TORONTO, ONTARIO announced today its results for the three
months and year ended November 30, 2007.
Financial Highlights (complete financial statements and MD&A to follow)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Twelve Months
ended November 30 ended November 30
---------------------------------------------------------------------------
(in $000 except per share
amounts) 2007 2006 2007 2006
---------------------------------------------------------------------------
Sales $151,359 $176,571 $627,424 $631,254
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Earnings (loss) from
operations $(1,677) $6,304 $1,690 $10,327
Loss on disposal of
property, plant & equipment (191) (96) (1,910) (345)
Depreciation and amortization 4,731 5,033 17,740 18,941
EBITDA (1) $2,863 $11,241 $17,520 $28,923
Net loss $(33,633) $(716) $(35,501) $(269)
Earnings (loss) per share
before loss on asset held
for sale and goodwill
impairment $(0.04) $0.08 $(0.07) $0.09
EPS diluted $(0.52) $(0.01) $(0.55) $0.00
Shareholders' equity $177,661 $210,954 $177,661 $210,954
Common shares outstanding 64,116,131 64,116,131 64,116,131 64,116,131
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(1) The terms "EBITDA" and "EPS before loss on asset held for sale and
goodwill impairment" are non-GAAP financial measures and do not
necessarily have a standardized meaning amongst issuers. EBITDA is
defined as earnings (loss) from operations after loss on disposal of
property, plant and equipment and before depreciation and amortization.
"EPS before loss on asset held for sale and goodwill impairment" is
defined as "EPS diluted" before the impact on net earnings from the
loss on asset held for sale and goodwill impairment. The Company
believes that this adjustment to EPS diluted is useful because it
removes non-cash accounting losses, therefore providing a better
measure of the Company's operating performance.
Commenting on the results, David Feldberg, President and CEO,
noted "Fourth quarter revenues were the weakest of any fourth
quarter in the past three years - and were disappointing. However,
for the fiscal 2007 year, we increased our revenues (in source
currency) in all our markets, the U.S., Canada and International -
the third consecutive year that we have achieved this broad growth.
Our sales have increased on a year-over-year basis in 11 of the
last 13 quarters. We believe that we will continue to grow our
business in 2008 and beyond."
Cautionary Statement
Certain of the above statements are forward-looking statements
with respect to the Company's future prospects. These statements
involve risks and uncertainties that could cause the Company's
financial results to differ materially from stated expectations as
a consequence of a number of factors, including but not limited to:
fluctuations in the Company's operating results due to product
demand arising from competitive and general economic and business
conditions in the Company's North American and international
markets and operations; significant fluctuations in exchange rates
for currencies in which the Company does business; changes in the
cost of raw materials; the ability to maintain the proprietary
nature of the Company's intellectual property in the design and
manufacturing of its products; changes in the Company's markets,
including technology change, changes in customer requirements,
frequent new product introductions by competitors and emerging
standards; the Company's dependence on key personnel; the Company's
dependence on key commitments from significant dealers and
distributors; availability of financing for the Company; potential
liabilities arising from product defects; environmental matters and
other factors set forth in the Company's reports and filings with
Canadian securities regulators. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise.
Teknion Corporation (TSX: TKN) is a leading international
designer, manufacturer and marketer of office systems and related
office furniture products. Teknion's headquarters are located in
Toronto, Ontario. The company has offices and facilities in Canada,
the United States, the United Kingdom and the Pacific Rim, and
serves clients through a network of authorized dealers worldwide.
Visit Teknion at www.teknion.com.
TEKNION CORPORATION
Consolidated Balance Sheets
(Unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at As at
November 30, November 30,
2007 2006
-------------------------------------------------------------------------
Assets
Current assets:
Cash $ 7,321 $ 5,862
Accounts receivable 121,632 128,197
Inventory 49,093 51,913
Prepaid expenses and other deposits 4,368 4,620
Income taxes receivable - 427
Future income taxes 2,705 2,724
Derivative instruments asset 3,861 -
Asset held for sale - 21,079
------------------------------------------------------------------------
188,980 214,822
Property, plant and equipment 145,938 136,900
Prepaid rent 9,981 11,089
Goodwill - 30,874
-------------------------------------------------------------------------
$ 344,899 $ 393,685
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Operating loans $ 49,640 $ 53,091
Accounts payable and accrued
liabilities 90,113 94,830
Income taxes payable 135 -
Due to affiliated companies 105 824
Current portion of long-term debt and
capital lease obligations 3,687 1,830
Liability held for sale - 13,853
------------------------------------------------------------------------
143,680 164,428
Long-term debt and capital lease
obligations 20,853 15,579
Future income taxes 2,705 2,724
-------------------------------------------------------------------------
167,238 182,731
Shareholders' equity:
Share capital 107,005 107,005
Retained earnings 78,424 113,925
Contributed surplus 1,479 376
Accumulated other comprehensive loss (9,247) (10,352)
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177,661 210,954
-------------------------------------------------------------------------
$ 344,899 $ 393,685
-------------------------------------------------------------------------
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TEKNION CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Periods ended November 30, 2007 and 2006
(in thousands of dollars, except per share Twelve months ended
amounts) November 30
--------------------------------------------------------------------------
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2007 2006
--------------------------------------------------------------------------
Share Capital
Issued
39,919,846 multiple voting shares 5,051 5,051
24,196,285 subordinate voting shares 101,954 101,954
--------------------------------------------------------------------------
Share capital, end of year $ 107,005 $ 107,005
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Retained earnings, beginning of year $ 113,925 $ 114,194
Loss for the year (35,501) (269)
--------------------------------------------------------------------------
Retained earnings, end of year $ 78,424 $ 113,925
--------------------------------------------------------------------------
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Contributed surplus
Contributed Surplus, beginning of year 376 94
Stock-based compensation plan 1,103 282
--------------------------------------------------------------------------
Contributed surplus, end of year $ 1,479 $ 376
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--------------------------------------------------------------------------
Accumulated other comprehensive gain on cash flow
hedges:
Balance, beginning of year - -
Impact of new cash flow hedge accounting rules on
December 1, 2006 (569) -
Unrealized gains on derivatives designated as
cash flow hedges 3,861 -
Reclassification of unrealized losses to earnings 569 -
-------------------------------------------------------------------------
Balance, end of year 3,861 -
Accumulated other comprehensive loss on
translation of net foreign operations
Balance, beginning of year (10,352) (10,143)
Unrealized loss on translation of net foreign
operations (2,756) (209)
-------------------------------------------------------------------------
Balance, end of year (13,108) (10,352)
--------------------------------------------------------------------------
Accumulated other comprehensive loss, end of year $ (9,247) $ (10,352)
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Total Shareholders' equity, end of year $ 177,661 $ 210,954
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TEKNION CORPORATION
Consolidated Statements of Earnings
(Unaudited)
Periods ended November 30, 2007 and 2006
(in thousands of dollars, Three months ended Twelve months ended
except per share amounts) November 30 November 30
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Sales $ 151,359 $ 176,571 $ 627,424 $ 631,254
Cost of sales 110,591 128,569 455,723 459,913
--------------------------------------------------------------------------
Gross margin 40,768 48,002 171,701 171,341
Expenses:
Selling, general and
administrative 37,714 36,665 152,271 142,073
Depreciation and
amortization 4,731 5,033 17,740 18,941
-------------------------------------------------------------------------
42,445 41,698 170,011 161,014
--------------------------------------------------------------------------
Earnings (loss) from
operations (1,677) 6,304 1,690 10,327
Interest expense, net 929 1,015 4,222 4,453
Loss on asset held for
sale - 5,827 - 5,827
Loss on disposal of
property, plant and
equipment 191 96 1,910 345
Goodwill impairment
charge 30,874 - 30,874 -
-------------------------------------------------------------------------
Loss before income taxes (33,671) (634) (35,316) (298)
Income taxes:
Current expense
(recovery) (38) 82 185 (29)
--------------------------------------------------------------------------
Net loss $ (33,633) $ (716) $ (35,501) $ (269)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Loss per share:
Basic and diluted $ (0.52) $ (0.01) $ (0.55) $ (0.00)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated Statements of Other Comprehensive Income
(Unaudited)
Periods ended November 30, 2007 and 2006
(in thousands of
dollars, except
per share Three months ended Twelve months ended
amounts) November 30 November 30
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Net loss $ (33,633) $ (716) $ (35,501) $ (269)
--------------------------------------------------------------------------
Other comprehensive
income (loss), net of
tax:
Unrealized gains
(losses) on translation
of self-sustaining
operations (1,628) 1,074 (2,756) (209)
Earnings (losses) on
derivatives designated
as cash flow hedges (1,825) - 3,861 -
Reclassification of
unrealized losses to
earnings - - 569 -
-------------------------------------------------------------------------
Other comprehensive
income (loss) (3,453) 1,074 1,674 (209)
--------------------------------------------------------------------------
Comprehensive income
(loss) $ (37,086) $ 358 $ (33,827) $ (478)
--------------------------------------------------------------------------
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TEKNION CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Periods ended November 30, 2007 and 2006
(in thousands of Three months ended Twelve months ended
dollars) November 30 November 30
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $ (33,633) $ (716) $ (35,501) $ (269)
Items not affecting
cash:
Depreciation and
amortization 4,731 5,033 17,740 18,941
Loss on asset held for
sale - 5,827 - 5,827
Loss on disposal of
property, plant and
equipment 191 96 1,910 345
Goodwill impairment
charge 30,874 - 30,874 -
Amortization of
stock-based compensation 143 89 563 282
--------------------------------------------------------------------------
2,306 10,329 15,586 25,126
Change in non-cash
operating working capital 4,583 (4,380) 2,647 (9,657)
---------------------------------------------------------------------------
6,889 5,949 18,233 15,469
Financing:
Operating loans (4,300) (14,047) (3,451) (9,965)
Proceeds from financing 2,454 - 6,975 -
Repayment of liability
held for sale - - (14,189) -
Repayment of long-term
debt and capital lease
obligations (641) (586) (2,290) (2,018)
--------------------------------------------------------------------------
(2,487) (14,633) (12,955) (11,983)
Investing:
Purchase of property,
plant and equipment (7,006) (5,130) (26,879) (21,673)
Proceeds on disposition
of equipment under
sale-leaseback 2,085 10,500 2,533 13,381
Proceeds on disposal of
property, plant and
equipment 357 23 21,374 191
--------------------------------------------------------------------------
(4,564) 5,393 (2,972) (8,101)
Effect of foreign
exchange changes on cash (312) 201 (847) 42
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Increase (decrease) in cash (474) (3,090) 1,459 (4,573)
Cash, beginning of period 7,795 8,952 5,862 10,435
---------------------------------------------------------------------------
Cash, end of period $ 7,321 $ 5,862 $ 7,321 $ 5,862
---------------------------------------------------------------------------
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Supplemental cash flow
information:
Interest paid $ 915 $ 1,245 $ 4,452 $ 5,085
Interest received (15) 100 230 356
Income taxes paid 34 299 613 1,600
Income taxes recovered - 150 618 851
Supplemental disclosure
relating to non-cash
investing and financing
activities:
Acquisition of
property,
plant and equipment
through:
Capital leases $ - $ 338 $ - $ 2,466
Tenant inducements 342 - 2,548 -
Consolidated Financial Statements of
TEKNION CORPORATION
Years ended November 30, 2007 and 2006
KPMG LLP Telephone (416) 228-7000
Chartered Accountants Fax (416) 228-7123
Yonge Corporate Centre Internet www.kpmg.ca
4100 Yonge Street Suite 200
Toronto ON M2P 2H3
Canada
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Teknion
Corporation as at November 30, 2007 and 2006 and the consolidated
statements of changes in shareholders' equity, earnings,
comprehensive income and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at November 30, 2007 and 2006 and the results of its
operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting
principles.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
February 13, 2008
KPMG LLP, is a Canadian limited liability partnership and a
member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. KPMG
Canada provides services to KPMG LLP.
