NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended January 31,
2006, 2005 and 2004 (tabular amounts in thousands of United States
dollars, except as otherwise noted) Note 1: Nature of Operations
Aber Diamond Corporation (the "Company" or "Aber") is a specialist
diamond company focusing on the mining and retail segments of the
diamond industry. The Company's most significant asset is a 40%
ownership interest in the Diavik group of mineral claims. The
Diavik Joint Venture (the "Joint Venture") is an unincorporated
joint arrangement between Diavik Diamond Mines Inc. ("DDMI" - 60%)
and Aber Diamond Mines Ltd. (40%). DDMI is the operator of the
Diavik Diamond Mine (the "Diavik Mine"). Both companies are
headquartered in Yellowknife, Canada. DDMI is a wholly owned
subsidiary of Rio Tinto plc of London, England, and Aber Diamond
Mines Ltd. is a wholly owned subsidiary of Aber Diamond Corporation
of Toronto, Canada. The Diavik Mine is located 300 kilometres
northeast of Yellowknife in the Northwest Territories. Aber records
its proportionate interest in the assets, liabilities and expenses
of the Joint Venture in the Company's financial statements with a
one-month lag. Note 2: Significant Accounting Policies The
consolidated financial statements are prepared by management in
accordance with accounting principles generally accepted in Canada,
and except as described in note 22 conform in all material respects
with accounting principles generally accepted in the United States.
The principal accounting policies presently followed by the Company
are summarized as follows: (a) Principles of Consolidation The
consolidated financial statements include the accounts of the
Company and all of its subsidiaries as well as its proportionate
share of unincorporated joint arrangements. Subsidiaries: A
subsidiary is an entity which is controlled by the Company. The
consolidated financial statements include all the assets,
liabilities, revenues, expenses and cash flows of the Company and
its subsidiaries after eliminating intercompany balances and
transactions. For partly owned subsidiaries, the net assets and net
earnings attributable to minority shareholders are presented as
minority interests on the consolidated balance sheet and
consolidated statement of earnings. Joint arrangements that are not
entities ("joint arrangements"): The Diavik Joint Venture is an
unincorporated joint arrangement. Aber owns an undivided 40%
interest in the assets, liabilities and expenses of the Joint
Venture. Aber records its proportionate interest in the assets,
liabilities and expenses of the Joint Venture in the Company's
consolidated financial statements with a one-month lag. The
accounting policies described below include those of the Joint
Venture. (b) Measurement Uncertainty The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of earnings,
revenues and expenses during the reporting year. Significant areas
requiring the use of management estimates relate to the
determination of impairment of capital assets, intangible assets,
goodwill and deferred mineral property costs, estimation of future
site restoration costs and future income taxes, and classification
of current portion of long-term debt. Financial results as
determined by actual events could differ from those estimated. (c)
Revenue Recognition Revenue from rough diamond sales is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred, the Company's price to the customer is fixed or
determinable and collection of the resulting receivable is
reasonably assured. Revenue from fine jewelry and watch sales is
recognized upon delivery of merchandise when the customer takes
ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable. Sales are
reported net of returns. Shipping and handling fees billed to
customers are included in net sales and the related costs are
included in cost of sales. (d) Cash Resources Cash and cash
equivalents, and cash collateral and cash reserve consist of cash
on hand, balances with banks and short-term money market
instruments (with a maturity on acquisition of less than 91 days),
and are carried at cost, which approximates market. Funds in cash
collateral and cash reserve are maintained as prescribed under the
Company's debt financing arrangements and will become available to
Aber for general corporate purposes and for debt servicing as
prescribed by the terms of credit facility agreements. (e) Trade
Accounts Receivable Trade accounts receivable are recorded at the
invoiced amount and generally do not bear interest. The allowance
for doubtful accounts is the Company's best estimate of the amount
of probable credit losses in the existing accounts receivable. The
Company reviews its allowance for doubtful accounts monthly.
Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for
recovery is considered remote. (f) Inventory Rough diamond
inventory is recorded at the lower of cost or net realizable value
and includes stockpiled ore, diamonds in process, and diamonds held
for sale. Cost is determined on an average cost basis including
production costs and value-added processing activity. Merchandise
inventory is recorded at the lower of cost or net realizable value
and includes fine jewelry and watches. Included in merchandise
inventory are production costs such as material, labour and
overhead costs. Supplies inventory is recorded at the lower of
average cost or replacement value and includes consumables and
spare parts maintained at the Diavik Mine site and at the Company's
sorting and distribution facility locations. (g) Deferred Mineral
Property Costs All direct costs relating to mineral properties,
including mineral claim acquisition costs, exploration and
development expenditures in the pre-production stage, ongoing
property exploration expenditures, pre-production operating costs
net of any recoveries, interest, and amortization, are capitalized
and accumulated on a property-by-property basis. The costs of
deferred mineral properties from which there is production are
amortized using the unit-of-production method based upon estimated
proven and probable reserves. General exploration expenditures
which do not relate to specific resource properties are expensed in
the period incurred. On an ongoing basis, the Company evaluates
each property based on results to date to determine the nature of
exploration and development activities that are warranted in the
future. If there is little prospect of the Company or its partners
continuing to explore or develop a property, the deferred costs
related to that property are written down to the estimated fair
value. (h) Capital Assets Capital assets are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are provided using the units-of-production method or
straight-line method as appropriate. The units-of-production method
is applied to a substantial portion of Diavik Mine capital assets
and, depending on the asset, is based on carats of diamonds
recovered during the period relative to the proven and probable ore
reserves of the ore deposit being mined or the total ore deposit.
Other capital assets are depreciated using the straight-line method
over the estimated useful lives of the related assets, which are as
follows: Estimated useful Asset life (years)
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Buildings 10-40 Machinery and mobile equipment 3-10 Computer
equipment and software 3 Furniture and equipment 2-10 Leasehold and
building improvements Up to 20
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Amortization for mine related assets was charged to deferred
mineral property costs during the pre-commercial production stage.
Maintenance and repair costs are charged to earnings while
expenditures for major renewals and improvements are capitalized.
