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 November 2007
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec City, 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 x
|
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 x
|
If
“Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
Page
1 of
125
TABLE
OF
CONTENTS
In
November 2007, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
issued its annual report containing its annual audited financial statements
and
management’s discussion and analysis thereof for its fiscal year ended August
31, 2007. At the same time, it also issued a cover letter, its notice of its
annual shareholders’ meeting, its form of proxy and its management proxy
circular. This report of Form 6-K sets forth said documents.
The
annual report containing the Corporation’s annual audited financial statements
and management’s discussion and analysis for its fiscal year ended August 31,
2007, a cover letter, its notice of annual shareholders’ meeting, its form of
proxy and its management proxy circular are hereby incorporated as documents
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.
SIGNATURES
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:
November 28, 2007
Annual
Report
2007
EXFO
Expertise
Reaching Out
Mission
Statement
EXFO’s
mission is to be a world leader in telecommunications test and measurement
equipment. This goal will be achieved through the pursuit of excellence and
the
full commitment of all our employees to exceed customer expectations with
market-driven innovation setting the highest standards.
Corporate
Profile
EXFO
is a
Tier-1 test and measurement expert in the global telecommunications industry,
especially in the portable test market segment. Our Telecom Division, which
represents about 85% of our business, offers a full range of test solutions
and
monitoring systems to network service providers, cable TV operators, telecom
system vendors and component manufacturers in approximately 70 countries.
We are
the global market leader for portable optical test solutions with an estimated
25.5% market share and a leading supplier of protocol and access test solutions
to enable triple-play deployments and converged IP networking. Our Windows-based
modular AXS-200, 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. Our Life
Sciences and Industrial Division offers value-added light-based solutions
in
high-precision medical device and opto-electronics assembly sectors, and
advanced fluorescence microscopy and electrophysiology solutions for the
life
sciences sector. For more information about our Telecom Division, visit
www.EXFO.com, and for our Life Sciences and Industrial Division, visit
www.EXFO-lifesciences.com.
Forward-looking
statements
This
Annual Report 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. Unless required by law or applicable regulations, we undertake
no
obligation to revise or update any of them to reflect events or circumstances
that occur after the date of this document.
Trademarks
and logos
EXFO
and
the EXFO logo are registered trademarks of EXFO Electro-Optical Engineering
Inc.
in Canada, the United States and/or other countries. Other EXFO product names
or
logos referenced in this document are either trademarks or registered trademarks
of EXFO Electro-Optical Engineering Inc. or of its affiliated companies.
All
other product names and trademarks mentioned herein are trademarks of their
respective owners. However, neither the presence nor absence of the
identification symbols ® or ™ affects the legal status of any
trademark.
All
dollar amounts in this Annual Report are expressed in US dollars, except
as
otherwise noted.
(tabular
amounts in thousands of US dollars, except per share data)
|
Consolidated
Statements of Earnings Data
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Sales
|
$ |
152,934
|
$ |
128,253
|
$ |
97,216
|
$ |
74,630
|
$ |
61,930
|
||||||||||
|
Gross
margin
|
$ |
87,798
|
$ |
70,978
|
$ |
53,157
|
$ |
40,074
|
$ |
25,733
|
||||||||||
| 57.4 | % | 55.3 | % | 54.7 | % | 53.7 | % | 41.6 | % | |||||||||||
|
Selling
and administrative
|
$ |
49,580
|
$ |
40,298
|
$ |
31,782
|
$ |
25,890
|
$ |
26,991
|
||||||||||
| 32.4 | % | 31.4 | % | 32.7 | % | 34.7 | % | 43.6 | % | |||||||||||
|
Net
research and development
|
$ |
16,668
|
$ |
15,404
|
$ |
12,190
|
$ |
12,390
|
$ |
15,879
|
||||||||||
| 10.9 | % | 12.0 | % | 12.5 | % | 16.6 | % | 25.6 | % | |||||||||||
|
Earnings
(loss) from operations
|
$ |
16,782
|
$ |
8,062
|
$ | (199 | ) | $ | (10,570 | ) | $ | (39,584 | ) | |||||||
| 11.0 | % | 6.3 | % | (0.2 | )% | (14.1 | )% | (63.9 | )% | |||||||||||
|
Net
earnings (loss)
|
$ |
42,275
|
$ |
8,135
|
$ | (1,634 | ) | $ | (8,424 | ) | $ | (54,950 | ) | |||||||
|
See
note (1) for selected informationincluded in net earnings
(loss)
|
27.6 | % | 6.3 | % | (1.7 | )% | (11.3 | )% | (88.7 | )% | ||||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ |
0.61
|
$ |
0.12
|
$ | (0.02 | ) | $ | (0.13 | ) | $ | (0.87 | ) | |||||||
|
(1)
Other Selected Information Included in Net Earnings (Loss)
|
||||||||||||||||||||
|
Inventory
write-offs
|
$ |
−
|
$ |
−
|
$ |
−
|
$ |
−
|
$ |
4,121
|
||||||||||
|
R&D
tax credits write-off (recovery)
|
$ | (3,162 | ) | $ |
−
|
$ |
−
|
$ |
−
|
$ |
2,297
|
|||||||||
|
Amortization
of intangible assets
|
$ |
2,864
|
$ |
4,394
|
$ |
4,836
|
$ |
5,080
|
$ |
5,676
|
||||||||||
|
Impairment
of long-lived assets and goodwill
|
$ |
−
|
$ |
604
|
$ |
−
|
$ |
620
|
$ |
7,427
|
||||||||||
|
Government
grants
|
$ | (1,079 | ) | $ | (1,307 | ) | $ |
−
|
$ |
−
|
$ | (712 | ) | |||||||
|
Restructuring
and other charges
|
$ |
−
|
$ |
−
|
$ |
292
|
$ |
1,729
|
$ |
4,134
|
||||||||||
|
Stock-based
compensation costs
|
$ |
981
|
$ |
1,032
|
$ |
963
|
$ |
449
|
$ |
−
|
||||||||||
|
Future
income tax expense (recovery)
|
$ | (24,566 | ) | $ |
−
|
$ |
−
|
$ |
−
|
$ |
28,385
|
|||||||||
|
Consolidated
Balance Sheets Data
|
||||||||||||||||||||
|
Cash
and short-term investments
|
$ |
129,758
|
$ |
111,290
|
$ |
112,002
|
$ |
89,128
|
$ |
57,376
|
||||||||||
|
Working
Capital
|
$ |
180,440
|
$ |
143,985
|
$ |
135,288
|
$ |
115,141
|
$ |
77,408
|
||||||||||
|
Total
assets
|
$ |
279,138
|
$ |
219,159
|
$ |
190,957
|
$ |
172,791
|
$ |
146,254
|
||||||||||
|
Long-term
debt (excluding current portion)
|
$ |
−
|
$ |
354
|
$ |
198
|
$ |
332
|
$ |
453
|
||||||||||
|
Shareholders’
equity
|
$ |
250,165
|
$ |
196,234
|
$ |
173,400
|
$ |
157,327
|
$ |
129,826
|
||||||||||
Fiscal
2007 proved to be another good year with market-share gains for a 22nd consecutive
reporting period, while being recognized with a fourth consecutive Growth
Strategy Leadership Award from Frost & Sullivan for gains in optical
testing. We delivered sales growth of 19.2% for record sales of $152.9 million
in 2007, largely due to strong performances from our optical and protocol
businesses and significant inroads into the Americas as well as Europe, Middle
East, and Africa (EMEA) markets.
I
am also
quite pleased with our long-term profitability results, especially with how
we
coped with a 32.1% increase in the Canadian dollar in the last five fiscal
years—certainly a major headwind. During that five-year period, our earnings
growth exceeded sales growth each and every year and our gross margin improved
annually as well. In 2007, more specifically, we increased our net earnings
78.8% year-over-year even if tax-related items are excluded.
All
the
credit for this success rests with our employees, whose commitment and passion
to better serve our customers are essential to our profitable growth strategy.
I
remain confident that we can continue growing sales and earnings in the long
term based on our strong positioning for key growth trends, our history of
systematically gaining market share, our strong focus on execution and healthy
balance sheet, as well as our global expansion plans for our sales, R&D and
manufacturing operations.
Fiscal
2007 was a defining year on many levels for EXFO, as demonstrated by the
following performance highlights:
Performance
highlights
|
·
|
Increased
sales 19.2% to a record high of $152.9
million
|
|
·
|
Delivered
sales growth of 20.9% and 10.6% for our Telecom and Life Sciences
&
Industrial Divisions, respectively
|
|
·
|
Grew
optical sales 19.9% and earned a fourth consecutive Growth Strategy
Leadership Award from Frost & Sullivan for largest market-share gains
in optical testing
|
|
·
|
Bolstered
protocol sales 48.2% to an all-time high of $17.1
million
|
|
·
|
Posted
a sales CAGR of 20.1% over the last 10
years
|
|
·
|
Improved
GAAP net earnings to $42.3 million* compared to $8.1 million in
2006
|
|
·
|
Achieved
11.0% in GAAP earnings from operations (or 8.2% excluding a one-time
R&D tax credit of $3.2 million and a government grant recovery of
$1.1
million) vs. 6.3% in 2006
|
|
·
|
Generated
a record high of $14.4 million in cash flows from operating
activities
|
|
·
|
Derived
33.7% of sales from new products (on the market two years or
less)
|
Numbers
aside, I firmly believe that first-class companies keep fine-tuning their
operations year after year. We did exactly that in 2007 by implementing numerous
company-wide initiatives like global sourcing, enhanced product development
processes and operational excellence. For example, we consolidated our telecom
manufacturing operations at our headquarters in Quebec City, Canada and
refocused our Concord, Canada and Montreal, Canada sites into R&D excellence
centers. These concurrent moves should not only reduce manufacturing costs,
but
also increase R&D efficiency.
Report
card for fiscal 2007
According
to our annual practice of providing corporate performance objectives, we
follow
up with a summary of our results for fiscal 2007.
Sales
growth. On the strength of a solid second half, we achieved annual
sales growth of 19.2% in 2007, while our corporate metric was 20%. We generated
significant sales growth in our optical (19.9%) and protocol (48.2%) businesses,
while expanding our presence in critical geographic regions with annual
growth
of 18.7% in the Americas and 27.5% in EMEA. On the other hand, sales from
our
copper-access business and Asia-Pacific region fell short of our plans
with
respective sales increases of 15.5% (Consultronics contributed only seven
months’ revenue in fiscal 2006) and 7.8% in 2007; targeted actions have been
implemented to accelerate growth for these sectors in 2008. Our Telecom
Division, which increased its sales by 20.9% year-over-year, grew substantially
faster than the industry. Our Life Sciences and Industrial Division, meanwhile,
posted year-over-year growth of 10.6%. Overall, net accepted orders increased
21.0% to $156.7 million in 2007 for a book-to-bill ratio of
1.02.
|
*
|
It
should be noted that we recognized $24.6 million in previously
unrecognized future income tax assets and $3.2 million in R&D tax
credits in the fourth quarter of fiscal 2007. These tax-related
items
increased our GAAP net earnings in 2007. Excluding these unusual
items, we
still would have improved our net earnings by 78.8%
year-over-year.
|
|
FY
2007 Corporate Performance Results
|
||
|
Goal
|
Metric
|
Result
|
|
Increase
sales through market-share gains
|
20%
sales growth year-over-year
|
19.2%
sales growth year-over-year
|
|
Maximize
profitability
|
GAAP
earnings from operations of 7%
|
GAAP
earnings from operations of 11%*
|
|
Focus
on innovation
|
35%
of sales from new products
|
33.7%
of sales from new products
|
|
*
8.2% excluding $3.2 million in recognition of previously unrecognized
R&D tax credits and $1.1 million from a government grant
recovery.
|
||
Profitability.
