UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer Pursuant to Rule 13a-16 or
15d-16
Under
the Securities Exchange Act of 1934
For
the
month of January 2007
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec, Quebec, Canada G1M 2K2
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
|
Form
20-F þ
|
Form
40-F o
|
Indicate
by check mark whether the registrant by furnishing the information contained
in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
|
Yes
o
|
No
þ
|
If
“Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
TABLE
OF CONTENTS
On
January 9, 2007, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the fourth fiscal quarter and year end
for the fiscal year ended November 30, 2006. This report on Form 6-K sets forth
the news release relating to EXFO’s announcement and certain information
relating to EXFO’s financial condition and results of operations for the first
fiscal quarter of the 2007 fiscal year. This press release and information
relating to EXFO’s financial condition and results of operations for the first
fiscal quarter of the 2007 fiscal year are hereby incorporated as a document
by
reference to Form F-3 (Registration Statement under the Securities Act of 1933)
declared effective as of July 30, 2001 and to Form F-3 (Registration Statement
under the Securities Act of 1933) declared effective as of
March 11, 2002 and to amend certain material information as set forth
in these two Form F-3 documents.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
|
|
|
By:
/s/
Germain Lamonde
Name:
Germain Lamonde
Title:
President and Chief Executive Officer
|
|
Date:
January 12, 2007
EXFO
Reports Significant Year-over-Year Increases in Sales, Net
Earnings and Gross Margin
| § |
Sales
increase 31.4% to $35.5 million from $27.0 M in Q1
2006
|
| § |
GAAP
net earnings reach $3.5 million vs. $0.4 million in Q1 2006, best
quarter
in six years
|
| § |
Gross
margin improves to 57.2% compared to 55.4% in Q1 2006, best quarter
in
five years
|
| § |
Five
new products launched, including 10 GigE module for FTB-200 Compact
Platform
|
QUEBEC
CITY, CANADA, January 9, 2007—EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today significant year-over-year growth in sales,
net
earnings and gross margin for the first quarter ended November 30,
2006.
Sales
increased 31.4% to US$35.5 million in the first quarter of fiscal 2007 from
US$27.0 million in the first quarter of 2006, but decreased 0.5% from US$35.7
million in the fourth quarter of 2006. Excluding Consultronics, which was
acquired in January 2006, sales increased organically 21.8 % year-over-year.
Net
bookings improved by 21.0% year-over-year to US$37.0 million for a book-to-bill
ratio of 1.04 in the first quarter of fiscal 2007 from US$30.6 million in
the same period last year and 13.3% from US$32.6 million in the fourth quarter
of 2006.
Gross
margin increased to its highest level in five years to 57.2% of sales in
the
first quarter of fiscal 2007 from 55.4% in the first quarter of 2006 and
54.3%
in the fourth quarter of 2006.
GAAP
net
earnings in the first quarter of fiscal 2007 totaled US$3.5 million, or US$0.05
per diluted share, compared to US$0.4 million, or US$ 0.01 per diluted share,
in
the same period last year and US$2.9 million or US$0.04 per diluted share,
in
the fourth quarter of 2006. GAAP net earnings in the first quarter of fiscal
2007 included US$0.9 million in amortization of intangible assets and
US$0.3 million in stock-based compensation costs.
“We
continue to execute our profitable growth strategy with solid year-over-year
progression in terms of sales, gross margin and net earnings, without
sacrificing our long-term plan as we keep strengthening our global sales
organization and accelerating our new product development programs,” said
Germain Lamonde, EXFO’s Chairman, President and CEO. “Within our Telecom
Division, our protocol business unit, which generated more than 80% sales
growth
from 2005 to 2006, continued to demonstrate solid traction in the first quarter
on the strength of our strong product offering, accelerating roadmap and
developments in the triple-play test market. Overall, the sale of new products
contributed about one-third to our revenues in the first quarter, while five
new
test solutions were released with several major product launches still to
come.
Given these data points, I am optimistic about the full fiscal year and our
long-term prospects.”
Selected
Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q1
2007
|
Q4
2006
|
Q1
2006
|
|||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||
|
Sales:
|
||||||||||
|
Telecom
Division
|
$
|
29,522
|
$
|
30,111
|
$
|
22,076
|
||||
|
Life
Sciences and Industrial Division
|
6,025
|
5,622
|
4,968
|
|||||||
|
Total
|
$
|
35,547
|
$
|
35,733
|
$
|
27,044
|
||||
|
Earnings
from operations:
|
||||||||||
|
Telecom
Division
|
$
|
1,803
|
$
|
1,275
|
$
|
488
|
||||
|
Life
Sciences and Industrial Division
|
956
|
1,088
|
195
|
|||||||
|
Total
|
$
|
2,759
|
$
|
2,363
|
$
|
683
|
||||
|
Other
selected information:
|
||||||||||
|
GAAP
net earnings
|
$
|
3,533
|
$
|
2,910
|
$
|
355
|
||||
|
Amortization
of intangible assets
|
$
|
882
|
$
|
1,043
|
$
|
1,221
|
||||
|
Stock-based
compensation costs
|
$
|
285
|
$
|
213
|
$
|
274
|
||||
Operating Expenses
Selling
and administrative expenses amounted to US$11.5 million, or 32.5% of sales,
in
the first quarter of fiscal 2007 compared to US$9.1 million, or 33.5% of
sales,
in the same period last year and US$10.9 million, or 30.4% of sales, in the
fourth quarter of 2006.
Gross
research and development expenses totaled US$5.5 million, or 15.5% of sales,
in
the first quarter of fiscal 2007 compared to US$4.0 million, or 14.8% of
sales,
in the first quarter of 2006 and US$5.2 million, or 14.6% of sales, in the
fourth quarter of 2006.
Net
R&D expenses totaled US$4.4 million, or 12.2% of sales, in the first quarter
of fiscal 2007 compared to US$3.1 million, or 11.6% of sales, in the same
period last year and US$4.3 million, or 12.0% of sales, in the fourth quarter
of
2006.
First-Quarter
Business Highlights
Market
expansion —
EXFO
delivered sales growth of 31.4% year-over-year due to market-share gains
in
optical testing, the contribution from Consultronics’ offering in xDSL, IPTV and
VoIP testing, increased success of the company’s protocol test solutions, as
well as accelerated traction from select products in the Life Sciences and
Industrial Division. This sales performance is aligned with the company’s
objective to achieve at least 20% revenue growth year-over-year for fiscal
2007.
Profitability
—
EXFO
generated GAAP net earnings of $3.5 million, or $0.05 per diluted share,
which
includes a charge of US$0.02 per diluted share for amortization of intangible
assets and stock-based compensation costs. Profitability was positively affected
by an increase in the company’s gross margin in the first quarter. In terms of
earnings from operations, it reached 7.8% in the first quarter versus the
company’s stated goal of 7% for the fiscal year.
Innovation
—EXFO
launched five new products in the first quarter including a 10 Gigabit Ethernet
test module for the FTB-200 Compact Platform; a new software suite
for its
1/10 Gigabit Ethernet test modules on the FTB-200, FTB-400 and IQS-500 test
platforms; an
IPTV
quality-of-service (QoS) assessment package for the CoLT-450P
DSL test
set; the next-generation Cable Assembly and Component Test System for production
testing of short fiber assemblies and fiber-to-the-x (FTTx) components; as
well
as FiberFinder™,
a new
breed of test instrument for the efficient and safe management of high-count,
live and dark optical fibers. Sales from products that have been on the market
for two years or less represented 32.8% of total sales in the first quarter
of
fiscal 2007, while the company’s published goal is 35% for the fiscal
year.
Business
Outlook
EXFO
forecasted sales between US$34.0 million and US$37.0 million and GAAP net
earnings between US$0.02 and US$0.05 per diluted share for the second quarter
ending Feb. 28, 2007. GAAP net earnings include US$0.01 per diluted share
in
amortization of intangible assets and stock-based compensation costs.
“We
are
maintaining sales guidance between $34 and $37 million despite a typically
weak
start of a new calendar year, which indicates our confidence in reaching
our
growth metric of 20% or more for fiscal 2007,” Mr. Lamonde added.
Conference
Call and Webcast
EXFO
will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the first quarter of fiscal 2007. To
listen
to the conference call and participate in the question period via telephone,
dial 1-416-620-5690. Germain
Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President
of Finance and Chief Financial Officer, will participate in the call.
An
audio
replay of the conference call will be available one hour after the event
until 7
p.m. on January 16, 2007. The replay number is 1-402-977-9141 and the
reservation number is 21310947.
The
audio Webcast and replay of the conference call will also be available on
EXFO’s
Website at www.EXFO.com,
under
the Investors section.
About
EXFO
EXFO
is a
recognized test and measurement expert in the global telecommunications
industry. The Telecom Division, which represents the majority of the company's
business, offers a full suite of test solutions and monitoring systems to
network service providers, cable TV operators, telecom system vendors and
component manufacturers in approximately 70 countries. EXFO is the global
market
leader for portable optical test solutions and a leading supplier of protocol
and access test solutions to enable triple-play deployments and converged
IP
networking. Its PC/Windows-based modular FTB-200; FTB-400 and IQS-500 test
platforms host a wide range of modular test solutions across optical, physical,
data and network layers, while maximizing technology reuse across several
market
segments. The Life Sciences and Industrial Division, which leverages several
core telecom technologies, offers value-added solutions in the life sciences
and
high-precision assembly sectors based on advanced spot-curing, fluorescence
microscopy and nanopositioning solutions. For more information about EXFO,
visit
www.EXFO.com.
