text size:
Inscape Corporation Announces First Quarter Results
By Benzinga Staff
September 09, 2010 6:21 PM
September 09, 2010 6:21 PM
HOLLAND LANDING, ONTARIO--(Marketwire - Sept. 9, 2010) - Mr. Madan Bhayana, Chief Executive Officer of Inscape (TSX:INQ), a leading designer, manufacturer and marketer of office systems, storage and architectural wall solutions for commercial office environments, announces the following financial results for the first quarter ended July 31, 2010:
Inscape Corporation
Summary of Consolidated Financial Results
(Unaudited) (in thousands except EPS)
Three Months Ended
July 31,
2010 2009 Change
-------------------------------------------------------------------- -------
Sales $ 17,694 $ 17,397 1.7%
--------------------------------------------------------------------
Gross margin 5,424 4,387 23.6%
Selling, general & administrative expenses 4,844 4,946 -2.1%
Unrealized (gain) loss on foreign exchange (3) 572
Unrealized gain on derivatives (152) -
Interest income (137) (92)
--------------------------------------------------------------------
Income (Loss) before taxes 872 (1,039)
Income tax expenses (recovery) 266 (77)
--------------------------------------------------------------------
Net Income (loss) $ 606 $ (962)
--------------------------------------------------------------------
--------------------------------------------------------------------
Basic and diluted earnings per share $ 0.04 $ (0.06)
Weighted average number of shares (in thousands)
for basic EPS calculation 15,044 15,097
for diluted EPS calculation 15,045 15,097
Commentary and Outlook
"We are pleased by the gross margin and profitability results in our first quarter of fiscal 2011. This is our third consecutive profitable quarter despite historically low sales volumes experienced by the office furniture industry in general and by our Company as well.
Our commitment is to continue our efforts to improve our market position and thereby increase our sales volumes. During the first quarter we have taken a number of steps in ensuring that we demonstrate our unique capabilities to designers and customers with additional sales resources in most of our target markets. At NeoCon, the primary industry trade show, we received very positive reception to the preview of ADDWALL, a scalable, functional and attractive all in one moveable wall solution. Customers and designers continued to express their interest in our ability to create visually appealing and flexible product applications using our integrated suite of products.
In August the Company purchased all intellectual property and trademarks owned by Acme Architectural Walls, a manufacturer and designer of demountable office partitions. Acme has been a leader in the New York City market for demountable office partitions for over 50 years, specializing in critical design sensitive solutions desired by architects and designers of numerous Fortune 500 clients. The acquisition of Acme's intellectual property and product portfolio by Inscape and the addition of local representation is a good fit for Inscape as we continue to invest in growing our architectural walls business.
Our outlook for the 2nd quarter of fiscal 2011 is positive based on large project volume from existing and new customers. We see strong indications that we are positioning our solutions more effectively which has led to a number of project awards. As historically been the case, our quarterly sales results may fluctuate based on timing of projects; however, we are confident that we are progressing towards growing sales and profitability.
We expect that sales for the second quarter of fiscal 2011 will be higher than the first quarter of fiscal 2011 and the second quarter of fiscal 2010." said Madan Bhayana, CEO.
Operating Performance
The first quarter of fiscal year 2011 ended on July 31, 2010 had a net income of $0.6 million, a substantial improvement from the net loss of $1.0 million in the same quarter of last fiscal year. Although the total sales of $17.7 million in the current quarter was only 1.7% higher than the $17.4 million earned in the same quarter of fiscal year 2010, the year-over-year increase of $1.6 million in the operating results was driven by the significant growth in gross profit and reduced negative impact from currency translation. The gross profit was up 23.6% from last year's $4.4 million to the current quarter's $5.4 million, while total operating expenses, including interest income, unrealized gains and losses on derivatives and currency translation, decreased 16.1% from last year's $5.4 million to the current quarter's $4.6 million. With the exclusion of the unrealized gains and losses on derivatives and currency translation from both periods, the current quarter would have a net income of $0.5 million while the same quarter of last year would have a net loss of $0.4 million.
