Notes to Consolidated Financial Statements
------------------------------------------ July 31, 2007 with
comparative figures (tabular amounts in thousands of United States
dollars, except as otherwise noted) NOTE 1: Nature of Operations
Aber Diamond Corporation (the "Company" or "Aber") is a specialist
diamond company focusing on the mining and retail segments of the
diamond industry. The Company's most significant asset is a 40%
ownership interest in the Diavik group of mineral claims. The
Diavik Joint Venture (the "Joint Venture") is an unincorporated
joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%)
and Aber Diamond Mines Ltd. (40%). DDMI is the operator of the
Diavik Diamond Mine (the "Diavik Mine"). Both companies are
headquartered in Yellowknife, Canada. DDMI is a wholly owned
subsidiary of Rio Tinto plc of London, England, and Aber Diamond
Mines Ltd. is a wholly owned subsidiary of Aber Diamond Corporation
of Toronto, Canada. The Diavik Mine is located 300 kilometres
northeast of Yellowknife in the Northwest Territories. Aber records
its proportionate interest in the assets, liabilities and expenses
of the Joint Venture in the Company's financial statements with a
one-month lag. During fiscal 2007, Aber acquired the remaining
47.17% interest in Harry Winston Inc. ("Harry Winston") that it did
not previously own. The results of Harry Winston, located in New
York City, US, are consolidated in the financial statements of the
Company. NOTE 2: Significant Accounting Policies The interim
consolidated financial statements are prepared by management in
accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts
of the Company and all of its subsidiaries as well as its
proportionate interest in the assets, liabilities and expenses of
joint arrangements. Intercompany transactions and balances have
been eliminated. The interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's annual report for
the year ended January 31, 2007, since these interim financial
statements do not include all disclosures required by Canadian
generally accepted accounting principles ("GAAP"). Excluding
adoption of the new standards for financial instruments described
below, these statements have been prepared following the same
accounting policies and methods of computation as the consolidated
financial statements for the year ended January 31, 2007. Changes
in Accounting Policy On February 1, 2007, the Company adopted three
new accounting standards issued by the Canadian Institute of
Chartered Accountants ("CICA") on financial instruments, hedges and
comprehensive income that require investment securities and hedging
derivatives to be accounted for at fair value. These standards are
substantially harmonized with US GAAP. Financial Instruments This
new standard requires the Company to revalue certain of its
financial assets and liabilities, including derivatives designated
in qualifying hedging relationships and embedded derivatives in
certain contracts, at fair value on the initial date of
implementation and at each subsequent financial reporting date. The
adoption of this new standard has not had a material impact on the
financial position of the Company. Under the new standard, the
Company has elected to add transaction costs related to its
non-revolving long- term debt to the carrying amount of the debt,
which has resulted in the following adjustments to the consolidated
balance sheet on February 1, 2007: As at February 1, 2007
Increase/(Decrease)
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Assets Other assets $ (859) Liabilities and Shareholders' Equity
Long-term debt $ (859) Cumulative translation adjustment (16,016)
Accumulated other comprehensive income 16,016
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This standard has had no material impact on the consolidated
statement of earnings. Prior period earnings have not been
restated. This standard also requires the Company to classify
financial assets and liabilities according to their characteristics
and management's choices and intentions related thereto for the
purposes of ongoing measurement. Subsequent measurement for these
assets and liabilities is based on either fair value or amortized
cost using the effective interest method, depending upon their
classification. In accordance with the new standard, the Company's
financial assets and liabilities are generally classified and
measured as follows: Asset/Liability Category Measurement Cash and
cash equivalents Held for trading Fair value Cash collateral and
cash reserves Held for trading Fair value Accounts receivable Loans
and receivables Amortized cost Accounts payable and accrued
liabilities Held for trading Fair value Bank advances Held for
trading Fair value Long-term debt Other liabilities Amortized cost
Hedges This new standard contains new rules for reporting fair
value and cash flow hedges. The Company has no significant hedges
and therefore this new standard has had no impact on the Company's
consolidated financial statements. Comprehensive Income This new
standard requires the Company to present a new consolidated
statement of comprehensive income to detail income items impacting
accumulated other comprehensive income, which is reported as part
of shareholders' equity. This statement has been included above in
the consolidated statement of changes in shareholders' equity.
