TORONTO, Sept. 10 /PRNewswire-FirstCall/ -- Harry Winston Diamond
Corporation (TSX: HW, NYSE: HWD) (the "Company") today reported
second quarter results for the period ended July 31, 2009. The
Company recorded a consolidated net loss of $24.5 million or $0.32
per share for the quarter, compared to net earnings of $49.9
million or $0.81 per share in the second quarter of the prior year.
The consolidated net loss for the quarter was significantly
impacted by a net foreign exchange loss primarily on future income
tax liabilities of $25.3 million or $0.33 per share, compared to a
net foreign exchange gain of $5.3 million or $0.09 per share in the
comparable quarter of the prior year. Robert Gannicott, Chairman
and Chief Executive Officer commented: "During this quarter the
diamond industry as a whole adjusted production to the curtailed
demand in the intermediate part of the diamond pipeline due to the
world economic conditions. Rough diamond prices increased
substantially during the quarter with our own pricing ending at 50%
above the low point in the first quarter. This improving trend has
continued into the third quarter. Although retail sales remained
below profitable levels, we have seen a 9% increase in transactions
worldwide compared to the prior quarter led by increases in the Far
East, including Japan. Sales have also edged up month to month
during the quarter suggesting a shift in momentum." Consolidated
sales were $94.8 million for the quarter compared to $186.1 million
for the comparable quarter of the prior year, resulting in a 75%
decrease in gross margin and a loss from operations of $3.9
million. The mining segment recorded sales of $46.0 million, a 56%
decrease from $105.0 million in the comparable quarter of the prior
year. The decrease in sales resulted from a combination of a 36%
decrease in rough diamond prices and a 31% decrease in volume of
carats sold in the second quarter. Rough diamond production for the
calendar quarter was 0.6 million carats, significantly lower than
the comparable quarter of the prior year due to a planned decrease
in ore production reflecting the softness in the rough diamond
market. Earnings from operations for the quarter were $1.7 million
compared to $67.5 million for the comparable quarter of the prior
year. The retail segment recorded a 40% decrease in sales to $48.8
million, with a loss from operations of $5.6 million compared to
earnings from operations of $5.9 million in the second quarter of
the prior year. Retail segment selling, general and administrative
expenses decreased by $5.8 million from $34.0 million in the
comparable quarter of the prior year. In addition, selling, general
and administrative expenses decreased by $2.0 million from the
first quarter of this year. Second Quarter Fiscal 2010 Financial
Highlights (US$ in millions except Earnings per Share amounts)
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Three Three Six Six months months months months ended ended ended
ended July 31, July 31, July 31, July 31, 2009 2008 2009 2008
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Sales 94.8 186.1 204.4 342.2
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Earnings from operations (loss) (3.9) 73.4 (14.0) 113.0
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Net earnings (loss) (24.5) 49.9 (69.6) 71.2
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Earnings (loss) per share ($0.32) $0.81 ($0.97) $1.17
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Conference Call and Webcast Beginning at 09:00AM (EST) on Friday,
September 11, the Company will host a conference call for analysts,
investors and other interested parties. Listeners may access a live
broadcast of the conference call on the Company's investor
relations web site at http://investor.harrywinston.com/ or by
dialing 800-706-7741 within North America or 617-614-3471 from
international locations and entering passcode 18664077. An online
archive of the broadcast will be available by accessing the
Company's investor relations web site at
http://investor.harrywinston.com/. A telephone replay of the call
will be available starting at noon through 12:00AM (EST), Friday,
September 18, 2009, by dialing 888-286-8010 within North America or
617-801-6888 from international locations and entering passcode
41485369. 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
percent 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/. 2010 Second Quarter
Report HARRY WINSTON DIAMOND COPORATION Six Months Ended July 31,
2009 Highlights (All figures are in United States dollars unless
otherwise indicated) Harry Winston Diamond Corporation recorded a
consolidated net loss of $24.5 million or $0.32 per share for the
quarter, compared to net earnings of $49.9 million or $0.81 per
share in the second quarter of the prior year. The consolidated net
loss for the quarter was significantly impacted by a net foreign
exchange loss primarily on future income tax liabilities of $25.3
million or $0.33 per share, compared to a net foreign exchange gain
of $5.3 million or $0.09 per share in the comparable quarter of the
prior year. Consolidated sales were $94.8 million for the quarter
compared to $186.1 million for the comparable quarter of the prior
year, resulting in a 75% decrease in gross margin and a loss from
operations of $3.9 million. The mining segment recorded sales of
$46.0 million, a 56% decrease from $105.0 million in the comparable
quarter of the prior year. The decrease in sales resulted from a
combination of a 36% decrease in rough diamond prices and a 31%
decrease in volume of carats sold in the second quarter. Rough
diamond production for the calendar quarter was 0.6 million carats,
significantly lower than the comparable quarter of the prior year
due to a planned decrease in ore production reflecting the softness
in the rough diamond market. Earnings from operations for the
quarter were $1.7 million compared to $67.5 million for the
comparable quarter of the prior year. The retail segment recorded a
40% decrease in sales to $48.8 million, with a loss from operations
of $5.6 million compared to earnings from operations of $5.9
million in the second quarter of the prior year. Retail segment
selling, general and administrative expenses decreased by $5.8
million from $34.0 million in the comparable quarter of the prior
year. In addition, selling, general and administrative expenses
decreased by $2.0 million from the first quarter of this fiscal
year. Management's Discussion and Analysis Prepared as of September
9, 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 and six months ended July 31, 2009 and its financial
position as at July 31, 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
and six months ended July 31, 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 "second quarter" refer to the three
months ended July 31, 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, 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 and the
demand for luxury goods, 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 18 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, world and US economic conditions and
the worldwide demand for luxury goods. Specifically, 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
18. Forward-looking information is subject to certain factors,
including risks and uncertainties, which could cause actual results
to differ materially from what we currently expect. These factors
include, among other things, the uncertain nature of mining
activities, including risks associated with underground
construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of
and harsh climate at the Diavik Diamond Mine site, risks associated
with regulatory requirements, fluctuations in diamond prices and
changes in US and world economic conditions, the risk of
fluctuations in the Canadian/US dollar exchange rate, cash flow and
liquidity risks and the risks of competition in the luxury jewelry
segment. Please see page 18 of this Interim Report, as well as the
Company's Annual Report, available at http://www.sedar.com/, for a
discussion of these and other risks and uncertainties involved in
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 of the Diavik Diamond Mine. 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 in the consolidated financial statements as part of
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 $103.7 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 The rough diamond market continued to build on the
momentum that was evident at the end of the first quarter. Rough
diamond prices increased substantially during the quarter with our
own pricing ending at 50% above the low point in the first quarter.
