Inscape Corporation
TSX : INQ

Inscape Corporation

December 03, 2009 17:27 ET

Inscape Corporation Announces Second Quarter Results

HOLLAND LANDING, ONTARIO--(Marketwire - Dec. 3, 2009) - 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 second quarter ended October 31, 2009:



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

Three Months Ended October 31,
2009 2008 Change
------------------------------------------------------------------ --------

Sales $ 16,783 $ 19,909 -15.7%
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Gross margin 4,167 4,322 -3.6%
Selling, general &
administrative expenses 4,886 6,001 -18.6%
Unrealized foreign exchange
loss (gain) 9 (1,130)
Interest income (153) (181)
------------------------------------------------------------------
Loss before taxes (575) (368)
Income taxes recovery (100) (437)
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Net income (loss) $ (475) $ 69
------------------------------------------------------------------
------------------------------------------------------------------

Basic and diluted earnings
per share $ (0.03) $ -

Weighted average number of shares
(in thousands)
for basic EPS calculation 15,097 15,097
for diluted EPS calculation 15,200 15,098



Six Months Ended October 31,
2009 2008 Change
------------------------------------------------------------------ --------

Sales $ 34,180 $ 40,171 -14.9%
------------------------------------------------------------------
Gross margin 8,634 9,392 -8.1%
Selling, general &
administrative expenses 9,912 11,948 -17.0%
Unrealized foreign exchange
loss (gain) 581 (1,150)
Interest income (245) (465)
------------------------------------------------------------------
Loss before taxes (1,614) (941)
Income taxes recovery (177) (647)
------------------------------------------------------------------
Net loss $ (1,437) $ (294)
------------------------------------------------------------------
------------------------------------------------------------------

Basic and diluted earnings
per share $ (0.10) $ (0.02)

Weighted average number of shares
(in thousands)
for basic EPS calculation 15,097 15,097
for diluted EPS calculation 15,197 15,099


Commentary and Outlook

"Our second quarter results reflect the continued softness in industry demand. Despite the overall sales contraction, we are pleased with the market acceptance of two recent product introductions, Scala and Planna. These products have received multiple design awards and have contributed positively to our business results. We are further encouraged by the industry recognition given to our newest product introduction, Tisch, which is an innovative, flexible benching product designed to meet evolving work styles. Our employees have diligently risen to the challenge of reducing our cost structure while strengthening our ability to serve customers, allowing us to deliver improved year-over-year operating results despite the lower sales volume. We expect that sales for the third quarter of fiscal 2010 will be higher than the second quarter of fiscal 2010, yet lower than the third quarter of fiscal 2009" said Mr. Bhayana.

Operating Performance

The second quarter of fiscal 2010 ended on October 31, 2009 had a net loss of $0.5 million or 3 cents per share compared to a breakeven result in the same period of fiscal 2009. Last year's quarter benefited from an unrealized U.S. currency translation gain of $1.1 million. The six-month period ended October 31, 2009 had a net loss of $1.4 million compared to a net loss of $0.3 million last year. Earnings per share decreased from a loss of 2 cents per share a year ago to 10 cents per share in the first six months of fiscal 2010; however, the current year's net loss included an unrealized U.S. currency translation loss of $0.6 million whereas the prior year's result included an unrealized U.S. currency translation gain of $1.2 million. With the exclusion of the unrealized loss and gain from both periods, current year's net loss would be $0.9 million compared to last year's net loss of $1.4 million, representing an improvement of about 40%. This non-GAAP measure is presented here to segregate the accounting impact of the unrealized U.S. currency translation gain/loss from the financial results of the Company's operations.

Sales for the second quarter of fiscal 2010 were 15.7% lower than the same quarter of fiscal 2009. Year-to-date sales were 14.9% behind the same period of last year. The declines reflect the adverse impact of the economy on the office furniture industry and the resulting pressure on selling prices. Without the benefit of gains from the U.S. currency hedge contracts, sales in the second quarter would have declined 18.7% from last year's quarterly result and the year-to-date sales would have been down by 19.7% from the same period of last year.

The second quarter's gross margin as a percentage of sales was 24.8% compared to 21.7% in the same quarter of last year. Year-to-date gross margin rose from last year's 23.4% to current year's 25.3%. Despite a decline in sales volume and lower net prices, gross margin increased due to improvements in variable production costs, reduction in fixed overheads and gains from U.S. currency hedge contracts.

