent impairment review of
capitalized exploration costs. The Company applied this EIC for the
quarter ended April 30, 2009. This abstract has had no material
impact on the consolidated financial statements. NOTE 3: Cash
Resources April 30, January 31, 2009 2009
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 121,246 $ 14,118 Short-term
investments(a) 751 2,617
-------------------------------------------------------------------------
Total cash and cash equivalents 121,997 16,735 Cash collateral and
cash reserves 260 30,145
-------------------------------------------------------------------------
Total cash resources $ 122,257 $ 46,880 --------------------------
-------------------------- (a) Short-term investments are held in
overnight deposits. During the quarter, total cash resources were
impacted by the $150.0 million net investment by Kinross and the
subsequent repayment of the mining segment's senior secured term
and revolving credit facilities. NOTE 4: Inventory and Supplies
April 30, January 31, 2009 2009
-------------------------------------------------------------------------
Rough diamond inventory $ 27,245 $ 31,872 Merchandise inventory
235,925 240,419 Supplies inventory 76,289 73,944
-------------------------------------------------------------------------
Total inventory and supplies $ 339,459 $ 346,235
-------------------------- -------------------------- During the
quarter, the Company recorded a write-down of $4.1 million on rough
diamond inventory, which was recorded in cost of sales. NOTE 5:
Diavik Joint Venture The following represents Harry Winston Diamond
Limited Partnership's 40% proportionate interest in the Joint
Venture as at March 31, 2009 and December 31, 2008: April 30,
January 31, 2009 2009
-------------------------------------------------------------------------
Current assets $ 107,226 $ 105,612 Long-term assets 764,999 754,886
Current liabilities 44,696 38,808 Long-term liabilities and
participant's account 827,529 821,690 April 30, April 30, THREE
MONTHS ENDED: 2009 2008
-------------------------------------------------------------------------
Expenses net of interest income of $0.2 million (2008 - interest
income of $0.2 million)(a) 41,896 33,959 Cash flows resulting from
(used in) operating activities (19,405) (27,391) Cash flows
resulting from financing activities 47,019 89,124 Cash flows
resulting from (used in) investing activities (23,291) (64,792)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income. 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 Accumu- lated January Amortization amorti- April 30, 31,
period Cost zation 2009 net 2009 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 2,065 3,510 3,649 Store leases 65 to 105
months 5,639 4,168 1,471 1,743
-------------------------------------------------------------------------
Intangible assets $136,574 $ 6,233 $130,341 $130,752
----------------------------------------
---------------------------------------- Amortization expense for
the three months ended April 30, 2009 was $0.4 million ($0.6
million for the three months ending April 30, 2008). NOTE 7:
Long-Term Debt April 30, January 31, 2009 2009
-------------------------------------------------------------------------
Mining segment credit facilities $ - $ 74,107 Harry Winston Inc.
credit facilities 179,322 199,846 First mortgage on real property
6,838 6,769
-------------------------------------------------------------------------
Total long-term debt 186,160 280,722
-------------------------------------------------------------------------
Less current portion (4,051) (75,097)
-------------------------------------------------------------------------
$ 182,109 $ 205,625 --------------------------
-------------------------- On March 31, 2009, with the closing of
the Kinross transaction, the Company repaid all amounts outstanding
on the mining segment's senior secured term and revolving credit
facilities. NOTE 8: Share Capital (a) Authorized Unlimited common
shares without par value. (b) Issued Number of shares Amount
---------------------------------------------------------------------
Balance, January 31, 2009 61,372,092 $ 381,541 SHARES ISSUED FOR:
Cash 15,200,000 44,758
---------------------------------------------------------------------
Balance, April 30, 2009 76,572,092 $ 426,299
-------------------------- -------------------------- (c) Stock
Options During the period, the Company issued 1,674,000 stock
options to officer and employees of the Company and its affiliates.
These options vest 50% immediately; 25% vest on the first
anniversary date and the remaining 25% vest on the second
anniversary date of the date of grant. The maximum term of these
options is 10 years. The Company estimated the fair value of the
options granted using the Black- Scholes option pricing model.