Polished diamond demand continued to be resilient in the Far East
and a cautious but definite return of interest from US buyers has
helped to revive the industry. Diamond polishers have been eager to
purchase rough diamonds, which are still restricted in supply,
leading to firmer prices in the quarter. Although it is anticipated
that the improved market conditions will encourage some diamond
producers to sell accumulated inventory, the increased supply is
not expected to dampen rough diamond prices. In the polished
diamond market, the hiatus in both mining and diamond polishing has
led to shortages in certain high-quality ranges. As the market
heads into the busy holiday season, the shortages are anticipated
to lead to further upward price movement. The Retail Jewelry Market
Trading conditions in the luxury segment of the diamond jewelry
market remain challenging. However, the Asian market is showing
signs of recovery while the US and European markets appear to have
reached bottom. Many industry peers are anticipating fourth quarter
sales to improve over last year's disappointing holiday season. (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 July 31, 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 2010 2009 2009 2009 Q2 Q1 Q4 Q3 Q2
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Sales $ 94,776 $109,643 $118,399 $148,623 $186,119 Cost of sales
66,294 83,944 68,908 71,679 73,542
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Gross margin 28,482 25,699 49,491 76,944 112,577 Gross margin (%)
30.1% 23.4% 41.8% 51.8% 60.5% Selling, general and administrative
expenses 32,380 35,749 39,399 33,998 39,194
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Earnings (loss) from operations (3,898) (10,050) 10,092 42,946
73,383
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Interest and financing expenses (2,998) (3,699) (4,960) (4,678)
(5,366) Other income 83 281 778 407 815 Insurance settlement -
3,250 17,240 - - Dilution loss (539) (34,222) - - - Impairment
charge - - (93,780) - - Foreign exchange gain (loss) (25,274)
(5,839) 4,649 48,982 5,301
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Earnings (loss) before income taxes (32,626) (50,279) (65,981)
87,657 74,133 Income taxes (recovery) (5,662) (3,120) 7,052 15,685
24,185
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Earnings (loss) before non-controlling interest (26,964) (47,159)
(73,033) 71,972 49,948 Non-controlling interest (2,443) (2,075)
(58) 81 1
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Net earnings (loss) $(24,521) $(45,084) $(72,975) $ 71,891 $ 49,947
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Basic earnings (loss) per share $ (0.32) $ (0.68) $ (1.19) $ 1.17 $
0.81 Diluted earnings (loss) per share $ (0.32) $ (0.68) $ (1.19) $
1.17 $ 0.81 Cash dividends declared per share $ 0.00 $ 0.00 $ 0.05
$ 0.05 $ 0.05 Total assets(i) $ 1,533 $ 1,592 $ 1,567 $ 1,645 $
1,637 Total long-term liabilities(i) $ 507 $ 496 $ 550 $ 562 $ 617
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Six Six months months ended ended 2009 2008 2008 July 31, July 31,
Q1 Q4 Q3 2009 2008
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Sales $156,079 $188,195 $176,478 $204,419 $342,198 Cost of sales
73,149 83,637 74,591 150,238 146,691
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Gross margin 82,930 104,558 101,887 54,181 195,507 Gross margin (%)
53.1% 55.6% 57.7% 26.5% 57.1% Selling, general and administrative
expenses 43,285 45,494 35,539 68,129 82,479
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Earnings (loss) from operations 39,645 59,064 66,348 (13,948)
113,028
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Interest and financing expenses (5,453) (7,082) (7,422) (6,697)
(10,819) Other income 246 706 594 364 1,061 Insurance settlement -
13,488 - 3,250 - Dilution loss - - - (34,761) - Impairment charge -
- - - - Foreign exchange gain (loss) 155 22,270 (40,584) (31,113)
5,456
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Earnings (loss) before income taxes 34,593 88,446 18,936 (82,905)
108,726 Income taxes (recovery) 13,336 (1,968) 26,197 (8,782)
37,521
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Earnings (loss) before non-controlling interest 21,257 90,414
(7,261) (74,123) 71,205 Non-controlling interest 1 (34) 90 (4,518)
2
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Net earnings (loss) $ 21,256 $ 90,448 $ (7,351) $(69,605) $ 71,203
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Basic earnings (loss) per share $ 0.35 $ 1.55 $ (0.13) $ (0.97) $
1.17 Diluted earnings (loss) per share $ 0.35 $ 1.54 $ (0.13) $
(0.97) $ 1.17 Cash dividends declared per share $ 0.05 $ 0.05 $
0.25 $ 0.00 $ 0.10 Total assets(i) $ 1,591 $ 1,494 $ 1,433 $ 1,533
$ 1,637 Total long-term liabilities(i) $ 634 $ 660 $ 530 $ 507 $
617
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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 9 for
additional information. Three Months Ended July 31, 2009 Compared
to Three Months Ended July 31, 2008 CONSOLIDATED NET EARNINGS The
Company recorded a second quarter consolidated net loss of $24.5
million or $0.32 per share compared to net earnings of $49.9
million or $0.81 per share in the second quarter of the prior year.
Consolidated net loss for the quarter included a net foreign
exchange loss primarily on future income tax liabilities of $25.3
million or $0.33 per share, compared to a net foreign exchange gain
of $5.3 million or $0.09 per share in the comparable quarter of the
prior year. CONSOLIDATED SALES Sales for the second quarter
totalled $94.8 million, consisting of rough diamond sales of $46.0
million and retail segment sales of $48.8 million. This compares to
sales of $186.1 million in the comparable quarter of the prior year
(rough diamond sales of $105.0 million and retail segment sales of
$81.1 million). The Company held two primary rough diamond sales in
the second quarter, consistent with the prior year. See "Segmented
Analysis" on page 9 for additional information. CONSOLIDATED COST
OF SALES AND GROSS MARGIN The Company's second quarter cost of
sales was $66.3 million for a gross margin of 30.1% compared to
$73.5 million cost of sales and gross margin of 60.5% 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 9 for
additional information. CONSOLIDATED SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES The principal components of selling,
general and administrative ("SG A") expenses include expenses for
salaries and benefits, advertising, professional fees, rent and
building related costs. The Company incurred SG A expenses of $32.4
million for the second quarter, compared to $39.2 million in the
comparable quarter of the prior year. Included in SG A expenses for
the second quarter are $4.2 million for the mining segment compared
to $5.2 million for the comparable quarter of the prior year and
$28.2 million for the retail segment compared to $34.0 million for
the comparable quarter of the prior year. For the mining segment,
the decrease was primarily due to 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 9 for additional information. CONSOLIDATED INCOME TAXES The
Company recorded a net income tax recovery of $5.7 million during
the second quarter, compared to a net income tax expense of $24.2
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 9%, 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 second quarter, the Canadian dollar strengthened against
the US dollar. As a result, the Company recorded an unrealized
foreign exchange loss of $19.0 million on the revaluation of the
Company's Canadian dollar denominated future income tax liability.
This compares to an unrealized foreign exchange gain of $4.4
million in the comparable quarter of the prior year. The unrealized
foreign exchange loss is not deductible for Canadian income tax
purposes. The rate of income tax payable by Harry Winston Inc.
varies by jurisdiction. Net operating losses are available in
certain jurisdictions to offset future income taxes payable in such
jurisdictions. The net operating losses are scheduled to expire
through 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 July 31, July 31, 2009 2008
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Statutory income tax rate 30 % 31 % Northwest Territories mining
royalty (net of income tax relief) (1)% 8 % Impact of foreign
exchange (15)% (4)% Earnings subject to tax different than
statutory rate 8 % (4)% Changes in valuation allowance - % 1 %
Impact of dilution loss (1)% - % Impact of income allocated to
non-controlling interest (2)% - % Assessments and adjustments (2)%
- % Other items - % 1 % Effective income tax rate 17 % 33 %
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CONSOLIDATED INTEREST AND FINANCING EXPENSES Interest and financing
expenses of $3.0 million were incurred during the second quarter
compared to $5.4 million during the comparable quarter of the prior
year. The Company repaid the full amount of $74.2 million of the
mining segment's senior secured term and revolving credit
facilities with the March 31, 2009 closing of the Kinross
transaction. CONSOLIDATED OTHER INCOME Other income of $0.1 million
was recorded during the quarter compared to $0.8 million in the
comparable quarter of the prior year. CONSOLIDATED DILUTION LOSS
The Company recorded a further non-cash dilution loss of $0.5
million as a result of a final working capital adjustment to the
subscription price for the investment by Kinross in HWDLP, which
holds the Company's 40% interest in the Diavik Diamond Mine.
CONSOLIDATED FOREIGN EXCHANGE LOSS A net foreign exchange loss of
$25.3 million was recognized during the quarter compared to a net
foreign exchange gain of $5.3 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 July 31, 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. Six Months Ended July 31, 2009 Compared to
Six Months Ended July 31, 2008 CONSOLIDATED NET EARNINGS The
Company recorded a consolidated net loss for the six months ended
July 31, 2009 of $69.6 million or $0.97 per share compared to net
earnings of $71.2 million or $1.17 per share for the six months
ended July 31, 2008. Consolidated net loss for the six months ended
July 31, 2009 included a non-cash dilution loss of $34.8 million or
$0.49 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 net
foreign exchange loss primarily on future income tax liabilities of
$31.1 million or $0.44 per share, compared to a net foreign
exchange gain of $5.5 million or $0.09 per share in the comparable
period of the prior year. CONSOLIDATED SALES Sales for the six
months ended July 31, 2009 totalled $204.4 million, consisting of
rough diamond sales of $103.6 million and retail segment sales of
$100.8 million. This compares to sales of $342.2 million for the
six months ended July 31, 2008 (rough diamond sales of $186.4
million and retail segment sales of $155.8 million). See "Segmented
Analysis" on page 9 for additional information. CONSOLIDATED COST
OF SALES AND GROSS MARGIN The Company's cost of sales for the six
months ended July 31, 2009 was $150.2 million for a gross margin of
26.5% compared to $146.7 million cost of sales and gross margin of
57.1% for the comparable period 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 9 for additional information. CONSOLIDATED SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES The Company incurred SG A expenses of
$68.1 million for the six months ended July 31, 2009, compared to
$82.5 million for the six months ended July 31, 2008. Included in
SG A expenses for the six months ended July 31, 2009 are $9.7
million for the mining segment compared to $12.4 million for the
comparable period of the prior year and $58.4 million for the
retail segment compared to $70.1 million for the comparable period
of the prior year. For the mining segment, the decrease was
primarily due to reduced 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 9 for additional information.
