Inscape Corporation
TSX : INQ

Inscape Corporation

September 08, 2009 16:30 ET

Inscape Corporation Announces First Quarter Results

HOLLAND LANDING, ONTARIO--(Marketwire - Sept. 8, 2009) - Peter Brunelle, President and 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, 2009:



Inscape Corporation
Summary of Consolidated Financial Results
(Unaudited) (in thousands except EPS)

Three Months Ended
July 31,
2009 2008 Change
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Sales $ 17,397 $ 20,262 -14.1%
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Gross margin 4,467 5,070 -11.9%
Selling, general & administrative expenses 5,026 5,947 -15.5%
Unrealized foreign exchange loss (gain) 572 (20)
Interest income (92) (284)
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Loss before taxes (1,039) (573)
Income taxes recovery (77) (210)
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Net loss $ (962) $ (363)
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Basic and diluted earnings per share $ (0.06) $ (0.02)

Weighted average number of shares (in thousands)
for basic EPS calculation 15,097 15,097
for diluted EPS calculation 15,170 15,119


Commentary and Outlook

"Our first quarter sales and profitability reflect the impact of the ongoing demand contraction within the industry versus the prior year" said Peter Brunelle, President and CEO. "This contraction has also brought with it a shift in the overall mix of our sales, away from day-to-day account business towards project business. The net result of this shift in our sales mix has been lower sales dollars realized per unit, pressuring our gross margins and profitability. As such we remain highly focused on reducing our fixed cost structure and we are pleased to see improved leveraging of our gross margin versus both the prior year and prior quarter despite the aggressive discounting environment and lower sales volume. We are encouraged by the early market response to our new products which were introduced for sale over the course of the last two quarters. Ultimately, our near-term success will be heavily influenced by the momentum of these products with end-users and the architectural and design community. We expect that sales for the second quarter of fiscal 2010 will be lower than the second quarter of fiscal 2009 and in line with the first quarter of fiscal 2010 dependent on specific project timing" said Mr. Brunelle.

Operating Performance

The first quarter of fiscal 2010 ended on July 31, 2009 had a net loss of $1.0 million, compared to a net loss of $0.4 million in the same period of fiscal 2009. Earnings per share declined from a loss of $0.02 per share a year ago to a loss of $0.06 per share. The current quarter's net loss included an unrealized currency translation loss of $0.6 million, which arose from the translation of the U.S. dollar denominated monetary net assets when the exchange rate fell from Canadian $1.19 at the beginning of the quarter to $1.08 at the end of the period. Interest income during the quarter was much less than the same quarter in last year primarily due to lower realized investment returns. On an operating basis that excludes interest income and foreign exchange gains and losses; the loss in Q1, 2010 would be $0.6 million versus a loss of $0.9 million in Q1 2009. This year-over-year operating basis comparison highlights the importance of the Company's fixed cost reductions and process improvement activities during a very weak industry demand environment.

Sales for the first quarter of fiscal 2010 fell 14.1% from $20.3 million in prior year to $17.4 million in current year, reflecting the impact of a widespread industry decline. Without the benefit of higher hedged exchange rates sales in the first quarter would have decreased 20.7% from last year's quarterly result.

In spite of the significant drop in sales volume, the first quarter's gross margin as a percentage of sales increased from last year's 25.0% to current year's 25.7%. The gross margin benefited from the improvement in the U.S. dollar hedge rate, the Company's initiatives in reducing fixed overhead and more efficient deployment of our labour resources. The benefits were offset by unfavourable overhead absorption due to lower volume and lower margin yields on certain projects.

SG&A as a percentage of sales was 28.9% compared to 29.4% in the same quarter of last year. In terms of dollars, it was $0.9 million or 15.5% lower. In addition to lower variable selling expenses related to decreased sales, more than half of the reduction in SG&A was attributable to reduced fixed and discretionary expenses. These lower expenditure levels reflect the Company's intention to direct its funds to those areas that offer the highest potential returns to our customers and our shareholders.

