Aber Diamond (MM) (NASDAQ:ABER)
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Notes to Consolidated Financial Statements
------------------------------------------
July 31, 2007 with comparative figures
(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.
During fiscal 2007, Aber acquired the remaining 47.17% interest in
Harry Winston Inc. ("Harry Winston") that it did not previously own.
The results of Harry Winston, located in New York City, US, are
consolidated in the financial statements of the Company.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by
management in accordance with accounting principles generally accepted
in Canada. The interim consolidated financial statements include the
accounts of the Company and all of its subsidiaries as well as its
proportionate interest in the assets, liabilities and expenses of joint
arrangements. Intercompany transactions and balances have been
eliminated.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto in the Company's annual report for the year ended January 31,
2007, since these interim financial statements do not include all
disclosures required by Canadian generally accepted accounting
principles ("GAAP"). Excluding adoption of the new standards for
financial instruments described below, these statements have been
prepared following the same accounting policies and methods of
computation as the consolidated financial statements for the year ended
January 31, 2007.
Changes in Accounting Policy
On February 1, 2007, the Company adopted three new accounting standards
issued by the Canadian Institute of Chartered Accountants ("CICA") on
financial instruments, hedges and comprehensive income that require
investment securities and hedging derivatives to be accounted for at
fair value. These standards are substantially harmonized with US GAAP.
Financial Instruments
This new standard requires the Company to revalue certain of its
financial assets and liabilities, including derivatives designated in
qualifying hedging relationships and embedded derivatives in certain
contracts, at fair value on the initial date of implementation and at
each subsequent financial reporting date.
The adoption of this new standard has not had a material impact on the
financial position of the Company. Under the new standard, the Company
has elected to add transaction costs related to its non-revolving long-
term debt to the carrying amount of the debt, which has resulted in the
following adjustments to the consolidated balance sheet on February 1,
2007:
As at February 1, 2007
Increase/(Decrease)
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Assets
Other assets $ (859)
Liabilities and Shareholders' Equity
Long-term debt $ (859)
Cumulative translation adjustment (16,016)
Accumulated other comprehensive income 16,016
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This standard has had no material impact on the consolidated
statement of earnings. Prior period earnings have not been restated.
This standard also requires the Company to classify financial assets
and liabilities according to their characteristics and management's
choices and intentions related thereto for the purposes of ongoing
measurement. Subsequent measurement for these assets and liabilities
is based on either fair value or amortized cost using the effective
interest method, depending upon their classification. In accordance
with the new standard, the Company's financial assets and liabilities
are generally classified and measured as follows:
Asset/Liability Category Measurement
Cash and cash equivalents Held for trading Fair value
Cash collateral and
cash reserves Held for trading Fair value
Accounts receivable Loans and receivables Amortized cost
Accounts payable and
accrued liabilities Held for trading Fair value
Bank advances Held for trading Fair value
Long-term debt Other liabilities Amortized cost
Hedges
This new standard contains new rules for reporting fair value and
cash flow hedges. The Company has no significant hedges and therefore
this new standard has had no impact on the Company's consolidated
financial statements.
Comprehensive Income
This new standard requires the Company to present a new consolidated
statement of comprehensive income to detail income items impacting
accumulated other comprehensive income, which is reported as part of
shareholders' equity. This statement has been included above in the
consolidated statement of changes in shareholders' equity.
Recently Issued Accounting Standards
Inventories
In May 2007, the CICA issued 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 cost method for inventories that are not ordinarily
interchangeable or goods and 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 new standard will apply to
the Company effective February 1, 2008. The Company is assessing the
impact this standard will have on its consolidated financial
statements.
NOTE 3:
Restatement
The Company has determined that the $7.0 million received from Tiffany
in fiscal 2005 to remove certain restrictions on the resale of Aber
shares owned by Tiffany should be treated as a capital transaction
rather than included in other income. The impact of this correction is
to reduce fiscal 2005 other income by $7.0 million, or $0.12 per share
(basic and fully diluted), and to create contributed surplus of
$7.0 million. Accordingly, other income, net income and earnings per
share for the year ended January 31, 2005 are restated to $2.6 million,
$46.1 million, $0.80 basic earnings per share and $0.78 fully diluted
earnings per share, respectively. Originally this amount was classified
as an operating activity rather than a financing activity in the
consolidated statement of cash flows. Accordingly, cash provided by
operating activities in fiscal 2005 would decrease to $143.4 million
and cash used in financing activities would decrease to $54.0 million.
Retained earnings at the beginning of fiscal 2006 have been restated to
reflect the above.
