Inscape Corporation
TSX : INQ

Inscape Corporation

March 04, 2010 18:46 ET

Inscape Corporation Announces Third Quarter Results

HOLLAND LANDING, ONTARIO--(Marketwire - March 4, 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 third quarter ended January 31, 2010:

Inscape Corporation        
Summary of Consolidated Financial Results        
(Unaudited) (in thousands except EPS)            
   
    Three Months Ended January 31,      
    2010     2009   Change  
   
Sales $ 17,909   $ 22,868   -21.7 %
Gross margin   5,293     5,398   -1.9 %
Selling, general & administrative expenses   5,219     5,523   -5.5 %
Unrealized foreign exchange loss (gain)   42     (158 )    
Interest income   (167 )   (164 )    
Income before taxes   199     197      
Income taxes   92     209      
Net income (loss) $ 107   $ (12 )    
   
Basic and diluted earnings per share $ 0.01   $ -      
   
Weighted average number of shares (in thousands)                
for basic EPS calculation   15,097     15,097      
for diluted EPS calculation   15,127     15,097      
   
   
    Nine Months Ended January 31,      
    2010     2009   Change  
   
Sales $ 52,089   $ 63,039   -17.4 %
Gross margin   13,927     14,790   -5.8 %
Selling, general & administrative expenses   15,131     17,471   -13.4 %
Unrealized foreign exchange loss (gain)   623     (1,308 )    
Interest income   (412 )   (629 )    
Loss before taxes   (1,415 )   (744 )    
Income taxes recovery   (85 )   (438 )    
Net loss $ (1,330 ) $ (306 )    
   
Basic and diluted earnings per share $ (0.09 ) $ (0.02 )    
   
Weighted average number of shares (in thousands)                
for basic EPS calculation   15,097     15,097      
for diluted EPS calculation   15,146     15,108      
                 

Commentary and Outlook

"We are pleased with the modest return to profitability in the third quarter. Sales levels remain depressed as the industry continues to experience widespread reductions in demand. Our employees and business partners continue to rise to the challenge of improving our business processes while at the same time streamlining our cost structure. In spite of the challenging sales environment, we generated positive cash flows from operations which allow us to make financial investments that continue to elevate our products to the highest possible quality levels.

During the quarter, we purchased our New York State based manufacturing facility where our wall products have been manufactured for the past 12 years. In addition to the substantial economic benefits supporting this purchase, there are substantial strategic benefits as the Company continues to expand its market position in the moveable wall segment of our industry. Our Wall division has been awarded substantial contracts for US government facilities where there is a growing need for our flexible, sustainable and cost effective moveable wall solutions.

Throughout our 120 year history, Inscape has demonstrated ability to provide creative solutions to customers. Our entire organization continues to work closely with our customers and our business partners to provide intelligent application solutions based on our integrated product offering. Despite the temporarily unfavourable industry climate, we will continue with our long- term commitment to deploy our cash resources towards products and capabilities that provide outstanding value to our customers.

We expect that sales for the fourth quarter of fiscal 2010 will be slightly lower than the third quarter of fiscal 2010." said Madan Bhayana, CEO.

Operating Performance

The third quarter of fiscal 2010 ended on January 31, 2010 had a net income of $0.1 million or 1 cent per share compared to a breakeven result in the same period of fiscal 2009. The quarter included an expense accrual of $0.5 million contractual benefits relating to the resignation of former Chief Executive Officer, which was announced in the press release in November 2009.

In January 2010 the Company exercised the purchase option under the lease agreement of the production plant at Falconer, New York State to acquire the property for $3.0 million (U.S. dollar $2.8 million). As a result of the purchase, an asset retirement obligation of $0.1 million relating to the paintline at the Falconer plant was reversed in the quarter in accordance with GAAP.

The year-to-date nine-month period ended January 31, 2010 had a net loss of $1.3 million or 9 cents per share compared to last year's net loss of $0.3 million or 2 cents per share. Current year-to-date results included an unrealized U.S. currency translation loss of $0.6 million whereas last year's results included an unrealized U.S. currency translation gain of $1.3 million. When the unrealized exchange loss and gain are excluded from both periods, current year's net loss would be $0.7 million compared to last year's net loss of $1.6 million. Net income or loss with the exclusion of unrealized currency translation losses and gains is a non-GAAP measure, which does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The purpose of disclosing this non- GAAP measure here is to separate the Company's operating results from the accounting impact of the unrealized U.S. currency translation gains or losses.