The recoverability of the amounts shown for the Diavik Mine capital
assets is dependent upon the continued existence of economically
recoverable reserves, upon maintaining title and beneficial
interest in the property, and upon future profitable production or
proceeds from disposition of the diamond properties. The amounts
representing Diavik Mine capital assets do not necessarily
represent present or future values. Upon the disposition of capital
assets, the accumulated amortization is deducted from the original
cost and any gain or loss is reflected in current earnings. (i)
Intangible Assets Intangible assets acquired individually or as
part of a group of other assets are initially recognized and
measured at cost. The cost of a group of intangible assets acquired
in a transaction, including those acquired in a business
combination that meet the specified criteria for recognition apart
from goodwill, is allocated to the individual assets acquired based
on their relative fair values. Intangible assets with finite useful
lives are amortized on a straight-line basis over their useful
lives as follows: Estimated useful Asset life (years)
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Wholesale distribution network 10 Store leases Up to 9
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The amortization methods and estimated useful lives of intangible
assets are reviewed annually. Intangible assets with indefinite
useful lives are not amortized and are tested for impairment
annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test
compares the carrying amount of the intangible asset with its fair
value, and an impairment loss is recognized in income for the
excess, if any. (j) Goodwill Goodwill is the residual amount that
results when the purchase price of an acquired business exceeds the
sum of the amounts allocated to the assets acquired, less
liabilities assumed, based on their fair values. Goodwill is
allocated, as of the date of the business combination, to the
Company's reporting units that are expected to benefit from the
synergies of the business combination. Goodwill is not amortized
and is tested for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be
impaired. The impairment test is carried out in two steps. In the
first step, the carrying amount of the reporting unit is compared
with its fair value. When the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
considered not to be impaired and the second step of the impairment
test is unnecessary. The second step is carried out when the
carrying amount of a reporting unit exceeds its fair value, in
which case the implied fair value of the reporting unit's goodwill
is compared with its carrying amount to measure the amount of the
impairment loss, if any. The implied fair value of goodwill is
determined in the same manner as the value of the goodwill is
determined in a business combination, using the fair value of the
reporting unit as if it was the purchase price. When the carrying
amount of the reporting unit goodwill exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an
amount equal to the excess and is presented as a separate line item
in the consolidated statement of earnings before extraordinary
items and discontinued operations. (k) Deferred Charges and Other
Assets Deferred financing costs are amortized over the repayment
terms of the related debt. Other assets are amortized over a period
not exceeding ten years. Amortization of deferred financing charges
relating to long-term debt was charged to the cost of the
underlying asset prior to the commencement of commercial activity.
(l) Future Site Restoration Costs The Company records the fair
value of any asset retirement obligations as a long-term liability
in the year in which the related environmental disturbance occurs,
based on the net present value of the estimated future costs. The
fair value of the liability is added to the carrying amount of the
deferred mineral property and this additional carrying amount is
amortized over the life of the asset based on units of production.
The obligation is adjusted at the end of each fiscal year to
reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. If the obligation is settled
for other than the carrying amount of the liability, the Company
will recognize a gain or loss on settlement. (m) Foreign Currency
Translation The functional currency of the Company is the US
dollar. At period end, monetary assets and liabilities denominated
in foreign currency are translated to US dollars at exchange rates
in effect at the balance sheet date and non-monetary assets and
liabilities are translated at rates of exchange in effect when the
assets were acquired or obligations incurred. Revenues and expenses
are translated at rates in effect at the time of the transactions.
Foreign exchange gains and losses are included in earnings. For
certain subsidiaries of the Company where the functional currency
is not the US dollar, the assets and liabilities of these
subsidiaries are translated at the rate of exchange in effect at
the balance sheet date. Revenues and expenses are translated at the
rate of exchange in effect at the time of the transactions. Foreign
exchange gains and losses are recorded in the cumulative
translation adjustment account under shareholders' equity. (n)
Income and Mining Taxes The Company accounts for income taxes under
the asset and liability method. Under this method, future tax
assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement
carrying value and the tax basis of assets and liabilities. Future
tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to
be recovered or settled. A reduction in respect of the benefit of a
future tax asset (a valuation allowance) is recorded against any
future tax asset if it is not likely to be realized. The effect on
future tax assets and liabilities of a change in tax rates is
recognized in earnings in the year during which the change in tax
rates is considered to be substantively enacted. (o) Stock-Based
Compensation The Company applies the fair value method to all
grants of stock options. All stock options granted are accounted
for as a capital transaction at the time of the grant and are
reflected as stock options in shareholders' equity. The fair value
of options granted is estimated at the date of grant using a
Black-Scholes option pricing model incorporating assumptions
regarding risk-free interest rates, dividend yield, volatility
factor of the expected market price of the Company's stock, and a
weighted average expected life of the options. The estimated fair
value of the options is recorded on a straight-line basis over the
vesting period. Any consideration paid on amounts attributable to
stock options is credited to share capital. (p) Restricted and
Deferred Share Unit Plan ("RSU" and "DSU") The RSU and DSU Plans
are full value phantom shares which mirror the value of Aber's
publicly traded common shares. Grants under the RSU Plan are on a
discretionary basis to employees of the Company subject to Board of
Director approval. Each RSU grant vests on the third anniversary of
the grant date, subject to special rules for death and disability.
Grants under the DSU Plan are awarded to non-executive directors of
the Company. Each DSU grant vests immediately on the grant date.
(q) Post Retirement Benefits The expected costs of post retirement
benefits under defined benefit arrangements are charged to the
profit and loss account over the service lives of employees
entitled to those benefits. Variations from the regular cost are
spread on a straight-line basis over the expected average remaining
service lives of relevant current employees. The plan assets and
liabilities are valued annually by qualified actuaries. (r)
Financial Instruments From time to time, the Company uses a limited
number of derivative financial instruments to manage its foreign
currency and interest rate exposure. For a derivative to qualify as
a hedge at inception and throughout the hedged period, the Company
formally documents the nature and relationships between the hedging
instruments and hedged items, as well as its risk-management
objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Financial
instruments qualifying for hedge accounting must maintain a
specified level of effectiveness between the hedge instrument and
the item being hedged, both at inception and throughout the hedged
period. The Company does not use derivatives for trading or
speculative purposes. (s) Basic and Diluted Earnings per Share
Basic earnings per share are computed by dividing net earnings
(loss) by the weighted average number of shares outstanding during
the year. Diluted earnings per share are prepared using the
treasury stock method to compute the dilutive effect of options and
warrants. The treasury stock method assumes the exercise of any "in
the money" options with the option proceeds would be used to
purchase common shares at the average market value for the year.
