TORONTO, Dec. 9 /PRNewswire-FirstCall/ -- Harry Winston Diamond
Corporation (TSX: HW, NYSE: HWD) (the "Company") today reported
third quarter results for the period ended October 31, 2009.
Results were impacted by the planned temporary closure of the
Diavik Diamond Mine leading to only a single diamond sale in the
quarter. The Company recorded a consolidated net loss of $0.2
million or $nil per share for the third quarter, compared to net
earnings of $71.9 million or $1.17 per share in the third quarter
of the prior year and compared to a net loss of $24.5 million or
$0.32 per share in the second quarter of the current year. Included
in consolidated net earnings for the prior year was a net foreign
exchange gain of $49.0 million or $0.80 per share primarily on
future income tax liabilities compared to a net foreign exchange
gain of $1.6 million or $0.02 per share in the current quarter.
Robert Gannicott, Chairman and Chief Executive Officer commented:
"We are very pleased to see a solid reversal in the negative trends
that have characterized the previous quarters. Diavik production is
set to increase, rough diamond prices continue to rise, and retail
sales have seen substantial improvement, led by the Far East,
including Japan. If US recovery takes hold it will inevitably
produce incremental demand for diamond products". Consolidated
sales were $74.8 million for the quarter compared to $148.6 million
for the comparable quarter of the prior year, resulting in a 62%
decrease in gross margin and a loss from operations of $4.9
million. The mining segment recorded sales of $20.8 million, a 77%
decrease from $90.7 million in the comparable quarter of the prior
year. The decrease in sales resulted from a combination of a 75%
decrease in volume of carats sold in the third quarter and a 9%
decrease in rough diamond prices. Rough diamond production for the
calendar quarter was 0.3 million carats compared to 0.9 million
carats in the comparable calendar quarter of the prior year. The
decrease in production was due to the planned six-week shutdown
from July 14, 2009 to August 24, 2009. The Company held one rough
diamond sale in the third quarter compared to three in the
comparable quarter of the prior year. Loss from operations for the
quarter was $4.5 million compared to earnings from operations of
$47.0 million for the comparable quarter of the prior year. The
retail segment recorded a 7% decrease in sales to $54.0 million
compared to the third quarter of the prior year. However, the loss
from operations decreased significantly to $0.5 million from a loss
of $4.0 million as retail gross margins for the quarter improved to
53.9% compared to 46.4% in the comparable quarter of the prior
year. Third Quarter Fiscal 2010 Financial Highlights (US$ in
millions except Earnings per Share amounts)
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Three Three Nine Nine months months months months ended ended ended
ended Oct 31, Oct 31, Oct 31, Oct 31, 2009 2008 2009 2008
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Sales 74.8 148.6 279.2 490.8
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Earnings from operations (loss) (4.9) 42.9 (18.9) 156.0
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Net earnings (loss) (0.2) 71.9 (69.8) 143.1
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Earnings (loss) per share $0.00 $1.17 ($0.95) $2.35
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Conference Call and Webcast Beginning at 4:00PM (EST) on Wednesday,
December 9, 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 800-259-0251 within North America or 617-614-3671 from
international locations and entering passcode 56737625. 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 the same day at 7:00PM (EST) through
Wednesday, December 16, 2009, by dialing 888-286-8010 within North
America or 617-801-6888 from international locations and entering
passcode 89482489. 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/. or for investor
information, visit http://investor.harrywinston.com/. Harry Winston
Diamond Corporation 2010 THIRD QUARTER REPORT Highlights (ALL
FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Harry Winston Diamond Corporation recorded a consolidated net loss
of $0.2 million or $nil per share for the third quarter, compared
to net earnings of $71.9 million or $1.17 per share in the third
quarter of the prior year and compared to a net loss of $24.5
million or $0.32 per share in the second quarter of the current
year. Included in consolidated net earnings for the prior year was
a net foreign exchange gain of $49.0 million or $0.80 per share
primarily on future income tax liabilities compared to a net
foreign exchange gain of $1.6 million or $0.02 per share in the
current quarter. Consolidated sales were $74.8 million for the
quarter compared to $148.6 million for the comparable quarter of
the prior year, resulting in a 62% decrease in gross margin and a
loss from operations of $4.9 million. The mining segment recorded
sales of $20.8 million, a 77% decrease from $90.7 million in the
comparable quarter of the prior year. The decrease in sales
resulted from a combination of a 75% decrease in volume of carats
sold in the third quarter and a 9% decrease in rough diamond
prices. Rough diamond production for the calendar quarter was 0.3
million carats compared to 0.9 million carats in the comparable
calendar quarter of the prior year. The decrease in production was
due to the planned six-week shutdown from July 14, 2009 to August
24, 2009 (the "Summer Shutdown"). The Company held one rough
diamond sale in the third quarter compared to three in the
comparable quarter of the prior year. Loss from operations for the
quarter was $4.5 million compared to earnings from operations of
$47.0 million for the comparable quarter of the prior year. The
retail segment recorded a 7% decrease in sales to $54.0 million.
However, the loss from operations decreased significantly to $0.5
million from a loss of $4.0 million in the third quarter of the
prior year as retail gross margins improved to 53.9% for the
quarter compared to 46.4% in the comparable quarter of the prior
year. Management's Discussion and Analysis Prepared as of December
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 nine months ended October 31, 2009 and its
financial position as at October 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 nine months ended October 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 "third quarter" refer
to the three months ended October 31, 2009 and all references to
"international" for the retail segment refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to
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",
"appears", "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 17 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
17. 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 17 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 continues to strengthen as
sustained demand for polished diamonds from the Far East and India,
coupled with reawakening interest from the US, has led to reduced
inventory levels amongst manufacturers. Rough diamonds remain in
short supply, enabling major diamond producers such as Russia to
reduce accumulated inventory without dampening the healthy price
increases achieved since the first quarter. Polished diamond demand
remains healthy with shortages appearing in popular ranges.
Polished diamond inventories have been depleted as a result of the
reduction in capacity earlier in the year as manufacturers
responded to market conditions and the ongoing scarcity of rough
diamonds. These conditions have allowed manufacturers to achieve
higher polished prices and negotiate more favourable credit terms.