NOTE 4:
Cash Resources
July 31, January 31,
2007 2007
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Diavik Joint Venture $ 13,756 $ 30,776
Cash and cash equivalents 37,892 23,398
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Total cash and cash equivalents 51,648 54,174
Cash collateral and cash reserves 25,510 51,448
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Total cash resources $ 77,158 $ 105,622
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NOTE 5:
Inventory and Supplies
July 31, January 31,
2007 2007
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Rough diamond inventory $ 17,833 $ 17,648
Merchandise inventory 258,472 228,157
Supplies inventory 45,008 27,931
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Total inventory and supplies $ 321,313 $ 273,736
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NOTE 6:
Diavik Joint Venture
The following represents Aber's 40% proportionate interest in the
Joint Venture as at June 30, 2007 and December 31, 2006, which is
reflected in the Company's consolidated financial statements as
follows:
July 31, January 31,
2007 2007
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Current assets $ 80,364 $ 66,037
Long-term assets 519,445 477,753
Current liabilities 26,346 35,671
Long-term liabilities and participant's
account 573,463 508,119
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Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
2007 2006 2007 2006
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Net expense 47,609 47,161 87,710 80,918
Cash flows
resulting from
operating
activities (39,941) (44,408) (83,983) (51,119)
Cash flows
resulting from
financing
activities 79,454 49,974 143,726 102,043
Cash flows
resulting from
investing
activities (38,191) (20,309) (67,813) (38,721)
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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 assets
of the Joint Venture to settle these liabilities.
NOTE 7:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of Shares Amount
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Balance, January 31, 2007 58,360,755 $ 305,165
Shares issued for:
Exercise of options 11,325 337
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Balance, July 31, 2007 58,372,080 $ 305,502
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(c) RSU and DSU Plans
Number of Units
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Balance, January 31, 2007 233,539
Net awards during the period 13,391
Payouts during the period (52,548)
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Balance, July 31, 2007 194,382
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Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Expense for July 31, July 31, July 31, July 31,
the period: 2007 2006 2007 2006
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RSU $ 295 $ 139 $ 460 $ 525
DSU 76 (173) 3 (37)
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$ 371 $ (34) $ 463 $ 488
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During the second quarter, the Company granted 757 Restricted Share
Units ("RSUs") and 758 Deferred Share Units ("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 Aber's publicly traded common shares. In addition, 52,548
RSUs vested during the second quarter, resulting in a payout of
$2.1 million.
Grants under the RSU Plan are primarily 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
settles its obligations under the RSU and DSU plans in cash in
accordance with the terms of the respective plans.
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 on the
probability of vesting. This expense is recognized on a straight-
line basis over the term of the grant.
NOTE 8:
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 2007. 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 July 31, 2007 was $57.9 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 and capital
leases for retail salons and corporate office space, and are as
follows:
2008 $ 74,725
2009 87,664
2010 88,381
2011 86,252
2012 85,665
Thereafter 153,402
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NOTE 9:
Employee Benefit Plans
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Expense for July 31, July 31, July 31, July 31,
the period: 2007 2006 2007 2006
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Defined benefit
pension plan at
Harry Winston $ 6 $ 30 $ 12 $ 60
Defined
contribution
plan at Harry
Winston 390 90 600 180
Defined
contribution
plan at the
Diavik Mine 238 186 401 364
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$ 634 $ 306 $ 1,013 $ 604
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NOTE 10:
Related Parties
Transactions with related parties for the six months ended July 31,
2007 include $0.9 million ($0.9 million for the six months ended
July 31, 2006) of rent relating to the New York salon, payable to a
Harry Winston employee.
NOTE 11:
Segmented Information
The Company operates in two segments within the
diamond industry, mining and retail, for the three months ended
July 31, 2007.