TEKNION CORPORATION
Consolidated Balance Sheets (In thousands of dollars)
November 30, 2007 and 2006
---------------------------------------------------------------------------
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2007 2006
---------------------------------------------------------------------------
Assets
Current assets:
Cash $ 7,321 $ 5,862
Accounts receivable (note 5(a)) 121,632 128,197
Inventory 49,093 51,913
Prepaid expenses and other deposits 4,368 4,620
Income taxes receivable - 427
Future income taxes (note 6) 2,705 2,724
Derivative instruments asset (note 17) 3,861 -
Asset held for sale (note 4) - 21,079
---------------------------------------------------------------------------
188,980 214,822
Property, plant and equipment (note 7) 145,938 136,900
Prepaid rent (note 8) 9,981 11,089
Goodwill (note 3) - 30,874
---------------------------------------------------------------------------
$ 344,899 $ 393,685
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Operating loans (note 9) $ 49,640 $ 53,091
Accounts payable and accrued liabilities (note 5(a)) 90,113 94,830
Due to affiliated companies (note 5(b)) 105 824
Income taxes payable 135 -
Current portion of long-term debt and capital lease
obligations (notes 10 and 11) 3,687 1,830
Liability held for sale (note 4) - 13,853
---------------------------------------------------------------------------
143,680 164,428
Long-term debt and capital lease obligations (notes
10 and 11) 20,853 15,579
Future income taxes (note 6) 2,705 2,724
Shareholders' equity:
Share capital (note 12) 107,005 107,005
Retained earnings 78,424 113,925
Contributed surplus (note 12) 1,479 376
Accumulated other comprehensive loss (9,247) (10,352)
--------------------------------------------------------------------------
177,661 210,954
Commitments (note 15)
Subsequent event (note 2)
$ 344,899 $ 393,685
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
On behalf of the Board:
"David Feldberg" Director
--------------------------------------------------
"David Sanchez" Director
--------------------------------------------------
TEKNION CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(In thousands of dollars)
Years ended November 30, 2007 and 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Share capital (note 12):
Issued:
39,919,846 multiple voting shares $ 5,051 $ 5,051
24,196,285 subordinate voting shares 101,954 101,954
---------------------------------------------------------------------------
Share capital, end of year $ 107,005 $ 107,005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Retained earnings, beginning of year $ 113,925 $ 114,194
Loss for the year (35,501) (269)
---------------------------------------------------------------------------
Retained earnings, end of year $ 78,424 $ 113,925
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Contributed surplus, beginning of year $ 376 $ 94
Stock-based compensation plan 1,103 282
---------------------------------------------------------------------------
Contributed surplus, end of year $ 1,479 $ 376
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated other comprehensive loss on cash flow
hedges:
Balance, beginning of year $ - $ -
Impact of new cash flow hedge accounting rules on
December 1, 2006 (note 1(p)(i)) (569) -
Unrealized gains on derivatives designated as
cash flow hedges 3,861 -
Reclassification of unrealized losses to earnings 569 -
--------------------------------------------------------------------------
Balance, end of year 3,861 -
Accumulated other comprehensive loss on translation
of net foreign operations:
Balance, beginning of year (10,352) (10,143)
Unrealized loss on translation of net foreign
operations (2,756) (209)
--------------------------------------------------------------------------
Balance, end of year (13,108) (10,352)
---------------------------------------------------------------------------
Accumulated other comprehensive loss, end of year $ (9,247) $ (10,352)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total shareholders' equity, end of year $ 177,661 $ 210,954
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
TEKNION CORPORATION
Consolidated Statements of Earnings
(In thousands of dollars, except per share amounts)
Years ended November 30, 2007 and 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
Sales $ 627,424 $ 631,254
Cost of sales 455,723 459,913
-----------------------------------------------------------------------
Gross margin 171,701 171,341
Expenses:
Selling, general and administrative (note 1(g)) 152,271 142,073
Depreciation and amortization 17,740 18,941
----------------------------------------------------------------------
170,011 161,014
-----------------------------------------------------------------------
Earnings from operations 1,690 10,327
Interest expense, net (notes 10 and 11) 4,222 4,453
Goodwill impairment charge (note 3) 30,874 -
Loss on asset held for sale (note 4) - 5,827
Loss on disposal of property, plant and equipment 1,910 345
-----------------------------------------------------------------------
Loss before income taxes (35,316) (298)
Income taxes (recovery) (note 6) 185 (29)
-----------------------------------------------------------------------
Loss for the year $ (35,501) $ (269)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Loss per share (note 13):
Basic and diluted $ (0.55) $ (0.00)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
(In thousands of dollars)
Years ended November 30, 2007 and 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Loss for the year $ (35,501) $ (269)
Other comprehensive income (loss), net of income taxes:
Unrealized losses on translation of
self-sustaining operations (2,756) (209)
Earnings on derivatives designated
as cash flow hedges 3,861 -
Reclassification of unrealized losses to earnings 569 -
-------------------------------------------------------------------------
Other comprehensive income (loss) 1,674 (209)
--------------------------------------------------------------------------
Comprehensive loss $ (33,827) $ (478)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
TEKNION CORPORATION
Consolidated Statements of Cash Flows
(In thousands of dollars)
Years ended November 30, 2007 and 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Loss for the year $ (35,501) $ (269)
Items not affecting cash:
Depreciation and amortization 17,740 18,941
Loss on asset held for sale - 5,827
Loss on disposal of property, plant and equipment 1,910 345
Amortization of stock-based compensation 563 282
Goodwill impairment charge 30,874 -
--------------------------------------------------------------------------
15,586 25,126
Change in non-cash operating working capital 2,647 (9,657)
--------------------------------------------------------------------------
18,233 15,469
Financing:
Operating loans (3,451) (9,965)
Proceeds from financing 6,975 -
Repayment of liability held for sale (14,189) -
Repayment of long-term debt and capital lease
obligations (2,290) (2,018)
--------------------------------------------------------------------------
(12,955) (11,983)
Investments:
Purchase of property, plant and equipment (26,879) (21,673)
Proceeds on disposal of equipment under
sale-leaseback 2,533 13,381
Proceeds on disposal of property, plant and
equipment 21,374 191
--------------------------------------------------------------------------
(2,972) (8,101)
Foreign exchange gain (loss) on cash held in foreign
currencies (847) 42
---------------------------------------------------------------------------
Increase (decrease) in cash 1,459 (4,573)
Cash, beginning of year 5,862 10,435
---------------------------------------------------------------------------
Cash, end of year $ 7,321 $ 5,862
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 4,452 $ 5,085
Interest received 230 356
Income taxes paid 613 1,600
Income taxes recovered 618 851
Supplemental disclosure relating to non-cash
financing and investing activities:
Acquisition of property, plant and equipment
through:
Capital leases - 2,466
Tenant inducements 2,548 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
TEKNION CORPORATION
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of dollars, except per share
amounts)
Years ended November 30, 2007 and 2006
Teknion Corporation is incorporated under the Ontario Business
Corporations Act, and its primary business activity is the design,
manufacture and sale of office furniture.
1. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP").
The consolidated financial statements include the accounts of
Teknion Corporation and all of its subsidiaries ("Teknion" or the
"Company"). All significant intercompany transactions have been
eliminated on consolidation.
(b) Revenue recognition:
The Company recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, persuasive
evidence of an arrangement exists and the sales price is fixed or
determinable. Credit notes to be issued to correct errors in
pricing are estimated based on historical trends and are recorded
as an adjustment to sales.
Defective goods are replaced or repaired. The cost associated
with replacement or repair is recorded in cost of sales. If the
Company notes a pattern of defects related to a certain product
then it will establish a specific warranty reserve for that
product. The warranty reserve is then evaluated on an ongoing basis
to ensure that the amount recorded is appropriate based on actual
replacement and repair experience.
Amounts billed to clients for shipping and handling of products
are recognized as sales in the consolidated statements of earnings.
Costs incurred by the Company for shipping and handling are
included in cost of sales.
(c) Inventory:
Inventory is valued at the lower of cost and net realizable
value. Cost is determined on a first-in, first-out basis.
(d) Property, plant and equipment:
Property, plant and equipment are recorded at cost and
depreciated on a declining-balance basis at the following annual
rates:
--------------------------------------------------
Buildings 5%
Computer hardware 20%
Computer software 20%
Manufacturing equipment 10%
Office equipment 20%
Tools and dies 10%
--------------------------------------------------
Showrooms are depreciated on a straight-line basis over four
years.
Leasehold improvements are amortized on a straight-line basis
over the term of the lease.
Patents and trademarks are amortized on a straight-line basis
over 10 years.
(e) Prepaid rent:
Prepaid rent is the difference between the net book value and
the ascribed value of the manufacturing equipment financed in a
sale-leaseback transaction. The prepaid rent is amortized on the
same basis as the leased assets and recorded in depreciation and
amortization.
(f) Goodwill:
Goodwill represents the difference between the purchase price
and the related underlying net asset values resulting from business
acquisitions. The Company reviews the carrying value of goodwill to
an estimate of its fair value annually. Due to the integrated
nature of the Company's operations and lack of differing economic
characteristics among the Company's subsidiaries, the entire
Company was determined to be one single reporting unit. The quoted
market price of the Company's stock on the impairment testing date
is the basis for determining the fair value of the Company's
reporting unit. If the fair value of the Company's one reporting
unit exceeds its carrying amount, further evaluation is not
necessary. However, if the fair value of the reporting unit is less
than its carrying amount, further evaluation is required to compare
the implied fair value of the reporting unit's goodwill to its
carrying amount to determine whether a write-down of goodwill is
required. Intangible assets with determinable lives continue to be
amortized over their estimated useful lives and are tested for
impairment at least annually or whenever events or changes in
circumstances indicate the carrying amount of the asset may not be
recoverable by comparing their book values with the undiscounted
cash flow expected to be received from their use. Note 3 describes
the results of the impairment test for November 30, 2007.
(g) Translation of foreign currency:
Foreign operations are classified as self-sustaining or
integrated.
(i) Self-sustaining foreign operations:
All assets and liabilities are translated into Canadian dollars
at exchange rates in effect at year end. Revenue and expenses are
translated at the average rates of exchange for the year. The
resulting net gains or losses are recorded as an unrealized gain or
loss in the consolidated statement of comprehensive income. Cash
flows are translated at the rate in effect at the time of the cash
flows.
(ii) Integrated foreign operations and accounts in foreign
currencies:
Integrated foreign operations and accounts in foreign currencies
have been translated into Canadian dollars using the temporal
method. Under this method, consolidated balance sheet monetary
items are translated at the rates of exchange in effect at year end
and non-monetary items are translated at historical exchange rates.
Revenue and expenses (other than depreciation and amortization,
which are translated at the same rates as the related property,
plant and equipment) are translated at the rates in effect on the
transaction dates or at the average rates of exchange for the year.
The resulting gains or losses are included in the consolidated
statements of earnings.
Included in selling, general and administrative expenses are
foreign exchange losses of $1,543,000 (2006 - gains of
$32,000).
(h) Income taxes:
The Company uses the asset and liability method of accounting
for the tax effect of temporary differences between the carrying
amount and the tax basis of the Company's assets and liabilities.
Temporary differences arise when the realization of an asset or the
settlement of a liability would give rise to either an increase or
decrease in the Company's income taxes payable for the year or a
later period.
Future income taxes are recorded at the income tax rates which
are expected to apply when the future tax liability is settled or
the future income tax asset is realized. Future tax assets are
recognized to the extent that realization of these assets is more
likely than not. Income tax expense consists of the income taxes
payable for the year and the change during the year in future
income tax assets and liabilities.
(i) Loss per share:
Basic loss per share is computed by dividing loss for the year
by the weighted average shares outstanding during the year. Diluted
loss per share is computed similarly to basic loss per share except
that the weighted average shares outstanding are increased to
include additional shares from the assumed exercise of stock
options, if dilutive. The number of additional shares is calculated
by assuming that outstanding stock options were exercised and that
the proceeds from such exercises were used to acquire shares of
common stock at the average market price during the year.
(j) Stock-based compensation plans:
The Company has stock-based compensation plans, which are
described in note 12. The Company accounts for all stock-based
payments to non-employees, and employee awards that are direct
awards of stock granted on or after December 1, 2003 under the fair
value-based method, and accounts for all stock-based employee
awards that call for settlement in cash or other assets, or are
stock appreciation rights that call for settlement by the issuance
of equity instruments, under that method.
Effective December 1, 2003, the Company elected early adoption,
on a prospective basis, of the new recommendations issued by The
Canadian Institute of Chartered Accountants ("CICA") related to
physically settled stock options. Stock options that were granted
before fiscal 2004 have been accounted for as a capital transaction
when exercised and no compensation cost has been recognized.
