Inscape Corporation
TSX : INQ

Inscape Corporation

September 12, 2005 16:30 ET

Inscape Corporation Announces First Quarter Results

HOLLAND LANDING, ONTARIO--(CCNMatthews - Sept. 12, 2005) - Peter Brunelle, President and Chief Executive Officer of Inscape Corporation (TSX:INQ), a leading designer, manufacturer and distributor of office furniture solutions, announced the following financial results for the quarter ended July 31, 2005 at the Company's Annual General Meeting, held today at the Exchange Tower, 130 King Street West, Toronto, Ontario:



INSCAPE
Summary of Financial Results
(millions, except EPS and number of shares)

3-Months 3-Months
Ended Ended
July 31, July 31,
2005 2004
(Q1, Fiscal (Q1, Fiscal
2006) 2005) Change
-------------------------------
Sales $ 23.5 $ 21.8 7.6%
Gross Margin 5.4 5.0 7.9%
Selling, General & Administrative expenses 6.2 7.1 -13.3%
Net Income/(loss) (0.4) (1.2) 64.5%
Earnings Per Share (EPS) $ (0.03) $ (0.08)

Weighted average number of shares 15,097 15,097
(in thousands)


Commentary and Outlook

"I am encouraged by the positive momentum being developed within the organization and by the improvement in our financial results during the first quarter", said Peter Brunelle, CEO of Inscape Corporation. "As the year unfolds we will diligently focus our efforts and resources on development of our core product categories and building our distribution, both of which are fundamental to sustaining growth and future profitability."

Inscape expects its shipments for the second quarter of fiscal 2006 to be higher than the second quarter of fiscal 2005. However, as the exchange rate used to translate U.S. sales during the second quarter of fiscal 2006 will be lower than the rate used in fiscal 2005, reported sales for the second quarter of fiscal 2006 are expected to be similar to fiscal 2005, despite this anticipated higher level of shipments.

Operating Performance

The level of shipments for the first quarter of fiscal 2006 was approximately 16% higher than the same period of fiscal 2005, however due to the lower exchange rate used to translate fiscal 2006 U.S. sales, reported sales were up by only 7.6%. This improvement reflects the general recovery in the office furniture industry and the Company's initiatives to increase sales.

Gross margin as a percentage of sales for the first quarter of fiscal 2006 was similar to the same quarter of fiscal 2005. The unfavourable impact of the weaker U.S. dollar and rising freight costs was offset by favourable overhead absorption as a result of higher sales volume and the favourable impact of the Company's cost reduction initiatives. Inscape continues to adjust its business to the realities of a weaker U.S. dollar.

Selling, general and administrative ("S,G&A") expenses during the first quarter of fiscal 2006 were $0.9 million lower than the same quarter of fiscal 2005. Although during the current quarter, the Company incurred higher variable selling expenses associated with the higher level of sales, overall S,G&A expenses were lower due to the cost reduction initiatives implemented by the Company and the favourable effect of the weaker U.S. dollar on U.S. dollar denominated expenses.

Despite the loss incurred during the quarter, Inscape was able to generate positive cash flow from operations, prior to changes in non-cash operating working capital. Inscape's balance sheet with no debt and cash balances of $17.3 million remains strong.

Quarterly Dividend

Simultaneous with the announcement of the Company's quarterly results, the Board of Directors declared an 11 cent dividend payable on September 29, 2005 to all shareholders of record as of September 23, 2005.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Tuesday, September 13, 2005, to discuss the Company's first quarter results and to provide additional outlook on the second quarter of fiscal 2006. To participate, please call 1-800-818-6210. A replay of the conference call will also be available from Tuesday, September 13, 2005 after 10:15 a.m. until midnight on Tuesday, September 20, 2005. To access the rebroadcast, please dial 1-800-558-5253. (Reservation Number 21259105).

Forward-Looking Statements

Certain of the above statements are forward-looking statements that involve risks and uncertainties. Actual results, particularly those achieved during the remainder of the fiscal year, 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 during the remainder of the fiscal year. 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.$ 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 distributor of high quality office furniture headquartered in Holland Landing, Ontario, Canada. The Company offers a wide array of highly innovative and integrated product solutions that effectively and efficiently landscape modern office interiors, including moveable walls, systems, storage products, and ergonomic work tools. Company operations are based across two manufacturing facilities totalling approximately 485,000 square feet.