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 three months
ended July 31, 2007 Mining Retail Total
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Sales
Canada $ 105,071 $ - $ 105,071
United States - 22,162 22,162
Europe - 21,248 21,248
Asia - 24,788 24,788
Cost of sales 46,217 35,610 81,827
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58,854 32,588 91,442
Selling, general and
administrative expenses 5,861 29,340 35,201
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Earnings from operations 52,993 3,248 56,241
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Interest and financing expenses (3,982) (3,240) (7,222)
Other income 356 189 545
Foreign exchange gain (loss) (11,985) 200 (11,785)
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Segmented earnings before
income taxes $ 37,382 $ 397 $ 37,779
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Segmented assets as at
July 31, 2007
Canada $ 761,976 $ - $ 761,976
United States - 470,233 470,233
Other foreign countries 8,284 126,773 135,057
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$ 770,260 $ 597,006 $ 1,367,266
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Goodwill as at July 31, 2007 $ - $ 96,575 $ 96,575
Capital expenditures $ 35,383 $ 8,556 $ 43,939
Other significant non-cash
items:
Income tax recovery - Future $ (7,122) $ (222) $ (7,344)
Amortization and accretion $ 17,969 $ 2,086 $ 20,054
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For the three months
ended July 31, 2006 Mining Retail Total
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Sales
Canada $ 91,476 $ - $ 91,476
United States - 18,185 18,185
Europe - 14,776 14,776
Asia - 15,525 15,525
Cost of sales 43,256 25,202 68,458
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48,220 23,284 71,504
Selling, general and
administrative expenses 4,373 22,798 27,171
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Earnings from operations 43,847 486 44,333
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Interest and financing expenses (2,714) (2,091) (4,805)
Other income 1,772 33 1,805
Foreign exchange gain 2,489 130 2,619
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Segmented earnings (loss)
before income taxes $ 45,394 $ (1,442) $ 43,952
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Segmented assets as at
July 31, 2006
Canada $ 743,288 $ - $ 743,288
United States - 278,501 278,501
Other foreign countries 20,383 73,427 93,810
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$ 763,671 $ 351,928 $ 1,115,599
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Goodwill as at July 31, 2006 $ - $ 41,966 $ 41,966
Capital expenditures $ 20,883 $ 6,331 $ 27,214
Other significant non-cash
items:
Income tax expense
(recovery) - Future $ 6,513 $ (1,497) $ 5,016
Amortization and accretion $ 16,675 $ 1,251 $ 17,926
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Sales to one customer in the mining segment totalled $8.1 million for
the three months ended July 31, 2007 ($5.7 million for the three
months ended July 31, 2006).
For the six months ended
July 31, 2007 Mining Retail Total
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Sales
Canada $ 187,823 $ - $ 187,823
United States - 46,503 46,503
Europe - 43,595 43,595
Asia - 36,713 36,713
Cost of sales 86,733 66,226 152,959
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101,090 60,585 161,675
Selling, general and
administrative expenses 10,948 58,464 69,412
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Earnings from operations 90,142 2,121 92,263
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Interest and financing expenses (7,657) (5,697) (13,354)
Other income 1,122 336 1,458
Foreign exchange gain (loss) (25,296) 219 (25,077)
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Segmented earnings (loss) before
income taxes $ 58,311 $ (3,021) $ 55,290
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Segmented assets as at
July 31, 2007
Canada $ 761,976 $ - $ 761,976
United States - 470,233 470,233
Other foreign countries 8,284 126,773 135,057
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$ 770,260 $ 597,006 $ 1,367,266
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Goodwill as at July 31, 2007 $ - $ 96,575 $ 96,575
Capital expenditures $ 72,948 $ 8,556 $ 81,504
Other significant non-cash items:
Income tax recovery - Future $ (9,805) $ (861) $ (10,666)
Amortization and accretion $ 35,659 $ 3,998 $ 39,657
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For the six months ended
July 31, 2006 Mining Retail Total
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Sales
Canada $ 160,784 $ - $ 160,784
United States - 39,333 39,333
Europe - 31,235 31,235
Asia - 27,881 27,881
Cost of sales 82,005 50,298 132,303
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78,779 48,151 126,930
Selling, general and
administrative expenses 9,160 45,306 54,466
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Earnings from operations 69,619 2,845 72,464
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Interest and financing expenses (5,511) (3,628) (9,139)
Other income 3,375 53 3,428
Foreign exchange gain 242 271 513
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Segmented earnings (loss) before
income taxes $ 67,725 $ (459) $ 67,266
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Segmented assets as at
July 31, 2006
Canada $ 743,288 $ - $ 743,288
United States - 278,501 278,501
Other foreign countries 20,383 73,427 93,810
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$ 763,671 $ 351,928 $ 1,115,599
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Goodwill as at July 31, 2006 $ - $ 41,966 $ 41,966
Capital expenditures $ 40,341 $ 9,017 $ 49,358
Other significant non-cash items:
Income tax expense (recovery)
- Future $ 2,678 $ (1,600) $ 1,078
Amortization and accretion $ 28,836 $ 2,452 $ 31,288
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Sales to one customer in the mining segment totalled $12.7 million for the six months ended July 31, 2007 ($14.2 million for the six months ended July 31, 2006).
DATASOURCE: Aber Diamond Corporation
CONTACT: PRNewswire - - 09/10/2007