Options with an average market value for the year higher than the
exercise price are not included in the calculation of diluted
earnings per share as such options are not dilutive. (t) Impairment
of Long-Lived Assets Long-lived assets, including property, plant
and equipment and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of by sale would be
separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet. (u)
Comparative Figures Certain figures have been reclassified to
conform with presentation in the current year. (v) Recently Issued
Accounting Pronouncements Deferred Stripping In March 2005, the
Emerging Issues Task Force of the Financial Accounting Standards
Board issued EITF No. 04-06, "Accounting for Stripping Costs
Incurred during Production". This rule says that post production
stripping costs are part of the cost of inventory, disallowing a
common mining industry practice of deferring stripping costs based
on life of mine stripping ratios. The standard is effective
February 1, 2006 for US GAAP purposes. In March 2006, the Emerging
Issues Committee of the Canadian Institute of Chartered Accountants
("CICA") issued EIC 160 on "Stripping Costs in the Production Phase
of a Mining Operation", which provide an alternative to inclusion
of stripping costs in inventory required by the US standard when
the stripping costs result in a betterment of the asset by
providing access to additional sources for ore, in which case the
stripping costs can be capitalized. The standard is effective for
the Company's fiscal year which commences February 1, 2007. The
Company has treated post production stripping costs as a cost of
inventory. Accounting for Stock Issued Compensation In December
2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R. This Statement replaces SFAS No. 123, "Accounting for
Stock Compensation," and supersedes Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company is currently assessing the impact of this pronouncement
on the financial statements. Note 3: Acquisition On April 1, 2004,
the Company completed the acquisition of a 51% share of Harry
Winston Inc., a luxury jewelry and watch retailer. The Company
purchased its interest for $85.0 million, of which $20.3 million
was in the form of a direct equity investment in Harry Winston. The
total purchase price, before transaction costs, is payable by the
Company in installments, with $49.8 million remaining to be paid
over the one-year period following closing. The Company also has
the option to purchase the remaining 49% interest in Harry Winston
on the sixth anniversary of the closing at the then fair market
value of such interest, failing which the other principal
shareholders of Harry Winston will have the ability to institute a
process for the sale of Harry Winston as an entity (including the
Company's 51% interest). The allocation of the purchase price to
the fair values of assets acquired and liabilities assumed is set
forth in the table below and continues to be refined. The valuation
of intangible assets has been completed by a third party valuator.
Purchase price amounts give rise to future income tax liabilities
that have been recorded in the same year in which the intangible
assets are separately identified. Accounts receivable $ 30,045
Inventory 92,658 Intangibles 44,160 Goodwill 41,966 Other assets
22,724 Accounts payable and accrued liabilities (32,199) Bank loan
(43,872) Future income tax liability (20,644) Minority interest
(16,519) Notes payable (12,099) Other liabilities (17,230)
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$ 88,990
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Cash paid at acquisition $ 40,000 Purchase price adjustment (5,066)
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Initial cash outlay 34,934 Promissory note 49,765 Acquisition and
other costs 4,291
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$ 88,990
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Aber owns a 52.83% share of Harry Winston Inc. ("Harry Winston")
located in New York City, US. Pursuant to the Stock Purchase
Agreement between Aber and the two minority shareholders, if
contribution to capital required by Harry Winston is not made by a
stockholder, the non-contributing stockholder's interest in Harry
Winston is diluted proportionately. As a result of the capital
contributions made by Aber but not by all minority shareholders in
fiscal 2005, Aber's ownership of Harry Winston increased from 51%
to 52.83%. The results of Harry Winston have been consolidated in
the financial statements of the Company effective April 1, 2004.
Minority interest represents the remaining 47.17% ownership of
Harry Winston not held by Aber. Note 4: Cash Resources 2006 2005
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Diavik Joint Venture $ 10,523 $ 6,889 Cash and cash equivalents
137,593 116,707
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Total cash and cash equivalents 148,116 123,596 Cash collateral and
cash reserve 14,276 13,786
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Total cash resources $ 162,392 $ 137,382
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Note 5: Inventory and Supplies 2006 2005
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Rough diamond inventory $ 21,612 $ 19,013 Merchandise inventory
164,691 110,175 Supplies inventory 16,268 9,739
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Total inventory and supplies $ 202,571 $ 138,927
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Note 6: Deferred Mineral Property Cost 2006
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Net Accumulated book Cost amortization value
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Diavik Mine $ 248,383 $ 52,016 $ 196,367
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2005
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Net Accumulated book Cost amortization value
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Diavik Mine $ 234,046 $ 34,017 $ 200,029
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The Company holds a 40% ownership interest in the Diavik group of
mineral claims, which contains commercially mineable diamond
reserves. DDMI, a subsidiary of Rio Tinto plc, is the operator of
the Joint Venture and holds the remaining 60% interest. The claims
are subject to private royalties which are in the aggregate 2% of
the value of production. Note 7: Capital Assets 2006
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Net Accumulated book Cost amortization value
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Diavik equipment and leaseholds(a) $ 337,020 $ 85,655 $ 251,365
Furniture, equipment and other(b) 14,900 7,126 7,774 Real property
- land and building(c) 50,654 8,058 42,596
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$ 402,574 $ 100,839 $ 301,735
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2005
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Net Accumulated book Cost amortization value
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Diavik equipment and leaseholds(a) $ 278,376 $ 54,170 $ 224,206
Furniture, equipment and other(b) 10,930 5,800 5,130 Real property
- land and building(c) 36,502 5,222 31,280
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$ 325,808 $ 65,192 $ 260,616
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(a) Diavik equipment and leaseholds are project related assets at
the Joint Venture level. (b) Furniture, equipment and other
includes equipment located at the Company's diamond sorting
facility and at Harry Winston's salons. (c) Real property is
comprised of land and a building which houses the corporate
activities of the Company and various leasehold improvements to
Harry Winston's salons and corporate offices. Note 8: Diavik Joint
Venture The following represents Aber's 40% proportionate interest
in the Joint Venture as at December 31, 2005 and 2004. 2006 2005
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Current assets $ 52,845 $ 33,057 Long-term assets 408,967 379,860
Current liabilities 14,600 9,198 Long-term liabilities and
participant's account 447,212 403,709 Year ended: Net expense
131,935 159,432 Cash flows resulting from operating activities
(89,490) (75,703) Cash flows resulting from financing activities
159,972 95,730 Cash flows resulting from investing activities
(67,762) (16,415)
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The Company is contingently liable for the other participant's
portion of the liabilities of the Joint Venture and to the extent
the Company's participating interest has increased because of the
failure of the other participant to make a cash contribution when
required, the Company would have access to an increased portion of
the assts of the Joint Venture to settle these liabilities. Note 9:
Intangible Assets Amortization Accumulated 2006 2005 period Cost
amortization Net Net
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Trademark indefinite life $ 33,850 $ - $ 33,850 $ 33,850 Drawings
indefinite life 5,200 - 5,200 5,200 Wholesale distribution network
120 months 2,500 (458) 2,042 2,292 Store leases 65 to 105 months
2,610 (780) 1,830 2,255
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Intangible assets $ 44,160 $ (1,238) $ 42,922 $ 43,597
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Note 10: Deferred Charges and Other Assets 2006 2005
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Prepaid pricing discount(i), net of accumulated amortization of
$1.4 million (2005-$0.2 Million) $ 10,322 $ 11,760 Other assets
4,855 5,410 Financing, net of accumulated amortization of $0.9
million (2005-$0.8 million) 2,927 3,729 Refundable security
deposits 4,577 3,000
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$ 22,681 $ 23,899
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(i) During fiscal 2005, $12.0 million was paid to Tiffany & Co.