On July 9, 2010, the Company repurchased 441,317 Class B subordinated voting Shares from an ex-officer of the Company at $1.88 per share before expenses. The shares were returned to treasury for cancellation on July 21, 2010. Basic and diluted earnings per share ("EPS") for the current quarter were 4 cents per share based on the weighted average number of shares outstanding during the period, which was 15,044,051 shares for the basic EPS and 15,044,975 for the diluted EPS. Basic EPS for the first quarter of fiscal year 2009 was a loss of 6 cents per share, based on 15,096,817 shares outstanding.
At the end of the current quarter, total cash, cash equivalents and short-term investments was at $18.8 million, compares to $19.7 million at the end of last fiscal year ended on April 30, 2010. During the three-month period, cash generated from operations was offset by increase in working capital and capital expenditures. The net decrease of $0.9 million in total cash, cash equivalents and short-term investments represents the cost and related expenses incurred in the Class B share buyback.
Sales in the first quarter of fiscal 2011 were $17.7 million, an increase of 1.7% from the sales of $17.4 million in the same quarter of last year. Compared to last year, the current quarter's sales reflected the gains from favourable US currency hedges and a 3.8% increase due to higher volumes, which were offset by lower realized selling prices. The Company expects that the US currency hedge gains and selling price pressure will continue to affect our reported sales for the rest of this fiscal year.
Gross margin as a percentage of sales in the first quarter of fiscal year 2011 was 30.7%, compared to last year's 25.2%. The growth in the current quarter's gross margin was driven by the US currency hedge gains that increased sales results, favourable overhead absorption due to higher volumes, lower manufacturing overheads, and improvements in variable production costs. The gains were partially eroded by lower realized selling prices.
Selling, general and administrative expenses ("SG&A") in the first quarter of fiscal year 2010 were 27.4% of sales, compared to 28.4% in the same quarter of last year. During the first quarter, the Company increased investments in various sales, marketing and promotion initiatives. Higher expenditures in these areas were offset by reduced administrative overheads and the benefit of the favourable exchange rate at which the U.S. dollar denominated expenditures were translated.
Conference Call
Inscape will host a conference call at 8:30 a.m. on Friday, September 10, 2010 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-741-5804. A replay of the conference call will also be available from Friday, September 10, 2010 after 10:30 a.m. until midnight on September 17, 2010. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21479828).
Forward-Looking Statements
Certain of the above statements are forward-looking statements that involve risks and uncertainties. Actual results could differ materially as a result of many factors including, but not limited to, further changes in market conditions and changes or delays in anticipated product demand. In addition, future results may also differ materially as a result of many factors, including: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in North America; length of sales cycles; significant fluctuations in international exchange rates, particularly the U.S. dollar exchange rate; restrictions in access to the U.S. market; changes in the Company's markets, including technology changes and competitive new product introductions; pricing pressures; dependence on key personnel; and other factors set forth in the Company's Ontario Securities Commission reports and filings.
About Inscape
Inscape Corporation is a leading designer, manufacturer and marketer of office systems, storage and architectural wall solutions for commercial office environments. Headquartered in Holland Landing, Ontario, the company has offices and production facilities in Canada and the United States totalling approximately 438,000 square feet and serves customers through a network of authorized dealers. For more information, please visit www.inscapesolutions.com.