CONSOLIDATED INCOME TAXES The Company recorded a net income tax
recovery of $8.8 million during the six months ended July 31, 2009,
compared to a net income tax expense of $37.5 million in the
comparable period of the prior year. The Company's effective income
tax rate for the six months ended July 31, 2009, excluding Harry
Winston's retail segment, is 6%, 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 six months ended July 31, 2009, the Canadian dollar
strengthened against the US dollar. As a result, the Company
recorded an unrealized foreign exchange loss of $23.0 million on
the revaluation of the Company's Canadian dollar denominated future
income tax liability. This compares to an unrealized foreign
exchange gain of $5.3 million in the comparable period of the prior
year. The unrealized foreign exchange loss is not deductible for
Canadian income tax purposes. During the six months ended July 31,
2009, the Company recorded a non-cash dilution loss of $34.8
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: Six Six months months ended
ended July 31, July 31, 2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 % Northwest Territories mining
royalty (net of income tax relief) - % 10 % Impact of foreign
exchange (6)% (4)% Earnings subject to tax different than statutory
rate 4 % (4)% Changes in valuation allowance (1)% 1 % Impact of
dilution loss (13)% - % Impact of income allocated to
non-controlling interest (2)% - % Assessments and adjustments (1)%
1 % Effective income tax rate 11 % 35 %
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES Interest and financing
expenses of $6.7 million were incurred during the six months ended
July 31, 2009 compared to $10.8 million during the comparable
period of the prior year. The Company repaid the full amount of
$74.2 million of the mining segment's senior secured term and
revolving credit facilities with the March 31, 2009 closing of the
Kinross transaction. CONSOLIDATED OTHER INCOME Other income of $0.4
million was recorded during the six months ended July 31, 2009
compared to $1.1 million in the comparable period of the prior
year. CONSOLIDATED INSURANCE SETTLEMENT The Company received the
remaining insurance settlement of $3.3 million related to the
December 2008 robbery at the Harry Winston Paris salon during the
six months ended July 31, 2009. CONSOLIDATED DILUTION LOSS During
the six months ended July 31, 2009, the Company recorded a non-cash
dilution loss of $34.8 million 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 LOSS A net
foreign exchange loss of $31.1 million was recognized during the
six months ended July 31, 2009 compared to a net foreign exchange
gain of $5.5 million in the comparable period of the prior year.
The current year to date 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 July 31, 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)
-------------------------------------------------------------------------
2010 2010 2009 2009 2009 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 45,941 $ 57,690 $ 51,100 $ 90,716 $105,014 Cost of sales
40,049 57,256 34,612 40,617 32,390
-------------------------------------------------------------------------
Gross margin 5,892 434 16,488 50,099 72,624 Gross margin (%) 12.8%
0.8% 32.3% 55.2% 69.2% Selling, general and administrative expenses
4,182 5,503 4,430 3,114 5,151
-------------------------------------------------------------------------
Earnings (loss) from operations $ 1,710 $ (5,069) $ 12,058 $ 46,985
$ 67,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six months months ended ended 2009 2008 2008 July 31, July 31,
Q1 Q4 Q3 2009 2008
-------------------------------------------------------------------------
Sales $ 81,393 $103,238 $122,711 $103,631 $186,407 Cost of sales
32,150 36,962 45,985 97,305 64,540
-------------------------------------------------------------------------
Gross margin 49,243 66,276 76,726 6,326 121,867 Gross margin (%)
60.5% 64.2% 62.5% 6.1% 65.4% Selling, general and administrative
expenses 7,208 5,663 6,748 9,685 12,359
-------------------------------------------------------------------------
Earnings (loss) from operations $ 42,035 $ 60,613 $ 69,978 $
(3,359) $109,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2009 Compared to Three Months Ended
July 31, 2008 MINING SALES Rough diamond sales for the quarter
totalled $46.0 million compared to $105.0 million in the comparable
quarter of the prior year resulting from a combination of a 36%
decrease in rough diamond prices and a 31% decrease in volume of
carats sold. Rough diamond prices have increased over the market
low seen in the first quarter of this year but remain significantly
lower than the prices achieved in the comparable quarter of the
prior year. Rough diamond production during the quarter was
significantly lower than the comparable quarter of the prior year
due to a planned decrease in ore production reflecting the softness
in the rough diamond market. The Company held two primary rough
diamond sales in the second 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 second quarter cost of sales was $40.0 million
resulting in a gross margin of 12.8% compared to $32.4 million cost
of sales and gross margin of 69.2% in the comparable quarter of the
prior year. The increase in cost of sales, attributable to mining
costs, resulted primarily from the costs associated with preparing
the A-418 kimberlite pipe for commercial production being
capitalized in the comparable quarter of the prior year. These same
activities have been recorded as direct operating costs in the
current quarter. 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 $1.0 million from the comparable period of the prior
year primarily due to a reduction in discretionary spending. Six
Months Ended July 31, 2009 Compared to Six Months Ended July 31,
2008 MINING SALES Rough diamond sales for the six months ended July
31, 2009 totalled $103.6 million compared to $186.4 million in the
comparable period of the prior year resulting from a 49% decrease
in rough diamond prices. During the first quarter of the fiscal
year, rough diamond prices were at their lowest level since the
Diavik Diamond Mine began operation. In addition, 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 prices
have increased over the market low seen in the first quarter but
remain significantly lower than the prices achieved in the
comparable period of the prior year. Rough diamond production
during the six months was significantly lower than the comparable
period of the prior year due to a planned decrease in ore
production reflecting the softness in the rough diamond market. The
Company held four primary rough diamond sales during the six months
ended July 31, 2009, consistent with the comparable period 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 For the
six months ended July 31, 2009, cost of sales was $97.3 million
resulting in a gross margin of 6.1% compared to $64.5 million cost
of sales and gross margin of 65.4% in the comparable period of the
prior year. The increase in cost of sales, attributable to mining
costs, resulted primarily from the costs associated with preparing
the A-418 kimberlite pipe for commercial production being
capitalized in the comparable period of the prior year. These same
activities have been recorded as direct operating costs in the
current year. Also included in cost of sales for the six months
ended July 31, 2009 is $9.8 million related to goods carried in
inventory at January 31, 2009, which were sold subsequent to year
end. 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 $2.7
million from the comparable period of the prior year primarily due
to reduced incentive based compensation and a reduction in
discretionary spending. Mining Segment Operational Update Ore
production for the second calendar quarter consisted of 0.7 million
carats produced from 0.13 million tonnes of ore from the A-154
South kimberlite pipe and 0.8 million carats produced from 0.25
million tonnes of ore from the A-418 kimberlite pipe. Rough diamond
production was significantly lower than the second calendar quarter
from the prior year as a result of the plan to reduce mining
activity to reflect the softness in the rough diamond market.