("Tiffany") by the Company to amend its rough diamond supply
agreement. The amendment eliminated all pricing discounts on future
sales. The payment has been deferred and is being amortized on a
straight-line basis over the remaining life of the contract. Note
11: Promissory Note 2006 2005
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Promissory note - $ 50,902
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The $50.9 million represented the balance of the purchase price
payable plus accrued interest (accrued interest to January 31,
2005) by the Company for its acquisition of 51% of Harry Winston;
this note was repaid on March 3, 2005. Note 12: Long-Term Debt 2006
2005
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Credit facility(a) $ 114,160 $ 90,000 Harry Winston credit
facility(b) 62,460 40,432 First mortgage on real property 8,639
8,279 Notes payable(c) - 12,099
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Total long-term debt 185,259 150,810
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Less current portion (27,915) (32,451)
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$ 157,344 $ 118,359
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(i) Long-Term Debt (a) Credit Facility The Company's credit
agreement includes a $100.0 million senior secured term facility
and a $75.0 million senior secured revolving facility. The
facilities have underlying interest rates, which at the option of
the Company are either LIBOR plus a spread of 1.50% to 2.625%, or
US Base Rate plus a spread of 0.50% to 1.625%. The facilities have
a final maturity date of December 15, 2008. The senior secured
revolving facility has a standby fee on undrawn amounts up to 1.5%,
dependent on certain financial ratios, payable quarterly. The
Company may at any time prepay, in whole or in part, borrowings
outstanding in minimum amounts of $5.0 million. The Company is
required to comply with certain financial and non-financial
covenants. Under the facilities, the Company is required to
establish a debt reserve account containing up to a maximum of
$15.0 million. The effective interest at January 31, 2006 was
6.36%. Scheduled amortization of the Company's senior secured term
facility is over ten equal consecutive semi-annual installments
commencing June 15, 2004. As at January 31, 2006, the Company had a
$44.2 million senior secured term facility and had $70.0 million
drawn under its senior secured revolving facility. The maximum
amount permitted to be drawn under the senior secured revolving
facility is reduced by $12.5 million semi-annually, commencing
September 2006. The Company is required to repay borrowings under
this facility in excess of the maximum permitted at each
semi-annual date, up to a maximum of $12.5 million. Interest and
financing charges include interest incurred on long-term debt, as
well as amortization of deferred financing charges. (b) Harry
Winston Credit Facility Harry Winston Inc. and Harry Winston Japan,
K.K. amended its $85.0 million secured credit agreement on January
31, 2006 with a syndicated group of banks to increase it to $110.0
million on March 1, 2006 and to $130.0 million on July 1, 2006. The
credit agreement includes both a revolving line of credit and fixed
rate loans. At January 31, 2006, $62.5 million had been drawn
against the facility. The amount available under this facility is
subject to availability determined using a borrowing formula based
on certain assets owned by Harry Winston Inc. and Harry Winston
Japan, K.K. The Harry Winston credit facility, which expires on
March 31, 2008, has no scheduled repayments required before that
date. The credit agreement contains affirmative and negative
financial and non-financial covenants, which apply to Harry Winston
on a consolidated basis. These provisions include minimum net
worth, minimum coverage of fixed charges, leverage ratio, minimum
EBITDA and limitations on capital expenditures. The outstanding
borrowings under the credit facility are secured by inventory and
accounts receivable of Harry Winston Inc. and inventory of Harry
Winston Japan, K.K. with no guarantees or recourse to Aber. The
facility provides for fixed rate loans and floating rate loans,
which bear interest at 2.50% above LIBOR and 1.50% above the bank's
prime rate, respectively. The effective interest rate at January
31, 2006 was 9.00%. (c) Notes Payable Included in long-term debt
were notes payable pertaining to convertible subordinated note
agreements with two of Harry Winston's minority shareholders. The
notes were subordinated to Harry Winston's credit facility. On
December 31, 2005, Harry Winston exercised its option to convert
the subordinated notes into common shares of Harry Winston. (d)
Required Principal Repayments 2006 $ 27,915 2007 45,449 2008 92,106
2009 13,025 2010 567 Thereafter 6,197
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$ 185,259
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(ii) Bank Advances The Company also operates a revolving financing
facility. Under the terms of the facility, the Company has
available $35.0 million (utilization in either US dollars or Euros)
for inventory and receivables funding in connection with marketing
activities through its Belgian subsidiary, Aber International N.V.
Borrowings under the facility bear interest at the bank's base rate
plus 1.5%. At January 31, 2006, $4.8 million was drawn under this
facility. This facility has an annual commitment fee of 0.75% per
annum. Harry Winston Japan, K.K. maintains unsecured credit
agreements with two banks each amounting to Yen 300 million (US
$2.6 million). The credit facilities bear interest at 1.875% per
annum and expire on April 28, 2006 and December 29, 2006,
respectively. Under these agreements, bank advances of $5.1 million
were outstanding at January 31, 2006. Note 13: Income Tax The
future income tax asset of the Company is $30.6 million, of which
$16.7 million relates to Harry Winston. Included in the future tax
assets is $15.2 million which has been recorded to recognize the
benefit of $48.4 million of net operating losses that Harry Winston
has available for carry forward to shelter income taxes for future
years. The net operating losses are scheduled to expire between
2018 and 2024. The future income tax liability of the Company is
$256.4 million of which $38.3 million relates to Harry Winston.