Forward-Looking
Statements
This
news
release contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information
or
statements of current condition. Words such as may,
will, expect, believe, anticipate, intend, could, estimate,
continue,
or the
negative or comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance
and
involve risks and uncertainties. Actual results may differ materially from
those
in forward-looking statements due to various factors including consolidation
in
the global telecommunications test and measurement industry; capital spending
levels in the telecommunications, life sciences and high-precision assembly
sectors; concentration of sales; fluctuating exchange rates and our ability
to
execute in these uncertain conditions; the effects of the additional actions
we
have taken in response to such economic uncertainty (including our ability
to
quickly adapt cost structures with anticipated levels of business, ability
to
manage inventory levels with market demand); market acceptance of our new
products and other upcoming products; limited visibility with regards to
customer orders and the timing of such orders; our ability to successfully
integrate our acquired and to-be-acquired businesses; the retention of key
technical and management personnel; and future economic, competitive and
market
conditions. Assumptions relating to the foregoing involve judgments and risks,
all of which are difficult or impossible to predict and many of which are
beyond
our control. Other risk factors that may affect our future performance and
operations are detailed in our Annual Report, on Form 20-F, and our other
filings with the U.S. Securities and Exchange Commission and the Canadian
securities commissions. We believe that the expectations reflected in the
forward-looking statements are reasonable based on information currently
available to us, but we cannot assure you that the expectations will prove
to
have been correct. Accordingly, you should not place undue reliance on these
forward-looking statements. These statements speak only as of the date of
this
document. We undertake no obligation to revise or update any of them to reflect
events or circumstances that occur after the date of this document.
-30-
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO
Electro-Optical Engineering Inc.
Interim
Consolidated Balance
Sheet
(in
thousands of US dollars)
|
As
at
November
30,
2006
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
|
$
|
7,741
|
$
|
6,853
|
|||
|
Short-term
investments
|
103,573
|
104,437
|
|||||
|
Accounts
receivable
|
|||||||
|
Trade,
less allowance for doubtful accounts of $451
($451
as at August 31, 2006)
|
22,910
|
20,891
|
|||||
|
Other
|
1,815
|
2,792
|
|||||
|
Income
taxes and tax credits recoverable
|
2,149
|
2,201
|
|||||
|
Inventories
(note 3)
|
23,496
|
24,623
|
|||||
|
Prepaid
expenses
|
1,358
|
1,404
|
|||||
|
163,042
|
163,201
|
||||||
|
Income
taxes and tax credits recoverable
|
859
|
476
|
|||||
|
Property,
plant and equipment
|
16,789
|
17,392
|
|||||
|
Intangible
assets
|
9,793
|
10,948
|
|||||
|
Goodwill
|
26,317
|
27,142
|
|||||
|
$
|
216,800
|
$
|
219,159
|
||||
|
Liabilities
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable and accrued liabilities (note 4)
|
$
|
16,798
|
$
|
17,337
|
|||
|
Deferred
revenue
|
1,877
|
1,772
|
|||||
|
Current
portion of long-term debt
|
105
|
107
|
|||||
|
18,780
|
19,216
|
||||||
|
Deferred
revenue
|
2,881
|
2,632
|
|||||
|
Government
grants
|
678
|
723
|
|||||
|
Long-term
debt
|
317
|
354
|
|||||
|
22,656
|
22,925
|
||||||
|
Contingency
(note 5)
|
|||||||
|
Shareholders’
Equity
|
|||||||
|
Share
capital
|
149,089
|
148,921
|
|||||
|
Contributed
surplus
|
4,011
|
3,776
|
|||||
|
Retained
earnings (note 6)
|
3,533
|
−
|
|||||
|
Cumulative
translation adjustment
|
37,511
|
43,537
|
|||||
|
194,144
|
196,234
|
||||||
|
$
|
216,800
|
$
|
219,159
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
7
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of
Earnings
(in
thousands of US dollars, except share and per share data)
|
Three
months ended
November
30,
|
||||||||||
|
2006
|
2005
|
|||||||||
|
Sales
|
$
|
35,547
|
$
|
27,044
|
||||||
|
Cost
of sales (1,2)
|
15,229
|
12,064
|
||||||||
|
Gross
margin
|
20,318
|
14,980
|
||||||||
|
Operating
expenses
|
||||||||||
|
Selling
and administrative(1)
|
11,542
|
9,058
|
||||||||
|
Net
research and development(1)
(note
7)
|
4,354
|
3,122
|
||||||||
|
Amortization
of property, plant and equipment
|
781
|
896
|
||||||||
|
Amortization
of intangible assets
|
882
|
1,221
|
||||||||
|
Total
operating expenses
|
17,559
|
14,297
|
||||||||
|
Earnings
from operations
|
2,759
|
683
|
||||||||
|
Interest
income
|
1,172
|
555
|
||||||||
|
Foreign
exchange gain (loss)
|
383
|
(318
|
)
|
|||||||
|
Earnings
before income taxes
|
4,314
|
920
|
||||||||
|
Income
taxes (note
8)
|
781
|
565
|
||||||||
|
Net
earnings for the period
|
$
|
3,533
|
$
|
355
|
||||||
|
Basic
and diluted net earnings per share
|
$
|
0.05
|
|
|
$
|
0.01
|
||||
|
Basic
weighted average number of shares outstanding
(000’s)
|
68,775
|
|
68,571
|
|||||||
|
Diluted
weighted average number of shares outstanding (000’s)
(note
9)
|
69,385
|
69,058
|
||||||||
|
(1) Stock-based
compensation costs included in:
|
||||||||||
|
Cost
of sales
|
$
|
34
|
$
|
42
|
||||||
|
Selling
and administrative
|
197
|
181
|
||||||||
|
Net
research and development
|
54
|
51
|
||||||||
|
$
|
285
|
$
|
274
|
|||||||
(2)
The
cost of sales is exclusive of amortization, shown separately.
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
8
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Retained
Earnings (Deficit)
and
Contributed Surplus
(in
thousands of US dollars)
|
Retained
earnings (Deficit)
|
|||||||
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
Balance
- Beginning of period
(note 6)
|
$
|
−
|
$
|
(381,846
|
)
|
||
|
Add
|
|||||||
|
Net
earnings for the period
|
3,533
|
355
|
|||||
|
Balance
- End of period
|
$
|
3,533
|
$
|
(381,491
|
)
|
||
|
Contributed
surplus
|
|||||||
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
Balance
- Beginning of period
|
$
|
3,776
|
$
|
2,949
|
|||
|
Add
(deduct)
|
|||||||
|
Stock-based
compensation costs
|
282
|
274
|
|||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
(47
|
)
|
−
|
||||
|
Balance
- End of period
|
$
|
4,011
|
$
|
3,223
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
9
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Cash
Flows
(in
thousands of US dollars)
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
earnings for the period
|
$
|
3,533
|
$
|
355
|
|||
|
Add
(deduct) items not affecting cash
|
|||||||
|
Discount
on short-term investments
|
414
|
171
|
|||||
|
Stock-based
compensation costs
|
285
|
274
|
|||||
|
Amortization
|
1,663
|
2,117
|
|||||
|
Deferred
revenue
|
494
|
293
|
|||||
|
Government
grants
|
(22
|
)
|
−
|
||||
|
6,367
|
3,210
|
||||||
|
Change
in non-cash operating items
|
|||||||
|
Accounts
receivable
|
(3,035
|
)
|
(3,193
|
)
|
|||
|
Income
taxes and tax credits
|
(418
|
)
|
(288
|
)
|
|||
|
Inventories
|
381
|
(1,133
|
)
|
||||
|
Prepaid
expenses
|
2
|
(116
|
)
|
||||
|
Accounts
payable and accrued liabilities
|
36
|
2,418
|
|||||
|
3,333
|
898
|
||||||
|
Cash
flows from investing activities
|
|||||||
|
Additions
to short-term investments
|
(194,266
|
)
|
(131,375
|
)
|
|||
|
Proceeds
from disposal and maturity of short-term investments
|
191,503
|
132,399
|
|||||
|
Additions
to property, plant and equipment and intangible assets
|
(811
|
)
|
(635
|
)
|
|||
|
Net
proceeds from disposal of property, plant and equipment
|
1,228
|
−
|
|||||
|
(2,346
|
)
|
389
|
|||||
|
Cash
flows from financing activities
|
|||||||
|
Repayment
of long-term debt
|
(27
|
)
|
(32
|
)
|
|||
|
Exercise
of stock options
|
121
|
19
|
|||||
|
94
|
(13
|
)
|
|||||
|
Effect
of foreign exchange rate changes on cash
|
(193
|
)
|
94
|
||||
|
Change
in cash
|
888
|
1,368
|
|||||
|
Cash
- Beginning of period
|
6,853
|
7,119
|
|||||
|
Cash
- End of period
|
$
|
7,741
|
$
|
8,487
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
10
| 1. |
Interim
financial information
|
The
financial information as at November 30, 2006 and for the three-month periods
ended November 30, 2005 and 2006 is unaudited. In the opinion of
management, all adjustments necessary to present fairly the results
of these periods in accordance with generally accepted accounting
principles (GAAP) in Canada have been included. The adjustments made were of
a
normal and recurring nature. Interim results may not necessarily be indicative
of results anticipated for the entire year.