Average grade increased slightly to 3.7 carats per tonne from 3.5
carats per tonne. The increase in average grade was primarily
driven by a significant increase in the grade of the ore from the
A-154 South kimberlite pipe. During the second calendar quarter,
open pit mining and processing of the A-154 South and A-418
kimberlite pipes continued. The Diavik Diamond Mine was
subsequently shut down from July 14, 2009 to August 24, 2009
inclusive. General upkeep of the open pits and haulage roads was
maintained during the summer shutdown. Pre-delivery of ore to the
processing plant was carried out in preparation for the late-August
resumption of production. Work continued on the underground pump
stations and associated pipelines as well as the related surface
works, including commissioning of the new crusher plant, expanded
water treatment and power generation plants. The underground mine
is on track to commence operation in the first calendar quarter of
2010. Harry Winston Diamond Limited Partnership's 40% Share of
Diavik Diamond Mine Production (reported on a one-month lag)
-------------------------------------------------------------------------
Three Three Six Six months months months months ended ended ended
ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 568 1,009 1,282 1,723 Grade
(carats/tonne) 3.73 3.52 3.97 3.74
-------------------------------------------------------------------------
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 plan incorporates a six-week
summer shutdown and a contemplated second six-week shutdown 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. The summer shutdown was 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. Some site activity was
continued where cost effective, such as planned work associated
with the processed kimberlite containment facility and essential
equipment maintenance. As a result of the summer shutdown, the
Company expects to hold one primary rough diamond sale in the third
quarter compared to three primary rough diamond sales in the
comparable quarter of the prior year. The Company plans to hold
three primary rough diamond sales in the fourth quarter (total
fiscal 2010 rough diamond sales of eight) compared to two primary
rough diamond sales in the fourth quarter of the prior year (total
fiscal 2009 rough diamond sales of nine). PRICING The rough diamond
market experienced a robust recovery during the second quarter and
pricing improved significantly. The current tone in the market has
encouraged diamond producers to sell-down inventory, but this has
not led to lower prices. The Company believes that rough and
polished diamond prices are now in balance. Further price increases
will be led by recovering consumer demand. 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. Total carat production is expected to be between 5 and 6
million carats on a 100% basis. The turmoil in the rough diamond
market over the last year has required the Diavik Diamond Mine
operating team to maintain a flexible and nimble approach to
production planning. Since the market has improved substantially
and consistently since the end of the first quarter, there is now a
new plan under consideration for the balance of this calendar year
and next year which would, if adopted, see a reversal of the winter
shutdown and delivery of approximately 7.5 million carats during
calendar 2010. Looking beyond calendar 2010, the objective is to
feed a 2 million tonne per year processing capability with a
combination of underground and open pit production. As underground
capacity ramps up to approximately 1.5 million tonnes per year,
open pit production will synchronously decline to 0.5 million
tonnes per year from the A-418 open pit until this pit is finally
closed at the end of calendar 2012. The feasibility of mining the
upper part of A-21 is now under review with the objective that it
becomes the supplemental ore source to underground production
beyond 2012. To extend production beyond 2022 will be dependent on
bringing resources and exploratory tonnages into reserves. COST OF
SALES 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. CAPITAL EXPENDITURES During the next three years, HWDLP's 40%
share of the planned capital expenditure is expected to be
approximately $135 million at an assumed average Canadian/US dollar
exchange rate of $0.91. HWDLP's portion of capital expenditure for
the fiscal year ending January 31, 2010 is expected to be $49
million at an assumed average Canadian/US dollar exchange rate of
$0.88, the majority of which is related to underground development.
During the first six months of fiscal 2010, HWDLP's share of
underground capital expenditures was $33.5 million. Although
underground development is substantially completed, limited
production is not expected to commence until calendar 2010. Further
development work that will allow for optimum production levels
through the use of different mining methods is expected to be
undertaken throughout calendar 2010 and 2011. The Company expects
to contribute $57 million over the following two years in support
of underground development, assuming an average Canadian/US dollar
exchange rate of $0.90. The balance of expected 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 four salons in Asia outside
of Japan: Beijing, Taipei, Hong Kong and Singapore. (expressed in
thousands of United States dollars) (quarterly results are
unaudited)
-------------------------------------------------------------------------
2010 2010 2009 2009 2009 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 48,835 $ 51,953 $ 67,299 $ 57,907 $ 81,105 Cost of sales
26,245 26,688 34,296 31,062 41,152
-------------------------------------------------------------------------
Gross margin 22,590 25,265 33,003 26,845 39,953 Gross margin (%)
46.3% 48.6% 49.0% 46.4% 49.3% Selling, general and administrative
expenses 28,198 30,246 34,969 30,884 34,043
-------------------------------------------------------------------------
Earnings (loss) from operations $ (5,608) $ (4,981) $ (1,966) $
(4,039) $ 5,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six months months ended ended 2009 2008 2008 July 31, July 31,
Q1 Q4 Q3 2009 2008
-------------------------------------------------------------------------
Sales $ 74,686 $ 84,957 $ 53,767 $100,788 $155,791 Cost of sales
40,999 46,675 28,606 52,933 82,151
-------------------------------------------------------------------------
Gross margin 33,687 38,282 25,161 47,855 73,640 Gross margin (%)
45.1% 45.1% 46.8% 47.5% 47.3% Selling, general and administrative
expenses 36,077 39,831 28,791 58,444 70,120
-------------------------------------------------------------------------
Earnings (loss) from operations $ (2,390) $ (1,549) $ (3,630)
$(10,589) $ 3,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2009 Compared to Three Months Ended
July 31, 2008 RETAIL SALES Sales for the second quarter were $48.8
million compared to $81.1 million for the comparable quarter of the
prior year, a decrease of 40%. Sales in the US market decreased 48%
to $15.0 million, European sales decreased 44% to $17.7 million,
and Asian sales decreased 21% to $16.1 million. RETAIL COST OF
SALES AND GROSS MARGIN Cost of sales for the retail segment or the
second quarter was $26.2 million compared to $41.2 million for the
comparable quarter of the prior year. Gross margin for the quarter
was $22.6 million or 46.3% compared to $40.0 million or 49.3% for
the second quarter of the prior year. Excluding the impact of sales
of Harry Winston Inc. pre-acquisition inventory, gross margin for
the second quarter and the comparable quarter of the prior year
would have been 47.1% and 51.3%, respectively. Gross margin in the
second quarter was impacted by a combination of lower sales and the
fixed cost leverage in cost of sales. RETAIL SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES SG A expenses decreased to $28.2 million
from $34.0 million in the comparable quarter of the prior year and
from $30.2 million in the first quarter of this fiscal year. The
decrease was due to an adjustment to incentive based compensation,
reduced advertising and selling expenses, savings from staff
reductions and reductions in discretionary spending. SG A expenses
include depreciation and amortization expense of $3.2 million,
consistent with the comparable quarter of the prior year. Six
Months Ended July 31, 2009 Compared to Six Months Ended July 31,
2008 RETAIL SALES Sales for the six months ended July 31, 2009 were
$100.8 million compared to $155.8 million for the comparable period
of the prior year, a decrease of 35%. Sales in the European market
decreased 42% to $37.0 million, US sales decreased 37% to $33.8
million, and Asian sales decreased 22% to $30.0 million. RETAIL
COST OF SALES AND GROSS MARGIN Cost of sales for the retail segment
for the six months ended July 31, 2009 was $52.9 million compared
to $82.2 million for the comparable period of the prior year. Gross
margin for the six months ended July 31, 2009 was $47.9 million or
47.5% compared to $73.6 million or 47.3% for the comparable period
of the prior year. Excluding the impact of sales of Harry Winston
Inc. pre-acquisition inventory, gross margin for the six months
ended July 31, 2009 and the comparable period of the prior year
would have been 48.4% and 49.4%, respectively. RETAIL SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES SG A expenses decreased to
$58.4 million from $70.1 million in the comparable period of the
prior year. The decrease was due to an adjustment to incentive
based compensation, reduced advertising and selling expenses,
savings from staff reductions and reductions in discretionary
spending. SG A expenses include depreciation and amortization
expense of $6.3 million, consistent with the comparable quarter of
the prior year. Retail Segment Operational Update During the second
quarter, the retail segment recorded a 40% decline in sales
compared with the comparable quarter of the prior year. The decline
in sales was consistent throughout most regions except for the
Japan market, where sales were only 5% below the comparable period
of the prior year. In response to the challenging economic
environment, the retail segment has reduced inventory levels as
well as capital expenditures. In addition, a series of cost
reduction measures have been implemented to better align the retail
cost structure with the current economic environment. The retail
salon network expansion plan for the year is limited to the
Singapore salon, which opened in July 2009, bringing the retail
network to 19 salons. Retail Segment Outlook Harry Winston Inc.
expects the economic environment to remain challenging over the
remainder of the year. Many retailers are anticipating fourth
quarter sales to improve over last year's disappointing holiday
season. The retail segment will continue cost- reduction
initiatives, strict controls over inventory purchasing and
reductions in capital expenditures. With the approach of the
holiday season, Harry Winston Inc. is optimistic that its new
collections of jewelry and watches will be well received by
customers. The cost-reduction initiatives taken in response to the
recession, coupled with the strength of the Harry Winston brand,
are aimed at delivering a higher level of sustainable profitability
for the retail segment during the anticipated economic recovery.