Harry Winston's future income tax liabilities include $20.6 million
from the purchase price allocation. The Company's future income tax
asset and liability accounts are revalued to take into
consideration the change in the Canadian dollar compared to the US
dollar and the unrealized foreign exchange gain or loss is recorded
in net earnings for each year. (a) The income tax provision
consists of the following: 2006 2005 2004
---------------------------------------------------------------------
Current expense $ 9,337 $ 4,743 $ 2,076 Future expense 59,784
51,593 8,253
---------------------------------------------------------------------
$ 69,121 $ 56,336 $ 10,329
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) The tax effects of temporary differences that give rise to
significant portions of the future tax assets and liabilities at
January 31, 2006 and 2005 are as follows: 2006 2005
---------------------------------------------------------------------
Future income tax assets: Net operating loss carryforwards $ 24,162
$ 29,708 Capital assets 738 356 Future site restoration costs 5,860
4,714 Other future income tax assets 4,837 2,519
---------------------------------------------------------------------
Gross future income tax assets 35,597 37,297 Valuation allowance
(4,972) (14,912)
---------------------------------------------------------------------
Future income tax assets 30,625 22,385 Future income tax
liabilities: Deferred mineral property costs (122,393) (112,860)
Capital assets (93,439) (20,922) Retail inventory (17,317) (19,136)
Goodwill (20,644) (20,644) Unrealized foreign exchange gains
(2,285) (906) Other future income tax liabilities (348) -
---------------------------------------------------------------------
Future income tax liabilities (256,426) (174,468)
---------------------------------------------------------------------
Future income tax liability, net $(225,801) $(152,083)
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) The difference between the amount of the reported consolidated
income tax provision and the amount computed by multiplying the
earnings (loss) before income taxes by the statutory tax rate of
40% (2005 - 42%; 2004 - 41%) is a result of the following: 2006
2005 2004
---------------------------------------------------------------------
Expected income tax expense $ 61,495 $ 46,426 $ 15,595 Resource
allowance (1,318) (1,607) (4,942) Non-deductible (non-taxable)
items 5,063 (26) 1,375 Large Corporations Tax 940 1,370 1,436
Northwest Territories mining royalty 13,995 12,459 4,569 Impact on
changes in future corporate income tax rates - 3,545 - Earnings
subject to tax different than statutory rate (6,832) (5,962)
(7,033) Losses for which benefit not recognized (recognized)
(2,372) 1,030 - Other (1,851) (899) (671)
---------------------------------------------------------------------
Recorded income tax expense $ 69,120 $ 56,336 $ 10,329
---------------------------------------------------------------------
---------------------------------------------------------------------
(d) The Company has net operating loss carryforwards for Canadian
income tax purposes of approximately $11.0 million. Harry Winston
has net operating loss carryforwards for US income tax purposes of
$48.4 million. Note 14: Future Site Restoration Costs 2006 2005
---------------------------------------------------------------------
Future site restoration costs $ 15,316 $ 13,855
---------------------------------------------------------------------
---------------------------------------------------------------------
The Joint Venture has an obligation under various agreements (note
18) to reclaim and restore the lands disturbed by its mining
operations. The Company's share of the total undiscounted amount of
the future cash flows that will be required to settle the
obligation incurred at January 31, 2006 is estimated to be $25.2
million of which approximately $16.4 million is expected to occur
at the end of the mine life. The anticipated cash flows relating to
the obligation at the time of the obligation have been discounted
at a credit adjusted risk-free interest rate of 5.57%. 2006 2005
---------------------------------------------------------------------
At February 1 $ 13,855 $ 12,880 Revision of previous estimates 744
257 Accretion of provision 717 718
---------------------------------------------------------------------
---------------------------------------------------------------------
At January 31 $ 15,316 $ 13,855
---------------------------------------------------------------------
Note 15: Share Capital (a) Authorized Unlimited common shares
without par value. (b) Issued Number of shares Amount
---------------------------------------------------------------------
Balance, January 31, 2003 54,636,670 $ 221,884 Shares issued for:
Cash on exercise of options 1,296,562 11,013
---------------------------------------------------------------------
Balance, January 31, 2004 55,933,232 $ 232,897 Shares issued for:
Cash 1,500,000 53,369 Cash on exercise of options 485,047 5,853
---------------------------------------------------------------------
Balance, January 31, 2005 57,918,279 $ 292,119 Shares issued for:
Share buyback (150,000) (757) Cash on exercise of options 365,501
5,752
---------------------------------------------------------------------
Balance, January 31, 2006 58,133,780 $ 297,114
---------------------------------------------------------------------
---------------------------------------------------------------------
The Toronto Stock Exchange ("TSX") accepted the Company's notice of
intention to proceed with a normal course issuer bid ("NCIB") to
allow the Company to buy back a percentage of its shares on the
open market. The notice filed with the TSX provides that the
Company may purchase, through the facilities of the TSX over a
one-year period, up to a total of 5% of its outstanding shares,
representing 2,850,000 shares. The notice has now expired.
Purchases made by the Company were in accordance with the rules and
policies of the TSX and the prices that the Company paid were the
market price of such shares at the time of acquisition thereof. Any
shares purchased were cancelled. During fiscal 2006, the Company
acquired 150,000 common shares for cancellation for cash of $4.7
million. The excess of the price of common shares repurchased over
the stated value has been allocated to retained earnings. (c) Stock
Options Under the Employee Stock Option Plan, approved in February
2001, the Company may grant options for up to 4,500,000 shares of
common stock. Options may be granted to any director, officer,
employee or consultant of the Company or any of its affiliates.