We generated 11.0% in GAAP earnings from operations in 2007,
while
our published metric was 7%. Excluding $3.2 million in recognition of R&D
tax credits and $1.1 million from a government grant recovery, our earnings
from
operations would have amounted to 8.2%. We surpassed our goal largely due
to
operational excellence and market-driven innovation that makes a difference
to
our customers. On the strength of higher sales volume, cost-effective product
designs and increased sales of software-intensive protocol test solutions,
we
raised our gross margin by 210 basis points to 57.4% in 2007. Had it not
been
for a 32.1% increase in the value of the Canadian dollar versus the US dollar
in
the last five fiscal years, we already would have reached our gross margin
target of 60%.
Innovation.
Sales from new products (on the market two years or less)
accounted for 33.7% of total sales in 2007 versus our stated goal of 35%.
The
ongoing success of several solutions that have passed the two-year threshold,
such as our FOT-930 MaxTester and PPM-350B PON Power Meter, lowered this
ratio
significantly, as these products continue to generate significant sales.
Nevertheless, I cannot be displeased with roughly a third of our sales coming
from new products since this figure remains well above industry
levels.
Eyeing
the future
Looking
ahead to 2008 and beyond, we have never been so well positioned for long-term
profitable growth. Our disciplined, market-driven product innovation process
has
placed us in the sweet spot for exploiting key growth trends in various
end-markets. As well, strategic initiatives to expand our global presence
and
accelerate market development should increase our competitive
advantages.
Key
industry trends
The
fundamentals of the telecom industry are fairly robust worldwide based upon
exponential growth in bandwidth demand (CAGR of 45% from 2003-2006 for global
Internet traffic, according to TeleGeography Research), intense competitive
stakes between telecom operators and cable TV companies pushing massive network
investments, and significant operational efficiencies and new-service revenues
that fully converged IP networks can deliver.
On
the
access side, telecom operators are in the early stages of deploying fiber
deeper
into their access networks, and it is increasingly clear that fiber-to-the-home
(FTTH) will become the network architecture of choice for years to come.
The
good news is that EXFO has established itself as the dominant player in the
optical FTTx test market thanks to its market-driven innovation, customer
intimacy and strategic R&D investments. We have continued to build on our
leadership position with the recent launch of a modular, handheld multimedium
test platform (AXS-200 SharpTESTER) for access networks. It demonstrates
not
only our commitment to this critical end-market, but also how we intend to
successfully leverage our Consultronics acquisition. We will continue to
expand
our product line and market position in this segment in order to take advantage
of telecom operators’ massive investments worldwide. They are focused on
providing differentiated, revenue-generating services to consumers who are
increasingly relying on telecom networks for their work, entertainment and
everyday activities.
As
bandwidth demand in access networks continues to explode, it is increasingly
placing a strain on metro rings and core networks. It is also driving the
need
for higher-speed technologies, such as 43 Gbit/s SONET/SDH and 100 Gbit/s
Ethernet, since these solutions are more economical than adding new fiber.
Consequently, we will continue to expand our broad product portfolio to address
these new high-end testing requirements. More specifically, we plan to leverage
our technological and market leadership position in dispersion testing (PMD
and
CD) to fully take advantage of this transition occurring in core
networks.
We
will
also continue to invest in our optical business, not only to defend but also
expand our leadership position. We remain confident that we can keep gaining
market share as demonstrated by our fourth consecutive Growth Strategy
Leadership Award from Frost & Sullivan for highest market-share gains. Our
estimated 25.5% market share in the portable optical instrumentation segment
reflects market leadership, strong brand equity and customer satisfaction.
As
well, our combined optical and protocol test solutions, which leverage a
large
base of modular test platforms, are playing a major role in our long-term
offense/defense market strategy.
Our
protocol testing business also demonstrated significant progress with sales
growth of 48.2% in 2007 on top of 81.5% in 2006. We will continue to leverage
our strong customer relationships, brand name and more than 22,000 entrenched
platforms to offer a highly beneficial value proposition to our customers.
As
telecom operators are increasingly transforming their networks to a more
flexible and future-proof IP architecture, our protocol test solutions should
continue to gain traction and enjoy strong growth for years to come. The
performance of our portable transport and datacom test solutions is unmatched.
We will continue to increase our competitive advantages as illustrated by
the
recent launch of our compact multiservice transport tester (FTB-8120NGE/8130NGE
Power Blazer), boasting next-generation SONET/SDH and 1 and 10 Gigabit Ethernet
technologies inside a single module.
Global
expansion
We
have
long established ourselves as a global company. In 2007, 41% of our sales
originated outside the Americas, and we will continue to add to our
international sales force, bolster customer support worldwide and improve
operational efficiencies. In recent months, we accelerated our global reach
with
major transformations in our manufacturing and R&D operations. Following a
series of moves to increase manufacturing efficiency and reduce cost of goods
sold, we opened our wholly owned telecom manufacturing facility in Shenzhen,
China in September 2007. We had initially outsourced some higher-volume,
lower-complexity products to a contract manufacturer in China. We believe
this
next step makes great economic sense for high-volume, low-complexity products.
This long-term initiative will help us raise our gross margin above our 60%
target, mitigate the negative impact of a strengthening Canadian dollar and
render us more competitive in the marketplace.
We’re
also expanding our global presence through our new R&D software development
center in Pune, India. We had initially outsourced some software development
to
an Indian technology partner and then extended the scope by acquiring that
partner to supplement our three R&D centers in Canada. We will continue
expanding our R&D operations in India to fully benefit from a wealth of IP
expertise, accelerate product development—especially for our software-intensive
protocol test solutions—take advantage of a lower cost structure, and leverage
business opportunities in this rapidly developing country. In the long run,
this
strategic action will enable us to remain ahead of the competition in the
global
marketplace.
Market
development
From
a
market-development standpoint, we’re increasingly penetrating selected
end-markets. We’re strategically focusing on a short list of countries and key
accounts that potentially will increase market-share gains and maximize
long-term growth. We’re also strengthening our brand-name recognition, better
segmenting our end-markets and pursuing strategic opportunities more
aggressively to optimize value creation. In addition, we have reinforced
our
sales management team with two seasoned Vice-Presidents—Americas and
International—to drive market-share gains, improve access to markets and
increase customer focus. Our three telecom business units, meanwhile, have
been
consolidated under a single Vice-President of Product Management and Marketing
to increase our market focus, better leverage platform synergies and strengthen
our brand name. Finally, we’re now relying on a full-time Vice-President of
Corporate Development to accelerate value creation through acquisitions,
partnerships and alliances.
Life
sciences and industrial division
In
terms
of our Life Sciences and Industrial Division, our strategy to leverage telecom
technologies into industrial and medical-device assembly and fluorescence
microscopy markets continues to deliver solid results. We intend to maintain
our
focus on heightened precision and reliability requirements in these niche
markets, while keeping operating costs to a minimum.
Against
this backdrop, I am pleased to provide the following performance metrics
for
fiscal 2008. These are goals established by the Board of Directors for our
management team and should not be misinterpreted as guidance.
|
Strategic
objectives for fiscal 2008
|
Metrics
|
|
Increase
sales through market-share gains
|
Grow
revenues by 20% year-over-year
|
|
Maximize
profitability
|
Generate
8% in GAAP earnings from operations
|
|
Focus
on innovation
|
Derive
30% of sales from new products (on the market two years or
less)
|
Wrap-up
I
would
like to extend my thanks to our Board for its invaluable counsel in 2007
and
throughout the years. It’s a privilege to be surrounded by such a high-caliber
group of directors, who are dedicated to the best interests of the company
and
its shareholders. As well, many thanks to our employees, who put their
outstanding talent and effort to contribution every day to make a difference
for
our valued customers. A final thank-you goes out to you, our shareholders,
for
your continued support. We are honored to have gained your trust and are
committed to keeping it—it’s not something that we take for granted. In short,
my whole team and I are highly committed to EXFO, its customers and
shareholders.
Sincerely,
/s/
Germain Lamonde
Germain
Lamonde
Chairman,
President and Chief Executive Officer
November
5, 2007
Corporate
Highlights– Fiscal 2007
August
2007
|
|
–
|
Posts
record sales of $152.9 million and GAAP net earnings of $42.3
million
|
|
|
–
|
Completes
fiscal 2007 with a total of 20 new
products
|
|
|
–
|
Launches
best-of-class OTDR for ultra-long-haul
networks
|
June
2007
|
|
–
|
Releases
network quality assurance system for triple-play IP
services
|
April
2007
|
|
–
|
Introduces
industry’s most powerful portable IPTV test
set
|
|
|
–
|
Extends
test capabilities of 10 Gigabit Ethernet test solution (FTB-8510G
Packet
Blazer™)
|
March
2007
|
|
–
|
Receives
US patent for PON power meter
technology
|
|
|
–
|
Launches
E-Series OTDRs for access, metro and long-haul
networks
|
|
|
–
|
Releases
FastReporter software
|
|
|
–
|
Introduces
NQMSfiber solution for monitoring optical
networks
|
February
2007
|
|
–
|
Launches
new variable optical attenuator for manufacturing
environment
|
|
|
–
|
Introduces
T-Carrier/PDH Transport Blazer test
module
|
|
|
–
|
Releases
IPTV quality-of-service test capabilities for Packet Blazer Ethernet
line
|
January
2007
|
|
–
|
Receives
Growth Strategy Leadership Award for xDSL test
market
|
|
|
–
|
Launches
VDSL2 test solution for CoLT-450P
|
|
|
–
|
Releases
enhanced Ethernet test module
|
|
|
–
|
Introduces
upgraded optical transport network (OTN) test
solution
|
November
2006
|
|
–
|
Launches
compact 10 Gigabit Ethernet test
solution
|
|
|
–
|
Releases
advanced IPTV software package for
CoLT-450P
|
October
2006
|
|
–
|
Introduces
new functionality for carrier-grade Ethernet
testing
|
September
2006
|
|
–
|
Secures
network quality assurance agreements with two
carriers
|
|
|
–
|
Launches
next-generation Cable and Component Assembly Test
System
|
|
|
–
|
Introduces
FiberFinder for identifying live and dark
fibers
|
Putting
complex networks to the test
Network
complexity and new telecom technologies are EXFO’s best friends. Network service
providers (NSPs) are continually turning to us to resolve their new testing
issues and assure network integrity as technological disruptions take place
across their next-generation networks. Consider the explosive demand for
bandwidth in access networks. Consumers are increasingly downloading music
over
the Internet, playing video games online, renting movies through
video-on-demand, and jumping at opportunities to access new IP services for
business, entertainment or everyday applications. New services like Internet
protocol television (IPTV) and high-definition television (HDTV) are in their
early deployment phases, but they will consume plenty of bandwidth. All these
bandwidth-hungry applications are prompting NSPs to install new hybrid
architectures like fiber-to-the-curb (FTTC) and fiber-to-the-node (FTTN),
in
which fiber is brought close to the home, while the existing copper plant
is
leveraged through the use of ADSL2+ or standards-based VDSL2 technologies.
