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 Mine, which are borne 40% by the
Company, 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. Harry Winston Diamond
Corporation'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 Mine
and the amount of the Company's Canadian dollar liabilities
relative to the revenue Harry Winston Diamond Corporation 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 Mine and exploration on the
Diavik property require licenses and permits from the Canadian
government. Renewal of the Diavik 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 Harry Winston Diamond
Corporation anticipates that DDMI, which is also the operator of
the Diavik 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 Mine or to further explore and develop the
Diavik property. Regulatory and Environmental Risks The operation
of the Diavik Mine, exploration activities at the Diavik Project
and the manufacturing of jewelry 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 Mine and in the manufacture of jewelry. As well, as Harry
Winston Diamond Corporation'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. Harry Winston Diamond
Corporation 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 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 Harry Winston Diamond
Corporation's business is subject to a number of risks and hazards
generally, 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
Mine, personal injury or death, environmental damage to the Diavik
property, delays in mining, closing of Harry Winston Inc.
manufacturing facilities or salons, monetary losses and possible
legal liability. Although insurance is maintained to protect
against certain risks in connection with the Diavik Mine, Harry
Winston Diamond Corporation's operations and the operations of
Harry Winston Inc., 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 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 Mine currently has no hedges for
its future anticipated fuel consumption. Reliance on Skilled
Employees Production at the Diavik 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 Mine. Currently, there is significant
competition for skilled workers in remote northern operations due
to the significant number of large-scale construction projects
ongoing and planned in Canada's north, including the various
construction projects relating to the development of the oil sands
in northern Alberta. Harry Winston Diamond Corporation's success at
marketing 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 existing
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 Harry Winston Diamond Corporation, through its ownership of
Harry Winston Inc., is exposed to competition in the retail diamond
market from other luxury goods, diamond and jewelry retailers. The
ability of Harry Winston Inc. to successfully compete with such
luxury goods, diamond and jewelry 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 Harry
Winston Diamond Corporation's results of operations will be
adversely affected. Changes in Accounting Policies Financial
Instruments, Hedges and Comprehensive Income On February 1, 2007,
the Company adopted new accounting standards issued by the Canadian
Institute of Chartered Accountants ("CICA") on equity, 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. The adoption of these new accounting standards has not had a
material impact on the financial position of the Company. For a
description of the new standards and the impact on the Company's
financial statements, please see note 3 to the consolidated
financial statements on page 30 of this report. 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. Financial Instruments -
Disclosures In December 2006, the CICA issued Handbook Section
3862, "Financial Instruments - Disclosures", and Handbook Section
3863, "Financial Instruments - Presentation", which supersede
Handbook Section 3861, the previously issued standard on financial
instruments. 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. Capital Disclosures
In December 2006, the CICA issued Handbook Section 1535, "Capital
Disclosures". This new standard requires the disclosure of
information about an entity's objectives, policies and processes
for managing capital. This new standard will apply to the Company
effective February 1, 2008. The Company is currently assessing the
impact of these new standards on its consolidated financial
statements. Outstanding Share Information As at January 31, 2008
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 58,372,091
Options outstanding 1,719,338 Fully diluted 60,091,429
-------------------------------------------------------------------------
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,
2008 2007
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 5) $ 49,628
$ 54,174 Cash collateral and cash reserves (note 5) 25,615 51,448
Accounts receivable 25,505 13,297 Inventory and supplies (note 6)
322,228 273,736 Prepaid expenses and other current assets 58,617
27,683
-------------------------------------------------------------------------
481,593 420,338 Deferred mineral property costs (note 7) 179,990
188,058 Capital assets (note 8) 548,827 384,532 Intangible assets,
net (note 10) 132,628 134,320 Goodwill (note 4) 93,780 98,142 Other
assets (note 11) 16,167 18,187 Future income tax asset (note 13)
40,963 44,337
-------------------------------------------------------------------------
$ 1,493,948 $ 1,287,914 ------------------------------
------------------------------ Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities $
124,426 $ 118,971 Income taxes payable 48,118 5,776 Bank advances
(note 12(ii)) 34,928 29,776 Current portion of long-term debt (note
12) 54,137 95,434
-------------------------------------------------------------------------
261,609 249,957 Long-term debt (note 12) 255,212 185,446 Future
income tax liability (note 13) 370,500 333,498 Other long-term
liability 1,730 - Future site restoration costs (note 14) 32,980
17,200 Minority interest 255 85 Shareholders' equity: Share capital
(note 15) 305,502 305,165 Contributed surplus 15,614 14,922
Retained earnings 225,334 165,625 Accumulated other comprehensive
income 25,212 16,016
-------------------------------------------------------------------------
571,662 501,728 Commitments and guarantees (note 17) Subsequent
events (note 21)
-------------------------------------------------------------------------
$ 1,493,948 $ 1,287,914 ------------------------------
------------------------------ See accompanying notes to
consolidated financial statements. On behalf of the Board: Robert
A. Gannicott Matthew W. Barrett Director Director Consolidated
Statements of Earnings (expressed in thousands of United States
dollars, except per share amounts) Years ended January 31, 2008
2007
-------------------------------------------------------------------------
Sales $ 679,307 $ 558,793 Cost of sales 311,187 285,498
-------------------------------------------------------------------------
Gross margin 368,120 273,295 Selling, general and administrative
expenses 150,445 126,536
-------------------------------------------------------------------------
Earnings from operations 217,675 146,759
-------------------------------------------------------------------------
Interest and financing expenses (27,858) (21,150) Other income
2,758 5,081 Insurance settlement (note 20) 13,488 - Foreign
exchange gain (loss) (43,391) 8,784
-------------------------------------------------------------------------
Earnings before income taxes 162,672 139,474 Income taxes - Current
(note 13) 47,516 14,763 Income taxes - Future (note 13) 8,578
20,067
-------------------------------------------------------------------------
Earnings before minority interest 106,578 104,644 Minority interest
170 375
-------------------------------------------------------------------------
Net earnings $ 106,408 $ 104,269 ------------------------------
------------------------------ Earnings per share Basic $ 1.82 $
1.79 ------------------------------ ------------------------------
Fully diluted (note 16) $ 1.81 $ 1.76
------------------------------ ------------------------------
Weighted average number of shares outstanding 58,369,338 58,257,449
------------------------------ ------------------------------ See
accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (expressed in
thousands of United States dollars) Years ended January 31, 2008
2007
-------------------------------------------------------------------------
Net earnings $ 106,408 $ 104,269 Other comprehensive income (loss)
Net gain (loss) on translation of net foreign operations (net of
tax - nil) 9,196 (328)
-------------------------------------------------------------------------
Total comprehensive income $ 115,604 $ 103,941
------------------------------ ------------------------------ 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, 2008 2007
-------------------------------------------------------------------------
Common shares: Balance at beginning of year $ 305,165 $ 300,652
Issued during the year 337 4,513
-------------------------------------------------------------------------
Balance at end of year 305,502 305,165
-------------------------------------------------------------------------
Contributed surplus: Balance at beginning of year 14,922 15,267
Stock option expense 692 (345)
-------------------------------------------------------------------------
Balance at end of year 15,614 14,922
-------------------------------------------------------------------------
Retained earnings: Balance at beginning of year 165,625 119,630 Net
earnings 106,408 104,269 Dividends paid (46,699) (58,274)
-------------------------------------------------------------------------
Balance at end of year 225,334 165,625
-------------------------------------------------------------------------
Accumulated other comprehensive income: Balance at beginning of
year 16,016 16,344 Other comprehensive income (loss) Net gain
(loss) on translation of net foreign operations (net of tax - nil)
9,196 (328)
-------------------------------------------------------------------------
Balance at end of year 25,212 16,016
-------------------------------------------------------------------------
Total shareholders' equity $ 571,662 $ 501,728
------------------------------ ------------------------------ 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, 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings $ 106,408 $
104,269 Items not involving cash: Amortization and accretion 81,174
68,728 Future income taxes 8,578 20,067 Stock-based compensation
2,422 1,250 Foreign exchange 45,201 (7,617) Loss on write-off of
investment - 909 Minority interest 170 352 Change in non-cash
operating working capital (50,069) (10,393)
-------------------------------------------------------------------------
193,884 177,565
-------------------------------------------------------------------------
Financing Increase/(decrease) in long-term debt (19,637) 51,062
Increase in revolving credit 52,722 64,716 Dividends paid (46,699)
(58,274) Issue of common shares 337 2,918