Consolidated Balance Sheets
(all amounts in thousands of dollars)
April 30, April 30,
2005 2005
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Assets
Current
Cash and cash equivalents $17,312 $19,978
Accounts receivable 10,020 11,443
Inventory 6,604 6,432
Prepaid expenses 1,103 860
Income taxes receivable 643 296
--------- ---------
35,682 39,009

Capital assets 34,074 34,775
Other assets 1,388 1,398
Future income tax asset 6,000 5,971
--------- ---------

$77,144 $81,153
--------- ---------
--------- ---------

Liabilities
Current
Accounts payable and accrued liabilities $11,654 $13,117
Income taxes payable 239 699
--------- ---------
11,893 13,816

Asset retirement obligation 329 335
Other long-term obligation 1,075 1,209
Future income tax liability 5,656 5,529
--------- ---------
18,953 20,889
Shareholders' Equity
Share capital 57,059 57,059
Contributed surplus 95 86
Retained earnings 1,037 3,119
--------- ---------
$77,144 $81,153
--------- ---------
--------- ---------


Consolidated Statements of Loss and Retained Earnings
(all amounts in thousands of dollars, except per share amounts)

Three months ended July 31,
2005 2004
---------------------------------------------------------------------

Sales $23,483 $21,823

Cost of goods sold 18,070 16,806
-------- --------
Gross margin 5,413 5,017

Expenses

Selling, general and administrative 6,181 7,127
Net interest income (160) (158)
-------- --------
6,021 6,969
-------- --------
Loss before taxes (608) (1,952)

Income taxes recovery (187) (766)
-------- --------
Net loss ($421) ($1,186)
-------- --------
-------- --------


Retained earnings, beginning of period
As originally stated 3,119 23,592
Impact of changes in accounting policies:
Asset retirement obligations - (72)
-------- --------
Retained earnings as restated 3,119 23,520
Stock options - (103)
Dividends (1,661) (1,661)
-------- --------
Retained earnings, end of period $1,037 $20,570
-------- --------
-------- --------


Consolidated Statements of Cash Flow
(all amounts in thousands of dollars)

Three months ended July 31,
2005 2004
---------------------------------------------------------------------

Net inflow (outflow) of cash related
to the following activities:

OPERATING
Net income ($421) ($1,186)
Items not affecting cash:
Amortization 1,362 1,782
Future income taxes 98 (86)
Deferred expenses (174) 1
Stock based compensation 30 18
Loss (gain) on sale of capital assets 34 (37)
--------- --------
(857) 160

Changes in non-cash operating working capital items (1,239) (3,633)
--------- --------
(310) (3,141)
--------- --------
FINANCING
Dividends paid (1,661) (1,661)
--------- --------

INVESTING
Additions to capital assets (832) (822)
Proceeds from sale of capital assets 137 37
--------- --------
(695) (785)
--------- --------

Net cash inflow(outflow) (2,666) (5,587)

Cash and cash equivalents, beginning of period 19,978 24,174

--------- --------
Cash and cash equivalents, end of period $17,312 $18,587
--------- --------
--------- --------

Cash and cash equivalents consist of:
Cash ($741) $979
Short-term investments 18,053 17,608
--------- --------
$17,312 $18,587
--------- --------
--------- --------
SUPPLEMENTAL INFORMATION
Interest paid $0 $0
Income taxes paid $746 $321


Notes to the Interim Consolidated Financial Statements
For quarters ended July
Unaudited (in thousands of dollars except share and per share amounts)


1. BASIS OF PRESENTATION

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles; however, they do not include all of the disclosure requirements for annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended April 30, 2005, except for the changes disclosed in Note 2. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended April 30, 2005 including notes thereto. These interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the periods reported.

2. CHANGE IN ACCOUNTING POLICIES

Effective May 1, 2004, the Company prospectively adopted the new CICA Handbook section 1100, Generally Accepted Accounting Principles (GAAP). This standard establishes what constitutes Canadian generally accepted accounting standards and provides guidance on the GAAP hierarchy. The adoption of this standard did not have a material effect on the Company's results of operations, financial position or cash flows.

Effective May 1, 2004, the Company adopted the requirements of the CICA handbook section 3110 retroactively with restatement, which requires the Company to estimate the fair value of asset retirement obligations arising from the retirement of long lived assets. The Company's obligations are in connection with leased properties. An adjustment was recorded to decrease opening retained earnings for the year ended April 30, 2003 by $137 (net of tax of $81), representing the expense incurred prior to May 1, 2003. There was also an adjustment to increase retained earnings by $65 (net of tax of $33) to reflect the income statement impact for the year ended April 30, 2004. The total estimated undiscounted asset retirement obligations which are expected to settle in 2008 and 2009 are $360. As at May 1, 2004, the present value of these obligations was estimated using a credit-adjusted risk-free rate of 4.21%. During the quarter, the Company's asset retirement obligation decreased from $335 to $329 as a result of accretion and foreign currency fluctuations.

Effective May 1, 2004, the Company adopted the requirements of the Canadian Institute of Chartered Accountants ("CICA") handbook Section 3870 retroactively without restatement. This section requires the Company to estimate the fair value of stock-based compensation granted to employees and to record the expense over the estimated vesting period of the stock options granted. The Company uses a Black Scholes option-pricing model to estimate the fair value of stock options. Using this model, the Company estimated that the total stock-based compensation incurred for the years ended April 30, 2002 and 2003 was $103 and consequently opening retained earnings were adjusted by this amount. The offset to retained earnings was recorded as an increase in contributed surplus. During the year ended April 30, 2005, options expired without vesting resulting in a reversal of $56 to selling, general and administrative expense, as well an expense of $39 was recorded for 2005. As a result of this change in accounting policy, a compensation expense of $10 has been recorded to selling, general and administrative expense in the quarter.