Even
better, some leading-edge NSPs are looking to passive optical network
(PON)-based, fiber-to-the-home (FTTH) solutions in which unlimited bandwidth
renders their networks virtually future-proof. Clearly, these rollouts must
be
tested during deployment, service activation and maintenance phases to assure
quality of experience (QoE) and minimize customer churn.
EXFO
has
grown to become THE recognized expert and partner of choice in the optical
test
business over the past 22 years. For example, we worked closely with a Tier-1
NSP to develop test solutions for its major FTTH initiative, resulting in
a
strong first-mover advantage in this high-growth market segment. In fiscal
2007,
we consolidated our competitive advantage with the launch of our E-Series
OTDRs
for characterizing access, metro and long-haul networks and received a US
patent
for our PON power meter supporting BPON, GPON and EPON technologies. We also
introduced FiberFinder, a handy instrument designed for the safe and efficient
management of live and dark fibers in patch panels and central offices. Finally,
we released a next-generation cable assembly and component test system for
the
production testing of short fiber assemblies and FTTx components.
Four
years and counting
Gaining
market share has become second nature at EXFO. We were named recipient of
the
Growth Strategy Leadership Award by Frost & Sullivan for the fourth
consecutive year in 2007. The award is presented annually to the company
whose
growth strategy generates the largest market-share gains in the global
fiber-optic test equipment (FOTE) market during the previous calendar year.
Frost & Sullivan, a leading market research firm in the telecom test and
measurement industry, reported that we increased our overall market share
from
11.0% in 2005 to 12.7% in 2006 for third place overall in the global FOTE
market. Based on this market data, we improved our leadership position in
the
portable installation and maintenance test market from an estimated 23.0%
in
2005 to 25.5% in 2006.
EXFO
made
significant inroads in the handheld optical time-domain reflectometry (OTDR)
market segment with year-over-year growth of 39.0% in 2006, according to
Frost
& Sullivan. We also grew sales 26.1% year-over-year in the handheld optical
spectrum analyzer (OSA) market segment and 10.4% in the handheld optical
power
meter segment. All told, we hold the No. 1 position in the handheld OTDR
(26.2%
market share), optical loss test set (57.9%), power meter (23.8%), light
source
(15.4%) and PMD (33.3%) segments. Accordingly, Frost & Sullivan handed us
related Market Leadership Awards for the handheld OTDR and OLTS segments
of the
FOTE market.
Innovation
lives here
Innovation
means different things to different people. At EXFO, we tend to favor simple
and
pragmatic ideas, born from direct interaction with customers, as we pride
ourselves on being very market-driven. Consider the onslaught of triple-play
services in broadband access networks. After speaking with a number of NSPs
about this new market reality, we came to the realization that they were
looking
for a simple, cost-effective solution that could test new services like IPTV
and
VoIP on both copper and optical links.
Enter
the
AXS-200 SharpTESTER, a multiservice, multimedium platform that characterizes
and
troubleshoots access networks. This modular handheld unit, which leverages
leading-edge technology from our acquisition of Consultronics, can easily
be
configured for copper, DSL, triple-play, Ethernet or optical testing
applications. The AXS-200 SharpTESTER, using a common Windows CE graphical
user
interface, boasts simple pass/fail displays and one-touch function buttons
to
enable quick and efficient service turn-ups. Best of all, its ease of use
allows
both entry-level and expert technicians to begin field-testing duties in
no
time.
Strong
branding extends into protocol testing
Following
more than three years of development efforts dedicated to next-generation,
IP
networks, EXFO now offers one of the most advanced lines of portable protocol
test solutions for NSPs. Our strong brand name in optical testing, based
on the
strength of superior products and best-in-class customer support, has
successfully carried over into the protocol testing market. As demonstrated
by
our 48.2% sales growth for protocol testing solutions in 2007, atop of 81.5%
in
2006, we are clearly making significant market-share gains.
As
NSPs
are furiously rolling out voice, data and video services to increase revenue
streams and lower operating costs, our focus on next-generation IP testing
has
provided us with a strong foothold in this large and fast-growing market.
In
2007, we launched a powerful portable IPTV test set (FTB-8510B Packet Blazer)
with a series of advanced features like 100-channel parallel monitoring
capability and the support of ETSI TR 101 290 metrics as outlined by digital
video broadcast measurement guidelines. Combined with the CoLT-450P DSL
Triple-Play Test Set and AXS-200/620 Triple-Play Test Set for copper links,
EXFO’s latest technology provides field technicians with the most effective
tools to support IPTV service rollouts and troubleshooting activities from
core
to access networks.
Following
the year-end, we released the most compact and feature-rich multiservice
transport test solution on the market. The FTB-8120NGE and FTB-8130NGE Power
Blazer test modules offer a full range of SONET/SDH, next-generation SONET/SDH
and Ethernet testing capabilities within the FTB-200 Compact Platform and
FTB-400 Universal Test System. The beauty of this concept is that it combines
SONET/SDH and Ethernet testing inside a single module to characterize network
elements like multiservice transport platforms (MSTPs) and reconfigurable
optical add/drop multiplexers (ROADMs).
Rising
stakes for network monitoring
As
NSPs
are under intense pressure to improve network reliability and reduce operating
costs, they are increasingly looking for real-time 24/7 monitoring solutions.
EXFO has responded to this growing market trend with the introduction of
its
NQMSfiber and NQMSpacket Network Quality Assurance Management
Systems.
Leveraging
best-in-class test modules like OTDRs and Ethernet testers (up to 10 Gbit/s)
strategically placed along telecom networks, our central-office, rackmounted
solutions remotely carry out automated, real-time, performance monitoring
on
various services and on the fiber itself. Given exceedingly high expectations
for IPTV services, characterizing the user’s quality of experience is a
sure-fire way to reduce customer churn and maximize profitability.
Miniaturization
trend impacts niche markets
Cellular
phones are shrinking for increased convenience. Medical devices are becoming
more discreet than ever. Even circuit boards for automotive electronics are
following suit to consume less space. Less is more in the life sciences and
high-tech industrial assembly markets and EXFO is well attuned to this global
miniaturization trend. Based on our long-standing experience in bonding tiny
optical component parts, we have extended this expertise to become the global
leader in light-based curing and precision assembly of medical, microelectronic
and digital printing devices.
In
fiscal
2007, we joined forces with a partner to deliver the most compact solution
for
the industrial printing industry. A high-powered fiber-optic light guide,
coupled with our OmniCure 2000 system, is small enough to mount right next
to a
printhead. It pins, or partially cures, UV curable inks immediately after
they
are jetted for the sharpest image quality. But that’s merely one application
among several in selected niche markets. Our ultraviolet/visible spot-curing
products deliver precise doses of the appropriate spectral light onto
photosensitive adhesives and other materials to significantly reduce curing
time. A proprietary closed-loop feedback technology allows the user to select
the required output levels, lock in the settings and continuously maintain
them
to ensure repeatable cures. Our state-of-the-art OmniCure Series 2000, based
on
2000 hours of warranted lamp life, is a high-end automated system that can
easily be controlled externally with a personal computer. It delivers stronger
cures, heightened efficiency and reduced manufacturing costs for our
customers.
X-Cite
The
X-Cite series is a most appropriate name for our fluorescence illumination
system. We took the fluorescence microscopy industry by storm barely a few
years
ago with a high-intensity light source—adapted from our light-based curing
technology—that lasted three times longer than conventional illumination
systems. We have since improved on that original product offering with the
X-Cite 120 XL, a next-generation system delivering superior image quality
and
2000 hours of lamp life. It lasts 60% longer than the previous model and
up to
10 times longer than conventional systems.
The
X-Cite 120 XL is a self-contained illumination unit separate from a microscope.
A simple light guide attachment through patented coupling optics ensures
a
uniform field of view with no heat from the lamp being transferred to the
sample
under study. Most of the major microscope manufacturers around the world
are
reselling this innovative solution to their existing customers.
Burleigh
In
the
laboratory, miniaturization gives way to nanometer-scale precision. The
extremely precise, fast and stable positioning provided by the Burleigh PCS-6000
Micromanipulators is derived from our proven expertise in piezoelectric
technology (PZT). For patch-clamp applications, nothing is smoother than
PZT
travel. It delivers total control and maximum productivity. Our PZT systems
and
high-performance mounting solutions—combining stability with extremely smooth
and predictable instrument motion—also enable grounding-breaking research in
cell manipulation, electrophysiology and in-vitro fertilization.
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
The
following discussion and analysis of the consolidated financial condition and
results of operations of EXFO Electro-Optical Engineering Inc. for the fiscal
years ended August 31, 2005, 2006 and 2007, should be read in conjunction
with our consolidated financial statements and the related notes included
elsewhere in this Annual Report. Our consolidated financial statements have
been
prepared in accordance with generally accepted accounting principles in Canada,
or Canadian GAAP. Significant differences in measurement and
disclosure from generally accepted accounting principles in the United States,
or U.S. GAAP, are set out in note 20 to our consolidated financial
statements. Our measurement currency is the Canadian dollar although we report
our financial statements in US dollars.
The
following discussion and analysis of financial condition and results of
operations is dated November 1, 2007.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamentals of the wireline telecom industry are fairly robust in most regions
of the world, based upon exponential growth in bandwidth demand, intense
competition – mainly in the United States – between telecom operators (telcos)
and cable companies (cablecos) pushing massive network investments, and
significant operational efficiencies and service revenues generated by fully
converged IP (Internet protocol) networks.
Global
Internet bandwidth grew at a compound annual growth rate (CAGR) of 45% from
2003
to 2006, according to TeleGeography Research. This trend is likely to
remain steady, if not accelerate, with the upcoming anticipation and explosion
of IPTV (Internet protocol television) and HD-IPTV (high-definition Internet
protocol television), as this will consume a colossal amount of additional
bandwidth. As a result, telcos and cablecos are investing substantially in
their
access networks in order to provide differentiated, revenue-generating services
to attract and retain consumers who are increasingly relying on broadband
network services for their work, entertainment and everyday activities. From
a
telco perspective, it is now clear that fiber-to-the-premises (FTTP)
will become the access network architecture of choice, which will allow them
to
meet heightened bandwidth requirements and future-proof their access networks
as
residential bandwidth requirements are growing from the 1 to 5 Mbit/s (megabits
per second) of the past to the 30 to 100 Mbit/s required in the future to assure
multiple HD-IPTV channels, online gaming, high-speed content-rich Internet,
VoIP
(voice-over-Internet-protocol) telephony, and a myriad of additional
IP-based applications. Hybrid architectures, combining copper and fiber
(fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also
keep expanding in the short term, since they are less expensive methods to
increase bandwidth and can be mass-deployed faster. These decisions are
applicable 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. It
is
important to mention that the cost of deploying fiber-to-the-home (FTTH) has
largely been falling over the last three years as volume increased and
deployment tools, like those we offer, are making the task increasingly easier.
We are only at the early stages of fiber deployments in access networks both
in
the Americas and around the world.
As
bandwidth growth in access networks continues to increase, it has begun placing
a strain on metro rings and core networks. It is also driving the need for
higher-speed technologies, such as 43 Gbit/s (gigabits per
second) SONET/SDH and 100 Gbit/s Ethernet, because these
solutions are expected to be significantly more economical, especially if one
will be forced to dig trenches to deploy new fiber in metro or long-distance
routes.