The Retail Jewelry Market Encouraging signs of recovery are
beginning to appear in certain economies, particularly in Asia. The
tone in the US and European markets indicates that the worst of the
global recession's impact appears to have passed, but signs of the
recovery are modest. The increase in commodity prices has helped to
bolster a modest renewal in consumer demand for luxury goods from
the Russian and Middle Eastern markets. The outlook is cautiously
optimistic regarding the holiday season as the global economy
appears to have stabilized and shown improvements in certain
regions. (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 October 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 2010 2009 2009 Q3 Q2 Q1 Q4 Q3
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Sales $ 74,828 $ 94,776 $109,643 $118,399 $148,623 Cost of sales
45,227 66,294 83,944 68,908 71,679
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Gross margin 29,601 28,482 25,699 49,491 76,944 Gross margin (%)
39.6% 30.1% 23.4% 41.8% 51.8% Selling, general and administrative
expenses 34,542 32,380 35,749 39,399 33,998
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Earnings (loss) from operations (4,941) (3,898) (10,050) 10,092
42,946
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Interest and financing expenses (2,448) (2,998) (3,699) (4,960)
(4,678) Other income 99 83 281 778 407 Insurance settlement 100 -
3,250 17,240 - Dilution loss - (539) (34,222) - - Impairment charge
- - - (93,780) - Foreign exchange gain (loss) 1,598 (25,274)
(5,839) 4,649 48,982
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Earnings (loss) before income taxes (5,592) (32,626) (50,279)
(65,981) 87,657 Income taxes (recovery) (4,221) (5,662) (3,120)
7,052 15,685
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Earnings (loss) before non-controlling interest (1,371) (26,964)
(47,159) (73,033) 71,972 Non-controlling interest (1,157) (2,443)
(2,075) (58) 81
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Net earnings (loss) $ (214) $(24,521) $(45,084) $(72,975) $ 71,891
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Basic earnings (loss) per share $ 0.00 $ (0.32) $ (0.68) $ (1.19) $
1.17 Diluted earnings (loss) per share $ 0.00 $ (0.32) $ (0.68) $
(1.19) $ 1.17 Cash dividends declared per share $ 0.00 $ 0.00 $
0.00 $ 0.05 $ 0.05 Total assets(i) $ 1,535 $ 1,533 $ 1,592 $ 1,567
$ 1,645 Total long-term liabilities(i) $ 506 $ 507 $ 496 $ 550 $
562
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Nine Nine months months ended ended 2009 2009 2008 Oct. 31, Oct.
31, Q2 Q1 Q4 2009 2008
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Sales $186,119 $156,079 $188,195 $279,247 $490,821 Cost of sales
73,542 73,149 83,637 195,465 218,370
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Gross margin 112,577 82,930 104,558 83,782 272,451 Gross margin (%)
60.5% 53.1% 55.6% 30.0% 55.5% Selling, general and administrative
expenses 39,194 43,285 45,494 102,671 116,477
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Earnings (loss) from operations 73,383 39,645 59,064 (18,889)
155,974
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Interest and financing expenses (5,366) (5,453) (7,082) (9,145)
(15,497) Other income 815 246 706 463 1,468 Insurance settlement -
- 13,488 3,350 - Dilution loss - - - (34,761) - Impairment charge -
- - - - Foreign exchange gain (loss) 5,301 155 22,270 (29,515)
54,438
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Earnings (loss) before income taxes 74,133 34,593 88,446 (88,497)
196,383 Income taxes (recovery) 24,185 13,336 (1,968) (13,002)
53,205
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Earnings (loss) before non-controlling interest 49,948 21,257
90,414 (75,495) 143,178 Non-controlling interest 1 1 (34) (5,676)
83
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Net earnings (loss) $ 49,947 $ 21,256 $ 90,448 $(69,819) $143,095
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Basic earnings (loss) per share $ 0.81 $ 0.35 $ 1.55 $ (0.95) $
2.35 Diluted earnings (loss) per share $ 0.81 $ 0.35 $ 1.54 $
(0.95) $ 2.34 Cash dividends declared per share $ 0.05 $ 0.05 $
0.05 $ 0.00 $ 0.15 Total assets(i) $ 1,637 $ 1,591 $ 1,494 $ 1,535
$ 1,645 Total long-term liabilities(i) $ 617 $ 634 $ 660 $ 506 $
562
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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 October 31, 2009
Compared to Three Months Ended October 31, 2008 CONSOLIDATED NET
EARNINGS The Company recorded a third quarter consolidated net loss
of $0.2 million or $nil per share compared to net earnings of $71.9
million or $1.17 per share in the third quarter of the prior year.
Included in consolidated net earnings for the prior year was a net
foreign exchange gain of $49.0 million or $0.80 per share primarily
on future income tax liabilities compared to a net foreign exchange
gain of $1.6 million or $0.02 per share in the current quarter.
CONSOLIDATED SALES Sales for the third quarter totaled $74.8
million, consisting of rough diamond sales of $20.8 million and
retail segment sales of $54.0 million. This compares to sales of
$148.6 million in the comparable quarter of the prior year (rough
diamond sales of $90.7 million and retail segment sales of $57.9
million). The Company held one rough diamond sale in the third
quarter, compared to three in the comparable quarter of the prior
year. See "Segmented Analysis" on page 9 for additional
information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The
Company's third quarter cost of sales was $45.2 million for a gross
margin of 39.6% compared to $71.7 million cost of sales and gross
margin of 51.8% 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 $34.5 million for the third quarter,
compared to $34.0 million in the comparable quarter of the prior
year. Included in SG&A expenses for the third quarter are $4.9
million for the mining segment compared to $3.1 million for the
comparable quarter of the prior year and $29.6 million for the
retail segment compared to $30.9 million for the comparable quarter
of the prior year. For the mining segment, the higher SG&A
expenses were primarily due to a mark-to-market increase to
stock-based compensation resulting from the Company's increased
share price. For the retail segment, the decrease was due to
reduced discretionary spending. See "Segmented Analysis" on page 9
for additional information. CONSOLIDATED INCOME TAXES The Company
recorded a net income tax recovery of $4.2 million during the third
quarter, compared to a net income tax expense of $15.7 million in
the comparable quarter of the prior year. The Company's effective
income tax rate for the quarter, excluding Harry Winston's retail
segment, was 65%, 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 and impact of income allocated to
non-controlling interest. 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 third quarter, the Canadian
dollar weakened against the US dollar. As a result, the Company
recorded an unrealized foreign exchange gain of $0.8 million on the
revaluation of the Company's Canadian dollar denominated future
income tax liability. This compares to an unrealized foreign
exchange gain of $39.4 million in the comparable quarter of the
previous year. The unrealized foreign exchange gain is not taxable
for Canadian income tax purposes. The consolidated net loss before
taxes for the third quarter is $5.6 million, compared to a
consolidated net income before taxes of $87.7 million in the
comparable quarter of the prior year. During the third quarter,
losses were generated in higher taxing jurisdictions, resulting in
tax recoveries based on higher tax rates. Also during the third
quarter, income was generated in lower taxing jurisdictions,
resulting in tax expenses based on lower tax rates. These tax rate
differences contributed to the actual reported tax provision being
higher than the expected tax provision based on the statutory tax
rate. In addition, the tax benefit of certain losses could not be
recognized because the criteria for recognizing them as a future
tax asset were not met. Furthermore, accounting income included
certain items that are considered to be permanent differences and
will never be tax deductible nor taxable. When all of these
reconciling items are expressed as a percentage of the relatively
low consolidated net loss before taxes reported in the third
quarter, the impact on the effective tax rate becomes higher. As a
consequence, the third quarter effective tax rate was 75% on a
consolidated basis. 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:
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Three months Three months ended ended October 31, October 31, 2009
2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 % Stock compensation (2)% - %
Northwest Territories mining royalty (net of income tax relief) 5 %
5 % Impact of foreign exchange 22 % (19)% Earnings subject to tax
different than statutory rate 34 % 1 % Changes in valuation
allowance (4)% - % Impact of loss allocated to non-controlling
interest (10)% - % Assessments and adjustments (4)% 1 % Other items
4 % (1)% Effective income tax rate 75 % 18 %
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CONSOLIDATED INTEREST AND FINANCING EXPENSES Interest and financing
expenses of $2.4 million were incurred during the third quarter
compared to $4.7 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 $0.4 million in the
comparable quarter of the prior year. CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $1.6 million was recognized during
the quarter compared to a net foreign exchange gain of $49.0
million in the comparable quarter of the prior year. The gain
relates principally to the revaluation of the Company's Canadian
dollar denominated long-term future income tax liability as a
result of the weakening of the Canadian dollar against the US
dollar at October 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 foreign exchange derivative instruments outstanding.