These
interim consolidated financial statements are prepared in accordance with
generally accepted accounting principles in Canada and use the same
accounting policies and methods used in the preparation of the company’s most
recent annual consolidated financial statements. However, all disclosures
required for annual financial statements have not been included in these
financial statements. Consequently, these interim consolidated financial
statements should be read in conjunction with the company’s most recent annual
consolidated financial statements.
| 2. |
New
accounting standards and
pronouncements
|
In
January 2005, the Canadian Institute of Chartered Accountants (CICA) issued
four
new accounting standards in relation to financial instruments: Section 3855,
“Financial Instruments - Recognition and Measurement”; Section 3865, “Hedges”;
Section 1530, “Comprehensive Income”; and Section 3251, “Equity”.
Section
3855 expands on Section 3860, “Financial Instruments - Disclosure and
Presentation”, by prescribing when a financial instrument is to be
recognized on the balance sheet and at what amount. It also specifies how
financial instrument gains and losses are to be presented in the financial
statements.
Section
3865 provides an alternative to Section 3855 for entities that choose to
designate qualifying transactions as hedges for accounting purposes. It replaces
and expands on Accounting Guideline 13, “Hedging Relationships”, and on the
hedging guidance in Section 1650, “Foreign Currency Translation”, by specifying
how hedge accounting is applied and what disclosures it requires.
Section
1530, “Comprehensive Income”, introduces a new requirement to temporarily
present certain gains and losses outside net income.
Consequently,
Section 3250, “Surplus”, has been revised as Section 3251, “Equity”.
Sections
1530, 3251, 3855 and 3865 apply to fiscal years beginning on or after October
1,
2006. The company will adopt these new standards on September 1, 2007. Although
the final adjustments will be based on the financial instruments that the
company will be a party to on the adoption date, the company is currently
assessing the effects of these new standards and impacts consistent with the
adjustments described under note 20 item b) of the company’s most recent annual
consolidated financial statements are expected.
| 3. |
Inventories
|
|
As
at
November
30,
2006
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Raw
materials
|
$
|
12,758
|
$
|
14,353
|
|||
|
Work
in progress
|
1,310
|
1,043
|
|||||
|
Finished
goods
|
9,428
|
9,227
|
|||||
|
$
|
23,496
|
$
|
24,623
|
||||
| 4. |
Accounts
payable and accrued
liabilities
|
|
As
at
November
30,
2006
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Trade
|
$
|
9,027
|
$
|
7,487
|
|||
|
Salaries
and social benefits
|
4,847
|
5,991
|
|||||
|
Warranty
|
855
|
1,006
|
|||||
|
Commissions
|
751
|
835
|
|||||
|
Restructuring
charges
|
314
|
691
|
|||||
|
Other
|
1,004
|
1,327
|
|||||
|
$
|
16,798
|
$
|
17,337
|
||||
Changes
in the warranty provision are as follows:
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
(unaudited)
|
|||||||
|
Balance
- Beginning of period
|
$
|
1,006
|
$
|
725
|
|||
|
Provision
|
270
|
249
|
|||||
|
Settlements
|
(421
|
)
|
(158
|
)
|
|||
|
Balance
- End of period
|
$
|
855
|
$
|
816
|
|||
Changes
in the restructuring charges payable are as follows:
|
Balance
as at
August
31,
2006
|
Payments
|
Balance
as at
November
30,
2006
|
||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||
|
Fiscal
2006 plan
|
||||||||||
|
Severance
expenses
|
$
|
631
|
$
|
(357
|
)
|
$
|
274
|
|||
|
Fiscal
2003 plan
|
||||||||||
|
Exited
leased facilities
|
60
|
(20
|
)
|
40
|
||||||
|
Total
for all plans
|
$
|
691
|
$
|
(377
|
)
|
$
|
314
|
|||
| 5. |
Contingency
|
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against the company, four of
the underwriters of its Initial Public Offering and some of its executive
officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of
1933.
This class action alleges that the company’s registration statement and
prospectus filed with the Securities and Exchange Commission on June 29, 2000,
contained material misrepresentations and/or omissions resulting from (i) the
underwriters allegedly soliciting and receiving additional, excessive and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with the
company’s Initial Public Offering; and (ii) the underwriters allegedly
entering into agreements with customers whereby shares issued in connection
with
the company’s Initial Public Offering would be allocated to those customers in
exchange for which customers agreed to purchase additional amounts of shares
in
the after-market at pre-determined prices.
On
April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the underwriters in all of the 310 cases included
in
this class action and also filed an amended complaint containing allegations
specific to four of the company’s underwriters, the company and two of its
executive officers. In addition to the allegations mentioned above, the amended
complaint alleges that the underwriters (i) used their analysts to manipulate
the stock market; and (ii) implemented schemes that allowed issuer insiders
to sell their shares rapidly after an initial public offering and benefit from
high market prices. As concerns the company and its two executive officers
in
particular, the amended complaint alleges that (i) the company’s registration
statement was materially false and misleading because it failed to disclose
the
additional commissions and compensation to be received by underwriters; (ii)
the
two named executive officers learned of or recklessly disregarded the alleged
misconduct of the underwriters; (iii) the two named executive officers had
motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of the company’s stock and the fact that an alleged artificially
inflated stock price could be used as currency for acquisitions; and (iv) the
two named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and had
the ability to prevent its issuance or cause it to be corrected. The plaintiffs
in this suit seek an unspecified amount for damages suffered.
In
July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against the company was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights
and
Tolling Agreements entered into with the plaintiffs.
In
June
2003, a committee of the company’s Board of Directors conditionally approved a
proposed settlement between the issuer defendants, the individual defendants,
and the plaintiffs. If approved, the settlement would provide, among other
things, a release of the company and of the individual defendants for the
conduct alleged in the action to be wrongful in the amended complaint. The
company would agree to undertake other responsibilities under the settlement,
including agreeing to assign away, not assert, or release certain potential
claims the company may have against its underwriters.
On
June 25, 2004, the Plaintiffs moved for preliminary approval of the
settlement. The court granted the preliminary approval motion on February 15,
2005, subject to certain modifications. On August 31, 2005, the court
issued a preliminary order further approving the modifications to the
settlement and certifying the settlement classes. The court also appointed
the Notice Administrator for the settlement and ordered that notice of the
settlement be distributed to all settlement class members beginning on November
15, 2005. A settlement fairness hearing was held on April 24, 2006;
however, no ruling has been issued yet by the court.
The
plaintiffs have continued to litigate against the underwriter defendants.
The district court has directed that the litigation proceed within a number
of "focus cases" rather than in all of the 310 cases that have been
consolidated. The company's case is not one of these focus
cases. On October 13, 2004, the district court certified the focus
cases as class actions. The underwriter defendants appealed that
ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit
reversed the district court’s class certification decision. Because the
company's settlement with the plaintiffs involves the certification of the
case
as a class action as part of the approval process, the impact of the Court
of Appeals' ruling on the company's settlement is unclear.
If
the
court determines that the settlement is fair to the class members, and that
the
settlement classes can be certified, the settlement will be
approved. The
settlement provides that, if the plaintiffs do not obtain any
recovery from the underwriter defendants, the members of the class
action would receive an amount not expected to exceed $2,507,678. Any direct
financial impact plus any legal fees are expected to be borne by the company’s
insurance carriers. However, there can be no assurance that this proposed
settlement would be approved and implemented in its current form, or at
all. Therefore, it is not possible to predict the final outcome of the
case, nor to determine the amount of any possible losses. If the settlement
process fails, the company will continue to defend its position in this
litigation that the claims against it, and its officers, are without merit.
Accordingly, no provision for this case has been made in the interim
consolidated financial statements as at November 30, 2006.
| 6. |
Elimination
of deficit
|
On
August
31, 2006, upon the approval of the Board of Directors on that date, the company
eliminated its deficit of $373,711,000 against its share
capital.
| 7. |
Net
research and development
expenses
|
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
(unaudited)
|
|||||||
|
Gross
research and development expenses
|
$
|
5,509
|
$
|
4,006
|
|||
|
Research
and development tax credits and grants
|
(1,155
|
)
|
(884
|
)
|
|||
|
$
|
4,354
|
$
|
3,122
|
||||
| 8. |
Income
taxes
|
During
the three months ended November 30, 2005 and 2006, the company recorded income
taxes of $565,000 and $781,000, respectively. Most of these income taxes
represent income taxes payable at the Canadian federal level, which are reduced
by research and development tax credits that are recorded against gross research
and development expenses in the statements of earnings.
The
company records a full valuation allowance against its future income tax assets
because it is more likely than not that these assets will not be recovered.
This
caused its income tax rate to be distorted in relation to its pre-tax accounting
income.
| 9. |
Earnings
per share
|
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
(unaudited)
|
|||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,775
|
68,571
|
|||||
|
Plus
dilutive effect of:
|
|||||||
|
Stock
options (000’s)
|
435
|
426
|
|||||
|
Restricted
share units (000’s)
|
132
|
37
|
|||||
|
Deferred
share units (000’s)
|
43
|
24
|
|||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,385
|
69,058
|
|||||
|
Stock
awards excluded from the calculation of the diluted weighted average
number of shares because their exercise price was greater than the
average
market price of the common shares (000’s)
|
1,444
|
1,803
|
|||||
| 10. |
Segment
information
|
The
company is organized under two reportable segments: the Telecom Division and
the
Life Sciences and Industrial Division. The Telecom Division offers integrated
test solutions to network service providers, cable TV operators, system vendors
and component manufacturers throughout the global telecommunications industry.
The Life Sciences and Industrial Division mainly leverages developed and
acquired core telecom technologies for high-precision assembly and research
sectors.