Under the fair value-based method, compensation cost for
physically settled stock options and direct awards of stock is
measured at fair value at the grant date, while compensation cost
for awards that call for settlement in cash or other assets, or are
stock appreciation rights that call for settlement by the issuance
of equity instruments, is measured at the ultimate settlement
amount. Compensation cost is recognized in earnings on a
straight-line basis over the relevant vesting period. The
counterpart is recognized in contributed surplus or as a liability,
as appropriate. Upon exercise of a stock option, share capital is
recorded as the sum of the proceeds received and the related amount
of contributed surplus.
(k) Guarantees:
The Company is required to disclose significant information on
guarantees it has provided, without regard to whether it will have
to make any payments under the guarantees and in addition to the
accounting required by CICA Handbook Section 3290, Contingencies.
As at November 30, 2007 and 2006, the Company has guarantees of
$5.0 million outstanding that relate to bank overdraft facilities
and a foreign exchange trading indemnity.
In certain situations, the Company provides performance bonds to
ensure installations are carried out in accordance with the
agreement. If either the contractor or the Company do not comply
with the terms of the agreement, the Company would be liable for
payments under the terms of the performance bond. The Company has
not experienced a loss to date and future losses are not
anticipated; therefore, no liability has been recorded in the
consolidated financial statements. The amount of performance bonds
outstanding at year end is not significant.
(l) Impairment of long-lived assets:
Long-lived assets, including property, plant and equipment
subject to depreciation, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the consolidated balance sheets
and reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated or amortized. The
assets and liabilities classified as held for sale would be
presented separately in the appropriate asset and liability
sections of the consolidated balance sheets.
(m) Use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the years.
Significant items subject to such estimates and assumptions include
the carrying amount of property, plant and equipment, goodwill,
valuation allowances for receivables, inventory and future income
taxes, and valuation of derivative financial instruments. Actual
results could differ from those estimates.
(n) Asset retirement obligations:
The Company recognizes the fair value of a future asset
retirement obligation as a liability in the year in which it incurs
a legal obligation associated with the retirement of tangible
long-lived assets that results from the acquisition, construction,
development and/or normal use of the assets. The Company
concurrently recognizes a corresponding increase in the carrying
amount of the related long-lived asset that is depreciated over the
life of the asset. The fair value of the asset retirement
obligation is estimated using the expected cash flow approach that
reflects a range of possible outcomes discounted at a
credit-adjusted risk-free interest rate. Subsequent to the initial
measurement, the asset retirement obligation is adjusted at the end
of each year to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. Changes in
the obligation due to the passage of time are recognized in
earnings as an operating expense using the interest method. Changes
in the obligation due to changes in estimated cash flows are
recognized as an adjustment of the carrying amount of the related
long-lived asset that is depreciated over the remaining life of the
asset. During the years ended November 30, 2007 and 2006, the
Company determined there were no significant future asset
retirement obligations.
(o) Variable interest entities:
The Company has established criteria to identify variable
interest entities ("VIEs") and the primary beneficiary of such
entities. Entities that qualify as VIEs must be consolidated by
their primary beneficiary. During the years ended November 30, 2007
and 2006, the Company had no VIEs to be consolidated.
(p) Changes in accounting policies:
CICA Handbook Section 1506, Accounting Changes, prescribes
expanded disclosure for changes in accounting policies, accounting
estimates and accounting for errors. Under the new standard,
accounting changes should be applied retrospectively unless
otherwise permitted or where it is deemed impractical. The new
standard also requires that the Company disclose new primary
sources of GAAP that have been issued, but are not yet effective
and have not been adopted by the Company.
(i) Accounting policies that have been changed in 2007:
(a) Comprehensive income:
On December 1, 2006, the Company adopted CICA Handbook Section
1530, Comprehensive Income. The section establishes standards for
reporting and presenting comprehensive income, which is defined as
the change in equity from transactions and other events from
non-owner sources. Other comprehensive income refers to items
recognized in comprehensive income that are excluded from net
income calculated in accordance with GAAP.
(b) Financial instruments:
On December 1, 2006, the Company adopted CICA Handbook Section
3251, Equity, Section 3855, Financial Instruments - Recognition and
Measurement, Section 3861, Financial Instruments - Disclosure and
Presentation, and Section 3865, Hedges.
Section 3861 establishes standards for presentation of financial
instruments and non-financial derivatives, and identifies the
information that should be disclosed about them. Under the new
standards, policies followed for periods prior to the effective
date generally are not reversed and, therefore, the comparative
figures have not been restated except for the requirement to
restate currency translation adjustment as part of other
comprehensive income. Section 3865 describes when and how hedge
accounting can be applied as well as the disclosure requirements.
Hedge accounting enables the recording of gains, losses, revenue
and expenses from derivative financial instruments in the same year
as for those related to the hedged item.
Section 3855 prescribes when a financial asset, financial
liability or non-financial derivative is to be recognized on the
consolidated balance sheets and at what amount, requiring fair
value or cost-based measures under different circumstances. Under
Section 3855, financial instruments must be classified into one of
these five categories: held-for-trading, held-to-maturity, loans
and receivables, available-for-sale financial assets or other
financial liabilities. All financial instruments, including
derivatives, are measured in the consolidated balance sheets at
fair value except for loans and receivables, held-to-maturity
investments and other financial liabilities which are measured at
amortized cost. Subsequent measurement and changes in fair value
will depend on their initial classification, as follows:
held-for-trading financial assets are measured at fair value and
changes in fair value are recognized in net earnings;
available-for-sale financial instruments are measured at fair value
with changes in fair value recorded in other comprehensive income
until the investment is derecognized or impaired at which time the
amounts would be recorded in net earnings.
Upon adoption of these new standards, the Company designated its
cash as held-for-trading, which is measured at fair value. Accounts
receivable are classified as loans and receivables, which are
measured at amortized cost. Operating loans, accounts payable and
accrued liabilities, due to affiliated companies, long-term debt
and capital lease obligations are classified as other financial
liabilities, which are measured at amortized cost.
All derivative instruments, including embedded derivatives, are
recorded in the consolidated balance sheet at fair value unless
exempted from derivative treatment as a normal purchase and sale.
All changes in their fair value are recorded in earnings unless
cash flow hedge accounting is used, in which case changes in fair
value are recorded in other comprehensive income. The Company has
elected to apply this accounting treatment for all embedded
derivatives in host contracts entered into on or after December 1,
2002. The impact of the change in accounting policy related to
embedded derivatives was not material.
(ii) Accounting standards that have been issued but are not yet
effective:
(a) Financial instruments:
CICA Handbook Section 3862, Financial Instruments - Disclosures,
requires entities to provide disclosures in their financial
statements that enable users to evaluate the significance of
financial instruments for the entity's financial position and
performance, the nature and extent of risks arising from financial
instruments to which the entity is exposed during the year and at
the balance sheet date, and how the entity manages those risks.
CICA Handbook Section 3863, Financial Instruments - Presentation,
carries forward the former presentation requirements included in
CICA Handbook Section 3861. The Company is evaluating the potential
impact of adopting these standards on its financial statement
disclosure and presentation and will apply the standards
accordingly for the fiscal year beginning on December 1, 2007.
(b) Inventories:
CICA Handbook Section 3031, Inventories, prescribes the
measurement of inventories at the lower of cost and net realizable
value, with guidance on the determination of cost including
allocation of overheads and other costs of inventory. The section
also expands disclosure requirements with respect to inventory
classifications and inventories recognized as an expense during the
year. Reversals of previous write-downs to net realizable value are
permitted when there is a subsequent increase in the value of
inventories. The Company is evaluating the potential impact of
adopting these standards on its financial statement presentation
and will apply the standards accordingly for the fiscal year
beginning on December 1, 2007.
2. Subsequent events:
Arrangement to acquire Teknion shares by 2158436 Ontario
Limited:
On December 24, 2007, the Company announced that it had entered
into an agreement with an affiliate of Teknion's controlling
shareholder (the "Arrangement"), pursuant to which the affiliate
agreed to acquire all of the subordinate voting shares of the
Company not held directly or indirectly by the controlling
shareholder for a price of $3.15 cash per share.
The Arrangement is subject to customary conditions including,
but not limited to, the approval of not less than two-thirds of the
shareholders and a majority of the minority shareholders of the
Company, the receipt of all required regulatory approvals and there
being no material adverse change with respect to Teknion. It is
expected that Teknion will hold a meeting of shareholders to
consider the Arrangement on or about Friday, February 22, 2008 and,
if approved, that the Arrangement will be completed by the end of
February 2008.
Upon consummation of the Arrangement, all of the stockholder
securities granted and outstanding (i.e., options, director
deferred share units ("DSUs"), employee DSUs and restricted share
units ("RSUs") and any granted but unissued shares outstanding
under the employee stock purchase plan ("ESPP")) shall, without any
further action on behalf of any holder of these securities, be
cancelled and each respective plan under which such securities were
granted shall be terminated.
If the Arrangement is approved, the unrecognized compensation
expense will be recognized in the consolidated statements of
earnings in 2008. The details are as follows:
------------------------
------------------------
Stock options $ 751
Employee RSUs 334
------------------------
$ 1,085
------------------------
------------------------
3. Goodwill impairment:
Based on the results of its annual testing for impairment of
goodwill in accordance with CICA Handbook Section 3062, Goodwill
and Other Intangible Assets, and the Company's accounting policy as
set forth in note 1(f), the Company has determined that goodwill is
impaired. The determination was made by comparing the fair value of
the Company based on the Company's share price with the carrying
amount of the Company's shareholders' equity. The share price used
to assess fair value was $3.15, the share price under the
Arrangement (note 2). As the carrying amount of the shareholders'
equity exceeds its fair value, the implied fair value of the
goodwill was determined as nil, being the residual amount after the
fair value was allocated to the tangible and intangible assets of
the Company. The Company has recorded a non-cash goodwill
impairment charge of $30.9 million for the fiscal year ended
November 30, 2007.
4. Asset and liability held for sale:
On February 12, 2007, the Company sold its U.S. headquarters
building. This transaction was recorded in fiscal 2006. The
following table summarizes the transaction:
---------------------------------------------------------------------
---------------------------------------------------------------------
Exchange
$ U.S. rate $ Canadian
---------------------------------------------------------------------
Sale price, net of transaction costs
of U.S. $697 $ 17,978 1.17 $ 21,079
Net book value 17,452 1.54 26,906
---------------------------------------------------------------------
Gain (loss) $ 526 $ (5,827)
---------------------------------------------------------------------
---------------------------------------------------------------------
Net proceeds on sale, after the discharge of the mortgage on the
property of $13.9 million (U.S. $12.1 million), were $6.9
million.
As the Company's U.S. subsidiary is an integrated foreign
operation, property, plant and equipment are translated at
historical exchange rates. The prevailing exchange rate at the date
of acquisition of the property was U.S. $1.00 equals Cdn. $1.54.
Accordingly, this transaction results in an accounting loss of $5.8
million.
5. Related party transactions and balances:
(a) Substantially all related party transactions occurred with
an indirect shareholder, Global Upholstery Co. Limited, and
entities related to, controlled or significantly influenced by it
(collectively "Global").
Transactions between the Company and Global occur at prices that
are in accordance with written agreements between the Company and
Global. Management believes that the prices and terms at which
transactions are conducted with Global are competitive with prices
and terms for comparable arm's-length transactions. The Corporate
Governance Committee is responsible for and reviews, monitors and
establishes all policies for related party transactions.
Related party amounts included in accounts receivable and
accounts payable and accrued liabilities are as follows:
-------------------------------------------------------------------
-------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------
Accounts receivable $ 3,334 $ 3,113
Accounts payable and accrued liabilities 7,668 10,925
-------------------------------------------------------------------
-------------------------------------------------------------------
Transactions with related parties are as follows:
-------------------------------------------------------------------
-------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------
Sales $ 10,556 $ 9,761
Purchases 46,831 44,416
Other 8,579 8,616
-------------------------------------------------------------------
-------------------------------------------------------------------
(b) The amounts due to Global are unsecured, non-interest
bearing and payable on demand.