Nine Months Ended October 31, 2009 Compared to Nine Months Ended
October 31, 2008 CONSOLIDATED NET EARNINGS The Company recorded a
consolidated net loss for the nine months ended October 31, 2009 of
$69.8 million or $0.95 per share compared to net earnings of $143.1
million or $2.35 per share for the nine months ended October 31,
2008. Consolidated net loss for the nine months ended October 31,
2009 included a non-cash dilution loss of $34.8 million or $0.47
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 $29.5
million or $0.40 per share, compared to a net foreign exchange gain
of $54.4 million or $0.89 per share in the comparable period of the
prior year. CONSOLIDATED SALES Sales for the nine months ended
October 31, 2009 totaled $279.2 million, consisting of rough
diamond sales of $124.4 million and retail segment sales of $154.8
million. This compares to sales of $490.8 million for the nine
months ended October 31, 2008 (rough diamond sales of $277.1
million and retail segment sales of $213.7 million). The Company
held five rough diamond sales during the nine months ended October
31, 2009, compared to seven in the comparable period of the prior
year. See "Segmented Analysis" on page 9 for additional
information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The
Company's cost of sales for the nine months ended October 31, 2009
was $195.5 million for a gross margin of 30.0% compared to $218.4
million cost of sales and gross margin of 55.5% 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 $102.7 million
for the nine months ended October 31, 2009, compared to $116.5
million for the nine months ended October 31, 2008. Included in
SG&A expenses for the nine months ended October 31, 2009 are
$14.6 million for the mining segment compared to $15.5 million for
the comparable period of the prior year and $88.1 million for the
retail segment compared to $101.0 million for the comparable period
of the prior year. For the retail segment, 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. See "Segmented Analysis" on page 9 for
additional information. CONSOLIDATED INCOME TAXES The Company
recorded a net income tax recovery of $13.0 million during the nine
months ended October 31, 2009, compared to a net income tax expense
of $53.2 million in the comparable period of the prior year. The
Company's effective income tax rate for the nine months ended
October 31, 2009, excluding Harry Winston's retail segment, was 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 nine months ended October
31, 2009, the Canadian dollar strengthened against the US dollar.
As a result, the Company recorded an unrealized foreign exchange
loss of $22.2 million on the revaluation of the Company's Canadian
dollar denominated future income tax liability. This compares to an
unrealized foreign exchange gain of $44.7 million in the comparable
period of the prior year. The unrealized foreign exchange loss is
not deductible for Canadian income tax purposes. During the nine
months ended October 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 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 loss 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:
-------------------------------------------------------------------------
Nine months Nine months ended ended October 31, October 31, 2009
2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 % Northwest Territories mining
royalty (net of income tax relief) - % 8 % Impact of foreign
exchange (5)% (11)% Earnings subject to tax different than
statutory rate 6 % (1)% Changes in valuation allowance (1)% - %
Impact of dilution loss (12)% - % Impact of loss allocated to
non-controlling interest (2)% - % Assessments and adjustments (1)%
1 % Other items - % (1)% Effective income tax rate 15 % 27 %
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES Interest and financing
expenses of $9.1 million were incurred during the nine months ended
October 31, 2009 compared to $15.5 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 $0.5
million was recorded during the nine months ended October 31, 2009
compared to $1.5 million in the comparable period of the prior
year. CONSOLIDATED INSURANCE SETTLEMENT The Company received the
remaining insurance settlement of $3.4 million related to the
December 2008 robbery at the Harry Winston Paris salon during the
nine months ended October 31, 2009. CONSOLIDATED DILUTION LOSS
During the nine months ended October 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
A net foreign exchange loss of $29.5 million was recognized during
the nine months ended October 31, 2009 compared to a net foreign
exchange gain of $54.4 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
October 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
foreign exchange 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 2010 2009 2009 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 20,765 $ 45,941 $ 57,690 $ 51,100 $ 90,716 Cost of sales
20,319 40,049 57,256 34,612 40,617
-------------------------------------------------------------------------
Gross margin 446 5,892 434 16,488 50,099 Gross margin (%) 2.1%
12.8% 0.8% 32.3% 55.2% Selling, general and administrative expenses
4,932 4,182 5,503 4,430 3,114
-------------------------------------------------------------------------
Earnings (loss) from operations $ (4,486) $ 1,710 $ (5,069) $
12,058 $ 46,985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Nine months months ended ended 2009 2009 2008 Oct. 31, Oct.
31, Q2 Q1 Q4 2009 2008
-------------------------------------------------------------------------
Sales $105,014 $ 81,393 $103,238 $124,396 $277,123 Cost of sales
32,390 32,150 36,962 117,624 105,157
-------------------------------------------------------------------------
Gross margin 72,624 49,243 66,276 6,772 171,966 Gross margin (%)
69.2% 60.5% 64.2% 5.4% 62.1% Selling, general and administrative
expenses 5,151 7,208 5,663 14,617 15,473
-------------------------------------------------------------------------
Earnings (loss) from operations $ 67,473 $ 42,035 $ 60,613 $
(7,845) $156,493
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended October 31, 2009 Compared to Three Months Ended
October 31, 2008 MINING SALES Rough diamond sales for the quarter
totaled $20.8 million compared to $90.7 million in the comparable
quarter of the prior year resulting from a combination of a 75%
decrease in volume of carats sold and a 9% decrease in rough
diamond prices. Rough diamond production during the quarter was
significantly lower than the comparable quarter due to the Summer
Shutdown, which reduced goods available for sale by the Company in
the third quarter. The Company held one rough diamond sale in the
third quarter compared to three in the comparable quarter of the
prior year. Rough diamond prices continued to increase over the
second quarter of this year but remain lower than the prices
achieved in the comparable quarter of the prior year. The Company
expects that results for its mining segment will continue to
fluctuate depending on the seasonality of production at the Diavik
Diamond Mine, the number of 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 third quarter cost of sales was $20.3 million
resulting in a gross margin of 2.1% compared to $40.6 million cost
of sales and gross margin of 55.2% in the comparable quarter of the
prior year. The decrease in cost of sales reflected lower mining
activity resulting from the Summer Shutdown and the completion of
only one sale during the quarter. Cost of sales also included a
$5.8 million write-down of inventorized costs associated with the
Summer Shutdown. 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
increased by $1.8 million from the comparable period of the prior
year primarily due to a mark-to-market increase to stock-based
compensation resulting from the Company's increased share price.
Nine Months Ended October 31, 2009 Compared to Nine Months Ended
October 31, 2008 MINING SALES Rough diamond sales for the nine
months ended October 31, 2009 totaled $124.4 million compared to
$277.1 million in the comparable period of the prior year resulting
from a combination of a 44% decrease in rough diamond prices and a
20% decrease in volume of carats sold. The Company held five rough
diamond sales during the nine months ended October 31, 2009,
compared to seven in the comparable period of the prior year. Rough
diamond prices have increased significantly over the market lows
seen in the first quarter of this year but remain lower than the
prices achieved in the comparable period of the prior year. 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 production during the nine months ended
October 31, 2009 was significantly lower than the comparable period
of the prior year due to the Summer Shutdown, which reduced goods
available for sale by the Company in the third quarter, as well as
a planned decrease in ore production. 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 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
nine months ended October 31, 2009, cost of sales was $117.6
million resulting in a gross margin of 5.4% compared to $105.2
million cost of sales and gross margin of 62.1% 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 first half of the prior year.
