Inscape Corporation

Inscape Corporation

March 10, 2005 16:53 ET

Inscape Corporation Announces Third Quarter Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: INSCAPE CORPORATION

TSX SYMBOL: INQ.SV

MARCH 10, 2005 - 16:53 ET

Inscape Corporation Announces Third Quarter Results

HOLLAND LANDING, ONTARIO--(CCNMatthews - March 10, 2005) - Peter
Brunelle, President and Chief Executive Officer of Inscape (TSX:INQ.SV),
a leading designer, manufacturer and distributor of office furniture
solutions, announced the following financial results for the quarter
ended January 31, 2005:



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

3-Months Ended 3-Months Ended
January 31, 2005 January 31, 2004
(Q3, Fiscal 2005) (Q3, Fiscal 2004) Change
-----------------------------------------------
(As restated)

Revenue $ 30.4 $ 27.5 10.2%
Gross Margin 8.7 8.4 2.6%
Selling, General &
Administrative expenses 7.6 7.5 1.7%
Net Income, prior to
restructuring costs and
revaluation of future
income taxes 0.9 0.9
Restructuring costs (after-tax) -8.8 -
Revaluation of future
income taxes - -0.7(b)
Net income -7.9 0.2
Earnings Per Share (EPS) $-0.52(a) $ 0.02

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

9-Months Ended 9-Months Ended
January 31, 2005 January 31, 2004 Change
-----------------------------------------------

Revenue $ 76.4 $ 91.4 -16.4%
Gross Margin 19.4 30.5 -36.5%
Selling, General &
Administrative expenses 22.5 24.8 - 9.2%
Net Income, prior to
restructuring costs and
revaluation of future
income taxes -1.7 4.5 -219.1%
Restructuring costs (after-tax) -8.8(a) -1.5
Revaluation of future
income taxes - -0.7(b)
Net Income -10.5 2.3
Earnings Per Share (EPS) $ -0.70(a) $ 0.15(c)

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

(a) Reflects the impact of restructuring costs of $0.58 per share
(pre-tax restructuring costs were $9.9 million).

(b) During the quarter, future income taxes were revalued to reflect
the new Ontario income tax rates. This resulted in an expense of
$0.7 million and had an impact of $0.05 per share.
(c) Reflects the impact of restructuring costs of $0.10 per share
(pre-tax restructuring costs were $2.2 million) and revaluation
of future income taxes of $0.05 per share.


Commentary and Outlook

"I am pleased with the improvement in Inscape's financial results during
the third quarter", said Peter Brunelle, CEO of Inscape Corporation. "We
have taken and continue to take the necessary steps to restructure the
business to reflect current market realities. While we recognize that
there is always more to do, we have a sound business and I am excited
about our future."

With respect to the near term outlook, the Business and Institutional
Furniture Manufacturer's Association ("BIFMA") anticipates that
shipments in the first calendar quarter of 2005 will be 12.5% lower than
the fourth quarter of 2004 and 5.4% higher than the same quarter of
2004. Based on current order input levels, Inscape anticipates that
fourth quarter revenues may be lower than the fourth quarter of fiscal
2004. Earnings in the fourth quarter of fiscal 2005 will also be
adversely impacted by the effect of the stronger Canadian dollar and
restructuring costs related to the New York showroom.

Restructuring initiative

As announced in December 2004, Inscape decided to discontinue its
seating product line. Third quarter earnings include a one-time pre-tax
charge of approximately $1.8 million with respect to this decision. This
charge relates to the write-down of manufacturing assets and inventory
related to this product line. Seating has always been a minor part of
Inscape's business and therefore this discontinuance will have minimal
impact on the Company's consolidated earnings on a go forward basis.