Sales for the third quarter of fiscal 2010 were 21.7% lower than the same quarter of fiscal 2009. Year-to-date sales were 17.4% behind the same period of last year. The results reflect the contraction and pricing pressure being experienced in office furniture businesses. Without the benefit of gains from the U.S. currency hedge contracts, sales in the third quarter would have declined 23% and the year-to-date sales would have been down by 21%.

The third quarter's gross margin as a percentage of sales was 29.6% compared to 23.6% in the same quarter of last year. Year-to-date gross margin rose from last year's 23.5% to current year's 26.7%. While the gross margins were depressed by pricing pressure and unfavourable overhead absorption resulting from lower sales volumes, the negative factors were more than offset by gains in currency hedges, reductions in fixed overheads and improvements in variable production costs. The third quarter also benefited by the $0.1 million reversal of asset retirement obligation discussed in the previous paragraphs. This non-recurring item contributed 0.9 percentage points to the third quarter gross margin and 0.3 percentage points to the year-to-date gross margin.

The third quarter's SG&A expenses were $0.3 million or 5.5% lower than the same quarter of last year. The variable selling expenses were $0.5 million lower resulting from lower sales volumes. The fixed SG&A expenses were $0.2 million higher because of the $0.5 million contractual benefit expense accrual for the former Chief Executive Officer. With the exclusion of this unusual item, the fixed SG&A would be $0.3 million lower than the same period of last year due to various cost control measures. As a percentage of sales, the third quarter SG&A was 29.1%, compared with 24.2% in the same quarter of last year because of current year's lower sales volumes and the contractual benefits accrual. Year-to-date SG&A expenses were $2.3 million less than the level a year ago. $1.2 million of the decrease related to variable selling expenses and $1.1 million were savings from fixed overheads. As a percentage of sales, SG&A increased from last year's 27.7% to current year's 29.0% mainly due to lower sales volumes.

The quarterly interest income was comparable to the income earned in the same quarter of last year. On a year-to-date basis, current year's interest income was less than prior year's records because last year's yield on investments started to decline only after the first quarter.

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 rate in the third quarter of fiscal 2010 was 46.2%, compared with 106.1% in the same quarter in fiscal 2009. Last year's high tax rate was the result of certain non- deductible expenses for income tax purposes and a reduction in the tax rate of loss carryforwards. Year-to-date effective income tax recovery rate was 6.0%, compared with 58.9% 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 loss carryforwards and other non-deductible items such as marked-to-market investment 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 $5.8 million and liquid short-term investments of $15.1 million. The decrease in cash and cash equivalent balance of about $3.3 million from the level at the end of the second quarter was mainly attributed to the purchase of the Falconer plant in New York State. The Company does not expect significant change in the current working capital requirements in the near-term. The cash position and credit facility provide the Company necessary capital resources to develop new products, meet all other expected financial requirements, and support business growth and acquisition opportunities.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Monday, March 8, 2010 to discuss the Company's quarterly results and to provide additional outlook on the next quarter. To participate, please call 1-800-909-4197. A replay of the conference call will also be available from Monday, March 8, 2010 after 10:45 a.m. until midnight on March 15, 2010. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21458338).

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)
    January 31     April 30
    2010     2009
ASSETS          
CURRENT          
  Cash and cash equivalents $ 5,817   $ 13,857
  Short-term investments   15,101     11,270
  Accounts receivable   10,500     11,047
  Inventory (Note 3)   4,741     4,932
  Derivative assets   5,778     -
  Income taxes receivable   574     634
  Prepaid expenses   711     845
    43,222     42,585
CAPITAL ASSETS   26,026     24,900
INTANGIBLE ASSETS   592     602
DERIVATIVE ASSETS   997     1,247
DEFERRED PENSION ASSETS   1,930     1,948
FUTURE INCOME TAX ASSETS   2,734     2,610
  $ 75,501   $ 73,892
 