These same activities have been recorded as direct operating costs
in the current year. The gross margin rate was significantly
reduced as a result of lower carat production associated with the
Summer Shutdown. Also included in cost of sales for the nine months
ended October 31, 2009 is a $5.8 million write-down of inventorized
costs associated with the Summer Shutdown and $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 $0.9 million from the comparable period of the prior
year. Mining Segment Operational Update Ore production for the
third calendar quarter consisted of 0.7 million carats produced
from 0.12 million tonnes of ore from the A-154 South kimberlite
pipe and 0.1 million carats produced from 0.06 million tonnes of
ore from the A-418 kimberlite pipe. Rough diamond production was
significantly lower than the third calendar quarter of the prior
year as a result of the Summer Shutdown, which greatly reduced the
ore throughput to the processing plant. Average grade increased to
4.4 carats per tonne from 3.4 carats per tonne in the prior year.
The increase in average grade was primarily driven by a significant
increase in the proportion of ore sourced from the A-154 South
kimberlite pipe. During the third calendar quarter, open pit mining
and processing of the A-154 South and A-418 kimberlite pipes
continued. The Diavik Diamond Mine was 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. HARRY
WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND
MINE PRODUCTION (reported on a one-month lag)
-------------------------------------------------------------------------
Three months Three months Nine months Nine months ended ended ended
ended September 30, September 30, September 30, September 30, 2009
2008 2009 2008
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 331 928 1,614 2,651 Grade
(carats/tonne) 4.43 3.36 4.05 3.59
-------------------------------------------------------------------------
Mining Segment Outlook The Company's mine plan for calendar 2009
incorporated various production options, including a six-week
shutdown at year end. The year-end shutdown, which was originally
planned for December 1, 2009 through January 11, 2010, has been
cancelled in light of improved market conditions. The Company plans
to hold three rough diamond sales in the fourth quarter (total
fiscal 2010 rough diamond sales of eight) compared to two rough
diamond sales in the fourth quarter of the prior year (total fiscal
2009 rough diamond sales of nine). A new mine plan and budget for
calendar 2010 is under final review by Rio Tinto plc, the operator
of the Diavik Diamond Mine, and the Company. The plan for calendar
2010 foresees Diavik Diamond Mine production of approximately 7.8
million carats from the processing of 2.1 million tonnes of ore.
PRICING The rough diamond market continues to experience a robust
recovery from the extreme market lows seen in the first quarter of
the year and pricing has improved significantly. The current tone
in the market has encouraged diamond producers to sell-down
inventory, but this has not led to lower prices. PRODUCTION The
estimate for calendar 2009 is unchanged at 1.4 million tonnes of
open pit ore 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
approximately 5.5 million carats on a 100% basis. In calendar 2010,
open pit mining from A-418 supplemented by A-154 South is expected
to be the primary source of ore. Underground mining is scheduled to
commence in the first calendar quarter, with ore sourced mainly
from the A-154 South kimberlite pipe. Total open pit ore mined is
expected to be 1.4 million tonnes and total underground is expected
to be 0.7 million tonnes. Looking beyond calendar 2010, the
objective is to utilize as much of the processing capability with a
combination of underground and open pit production. As underground
capacity ramps up, open pit production from the A-418 kimberlite
pipe will synchronously decline. A new mining technique is under
consideration for the potential mining of the A-21 resource. The
feasibility of this resource is now under review with the objective
that it becomes the supplemental ore source to underground
production beyond 2012. In addition, exploration work has
identified extensions at depth to the A-418 and A-154 North
kimberlite pipes. Extension of 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 2010 is estimated to be approximately $185 million. The
Company expects cost of sales in fiscal 2011 to increase to
approximately $265 million. This increase is primarily due to the
cost of mining open pit synchronously with the high cost start-up
phase of underground mining. Of this increase, approximately half
is related to an increase in non-cash costs. The Company expects
that the cost of sales will decline as the velocity of underground
mining increases and open pit waste stripping ends. CAPITAL
EXPENDITURES HWDLP's portion of capital expenditure for the fiscal
year ending January 31, 2010 is expected to be $45 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 nine months of fiscal 2010, HWDLP's share of capital
expenditures was $43 million, of which underground capital
expenditures were $38 million. During fiscal 2011, HWDLP's 40%
share of the planned capital expenditures is expected to be
approximately $54 million at an assumed average Canadian/US dollar
exchange rate of $0.95, of which $25 million relates to
substantially completing underground development. 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 2010 2009 2009 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 54,063 $ 48,835 $ 51,953 $ 67,299 $ 57,907 Cost of sales
24,908 26,245 26,688 34,296 31,062
-------------------------------------------------------------------------
Gross margin 29,155 22,590 25,265 33,003 26,845 Gross margin (%)
53.9% 46.3% 48.6% 49.0% 46.4% Selling, general and administrative
expenses 29,610 28,198 30,246 34,969 30,884
-------------------------------------------------------------------------
Earnings (loss) from operations $ (455) $ (5,608) $ (4,981) $
(1,966) $ (4,039)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Nine months months ended ended 2009 2009 2008 Oct. 31, Oct.
31, Q2 Q1 Q4 2009 2008
-------------------------------------------------------------------------
Sales $ 81,105 $ 74,686 $ 84,957 $154,851 $213,698 Cost of sales
41,152 40,999 46,675 77,841 113,213
-------------------------------------------------------------------------
Gross margin 39,953 33,687 38,282 77,010 100,485 Gross margin (%)
49.3% 45.1% 45.1% 49.7% 47.0% Selling, general and administrative
expenses 34,043 36,077 39,831 88,054 101,004
-------------------------------------------------------------------------
Earnings (loss) from operations $ 5,910 $ (2,390) $ (1,549)
$(11,044) $ (519)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended October 31, 2009 Compared to Three Months Ended
October 31, 2008 RETAIL SALES Sales for the third quarter were
$54.0 million compared to $57.9 million for the comparable quarter
of the prior year, a decrease of 7%. Sales in Asia increased 53% to
$20.2 million, European sales decreased 10% to $21.0 million, and
US sales decreased 40% to $12.8 million. RETAIL COST OF SALES AND
GROSS MARGIN Cost of sales for the retail segment for the third
quarter was $24.9 million compared to $31.1 million for the
comparable quarter of the prior year. Gross margin for the quarter
was $29.2 million or 53.9% compared to $26.8 million or 46.4% for
the third quarter of the prior year. Excluding the impact of sales
of Harry Winston Inc. pre-acquisition inventory, gross margin for
the third quarter and the comparable quarter of the prior year
would have been 54.5% and 48.6%, respectively. The increase in
gross margin is the result of the product mix sold during the
quarter, in particular an increased proportion of higher margin
sales in the Asian market and high-end watches. RETAIL SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses decreased to
$29.6 million from $30.9 million in the comparable quarter of the
prior year. The decrease was due to reduced discretionary spending.