As
telecommunication networks are being transformed to provide IP-based voice,
video and data capabilities, the legacy SONET/SDH networks, which were designed
in the 1980s and 1990s and implemented until 2005, will not be capable of
efficiently carrying these emerging IP-based services as they are based on
design standards aimed at public switched telephone network (PSTN)
point-to-point voice transmission only. As a result, telcos are increasingly
turning to more flexible and future-proof IP-based, next-generation networks
to
allow for more versatile and efficient transport of a new range of applications
and services, and to offer customers higher-margin triple-play services while
reducing their operating costs.
These
market dynamics are expected to positively affect telecom test, measurement
and
monitoring companies in 2008 and beyond.
COMPANY
OVERVIEW
EXFO
is a
test and measurement expert in the global telecommunications industry,
especially in the portable test market segment. Our Telecom Division, which
represents about 85% of our business, offers a full range of test solutions
and
monitoring systems to network service providers, cable TV operators, telecom
system vendors and component manufacturers in approximately 70 countries. We
are
the global market leader for portable optical test solutions with an estimated
25.5% market share and a leading supplier of protocol and access test solutions
to enable triple-play deployments and converged IP networking. Our Windows-based
modular AXS-200, 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. Our Life
Sciences and Industrial Division offers value-added light-based solutions in
high-precision medical device and opto-electronics assembly sectors, and
advanced fluorescence microscopy and electrophysiology solutions for the life
sciences sector.
EXFO
was
founded in 1985 in Quebec City, Canada. Our original products were focused
on
the needs of installers and operators of fiber-optic networks. Customers use
these field-portable testing products for the installation, maintenance,
monitoring and troubleshooting of optical networks. In 1996, we supplemented
our
product portfolio with an extensive line of high-end products that are mainly
dedicated to research and development as well as manufacturing activities
of optical component manufacturers and system vendors.
Over
the
past few years, we have enhanced our competitive position through acquisitions
of copper/xDSL (digital subscriber line) and protocol test businesses. In
January 2006, we acquired substantially all the assets of Consultronics
Limited, a leading supplier of test equipment for copper-based broadband access
networks, for a total cash consideration of $19.1 million. Above and beyond
copper/xDSL test solutions, Consultronics had a rich product portfolio for
testing next-generation technologies, such as IPTV and VoIP, which are critical
for NSPs in their deployment of triple-play services (voice, data, and
video) over optical and copper links in access networks. This acquisition was
a
strategic initiative to position EXFO as a provider of a comprehensive solution
for broadband access and triple-play testing, since it complemented our market
leadership in the optical FTTx test market.
In
November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol
Inc. and now merged with EXFO), a supplier of legacy protocol-testing and
optical-network performance management equipment for NSPs. This transaction
served as a technology base from which we gradually expanded toward
next-generation test capabilities; by fully integrating this technology into
our
modular PC-based FTB and IQS test platforms, it has allowed us to offer unique
combined optical and protocol test solutions inside a single test platform
to
help our customers increase, accelerate and simplify test procedures while
reducing operating costs. In October 2002, our wholly-owned subsidiary, EXFO
Gnubi, purchased substantially all the assets of gnubi communications,
L.P., a supplier of multichannel telecom and datacom testing solutions
for the system manufacturer market. As we expanded from optical
testing into protocol testing applications, we more than doubled our addressable
test market and started to offer a more complete line of test solutions to
our
customers.
Previously,
we had completed two acquisitions to bolster growth in the optical component
manufacturing market. We acquired Burleigh Instruments, Inc. (renamed EXFO
Burleigh Products Group Inc.) in December 2000. We also added EFOS Inc. (renamed
EXFO Photonic Solutions Inc.) in March 2001. We have since exited the optical
component manufacturing automation business, and the operations of these two
businesses have mostly been consolidated in Toronto, Canada to serve as our
Life
Sciences and industrial Division.
In
fiscal
2007, we launched 20 new products, compared to 18 in 2006. Key product
introductions included, among others, IPTV test capabilities for our Packet
Blazer Ethernet product line; a standards-based very-high-speed digital
subscriber line, version 2 (VDSL2) test module to characterize IPTV and
high-definition television (HDTV) over copper access links; a 10 Gigabit
Ethernet module for our FTB-200 Compact Platform; a multipurpose series
of OTDRs for testing access, metro and long-haul networks; a
next-generation cable assembly and component test system for production testing
of short fiber assemblies and FTTx components, and the NQMS line of quality
assurance systems for the real-time monitoring of packet signals as well as
fiber links. Products on the market two years or less accounted for 33.7%
of sales in fiscal 2007.
Subsequent
to the year-end, we released three additional solutions, namely the AXS-200
SharpTESTER, a multiservice, multimedium test platform for characterizing
and troubleshooting commercial and residential access networks; a compact
multiservice transport test set that combines next-generation SONET/SDH and
Ethernet testing inside a single module; and a cost-effective handheld tester
for the rapid installation and maintenance of asymmetric digital subscriber
line
ADSL/ADSL2/ADSL2+ services.
As
well,
Frost & Sullivan, a leading market research firm in the telecommunications
test and measurement industry, named EXFO recipient of the Growth Strategy
Leadership Award for the fourth consecutive year in the global fiber-optic
test
equipment (FOTE) market. According to Frost & Sullivan, EXFO generated the
largest market-share gains in calendar 2006, moving from 11.0% in 2005 to 12.7%
in 2006 for third place overall in the FOTE market. Based on this report, we
estimate that we improved our leadership position in our core installation
and
maintenance world test market from 23.0% in 2005 to 25.5% in 2006.
In
the
third quarter of fiscal 2007, as part of ongoing efforts to improve our gross
margin, we transferred the manufacturing activities of our protocol product
line
from Montreal, Canada, to our facilities in Quebec City, Canada. In the fourth
quarter, we moved the manufacturing activities of our copper access product
line
from Concord, Canada, to Quebec City. Following the year-end, we opened our
own
telecom manufacturing facility in Shenzhen, China. Our plan is to maintain
two main telecom manufacturing sites; low-volume, high-complexity products
will
be manufactured in Quebec City, whereas high-volume, low-complexity products
will be manufactured in Shenzhen.
In
the
third quarter of fiscal 2007, we also began to establish a software development
center in Pune, India, to supplement the research and development
capabilities of our three Canadian centers. We expect this to enable us to
benefit from a wealth of IP expertise in India, to accelerate
product development ― especially for our software-intensive protocol test
solutions ― to take advantage of a lower cost structure, and to leverage
business opportunities in this rapidly developing country.
Overall
for fiscal 2007, we increased sales 19.2% to $152.9 million from $128.3 million
in 2006. GAAP net earnings reached $42.3 million, or $0.61 per diluted share,
including $24.6 million in recognition of previously unrecognized future income
taxes, $3.2 million in recognition of previously unrecognized research and
development tax credits, $2.9 million in amortization of intangible assets,
$1.1
million from a government grant recovery and $1.0 million in stock-based
compensation costs. In 2006, GAAP net earnings totaled $8.1 million, or $0.12
per diluted share, including $4.4 million in amortization of intangible assets,
$1.3 million from a government grant recovery, $604,000 for impairment of
long-lived assets and $1.0 million in stock-based compensation
costs.
Based
on
this sales and earnings data for fiscal 2007, we concluded that it was more
likely than not that a portion of our future income tax assets, written off
during the telecom downturn in 2003, would be recovered. As a result, we
recognized $24.6 million in previously unrecognized income tax assets and $3.2
million in previously unrecognized research and development tax credits in
the
fourth quarter of 2007. These future income tax assets and tax credits relate
to
our operations in Canada and in the United States.
On
November 5, 2007, the Board of Directors approved a share repurchase program,
by
way of normal course issuer bid on the open market, up to 9,9% of our public
float (as defined by the Toronto Stock Exchange), or 2.9 million
of subordinate voting shares, at the prevailing market price. We expect to
use cash, short-term investments, or future cash flows from operating activities
to fund the repurchase of shares. The normal course issuer bid will start
on November 8, 2007, and end on November 7, 2008, or an earlier
date if we repurchase the maximum number of shares permitted under the bid.
The program does not require that we repurchase any specific number of shares,
and it may be modified, suspended or terminated at any time, without prior
notice. All shares repurchased under the bid will be canceled.
Sales
We
sell
our products to a diversified customer base in approximately 70 countries
through our direct sales force and channel partners like sales representatives
and distributors. Most of our sales are denominated in US dollars and
Euros.
Over
the
last three fiscal years, we had one customer that accounted for more than 10%
of
our global sales with 23.3%, 13.8% and 14.7% in fiscal 2005, 2006 and 2007,
respectively. The significant sales concentration with this Tier-1 carrier
in
fiscal 2005 was largely due to our leadership position in the FTTx test market
and to lower investments by most other carriers. This sales concentration
significantly decreased in fiscal 2006 as we significantly increased
our business with several other accounts around the globe. Although we
maintained our leadership position with this customer, as it migrated to
lower-priced test solutions, we reduced our customer concentration to a better
level.
We
believe that we have a vast array of products, a diversified customer base,
and
good spread across geographical areas, which provides us with reasonable
protection against concentration of sales and credit risk.
Cost
of Sales
Cost
of
sales includes raw materials, salaries and related expenses for direct and
indirect manufacturing personnel (net of government grants) as well as overhead
costs. Excess, obsolete and scrapped materials are also included in cost of
sales. However, cost of sales is exclusive of amortization, which is shown
separately in the statements of earnings.
Operating
Expenses
We
classify our operating expenses into three main categories: selling and
administrative expenses, research and development expenses and amortization
expenses.
Selling
and administrative expenses consist primarily of salaries and related expenses
for personnel, sales commissions, travel expenses, marketing programs,
professional services, information systems, human resources and other corporate
expenses.
Gross
research and development expenses consist primarily of salaries and related
expenses for engineers and other technical personnel, material component costs
as well as fees paid to third-party consultants. We are eligible to receive
research and development tax credits and government grants on research and
development activities carried out in Canada. All related research and
development tax credits and government grants are recorded
as a reduction of gross research and development
expenses.
OUR
STRATEGY
Strategic
Objectives for Fiscal 2007
In
our
fiscal 2006 Annual Report, we had established three strategic objectives for
fiscal 2007. We planned to increase sales through market-share gains,
maximize profitability and focus on innovation. The following section reviews
our strategic objectives for fiscal 2007 and the results achieved for each
of
these objectives.
Increase
sales through market-share gains
On
the
strength of a solid second half, we achieved annual sales growth of 19.2% in
fiscal 2007, while our corporate metric was 20%. In fiscal 2007, we garnered
significant year-over-year sales growth and market-share gains in our optical
(19.9%) and protocol (48.2%) businesses, while expanding our presence in the
critical geographic regions of the Americas (18.7% sales growth
year-over-year) and Europe, Middle East and Africa (27.5% sales growth
year-over-year). On the other hand, sales from our copper-access business and
Asia-Pacific region fell short of our plans. Targeted actions have been
implemented for fiscal 2008 and beyond to address these issues. Overall, in
fiscal 2007, our Telecom Division, which increased its sales by 20.9%
year-over-year, grew substantially faster than the industry.