The Company is committed to continue building the Harry Winston
brand over the long term. Liquidity and Capital Resources Working
Capital As at July 31, 2009, the Company had unrestricted cash and
cash equivalents of $67.9 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 $65.0 million and short-term
investments of $2.9 million at July 31, 2009. The short-term
investments were held in overnight deposits. 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
on March 31, 2009. During the quarter ended July 31, 2009, the
Company reported a use of cash from operations of $20.0 million,
compared to a source of cash of $46.2 million in the comparable
quarter of the prior year. The current quarter use of cash resulted
from a combination of a significant reduction in net earnings and
in income taxes payable. Working capital increased to $296.6
million at July 31, 2009 from $195.1 million at January 31, 2009.
During the second quarter, the Company increased accounts
receivable by $0.9 million; increased prepaid expenses and other
current assets by $0.8 million; decreased inventory by $18.3
million; decreased accounts payable and accrued liabilities by
$18.9 million; and decreased income taxes payable by $25.5 million.
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. With the closing of the Kinross transaction and the
repayment in full of the mining segment's senior secured credit
facilities, the Company assesses liquidity and capital resources on
a consolidated basis. The Company's requirements are for cash
operating expenses, working capital, contractual debt requirements
and capital expenditures. The Company believes that it will
generate sufficient liquidity to meet its anticipated requirements
for the next 12 months. Financing Activities As at July 31, 2009,
Harry Winston Inc. had $151.5 million outstanding on its $250.0
million secured five-year revolving credit facility, which is used
to fund salon inventory and capital expenditure requirements. This
represents a decrease of $28.1 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 CHF
17.5 million ($16.1 million) used to finance the construction of
the Company's watch factory in Geneva, Switzerland. At July 31,
2009, $15.3 million was outstanding compared to $14.7 million at
January 31, 2009. The bank has a secured interest in the factory
building. In addition, the Company has a demand credit facility of
CHF 2.0 million ($1.8 million), supported by a $2.0 million standby
letter of credit. At July 31, 2009, $1.4 million was outstanding
compared to $0.5 million at January 31, 2009. Harry Winston Japan,
K.K. maintains secured and unsecured credit agreements with three
banks amounting to (Yen)2,065 million ($21.7 million). At July 31,
2009, $21.7 million had been drawn against these facilities and
classified as bank advances compared to $23.1 million at January
31, 2009, $5.5 million of which was long term. At July 31, 2009,
$0.8 million was drawn under the Company's revolving financing
facility relating to its Indian subsidiary, Harry Winston Diamond
(India) Private Limited. No amounts were outstanding under the
revolving financing facility for its Belgian subsidiary, Harry
Winston Diamond International N.V. at July 31, 2009. During the
second quarter, the Company repaid the revolving financing facility
for its Israeli subsidiary, Harry Winston Diamond (Israel) Limited,
and the facility was subsequently cancelled. 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 During the second quarter, the Company
purchased capital assets of $15.8 million, of which $14.7 million
were purchased for the mining segment and $1.1 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, HWDLP is obligated to fund 40%
of the Joint Venture's total expenditures on a monthly basis.
HWDLP'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 $160 million assuming a Canadian/US
average exchange rate of $0.93 for the five years. The most
significant contractual obligations for the ensuing five-year
period can be summarized as follows: CONTRACTUAL OBLIGATIONS
(expressed in thousands of United States Less than Year Year After
dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt (a)(b) $205,029 $ 8,513 $ 16,463 $162,865 $ 17,188
Environmental and participation agreements incremental commitments
(c) 88,041 73,127 2,970 1,150 10,794 Operating lease obligations
(d) 109,427 18,817 27,085 19,495 44,030 Capital lease obligations
(e) 1,027 687 340 - -
-------------------------------------------------------------------------
Total contractual obligations $403,524 $101,144 $ 46,858 $183,510 $
72,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. 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 July 31, 2009, $151.1
million had been drawn against this secured credit facility which
expires on March 31, 2013. Also included in long-term debt of Harry
Winston Inc. is a 25-year loan agreement for CHF 17.5 million
($16.1 million) used to finance the construction of the Company's
watch factory in Geneva, Switzerland. The loan agreement is
comprised of a CHF 3.5 million ($3.2 million) loan and a CHF 14.0
million ($12.9 million) loan. The CHF 3.5 million loan bears
interest at a rate of 3.9% and matures on April 22, 2013 (extended
from April 22, 2010). The CHF 14.0 million loan bears interest at a
rate of 3.55% and matures on January 31, 2033. At July 31, 2009,
$15.3 million was outstanding on the loan agreement compared to
$14.7 million at January 31, 2009. The bank has a secured interest
in the factory building. In addition, the Company has a demand
credit facility of CHF 2.0 million ($1.8 million), supported by a
$2.0 million standby letter of credit. The demand credit facility
bears interest at a rate of 5.0% per annum. At July 31, 2009, $1.4
million was outstanding, compared to $0.5 million at January 31,
2009. Harry Winston Japan, K.K. maintains unsecured credit
agreements with two banks, each amounting to (Yen)1,490 million
($15.6 million). At July 31, 2009, $15.6 million had been drawn
against these facilities and classified as bank advances. The
credit facilities amounting to $7.8 million, $2.6 million and $5.2
million, bear interest at 1.98%, 1.98% and 2.38%, respectively, and
expired on August 31, 2009 (subsequently extended to September 30,
2009), October 30, 2009 and June 28, 2010, respectively. Harry
Winston Japan, K.K. also maintains a secured credit agreement
amounting to (Yen)575 million ($6.1 million) classified as bank
advances. The facility is secured by inventory owned by Harry
Winston Japan, K.K., bears interest at 2.15% and expires on
December 18, 2009. The Company's first mortgage on real property
has scheduled principal payments of approximately $0.1 million
quarterly, and may be prepaid at any time. On July 31, 2009, $7.4
million was outstanding on the mortgage payable. (b) Interest on
long-term debt is calculated at various fixed and floating rates.
Projected interest payments on the current debt outstanding were
based on interest rates in effect at July 31, 2009, and have been
included under long-term debt in the table above. Interest payments
for the next 12 months are approximated to be $7.4 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 HWDLP's share as at July 31, 2009 was
$71.8 million based on its 40% ownership interest in the Diavik
Diamond Mine. There can be no assurance that the operator will
continue its practice of posting letters of credit in fulfillment
of this obligation, in which event HWDLP would be required to post
its proportionate share of such security directly, which would
result in additional constraints on liquidity. 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 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 HWDLP could be diluted under the amended
partnership agreement as a result of 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
or in diamonds available for sale 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 has established 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 each
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. Financial
Instruments In June 2009, the CICA amended Handbook Section 3862,
"Financial Instruments - Disclosures", to enhance disclosure
requirements for fair value measurement of financial instruments
and liquidity risk. The changes are effective for annual financial
statements relating to fiscal years ending after September 30,
2009. The Company is currently assessing the impact of this
amendment 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. Although the Company's IFRS conversion
project consists of three sequential phases, certain aspects of
each phase sometimes occur concurrently, resulting in the analysis
of certain areas being further developed than in other areas.