SG&A expenses include depreciation and amortization expense of
$3.4 million, compared to $3.1 million in the comparable quarter of
the prior year. Nine Months Ended October 31, 2009 Compared to Nine
Months Ended October 31, 2008 RETAIL SALES Sales for the nine
months ended October 31, 2009 were $154.8 million compared to
$213.7 million for the comparable period of the prior year, a
decrease of 28%. Sales in Asia decreased 3% to $50.2 million,
European sales decreased 33% to $58.0 million, and US sales
decreased 38% to $46.6 million. RETAIL COST OF SALES AND GROSS
MARGIN Cost of sales for the retail segment for the nine months
ended October 31, 2009 was $77.8 million compared to $113.2 million
for the comparable period of the prior year. Gross margin for the
nine months ended October 31, 2009 was $77.0 million or 49.7%
compared to $100.5 million or 47.0% for the comparable period of
the prior year. Excluding the impact of sales of Harry Winston Inc.
pre-acquisition inventory, gross margin for the nine months ended
October 31, 2009 and the comparable period of the prior year would
have been 50.5% and 49.2%, respectively. RETAIL SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES SG&A expenses decreased to $88.1
million from $101.0 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
$9.7 million, compared to $9.4 million in the comparable quarter of
the prior year. Retail Segment Operational Update During the third
quarter, the retail segment recorded a 7% decline in sales over the
comparable quarter of the prior year. All markets outside of the US
have experienced a positive sales trend compared to the same
quarter of the prior year. The US market continues to remain
subdued with soft consumer demand. The Company successfully
introduced the Harry Winston New York Collection, a series of
jewelry and timepieces inspired by the glamour and architecture of
some of New York's most famous landmarks. Strict cost control
measures continue to be a priority. The retail segment operated a
network of 19 salons during the quarter. Retail Segment Outlook
Sales within the third quarter increased sequentially from August
to October, an encouraging trend as the retail segment enters the
important fourth quarter. Harry Winston Inc. remains cautiously
optimistic about the holiday season. Although significant economic
challenges remain, the high-end luxury goods market is showing
signs of recovery. Harry Winston Inc. is optimistic that its
recently introduced New York Collection of jewelry and timepieces
will continue to be well received by customers. The Company will
continue its cost reduction initiatives and strict controls over
inventory purchasing and capital expenditures. The Company believes
that the combination of a significantly lower cost structure and
the strong Harry Winston brand, with its global profile and
concentration on core strengths of craftsmanship and creativity,
has positioned the retail segment to deliver a higher level of
sustained profitability during the anticipated economic recovery.
Liquidity and Capital Resources Working Capital As at October 31,
2009, the Company had unrestricted cash and cash equivalents of
$53.8 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 $53.8 million and short-term investments of $nil at
October 31, 2009. 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 October 31, 2009, the Company reported a use of cash
from operations of $16.3 million, compared to a source of cash of
$48.3 million in the comparable quarter of the prior year. The
current quarter use of cash resulted from a significant reduction
in net earnings. Working capital increased to $297.5 million at
October 31, 2009 from $195.1 million at January 31, 2009. During
the third quarter, the Company increased accounts receivable by
$4.7 million; decreased prepaid expenses and other current assets
by $12.5 million; increased inventory by $21.0 million; decreased
accounts payable and accrued liabilities by $4.2 million; and
decreased income taxes payable by $2.6 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 rough diamond sales
events conducted during the quarter and the volume, size and
quality distribution of rough diamonds delivered from the Diavik
Diamond Mine in each quarter, 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 October 31,
2009, the Company's main retail subsidiary, 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 ($17.0 million) used to
finance the construction of the Company's watch factory in Geneva,
Switzerland. At October 31, 2009, $16.1 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 ($1.9 million),
supported by a $2.0 million standby letter of credit, which is
classified as bank advances. At October 31, 2009, $0.8 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) 2,050 million ($22.5
million). At October 31, 2009, $22.5 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 October 31, 2009, $7.5 million was drawn under the Company's
revolving financing facility relating to its Belgian subsidiary,
Harry Winston Diamond International N.V. No amounts were
outstanding under the revolving financing facility for its Indian
subsidiary, Harry Winston Diamond (India) Private Limited at
October 31, 2009. 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 third quarter, the Company purchased capital assets of $7.5
million, of which $6.5 million were purchased for the mining
segment and $1.0 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 2010 to 2014, is approximately
$150 million assuming a Canadian/US average exchange rate of $0.99
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 Less of United
States than Year Year After dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $203,973 $ 8,569 $ 16,530 $161,591 $ 17,283
Environmental and participation agreements incremental
commitments(c) 87,682 72,829 2,958 1,146 10,749 Operating lease
obligations(d) 104,451 18,787 25,961 19,730 39,973 Capital lease
obligations(e) 846 594 252 - -
-------------------------------------------------------------------------
Total contractual obligations $396,952 $100,779 $ 45,701 $182,467 $
68,005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 October 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
($17.0 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 ($3.4 million) loan and a CHF 14.0
million ($13.6 million) loan. The CHF 3.5 million loan bears
interest at a rate of 3.9% and matures on April 22, 2013. The CHF
14.0 million loan bears interest at a rate of 3.55% and matures on
January 31, 2033. At October 31, 2009, $16.1 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 ($1.9 million), supported by a $2.0 million standby
letter of credit, which is classified as bank advances. The demand
credit facility bears interest at a rate of 5.0% per annum. At
October 31, 2009, $0.8 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)
1,475 million ($16.2 million). At October 31, 2009, $16.2 million
had been drawn against these facilities and classified as bank
advances. The credit facilities amounting to $8.0 million, $2.7
million and $5.5 million, bear interest at 1.98%, 2.48% and 2.38%,
respectively, and expire on December 30, 2009 (extended from
November 30, 2009), January 29, 2010 and June 28, 2010,
respectively. Harry Winston Japan, K.K. also maintains a secured
credit agreement amounting to (Yen) 575 million ($6.3 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 $0.2
million quarterly, and may be prepaid at any time. On October 31,
2009, $7.3 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 October 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 October 31,
2009 was $71.5 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 for 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 had 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 rough diamond sales events conducted during the quarter
and the volume, size and quality distribution of rough diamonds
delivered from the Diavik Diamond Mine in each quarter, 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 have experienced 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. Licences and Permits The operation of the Diavik
Diamond Mine and exploration on the Diavik property requires
licences and permits from the Canadian government. The Diavik
Diamond Mine Type "A" Water Licence was renewed by the regional
Wek'eezhii Land and Water Board to October 31, 2015. While the
Company anticipates that DDMI, the operator of the Diavik Diamond
Mine, will be able to renew this licence 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 licences
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 has been 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 continue or
that the current expansion 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. Equity In
August 2009, the CICA amended Section 3251, "Equity". The
amendments apply only to entities that have adopted Section 1602,
"Non-Controlling Interests". The amendments require separate
presentation on the consolidated statements of earnings and
comprehensive income of earnings attributable to owners of the
Company and those attributable to non-controlling interests. The
amendments require that non-controlling interests be presented
separately as a component of equity. As the Company has not adopted
section 1602, which is mandatory for fiscal years beginning on or
after January 1, 2011, the amendments are not applicable to the
Company in the interim. 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.
This phase was substantially completed during the second quarter.
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.
