TORONTO, April 2 /PRNewswire-FirstCall/ -- Harry Winston Diamond
Corporation (TSX: HW, NYSE: HWD) today reported fourth quarter and
annual results for the period ending January 31, 2009. The Company
recorded consolidated net earnings of $70.1 million or $1.15 per
share for the year, compared to net earnings of $106.4 million or
$1.82 per share in the prior year. Consolidated net earnings for
the year included a non-cash write-down of the goodwill relating to
the retail operations of $93.8 million or $1.54 per share. The
write-down was partially offset by a $59.1 million net foreign
exchange gain or $0.96 per share, compared to a net $43.4 million
foreign exchange loss or $0.74 per share in the prior year.
Consolidated net earnings also included an after-tax gain on
insurance settlement of $9.9 million or $0.16 per share, compared
to $8.0 million or $0.14 per share in the prior year. Consolidated
sales were $609.2 million for the year compared to $679.3 million
for the prior year, resulting in a 13% decrease in gross margin and
a 24% decrease in consolidated earnings from operations. The mining
segment recorded sales of $328.2 million, a 21% decrease from
$413.8 million in the prior year. The decrease in sales resulted
from lower rough diamond production and lower rough diamond prices
in the fourth quarter. Rough diamond production for the calendar
year was down 23% to 3.7 million carats produced versus 4.8 million
for the prior year. Earnings from operations for the mining segment
decreased 24% to $168.6 million compared to the prior year. The
decrease was due primarily to lower sales and to a lesser degree a
decrease in gross margin. The retail segment recorded a 6% increase
in sales to $281.0 million, with a loss from operations of $2.5
million compared to a loss from operations of $3.1 million in the
prior year. Retail segment SG&A as a percentage of sales
remained consistent with the prior year at 48%. Fourth Quarter and
Fiscal 2009 Financial Highlights (US$ in millions except Earnings
per Share amounts)
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Three Three Twelve Twelve months months months months ended ended
ended ended Jan. 31, Jan. 31, Jan. 31, Jan. 31, 2009 2008 2009 2008
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Sales 118.4 188.2 609.2 679.3
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Earnings from operations 10.1 59.1 166.1 217.7
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Net earnings (loss) (73.0) 90.4 70.1 106.4
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Earnings (loss) per share $(1.19) $1.55 $1.15 $1.82
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Robert Gannicott, Chairman and Chief Executive Officer said,
"Credit is the vascular system of the diamond industry. Its rapid
decline last October shocked the diamond supply chain to a sudden
standstill that persisted into this year. Our response, and that of
our mine operating partner, Rio Tinto, has been defensive while
preserving the ability to increase production promptly when
conditions have sufficiently improved by reducing capital and
operating costs without jeopardizing the future of our production
and sales platforms. With the successful completion of the Kinross
investment, we have now paid down our mining segment debt. We now
see some tentative recovery in the diamond market, albeit from a
reduced base compared to 6 months ago. Diamonds are underpinned by
their deeply rooted use in bridal ceremonies throughout the world.
The Diavik Mine remains one of the highest margin diamond mines and
Harry Winston a premier diamond brand. We are well positioned for
an improvement in global economic conditions." Thomas J. O'Neill,
President added, "Harry Winston has met the economic challenges
with concentrated marketing and substantial cost reductions. The
premium position of the brand and the international diversity of
our business model support us through the present conditions and
position us well for future economic recovery." Conference Call and
Webcast Beginning at 9:00AM ET, on Friday, April 3, the company
will host a conference call for analysts, investors and other
interested parties. Listeners may access a live broadcast of the
conference call on the company's investor relations website at
http://investor.harrywinston.com/ or by dialing 800-510-0146 within
North America or 617-614-3449 from international locations and
entering passcode 37236627. An online archive of the broadcast will
be available by accessing the company's investor relations website
at http://investor.harrywinston.com/. A telephone replay of the
call will be available one hour after the call through 11:00PM ET,
April 16, 2009, by dialing 888-286-8010 within North America or
617-801-6888 from international locations and entering passcode
73080790. Information in this news release that is not current or
historical factual information may constitute forward-looking
information or statements within the meaning of applicable
securities laws. Implicit in this information, particularly in
respect of statements as to future operating results and economic
performance of Harry Winston Diamond Corporation and statements
about the Diavik Diamond Mine are assumptions regarding world
economic conditions, projected revenue and expenses, diamond
prices, construction timelines and mine operating plans and
budgets, ore grades and the Canadian/US dollar exchange rate.
Specifically, in estimating Harry Winston Diamond Corporation's
projected share of the Diavik Diamond Mine capital expenditure
requirements over the next five years, Harry Winston Diamond
Corporation has used an average Canadian/US dollar exchange rate of
$0.86. These assumptions, although considered reasonable by Harry
Winston Diamond Corporation at the time of preparation, may prove
to be incorrect. Forward-looking information is subject to certain
factors, including risks and uncertainties, which could cause
actual results to differ materially from what we currently expect.
These factors include, among other things, the uncertain nature of
mining activities, including risks associated with underground
construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of
and harsh climate at the Diavik Diamond Mine site, risks associated
with regulatory requirements, fluctuations in diamond prices,
changes in US and world economic conditions, risks of competition
in the luxury jewelry segment, financing and credit market risk,
risks relating to the Company's salon expansion strategy and the
risk of fluctuations in the Canadian/US dollar exchange rate. About
Harry Winston Diamond Corporation Harry Winston Diamond Corporation
(TSX: HW; NYSE: HWD) is a specialist diamond enterprise with assets
in the mining and retail segments of the diamond industry. The
company supplies rough diamonds to the global market from its 40%
interest in the Diavik Diamond Mine, located in Canada's Northwest
Territories. The company's retail division, Harry Winston, Inc., is
a premier jewelry and timepiece retailer with salons in key
locations including New York, Paris, London, Beijing, Tokyo and
Beverly Hills. For more information, please go to
http://www.harrywinston.com/ or for investor information, visit
investor.harrywinston.com. Investor Relations - (416) 362-2237 ext
290 or . Highlights (All figures are in United States dollars
unless otherwise indicated) Harry Winston Diamond Corporation
recorded consolidated net earnings of $70.1 million or $1.15 per
share for the year, compared to net earnings of $106.4 million or
$1.82 per share in the prior year. Consolidated net earnings for
the year included a non-cash write-down of the goodwill relating to
the retail operations of $93.8 million or $1.54 per share. The
write-down was partially offset by a $59.1 million net foreign
exchange gain or $0.96 per share, compared to a net $43.4 million
foreign exchange loss or $0.74 per share in the prior year.
Consolidated net earnings also included an after-tax gain on
insurance settlement of $9.9 million or $0.16 per share, compared
to $8.0 million or $0.14 per share in the prior year. Consolidated
sales were $609.2 million for the year compared to $679.3 million
for the prior year, resulting in a 13% decrease in gross margin and
a 24% decrease in consolidated earnings from operations. The mining
segment recorded sales of $328.2 million, a 21% decrease from
$413.8 million in the prior year. The decrease in sales resulted
from lower rough diamond production and lower rough diamond prices
in the fourth quarter. Rough diamond production for the calendar
year was down 23% to 3.7 million carats produced versus 4.8 million
for the prior year. Earnings from operations for the mining segment
decreased 24% to $168.6 million compared to the prior year. The
decrease was due primarily to lower sales and to a lesser degree a
decrease in gross margin. The retail segment recorded a 6% increase
in sales to $281.0 million, with a loss from operations of $2.5
million compared to a loss from operations of $3.1 million in the
prior year. Retail segment SG&A as a percentage of sales
remained consistent with the prior year at 48%. Management's
Discussion and Analysis Prepared as of April 2, 2009 (all figures
are in United States dollars unless otherwise indicated) The
following is management's discussion and analysis ("MD&A") of
the results of operations for Harry Winston Diamond Corporation
("Harry Winston Diamond Corporation", or the "Company") for the
fiscal year ended January 31, 2009, and its financial position as
at January 31, 2009. This MD&A is based on the Company's
consolidated financial statements prepared in accordance with
generally accepted accounting principles in Canada ("Canadian
GAAP") and should be read in conjunction with the consolidated
financial statements and notes thereto. Unless otherwise specified,
all financial information is presented in United States dollars.
Unless otherwise indicated, all references to "year" refer to the
fiscal year of Harry Winston Diamond Corporation ended January 31.
Unless otherwise indicated, references to "international" for the
retail segment refer to Europe and Asia. Certain comparative
figures have been reclassified to conform with the current year's
presentation. Caution Regarding Forward-Looking Information Certain
information included in this MD&A may constitute
forward-looking information within the meaning of Canadian and
United States securities laws. In some cases, forward-looking
information can be identified by the use of terms such as "may",
"will", "should", "expect", "plan", "anticipate", "believe",
"intend", "estimate", "predict", "potential", "continue" or other
similar expressions concerning matters that are not historical
facts. Forward-looking information may relate to management's
future outlook and anticipated events or results, and may include
statements or information regarding plans, timelines and targets
for construction, mining, development, production and exploration
activities at the Diavik Diamond Mine, future mining and processing
at the Diavik Diamond Mine, projected capital expenditure
requirements and the funding thereof, new salon openings, liquidity
and working capital requirements and sources, estimated reserves
and resources at, and production from, the Diavik Diamond Mine, the
number and timing of expected rough diamond sales, expected diamond
prices and expectations concerning the diamond industry, expected
cost of sales and gross margin trends in the mining segment, and
expected sales trends in the retail segment. Actual results may
vary from the forward looking information. See "Risks and
Uncertainties" on page 19 for material risk factors that could
cause actual results to differ materially from the forward looking
information. Forward-looking information is based on certain
factors and assumptions regarding, among other things, mining,
production, construction and exploration activities at the Diavik
Diamond Mine, credit and general capital market conditions and the
ability of the Company to refinance or replace its existing credit
facilities, the level of worldwide diamond production and world and
US economic conditions and demand for luxury goods. Specifically,
in estimating Harry Winston Diamond Corporation's projected share
of the Diavik Diamond Mine capital expenditure requirements over
the next five years, Harry Winston Diamond Corporation has used an
average Canadian/US dollar exchange rate of $0.86. In making
statements regarding expected diamond prices and expectations
concerning the diamond industry and expected sales trends in the
retail segment, the Company has made assumptions regarding, among
other things, world and US economic conditions and demand for
luxury goods. While Harry Winston Diamond Corporation considers
these assumptions to be reasonable based on the information
currently available to it, they may prove to be incorrect. See
"Risks and Uncertainties" on page 19. Forward-looking information
is subject to certain factors, including risks and uncertainties,
which could cause actual results to differ materially from what we
currently expect. These factors include, among other things, the
uncertain nature of mining activities, including risks associated
with underground construction and mining operations, risks
associated with joint venture operations, risks associated with the
remote location of and harsh climate at the Diavik Diamond Mine
site, risks associated with regulatory requirements, fluctuations
in diamond prices and changes in US and world economic conditions,
the risk of fluctuations in the Canadian/US dollar exchange rate,
financing and credit market risk, risks relating to the Company's
salon expansion strategy and the risks of competition in the luxury
jewelry segment. Please see page 19 of this Annual Report, as well
as the Company's current Annual Information Form, available at
http://www.sedar.com/, for a discussion of these and other risks
and uncertainties involved in Harry Winston Diamond Corporation's
operations. Readers are cautioned not to place undue importance on
forward-looking information, which speaks only as of the date of
this Management's Discussion and Analysis, and should not rely upon
this information as of any other date. Due to assumptions, risks
and uncertainties, including the assumptions, risks and
uncertainties identified above and elsewhere in this Management's
Discussion and Analysis, actual events may differ materially from
current expectations. The Company uses forward looking statements
because it believes such statements provide useful information with
respect to the future operation and financial performance of the
Company, and cautions readers that the information may not be
appropriate for other purposes. While Harry Winston Diamond
Corporation may elect to, it is under no obligation and does not
undertake to update or revise any forward-looking information,
whether as a result of new information, future events or otherwise
at any particular time, except as required by law. Additional
information concerning factors that may cause actual results to
materially differ from those in such forward-looking statements is
contained in the Harry Winston Diamond Corporation's filings with
Canadian and United States securities regulatory authorities and
can be found at http://www.sedar.com/ and http://www.sec.gov/,
respectively. Summary Discussion Harry Winston Diamond Corporation
is a specialist diamond company focusing on the mining and retail
segments of the diamond industry. The Company supplies rough
diamonds to the global market from production received from its 40%
ownership interest in the Diavik Diamond Mine, located off Lac de
Gras in Canada's Northwest Territories. The Company also owns a
100% interest in Harry Winston Inc., the premier fine jewelry and
watch retailer operating under the Harry Winston(R) brand. As at
January 31, 2009, the Company's most significant asset is a 40%
ownership interest in the Diavik group of mineral claims. The
Diavik Joint Venture (the "Joint Venture") is an unincorporated
joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%)
and Harry Winston Diamond Mines Ltd. (40%) where Harry Winston
Diamond Corporation owns an undivided 40% ownership interest in the
assets, liabilities and expenses. DDMI is the operator of the
Diavik Diamond Mine. Both companies are headquartered in
Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto
plc of London, England, and Harry Winston Diamond Mines Ltd. is a
wholly owned subsidiary of Harry Winston Diamond Corporation of
Toronto, Canada. On March 19, 2009, the Company announced a
strategic investment by Kinross Gold Corporation ("Kinross"),
whereby Kinross will make a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a
direct equity stake in the Company. Kinross will subscribe for 15.2
million of the Company's treasury shares at a price of $3.00 per
share, being approximately 19.9% of the Company's issued equity
post the transaction. Kinross will also subscribe for new
partnership units representing a 22.5% interest in the limited
partnership which holds the Company's 40% ownership interest in the
Diavik Diamond Mine, for a net effective subscription value of
$104.4 million. The transaction closed on March 31, 2009 and the
Company's economic interest in the Diavik Diamond Mine is now 31%.
With the closing of the Kinross transaction, all amounts
outstanding on the Company's senior secured term and revolving
credit facilities were repaid as of March 31, 2009. If the
transaction had closed on January 31, 2009, the Company would have
recorded a non-cash dilution loss of approximately $30 million in
respect of its interest in the Diavik Diamond Mine. Market
Commentary The Diamond Market During the first eight months of
fiscal 2009 sales of rough diamonds were strong and increases in
prices were achieved. Commencing in the fourth quarter of fiscal
2009, the diamond industry began to be significantly impacted by
the global economic slowdown and the ongoing world-wide credit
crisis. The availability of credit to the diamond processing and
jewelry manufacturing sectors of the industry has declined, thus
reducing demand for rough diamonds as the industry supply lines
de-stock. The Company anticipates challenging trading conditions
for the near-term although subdued demand has returned for certain
rough diamond categories reflecting the sell-through of core
engagement ring type products which account for about half of the
overall polished diamond market. The decline in polished diamond
prices has been significantly less than the price declines in rough
diamonds although sales volumes have declined substantially as the
world economic crisis has deepened. (R) Harry Winston is a
registered trademark of Harry Winston Inc. The Retail Jewelry
Market The luxury diamond jewelry market has also been negatively
affected by the severity of the global economic downturn. The major
markets of the United States and Japan have experienced the most
significant decreases in demand, while consumers in the Middle East
and parts of Asia continue to purchase luxury diamond products.
Consolidated Financial Results The following is a summary of the
Company's consolidated quarterly results for the eight quarters
ended January 31, 2009 following the basis of presentation utilized
in its Canadian GAAP financial statements: (expressed in thousands
of United States dollars except per share amounts and where
otherwise noted) (quarterly results are unaudited)
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2009 2009 2009 2009 Q4 Q3 Q2 Q1
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Sales $ 118,399 $ 148,623 $ 186,119 $ 156,079 Cost of sales 68,908
71,679 73,542 73,149
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Gross margin 49,491 76,944 112,577 82,930 Gross margin (%) 41.8%
51.8% 60.5% 53.1% Selling, general and administrative expenses
39,399 33,998 39,194 43,285
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Earnings from operations 10,092 42,946 73,383 39,645
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Interest and financing expenses (4,960) (4,678) (5,366) (5,453)
Other income 778 407 815 246 Insurance settlement 17,240 - - -
Impairment charge (93,780) - - - Foreign exchange gain (loss) 4,649
48,982 5,301 155
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Earnings (loss) before income taxes (65,981) 87,657 74,133 34,593
Income taxes (recovery) 7,052 15,685 24,185 13,336
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Earnings (loss) before minority interest (73,033) 71,972 49,948
21,257 Minority interest (58) 81 1 1
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Net Earnings (loss) $ (72,975) $ 71,891 $ 49,947 $ 21,256
-------------------------------------------------------------------------
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Basic earnings (loss) per share $ (1.19) $ 1.17 $ 0.81 $ 0.35
Diluted earnings (loss) per share $ (1.19) $ 1.17 $ 0.81 $ 0.35
Cash dividends declared per share $ 0.05 $ 0.05 $ 0.05 $ 0.05 Total
assets(i) $ 1,567 $ 1,645 $ 1,637 $ 1,591 Total long-term
liabilities(i) $ 550 $ 562 $ 617 $ 634
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2008 2008 2008 2008 Q4 Q3 Q2 Q1
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Sales $ 188,195 $ 176,478 $ 173,269 $ 141,365 Cost of sales 83,637
74,591 81,827 71,132
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Gross margin 104,558 101,887 91,442 70,233 Gross margin (%) 55.6%
57.7% 52.8% 49.7% Selling, general and administrative expenses
45,494 35,539 35,201 34,211
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Earnings from operations 59,064 66,348 56,241 36,022
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Interest and financing expenses (7,082) (7,422) (7,222) (6,132)
Other income 706 594 545 913 Insurance settlement 13,488 - - -
Impairment charge - - - - Foreign exchange gain (loss) 22,270
(40,584) (11,785) (13,292)
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Earnings (loss) before income taxes 88,446 18,936 37,779 17,511
Income taxes (recovery) (1,968) 26,197 17,747 14,118
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Earnings (loss) before minority interest 90,414 (7,261) 20,032
3,393 Minority interest (34) 90 (26) 140
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Net Earnings (loss) $ 90,448 $ (7,351) $ 20,058 $ 3,253
-------------------------------------------------------------------------
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Basic earnings (loss) per share $ 1.55 $ (0.13) $ 0.34 $ 0.06
Diluted earnings (loss) per share $ 1.54 $ (0.13) $ 0.33 $ 0.05
Cash dividends declared per share $ 0.05 $ 0.25 $ 0.25 $ 0.25 Total
assets(i) $ 1,494 $ 1,433 $ 1,367 $ 1,315 Total long-term
liabilities(i) $ 660 $ 530 $ 486 $ 408
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-------------------------------------------------------------- 2009
2008 2007 Total Total Total
--------------------------------------------------------------
Sales $ 609,220 $ 679,307 $ 558,793 Cost of sales 287,278 311,187
285,498
--------------------------------------------------------------
Gross margin 321,942 368,120 273,295 Gross margin (%) 52.8% 54.2%
48.9% Selling, general and administrative expenses 155,876 150,445
126,536
--------------------------------------------------------------
Earnings from operations 166,066 217,675 146,759
--------------------------------------------------------------
Interest and financing expenses (20,457) (27,858) (21,150) Other
income 2,246 2,758 5,081 Insurance settlement 17,240 13,488 -
Impairment charge (93,780) - - Foreign exchange gain (loss) 59,087
(43,391) 8,784
--------------------------------------------------------------
Earnings (loss) before income taxes 130,402 162,672 139,474 Income
taxes (recovery) 60,256 56,094 34,830
--------------------------------------------------------------
Earnings (loss) before minority interest 70,146 106,578 104,644
Minority interest 25 170 375
-------------------------------------------------------------- Net
Earnings (loss) $ 70,121 $ 106,408 $ 104,269
--------------------------------------------------------------
--------------------------------------------------------------
Basic earnings (loss) per share $ 1.15 $ 1.82 $ 1.79 Diluted
earnings (loss) per share $ 1.15 $ 1.81 $ 1.76 Cash dividends
declared per share $ 0.20 $ 0.80 $ 1.00 Total assets(i) $ 1,567 $
1,494 $ 1,288 Total long-term liabilities(i) $ 550 $ 660 $ 536
-------------------------------------------------------------- (i)
Total assets and total long-term liabilities are expressed in
millions of United States dollars. The comparability of
quarter-over-quarter results is impacted by seasonality for both
the mining and retail segments. Harry Winston Diamond Corporation
expects that the quarterly results for its mining segment will
continue to fluctuate depending on the seasonality of production at
the Diavik Diamond Mine, the number of sales events conducted
during the quarter, and the volume, size and quality distribution
of rough diamonds delivered from the Diavik Diamond Mine in each
quarter. The quarterly results for the retail segment are also
seasonal, with generally higher sales during the fourth quarter due
to the holiday season. See "Segmented Analysis" on page 9 for
additional information. Year Ended January 31, 2009 Compared to
Year Ended January 31, 2008 Consolidated Net Earnings Harry Winston
Diamond Corporation's net earnings for the fiscal year ended
January 31, 2009 totalled $70.1 million or $1.15 per share,
compared to net earnings of $106.4 million or $1.82 per share for
the prior year. Net earnings were impacted by a non-cash write-down
of the goodwill relating to the retail operations of $93.8 million
or $1.54 per share. The write-down was partially offset by a net
$59.1 million foreign exchange gain or $0.96 per share, compared to
a net foreign exchange loss of $43.4 million or $0.74 per share in
the prior year. Also impacting results was an after-tax gain on
insurance settlement of $9.9 million or $0.16 per share that
resulted from the December 2008 robbery at the Harry Winston Paris
salon, compared to an after-tax gain of $8.0 million or $0.14 per
share from the October 2007 robbery. Consolidated Sales The Company
recorded sales for the fiscal year ended January 31, 2009 of $609.2
million compared to sales of $679.3 million for the prior year. On
a segment basis, rough diamond sales accounted for $328.2 million
of these sales compared to $413.8 million for the prior year. The
Company completed nine rough diamond sales, one of which was an
open-market tender, during the fiscal year, compared to ten rough
diamond sales the prior year. Harry Winston's retail segment sales
were $281.0 million, compared to $265.5 million for the prior year.