Maximize
profitability
We
generated GAAP earnings from operations of 11.0% in fiscal 2007, while our
published metric was 7%. Our GAAP earnings from operations in fiscal 2007
included $3.2 million for the one-time recognition of prior years’
non-refundable research and development tax credits and one-time grant revenue
of $1.1 million. These items were not initially forecasted in our corporate
metric. Consequently, excluding these one-time items, our earnings from
operations would have amounted to 8.2%, well above our stated goal. We believe
we surpassed our goal largely due to operational excellence and market-driven
innovation that makes a difference for our customers.
Focus
on innovation
Sales
from new products (on the market two years or less) accounted for 33.7% of
total
sales in 2007, compared to our stated goal of 35%. The ongoing success of
our FTTx products lowered this ratio to a considerable extent, since many of
them have surpassed the two-year threshold for new products but continue to
generate significant sales. Nevertheless, we cannot be displeased with
approximately one-third of our sales from new products as this figure remains
well above industry levels.
Strategic
Objectives for Fiscal 2008
The
fundamentals of the telecom industry are robust in the Americas and worldwide;
this statement is based on exponential growth in bandwidth demand (45% from
2003 to 2006) for global Internet traffic; intense competitive stakes between
telecom operators and cable companies, which drives massive network investments;
and significant operational efficiencies and new service revenues that can
be
delivered by the increasing amount of fully converged IP networks.
As
we
remain committed to best practices in financial reporting, once again this
year,
we are providing our investors with our strategic objectives for fiscal 2008
along with key performance metrics. These are goals established for our
management team and should not be misinterpreted as guidance. The strategic
objectives for fiscal 2008 are the continuity of prior years. As always, we
are
highly focused on creating value for our shareholders, providing the highest
degree of profitable growth. In fiscal 2008, we intend to maintain our long-term
focus on profitable growth by increasing sales in both divisions through
market-share gains; maximize profitability through proper execution and
efficiency of our cost-reduction programs; and focus on innovation to positively
position the organization for the long-term growth opportunities that exist
in
our space.
Increase
sales through market-share gains
We
plan
on increasing sales with a 20% growth target for fiscal 2008. We believe that
we
can continue gaining market share based on our strong positioning for key growth
trends, such as the deployment of fiber deeper into access networks and the
migration of networks towards converged, IP architectures; our history of
gaining market share as evidenced by four consecutive Growth Strategy Leadership
Awards from Frost & Sullivan for largest market share gains in optical
testing; strong focus on execution as demonstrated by a sales compound annual
growth rate of 27.0% over the last three years and 20.1% over the last 10 years,
as well as ongoing investments on global sales and marketing staff.
Maximize
profitability
We
intend
to generate GAAP earnings from operations of 8% in 2008, even considering a
moderate strengthening of the Canadian dollar and our global expansion plans.
We
seek to accomplish this through higher sales volumes enabling
us to better absorb our fixed manufacturing costs, increased sales of
higher-margin protocol test solutions, and a lower cost structure with some
manufacturing and R&D activities being carried out in China and India,
respectively.
Focus
on innovation
We
expect
to derive at least 30% of sales from new products that have been on the market
two years or less in fiscal 2008. It remains an aggressive target, since we
are
usually first to market with our new products to quickly capture market share.
Consequently, just when our new products are receiving global market acceptance,
they often cross the two-year threshold for new products. We believe this
innovation metric is critical for us because it measures the effectiveness
of
our market-driven innovation program.
Key
Performance Indicators
As
measures to assess the realization of our strategic plan and its objectives,
we
have set out three consolidated key performance indicators for fiscal 2008.
They
are summarized as follows:
|
Strategic
objectives for fiscal 2008
|
Key
performance indicators for fiscal 2008
|
|
Increase
sales through market-share gains
|
20%
sales growth year-over-year
|
|
Maximize
profitability
|
8%
in earnings from operations
|
|
Focus
on innovation
|
30%
of sales from new products (on the market two years or
less)
|
Capability
to Deliver Results
At
EXFO,
we believe that we have the capabilities to deliver expected results thanks
to
outstanding products, an excellent reputation in the marketplace, a sound
financial position, as well as an experienced workforce and management
team.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis of financial conditions and results of operations is
based on our consolidated financial statements included elsewhere in this Annual
Report. As previously mentioned, they have been prepared in accordance with
Canadian GAAP. The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets
and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting years. On an ongoing
basis, we evaluate these estimates and assumptions, including those related
to
revenue recognition, the allowance for doubtful accounts, the amount of tax
credits recoverable, the reserve for excess and obsolete inventories, the useful
lives of capital assets, the valuation of long-lived assets, the valuation
allowance of future income tax assets, the amount of certain accrued liabilities
and deferred revenue as well as stock-based compensation costs. We base our
estimates and assumptions on historical experience and on other factors that
we
believe to be reasonable under the circumstances, the result of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from these estimates.
The
following summarizes our critical accounting policies as well as other policies
that require the most significant judgment and estimates in the preparation
of
our consolidated financial statements.
Revenue
recognition. For products in which software is incidental, we recognize
revenue when persuasive evidence of an arrangement exists, the product has
been
delivered, the price is fixed or determinable and collection of the resulting
receivable is reasonably assured. In addition, provisions are made for estimated
returns, warranties and support obligations.
For
products in which software is not incidental, revenues are separated into two
categories: product and post-contract customer support (PCS) revenues, based
upon vendor-specific objective evidence of fair value. Product revenues for
these sales are recognized as described above. PCS revenues are deferred and
recognized ratably over the years of the support arrangement. PCS revenues
are
recognized at the time the product is delivered when provided substantially
within one year of delivery, the costs of providing this support are
insignificant (and accrued at the time of delivery) and no (or infrequent)
software upgrades or enhancements are provided.
For
all
sales, we use a binding purchase order as evidence that a sales arrangement
exists.
Delivery
generally occurs when the product is handed over to a transporter for
shipment.
At
the
time of the transaction, we assess whether the price associated with our revenue
transaction is fixed or determinable, and whether or not collection is
reasonably assured. We assess whether the price is fixed or determinable
based on the payment terms associated with the transaction. We assess collection
based on a number of factors, including past transaction history and the
creditworthiness of the customer. Generally, collateral or other security is
not
requested from customers.
Most
sales arrangements do not generally include acceptance clauses. However, if
a
sales arrangement does include an acceptance provision, acceptance occurs upon
the earliest of the receipt of a written customer acceptance or the expiration
of the acceptance period. For these sales arrangements, the sale is recognized
when acceptance occurs.
Revenue
for extended warranties is recognized on a straight-line basis over the warranty
period.
Allowance
for doubtful accounts. We estimate collectibility of accounts receivable on
an ongoing basis by reviewing balances outstanding over a certain period of
time. We determine our allowance for doubtful accounts receivable based on
our
historical accounts receivable collection experience and on the information
that
we have about the status of our accounts receivable balances. If the financial
conditions of our customers deteriorate, resulting in an impairment of
their ability to make required payments, additional allowance may be required,
which could adversely affect our future results.
Reserve
for excess and obsolete inventories. We state our inventories at the lower
of cost, determined on an average cost basis and replacement cost or net
realizable value, and we provide reserves for excess and obsolete inventories.
We determine our reserves for excess and obsolete inventories based on the
quantities we have on hand versus expected needs for these inventories, so
as to
support future sales of our products. It is possible that additional inventory
reserves may occur if future sales are less than our forecasts or if there
is a
significant shift in product mix compared to our forecasts, which could
adversely affect our future results.
Research
and development tax credits and government grants. We record research and
development tax credits and government grants based on our interpretation of
tax
laws and grant programs, especially regarding related eligible projects and
expenses, and when there is reasonable assurance that we have complied and
will
continue to comply with all conditions and laws. Also, our judgment and
estimates are based on historical experience. It is possible, however, that
the
tax authorities or the sponsors of the grant programs have a different
interpretation of laws and application of conditions related to the programs
or
that we do not comply with all conditions related to grants in the future,
which
could adversely affect our future results. Furthermore, a significant part
of
our research and development tax credits are refundable against income taxes
payable, causing their ultimate realization to be dependent upon the
generation of taxable income. If we obtain information that causes our forecast
of future taxable income to change or if actual taxable income differs from
our
forecast, we may have to revise the carrying value of these tax credits, which
would affect our results in the period in which the change was
made.
Impairment
of long-lived assets and goodwill. We assess impairment of long-lived
assets when events or circumstances indicate that costs may not be
recoverable. Impairment exists when the carrying value of an asset, or a group
of assets, is greater than the pre-tax undiscounted future cash flows expected
to be provided by the asset or the group of assets. The amount of impairment
loss, if any, is the excess of the carrying value over the fair value. We assess
fair value of long-lived assets based on discounted future cash
flows.
We
assess
impairment of goodwill on an annual basis, or more frequently, if events or
circumstances indicate that it might be impaired. Recoverability of
goodwill is determined at the reporting-unit level using a two-step approach.
First, the carrying value of a reporting unit is compared to its fair value,
which is determined based on a combination of discounted future cash flows
and a
market approach. If the carrying value of a reporting unit exceeds its fair
value, the second step is performed. In this step, the amount of impairment
loss, if any, represents the excess of the carrying value of goodwill over
its
fair value and the loss is charged to earnings in the period in which it is
incurred. For the purposes of this impairment test, the fair value of goodwill
is estimated in the same way as goodwill is determined in business
combinations; that is, the excess of the fair value of a reporting unit over
the
estimated fair value of its net identifiable assets.
Future
income taxes. We account for income taxes using the liability method of tax
allocation. Under this method, future income tax assets and liabilities are
determined based on deductible or taxable temporary differences between
financial statement values and tax values of assets and liabilities as well
as
the carryforward of unused tax losses and reductions, using substantively
enacted or enacted income tax rates for the years in which the assets are
expected to be realized or the liabilities to be settled. In assessing the
recoverability of our future income tax assets, we consider whether it is
more likely than not that some or all of the future income tax assets will
not
be realized. The ultimate realization of our future income tax assets is
dependent upon the generation of sufficient future taxable income during the
periods in which those assets are expected to be realized.
Stock-based
compensation costs. We account for all forms of employee stock-based
compensation using the fair value-based method. This method requires that we
make estimates about the risk-free interest rate, the expected volatility of
our
shares, the expected life of the awards and the forfeiture rate.
New
accounting standards and pronouncements to be adopted after fiscal
2007
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. Any adjustment to financial assets and liabilities as at September 1,
2007, will be reflected as an adjustment to retained earnings
or accumulated other comprehensive income. Section 3865 also does not
permit restatement of prior year's financial statements. Any gains or
losses on hedge relationships that no longer qualify are to be reflected in
retained earnings as at September 1, 2007. Any gains or losses of hedging
instruments are adjusted to retained earnings or the component of accumulated
other comprehensive income associated with the hedged items. We adopted these
new standards on September 1, 2007, and impacts consistent with the adjustments
described under note 20 items a) and c) to our consolidated financial
statements included elsewhere in this Annual Report will affect our financial
statements for fiscal 2008 and beyond.
