Shermag reports first quarter results

    SHERBROOKE, QC, Aug. 9 /CNW Telbec/ - Shermag Inc. (TSX: SMG), today
reported its results for the first quarter ended June 29, 2007. All dollar
amounts are in Canadian dollars unless otherwise indicated.
    Consolidated gross revenue for the period totalled $31.1 million, down
32% from consolidated sales of $45.8 million for the corresponding period last
year. Net revenue was $29.3 million, a 31% reduction from the $42.5 million
posted a year ago. The Company trimmed its net loss for the quarter on a
year-over-year basis, with a net loss of $3.9 million or $0.29 per share for
the most recent period, compared to a net loss of $4.4 million or $0.33 per
share for the same quarter a year earlier.
    Shermag President and CEO, Mr. Jeff Casselman, explained that the reduced
sales volume was related to a challenging economic environment for furniture,
combined with the Company's decision to increase its selling prices in
US dollars to better reflect the costs of domestically manufactured products.
    Canadian sales fell 15.7% from $15.3 million to $12.9 million. In
US dollars, exports declined 39.3% from $27 million to $16.4 million. In
Canadian dollars, the value of exports fell 40% to $18.3 million or 59% of
gross revenue. The average exchange rate applied to the first quarter
financial results was CA$1.115/US$, compared to CA$1.13/US$ for the same
period last year. The decline in the Canadian/US exchange rate had a negative
impact of $0.3 million on the sales of the first quarter, compared with the
same quarter last year.

    Full results for the first quarter ended June 29, 2007 were as follows:

    Comparative results - 1st Quarter
    (in thousands of dollars,                      1st Quarter   1st Quarter
     except per share data)                          2007-2008     2006-2007
    Gross revenue                                    $  31,147     $  45,810
    Gross earnings(1)                                $   3,643     $   3,626
    Loss before income taxes                         $  (5,795)    $  (6,358)
    Net loss                                         $  (3,935)    $  (4,379)
    Loss per common share - basic                    $   (0,29)    $   (0.33)
    Loss per common share - diluted                  $   (0.29)    $   (0.33)
    Exports                                          $  18,263     $  30,501
    (1) Excluding amortization

    Gross profit remained consistent with last year's first quarter at
$3.6 million despite a 32% reduction in sales, reflecting the Company's
progress in implementing its transformation plan. Also during the period, the
Company reduced its inventories of finished products by $2.1 million, raw
materials by $1 million and work in progress by $0.5 million for a total
reduction of $3.6 million. This reduction results from measures undertaken
during the previous quarter to compensate for the decrease in demand. Selling
and administrative expenses were reduced from $7.3 million to $6.4 million.


    "The Company's transformation plan which includes consolidation of
domestic manufacturing, increased use of global sourcing, and a move towards
better quality and higher priced domestically made-to-order products, is
improving our gross margins. However, current unfavourable market and exchange
rate conditions require additional initiatives to further reduce expenses to
reflect the reality of our revenue and gross margin levels," commented
Mr. Casselman.

    Annual Meeting of Shareholders

    Shermag holds its annual general meeting later this morning at 10:00 a.m.
at the Company's Montréal Distribution Centre, located at 795-90th Avenue,
LaSalle, Québec.


    Shermag Inc. (SMG), headquartered in Sherbrooke, Québec, is a leader in
the design, production, marketing and distribution of high-quality residential
furniture. The Company employs about 1,200 people and is a vertically
integrated manufacturer and importer with its own cutting rights, sawmill,
veneer plant, manufacturing operations and global sourcing division.


    This news release, in particular the section under the heading "Outlook",
contains forward-looking statements about the Company's operations,
objectives, strategies, financial situation and performance. These statements
are made based on assumptions and management's best estimates with regard to
future events. However, the business of the Company is subject to risks and
uncertainties that could cause actual results to differ from expected results.
Important factors that could cause such differences are changes in pricing
pressure being exerted by competitors, particularly Asian-based companies,
significant movement in the Canadian/US dollar exchange rate, and
unanticipated problems in implementing the Company's Business Transformation
Plan. This is not an exhaustive list. A broader discussion of risk factors
that could affect future performance can be found in the Company's Annual MD&A
and Annual Information Form, filed with Canadian securities regulatory
authorities. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual
results. The Company disclaims any intention or obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