Effective income tax recovery rate in the first quarter of 2010 was 7.4%, compared to 36.6% in last year. The substantially lower recovery rate was attributable to the unrealized translation loss of $0.6 million, which was non-tax recoverable for the U.S. tax purposes. Tax recovery for the Canadian side of the business was down as well since the Canadian corporate tax rate has been reduced. Fluctuations in the effective tax rate are also attributable to differences in the tax rates levied by different jurisdictions and variations in adjustments between accounting income and taxable income.

At the end of the quarter, the Company remained debt free and had cash and cash equivalents of $11.8 million and liquid short-term investments of $11.5 million.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Wednesday, September 9, 2009 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-897-4662. A replay of the conference call will also be available from Wednesday, September 9, 2009 after 10:30 a.m. until midnight on September 16, 2009. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21434352).

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 438,500 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)
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July 31 April 30
2009 2009
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ASSETS
CURRENT
Cash and cash equivalents $ 11,795 $ 13,857
Short-term investments 11,476 11,270
Accounts receivable 8,851 11,047
Inventory (Note 3) 4,753 4,932
Derivative assets 3,579 -
Income taxes receivable 574 634
Prepaid expenses 1,105 845
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42,133 42,585
CAPITAL ASSETS 24,237 24,900
INTANGIBLE ASSETS 601 602
DERIVATIVE ASSETS 3,934 1,247
DEFERRED PENSION ASSETS 1,874 1,948
FUTURE INCOME TAX ASSETS 2,649 2,610
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$ 75,428 $ 73,892
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LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 7,416 $ 10,611
Derivative liabilities - 1,725
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7,416 12,336
OTHER LONG-TERM OBLIGATIONS 513 528
FUTURE INCOME TAX LIABILITIES 5,689 3,351
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13,618 16,215
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SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 57,059 57,059
CONTRIBUTED SURPLUS 84 84
ACCUMULATED OTHER COMPREHENSIVE INCOME 5,118 23
RETAINED EARNINGS (DEFICIT) (451) 511
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61,810 57,677
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$ 75,428 $ 73,892
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See accompanying notes to the financial statements



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(in thousands, except per share amounts)
----------------------------------------------------------------------------
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Three Months Ended July 31,
2009 2008
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SALES $ 17,397 $ 20,262
COST OF GOODS SOLD 12,930 15,192
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GROSS MARGIN 4,467 5,070

EXPENSES
Selling, general and administrative 5,026 5,947
Unrealized foreign exchange (gain) loss 572 (20)
Interest income (92) (284)
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5,506 5,643
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LOSS BEFORE TAXES (1,039) (573)
INCOME TAX RECOVERY (77) (210)
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NET LOSS $ (962) $ (363)
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BASIC AND DILUTED LOSS PER SHARE (Note 4) $ (0.06) $ (0.02)
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See accompanying notes to the financial statements



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)(in thousands)
----------------------------------------------------------------------------
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Three Months Ended
July 31,
2009 2008
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NET LOSS $ (962) $ (363)
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Unrealized gains (losses) on derivatives designated as cash
flow hedges, net of taxes of $2,053, (2008 - $60) 4,643 (132)

Reclassification of losses (gains) on derivatives designated
as cash flow hedges to income, net of taxes of $206,
(2008 - $81) 452 (163)
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES 5,095 (295)
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COMPREHENSIVE INCOME (LOSS), NET OF TAXES $4,133 $ (658)
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See accompanying notes to the financial statements