In
December 2006, the CICA issued three new Sections, which provide a complete
set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 is the Canadian equivalent to International Financial Reporting Standards
(IFRS) 7, “Financial Instruments − Disclosures”, and replaces the
disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard places
increased emphasis on disclosures about risks associated with both recognized
and unrecognized financial instruments and how these risks are managed. It
is
also intended to remove any duplicate disclosures and simplify the disclosures
about concentrations of risk, credit risk, liquidity risk and price risk
currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 converges with the capital disclosures amendments to International
Accounting Standards (IAS) 1, “Presentation of Financial Statements”. Section
1535 applies to all entities regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital
and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1,
2007.
We will adopt these new standards on September 1, 2008, and are currently
assessing the effects these new standards will have on our consolidated
financial statements.
In
June
2007, the CICA issued Section 3031, “Inventories” to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in
the
value of inventories. The new standard applies to fiscal years beginning on
or
after January 1, 2008. We will adopt this new standard on September 1, 2008,
and
are currently assessing the effects this new standard will have on our
consolidated financial statements.
RESULTS
OF OPERATIONS
The
following table sets forth certain Canadian GAAP consolidated financial
statements data in thousands of US dollars, except per share data and
as a percentage of sales for the years indicated:
|
Consolidated
statements of earnings data:
|
2007
|
2006
|
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Sales
|
$ |
152,934
|
$ |
128,253
|
$ |
97,216
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost
of sales (1)
|
65,136
|
57,275
|
44,059
|
42.6
|
44.7
|
45.3
|
||||||||||||||||||
|
Gross
margin
|
87,798
|
70,978
|
53,157
|
57.4
|
55.3
|
54.7
|
||||||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||||||
|
Selling
and administrative
|
49,580
|
40,298
|
31,782
|
32.4
|
31.4
|
32.7
|
||||||||||||||||||
|
Net
research and development (2)
|
16,668
|
15,404
|
12,190
|
10.9
|
12.0
|
12.5
|
||||||||||||||||||
|
Amortization
of property, plant and equipment
|
2,983
|
3,523
|
4,256
|
1.9
|
2.7
|
4.4
|
||||||||||||||||||
|
Amortization
of intangible assets
|
2,864
|
4,394
|
4,836
|
1.9
|
3.4
|
5.0
|
||||||||||||||||||
|
Impairment
of long-lived assets
|
−
|
604
|
−
|
−
|
0.5
|
−
|
||||||||||||||||||
|
Government
grants
|
(1,079 | ) | (1,307 | ) |
−
|
(0.7 | ) | (1.0 | ) |
−
|
||||||||||||||
|
Restructuring
and other charges
|
−
|
−
|
292
|
−
|
−
|
0.3
|
||||||||||||||||||
|
Total
operating expenses
|
71,016
|
62,916
|
53,356
|
46.4
|
49.0
|
54.9
|
||||||||||||||||||
|
Earnings
(loss) from operations
|
16,782
|
8,062
|
(199 | ) |
11.0
|
6.3
|
(0.2 | ) | ||||||||||||||||
|
Interest
and other income
|
4,717
|
3,253
|
2,524
|
3.0
|
2.5
|
2.6
|
||||||||||||||||||
|
Foreign
exchange loss
|
(49 | ) | (595 | ) | (1,336 | ) |
−
|
(0.5 | ) | (1.4 | ) | |||||||||||||
|
Earnings
before income taxes
|
21,450
|
10,720
|
989
|
14.0
|
8.3
|
1.0
|
||||||||||||||||||
|
Income
taxes
|
||||||||||||||||||||||||
|
Current
|
3,741
|
2,585
|
2,623
|
2.4
|
2.0
|
2.7
|
||||||||||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(24,566 | ) |
−
|
−
|
(16.0 | ) |
−
|
−
|
||||||||||||||||
| (20,825 | ) |
2,585
|
2,623
|
(13.6 | ) |
2.0
|
2.7
|
|||||||||||||||||
|
Net
earnings (loss) for the year
|
$ |
42,275
|
$ |
8,135
|
$ | (1,634 | ) | 27.6 | % | 6.3 | % | (1.7 | )% | |||||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ |
0.61
|
$ |
0.12
|
$ | (0.02 | ) | |||||||||||||||||
|
Segment
information
|
||||||||||||||||||||||||
|
Sales:
|
||||||||||||||||||||||||
|
Telecom
Division
|
$ |
129,839
|
$ |
107,376
|
$ |
80,120
|
84.9 | % | 83.7 | % | 82.4 | % | ||||||||||||
|
Life
Sciences and Industrial Division
|
23,095
|
20,877
|
17,096
|
15.1
|
16.3
|
17.6
|
||||||||||||||||||
| $ |
152,934
|
$ |
128,253
|
$ |
97,216
|
100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||
|
Earnings
(loss) from operations:
|
||||||||||||||||||||||||
|
Telecom
Division
|
$ |
13,132
|
$ |
6,679
|
$ |
763
|
8.6 | % | 5.2 | % | 0.8 | % | ||||||||||||
|
Life
Sciences and Industrial Division
|
3,650
|
1,383
|
(962 | ) |
2.4
|
1.1
|
(1.0 | ) | ||||||||||||||||
| $ |
16,782
|
$ |
8,062
|
$ | (199 | ) | 11.0 | % | 6.3 | % | (0.2 | )% | ||||||||||||
|
Research
and development data:
|
||||||||||||||||||||||||
|
Gross
research and development
|
$ |
25,201
|
$ |
19,488
|
$ |
15,878
|
16.5 | % | 15.2 | % | 16.3 | % | ||||||||||||
|
Net
research and development
(2)
|
$ |
16,668
|
$ |
15,404
|
$ |
12,190
|
10.9 | % | 12.0 | % | 12.5 | % | ||||||||||||
|
Consolidated
balance sheets data:
|
||||||||||||||||||||||||
|
Total
assets
|
$ |
279,138
|
$ |
219,159
|
$ |
190,957
|
||||||||||||||||||
|
(1)
The cost of sales is exclusive of amortization, shown
separately.
|
|
(2)
Net research and development expenses for the year ended August 31,
2007,
include recognition of previously unrecognized research and development
tax credits of $3,162.
|
SALES
Fiscal
2007 vs. 2006
In
fiscal
2007, our global sales increased 19.2% to $152.9 million from $128.3 million
in
2006, with an 85%-15% split in favor of our Telecom Division (84%-16% in
2006).
Telecom
Division
In
fiscal
2007, sales of our Telecom Division increased 20.9% to $129.8 million from
$107.4 million in 2006.
In
fiscal
2007, we posted organic sales growth due to market-share gains in optical
testing and next-generation IP test solutions and due to continued spending
in access networks fueled by the competitive dynamic between telephone and
cable
companies. In fiscal 2007, sales of our optical test solutions increased 19.9%
to $102.1 million ($85.2 million in 2006), and we earned our fourth
consecutive Growth Strategy Leadership Award from Frost & Sullivan for
largest market-share gains in optical testing. Also, during fiscal 2007,
protocol test solutions were our fastest-growing product line with a sales
increase of 48.2% year-over-year as they reached $17.1 million, compared to
$11.5 million in 2006. Also, in 2007, they represented more than 10% of our
Telecom sales. Given the much larger addressable market for protocol test
solutions and our very strong product offering – especially for next-generation
IP-based test solutions – we believe that protocol revenues should continue to
grow faster than our optical revenues over the next few years.
In
addition, during fiscal 2007, sales of our copper-access test solutions
increased 15.5% to $7.7 million, compared to $6.7 million in 2006. It should
be
noted however, that Consultronics (acquired in January 2006) contributed to
our sales during the whole period compared to about seven months in 2006, which
contributed to the increase in our sales
year-over-year. This business unit did not perform as well
as expected in 2007 as large-scale IPTV deployments have been delayed until
calendar 2008. We expect sales of this sector to increase over time as we take
advantage of a strengthening product offering, as our sales channels gain
additional experience in this technology area, and as IPTV deployments
accelerate. Following year-end, we launched new added-value products that
integrate Consultronics’ core knowledge and intellectual property; namely,
the AXS-200 SharpTESTER, a multiservice, multimedium test platform for
characterizing and troubleshooting commercial and residential access networks.
A
large portion of our sales of copper-access products in fiscal 2007 were made
to
a Tier-1 carrier in the United States.
During
fiscal 2007, we faced increased pricing pressure, especially in the Asia-Pacific
region, which prevented us from further increasing our sales
year-over-year.
Life
Sciences and Industrial Division
In
fiscal
2007, sales of our Life Sciences and Industrial Division increased 10.6% to
$23.1 million from $20.9 million in 2006. The increase in sales in
fiscal 2007, compared to 2006, is mainly due to increased sales activities
in
the curing market as well as market-share gains in the fluorescence illumination
market, following our efforts to expand international markets, mainly Europe
and
Asia.
Net
bookings
Overall,
for the two divisions, net accepted orders increased 21.0% to $156.7 million
in
fiscal 2007 from $129.4 million in 2006, for a book-to-bill ratio of 1.02
in fiscal 2007. Our increase of 21.0% in net accepted orders in fiscal 2007,
compared to 2006, reflects the increased demand for our test solutions
(especially in the Americas and in the Europe, Middle East and Africa regions),
market-share gains in the telecommunications and
fluorescence illumination markets as well as stronger telecommunications and
curing market environment.
Fiscal
2006 vs. 2005
In
fiscal
2006, our global sales increased 31.9% to $128.3 million from $97.2 million
in
2005, with an 84%-16% split in favor of our Telecom Division.
Telecom
Division
In
fiscal
2006, sales of our Telecom Division increased 34.0% to $107.4 million from
$80.1 million in 2005.
In
fiscal
2006, we leveraged our portfolio of new products and an increased demand for
our
test solutions, especially in Europe, Middle East and Africa and Asia-Pacific,
to increase our year-over-year sales in our Telecom Division. We also
consolidated our dominant FTTx market position in the Americas by enabling
a
Tier-1 carrier to migrate to less expensive test solutions. Although
revenues were down at this customer year-over-year, we maintained our market
share through the sales of cost-effective test solutions, such as our handheld
AXS-100 OTDR, to help reduce cost of deployments. In addition, the positive
spending environment, as well as the market share we gained in fiscal 2006
for
our optical and protocol products, helped us increase our sales of that Division
year-over-year. Also, Consultronics contributed about seven months to our
Telecom Division, which had a positive impact on our consolidated sales during
fiscal 2006. The results of Consultronics have been included in our consolidated
statement of earnings since the closing of the acquisition on January 26, 2006.
Finally, in fiscal 2006, our top customer accounted for 16.5% of our Telecom
sales, compared to 28.2% of sales in 2005, reflecting the diversification of
our
customer base. In fact, excluding sales to our top customer, our sales of this
Division would have increased 56.0% in fiscal 2006, compared to
2005.
Although,
in the past few years, our market share in the protocol test market has been
modest, our protocol-product results in the second half of fiscal 2006
accelerated substantially year-over-year, making this sector our fastest-growing
line of business in 2006.
Life
Sciences and Industrial Division
In
fiscal
2006, sales of our Life Sciences and Industrial Division increased 22.1% to
$20.9 million from $17.1 million in 2005. As for fiscal 2007, the
increase in sales in fiscal 2006, compared to 2005, is mainly due
to increased sales activities in the curing market as well as market-share
gains in the fluorescence illumination market, following our efforts to expand
international markets, mainly Europe and Asia.
Geographic
distribution
Fiscal
2007 vs. 2006
In
fiscal
2007, sales to the Americas, Europe-Middle East-Africa (EMEA) and Asia-Pacific
(APAC) accounted for 59%, 27% and 14% of global sales, respectively, compared
to
60%, 25% and 15%, respectively in 2006.