INSCAPE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)(in thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
July 31 April 30
2010 2010
----------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 565 $ 2,675
Short-term investments 18,229 17,073
Accounts receivable 11,597 11,180
Inventory (Note 3) 5,219 4,550
Derivative assets 5,513 7,537
Income taxes receivable 212 539
Prepaid expenses 975 775
----------------------------------------------------------------------------
42,310 44,329
CAPITAL ASSETS 24,972 25,309
INTANGIBLE ASSETS 881 871
DERIVATIVE ASSETS 369 381
DEFERRED PENSION ASSETS 1,878 1,933
FUTURE INCOME TAX ASSETS 2,426 2,658
----------------------------------------------------------------------------
$ 72,836 $ 75,481
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 7,914 $ 8,175
OTHER LONG-TERM OBLIGATIONS 260 261
FUTURE INCOME TAX LIABILITIES 4,854 5,488
----------------------------------------------------------------------------
13,028 13,924
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 54,494 57,059
CONTRIBUTED SURPLUS (Note 4) 1,789 84
ACCUMULATED OTHER COMPREHENSIVE INCOME 3,497 4,992
RETAINED EARNINGS (DEFICIT) 28 (578)
----------------------------------------------------------------------------
59,808 61,557
----------------------------------------------------------------------------
$ 72,836 $ 75,481
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note - These interim financial statements have not been reviewed by an
auditor
Approved by the Board of Directors,
Director Director
Madan Bhayana Robert G. Long
INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(in thousands, except per share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended July
31,
2010 2009
----------------------------------------------------------------------------
SALES $ 17,694 $ 17,397
COST OF GOODS SOLD including amortization of $752
(2009 - $758) 12,270 13,010
----------------------------------------------------------------------------
GROSS MARGIN 5,424 4,387
EXPENSES
Selling, general and administrative including
amortization of $184 (2009 - $207) 4,844 4,946
Unrealized (gain) loss on foreign exchange (3) 572
Unrealized derivatives gain (152) -
Interest income (137) (92)
----------------------------------------------------------------------------
4,552 5,426
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES 872 (1,039)
INCOME TAXES (RECOVERY) 266 (77)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 606 $ (962)
----------------------------------------------------------------------------
BASIC AND DILUTED INCOME (LOSS) PER SHARE (Note 4) $ 0.04 $ (0.06)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note - These interim financial statements have not been reviewed by an
auditor
INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)(in thousands)
----------------------------------------------------------------------------
Three Months Ended July
31,
2010 2009
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 606 $ (962)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Unrealized gains on derivatives designated as
cash flow hedges, net of taxes of $95 (2009 -
$2,053) (231) 4,643
Reclassification of losses (gains) on derivatives
designated as cash flow hedges to income, net of
taxes of $559 (2009 - $206) (1,264) 452
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES (1,495) 5,095
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS), NET OF TAXES $ (889) $ 4,133
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note - These interim financial statements have not been reviewed by an
auditor
INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)(in thousands)
Period Ended July 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Other Total
Comprehen- Retained AOCI and Total
Share Contributed sive Income Earnings Retained Shareholders'
Capital Surplus ("AOCI") (Deficit) Earnings Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BALANCE
- May
1, 2010 $57,059 $ 84 $ 4,992 $ (578) $4,414 $ 61,557
Share
Buy-
back
(Note
4) (2,565) 1,705 - - - (860)
Net
Income - - - 606 606 606
Other
Compreh-
ensive
Loss - - (1,495) - (1,495) (1,495)
----------------------------------------------------------------------------
BALANCE
- July
31,
2010 $54,494 $ 1,789 $ 3,497 $ 28 $3,525 $ 59,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Period Ended July 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Other Total
Comprehen- AOCI and Total
Share Contributed sive Income Retained Retained Shareholders'
Capital Surplus ("AOCI") Earnings Earnings Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BALANCE
- May
1, 2009 $ 57,059 $ 84 $ 23 $ 511 $ 534 $ 57,677
Net Loss - - - (962) (962) (962)
Other
Compreh-
ensive
Income - - 5,095 - 5,095 5,095
----------------------------------------------------------------------------
BALANCE
- July
31,
2009 $ 57,059 $ 84 $ 5,118 $ (451) $4,667 $ 61,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note - These interim financial statements have not been reviewed by an
auditor
INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(in thousands)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended July
31,
2010 2009
---------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING ACTIVITIES
Net income (loss) $ 606 $ (962)
Items not affecting cash:
Amortization 936 965
Pension expense 235 180
Unrealized loss (gain) on short-term
investments held for trading (90) 45
Unrealized gain on derivatives (152) -
Future income taxes 266 (77)
Derivative assets and liabilities 116 (636)
Deferred expenses and other expenses (12) (90)
Stock based compensation 11 49
Unrealized loss (gain) on foreign exchange (3) 572
Loss (gain) on sale of capital assets 5 -
---------------------------------------------------------------------------
1,918 46
Employer's contribution to pension funds (177) (143)
Changes in non-cash operating working capital
items (1,212) (1,330)
---------------------------------------------------------------------------
Cash generated from (used for) operating activities 529 (1,427)