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)(in thousands)
Three Months Ended July 31, 2009
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Accumu-
lated
Other
Compreh- Total AOCI Total
Contri- ensive Retained and Share-
Share buted Income Earnings Retained holders'
Capital Surplus ("AOCI") (Deficit) Earnings Equity
----------------------------------------------------------------------------
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BALANCE - May
1, 2009 $ 57,059 $ 84 $ 23 $ 511 $ 534 $ 57,677
Net Loss - - - (962) (962) (962)
Other
Comprehensive
Income - - 5,095 - 5,095 5,095
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BALANCE - July
31, 2009 $ 57,059 $ 84 $ 5,118 $ (451) $ 4,667 $ 61,810
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Three Months Ended July 31, 2008
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Accumu-
lated
Other
Compreh- Total AOCI Total
Contri- ensive and Share-
Share buted Income Retained Retained holders'
Capital Surplus ("AOCI") Earnings Earnings Equity
----------------------------------------------------------------------------
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BALANCE - May
1, 2008 $ 57,059 $ 84 $ 310 $ 1,851 $ 2,161 $ 59,304
Net Loss - - - (363) (363) (363)
Other
Comprehensive
Loss - - (295) - (295) (295)
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BALANCE - July
31, 2008 $ 57,059 $ 84 $ 15 $ 1,488 $ 1,503 $ 58,646
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See accompanying notes to the financial statements



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(in thousands)
----------------------------------------------------------------------------
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Three Months Ended July 31,
2009 2008
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NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES:

OPERATING ACTIVITIES
Net loss $ (962) $ (363)
Items not affecting cash:
Amortization 965 1,047
Pension expense 180 114
Unrealized loss on short-term investments held
for trading 45 55
Future income taxes (77) (126)
Derivative assets and liabilities (636) 206
Deferred expenses and other expenses (90) (39)
Stock based compensation 49 17
Unrealized foreign exchange (gain) loss 572 (20)
Gain on sale of capital assets - (1)
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46 890
Employer's contribution to pension funds (143) (164)
Changes in non-cash operating working capital
items (1,330) (3,146)
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Cash used for operating activities (1,427) (2,420)
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INVESTING ACTIVITIES
Short-term investments held for trading (251) 3,261
Additions to capital assets (301) (617)
Proceeds from sale of capital assets - 44
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Cash generated from (used for) investing
activities (552) 2,688
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Unrealized foreign exchange loss on cash and
cash equivalents (83) (6)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,062) 262
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,857 6,126
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,795 $ 6,388
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CASH AND CASH EQUIVALENTS CONSIST OF:
Cash $ 1,523 $ 2,226
Cash equivalents 10,272 4,162
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$ 11,795 $ 6,388
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SUPPLEMENTAL INFORMATION
Income taxes paid (received) $ (1) $ 606

See accompanying notes to the financial statements


Notes to the Interim Consolidated Financial Statements

For three-month periods ended July 31, 2009 and July 31, 2008

Unaudited (in thousands except share and per share amounts)

1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements (the "interim consolidated financial statements") have been prepared in accordance with Canadian generally accepted accounting principles. These interim financial statements do not include all of the disclosure requirements for annual consolidated financial statements, and accordingly, these statements should be read in conjunction with the consolidated financial statements for the year ended April 30, 2009 including the notes thereto.

2. ACCOUNTING POLICIES

Change in 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, 2009, except for the new accounting policies as noted below.

Intangible Assets

Section 3064 "Goodwill and Intangible Assets" - This section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. An intangible asset is an identifiable non-monetary asset without physical substance. The asset is recognized at cost if the owner entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The cost of intangible assets with finite useful lives is amortized and is subject to annual or more frequent impairment testing. The adoption of this standard had no impact on the Company's financial statements.

Future Accounting Policy Changes

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 years beginning May 1, 2011.

The Company has a three-phase IFRS changeover plan:

Phase 1: in fiscal year 2009 the Company identified at high level major differences between Canadian GAAP and IFRS. Based upon the current state of IFRS and Canadian GAAP, a small number of topics will have impacts on the Company's consolidated financial statements. These will include componentization of property, plant and equipment, actuarial gains and losses of defined benefit pension plans, impairment of long-lived assets: as well as, a significant increase in note disclosure.

Phase 2: in fiscal year 2010 the Company will select IFRS accounting polices and adoption methods (IFRS 1) with external auditors' comments and Audit Committee's approval. This will include developing skeleton financial statements and notes, identifying and resolving possible data collection and reporting issues, as well as, providing training of personnel.