6. Income taxes:
Income taxes have been determined in accordance with the
legislation prevailing in Canada and the applicable foreign
jurisdictions. The effective income tax rate differs from the basic
Canadian combined federal and provincial tax rate as follows:
--------------------------------------------------------------------
--------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------
Loss before income taxes $ (35,316) $ (298)
--------------------------------------------------------------------
--------------------------------------------------------------------
Combined statutory tax rate 36.1% 36.1%
--------------------------------------------------------------------
--------------------------------------------------------------------
Computed income tax recovery $ (12,749) $ (108)
Increase (decrease) resulting from:
Canadian provincial rate differences (412) (27)
International rate differences (251) (132)
Valuation allowance 2,316 (2,632)
Corporate minimum taxes 54 52
Impact on future taxes of Canadian
tax rate reductions - 1,159
Goodwill impairment charge with no tax benefit 11,146 -
Loss with no tax benefit - 2,104
Prior year recoveries - (354)
Other differences 81 (91)
--------------------------------------------------------------------
$ 185 $ (29)
--------------------------------------------------------------------
--------------------------------------------------------------------
The tax effects of temporary differences that give rise to
significant portions of the future tax assets and future tax
liabilities at November 30 are presented below:
---------------------------------------------------------------------
---------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------
Future tax assets:
Accounts receivable $ 274 $ 274
Inventory 1,697 1,697
Accounts payable and accrued liabilities 734 753
--------------------------------------------------------------------
2,705 2,724
Long-term debt and capital lease obligations 3,335 3,475
Non-capital loss carryforwards 42,226 51,948
Valuation allowance (29,407) (32,146)
--------------------------------------------------------------------
16,154 23,277
---------------------------------------------------------------------
18,859 26,001
Future tax liabilities:
Property, plant and equipment - differences in
accounting and tax net book values (18,859) (26,001)
---------------------------------------------------------------------
Net future tax asset $ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
Future tax benefits for operating loss and tax credit
carryforwards are recognized to the extent that realization of
these benefits is considered certain. At November 30, 2007, it was
not certain whether the future benefit of operating losses and tax
credit carryforwards would be realized and, therefore, the net
future tax asset was reduced to nil.
At November 30, 2007, the Company has the following amounts
available to reduce future years' income for tax purposes.
-------------------------------------
-------------------------------------
Unused tax losses expiring:
2009 $ 194
2010 27,308
2014 32,666
2015 5,337
2023 19,263
2024 3,867
2026 1,926
2027 2,455
Indefinite 18,075
-------------------------------------
$ 111,091
-------------------------------------
-------------------------------------
At November 30, 2007, the Company had undeducted scientific
research and experimental development expenses of $4.9 million that
can be carried forward indefinitely.
7. Property, plant and equipment:
-------------------------------------------------------------------
-------------------------------------------------------------------
Accumulated
depreciation
and Net book
2007 Cost amortization value
-------------------------------------------------------------------
Land $ 5,409 $ - $ 5,409
Buildings 31,142 8,734 22,408
Computer hardware 24,742 17,833 6,909
Computer software 24,010 14,718 9,292
Manufacturing equipment, office
equipment and showrooms 94,036 57,058 36,978
Tools and dies 50,346 21,254 29,092
Leasehold improvements 44,666 26,985 17,681
Patents and trademarks 4,574 2,835 1,739
Property under capital leases:
Manufacturing equipment 18,379 1,949 16,430
-------------------------------------------------------------------
$ 297,304 $ 151,366 $ 145,938
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
Accumulated
depreciation
and Net book
2006 Cost amortization value
-------------------------------------------------------------------
Land $ 5,409 $ - $ 5,409
Buildings 30,773 7,766 23,007
Computer hardware 30,234 23,389 6,845
Computer software 19,116 13,731 5,385
Manufacturing equipment, office
equipment and showrooms 95,842 56,333 39,509
Tools and dies 47,548 19,303 28,245
Leasehold improvements 37,460 26,195 11,265
Patents and trademarks 4,157 2,502 1,655
Property under capital leases:
Manufacturing equipment 15,847 267 15,580
-------------------------------------------------------------------
$ 286,386 $ 149,486 $ 136,900
-------------------------------------------------------------------
-------------------------------------------------------------------
As at November 30, 2007, Teknion had $5.1 million (2006 - $3.25
million) capitalized as construction in progress, which is not
being depreciated.
8. Prepaid rent:
On November 30, 2006, the Company sold equipment for proceeds of
$10.5 million and simultaneously entered into a seven-year sale
leaseback with the buyer. The sale leaseback has been accounted for
as a capital lease. The difference between the amount received in
this transaction and the net book value of the equipment is
reflected on the consolidated balance sheets as prepaid rent.
9. Operating loans:
At November 30, 2007, Teknion had available secured operating
lines of credit of up to $111.4 million (2006 - $111.9 million).
Borrowings under these lines of credit bear interest at varying
rates ranging from the banks' prime rate minus 0.25% to plus 2% per
annum. The Company and certain of its subsidiaries have entered
into general security agreements and undertaken an assignment of
certain assets to secure bank borrowings.
During 2006, the Company entered into a revolving facility with
a related party for $6.8 million, bearing interest at the bank's
prime rate plus 0.5% . This facility was undrawn at year end.
10. Long-term debt:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
Up to $12.0 million term loan, unsecured, bearing
interest at the average of government of Canada
2-year and 3-year benchmark bond yields plus
a margin ranging from 1.85% to 2.05%.
The weighted average interest rate for loans
drawn as of November 30, 2007 is 6.23%.
The loans are repayable in equal monthly
principal instalments, plus applicable interest,
to November 30, 2012 regardless of when the
individual loan is drawn. Principal repayments
were $0.1 million per month as of November 30, 2007 $ 6,498 $ -
U.S. $1.0 million (2006 - U.S. $1.0 million) 1998
industrial revenue bonds, bearing interest at the
variable seven-day market rate plus 1.5%, principal
repayments made monthly to March 1, 2018, secured
by a second mortgage on real estate and a charge
over book debts of the Company's Minnesota,
U.S. subsidiary 972 1,131
0.6 million (2006 - 2.4 million) Malaysian ringgit
term loan, bearing interest at 7.75%, payable in
monthly instalments of 0.04 million Malaysian
ringgit, secured by a charge over land, buildings
and all assets of the Company's Malaysian
subsidiary, due May 2009 186 764
-----------------------------------------------------------------------
7,656 1,895
Less current portion 1,637 667
---------------------------------------------------------------------------
$ 6,019 $ 1,228
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Annual principal repayments on long-term debt are due as
follows:
-----------------------------------------------------
-----------------------------------------------------
2008 $ 1,637
2009 1,533
2010 1,480
2011 1,486
2012 1,005
Thereafter 515
-----------------------------------------------------
$ 7,656
-----------------------------------------------------
-----------------------------------------------------
Interest expensed on long-term debt was $231,000 in 2007 (2006 -
$876,000).
11. Capital lease obligations:
In 2007, the Company entered into capital lease arrangements for
machinery and equipment totalling $2.6 million. These obligations,
in addition to those entered into in 2006 of $15.8 million, are
repayable over five to seven years and bear interest at fixed rates
ranging from 5.7% to 6.4% .
Annual minimum lease payments for all capital leases are as
follows:
------------------------------------------
------------------------------------------
2008 $ 2,994
2009 3,757
2010 3,757
2011 3,826
2012 2,886
Thereafter 2,914
------------------------------------------
Total minimum lease payments 20,134
Less amount representing interest 3,250
------------------------------------------
Total capital lease obligations 16,884
Less current portion 2,050
------------------------------------------
$ 14,834
------------------------------------------
------------------------------------------
Interest expensed for capital lease obligations was $844,000 in
2007 (2006 - $157,000).
12. Share capital:
The financial impact on share capital of the pending transaction
(the "Arrangement") are detailed in note 2.
--------------------------------------------------------------------
--------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------
Authorized:
Unlimited Class A preference shares, non-voting
Unlimited Class B preference shares, non-voting
39,919,846 multiple voting shares
Unlimited subordinate voting shares
Issued and outstanding:
39,919,846 multiple voting shares $ 5,051 $ 5,051
24,196,285 subordinate voting shares 101,954 101,954
--------------------------------------------------------------------
$ 107,005 $ 107,005
--------------------------------------------------------------------
--------------------------------------------------------------------
(a) Class A and Class B preference shares:
Class A and Class B preference shares are issuable in series,
with other attributes to be determined at the time of issue. The
Class A preference shares will rank prior to the Class B preference
shares and both will rank prior to the multiple voting shares and
subordinate voting shares as to dividends and as to distributions
in the event of liquidation, dissolution or winding up of the
Company.
(b) Multiple voting shares and subordinate voting shares:
The multiple and subordinate voting shares rank equally on a
share-for-share basis as to dividends and as to distributions in
the event of liquidation, dissolution or winding up of the Company.
The multiple voting shares carry 10 votes per share and are
convertible into subordinate voting shares on a one-for-one basis
at the option of the holder. The subordinate voting shares carry
one vote per share.
(c) Stock option plan:
The Company's stock option plan is for directors, officers,
employees and affiliates of the Company. The stock option plan is
administered by a committee of the Board of Directors of the
Company. The price at the date of grant cannot be less than the
market price at issue of the subordinate voting shares on any stock
exchange on which the subordinate voting shares are listed. The
term of the options range from five to ten years and are
non-assignable, except in certain limited circumstances. The
vesting periods of options granted under the stock option plan
range from four to five years, as determined by a committee of the
Board of Directors of the Company at the time the options are
granted. The Board of Directors of the Company may, from time to
time, amend or revise the terms of the stock option plan, subject
to applicable law and the rules of any stock exchange on which the
subordinate voting shares are listed, or may discontinue the stock
option plan at any time. The maximum number of subordinate voting
shares that may be issued pursuant to the stock option plan is
6,072,190 subordinate voting shares.
In 2007, the Company granted no stock options (2006 - 512,500
stock options were granted at an exercise price of $5.60) . The
compensation expense recorded for the year ended November 30, 2007,
in respect of stock options granted on or after December 1, 2003,
was $357,000 (2006 - $281,900) based on a four-year vesting period.
The counterpart is recorded as contributed surplus. Any
consideration paid by employees on exercise of stock options is
credited to share capital.
The fair value of the stock options granted in 2006 was
estimated on the date of the grant using the Black-Scholes option
pricing model with the following assumptions:
---------------------------------------------------------------
---------------------------------------------------------------
Expected Fair value
Risk-free Volatility life of Options per option
rate of return factor options granted granted
---------------------------------------------------------------
2006 4.03% 44% 5 years 512,500 $ 2.46
---------------------------------------------------------------
---------------------------------------------------------------
The following is a summary of the number of subordinate voting
shares issuable pursuant to outstanding stock options:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Number of Weighted Number of Weighted
shares average price shares average price
---------------------------------------------------------------------------
Options outstanding,
beginning of year 3,302,170 $ 9.19 3,826,745 $ 10.44
Options cancelled and
expired (463,312) 9.03 (1,037,075) 12.03
Grant of additional
options - - 512,500 5.60
---------------------------------------------------------------------------
Options outstanding,
end of year 2,838,858 9.19 3,302,170 9.19
---------------------------------------------------------------------------
---------------------------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
2007 2006
----------------------------------------------------------
Weighted average subscription price
of outstanding options $9.19 $9.19
Number of options exercisable at
November 30 2,515,889 2,624,840
Weighted average subscription price
of outstanding exercisable options $9.58 $10.15
----------------------------------------------------------
----------------------------------------------------------
The range of subscription prices for options granted were as
follows:
-------------------------------------------------
-------------------------------------------------
2007 2006
-------------------------------------------------
High Low High Low
-------------------------------------------------
Grant of options $ - $ - $ 5.60 $ 5.60
-------------------------------------------------
-------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total options outstanding Total options exercisable
----------------------------------- -------------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding, remaining average exercisable, average
exercise November 30, contractual exercise November 30, exercise
prices 2007 life (years) price 2007 price
---------------------------------------------------------------------------
$ 5.20 -
$ 8.99 1,025,388 4.61 $ 5.37 702,419 $ 5.26
$ 9.00 -
$ 12.99 1,166,970 3.26 9.85 1,166,970 9.85
$13.00 -
$15.99 609,500 3.36 13.75 609,500 3.36
$16.00 -
$21.20 37,000 3.11 19.39 37,000 3.11
---------------------------------------------------------------------------
2,838,858 3.77 9.19 2,515,889 9.58
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(d) DSUs:
During 2005, the Company established a plan to grant DSUs to its
non-management directors. Under this plan, the directors may elect
to receive a portion of their annual compensation in DSUs. A DSU is
a unit equivalent in value to one common share of the Company based
on the 20-day average trading price of the Company's common shares
on the Toronto Stock Exchange (the "Weighted Average Price")
immediately prior to the date on which the value of the DSU is
determined. DSUs may be redeemed following termination of board
service, and prior to the end of the year following departure from
the board, based on the Weighted Average Price at the time of
redemption.