The Company is currently progressing through its design phase
activities. 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 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, the
Company expects 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 to
date. Outstanding Share Information As at October 31, 2009
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 76,588,592
Options outstanding 3,233,779 Fully diluted 79,822,371
-------------------------------------------------------------------------
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) October 31,
January 31, 2009 2009 (unaudited)
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 53,846
$ 16,735 Cash collateral and cash reserves (note 3) 287 30,145
Accounts receivable (note 14) 22,740 66,980 Inventory and supplies
(note 4) 346,083 346,235 Prepaid expenses and other current assets
37,787 48,130
-------------------------------------------------------------------------
460,743 508,225 Mining capital assets 808,896 800,358 Retail
capital assets 65,814 68,258 Intangible assets, net (note 6)
129,518 130,752 Other assets 16,149 15,644 Future income tax asset
54,247 43,338
-------------------------------------------------------------------------
$ 1,535,367 $ 1,566,575 --------------------------
-------------------------- Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities (note
7) $ 86,367 $ 118,390 Income taxes payable 44,871 76,987 Bank
advances 30,897 42,621 Current portion of long-term debt (note 8)
1,153 75,097
-------------------------------------------------------------------------
163,288 313,095 Long-term debt (note 8) 173,723 205,625 Future
income tax liability 288,722 303,284 Other long-term liability
2,774 1,946 Future site restoration costs 40,807 39,506
Non-controlling interest (note 1) 178,911 280 Shareholders' Equity:
Share capital (note 9) 426,281 381,541 Contributed surplus 17,560
16,079 Retained earnings 213,358 283,177 Accumulated other
comprehensive income (note 7) 29,943 22,042
-------------------------------------------------------------------------
687,142 702,839 Commitments and guarantees (note 10)
-------------------------------------------------------------------------
$ 1,535,367 $ 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) (UNAUDITED) Three months Three months Nine months Nine
months ended ended ended ended October 31, October 31, October 31,
October 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
Sales $ 74,828 $ 148,623 $ 279,247 $ 490,821 Cost of sales 45,227
71,679 195,465 218,370
-------------------------------------------------------------------------
Gross margin 29,601 76,944 83,782 272,451 Selling, general and
administrative expenses 34,542 33,998 102,671 116,477
-------------------------------------------------------------------------
Earnings (loss) from operations (4,941) 42,946 (18,889) 155,974
-------------------------------------------------------------------------
Interest and financing expenses (2,448) (4,678) (9,145) (15,497)
Other income 99 407 463 1,468 Insurance settlement (note 14) 100 -
3,350 - Dilution loss (note 15) - - (34,761) - Foreign exchange
gain (loss) 1,598 48,982 (29,515) 54,438
-------------------------------------------------------------------------
Earnings (loss) before income taxes (5,592) 87,657 (88,497) 196,383
Income tax expense - Current 1,293 23,804 2,487 72,893 Income tax
recovery - Future (5,514) (8,119) (15,489) (19,688)
-------------------------------------------------------------------------
Earnings (loss) before non-controlling interest (1,371) 71,972
(75,495) 143,178 Non-controlling interest (note 1) (1,157) 81
(5,676) 83
-------------------------------------------------------------------------
Net earnings (loss) $ (214) $ 71,891 $ (69,819) $ 143,095
----------------------------------------------------
---------------------------------------------------- Earnings
(loss) per share Basic $ 0.00 $ 1.17 $ (0.95) $ 2.35
----------------------------------------------------
---------------------------------------------------- Fully diluted
$ 0.00 $ 1.17 $ (0.95) $ 2.34
----------------------------------------------------
---------------------------------------------------- Weighted
average number of shares outstanding 76,588,592 61,372,091
73,202,442 60,894,313
----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (EXPRESSED IN
THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED) Three months Three
months Nine months Nine months ended ended ended ended October 31,
October 31, October 31, October 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (214) $ 71,891 $ (69,819) $ 143,095 Other
comprehensive income Net gain (loss) on translation of net foreign
operations (net of tax - nil) 4,735 (6,281) 8,514 (4,346) Change in
fair value of derivative financial instruments designated as cash
flow hedges (613) - (613) -
-------------------------------------------------------------------------
Total comprehensive income (loss) $ 3,908 $ 65,610 $ (61,918) $
138,749 ----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED) Three
months Three months Nine months Nine months ended ended ended ended
October 31, October 31, October 31, October 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
COMMON SHARES: Balance at beginning of period $ 426,281 $ 381,541 $
381,541 $ 305,502 Issued during the period - - 44,740 76,039
-------------------------------------------------------------------------
Balance at end of period 426,281 381,541 426,281 381,541
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS: Balance at beginning of period 17,357 15,906
16,079 15,614 Stock option expense 203 87 1,481 379
-------------------------------------------------------------------------
Balance at end of period 17,560 15,993 17,560 15,993
-------------------------------------------------------------------------
RETAINED EARNINGS: Balance at beginning of period 213,572 290,398
283,177 225,334 Net earnings (loss) (214) 71,891 (69,819) 143,095
Dividends paid - (3,069) - (9,209)
-------------------------------------------------------------------------
Balance at end of period 213,358 359,220 213,358 359,220
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance at beginning of
period 25,821 27,147 22,042 25,212 Other comprehensive income Net
gain (loss) on translation of net foreign operations (net of tax -
nil) 4,735 (6,281) 8,514 (4,346) Change in fair value of derivative
financial instruments designated as cash flow hedges (613) - (613)
-
-------------------------------------------------------------------------
Balance at end of period 29,943 20,866 29,943 20,866
-------------------------------------------------------------------------
Total Shareholders' Equity $ 687,142 $ 777,620 $ 687,142 $ 777,620
----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (EXPRESSED IN THOUSANDS OF
UNITED STATES DOLLARS) (UNAUDITED) Three months Three months Nine
months Nine months ended ended ended ended October 31, October 31,
October 31, October 31, 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings (loss) $ (214) $
71,891 $ (69,819) $ 143,095 Items not involving cash: Amortization
and accretion 11,208 21,707 45,854 52,440 Future income tax
recovery (5,514) (8,119) (15,489) (19,688) Stock-based compensation
and pension expense 1,020 296 2,310 875 Foreign exchange loss
(gain) (1,679) (51,331) 29,419 (57,582) Loss on disposal of assets
- 3 - 491 Non-controlling interest (1,157) 81 (5,676) 83 Dilution
loss - - 34,761 - Change in non-cash operating working capital
(19,977) 13,815 (18,910) 9,144
-------------------------------------------------------------------------
(16,313) 48,343 2,450 128,858
-------------------------------------------------------------------------
Financing Decrease in long- term debt (142) (12,558) (264) (39,725)
Increase (decrease) in revolving credit 7,886 (5,530) (43,959)
174,895 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) - Dividends paid - (3,069) -
(9,209) Issue of common shares, net of issue costs - - 44,740
76,039
-------------------------------------------------------------------------
7,744 (21,157) (80,393) 42,891
-------------------------------------------------------------------------
Investing Subscription of partnership units - - 125,095 - Cash
collateral and cash reserve 1 46 29,858 358 Mining capital assets
(6,547) (38,350) (43,348) (168,258) Retail capital assets (1,029)
(1,384) (2,596) (9,040) Other assets (446) - (753) (1)
-------------------------------------------------------------------------
(8,021) (39,688) 108,256 (176,941)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 2,533 (3,278) 6,798
(3,898) Increase (decrease) in cash and cash equivalents (14,057)
(15,780) 37,111 (9,090) Cash and cash equivalents, beginning of
period (note 3) 67,903 56,318 16,735 49,628
-------------------------------------------------------------------------
Cash and cash equivalents, end of period (note 3) $ 53,846 $ 40,538
$ 53,846 $ 40,538
----------------------------------------------------
---------------------------------------------------- Change in
non-cash operating working capital Accounts receivable (4,709)
2,503 44,465 (2,224) Prepaid expenses and other current assets
12,548 11,963 7,612 13,497 Inventory and supplies (21,042) (23,027)
4,078 (46,013) Accounts payable and accrued liabilities (4,171)