EXPECTED ACCOUNTING DIFFERENCES BETWEEN CANADIAN GAAP IFRS At July
31, 2009, the Company had substantially completed the Assessment
Phase of its IFRS conversion project. The following areas have been
identified where the accounting differences between Canadian GAAP
and existing IFRS may have an impact on the Company's consolidated
financial statements. The accounting differences described below
should not be regarded as a complete list of areas that may be
impacted by the transition to IFRS. Analysis of accounting
differences is still in progress, particularly where choices of
accounting policies are available. Property, plant and equipment -
Separate accounting for components of property, plant and equipment
is more vigorously applied and broader under IFRS. Costs are
allocated to significant parts of an asset if the useful lives
differ, and each part is then separately depreciated. Exploration
and evaluation - IFRS 6, "Exploration for and Evaluation of Mineral
Resources", allows an entity to either develop a new accounting
policy for exploration and evaluation expenditures consistent with
IFRS requirements or continue to follow the Company's existing
policy. Income taxes - Existing IFRS requires the recognition of
deferred taxes in situations not required under Canadian GAAP.
Specifically, a deferred tax liability (asset) is recognized for
exchange gains and losses relating to foreign non-monetary assets
and liabilities that are remeasured into the functional currency
using historical exchange rates. Similar timing differences are
also recognized for the difference in tax bases between
jurisdictions as a result of intra- group transfer of assets. Asset
impairment - Under IFRS, assets are tested for impairment either
individually or within cash generating units. This approach
reflects the smallest group of assets capable of generating largely
independent cash inflows, which may differ from asset groups under
Canadian GAAP. Impairment charges relating to long-lived assets may
be more frequent under IFRS as the cash flow test for
recoverability is based on a one step discounted cash flow
approach. Impairment under IFRS is recognized if the carrying
amount exceeds the higher of fair value less cost to sell, or value
in use. Reversal of impairment charges is required under IFRS if
the circumstances leading to the impairment have changed. In
addition, the International Accounting Standards Board has a number
of ongoing projects that could result in the issuance of new IFRS
that could affect the ultimate differences between Canadian GAAP
and IFRS. In particular, we expect that there may be revised IFRS
issued and in effect in relation to joint arrangements and income
taxes. The Company is monitoring these international accounting
developments. The Company also anticipates a significant increase
in disclosure within its consolidated financial statements
resulting from the adoption of IFRS and is continuing to assess the
level of disclosure required. FIRST TIME ADOPTION OF IFRS IFRS 1,
"First Time Adoption of International Financial Reporting
Standards" ("IFRS 1"), provides mandatory guidance that generally
requires full retrospective application of the IFRS and
interpretations from the date of transition, February 1, 2010. All
material accounting differences leading up to February 1, 2010
between Canadian GAAP and IFRS will be eliminated generally through
opening retained earnings at the date of transition. However, IFRS
1 allows certain optional exemptions in the application of
particular standards to prior periods in order to assist companies
with the transition process. The Company is continuing to evaluate
the IFRS 1 optional exemptions available. At this time, the impact
on the Company's financial position and results of operations is
not reasonably determinable or estimable for any of the IFRS
conversion areas identified. From the perspective of the Company's
systems and controls, no significant impact has currently been
identified from management's high-level impact assessment on
systems and business processes carried out to date. Outstanding
Share Information As at July 31, 2009
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 76,588,592
Options outstanding 3,234,179 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) July 31, January
31, 2009 2009 (unaudited)
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 67,903
$ 16,735 Cash collateral and cash reserves (note 3) 288 30,145
Accounts receivable (note 13) 18,031 66,980 Inventory and supplies
(note 4) 321,113 346,235 Prepaid expenses and other current assets
52,416 48,130
-------------------------------------------------------------------------
459,751 508,225 Mining capital assets 812,914 800,358 Retail
capital assets 65,304 68,258 Intangible assets, net (note 6)
129,929 130,752 Other assets 15,082 15,644 Future income tax asset
50,038 43,338
-------------------------------------------------------------------------
$ 1,533,018 $ 1,566,575 ---------------------------
--------------------------- Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities $
90,542 $ 118,390 Income taxes payable 47,656 76,987 Bank advances
23,883 42,621 Current portion of long-term debt (note 7) 1,109
75,097
-------------------------------------------------------------------------
163,190 313,095 Long-term debt (note 7) 173,065 205,625 Future
income tax liability 291,601 303,284 Other long-term liability
1,958 1,946 Future site restoration costs 40,105 39,506
Non-controlling interest (note 1) 180,068 280 Shareholders' Equity:
Share capital (note 8) 426,281 381,541 Contributed surplus 17,357
16,079 Retained earnings 213,572 283,177 Accumulated other
comprehensive income 25,821 22,042
-------------------------------------------------------------------------
683,031 702,839 Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,533,018 $ 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 Six Six months months months months ended
ended ended ended July 31, July 31, July 31, July 31, 2009 2008
2009 2008
-------------------------------------------------------------------------
Sales $ 94,776 $ 186,119 $ 204,419 $ 342,198 Cost of sales 66,294
73,542 150,238 146,691
-------------------------------------------------------------------------
Gross margin 28,482 112,577 54,181 195,507 Selling, general and
administrative expenses 32,380 39,194 68,129 82,479
-------------------------------------------------------------------------
Earnings (loss) from operations (3,898) 73,383 (13,948) 113,028
-------------------------------------------------------------------------
Interest and financing expenses (2,998) (5,366) (6,697) (10,819)
Other income 83 815 364 1,061 Insurance settlement (note 13) - -
3,250 - Dilution loss (note 14) (539) - (34,761) - Foreign exchange
gain (loss) (25,274) 5,301 (31,113) 5,456
-------------------------------------------------------------------------
Earnings (loss) before income taxes (32,626) 74,133 (82,905)
108,726 Income tax expense - Current 2,019 27,589 1,194 49,089
Income tax recovery - Future (7,681) (3,404) (9,976) (11,568)
-------------------------------------------------------------------------
Earnings (loss) before non-controlling interest (26,964) 49,948
(74,123) 71,205 Non-controlling interest (note 1) (2,443) 1 (4,518)
2
-------------------------------------------------------------------------
Net earnings (loss) $ (24,521) $ 49,947 $ (69,605) $ 71,203
---------------------------------------------------
--------------------------------------------------- Earnings (loss)
per share Basic $ (0.32) $ 0.81 $ (0.97) $ 1.17
---------------------------------------------------
--------------------------------------------------- Fully diluted $
(0.32) $ 0.81 $ (0.97) $ 1.17
---------------------------------------------------
--------------------------------------------------- Weighted
average number of shares outstanding 76,579,975 61,372,091
71,509,367 60,655,424
---------------------------------------------------
--------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (EXPRESSED IN
THOUSANDS OF UNITED STATES DOLLARS) Three Three Six Six months
months months months ended ended ended ended July 31, July 31, July
31, July 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (24,521) $ 49,947 $ (69,605) $ 71,203 Other
comprehensive income Net gain (loss) on translation of net foreign
operations (net of tax - nil) 3,693 (654) 3,779 1,935
-------------------------------------------------------------------------
Total comprehensive income (loss) $ (20,828) $ 49,293 $ (65,826) $
73,138 ---------------------------------------------------
--------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED) Three
Three Six Six months months months months ended ended ended ended
July 31, July 31, July 31, July 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
COMMON SHARES: Balance at beginning of period $ 426,299 $ 381,541 $