As of the date of the grant, the fair value of the DSUs
outstanding, being the fair market value of the Company's common
shares at that date, are expensed during the year and a liability
is recorded on the Company's consolidated balance sheets. The value
of the DSU liability is adjusted to reflect changes in the market
value of the Company's common shares. The expense for fiscal 2007
related to DSUs granted to the directors for services rendered was
$200,000 (2006 - $177,000).
(e) Employee DSU and RSU plans:
In February 2007, the Company implemented a DSU and RSU plan for
senior officers of the Company. Under the DSU plan, senior officers
may elect to receive a portion of their cash bonus in the form of
DSUs which vest immediately. As amounts were awarded in exchange
for cash bonuses expensed but unpaid in the prior fiscal year, no
expense was recorded in the current year. In 2007, the bonus
accrual of $540,000 was transferred to contributed surplus. DSUs
are redeemable in subordinate voting shares (or in cash at the
Company's option), only when an officer ceases to be an employee
and must be redeemed by December 31 of the year following that
event. As at November 30, 2007, there were 136,534 DSUs outstanding
(2006 - nil).
Under the RSU plan, senior officers receive an award of RSUs
which vest at the end of three years, at which time the RSUs are
paid to the employee in subordinate voting shares (or in cash at
the Company's option). The compensation expense is recognized
evenly over the vesting period (2007 - $206,000; 2006 - nil) except
where the employee is eligible to retire prior to the vesting date,
in which case the expenses is recognized between the grant date and
the date the employee is eligible to retire. As at November 30,
2007, there were 136,534 RSUs (2006 - nil) awarded and outstanding,
of which none were vested.
(f) ESPP:
The Company's ESPP allows employees to purchase subordinate
voting shares through payroll deductions. As at November 30, 2007,
there were 45,710 shares granted and still to be issued from
treasury shares. Effective December 31, 2007, the plan was
suspended pending approval of the Arrangement. Subsequent to
November 30, 2007, all remaining entitlements in the ESPP were
issued as shares from treasury.
13. Loss per share:
The following table sets forth the computation of basic and
diluted loss per share:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Numerator for basic and diluted loss
per share - loss for the year $ (35,501) $ (269)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Denominator for basic and diluted loss per share -
weighted average shares 64,116,131 64,116,131
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Basic and diluted loss per share $ (0.55) $ (0.00)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Pension plan:
Effective August 1, 2007, the Company initiated a registered,
defined-contribution pension plan, replacing the Company's deferred
profit sharing plan. Under the pension plan, the Company's
contributions are based on each employee's earnings and age.
Contributions are invested by the plan administrator based on
investment allocations determined by the employee.
Contributions into the pension plan in 2007 were $592,000.
15. Commitments:
The minimum annual lease payments under long-term operating
leases for premises and equipment for the next five fiscal years
and thereafter are as follows:
----------------------
----------------------
2008 $ 11,402
2009 7,900
2010 6,660
2011 5,552
2012 4,360
Thereafter 10,614
----------------------
$ 46,488
----------------------
----------------------
16. Segmented information:
Industry:
The Company is considered to operate in one operating segment,
that being the design, manufacture and marketing of office systems
and related office furniture products.
Geographic:
----------------------------------------------------------
----------------------------------------------------------
2007 2006
----------------------------------------------------------
Sales (based on location of customer):
Canada $ 220,189 $ 219,094
United States 339,077 347,525
International 68,158 64,635
----------------------------------------------------------
$ 627,424 $ 631,254
----------------------------------------------------------
----------------------------------------------------------
Total assets:
Canada $ 221,256 $ 217,111
United States 92,166 136,714
International 31,477 39,860
----------------------------------------------------------
$ 344,899 $ 393,685
----------------------------------------------------------
----------------------------------------------------------
Property, plant and equipment:
Canada $ 114,836 $ 112,066
United States 19,403 12,444
International 11,699 12,390
----------------------------------------------------------
$ 145,938 $ 136,900
----------------------------------------------------------
----------------------------------------------------------
Goodwill:
Canada $ - $ 10,124
United States - 18,807
International - 1,943
----------------------------------------------------------
$ - $ 30,874
----------------------------------------------------------
----------------------------------------------------------
17. Financial instruments:
Teknion operates internationally, which gives rise to a risk
that earnings and cash flows may be adversely affected by
fluctuations in foreign exchange rates. Foreign exchange contracts
are used by the Company to manage foreign exchange risk. The
Company does not enter into foreign exchange contracts for
speculative purposes.
(a) Foreign exchange contracts:
Teknion enters into foreign exchange contracts to limit its
exposure to foreign exchange fluctuations on future revenue and
expenditure streams. The Company's current policy provides that it
can enter into forward contracts and hedge up to 75% of its
estimated excess U.S. dollar cash flows up to 18 months in advance.
Beyond 18 months (to a maximum of 24 months), the Company can hedge
up to 50% of its estimated excess U.S. dollar cash flows. The
Company is under no obligation to hedge its expected excess U.S.
dollar cash flows. At November 30, 2007, the Company had
outstanding foreign exchange contracts representing a commitment to
sell U.S. $63.0 million at an average rate of exchange of $1.06
(2006 - U.S. $61.0 million at an average rate of exchange of $1.13)
. The fair value of these contracts was $3.9 million in favour of
the Company at November 30, 2007 (2006 - $0.5 million in favour of
the counterparties). These contracts mature within 12 months (2006
- 11 months). Subsequent to year end, the Company entered into
additional contracts to sell U.S. $37.0 million in 2008 at an
average exchange rate of $1.02.
In addition, the Company holds foreign exchange options
totalling U.S. $2.0 million (2006 - $11.0 million). These options
have an average rate of exchange of $1.18 with cancellation rates
at Cdn. $1.11.
The Company enters into foreign currency forward contracts and
foreign currency option contracts to hedge foreign exchange
exposure on anticipated sales. The effective portion of changes in
the fair value of derivatives that are designated and qualify as
cash flow hedges is recognized in other comprehensive income. Any
gain or loss in fair value relating to the ineffective portion is
recognized immediately in the consolidated statements of earnings
in selling, general and administrative expenses. This had no impact
on opening retained earnings as of November 30, 2006. Upon adoption
of the new standards, the Company re-measured its cash flow hedge
derivatives at fair value. The effective portion of the fair value
of the hedged item totalled $0.6 million (loss). The fair value of
the contracts as at November 30, 2007 is $3.9 million and has been
recorded as a derivative instruments asset on the consolidated
balance sheet. When the hedged item is sold or settled, the entire
gain or loss is recognized in the consolidated statements of
earnings. The amount of other comprehensive income that is expected
to be reclassified to the consolidated statements of earnings over
the next 12 months is $3.9 million.
(b) Fair values of other financial instruments:
Teknion has evaluated the fair values of its other financial
instruments based on the current interest rate environment, related
market values and current pricing of financial instruments with
comparable terms. The carrying amounts of cash, accounts
receivable, operating loans, accounts payable and accrued
liabilities and due to affiliated companies approximate fair values
due to the short-term nature of these financial instruments.
Long-term debt and capital lease obligations approximate market
value as the interest rate charged is comparable to the current
borrowing rate of the Company.
(c) Credit risk:
The Company, in the normal course of business, is exposed to
credit risk from its customers. In addition, Teknion is also
exposed to credit risk from the potential default by any of its
counterparties on its foreign exchange forward contracts. The
Company controls its credit risk by following established credit
and collection policies and dealing with counterparties that are
major financial institutions and which the Company anticipates will
satisfy their obligations under the contracts.
18. Comparative figures:
Certain 2006 figures have been reclassified to conform with the
financial statement presentation adopted in 2007.
Teknion Corporation - 2007
Management's Discussion and Analysis February 13, 2008
On December 24, 2007, the Company announced that it had entered
into an agreement with 2158436 Ontario Limited ("2158436"), a
company controlled by Teknion's controlling shareholders, pursuant
to which 2158436 agreed to acquire all of the shares of Teknion not
already held by it or its affiliates. Accordingly, a special
meeting of shareholders of Teknion Corporation will be held on
February 22, 2008 where shareholders will be asked to approve a
plan of arrangement (the "Arrangement") under the Business
Corporations Act (Ontario) that has been proposed by 2158436. If
approved, and subject to other customary conditions, the
Arrangement will result in the acquisition of all of the
outstanding Subordinate Voting Shares of Teknion (other than those
owned by Teknion's controlling shareholders) for $3.15 cash per
share and Teknion will cease being a public entity.
The transaction has been approved unanimously by the Board of
Directors of Teknion (with interested directors abstaining)
following the report and favourable, unanimous recommendation of
the transaction by a Special Committee comprised of independent
directors. The Board also has determined unanimously (with
interested directors abstaining) to recommend to holders of
Subordinate Voting Shares of Teknion that they vote in favour of
the transaction. In making their determinations, the Board and the
Special Committee considered, among other things, a formal
valuation and fairness opinion delivered by TD Securities Inc. to
the Special Committee.
To become effective, the resolution approving the Arrangement
must be approved by (i) at least 66 2/3% of the votes cast by
holders of Teknion's Multiple Voting Shares and Subordinate Voting
Shares, voting together as one class with each Multiple Voting
Share having one vote only, and (ii) a simple majority of the votes
cast by those holders of Subordinate Voting Shares, other than
Teknion's controlling shareholders. Teknion has been advised that
2158436 has entered into agreements with certain institutions and
other shareholders holding approximately 43% of the outstanding
subordinate voting shares, pursuant to which such shareholders have
committed to support the transaction.
Copies of the Arrangement Agreement, Notice of Special Meeting
and Management Information Circular relating to the special meeting
of shareholders to be held on February 22, 2008 to consider the
proposed Arrangement and other relevant documents have been filed
with Canadian Securities Regulators and are available at
www.sedar.com. It is anticipated that the Arrangement transaction,
if approved by shareholders, will be completed on or about February
28, 2008.
The following management's discussion and analysis of the
financial condition and results of operations for Teknion
Corporation ("Teknion" or the "Company") for the years ended
November 30, 2007 and 2006, should be read in conjunction with the
Company's consolidated financial statements and the notes to those
statements. In addition, the Company's continuous disclosure
filings are available at www.sedar.com.
This MD&A generally reflects the historical operations of
Teknion as a public entity and is generally drafted from the
perspective of Teknion as a continuing public entity.
OVERVIEW
Teknion is an international designer, manufacturer and marketer
of office systems and related products such as seating, storage,
filing and tables. The Company's primary product offering is office
systems, which accounted for a majority of the Company's sales in
fiscal 2007. The Company's operations include approximately 2.5
million square feet of vertically integrated manufacturing space,
sales and marketing operations, and showrooms located in major
markets around the world. The Company's products are sold through
authorized dealers.
Beginning in mid-2001 and continuing throughout fiscal 2003, the
contract office furniture industry experienced an unprecedented
decline in demand. The estimated total annual production of office
furniture in the U.S. declined from approximately U.S. $13 billion
in 2000 to U.S. $8.4 billion in fiscal 2003. In late fiscal 2003,
the rate of decline subsided, and in fiscal 2004 the industry grew
to U.S. $8.8 billion. The industry has continued to grow and
reached U.S. $11.4 billion in fiscal 2007.
Given the significant change in market conditions since 2001,
the Company has successfully improved its cost structure.
Manufacturing space has been consolidated, selling, general and
administrative costs have been significantly reduced, and the
Company's Malaysian and U.K. operations have been restructured.
