Aber Diamond (MM) (NASDAQ:ABER)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 31, 2006, 2005 and 2004 (tabular amounts in thousands
of United States dollars, except as otherwise noted)
Note 1:
Nature of Operations
Aber Diamond Corporation (the "Company" or "Aber") is a specialist
diamond company focusing on the mining and retail segments of the
diamond industry.
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 Aber Diamond Mines Ltd.
(40%). DDMI is the operator of the Diavik Diamond Mine (the "Diavik
Mine"). Both companies are headquartered in Yellowknife, Canada. DDMI
is a wholly owned subsidiary of Rio Tinto plc of London, England, and
Aber Diamond Mines Ltd. is a wholly owned subsidiary of Aber Diamond
Corporation of Toronto, Canada. The Diavik Mine is located
300 kilometres northeast of Yellowknife in the Northwest Territories.
Aber 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.
Note 2:
Significant Accounting Policies
The consolidated financial statements are prepared by management in
accordance with accounting principles generally accepted in Canada,
and except as described in note 22 conform in all material respects
with accounting principles generally accepted in the United States.
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 which 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. Aber
owns an undivided 40% interest in the assets, liabilities and
expenses of the Joint Venture. Aber 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, and classification of
current portion of long-term debt. Financial results as determined by
actual events could differ from those estimated.
(c) Revenue Recognition
Revenue from rough diamond sales is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, 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. Shipping and
handling fees billed to customers are included in net sales and the
related costs are included in cost of sales.
(d) Cash Resources
Cash and cash equivalents, and cash collateral and cash reserve
consist of cash on hand, balances with banks and short-term money
market instruments (with a maturity on acquisition of less than
91 days), and are carried at cost, which approximates market.
Funds in cash collateral and cash reserve are maintained as
prescribed under the Company's debt financing arrangements and will
become available to Aber 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 charged
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 and includes stockpiled ore, diamonds in process,
and diamonds held for sale. 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.
Supplies inventory is recorded at the lower of average cost or
replacement value and includes consumables and spare parts maintained
at the Diavik Mine site and at the Company's sorting and distribution
facility locations.
(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 unit-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 Company or its partners 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 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 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:
Estimated useful
Asset life (years)
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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
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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 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 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 relative fair values.
Intangible assets with finite useful lives are amortized on a
straight-line basis over their useful lives as follows:
Estimated useful
Asset life (years)
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Wholesale distribution network 10
Store leases Up to 9
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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. The
implied fair value of goodwill is determined in the same manner as
the value of the goodwill is determined in a business combination,
using the fair value of the reporting unit as if it was the purchase
price. 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) Deferred Charges and Other Assets
Deferred financing costs are amortized over the repayment terms of
the related debt. Other assets are amortized over a period not
exceeding ten years.
Amortization of deferred financing charges relating to long-term debt
was charged to the cost of the underlying asset prior to the
commencement of commercial activity.
(l) Future Site Restoration Costs
The Company records the fair value of any asset retirement
obligations 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 at the end
of each fiscal year 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 period
end, monetary assets and liabilities denominated in foreign currency
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 recorded in the cumulative translation
adjustment account 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.
All stock options granted are accounted for as a capital transaction
at the time of the grant and are reflected as stock options in
shareholders' equity. 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 on a
straight-line basis over the vesting period. Any consideration paid
on amounts attributable to stock options is credited to share
capital.
(p) Restricted and Deferred Share Unit Plan ("RSU" and "DSU")
The RSU and DSU Plans are full value phantom shares which mirror the
value of Aber'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 uses 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. 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) Comparative Figures
Certain figures have been reclassified to conform with presentation
in the current year.
(v) Recently Issued Accounting Pronouncements
Deferred Stripping
In March 2005, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued EITF No. 04-06, "Accounting for
Stripping Costs Incurred during Production". This rule says that post
production stripping costs are part of the cost of inventory,
disallowing a common mining industry practice of deferring stripping
costs based on life of mine stripping ratios. The standard is
effective February 1, 2006 for US GAAP purposes. In March 2006, the
Emerging Issues Committee of the Canadian Institute of Chartered
Accountants ("CICA") issued EIC 160 on "Stripping Costs in the
Production Phase of a Mining Operation", which provide an alternative
to inclusion of stripping costs in inventory required by the US
standard when the stripping costs result in a betterment of the asset
by providing access to additional sources for ore, in which case the
stripping costs can be capitalized. The standard is effective for the
Company's fiscal year which commences February 1, 2007. The Company
has treated post production stripping costs as a cost of inventory.
Accounting for Stock Issued Compensation
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R. This Statement replaces SFAS No. 123,
"Accounting for Stock Compensation," and supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company is currently assessing the impact of this
pronouncement on the financial statements.
Note 3:
Acquisition
On April 1, 2004, the Company completed the acquisition of a
51% share of Harry Winston Inc., a luxury jewelry and watch retailer.