Phase 3: in fiscal year 2011, for comparative purposes to be used in fiscal year 2012 consolidated financial statements, the Company will prepare fiscal year 2011 opening balance sheet under IFRS, prepare quarterly financial statements under Canadian GAAP and IFRS, compile fiscal 2012 budget under IFRS and communicate with stakeholders the impact of IFRS.

3. INVENTORY



July 31, April 30,
2009 2009
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Raw materials $ 3,791 $ 4,026
Work-in-process 355 444
Finished goods 607 463
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$ 4,753 $ 4,933
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Raw materials are measured at the lower of cost and replacement cost, determined on a first-in, first-out basis. Work-in-progress and finished goods are measured at the lower of cost and net realizable value, determined on a first-in, first-out basis. For the three-month period ended July 31, 2009, inventories of $12,931 were expensed and included in cost of goods sold (2008 - $14,672).

4. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:



July 31, April 30,
2009 2009
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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,
2009 - 5,345,881) $ 375 $ 375
9,750,936 Class B subordinated voting shares (April
30, 2009 - 9,750,936) 56,684 56,684
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$ 57,059 $ 57,059
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Three Months Ended July 31,
Numerator 2009 2008
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Net loss for the quarter for basic and diluted
earnings per share $ (962) $ (363)

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Denominator 2009 2008
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Weighted average number of shares outstanding
for basic earnings per share 15,096,817 15,096,817
Weighted average number of shares outstanding
for diluted earnings per share 15,170,348 15,118,752
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Stock options for 642,500 shares were not included in the computation of diluted earnings per share for the three-month period ended July 31, 2009 as they were anti-dilutive for the period (2008 - 534,500).

5. 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,
2009 2008
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Sales from
United States $ 15,083 $ 16,841
Canada 2,258 2,888
Other 56 533
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$ 17,397 $ 20,262
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July 31 April 30
2009 2009
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Capital Assets
Canada $ 22,724 $ 23,390
United States 1,513 1,510
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$ 24,237 $ 24,900
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6. PENSION EXPENSE

Total pension expense relating to the various defined benefit plans is $180 for the three-month period ended July 31, 2009 (2008 - $114).

7. 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, and trade accounts receivable 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. Management reports to the Board of Directors quarterly the Company's investment portfolios to show their compliance with the investment policy. 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 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, 2009, the allowance for doubtful accounts was $175 (April 30, 2009 - $201).

(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 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, 2009, the Company has a series of outstanding forward contracts due from August 2009 to May 2011 to sell a total of U.S. $67,000 (2008 - U.S. $20,000) at an average exchange rate of Canadian $1.19 (2008 - $1.03). The related total fair market value had an unrealized gain of $7,513 (2008 - unrealized gain of $44).Based on existing average forward contract exchange rate and the mix of U.S. dollar denominated sales and expenses, for the three-month periods ended July 31, 2009 and July 31, 2008, variation in U.S. dollar spot exchange rate has no material impact on the Company's net earnings because in both periods the unhedged U.S. dollar sales almost offset U.S. dollar expenses.

(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 staggering maturity dates. For the three months ended July 31, 2009, each 100 basis point variation in the market interest rate is estimated to result in a change of $14 in the Company's net income (2008 - $43).

(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 minimal as its cash and cash equivalents and short-term investments are consistently in excess of the financial liabilities. The Company is debt-free and has a line of credit of $10,000 which remained unused as at July 31, 2009.

8. 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. 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.

9. 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 $10,000 or 75% of receivable values minus 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 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, 2009 and April 30, 2009.

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 is not less than $50 million at any time, measured quarterly

The Company was in compliance with these covenants during the three-month periods ended July 31, 2009 and July 31, 2008.

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.

Contact Information

  • Inscape Corporation
    Kent Smallwood CA
    Chief Financial Officer
    905-836-7676
    905-836-5037 (FAX)