(5,985) (35,188) 8,850 Income taxes payable (2,603) 28,361 (39,877)
35,034
-------------------------------------------------------------------------
$ (19,977) $ 13,815 $ (18,910) $ 9,144
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid $ 6,304 $
(5,864) $ 42,782 $ 36,704 Cash interest paid $ 2,713 $ 4,165 $
8,852 $ 12,963
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements OCTOBER 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. EQUITY In
August 2009, the CICA amended Section 3251, "Equity". The
amendments apply only to entities that have adopted Section 1602,
"Non-Controlling Interests". The amendments require separate
presentation on the consolidated statements of earnings and
comprehensive income of earnings attributable to owners of the
Company and those attributable to non-controlling interests. The
amendments require that non-controlling interests be presented
separately as a component of equity. As the Company has not adopted
section 1602, which is mandatory for fiscal years beginning on or
after January 1, 2011, the amendments are not applicable to the
Company in the interim. NOTE 3: Cash Resources October 31, January
31, 2009 2009
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 53,846 $ 14,118 Short-term
investments(a) - 2,617
-------------------------------------------------------------------------
Total cash and cash equivalents 53,846 16,735 Cash collateral and
cash reserves 287 30,145
-------------------------------------------------------------------------
Total cash resources $ 54,133 $ 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
October 31, January 31, 2009 2009
-------------------------------------------------------------------------
Rough diamond inventory $ 33,406 $ 31,872 Merchandise inventory
233,378 240,419 Supplies inventory 79,299 73,944
-------------------------------------------------------------------------
Total inventory and supplies $ 346,083 $ 346,235
-------------------------- -------------------------- During the
three months ended October 31, 2009, the Company recorded a
write-down of $5.8 million on rough diamond inventory ($nil for the
three months ended October 31, 2008), which was recorded in cost of
sales. During the nine months ended October 31, 2009, the Company
recorded a write-down of $9.9 million on rough diamond inventory
($nil for the nine months ended October 31, 2008). NOTE 5: Diavik
Joint Venture The following represents Harry Winston Diamond
Limited Partnership's 40% proportionate interest in the Joint
Venture as at September 30, 2009 and December 31, 2008: October 31,
January 31, 2009 2009
-------------------------------------------------------------------------
Current assets $ 97,028 $ 105,612 Long-term assets 765,581 754,886
Current liabilities 25,099 38,808 Long-term liabilities and
participant's account 837,510 821,690
-------------------------------------------------------------------------
Three months Three months Nine months Nine months ended ended ended
ended October 31, October 31, October 31, October 31, 2009 2008
2009 2008
-------------------------------------------------------------------------
Expenses net of interest income of $0.1 million (2008 - interest
income of $0.1 million)(a)(b) $ 29,511 $ 61,168 $ 112,079 $ 138,798
Cash flows resulting from (used in) operating activities (33,883)
(47,434) (91,896) (108,655) Cash flows resulting from financing
activities 36,433 68,220 132,030 243,721 Cash flows resulting from
(used in) investing activities (1,457) (31,365) (40,700) (146,337)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income. (b) Expenses net
of interest income for the nine months ended October 31, 2009 of
$0.3 million (nine months ended October 31, 2008 of $0.3 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 October 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
distribution network 120 months 5,575 (2,344) 3,231 3,649 Store
leases 65 to 105 months 5,639 (4,712) 927 1,743
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ (7,056) $ 129,518 $ 130,752
-----------------------------------------------
----------------------------------------------- Amortization
expense for the nine months ended October 31, 2009 was $1.2 million
($1.5 million for the nine months ended October 31, 2008). NOTE 7:
Derivative Financial Instruments On October 1, 2009, the Company
executed an interest rate cash flow hedge on Harry Winston Inc's
five-year revolving credit facility in the form of a swap to
mitigate the Company's exposure to variability in cash flows for
the future interest payments on a designated portion of borrowings
on the facility. The interest rate swap qualifies as a hedge.
Accordingly, the fair value of the derivative is recorded as an
asset or liability on the consolidated balance sheet and the change
in the derivative's fair value at the end of each period is
recorded in accumulated other comprehensive income. Any gain or
loss in fair value relating to the ineffective portion of the
hedging relationship is recorded in current earnings. For the nine
months ended October 31, 2009, the Company recorded an accumulated
other comprehensive loss of $0.6 million. No gain or loss was
recorded in earnings as a result of hedge ineffectiveness. October
31, 2009
-------------------------------------------------------------------------
Interest rates ----------------------- Notional principal Receive
Pay
-------------------------------------------------------------------------
Interest 1 year: receive rate swap variable - pay fixed $ 140,000
1-month LIBOR 3.19%
-------------------------------------------------------------------------
NOTE 8: Long-Term Debt October 31, January 31, 2009 2009
-------------------------------------------------------------------------
Mining segment credit facilities $ - $ 74,107 Harry Winston Inc.
credit facilities 167,612 199,846 First mortgage on real property
7,264 6,769
-------------------------------------------------------------------------
Total long-term debt 174,876 280,722
-------------------------------------------------------------------------
Less current portion (1,153) (75,097)
-------------------------------------------------------------------------
$ 173,723 $ 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 9: 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, October 31, 2009 76,588,592 $ 426,281
-------------------------- -------------------------- (c) Stock
Options During the nine months ended October 31, 2009, the Company
issued 1,674,000 stock options to officers 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 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 $1.5 million for
the nine months ended October 31, 2009 ($0.4 million for the nine
months ended October 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 Number of RSU units
---------------------------------------------------------------------
Balance, January 31, 2009 108,599 AWARDS AND PAYOUTS DURING THE
PERIOD (NET): RSU awards 11,500 RSU payouts (74,614)
---------------------------------------------------------------------
Balance, October 31, 2009 45,485 ------------- ------------- Number
of DSU units
---------------------------------------------------------------------
Balance, January 31, 2009 128,988 AWARDS AND PAYOUTS DURING THE
PERIOD (NET): DSU awards 59,144 DSU payouts (15,741)
---------------------------------------------------------------------
Balance, October 31, 2009 172,391 ------------- ------------- Three
months Three months Nine months Nine months Expense ended ended
ended ended (recovery) October 31, October 31, October 31, October
31, for the period 2009 2008 2009 2008
---------------------------------------------------------------------
RSU $ 81 $ (995) $ 98 $ (660) DSU 542 (659) 958 (422)
---------------------------------------------------------------------
$ 623 $ (1,654) $ 1,056 $ (1,082)
----------------------------------------------------
---------------------------------------------------- During the
nine months ended October 31, 2009, the Company granted 11,500 RSUs
and 59,144 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 10:
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 October 31, 2009 was
$71.5 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 $ 92,210 2011 88,683 2012 87,993 2013 86,398
2014 86,791 Thereafter 127,655
---------------------------------------------------------------------
NOTE 11: Employee Benefit Plans Three months Three months Nine
months Nine months ended ended ended ended Expenses for October 31,
October 31, October 31, October 31, the period 2009 2008 2009 2008
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston retail segment $ 466 $
413 $ 1,424 $ 1,227 Defined contribution plan - Harry Winston
retail segment 210 235 630 705 Defined contribution plan - Harry
Winston mining segment 29 - 130 236 Defined contribution plan -
Diavik Diamond Mine 190 236 591 733
-------------------------------------------------------------------------
$ 895 $ 884 $ 2,775 $ 2,901
----------------------------------------------------
---------------------------------------------------- NOTE 12:
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 13: 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
October 31, 2009 is considered to approximate its carrying value.