The Company purchased its interest for $85.0 million, of which
$20.3 million was in the form of a direct equity investment in Harry
Winston. The total purchase price, before transaction costs, is
payable by the Company in installments, with $49.8 million remaining
to be paid over the one-year period following closing. The Company
also has the option to purchase the remaining 49% interest in Harry
Winston on the sixth anniversary of the closing at the then fair
market value of such interest, failing which the other principal
shareholders of Harry Winston will have the ability to institute a
process for the sale of Harry Winston as an entity (including the
Company's 51% interest).
The allocation of the purchase price to the fair values of assets
acquired and liabilities assumed is set forth in the table below and
continues to be refined. The valuation of intangible assets has been
completed by a third party valuator. Purchase price amounts give rise
to future income tax liabilities that have been recorded in the same
year in which the intangible assets are separately identified.
Accounts receivable $ 30,045
Inventory 92,658
Intangibles 44,160
Goodwill 41,966
Other assets 22,724
Accounts payable and accrued liabilities (32,199)
Bank loan (43,872)
Future income tax liability (20,644)
Minority interest (16,519)
Notes payable (12,099)
Other liabilities (17,230)
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$ 88,990
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Cash paid at acquisition $ 40,000
Purchase price adjustment (5,066)
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Initial cash outlay 34,934
Promissory note 49,765
Acquisition and other costs 4,291
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$ 88,990
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Aber owns a 52.83% share of Harry Winston Inc. ("Harry Winston")
located in New York City, US. Pursuant to the Stock Purchase
Agreement between Aber and the two minority shareholders, if
contribution to capital required by Harry Winston is not made by a
stockholder, the non-contributing stockholder's interest in Harry
Winston is diluted proportionately. As a result of the capital
contributions made by Aber but not by all minority shareholders in
fiscal 2005, Aber's ownership of Harry Winston increased from 51% to
52.83%. The results of Harry Winston have been consolidated in the
financial statements of the Company effective April 1, 2004. Minority
interest represents the remaining 47.17% ownership of Harry Winston
not held by Aber.
Note 4:
Cash Resources
2006 2005
---------------------------------------------------------------------
Diavik Joint Venture $ 10,523 $ 6,889
Cash and cash equivalents 137,593 116,707
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Total cash and cash equivalents 148,116 123,596
Cash collateral and cash reserve 14,276 13,786
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Total cash resources $ 162,392 $ 137,382
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Note 5:
Inventory and Supplies
2006 2005
---------------------------------------------------------------------
Rough diamond inventory $ 21,612 $ 19,013
Merchandise inventory 164,691 110,175
Supplies inventory 16,268 9,739
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Total inventory and supplies $ 202,571 $ 138,927
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Note 6:
Deferred Mineral Property Cost
2006
---------------------------------------------------------------------
Net
Accumulated book
Cost amortization value
---------------------------------------------------------------------
Diavik Mine $ 248,383 $ 52,016 $ 196,367
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---------------------------------------------------------------------
2005
---------------------------------------------------------------------
Net
Accumulated book
Cost amortization value
---------------------------------------------------------------------
Diavik Mine $ 234,046 $ 34,017 $ 200,029
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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.
Note 7:
Capital Assets
2006
---------------------------------------------------------------------
Net
Accumulated book
Cost amortization value
---------------------------------------------------------------------
Diavik equipment and leaseholds(a) $ 337,020 $ 85,655 $ 251,365
Furniture, equipment and other(b) 14,900 7,126 7,774
Real property - land and
building(c) 50,654 8,058 42,596
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$ 402,574 $ 100,839 $ 301,735
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---------------------------------------------------------------------
2005
---------------------------------------------------------------------
Net
Accumulated book
Cost amortization value
---------------------------------------------------------------------
Diavik equipment and leaseholds(a) $ 278,376 $ 54,170 $ 224,206
Furniture, equipment and other(b) 10,930 5,800 5,130
Real property - land and
building(c) 36,502 5,222 31,280
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$ 325,808 $ 65,192 $ 260,616
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(a) Diavik equipment and leaseholds are project related assets at the
Joint Venture level.
(b) Furniture, equipment and other includes equipment located at the
Company's diamond sorting facility and at Harry Winston's salons.
(c) Real property is comprised of land and a building which houses the
corporate activities of the Company and various leasehold
improvements to Harry Winston's salons and corporate offices.
Note 8:
Diavik Joint Venture
The following represents Aber's 40% proportionate interest in the
Joint Venture as at December 31, 2005 and 2004.
2006 2005
---------------------------------------------------------------------
Current assets $ 52,845 $ 33,057
Long-term assets 408,967 379,860
Current liabilities 14,600 9,198
Long-term liabilities and participant's
account 447,212 403,709
Year ended:
Net expense 131,935 159,432
Cash flows resulting from operating activities (89,490) (75,703)
Cash flows resulting from financing activities 159,972 95,730
Cash flows resulting from investing activities (67,762) (16,415)
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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 assts of
the Joint Venture to settle these liabilities.