Compensation expense for stock options was $1.1 million for the
three months ended April 30, 2009 (2009 - $0.2 million) and is
presented as a component of selling, general and administrative
expenses. The Company used historical exercise data to determine
the expected term of the options granted. (d) RSU and DSU Plans RSU
Number of units
---------------------------------------------------------------------
Balance, January 31, 2009 108,599 Awards and payouts during the
PERIOD (net): RSU awards 11,499 RSU payouts -
---------------------------------------------------------------------
Balance, April 30, 2009 120,098 ------------ ------------ DSU
Number of units
---------------------------------------------------------------------
Balance, January 31, 2009 128,988 Awards and payouts during the
PERIOD (net): DSU awards 26,727 DSU payouts -
---------------------------------------------------------------------
Balance, April 30, 2009 155,715 ------------ ------------ Three
Three months months ended ended April 30, April 30, Expense
(recovery) for the period 2009 2008
---------------------------------------------------------------------
RSU $ (60) $ 509 DSU 126 567
---------------------------------------------------------------------
$ 66 $ 1,076 -------------------------- --------------------------
During the period, the Company granted 11,499 RSUs and 26,727 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. Grants under the RSU Plan are on a
discretionary basis to employees of the Company subject to Board of
Director approval or in accordance with employment contracts. 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 the 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 the grant.
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. HWDLP's share of this funding requirement is $0.2
million for calendar 2009. Further funding will be required in
future years; however, specific amounts have not yet been
determined. 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. HWDLP's share of the letters of
credit outstanding posted by the operator of the Joint Venture with
respect to the environmental agreements as at April 30, 2009 was
$64.8 million. The agreement specifically provides that these
funding requirements 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 12 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 Harry Winston Diamond Limited Partnership's 40%
ownership interest, before any reduction of future reclamation
activities, and future minimum annual rentals under non-
cancellable operating and capital leases for retail salons,
corporate office space, and long-term leases for property, land,
office premises and a fuel tank farm at the Diavik Diamond Mine and
are as follows: 2010 $ 85,520 2011 83,165 2012 81,129 2013 79,161
2014 78,980 Thereafter 123,588
---------------------------------------------------------------------
NOTE 10: Employee Benefit Plans Three Three months months ended
ended April 30, April 30, Expenses for the period 2009 2008
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston retail segment $ 504 $
411 Defined contribution plan - Harry Winston retail segment 210
234 Defined contribution plan - Diavik Diamond Mine 178 212
-------------------------------------------------------------------------
$ 892 $ 857 -------------------------- --------------------------
NOTE 11: Capital Management As part of the Kinross investment, the
Company and Kinross have agreed to certain provisions regarding
capital management for a period of two years following closing
subject to earlier termination in specified circumstances. During
this period, without Kinross' consent not to be unreasonably
withheld, the Company has agreed not to incur indebtedness in
excess of a specified amount, subject to an exception for
indebtedness incurred to finance an acquisition by the Company. In
addition, the Company has agreed not to pay dividends and to limit
the amount of funding it will provide to the retail segment. The
capital management provisions do not in any way limit the Company's
ability to issue equity or equity-linked securities subject to
compliance with Kinross' pro rata participation right in such
equity issuances. NOTE 12: Financial Instruments The Company has
various financial instruments comprising 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 Company's long-term debt
is fully secured; hence the fair value of this instrument at April
30, 2009 is considered to approximate its carrying value. The
carrying values of these financial instruments are as follows:
April 30, 2009 January 31, 2009
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying fair value value fair value
value
-------------------------------------------------------------------------
Financial Assets: Cash and cash equivalents $ 121,997 $ 121,997 $
16,735 $ 16,735 Cash collateral and cash reserves 260 260 30,145
30,145 Accounts receivable 16,961 16,961 66,980 66,980
-------------------------------------------------------------------------