-------------------------------------------------------------------------
(13,277) 60,422
-------------------------------------------------------------------------
Investing Cash collateral and cash reserve 25,701 (37,172) Deferred
mineral property costs (7,522) (16,834) Capital assets (201,845)
(119,904) Deferred charges (2,115) (171) Purchase of Harry Winston
Inc. - (158,150)
-------------------------------------------------------------------------
(185,781) (332,231)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 628 302 Decrease in cash
and cash equivalents (4,546) (93,942) Cash and cash equivalents,
beginning of year (note 5) 54,174 148,116
-------------------------------------------------------------------------
Cash and cash equivalents, end of year (note 5) $ 49,628 $ 54,174
------------------------------ ------------------------------
Change in non-cash operating working capital Accounts receivable
(8,641) 1,058 Prepaid expenses and other current assets (32,756)
6,157 Inventory and supplies (48,489) (53,807) Accounts payable and
accrued liabilities 9,622 34,117 Income taxes payable 30,195 2,082
-------------------------------------------------------------------------
$ (50,069) $ (10,393)
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid $ 11,052 $
11,780 Cash interest paid $ 24,946 $ 18,746
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements Years ended January 31, 2008
and 2007 (tabular amounts in thousands of United States dollars,
except as otherwise noted) NOTE 1: Change in Name Effective
November 9, 2007, Aber Diamond Corporation changed its name to
Harry Winston Diamond Corporation. NOTE 2: Nature of Operations
Harry Winston Diamond Corporation (the "Company") is a specialist
diamond company focusing on the mining and retail segments of the
diamond industry. The Company's most significant asset is a 40%
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. (formerly 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 Harry Winston Diamond Mines Ltd. is a wholly owned
subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.
The name of Aber Diamond Mines Ltd. was changed to Harry Winston
Diamond Mines Ltd. on December 3, 2007. The Diavik 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. During fiscal
2007, the Company acquired the remaining 47.17% interest in Harry
Winston Inc. that it did not previously own. The results of Harry
Winston Inc., located in New York City, US, are consolidated in the
financial statements of the Company. NOTE 3: 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% 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 and includes 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 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 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 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 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. 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 were 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) Other Assets Other assets
are 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)
Comparative Figures Certain figures have been reclassified to
conform with presentation in the current year. (v) 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: (i)
Financial Instruments - Recognition and Measurement, (ii) Hedges,
and (iii) Comprehensive Income. Financial Instruments This new
standard required 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 elected to add transaction costs related to its non-
revolving long-term debt to the carrying amount of the debt and was
required to reclassify cumulative translation amounts to
accumulated other comprehensive income, which resulted in the
following adjustments to the consolidated balance sheet on February
1, 2007: As at February 1, 2007 Increase/(Decrease)
--------------------------------------------------------------------
Assets Other assets $ (859) Liabilities and Shareholders' Equity
Long-term debt $ (859) Cumulative translation adjustment (16,016)
Accumulated other comprehensive income 16,016
--------------------------------------------------------------------
This standard has had no material impact on the consolidated
statement of earnings. Prior period earnings have not been
restated. This standard also required 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 Amortized cost receivables Accounts payable and Held for
trading Fair value accrued liabilities Income taxes payable 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
required 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. (w)
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. NOTE 4: Acquisition On September 29,
2006, the Company acquired the remaining 47.17% ownership of Harry
Winston Inc. for $157.2 million, paid in cash on the acquisition
date. The final allocation of the purchase price to the fair values
of assets acquired and liabilities assumed is set forth in the
table below. 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. Cash
$ 2,433 Accounts receivable 4,909 Inventory 107,690 Intangibles
92,414 Goodwill(a) 57,230 Other assets 31,835 Accounts payable and
accrued liabilities (18,728) Bank loan (54,653) Other liabilities
(64,980)
-------------------------------------------------------------------------
$ 158,150 ----------- ----------- Cash paid at acquisition $
157,150 Acquisition and other costs 1,000
-------------------------------------------------------------------------
$ 158,150 ----------- ----------- (a) Tax benefits relating to
pre-acquisition net operating losses ("NOLs") at Harry Winston Inc.