Note 9:
Intangible Assets
Amortization Accumulated 2006 2005
period Cost amortization Net Net
-------------------------------------------------------------------------
Trademark indefinite life $ 33,850 $ - $ 33,850 $ 33,850
Drawings indefinite life 5,200 - 5,200 5,200
Wholesale
distribution
network 120 months 2,500 (458) 2,042 2,292
Store leases 65 to 105 months 2,610 (780) 1,830 2,255
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Intangible
assets $ 44,160 $ (1,238) $ 42,922 $ 43,597
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Note 10:
Deferred Charges and Other Assets
2006 2005
---------------------------------------------------------------------
Prepaid pricing discount(i), net of
accumulated amortization of $1.4 million
(2005-$0.2 Million) $ 10,322 $ 11,760
Other assets 4,855 5,410
Financing, net of accumulated amortization
of $0.9 million (2005-$0.8 million) 2,927 3,729
Refundable security deposits 4,577 3,000
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$ 22,681 $ 23,899
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(i) During fiscal 2005, $12.0 million was 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 11:
Promissory Note
2006 2005
---------------------------------------------------------------------
Promissory note - $ 50,902
---------------------------------------------------------------------
---------------------------------------------------------------------
The $50.9 million represented the balance of the purchase price
payable plus accrued interest (accrued interest to January 31, 2005)
by the Company for its acquisition of 51% of Harry Winston; this note
was repaid on March 3, 2005.
Note 12:
Long-Term Debt
2006 2005
---------------------------------------------------------------------
Credit facility(a) $ 114,160 $ 90,000
Harry Winston credit facility(b) 62,460 40,432
First mortgage on real property 8,639 8,279
Notes payable(c) - 12,099
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Total long-term debt 185,259 150,810
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Less current portion (27,915) (32,451)
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$ 157,344 $ 118,359
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(i) Long-Term Debt
(a) Credit Facility
The Company's credit agreement includes a $100.0 million senior
secured term facility and a $75.0 million senior secured revolving
facility. The facilities have underlying interest rates, which at
the option of the Company are either LIBOR plus a spread of 1.50% to
2.625%, or US Base Rate plus a spread of 0.50% to 1.625%. The
facilities have a final maturity date of December 15, 2008. The
senior secured revolving facility has a standby fee on undrawn
amounts up to 1.5%, dependent on certain financial ratios, payable
quarterly. The Company may at any time prepay, in whole or in part,
borrowings outstanding in minimum amounts of $5.0 million. The
Company is required to comply with certain financial and
non-financial covenants. Under the facilities, the Company is
required to establish a debt reserve account containing up to a
maximum of $15.0 million. The effective interest at January 31,
2006 was 6.36%.
Scheduled amortization of the Company's senior secured term
facility is over ten equal consecutive semi-annual installments
commencing June 15, 2004. As at January 31, 2006, the Company had a
$44.2 million senior secured term facility and had $70.0 million
drawn under its senior secured revolving facility. The maximum
amount permitted to be drawn under the senior secured revolving
facility is reduced by $12.5 million semi-annually, commencing
September 2006. The Company is required to repay borrowings under
this facility in excess of the maximum permitted at each
semi-annual date, up to a maximum of $12.5 million.
Interest and financing charges include interest incurred on
long-term debt, as well as amortization of deferred financing
charges.
(b) Harry Winston Credit Facility
Harry Winston Inc. and Harry Winston Japan, K.K. amended its
$85.0 million secured credit agreement on January 31, 2006 with a
syndicated group of banks to increase it to $110.0 million on
March 1, 2006 and to $130.0 million on July 1, 2006. The credit
agreement includes both a revolving line of credit and fixed rate
loans. At January 31, 2006, $62.5 million had been drawn against the
facility. The amount available under this facility is subject to
availability determined using a borrowing formula based on certain
assets owned by Harry Winston Inc. and Harry Winston Japan, K.K. The
Harry Winston credit facility, which expires on March 31, 2008, has
no scheduled repayments required before that date.
The credit agreement contains affirmative and negative financial and
non-financial covenants, which apply to Harry Winston on a
consolidated basis. These provisions include minimum net worth,
minimum coverage of fixed charges, leverage ratio, minimum EBITDA
and limitations on capital expenditures. The outstanding borrowings
under the credit facility are secured by inventory and accounts
receivable of Harry Winston Inc. and inventory of Harry Winston
Japan, K.K. with no guarantees or recourse to Aber.
The facility provides for fixed rate loans and floating rate loans,
which bear interest at 2.50% above LIBOR and 1.50% above the bank's
prime rate, respectively. The effective interest rate at January 31,
2006 was 9.00%.