    Information for shareholders

    Shermag Inc. will hold a conference call to discuss these results today
Thursday, August 9, 2007 at 2:00 p.m., Eastern Time. Interested parties can
join the call by dialing (416) 340-2216 for all Toronto area callers or
1-866-898-9626 for all other North American callers.
    If you are unable to call in at this time, you may access a recording of
the conference by calling (416) 695-5800 for Toronto area or 1-800-408-3053
for others and entering the passcode 3231299# on your phone. This recording
will be available as of 3:00 p.m. on Thursday, August 9, until midnight on
Friday, August 17.
    An archive webcasting of this call will be made available on August 9,
2007, as of 3:00 p.m. at or in our website, in the news


    in thousands of dollars,
     except per share data
                                                    Three-month period ended
                                                       June 29       June 30
                                                          2007          2006
                                                     (13 weeks)    (13 weeks)
                                                   ------------  ------------
                                                             $             $

    Gross revenue                                       31,147        45,810
    Less : returns, allowances and discounts             1,843         3,328
                                                   ------------  ------------
    Net revenue                                         29,304        42,482
    Cost of sales                                       25,661        38,856
                                                   ------------  ------------

    Gross profit excluding amortization                  3,643         3,626
                                                   ------------  ------------

    Selling and administrative expenses                  6,433         7,316
    Interest expenses                                      379           428
    Exchange loss                                        1,365           920
    Amortization                                           914         1,161
    Maintenance expenses for assets held for sale          492           159
    Change in fair value of derivative financial
     instruments                                          (145)
                                                   ------------  ------------
                                                         9,438         9,984
                                                   ------------  ------------
    Loss before income taxes                            (5,795)       (6,358)
    Income taxes                                        (1,860)       (1,979)
                                                   ------------  ------------

    Net loss                                            (3,935)       (4,379)
                                                   ------------  ------------
                                                   ------------  ------------
    Loss per common share - basic  (note 4)              (0.29)        (0.33)
                                                   ------------  ------------
                                                   ------------  ------------
    Loss per common share - diluted  (note 4)            (0.29)        (0.33)
                                                   ------------  ------------
                                                   ------------  ------------


    in thousands of dollars,
     except per share data
                                                    Three-month period ended
                                                       June 29       June 30
                                                          2007          2006
                                                     (13 weeks)    (13 weeks)
                                                   ------------  ------------
                                                             $             $

    Net loss                                            (3,935)
    Other comprehensive income
      Loss on derivative financial instruments
       designated as cash flow hedges prior to
       March 31, 2007, transferred to earnings
      (net of income taxes of $46,434)                      99
                                                   ------------  ------------
    Comprehensive income                                (3,836)            -
                                                   ------------  ------------
                                                   ------------  ------------


    in thousands of dollars
                                                   ------------  ------------
                                                   Three-month   Three-month
                                                        period        period
                                                         ended         ended
                                                       June 29,      June 30,
                                                          2007          2006
                                                   ------------  ------------
                                                             $             $

    Balance, beginning of period                        34,423        51,802
    Net loss                                            (3,935)       (4,379)
                                                   ------------  ------------
    Balance, end of period                              30,488        47,423
                                                   ------------  ------------
                                                   ------------  ------------


    in thousands of dollars
                                                   ------------  ------------
                                                         As at         As at
                                                       June 29,     March 30,
                                                          2007          2007
                                                    (unaudited)     (audited)
                                                   ------------  ------------
                                                             $             $
      Current assets
        Cash and cash equivalents                           35            21
        Accounts receivable                             19,029        23,726
        Income taxes receivable                            288         6,331
        Inventories                                     38,945        42,546
        Prepaid expenses                                 1,267           981
                                                   ------------  ------------
                                                        59,564        73,605
      Property, plant and equipment                     33,987        34,531
      Assets held for sale                               8,497         8,514
      Goodwill                                           2,872         2,872
      Other assets                                       2,371         2,356
      Future income taxes                                  210            76
                                                   ------------  ------------

                                                       107,501       121,954
                                                   ------------  ------------
                                                   ------------  ------------
      Current liabilities
        Accounts payable and accrued liabilities        14,270        16,526
        Installments on long-term debt                   1,264         1,271
                                                   ------------  ------------
                                                        15,534        17,797
      Long-term debt (note 5)                           17,929        24,640
      Deferred credits                                   3,032         3,066
      Future income taxes                                1,452         2,951
                                                   ------------  ------------
                                                        37,947        48,454
                                                   ------------  ------------
      Capital stock                                     38,735        38,735
      Contributed surplus                                  331           342
      Retained earnings                                 30,488        34,423
                                                   ------------  ------------
                                                        69,554        73,500
                                                   ------------  ------------