381,541 $ 305,502 Issued during the period (18) - 44,740 76,039
-------------------------------------------------------------------------
Balance at end of period 426,281 381,541 426,281 381,541
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS: Balance at beginning of period 17,154 15,769
16,079 15,614 Stock option expense 203 137 1,278 292
-------------------------------------------------------------------------
Balance at end of period 17,357 15,906 17,357 15,906
-------------------------------------------------------------------------
RETAINED EARNINGS: Balance at beginning of period 238,093 243,521
283,177 225,334 Net earnings (loss) (24,521) 49,947 (69,605) 71,203
Dividends paid - (3,070) - (6,139)
-------------------------------------------------------------------------
Balance at end of period 213,572 290,398 213,572 290,398
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance at beginning of
period 22,128 27,801 22,042 25,212 Other comprehensive income Net
gain (loss) on translation of net foreign operations (net of tax -
nil) 3,693 (654) 3,779 1,935
-------------------------------------------------------------------------
Balance at end of period 25,821 27,147 25,821 27,147
-------------------------------------------------------------------------
Total Shareholders' Equity $ 683,031 $ 714,992 $ 683,031 $ 714,992
---------------------------------------------------
--------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (EXPRESSED IN THOUSANDS OF
UNITED STATES DOLLARS) (UNAUDITED) Three Three Six Six months
months months months ended ended ended ended July 31, July 31, July
31, July 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings (loss) $
(24,521) $ 49,947 $ (69,605) $ 71,203 Items not involving cash:
Amortization and accretion 16,971 16,778 34,646 30,733 Future
income tax recovery (7,681) (3,404) (9,976) (11,568) Stock-based
compensation and pension expense 225 222 1,290 579 Foreign exchange
loss (gain) 24,604 (5,677) 31,098 (6,251) Loss on disposal of
assets - 19 - 489 Non-controlling interest (2,443) 1 (4,518) 2
Dilution loss 539 - 34,761 - Change in non-cash operating working
capital (27,729) (11,679) 1,066 (4,671)
-------------------------------------------------------------------------
(20,035) 46,207 18,762 80,516
-------------------------------------------------------------------------
Financing Decrease in long-term debt (74) (14,691) (122) (27,168)
Increase (decrease) in revolving credit (12,929) 25,235 (51,845)
180,425 Repayment of mining segment senior secured term and
revolving credit facilities - - (74,160) - Repayment of Harry
Winston Inc. 2008 revolving credit facility - - - (159,109)
Distribution to Kinross (6,750) - (6,750) - Dividends paid -
(3,070) - (6,139) Issue of common shares, net of issue costs (18) -
44,740 76,039
-------------------------------------------------------------------------
(19,771) 7,474 (88,137) 64,048
-------------------------------------------------------------------------
Investing Subscription of partnership units (696) - 125,095 - Cash
collateral and cash reserve (28) 8,635 29,857 312 Mining capital
assets (14,673) (63,284) (36,802) (129,908) Retail capital assets
(1,128) (4,413) (1,567) (7,656) Other assets (525) - (307) (1)
-------------------------------------------------------------------------
(17,050) (59,062) 116,276 (137,253)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 2,762 (77) 4,267 (621)
Increase (decrease) in cash and cash equivalents (54,094) (5,458)
51,168 6,690 Cash and cash equivalents, beginning of period (note
3) 121,997 61,776 16,735 49,628
-------------------------------------------------------------------------
Cash and cash equivalents, end of period (note 3) $ 67,903 $ 56,318
$ 67,903 $ 56,318
---------------------------------------------------
--------------------------------------------------- Change in
non-cash operating working capital Accounts receivable (863)
(6,459) 49,173 (4,727) Prepaid expenses and other current assets
(835) 5,969 (4,936) 1,534 Inventory and supplies 18,345 (4,409)
25,121 (22,986) Accounts payable and accrued liabilities (18,911)
(3,864) (31,018) 14,835 Income taxes payable (25,465) (2,916)
(37,274) 6,673
-------------------------------------------------------------------------
$ (27,729) $ (11,679) $ 1,066 $ (4,671)
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid $ 25,662 $
30,373 $ 36,478 $ 42,568 Cash interest paid $ 2,392 $ 4,390 $ 6,139
$ 8,798
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements JULY 31, 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 in the consolidated financial
statements as part of 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 $103.7 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 each
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. FINANCIAL
INSTRUMENTS In June 2009, the CICA amended Handbook Section 3862,
"Financial Instruments - Disclosures", to enhance disclosure
requirements for fair value measurement of financial instruments
and liquidity risk. The changes are effective for annual financial
statements relating to fiscal years ending after September 30,
2009. The Company is currently assessing the impact of this
amendment on the consolidated financial statements. NOTE 3: Cash
Resources July 31, January 31, 2009 2009
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 65,024 $ 14,118 Short-term
investments(a) 2,879 2,617
-------------------------------------------------------------------------
Total cash and cash equivalents 67,903 16,735 Cash collateral and
cash reserves 288 30,145
-------------------------------------------------------------------------
Total cash resources $ 68,191 $ 46,880 ----------------------------
---------------------------- (a) Short-term investments are held in
overnight deposits. 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 on March 31, 2009. NOTE 4: Inventory and Supplies
July 31, January 31, 2009 2009
-------------------------------------------------------------------------
Rough diamond inventory $ 13,145 $ 31,872 Merchandise inventory
232,068 240,419 Supplies inventory 75,900 73,944
-------------------------------------------------------------------------
Total inventory and supplies $ 321,113 $ 346,235
---------------------------- ---------------------------- During
the six months ended July 31, 2009, the Company recorded a write-
down of $4.1 million on rough diamond inventory (nil for the three
months ended July 31, 2009), 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 June 30, 2009 and December 31, 2008: July 31,
January 31, 2009 2009
-------------------------------------------------------------------------
Current assets $ 111,557 $ 105,612 Long-term assets 769,384 754,886
Current liabilities 34,140 38,808 Long-term liabilities and
participant's account 846,801 821,690
-------------------------------------------------------------------------
Three Three Six Six months months months months ended ended ended
ended July 31, July 31, July 31, July 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
Expenses net of interest income of $0.1 million (2008 - interest
income of $0.1 million)(a)(b) 40,672 43,671 82,568 77,630 Cash
flows resulting from (used in) operating activities (38,608)
(33,830) (58,014) (61,221) Cash flows resulting from financing
activities 48,577 86,377 95,596 175,501 Cash flows resulting from
(used in) investing activities (15,951) (50,181) (39,242) (114,973)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income. (b) Expenses net
of interest income for the six months ended July 31, 2009 of $0.3
million (six months ended July 31, 2008 of $0.2 million). The
Company is contingently liable for the other participant's portion
of the liabilities of the Joint Venture, and to the extent the
Company's participating interest has increased because of the
failure of the other participant to make a cash contribution when
required, the Company would have access to an increased portion of
the assets of the Joint Venture to settle these liabilities. NOTE
6: Intangible Assets Amortization Accumulated July 31, January 31,
period Cost amortization 2009 net 2009 net
-------------------------------------------------------------------------
Trademark indefinite life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite life 12,365 - 12,365 12,365 Wholesale distri-
bution network 120 months 5,575 2,205 3,370 3,649 Store leases 65
to 105 months 5,639 4,440 1,199 1,743
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ 6,645 $ 129,929 $ 130,752
--------------------------------------------
-------------------------------------------- Amortization expense
for the six months ended July 31, 2009 was $0.8 million ($1.1
million for the six months ended July 31, 2008). NOTE 7: Long-Term
Debt July 31, January 31, 2009 2009
-------------------------------------------------------------------------
Mining segment credit facilities $ - $ 74,107 Harry Winston Inc.