Consolidated Cost of Sales and Gross Margin The Company recorded
cost of sales of $287.3 million for a gross margin of 52.8% during
the fiscal year compared to cost of sales of $311.2 million and a
gross margin of 54.2% during the prior year. The Company's cost of
sales includes costs associated with mining, sorting and retail
activities. See "Segmented Analysis" on page 9 for additional
information. Consolidated Selling, General and Administrative
Expenses The principal components of selling, general and
administrative ("SG&A") expenses include expenses for salaries
and benefits, advertising, professional fees, rent and building
related costs. Harry Winston Diamond Corporation incurred SG&A
expenses of $155.9 million for the fiscal year compared to $150.4
million for the prior year. The increase of $5.4 million in
SG&A expenses from the prior year is primarily due to an
increase of $4.0 million in insurance premiums, $3.4 million in
amortization expense, $3.0 million in rent and building related
expenses, $1.3 million in salaries and benefits, partially offset
by a decrease of $3.0 million in advertising and selling expenses,
$2.1 million in stock-based compensation, and $1.2 million in
professional fees. Included in SG&A expenses for the year are
$19.9 million for the mining segment as compared to $23.4 million
for the prior year, and $136.0 million for the retail segment as
compared to $127.1 million for the prior year. For the mining
segment, the decrease in SG&A expenses was primarily due to a
mark-to-market reduction in stock-based compensation. For the
retail segment, the increase was as a result of our continued
investment in the Harry Winston brand, and reflected an increase in
salaries and benefits, rent and building related expenses and
depreciation and amortization expense. See "Segmented Analysis" on
page 9 for additional information. Consolidated Income Taxes The
Company recorded a tax expense of $60.3 million during the twelve
months ended January 31, 2009, compared to a tax expense of $56.1
million in the comparable period of the prior year. The Company's
effective income tax rate for the year, excluding Harry Winston's
retail segment, is 27%, which is based on a statutory income tax
rate of 31% adjusted for various items including Northwest
Territories mining royalty, impact of foreign exchange, and
earnings subject to tax different than the statutory rate. The
Company's functional and reporting currency is US dollars; however,
the calculation of income tax expense is based on income in the
currency of the country of origin. As such, the Company is
continually subject to foreign exchange fluctuations, particularly
as the Canadian dollar moves against the US dollar. During the
twelve months ended January 31, 2009, the Company recorded an
unrealized foreign exchange gain of $48.6 million on the
revaluation of the Canadian dollar denominated future income tax
liability, as compared to an unrealized foreign exchange loss of
$37.0 million recorded in the comparable period of the prior year.
The unrealized foreign exchange gain is not taxable for Canadian
income tax purposes. The Company also recorded a non-cash
impairment charge of $93.8 million in relation to the goodwill of
Harry Winston's retail segment in the current year. The impairment
charge is not deductible for Canadian income tax purposes. The
impact of foreign exchange and impairment charge on goodwill are
the main causes of the unusual effective tax rate for the current
year. The rate of income tax payable by Harry Winston Inc. varies
by jurisdiction. Net operating losses are available in certain
jurisdictions to offset future income taxes payable in such
jurisdictions. The net operating losses are scheduled to expire
through 2028. The Company has provided a table below summarizing
the movement from the statutory to the effective income tax rate as
a percentage of earnings before taxes: Year ended Year ended
January 31, January 31, 2009 2008
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Statutory income tax rate 31% 34% Northwest Territories mining
royalty (net of income tax relief) 12% 12% Impact of foreign
exchange (16)% 6% Impact of changes in future income tax rates -%
(7)% Earnings subject to tax different than statutory rate (5)%
(4)% Changes in valuation allowance 2% (2)% Benefits of losses
recognized through reduction of goodwill -% 3% Assessments and
adjustments -% (7)% Impact of impairment charge on goodwill 22% -%
Other items -% (1)% Effective income tax rate 46% 34%
-------------------------------------------------------------------------
Consolidated Interest and Financing Expenses Interest and financing
expenses of $20.5 million were incurred during the fiscal year
compared to $27.9 million for the prior year. The reduction in
interest and financing expenses relates to a combination of
reduction in debt levels in the mining segment and lower interest
rates. Consolidated Other Income Other income, which includes
interest income on the Company's various bank balances, was $2.2
million during the year compared to $2.8 million in the prior year.
Consolidated Insurance Settlement In December 2008, approximately
$31.7 million in Company-owned and consigned retail inventory at
cost was stolen during a second robbery at the Harry Winston Paris
salon. The Company was fully insured against the loss, and
recognized a pre-tax gain of $16.7 million in the fourth quarter on
settlement of the insurance claim compared to a pre-tax gain of
$13.5 million on the first Paris salon robbery that occurred in the
third quarter of the prior year. The remaining balance of the
insurance claim is $3.3 million, of which $1.0 million was received
in February 2009; the insurance company has agreed to pay the
balance of $2.3 million which is expected to be received during
April 2009. Also included in insurance settlement is a $0.5 million
gain resulting from an excavator fire that occurred in the fourth
quarter of fiscal 2006 at the Diavik Diamond Mine. Consolidated
Impairment Charge The Company tested goodwill for impairment and
determined that the carrying value of its retail segment is below
the fair value as described on page 17. The Company recorded a
non-cash goodwill impairment charge of $93.8 million during the
fourth quarter. Consolidated Foreign Exchange Gain (Loss) A net
foreign exchange gain of $59.1 million was recognized during the
fiscal year compared with a net foreign exchange loss of $43.4
million recognized during the prior year. The current year gain
relates principally to the revaluation of the Company's Canadian
dollar denominated long-term future income tax liability as a
result of the weakening of the Canadian dollar against the US
dollar at January 31, 2009. The Company's ongoing currency exposure
relates primarily to expenses and obligations incurred in Canadian
dollars, as well as the revaluation of certain Canadian monetary
balance sheet amounts. The Company does not currently have any
significant derivative instruments outstanding. Three Months Ended
January 31, 2009 Compared to Three Months Ended January 31, 2008
Consolidated Net Earnings The Company recorded a fourth quarter
loss of $73.0 million or $1.19 per share compared to net earnings
of $90.4 million or $1.55 per share in the fourth quarter of the
prior year. The net loss resulted from a non-cash write-down of the
goodwill relating to the retail operations of $93.8 million or
$1.53 per share. The Company recognized a net $4.6 million foreign
exchange gain or $0.08 per share, compared to a net foreign
exchange gain of $22.3 million or $0.38 per share in the comparable
quarter of the prior year. Also impacting results was an after-tax
gain on insurance settlement of $9.9 million or $0.16 per share
that resulted from the December 2008 robbery at the Harry Winston
Paris salon, compared to a fourth quarter after-tax gain of $8.0
million or $0.14 per share from the October 2007 robbery.
Consolidated Sales Sales for the fourth quarter totalled $118.4
million, consisting of rough diamond sales of $51.1 million and
retail segment sales of $67.3 million. This compares to sales of
$188.2 million in the comparable quarter of the prior year (rough
diamond sales of $103.2 million and retail segment sales of $85.0
million). The Company held two primary rough diamond sales in the
fourth quarter, consistent with the prior year. Ongoing quarterly
variations in revenues are inherent in Harry Winston Diamond
Corporation's business, resulting from the seasonality of the
mining and retail activities as well as from the variability of the
rough diamond sales schedule. Consolidated Cost of Sales and Gross
Margin The Company's fourth quarter cost of sales was $68.9 million
for a gross margin of 41.8% compared to $83.6 million cost of sales
and gross margin of 55.6% for the comparable quarter of the prior
year. The Company's cost of sales includes costs associated with
mining, rough diamond sorting and retail sales activities. See
"Segmented Analysis" on page 9 for additional information.
Consolidated Selling, General and Administrative Expenses The
principal components of SG&A expenses include expenses for
salaries and benefits, advertising, professional fees, rent and
building related costs. The Company incurred SG&A expenses of
$39.4 million for the fourth quarter, compared to $45.5 million in
the comparable quarter of the prior year. Included in SG&A
expenses for the fourth quarter are $4.4 million for the mining
segment as compared to $5.7 million for the comparable quarter of
the prior year, and $35.0 million for the retail segment as
compared to $39.8 million for the comparable quarter of the prior
year. For the mining segment, the decrease was primarily due to a
reduction in discretionary spending. For the retail segment, the
decrease was due to a combination of reduced advertising and
selling expenses and an adjustment to an equity-related
compensation program resulting from the reduction in fair value of
the retail segment. See "Segmented Analysis" on page 9 for
additional information. Consolidated Income Taxes The Company
recorded a tax expense of $7.1 million during the fourth quarter,
compared to a net tax recovery of $2.0 million in the comparable
quarter of the prior year. The Company's effective income tax rate
for the quarter, excluding Harry Winston's retail segment, is 28%,
which is based on a statutory income tax rate of 31% adjusted for
various items including Northwest Territories mining royalty,
impact of foreign exchange, and earnings subject to tax different
than the statutory rate. The Company's functional and reporting
currency is US dollars; however, the calculation of income tax
expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves
against the US dollar. During the fourth quarter of fiscal 2009,
the Canadian dollar weakened against the US dollar. As a result,
the Company recorded an unrealized foreign exchange gain of $3.9
million on the revaluation of the Company's Canadian dollar
denominated future income tax liability. This compares to an
unrealized foreign exchange gain of $17.7 million in the comparable
quarter of the previous year. The unrealized foreign exchange gain
is not taxable for Canadian income tax purposes. During the fourth
quarter of fiscal 2009, the Company also recorded a non-cash
impairment charge of $93.8 million in relation to the goodwill of
Harry Winston's retail segment. The impairment charge is not
deductible for Canadian income tax purposes and is the primary
cause of the unusual effective tax rate for the current quarter.
The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain
jurisdictions to offset future income taxes payable in such
jurisdictions. The net operating losses are scheduled to expire
through 2028. The Company has provided a table below summarizing
the movement from the statutory to the effective income tax rate as
a percentage of earnings before taxes: Three months Three months
ended ended January 31, January 31, 2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 31% 34% Stock compensation -% (1)%
Northwest Territories mining royalty (net of income tax relief)
(1)% 6% Impact of foreign exchange -% (11)% Impact of changes in
future income tax rates -% (12)% Earnings subject to tax different
than statutory rate 4% (1)% Changes in valuation allowance (2)%
(4)% Benefits of losses recognized through reduction of goodwill -%
3% Assessments and adjustments 2% (15)% Impact of impairment charge
on goodwill (44)% -% Other items (1)% (1)% Effective income tax
rate (11)% (2)%
-------------------------------------------------------------------------
Consolidated Interest and Financing Expenses Interest and financing
expenses of $5.0 million were incurred during the fourth quarter
compared to $7.1 million during the comparable quarter of the prior
year. The reduction in interest and financing expenses resulted
from a combination of a reduction in debt levels in the mining
segment and lower interest rates. Consolidated Other Income Other
income of $0.8 million was recorded during the quarter compared to
other income of $0.7 million in the comparable quarter of the prior
year. Consolidated Insurance Settlement In December 2008,
approximately $31.7 million in Company-owned and consigned retail
inventory at cost was stolen during a second robbery at the Harry
Winston Paris salon. The Company was fully insured against the
loss, and recognized a pre-tax gain of $16.7 million in the fourth
quarter on settlement of the insurance claim compared to a fourth
quarter pre-tax gain of $13.5 million on the first Paris salon
robbery that occurred in the third quarter of the prior year. The
remaining balance of the insurance claim is $3.3 million, of which
$1.0 million was received in February 2009; the insurance company
has agreed to pay the balance of $2.3 million which is expected to
be received during April 2009. Also included in insurance
settlement is a $0.5 million gain resulting from an excavator fire
that occurred in the fourth quarter of fiscal 2006 at the Diavik
Diamond Mine. Consolidated Impairment Charge The Company tested
goodwill for impairment and determined that the carrying value of
its retail segment is below its fair value as described on page 17.
The Company recorded a non-cash goodwill impairment charge of $93.8
million during the fourth quarter. Consolidated Foreign Exchange
Gain A net foreign exchange gain of $4.6 million was recognized
during the quarter compared to a net foreign exchange gain of $22.3
million in the comparable quarter of the prior year. The gains
relate principally to the revaluation of the Company's Canadian
dollar denominated long-term future income tax liability as a
result of the weakening of the Canadian dollar against the US
dollar at year end. The Company's ongoing currency exposure relates
primarily to expenses and obligations incurred in Canadian dollars,
as well as the revaluation of certain Canadian monetary balance
sheet amounts. The Company does not currently have any significant
derivative instruments outstanding. Segmented Analysis The
operating segments of the Company include mining and retail
segments. Mining The mining segment includes the production and
sale of rough diamonds. (expressed in thousands of United States
dollars) (quarterly results are unaudited)
-------------------------------------------------------------------------
2009 2009 2009 2009 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 51,100 $ 90,716 $ 105,014 $ 81,393 Cost of sales 34,612
40,617 32,390 32,150
-------------------------------------------------------------------------
Gross margin 16,488 50,099 72,624 49,243 Gross margin (%) 32.3%
55.2% 69.2% 60.5% Selling, general and administrative expenses
4,430 3,114 5,151 7,208
-------------------------------------------------------------------------
Earnings from operations $ 12,058 $ 46,985 $ 67,473 $ 42,035
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2008 2008 2008 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 103,238 $ 122,711 $ 105,071 $ 82,752 Cost of sales 36,962
45,985 46,217 40,516
-------------------------------------------------------------------------
Gross margin 66,276 76,726 58,854 42,236 Gross margin (%) 64.2%
62.5% 56.0% 51.0% Selling, general and administrative expenses
5,663 6,748 5,861 5,087
-------------------------------------------------------------------------
Earnings from operations $ 60,613 $ 69,978 $ 52,993 $ 37,149
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------- 2009
2008 2007 Total Total Total
--------------------------------------------------------------
Sales $ 328,223 $ 413,772 $ 332,573 Cost of sales 139,769 169,680
166,879
--------------------------------------------------------------
Gross margin 188,454 244,092 165,694 Gross margin (%) 57.4% 59.0%
49.8% Selling, general and administrative expenses 19,903 23,359
21,222
--------------------------------------------------------------
Earnings from operations $ 168,551 $ 220,733 $ 144,472
--------------------------------------------------------------
-------------------------------------------------------------- Year
Ended January 31, 2009 Compared to Year Ended January 31, 2008
Mining Sales Rough diamond sales for the year totalled $328.2
million compared to $413.8 million in the prior year resulting
primarily from lower carat production. The Company's share of rough
diamond production during the calendar year decreased 23% to 3.7
million carats compared to the prior year. The lower production
resulted from the negative grade variation in the A-154 South pipe
combined with the mining of low grade, mud-rich material from the
top of the A-418 pipe and a higher volume of A-418 ore being
processed due to challenging mining conditions in the lower benches
of the A-154 pit. The Company held nine primary rough diamond
sales, one of which was an open-market tender, during the fiscal
year compared to ten in the prior year. Harry Winston Diamond
Corporation expects that results for its mining segment will
continue to fluctuate depending on the seasonality of production at
the Diavik Diamond Mine, the number of primary and secondary sales
events conducted at each sales location during the year, rough
diamond prices and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine in each year.