The
following tables set out information by segment:
|
Three
months ended November 30, 2006
|
||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||
|
(unaudited)
|
||||||||||
|
Sales
|
$
|
29,522
|
$
|
6,025
|
$
|
35,547
|
||||
|
Earnings
from operations
|
$
|
1,803
|
$
|
956
|
$
|
2,759
|
||||
|
Unallocated
items
|
||||||||||
|
Interest
income
|
1,172
|
|||||||||
|
Foreign
exchange gain
|
383
|
|||||||||
|
Earnings
before income taxes
|
4,314
|
|||||||||
|
Income
taxes
|
781
|
|||||||||
|
Net
earnings for the period
|
$
|
3,533
|
||||||||
|
Three
months ended November 30, 2005
|
||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||
|
(unaudited)
|
||||||||||
|
Sales
|
$
|
22,076
|
$
|
4,968
|
$
|
27,044
|
||||
|
Earnings
from operations
|
$
|
488
|
$
|
195
|
$
|
683
|
||||
|
Unallocated
items
|
||||||||||
|
Interest
income
|
555
|
|||||||||
|
Foreign
exchange loss
|
(318
|
)
|
||||||||
|
Earnings
before income taxes
|
920
|
|||||||||
|
Income
taxes
|
565
|
|||||||||
|
Net
earnings for the period
|
$
|
355
|
||||||||
Total
assets by reportable segment are detailed as follows:
|
As
at
November
30,
2006
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Total
assets
|
|||||||
|
Telecom
Division
|
$
|
91,964
|
$
|
93,853
|
|||
|
Life
Sciences and Industrial Division
|
10,514
|
11,339
|
|||||
|
Unallocated
assets
|
114,322
|
113,967
|
|||||
|
$
|
216,800
|
$
|
219,159
|
||||
Unallocated
assets are comprised of cash, short-term investments and income taxes and tax
credits recoverable.
| 11. |
Stock-based
compensation
|
On
September 1, 2003, the company adopted the amendment made to the CICA Handbook
section 3870, “Stock-Based Compensation and Other Stock-Based Payments”.
Accordingly, employee stock awards granted on or after
September 1, 2003, were accounted for using the fair value-based
method. However, if the fair value-based method had been applied to employee
stock awards granted prior to September 1, 2003, and outstanding as at
November 30, 2005, the pro forma net earnings per share would have
been lower than the net earnings per share for the three months ended November
30, 2005, by $0.01.
| 12. |
Differences
between Canadian and U.S.
GAAP
|
These
interim consolidated financial statements are prepared in accordance with
Canadian GAAP and significant differences in measurement and disclosure from
U.S. GAAP are set out in note 20 to the company’s most recent annual
consolidated financial statements. This note describes significant changes
occurring since the most recent annual consolidated financial statements and
provides a quantitative analysis of all significant differences. All disclosures
required in annual financial statements under U.S. GAAP and Regulation S-X
of
the Securities and Exchange Commission in the United States have not been
provided in these interim consolidated financial statements.
Comprehensive
income (loss) under U.S. GAAP
Comprehensive
income (loss) under U.S. GAAP is as follows:
|
Three
months ended
November
30,
|
|||||||
|
2006
|
2005
|
||||||
|
(unaudited)
|
|||||||
|
Net
earnings for the period in accordance with Canadian GAAP and
U.S. GAAP
|
$
|
3,533
|
$
|
355
|
|||
|
Other
comprehensive income (loss)
|
|||||||
|
Foreign
currency translation adjustment
|
(5,832
|
)
|
3,048
|
||||
|
Unrealized
gains (losses) on forward exchange contracts
|
(2,075
|
)
|
1,097
|
||||
|
Reclassification
of realized gains on forward exchange contracts in net
earnings
|
(736
|
)
|
(435
|
)
|
|||
|
Comprehensive
income (loss) under U.S. GAAP
|
$
|
(5,110
|
)
|
$
|
4,065
|
||
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported shareholders’ equity under Canadian GAAP as compared to U.S.
GAAP:
|
As
at
November
30,
2006
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$
|
194,144
|
$
|
196,234
|
|||
|
Forward
exchange contracts
|
2,640
|
5,451
|
|||||
|
Goodwill
|
(11,750
|
)
|
(11,908
|
)
|
|||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$
|
185,034
|
$
|
189,777
|
|||
The
following table summarizes the shareholders’ equity activity under U.S. GAAP
since August 31, 2006:
|
Share
capital
|
Contributed
surplus
|
Deficit
|
Deferred
stock-based
compensation costs
|
Other
capital
|
Accumulated
other comprehensive income
|
Shareholders’
equity
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||
|
Balance
as at August 31, 2006
|
$
|
598,421
|
$
|
1,537
|
$
|
(458,944
|
)
|
$
|
(1,371
|
)
|
$
|
5,504
|
$
|
44,630
|
$
|
189,777
|
||||||
|
Net
earnings for the period
|
-
|
-
|
3,533
|
-
|
-
|
-
|
3,533
|
|||||||||||||||
|
Stock-based
compensation costs
|
-
|
-
|
-
|
(347
|
)
|
593
|
-
|
246
|
||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
(5,832
|
)
|
(5,832
|
)
|
|||||||||||||
|
Unrealized
losses on forward exchange contracts
|
-
|
-
|
-
|
-
|
-
|
(2,811
|
)
|
(2,811
|
)
|
|||||||||||||
|
Exercise
of stock options
|
121
|
-
|
-
|
-
|
-
|
-
|
121
|
|||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock awards
|
47
|
-
|
-
|
-
|
(47
|
)
|
-
|
-
|
||||||||||||||
|
Balance
as at November 30, 2006
|
$
|
598,589
|
$
|
1,537
|
$
|
(455,411
|
)
|
$
|
(1,718
|
)
|
$
|
6,050
|
$
|
35,987
|
$
|
185,034
|
||||||
Accumulated
other comprehensive income is comprised of the following:
|
As
at
November
30,
2006
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Foreign
currency translation adjustment
|
|||||||
|
Current
period
|
$
|
(5,832
|
)
|
$
|
12,322
|
||
|
Cumulative
effect of prior periods
|
39,179
|
26,857
|
|||||
|
33,347
|
39,179
|
||||||
|
Unrealized
gains on forward exchange contracts
|
|||||||
|
Current
period
|
(2,811
|
)
|
2,514
|
||||
|
Cumulative
effect of prior periods
|
5,451
|
2,937
|
|||||
|
2,640
|
5,451
|
||||||
|
$
|
35,987
|
$
|
44,630
|
||||
Research
and development tax credits
Under
Canadian GAAP, all research and development tax credits are recorded as a
reduction of gross research and development expenses. Under U.S. GAAP, tax
credits that are refundable against taxable income are recorded in the income
taxes. These tax credits amounted to $536,000 and $771,000 for the three months
ended November 30, 2005 and 2006, respectively. This difference has no
impact on the net earnings and the net earnings per share for the
reporting periods.
Statements
of cash flows
For
the
three months ended November 30, 2005 and 2006, there were no significant
differences between the statements of cash flows under Canadian GAAP as
compared to U.S. GAAP, except for the subtotal before change in non-cash
operating items, whose presentation is not permitted under U.S.
GAAP.
New
accounting standards and pronouncements
In
May
2005, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 154, “Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3”.
This statement replaces APB Opinion No. 20, “Accounting Changes”,
and FASB
Statement No. 3, “Reporting Accounting Changes in Interim Financial
Statements”,
and
changes the requirements for the accounting and reporting of a change in
accounting principle. This statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not
include specific transition provisions. In general, this statement requires
a
company to account for the adoption of a new accounting policy by applying
the
new principle to prior accounting periods as if that principle had always been
adopted. This statement is effective for accounting changes or error corrections
in fiscal years beginning after December 15, 2005.
In
June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes”, which clarifies the accounting for uncertainties
in income taxes recognized in accordance with SFAS 109, “Accounting for Income
Taxes”. The interpretation is effective for fiscal years beginning after
December 15, 2006. The company will adopt this interpretation on September
1,
2007, and is currently assessing the impact its adoption will have on its
financial statements.
On
September 15, 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
establishes a framework for measuring fair value in GAAP, and is applicable
to
other accounting pronouncements in which fair value is considered to be the
relevant measurement attribute. SFAS 157 also expands disclosures about fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007. The company will adopt this statement on
September 1, 2008 and has not yet assessed the impact its adoption
will have on its financial statements.
Management’s
Discussion and Analysis of Financial
Condition
and
Results of Operations
This
discussion and analysis contains forward-looking statements within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995 and we intend
that such forward- looking statements be subject to the safe harbors created
thereby. Forward-looking statements are statements other than historical
information or statements of current condition. Words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate”, “continue” or
the negative or comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances
are
forward-looking statements. They are not guarantees of future performance
and
involve risks and uncertainties. Actual results may differ materially from
those
in the forward-looking statements due to various factors, including
consolidation in the global telecommunications test and measurement industry;
capital spending levels in the telecommunications, life sciences and
high-precision assembly sectors; concentration of sales; fluctuating exchange
rates and our ability to execute in these uncertain conditions; the effects
of
the additional actions we have taken in response to such economic uncertainty
(including workforce reductions, ability to quickly adapt cost structures
with
anticipated levels of business, ability to manage inventory levels with market
demand); market acceptance of our new products and other upcoming products;
limited visibility with regards to customer orders and the timing of such
orders; our ability to successfully integrate our acquired and to-be-acquired
businesses and to operate and manage businesses in foreign countries; the
retention of key technical and management personnel; and future economic,
competitive and market conditions. Assumptions relating to the foregoing
involve
judgments and risks, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Other risk factors that
may
affect our future performance and operations are detailed in our Annual Report
on Form 20-F and our other filings with the U.S. Securities and Exchange
Commission and the Canadian securities commission. We believe that the
expectations reflected in the forward-looking statements are reasonable based
on
information currently available to us, but we cannot assure you that the
expectations will prove to have been correct. Accordingly, you should not
place
undue reliance on these forward-looking statements. These statements speak
only
as at the date of this document. We undertake no obligation to revise or
update
any of them to reflect events or circumstances that occur after the date
of this
document.