Options granted to directors vest immediately and options granted
to officers, employees or consultants vest over three to four
years. The maximum term of an option is ten years. The number of
shares reserved for issuance to any one optionee pursuant to
options cannot exceed 2% of the issued and outstanding common
shares of the Company at the date of grant of such options. The
exercise price of each option cannot be less than the fair market
value of the shares on the last trading day preceding the date of
the grant. The Company's shares are primarily traded on a Canadian
dollar based exchange, and accordingly stock option information is
presented in Canadian dollars, with conversion to US dollars at the
average exchange rate for the year. Changes in share options
outstanding are as follows: 2006 2005
---------------------------------------------------------------------
Weighted average Weighted average Options exercise price Options
exercise price 000s CDN$ US$ 000s CDN$ US$
---------------------------------------------------------------------
Outstanding, beginning of year 2,342 $ 23.52 $ 18.95 2,515 $ 18.69
$ 13.53 Granted 10 36.83 31.18 335 41.60 32.00 Exercised (366)
18.76 15.63 (485) 15.38 11.83 Expired (27) 26.49 22.07 (23) 21.66
16.66
---------------------------------------------------------------------
1,959 $ 23.34 $ 20.49 2,342 $ 22.62 $ 18.22
---------------------------------------------------------------------
---------------------------------------------------------------------
2004 ------------------------------------------ Weighted average
Options exercise price 000s CDN$ US$
------------------------------------------ Outstanding, beginning
of year 3,363 $ 14.48 $ 10.48 Granted 524 29.21 21.15 Exercised
(1,297) 11.88 8.49 Expired (75) 21.11 15.29
------------------------------------------ 2,515 $ 18.69 $ 13.53
------------------------------------------
------------------------------------------ The following summarizes
information about stock options outstanding at January 31, 2006:
Options outstanding Options exercisable
---------------------------------------------------------------------
Weighted average Weighted Weighted Range of remaining average
average exercise Number contract- exercise Number exercise prices
outstanding ual life price exercis- price CDN$ 000s in years CDN$
able 000s CDN$
---------------------------------------------------------------------
$9.10-$9.15 313 4.9 $ 9.14 313 $ 9.14 10.60-10.85 75 4.0 10.65 75
10.65 12.45-12.45 336 6.0 12.45 336 12.45 17.50-18.95 60 6.2 17.74
60 17.74 23.35-29.25 729 7.6 25.32 574 25.01 34.20-40.30 111 8.9
39.68 50 40.00 41.45-41.95 335 9.3 41.60 84 41.60
---------------------------------------------------------------------
1,959 $ 23.34 1,492 $ 19.28
---------------------------------------------------------------------
---------------------------------------------------------------------
(d) Stock-Based Compensation The Company applies the fair value
method to all grants of stock options. The fair value of options
granted during the years ended January 31, 2006, 2005 and 2004 was
estimated using a Black-Scholes option pricing model with the
following weighted average assumptions: 2006 2005 2004
---------------------------------------------------------------------
Risk-free interest rate 3.81% 3.58% 4.64% Dividend yield 0.77% - -
Volatility factor(i) 25.97% 30.31% 33.26% Expected life of the
options 3.6 years 3.6 years 6.4 years Average fair value per
option, CDN $ 8.48 $ 11.54 $ 11.89 Average fair value per option,
US $ 7.06 $ 8.88 $ 8.61
---------------------------------------------------------------------
(i) Volatility factor is based on the Company's historical share
price but not including share price information preceding the
Company's announcement of securing project financing for the Diavik
Project. Options granted in fiscal 2005 were made prior to the
adoption of a dividend policy by the Company. (e) Restricted and
Deferred Share Unit Plans ("RSU" and "DSU" Plans) Number of units
---------------------------------------------------------------------
Balance, January 31, 2004 - Awards during the year (net): RSU
58,344 DSU 15,804
---------------------------------------------------------------------
Balance, January 31, 2005 74,148 Awards during the year (net): RSU
45,615 DSU 25,275
---------------------------------------------------------------------
Balance, January 31, 2006 145,038
---------------------------------------------------------------------
---------------------------------------------------------------------
During the fiscal year, the Company granted 45,615 RSUs (net of
decreases) and 25,275 DSUs under an employee and director incentive
compensation program, respectively. The RSU and DSU Plans are full
value phantom shares which mirror the value of Aber's publicly
traded common shares. Grants under the RSU Plan are on a
discretionary basis to employees of the Company subject to Board of
Director approval. Each RSU grant vests on the third anniversary of
the grant date, subject to special rules for death and disability.
The Company anticipates paying out cash on maturity of RSUs and
DSUs. Only non-executive directors of the Company are eligible for
grants under the DSU Plan. Each DSU grant vests immediately on the
grant date. The expenses related to the RSUs and DSUs are accrued
based on the price of Aber's common shares at the end of the period
and the probability of vesting. This expense is recognized on a
straight-line basis over the term of the grant. The Company
recognized an expense of $2.6 million (2005-$1.0 million) for the
twelve months ended January 31, 2006. Note 16: Earnings (Loss) per
Share The following table sets forth the computation of diluted
earnings per share: 2006 2005 2004
---------------------------------------------------------------------
Numerator: Net earnings for the year $ 81,253 $ 53,084 $ 27,707
---------------------------------------------------------------------
---------------------------------------------------------------------
Denominator (thousands of shares): Weighted average number of
shares outstanding 57,957 57,569 55,137 Dilutive effect of employee
stock options/RSUs/DSUs 864 1,175 1,166
---------------------------------------------------------------------
58,821 58,744 56,303
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of anti-dilutive options - - 102
---------------------------------------------------------------------
---------------------------------------------------------------------
Note 17: Other Income In the prior year, the Company received funds
from Tiffany to remove certain restrictions on the disposal of Aber
shares owned by Tiffany. Tiffany disposed of such shares and no
longer owns any shares of Aber and therefore is no longer
classified as a related party. Note 18: Commitments and Guarantees
(a) Environmental Agreement Through negotiations of environmental
and other agreements, the Joint Venture must provide funding for
the Environmental Monitoring Advisory Board. Aber's share of this
funding requirement was $0.2 million for calendar 2005. Further
funding will be required in future years; however, specific amounts
have not yet been determined. These agreements also state the Joint
Venture must provide security deposits for the performance by the
Joint Venture of its reclamation and abandonment obligations under
all environmental laws and regulations. Aber's share of the Joint
Venture's letters of credit outstanding with respect to the
environmental agreements as at January 31, 2006 was $36.7 million.