were not recognized as a separate identifiable asset in the
purchase price allocations and consequently are a component of
goodwill. Harry Winston Inc. has since recognized benefits of $5.2
million relating to these NOLs (2008 - $4.4 million; 2007 - $0.8
million), which have been recorded as a reduction to goodwill in
the applicable periods. NOTE 5: Cash Resources 2008 2007
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 33,028 $ 44,377 Short-term
investments(a) 16,600 9,797
-------------------------------------------------------------------------
Total cash and cash equivalents 49,628 54,174 Cash collateral and
cash reserves 25,615 51,448
-------------------------------------------------------------------------
Total cash resources $ 75,243 $ 105,622 ------------------------
------------------------ (a) Short-term investments are held in
overnight deposits. NOTE 6: Inventory and Supplies 2008 2007
-------------------------------------------------------------------------
Rough diamond inventory $ 17,097 $ 17,648 Merchandise inventory
254,101 228,157 Supplies inventory 51,030 27,931
-------------------------------------------------------------------------
Total inventory and supplies $ 322,228 $ 273,736
------------------------ ------------------------ NOTE 7: Deferred
Mineral Property Costs 2008 2007
-------------------------------------------------------------------------
Accumulated Net Accumulated Net amorti- book amorti- book Cost
zation value Cost zation value
-------------------------------------------------------------------------
Diavik Mine $ 271,316 $ 91,326 $ 179,990 $ 265,217 $ 77,159 $
188,058
-----------------------------------------------------------------
-----------------------------------------------------------------
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 8: Capital Assets 2008 2007
-------------------------------------------------------------------------
Accumulated Net Accumulated Net amorti- book amorti- book Cost
zation value Cost zation value
-------------------------------------------------------------------------
Diavik equipment and leaseholds(a) $586,208 $136,771 $449,437
$422,419 $101,912 $320,507 Furniture, equipment and other(b) 29,163
13,044 16,119 20,193 9,530 10,663 Real property - land and
building(c) 97,745 14,474 83,271 64,691 11,329 53,362
-------------------------------------------------------------------------
$713,116 $164,289 $548,827 $507,303 $122,771 $384,532
----------------------------------------------------------
---------------------------------------------------------- (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 Inc. salons. (c) 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. NOTE 9: Diavik Joint Venture The following
represents Harry Winston Diamond Corporation's 40% proportionate
interest in the Joint Venture as at December 31, 2007 and 2006:
2008 2007
-------------------------------------------------------------------------
Current assets $ 110,199 $ 66,037 Long-term assets 605,300 477,753
Current liabilities 40,631 35,671 Long-term liabilities and
participant's account 674,868 508,119 Year ended: Expenses net of
interest income of $0.5 million (2007 - $0.8 million)(a) 177,049
171,429 Cash flows resulting from operating activities (121,440)
(76,828) Cash flows resulting from financing activities 290,615
180,252 Cash flows resulting from investing activities (165,645)
(100,467)
-------------------------------------------------------------------------
(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 10: Intangible
Assets Accumulated Amortization amorti- period Cost zation 2008 net
2007 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 (1,369) 4,206 4,763 Store
leases 65 to 105 months 5,639 (2,577) 3,062 4,197
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ (3,946) $ 132,628 $ 134,320
-------------------------------------------
------------------------------------------- Amortization expense
for 2008 was $1.7 million (2007 - $1.0 million). NOTE 11: Other