The
following discussion and analysis of financial condition and results of
operations is dated January 5, 2007.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
Global
market demand for telecom test and measurement equipment should remain strong
in
the years to come as most network service providers (NSPs) are increasing
capital expenditures to upgrade their networks for converged Internet protocol
(IP) services and triple-play (voice, data and video) offerings. These market
forces create needs for differentiated test solutions to help NSPs accelerate
deployment and ensure service quality in their network build-outs.
With
the
ongoing globalization of the world’s economy and the emergence of new consumer
markets, NSPs are poised to capitalize on growing demand for communications
and
entertainment services. In 2006, some smaller telecom operators launched
broadcast-quality video services based on IP communications. This technology,
better known as IPTV, allows telephone companies (telcos) to efficiently
offer
TV, HDTV and interactive TV services to their broadband subscribers. Tier-1
and Tier-2 telcos are expected to launch similar IPTV services on a large-scale
basis starting in calendar 2007. While Web-based streaming video is offered
for
free on a best-effort basis, IPTV, whom many regard as the broadband “killer
application,” will require a high level of performance to ensure a quality user
experience. NSPs, after all, don’t want customer churn to prevent a meaningful
return on their massive investments.
To
deliver a wide range of differentiated IP services, NSPs will continue
transforming their legacy, circuit-switched networks into highly efficient,
flexible and scalable packet-based IP architectures. Telcos and cablecos
have
already proven that they can generate significant revenues from higher-margin
services on hybrid networks, while reducing operating costs. IPTV should
only
accelerate the migration towards fully converged, IP-based networks, since
it
typically allows NSPs to nearly double average revenue per user (ARPU).
The
increasing reliance on telecom and IP-related services will continue driving
bandwidth consumption, thus pushing the deployment of fiber deeper into access
networks. Competition between telcos and cablecos has intensified as triple-play
offerings are announced almost daily. Hybrid architectures combining copper
and
fiber (fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will
keep
expanding worldwide, since this is the quickest and least expensive method
to
increase bandwidth. To remain competitive with cablecos, telcos are migrating
from former asymmetric digital subscriber line (ADSL), to current ADSL2+,
and
onto future very-high-data-rate digital subscriber line 2+ (VDSL2+) technologies
as interoperability becomes a reality. Telcos, however, will increasingly
opt
for all-fiber, passive optical network (PON)-based architectures
(fiber-to-the-premises, or FTTP) to meet heightened bandwidth requirements
and
to future-proof their networks. These decisions will apply not only to
green-field deployments and high-rise buildings, but also to larger-scale
rollouts as operating costs are less than FTTC and FTTN and cost of deployments
are falling. We are still in the early stages of building access networks
around
the world.
Metro
network deployments, taking advantage of carrier-grade Ethernet and
metro-Ethernet technologies, are moving ahead to handle large increases in
bandwidth consumption in access networks. These network upgrades, in turn,
will
eventually place a strain on long-haul networks, where excess capacity created
by massive overspending in the late-90s is gradually being consumed. NSPs
are
more than ever committed to deploying next-generation SONET/SDH transport
technologies, while 40 Gb/s deployments are not far behind.
These
key
market trends affected multiple segments of the global telecommunications
supply
chain in the first quarter of fiscal 2007. Nevertheless,
system vendors benefited from orders by both telcos and cablecos for
next-generation, converged IP networks as well as from major investments
by
telcos in access networks. Component vendors saw demand for optical components
that support FTTx and IP-based systems. Some test and measurement equipment
vendors attracted the attention of telcos, cablecos, system manufacturers
and
component vendors, especially ones offering test solutions for IP networking
and/or FTTx applications.
COMPANY
OVERVIEW
We
reported sales of $35.5 million in the first quarter of fiscal 2007, which
represented an increase of 31.4% year-over-year. Our corporate performance
metric for sales growth (not guidance) in fiscal 2007 was established at
20%
year-over-year. Sales during the first quarter of fiscal 2007 included those
of
Consultronics Limited, a leading supplier of xDSL, IPTV and VoIP test equipment
for copper-based broadband access networks, which was integrated into our
Telecom Division following the closing of the acquisition in January 2006;
this
contributed to increase our sales more significantly during the first quarter
of
fiscal 2007, compared to the same period last year. Excluding these sales,
we
would have reported organic growth of 21.8% year-over-year.
Looking
at the bottom line, we generated GAAP net earnings of $3.5 million, or $0.05
per
diluted share, in the first quarter of fiscal 2007 compared to $0.4
million, or $0.01 per diluted share, in the same period of 2006. Net earnings
per share in the first quarter of 2007 included charges of $0.02 for
amortization of intangible assets and stock-based compensation costs. In
terms
of earnings from operations, they reached 7.8% in the first quarter of fiscal
2007 compared to our stated goal of 7% for the whole fiscal year.
During
the first quarter of fiscal 2007, we launched five new products including
the
compatibility of our 10 Gigabit Ethernet test module with our FTB-200
Compact Platform; a suite of new
software features for our FTB-8510
Packet Blazer
and
IQS-8510
Packet Blazer
Ethernet
test modules; an
IPTV
quality-of-service (QoS) software assessment package for our CoLT-450P
DSL test
set; a
next-generation cable assembly and component test system for production testing
of short fiber assemblies and fiber-to-the-x (FTTx) components; and FiberFinder™,
a new product category for the efficient and safe management of live and
dark optical fibers. Sales derived from products that have been on the market
two years or less represented 32.8% of total sales in the first quarter of
fiscal 2007, while our published goal is 35% for the whole fiscal
year.
During
the first quarter of fiscal 2007, we implemented SAP at the Toronto, Canada
and
the Southampton, United Kingdom facilities of our newly acquired Consultronics.
OUR
STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
For
a
complete description of our strategy and the related key performance indicators,
as well as our capability to deliver results in fiscal 2007, please refer
to the
corresponding sections in our most recent Annual Report, filed with the
securities commissions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For
a
complete description of our critical accounting policies and estimates, please
refer to the corresponding section in our most recent Annual Report, filed
with
the securities commissions. The following details the changes in critical
accounting policies that will be adopted in fiscal 2008.
In
January 2005, the Canadian Institute of Chartered Accountants (CICA) issued
four
new accounting standards in relation to financial instruments: Section 3855,
"Financial Instruments - Recognition and Measurement"; Section 3865, "Hedges";
Section 1530, "Comprehensive Income"; and Section 3251, "Equity".
Section
3855 expands on Section 3860, "Financial Instruments - Disclosure and
Presentation", by prescribing when a financial instrument is to be recognized
on
the balance sheet and at what amount. It also specifies how financial instrument
gains and losses are to be presented in the financial statements.
Section
3865 provides an alternative to Section 3855 for entities that choose to
designate qualifying transactions as hedges for accounting purposes. It replaces
and expands on Accounting Guideline 13, "Hedging Relationships", and on the
hedging guidance in Section 1650, "Foreign Currency Translation", by specifying
how hedge accounting is applied and what disclosures it requires.
Section
1530, "Comprehensive Income", introduces a new requirement to temporarily
present certain gains and losses outside net income.
Consequently,
Section 3250, "Surplus", has been revised as Section 3251, "Equity".