The agreement specifically provides that these funding requirements
will be reduced by amounts incurred by the Joint Venture on
reclamation and abandonment activities. (b) Participation
Agreements The Joint Venture has signed participation agreements
with various native groups. These agreements are expected to
contribute to the social, economic and cultural well-being of the
Aboriginal Bands. The agreements are each for an initial term of
twelve years and shall be automatically renewed on terms to be
agreed for successive periods of six years thereafter until
termination. The agreements terminate in the event the mine
permanently ceases to operate. (c) Commitments Commitments include
the cumulative maximum funding commitments secured by letters of
credit of the Joint Venture's environmental and participation
agreements at Aber's 40% share, before any reduction of future
reclamation activities and future minimum annual rentals under
non-cancellable operating leases for retail salons and corporate
office space, and are as follows: 2006 $ 56,868 2007 65,465 2008
77,519 2009 79,139 2010 79,577 Thereafter 132,361
---------------------------------------------------------------------
Note 19: Employee Benefit Plans Year ended Year ended January 31,
January 31, Expenses for the year: 2006 2005
---------------------------------------------------------------------
Defined benefit pension plan at Harry Winston(a) $ 119 $ 114
Defined contribution plan at Harry Winston(b) 323 213 Defined
contribution plan at the Diavik Mine(b) 564 469
---------------------------------------------------------------------
$ 1,006 $ 796
---------------------------------------------------------------------
(a) Defined Benefit Pension Plan Harry Winston sponsors a defined
benefit pension plan covering substantially all of its employees
based in the United States. The benefits are based on years of
service and the employee's compensation. In April 2001, Harry
Winston amended its defined benefit pension plan. The amendment
froze plan participation effective April 30, 2001. Harry Winston's
funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. Plan assets consisted
primarily of fixed income, equity and other short-term investments.
Certain foreign subsidiaries of Harry Winston have separate pension
plan arrangements, which are fully funded at January 31, 2006. The
plan assets and benefit obligations were valued as of January 1,
2006. The next valuation is scheduled for January 1, 2007. (i)
Information about Harry Winston's defined benefit plans are as
follows: 2006 2005
-------------------------------------------------------------------
Accrued benefit obligation: Balance, beginning of year $ 11,609 $
11,510 Interest cost 652 557 Actuarial gain 171 4 Effects of
changes in assumptions 289 284 Benefits paid (886) (746)
-------------------------------------------------------------------
Balance, end of year 11,835 11,609
-------------------------------------------------------------------
Plan assets: Fair value, beginning of year 8,485 7,745 Actual
return on plan assets 927 359 Employer contributions 1,069 1,127
Benefits paid (887) (746)
-------------------------------------------------------------------
Fair value, end of year 9,594 8,485
-------------------------------------------------------------------
Funded status - plan deficit (included in accrued liabilities) $
(2,241) $ (3,124)
-------------------------------------------------------------------
-------------------------------------------------------------------
(ii) Plan assets The asset allocation of Harry Winston's pension
benefits at January 31, 2006 were as follows: 2006 2005
-------------------------------------------------------------------
Asset category: Cash equivalents 4% 19% Equity securities 76% 75%
Fixed income securities 19% 5% Other 1% 1%
-------------------------------------------------------------------
Total 100% 100%
-------------------------------------------------------------------
-------------------------------------------------------------------
(iii) The significant assumptions used are as follows: 2006 2005
-------------------------------------------------------------------
Accrued benefit obligation: Discount rate 5.50% 5.75% Expected
long-term rate of return 7.50% 7.50%
-------------------------------------------------------------------
Benefit costs for the year: Discount rate 5.50% 5.75% Expected
long-term rate of return on plan assets 7.50% 7.50% Rate of
compensation increase 0.00% 0.00%
-------------------------------------------------------------------
Harry Winston's overall expected long-term rate of return on assets
is 7.50%. The expected long-term rate of return is based on the
portfolio as a whole and not on the sum of the returns on
individual asset categories. The return is based exclusively on
historical returns, without adjustments. (iv) Harry Winston expects
to contribute $1.1 million to its pension plan in calendar 2006.
The benefits of $0.9 million are expected to be paid in each
calendar year from 2006 to 2010. The aggregate benefits expected to
be paid in the five calendar years from 2011 to 2015 are $12.1
million. The expected benefits are based on the same assumptions
used to measure Harry Winston's benefit obligation at January 31,
2006. (b) Defined Contribution Plan Harry Winston has a defined
contribution 401(k) plan covering substantially all employees in
the United States that provides employer-matching contributions
based on amounts contributed by an employee, up to 50% of the first
6% of the employee's salary. Employees must meet minimum service
requirements and be employed on December 31 of each year in order
to receive this matching contribution. The Joint Venture sponsors a
defined contribution plan whereby the employer contributes 6% of
the employee's salary. The cost of the Joint Venture's
contributions for the fiscal year was $1.4 million (2005-$1.2
million). Note 20: Related Parties Transactions with related
parties for the fiscal year include $0.5 million payable (2005-$0.5
million) under management agreements with all of Harry Winston's
shareholders and $1.7 million (2005 - $4.3 million) of rent
relating to the New York salon, payable to an employee and
shareholder. Note 21: Segmented Information The Company operates in
two segments within the diamond industry, mining and retail, as of
January 31, 2006. The mining segment consists of the Company's
rough diamond business. This business includes the 40% interest in
the Diavik group of mineral claims and the sale of rough diamonds
in the market-place. The retail segment consists of the Company's
ownership in Harry Winston. This segment consists of the marketing
of fine jewelry and watches on a worldwide basis. For the twelve
months ended January 31, 2006 Mining Retail Total
---------------------------------------------------------------------
Revenue Canada $ 314,073 $ - $ 314,073 United States - 75,212
75,212 Europe - 66,279 66,279 Asia - 49,670 49,670 Cost of sales
129,061 93,546 222,607
---------------------------------------------------------------------
185,012 97,615 282,627 Selling, general and administrative expenses
21,129 85,819 106,948
---------------------------------------------------------------------
Earnings from operations 163,883 11,796 175,679
---------------------------------------------------------------------
Interest and financing expenses (10,150) (4,783) (14,933) Other
income/(expense) 4,352 (19) 4,333 Foreign exchange loss (10,488)
(855) (11,343)
---------------------------------------------------------------------
Segmented earnings before income taxes $ 147,597 $ 6,139 $ 153,736
---------------------------------------------------------------------
---------------------------------------------------------------------
Segmented assets as at January 31, 2006 Canada $ 706,431 $ - $
706,431 United States - 255,424 255,424 Other foreign countries
19,515 62,243 81,758
---------------------------------------------------------------------
$ 725,946 $ 317,667 $1,043,613
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill as at January 31 $ - $ 41,966 $ 41,966 Capital
expenditures $ 37,743 $ 14,931 $ 52,674 Other significant non-cash
items: Income tax expense $ 61,677 $ (1,893) $ 59,784
---------------------------------------------------------------------
For the twelve months ended January 31, 2005 Mining Retail Total
---------------------------------------------------------------------
Revenue Canada $ 252,666 $ - $ 252,666 United States - 52,324
52,324 Europe - 48,098 48,098 Asia - 32,314 32,314 Cost of sales
119,314 69,997 189,311
---------------------------------------------------------------------
133,352 62,739 196,091 Selling, general and administrative expenses
16,024 58,274 74,298
---------------------------------------------------------------------
Earnings from operations 117,328 4,465 121,793
---------------------------------------------------------------------
Interest and financing expenses (11,399) (4,198) (15,597) Other
income/(expense) 9,795 (127) 9,668 Loss on sale of other assets
(30) - (30) Foreign exchange gain (loss) (6,244) 949 (5,295)
---------------------------------------------------------------------
Segmented earnings before income taxes $ 109,450 $ 1,089 $ 110,539
---------------------------------------------------------------------
---------------------------------------------------------------------
Segmented assets as at January 31, 2005 Canada $ 640,187 $ - $
640,187 United States - 198,017 198,017 Other foreign countries
6,604 52,144 58,748
---------------------------------------------------------------------
$ 646,791 $ 250,161 $ 896,952
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill as at January 31 $ - $ 41,966 $ 41,966 Capital
expenditures $ 15,536 $ 5,163 $ 20,699 Other significant non-cash
items: Income tax expense $ 52,228 $ (635) $ 51,593
---------------------------------------------------------------------
Segmented reporting started in fiscal 2005 with the acquisition of
Harry Winston on April 1, 2004. Sales to one customer in the mining
segment totalled $23.0 million (2005-$29.7 million) for the fiscal
year. Note 22: Differences Between Canadian and United States
Generally Accepted Accounting Principles These financial statements
have been prepared in accordance with generally accepted accounting
principles ("GAAP") in Canada. Except as set out below, these
financial statements also comply, in all material aspects, with
accounting principles generally accepted in the United States and
the rules and regulations of the Securities Exchange Commission.