(c) Notes Payable
Included in long-term debt were notes payable pertaining to
convertible subordinated note agreements with two of Harry Winston's
minority shareholders. The notes were subordinated to Harry
Winston's credit facility. On December 31, 2005, Harry Winston
exercised its option to convert the subordinated notes into common
shares of Harry Winston.
(d) Required Principal Repayments
2006 $ 27,915
2007 45,449
2008 92,106
2009 13,025
2010 567
Thereafter 6,197
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$ 185,259
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(ii) Bank Advances
The Company also operates a revolving financing facility. Under the
terms of the facility, the Company has available $35.0 million
(utilization in either US dollars or Euros) for inventory and
receivables funding in connection with marketing activities through
its Belgian subsidiary, Aber International N.V. Borrowings under the
facility bear interest at the bank's base rate plus 1.5%. At
January 31, 2006, $4.8 million was drawn under this facility. This
facility has an annual commitment fee of 0.75% per annum.
Harry Winston Japan, K.K. maintains unsecured credit agreements with
two banks each amounting to Yen 300 million (US $2.6 million). The
credit facilities bear interest at 1.875% per annum and expire on
April 28, 2006 and December 29, 2006, respectively. Under these
agreements, bank advances of $5.1 million were outstanding at
January 31, 2006.
Note 13:
Income Tax
The future income tax asset of the Company is $30.6 million, of which
$16.7 million relates to Harry Winston. Included in the future tax
assets is $15.2 million which has been recorded to recognize the
benefit of $48.4 million of net operating losses that Harry Winston
has available for carry forward to shelter income taxes for future
years. The net operating losses are scheduled to expire between 2018
and 2024.
The future income tax liability of the Company is $256.4 million of
which $38.3 million relates to Harry Winston. Harry Winston's future
income tax liabilities include $20.6 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:
2006 2005 2004
---------------------------------------------------------------------
Current expense $ 9,337 $ 4,743 $ 2,076
Future expense 59,784 51,593 8,253
---------------------------------------------------------------------
$ 69,121 $ 56,336 $ 10,329
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) The tax effects of temporary differences that give rise to
significant portions of the future tax assets and liabilities at
January 31, 2006 and 2005 are as follows:
2006 2005
---------------------------------------------------------------------
Future income tax assets:
Net operating loss carryforwards $ 24,162 $ 29,708
Capital assets 738 356
Future site restoration costs 5,860 4,714
Other future income tax assets 4,837 2,519
---------------------------------------------------------------------
Gross future income tax assets 35,597 37,297
Valuation allowance (4,972) (14,912)
---------------------------------------------------------------------
Future income tax assets 30,625 22,385
Future income tax liabilities:
Deferred mineral property costs (122,393) (112,860)
Capital assets (93,439) (20,922)
Retail inventory (17,317) (19,136)
Goodwill (20,644) (20,644)
Unrealized foreign exchange gains (2,285) (906)
Other future income tax liabilities (348) -
---------------------------------------------------------------------
Future income tax liabilities (256,426) (174,468)
---------------------------------------------------------------------
Future income tax liability, net $(225,801) $(152,083)
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 40% (2005 -
42%; 2004 - 41%) is a result of the following:
2006 2005 2004
---------------------------------------------------------------------
Expected income tax expense $ 61,495 $ 46,426 $ 15,595
Resource allowance (1,318) (1,607) (4,942)
Non-deductible (non-taxable) items 5,063 (26) 1,375
Large Corporations Tax 940 1,370 1,436
Northwest Territories mining
royalty 13,995 12,459 4,569
Impact on changes in future
corporate income tax rates - 3,545 -
Earnings subject to tax different
than statutory rate (6,832) (5,962) (7,033)
Losses for which benefit not
recognized (recognized) (2,372) 1,030 -
Other (1,851) (899) (671)
---------------------------------------------------------------------
Recorded income tax expense $ 69,120 $ 56,336 $ 10,329
---------------------------------------------------------------------
---------------------------------------------------------------------
(d) The Company has net operating loss carryforwards for Canadian income
tax purposes of approximately $11.0 million. Harry Winston has net
operating loss carryforwards for US income tax purposes of
$48.4 million.
Note 14:
Future Site Restoration Costs
2006 2005
---------------------------------------------------------------------
Future site restoration costs $ 15,316 $ 13,855
---------------------------------------------------------------------
---------------------------------------------------------------------
The Joint Venture has an obligation under various agreements
(note 18) 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, 2006 is estimated to be $25.2 million of which
approximately $16.4 million is expected to occur at the end of the
mine life. 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 5.57%.