Recently Issued Accounting Standards Inventories In May 2007, the
CICA issued Handbook Section 3031, "Inventories", which supersedes
the previously issued standard on inventory. The new standard
introduces significant changes to the measurement and disclosure of
inventory. The measurement changes include: the elimination of
LIFO, the requirement to measure inventories at the lower cost
method for inventories that are not ordinarily interchangeable or
goods and services produced for specific purposes, the requirement
for an entity to use a consistent cost formula for inventory of a
similar nature and use, and the reversal of previous write-downs to
net realizable value when there is a subsequent increase in the
value of inventories. Disclosures of inventories have also been
enhanced. Inventory policies, carrying amounts, amounts recognized
as an expense, write-downs and the reversals of write- downs are
required to be disclosed. This new standard will apply to the
Company effective February 1, 2008. The Company is assessing the
impact this standard will have on its consolidated financial
statements. NOTE 3: Restatement The Company has determined that the
$7.0 million received from Tiffany in fiscal 2005 to remove certain
restrictions on the resale of Aber shares owned by Tiffany should
be treated as a capital transaction rather than included in other
income. The impact of this correction is to reduce fiscal 2005
other income by $7.0 million, or $0.12 per share (basic and fully
diluted), and to create contributed surplus of $7.0 million.
Accordingly, other income, net income and earnings per share for
the year ended January 31, 2005 are restated to $2.6 million, $46.1
million, $0.80 basic earnings per share and $0.78 fully diluted
earnings per share, respectively. Originally this amount was
classified as an operating activity rather than a financing
activity in the consolidated statement of cash flows. Accordingly,
cash provided by operating activities in fiscal 2005 would decrease
to $143.4 million and cash used in financing activities would
decrease to $54.0 million. Retained earnings at the beginning of
fiscal 2006 have been restated to reflect the above. NOTE 4: Cash
Resources July 31, January 31, 2007 2007
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Diavik Joint Venture $ 13,756 $ 30,776 Cash and cash equivalents
37,892 23,398
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Total cash and cash equivalents 51,648 54,174 Cash collateral and
cash reserves 25,510 51,448
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Total cash resources $ 77,158 $ 105,622
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NOTE 5: Inventory and Supplies July 31, January 31, 2007 2007
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Rough diamond inventory $ 17,833 $ 17,648 Merchandise inventory
258,472 228,157 Supplies inventory 45,008 27,931
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Total inventory and supplies $ 321,313 $ 273,736
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NOTE 6: Diavik Joint Venture The following represents Aber's 40%
proportionate interest in the Joint Venture as at June 30, 2007 and
December 31, 2006, which is reflected in the Company's consolidated
financial statements as follows: July 31, January 31, 2007 2007
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Current assets $ 80,364 $ 66,037 Long-term assets 519,445 477,753
Current liabilities 26,346 35,671 Long-term liabilities and
participant's account 573,463 508,119
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Three Months Three Months Six Months Six Months Ended Ended Ended
Ended July 31, July 31, July 31, July 31, 2007 2006 2007 2006
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Net expense 47,609 47,161 87,710 80,918 Cash flows resulting from
operating activities (39,941) (44,408) (83,983) (51,119) Cash flows
resulting from financing activities 79,454 49,974 143,726 102,043
Cash flows resulting from investing activities (38,191) (20,309)
(67,813) (38,721)
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The Company is contingently liable for the other participant's
portion of the liabilities of the Joint Venture and to the extent
the Company's participating interest has increased because of the
failure of the other participant to make a cash contribution when
required, the Company would have access to an increased portion of
the assets of the Joint Venture to settle these liabilities. NOTE
7: Share Capital (a) Authorized Unlimited common shares without par
value. (b) Issued Number of Shares Amount
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Balance, January 31, 2007 58,360,755 $ 305,165 Shares issued for:
Exercise of options 11,325 337
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Balance, July 31, 2007 58,372,080 $ 305,502
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(c) RSU and DSU Plans Number of Units
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Balance, January 31, 2007 233,539 Net awards during the period
13,391 Payouts during the period (52,548)
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Balance, July 31, 2007 194,382
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Three Months Three Months Six Months Six Months Ended Ended Ended
Ended Expense for July 31, July 31, July 31, July 31, the period:
2007 2006 2007 2006
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RSU $ 295 $ 139 $ 460 $ 525 DSU 76 (173) 3 (37)
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$ 371 $ (34) $ 463 $ 488
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During the second quarter, the Company granted 757 Restricted Share
Units ("RSUs") and 758 Deferred Share Units ("DSUs") under an
employee and director incentive compensation program, respectively.