Mining Cost of Sales and Gross Margin The Company's cost of sales
for the fiscal year was $139.8 million for a gross margin of 57.4%
compared to $169.7 million cost of sales and gross margin of 59.0%
in the prior year. The decrease in the gross margin percentage
resulted primarily from lower production. A substantial portion of
cost of sales is mining operating costs, which are incurred at the
Diavik Diamond Mine. Cost of sales also includes rough diamond
sorting costs, which consist of Harry Winston Diamond Corporation's
cost of handling and sorting product in preparation for sales to
third parties, and amortization and depreciation, the majority of
which is recorded using the unit-of-production method over
estimated proven and probable reserves. Mining Selling, General and
Administrative Expenses SG&A expenses for the mining segment
decreased by $3.5 million from the prior year primarily due to a
mark-to-market reduction to stock-based compensation and a
reduction in discretionary spending. Three Months Ended January 31,
2009 Compared to Three Months Ended January 31, 2008 Mining Sales
Rough diamond sales for the quarter totalled $51.1 million compared
to $103.2 million in the comparable quarter of the prior year
resulting from a combination of lower carat production and a
softening of the rough diamond market, leading to lower sales
volumes and prices. Rough diamond production decreased 12% in the
fourth calendar quarter from the prior year. The lower production
resulted from the negative grade variation in the A-154 South pipe
combined with a higher volume of A-418 ore being processed due to
challenging mining conditions in the lower benches of the A-154
pit. The Company held two primary rough diamond sales in the fourth
quarter, consistent with the prior year. The Company expects that
results for its mining segment will continue to fluctuate depending
on the seasonality of production at the Diavik Diamond Mine, the
number of primary and secondary sales events conducted at each
sales location during the quarter, rough diamond prices and the
volume, size and quality distribution of rough diamonds delivered
from the Diavik Diamond Mine in each quarter. Mining Cost of Sales
and Gross Margin The Company's fourth quarter cost of sales was
$34.6 million for a gross margin of 32.3% compared to $37.0 million
cost of sales and gross margin of 64.2% in the comparable quarter
of the prior year. The decrease in the gross margin percentage was
driven by lower carat production and lower prices. The mining gross
margin is anticipated to fluctuate between quarters, resulting from
variations in the specific mix of product sold during each quarter
and rough diamond prices. A substantial portion of cost of sales is
mining operating costs, which are incurred at the Diavik Diamond
Mine. Cost of sales also includes sorting costs, which consist of
Harry Winston Diamond Corporation's cost of handling and sorting
product in preparation for sales to third parties, and amortization
and depreciation, the majority of which is recorded using the
unit-of-production method over estimated proven and probable
reserves. Mining Selling, General and Administrative Expenses
SG&A expenses for the mining segment decreased by $1.2 million
from the comparable period of the prior year primarily due to a
reduction in discretionary spending. Retail The retail segment
includes sales from Harry Winston's salons which are located in
prime markets around the world including eight salons in the United
States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas,
Dallas, Chicago and Costa Mesa; five salons in Japan: Ginza,
Roppongi Hills, Osaka, Omotesando and Nagoya; two salons in Europe:
Paris and London; and three salons in Asia outside of Japan:
Beijing, Taipei and Hong Kong. (expressed in thousands of United
States dollars) (quarterly results are unaudited)
-------------------------------------------------------------------------
2009 2009 2009 2009 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 67,299 $ 57,907 $ 81,105 $ 74,686 Cost of sales 34,296
31,062 41,152 40,999
-------------------------------------------------------------------------
Gross margin 33,003 26,845 39,953 33,687 Gross margin (%) 49.0%
46.4% 49.3% 45.1% Selling, general and administrative expenses
34,969 30,884 34,043 36,077
-------------------------------------------------------------------------
Earnings (loss) from operations $ (1,966) $ (4,039) $ 5,910 $
(2,390)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2008 2008 2008 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 84,957 $ 53,767 $ 68,198 $ 58,613 Cost of sales 46,675
28,606 35,610 30,616
-------------------------------------------------------------------------
Gross margin 38,282 25,161 32,588 27,997 Gross margin (%) 45.1%
46.8% 47.8% 47.8% Selling, general and administrative expenses
39,831 28,791 29,340 29,124
-------------------------------------------------------------------------
Earnings (loss) from operations $ (1,549) $ (3,630) $ 3,248 $
(1,127)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------- 2009
2008 2007 Total Total Total
--------------------------------------------------------------
Sales $ 280,997 $ 265,535 $ 226,220 Cost of sales 147,509 141,507
118,619
--------------------------------------------------------------
Gross margin 133,488 124,028 107,601 Gross margin (%) 47.5% 46.7%
47.6% Selling, general and administrative expenses 135,973 127,086
105,314
--------------------------------------------------------------
Earnings (loss) from operations $ (2,485) $ (3,058) $ 2,287
--------------------------------------------------------------
-------------------------------------------------------------- Year
Ended January 31, 2009 Compared to Year Ended January 31, 2008
Retail Sales Sales for the fiscal year ending January 31, 2009 were
$281.0 million compared to $265.5 million for the prior year. Sales
in the European market increased 44% to $117.6 million, US sales
decreased 16% to $94.0 million, and Asian sales decreased 3% to
$69.4 million. Retail Cost of Sales and Gross Margin Cost of sales
for Harry Winston Inc. for the fiscal year was $147.5 million
compared to $141.5 million for the prior year. Gross margin for the
fiscal year was $133.5 million or 47.5% compared to $124.0 million
or 46.7% for the prior year. Excluding the impact of sales of Harry
Winston Inc. pre-acquisition inventory, gross margin for the fiscal
year and the prior year would have been 49.4% and 50.3%,
respectively. This decrease in gross margin is the result of the
product mix sold, in particular a lower proportion of higher-margin
sales in the Japanese market, an increased contribution of high
dollar value transactions which carry lower-than-average gross
margins, and higher research and development costs to support the
growing watch business. Retail Selling, General and Administrative
Expenses SG&A expenses increased to $136.0 million for the
fiscal year as compared to $127.1 million in the prior year.
However, SG&A as a percentage of sales remained at 48% for the
fiscal year consistent with the prior year. The increase of $8.9
million in SG&A expenses from the prior year is primarily due
to an increase of $4.0 million in insurance premiums, $3.3 million
in amortization expense, $3.1 million in rent and building related
expenses, $0.6 million in salaries and benefits, offset by a
decrease of $3.0 million in advertising and selling expenses.
Included in these amounts was approximately $2.0 million of
non-recurring expenses related to restructuring and improvements
carried out at the Geneva watch factory. SG&A expenses include
depreciation and amortization expense of $12.6 million compared to
$9.3 million in the comparable period of the prior year. Three
Months Ended January 31, 2009 Compared to Three Months Ended
January 31, 2008 Retail Sales Sales for the fourth quarter were
$67.3 million compared to $85.0 million for the comparable quarter
of the prior year, a decrease of 21%. Sales in the European market
increased 77% to $30.9 million. US sales decreased 60% to $18.8
million, and Asian sales decreased 16% to $17.6 million. Retail
Cost of Sales and Gross Margin Cost of sales for Harry Winston Inc.
for the fourth quarter was $34.3 million compared to $46.7 million
for the comparable quarter of the prior year. Gross margin for the
quarter was $33.0 million or 49.0% compared to $38.3 million or
45.1% for the fourth quarter of the prior year. Excluding the
impact of sales of Harry Winston Inc. pre-acquisition inventory,
gross margin for the fourth quarter and the comparable quarter of
the prior year would have been 50.1% and 47.4%, respectively. Gross
margin in the fourth quarter of the prior year was impacted by a
significant sale of a wide range of jewelry items to the Russian
market, which generated a lower than average gross margin. This
sale was made to increase awareness of the Harry Winston brand in
this market, where demand for luxury brands has grown rapidly over
the past several years. Retail Selling, General and Administrative
Expenses SG&A expenses decreased to $35.0 million from $39.8
million in the comparable quarter of the prior year. The decrease
was due to a combination of reduced advertising and selling
expenses and an adjustment to an equity-related compensation
program resulting from the non-cash goodwill impairment charge on
the carrying value of the retail segment. SG&A expenses include
depreciation and amortization expense of $3.2 million, consistent
with the comparable quarter of the prior year. SG&A as a
percentage of sales increased to 52% compared to 47% in the
comparable quarter of the prior year. Operational Update Harry
Winston Diamond Corporation's results of operations include results
from its mining and retail operations. Mining Segment Annual
production at the Diavik Diamond Mine reached 9.2 million carats
for the calendar year ended December 31, 2008, representing a
decrease of 23% over the prior year. The lower production resulted
from a local grade decrease compared to the reserve grade in a part
of the A-154 South pipe combined with the mining of low grade,
mud-rich material from the top of the A-418 pipe. A higher volume
of A-418 ore was processed compared to plan due to challenging
mining conditions in the lower benches of the A-154 pit. During the
fourth quarter of 2008, the Diavik Diamond Mine reached a milestone
of 50 million carats produced. Ore production for the fourth
calendar quarter consisted of 1.5 million carats produced from 0.29
million tonnes of ore from the A-154 South kimberlite pipe, and 1.1
million carats produced from 0.28 million tonnes from the A-418
kimberlite pipe. Harry Winston Diamond Corporation's 40% Share of
Diavik Diamond Mine Production (reported on a one-month lag)
-------------------------------------------------------------------------
Three Three Twelve Twelve months months months months ended ended
ended ended December December December December 31, 31, 31, 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 1,039 1,177 3,690 4,777 Grade
(carats/tonne) 4.56 5.06 3.82 4.97
-------------------------------------------------------------------------
Retail Segment For the fiscal year, the retail segment generated
growth in sales of 6% over the prior year period. Strong sales to
clients in the Middle East, Russia and Asia outside of Japan
compensated for weaker sales in the US and Japan. A new salon was
opened in Costa Mesa, California in August 2008. For the fourth
quarter, the retail segment recorded a 21% decline in sales over
the comparable quarter of the prior year. Weak sales in the US and
Japan were primarily responsible for the overall decrease in sales.
Harry Winston Inc. operated a network of 18 retail salons during
the current year. The retail segment has implemented a series of
measures in response to the global recession, including cost
reduction initiatives, close monitoring of inventory levels and a
very selective expansion of the retail salon distribution network.
Liquidity and Capital Resources Working Capital As at January 31,
2009, Harry Winston Diamond Corporation had unrestricted cash and
cash equivalents of $16.7 million and contingency cash collateral
and reserves of $30.1 million as required under the Company's debt
arrangements, compared to $49.6 million and $25.6 million,
respectively, at January 31, 2008. The Company had cash on hand and
balances with banks of $14.1 million and short-term investments of
$2.6 million at January 31, 2009. The short-term investments were
held in overnight deposits. Total cash resources at January 31,
2009 were $28.3 million lower than $75.2 million at January 31,
2008, resulting from additional joint venture cash calls to support
the development of underground mining and debt repayments. During
the year ended January 31, 2009, the Company generated $144.1
million in cash from operations, compared to $193.9 million in the
prior year. Working capital decreased to $195.1 million at January
31, 2009 from $220.0 million at January 31, 2008. During the fiscal
year, the Company increased accounts receivable by $43.3 million,
most of which related to an insurance settlement receivable
resulting from the Paris salon robbery (which was received in
February 2009), decreased prepaid expenses and other current assets
by $8.2 million, increased inventory by $24.0 million, decreased
accounts payable and accrued liabilities by $4.5 million, and
increased income taxes payable by $39.1 million. The Company's
liquidity requirements fluctuate from quarter to quarter depending
on, among other factors, the seasonality of production at the
Diavik Diamond Mine, seasonality of mine operating expenses,
capital expenditure programs, the number of sales events conducted
during the quarter and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine in each
quarter, along with the seasonality of sales and salon expansion in
the retail segment. The Company's principal working capital needs
include investments in inventory, prepaid expenses and other
current assets, and accounts payable and income taxes payable. The
Company's mining and retail segments maintain separate financing
arrangements. Accordingly, the Company assesses liquidity and
capital resources on a segmented basis. The retail segment's cash
requirements are for cash operating expenses, working capital and
capital expenditures, including salon expansion. The Company
believes that cash on hand, cash generated from operations and
access to credit facilities will be sufficient to meet anticipated
cash requirements for the retail segment next fiscal year. The
mining segment's cash requirements are for cash operating expenses,
working capital and capital expenditures. With the closing of the
Kinross transaction, the Company believes that cash on hand and
cash generated from the sale of rough diamonds will be sufficient
to meet anticipated cash requirements for the next fiscal year.
Financing Activities During the fiscal year, Harry Winston Diamond
Corporation repaid $52.2 million of its senior secured term
facilities. At January 31, 2009, the Company had $24.2 million
outstanding on its senior secured term credit facilities and $50.0
million outstanding on its senior secured revolving credit
facility. With the closing of the Kinross transaction, all amounts
outstanding on the Company's senior secured term and revolving
credit facilities were repaid as of March 31, 2009. On February 22,
2008, Harry Winston Inc. entered into a new credit agreement with a
syndicate of banks for a $250.0 million, five-year revolving credit
facility. As at January 31, 2009, Harry Winston Inc. had $179.6
million outstanding on its $250.0 million secured five-year
revolving credit facility, which is used to fund salon inventory
and capital expenditure requirements. This represents an increase
of $25.6 million from the amount outstanding at January 31, 2008.
Also included in long-term debt of the Company's retail operations
is a 25-year loan agreement for $15.0 million (17.5 million CHF)
used to finance the construction of the new watch factory in
Geneva, Switzerland. At January 31, 2009, $14.7 million had been
drawn against the facility compared to $16.1 million at January 31,
2008. The bank has a secured interest in the factory building. On
June 26, 2008, the bank further extended a demand credit facility
for 2.0 million CHF. The new facility is supported by a $2.0
million standby letter of credit. At January 31, 2009, $0.5 million
was drawn against this demand credit facility. Harry Winston Japan,
K.K. maintains secured and unsecured credit agreements with three
banks amounting to $23.1 million ((Yen)2,075 million). At January
31, 2009, $23.1 million had been drawn against these facilities,
$5.5 million of which is long term, payable on June 28, 2010, with
the balance of $17.6 million classified as bank advances. At
January 31, 2009, $18.4 million, $4.7 million and $1.5 million were
drawn under the Company's revolving financing facilities relating
to its Belgian subsidiary, Harry Winston Diamond International
N.V., its Israeli subsidiary, Harry Winston Diamond (Israel)
Limited and its Indian subsidiary, Harry Winston Diamond (India)
Private Limited, respectively. During the fiscal year, the Company
made dividend payments of $12.3 million or $0.20 per share to its
shareholders. On March 14, 2008, the Company completed a 3 million
common share private placement. The non-brokered private placement
sold 3 million common shares at CDN $25 per share. No fees or
commissions were payable on this transaction which generated net
proceeds of CDN $75.0 million. This transaction diluted the
Company's issued and outstanding shares by 5%. Investing Activities
During the fiscal year, the Company purchased capital assets of
$209.9 million, of which $200.3 million were purchased for the
mining segment and $9.6 million for the retail segment. Contractual
Obligations The Company has contractual payment obligations with
respect to long-term debt and, through its participation in the
Joint Venture, future site restoration costs at the Diavik Diamond
Mine level. Additionally, at the Joint Venture level, contractual
obligations exist with respect to operating purchase obligations,
as administered by DDMI, the operator of the mine. In order to
maintain its 40% ownership interest in the Diavik Diamond Mine, the
Company is obligated to fund 40% of the Joint Venture's total
expenditures on a monthly basis. Harry Winston Diamond
Corporation's current projected share of the planned capital
expenditures at the Diavik Diamond Mine, which are not reflected in
the table below, including capital expenditures for the calendar
years 2009 to 2013, is approximately $170 million assuming a
Canadian/US average exchange rate of $0.86 for the five years. The
most significant contractual obligations for the ensuing five-year
period can be summarized as follows: Contractual Obligations
(expressed in thousands of United States Less than Year Year After
dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $245,198 $ 9,488 $ 26,799 $192,135 $ 16,776
Environmental and participation agreements incremental
commitments(c) 77,345 64,243 2,609 1,011 9,482 Operating lease
obligations(d) 106,064 17,701 26,280 16,865 45,218 Capital lease
obligations(e) 1,389 844 545 - -
-------------------------------------------------------------------------
Total contractual obligations $429,996 $ 92,276 $ 56,233 $210,011 $
71,476
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. The mining segment's credit
agreements are comprised of two senior secured term credit
facilities and a senior secured revolving credit facility. The
existing facilities had a maturity date of December 15, 2009. At
January 31, 2009, $24.2 million in total was outstanding on the
senior secured term credit facilities, and $50.0 million was
outstanding on the senior secured revolving credit facility. With
the closing of the Kinross transaction, these amounts outstanding
on the Company's senior secured term and revolving credit
facilities were repaid as of March 31, 2009. The Company's first
mortgage on real property has scheduled principal payments of
approximately $0.1 million quarterly, and may be prepaid after
2009. On January 31, 2009, $6.8 million was outstanding on the
mortgage payable. On February 22, 2008, Harry Winston Inc. entered
into a new credit agreement with a syndicate of banks for a $250.0
million, five-year revolving credit facility. There are no
scheduled repayments required before maturity. At January 31, 2009,
$179.6 million had been drawn against this secured credit facility
which expires on March 31, 2013. Also included in long-term debt of
Harry Winston Inc. is a 25-year loan agreement for $15.0 million
(17.5 million CHF) used to finance the construction of the new
watch factory in Geneva, Switzerland. The bank has a secured
interest in the factory building. The loan agreement is comprised
of a 3.5 million CHF loan and a 14.0 million CHF loan. The 3.5
million CHF loan bears interest at a rate of 3.9% and matures on
April 22, 2010. The 14.0 million CHF loan bears interest at a rate
of 3.55% and matures on January 31, 2033. Quarterly payments on the
loan began on June 30, 2008. At January 31, 2009, $14.7 million was
outstanding on these loan agreements. On June 26, 2008, the bank
further extended a demand credit facility for 2.0 million CHF. The
new facility is supported by a $2.0 million standby letter of
credit and bears interest at a rate of 5.0% per annum. At January
31, 2009, $0.5 million was drawn against the demand credit
facility. Harry Winston Japan, K.K. maintains unsecured credit
agreements with two banks each amounting to $8.4 million ((Yen)750
million). At January 31, 2009, $16.8 million had been drawn against
these facilities, $5.5 million of which is long term, with the
balance of $11.3 million classified as bank advances. The
short-term portion of the credit facilities bear interest at 1.98%
and expire on April 30, 2009, and June 1, 2009, respectively. The
long-term portion bears interest at 2.38% and expires on June 28,
2010. Harry Winston Inc. has also entered into a credit agreement
to provide a credit facility to Harry Winston Japan, K.K. secured
solely by the inventory of Harry Winston Japan, K.K. in an amount
of $6.4 million ((Yen)575 million). This facility bears interest at
2.30% and expires on June 19, 2009. (b) Interest on long-term debt
is calculated at various fixed and floating rates. Projected
interest payments on the current debt outstanding were based on
interest rates in effect at January 31, 2009 and have been included
under long-term debt in the table above. Interest payments for
fiscal 2010 are approximated to be $8.5 million. (c) The Joint
Venture, under environmental and other agreements, must provide
funding for the Environmental Monitoring Advisory Board. These
agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental
laws and regulations. The Joint Venture has fulfilled its
obligations for the security deposits by posting letters of credit
of which Harry Winston Diamond Corporation's share as at January
31, 2009 was $61.4 million based on the Company's 40% ownership
interest in the Diavik Diamond Mine. Following the closing of the
transaction with Kinross of an indirect interest in the Diavik
Diamond Mine as described on page 16, the Company will effectively
have a 31% economic interest in the Diavik Diamond Mine. The
requirement to post security for the reclamation and abandonment
obligations may be reduced to the extent of amounts spent by the
Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The actual cash
outlay for the Joint Venture's obligations under these agreements
is not anticipated to occur until later in the life of the Diavik
Diamond Mine. (d) Operating lease obligations represent future
minimum annual rentals under non-cancellable operating leases for
Harry Winston salons and office space. Harry Winston Inc.'s New
York salon lease expires on December 17, 2010 with an option to
renew. (e) Capital lease obligations represent future minimum
annual rentals under non-cancellable capital leases for Harry
Winston Inc. retail exhibit space. Outlook Mining A mine plan and
budget for calendar 2009 was approved in the fourth quarter of
calendar 2008 by both Rio Tinto plc, the operator of the Diavik
Diamond Mine, and the Company. However, as a result of the weakness
in the diamond industry and the global credit markets, significant
changes to this mine plan and budget are expected. On March 30,
2009, DDMI announced that it plans to take a series of actions to
preserve the strength of the Diavik Diamond Mine during the
challenging global market conditions. These actions include two
production shutdowns, further deferral of the start of underground
mine production, and accelerating the planned transition to a
smaller work force. Summer and winter production shutdowns of six
weeks each in duration will be implemented. During these shutdowns
diamond production will cease and the mine will be placed on a care
and maintenance schedule. The summer shutdown is scheduled for July
14, 2009 to August 24, 2009 inclusive. The winter shutdown is
scheduled for December 1, 2009 to January 11, 2010 inclusive.