SG&A as a percentage of sales was 29.1%, compared with 30.1% in the same quarter of last year. Year-to-date SG&A as a percentage of sales was 29.0% which is slightly lower than last year's 29.7%. In dollar terms, the six-month period SG&A was $2.0 million or 17% lower than the year before. In addition to lower variable selling expenses as a result of lower sales, more than half of the saving in SG&A was attributable to reduced fixed and discretionary expenses.

Both quarterly and year-to-date interest income was lower than the prior year due to lower yields on short-term investments.

Fluctuations in the effective tax rate are attributable to differences in the tax rates levied by different jurisdictions and variations in adjustments between accounting income and taxable income. Effective income tax recovery rate in the second quarter of fiscal 2010 was 17.4%, compared with 118.8% in the same quarter in fiscal 2009. Year-to-date effective income tax recovery rate was 11.0%, compared with 68.8% in last year. The substantially lower overall tax rates in the current year were attributable to the non-taxable unrealized U.S. currency translation loss for U.S. tax purposes, year-over-year reduction in the enacted tax rates for the Canadian entities and other non-taxable items such as mark-to-market investment gains or losses of the Company's short-term investments.

At the end of the quarter, the Company remained debt free and had cash and cash equivalents of $9.1 million and liquid short-term investments of $15.1 million. The cash position and credit facility provide the Company necessary capital resources to develop new products, contribute to the pension plans, meet all other expected financial requirements and finance business growth and acquisition opportunities.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Friday, December 4, 2009 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-919-8049. A replay of the conference call will also be available from Friday, December 4, 2009 after 10:45 a.m. until midnight on December 11, 2009. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21441778).

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)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
October 31 April 30
2009 2009
----------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 9,060 $ 13,857
Short-term investments 15,143 11,270
Accounts receivable 9,550 11,047
Inventory (Note 3) 5,090 4,932
Derivative assets 3,916 -
Income taxes receivable 576 634
Prepaid expenses 964 845
----------------------------------------------------------------------------
44,299 42,585
CAPITAL ASSETS 23,510 24,900
INTANGIBLE ASSETS 600 602
DERIVATIVE ASSETS 2,820 1,247
DEFERRED PENSION ASSETS 1,920 1,948
FUTURE INCOME TAX ASSETS 2,793 2,610
----------------------------------------------------------------------------
$ 75,942 $ 73,892
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES
CURRENT
Accounts payable and accrued
liabilities $ 9,134 $ 10,611
Derivative liabilities - 1,725
----------------------------------------------------------------------------
9,134 12,336
OTHER LONG-TERM OBLIGATIONS 559 528
FUTURE INCOME TAX LIABILITIES 5,480 3,351
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15,173 16,215
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 57,059 57,059
CONTRIBUTED SURPLUS 84 84
ACCUMULATED OTHER COMPREHENSIVE INCOME 4,552 23
RETAINED EARNINGS (DEFICIT) (926) 511
----------------------------------------------------------------------------
60,769 57,677
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$ 75,942 $ 73,892
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note - These interim financial statements have not been reviewed
by an auditor



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(in thousands, except per share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended Year-to-date Ended
October 31, October 31,
2009 2008 2009 2008
----------------------------------------------------------------------------

SALES $ 16,783 $ 19,909 $ 34,180 $ 40,171
COST OF GOODS SOLD 12,616 15,587 25,546 30,779
----------------------------------------------------------------------------
GROSS MARGIN 4,167 4,322 8,634 9,392

EXPENSES
Selling, general and
administrative 4,886 6,001 9,912 11,948
Unrealized foreign exchange
(gain) loss 9 (1,130) 581 (1,150)
Interest income (153) (181) (245) (465)
----------------------------------------------------------------------------
4,742 4,690 10,248 10,333
----------------------------------------------------------------------------
LOSS BEFORE TAXES (575) (368) (1,614) (941)
INCOME TAX RECOVERY (100) (437) (177) (647)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ (475) $ 69 $ (1,437) $ (294)
----------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
SHARE (Note 4) $ (0.03) $ 0.00 $ (0.10) $ (0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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 Year-to-date Ended
October 31, October 31,
2009 2008 2009 2008
----------------------------------------------------------------------------
NET INCOME (LOSS) $ (475) $ 69 $ (1,437) $ (294)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAXES
Unrealized gains (losses) on
derivatives designated as
cash flow hedges, (three-month
net of taxes of $408 2008 -
$1,547, year-to-date net of
taxes of $1,645, 2008 -
$1,607) (922) (3,392) 3,721 (3,524)