These activities, coupled with the Company's continued focus on
improving manufacturing efficiency and reducing input costs, have
had a significant positive impact. However, the high prices of
commodities, including steel, aluminum, fuel and its derivatives,
and further weakening of the U.S. dollar have mitigated, to a
considerable extent, the benefit of the Company's initiatives. The
value of the U.S. dollar relative to the Canadian dollar has
declined 36% from CDN $1.57 at November 30, 2002 to CDN $1.00 at
November 30, 2007.
In addition to focusing on its cost structure, Teknion has
continued to introduce innovative, award-winning office products.
The Company considers that this strategy is not only key to growth
but will result in a more sustainable revenue base during changing
economic conditions.
RESULTS OF OPERATIONS
Annual
Years ended November 30
(000 except per share amounts)
2007 2006 2005
---------------------------------------------------------------------------
Sales $627,424 $631,254 $606,183
Gross margin $171,701 $171,341 $165,393
Gross margin (% of sales) 27.4% 27.1% 27.3%
Earnings from operations $1,690 $10,327 $4,910
Loss before income taxes $(35,316) $(298) $(7)
Net loss $(35,501) $(269) $(21,155)
Earnings (loss) per share before loss on
asset held for sale and goodwill
impairment(1) $(0.07) $0.09 $(0.33)
Earnings (loss) per share (basic & diluted) $(0.55) $(0.00) $(0.33)
Total assets $344,899 $393,685 $393,197
Long-term debt and capital lease obligations $20,853 $15,579 $16,087
Multiple voting shares 39,920 39,920 39,920
Subordinate voting shares 24,196 24,196 24,196
Quarterly Results
Fiscal 2007
First Second Third Fourth
(000 except per share Quarter Quarter Quarter Quarter Year
amounts)
---------------------------------------------------------------------------
Sales $150,955 $165,732 $159,378 $151,359 $627,424
Gross margin $37,930 $46,272 $46,731 $40,768 $171,701
Gross margin (% of sales) 25.1% 27.9% 29.3% 26.9% 27.4%
Earnings (loss) from
operations $(3,575) $1,974 $4,968 $(1,677) $1,690
Earnings (loss)
before income taxes $(5,863) $239 $3,979 $(33,671) $(35,316)
Net earnings (loss) $(5,938) $150 $3,920 $(33,633) $(35,501)
Earnings (loss) per share
before loss on assets
held for sale and
goodwill impairment (1) $(0.09) $0.00 $0.06 $(0.04) $(0.07)
Earnings (loss) per share
(basic and diluted) $(0.09) $0.00 $0.06 $(0.52) $(0.55)
Fiscal 2006
First Second Third Fourth
(000 except per share Quarter Quarter Quarter Quarter Year
amounts)
---------------------------------------------------------------------------
Sales $134,033 $164,365 $156,285 $176,571 $631,254
Gross margin $32,004 $48,425 $42,910 $48,002 $171,341
Gross margin (% of sales) 23.9% 29.5% 27.5% 27.2% 27.1%
Earnings (loss) from
operations $(6,199) $6,742 $3,480 $6,304 $10,327
Earnings (loss)
before income taxes $(7,450) $5,493 $2,293 $(634) $(298)
Net earnings (loss) $(7,511) $5,767 $2,191 $(716) $(269)
Earnings (loss) per share
before loss on assets
held for sale and
goodwill impairment (1) $(0.11) $0.09 $0.03 $0.08 $0.09
Earnings (loss) per share
(basic and diluted) $(0.11) $0.09 $0.03 $(0.01) $(0.00)
(1) The term "EPS before loss on asset held for sale and goodwill
impairment" is a non-GAAP financial measure and does not necessarily
have a standardized meaning among issuers. EPS before loss on asset
held for sale and goodwill impairment is defined as EPS diluted, before
the impact on net earnings from the loss on asset held for sale and
goodwill impairment. The Company believes that this adjustment to EPS
diluted is useful because it removes non-cash accounting losses,
therefore providing a better measure of the Company's operating
performance.
The fluctuation in quarterly earnings before income taxes is
largely a result of changes in sales volume and product mix. The
project nature of the Company's business can result in significant
fluctuations in order levels from period to period, and the first
quarter of the fiscal year is historically weaker than subsequent
quarters. In 2007, the fourth quarter also experienced weaker
sales, particularly in the U.S. In 2007, net earnings (loss) was
positive in the second and third quarters and negative in the first
and fourth quarters. Losses were incurred in the first and fourth
quarters as sales in these quarters were below Teknion's break-even
sales level. In addition, in the fourth quarter of 2007, Teknion
recorded a non-cash accounting loss on goodwill impairment of $30.9
million. This matter is discussed in more detail under the heading
Goodwill Impairment Charge.
In 2006, earnings (loss) from operations was positive in all but
the first quarter when the sales level was below the Company's
break-even sales level. In addition, in the fourth quarter of
fiscal 2006, the Company recorded a loss on asset held for sale of
$5.8 million. This loss is a non-cash accounting loss relating to
the sale of the Company's U.S. headquarters building subsequent to
year-end.
Sales
Sales by Geographic Region
Teknion's sales represented by geographic region are set forth below.
----------------------------------------------------------------------
Years ended November 30
(000) 2007 % 2006 % 2005 %
----------------------------------------------------------------------
Canada $220,189 35.1 $219,094 34.7 $204,731 33.8
United States 339,077 54.0 347,525 55.1 341,667 56.3
International 68,158 10.9 64,635 10.2 59,785 9.9
---------------------------------------------
Total $627,424 100.0 $631,254 100.0 $606,183 100
---------------------------------------------
Sales for the year ended November 30, 2007, were $627.4 million,
consistent with the prior year. Reported sales were negatively
impacted by the decline in value of the U.S. dollar relative to the
Canadian dollar and would have increased by approximately 3% in
fiscal 2007 if the relative value of the currencies had remained
the same as the prior year.
Sales in fiscal 2006 were $631.3 million, an increase of 4.1%
compared to the prior year. Sales growth would have been 8% had the
Canadian /U.S. dollar exchange rate remained the same as the prior
year.
Canada
Canadian sales increased $1.1 million to $220.2 in fiscal 2007,
reaching the highest level in the Company's history. Sales
increased by 7 % in fiscal 2006 over 2005. The more modest growth
achieved in 2007 compared to 2006 occurred because of lower
spending by certain contractual customers in 2007 and increased
competition in the marketplace. The Canadian market remains strong
and activity levels are high.
On a quarterly basis Canadian sales were as follows: first
quarter $49.1 million, second quarter $63.7 million, third quarter
$55.8 million and fourth quarter $51.6 million. The second quarter
is typically the strongest quarter in the year for the Canadian
market and this trend was repeated in 2007.
United States
The following table reflects U.S. sales in U.S. dollars:
-----------------------------------------------------------------------
Years ended November 30 2007 2006 2005
(000)
-----------------------------------------------------------------------
U.S. sales U.S. $ 306,442 U.S. $298,862 U.S. $273,178
U.S. sales in 2007 declined 2.4% in Canadian dollars to $339.1
million; however, in U.S. dollars, sales increased 2.5%. The
Business and Institutional Furniture Manufacturers Association
(BIFMA) reported industry growth of 5.8% for the same period. To
the end of the third quarter, Teknion's growth rate exceeded the
industry growth rate. In the fourth quarter, Teknion's sales
declined compared to the prior year quarter. The prior year quarter
was Teknion's strongest quarter in six years and included several
large government projects. In fiscal 2006, in source currency sales
increased 9.4% exceeding the industry growth rate of 8.3%. Growth
in the U.S. reflects projects from a wide variety of industries. In
addition, sectors into which the Company has expanded its presence
over the past three years, such as government, health and
education, and day-to-day dealer business including "quick-ship,"
have also been important contributors to growth.
On a quarterly basis U.S. sales in Canadian dollars were as
follows: first quarter $84.6 million, second quarter $84.3 million,
third quarter $86.5 million and fourth quarter $83.7 million. In
source currency, U.S. sales grew through the fiscal year until the
fourth quarter, as second quarter sales exceeded the first quarter
by 2.6% and third quarter sales exceeded the second quarter by
7.1%. Fourth quarter sales were 1.6% lower than the third quarter
because of the project nature of the Company's business.
International
International sales increased 5.5% to $68.2 million. This
follows an increase in 2006 over 2005 of 8.1%. As the majority of
Teknion's International sales are transacted in U.S. dollars,
further weakening of the U.S. dollar relative to the Canadian
dollar reduced the growth rate. In U.S. dollars, International
sales increased approximately 15% over 2006. International sales
benefited from strong growth in the Caribbean and India. In
addition to projects for foreign-based companies, many of Teknion's
North American customers have been expanding their overseas
operations and look to Teknion to supply them.
On a quarterly basis International sales in Canadian dollars
were as follows: first quarter $17.3 million, second quarter $17.8
million, third quarter $17.1 million and fourth quarter $16.0
million. Teknion's International sales are significantly influenced
quarter-to-quarter by the timing of large projects.
Gross Margin
Gross margin as a percentage of sales in 2007 was 27.4% as
compared to 27.1% in 2006 (27.3% in 2005). Further weakening of the
U.S. dollar relative to the Canadian dollar negatively affected
gross margin by 2.1% of sales in 2007 compared to 2006 (2.6% in
2006 compared to 2005). The Company's cost reduction and price
realization initiatives combined with improved capacity utilization
more than offset the negative impact of further weakening of the
U.S. dollar relative to the Canadian dollar.
Gross margin as a percentage of sales in the current fiscal year
was 25.1% in the first quarter, 27.9% in the second quarter, 29.3%
in the third quarter and 26.9% in the fourth quarter. The
fluctuation of gross margin between the quarters reflects the
impact of capacity utilization and product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were
$152.3 million, 24.3% of sales, compared to $142.1 million, 22.5%
of sales in 2006 (23.2% in 2005). 2007 SG&A includes expenses
of approximately $4.4 million (2006 - $0) relating to the
implementation of a new order management system. The system is
designed to streamline Teknion's order receipt, manufacturing
scheduling, shipping/logistics and customer-facing processes. The
implementation of this system will extend into 2008, and savings
associated with the new system will not be realized until 2009.
SG&A spending also reflects higher costs associated with the
introduction of a number of new products.
Depreciation and Amortization Expense ("Depreciation")
Depreciation was $17.7 million in 2007 compared to $18.9 million
in 2006 and $20.1 million in 2005. Depreciation expense has been
declining because of the lower level of capital spending from 2003
to 2005 inclusive. For 2008, depreciation is expected to be similar
to 2007 levels.
Interest Expense
Net interest expense declined in fiscal 2007 to $4.2 million
from $4.5 million in 2006 ($3.5 million in 2005). The impact of
higher interest rates in 2007 compared to 2006 was offset by lower
borrowing arising from the sale of Teknion's U.S. headquarters
building and repayment of the mortgage on the property of U.S.
$12.1 million.
Loss on Disposal of Property, Plant and Equipment
The loss on disposal of property, plant and equipment totaled
$1.9 million as compared to $345 thousand in fiscal 2006. The
losses relate primarily to facility and showroom relocations and
renovations in the U.S.
Goodwill Impairment Charge
Based on the results of its annual testing for impairment of
goodwill in accordance with CICA Handbook Section 3062, Goodwill
and Other Intangible Assets, and the Company's accounting policy as
set forth in note 1(f) to the consolidated financial statements,
the Company has determined that goodwill is impaired. The
determination was made by comparing the fair value of the Company
based on the Company's share price with the carrying amount of the
Company's shareholders' equity. The share price used to assess fair
value was $3.15, the share price under the Arrangement. As the
carrying amount of the shareholders' equity exceeds its fair value,
the implied fair value of the goodwill was determined as nil, being
the residual amount after the fair value was allocated to the
tangible and intangible assets of the Company. The Company has
recorded a non-cash goodwill impairment charge of $30.9 million for
the fiscal year ended November 30, 2007.
Earnings From Operations
Teknion reported earnings from operations in 2007 of $1.7
million as compared to $10.3 million in 2006. The decline in
earnings from operations reflects one-time costs associated with
implementation of the aforementioned new order management system
totaling $4.4 million and costs related to the largest product
launch in many years. In addition, the average exchange rate
realized on the Company's U.S. dollar cash flows fell, reducing
earnings from operations by approximately $10 million. This factor
is described below in more detail under the heading Impact of
Foreign Exchange on the Company's Operating Results.