Approximately 500 full-time equivalent positions will be affected
by the shutdowns, with affected workers being provided with a
number of options to fit their circumstances. Additional actions
include placing the underground mine on care and maintenance by the
third quarter of 2009, once the majority of its construction is
complete. Diavik Diamond Mine will also be accelerating the process
of employee reductions required for a fully operational underground
mine. This will be achieved primarily by natural attrition. These
actions will reduce operating expenditures, defer a significant
amount of underground capital expenditures and reduce carat
production in calendar 2009 to ensure that the operation is well
positioned for the future. The operational plan for the Diavik
Diamond Mine will remain flexible for the balance of this calendar
year to maintain the ability to respond to changing diamond market
conditions. Further details of the plan are expected to be
available by the end of April 2009. Retail Harry Winston Inc.
expects sales in the luxury diamond jewelry industry to continue to
be negatively impacted by economic conditions through at least the
first half of the fiscal year. The Company has implemented a series
of cost reduction measures to align its cost structure with the
realities of the economy. The strength of the Harry Winston brand
and international distribution network has positioned the Company
to withstand the unprecedented economic challenges currently being
faced throughout the world. Harry Winston Inc. will continue to
focus on providing our customers with the highest level of quality
and service in our industry. Notwithstanding the current economic
conditions, Harry Winston Inc. will continue its plan to strengthen
its brand and expand its retail salon network and product offering
over the next several years. To that end, one salon is planned to
be opened in Singapore during in fiscal 2010. Dividend On March 19,
2009, the Company announced that it has suspended its dividend for
the time being. Subsequent Event On March 19, 2009, the Company
announced a strategic investment by Kinross Gold Corporation,
whereby Kinross will make a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a
direct equity stake in the Company. Kinross will subscribe for 15.2
million of the Company's treasury shares at a price of $3.00 per
share, being approximately 19.9% of the Company's issued equity
post the transaction. Kinross will also subscribe for new
partnership units representing a 22.5% interest in the limited
partnership which holds the Company's 40% ownership interest in the
Diavik Diamond Mine, for a net effective subscription value of
$104.4 million. The transaction closed on March 31, 2009 and the
Company's economic interest in the Diavik Diamond Mine is now 31%.
With the closing of the Kinross transaction, all amounts
outstanding on the Company's senior secured term and revolving
credit facilities were repaid as of March 31, 2009. If the
transaction had closed on January 31, 2009, the Company would have
recorded a non-cash dilution loss of approximately $30 million in
respect of its interest in the Diavik Diamond Mine. Disclosure
Controls and Procedures The Company has designed a system of
disclosure controls and procedures to provide reasonable assurance
that material information relating to Harry Winston Diamond
Corporation, including its consolidated subsidiaries, is made known
to them by others within those entities, particularly during the
period in which the Company's annual filings are being prepared. In
designing and evaluating the disclosure controls and procedures,
the management of the Company recognized that any controls and
procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control
objectives. The management of Harry Winston Diamond Corporation was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The result of the
inherent limitations in all control systems means no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected. The management of
Harry Winston Diamond Corporation has evaluated the effectiveness
of the design and operation of its disclosure controls and
procedures as of the end of the period covered by the Annual
Report. Based on that evaluation, management has concluded that
these disclosure controls and procedures, as defined in Canada by
Multilateral Instrument 52-109, Certification of Disclosure in
Issuers' Annual and Interim Filings, and in the United States by
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act"), are effective as of January 31, 2009 to ensure
that information required to be disclosed in reports that the
Company will file or submit under Canadian securities legislation
and the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in those rules and
forms. Internal Control over Financial Reporting The certifying
officers of Harry Winston Diamond Corporation have designed a
system of internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance
with Canadian GAAP and the requirements of the Securities and
Exchange Commission in the United States, as applicable. Management
is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company, including its
consolidated subsidiaries. Management has evaluated the
effectiveness of internal control over financial reporting using
the framework and criteria established in the Internal Control -
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
management has concluded that internal control over financial
reporting was effective as of January 31, 2009. Changes in Internal
Control over Financial Reporting During the fourth quarter of
fiscal 2009 there were no changes in the Company's internal control
over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting. Critical Accounting Estimates
Management is often required to make judgments, assumptions and
estimates in the application of Canadian generally accepted
accounting principles that have a significant impact on the
financial results of the Company. Certain policies are more
significant than others and are, therefore, considered critical
accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in
their application or if they result from a choice between
accounting alternatives and that choice has a material impact on
the Company's reported results or financial position. The following
discussion outlines the accounting policies and practices that are
critical to determining Harry Winston Diamond Corporation's
financial results. Goodwill The Company tests goodwill for
impairment on an annual basis as of January 31 of each year and at
any other time if an event occurs or circumstances change that
would more likely than not reduce the fair value of the retail
reporting unit below its carrying amount. The Company's goodwill
relates to its retail segment, which was acquired through its
purchase of Harry Winston Inc. The impairment test for goodwill is
a two-step process. Step one consists of a comparison of the fair
value of the reporting unit with its carrying amount, including
goodwill allocated to the reporting unit. Measurement of the fair
value of the reporting unit is based on the amount of consideration
that would be agreed upon in an arm's length transaction between
knowledgeable, willing parties who are under no compulsion to act.
The Company determined the fair value of the retail reporting unit
using the discounted cash flow as the primary methodology. To
support the fair value conclusion based on the discounted cash flow
method the Company compared the implied multiples of enterprise
value to revenue and enterprise value to EBITDA to those multiples
for comparable publicly traded companies and acquisition
transactions for comparable companies. These approaches involve
significant management judgment. If the carrying amount of the
reporting unit exceeds its fair value, step two requires that the
fair value of the reporting unit be allocated to the underlying
assets and liabilities of that reporting unit, whether or not
previously recognized, resulting in an implied fair value of
goodwill. If the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill, a non-cash
impairment charge equal to the excess is recorded in earnings. The
significant adverse changes in the global business climate that
began in the third quarter of fiscal 2009 have worsened, resulting
in a deterioration in the operating environment for the Company's
retail segment. This has resulted in adverse changes to the
Company's financial forecasts for the retail reporting unit. As at
January 31, 2009, the Company determined that the fair value of the
retail reporting unit was less than its carrying value and a
non-cash goodwill impairment charge of $93.8 million was made
during the fourth quarter. This charge eliminates the goodwill
recorded on the acquisition of Harry Winston Inc. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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 date of the financial statements, and the
reported amounts of earnings, revenues and expenses during the
reporting year. Significant areas requiring the use of management
estimates relate to the determination of impairment of capital
assets, intangible assets, goodwill and deferred mineral property
costs, estimation of future site restoration costs and future
income taxes. Financial results as determined by actual events
could differ from those estimated. The most significant estimates
relate to the valuation of deferred mineral property costs and
future site restoration costs. Management makes significant
estimates related to the measurement of reclamation obligations and
the timing of the related cash flows and future income tax
liabilities. Such timing and measurement uncertainty could have a
material effect on the reported results of operations and the
financial position of the Company. Actual results could differ
materially from those estimates in the near term. Deferred Mineral
Property Costs and Mineral Reserves Harry Winston Diamond
Corporation capitalizes all direct development and pre-production
costs relating to mineral properties and amortizes such costs on a
unit-of-production basis upon commencement of commercial production
relating to the underlying property. Deferred mineral property
costs are amortized based on estimated proven and probable reserves
at the property. On an ongoing basis, the Company evaluates
deferred costs relating to each property to ensure that the
estimated recoverable amount exceeds the carrying value. Based on
the Diavik Diamond Mine's latest projected open pit and underground
life from the mine plan and diamond prices from the Diavik Project
feasibility study, there is no requirement to write down deferred
mineral property costs. The estimation of reserves is a subjective
process. Forecasts are based on engineering data, projected future
rates of production and the timing of future expenditures, all of
which are subject to numerous uncertainties and various
interpretations. The Company expects that its estimates of reserves
will change to reflect updated information. Reserve estimates can
be revised upward or downward based on the results of future
drilling, testing or production levels, and diamond prices. Changes
in reserve estimates can impact the evaluation of net recoverable
deferred costs. Future Site Restoration Costs The Company has
obligations for future site restoration costs. The Company records
the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the
assets. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the
obligation is adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows
underlying the obligation. If the obligation is settled for other
than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. As at January 31, 2009,
estimates of all legal obligations at the joint venture level have
been included in the consolidated financial statements of the
Company. Processes to track and monitor these obligations are
carried out at the joint venture level. Intangible Assets Certain
of the Company's intangible assets are recorded at fair value upon
acquisition and have an indefinite useful life. The Company
assesses impairment of such intangible assets by determining
whether the carrying value exceeds the fair value. If the fair
value is determined to be less than the net book value, the excess
of the net book value over the fair value is charged to earnings in
the year in which such impairment is determined by management.
These approaches involve significant management judgment and, as a
result, are subject to change. Risks and Uncertainties Harry
Winston Diamond Corporation is subject to a number of risks and
uncertainties as a result of its operations. In addition to the
other information contained in this Management's Discussion and
Analysis and the Company's other publicly filed disclosure
documents, readers should give careful consideration to the
following risks, each of which could have a material adverse effect
on the Company's business prospects or financial condition: Nature
of Mining The operation of the Diavik Diamond Mine is subject to
risks inherent in the mining industry, including variations in
grade and other geological differences, unexpected problems
associated with required water retention dikes, water quality,
surface and underground conditions, processing problems, equipment
performance, accidents, labour disputes, risks relating to the
physical security of the diamonds, force majeure risks and natural
disasters. Particularly with underground mining operations,
inherent risks include variations in rock structure and strength as
it impacts on mining method selection and performance, de-watering
and water handling requirements, achieving the required paste
backfill strengths, and unexpected local ground conditions.
Hazards, such as unusual or unexpected rock formations, rock
bursts, pressures, collapses, flooding or other conditions, may be
encountered during mining. Such risks could result in personal
injury or fatality; damage to or destruction of mining properties,
processing facilities or equipment; environmental damage; delays,
suspensions or permanent reductions in mining production; monetary
losses; and possible legal liability. The Diavik Diamond Mine,
because of its remote northern location and access only by winter
road or by air, is subject to special climate and transportation
risks. These risks include the inability to operate or to operate
efficiently during periods of extreme cold, the unavailability of
materials and equipment, and increased transportation costs due to
the late opening and/or early closure of the winter road. Such
factors can add to the cost of mine development, production and
operation and/or impair production and mining activities, thereby
affecting the Company's profitability. Nature of Joint Arrangement
with DDMI The Company owns an undivided 40% interest in the assets,
liabilities and expenses of the Diavik Diamond Mine and the Diavik
group of mineral claims. The Diavik Diamond Mine and the
exploration and development of the Diavik group of mineral claims
is a joint arrangement between DDMI (60%) and Harry Winston Diamond
Mines Ltd. (40%), and is subject to the risks normally associated
with the conduct of joint ventures and similar joint arrangements.
These risks include the inability to exert influence over strategic
decisions made in respect of the Diavik Diamond Mine and the Diavik
group of mineral claims. By virtue of DDMI's 60% interest in the
Diavik Diamond Mine, it has a controlling vote in virtually all
Joint Venture management decisions respecting the development and
operation of the Diavik Diamond Mine and the development of the
Diavik group of mineral claims. Accordingly, DDMI is able to
determine the timing and scope of future project capital
expenditures, and therefore is able to impose capital expenditure
requirements on the Company that the Company may not have
sufficient cash to meet. The Company's contribution to capital
requirements to complete the underground development and supporting
infrastructure contemplated by the current mine plan is estimated
to be $75 million for fiscal 2010 at an average Canadian/US dollar
exchange rate of $0.85, with funding expected to be provided by
cash flow from operations and a refinancing of the Company's credit
facilities. There can be no assurance that the Company will be able
to refinance its current credit facilities on satisfactory terms
and conditions, or at all. A failure by the Company to meet capital
expenditure requirements imposed by DDMI could result in the
Company's interest in the Diavik Diamond Mine and the Diavik group
of mineral claims being diluted. Agreement with Kinross Under the
amended partnership agreement of Harry Winston Diamond Limited
Partnership, the general partner is entitled to request that the
partners in the partnership advance funds to the partnership pro
rata based on their holdings of partnership units for the purpose
of satisfying the partnership's obligations under various
contractual commitments, including those deriving from the joint
arrangement between DDMI and Harry Winston Diamond Mines Ltd. The
partners may unanimously determine to fund any cash call by way of
a loan rather than equity contribution. If a partner fails to
contribute its proportion of funds with respect to a cash call, the
non-defaulting partner or partners will have the option, but not
the obligation, to fund the defaulting partner's portion of the
cash call by way of equity contribution or loan or a combination of
the two; provided that if any equity contribution is made, the
non-defaulting partner's interest in the Harry Winston Diamond
Limited Partnership will be increased proportionately through the
issuance of additional partnership units. As DDMI, under the joint
arrangement between DDMI and Harry Winston Diamond Mines Ltd, is
able to determine the timing and scope of future project capital
expenditures and to impose capital expenditure requirements on the
Company that the Company may not have sufficient cash to meet, the
Company's interest in the Harry Winston Diamond Limited Partnership
could be diluted under the amended partnership agreement as a
failure by the Company to meet cash call requirements imposed by
the amended partnership agreement which could result in the
Company's interest in the partnership being diluted. Diamond Prices
and Demand for Diamonds The profitability of the Company is
dependent upon production from the Diavik Diamond Mine and on the
results of the operations of its retail operations. Each in turn is
dependent in significant part upon the worldwide demand for and
price of diamonds. Diamond prices fluctuate and are affected by
numerous factors beyond the control of the Company, including
worldwide economic trends, particularly in the US, Japan, China and
India, worldwide levels of diamond discovery and production and the
level of demand for, and discretionary spending on, luxury goods
such as diamonds and jewelry. Low or negative growth in the
worldwide economy, prolonged credit market disruptions or the
occurrence of terrorist or similar activities creating disruptions
in economic growth could result in decreased demand for luxury
goods such as diamonds and jewelry, thereby negatively affecting
the price of diamonds and jewelry. Similarly, a substantial
increase in the worldwide level of diamond production could also
negatively affect the price of diamonds. In each case, such
developments could materially adversely affect the Company's
results of operations. Cash Flow and Liquidity The Company's
liquidity requirements fluctuate from quarter to quarter depending
on, among other factors, the seasonality of production at the
Diavik Diamond Mine, seasonality of mine operating expenses,
capital expenditure programs, the number of sales events conducted
during the quarter and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine in each
quarter, along with the seasonality of sales and salon expansion in
the retail segment. The Company's principal working capital needs
include investments in inventory, prepaid expenses and other
current assets, and accounts payable and income taxes payable.
There can be no assurance that the Company will be able to meet
each or all of its liquidity requirements. A failure by the Company
to meet its liquidity requirements could result in the Company
failing to meet its planned developments objectives, or in the
Company being in default of a contractual obligation, each of which
could have a material adverse effect on the Company's business
prospects or financial condition. Economic Environment The
Company's financial results are tied to the global economic
environment. The global markets are experiencing the impact of a
significant US and International economic downturn. This could
restrict the Company's growth opportunities both domestically and
internationally. Should economic conditions not improve or further
deteriorate, the Company could experience revenue pressure across
both its business segments and a decrease in the availability of
credit, which could have a material adverse effect on the Company's
business prospects or financial condition. Currency Risk Currency
fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the US
dollar price, and although the Company reports its financial
results in US dollars, a majority of the costs and expenses of the
Diavik Diamond Mine are incurred in Canadian dollars. Further, the
Company has a significant future income tax liability that has been
incurred and will be payable in Canadian dollars. The Company's
currency exposure relates primarily to expenses and obligations
incurred by it in Canadian dollars and, secondarily, to revenues of
Harry Winston Inc. in currencies other than the US dollar. The
appreciation of the Canadian dollar against the US dollar, and the
depreciation of such other currencies against the US dollar,
therefore, will increase the expenses of the Diavik Diamond Mine
and the amount of the Company's Canadian dollar liabilities
relative to the revenue the Company will receive from diamond
sales, and will decrease the US dollar revenues received by Harry
Winston Inc. From time to time, the Company may use a limited
number of derivative financial instruments to manage its foreign
currency exposure. Licenses and Permits The operation of the Diavik
Diamond Mine and exploration on the Diavik property requires
licenses and permits from the Canadian government. Renewal of the
Diavik Diamond Mine Type "A" Water License was granted by the
regional Wek'eezhii Land and Water Board on November 1, 2007 for an
eight-year period. While the Company anticipates that DDMI, which
is also the operator of the Diavik Diamond Mine, will be able to
renew this license and other necessary permits in the future, there
can be no guarantee that DDMI will be able to do so or obtain or
maintain all other necessary licenses and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the Diavik property. Regulatory and
Environmental Risks The operation of the Diavik Diamond Mine,
exploration activities at the Diavik Project and the manufacturing
of jewelry and watches are subject to various laws and regulations
governing the protection of the environment, exploration,
development, production, taxes, labour standards, occupational
health, waste disposal, mine safety, manufacturing safety and other
matters. New laws and regulations, amendments to existing laws and
regulations, or more stringent implementation or changes in
enforcement policies under existing laws and regulations could have
a material adverse impact on the Company by increasing costs and/or
causing a reduction in levels of production from the Diavik Diamond
Mine and in the manufacture of jewelry and watches. As well, as the
Company's international operations expand, it or its subsidiaries
become subject to laws and regulatory regimes which differ
materially from those under which they operate in Canada and the
US. Mining and manufacturing are subject to potential risks and
liabilities associated with pollution of the environment and the
disposal of waste products occurring as a result of mining and
manufacturing operations. To the extent that the Company's
operations are subject to uninsured environmental liabilities, the
payment of such liabilities could have a material adverse effect on
the Company. Climate Change Canada ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change in late
2002 and the Kyoto Protocol came into effect in Canada in February
2005. The Canadian government is currently developing a number of
policy measures in order to meet its emission reduction guidelines.
While the impact of these measures cannot be quantified at this
time, the likely effect will be to increase costs for fossil fuels,
electricity and transportation, restrict industrial emission
levels, impose added costs for emissions in excess of permitted
levels and increase costs for monitoring and reporting. Compliance
with these initiatives could have a material adverse effect on the
Company's results of operations. Resource and Reserve Estimates The
Company's figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can
be given that the anticipated carats will be recovered. The
estimation of reserves is a subjective process. Forecasts are based
on engineering data, projected future rates of production and the
timing of future expenditures, all of which are subject to numerous
uncertainties and various interpretations. The Company expects that
its estimates of reserves will change to reflect updated
information. Reserve estimates may be revised upward or downward
based on the results of current and future drilling, testing or
production levels and on changes in mine design. In addition,
market fluctuations in the price of diamonds or increases in the
costs to recover diamonds from the Diavik Diamond Mine may render
the mining of ore reserves uneconomical. Mineral resources that are
not mineral reserves do not have demonstrated economic viability.