Reclassification of losses
(gains) on derivatives
designated as cash flow hedges
to income, (three-month net of
taxes of $162, 2008 - $37,
year-to-date net of taxes of
$368, 2008 - $118) 356 (75) 808 (238)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAXES (566) (3,467) 4,529 (3,762)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS),
NET OF TAXES $ (1,041) $ (3,398) $ 3,092 $ (4,056)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note - These interim financial statements have not been reviewed by
an auditor



INSCAPE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)(in thousands)
Year-to-date Ended October 31, 2009
----------------------------------------------------------------------------
Accumulated
Other
Share Capital Contributed Comprehensive
Surplus Income
("AOCI")
----------------------------------------------------------------------------
BALANCE - May 1, 2009 $ 57,059 $ 84 $ 23
Net Loss - - -
Other Comprehensive Income - - 4,529
----------------------------------------------------------------------------
BALANCE - October 31, 2009 $ 57,059 $ 84 $ 4,552
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----------------------------------------------------------------------------


----------------------------------------------------------------------------
Retained Total AOCI Total
Earnings and Retained Shareholders'
(Deficit) Earnings Equity
----------------------------------------------------------------------------
BALANCE - May 1, 2009 $ 511 $ 534 $ 57,677
Net Loss (1,437) (1,437) (1,437)
Other Comprehensive Income - 4,529 4,529
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BALANCE - October 31, 2009 $ (926) $ 3,626 $ 60,769
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Year-to-date Ended October 31, 2008
----------------------------------------------------------------------------
Accumulated
Other
Share Capital Contributed Comprehensive
Surplus Income
("AOCI")
----------------------------------------------------------------------------
BALANCE - May 1, 2008 $ 57,059 $ 84 $ 310
Net Loss - - -
Other Comprehensive Loss - - (3,762)
----------------------------------------------------------------------------
BALANCE - October 31, 2008 $ 57,059 $ 84 $ (3,452)
----------------------------------------------------------------------------
----------------------------------------------------------------------------



----------------------------------------------------------------------------
Retained Total AOCI Total
Earnings and Retained Shareholders'
Earnings Equity
----------------------------------------------------------------------------
BALANCE - May 1, 2008 $ 1,851 $ 2,161 $ 59,304
Net Loss (294) (294) (294)
Other Comprehensive Loss - (3,762) (3,762)
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BALANCE - October 31, 2008 $ 1,557 $ (1,895) $ 55,248
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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 Year-to-date Ended
October 31, October 31,
2009 2008 2009 2008
----------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH
RELATED TO THE FOLLOWING
ACTIVITIES:

OPERATING ACTIVITIES
Net income (loss) $ (475) $ 69 $ (1,437) $ (294)
Items not affecting cash:
Amortization 1,005 1,059 1,970 2,106
Pension expense 184 106 364 220
Unrealized loss on short-term
investments held for trading 39 (16) 84 39
Future income taxes (100) (383) (177) (509)
Derivative assets and
liabilities (34) 695 (670) 901
Deferred expenses and other
expenses (3) 42 (93) 3
Stock based compensation 41 (128) 90 (111)
Unrealized foreign exchange
(gain) loss 9 (1,130) 581 (1,150)
Gain on sale of capital assets - (19) - (20)
----------------------------------------------------------------------------
666 295 712 1,185
Employer's contribution to
pension funds (227) (163) (370) (327)
Changes in non-cash operating
working capital items 811 1,072 (519) (2,074)
----------------------------------------------------------------------------
Cash generated from (used for)
operating activities 1,250 1,204 (177) (1,216)
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Short-term investments held
for trading (3,706) 2,964 (3,957) 6,225
Additions to capital assets (279) (1,027) (580) (1,644)
Proceeds from sale of capital
assets - 47 - 91
----------------------------------------------------------------------------
Cash generated from (used for)
investing activities (3,985) 1,984 (4,537) 4,672
----------------------------------------------------------------------------
Unrealized foreign exchange
loss on cash and cash
equivalents - 407 (83) 401
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (2,735) 3,595 (4,797) 3,857
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 11,795 6,388 13,857 6,126
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CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 9,060 $ 9,983 $ 9,060 $ 9,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS
CONSIST OF:
Cash $ 1,842 $ 5,182 $ 1,842 $ 5,182
Cash equivalents 7,218 4,801 7,218 4,801
----------------------------------------------------------------------------
$ 9,060 $ 9,983 $ 9,060 $ 9,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------

SUPPLEMENTAL INFORMATION
Income taxes paid (received) $ (1) $ - $ (1) $ 572

Note - These interim financial statements have not been reviewed by
an auditor



Notes to the Interim Consolidated Financial Statements
For three-month periods ended October 31, 2009 and October 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.