Income Taxes
The Company's 2007 income tax expense of $185 thousand (2006 -
recovery of $29 thousand) largely reflects U.S. state taxes. In
2004 and 2005, Teknion established an income tax valuation
allowance whereby it wrote off previously recorded net future tax
assets. This matter is discussed below in further detail under the
heading Critical Accounting Estimates.
Impact of Foreign Exchange Fluctuations on the Company's
Operating Results
As noted under the heading Sales by Geographic Region, more than
half of Teknion's sales are U.S.-based and are billed and collected
in U.S. dollars. In addition, the majority of International sales
are transacted in U.S. dollars. Accordingly, the Company's
operating results are affected by exchange rate fluctuations
between the Canadian dollar and the U.S. dollar. The exchange rate
effect on earnings before income taxes relates to the level of U.S.
dollars received in excess of U.S. dollar expenditures (the
"exposure"). These U.S. dollar expenditures create a "natural"
hedge, which at current sales levels, is approaching half of the
Company's U.S. dollar sales. This natural hedge derives principally
from the purchase of products and material in U.S. dollars and from
the cost of running the Company's U.S. operations. Teknion
estimates that for 2007, U.S. dollars received in excess of U.S.
dollar expenditures totaled $148 million (2006 - $140 million, 2005
- $125 million). To mitigate the impact of short-term fluctuations
of the exchange rate, the Company enters into foreign exchange
forward contracts. The objective of entering into foreign exchange
forward contracts is to provide the Company with some certainty of
the Canadian dollars it will receive when it sells its excess U.S.
dollars. The Company's current policy provides that it may (but is
not required to) enter into forward contracts and hedge up to 75%
of its estimated excess U.S. dollar cash flows for 18 months and up
to 50% for the six-month period beyond 18 months (for a total of 24
months). The details of these contracts are included in Note 17 to
the consolidated financial statements. These contracts together
with the sale of U.S. dollars in the spot market resulted in an
average effective exchange rate on the exposure for the fiscal year
of approximately U.S.$1.00 equals CDN $1.13 (2006 - CDN $1.19, 2005
- CDN $1.28). For 2007, the decline in the average effective
exchange rate as compared to 2006 reduced earnings before income
taxes by $10 million. In 2006, the decline reduced earnings before
income taxes by $13 million compared to 2005. As the impact is
cumulative, 2007 earnings before income taxes are lower by $23
million as compared to what they would be if the average effective
rate in 2007 was the same as the average effective rate in
2005.
In fiscal 2006, in addition to the impact of fluctuations in the
exchange rate on the Company's day-today operations, the Company
recorded a non-cash accounting loss of $5.8 million, relating to
the sale of its U.S. headquarters building. This loss relates to
the weakening of the U.S. dollar between the date this building was
acquired and its sale in early 2007.
For 2008, the Company has entered into foreign exchange forward
contracts as detailed in Note 17 to the consolidated financial
statements. The average rate of these forward contracts is U.S.
$1.00 equals CDN $1.06 and total U.S. $63 million at November 30,
2007. Subsequent to year-end, the Company continued to enter into
foreign exchange forward contracts for fiscal 2008.
FOURTH QUARTER 2007
The Company reported a loss from operations of $1.7 million and
sales of $151.4 million as compared to earnings from operations of
$6.3 million and sales of $176.6 million in the fourth quarter of
the prior year. During the fourth quarter of 2007, the Company
operated below its break-even sales level. In addition, in the
fourth quarter the Company recorded a goodwill impairment charge of
$30.9 million which is included in the net loss for the quarter.
This charge is described in more detail above under the heading
Goodwill Impairment Charge.
Geographic Segmentation
-----------------------------------------
Three months ended November 30
-----------------------------------------
(000) 2007 2006
-----------------------------------------
Sales:
Canada $51,624 $48,243
United States 83,708 109,284
International 16,027 19,044
-----------------------------------------
Total $151,359 $176,571
-----------------------------------------
Sales for the fourth quarter ended November 30, 2007, were
$151.4 million compared to $176.6 million in the fourth quarter of
the prior year.
On a segmented basis, compared to the prior year period, U.S.
sales in the fourth quarter decreased by 23% to $83.7 million in
Canadian dollars and by 15.4% in source currency. For the fiscal
year, U.S. sales increased 2.7% in source currency. BIFMA reported
industry growth of 5.6 % for the quarter. The fourth quarter of
fiscal 2006, the Company's strongest quarter in six years, included
several large government projects that were an important
contributor to sales levels in 2006.
Canadian sales increased by 7% to $51.6 million for the quarter
and were similar to 2006 for the fiscal year. The Canadian market
remains strong and activity levels are high although growth in
fiscal 2007 was tempered by lower spending by certain contractual
customers and increased competition in the marketplace.
International sales were $16.0 million for the quarter compared
to $19.0 million in the prior year period. The decline in the
quarter compared to the prior year reflects the project nature of
the business. For the year, International sales increased by 5.5%
and approximately 15% in source currency (the majority of Teknion's
International business is transacted in U.S. dollars).
Gross margin, as a percentage of sales, was 26.9% for the
quarter compared to 27.2% in the fourth quarter of the prior year.
Further weakening of the U.S. dollar reduced gross margin by 1.8%
of sales as compared to the prior year quarter. In addition, in the
fourth quarter of 2007, the Company operated with lower capacity
utilization (sales were 14% lower than the prior year quarter)
negatively affecting gross margin.
SG&A was $37.7 million for the quarter, 24.9% of sales, as
compared to $36.7 million, 20.8% of sales in the prior year
quarter. The current quarter includes expenses of approximately
$1.1 million (2006 - $0) relating to the implementation of a new
order management system. The system is designed to streamline
Teknion's order receipt, manufacturing scheduling,
shipping/logistics and customer-facing processes.
LIQUIDITY AND CAPITAL RESOURCES
Years ended November 30 2007 2006 2005
(000)
Cash from operations before
non-cash working capital changes $15,586 $25,094 $20,916
Cash from (used in) operations after
non-cash working capital changes $18,233 $15,469 $(1,243)
Non-cash working capital (1) $84,740 $89,503 $80,269
Capital expenditures $29,427 $24,139 $16,504
Net debt to equity (1) 0.38:1 0.37:1 0.33:1
(1) The terms non-cash working capital and net debt are non-GAAP financial
measures and do not necessarily have standardized meanings amongst
issuers. They are defined as follows: Non-cash working capital is
defined as current assets less current liabilities excluding cash,
future income taxes, assets held for sale, derivative instruments
asset, operating loans, the current portion of long-term debt and
liability held for sale. The Company believes that non-cash working
capital is a useful figure because it measures the effectiveness of
the Company's accounts receivable collection, inventory management
and supplier payment practices. Net debt is defined as operating loans
plus long-term debt and capital lease obligations (including current
portion) less cash. The Company believes that net debt is a useful
figure because it measures the total borrowings of the Company without
distinction of the term of the debt.
Cash flow from operations before non-cash working capital
changes was $15.6 million in 2007 compared to $25.1 million in
2006. The decline reflects lower net earnings for the year.
Non-cash working capital declined to $84.7 million from $89.5
million in 2006 (2005 - $80.3 million). The decline in 2007
reflects lower fourth quarter sales in 2007 compared to 2006 and
2005. Days outstanding for accounts receivable were 71 days at
year-end (65 days at November 30, 2006 and 2005). The increase
compared to prior years reflects timing of project completion and
therefore payment on certain large projects during the fourth
quarter. Further, the number of days of production inventory was 39
days at November 30, 2007, compared to 41 days at November 30, 2006
(41 days at November 30, 2005).
Capital expenditures in 2007 totaled $29.4 million (including
tenant inducements of $2.5 million) compared to $24.1 million in
2006 (2005 - $16.5 million). Capital expenditures in 2007 included
tooling for new products, equipment to increase capacity and
efficiency, safety upgrades, leasehold improvements relating to
facility and showroom relocations and renovations in the year and
the capital portion of the aforementioned new order management
system. For 2008, capital expenditures are expected to total
approximately $14 million.
At November 30, 2007, the balance sheet is strong with a net
debt-to-equity ratio of 0.38:1. Total net debt was $66.9 million
compared to $78.5 million at November 30, 2006. At November 30,
2007, the Company utilized $43.1 million of its $111.4 million
operating lines of credit, with the majority of its credit lines
bearing interest at the banks' prime rate less 0.25% per annum.
In order to better balance its mix of short and long-term
financing, during the year Teknion continued to enter into capital
lease arrangements which now total $16.9 million (2006 - $15.5
million). The terms of these arrangements are five to seven years
with fixed rates ranging from 5.7% to 6.4%. In addition, in 2007
the Company entered into a $12 million five-year term loan to
finance the Company's new order management system. To November 30,
2007, draws on this facility totaled $6.5 million (net of principal
repayments). The rate is fixed at the time of each draw and
currently averages 6.23%.
During the year, Teknion sold its U.S. headquarters for net
proceeds of U.S. $18.0 million and repaid the mortgage on the
property of U.S. $12.1 million.
The following table summarizes the Company's contractual
obligations:
(000s) Total Less than 1-3 4-5 After
1 year years years 5 years
------------------------------------------
Long-term debt and capital
lease obligations $27,790 $4,631 $10,527 $9,203 $3,429
Operating leases 46,488 11,402 14,560 9,912 10,614
------------------------------------------
Total contractual obligations $74,278 $16,033 $25,087 $19,115 $14,043
------------------------------------------
Consolidated Statement of Other Comprehensive Income
As outlined in Note 1(p)(i)(a) to the Consolidated Financial
Statements, the Company has adopted new CICA Handbook section 1530.
As reflected on the Consolidated Statement of Other Comprehensive
Income, unrealized losses on translation of self-sustaining
operations for the year total $2.8 million. The loss relates to the
impact of the change in exchange rates on the Company's net
investment in its foreign self-sustaining operations for the
year.
Earnings on derivatives designed as cash flow hedges totaling
$3.9 million relate to the Company's foreign exchange forward
contracts for the sale of U.S. dollars in future periods. This gain
reflects the difference between the exchange rates of forward
foreign exchange contracts held, compared to the rate that would
have been achieved if the Company had entered into these contracts
at the end of the fiscal year. In other words, the Company's
forward foreign exchange contracts have been "marked to market" for
the purpose of determining earnings on derivatives.
RELATED PARTY TRANSACTIONS
Transactions with related parties were as follows:
(000s) 2007 2006 2005
Sales $10,556 $9,761 $11,006
Purchases 46,831 44,416 57,215
Lease payments 8,459 8,469 6,499
Other purchases 120 147 983
Substantially all related party transactions occurred with an
indirect shareholder, Global Upholstery Co. Limited, and entities
related to, controlled, or significantly influenced by it
(collectively "Global").
Transactions between the Company and Global occur at prices that
are either in accordance with written agreements between the
Company and Global or in accordance with regular market prices.
Management believes that the prices and terms at which all
transactions are conducted with Global are competitive with prices
and terms for comparable arm's-length transactions. The Corporate
Governance Committee of the Board of Directors is responsible for
and reviews, monitors and establishes all policies for related
party transactions.
Purchases from Global
Global manufactures the Boulevard and Descor lines, both of
which are targeted to the mid-priced segment of the contract
furniture market. Boulevard and Descor are sold in the U.S. by
Teknion pursuant to an exclusive distribution agreement with
Global.
The Global Group Israel Limited Partnership ("Global Israel") is
a supplier of certain products to Teknion for the European market,
and for its own account and is the exclusive manufacturer and
distributor of Teknion products in Israel, The Czech Republic, The
Slovak Republic, Bulgaria, Turkey, Cyprus and Egypt (collectively
the "Territory"). Global Israel has agreed not to sell or permit a
sale of Teknion products outside the Territory other than to
Teknion.
Global maintains a government-certified testing laboratory for
purposes of testing newly developed and customized products, and
components used in the manufacturing of products. The Company uses
the facility and pays Global for use of this testing facility.
Sales to Global
Global currently purchases components and products manufactured
by the Company.
Sales to Related Party Dealers
One of the Company's subsidiaries has a third-party minority
shareholder. This shareholder has a direct or indirect interest in
office furniture dealers that sell and distribute the Company's
products. The prices at which product is purchased by this related
party from the Company are competitive.