During December 2004, Inscape also announced its decision to pursue a
new business model in New York that is expected to generate additional
sales in this market for Inscape. This decision also allows the Company
to vacate its existing showroom in New York. The Company anticipates
vacating the showroom by April 30, 2005. During the third quarter,
Inscape recorded pre-tax costs of $0.3 million, with respect to the
accelerated depreciation of leasehold improvements at this showroom.
During the fourth quarter of fiscal 2005, the Company will record an
additional $0.4 million of accelerated depreciation. The Company will
also record pre-tax costs of $1.3 million in connection with vacating
this showroom as current rental rates for this location are lower than
Inscape's lease rate. This cost will be recognized in the period the
Company ceases using the showroom, which is anticipated to be during the
fourth quarter of fiscal 2005. Assuming that the Company is able to
sub-lease this space, it will reduce pre-tax expenses by approximately
U.S. $0.4 million annually.

As announced in September 2004, Inscape's management has been conducting
a strategic review of all aspects of its business. As part of this
review, the Company concluded that its architectural products business
is unlikely to generate the levels of income required to support the
book value of the underlying assets. Consequently, during the third
quarter of fiscal 2005, the Company has recorded an impairment
write-down of $8.1 million (pre-tax) with respect to this business. This
consists of $3.9 million with respect to goodwill and other intangible
assets and $4.2 million with respect to capital assets.

Operating Performance

Revenues in the third quarter of fiscal 2005 were 10.2% higher than the
same quarter of last year. Had U.S. revenues in the third quarter of
fiscal 2005 been translated at the exchange rates prevailing in fiscal
2004, the increase would have been over 28%. This increase was primarily
due to an unusually large volume of orders received for shipment prior
to the end of the calendar year. On a year to date basis, revenues
declined by 16.4% from 2004 levels. Most of this decline is due to the
lower exchange rate used to translate U.S. sales in 2005.

Gross margin as a percentage of revenue for the third quarter declined
from 30.6% in fiscal 2004 to 28.5% in fiscal 2005 and on a year-to-date
basis it declined from 33.3% to 25.4%. These reductions were principally
due to the effect of the weaker U.S. dollar. For the third quarter of
fiscal 2005, increased revenues and the corresponding favourable
overhead absorption almost entirely offset the impact of this
unfavourable exchange rate.

Selling, general and administrative ("S,G&A") expenses during the third
quarter of fiscal 2005 were similar to the same quarter of fiscal 2004.
This is despite higher levels of variable S,G&A incurred in fiscal 2005
due to increased revenues and recording increased amortization related
to the Company's New York showroom. Fiscal 2005 third quarter S,G&A
benefited from the weaker U.S. dollar, however this was not apparent
when compared with the third quarter of fiscal 2004, as fiscal 2004
S,G&A included currency hedging gains. On a year to date basis, S,G&A
expenses in fiscal 2005 were lower than fiscal 2004 by $2.3 million.
This reduction is primarily a result of the cost reduction initiatives
implemented by the Company and the favourable effect of the weaker U.S.
dollar on U.S. dollar denominated selling costs.

Net income during fiscal 2005 was lower than fiscal 2004 primarily due
to lower gross margins as described above. Despite, the loss incurred
during the quarter, the Company generated $4.1 million of cash flow from
operations prior to non-cash operating working capital. Inscape's
balance sheet with no debt and cash balances of approximately $21.7
million remains strong.

New Appointment to Board of Directors

Inscape is pleased to announce that Peter Brunelle, who was appointed
President and Chief Executive Officer of the Company in February 2005,
has also been appointed to the Company's Board of Directors.

Quarterly Dividend

Given the Company's strong cash position, simultaneous with the
announcement of the Company's quarterly results, the Board of Directors
declared an 11 cent dividend payable on March 29, 2005 to all
shareholders of record as of March 22, 2005. As disclosed in September
2004, the Company's dividend policy is under ongoing review.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Friday, March 11,
2005, to discuss the Company's third quarter results and to provide
additional outlook on the next quarter. To participate, please call
1-800-701-4762. A replay of the conference call will also be available
from Friday, March 11, 2005 after 10:15 a.m. until midnight on Friday,
March 18, 2005. To access the rebroadcast, please dial 1-800-558-5253.
(Reservation Number 21233279).