In
fiscal
2007, we reported sales increases in dollars in every geographic area. In fact,
sales to the Americas, EMEA and APAC increased (in dollars) 18.7%, 27.5% and
7.8% year-over-year, respectively.
In
the
Americas, the increase in sales in dollars in fiscal 2007, compared to the
same
period last year, comes from the United States and Canada, where we witnessed
an
increase in sales of our optical and protocol test solutions. In the United
States, we continue leveraging our dominant FTTx market position to increase
our
sales. In addition, sales to our top customer, who is located in the United
States, increased in dollars in fiscal 2007, compared to 2006. Sales to this
customer represented $22.5 million, or 14.7% of global sales in 2007, compared
to $17.7 million, or 13.8% of our global sales in 2006, representing an
increase of 27.0% year-over-year. In Latin America, we reported a slight
decrease in sales in fiscal 2007 compared to 2006.
The
significant increase in sales in the EMEA market, in dollars, in fiscal 2007,
compared to 2006, is apparent in the results for all our product lines,
following our efforts to aggressively develop this market in the last several
years and investment to increase our sales presence and develop stronger support
and service operations in this region. Many Tier-1 carriers in EMEA are
migrating their traditional circuit-switched core networks to higher-speed,
dense wavelength-division multiplexing (DWDM) and next-generation packet-based
architectures, which is creating a market demand for our protocol test
solutions and fiber characterization test kits. In addition, we are leveraging
our FTTx leadership gained in the United States to provide consultancy with
many
of the early adopters in this field in EMEA.
In
the
APAC market, we are starting to see the impact of the introduction of some
specific optical, protocol and life science and industrial products as we
steadily increase our market presence in this growth region; this explains
the
increase in sales in this region in fiscal 2007, compared to the corresponding
period last year. However, although we reported sales growth year-over-year
in this region, we are facing significant competitive pricing pressure, which
prevented us from reaching expected sales growth. In addition, a significant
portion of our sales to this market are made through tenders, which vary in
number and importance year-over-year.
Fiscal
2006 vs. 2005
During
fiscal 2006, sales to the Americas, EMEA and APAC accounted for 60%, 25% and
15%
of global sales, respectively, compared to 68%, 20% and 12%, respectively in
2005. Although our sales increased in dollars in every geographic area, we
made
greater progress in EMEA and APAC in fiscal 2006, compared to 2005, where we
gained market share in both divisions. Global sales to these two markets
increased 66.9% and 66.4%, respectively in fiscal 2006, compared to 2005. In
comparison, our sales to the Americas increased 15.6%
year-over-year.
The
significant increase in sales in the EMEA market is mainly due to improved
market penetration by both divisions, following our efforts to develop this
market in the last several quarters. Namely, since the second quarter of fiscal
2006, we were selected as sole-source supplier by a Tier-1 network service
provider for all its fiber deployment test applications – including FTTx –
further increasing our sales to this market year-over-year.
Over
the
last several quarters, we strengthened our product offering in APAC,
specifically by implementing a multi-tiered platform strategy to meet different
customer demands and different price points and by expanding our sales and
marketing activities in this region. Our increased focus on and interaction
with
this market, combined with our enhanced capability to win tenders (which may
vary in number and importance) contributed to our growth in the APAC
region.
In
the
Americas, sales to our top customer, who is located in the United States,
decreased in fiscal 2006, compared to 2005, as it migrated to lower-priced
test
solutions, thus affecting our sales to the Americas year-over-year. However,
we
were able to leverage our customer base and increase our sales to this region
in
fiscal 2006, compared to 2005. Also, Consultronics, whose customers are mainly
in the Americas, helped increase our sales to the Americas in fiscal 2006.
In
fact, excluding sales to our top customer, our sales to the Americas would
have
increased 35.1% year-over-year, which is quite remarkable considering that
our
end-markets increased in mid single digits in 2006.
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 fiscal 2007, our top customer accounted for 14.7%
($22.5 million) of our global sales, and our top three customers accounted
for
19.6% of our global sales. For the corresponding period last year, our top
customer accounted for 13.8% ($17.7 million) of our global sales, and our top
three customers accounted for 19.4% of our global sales.
GROSS
MARGIN
Gross
margin amounted to 57.4%, 55.3% and 54.7% of sales for fiscal 2007, 2006 and
2005, respectively.
Fiscal
2007 vs. 2006
Despite
the increased strength of the Canadian dollar, compared to the US dollar in
fiscal 2007 versus 2006 and the intense competitive pressure on selling prices
that we faced in 2007, we were able to significantly increase our gross margin
(2.1%) year-over-year.
This
increase in our gross margin in fiscal 2007, compared to 2006 can be explained
by several factors. First, the increase in sales year-over-year resulted in
an
increase in manufacturing activities, allowing us to better absorb our fixed
manufacturing costs. In addition, sales of our protocol test solutions increased
in dollar and as a percentage of sales year-over-year; this had a positive
impact on our gross margin, as these products are more software-intensive and
tend to have better gross margin than our optical test solutions. 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.
Finally, our initiative to outsource the manufacturing of some product lines
to
China in fiscal 2007 helped us to improve our gross margin
year-over-year.
However,
as mentioned above, we are facing continued aggressive pricing pressure
worldwide, which negatively affected the gross margin in fiscal 2007. In
addition, in 2007, 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. Furthermore, the
transfer, in fiscal 2007, of our protocol and copper access manufacturing
operations from Montreal and Concord to our Quebec City plant resulted in
one-time charges, which negatively affected our gross margin during that period.
Finally, in fiscal 2007, the setup of our own manufacturing activities
in China (which will be operational in 2008) resulted in additional
one-time costs in 2007, thus reducing the gross margin of that year. We believe
these two initiatives should contribute to bring our gross margin close to
60%.
On
an
ongoing basis and when technically possible, we adjust the design of our
products to reuse excess inventory, and, over the past few years, we experienced
higher sales than expected on some product lines consuming such excess
inventory. Consequently, we were able to reuse excess inventories that were
written off following the telecom downturn in 2001 and 2002. Excess inventory
reuse accounted for approximately $1.7 million, or 1.1% of sales in fiscal
2007, compared to approximately $1.2 million, or 0.9% of sales in 2006 and
approximately $1.6 million, or 1.7% of sales in 2005. Inventory write-offs
recorded during the telecom downturn were based on our best estimate at
that time.
Fiscal
2006 vs. 2005
The
increase in our gross margin in fiscal 2006, compared to 2005, can be explained
by the following factors. First, we succeeded in increasing the market
acceptance of our new products (designed in the last few years) on which
we had focused our research and development efforts to simultaneously
create lower cost of goods and the most advanced solutions. Second, the
significant rise in sales year-over-year resulted in an increase in
manufacturing activities, allowing us to better absorb our fixed manufacturing
costs. Also, we were able to reduce our cost of goods sold by better leveraging
our supplier base. Furthermore, streamlined operations following our
consolidation action in fiscal 2005 and continued cost-reduction programs
allowed us to further improve our gross margin. However, the shift in the
geographic distribution of our sales resulted in more sales, in percentage
of
total sales, made to the EMEA and APAC markets, where gross
margins tend to be lower as most of our sales to these markets are made through
distribution channels. In addition, we faced aggressive pricing pressure
worldwide. Furthermore, in fiscal 2006, we incurred one-time charges related
to
the integration of Consultronics manufacturing activities, which reduced our
gross margin year-over-year. Finally, a stronger Canadian dollar, compared
to
the US dollar, prevented us from further improving our gross margin as some
cost
of sales items are denominated in Canadian dollars.
Outlook
for Fiscal 2008
Considering
the expected sales growth in fiscal 2008, the expected increase in sales of
protocol products (which tend to generate higher margins), the cost-effective
design of our products, our manufacturing activities in China (which we believe
should lower our cost of goods over time), our tight control on operating costs,
we expect our gross margin to improve in 2008 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, challenges encountered in the
ramp-up of our manufacturing facilities in China, 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 2008.
SELLING
AND ADMINISTRATIVE
Selling
and administrative expenses were $49.6 million, $40.3 million and $31.8 million
for fiscal 2007, 2006 and 2005, respectively. As a percentage of sales, selling
and administrative expenses amounted to 32.4%, 31.4% and 32.7% for fiscal 2007,
2006 and 2005, respectively.
Fiscal
2007 vs. 2006
In
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), compared to the corresponding period last
year.
In addition, our overall commission expenses increased in fiscal 2007, compared
to the corresponding period last year, due to the increase in sales
year-over-year and the shift in customer mix. In fact, in fiscal 2007, we had
large orders sold directly to international customers for which we still had
to
pay commissions to distributors instead of selling through our distributors
at a
discounted price, which increased our selling expenses year-over-year, but
had,
to some extent, a positive impact on our gross margin. Furthermore,
Consultronics, acquired in January 2006, contributed for the whole period to
our
selling and administrative expenses, compared to about seven months in 2006,
thus increasing these expenses year-over-year.
Also,
a
stronger Canadian dollar on average for the period, compared to the US dollar
during fiscal 2007 versus 2006, caused our selling and administrative expenses
to increase year-over-year, as more than half of these expenses are denominated
in Canadian dollars. In addition, the setup in 2007 of manufacturing facilities
in China and a software development center in India contributed to an
increase in our administrative expenses year-over-year.
Finally,
in fiscal 2007, and despite an increase in sales, our selling and administrative
expenses increased in percentage of sales compared to the corresponding
period last year. Larger commissions on international sales as well as our
efforts to develop international markets and operations contributed to the
increase in these expenses as a percentage of sales.
Fiscal
2006 vs. 2005
The
increase in our selling and administrative expenses in dollars in fiscal 2006,
compared to 2005, is mainly due to our decision to increase our sales
activities worldwide. In addition, our commission expenses increased
year-over-year due to the increase in sales. Furthermore, a stronger Canadian
dollar, compared to the US dollar year-over-year, caused our selling and
administrative expenses to increase. Finally, in fiscal 2006, Consultronics
contributed about seven months to our selling and administrative expenses,
increasing these expenses year-over-year.
Outlook
for Fiscal 2008
For
fiscal 2008, we expect our selling and administrative expenses to increase
in
dollars and range between 30% and 32% of sales. In particular, in fiscal 2008,
we expect our commission expenses to increase as sales volume increases.
Furthermore, considering our goal of becoming the leading player in the telecom
test, measurement and monitoring space, we plan to continue intensifying 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
Gross
research and development expenses
Gross
research and development expenses totaled $25.2 million, $19.5 million and
$15.9
million for fiscal 2007, 2006 and 2005, respectively. As a percentage of sales,
gross research and development expenses amounted to 16.5%, 15.2% and 16.3%
for fiscal 2007, 2006 and 2005, respectively, while net research and development
expenses accounted for 10.9%, 12.0% and 12.5% of sales for these respective
periods. Net research and development expenses for fiscal 2007 included the
recognition of non-refundable research and development tax credits in the amount
of $3.2 million that were written off in fiscal 2003 following the downturn
in
the telecommunications industry; this explains the 2.1% year-over-year decrease
in net research and development expenses as a percentage of sales.