Leases from Global
The Company leases properties from Global. These properties are
used for general manufacturing and office purposes.
Revolving Loan Facility
The Company entered into a $6.8 million revolving loan facility
with Global in the prior fiscal year. The facility is secured by
first charges on certain of the Company's properties, and bears
interest at the banks' prime rate plus 0.5%. There were no
borrowings against this facility at year-end.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company's financial statements in
conformity with Canadian generally accepted accounting principles
requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported
amount of revenue and expenses during the reporting period.
The most significant accounting estimate included in the
consolidated financial statements was goodwill valued at $30.9
million, and the valuation of net future tax assets. In 2007, the
Company determined that the goodwill was impaired and recorded a
charge of $30.9 million in the fourth quarter. This charge is
described in more detail above under the heading Goodwill
Impairment Charge.
Regarding the valuation of net future tax assets, the Company
assesses their realization to determine whether an income tax
valuation allowance is required. The main factors that are
considered include:
- cumulative losses in recent years;
- the carry forward period associated with the future tax
assets;
- net earnings/loss by tax jurisdiction; and
- future earnings potential determined through the use of
internal forecasts and available external market research.
Based on the above-noted factors, during fiscal 2005 and 2004,
valuation allowances of $20.3 million and $8.1 million were
recorded, respectively. Accordingly, the Company reduced its net
future tax asset on its consolidated balance sheet to nil by the
end of fiscal 2005 and the income tax expense for fiscal 2005
included an additional expense of $20.3 million relating to the
valuation allowance. As shown in Note 6 to the consolidated
financial statements, the Company has tax losses totaling $111.1
million, which can be applied against future year's earnings.
NEW CICA REPORTING REQUIREMENTS
Effective for fiscal 2007
On December 1, 2006, the Company adopted CICA Handbook Section
1530 Comprehensive Income, Section 3251 Equity, Section 3855
Financial Instruments - Recognition and Measurement, Section 3861
Financial Instruments - Disclosure and Presentation and Section
3865 Hedges. Section 1530 establishes standards for reporting and
presenting comprehensive income, which is defined as the change in
equity from transactions and other events from non-owner sources.
Other comprehensive income refers to items recognized in
comprehensive income that are excluded from net income calculated
in accordance with generally accepted accounting principles.
Section 3861 establishes standards for presentation of financial
instruments and non-financial derivatives, and identifies the
information that should be disclosed about them. Under the new
standards, policies followed for periods prior to the effective
date generally are not reversed and therefore, the comparative
figures have not been restated except for the requirement to
restate the currency translation adjustment as part of other
comprehensive income. Section 3865 describes when and how hedge
accounting can be applied as well as the disclosure requirements.
Hedge accounting enables the recording of gains, losses, revenues
and expenses from derivative financial instruments in the same
period as for those related to the hedged item.
Section 3855 prescribes when a financial asset, financial
liability or non-financial derivative is to be recognized on the
balance sheet and at what amount, requiring fair value or
cost-based measures under different circumstances. Under Section
3855, financial instruments must be classified into one of these
five categories: held-for-trading, held-to-maturity, loans and
receivables, available-for-sale financial assets or other financial
liabilities. All financial instruments, including derivatives, are
measured in the balance sheet at fair value except for loans and
receivables, held-to-maturity investments and other financial
liabilities, which are measured at amortized cost. Subsequent
measurement and changes in fair value will depend on their initial
classification, as follows: held-for-trading financial assets are
measured at fair value and changes in fair value are recognized in
net earnings; available-for-sale financial instruments are measured
at fair value with changes in fair value recorded in other
comprehensive income until the investment is derecognized or
impaired at which time the amounts would be recorded in net
earnings.
Under adoption of these new standards, the Company designated
its cash as held-for-trading, which is measured at fair value.
Accounts receivable is classified as loans and receivables, which
is measured at amortized cost. Bank indebtedness, accounts payable
and accrued liabilities, long-term debt and capital lease
obligations are classified as other financial liabilities, which
are measured at amortized cost.
All derivative instruments, including embedded derivatives, are
recorded in the statement of earnings at fair value unless exempted
from derivative treatment as a normal purchase and sale. All
changes in their fair value are recorded in earnings unless cash
flow hedge accounting is used, in which case changes in fair value
are recorded in other comprehensive income. The Company has elected
to apply this accounting treatment for all embedded derivatives in
host contracts entered into on or after December 1, 2002. The
impact of the change in accounting policy related to embedded
derivatives was not material.
The Company enters into foreign currency forward contracts and
foreign currency option contracts to hedge foreign exchange
exposure on anticipated sales. The effective portion of changes in
the fair value of derivatives that are designated and qualify as
cash flow hedges is recognized in other comprehensive income. Any
gain or loss in fair value relating to the ineffective portion is
recognized immediately in the statement of earnings in other income
(expense). The impact on opening retained earnings was not
material. Upon adoption of the new standards, the Company
remeasured its cash flow hedge derivatives at fair value. The
portion of the fair value of the hedged item totaled $0.6 million.
The fair value of the contracts as at November 30, 2007 is $3.9
million and recorded as derivative instrument asset on the
consolidated balance sheet.
Effective for Fiscal 2008
The CICA issued Sections 3862, Financial Instruments-Disclosure,
and Section 3031-Inventories. These standards are effective for the
Company on December 1, 2007.
The new financial instruments standard requires entities to
provide disclosures in their financial statements that enable users
to evaluate the significance of financial instruments for the
entity's financial position and performance, the nature and extent
of risks arising from financial instruments to which the entity is
exposed during the year and at the balance sheet date, and how the
entity manages those risks.
The new inventories standard prescribes the measurement of
inventories at the lower of cost and net realizable value, with
guidance on the determination of cost including allocation of
overheads and other costs of inventory. The section also expands
disclosure requirements with respect to inventory classifications
and inventories recognized as an expense during the year. Reversals
of previous write-downs to net realizable value are permitted when
there is a subsequent increase in the value of inventories.
The Company is evaluating the potential impact of adopting these
standards on its financial statement presentation and will apply
the standards accordingly for the fiscal year beginning on December
1, 2007.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER
FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide
reasonable assurance that all relevant information is gathered and
reported to senior management, including the CEO and CFO, on a
timely basis, so that appropriate decisions can be made regarding
public disclosure. An evaluation of the effectiveness of the design
and operation of the disclosure controls and procedures was
conducted as of November 30, 2007. Based on this evaluation, the
CEO and CFO have concluded that the disclosure controls and
procedures, as defined in Multilateral Instrument 52-109,
Certification of Disclosure in Issuers' Annual and Interim Filings,
are effective as of November 30, 2007, to ensure that information
required to be disclosed in reports that we file under Canadian
securities legislation is reported within the time periods
required.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance
with Canadian generally accepted accounting principles. Management
is responsible for establishing and maintaining adequate internal
control. Management, including the CEO and CFO, has evaluated the
design of internal control over financial reporting and based on
this evaluation, has concluded that internal control over financial
reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian
generally accepted accounting principles as of November 30,
2007.
RISK FACTORS
The risks and uncertainties outlined below are not the only ones
the Company faces. Additional risks and uncertainties not presently
known to the Company or that are currently considered less
significant may also adversely affect the Company's business,
operating results and financial position.
Foreign Exchange Risk
Over half of the Company's sales are transacted, and revenues
thereon are received, in U.S. dollars; however, the majority of the
Company's manufacturing operations are located in Canada and
accordingly most of the Company's costs are incurred in Canadian
dollars. As a result, the Company's profit margins and competitive
position may be affected by exchange rate fluctuations between the
Canadian dollar and the U.S. dollar.
While the Company enters into foreign currency forward exchange
contracts in order to manage its short-term exposure to the
fluctuation of the currencies, the terms of these contracts are
usually no more than a year, and are not intended to hedge 100% of
the Company's estimated U.S. dollar exposure. Note 17 to the
consolidated financial statements sets out the details of the
foreign exchange contracts in place at November 30, 2007.
Changes in the Cost of Raw Materials
The Company's cost of sales is influenced by the cost of raw
materials and certain commodities such as steel, aluminum and
petroleum-based products used directly or indirectly in the
manufacture and sale of its products. When the cost of raw
materials and commodities rises, there is no assurance that the
Company will be able to pass these cost increases on to its
customers. Accordingly, gross margin could decline as such costs
increase.
General Economic and Business Conditions
The Company's sales and therefore its overall operating results
and financial position are significantly affected by the level of
spending for office furniture, which, in turn, is a function of the
general economic environment. As the economy slows, "white collar
employment" and commercial construction typically decline, and
office vacancy rates increase. In addition, during such periods
increased amounts of "nearly new" used office furniture may be
available for purchase in the market. These factors would likely
result in a decline in demand for new office furniture and increase
price competition in the market.
Proprietary Products and Marketability of Products
Amongst other factors, office furniture companies compete on the
basis of the design of their products. In order for the Company to
increase sales and to prevent sales from declining it must continue
to offer products desired by the market. Rapid changes in
technology, customer requirements, product introductions by
competitors, emerging standards and other factors could negatively
affect the market's acceptance of the Company's products. In
addition, the Company's financial results could be negatively
impacted if the Company's intellectual property rights to its
designs were challenged and it was prevented from selling a
product, or alternatively, if a competitor introduced a product
with similar design advantages.
Key Personnel
The Company relies on certain key executives to fulfill its
business strategy. The loss of a key individual and the inability
to replace that person within a reasonable period of time could be
detrimental to the Company's operating results.
Commitments from Significant Dealers or Distributors
The Company relies on many independent dealers to assist in
marketing and distributing products to the market. Although the
loss of an individual dealer would not likely be detrimental to the
Company's operating results, the loss of several dealers within a
short period of time could result in a decline in sales and
operating profit.
Financing
The Company relies on a number of lenders to finance the
business. In the event that a significant lender determined that it
no longer wished to provide financing and the Company was unable to
replace the lender or provide an alternate source of funds within a
reasonable period of time, the Company would have difficulty in
meeting commitments to suppliers, employees and other stakeholders.
In addition, under such circumstances, it is unlikely that the
Company could grow or expand the business.
Other Risks and Uncertainties
In addition to the risks and uncertainties outlined above,
factors that could cause actual results to differ from expectations
include, but are not limited to: the Company's dependence on its
suppliers; potential liabilities arising from product defects; and
environmental matters.
OUTLOOK
Management continues to believe that, over the long term, the
worldwide business environment will increasingly require that
organizations utilize costly office space more effectively and
improve the working environment to increase employee productivity.
The Company also believes that these factors, combined with
increased commercial construction and capital spending, as well as
the growing use of technology and the increasing awareness of
workplace health and safety, will allow growth in the contract
office furniture industry to exceed growth in GDP.
In the U.S., industry growth has moderated, reflecting a
slowdown in overall economic growth. Many believe that current
uncertainty in credit markets and the rapid deterioration of the
housing market will lead to a recession which undoubtedly will
further decrease the demand for office furniture. BIFMA is
forecasting no growth for the industry in 2008. These factors
combined with the current level of the Canadian dollar relative to
the U.S. dollar put additional pressure on the Company's operating
performance.
The Company's strategies for future growth and improvement to
its operating results are to continue to: develop its sales and
marketing initiatives to expand its presence and market share,
focusing on market segments where the Company previously did not
have a strong presence; leverage the strength and economies of
scale resulting from the vertical integration and recent
modernization of its manufacturing facilities and processes;
maintain its focus on design and innovation to ensure it can
respond quickly with new and enhanced products to meet the needs of
its customers; continue its focus on cost improvement and
efficiency; and make prudent acquisitions that meet the Company's
long-term strategic objectives.
FORWARD-LOOKING STATEMENTS
This management discussion and analysis of the financial
condition and results of operations contains forward-looking
statements with respect to the Company's future prospects. These
statements involve certain risks and uncertainties as outlined
above under the heading Risk Factors that could cause the Company's
financial results to differ materially from stated expectations.
The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise.
Contacts: Teknion Corporation Steven E. Cohen Senior Vice
President, Corporate Development (416) 661-1577, ext. 2456 Teknion
Corporation Scott E. Bond Senior Vice President, Chief Financial
Officer & Secretary (416) 661-1577, ext. 2391 Website:
www.teknion.com
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