2006 2005
---------------------------------------------------------------------
At February 1 $ 13,855 $ 12,880
Revision of previous estimates 744 257
Accretion of provision 717 718
---------------------------------------------------------------------
---------------------------------------------------------------------
At January 31 $ 15,316 $ 13,855
---------------------------------------------------------------------
Note 15:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of
shares Amount
---------------------------------------------------------------------
Balance, January 31, 2003 54,636,670 $ 221,884
Shares issued for:
Cash on exercise of options 1,296,562 11,013
---------------------------------------------------------------------
Balance, January 31, 2004 55,933,232 $ 232,897
Shares issued for:
Cash 1,500,000 53,369
Cash on exercise of options 485,047 5,853
---------------------------------------------------------------------
Balance, January 31, 2005 57,918,279 $ 292,119
Shares issued for:
Share buyback (150,000) (757)
Cash on exercise of options 365,501 5,752
---------------------------------------------------------------------
Balance, January 31, 2006 58,133,780 $ 297,114
---------------------------------------------------------------------
---------------------------------------------------------------------
The Toronto Stock Exchange ("TSX") accepted the Company's notice of
intention to proceed with a normal course issuer bid ("NCIB") to
allow the Company to buy back a percentage of its shares on the open
market. The notice filed with the TSX provides that the Company may
purchase, through the facilities of the TSX over a one-year period,
up to a total of 5% of its outstanding shares, representing
2,850,000 shares. The notice has now expired. Purchases made by the
Company were in accordance with the rules and policies of the TSX and
the prices that the Company paid were the market price of such shares
at the time of acquisition thereof. Any shares purchased were
cancelled.
During fiscal 2006, the Company acquired 150,000 common shares for
cancellation for cash of $4.7 million. The excess of the price of
common shares repurchased over the stated value has been allocated to
retained earnings.
(c) Stock Options
Under the Employee Stock Option Plan, approved in February 2001, the
Company may grant options for up to 4,500,000 shares of common stock.
Options may be granted to any director, officer, employee or
consultant of the Company or any of its affiliates. Options granted
to directors vest immediately and options granted to officers,
employees or consultants vest over three to four years. The maximum
term of an option is ten years. The number of shares reserved for
issuance to any one optionee pursuant to options cannot exceed 2% of
the issued and outstanding common shares of the Company at the date
of grant of such options.
The exercise price of each option cannot be less than the fair market
value of the shares on the last trading day preceding the date of the
grant.
The Company's shares are primarily traded on a Canadian dollar based
exchange, and accordingly stock option information is presented in
Canadian dollars, with conversion to US dollars at the average
exchange rate for the year.
Changes in share options outstanding are as follows:
2006 2005
---------------------------------------------------------------------
Weighted average Weighted average
Options exercise price Options exercise price
000s CDN$ US$ 000s CDN$ US$
---------------------------------------------------------------------
Outstanding,
beginning
of year 2,342 $ 23.52 $ 18.95 2,515 $ 18.69 $ 13.53
Granted 10 36.83 31.18 335 41.60 32.00
Exercised (366) 18.76 15.63 (485) 15.38 11.83
Expired (27) 26.49 22.07 (23) 21.66 16.66
---------------------------------------------------------------------
1,959 $ 23.34 $ 20.49 2,342 $ 22.62 $ 18.22
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
------------------------------------------
Weighted average
Options exercise price
000s CDN$ US$
------------------------------------------
Outstanding,
beginning
of year 3,363 $ 14.48 $ 10.48
Granted 524 29.21 21.15
Exercised (1,297) 11.88 8.49
Expired (75) 21.11 15.29
------------------------------------------
2,515 $ 18.69 $ 13.53
------------------------------------------
------------------------------------------
The following summarizes information about stock options outstanding
at January 31, 2006:
Options outstanding Options exercisable
---------------------------------------------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contract- exercise Number exercise
prices outstanding ual life price exercis- price
CDN$ 000s in years CDN$ able 000s CDN$
---------------------------------------------------------------------
$9.10-$9.15 313 4.9 $ 9.14 313 $ 9.14
10.60-10.85 75 4.0 10.65 75 10.65
12.45-12.45 336 6.0 12.45 336 12.45
17.50-18.95 60 6.2 17.74 60 17.74
23.35-29.25 729 7.6 25.32 574 25.01
34.20-40.30 111 8.9 39.68 50 40.00
41.45-41.95 335 9.3 41.60 84 41.60
---------------------------------------------------------------------
1,959 $ 23.34 1,492 $ 19.28
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 years ended January 31,
2006, 2005 and 2004 was estimated using a Black-Scholes option
pricing model with the following weighted average assumptions:
2006 2005 2004
---------------------------------------------------------------------
Risk-free interest rate 3.81% 3.58% 4.64%
Dividend yield 0.77% - -
Volatility factor(i) 25.97% 30.31% 33.26%
Expected life of the options 3.6 years 3.6 years 6.4 years
Average fair value per
option, CDN $ 8.48 $ 11.54 $ 11.89
Average fair value per
option, US $ 7.06 $ 8.88 $ 8.61
---------------------------------------------------------------------
(i) Volatility factor is based on the Company's historical share price
but not including share price information preceding the Company's
announcement of securing project financing for the Diavik Project.