Assets 2008 2007
-------------------------------------------------------------------------
Prepaid pricing discount(a), net of accumulated amortization of
$4.6 million (2007 - $3.1 million) $ 7,440 $ 8,880 Other assets
2,512 5,220 Refundable security deposits 6,215 4,087
-------------------------------------------------------------------------
$ 16,167 $ 18,187 ------------------------ ------------------------
(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
12: Long-Term Debt and Bank Advances (i) Long-Term Debt 2008 2007
--------------------------------------------------------------------
Credit facility(a) $ 125,677 $ 158,140 Harry Winston Inc. credit
facilities(b) 174,850 114,782 First mortgage on real property 8,822
7,958
--------------------------------------------------------------------
Total long-term debt 309,349 280,880
--------------------------------------------------------------------
Less current portion (54,137) (95,434)
--------------------------------------------------------------------
$ 255,212 $ 185,446 ------------------------
------------------------ (a) Credit Facility The Company's credit
agreement includes two senior secured term facilities and a senior
secured revolving facility. The facilities have underlying interest
rates, which at the option of the Company are either LIBOR plus a
spread of 1.25% to 2.375%, or US Base Rate plus a spread of 0.25%
to 1.375%. On May 31, 2007, Harry Winston Diamond Corporation
amended its existing credit facility to extend the maturity date to
December 15, 2009 from 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 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 Mine for 30 days following each
reporting period. The effective interest rate at January 31, 2008
was 4.53%. Scheduled amortization of the Company's senior secured
term facilities is $12.5 million payable quarterly commencing March
2008 with the remaining balance due in December 2009. The maximum
amount permitted to be drawn under the senior secured revolving
facility is reduced by $12.5 million quarterly, commencing March
2009. As at January 31, 2008, the Company had $76.4 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) Harry Winston Inc. and Harry Winston Japan,
K.K. amended its $140.0 million secured credit agreement on April
23, 2007 with a syndicated group of banks to increase it to $200.0
million effective April 30, 2007. The credit agreement includes
both a revolving line of credit and fixed rate loans. At January
31, 2008, $154.0 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 amendment
further extends the additional facility of $10.0 million scheduled
to expire on April 30, 2007 to March 31, 2008. The amended credit
facility is supported by a $20.0 million limited guarantee provided
by Harry Winston Diamond Corporation. The Harry Winston Inc. and
Harry Winston Japan, K.K. credit facility, which expired 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 the retail segment.
These provisions include minimum net worth, minimum coverage of
fixed charges, leverage ratio, minimum EBITDA and limitations on
capital expenditures and certain investments. 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. The common stock of Harry Winston Inc. and 65%
of the common stock of Harry Winston Inc.'s foreign subsidiaries
are also pledged to the bank to secure the loan. The facility
provides for fixed rate loans and floating rate loans, which bear
interest at 2.25% above LIBOR and 1.00% above the bank's prime
rate, respectively. The effective interest rate at January 31, 2008
was 9.0% for the revolving line of credit loans and 7.46% for the
fixed rate loans. 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. 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. has entered
into a 25-year loan agreement to finance the construction of a new
watch factory in Geneva, Switzerland for 17.5 million CHF. The
watch factory has been pledged to secure the loan. The loan
agreement bears interest at 3.55% and matures on January 31, 2033.