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 innovative and integrated product
solutions that effectively and efficiently landscape modern office
interiors, including moveable walls, systems and storage products.
Company operations are based across two manufacturing facilities
totalling approximately 485,000 square feet.

Visit Inscape at www.inscapesolutions.com.



Consolidated Balance Sheets
Unaudited (all amounts in thousands of dollars)


January 31, 2005 April 30, 2004
---------------------------------------------------------------------
(As restated - Note 2)

Assets
Current
Cash and cash equivalents $21,737 $24,174
Accounts receivable 11,385 10,763
Inventory 6,844 6,884
Prepaid expenses 952 946
Income taxes receivable 1,913 2,004
---------------- ---------------
42,831 44,771

Capital assets 36,863 47,387
Other assets (Note 3) 1,379 4,745
Future income tax asset 4,154 3,927
---------------- ---------------
$85,227 $100,830
---------------- ---------------
---------------- ---------------

Liabilities
Current
Accounts payable and accrued
liabilities $12,757 $12,767
Income taxes payable 1,358 1,119
---------------- ---------------
14,115 13,886

Asset retirement obligations (Note 2) 337 325
Future income tax liability 5,722 6,040
---------------- ---------------
20,174 20,251

Shareholders' Equity
Share capital (Note 4) 57,059 57,059
Contributed surplus (Note 2) 76 -
Retained earnings 7,918 23,520
---------------- ---------------
$85,227 $100,830
---------------- ---------------
---------------- ---------------



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

Three months ended Nine months ended
January 31, January 31,
2005 2004 2005 2004
---------------------------------------------- -------------------
(As restated (As restated
- Note 2) - Note 2)
Sales $30,350 $27,545 $76,404 $91,436

Cost of goods sold 21,695 19,121 57,032 60,969
Gross margin 8,655 8,424 19,372 30,467

Expenses
Selling, general and
administrative 7,598 7,463 22,529 24,786
Restructuring costs
and asset impairment
(Note 7) 9,900 - 9,900 2,171
Net interest income (211) (166) (516) (605)
--------- -------- -------- -------
17,287 7,297 31,913 26,352
--------- -------- -------- -------
(Loss) income before taxes (8,632) 1,127 (12,541) 4,115

Income taxes (736) 902 (2,025) 1,802
--------- -------- -------- -------
Net (loss) income (7,896) 225 (10,516) 2,313

Retained earnings,
beginning of period
As originally stated 17,475 28,753 23,592 29,987
Impact of changes in
accounting policies:
Asset retirement
obligations (Note 2) - 137 (72) 137
--------- -------- -------- -------
Retained earnings
as restated 17,475 28,890 23,520 30,124
Stock options (Note 2) - - (103) -
Dividends (Note 4) (1,661) (1,661) (4,983) (4,983)
--------- -------- -------- -------
Retained earnings,
end of period $7,918 $27,454 $7,918 $27,454
--------- -------- -------- -------
--------- -------- -------- -------

Basic (loss) earnings
per share (Note 4) ($0.52) $0.02 ($0.70) $0.15
Diluted (loss) earnings
per share (Note 4) ($0.52) $0.02 ($0.69) $0.15



Consolidated Statements of Cash Flows
Unaudited (all amounts in thousands of dollars)

Three months ended Nine months ended
January 31, January 31,
2005 2004 2005 2004
--------------------------------------------- ------------------
(As restated (As restated
- Note 2) - Note 2)

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

OPERATING
Net income (loss) ($7,896) $225 ($10,516) $2,313
Items not affecting cash:
Amortization 2,187 2,022 5,784 5,913
Future income taxes (389) 1,506 (545) 1,735
Deferred expenses and
other expense 340 36 407 348
Stock based compensation (62) - (27) -
Restructuring costs
and asset impairment 9,900 - 9,900 -
Gain on sale of
capital assets (1) - (13) -
---------- ------- --------- -------
4,079 3,789 4,990 10,309

Changes in non-cash
operating working
capital items 3,929 3,283 (898) (4,031)
--------- ------- --------- -------
8,008 7,072 4,092 6,278
--------- ------- --------- -------