The RSU and DSU Plans are full value phantom shares that mirror the
value of Aber's publicly traded common shares. In addition, 52,548
RSUs vested during the second quarter, resulting in a payout of
$2.1 million. Grants under the RSU Plan are primarily on a
discretionary basis to employees of the Company subject to Board of
Director approval. Each RSU grant vests on the third anniversary of
the grant date, subject to special rules for death and disability.
The Company settles its obligations under the RSU and DSU plans in
cash in accordance with the terms of the respective plans. Only
non-executive directors of the Company are eligible for grants
under the DSU Plan. Each DSU grant vests immediately on the grant
date. The expenses related to the RSUs and DSUs are accrued based
on the price of Aber's common shares at the end of the period and
on the probability of vesting. This expense is recognized on a
straight- line basis over the term of the grant. NOTE 8:
Commitments and Guarantees (a) Environmental Agreement Through
negotiations of environmental and other agreements, the Joint
Venture must provide funding for the Environmental Monitoring
Advisory Board. Aber's share of this funding requirement was $0.2
million for calendar 2007. Further funding will be required in
future years; however, specific amounts have not yet been
determined. These agreements also state the Joint Venture must
provide security deposits for the performance by the Joint Venture
of its reclamation and abandonment obligations under all
environmental laws and regulations. Aber's share of the Joint
Venture's letters of credit outstanding with respect to the
environmental agreements as at July 31, 2007 was $57.9 million. The
agreement specifically provides that these funding requirements
will be reduced by amounts incurred by the Joint Venture on
reclamation and abandonment activities. (b) Participation
Agreements The Joint Venture has signed participation agreements
with various native groups. These agreements are expected to
contribute to the social, economic and cultural well-being of the
Aboriginal bands. The agreements are each for an initial term of
twelve years and shall be automatically renewed on terms to be
agreed for successive periods of six years thereafter until
termination. The agreements terminate in the event the mine
permanently ceases to operate. (c) Commitments Commitments include
the cumulative maximum funding commitments secured by letters of
credit of the Joint Venture's environmental and participation
agreements at Aber's 40% share, before any reduction of future
reclamation activities, and future minimum annual rentals under
non-cancellable operating and capital leases for retail salons and
corporate office space, and are as follows: 2008 $ 74,725 2009
87,664 2010 88,381 2011 86,252 2012 85,665 Thereafter 153,402
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NOTE 9: Employee Benefit Plans Three Months Three Months Six Months
Six Months Ended Ended Ended Ended Expense for July 31, July 31,
July 31, July 31, the period: 2007 2006 2007 2006
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Defined benefit pension plan at Harry Winston $ 6 $ 30 $ 12 $ 60
Defined contribution plan at Harry Winston 390 90 600 180 Defined
contribution plan at the Diavik Mine 238 186 401 364
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$ 634 $ 306 $ 1,013 $ 604
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NOTE 10: Related Parties Transactions with related parties for the
six months ended July 31, 2007 include $0.9 million ($0.9 million
for the six months ended July 31, 2006) of rent relating to the New
York salon, payable to a Harry Winston employee. NOTE 11: Segmented
Information The Company operates in two segments within the diamond
industry, mining and retail, for the three months ended July 31,
2007. The mining segment consists of the Company's rough diamond
business. This business includes the 40% interest in the Diavik
group of mineral claims and the sale of rough diamonds in the
market-place. The retail segment consists of the Company's
ownership in Harry Winston. This segment consists of the marketing
of fine jewelry and watches on a worldwide basis. For the three
months ended July 31, 2007 Mining Retail Total
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Sales Canada $ 105,071 $ - $ 105,071 United States - 22,162 22,162
Europe - 21,248 21,248 Asia - 24,788 24,788 Cost of sales 46,217
35,610 81,827
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58,854 32,588 91,442 Selling, general and administrative expenses
5,861 29,340 35,201
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Earnings from operations 52,993 3,248 56,241
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Interest and financing expenses (3,982) (3,240) (7,222) Other
income 356 189 545 Foreign exchange gain (loss) (11,985) 200
(11,785)
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Segmented earnings before income taxes $ 37,382 $ 397 $ 37,779
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Segmented assets as at July 31, 2007 Canada $ 761,976 $ - $ 761,976
United States - 470,233 470,233 Other foreign countries 8,284