Under this agreement approximately $16.1 million is outstanding at
January 31, 2008. Quarterly payments on the loan are scheduled to
begin on June 30, 2008. (iii) On October 31, 2007, Harry Winston
Japan, K.K. entered into a secured credit facility for $5.4 million
((Yen)575 million). This credit agreement is secured solely by the
inventory of Harry Winston Japan, K.K. This credit facility expires
on June 20, 2008, and bears interest at 1.91%. Under this
agreement, $5.4 million was outstanding at January 31, 2008, of
which $0.7 million was classified as bank advances. (c) Required
Principal Repayments 2009 $ 54,137 2010 77,500 2011 5,857 2012
1,236 2013 1,292 Thereafter 169,327
--------------------------------------------------------------- $
309,349 ---------- ---------- (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. and its
Israeli subsidiary, Harry Winston Diamond (Israel) 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, 2008, $19.9
million was drawn under these two facilities. 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 $7.0 million ((Yen)750 million). The credit
facilities bear interest at 2.13% and 2.38% per annum and expire on
June 2, 2008 and June 28, 2010, respectively. Under these
agreements, bank advances of $14.0 million were outstanding at
January 31, 2008. NOTE 13: Income Tax The future income tax asset
of the Company is $41.0 million, of which $18.1 million relates to
Harry Winston Inc. Included in the future tax asset is $13.2
million that has been recorded to recognize the benefit of $40.2
million of net operating losses that Harry Winston Inc. has
available for carry forward to shelter income taxes for future
years. The net operating losses are scheduled to expire between
2021 and 2027. The future income tax liability of the Company is
$370.5 million of which $73.0 million relates to Harry Winston Inc.
Harry Winston Inc.'s future income tax liabilities include $57.1
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: 2008 2007
--------------------------------------------------------------------
Current expense $ 47,516 $ 14,763 Future expense 8,578 20,067
--------------------------------------------------------------------
$ 56,094 $ 34,830 ------------------------ ------------------------
(b) The tax effects of temporary differences that give rise to
significant portions of the future tax assets and liabilities at
January 31, 2008 and 2007 are as follows: 2008 2007
--------------------------------------------------------------------
Future income tax assets: Net operating loss carryforwards $ 23,458
$ 36,589 Capital assets 1,158 770 Future site restoration costs
13,135 6,948 Other future income tax assets 6,409 5,125
--------------------------------------------------------------------
Gross future income tax assets 44,160 49,432 Valuation allowance
(3,197) (5,095)
--------------------------------------------------------------------
Future income tax assets 40,963 44,337 Future income tax
liabilities: Deferred mineral property costs (56,776) (78,634)
Capital assets (160,319) (102,261) Retail inventory (13,781)
(19,530) Goodwill (57,718) (61,460) Unrealized foreign exchange
gains (3,194) (871) Other future income tax liabilities (78,712)
(70,742)
--------------------------------------------------------------------
Future income tax liabilities (370,500) (333,498)
--------------------------------------------------------------------
Future income tax liability, net $ (329,537) $ (289,161)
------------------------ ------------------------ (c) The
difference between the amount of the reported consolidated income
tax provision and the amount computed by multiplying the earnings
before income taxes by the statutory tax rate of 34% (2007 - 37%)
is a result of the following: 2008 2007
--------------------------------------------------------------------
Expected income tax expense $ 55,308 $ 51,605 Non-deductible
(non-taxable) items 9,773 (6,032) Northwest Territories mining
royalty (net of income tax relief) 18,856 12,631 Impact of changes
in future corporate income tax rates (11,697) (16,949) Earnings
subject to tax different than statutory rate (5,293) (7,965)
Benefit on losses recognized through reduction of goodwill 4,362
840 Assessments and adjustments (11,649) - Change in valuation
allowance (2,477) 363 Other (1,089) 337
--------------------------------------------------------------------
Recorded income tax expense $ 56,094 $ 34,830
------------------------ ------------------------ (d) The Company
has net operating loss carryforwards for Canadian income tax
purposes of approximately $23.9 million. Harry Winston Inc. has net
operating loss carryforwards for US income tax purposes of $32.2
million and $8.0 million for other foreign jurisdiction tax
purposes. NOTE 14: Future Site Restoration Costs 2008 2007
-------------------------------------------------------------------------
At February 1, 2007 and 2006 $ 17,200 $ 15,316 Revision of previous
estimates 14,897 - Accretion of provision 883 1,884
-------------------------------------------------------------------------