Due to the uncertainty that may attach to inferred mineral
resources, there is no assurance that mineral resources at the
Diavik property will be upgraded to proven and probable ore
reserves. Insurance The Company's business is subject to a number
of risks and hazards, including adverse environmental conditions,
industrial accidents, labour disputes, unusual or unexpected
geological conditions, risks relating to the physical security of
diamonds and jewelry held as inventory or in transit, changes in
the regulatory environment and natural phenomena such as inclement
weather conditions. Such occurrences could result in damage to the
Diavik Diamond Mine, personal injury or death, environmental damage
to the Diavik property, delays in mining, closing of Harry Winston
Inc.'s manufacturing facilities or salons, monetary losses and
possible legal liability. Although insurance is maintained to
protect against certain risks in connection with the Diavik Diamond
Mine and the Company's operations, the insurance in place will not
cover all potential risks. It may not be possible to maintain
insurance to cover insurable risks at economically feasible
premiums. Fuel Costs The Diavik Diamond Mine's expected fuel needs
are purchased periodically during the year for storage, and
transported to the mine site by way of the winter road. These costs
will increase if transportation by air freight is required due to a
shortened "winter road season" or unexpectedly high fuel usage. The
cost of the fuel purchased is based on the then prevailing price
and expensed into operating costs on a usage basis. The Diavik
Diamond Mine currently has no hedges for its future anticipated
fuel consumption. Reliance on Skilled Employees Production at the
Diavik Diamond Mine is dependent upon the efforts of certain
skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled
employees may adversely affect the level of diamond production from
the Diavik Diamond Mine. The Company's success at marketing rough
diamonds and in operating the business of Harry Winston Inc. is
dependent on the services of key executives and skilled employees,
as well as the continuance of key relationships with certain third
parties, such as diamantaires. The loss of these persons or the
Company's inability to attract and retain additional skilled
employees or to establish and maintain relationships with required
third parties may adversely affect its business and future
operations in marketing diamonds and in operating its retail
segment. Expansion of the Existing Salon Network A key component of
the Company's retail strategy is the expansion of its salon
network. This strategy requires the Company to make ongoing capital
expenditures to build and open new salons, to refurbish existing
salons from time to time, and to incur additional operating
expenses in order to operate the new salons. To date, much of this
expansion has been financed through borrowings by Harry Winston
Inc. There can be no assurance that the expansion of the salon
network will prove successful in increasing annual sales or
earnings from the retail segment, and the increased debt levels
resulting from this expansion could negatively impact the Company's
liquidity and its results from operations in the absence of
increased sales and earnings. Competition in the Luxury Jewelry
Segment The Company is exposed to competition in the retail diamond
market from other luxury goods, diamond, jewelry and watch
retailers. The ability of Harry Winston Inc. to successfully
compete with such luxury goods, diamond, jewelry and watch
retailers is dependent upon a number of factors, including the
ability to source high-end polished diamonds and protect and
promote its distinctive brand name and reputation. If Harry Winston
Inc. is unable to successfully compete in the luxury jewelry
segment, then the Company's results of operations will be adversely
affected. Changes in Accounting Policies Capital Disclosures
Effective February 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered
Accountants ("CICA"), Handbook Section 1535, "Capital Disclosures".
This new standard specifies the requirements for disclosure of both
qualitative and quantitative information to enable users of
financial statements to evaluate the Company's objectives, policies
and processes for managing capital. This disclosure is contained in
note 17 to the consolidated financial statements. Inventories
Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3031,
"Inventories", which supersedes the previously issued standard on
inventory. The new standard introduces significant changes to the
measurement and disclosure of inventory. The measurement changes
include: the elimination of LIFO, the requirement to measure
inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or
services produced for specific purposes, the requirement for an
entity to use a consistent cost formula for inventory of a similar
nature and use, and the reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value
of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an
expense, write-downs and the reversals of write-downs are required
to be disclosed. This standard has had no material impact on the
consolidated financial statements. Financial Instruments Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on
disclosure of risks associated with both recognized and
unrecognized financial instruments and how the Company manages
these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed
in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure is contained in notes 18 and 19 to
the consolidated financial statements. Recently Issued Accounting
Standards Goodwill and Intangibles On February 1, 2008 the CICA
issued Handbook Section 3064, "Goodwill and Intangible Assets".
This Section establishes revised standards for the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets. The changes are effective for interim and annual financial
statements beginning January 1, 2009. The Company is currently
assessing the impact of this standard on its consolidated financial
statements. International Financial Reporting Standards ("IFRS") In
February 2008, the Canadian Accounting Standards Board confirmed
that publically accountable enterprises will be required to adopt
IFRS in place of Canadian Generally Accepted Accounting Principles
(GAAP) for financial periods beginning on or after January 1, 2011.
Accordingly, commencing February 1, 2011 the Company will convert
over to IFRS and prepare its first financial statements in
accordance with IFRS for the three month period ended April 30,
2011, with comparative information also prepared under IFRS. The
conversion project from Canadian GAAP to IFRS is led by finance
management, and will include representatives from various areas of
the Company as necessary to plan for and achieve a smooth
transition. The Company has engaged the services of a third party
expert advisor to assist. Regular progress reporting to senior
management and to the Audit Committee on the status of the IFRS
conversion project has been instituted. The conversion project
consists of three phases: Assessment Phase - This phase involves: a
review of accounting differences between Canadian GAAP and IFRS; an
evaluation of IFRS 1 exemptions for first time IFRS adopters; and a
high level impact assessment on systems and business processes.
Design Phase - This phase involves: prioritizing and resolving
accounting treatment issues; quantifying the impact of converting
to IFRS; reviewing and approving accounting policy choices;
performing a detailed impact assessment on systems and processes;
designing system and business process changes; developing IFRS
training material; and drafting IFRS financial statement content.
Implementation Phase - This phase involves: changes to systems and
business processes; determining the opening IFRS transition balance
sheet; dual accounting under both Canadian GAAP and IFRS; and
preparing detailed reconciliations of Canadian GAAP to IFRS
financial statements. The Company is currently in the assessment
phase of its IFRS conversion project and expects this phase to be
completed during the second quarter of fiscal 2010. The Company
cannot at this time reasonably estimate the impact of adopting IFRS
on its consolidated financial statements. Outstanding Share
Information As at January 31, 2009
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 61,372,092
Options outstanding 1,604,338 Fully diluted 62,976,430
-------------------------------------------------------------------------
Additional Information Additional information relating to the
Company, including the Company's most recently filed annual
information form, can be found on SEDAR at http://www.sedar.com/,
and is also available on the Company's website at
http://investor.harrywinston.com/. Consolidated Balance Sheets
(expressed in thousands of United States dollars) As at January 31,
2009 2008
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 16,735
$ 49,628 Cash collateral and cash reserves (note 3) 30,145 25,615
Accounts receivable (note 20) 66,980 25,505 Inventory and supplies
(note 4) 346,235 322,228 Prepaid expenses and other current assets
48,130 58,617
-------------------------------------------------------------------------
508,225 481,593 Mining capital assets (note 5) 800,358 658,200
Retail capital assets (note 5) 68,258 70,617 Intangible assets, net
(note 8) 130,752 132,628 Goodwill (note 7) - 93,780 Other assets
(note 9) 15,644 16,167 Future income tax asset (note 11) 43,338
40,963
-------------------------------------------------------------------------
$ 1,566,575 $ 1,493,948 --------------------------
-------------------------- Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities $
118,390 $ 124,426 Income taxes payable 76,987 48,118 Bank advances
(note 10(ii)) 42,621 34,928 Current portion of long-term debt (note
10) 75,097 54,137
-------------------------------------------------------------------------
313,095 261,609 Long-term debt (note 10) 205,625 255,212 Future
income tax liability (note 11) 303,284 370,500 Other long-term
liability 1,946 1,730 Future site restoration costs (note 12)
39,506 32,980 Minority interest 280 255 Shareholders' equity: Share
capital (note 13) 381,541 305,502 Contributed surplus 16,079 15,614
Retained earnings 283,177 225,334 Accumulated other comprehensive
income 22,042 25,212
-------------------------------------------------------------------------
702,839 571,662 Commitments and guarantees (note 15)
-------------------------------------------------------------------------
$ 1,566,575 $ 1,493,948 --------------------------
-------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Earnings
(expressed in thousands of United States dollars, except per share
amounts) Years ended January 31, 2009 2008
-------------------------------------------------------------------------
Sales $ 609,220 $ 679,307 Cost of sales 287,278 311,187
-------------------------------------------------------------------------
Gross margin 321,942 368,120 Selling, general and administrative
expenses 155,876 150,445
-------------------------------------------------------------------------
Earnings from operations 166,066 217,675
-------------------------------------------------------------------------
Interest and financing expenses (20,457) (27,858) Other income
2,246 2,758 Insurance settlement (note 20) 17,240 13,488 Impairment
charge (93,780) - Foreign exchange gain (loss) 59,087 (43,391)
-------------------------------------------------------------------------
Earnings before income taxes 130,402 162,672 Income tax expense -
Current (note 11) 81,787 47,516 Income tax expense (recovery) -
Future (note 11) (21,531) 8,578
-------------------------------------------------------------------------
Earnings before minority interest 70,146 106,578 Minority interest
25 170
-------------------------------------------------------------------------
Net earnings $ 70,121 $ 106,408 --------------------------
-------------------------- Earnings per share Basic $ 1.15 $ 1.82
-------------------------- -------------------------- Fully diluted
(note 13) $ 1.15 $ 1.81 --------------------------
-------------------------- Weighted average number of shares
outstanding 61,013,758 58,369,338 --------------------------
-------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Comprehensive
Income (expressed in thousands of United States dollars) Years
ended January 31, 2009 2008
-------------------------------------------------------------------------
Net earnings $ 70,121 $ 106,408 Other comprehensive income (loss)
Net gain (loss) on translation of net foreign operations (net of
tax - nil) (3,170) 9,196
-------------------------------------------------------------------------
Total comprehensive income $ 66,951 $ 115,604
-------------------------- -------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in thousands of United States dollars) Years ended
January 31, 2009 2008
-------------------------------------------------------------------------
Common shares: Balance at beginning of year $ 305,502 $ 305,165
Issued during the year 76,039 337
-------------------------------------------------------------------------
Balance at end of year 381,541 305,502
-------------------------------------------------------------------------
Contributed surplus: Balance at beginning of year 15,614 14,922
Stock option expense 465 692
-------------------------------------------------------------------------
Balance at end of year 16,079 15,614
-------------------------------------------------------------------------
Retained earnings: Balance at beginning of year 225,334 165,625 Net
earnings 70,121 106,408 Dividends paid (12,278) (46,699)
-------------------------------------------------------------------------
Balance at end of year 283,177 225,334
-------------------------------------------------------------------------
Accumulated other comprehensive income: Balance at beginning of
year 25,212 16,016 Other comprehensive income (loss) Net gain
(loss) on translation of net foreign operations (net of tax - nil)
(3,170) 9,196
-------------------------------------------------------------------------
Balance at end of year 22,042 25,212
-------------------------------------------------------------------------
Total shareholders' equity $ 702,839 $ 571,662
-------------------------- -------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (expressed in thousands of
United States dollars) For the years ended January 31, 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings $ 70,121 $
106,408 Items not involving cash: Amortization and accretion 76,970
81,174 Future income tax expense (recovery) (21,531) 8,578
Stock-based compensation and pension expense 683 2,422 Foreign
exchange loss (gain) (60,996) 45,201 Loss on disposal of assets 494
- Minority interest 25 170 Impairment charge 93,780 - Change in
non-cash operating working capital (15,470) (50,069)
-------------------------------------------------------------------------
144,076 193,884
-------------------------------------------------------------------------
Financing Decrease in long-term debt (52,194) (19,637) Increase in
revolving credit 191,799 52,722 Repayment of Harry Winston Inc.
revolving credit (159,109) - Dividends paid (12,278) (46,699) Issue
of common shares 76,039 337
-------------------------------------------------------------------------
44,257 (13,277)
-------------------------------------------------------------------------
Investing Cash collateral and cash reserve (4,530) 25,701 Mining
capital assets (200,289) (170,711) Retail capital assets (9,574)
(38,656) Other assets (3,035) (2,115)
-------------------------------------------------------------------------
(217,428) (185,781)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances (3,798) 628 Decrease in
cash and cash equivalents (32,893) (4,546) Cash and cash
equivalents, beginning of year (note 3) 49,628 54,174
-------------------------------------------------------------------------
Cash and cash equivalents, end of year (note 3) $ 16,735 $ 49,628
-------------------------- -------------------------- Change in
non-cash operating working capital Accounts receivable (43,311)
(8,641) Prepaid expenses and other current assets 8,230 (32,756)
Inventory and supplies (24,007) (48,489) Accounts payable and
accrued liabilities 4,470 9,622 Income taxes payable 39,148 30,195
-------------------------------------------------------------------------
$ (15,470) $ (50,069)
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid $ 35,986 $
11,052 Cash interest paid $ 17,570 $ 24,946
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements Years ended January 31, 2009
and 2008 (tabular amounts in thousands of United States dollars,
except as otherwise noted) NOTE 1: Nature of Operations Harry
Winston Diamond Corporation (the "Company") is a specialist diamond
company focusing on the mining and retail segments of the diamond
industry. At January 31, 2009, the Company's most significant asset
is a 40% ownership interest in the Diavik group of mineral claims.
The Diavik Joint Venture (the "Joint Venture") is an unincorporated
joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%)
and Harry Winston Diamond Mines Ltd. (40%). DDMI is the operator of
the Diavik Diamond Mine. Both companies are headquartered in
Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto
plc of London, England, and Harry Winston Diamond Mines Ltd. is a
wholly owned subsidiary of Harry Winston Diamond Corporation of
Toronto, Canada. The Diavik Diamond Mine is located 300 kilometres
northeast of Yellowknife in the Northwest Territories. The Company
records its proportionate interest in the assets, liabilities and
expenses of the Joint Venture in the Company's financial statements
with a one-month lag. On March 19, 2009, the Company announced a
strategic investment by Kinross Gold Corporation ("Kinross"),
whereby Kinross will make a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a
direct equity stake in the Company. Kinross will subscribe for 15.2
million of the Company's treasury shares at a price of $3.00 per
share, being approximately 19.9% of the Company's issued equity
post the transaction. Kinross will also subscribe for new
partnership units representing a 22.5% interest in the limited
partnership which holds the Company's 40% ownership interest in the
Diavik Diamond Mine, for a net effective subscription value of
$104.4 million. The transaction closed on March 31, 2009 and the
Company's economic interest in the Diavik Diamond Mine is now 31%.
With the closing of the Kinross transaction, all amounts
outstanding on the Company's senior secured term and revolving
credit facilities were repaid as of March 31, 2009. If the
transaction had closed on January 31, 2009, the Company would have
recorded a non-cash dilution loss of approximately $30 million in
respect of its interest in the Diavik Diamond Mine. With this
transaction, the Company believes it will have sufficient resources
to meet anticipated cash requirements for the next fiscal year. The
Company also owns a 100% interest in Harry Winston Inc., the
premier fine jewelry and watch retailer. The results of Harry
Winston Inc., located in New York City, US, are consolidated in the
financial statements of the Company. Certain comparative figures
have been reclassified to conform with the current year's
presentation. NOTE 2: Significant Accounting Policies The
consolidated financial statements are prepared by management in
accordance with accounting principles generally accepted in Canada.
The principal accounting policies presently followed by the Company
are summarized as follows: (a) Principles of Consolidation The
consolidated financial statements include the accounts of the
Company and all of its subsidiaries as well as its proportionate
share of unincorporated joint arrangements. Subsidiaries A
subsidiary is an entity that is controlled by the Company. The
consolidated financial statements include all the assets,
liabilities, revenues, expenses and cash flows of the Company and
its subsidiaries after eliminating intercompany balances and
transactions. For partly owned subsidiaries, the net assets and net
earnings attributable to minority shareholders are presented as
minority interests on the consolidated balance sheet and
consolidated statement of earnings. Joint Arrangements That Are Not
Entities ("Joint Arrangements") The Diavik Joint Venture is an
unincorporated joint arrangement. Harry Winston Diamond Corporation
owns an undivided 40% ownership interest in the assets, liabilities
and expenses of the Joint Venture. Harry Winston Diamond
Corporation records its proportionate interest in the assets,
liabilities and expenses of the Joint Venture in the Company's
consolidated financial statements with a one-month lag. The
accounting policies described below include those of the Joint
Venture. (b) Measurement Uncertainty The preparation of financial
statements in conformity with generally accepted accounting
principles 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 date of the
financial statements, and the reported amounts of earnings,
revenues and expenses during the reporting year. Significant areas
requiring the use of management estimates relate to the
determination of impairment of capital assets, intangible assets,
goodwill and deferred mineral property costs, estimation of future
site restoration costs and future income taxes. Financial results
as determined by actual events could differ from those estimated.
(c) Revenue Recognition Revenue from rough diamond sales is
recognized upon delivery of merchandise when the customer takes
ownership and assumes risk of loss, persuasive evidence of an
arrangement exists, the Company's price to the customer is fixed or
determinable and collection of the resulting receivable is
reasonably assured. Revenue from fine jewelry and watch sales is
recognized upon delivery of merchandise when the customer takes
ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable. Sales are
reported net of returns. (d) Cash Resources Cash and cash
equivalents, and cash collateral and cash reserves, consist of cash
on hand, balances with banks and short-term money market
instruments (with a maturity on acquisition of less than 90 days),
and are carried at cost, which approximates market. Funds in cash
collateral and cash reserves are maintained as prescribed under the
Company's debt financing arrangements and will become available to
Harry Winston Diamond Corporation for general corporate purposes
and for debt servicing as prescribed by the terms of credit
facility agreements. (e) Trade Accounts Receivable Trade accounts
receivable are recorded at the invoiced amount and generally do not
bear interest. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the
existing accounts receivable. The Company reviews its allowance for
doubtful accounts monthly. Account balances are written off against
the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. (f) Inventory
Rough diamond inventory is recorded at the lower of cost or net
realizable value. Cost is determined on an average cost basis
including production costs and value-added processing activity.
Merchandise inventory is recorded at the lower of cost or net
realizable value and includes fine jewelry and watches. Included in
merchandise inventory are production costs such as material, labour
and overhead costs. For the prior year, supplies inventory was
recorded at the lower of average cost or replacement value and
includes consumables and spare parts to be maintained at the Diavik
Diamond Mine site and at the Company's sorting and distribution
facility locations. Effective February 1, 2008, the Company adopted
new accounting recommendations from the CICA, Handbook Section
3031, "Inventories", which supersedes the previously issued
standard on inventory. Under the new standard, major spare parts
are classifed as capital assets and previous write-downs to net
realizable value are reversed where there is a subsequent increase
in the value of inventories. This standard has had no material
impact on the consolidated financial statements. (g) Deferred
Mineral Property Costs All direct costs relating to mineral
properties, including mineral claim acquisition costs, exploration
and development expenditures in the pre-production stage, ongoing
property exploration expenditures, pre-production operating costs
net of any recoveries, interest, and amortization, are capitalized
and accumulated on a property-by-property basis. The costs of
deferred mineral properties from which there is production are
amortized using the units-of-production method based upon estimated
proven and probable reserves. General exploration expenditures
which do not relate to specific resource properties are expensed in
the period incurred. On an ongoing basis, the Company evaluates
each property based on results to date to determine the nature of
exploration and development activities that are warranted in the
future. If there is little prospect of the Joint Venture continuing
to explore or develop a property, the deferred costs related to
that property are written down to the estimated fair value. (h)
Capital Assets Capital assets are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the units-of-production method or straight-line
method as appropriate. The units-of-production method is applied to
a substantial portion of Diavik Diamond Mine capital assets and,
depending on the asset, is based on carats of diamonds recovered
during the period relative to the proven and probable ore reserves
of the ore deposit being mined or to the total ore deposit. Other
capital assets are depreciated using the straight-line method over
the estimated useful lives of the related assets, which are as
follows: Asset Estimated useful life (years)
---------------------------------------------------------------------
Buildings 10-40 Machinery and mobile equipment 3-10 Computer
equipment and software 3 Furniture and equipment 2-10 Leasehold and
building improvements Up to 20
---------------------------------------------------------------------
Amortization for mine related assets was charged to deferred
mineral property costs during the pre-commercial production stage.
Maintenance and repair costs are charged to earnings while
expenditures for major renewals and improvements are capitalized.
The recoverability of the amounts shown for the Diavik Diamond Mine
capital assets is dependent upon the continued existence of
economically recoverable reserves, upon maintaining title and
beneficial interest in the property, and upon future profitable
production or proceeds from disposition of the diamond properties.
The amounts representing Diavik Diamond Mine capital assets do not
necessarily represent present or future values. Upon the
disposition of capital assets, the accumulated amortization is
deducted from the original cost and any gain or loss is reflected
in current earnings. (i) Intangible Assets Intangible assets
acquired individually or as part of a group of other assets are
initially recognized and measured at cost. The cost of a group of
intangible assets acquired in a transaction, including those
acquired in a business combination that meet the specified criteria
for recognition apart from goodwill, is allocated to the individual
assets acquired based on their fair values at acquisition.