Options granted in fiscal 2005 were made prior to the adoption of a
dividend policy by the Company.
(e) Restricted and Deferred Share Unit Plans ("RSU" and "DSU" Plans)
Number of
units
---------------------------------------------------------------------
Balance, January 31, 2004 -
Awards during the year (net):
RSU 58,344
DSU 15,804
---------------------------------------------------------------------
Balance, January 31, 2005 74,148
Awards during the year (net):
RSU 45,615
DSU 25,275
---------------------------------------------------------------------
Balance, January 31, 2006 145,038
---------------------------------------------------------------------
---------------------------------------------------------------------
During the fiscal year, the Company granted 45,615 RSUs (net of
decreases) and 25,275 DSUs under an employee and director incentive
compensation program, respectively. The RSU and DSU Plans are full
value phantom shares which mirror the value of Aber'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 Aber's common shares at the end of the period and the
probability of vesting. This expense is recognized on a straight-line
basis over the term of the grant. The Company recognized an expense
of $2.6 million (2005-$1.0 million) for the twelve months ended
January 31, 2006.
Note 16:
Earnings (Loss) per Share
The following table sets forth the computation of diluted earnings
per share:
2006 2005 2004
---------------------------------------------------------------------
Numerator:
Net earnings for the year $ 81,253 $ 53,084 $ 27,707
---------------------------------------------------------------------
---------------------------------------------------------------------
Denominator (thousands of shares):
Weighted average number of
shares outstanding 57,957 57,569 55,137
Dilutive effect of employee
stock options/RSUs/DSUs 864 1,175 1,166
---------------------------------------------------------------------
58,821 58,744 56,303
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of anti-dilutive options - - 102
---------------------------------------------------------------------
---------------------------------------------------------------------
Note 17:
Other Income
In the prior year, the Company received funds from Tiffany to remove
certain restrictions on the disposal of Aber shares owned by Tiffany.
Tiffany disposed of such shares and no longer owns any shares of Aber
and therefore is no longer classified as a related party.
Note 18:
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. Aber's share of this funding requirement was
$0.2 million for calendar 2005. 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. Aber's share of the Joint Venture's letters of credit
outstanding with respect to the environmental agreements as at
January 31, 2006 was $36.7 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 Aber's 40% share, before any reduction of
future reclamation activities and future minimum annual rentals under
non-cancellable operating leases for retail salons and corporate
office space, and are as follows:
2006 $ 56,868
2007 65,465
2008 77,519
2009 79,139
2010 79,577
Thereafter 132,361
---------------------------------------------------------------------
Note 19:
Employee Benefit Plans
Year ended Year ended
January 31, January 31,
Expenses for the year: 2006 2005
---------------------------------------------------------------------
Defined benefit pension plan
at Harry Winston(a) $ 119 $ 114
Defined contribution plan at Harry Winston(b) 323 213
Defined contribution plan at
the Diavik Mine(b) 564 469
---------------------------------------------------------------------
$ 1,006 $ 796
---------------------------------------------------------------------
(a) Defined Benefit Pension Plan
Harry Winston sponsors a defined benefit pension plan covering
substantially all of its employees based in the United States. The
benefits are based on years of service and the employee's
compensation. In April 2001, Harry Winston amended its defined
benefit pension plan. The amendment froze plan participation
effective April 30, 2001. Harry Winston's funding policy 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 consisted primarily of fixed income, equity and
other short-term investments. Certain foreign subsidiaries of Harry
Winston have separate pension plan arrangements, which are fully
funded at January 31, 2006. The plan assets and benefit obligations
were valued as of January 1, 2006. The next valuation is scheduled
for January 1, 2007.
(i) Information about Harry Winston's defined benefit plans are as
follows:
2006 2005
-------------------------------------------------------------------
Accrued benefit obligation:
Balance, beginning of year $ 11,609 $ 11,510
Interest cost 652 557
Actuarial gain 171 4
Effects of changes in assumptions 289 284
Benefits paid (886) (746)
-------------------------------------------------------------------
Balance, end of year 11,835 11,609
-------------------------------------------------------------------
Plan assets:
Fair value, beginning of year 8,485 7,745
Actual return on plan assets 927 359
Employer contributions 1,069 1,127
Benefits paid (887) (746)
-------------------------------------------------------------------
Fair value, end of year 9,594 8,485
-------------------------------------------------------------------
Funded status - plan deficit (included
in accrued liabilities) $ (2,241) $ (3,124)
-------------------------------------------------------------------
-------------------------------------------------------------------
(ii) Plan assets
The asset allocation of Harry Winston's pension benefits at
January 31, 2006 were as follows:
2006 2005
-------------------------------------------------------------------
Asset category:
Cash equivalents 4% 19%
Equity securities 76% 75%
Fixed income securities 19% 5%
Other 1% 1%
-------------------------------------------------------------------
Total 100% 100%
-------------------------------------------------------------------
-------------------------------------------------------------------
(iii) The significant assumptions used are as follows:
2006 2005
-------------------------------------------------------------------
Accrued benefit obligation:
Discount rate 5.50% 5.75%
Expected long-term rate of return 7.50% 7.50%
-------------------------------------------------------------------
Benefit costs for the year:
Discount rate 5.50% 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'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.