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 conduct quantitative impact analysis of adopting IFRS, select IFRS accounting polices and adoption methods (IFRS 1) with external auditors' comments and Audit Committee's approval, develop financial statements and notes mock-ups, provide training of personnel, identify and resolve possible data collection and reporting issues.

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.

Financial Instruments - Disclosures

In June 2009, the CICA amended CICA HB 3862 - Financial Instruments - Disclosures, which adopted the amendments issued in March 2009 by the International Accounting Standards Boards (IASB) to IFRS 7 - Financial Instruments: Disclosures. The amendments enhance disclosures about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk, of financial instruments. The amendments are effective for annual financial statements for fiscal years ending after September 30, 2009, with early adoption permitted. The Company is assessing the potential impact of the amendments to this standard.

3. INVENTORY



October 31, April 30,
2009 2009
----------------------------------------------------------------------------
Raw materials $ 4,095 $ 4,026
Work-in-process 358 443
Finished goods 637 463
----------------------------------------------------------------------------
$ 5,090 $ 4,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 October 31, 2009, inventories of $12,484 were expensed and included in cost of goods sold (2008 - $15,063). For the six-month period ended October 31, 2009, inventories of $25,415 were expensed and included in cost of goods sold (2008 - $29,735).

4. EARNINGS PER SHARE



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

Three Months Ended October 31,
Numerator 2009 2008
----------------------------------------------------------------------------

Net income (loss) for the quarter for basic
and diluted earnings per share $ (475) $ 69

----------------------------------------------------------------------------
----------------------------------------------------------------------------


Denominator 2009 2008
----------------------------------------------------------------------------
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 15,200,240 15,098,059
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six Months Ended October 31,
Numerator 2009 2008
----------------------------------------------------------------------------

Net loss for the period for basic and diluted
earnings per share $ (1,437) $ (294)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Denominator
----------------------------------------------------------------------------
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 15,197,158 15,099,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock options for 642,500 shares were not included in the computation of diluted earnings per share for the three-month and six-month periods ended October 31, 2009 as they were anti-dilutive for the period (2008 - 727,000).

5. SEGMENT INFORMATION




The Company operates under one reporting segment, which is the design and
manufacture of office systems and furniture.

Three Months Ended October 31,
2009 2008
----------------------------------------------------------------------------
Sales from
United States $ 14,280 $ 17,047
Canada 2,368 $ 2,570
Other 135 292
----------------------------------------------------------------------------
$ 16,783 $ 19,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six Months Ended October 31,
2009 2008
----------------------------------------------------------------------------
Sales from
United States $ 29,363 $ 33,888
Canada 4,626 5,458
Other 191 825
----------------------------------------------------------------------------
$ 34,180 $ 40,171
----------------------------------------------------------------------------
----------------------------------------------------------------------------

October 31 April 30
2009 2009
----------------------------------------------------------------------------
Capital Assets
Canada $ 22,049 $ 23,390
United States 1,461 1,510
----------------------------------------------------------------------------
$ 23,510 $ 24,900
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. PENSION EXPENSE

Total pension expense relating to the various defined benefit plans is $184 for the three-month period ended October 31, 2009 (2008 - $106). Total pension expense relating to the various defined benefit plans is $364 for the six-month period ended October 31, 2009 (2008 - $220).

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 October 31, 2009, the allowance for doubtful accounts was $173 (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 October 31, 2009, the Company has a series of outstanding forward contracts due from November 2009 to June 2011 to sell a total of U.S. $58,000 (2008 - U.S. $65,000) at an average exchange rate of Canadian $1.20 (2008 - $1.12). The related total fair market value had an unrealized gain of $6,735 (2008 - unrealized loss of $5,023). Based on existing average forward contract exchange rate and the mix of U. S. dollar denominated sales and expenses, for the six-month periods ended October 31, 2009 and October 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 six months ended October 31, 2009, each 100 basis point variation in the market interest rate is estimated to result in a change of $64 in the Company's net income (2008 - $74).

(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 October 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 can adjust the amount of any 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 this 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 this facility as at October 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 October 31, 2009 and October 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.

10. SUBSEQUENT EVENT

On November 30, 2009 the Board of Directors announced the resignation of Mr. Peter Brunelle, the President and Chief Executive Officer. The Chairman of the Board Mr. Madan Bhayana has been appointed Chief Executive Officer to provide continuity and ensure an orderly transition. Pre-tax contractual benefits of about $470 for Mr. Brunelle were accrued in the Company's November 2009 financial statements.

Contact Information

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