Intangible assets with finite useful lives are amortized on a
straight-line basis over their useful lives as follows: Asset
Estimated useful life (years)
---------------------------------------------------------------------
Wholesale distribution network 10 Store leases Up to 9
---------------------------------------------------------------------
The amortization methods and estimated useful lives of intangible
assets are reviewed annually. Intangible assets with indefinite
useful lives are not amortized and are tested for impairment
annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test
compares the carrying amount of the intangible asset with its fair
value, and an impairment loss is recognized in income for the
excess, if any. (j) Goodwill Goodwill is the residual amount that
results when the purchase price of an acquired business exceeds the
sum of the amounts allocated to the assets acquired, less
liabilities assumed, based on their fair values. Goodwill is
allocated, as of the date of the business combination, to the
Company's reporting units that are expected to benefit from the
synergies of the business combination. Goodwill is not amortized
and is tested for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be
impaired. The impairment test is carried out in two steps. In the
first step, the carrying amount of the reporting unit is compared
with its fair value. When the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
considered not to be impaired and the second step of the impairment
test is unnecessary. The second step is carried out when the
carrying amount of a reporting unit exceeds its fair value, in
which case the implied fair value of the reporting unit's goodwill
is compared with its carrying amount to measure the amount of the
impairment loss, if any. When the carrying amount of the reporting
unit goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to the excess and
is presented as a separate line item in the consolidated statement
of earnings before extraordinary items and discontinued operations.
(k) Other Assets Other assets include depreciable assets amortized
over a period not exceeding ten years. (l) Future Site Restoration
Costs The Company records the fair value of any asset retirement
obligation as a long-term liability in the year in which the
related environmental disturbance occurs, based on the net present
value of the estimated future costs. The fair value of the
liability is added to the carrying amount of the deferred mineral
property and this additional carrying amount is amortized over the
life of the asset based on units of production. The obligation is
adjusted periodically to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. If the
obligation is settled for other than the carrying amount of the
liability, the Company will recognize a gain or loss on settlement.
(m) Foreign Currency Translation The functional currency of the
Company is the US dollar. At year end, monetary assets and
liabilities denominated in foreign currencies are translated to US
dollars at exchange rates in effect at the balance sheet date and
non-monetary assets and liabilities are translated at rates of
exchange in effect when the assets were acquired or obligations
incurred. Revenues and expenses are translated at rates in effect
at the time of the transactions. Foreign exchange gains and losses
are included in earnings. For certain subsidiaries of the Company
where the functional currency is not the US dollar, the assets and
liabilities of these subsidiaries are translated at the rate of
exchange in effect at the balance sheet date. Revenues and expenses
are translated at the rate of exchange in effect at the time of the
transactions. Foreign exchange gains and losses are accumulated in
other comprehensive income under shareholders' equity. (n) Income
and Mining Taxes The Company accounts for income taxes under the
asset and liability method. Under this method, future tax assets
and liabilities are recognized for future tax consequences
attributable to differences between the financial statement
carrying value and the tax basis of assets and liabilities. Future
tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to
be recovered or settled. A reduction in respect of the benefit of a
future tax asset (a valuation allowance) is recorded against any
future tax asset if it is not likely to be realized. The effect on
future tax assets and liabilities of a change in tax rates is
recognized in earnings in the year during which the change in tax
rates is considered to be substantively enacted. (o) Stock-Based
Compensation The Company applies the fair value method to all
grants of stock options. The fair value of options granted is
estimated at the date of grant using a Black-Scholes option pricing
model incorporating assumptions regarding risk-free interest rates,
dividend yield, volatility factor of the expected market price of
the Company's stock, and a weighted average expected life of the
options. The estimated fair value of the options is recorded as an
expense on a straight-line basis over the vesting period, with an
offsetting credit to shareholders' equity. Any consideration
received on amounts attributable to stock options is credited to
share capital. (p) Restricted and Deferred Share Unit ("RSU" and
"DSU") Plans The RSU and DSU Plans are full value phantom shares
that mirror the value of Harry Winston Diamond Corporation's
publicly traded common shares. Grants under the RSU Plan are on a
discretionary basis to employees of the Company subject to Board of
Director approval. Each RSU grant vests on the third anniversary of
the grant date, subject to special rules for death and disability.
Grants under the DSU Plan are awarded to non-executive directors of
the Company. Each DSU grant vests immediately on the grant date.
(q) Post Retirement Benefits The expected costs of post retirement
benefits under defined benefit arrangements are charged to the
profit and loss account over the service lives of employees
entitled to those benefits. Variations from the regular cost are
spread on a straight-line basis over the expected average remaining
service lives of relevant current employees. The plan assets and
liabilities are valued annually by qualified actuaries. (r)
Financial Instruments From time to time, the Company may use a
limited number of derivative financial instruments to manage its
foreign currency and interest rate exposure. For a derivative to
qualify as a hedge at inception and throughout the hedged period,
the Company formally documents the nature and relationships between
the hedging instruments and hedged items, as well as its
risk-management objectives, strategies for undertaking the various
hedge transactions and method of assessing hedge effectiveness.
Financial instruments qualifying for hedge accounting must maintain
a specified level of effectiveness between the hedge instrument and
the item being hedged, both at inception and throughout the hedged
period. Gains and losses resulting from any ineffectiveness in a
hedging relationship must be recognized immediately in net income.
The Company does not use derivatives for trading or speculative
purposes. (s) Basic and Diluted Earnings per Share Basic earnings
per share are computed by dividing net earnings (loss) by the
weighted average number of shares outstanding during the year.
Diluted earnings per share are prepared using the treasury stock
method to compute the dilutive effect of options and warrants. The
treasury stock method assumes the exercise of any "in-the-money"
options with the option proceeds would be used to purchase common
shares at the average market value for the year. Options with an
average market value for the year higher than the exercise price
are not included in the calculation of diluted earnings per share
as such options are not dilutive. (t) Impairment of Long-Lived
Assets Long-lived assets, including property, plant and equipment
and purchased intangibles subject to amortization, 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 by sale would be separately
presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet. (u)
Adoption of New Accounting Standards and Developments Capital
Disclosures Effective February 1, 2008, the Company adopted new
accounting recommendations from the Canadian Institute of Chartered
Accountants ("CICA"), Handbook Section 1535, "Capital Disclosures".
This new standard specifies the requirements for disclosure of both
qualitative and quantitative information to enable users of
financial statements to evaluate the Company's objectives, policies
and processes for managing capital. This disclosure is contained in
note 17 to the consolidated financial statements. Inventories
Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3031,
"Inventories", which supersedes the previously issued standard on
inventory. The new standard introduces significant changes to the
measurement and disclosure of inventory. The measurement changes
include: the elimination of LIFO, the requirement to measure
inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or
services produced for specific purposes, the requirement for an
entity to use a consistent cost formula for inventory of a similar
nature and use, and the reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value
of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an
expense, write-downs and the reversals of write-downs are required
to be disclosed. This standard has had no material impact on the
consolidated financial statements. Financial Instruments Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on
disclosure of risks associated with both recognized and
unrecognized financial instruments and how the Company manages
these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed
in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure is contained in notes 18 and 19 to
the consolidated financial statements. (v) Recently Issued
Accounting Standards Goodwill and Intangibles On February 1, 2008,
the CICA issued Handbook Section 3064, "Goodwill and Intangible
Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets. The changes are effective for interim and
annual financial statements beginning January 1, 2009. The Company
is currently assessing the impact of this standard on its
consolidated financial statements. NOTE 3: Cash Resources 2009 2008
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 14,118 $ 33,028 Short-term
investments(a) 2,617 16,600
-------------------------------------------------------------------------
Total cash and cash equivalents 16,735 49,628 Cash collateral and
cash reserves 30,145 25,615
-------------------------------------------------------------------------
Total cash resources $ 46,880 $ 75,243 -------------------------
------------------------- (a) Short-term investments are held in
overnight deposits. NOTE 4: Inventory and Supplies 2009 2008
-------------------------------------------------------------------------
Rough diamond inventory $ 31,872 $ 17,097 Merchandise inventory
240,419 254,101 Supplies inventory 73,944 51,030
-------------------------------------------------------------------------
Total inventory and supplies $ 346,235 $ 322,228
------------------------- ------------------------- NOTE 5: Capital
Assets 2009
-------------------------------------------------------------------------
Accumulated Net Cost amortization book value
-------------------------------------------------------------------------
MINING: Deferred mineral property costs(a) $ 283,049 $ 113,679 $
169,370 Diavik equipment and leaseholds(b) 776,638 171,571 605,067
Furniture, equipment and other(c) 7,912 4,814 3,098 Real property -
land and building(d) 27,758 4,935 22,823
-------------------------------------------------------------------------
$1,095,357 $ 294,999 $ 800,358
--------------------------------------
-------------------------------------- RETAIL: Furniture, equipment
and other(c) $ 27,265 $ 13,586 $ 13,679 Real property - land and
building(d) 72,686 18,107 54,579
-------------------------------------------------------------------------
$ 99,951 $ 31,693 $ 68,258 --------------------------------------
-------------------------------------- 2008
-------------------------------------------------------------------------
Accumulated Net Cost amortization book value
-------------------------------------------------------------------------
MINING: Deferred mineral property costs(a) $ 271,316 $ 91,326 $
179,990 Diavik equipment and leaseholds(b) 586,208 136,771 449,437
Furniture, equipment and other(c) 5,383 3,783 1,600 Real property -
land and building(d) 31,729 4,556 27,173
-------------------------------------------------------------------------
$ 894,636 $ 236,436 $ 658,200
--------------------------------------
-------------------------------------- RETAIL: Furniture, equipment
and other(c) $ 23,780 $ 9,261 $ 14,519 Real property - land and
building(d) 66,016 9,918 56,098
-------------------------------------------------------------------------
$ 89,796 $ 19,179 $ 70,617 --------------------------------------
-------------------------------------- (a) The Company holds a 40%
ownership interest in the Diavik group of mineral claims, which
contains commercially mineable diamond reserves. DDMI, a subsidiary
of Rio Tinto plc, is the operator of the Joint Venture and holds
the remaining 60% interest. The claims are subject to private
royalties which are in the aggregate 2% of the value of production.
(b) Diavik equipment and leaseholds are project related assets at
the Joint Venture level. (c) Furniture, equipment and other
includes equipment located at the Company's diamond sorting
facility and at Harry Winston Inc. salons. (d) Real property is
comprised of land and a building that houses the corporate
activities of the Company and various leasehold improvements to
Harry Winston Inc. salons and corporate offices. Amortization
expense for 2009 was $71.8 million (2008 - $76.6 million). NOTE 6:
Diavik Joint Venture The following represents Harry Winston Diamond
Corporation's 40% proportionate interest in the Joint Venture as at
December 31, 2008 and 2007: 2009 2008
-------------------------------------------------------------------------
Current assets $ 105,612 $ 110,199 Long-term assets 754,886 605,300
Current liabilities 38,808 40,631 Long-term liabilities and
participant's account 821,690 674,868 YEAR ENDED: Expenses net of
interest income of $0.3 million and an insurance settlement of $0.5
million (2008 - interest income of $0.5 million)(a) 187,839 177,049
Cash flows resulting from (used in) operating activities (121,955)
(121,440) Cash flows resulting from financing activities 292,208
290,615 Cash flows resulting from (used in) investing activities
(183,552) (165,645)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income. The Company is
contingently liable for the other participant's portion of the
liabilities of the Joint Venture and to the extent the Company's
participating interest has increased because of the failure of the
other participant to make a cash contribution when required, the
Company would have access to an increased portion of the assets of
the Joint Venture to settle these liabilities. NOTE 7: Goodwill The
Company tests goodwill for impairment on an annual basis as of
January 31 of each year and at any other time if an event occurs or
circumstances change that would more likely than not reduce the
fair value of the retail reporting unit below its carrying amount.
The Company's goodwill relates to its retail segment, which was
acquired through its purchase of Harry Winston Inc. The impairment
test for goodwill is a two-step process. Step one consists of a
comparison of the fair value of the reporting unit with its
carrying amount, including goodwill allocated to the reporting
unit. Measurement of the fair value of the reporting unit is based
on the amount of consideration that would be agreed upon in an
arm's length transaction between knowledgeable, willing parties who
are under no compulsion to act. The Company determined the fair
value of the retail reporting unit using the discounted cash flow
as the primary methodology. To support the fair value conclusion
based on the discounted cash flow method the Company compared the
implied multiples of enterprise value to revenue and enterprise
value to EBITDA to those multiples for comparable publicly traded
companies and acquisition transactions for comparable companies.
These approaches involve significant management judgment. If the
carrying amount of the reporting unit exceeds its fair value, step
two requires that the fair value of the reporting unit be allocated
to the underlying assets and liabilities of that reporting unit,
whether or not previously recognized, resulting in an implied fair
value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, a
non-cash impairment charge equal to the excess is recorded in
earnings. The significant adverse changes in the global business
climate that began in the third quarter of fiscal 2009 have
worsened, resulting in a deterioration in the operating environment
for the Company's retail segment. This has resulted in adverse
changes to the Company's financial forecasts for the retail
reporting unit. As at January 31, 2009, the Company determined that
the fair value of the retail reporting unit was less than its
carrying value and a non-cash goodwill impairment charge of $93.8
million was made during the fourth quarter. This charge eliminates
the goodwill recorded on the acquisition of Harry Winston Inc. NOTE
8: Intangible Assets Accumulated Amortization amorti- period Cost
zation 2009 net 2008 net
-------------------------------------------------------------------------
Trademark indefinite life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite life 12,365 - 12,365 12,365 Wholesale
distribution network 120 months 5,575 1,926 3,649 4,206 Store
leases 65 to 105 months 5,639 3,896 1,743 3,062
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ 5,822 $ 130,752 $ 132,628
--------------------------------------------
-------------------------------------------- Amortization expense
for 2009 was $1.9 million (2008 - $1.7 million). The Company
completed a valuation of its trademark and drawings as of January
31, 2009 and concluded that there was no impairment of these
assets. NOTE 9: Other Assets 2009 2008
-------------------------------------------------------------------------
Prepaid pricing discount(a), net of accumulated amortization of
$6.0 million (2008 - $4.6 million) $ 6,000 $ 7,440 Other assets
2,391 2,512 Refundable security deposits 7,253 6,215
-------------------------------------------------------------------------
$ 15,644 $ 16,167 -------------------------
------------------------- (a) Prepaid pricing discount represents
funds paid to Tiffany & Co. ("Tiffany") by the Company to amend
its rough diamond supply agreement. The amendment eliminated all
pricing discounts on future sales. The payment has been deferred
and is being amortized on a straight-line basis over the remaining
life of the contract. NOTE 10: Long-Term Debt and Bank Advances (i)
Long-Term Debt 2009 2008
--------------------------------------------------------------------
Credit facility(a) $ 74,107 $ 125,677 Harry Winston Inc. credit
facilities(b) 199,846 174,850 First mortgage on real property 6,769
8,822
--------------------------------------------------------------------
Total long-term debt 280,722 309,349
--------------------------------------------------------------------
Less current portion (75,097) (54,137)
--------------------------------------------------------------------
$ 205,625 $ 255,212 -------------------------
------------------------- (a) Credit Facility The Company's credit
agreement includes two senior secured term facilities and a senior
secured revolving facility with a maturity date of December 15,
2009. With the closing of the Kinross transaction, all amounts
outstanding on the Company's senior secured term and revolving
credit facilities were repaid as of March 31, 2009. The facilities
have underlying interest rates, which at the option of the Company
are either LIBOR plus a spread of 1.25% to 2.375%, or US Base Rate
plus a spread of 0.25% to 1.375%. The Company is required to comply
with certain financial and non-financial covenants. These covenants
include consolidated tangible net worth at the Harry Winston
Diamond Corporation level, and debt to free cash flow, current
assets to current liabilities, mine life protection ratio,
historical debt service coverage ratio and annual loan life
coverage ratio at the Harry Winston Diamond Mines Ltd. level. Under
the facilities, the Company is required to establish a debt reserve
account of $25.0 million and an amount equal to the billing
delivered by DDMI reflecting estimated operating expenses,
maintenance capital expenditures and other capital expenditures of
the Diavik Diamond Mine for 30 days following each reporting
period. The effective interest rate at January 31, 2009 was 2.45%.
Scheduled amortization of the Company's senior secured term
facilities of $12.5 million payable quarterly commenced March 2008
with the remaining balance paid out with the closing of the Kinross
transaction on March 31, 2009. The maximum amount permitted to be
drawn under the senior secured revolving facility was reduced by
$12.5 million quarterly, commencing March 2009. As at January 31,
2009, the Company had $24.1 million of senior secured term
facilities and had $50.0 million drawn under its senior secured
revolving facility. Interest and financing charges include interest
incurred on long-term debt, as well as amortization of deferred
financing charges. (b) Harry Winston Inc. Credit Facilities (i) On
February 22, 2008, Harry Winston Inc. refinanced its secured credit
agreement by entering into a new secured five-year agreement with a
consortium of banks, establishing a $250.0 million facility for
revolving credit loans. The new facility expires on March 31, 2013.
In addition, Harry Winston Inc. may increase the credit facility by
an additional $50.0 million to $300.0 million during the term of
the facility. There are no scheduled repayments required before
maturity. The new credit facility is supported by a $20.0 million
limited guarantee provided by Harry Winston Diamond Corporation.
The amount available under this facility is subject to a borrowing
base formula based on certain assets of Harry Winston Inc. At
January 31, 2009, $179.6 million had been drawn against this
facility. The new credit agreement contains affirmative and
negative non-financial and financial covenants, which apply to the
retail segment. These provisions include consolidated minimum
tangible net worth, minimum coverage of fixed charges, leverage
ratio and limitations on capital expenditures and certain
investments. The credit agreement also includes a change of control
provision, which would result in the entire unpaid principal and
all accrued interest of the facility becoming due immediately upon
change of control, as defined. Any material adverse change, as
defined, in the retail segment's business, assets, liabilities,
consolidated financial position or consolidated results of
operations constitutes default under the agreement. The retail
segment has pledged 100% of Harry Winston Inc.'s common stock and
66 2/3% of the common stock of its foreign subsidiaries to the bank
to secure the loan. Inventory and accounts receivable of Harry
Winston Inc. are pledged as collateral to secure the borrowings of
Harry Winston Inc. In addition, an assignment of proceeds on
insurance covering security collateral was made. Loans under the
credit facility can be either fixed rate loans or revolving line of
credit loans. The fixed rate loans will bear interest within a
range of 1.50% to 2.25% above LIBOR based upon a pricing grid
determined by the fixed charge coverage ratio. Interest under this
option will be determined for periods of either one, two, three or
six months. The revolving line of credit loans will bear interest
within a range of 0.50% to 0.75% above the bank's prime rate based
upon a pricing grid determined by the fixed charge coverage ratio
as well. (ii) Harry Winston S.A. maintains a 25-year loan agreement
for $15.0 million (17.5 million CHF) used to finance the
construction of the new watch factory in Geneva, Switzerland. At
January 31, 2009, $14.7 million had been drawn against the facility
compared to $16.1 million at January 31, 2008. The bank has a
secured interest in the factory building. On June 26, 2008, the
bank further extended a demand credit facility for 2.0 million CHF.