FINANCING
Dividends paid (1,661) (1,661) (4,983) (4,983)
--------- ------- --------- -------
(1,661) (1,661) (4,983) (4,983)
--------- ------- --------- -------

INVESTING
Additions to capital
assets (435) (930) (1,559) (2,879)
Proceeds from sale of
capital assets 1 - 13 -
--------- ------- --------- -------
(434) (930) (1,546) (2,879)
--------- ------- --------- -------
--------- ------- --------- -------

Net cash inflow (outflow) 5,913 4,481 (2,437) (1,584)

Cash and cash equivalents,
beginning of period 15,824 19,001 24,174 25,066

--------- ------- --------- -------
Cash and cash equivalents,
end of period $21,737 $23,482 $21,737 $23,482
--------- ------- --------- -------
--------- ------- --------- -------

SUPPLEMENTAL INFORMATION
Interest paid - - - -
Income taxes paid $109 $786 $460 $3,794


Notes to the Interim Consolidated Financial Statements

As at January 31, 2005

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,
2004, 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, 2004
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 January 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 is expected to settle in
2008 and 2009 is $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
increased by $3 and for the nine month period has increased from $325 to
$337 as a result of accretion (2004-$317) .

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 quarter, options expired without vesting
resulting in a reversal of $56 to selling, general and administrative
expense. As a result of this change in accounting policy, a compensation
expense of $29 has been recorded to selling, general and administrative
expense in 2005 (2004-$53).

Effective May 1, 2004, the Company adopted the requirements of the CICA
handbook accounting guideline AcG-13 which requires the Company to
identify, designate,
document and assess the effectiveness of their hedging relationships.
Adoption of this section had no impact on the financial statements.



3. OTHER ASSETS

As at January 31, As at April 30,
2005 2004
---------------- ----------------

Goodwill (Note 7) $ - $2,593
Deferred pension asset 1,105 1,452
Other (net of accumulated amortization
of $903; 2004-$979) 274 700
---------------- ----------------
$1,379 $4,745
--------------- ---------------
--------------- ---------------

4. 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 January 31, 2005 15,096,817 $57,059
----------- ---------------
----------- ---------------


Stock options outstanding as at January 31, 2005 have exercise prices
ranging from $7.75 to $22.50 per share and expiry dates up to April 30,
2010. During the quarter 435,000 stock options were issued.

During the quarter and nine month period ended January 31, 2005,
dividends of $1,661 and $4,983 were declared and paid, respectively.

Basic and diluted earnings per share calculations

The following tables set forth the computation of basic and diluted
earnings per share for the quarters ended January 31, 2005 and January
31, 2004:



Numerator Three months Three months
ended ended
January 31, January31,
2005 2004
------------ -------------
Net (loss)/income for the (As restated)
quarter ended for

basic and diluted earnings per share $(7,896) $225

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

Denominator

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

Effect of dilutive securities
Stock options 69,473 0
---------------------------------------------------------------------
15,166,290 15,096,817
---------------------------------------------------------------------
---------------------------------------------------------------------


Stock options for 448,650 shares (January 31, 2004 - 526,900 shares)
were not included in the computation of diluted earnings per share, as
they were anti dilutive for the periods.

Basic and diluted earnings per share calculations
The following tables set forth the computation of basic and diluted
earnings per share for the nine months ended January 31 2005 and 2004:



Numerator Nine months Nine months
ended ended
January 31, January31,
2005 2004
------------ -------------
Net (loss)/income for the quarter (As restated)
ended for

basic and diluted earnings per share $(10,516) $2,313
---------------------------------------------------------------------
---------------------------------------------------------------------

Denominator

Denominator for basic earnings per share
Weighted average shares 15,096,817 15,096,817
Effect of dilutive securities
Stock options 124,411 0
---------------------------------------------------------------------
---------------------------------------------------------------------
15,221,228 15,096,817
---------------------------------------------------------------------
---------------------------------------------------------------------

Stock options for 363,650 shares (January 31, 2004 - 526,900 shares)
were not included in the computation of diluted earnings per share,
as they were dilutive for the period ended January 31, 2005 and
anti dilutive for January 31, 2004.