---------------------------------------------------------------------------
FINANCING
Share buy-back (860) -
---------------------------------------------------------------------------
INVESTING ACTIVITIES
Short-term investments held for trading (1,066) (251)
Additions to capital assets (621) (301)
Proceeds from sale of capital assets 7 -
---------------------------------------------------------------------------
Cash generated from (used for) investing activities (1,680) (552)
---------------------------------------------------------------------------
Unrealized foreign exchange gain (loss) on cash and
cash equivalents (99) (83)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,110) (2,062)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,675 13,857
---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 565 $ 11,795
---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS CONSIST OF:
Cash $ 559 $ 1,523
Cash equivalents 6 10,272
---------------------------------------------------------------------------
$ 565 $ 11,795
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
Income taxes paid (refund received) $ (337) $ (1)
Note - These interim financial statements have not been reviewed by an
auditor
Notes to the Consolidated Financial Statements
For periods ended July 31, 2010 and July 31, 2010
Unaudited (in thousands except share and per share amounts)
----------------------------------------------------------------------------
1. BASIS OF ACCOUNTING
Inscape Corporation's consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of commitments and contingencies and the reported amounts of sales and expenses during the reporting period. Estimates and assumptions are used in items such as useful lives of capital assets and intangible assets, valuation allowances for receivables and inventory, future tax assets and liabilities, and defined benefit pension amounts. Actual results could differ from those estimates.
2. ACCOUNTING POLICIES
These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended April 30, 2010.
Future Accounting Policy Changes
EIC 175, Revenue Arrangements with Multiple Deliverables
In February 2010, the Emerging Issues Committee of the CICA issued EIC-175, Multiple Deliverable Revenue Arrangements ("EIC-175"). EIC-175 provides additional guidance on how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. This section applies to revenue arrangements with multiple deliverables entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011, which is our fiscal year beginning on May 1, 2011. The Company is evaluating the impact on the adoption of this standard.
International Financial Reporting Standards ("IFRS")
In February 2008, the CICA announced that accounting standards for public companies will be replaced by International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. Accordingly the Company will adopt IFRS for its fiscal year beginning May 1, 2011. The Company's conversion to IFRS is progressing as planned and is in the process of estimating the conversion's impact on its financial position and results of operations.
3. INVENTORY
July 31, April 30,
2010 2009
----------------------------------------------------------------------------
Raw materials $ 3,705 $ 3,502
Work-in-progress 516 360
Finished goods 998 688
----------------------------------------------------------------------------
$ 5,219 $ 4,550
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the period ended July 31, 2010, inventories of $12,239 were expensed and included in cost of goods sold (2009 - $12,931).
4. SHARE CAPITAL
July 31, April 30,
2010 2009
----------------------------------------------------------------------------
Authorized
7,670,881 Class A multiple voting shares, 10 votes
per share
Unlimited Class B subordinated voting shares, 1
vote per share
Issued
5,345,881 Class A multiple voting shares (April
30, 2010 - 5,345,881) $ 375 $ 375
9,309,619 Class B subordinated voting shares
(April 30, 2010 - 9,750,936) 54,119 56,684
----------------------------------------------------------------------------
$ 54,494 $ 57,059
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On July 9, 2010 the Company bought back 441,317 Class B subordinated voting shares from an ex- officer of the Company at $1.88 per share. The shares were returned to treasury and were cancelled on July 21, 2010. Changes in the Company's share capital accounts are summarized in the table below:
Number of
shares Share Contributed
('000) Capital Surplus
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ 84
Class A Multiple voting 5,346 $ 375
Class B Subordinated voting 9,751 56,684
----------------------------------------------------------------------------
Balance at April 30, 2010 15,097 57,059 84
Class B share buy-back (441) (2,565) 1,736
Share buy-back expenses (31)
----------------------------------------------------------------------------
Balance at July 31, 2010 14,656 $ 54,494 $ 1,789
----------------------------------------------------------------------------
5. EARNINGS PER SHARE
The following tables set forth the components used in the basic and diluted earnings per share calculations:
Three Months Ended July 31,
Numerator 2010 2009
----------------------------------------------------------------------------
Net income (loss) for the quarter for basic
and diluted earnings per share $ 606 $ (962)
----------------------------------------------------------------------------
Denominator 2010 2009
----------------------------------------------------------------------------
Weighted average number of shares outstanding
for basic earnings per share 15,044,051 15,096,817
Weighted average number of shares outstanding
for diluted earnings per share 15,044,975 15,096,817
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock options for 500,188 shares were not included in the computation of basic income per share for the three-month period ended July 31, 2010 (2009 - 642,500) as they are anti-dilutive for the period. Diluted loss per common share for the three-month ended July 31, 2009 has not been disclosed as the effect of the conversion would be anti-dilutive.