The new facility is supported by a $2.0 million standby letter of
credit. At January 31, 2009, $0.5 million was drawn against this
demand credit facility. The loan agreement bears interest at 3.55%
and matures on January 31, 2033. Quarterly payments on the loan
began on June 30, 2008. (iii) Harry Winston Japan, K.K. maintains
unsecured credit agreements with two banks each amounting to $8.4
million ((Yen)750 million). At January 31, 2009, $16.8 million had
been drawn against these facilities, $5.5 million of which is long
term, with the balance of $11.3 million classified as bank
advances. The short-term portions of the credit facilities bear
interest at 1.98% and expire on April 30, 2009, and June 1, 2009,
respectively. The long-term portion bears interest at 2.38% and
expires on June 28, 2010. (c) Required Principal Repayments 2010 $
75,097 2011 9,613 2012 1,073 2013 1,119 2014 180,778 Thereafter
13,042
---------------------------------------------------------------- $
280,722 ------------ ------------ (ii) Bank Advances The Company
operates two other revolving financing facilities. The Company has
available $45.0 million (utilization in either US dollars or Euros)
and $10.0 million for inventory and receivables funding in
connection with marketing activities through its Belgian
subsidiary, Harry Winston Diamond International N.V., its Israeli
subsidiary, Harry Winston Diamond (Israel) Limited, and its Indian
subsidiary, Harry Winston Diamond (India) Private Limited,
respectively. Borrowings under the Belgium facility bear interest
at the bank's base rate plus 1.5% and borrowings under the Israeli
facility bear interest at LIBOR plus 1%. At January 31, 2009, $18.4
million, $4.7 million and $1.5 million were drawn under the
Company's revolving financing facilities relating to its Belgian
subsidiary, Harry Winston Diamond International N.V., its Israeli
subsidiary, Harry Winston Diamond (Israel) Limited and its Indian
subsidiary, Harry Winston Diamond (India) Private Limited,
respectively. Harry Winston Diamond (Israel) Limited has scheduled
repayments of $1.0 million per month on the outstanding balance
commencing February 2009. The Belgium facility has an annual
commitment fee of 0.75% per annum. Both facilities are guaranteed
by Harry Winston Diamond Corporation. Harry Winston Japan, K.K.
maintains unsecured credit agreements with two banks each amounting
to $8.4 million ((Yen)750 million). At January 31, 2009, $16.8
million had been drawn against these facilities, $5.5 million of
which is long term, with the balance of $11.3 million classified as
bank advances. The short-term portions of the credit facilities
bear interest at 1.98% and expire on April 30, 2009, and June 1,
2009, respectively. The long-term portion bears interest at 2.38%
and expires on June 28, 2010. Harry Winston Inc. has also entered
into a credit agreement to provide a credit facility to Harry
Winston Japan, K.K. secured solely by the inventory of Harry
Winston Japan, K.K. in an amount of $6.4 million ((Yen)575
million). This facility bears interest at 2.30% and expires on June
19, 2009. NOTE 11: Income Tax The future income tax asset of the
Company is $43.3 million, of which $29.3 million relates to the
retail segment. Included in the future tax asset is $22.5 million
that has been recorded to recognize the benefit of $69.6 million of
net operating losses that Harry Winston Inc. and its subsidiaries
have available for carryforward to shelter income taxes for future
years. The net operating losses are scheduled to expire between
2014 and 2028. The future income tax liability of the Company is
$303.3 million of which $82.7 million relates to the retail
segment. Harry Winston Inc.'s future income tax liabilities include
$56.7 million from the purchase price allocation. The Company's
future income tax asset and liability accounts are revalued to take
into consideration the change in the Canadian dollar compared to
the US dollar and the unrealized foreign exchange gain or loss is
recorded in net earnings for each year. (a) The income tax
provision consists of the following: 2009 2008
---------------------------------------------------------------------
Current expense $ 81,787 $ 47,516 Future expense (21,531) 8,578
---------------------------------------------------------------------
$ 60,256 $ 56,094 -------------------------
------------------------- (b) The tax effects of temporary
differences that give rise to significant portions of the future
tax assets and liabilities at January 31, 2009 and 2008 are as
follows: 2009 2008
---------------------------------------------------------------------
FUTURE INCOME TAX ASSETS: Net operating loss carryforwards $ 27,199
$ 23,458 Capital assets 1,267 1,158 Future site restoration costs
12,691 13,135 Retail inventory 2,635 1,426 Other future income tax
assets 4,959 4,983
---------------------------------------------------------------------
Gross future income tax assets 48,751 44,160 Valuation allowance
(5,413) (3,197)
---------------------------------------------------------------------
Future income tax assets 43,338 40,963 FUTURE INCOME TAX
LIABILITIES: Deferred mineral property costs (38,813) (56,776)
Capital assets (151,579) (160,319) Retail inventory (25,735)
(13,781) Goodwill (56,748) (57,718) Unrealized foreign exchange
gains (580) (3,194) Other future income tax liabilities (29,829)
(78,712)
---------------------------------------------------------------------
Future income tax liabilities (303,284) (370,500)
---------------------------------------------------------------------
Future income tax liability, net $ (259,946) $ (329,537)
------------------------- ------------------------- (c) The
difference between the amount of the reported consolidated income
tax provision and the amount computed by multiplying the earnings
(loss) before income taxes by the statutory tax rate of 31% (2008 -
34%) is a result of the following: 2009 2008
---------------------------------------------------------------------
Expected income tax expense $ 40,424 $ 55,308 Non-deductible
(non-taxable) items (20,884) 9,773 Northwest Territories mining
royalty (net of income tax relief) 15,686 18,856 Impact of changes
in future corporate income tax rates - (11,697) Earnings subject to
tax different than statutory rate (6,032) (5,293) Benefit on losses
recognized through reduction of goodwill - 4,362 Impact of
impairment charge on goodwill 29,034 - Assessments and adjustments
(64) (11,649) Change in valuation allowance 2,603 (2,477) Other
(511) (1,089)
---------------------------------------------------------------------
Recorded income tax expense $ 60,256 $ 56,094
------------------------- ------------------------- (d) The Company
has net operating loss carryforwards for Canadian income tax
purposes of approximately $1.1 million. Harry Winston Inc. has net
operating loss carryforwards for US income tax purposes of $54.9
million and $14.7 million for other foreign jurisdiction tax
purposes. NOTE 12: Future Site Restoration Costs 2009 2008
-------------------------------------------------------------------------
At February 1, 2008 and 2007 $ 32,980 $ 17,200 Revision of previous
estimates 4,880 14,897 Accretion of provision 1,646 883
-------------------------------------------------------------------------
At January 31, 2009 and 2008 $ 39,506 $ 32,980
------------------------- ------------------------- The Joint
Venture has an obligation under various agreements (note 15) to
reclaim and restore the lands disturbed by its mining operations.
The Company's share of the total undiscounted amount of the future
cash flows that will be required to settle the obligation incurred
at January 31, 2009 is estimated to be $49.9 million of which
approximately $32.4 million is expected to occur at the end of the
mine life. The revision of previous estimates in fiscal 2008
reflects anticipated higher costs for fuel, labour and equipment
based on a significant escalation in these key operating costs in
recent years. The anticipated cash flows relating to the obligation
at the time of the obligation have been discounted at a credit
adjusted risk-free interest rate of 4.96%. NOTE 13: Share Capital
(a) Authorized Unlimited common shares without par value. (b)
Issued Number of shares Amount
---------------------------------------------------------------------
Balance, January 31, 2007 58,360,755 $ 305,165 SHARES ISSUED FOR:
Exercise of options 11,336 337
---------------------------------------------------------------------
Balance, January 31, 2008 58,372,091 $ 305,502 SHARES ISSUED FOR:
Cash 3,000,001 76,039
---------------------------------------------------------------------
Balance, January 31, 2009 61,372,092 $ 381,541
------------------------- ------------------------- (c) Stock
Options The Corporation currently has in place a stock option plan,
which was approved by the shareholders of the Corporation on July
27, 2000, amended by the shareholders on June 28, 2001 and amended
by the directors on March 28, 2002 (the "Stock Option Plan"). On
March 31, 2008, the Board of Directors approved amendments to the
Stock Option Plan which were approved by the shareholders on June
4, 2008: a) an increase in the size of the Stock Option Plan, such
that a maximum of 6,000,000 Common Shares may be issued pursuant to
the Stock Option Plan after March 31, 2008; b) the introduction of
a "cashless" settlement alternative in connection with the exercise
of options under the Stock Option Plan; c) the addition of a
provision whereby, if the expiry date of an option granted under
the Stock Option Plan would otherwise occur during or within ten
days following a Black-Out Period the expiry date of such option
shall be extended to the first business day which is at least ten
days after the end of the Black-Out Period. Options may be granted
to any director, officer, employee or consultant of the Company or
any of its affiliates. Options granted to directors vest
immediately and options granted to officers, employees or
consultants vest over three to four years. The maximum term of an
option is ten years. The number of shares reserved for issuance to
any one optionee pursuant to options cannot exceed 2% of the issued
and outstanding common shares of the Company at the date of grant
of such options. The exercise price of each option cannot be less
than the fair market value of the shares on the last trading day
preceding the date of the grant. The Company's shares are primarily
traded on a Canadian dollar based exchange, and accordingly stock
option information is presented in Canadian dollars, with
conversion to US dollars at the average exchange rate for the year.
Compensation expense for stock options was $0.5 million for fiscal
2009 (2008 - $0.2 million) and is presented as a component of both
cost of sales and selling, general and administrative expenses. The
amount credited to share capital for the exercise of the options is
the sum of (a) the cash proceeds received and (b) the amount
debited to contributed surplus upon exercise of stock options by
optionees (2009 - $nil; 2008 - $0.1 million). Changes in share
options outstanding are as follows: 2009 2008
---------------------------------------------------------------------
Weighted average Weighted average Options exercise price Options
exercise price
---------------------------------------------------------------------
000s CDN$ US$ 000s CDN$ US$
---------------------------------------------------------------------
Outstanding, beginning of year 1,719 $ 23.52 $ 22.19 1,631 $ 23.43
$ 20.63 Granted - - - 100 25.52 24.08 Exercised - - - (11) 27.01
25.48 Expired (115) 38.49 31.38 (1) 26.45 24.95
---------------------------------------------------------------------
1,604 $ 22.45 $ 18.30 1,719 $ 23.52 $ 22.19
-----------------------------------------------------
----------------------------------------------------- The following
summarizes information about stock options outstanding at January
31, 2009: Options outstanding Options exercisable
------------------------------------------------------------
Weighted average Weighted Weighted Range of remaining average
average exercise Number contractual exercise Number exercise prices
outstanding life price exercisable price CDN$ 000s in years CDN$
000s CDN$
-------------------------------------------------------------------------
$9.10-$9.15 268 0.8 $ 9.15 268 $ 9.15 10.60-12.45 302 1.9 12.36 302
12.36 17.50-17.50 39 2.8 17.50 39 17.50 23.35-29.25 750 4.3 25.30
675 25.27 36.38-40.00 10 6.7 36.38 8 36.38 41.45-41.95 235 5.4
41.66 235 41.66
-------------------------------------------------------------------------
1,604 $ 22.45 1,527 $ 22.28
------------------------------------------------------------
------------------------------------------------------------ (d)
Stock-Based Compensation The Company applies the fair value method
to all grants of stock options. The fair value of options granted
during the year ended January 31, 2008 was estimated using a
Black-Scholes option pricing model with the following weighted
average assumptions. The Company did not grant any options during
fiscal 2009. 2009 2008
---------------------------------------------------------------------
Risk-free interest rate - 3.45% Dividend yield - 0.00% Volatility
factor - 39.18% Expected life of the options - 3.6 years Average
fair value per option, CDN - $ 8.53 Average fair value per option,
US - $ 8.50
---------------------------------------------------------------------
(e) RSU and DSU Plans RSU Number of units
---------------------------------------------------------------------
Balance, January 31, 2007 174,390 AWARDS AND PAYOUTS DURING THE
YEAR (NET): RSU awards 21,873 RSU payouts (52,548)
---------------------------------------------------------------------
Balance, January 31, 2008 143,715 AWARDS AND PAYOUTS DURING THE
YEAR (NET): RSU awards (2,500) RSU payouts (32,616)
---------------------------------------------------------------------
Balance, January 31, 2009 108,599 ---------------- ----------------
DSU Number of units
---------------------------------------------------------------------
Balance, January 31, 2007 59,149 AWARDS AND PAYOUTS DURING THE YEAR
(NET): DSU awards 21,626 DSU payouts (8,577)
---------------------------------------------------------------------
Balance, January 31, 2008 72,198 AWARDS AND PAYOUTS DURING THE YEAR
(NET): DSU awards 56,790 DSU payouts -
---------------------------------------------------------------------
Balance, January 31, 2009 128,988 ---------------- ----------------
During the fiscal year, the Company granted (2,500) RSUs (net of
forfeitures) and 56,790 DSUs under an employee and director
incentive compensation program, respectively. The RSU and DSU Plans
are full value phantom shares that mirror the value of Harry
Winston Diamond Corporation's publicly traded common shares. Grants
under the RSU Plan are on a discretionary basis to employees of the
Company subject to Board of Director approval. Each RSU grant vests
on the third anniversary of the grant date, subject to special
rules for death and disability. The Company anticipates paying out
cash on maturity of RSUs and DSUs. Only non-executive directors of
the Company are eligible for grants under the DSU Plan. Each DSU
grant vests immediately on the grant date. The expenses related to
the RSUs and DSUs are accrued based on the price of Harry Winston
Diamond Corporation's common shares at the end of the period and on
the probability of vesting. This expense is recognized on a
straight-line basis over the term of the grant. The Company
recognized a recovery of $1.9 million (2008 - recovery of $0.1
million) for the twelve months ended January 31, 2009. NOTE 14:
Earnings per Share The following table sets forth the computation
of diluted earnings per share: 2009 2008
-------------------------------------------------------------------------
NUMERATOR: Net earnings for the year $ 70,121 $ 106,408
------------------------- ------------------------- DENOMINATOR
(THOUSANDS OF SHARES): Weighted average number of shares
outstanding 61,014 58,369 Dilutive effect of employee stock options
193 530
-------------------------------------------------------------------------
61,207 58,899 ------------------------- -------------------------
NOTE 15: Commitments and Guarantees (a) Environmental Agreement
Through negotiations of environmental and other agreements, the
Joint Venture must provide funding for the Environmental Monitoring
Advisory Board. Harry Winston Diamond Corporation's share of this
funding requirement was $0.2 million for calendar 2009. Further
funding will be required in future years; however, specific amounts
have not yet been determined. These agreements also state the Joint
Venture must provide security deposits for the performance by the
Joint Venture of its reclamation and abandonment obligations under
all environmental laws and regulations. Harry Winston Diamond
Corporation's share of the Joint Venture's letters of credit
outstanding with respect to the environmental agreements as at
January 31, 2009 was $61.4 million. The agreement specifically
provides that these funding requirements will be reduced by amounts
incurred by the Joint Venture on reclamation and abandonment
activities. (b) Participation Agreements The Joint Venture has
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of the Aboriginal bands. The agreements are
each for an initial term of twelve years and shall be automatically
renewed on terms to be agreed for successive periods of six years
thereafter until termination. The agreements terminate in the event
the mine permanently ceases to operate. (c) Commitments Commitments
include the cumulative maximum funding commitments secured by
letters of credit of the Joint Venture's environmental and
participation agreements at Harry Winston Diamond Corporation's 40%
ownership percentage, before any reduction of future reclamation
activities, and future minimum annual rentals under non-cancellable
operating and capital leases for retail salons and corporate office
space, and are as follows: 2010 $ 82,787 2011 81,507 2012 78,044
2013 76,620 2014 75,612 Thereafter 122,563
---------------------------------------------------------------------
NOTE 16: Employee Benefit Plans Year ended Year ended January 31,
January 31, Expense for the year 2009 2008
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston retail segment(a) $
1,527 $ 1,213 Defined contribution plan - Harry Winston retail
segment(b) 866 1,063 Defined contribution plan - Harry Winston
mining segment(b) 223 - Defined contribution plan - Diavik Diamond
Mine(b) 916 833
-------------------------------------------------------------------------
$ 3,532 $ 3,109 ------------------------- -------------------------
(a) Defined Benefit Pension Plan The Harry Winston retail segment
sponsors three separate defined benefit pension plans covering
substantially all of its employees in the United States, Japan and
Switzerland. The principal pension plan is the Harry Winston
Employee Retirement Plan for Harry Winston Inc. US employees. The
benefits for the Harry Winston Inc. plan are based on years of
service and the employee's compensation. In April 2001, Harry
Winston Inc. amended its defined benefit pension plan. The
amendment froze plan participation effective April 30, 2001. Harry
Winston Inc.'s funding policy for the US plan is to contribute
amounts to the plan sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security
Act of 1974. Plan assets consist primarily of fixed income, equity
and other short-term investments. The other two defined benefit
pension plans are sponsored by retail segment subsidiaries Harry
Winston Japan, K.K. and Harry Winston S.A., which converted their
previous pension plan arrangements into defined benefit plans
effective February 1, 2007. Pension liabilities for these two
non-US plans are funded in accordance with local laws and
regulations. (i) INFORMATION ABOUT HARRY WINSTON INC.'S US DEFINED
BENEFIT PLAN IS AS FOLLOWS: 2009 2008
---------------------------------------------------------------
ACCRUED BENEFIT OBLIGATION: Balance, beginning of year $ 11,296 $
11,784 Interest cost 656 627 Actuarial gain (3,171) (373) Effects
of changes in assumptions - - Benefits paid (738) (742)
---------------------------------------------------------------
Balance, end of year 8,043 11,296 PLAN ASSETS: Fair value,
beginning of year 10,384 10,574 Actual return on plan assets
(2,426) 397 Employer contributions - 155 Benefits paid (738) (742)
---------------------------------------------------------------
Fair value, end of year 7,220 10,384
---------------------------------------------------------------
Funded status - plan deficit (included in accrued liabilities) $
(823) $ (912) ------------------------- -------------------------
US plan assets represented approximately 61% of total Harry Winston
retail segment plan assets at January 31, 2009. The unfunded status
of the retail segment plans are comprised of $0.8 million
attributed to the US-based Harry Winston Inc. plan, as reported in
the table above, and $1.4 million attributed to the Harry Winston
Japan, K.K. plan. The Harry Winston Japan, K.K. plan is non-funded
with a benefit obligation of $1.4 million. The Harry Winston S.A.
plan was fully funded at January 31, 2009 with a benefit obligation
of $4.3 million offset by plan assets of $4.5 million. The
following table provides the components of the net periodic pension
costs for the three plans for the years ended January 31. 2009 2008
---------------------------------------------------------------
Service cost $ (1,408) $ (1,357) Interest cost (863) (808) Expected
return on plan assets 923 952 Net actuarial loss - -
---------------------------------------------------------------
Total $ (1,348) $ (1,213) -------------------------
------------------------- (ii) PLAN ASSETS The asset allocation of
Harry Winston Inc.'s US pension benefits at January 31, 2009 were
as follows: 2009 2008
---------------------------------------------------------------
ASSET CATEGORY: Cash equivalents 10% 2% Equity securities 54% 72%
Fixed income securities 36% 24% Other 0% 2%
---------------------------------------------------------------
Total 100% 100% ------------------------- -------------------------
(iii) THE SIGNIFICANT ASSUMPTIONS USED FOR HARRY WINSTON INC.'S US
PLAN ARE AS FOLLOWS: 2009 2008
---------------------------------------------------------------
ACCRUED BENEFIT OBLIGATION: Discount rate 6.53% 6.24% Expected
long-term rate of return 7.50% 7.50%
---------------------------------------------------------------
BENEFIT COSTS FOR THE YEAR: Discount rate 6.24% 5.75% Expected
long-term rate of return on plan assets 7.50% 7.50% Rate of
compensation increase 0.00% 0.00%
---------------------------------------------------------------
Harry Winston Inc's overall expected long-term rate of return on
assets is 7.50%. The expected long-term rate of return is based on
the portfolio as a whole and not on the sum of the returns on
individual asset categories. The return is based exclusively on
historical returns, without adjustments. Harry Winston S.A.'s
overall expected long-term rate of return on assets is 3.25%.