                                                       107,501       121,954
                                                   ------------  ------------
                                                   ------------  ------------


    in thousands of dollars
                                                    Three-month period ended
                                                       June 29       June 30
                                                          2007          2006
                                                     (13 weeks)    (13 weeks)
                                                   ------------  ------------
                                                             $             $
    Operating activities
      Net loss                                          (3,935)       (4,379)
      Non-cash items
        Amortization                                       914         1,161
        Amortization of deferred credits                   (38)          (44)
        Loss (gain) on disposal of assets                  142          (200)
        Future income taxes                             (1,633)          (50)
        Stock-based compensation                           (12)           36
        Changes in working capital items                11,657          (196)
                                                   ------------  ------------
    Cash flows from operating activities                 7,095        (3,672)
                                                   ------------  ------------
    Investing activities
      Advance to a company subject to
       significant influence                                             (18)
      Property, plant and equipment                        (93)         (349)
      Disposal of property, plant and equipment             18         1,875
      Deferred credits                                       5
      Deferred charges                                    (293)         (345)
                                                   ------------  ------------
    Cash flows from investing activities                  (363)        1,163
                                                   ------------  ------------
    Financing activities
      Net change in long-term revolving credits         (6,397)       17,921
      Long-term loans and credits                                      5,947
      Installments on long-term loans                     (321)      (21,552)
                                                   ------------  ------------
    Cash flows from financing activities                (6,718)        2,316
                                                   ------------  ------------
    Net increase (decrease) in cash and cash
     equivalents                                            14          (193)
    Cash and cash equivalents, beginning of year            21           229
                                                   ------------  ------------

    Cash and cash equivalents, end of year                  35            36
                                                   ------------  ------------
                                                   ------------  ------------

    Shermag Inc.
    Notes to interim consolidated financial statements
    June 29, 2007 and June 30, 2006
    (The amounts in the tables are in thousands of dollars except for
     per share amounts)


    Basis of presentation

    These unaudited interim consolidated financial statements follow the same
accounting policies as in the most recent annual audited financial statements,
except for the recently adopted accounting policies described in Note 2.


    Financial instruments

    On March 31, 2007, in accordance with the applicable transitional
provisions, the Company retroactively adopted, without restatement of
prior-year financial statements, the new recommendations of Section 3855,
Financial Instruments - Recognition and Measurement, Section 3865, Hedges,
Section 1530, Comprehensive Income, Section 3861, Financial Instruments -
Disclosure and Presentation and Section 3251, Equity, issued by the Canadian
Institute of Chartered Accountants. Section 3855 and 3861 establish standards
for classification, recognition, measurement, presentation and disclosure of
financial instruments (including derivatives) in the financial statements.
Section 3865 sets out standards specifying when and how an entity can use
hedge accounting. Section 1530 establishes standards for the presentation of
comprehensive income and its components including net earnings and other
comprehensive income items. Section 3251 establishes standards for the
presentation of equity during the reporting period.
    The application of these standards requires classification of all
financial assets and liabilities of the Company and derivatives into
categories for which clearly defined rules determine the standards to be
applied in compliance with the recommendations of these new sections. All
derivative financial instruments used must be recorded in the balance sheet at
their fair value.

    The Company has implemented the following classifications:

    - Cash and cash equivalents are classified as "Assets held for trading".
      They are measured at fair value and the gains or losses resulting from
      the re-measurement at the end of each period are recorded in the
      results. The carrying value of cash and cash equivalents is a
      reasonable estimate of their fair value due to their short-term

    - Accounts receivable are classified as "Loans and receivables". They are
      recorded at cost, which upon the initial measurement is equal to their
      fair value. Subsequent measurements are recorded at amortized cost
      using the effective interest method, which generally corresponds to
      cost minus the allowance for doubtful accounts.

    - Accounts payable and accrued liabilities and long-term debt are
      classified as "Other financial liabilities". They are initially
      presented at their fair value. Subsequent measurements are recorded at
      amortized cost, using the effective interest rate method. For the
      Company, that value generally corresponds to cost as a result of the
      short-term maturity of these instruments or of the floating rate nature
      of some loans or because management estimates that the loan payable
      with a fixed rate has no significant difference between its fair value
      and the carrying value, based on rates currently available to the
      Company on loans with similar terms and maturity. However, deferred
      financing expenses related to the revolving credit continue to be
      presented as long-term assets and amortized on the duration of the

    Section 3865, Hedges, sets out standards on when and how an entity can use
hedge accounting. The adoption of these new standards is optional. The Company
enters, in the normal course of its operations, into forward exchange
contracts. For these derivatives held at March 31, 2007, the Company elected
to cease using hedge accounting. As a result, in compliance with Section 3855,
Financial Instruments - Recognition and Measurement, these derivatives are
measured at fair value at the end of each period and the gains or losses
resulting from re-measurement are recognized in earnings as "Change in fair
value of derivative financial instruments". Non realized gains or losses at
transition date were recognized in "Other comprehensive income" and will be
recognized in earnings when the initially underlying hedged transactions are
    The adoption of these new standards translated as at March 31, 2007 into a
$98,581 decrease in accumulated other comprehensive income, a $145,015
increase in derivative financial instruments reported under liabilities, and a
$46,434 increase in future income tax assets.
    For the three-month period ended June 29, 2007, the Company reclassified a
loss of $145,015, net of $46,434 in related income taxes, under Earnings,
representing the portion of the non realized losses on forward exchange
contracts at the transition date recorded under "Comprehensive income"
realized during the period.