Sections
1530, 3251, 3855 and 3865 apply to fiscal years beginning on or after October
1,
2006. We will adopt these new standards on September 1, 2007. Although the
final
adjustments will be based on the financial instruments that we will be a
party
to on the adoption date, we are currently assessing the effects of these
new
standards and impacts consistent with the adjustments described under note
20
item b) of our most recent annual consolidated financial statements are
expected.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition
and
results of operations for the three months ended November 30, 2005 and 2006,
should be read in conjunction with our interim consolidated financial statements
and the related notes thereto. Our interim consolidated financial statements
have been prepared in accordance with Canadian generally accepted accounting
principles (Canadian GAAP) and significant differences in measurement and
disclosure from United States generally accepted accounting principles
(U.S. GAAP) are set out in note 12 to our interim consolidated financial
statements. Our measurement currency is the Canadian dollar although we report
our financial statements in US dollars. The following table sets forth
interim consolidated statements of earnings data in thousands of US dollars,
except per share data, and as a percentage of sales for the periods
indicated:
|
Three
months ended
November
30,
|
Three
months ended
November
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Consolidated
statements of earnings data:
|
|||||||||||||
|
Sales
|
$
|
35,547
|
$
|
27,044
|
100.0
|
%
|
100.0
|
%
|
|||||
|
Cost
of sales (1)
|
15,229
|
12,064
|
42.8
|
44.6
|
|||||||||
|
Gross
margin
|
20,318
|
14,980
|
57.2
|
55.4
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Selling
and administrative
|
11,542
|
9,058
|
32.5
|
33.5
|
|||||||||
|
Net
research and development
|
4,354
|
3,122
|
12.2
|
11.6
|
|||||||||
|
Amortization
of property, plant and equipment
|
781
|
896
|
2.2
|
3.3
|
|||||||||
|
Amortization
of intangible assets
|
882
|
1,221
|
2.5
|
4.5
|
|||||||||
|
Total
operating expenses
|
17,559
|
14,297
|
49.4
|
52.9
|
|||||||||
|
Earnings
from operations
|
2,759
|
683
|
7.8
|
2.5
|
|||||||||
|
Interest
income
|
1,172
|
555
|
3.3
|
2.1
|
|||||||||
|
Foreign
exchange gain (loss)
|
383
|
(318
|
)
|
1.1
|
(1.2
|
)
|
|||||||
|
Earnings
before income taxes
|
4,314
|
920
|
12.2
|
3.4
|
|||||||||
|
Income
taxes
|
781
|
565
|
2.2
|
2.1
|
|||||||||
|
Net
earnings for the period
|
$
|
3,533
|
$
|
355
|
10.0
|
%
|
1.3
|
%
|
|||||
|
Basic
and diluted net earnings per share
|
$
|
0.05
|
$
|
0.01
|
|||||||||
|
Segment
information:
|
|||||||||||||
|
Sales:
|
|||||||||||||
|
Telecom
Division
|
$
|
29,522
|
$
|
22,076
|
83.1
|
%
|
81.6
|
%
|
|||||
|
Life
Sciences and Industrial Division
|
6,025
|
4,968
|
16.9
|
18.4
|
|||||||||
|
$
|
35,547
|
$
|
27,044
|
100.0
|
%
|
100.0
|
%
|
||||||
|
Earnings
from operations:
|
|||||||||||||
|
Telecom
Division
|
$
|
1,803
|
$
|
488
|
5.1
|
%
|
1.8
|
%
|
|||||
|
Life
Sciences and Industrial Division
|
956
|
195
|
2.7
|
0.7
|
|||||||||
|
$
|
2,759
|
$
|
683
|
7.8
|
%
|
2.5
|
%
|
||||||
|
Research
and development data:
|
|||||||||||||
|
Gross
research and development
|
$
|
5,509
|
$
|
4,006
|
15.5
|
%
|
14.8
|
%
|
|||||
|
Net
research and development
|
$
|
4,354
|
$
|
3,122
|
12.2
|
%
|
11.6
|
%
|
|||||
(1)
The
cost of sales is exclusive of amortization, shown separately.
SALES
For
the
three months ended November 30, 2006, our global sales increased 31.4% to
$35.5 million from $27.0 million for the same period last year, with an
83%-17% split in favor of our Telecom Division (82%-18% in 2006).
Telecom
Division
For
the
three months ended November 30, 2006, our Telecom Division sales increased
33.7%
to $29.5 million from $22.1 million for the same period last year.
During
the first quarter of fiscal 2007, we posted significant organic growth due
to
market-share gains in optical testing and continued spending in access networks
fuelled by the competitive dynamic between North American telephone and cable
companies.
In
addition, Consultronics, which we acquired in January 2006, contributed to
the
increase in our telecom sales year-over-year, although sales of Consultronics
products were lower than at the time of the acquisition as a result of the
sales integration process that has taken longer than expected and the fact
that
we discontinued some of their product lines. However, we expect sales of
these
test solutions to increase over time as the integration process is now
completed. In addition, these solutions are now better leveraged by our global
sales channels and we are also developing and launching new products that
will
integrate Consultronics’ core knowledge and intellectual property. Excluding
Consultronics’ sales, our organic growth would have reached 21.9%
year-over-year.
Finally,
during the first quarter of fiscal 2007, we benefited from a significant
increase in the demand for our protocol test solutions, which also contributed
to increase our telecom sales year-over-year. Sales of our protocol test
solutions increased to their highest historical levels in the first quarter
of
fiscal 2007, representing more than 10% of our telecom sales. Based on these
data points and given the much larger addressable market for protocol test
solutions, we believe that protocol revenues should grow faster than our
optical
revenues. On a medium- and long-term basis, we anticipate that revenues from
these segments will eventually be equal.
Life
Sciences and Industrial Division
For
the
three months ended November 30, 2006, sales of our Life Sciences and Industrial
Division increased 21.3% to $6.0 million from $5.0 million for the same period
last year. The increase in sales in the first quarter of fiscal 2007, compared
to the same period last year, is mainly due to increased sales activities
in the
curing market as well as market-share gains in the fluorescence illumination
market.
Net
Bookings
Overall,
for the two divisions, net accepted orders increased 21.0% to $37.0 million
in
the first quarter of fiscal 2007 from $30.6 million for the same period last
year. Our book-to-bill ratio reached 1.04 in the first quarter of fiscal
2007,
compared to 1.13 for the same period last year. In the previous quarter,
the net
book-to-bill ratio was 0.91. Our 21.0% increase in net accepted orders in
the
first quarter of fiscal 2007, compared to the same period last year, reflects
the impact of the Consultronics acquisition, the increased demand in our
test
solutions (especially in the Americas and in the Europe-Middle East-Africa
(EMEA) region), market-share gains in the telecommunications and life sciences
markets as well as the improvement in the telecommunications market environment.
Geographic
distribution
For
the
three months ended November 30, 2006, sales to the Americas, Europe-Middle
East-Africa (EMEA) and Asia-Pacific (APAC) accounted for 57%, 29% and 14%
of
global sales, respectively. For the corresponding period last year, sales
to the
Americas, EMEA and APAC accounted for 60%, 25% and 15% of global sales,
respectively. Although our sales increased in dollars in every geographic
area
during the first quarter of fiscal 2007, compared to the same period last
year,
we made greater progress in the EMEA and the Americas markets. Sales to these
two markets increased 51.0% and 25.4%, respectively
year-over-year.
The
significant increase in sales in the EMEA market in the first quarter of
fiscal
2007, compared to the same period last year, is mainly due to improved market
penetration by both divisions, following our efforts to develop this market
in
the last several years. Among other things, Tier-1 carriers in EMEA (especially
in Europe) have begun migrating their traditional, circuit-switched voice
networks to packet-based, IP architectures, which is creating a market demand
for our protocol test solutions.
In
the
Americas, sales to our top customer, who is located in the United States,
increased in dollars in the first quarter of fiscal 2007, compared to the
same
period last year. This customer, along with other leading carriers, have
continued their investments in access networks, fuelled by the competitive
pressure from cable companies to offer triple-play services (voice, data
and
video) to end-customers. As well, Consultronics, whose customers are mainly
located in the Americas, helped increase our sales to the Americas,
year-over-year.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, cable TV operators, optical system and component
manufacturers, as well as customers in the life sciences and high-precision
assembly sectors. During the three months ended November 30, 2006, our top
customer accounted for 13.9% ($4.9 million) of our global sales and our top
three customers accounted for 19.5% of our global sales. For the corresponding
period last year, the same single customer accounted for 13.2% ($3.6 million)
of
our global sales and our top three customers accounted for 24.5% of our global
sales.
GROSS
MARGIN
Gross
margin amounted to 57.2% of sales for the three months ended
November 30, 2006, compared to 55.4% for the same period last year.
The
increase in our gross margin in the first quarter of fiscal 2007, compared
to
the same period last year, can be explained by the following factors. First,
the
significant increase in sales year-over-over (31.4%) resulted in an increase
in
manufacturing activities, allowing us to better absorb our fixed manufacturing
costs. In addition, during the first quarter of fiscal 2007, our gross margin
was positively affected by the increased sales of our protocol test solutions
and by the contribution of Consultronics. Protocol and copper-access test
solutions tend to have better margins than our optical ones. Furthermore,
we
were able to reduce our cost of goods sold by better leveraging our supplier
base and by developing innovative new products with cost-effective design.
However, the shift in the geographic distribution of our sales in the first
quarter of fiscal 2007, compared to the same period last year, resulted in
more
sales made to the EMEA market (in percentage of total sales), where gross
margins tend to be slightly lower than our average. Also, we are facing
continued aggressive pricing pressure worldwide. Finally, a stronger Canadian
dollar, compared to the US dollar year-over-year, prevented us from further
improving our gross margin as some cost of sales items are denominated in
Canadian dollars.
Considering
the expected sales growth in fiscal 2007, the expected increase in sales
of
protocol products (which tend to generate higher margins), the cost-effective
design of our products, our tight control on operating costs as well as the
full
contribution of Consultronics, whose products have slightly higher margins
than
our existing ones, we expect our gross margin to improve in 2007 and beyond.
However, our gross margin may fluctuate quarter-over-quarter as our sales
may
fluctuate. Furthermore, our gross margin can be negatively affected by increased
competitive pricing pressure, customer concentration and/or consolidation,
increased obsolescence costs, shifts in customer and product mix,
under-absorption of fixed manufacturing costs and increases in product offerings
by other suppliers in our industry. Finally, any further increase in the
strength of the Canadian dollar would have a negative impact on our gross
margin in fiscal 2007.
SELLING
AND ADMINISTRATIVE
For
the
three months ended November 30, 2006, selling and administrative expenses
were
$11.5 million, or 32.5% of sales, compared to $9.1 million, or 33.5% of sales
for the same period last year.
During
the first quarter of fiscal 2007, we continued intensifying our sales and
marketing activities to develop our markets and leverage the significant
research and development investments of the prior years; this resulted in
higher
sales and marketing expenditures (including number of employees) year-over-year.
In addition, in the first quarter of fiscal 2007, Consultronics, which we
acquired in January 2006, contributed the whole period to our selling and
administrative expenses, and therefore caused these expenses to increase
year-over-year. Furthermore, a stronger Canadian dollar, compared to the US
dollar year-over-year, caused our selling and administrative expenses to
increase, as more than half of these are incurred in Canadian dollars. However,
despite increased sales volume year-over-year, our overall commissions expenses
decreased in the first quarter of fiscal 2007, compared to the same period
last
year, due to the shift in the customers and products mix. In fact, during
the
first quarter of fiscal 2006, we had large orders sold directly to international
customers for whom we had to pay commissions to distributors. Finally, our
significant increase in revenues allowed us to reduce our selling and
administrative expenses on a percentage basis as a portion of these expenses
tend to be fixed.