6. SEGMENT INFORMATION
The Company operates under one reporting segment, which is the design and manufacture of office systems and furniture.
Three Months Ended July 31,
2010 2009
----------------------------------------------------------------------------
Sales from
United States $ 15,181 $ 15,083
Canada 1,884 2,258
Other 629 56
----------------------------------------------------------------------------
$ 17,694 $ 17,397
----------------------------------------------------------------------------
----------------------------------------------------------------------------
July 31, April 30,
2010 2010
----------------------------------------------------------------------------
Capital Assets
Canada $ 20,745 $ 21,096
United States 4,227 4,213
----------------------------------------------------------------------------
$ 24,972 $ 25,309
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. PENSION EXPENSE
Total pension expense relating to the various defined benefit plans is $235 for the three-month period ended July 31, 2010 (2009 - $180).
8. FINANCIAL INSTRUMENTS
Risk exposures of the Company's financial instruments and the related risk management are as follows:
(a) Credit risk - The Company's cash and cash equivalents, short-term investments, trade accounts receivable and derivative assets are subject to the risk that the counter-parties may fail to discharge their obligation to pay the Company. The Company's investment policy specifies the types of permissible investments, the minimum credit ratings required and the maximum balances allowed. The purchase of any securities carrying a credit rating below BBB for bonds or R1-Low for commercial paper is prohibited. The counterparty of the Company's derivatives is a major Canadian bank. The Company has credit policies and procedures to manage trade accounts receivable credit risk by assessing new customers' credit history, reviewing of credit limits, monitoring aging of accounts receivable and establishing an allowance for doubtful accounts based on specific customer information and general historical trends. The Company has historically experienced minimal customer defaults on trade accounts receivable. As at July 31, 2010, the allowance for doubtful accounts was $201 (April 30, 2010 - $217).
The following table summarizes the amounts that best represent the Company's maximum exposure to credit risk without taking into account any collateral held or other credit enhancements:
July 31, April 30,
2010 2010
----------------------------------------------------------------------------
Cash and cash equivalents $ 565 $ 2,675
Short-term investments 18,229 17,073
Accounts receivable prior to provisions for doubtful
accounts 11,798 11,397
Derivative assets 5,882 7,918
----------------------------------------------------------------------------
$ 36,474 $ 39,063
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Currency risk - The Company's U.S. dollar denominated cash, trade accounts receivable, accounts payable and accrued liabilities are subject to the risk that their fair values will fluctuate because of changes in the U.S. dollar exchange rate relative to the Canadian dollar. The Company uses U.S. dollar forward exchange contracts to manage the currency risk. The Company has a policy in place to ensure that all such derivatives are used only to manage currency risk and not for trading purposes.
As at July 31, 2010, the Company has a series of outstanding forward contracts due from August 2010 to December 2011 to sell a total of U.S. $38,668 (2009 - U.S. $67,000) at an average exchange rate of Canadian $1.18 (2009 - $1.19). The mark-to-market values of the contracts had a net gain of $5,701 as at July 31, 2010 (2009 -$7,429). In accordance with the accounting policy on cash flow hedging for anticipated transactions, $742 of the gain had been accrued in the statements of operations in the periods when the contracts were entered and the subsequent periods when the mark-to-market values were updated. The remaining $4,959 ($3,497 after tax) was recorded in accumulated other comprehensive income and is expected to be reclassified to net income within the next 12 months.