LIABILITIES          
CURRENT          
  Accounts payable and accrued liabilities $ 8,978   $ 10,611
  Derivative liabilities   -     1,725
    8,978     12,336
OTHER LONG-TERM OBLIGATIONS   255     528
FUTURE INCOME TAX LIABILITIES   5,489     3,351
    14,722     16,215
 
SHAREHOLDERS' EQUITY          
SHARE CAPITAL   57,059     57,059
CONTRIBUTED SURPLUS   84     84
ACCUMULATED OTHER COMPREHENSIVE INCOME   4,455     23
RETAINED EARNINGS (DEFICIT)   (819 )   511
    60,779     57,677
  $ 75,501   $ 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 January 31,     Year-to-date Ended January 31,  
    2010     2009     2010     2009  
   
SALES $ 17,909   $ 22,868   $ 52,089   $ 63,039  
COST OF GOODS SOLD   12,616     17,470     38,162     48,249  
GROSS MARGIN   5,293     5,398     13,927     14,790  
EXPENSES                        
  Selling, general and administrative   5,219     5,523     15,131     17,471  
  Unrealized foreign exchange (gain) loss   42     (158 )   623     (1,308 )
  Interest income   (167 )   (164 )   (412 )   (629 )
    5,094     5,201     15,342     15,534  
INCOME (LOSS) BEFORE TAXES   199     197     (1,415 )   (744 )
INCOME TAX EXPENSE (RECOVERY)   92     209     (85 )   (438 )
NET INCOME (LOSS) $ 107   $ (12 ) $ (1,330 ) $ (306 )
BASIC AND DILUTED INCOME (LOSS) PER SHARE (Note 4) $ 0.01   $ 0.00   $ (0.09 ) $ (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 January 31,   Year-to-date Ended January 31,  
    2010     2009     2010     2009  
NET INCOME (LOSS) $ 107   $ (12 ) $ (1,330 ) $ (306 )
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES                        
  Unrealized gains (losses) on derivatives designated as cash flow                        
  hedges, (three-month net of taxes of $106, 2009 - $148,                        
  year-to-date net of taxes of $1,539, 2009 - $1,459)   (238 )   326     3,483     (3,198 )
  Reclassification of losses (gains) on derivatives designated as                        
  cash flow hedges to income, (three-month net of taxes of $65,                        
  2009 - $36, year-to-date net of taxes of $433, 2009 - $154)   141     (72 )   949     (310 )
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES   (97 )   254     4,432     (3,508 )
COMPREHENSIVE INCOME (LOSS) , NET OF TAXES $ 10   $ 242   $ 3,102   $ (3,814 )
   
Note - These interim financial statements have not been reviewed by an auditor                   
   
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY            
(Unaudited)(in thousands)                      
Year-to-date Ended January 31, 2010                  
    Share Capital   Contributed Surplus Accumulated Other Comprehensive Income ("AOCI") Retained Earnings (Deficit) Total AOCI and Retained Earnings   Total Shareholders' Equity
                       
BALANCE - May 1, 2009 $ 57,059 $ 84 $ 23 $ 511 $ 534 $ 57,677
Net Loss   -   -   -   (1,330)   (1,330)   (1,330)
Other Comprehensive Income   -   -   4,432   -   4,432   4,432
BALANCE - January 31, 2010 $ 57,059 $ 84 $ 4,455 $ (819) $ 3,636 $ 60,779
 
 
Year-to-date Ended January 31, 2009                      
    Share Capital   Contributed Surplus   Accumulated Other Comprehensive Income ("AOCI")   Retained Earnings   Total AOCI and Retained Earnings   Total Shareholders' Equity
BALANCE - May 1, 2008 $ 57,059 $ 84 $ 310 $ 1,851 $ 2,161 $ 59,304
Net Loss   -   -   -   (306)   (306)   (306)
Other Comprehensive Loss   -   -   (3,508)   -   (3,508)   (3,508)
BALANCE - January 31, 2009 $ 57,059 $ 84 $ (3,198) $ 1,545 $ (1,653) $ 55,490
 