Effective May 1, 2004, the Company prospectively adopted the recommendations of Accounting Guideline 13 "Hedging Relationships" ("AcG-13") and those of Emerging Committee Abstract 128 "Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments" ("EIC-128"). AcG-l3 deals with the identification, designation, documentation and measurement of effectiveness of hedging relationships for the purpose of applying hedge accounting. AcG-13 is effective for fiscal years beginning on or after July 1, 2003 and upon implementation of AcG-l3, accounting in accordance with EIC-128 is required. Under EIC-128, freestanding derivative instruments that give rise to a financial asset or financial liability and do not qualify for hedge accounting under AcG-13 should be recognized in the balance sheet and measured at fair value, with changes in fair value recognized in earnings for the year. The adoption of AcG-13 and EIC-128 had no material impact on the results of operations and the financial position of the Company.

Prior to May 1, 2004, the fair value gains or losses relating to the Company's hedging activities were recognized in income in the same period as those on the hedged items.

Derivative financial instruments that are not eligible for hedge accounting are recognized on the balance sheet at their fair value, with changes in their fair value recognized in income.

Effective February 1, 2005, the Company prospectively adopted the recommendations of Accounting Guideline 15 "Consolidation of Variable Interest Entities" ("AcG-15"). AcG-15 deals with determining when an enterprise includes the assets, liabilities and results of activities of a "variable interest entity" in its consolidated financial statements. AcG-15 is effective for quarters or fiscal years beginning on or after November 1, 2004. The adoption of AcG-15 had no impact on the results of operations and the financial position of the Company.

Effective June 17, 2005, the Company established a "Deferred Share Units" ("DSU") plan for eligible Directors. This plan allows Directors to elect to take their Directors fees in the form of DSU rather than cash. During the quarter, 2,483 DSU were granted under this plan and an expense of $22, calculated based upon the Company's share price at the date of the DSU grant, has been recorded to selling, general and administrative expense.

3. SHARE CAPITAL

The share capital which was unchanged from year-end, is as follows:



Number of Amount
Shares $000's


Class A multiple voting shares 5,345,881 $ 376
Class B subordinated voting shares 9,750,936 56,683
----------- -------
Total outstanding at July 31, 2005 15,096,817 $57,059
----------- -------
----------- -------


Stock options outstanding as at July 31, 2005 have exercise prices ranging from $7.75 to $22 per share and expiry dates up to April 30, 2010. There were no stock options issued during the quarter.

During the quarter, dividends of $1,661 were declared and paid.

Basic and diluted earnings per share calculations

The following tables set forth the computation of basic and diluted earnings per share:



Numerator Three months Three months
ended ended
July 31, 2005 July 31, 2004
------------- --------------
Net loss for the quarter ended for

basic and diluted earnings per share $(421) $(1,186)

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

Denominator

Denominator for basic earnings per share
Weighted average shares 15,096,817 15,096,817

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


Stock options for 411,150 shares (July 31, 2004 - 573,400 shares) were not included in the computation of diluted earnings per share, as they were anti dilutive for the periods.

4. SEGMENT INFORMATION

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

The Company's ultimate customers are primarily located in the United States



Revenue from: Three months Three months
ended ended
July 31, 2005 July 31, 2004

United States $19,993 $19,950
Canada 3,262 1,603
Other 228 270
------------- -------------
$23,483 $21,823
------------- -------------
------------- -------------


Capital Assets July 31, 2005 April 30, 2005
------------- --------------
United States $ 1,533 $ 1,621
Canada 32,541 33,154
-------- --------
$ 34,074 $ 34,775
-------- --------
-------- --------


5. PENSION EXPENSE

The pension expense relating to the various defined benefit plans for the quarter is approximately $126 (July 2004 $131) comprising the following components:



Three months Three months
ended ended
July 31, 2005 July 31, 2004
-------------- --------------
Defined benefit plans
Benefits earned during the period $ 104 $ 101
Interest cost on benefit obligation 204 214
Return on plan assets (228) (234)
Other 46 50
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$ 126 $ 131
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6. RESTRUCTURING COSTS AND ASSET IMPAIRMENT

The table below shows changes in the liability related to the restructuring initiatives with respect to the discontinuance of manufacturing operations at its Scarborough, Ontario metal filing and seating facilities and the changed business model in New York.



Three months ended July 31, 2005
Opening Ending
balance Changes Payments Liability

Employee termination expenses $ 335 $ - $ 11 $ 324
Lease obligations 1,446 - 206 1,240
---------------------------------------------------------------------
$ 1,781 $ - $ 217 $ 1,564
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