Long-term rate of return for Harry Winston Japan, K.K. plan assets
is not applicable due to the unfunded status of the plan. The
weighted average assumptions used to determine the benefit
obligations for Harry Winston Japan, K.K. and Harry Winston S.A. at
January 31, 2009 are a discount rate and expected long- term rate
of return of 1.70% and 0.00% and 2.50% and 3.25%, respectively. The
weighted average assumptions used to determine the benefit costs
for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31,
2009 are a discount rate, expected long-term rate of return and a
rate of compensation increase of 1.70%, 0.00% and 4.42%, and 3.00%,
3.25% and 3.00%, respectively. (iv) Harry Winston retail segment
expects to contribute $0.9 million to its pension plan in calendar
2009 Benefits of approximately $1.4 million are expected to be paid
by the retail segment in each calendar year from 2010 to 2014. The
aggregate benefits expected to be paid in the five calendar years
from 2015 to 2019 are $6.9 million. The expected benefits are based
on the same assumptions used to measure the retail segment's
benefit obligation at January 31, 2009. (b) Defined Contribution
Plan Harry Winston Inc. has a defined contribution 401(k) plan
covering substantially all employees in the United States. For the
fiscal years ended January 31, 2009 and 2008, Harry Winston Inc.
elected to increase the employer-matching contribution to 100% of
the first 6% of the employee's salary from 50% in fiscal 2007 and
prior. Employees must meet minimum service requirements and be
employed on December 31 of each year in order to receive this
matching contribution. The Joint Venture sponsors a defined
contribution plan whereby the employer contributes 6% of the
employee's salary. Harry Winston Diamond Corporation introduced a
defined contribution plan in fiscal 2009 whereby the employer
contributes to a maximum of 6% of the employee's salary to the
maximum contribution limit under Canada's Income Tax Act. (c)
Deferred Compensation Plan On January 28, 2005, the Board of
Directors of Harry Winston Inc. approved an Equity Participation
Plan (the "Plan") for certain executives of Harry Winston Inc. The
Plan involves "Phantom Stock" awards, as defined in the executives'
employment agreements, which are payable in cash. These awards are
split into a 40% time-vested award and a 60% cliff-vested award.
The value of the award for each executive is calculated as a
percentage of return on investment, as defined in the agreements as
the excess of the fair value of Harry Winston Inc. at the date of
calculation, over the fair value of Harry Winston Inc. at April 2,
2004, adjusted for certain items as defined in the agreements. The
40% time-vested award vests on the six annual anniversaries of each
executive's designated start date and over the six-year period, the
vesting percentages are 0%, 0%, 10%, 10%, 10% and 10%,
respectively. The 60% cliff-vested award vests in full on the date
that Harry Winston Diamond Corporation becomes the acquirer of 100%
of the common stock of Harry Winston Inc. The executives must
remain employed by Harry Winston Inc. through the vesting dates in
order for the awards to vest. Both awards would vest immediately
upon the date of any future change in control as defined in the
employment agreements. On September 29, 2006, Harry Winston Diamond
Corporation acquired 100% of the common stock of Harry Winston Inc.
As a result, the cliff-vested award has vested. At January 31, 2009
and 2008, Harry Winston Inc. has recorded a liability of $3.1
million and $6.3 million, respectively, relating to the Plan. At
January 31, 2009 and 2008, Harry Winston Inc. has recorded a
liability of $6.0 million and $5.8 million, respectively, in
connection with a deferred compensation plan for a key executive.
According to the terms of this plan, the executive is entitled to
deferred compensation of $5.0 million, which vests in equal
installments on the first through the third anniversaries of the
executive's first day of employment with Harry Winston Inc. On each
vesting date, the vested portion of the deferred compensation will
be paid to the executive unless the executive provides Harry
Winston Inc. with prior written notice to defer receipt of all or a
portion of the vested portion of the deferred compensation. All
such vested amounts deferred at the request of the executive will
be distributed to the executive upon the executive's termination of
employment with Harry Winston Inc. The deferred compensation bears
interest at LIBOR. NOTE 17: Capital Management The Company's
capital includes cash and cash equivalents, short-term debt,
long-term debt and equity, which includes issued common shares,
contributed surplus and retained earnings. The Company's primary
objective with respect to its capital management is to ensure that
it has sufficient cash resources to maintain its ongoing
operations, to provide returns to shareholders and benefits for
other stakeholders, and to pursue growth opportunities. To meet
these needs, the Company may from time to time raise additional
funds through borrowing and/or the issuance of equity or debt or by
securing strategic partners, upon approval by the Board of
Directors. The Board of Directors reviews and approves any material
transactions out of the ordinary course of business, including
proposals on acquisitions or other major investments or
divestitures, as well as annual capital and operating budgets. The
Company's mining and retail segments maintain separate financing
arrangements. Accordingly, the Company assesses liquidity and
capital resources on a segmented basis. The retail segment's cash
requirements are for cash operating expenses, working capital and
capital expenditures, including salon expansion. The Company
believes that cash on hand, cash generated from operations and
access to credit facilities will be sufficient to meet anticipated
cash requirements for the retail segment next fiscal year. The
mining segment's cash requirements are for cash operating expenses,
working capital and capital expenditures. With the closing of the
Kinross transaction, the Company believes that cash on hand and
cash generated from the sale of rough diamonds will be sufficient
to meet anticipated cash requirements for the next fiscal year. The
Company is subject to externally imposed capital requirements
related to its senior secured term and revolving credit facilities,
whereby it is required to maintain a consolidated tangible net
worth in excess of $250 million. There has been no change with
respect to the Company's overall capital risk management strategy.
At January 31, 2009, the Company is in compliance with this
covenant. NOTE 18: Financial Instruments The Company has various
financial instruments comprised of cash and cash equivalents, cash
collateral and cash reserves, accounts receivable, accounts payable
and accrued liabilities, bank advances and long-term debt. Cash and
cash equivalents consist of cash on hand and balances with banks
and short-term investments held in overnight deposits with a
maturity on acquisition of less than 90 days. Cash and cash
equivalents are designated as held-for-trading and are carried at
fair value. The fair value of accounts receivable is determined by
the amount of cash anticipated to be received in the normal course
of business from the financial asset. The Company's long-term debt
is fully secured; hence the fair value of this instrument at
January 31, 2009 is considered to approximate its carrying value.
The carrying values of these financial instruments are as follows:
January 31, 2009 January 31, 2008
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying Fair Value Value Fair Value
Value
-------------------------------------------------------------------------
FINANCIAL ASSETS: Cash and cash equivalents $ 16,735 $ 16,735 $
49,628 $ 49,628 Cash collateral and cash reserves 30,145 30,145
25,615 25,615 Accounts receivable 66,980 66,980 25,505 25,505
-------------------------------------------------------------------------
$ 113,860 $ 113,860 $ 100,748 $ 100,748
------------------------------------------------
------------------------------------------------ FINANCIAL
LIABILITIES: Accounts payable and accrued liabilities $ 118,390 $
118,390 $ 124,426 $ 124,426 Bank advances 42,621 42,621 34,928
34,928 Long-term debt 280,722 280,722 309,349 309,349
-------------------------------------------------------------------------
$ 441,733 $ 441,733 $ 468,703 $ 468,703
------------------------------------------------
------------------------------------------------ NOTE 19: Financial
Risk Exposure and Risk Management The Company is exposed, in
varying degrees, to a variety of financial instrument related risks
by virtue of its activities. The Company's overall financial risk
management program focuses on the preservation of capital and
protecting current and future Company assets and cash flows by
minimizing exposure to risks posed by the uncertainties and
volatilities of financial markets. The Company's Audit Committee
has responsibility to review and discuss significant financial
risks or exposures and to assess the steps management has taken to
monitor, control, report and mitigate such risks to the Company.
Financial risk management is carried out by the Finance department,
which identifies and evaluates financial risks and establishes
controls and procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are
managed are as follows: i) Currency Risk The Company's sales are
predominately denominated in US dollars. As the Company operates in
an international environment, some of the Company's financial
instruments and transactions are denominated in currencies other
than the US dollar. The results of the Company's operations are
subject to currency transaction risk and currency translation risk.
The operating results and financial position of the Company are
reported in US dollars in the Company's consolidated financial
statements. The Company's primary foreign exchange exposure
impacting pre-tax earnings arises from the following sources: Net
Canadian dollar denominated monetary assets and liabilities. The
most significant exposure relates to its Canadian dollar future
income tax liability. The Company's functional and reporting
currency is US dollars; however, the calculation of income tax
expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves
against the US dollar. The weakening/strengthening of the Canadian
dollar versus the US dollar results in an unrealized foreign
exchange gain/loss on the revaluation of the Canadian dollar
denominated future income tax liability. Committed or anticipated
foreign currency denominated transactions, primarily Canadian
dollar costs at the Diavik Diamond Mine. Based on the Company's net
exposure to Canadian dollar monetary assets and liabilities at
January 31, 2009, a one-cent change in the exchange rate would have
impacted pre-tax net earnings for the year by $2.5 million. ii)
Interest Rate Risk Interest rate risk is the risk borne by an
interest-bearing asset or liability as a result of fluctuations in
interest rates. Financial assets and financial liabilities with
variable interest rates expose the Company to cash flow interest
rate risk. The Company's most significant interest rate risk arises
from its various credit facilities which bear variable interest
based on LIBOR. Based on the Company's LIBOR based credit
facilities at January 31, 2009, a 100 basis point change in the
LIBOR rate would have impacted pre-tax net earnings for the year by
$1.9 million. iii) Concentration of Credit Risk Credit risk is the
risk of a financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligation. Financial instruments that potentially
subject the Company to credit risk consist of trade receivables
from retail segment clients. While economic factors can affect
credit risk, the Company manages risk by providing credit terms on
a case-by-case basis only after a review of the client's financial
position and past credit history. The Company has not experienced
significant losses in the past from its customers. The Company's
exposure to credit risk in the mining segment is minimized by its
sales policy, which requires receipt of cash prior to the delivery
of rough diamonds to its customers. The Company manages credit
risk, in respect of short-term investments, by maintaining bank
accounts with Tier 1 banks and investing only in term deposits or
banker's acceptances with highly rated financial institutions that
are capable of prompt liquidation. The Company monitors and manages
its concentration of counterparty credit risk on an ongoing basis.
At January 31, 2009, the Company's maximum counterparty credit
exposure consists of the carrying amount of cash and cash
equivalents and accounts receivable, which approximates fair value.
iv) Liquidity Risk Liquidity risk is the risk that the Company will
not be able to meet its financial obligations as they fall due. The
Company manages its liquidity by ensuring that there is sufficient
capital to meet short and long-term business requirements, after
taking into account cash flows from operations and the Company's
holdings of cash and cash equivalents. The Company also strives to
maintain sufficient financial liquidity at all times in order to
participate in investment opportunities as they arise, as well as
to withstand sudden adverse changes in economic circumstances.
Management forecasts cash flows for its current and subsequent
fiscal years to predict future financing requirements. Future
requirements are met through a combination of committed credit
facilities and access to capital markets. At January 31, 2009, the
Company had $16.7 million of cash and cash equivalents and $70.4
million available under credit facilities. The following table
summarizes the aggregate amount of contractual future cash outflows
for the Company's financial liabilities: (expressed in thousands of
Less than Year Year After United States dollars) Total 1 year 2-3
4-5 5 years
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $118,390 $118,390 $ - $ -
$ - Income taxes payable 76,987 76,987 - - - Bank advances 42,621
42,621 - - - Long-term debt(a) 320,118 84,408 26,799 192,135 16,776
Environmental and participation agreements incremental commitments
77,345 64,243 2,609 1,011 9,482 Operating lease obligations 106,064
17,701 26,280 16,865 45,218 Capital lease obligations 1,389 844 545
- -
-------------------------------------------------------------------------
(a) Includes projected interest payments on the current debt
outstanding based on interest rates in effect at January 31, 2009.
NOTE 20: Insurance Settlements In December 2008, approximately
$31.7 million in Company-owned and consigned retail inventory at
cost was stolen during a second robbery at the Harry Winston Paris
salon. The Company was fully insured against the loss, and
recognized a pre-tax gain of $16.7 million in the fourth quarter on
settlement of the insurance claim compared to a pre-tax gain of
$13.5 million on the first Paris salon robbery that occurred in the
third quarter of the prior year. Included in accounts receivable at
January 31, 2009 is a $48.4 million receivable relating to the
insurance settlement that was received in February 2009. The
remaining balance of the insurance claim is $3.3 million, of which
$1.0 million was received in February 2009; the insurance company
has agreed to pay the balance of $2.3 million which is expected to
be received during April 2009. Also included in insurance
settlement is a $0.5 million gain resulting from an excavator fire
that occurred in the fourth quarter of fiscal 2006 at the Diavik
Diamond Mine. NOTE 21: Segmented Information The Company operates
in two segments within the diamond industry, mining and retail, as
of January 31, 2009. The mining segment consists of the Company's
rough diamond business. This business includes the 40% interest in
the Diavik group of mineral claims and the sale of rough diamonds
in the market-place. The retail segment consists of the Company's
ownership in Harry Winston Inc. This segment consists of the
marketing of fine jewelry and watches on a worldwide basis. For the
twelve months ended January 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 328,223 $ - $ 328,223 United States - 93,978
93,978 Europe - 117,588 117,588 Asia - 69,431 69,431 Cost of sales
139,769 147,509 287,278
-------------------------------------------------------------------------
Gross margin 188,454 133,488 321,942 Gross margin (%) 57.4% 47.5%
52.8% Selling, general and administrative expenses 19,903 135,973
155,876
-------------------------------------------------------------------------
Earnings (loss) from operations 168,551 (2,485) 166,066
-------------------------------------------------------------------------
Interest and financing expenses (9,183) (11,274) (20,457) Other
income 2,595 (349) 2,246 Insurance settlement 558 16,682 17,240
Impairment charge - (93,780) (93,780) Foreign exchange gain (loss)
60,879 (1,792) 59,087
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 223,400 $ (92,998)
$ 130,402 --------------------------------------
-------------------------------------- Segmented assets as at
January 31, 2009 Canada $ 980,500 $ - $ 980,500 United States -
404,952 404,952 Other foreign countries 27,243 153,880 181,123
-------------------------------------------------------------------------
$1,007,743 $ 558,832 $1,566,575
-------------------------------------------------------------------------
Capital expenditures $ 200,289 $ 9,574 $ 209,863 OTHER SIGNIFICANT
NON-CASH ITEMS: Income tax recovery $ (17,789) $ (3,742) $ (21,531)
Amortization and accretion $ 64,374 $ 12,596 $ 76,970
-------------------------------------------------------------------------
For the twelve months ended January 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue Canada $ 413,772 $ - $ 413,772 United States - 112,453
112,453 Europe - 81,429 81,429 Asia - 71,653 71,653 Cost of sales
169,680 141,507 311,187
-------------------------------------------------------------------------
Gross margin 244,092 124,028 368,120 Gross margin (%) 59.0% 46.7%
54.2% Selling, general and administrative expenses 23,359 127,086
150,445
-------------------------------------------------------------------------
Earnings (loss) from operations 220,733 (3,058) 217,675
-------------------------------------------------------------------------
Interest and financing expenses (14,940) (12,918) (27,858) Other
income 2,326 432 2,758 Insurance settlement - 13,488 13,488 Foreign
exchange gain (loss) (45,042) 1,651 (43,391)
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 163,077 $ (405) $
162,672 --------------------------------------
-------------------------------------- Segmented assets as at
January 31, 2008 Canada $ 856,841 $ - $ 856,841 United States -
459,525 459,525 Other foreign countries 22,466 155,116 177,582
-------------------------------------------------------------------------
$ 879,307 $ 614,641 $1,493,948
-------------------------------------------------------------------------
Goodwill as at January 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 170,711 $ 38,656 $ 209,367 OTHER SIGNIFICANT
NON-CASH ITEMS: Income tax expense (recovery) $ 13,874 $ (5,296) $
8,578 Amortization and accretion $ 71,840 $ 9,334 $ 81,174
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $20.8 million
(2008 - $28.4 million) for the twelve months ended January 31,
2009. Diavik Diamond Mine Mineral Reserve and Mineral Resource
Statement AS OF DECEMBER 31, 2008 Proven and Probable Reserves
Proven and Proven Probable Probable
-------------------------------------------------------------------------
Open Mill- Mill- Mill- Mill- Mill- Mill- pit and ions Carats ions
ions Carats ions ions Carats ions underground of per of of per of
of per of mining tonnes tonne carats tonnes tonne carats tonnes
tonne carats
-------------------------------------------------------------------------
A-154 South Open Pit - - - 0.7 6.1 4.3 0.7 6.1 4.3 Underground - -
- 2.9 4.8 13.8 2.9 4.8 13.8
-------------------------------------------------------------------------
Total A-154 South - - - 3.6 5.0 18.2 3.6 5.0 18.2
-------------------------------------------------------------------------
A-154 North Open Pit - - - - - - - - - Underground 2.9 2.2 6.3 5.7
2.1 12.2 8.6 2.1 18.4
-------------------------------------------------------------------------
Total A-154 North 2.9 2.2 6.3 5.7 2.1 12.2 8.6 2.1 18.4
-------------------------------------------------------------------------
A-418 Open Pit 3.6 3.0 10.7 - - - 3.6 3.0 10.7 Underground 0.5 3.9
1.9 3.8 3.7 13.9 4.3 3.7 15.9
-------------------------------------------------------------------------
Total A-418 4.1 3.1 12.7 3.8 3.7 13.9 7.9 3.4 26.6
-------------------------------------------------------------------------
Total Open Pit 3.6 3.0 10.7 0.7 6.1 4.3 4.3 3.5 15.1 Underground
3.4 2.4 8.2 12.4 3.2 39.9 15.8 3.0 48.1
-------------------------------------------------------------------------
Total Reserves 7.0 2.7 18.9 13.1 3.4 44.3 20.1 3.1 63.2
-----------------------------------------------------------
----------------------------------------------------------- Note:
Totals may not add up due to rounding. Additional Indicated and
Inferred Resources Measured Indicated Inferred Resources Resources
Resources
-------------------------------------------------------------------------
Mill- Mill- Mill- Mill- Mill- Mill- ions Carats ions ions Carats
ions ions Carats ions Kimberlite of per of of per of of per of pipe
tonnes tonne carats tonnes tonne carats tonnes tonne carats
-------------------------------------------------------------------------
A-154 South - - - - - - 0.6 5.0 2.9 A-154 North - - - - - - 2.0 2.5
5.0 A-418 - - - - - - 0.6 4.0 2.5 A-21 - - - 4.1 3.1 12.7 0.7 2.8
1.9
-------------------------------------------------------------------------
Total - - - 4.1 3.1 12.7 3.9 3.2 12.4
-----------------------------------------------------------
----------------------------------------------------------- Note:
Totals may not add up due to rounding. The above mineral reserve
and mineral resource statement was prepared by Diavik Diamond Mines
Inc., operator of the Diavik Diamond Mine, under the supervision of
Calvin Yip, P.Eng., Principal Advisor, Strategic Planning of Diavik
Diamond Mines Inc., a Qualified Person within the meaning of
National Instrument 43-101 of the Canadian Securities
Administrators. For further details and information concerning
Harry Winston Diamond Corporation's Mineral Reserves and Resources,
readers should reference Harry Winston Diamond Corporation's Annual
Information Form available through http://www.sedar.com/ and
http://investor.harrywinston.com/. DATASOURCE: Harry Winston
Diamond Corporation CONTACT: Investor Relations, (416) 362-2237 ext
290 or
Copyright