The following tables reconcile results as reported under Canadian
GAAP with those that would have been reported under United States
GAAP ("US GAAP"). Canadian GAAP US GAAP 2006 2006
---------------------------------------------------------------------
Balance sheet: Mining interests(a) $ 196,367 $ 144,761 Long-term
debt 157,344 170,505 Future income tax liability, net 225,801
196,802 Shareholders' equity 451,893 411,949
---------------------------------------------------------------------
Canadian GAAP US GAAP 2005 2005
---------------------------------------------------------------------
Balance sheet: Mining interests(a) $ 200,029 $ 143,693 Long-term
debt 118,359 131,520 Future income tax liability, net 152,083
126,826 Shareholders' equity 419,472 371,056
---------------------------------------------------------------------
2006 2005 2004
---------------------------------------------------------------------
Earnings for the year, Canadian GAAP $ 81,253 $ 53,084 $ 27,707
Foreign exchange gain(b) - - (13,161) Amortization(c) 4,730 14,322
(10,775) Future income taxes 3,742 (9,075) 5,441 Mark-to-market
foreign currency contracts - - (1,007)
---------------------------------------------------------------------
Earnings for the year, US GAAP $ 89,725 $ 58,331 $ 8,205
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic earnings per share $ 1.55 $ 1.01 $ 0.15
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted earnings per share $ 1.53 $ 0.99 $ 0.15
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Expenditures on Mining Interests Prior to the Establishment of
Proven and Probable Reserves Effective February 1, 1999, the
Company changed its method of accounting for costs on unproven
properties under US GAAP from capitalizing all expenditures to
expensing all costs prior to the completion of a definitive
feasibility study which establishes proven and probable reserves.
Upon commencement of commercial production, certain mineral
property costs were reclassified to capital assets and inventory,
for both Canadian and US GAAP purposes. (b) US Functional Currency
For US GAAP purposes, commercial production commenced as of
February 1, 2003 and, therefore, the US dollar became the
functional currency for the Company as of that date. Accordingly,
foreign exchange gains recorded prior to the commencement of
commercial production on August 1, 2003, for Canadian GAAP
purposes, during the first and second quarters of the prior fiscal
year, are reversed. (c) Amortization of Deferred Mineral Property
and Deferred Charges and Other Assets For US GAAP purposes,
commercial production commenced as of February 1, 2003. Therefore,
all of the fiscal 2005 amortization pertaining to items deferred
for Canadian GAAP purposes during the first and second quarters of
fiscal 2004 was added back to net earnings for US GAAP purposes. In
fiscal 2006 and fiscal 2005, amortization expense is less for US
GAAP purposes as a result of accounting for costs of unproven
properties (see note 22(a) above). In fiscal 2004, amortization
expense is higher for US GAAP purposes as a result of different
dates used for commercial production. (d) Impact of Recent United
States Accounting Pronouncements In December 2004, FASB issued SFAS
123 (revised), "Share-Based Payment". The FASB has issued revised
standards to require companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based
compensation issued to employees, but expresses no preference for a
type of valuation model. The way an award is classified will affect
the measurement of compensation cost. Liability-classified awards
are remeasured to fair value at each balance sheet date until the
award is settled. Equity-classified awards are measured at
grant-date fair value and the grant-date fair value is recognized
over the requisite service period. Such awards are not subsequently
remeasured. The revised statement is effective for public
companies' interim or annual periods beginning after June 15, 2005
and is effective for non-public companies for annual periods
beginning after December 15, 2005. The adoption of this standard is
not expected to have an impact on the consolidated financial
statements of the Company. In May 2005, the US Financial Accounting
Standards Board ("FASB") issued SFAS 154, "Accounting Changes and
Error Corrections" to replace APB Opinion No. 20, "Accounting
Changes", and FASB Statement No. 3, "Reporting Accounting Changes
in Interim Financial Statements". Previously, most accounting
changes were recognized by including the cumulative effect of
changing to a newly adopted accounting principle in the net income
of the period of the change. The revised standard improves
financial reporting by requiring voluntary changes in accounting
principles to be reported via retrospective application, unless
impracticable. The revised standard will improve the consistency of
financial information between periods and enhance the usefulness of
the financial information by facilitating analysis and
understanding of comparative accounting data. The revised standard
is effective for accounting changes made in fiscal years beginning
after December 15, 2005. The adoption of this standard is not
expected to have an impact on the consolidated financial statements
of the Company. DATASOURCE: Aber Diamond Corporation CONTACT:
PRNewswire -- March 14
Copyright