For
fiscal 2007, we expect our selling and administrative expenses to increase
in
dollars, while remaining in the 30% to 32% range for the whole fiscal year.
In
particular, in fiscal 2007, we will have the full impact of the acquisition
of
Consultronics on our selling and administrative expenses. Also, we expect
our
commission expenses to increase as sales volume increases. Furthermore,
considering our goal of becoming the leading player in the telecom test and
measurement space, we will intensify our sales and marketing efforts, both
domestic and international, which will also cause our expenses to rise. Finally,
any further increase in the strength of the Canadian dollar would also cause
our
selling and administrative expenses to increase, as more than half of these
expenses are incurred in Canadian dollars.
RESEARCH
AND DEVELOPMENT
For
the
three months ended November 30, 2006, gross research and development expenses
totaled $5.5 million, or 15.5% of sales, compared to $4.0 million, or 14.8%
of sales for the same period last year.
The
increase in our gross research and development expenses in dollars in the
first
quarter of fiscal 2007, compared to the same period last year, is mostly
due to
the contribution of the Consultronics acquisition and the negative impact
of the
increased strength of the Canadian dollar, compared to the US dollar
year-over-year as the majority of these expenses are incurred in Canadian
dollars. Over the last few quarters, we intensified our research and development
activities, including additional employees, which resulted in more gross
research and development expenses in both divisions during the first quarter
of
fiscal 2007, compared to the same period last year. This also explains the
increase in our gross research and development expenses as a percentage of
sales
year-over-year.
For
the
three months ended November 30, 2006, tax credits and grants from the Canadian
federal and provincial governments for research and development activities
were
$1.2 million, or 21.0% of gross research and development expenses, compared
to
$884,000, or 22.1% of gross research and development expenses for the same
period last year.
The
increase in dollars of our tax credits and grants in the first quarter of
fiscal
2007, compared to the same period last year is directly related to the increase
in our gross research and development expenses as we were entitled to the
same
tax credits and grants programs.
For
the
first quarter of fiscal 2007, 32.8% of our sales originated from products
that
have been on the market for two years or less, which is slightly below our
stated goal of 35% for fiscal 2007. Over the last few months, our successful
FTTx products moved down to the denominator part of the ratio as they have
been
on the market for more than two years. These products still contributed strongly
to our sales in the first quarter of fiscal 2007.
For
fiscal 2007, we expect to increase our research and development expenses
at the
same rate as we grow our sales, given our focus on innovation, our desire
to
gain market shares and our goal to exceed customer needs and expectations
and
the full impact of the acquisition of Consultronics. We also intend to
increasingly take advantage of talent pools around the world to cost-effectively
design innovative test solutions. Finally, any further increase in the strength
of the Canadian dollar would cause our net research and development expenses
to
increase, as most of these are incurred in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
For
the
three months ended November 30, 2006, amortization of intangible assets was
$882,000, compared to $1.2 million for the same period last year. The decrease
in amortization expenses for the first quarter of fiscal 2007, compared to
the
same period last year, despite the increase in the strength of the Canadian
dollar compared to the US dollar year-over-year, and the acquisition of
Consultronics, is mainly due to the fact that some of our intangible assets
became fully amortized during fiscal 2006 and in the first quarter of 2007;
namely, those related to our Life Sciences and Industrial Division and our
protocol activities.
INTEREST
AND OTHER INCOME
For
the
three months ended November 30, 2006, interest income amounted to $1.2 million,
compared to $555,000 for the same period last year. Most of the increase
in our
interest income is due to the significant increase in interest rate, which
almost doubled year-over-year. Also, the increased strength of the Canadian
dollar compared to the US dollar year-over-year contributed to increase our
interest income to some extent as they are denominated in Canadian dollars.
FOREIGN
EXCHANGE GAIN (LOSS)
For
the
three months ended November 30, 2006, the foreign exchange gain amounted
to
$383,000 compared to a foreign exchange loss of $318,000 for the same period
last year.
During
the first quarter of fiscal 2007, the value of the Canadian dollar decreased
compared to the US dollar versus the previous quarter, which resulted in a
foreign exchange gain in the first quarter of fiscal 2007.
During
the first quarter of fiscal 2006, the value of the Canadian dollar increased
compared to the US dollar versus the previous quarter, which resulted in
a
foreign exchange loss in the first quarter of fiscal 2006.
It
should
be noted that foreign exchange rate fluctuations also flow through the P&L
line items as a significant portion of our operating items are denominated
in Canadian dollars and we report our results in US dollars.
The average value of the Canadian dollar compared to the US dollar in the
first
quarter of fiscal 2007 was CA$1.1270 = US$1.00 versus CA$1.1794 = $US1.00
during
the same period last year, representing an increase of 5% in the value of
the Canadian dollar compared to the US dollar.
We
manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
further increase in the value of the Canadian dollar, compared to the US
dollar,
would have a negative impact on our operating results.
INCOME
TAXES
For
the
three months ended November 30, 2006, our income tax expense was $781,000
compared to $565,000 for the same period last year.
Most
of
the income tax expenses recorded in fiscal 2006 and 2007 represents income
taxes
payable at the Canadian federal level, which are reduced by research and
development tax credits that are recorded against gross research and development
expenses in the statements of earnings.
We
record
a full valuation allowance against our future income tax assets because it
is
more likely than not that these assets will not be recovered. The valuation
allowance will be reversed once we will have concluded that realization of
future income tax assets is more likely than not, which we review on a quarterly
basis. Consequently, our income tax rates are distorted compared to statutory
rates.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Requirements and Capital Resources
As
at
November 30, 2006, cash and short-term investments consisted of $111.3 million,
which remained flat compared to August 31, 2006, while our working capital
was
at $144.3 million. During the first quarter of fiscal 2007, operating activities
generated $3.3 million in cash. In addition, during the same period, we received
$1.2 million from the sale of one of our buildings and paid $811,000 for
the purchase of property, plant and equipment, for a net positive effect
on cash
of $417,000 from these investing activities. On the other hand, we recorded
an
unrealized foreign exchange loss of $3.4 million on our cash and short-term
investments in the first quarter of fiscal 2007. This unrealized foreign
exchange loss resulted from the translation, in US dollars, of our
Canadian-dollar-denominated cash and short-term investments and was recorded
in
the cumulative translation adjustment in the balance sheet. This loss resulted
solely from the decrease of the value of the Canadian dollar compared to
the US
dollar versus the previous quarter.
Our
short-term investments consist of commercial paper issued by fourteen (nine
as
of August 31, 2006) quality, high-credit corporations and trusts; therefore,
we
consider the risk of non-performance of these financial instruments to be
remote. For the purposes of managing our cash position, we have established
a
cash management policy, which we follow and monitor on a regular basis. These
short-term investments will be used for working capital and other general
corporate purposes, including other potential acquisitions.
We
believe that our cash balances and short-term investments will be sufficient
to
meet our liquidity and capital requirements for the foreseeable future. In
addition to these assets, we have unused available lines of credit of $10.6
million for working capital and other general corporate purposes and an unused
line of credit of $11.3 million for foreign currency exposure related to
forward exchange contracts. However, possible operating losses and/or possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing. There can be no assurance
that
additional debt or equity financing will be available when required or, if
available, that it can be secured on satisfactory terms. Our lines of credit
bear interest at prime rate.
Sources
and Uses of Cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
Activities
Cash
flows provided by operating activities were $3.3 million for the three months
ended November 30, 2006, compared to $898,000 for the same period last
year. Cash flows provided by operating activities in the first quarter of
fiscal
2007 were mainly attributable to the net earnings before items not affecting
cash of $6.4 million, offset in part by the negative net change in non-cash
operating items of $3.0 million mainly attributable to the increase of our
accounts receivable. The timing of our sales within the quarter explains
the
increase in our accounts receivable as our sales were relatively flat compared
to the previous quarter.
Investing
Activities
Cash
flows used by investing activities were $2.3 million for the three months
ended
November 30, 2006, compared to cash flows provided of $389,000 for the same
period last year. In the first quarter of fiscal 2007, we acquired $2.8
million worth of short-term investments and paid $811,000 for the purchase
of
property, plant and equipment. On the other hand, during the same period,
we
received $1.2 million following the sale of one of our buildings located
in
Rochester, NY. For the corresponding period last year, we disposed of $1.0
million worth of short-term investments and paid $635,000 for the purchase
of
property, plant and equipment.
FORWARD
EXCHANGE CONTRACTS
We
utilize forward exchange contracts to manage our foreign currency exposure.
Our
policy is not to utilize those derivative financial instruments for trading
or
speculative purposes.
Our
forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign
exchange translation gains and losses on these contracts are recognized as
an
adjustment of the revenues when the corresponding sales are
recorded.
As
at
November 30, 2006, we held forward exchange contracts to sell US dollars
at
various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted
average contractual
forward
rates
|
||
|
December
2006 to August 2007
|
$27,100,000
|
1.1598
|
||
|
September
2007 to June 2009
|
$31,800,000
|
1.1232
|
As
at
November 30, 2006, the fair value of our forward exchange contracts, which
represents the difference between their contractual amounts and their current
trading value, amounted to an unrecognized gain of $2.8 million ($5.5 million
as
at August 31, 2006). The decrease in the unrecognized gain in the first quarter
of fiscal 2007, compared to the previous quarter is mainly due to the sequential
decrease in the value of the Canadian dollar compared to the US dollar.