(iv) Harry Winston expects to contribute $1.1 million to its pension
plan in calendar 2006. The benefits of $0.9 million are expected to
be paid in each calendar year from 2006 to 2010. The aggregate
benefits expected to be paid in the five calendar years from 2011
to 2015 are $12.1 million. The expected benefits are based on the
same assumptions used to measure Harry Winston's benefit obligation
at January 31, 2006.
(b) Defined Contribution Plan
Harry Winston has a defined contribution 401(k) plan covering
substantially all employees in the United States that provides
employer-matching contributions based on amounts contributed by an
employee, up to 50% of the first 6% of the employee's salary.
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. The cost of the
Joint Venture's contributions for the fiscal year was $1.4 million
(2005-$1.2 million).
Note 20:
Related Parties
Transactions with related parties for the fiscal year include
$0.5 million payable (2005-$0.5 million) under management agreements
with all of Harry Winston's shareholders and $1.7 million (2005 -
$4.3 million) of rent relating to the New York salon, payable to an
employee and shareholder.
Note 21:
Segmented Information
The Company operates in two segments within the diamond industry,
mining and retail, as of January 31, 2006.
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. This segment consists of the marketing of fine jewelry and
watches on a worldwide basis.
For the twelve months ended
January 31, 2006 Mining Retail Total
---------------------------------------------------------------------
Revenue
Canada $ 314,073 $ - $ 314,073
United States - 75,212 75,212
Europe - 66,279 66,279
Asia - 49,670 49,670
Cost of sales 129,061 93,546 222,607
---------------------------------------------------------------------
185,012 97,615 282,627
Selling, general and
administrative expenses 21,129 85,819 106,948
---------------------------------------------------------------------
Earnings from operations 163,883 11,796 175,679
---------------------------------------------------------------------
Interest and financing expenses (10,150) (4,783) (14,933)
Other income/(expense) 4,352 (19) 4,333
Foreign exchange loss (10,488) (855) (11,343)
---------------------------------------------------------------------
Segmented earnings before
income taxes $ 147,597 $ 6,139 $ 153,736
---------------------------------------------------------------------
---------------------------------------------------------------------
Segmented assets as at
January 31, 2006
Canada $ 706,431 $ - $ 706,431
United States - 255,424 255,424
Other foreign countries 19,515 62,243 81,758
---------------------------------------------------------------------
$ 725,946 $ 317,667 $1,043,613
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill as at January 31 $ - $ 41,966 $ 41,966
Capital expenditures $ 37,743 $ 14,931 $ 52,674
Other significant non-cash items:
Income tax expense $ 61,677 $ (1,893) $ 59,784
---------------------------------------------------------------------
For the twelve months ended
January 31, 2005 Mining Retail Total
---------------------------------------------------------------------
Revenue
Canada $ 252,666 $ - $ 252,666
United States - 52,324 52,324
Europe - 48,098 48,098
Asia - 32,314 32,314
Cost of sales 119,314 69,997 189,311
---------------------------------------------------------------------
133,352 62,739 196,091
Selling, general and
administrative expenses 16,024 58,274 74,298
---------------------------------------------------------------------
Earnings from operations 117,328 4,465 121,793
---------------------------------------------------------------------
Interest and financing expenses (11,399) (4,198) (15,597)
Other income/(expense) 9,795 (127) 9,668
Loss on sale of other assets (30) - (30)
Foreign exchange gain (loss) (6,244) 949 (5,295)
---------------------------------------------------------------------
Segmented earnings before
income taxes $ 109,450 $ 1,089 $ 110,539
---------------------------------------------------------------------
---------------------------------------------------------------------
Segmented assets as at
January 31, 2005
Canada $ 640,187 $ - $ 640,187
United States - 198,017 198,017
Other foreign countries 6,604 52,144 58,748
---------------------------------------------------------------------
$ 646,791 $ 250,161 $ 896,952
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill as at January 31 $ - $ 41,966 $ 41,966
Capital expenditures $ 15,536 $ 5,163 $ 20,699
Other significant non-cash items:
Income tax expense $ 52,228 $ (635) $ 51,593
---------------------------------------------------------------------
Segmented reporting started in fiscal 2005 with the acquisition of
Harry Winston on April 1, 2004.
Sales to one customer in the mining segment totalled $23.0 million
(2005-$29.7 million) for the fiscal year.