$ 139,218 $ 139,218 $ 113,860 $ 113,860
----------------------------------------------------
---------------------------------------------------- Financial
Liabilities: Accounts payable and accrued liabilities $ 107,992 $
107,992 $ 118,390 $ 118,390 Bank advances 24,230 24,230 42,621
42,621 Long-term debt 186,160 186,160 280,722 280,722
-------------------------------------------------------------------------
$ 318,382 $ 318,382 $ 441,733 $ 441,733
----------------------------------------------------
---------------------------------------------------- NOTE 13:
Insurance Settlement In December 2008, approximately $31.7 million
in Company-owned and consigned retail inventory at cost was stolen
during a second robbery at the Harry Winston Paris salon. Included
in accounts receivable at January 31, 2009 is a $48.4 million
receivable relating to the insurance settlement that was received
in February 2009. The $3.3 million balance of the insurance claim
was also received during the first quarter. NOTE 14: Dilution Loss
During the quarter, the Company recorded a non-cash dilution loss
of $34.2 million with respect to the investment by Kinross of an
indirect interest in the Diavik Diamond Mine. NOTE 15: Segmented
Information The Company operates in two segments within the diamond
industry, mining and retail, for the three months ended April 30,
2009. The mining segment consists of the Company's rough diamond
business. This business includes the 40% ownership 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 April 30, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 57,690 $ - $ 57,690 United States - 18,775 18,775
Europe - 19,325 19,325 Asia - 13,853 13,853 Cost of sales 57,256
26,688 83,944
-------------------------------------------------------------------------
Gross margin 434 25,265 25,699 Gross margin (%) 0.8% 48.6% 23.4%
Selling, general and administrative expenses 5,503 30,246 35,749
-------------------------------------------------------------------------
Loss from operations (5,069) (4,981) (10,050)
-------------------------------------------------------------------------
Interest and financing expenses (1,544) (2,155) (3,699) Other
income 261 20 281 Insurance settlement - 3,250 3,250 Dilution loss
(34,222) - (34,222) Foreign exchange gain (loss) (6,071) 232
(5,839)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (46,645) $ (3,634) $ (50,279)
--------------------------------------
-------------------------------------- Segmented assets as at April
30, 2009 Canada $ 1,058,266 $ - $ 1,058,266 United States - 362,279
362,279 Other foreign countries 18,592 153,236 171,828
-------------------------------------------------------------------------
$ 1,076,858 $ 515,515 $ 1,592,373
-------------------------------------------------------------------------
Capital expenditures $ 22,128 $ 439 $ 22,567 Other Significant
Non-Cash Items: Income tax recovery $ (626) $ (1,669) $ (2,295)
Amortization and accretion $ 14,573 $ 3,102 $ 17,675
-------------------------------------------------------------------------
For the three months ended April 30, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 81,393 $ - $ 81,393 United States - 24,926 24,926
Europe - 31,630 31,630 Asia - 18,130 18,130 Cost of sales 32,150
40,999 73,149
-------------------------------------------------------------------------
Gross margin 49,243 33,687 82,930 Gross margin (%) 60.5% 45.1%
53.1% Selling, general and administrative expenses 7,208 36,077
43,285
-------------------------------------------------------------------------
Earnings (loss) from operations 42,035 (2,390) 39,645
-------------------------------------------------------------------------
Interest and financing expenses (2,479) (2,974) (5,453) Other
income 632 (386) 246 Foreign exchange gain 74 81 155
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 40,262 $ (5,669) $
34,593 --------------------------------------
-------------------------------------- Segmented assets as at April
30, 2008 Canada $ 944,842 $ - $ 944,842 United States - 461,519
461,519 Other foreign countries 18,049 166,321 184,370
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$ 962,891 $ 627,840 $ 1,590,731
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Goodwill as at April 30, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 66,623 $ 3,243 $ 69,866 Other Significant Non-Cash
Items: Income tax recovery $ (6,628) $ (1,537) $ (8,165)
Amortization and accretion $ 10,739 $ 3,216 $ 13,955
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Sales to three significant customers in the mining segment totalled
$34.0 million for the three months ended April 30, 2009 ($9.2
million for the three months ended April 30, 2008 for the same
three significant customers). DATASOURCE: Harry Winston Diamond
Corporation CONTACT: For investor information, visit
http://investor.harrywinston.com/ or call Investor Relations on
(416) 362-2237 ext 290
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