5. 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 ended Three months ended
January 31, 2005 January 31, 2004

United States $28,140 $24,996
Canada 1,928 2,397
Other 282 152
------------------ ------------------
$30,350 $27,545
------------------ ------------------
------------------ ------------------


Revenue from: Nine months ended Nine months ended
January 31, 2005 January 31, 2004

United States $28,140 $24,996
Canada 1,928 2,397
Other 282 152
------------------ ------------------
$30,350 $27,545
------------------ ------------------
------------------ ------------------

Goodwill and Capital Assets As at January 31, April 30,
2005 2004
------------------ ------------------

United States $ 6,317 $11,127
Canada 34,796 38,853
------------------ ------------------
$ 41,113 $ 49,980
------------------ ------------------

The goodwill related to US operations (Note 3).


6. PENSION EXPENSE

The pension expense relating to the various defined benefit plans for
the quarter is approximately $131 (January 2004 $252) comprising the
following components:



Three months ended Three months ended
ended ended
January 31, 2005 January 31, 2005
------------------ ------------------
Defined benefit plans
Benefits earned during the year $ 101 $ 94
Interest cost on benefit obligation 214 208
Curtailment cost - 94
Return on plan assets (234) (205)
Other 50 61
---------------------------------------------------------------------
$ 131 $ 252
---------------------------------------------------------------------
---------------------------------------------------------------------


The pension expense relating to the various defined benefit plans for
the nine months ended is approximately $393 (January 2004 $756)
comprising the following components:


Nine months ended Nine months ended
January 31, 2005 January 31, 2004
------------------ ------------------

Defined benefit plans
Benefits earned during the year $ 303 $ 282
Interest cost on benefit obligation 642 624
Curtailment cost - 282
Return on plan assets (702) (615)
Other 150 183
---------------------------------------------------------------------
$ 393 $ 756
---------------------------------------------------------------------
---------------------------------------------------------------------


7. RESTRUCTURING COSTS AND ASSET IMPAIRMENT

The Company has recently undertaken a strategic review of its business.
As a result of this review, the Company has decided to discontinue its
seating product line. The Company has also concluded that its
architectural products business is unlikely to generate the levels of
income required to support the book value of the underlying assets.
Consequently, during the three months ended January 31, 2005, the
Company has recorded a total of $9,900 with respect to these two items.
These costs are non-cash items and consist of:

a) $1,795 with respect to the write-down of assets and inventory
relating to the Company's discontinued seating product line;

b) An impairment of $2,593 with respect to goodwill that had originated
from the acquisition of Dowcraft Corporation in 2001;

c) An impairment in the value of fixed assets and related intangible
assets of $4,251 and $1,261 respectively, with respect to the Company's
architectural products business.

The impairments have been determined based on expected undiscounted cash
flows expected to result from their use and eventual disposition.

During 2004, the Company discontinued manufacturing operations at its
Scarborough, Ontario metal filing and seating facilities and
consolidated operations at its Holland Landing, Ontario facility
recording a restructuring provision. The tables below show changes in
the liability related to the restructuring initiative.



Three months ended January 31, 2005
Opening Ending
Balance Changes Payments Liability

Employee termination
expenses $ 474 $ - $ 95 $ 379
---------------------------------------------------------------------
---------------------------------------------------------------------


Nine months ended January 31, 2005
Opening Ending
Balance Changes Payments Liability

Employee termination
expenses $ 612 $ - $ 233 $ 379
Other related expenses 79 - 79 -
---------------------------------------------------------------------
$ 691 $ - $ 312 $ 379
---------------------------------------------------------------------
---------------------------------------------------------------------


-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Inscape Corporation
    Rohit Bhardwaj
    Chief Financial Officer
    (905) 836-7676
    (905) 836-5037 (FAX)