At January 31, 2008 and 2007 $ 32,980 $ 17,200
------------------------ ------------------------ The Joint Venture
has an obligation under various agreements (note 17) 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, 2008 is estimated to be $53.4 million of which approximately
$33.1 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 5.57%. NOTE 15: Share Capital (a) Authorized
Unlimited common shares without par value. (b) Issued Number of
shares Amount
--------------------------------------------------------------------
Balance, January 31, 2006 58,133,780 $ 300,652 Shares issued for:
Exercise of options 226,975 4,513
--------------------------------------------------------------------
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
------------------------------ ------------------------------ (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. Compensation
expense for stock options was $0.2 million for fiscal 2008 (2007 -
$2.9 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
(2008 - $0.1 million; 2007 - $1.6 million). Changes in share
options outstanding are as follows: 2008 2007
----------------------------------------------------- Weighted
average Weighted average Options exercise price Options exercise
price
--------------------------------------------------------------------
000s CDN$ US$ 000s CDN$ US$
--------------------------------------------------------------------
Outstanding, beginning of year 1,631 $ 23.43 $ 20.63 1,959 $ 23.34
$ 20.49 Granted 100 25.52 24.08 - - - Exercised (11) 27.01 25.48
(227) 14.65 12.90 Expired (1) 26.45 24.95 (101) 41.39 36.49
--------------------------------------------------------------------
1,719 $ 23.52 $ 22.19 1,631 $ 23.43 $ 20.63
-----------------------------------------------------
----------------------------------------------------- The following
summarizes information about stock options outstanding at January
31, 2008: 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 1.8 $ 9.15 268 $ 9.15 10.60-12.45 302 2.9 12.36 302
12.36 17.50-17.50 39 3.8 17.50 39 17.50 23.35-29.25 765 5.3 25.36
665 25.34 36.38-40.00 110 5.9 39.67 105 39.83 41.45-41.95 235 6.4
41.66 177 41.66
-------------------------------------------------------------------------
1,719 $ 23.52 1,556 $ 22.67
------------------------------------------------------------
------------------------------------------------------------ (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, 2008 and 2007 was estimated
using a Black-Scholes option pricing model with the following
weighted average assumptions. The Company did not grant any options
during fiscal 2007. 2008 2007
--------------------------------------------------------------------
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, 2006 103,959 Awards during the year (net): RSU
70,431
--------------------------------------------------------------------
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 ---------------- ----------------
DSU Number of units
--------------------------------------------------------------------
Balance, January 31, 2006 41,079 Awards during the year (net): DSU
18,070
--------------------------------------------------------------------
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 ---------------- ----------------
During the fiscal year, the Company granted 21,873 RSUs (net of
forfeitures) and 21,626 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 $0.1 million (2007 - expense of $3.1
million) for the twelve months ended January 31, 2008. NOTE 16:
Earnings per Share The following table sets forth the computation
of diluted earnings per share: 2008 2007
-------------------------------------------------------------------------
Numerator: Net earnings for the year $ 106,408 $ 104,269
------------------------ ------------------------ Denominator
(thousands of shares): Weighted average number of shares
outstanding 58,369 58,257 Dilutive effect of employee stock options
530 1,022
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58,899 59,279 ------------------------ ------------------------
Number of anti-dilutive options - - ------------------------
------------------------ NOTE 17: 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 2008. 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, 2008 was $61.5
million. The agreement specifically provides that these funding
requirements will be reduced by amounts incurred by the Joint
Venture on reclamation and abandonment activities. (b)
Participation Agreements The Joint Venture has signed participation
agreements with various native groups. These agreements are
expected to contribute to the social, economic and cultural
well-being of the Aboriginal bands. The agreements are each for an
initial term of 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% 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:
2009 $ 93,573 2010 95,340 2011 94,255 2012 91,106 2013 91,044
Thereafter 155,976
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DATASOURCE: HARRY WINSTON DIAMOND CORPORATION CONTACT: PRNewswire -
- 04/07/2008
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