credit facilities 166,740 199,846 First mortgage on real property
7,434 6,769
-------------------------------------------------------------------------
Total long-term debt 174,174 280,722
-------------------------------------------------------------------------
Less current portion (1,109) (75,097)
-------------------------------------------------------------------------
$ 173,065 $ 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 44,685 Cash on exercise of options 16,500 55
-------------------------------------------------------------------------
Balance, July 31, 2009 76,588,592 $ 426,281
--------------------------- --------------------------- (c) Stock
Options During the six months ended July 31, 2009, the Company
issued 1,674,000 stock options to officer and employees of the
Company and its affiliates. These options vested 50% immediately;
25% will vest on the first anniversary date and the remaining 25%
will 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
$1.3 million for the six months ended July 31, 2009 ($0.3 for the
six months ended July 31, 2008) 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 11,500 RSU payouts (50,369)
-------------------------------------------------------------------------
Balance, July 31, 2009 69,730 ---------- ---------- DSU Number of
units
-------------------------------------------------------------------------
Balance, January 31, 2009 128,988 AWARDS AND PAYOUTS DURING THE
PERIOD (NET): DSU awards 44,714 DSU payouts -
-------------------------------------------------------------------------
Balance, July 31, 2009 173,702 ---------- ---------- Three Three
Six Six months months months months ended ended ended ended Expense
(recovery) for July 31, July 31, July 31, July 31, the period 2009
2008 2009 2008
-------------------------------------------------------------------------
RSU $ 77 $ (174) $ 17 $ 335 DSU 290 (330) 416 237
-------------------------------------------------------------------------
$ 367 $ (504) $ 433 $ 572
-------------------------------------------
------------------------------------------- During the six months
ended July 31, 2009, the Company granted 11,500 RSUs and 44,714
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 July 31, 2009 was
$71.8 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 $ 92,631 2011 89,803 2012 88,702 2013 86,674 2014 86,908
Thereafter 132,071 ------------------------------------------- NOTE
10: Employee Benefit Plans Three Three Six Six months months months
months ended ended ended ended July 31, July 31, July 31, July 31,
Expenses for the period 2009 2008 2009 2008
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston retail segment $ 454 $
403 $ 958 $ 814 Defined contribution plan - Harry Winston retail
segment 210 235 420 469 Defined contribution plan - Harry Winston
mining segment 101 - 101 - Defined contribution plan - Diavik
Diamond Mine 223 285 401 497
-------------------------------------------------------------------------
$ 988 $ 923 $ 1,880 $ 1,780 ---------------------------------------
--------------------------------------- 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 July 31, 2009
is considered to approximate its carrying value. The carrying
values of these financial instruments are as follows: July 31, 2009
January 31, 2009
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying fair value value fair value
value
-------------------------------------------------------------------------
FINANCIAL ASSETS: Cash and cash equivalents $ 67,903 $ 67,903 $
16,735 $ 16,735 Cash collateral and cash reserves 288 288 30,145
30,145 Accounts receivable 18,031 18,031 66,980 66,980
-------------------------------------------------------------------------
$ 86,222 $ 86,222 $ 113,860 $ 113,860
----------------------------------------------
---------------------------------------------- FINANCIAL
LIABILITIES: Accounts payable and accrued liabilities $ 90,542 $
90,542 $ 118,390 $ 118,390 Bank advances 23,883 23,883 42,621
42,621 Long-term debt 174,174 174,174 280,722 280,722
-------------------------------------------------------------------------
$ 288,599 $ 288,599 $ 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
The Company recorded a non-cash dilution loss of $34.8 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 July 31, 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 July
31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 45,941 $ - $ 45,941 United States - 15,035 15,035
Europe - 17,688 17,688 Asia - 16,112 16,112 Cost of sales 40,049
26,245 66,294
-------------------------------------------------------------------------
Gross margin 5,892 22,590 28,482 Gross margin (%) 12.8% 46.3% 30.1%
Selling, general and administrative expenses 4,182 28,198 32,380
-------------------------------------------------------------------------
Earnings (loss) from operations 1,710 (5,608) (3,898)
-------------------------------------------------------------------------
Interest and financing expenses (869) (2,129) (2,998) Other income
79 4 83 Dilution loss (539) - (539) Foreign exchange gain (loss)
(26,525) 1,251 (25,274)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (26,144) $ (6,482) $ (32,626)
------------------------------------
------------------------------------ Segmented assets as at July
31, 2009 Canada $ 995,011 $ - $ 995,011 United States - 365,424
365,424 Other foreign countries 13,899 158,684 172,583
-------------------------------------------------------------------------
$1,008,910 $ 524,108 $1,533,018
-------------------------------------------------------------------------
Capital expenditures $ 14,673 $ 1,128 $ 15,801 OTHER SIGNIFICANT
NON-CASH ITEMS: Income tax recovery $ (4,226) $ (3,455) $ (7,681)
Amortization and accretion $ 13,760 $ 3,211 $ 16,971
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totalled
$13.8 million for the three months ended July 31, 2009 ($12.2
million for the three months ended July 31, 2008). For the three
months ended July 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 105,014 $ - $ 105,014 United States - 28,984
28,984 Europe - 31,636 31,636 Asia - 20,485 20,485 Cost of sales
32,390 41,152 73,542
-------------------------------------------------------------------------
Gross margin 72,624 39,953 112,577 Gross margin (%) 69.2% 49.3%
60.5% Selling, general and administrative expenses 5,151 34,043
39,194
-------------------------------------------------------------------------
Earnings from operations 67,473 5,910 73,383
-------------------------------------------------------------------------
Interest and financing expenses (2,648) (2,718) (5,366) Other
income (expense) 816 (1) 815 Foreign exchange gain 5,187 114 5,301
-------------------------------------------------------------------------
Segmented earnings before income taxes $ 70,828 $ 3,305 $ 74,133
------------------------------------
------------------------------------ Segmented assets as at July
31, 2008 Canada $ 969,164 $ - $ 969,164 United States - 464,792
464,792 Other foreign countries 35,200 167,361 202,561
-------------------------------------------------------------------------
$1,004,364 $ 632,153 $1,636,517
-------------------------------------------------------------------------
Goodwill as at July 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 63,284 $ 4,413 $ 67,697 OTHER SIGNIFICANT NON-CASH
ITEMS: Income tax recovery $ (3,111) $ (293) $ (3,404) Amortization
and accretion $ 13,689 $ 3,089 $ 16,778
-------------------------------------------------------------------------
For the six months ended July 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 103,631 $ - $ 103,631 United States - 33,810
33,810 Europe - 37,013 37,013 Asia - 29,965 29,965 Cost of sales
97,305 52,933 150,238
-------------------------------------------------------------------------
Gross margin 6,326 47,855 54,181 Gross margin (%) 6.1% 47.5% 26.5%
Selling, general and administrative expenses 9,685 58,444 68,129
-------------------------------------------------------------------------
Loss from operations (3,359) (10,589) (13,948)
-------------------------------------------------------------------------
Interest and financing expenses (2,413) (4,284) (6,697) Other
income 340 24 364 Insurance settlement - 3,250 3,250 Dilution loss
(34,761) - (34,761) Foreign exchange gain (loss) (32,596) 1,483
(31,113)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (72,789) $ (10,116) $ (82,905)
------------------------------------
------------------------------------ Segmented assets as at July
31, 2009 Canada $ 995,011 $ - $ 995,011 United States - 365,424
365,424 Other foreign countries 13,899 158,684 172,583
-------------------------------------------------------------------------
$1,008,910 $ 524,108 $1,533,018
-------------------------------------------------------------------------
Capital expenditures $ 36,802 $ 1,567 $ 38,369 OTHER SIGNIFICANT
NON-CASH ITEMS: Income tax recovery $ (4,853) $ (5,123) $ (9,976)
Amortization and accretion $ 28,333 $ 6,313 $ 34,646
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totalled
$47.9 million for the six months ended July 31, 2009 ($21.3 million
for the six months ended July 31, 2008 for the same three
significant customers). For the six months ended July 31, 2008
Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 186,407 $ - $ 186,407 United States - 53,910
53,910 Europe - 63,266 63,266 Asia - 38,615 38,615 Cost of sales
64,540 82,151 146,691
-------------------------------------------------------------------------
Gross margin 121,867 73,640 195,507 Gross margin (%) 65.4% 47.3%
57.1% Selling, general and administrative expenses 12,359 70,120
82,479
-------------------------------------------------------------------------
Earnings from operations 109,508 3,520 113,028
-------------------------------------------------------------------------
Interest and financing expenses (5,127) (5,692) (10,819) Other
income (expense) 1,448 (387) 1,061 Foreign exchange gain 5,261 195
5,456
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 111,090 $ (2,364) $
108,726 ------------------------------------------
------------------------------------------ Segmented assets as at
July 31, 2008 Canada $ 969,164 $ - $ 969,164 United States -
464,792 464,792 Other foreign countries 35,200 167,361 202,561
-------------------------------------------------------------------------
$1,004,364 $ 632,153 $1,636,517
-------------------------------------------------------------------------
Goodwill as at July 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 129,908 $ 7,656 $ 137,564 OTHER SIGNIFICANT NON-CASH
ITEMS: Income tax recovery $ (9,739) $ (1,829) $ (11,568)
Amortization and accretion $ 24,428 $ 6,305 $ 30,733
-------------------------------------------------------------------------
DATASOURCE: Harry Winston Diamond Corporation CONTACT: For investor
information, visit http://investor.harrywinston.com/ or call
Investor Relations on (416) 362-2237 ext 290
Copyright