CONTINGENCY
As
discussed in note 5 to our interim consolidated financial statements, EXFO
was
named as a defendant in a U.S. securities class action related to its initial
public offering (IPO) in June 2000. The complaints allege that the prospectus
and the registration statement for the IPO failed to disclose that the
underwriters allegedly received excessive commissions and that the underwriters
and some investors collaborated in order to inflate the price of EXFO’s stock in
the after-market.
In
June
2003, a committee of the EXFO’s Board of Directors conditionally approved a
proposed settlement between the issuer defendants, the individual defendants,
and the plaintiffs. If approved, the settlement would provide, among other
things, a release of EXFO and of the individual defendants for the conduct
alleged in the action to be wrongful in the amended complaint. EXFO would
agree
to undertake other responsibilities under the settlement, including agreeing
to
assign away, not assert, or release certain potential claims EXFO may have
against its underwriters. Any direct financial impact of the proposed settlement
is expected to be borne by EXFO’s insurance carriers.
On
June
25, 2004, the Plaintiffs moved for preliminary approval of the settlement.
The
court granted the preliminary approval motion on February 15, 2005, subject
to
certain modifications. On August 31, 2005, the court issued a preliminary
order
further approving the modifications to the settlement and certifying the
settlement classes. The court also appointed the Notice Administrator for
the
settlement and ordered that notice of the settlement be distributed to all
settlement class members beginning on November 15, 2005. A settlement fairness
hearing was held on April 24, 2006; however, no ruling has been issued yet
by
the court.
The
plaintiffs have continued to litigate against the underwriter defendants.
The district court has directed that the litigation proceed within a number
of "focus cases" rather than in all of the 310 cases that have been
consolidated. The company's case is not one of these focus
cases. On October 13, 2004, the district court certified the focus
cases as class actions. The underwriter defendants appealed that
ruling, and on December 5, 2006, the Court of Appeals for the Second
Circuit reversed the district court’s class certification decision.
Because the company's settlement with the plaintiffs involves the certification
of the case as a class action as part of the approval process, the impact
of
the Court of Appeals' ruling on the company's settlement is
unclear.
If
the
court determines that the settlement is fair to the class members, and that
the
settlement classes can be certified, the settlement will be approved. The
settlement provides that, if the plaintiffs do not obtain any recovery from
the
underwriter defendants, the members of the class action would receive an
amount
not expected to exceed $2,507,678. Any direct financial impact plus any legal
fees are expected to be borne by EXFO’s insurance carriers. However, there can
be no assurance that this proposed settlement would be approved and implemented
in its current form, or at all. Therefore, it is not possible to predict
the
final outcome of the case, nor to determine the amount of any possible losses.
If the settlement process fails, EXFO will continue to defend its position
in
this litigation that the claims against it, and its officers, are without
merit.
Accordingly, no provision for this case has been made in the interim
consolidated financial statements as at November 30, 2006.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
Capital
As
at
January 5, 2007, EXFO had 37,143,000 multiple voting shares outstanding,
entitling to ten votes each and 31,655,083 subordinate voting shares
outstanding. The multiple voting shares and the subordinate voting shares
are
unlimited as to number and without par value.
Long-Term
Incentive Plan and Deferred Share Unit Plan
The
aggregate number of subordinate voting shares covered by stock options,
restricted share units (RSUs) and deferred share units (DSUs) granted under
the
Long-Term Incentive Plan and the Deferred Share Unit Plan was 2,834,869 as
at
November 30, 2006. The maximum number of subordinate voting shares issuable
under these two plans cannot exceed 6,306,153 shares. The following tables
summarize information about stock options, RSUs and DSUs granted to the members
of the Board of Directors and to Management and Corporate Officers of the
company and its subsidiaries as at November 30, 2006:
|
Stock
Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||
|
Chairman
of the Board, President and CEO
(one
individual)
|
179,642
|
8%
|
$9.05
|
|||
|
Board
of Directors (five individuals)
|
194,375
|
8%
|
$6.23
|
|||
|
Management
and Corporate Officers
(eight
individuals)
|
313,836
|
13%
|
$15.42
|
|||
|
687,853
|
29%
|
$11.16
|
|
Restricted
Share Units (RSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Chairman
of the Board, President and CEO
(one
individual)
|
59,913
|
14%
|
||||
|
Management
and Corporate Officers
(ten
individuals)
|
255,616
|
60%
|
||||
|
315,529
|
74%
|
|
Deferred
Share Units (DSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Board
of Directors (five individuals)
|
49,413
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As
at
November 30, 2006, our off-balance sheet arrangements consisted of letters
of
guarantee and forward exchange contracts. As at November 30, 2006, our letters
of guarantee amounted to $2.1 million; these letters of guarantee expire
at
various dates through fiscal 2010 and the full amount was reserved from one
of
our lines of credit. Our forward exchange contracts are described
above.
VARIABLE
INTEREST ENTITY
As
at
November 30, 2006, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over
the
past few years, we have managed our business in a difficult environment;
focused
on research and development programs for new and innovative products aimed
at
expected growth pockets in our sector; continued the development of our domestic
and international markets; and made strategic acquisitions. However, we operate
in a highly competitive sector that is in constant evolution and, as a result,
we encounter various risks and uncertainties that must be given appropriate
consideration in our strategic management policies.
We
are
exposed to currency risks due to the export of our Canadian-manufactured
products, the large majority of which are denominated in US dollars. These
risks
are partially hedged by operating expenses denominated in US dollars, the
purchase of raw materials in US dollars and forward exchange contracts. The
increased strength of the Canadian dollar, compared to the US dollar, over
the
last few years, caused our operating expenses and our foreign exchange loss
to
increase. Any further increase in the value of the Canadian dollar in the
coming
months would negatively affect our results of operations.
In
addition, risks and uncertainties related to the telecommunications test
and
measurement industry involve the rapid development of new products that may
have
short life cycles and require extensive research and development; the difficulty
of adequately predicting market size and trends; the difficulty of retaining
highly skilled employees; and the ability to quickly adapt our cost structure
to
changing market conditions in order to achieve profitability.
Furthermore,
given our strategic goals for growth and competitive positioning in our
industry, we are continuously expanding into international markets. This
exposes
us to certain risks and uncertainties related to changes in local laws and
regulations, multiple technological standards, protective legislation and
pricing pressure.
Also,
while strategic acquisitions, like those we have made in the past, the recent
acquisition of Consultronics and possibly others in the future, are essential
to
our long-term growth, they also expose us to certain risks and uncertainties
related to the rapid and effective integration of these businesses as well
as
their products, technologies and personnel. Finally, integration requires
the
dedication of management resources, which may detract their attention from
our
day-to-day business and operations.
The
economic environment of our industry could also result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results especially in terms of future sales and recoverability of
accounts receivable. However, the sectorial and geographic diversity of our
customer base provides us with a reasonable level of protection in this area.
Finally, other financial instruments, which potentially subject us to credit
risks, consist mainly of cash, short-term investments and forward exchange
contracts. Our short-term investments consist of debt instruments issued
by
fourteen quality, high-credit corporations and trusts. Our cash and forward
exchange contracts are held with or issued by quality high-credit financial
institutions; therefore, we consider the risk of non-performance on these
instruments to be remote.
For
a
more complete understanding of risk factors that may affect us, please refer
to
the risk factors set forth in our disclosure documents published with securities
commissions at www.sedar.com in Canada or www.edgar.com in the U.S.
QUARTERLY
SUMMARY FINANCIAL INFORMATION (Unaudited)
(tabular
amounts in thousands of US dollars, except per share data)
|
Q1-FY07
|
Q4-FY06
|
Q3-FY06
|
Q2-FY06
|
||||||||||
|
Sales
|
$
|
35,547
|
$
|
35,733
|
$
|
35,410
|
$
|
30,066
|
|||||
|
Cost
of sales
|
$
|
15,229
|
$
|
16,318
|
$
|
15,453
|
$
|
13,440
|
|||||
|
Gross
margin
|
$
|
20,318
|
$
|
19,415
|
$
|
19,957
|
$
|
16,626
|
|||||
|
Earnings
from operations
|
$
|
2,759
|
$
|
2,363
|
$
|
3,608
|
$
|
1,408
|
|||||
|
Net
earnings
|
$
|
3,533
|
$
|
2,910
|
$
|
3,504
|
$
|
1,366
|
|||||
|
Basic
and diluted net earnings per share
|
$
|
0.05
|
$
|
0.04
|
$
|
0.05
|
$
|
0.02
|
|||||
|
Q1-FY06
|
Q4-FY05
|
Q3-FY05
|
Q2-FY05
|
||||||||||
|
Sales
|
$
|
27,044
|
$
|
26,304
|
$
|
26,180
|
$
|
23,135
|
|||||
|
Cost
of sales
|
$
|
12,064
|
$
|
11,925
|
$
|
11,478
|
$
|
10,431
|
|||||
|
Gross
margin
|
$
|
14,980
|
$
|
14,379
|
$
|
14,702
|
$
|
12,704
|
|||||
|
Earnings
(loss) from operations
|
$
|
683
|
$
|
811
|
$
|
509
|
$
|
(182
|
)
|
||||
|
Net
earnings
|
$
|
355
|
$
|
454
|
$
|
276
|
$
|
9
|
|||||
|
Basic
and diluted net earnings per share
|
$
|
0.01
|
$
|
0.01
|
$
|
−
|
$
|
−
|
|||||
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32