    During the first quarter ended June 29, 2007, no expenses related to
unusual items were incurred. During the period, $748,889 was paid for
employment termination and installations consolidation costs, and at June 29,
2007, the balance to be paid for employment termination costs was $491,619.


    As at June 29, 2007 and June 30, 2006, the basic or diluted weighted
average number of common shares outstanding is 13,348,724 shares. The basic
and diluted loss per share is $0.29 in 2007 and $0.33 in 2006. Stock options
were not included in the diluted earnings per common share calculation since
the Company incurred a loss, and inclusion would have created an anti-dilutive


                                                    2007-06-29    2007-03-30
                                                   ------------  ------------
                                                             $             $

    Revolving credit, lender's prime rate (6%)((*))     10,326        16,723

    Term loan, lender's prime rate (6%), payable
     in monthly capital installments of $104,167,
     maturing in June 2014((*))                          8,834         9,147

    Loan, secured by rolling stock, 1.9%, payable
     in monthly blended installments of $894,
     maturing in March 2010                                 29            31

    Non-interest bearing loans from a government
     agency, payable in monthly and annual
     installments, maturing in 2007                          4            10
                                                   ------------  ------------
                                                        19,193        25,911
    Installments due within one year                     1,264         1,271
                                                   ------------  ------------
                                                        17,929        24,640
                                                   ------------  ------------
                                                   ------------  ------------

    ((*)) In accordance with this agreement, the Company is able to avail
          itself of a $55 million revolving credit in CAN dollars or its
          equivalent in US dollars, as well as a $10 million CAN term loan.
          Following an initial term maturing in June 2011, the revolving
          credit will subsequently be automatically renewed every year unless
          otherwise advised by either of the two parties involved. Both
          credit facilities are secured by a first rank mortage on the
          universality of all present and future movable and immovable,
          tangible and intangible assets.



    Unlimited number of common shares, without par value, voting and
    Unlimited number of preferred shares of first and second rank, without par
value, which can be issued in one or more series, for which the directors will
determine their number, designation, rights, privileges, conditions and

        Preferred shares of second rank, series 1, annual and non-cumulative
        $0.06 dividend per share, non-voting, non-participating, redeemable
        at the Company's option at the paid-up capital amount

                                      2007-06-29                  2007-03-30
                       --------------------------  --------------------------
                         Number of                   Number of
                            shares        Amount        shares        Amount
                         ----------    ----------    ----------    ----------
                                               $                           $
    Issued and fully

    Common shares
       beginning and
       end of year      13,348,724        38,286    13,348,724        38,286
    Preferred shares
     of second rank,
     series 1
       beginning and
       end of year         700,000           449       700,000           449
                                     ------------                ------------
                                          38,735                      38,735
                                     ------------                ------------
                                     ------------                ------------


    Balance, beginning of period
    Cumulative impact of accounting changes relating to
     financial instruments (Note 2)                                      (99)
    Adjusted beginning balance                                           (99)
    Other comprehensive income                                            99
    Balance, end of period                                                 -

    Accumulated other comprehensive income only includes losses on derivative
financial instruments designated as cash flow hedges prior to March 31, 2007.


    The income derived from a retail client amounts to $4,049,000 ($8,704,000
in 2006) and represents 13% (19% in 2006) of the total gross revenue for the


    On March 28, 2006, a fire at the Scierie Montauban Inc. subsidiary
destroyed assets. The Company's insurance program provides coverage for damage
to property destroyed, profit recovery and expenditure to minimize the total
cost of disruption to operations. As at March 31, 2006, the Company recorded a
$1,099,000 claim receivable equivalent to the book value of the assets
destroyed. During the year ended March 30, 2007, an additional amount of
$1,370,000 was recorded and a $500,000 advance cashed. During the quarter
ended June 29, 2007, the total amount recorded of $1,969,119 was cashed. Any
additional recovery will be recorded at such time as the insurance claim is
settled and the amounts are received.


    Certain comparative figures have been reclassified to comply with the
presentation adopted in the current year.

For further information:

For further information: Investor Relations: Rick Leckner, Maison
Brison, (514) 731-0000; Jeff Casselman, President and CEO, Shermag Inc., (819)

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