The fair value of derivative financial instruments included in
accounts payable and accrued liabilities is determined using
standard valuation techniques with observable market information.
The carrying values of these financial instruments are as follows:
October 31, 2009 January 31, 2009
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying fair value value fair value
value
-------------------------------------------------------------------------
FINANCIAL ASSETS: Cash and cash equivalents $ 53,846 $ 53,846 $
16,735 $ 16,735 Cash collateral and cash reserves 287 287 30,145
30,145 Accounts receivable 22,740 22,740 66,980 66,980
-------------------------------------------------------------------------
$ 76,873 $ 76,873 $ 113,860 $ 113,860
----------------------------------------------------
---------------------------------------------------- FINANCIAL
LIABILITIES: Accounts payable and accrued liabilities $ 86,367 $
85,754 $ 118,390 $ 118,390 Bank advances 30,897 30,897 42,621
42,621 Long-term debt 174,876 174,876 280,722 280,722
-------------------------------------------------------------------------
$ 292,140 $ 291,527 $ 441,733 $ 441,733
----------------------------------------------------
---------------------------------------------------- NOTE 14:
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 15: 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 16: Segmented Information The Company
operates in two segments within the diamond industry, mining and
retail, for the three months ended October 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
October 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 20,765 $ - $ 20,765 United States - 12,847 12,847
Europe - 20,987 20,987 Asia - 20,229 20,229 Cost of sales 20,319
24,908 45,227
-------------------------------------------------------------------------
Gross margin 446 29,155 29,601 Gross margin (%) 2.1% 53.9% 39.6%
Selling, general and administrative expenses 4,932 29,610 34,542
-------------------------------------------------------------------------
Loss from operations (4,486) (455) (4,941)
-------------------------------------------------------------------------
Interest and financing expenses (702) (1,746) (2,448) Other income
92 7 99 Insurance proceeds - 100 100 Foreign exchange gain 1,551 47
1,598
-------------------------------------------------------------------------
Segmented loss before income taxes $ (3,545) $ (2,047) $ (5,592)
---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2009 Canada $ 972,604 $ - $ 972,604 United States -
371,109 371,109 Other foreign countries 23,194 168,460 191,654
-------------------------------------------------------------------------
$ 995,798 $ 539,569 $ 1,535,367
-------------------------------------------------------------------------
Capital expenditures $ 6,547 $ 1,029 $ 7,576 OTHER SIGNIFICANT
NON-CASH ITEMS: Income tax recovery $ (4,192) $ (1,322) $ (5,514)
Amortization and accretion $ 7,845 $ 3,363 $ 11,208
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totaled
$4.4 million for the three months ended October 31, 2009 ($13.3
million for the three months ended October 31, 2008 for the same
three significant customers). For the three months ended October
31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 90,716 $ - $ 90,716 United States - 21,278 21,278
Europe - 23,433 23,433 Asia - 13,196 13,196 Cost of sales 40,617
31,062 71,679
-------------------------------------------------------------------------
Gross margin 50,099 26,845 76,944 Gross margin (%) 55.2% 46.4%
51.8% Selling, general and administrative expenses 3,114 30,884
33,998
-------------------------------------------------------------------------
Earnings (loss) from operations 46,985 (4,039) 42,946
-------------------------------------------------------------------------
Interest and financing expenses (1,898) (2,780) (4,678) Other
income 303 104 407 Foreign exchange gain (loss) 49,592 (610) 48,982
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 94,982 $ (7,325) $
87,657 ---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2008 Canada $ 981,791 $ - $ 981,791 United States -
469,130 469,130 Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 38,350 $ 1,384 $ 39,734 OTHER SIGNIFICANT NON-CASH
ITEMS: Income tax recovery $ (5,662) $ (2,457) $ (8,119)
Amortization and accretion $ 18,611 $ 3,096 $ 21,707
-------------------------------------------------------------------------
For the nine months ended October 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 124,396 $ - $ 124,396 United States - 46,657 46,657
Europe - 58,000 58,000 Asia - 50,194 50,194 Cost of sales 117,624
77,841 195,465
-------------------------------------------------------------------------
Gross margin 6,772 77,010 83,782 Gross margin (%) 5.4% 49.7% 30.0%
Selling, general and administrative expenses 14,617 88,054 102,671
-------------------------------------------------------------------------
Loss from operations (7,845) (11,044) (18,889)
-------------------------------------------------------------------------
Interest and financing expenses (3,115) (6,030) (9,145) Other
income 432 31 463 Insurance settlement - 3,350 3,350 Dilution loss
(34,761) - (34,761) Foreign exchange gain (loss) (31,045) 1,530
(29,515)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (76,334) $ (12,163) $ (88,497)
---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2009 Canada $ 972,604 $ - $ 972,604 United States -
371,109 371,109 Other foreign countries 23,194 168,460 191,654
-------------------------------------------------------------------------
$ 995,798 $ 539,569 $ 1,535,367
-------------------------------------------------------------------------
Capital expenditures $ 43,348 $ 2,596 $ 45,944 OTHER SIGNIFICANT
NON-CASH ITEMS: Income tax recovery $ (9,044) $ (6,445) $ (15,489)
Amortization and accretion $ 36,178 $ 9,676 $ 45,854
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totaled
$52.3 million for the nine months ended October 31, 2009 ($34.6
million for the nine months ended October 31, 2008 for the same
three significant customers). For the nine months ended October 31,
2008 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 277,123 $ - $ 277,123 United States - 75,188 75,188
Europe - 86,699 86,669 Asia - 51,811 51,811 Cost of sales 105,157
113,213 218,370
-------------------------------------------------------------------------
Gross margin 171,966 100,485 272,451 Gross margin (%) 62.1% 47.0%
55.5% Selling, general and administrative expenses 15,473 101,004
116,477
-------------------------------------------------------------------------
Earnings (loss) from operations 156,493 (519) 155,974
-------------------------------------------------------------------------
Interest and financing expenses (7,025) (8,472) (15,497) Other
income (expense) 1,751 (283) 1,468 Foreign exchange gain (loss)
54,853 (415) 54,438
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 206,072 $ (9,689) $
196,383 ---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2008 Canada $ 981,791 $ - $ 981,791 United States -
469,130 469,130 Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 168,258 $ 9,040 $ 177,298 OTHER SIGNIFICANT NON-CASH
ITEMS: Income tax recovery $ (15,401) $ (4,287) $ (19,688)
Amortization and accretion $ 43,039 $ 9,401 $ 52,440
-------------------------------------------------------------------------
DATASOURCE: Harry Winston Diamond Corporation CONTACT: Kelley
Stamm, Manager, Investor Relations, (416) 362-2237 ext 223 or
Copyright