The Company has entered into an agreement in February 2010 ("February agreement") and a second agreement in May 2010 ("May agreement") with a major Canadian bank with a right to accumulate U.S. currency forward contracts at a notional amount of U.S. $300 per month beginning March 2010 to October 2011 under the February agreement and to accumulate another U.S. $300 per month beginning May 2010 to December 2011 under the May agreement. The accumulation of the forward contracts is dependent on the USD/CAD spot rate staying at or above $0.9525 CAD per USD at a specific time of each month under the February agreement and at or above $0.9550 CAD per USD under the May agreement. If the spot rate is below the specified rates, then that month's accumulation does not occur. The forward contracts accumulated have a strike price of $1.10 CAD per USD to be settled in October 2011 under the February agreement and in December 2011 under the May agreement. As at July 31, 2010, eight forward contracts totalling $2,400 under the two agreements were accumulated. At the end of July 31, 2010, the agreements had a mark-to- market gain of $370. The unrealized gain on the derivatives was initially recognized in the statements of operations in the periods when the agreements were entered and the subsequent periods when the mark-to-market values were updated.
To fix the exchange rate for a machinery purchase to take place in the second quarter of fiscal year 2011, the Company has a variable rate forward contract to buy $305 euro at a rate between $1.3150 USD per euro to$1.365 USD per euro, depending on the spot rate at the contract settlement time. The mark-to-market loss of $18 at July 31, 2010 was charged to earnings as the contract was not eligible for hedge accounting.
(c) Interest rate risk - The Company's cash equivalents and short-term investments are subject to the risk that interest income will fluctuate because of changes in market interest rates. The Company manages the interest rate risk by investing in highly liquid financial instruments with staggered maturity dates. For the period ended July 31, 2010, each 100 basis point variation in the market interest rate is estimated to result in a change of $43 in the Company's interest income (2009 - $20).
(d) Liquidity risk - Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company's liquidity risk is very limited as its cash, cash equivalents and short-term investments are consistently in excess of the immediate financial liabilities. The Company is debt-free and has a line of credit of $10,000 which remained unused as at July 31, 2010.
(e) Fair value hierarchy
The following table presents the fair value hierarchy for the Company's financial instruments measured at fair value at July 31, 2010:
Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Cash and cash equivalents $ 565 $ - $ -
Short-term investments 18,229 - -
Derivative assets - 5,882 -
----------------------------------------------------------------------------
$ 18,794 $ 5,882 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. CAPITAL MANAGEMENT
The Company's objectives when managing capital are to safeguard the entity's ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders through growth in earnings.
Management defines capital as the Company's total shareholders' equity excluding components of accumulated other comprehensive income (loss) arising from cash flow hedges as summarized in the following table:
July 31, April 30,
2010 2010
----------------------------------------------------------------------------
Share Capital $ 54,494 $ 57,059
Contributed Surplus 1,789 84
Retained Earnings (Deficit) 28 (578)
----------------------------------------------------------------------------
$ 56,311 $ 56,565
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company manages its capital structure and makes modifications in response to changes in economic conditions and the risks associated with the underlying strategic initiatives. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, or draw on its line of credit.
See Note 10 on the Company's externally imposed covenants.
10. CREDIT FACILITY
The Company has a demand operating credit facility with its bank. The credit facility has a borrowing base that equals the lesser of :
(a) $10,000 or
(b) the sum of (i) 75% of receivable values plus
(ii) the lesser of 50% of (i) or 40% of raw material
inventory plus 50% of finished goods inventory minus
(iii) all priority claims.
Receivable values do not include the Company's accounts receivable that have been outstanding for 90 days or more or receivables that have payment terms of more than 30 days. The borrowing base at July 31, 2010 was $9,204 (April 30, 2010 $8,790). The interest rate on the demand operating credit facility is prime plus 1% to 1.5%. The agreement is secured by the Company's personal property. The Company has not drawn on the demand operating credit facility as at July 31, 2010.
The credit facility agreement has the following covenants:
1. The ratio of "total liabilities less postponed debt" to "shareholders'
equity less intangible assets" does not exceed 0.5 to 1.0 at any time,
measured quarterly
2. Shareholders' equity not to be less than $50 million at any time,
measured quarterly
The Company was in compliance with these covenants during the period.
The Company also has a foreign exchange contracts credit facility with the bank, which limits the amount of the Company's contingency liability relating to foreign exchange contracts to U.S. $10,000.
We're Loving