Note 22:
Differences Between Canadian and United States Generally Accepted
Accounting Principles
These financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Canada. Except
as set out below, these financial statements also comply, in all
material aspects, with accounting principles generally accepted in
the United States and the rules and regulations of the Securities
Exchange Commission. The following tables reconcile results as
reported under Canadian GAAP with those that would have been reported
under United States GAAP ("US GAAP").
Canadian
GAAP US GAAP
2006 2006
---------------------------------------------------------------------
Balance sheet:
Mining interests(a) $ 196,367 $ 144,761
Long-term debt 157,344 170,505
Future income tax liability, net 225,801 196,802
Shareholders' equity 451,893 411,949
---------------------------------------------------------------------
Canadian
GAAP US GAAP
2005 2005
---------------------------------------------------------------------
Balance sheet:
Mining interests(a) $ 200,029 $ 143,693
Long-term debt 118,359 131,520
Future income tax liability, net 152,083 126,826
Shareholders' equity 419,472 371,056
---------------------------------------------------------------------
2006 2005 2004
---------------------------------------------------------------------
Earnings for the year,
Canadian GAAP $ 81,253 $ 53,084 $ 27,707
Foreign exchange gain(b) - - (13,161)
Amortization(c) 4,730 14,322 (10,775)
Future income taxes 3,742 (9,075) 5,441
Mark-to-market foreign currency
contracts - - (1,007)
---------------------------------------------------------------------
Earnings for the year, US GAAP $ 89,725 $ 58,331 $ 8,205
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic earnings per share $ 1.55 $ 1.01 $ 0.15
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted earnings per share $ 1.53 $ 0.99 $ 0.15
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Expenditures on Mining Interests Prior to the Establishment of Proven
and Probable Reserves
Effective February 1, 1999, the Company changed its method of
accounting for costs on unproven properties under US GAAP from
capitalizing all expenditures to expensing all costs prior to the
completion of a definitive feasibility study which establishes proven
and probable reserves.
Upon commencement of commercial production, certain mineral property
costs were reclassified to capital assets and inventory, for both
Canadian and US GAAP purposes.
(b) US Functional Currency
For US GAAP purposes, commercial production commenced as of
February 1, 2003 and, therefore, the US dollar became the functional
currency for the Company as of that date. Accordingly, foreign
exchange gains recorded prior to the commencement of commercial
production on August 1, 2003, for Canadian GAAP purposes, during the
first and second quarters of the prior fiscal year, are reversed.
(c) Amortization of Deferred Mineral Property and Deferred Charges and
Other Assets
For US GAAP purposes, commercial production commenced as of
February 1, 2003. Therefore, all of the fiscal 2005 amortization
pertaining to items deferred for Canadian GAAP purposes during the
first and second quarters of fiscal 2004 was added back to net
earnings for US GAAP purposes. In fiscal 2006 and fiscal 2005,
amortization expense is less for US GAAP purposes as a result of
accounting for costs of unproven properties (see note 22(a) above).
In fiscal 2004, amortization expense is higher for US GAAP purposes
as a result of different dates used for commercial production.
(d) Impact of Recent United States Accounting Pronouncements
In December 2004, FASB issued SFAS 123 (revised), "Share-Based
Payment". The FASB has issued revised standards to require companies
to recognize in the income statement the grant-date fair value of
stock options and other equity-based compensation issued to
employees, but expresses no preference for a type of valuation model.
The way an award is classified will affect the measurement of
compensation cost. Liability-classified awards are remeasured to fair
value at each balance sheet date until the award is settled.
Equity-classified awards are measured at grant-date fair value and
the grant-date fair value is recognized over the requisite service
period. Such awards are not subsequently remeasured. The revised
statement is effective for public companies' interim or annual
periods beginning after June 15, 2005 and is effective for non-public
companies for annual periods beginning after December 15, 2005. The
adoption of this standard is not expected to have an impact on the
consolidated financial statements of the Company.
In May 2005, the US Financial Accounting Standards Board ("FASB")
issued SFAS 154, "Accounting Changes and Error Corrections" to
replace APB Opinion No. 20, "Accounting Changes", and FASB Statement
No. 3, "Reporting Accounting Changes in Interim Financial
Statements". Previously, most accounting changes were recognized by
including the cumulative effect of changing to a newly adopted
accounting principle in the net income of the period of the change.
The revised standard improves financial reporting by requiring
voluntary changes in accounting principles to be reported via
retrospective application, unless impracticable. The revised standard
will improve the consistency of financial information between periods
and enhance the usefulness of the financial information by
facilitating analysis and understanding of comparative accounting
data. The revised standard is effective for accounting changes made
in fiscal years beginning after December 15, 2005. The adoption of
this standard is not expected to have an impact on the consolidated
financial statements of the Company.
DATASOURCE: Aber Diamond Corporation
CONTACT: PRNewswire -- March 14