 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 January 31,   Year-to-date Ended January 31,  
    2010     2009     2010     2009  
NET INFLOW (OUTFLOW) OF CASH RELATED                        
TO THE FOLLOWING ACTIVITIES:                        
OPERATING ACTIVITIES                        
  Net income (loss) $ 107   $ (12 ) $ (1,330 ) $ (306 )
  Items not affecting cash:                        
    Amortization   870     1,078     2,840     3,184  
    Pension expense   182     113     546     333  
    Unrealized loss on short-term investments held for trading   38     1     122     40  
    Future income taxes   92     71     (85 )   (438 )
    Derivative assets and liabilities   (178 )   88     (848 )   989  
    Deferred expenses and other expenses   (12 )   (88 )   (105 )   (85 )
    Stock based compensation   (13 )   42     77     (69 )
    Unrealized foreign exchange (gain) loss   42     (158 )   623     (1,308 )
    Loss (gain) on sale of capital assets   15     (20 )   15     (40 )
    1,143     1,115     1,855     2,300  
  Employer's contribution to pension funds   (196 )   (154 )   (566 )   (481 )
  Changes in non-cash operating working capital items   (511 )   (3,889 )   (1,030 )   (5,963 )
Cash generated from (used for) operating activities   436     (2,928 )   259     (4,144 )
   
INVESTING ACTIVITIES                        
  Short-term investments held for trading   4     4,267     (3,953 )   10,492  
  Additions to capital assets   (3,699 )   (974 )   (4,279 )   (2,618 )
  Proceeds from sale of capital assets   2     20     2     111  
Cash generated from (used for) investing activities   (3,693 )   3,313     (8,230 )   7,985  
Unrealized foreign exchange gain (loss) on cash and cash equivalents   14     71     (69 )   472  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (3,243 )   456     (8,040 )   4,313  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   9,060     9,983     13,857     6,126  
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,817   $ 10,439   $ 5,817   $ 10,439  
   
CASH AND CASH EQUIVALENTS CONSIST OF:                        
  Cash $ 929   $ 2,610   $ 929   $ 2,610  
  Cash equivalents   4,888     7,829     4,888     7,829  
  $ 5,817   $ 10,439   $ 5,817   $ 10,439  
   
SUPPLEMENTAL INFORMATION                        
  Income taxes paid $ 4   $ -   $ 4   $ 572  
   
Note - These interim financial statements have not been reviewed by an auditor  
   

Notes to the Interim Consolidated Financial Statements

For nine-month periods ended January 31, 2010 and January 31, 2009

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 following policy:

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

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.

Business Combinations

In January 2009, the CICA issued Handbook Section 1582, Business Combinations to align accounting for business combinations under Canadian GAAP with International Financial Reporting Standards. Effective for acquisitions completed on or after January 1, 2011, the standard requires assets and liabilities acquired in a business combination to be measured at fair value at the acquisition date and acquisition-related costs to be expensed in the period in which they are incurred. The adoption of this standard will change the accounting for future business combinations. Early adoption of the standard is permitted. The Company will adopt this standard if and when the applicable transactions take place. Consolidated Financial Statements and Non-Controlling Interests In January 2009 the CICA issued Handbook Section 1601 Consolidated Financial Statements and Section 1602, Non-Controlling Interests. Effective January 1, 2011, the standards require non- controlling interests to be classified as a component of equity, and earnings and comprehensive income to be attributed to both the parent and non-controlling interest. Early adoption of the standards is permitted. The Company will adopt these standards if and when the applicable transactions take place.

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 identified the major areas where the conversion will have impact on the Company's IFRS financial statements. These will include componentization of property, plant and equipment, actuarial gains and losses of defined benefit pension plans, impairment of assets; share- based payment, related party disclosure, provisions and foreign exchange. Areas where accounting policy choices are available have also been identified. The Company is in the process of deciding on the policy choices and quantifying potential impact of the conversion.

3. INVENTORY
 
    January 31,   April 30,
    2010   2009
Raw materials $ 3,774 $ 4,026
Work-in-progress   388   443
Finished goods   579   463
  $ 4,741 $ 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 January 31, 2010, inventories of $12,489 were expensed and included in cost of goods sold (2009 - $16,628). For the nine-month period ended January 31, 2010, inventories of $37,904 were expensed and included in cost of goods sold (2009 - $46,363).