126,773 135,057
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$ 770,260 $ 597,006 $ 1,367,266
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Goodwill as at July 31, 2007 $ - $ 96,575 $ 96,575 Capital
expenditures $ 35,383 $ 8,556 $ 43,939 Other significant non-cash
items: Income tax recovery - Future $ (7,122) $ (222) $ (7,344)
Amortization and accretion $ 17,969 $ 2,086 $ 20,054
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For the three months ended July 31, 2006 Mining Retail Total
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Sales Canada $ 91,476 $ - $ 91,476 United States - 18,185 18,185
Europe - 14,776 14,776 Asia - 15,525 15,525 Cost of sales 43,256
25,202 68,458
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48,220 23,284 71,504 Selling, general and administrative expenses
4,373 22,798 27,171
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Earnings from operations 43,847 486 44,333
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Interest and financing expenses (2,714) (2,091) (4,805) Other
income 1,772 33 1,805 Foreign exchange gain 2,489 130 2,619
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Segmented earnings (loss) before income taxes $ 45,394 $ (1,442) $
43,952
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Segmented assets as at July 31, 2006 Canada $ 743,288 $ - $ 743,288
United States - 278,501 278,501 Other foreign countries 20,383
73,427 93,810
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$ 763,671 $ 351,928 $ 1,115,599
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Goodwill as at July 31, 2006 $ - $ 41,966 $ 41,966 Capital
expenditures $ 20,883 $ 6,331 $ 27,214 Other significant non-cash
items: Income tax expense (recovery) - Future $ 6,513 $ (1,497) $
5,016 Amortization and accretion $ 16,675 $ 1,251 $ 17,926
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Sales to one customer in the mining segment totalled $8.1 million
for the three months ended July 31, 2007 ($5.7 million for the
three months ended July 31, 2006). For the six months ended July
31, 2007 Mining Retail Total
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Sales Canada $ 187,823 $ - $ 187,823 United States - 46,503 46,503
Europe - 43,595 43,595 Asia - 36,713 36,713 Cost of sales 86,733
66,226 152,959
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101,090 60,585 161,675 Selling, general and administrative expenses
10,948 58,464 69,412
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Earnings from operations 90,142 2,121 92,263
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Interest and financing expenses (7,657) (5,697) (13,354) Other
income 1,122 336 1,458 Foreign exchange gain (loss) (25,296) 219
(25,077)
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Segmented earnings (loss) before income taxes $ 58,311 $ (3,021) $
55,290
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Segmented assets as at July 31, 2007 Canada $ 761,976 $ - $ 761,976
United States - 470,233 470,233 Other foreign countries 8,284
126,773 135,057
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$ 770,260 $ 597,006 $ 1,367,266
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Goodwill as at July 31, 2007 $ - $ 96,575 $ 96,575 Capital
expenditures $ 72,948 $ 8,556 $ 81,504 Other significant non-cash
items: Income tax recovery - Future $ (9,805) $ (861) $ (10,666)
Amortization and accretion $ 35,659 $ 3,998 $ 39,657
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For the six months ended July 31, 2006 Mining Retail Total
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Sales Canada $ 160,784 $ - $ 160,784 United States - 39,333 39,333
Europe - 31,235 31,235 Asia - 27,881 27,881 Cost of sales 82,005
50,298 132,303
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78,779 48,151 126,930 Selling, general and administrative expenses
9,160 45,306 54,466
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Earnings from operations 69,619 2,845 72,464
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Interest and financing expenses (5,511) (3,628) (9,139) Other
income 3,375 53 3,428 Foreign exchange gain 242 271 513
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Segmented earnings (loss) before income taxes $ 67,725 $ (459) $
67,266
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Segmented assets as at July 31, 2006 Canada $ 743,288 $ - $ 743,288
United States - 278,501 278,501 Other foreign countries 20,383
73,427 93,810
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$ 763,671 $ 351,928 $ 1,115,599
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Goodwill as at July 31, 2006 $ - $ 41,966 $ 41,966 Capital
expenditures $ 40,341 $ 9,017 $ 49,358 Other significant non-cash
items: Income tax expense (recovery) - Future $ 2,678 $ (1,600) $
1,078 Amortization and accretion $ 28,836 $ 2,452 $ 31,288
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Sales to one customer in the mining segment totalled $12.7 million
for the six months ended July 31, 2007 ($14.2 million for the six
months ended July 31, 2006). DATASOURCE: Aber Diamond Corporation
CONTACT: PRNewswire - - 09/10/2007
Copyright