4. EARNINGS PER SHARE

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

Three Months Ended January 31,  
Numerator   2010     2009  
   
Net income (loss) for the quarter for basic and diluted earnings per share $ 107   $ (12 )
 
Denominator   2010     2009  
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   15,126,572     15,096,817  
   
Nine Months Ended January 31,      
Numerator   2010     2009  
   
Net loss for the period for basic and diluted earnings per share $ (1,330 ) $ (306 )
 
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   15,146,029     15,108,231  
             

Stock options for 355,000 shares were not included in the computation of diluted earnings per share for the three-month period ended January 31, 2010 (2009 – 742,000) as they were anti-dilutive for the period. Stock options for 317,500 shares were not included in the computation of diluted earnings per share for the nine-month period ended January 31, 2010 (2009 – 682,000) as they were anti-dilutive for the period.

5. SEGMENT INFORMATION

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

Three Months Ended January 31,
    2010   2009
Sales from        
  United States $ 16,178 $ 19,509
  Canada   1,625 $ 3,239
  Other   106   120
  $ 17,909 $ 22,868
 
 Nine Months Ended January 31,
    2010   2009
Sales from        
  United States $ 45,541 $ 53,397
  Canada   6,251   8,697
  Other   297   945
  $ 52,089 $ 63,039
 
    January 31   April 30
    2010   2009
Capital Assets        
  Canada $ 21,658 $ 23,390
  United States   4,368   1,510
  $ 26,026 $ 24,900

In January 2010 the Company exercised the purchase option under the lease agreement of the production plant at Falconer, New York State to acquire the property for $3.0 million (U.S. dollar $2.8 million).

6. PENSION EXPENSE

 Total pension expense relating to the various defined benefit plans is $182 for the three-month period ended January 31, 2010 (2009 - $113). Total pension expense relating to the various defined benefit plans is $546 for the nine-month period ended January 31, 2010 (2009 - $333).

7. FINANCIAL INSTRUMENTS

Risk exposures of the Company's financial instruments and the related risk management are as follows:

  1. 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. Credit risks for the Company's cash and derivative assets are minimal as the counterparty to these financial instruments is a leading Canadian-based Tier 1 global financial institution. 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's cash equivalents and short-term investments as at the end of January 31, 2010 have DBRS CP ratings of R-1 low to R-1 middle and DBRS preferred shares rating of Pfd-1 superior. 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 January 31, 2010, the allowance for doubtful accounts was $168 (April 30, 2009 - $201).

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:

    January 31   April 30
    2010   2009
Cash and cash equivalents $ 5,817 $ 13,857
Short-term investments   15,101   11,270
Accounts receivable prior to provisions for doubtful accounts   10,668   11,248
Derivative assets   6,775   1,247
  $ 38,361 $ 37,622
  1. 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 January 31, 2010, the Company has a series of outstanding forward contracts due from February 2010 to June 2011 to sell a total of U.S. $49,000 (2009 – U.S. $67,000) at an average exchange rate of Canadian $1.21 (2009 – $1.15). The related total fair market value had an after-tax unrealized gain of $4,455 recorded in the accumulated other comprehensive income (2009 – after-tax unrealized loss of $3,198), of which about $3,764 is expected to be reclassified to net income within the next 12 months. Based on existing average forward contract exchange rate and the mix of U.S. dollar denominated sales and expenses, for the nine-month periods ended January 31, 2010 and January 31, 2009, 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.

  2. 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 nine months ended January 31, 2010, each 100 basis point variation in the market interest rate is estimated to result in a change of $83 in the Company's interest income (2009 – $157).

  3. 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 January 31, 2010.

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 as summarized in the following table:

    January 31     April 30
    2010     2009
Share Capital $ 57,059   $ 57,059
Contributed Surplus   84     84
Retained Earnings (Deficit)   (819 )   511
  $ 56,324   $ 57,654
           

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 January 31, 2010 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" not to 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 three-month periods ended January 31, 2010 and January 31, 2009.

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. RELATED PARTY TRANSACTION

The majority shareholder of the Company and Chairman of the Board Mr. Madan Bhayana was appointed as the Chief Executive Officer of the Company on November 30, 2009. During the quarter, compensation expense of $50 measured at the exchange amount was included in the selling, general and administrative expenses of the Consolidated Financial Statements.

Contact Information

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