Fiscal
2007 vs. 2006
In
fiscal
2007, we intensified our research and development activities in both divisions,
which resulted in higher gross research and development expenses, including
additional employees, compared to 2006. In addition, in fiscal 2007,
we subcontracted a larger portion of our research and development projects
in
Canada and India, compared to the corresponding period last year, which
resulted in an increase in our gross research and development expenses
year-over-year.
Furthermore,
Consultronics contributed to our research and development expenses during the
whole period this year, compared to about seven months in 2006, thus increasing
these expenses year-over-year. Finally, in fiscal 2007, the increased strength
of the Canadian dollar, on average, compared to the US dollar year-over-year,
contributed to the increase in our gross research and development expenses,
as
most of these are denominated in Canadian dollars.
The
above-mentioned factors explain the increase of our gross research and
development expenses as a percentage of sales in fiscal 2007, compared to
2006.
Fiscal
2006 vs. 2005
The
increase in our gross research and development expenses in dollars in fiscal
2006, compared to 2005, is due several reasons. First, in fiscal 2006,
Consultronics contributed about seven months to our gross research and
development expenses, which caused these expenses to increase year-over-year.
In
addition, in fiscal 2006, our gross research and development expenses were
negatively affected by the increased strength of the Canadian dollar, compared
to the US dollar year-over-year, as most of these expenses are incurred in
Canadian dollars following the consolidation of most of our research and
development activities in Canada. Finally, mix and timing of research and
development projects in fiscal 2006 resulted in more gross research and
development expenses during that year compared to 2005 for both
divisions.
Tax
credits and grants
Tax
credits and grants from the Canadian federal and provincial governments for
research and development activities were $8.5 million, $4.1 million and $3.7
million for fiscal 2007, 2006 and 2005, respectively. As percentage of
gross research and development expenses, tax credits and grants amounted to
33.9%, 21.0% and 23.2% for fiscal 2007, 2006 and 2005,
respectively.
Fiscal
2007 vs. 2006
During
fiscal 2003, following the downturn in the telecommunications industry and
after
being in a cumulative loss position, we wrote off deferred non-refundable
research and development tax credits of our parent company because it was more
likely than not that these assets would not be realized.
In
fiscal
2007, after reviewing both available positive and negative evidences, and
because we were in a cumulative profit position in the parent company at the
Canadian federal level, and also because we expect to generate sufficient
taxable income in future years, we concluded that is was more likely than not
that deferred non-refundable income tax credits of our parent company would
be
realized. Consequently, in fiscal 2007, we recorded previously unrecognized
non-refundable research and development tax credits in the amount of $3.2
million, or 12.5% of gross research and development expenses. These
non-refundable tax credits of $3.2 million recognized in fiscal 2007 can be
carried forward against future years’ Canadian federal income taxes payable and
expire between 2011 and 2014.
In
addition to this one-time tax credit, our tax credits increased in dollars
in
fiscal 2007, compared to 2006 for several reasons. First, the increase in gross
research and development expenses in Canada in 2007, compared to 2006,
resulted in more expenses being eligible for tax credits as we were entitled
to
similar grant programs and tax credits year-over-year. In addition, the
increased strength of the Canadian dollar, compared to the US dollar
year-over-year, resulted in higher tax credits since these credits are solely
earned on research and development expenses incurred in Canada.
Also,
due
to the one-time recognition of non-refundable tax credits from prior years,
our
tax credits significantly increased as a percentage of gross research and
development expense. Had prior years’ credits not been recognized, our tax
credits would have been flat year-over-year as a percentage of gross research
and development expenses, as we incurred most of our expenses in Canada and
were entitled to same grant programs and tax credits.
Fiscal
2006 vs. 2005
The
increase in our tax credits in dollars in fiscal 2006, compared to 2005, is
mainly related to the increase in our eligible gross research and development
expenses in Canada, since we were also entitled to similar grant programs and
tax credits year-over-year. In addition, the increased strength of the Canadian
dollar, compared to the US dollar year-over-year, also resulted in higher tax
credits since these credits are earned in Canada. However, our tax credits
decreased as a percentage of gross research and development expense. In fact,
following the acquisition of Consultronics, we incurred less gross expenses
that were eligible for tax credits since a part of Consultronics research and
development activities were held outside Canada and Quebec. In addition, the
mix
of research and development projects resulted in a lower proportion of expenses
being eligible for tax credits in fiscal 2006, compared to 2005.
Outlook
for Fiscal 2008
For
fiscal 2008, we plan to increase our research and development expenses at about
the same rate we grow our sales, given our focus on innovation, the addition
of
software features in our products, our desire to gain market shares and our
goal
to exceed customer needs and expectations. Also, we are increasingly taking
advantage of talent pools around the world by establishing a research and
development center focused on software development in Pune, India. Finally,
any further increase in the strength of the Canadian dollar in the upcoming
quarters would cause our net research and development expenses to increase,
as
most of these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For
fiscal 2007, amortization of property, plant and equipment was $3.0 million,
compared to $3.5 million in 2006 and $4.3 million in 2005. The decrease in
amortization expenses over the last two fiscal years, despite the increase
in
the strength of the Canadian dollar compared to the US dollar as well as the
acquisition of Consultronics in January 2006 is mainly due to the fact that
some of our property, plant and equipment became fully amortized over the last
three years.
Outlook
for Fiscal 2008
For
fiscal 2008, we expect the amortization of property, plant and equipment to
increase in dollars due to the upgrade of our IT systems in fiscal 2008 and,
more importantly, the startup of our own manufacturing and research and
development facilities in China and India. Also, any further increase in the
strength of the Canadian dollar in the upcoming quarters would cause our
amortization of property, plant and equipment to increase, as most of these
are
denominated in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
In
conjunction with the business combinations we completed over the past several
years, we recorded intangible assets, primarily consisting of core technology.
These intangible assets resulted in amortization expenses
of $2.9 million, $4.4 million and $4.8 million for fiscal 2007, 2006
and 2005, respectively. The decrease in amortization expense in the last
two fiscal years, despite the increased strength of the Canadian dollar compared
to the US dollar and the acquisition of Consultronics in January 2006 is mainly
due to the fact that some of our core technologies became fully amortized during
fiscal 2005 and 2006; namely, those related to the acquisition of EXFO Burleigh,
EXFO Photonics Solutions and EXFO Protocol.
Outlook
for Fiscal 2008
For
fiscal 2008, we expect the amortization of intangible assets to remain flat
in
dollars. This assumes no business combinations will be made during this
period. Also, any further increase in the strength of the
Canadian dollar in the upcoming quarters would cause our amortization of
intangible assets to increase, as most of these are denominated in Canadian
dollars.
IMPAIRMENT
OF LONG-LIVED ASSETS
Fiscal
2006
In
June
2006, we entered into an agreement to sell one of our buildings (located in
Rochester, NY) along with some equipment, and we recorded an impairment charge
of $604,000 in the third quarter of fiscal 2006. The impairment charge
represented the excess of the carrying value of these assets over the expected
net selling price of $1.2 million. The sale of these assets was finalized in
the
fourth quarter of 2006 for the expected net selling price, which was received
in
November 2006. These assets were related to the Life Sciences and Industrial
Division.
GOVERNMENT
GRANTS
During
1998, we entered into an agreement with the Quebec Minister of Industry,
Commerce, Science and Technology (“The Minister”). Pursuant to this agreement,
the Minister agreed to contribute, in the form of grants, up to CA$2.2
million over the period from January 1, 1998, through December 31, 2002, payable
based on the number of full-time jobs created during that period.
The
above
grants were subject to the condition that jobs created pursuant to the agreement
be maintained for a period of at least five years from the date of
creation. Since the beginning of the program, we deferred in the balance sheet
CA$1.5 million (US$1.3 million) until we received the final approval by the
sponsor of the program related to jobs created. In fiscal 2006, the sponsor
of
the program granted us with its final approval and we recorded
CA$1.5 million (US$1.3 million) in the earnings from operations in the
statement of earnings of fiscal 2006.
Furthermore,
until December 31, 2006, companies operating in the Quebec City area
were eligible for a refundable credit granted by the Quebec provincial
government. This credit was earned based on the increase of eligible production
and marketing salaries incurred in the Quebec City area at a rate of 40%. From
the total amount we claimed under this program, a sum of CA$1.1 million
(US$1.1 million) was deferred in the balance sheet until we received the final
approval of eligible salaries by the sponsor of the program. In fiscal 2007,
the
sponsor of the program granted us with its final approval, and we recorded
CA$1.1 million (US$1.1 million) in the earnings from operations in the statement
of earnings of fiscal 2007.
As
at
August, 31, 2007, we were not part of any significant grant
programs.
INTEREST
AND OTHER INCOME
Our
interest income mainly resulted from our short-term investments, less interests
and bank charges. Interest and other income amounted to $4.7 million, $3.3
million and $2.5 million for fiscal 2007, 2006 and 2005, respectively. The
increase in our interest income in fiscal 2007, compared to 2006, is mainly
due
to the increase in interest rates year-over-year. Also, our average cash
position increased in fiscal 2007 due to cash flows from operating activities,
which contributed to the further increase in interest revenue
year-over-year.
The
increase in our interest income in fiscal 2006, compared to 2005, is also mainly
due to the increase in interest rates year-over-year. In addition, despite
the
cash payment of $18.1 million for the acquisition of Consultronics
in January 2006, our average cash position increased in fiscal 2006 due to
cash flows from operating activities, which contributed to the further increase
in interest revenue year-over-year.
Outlook
for fiscal 2008
Assuming
no acquisitions paid in cash are made in fiscal 2008 and stability in interest
rates, we expect our interest income to slightly increase as our cash position
should increase with expected cash flows from operating activities
in fiscal 2008, compared to 2007.
FOREIGN
EXCHANGE LOSS
Foreign
exchange gains and losses are the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
The
foreign exchange loss amounted to $49,000, $595,000 and $1.3 million in fiscal
2007, 2006 and 2005, respectively.
In
fiscal
2007, the Canadian dollar fluctuated compared to the US dollar and overall,
this
resulted in a small exchange loss of $49,000. During that period, we
witnessed instability in the value of the Canadian dollar, compared to the
US
dollar. The average exchange rate was CA$1.1215 = US$1.00 in fiscal 2007,
compared to a year-end exchange rate of CA$1.1066 = US$1.00 as at
August 31, 2006 and CA$1.0564 = US$1.00
as at August 31, 2007.
The
significant exchange losses recorded in fiscal 2005 and 2006 were the result
of
the significant increase in the value of the Canadian dollar, compared to the
US
dollar, during these periods. However, the increase in the value of the
Canadian dollar was more significant in fiscal 2005, compared to 2006, which
resulted in a higher exchange loss in 2005. For instance, the year-end exchange
rate was CA$1.3167 = US$1.00 in fiscal 2004, compared to CA$1.1889 =
US$1.00 in 2005, representing an increase of 10.7% year-over-year. This compares
to a year-end exchange rate of CA$1.1066 = US$1.00 in fiscal 2006, which
resulted in an increase of 7.4%, compared to 2005. Also, the average exchange
rate was CA$1.2315 = US$1.00 in fiscal 2005, compared to CA$1.1481 = US$1.00
in 2006. On the other hand, higher levels of activity in fiscal 2006,
compared to 2005, contributed to the increase in exchange loss in
2006.
It
should
be noted that foreign exchange rate fluctuations also flow through the profit
and loss line items as a significant portion of our operating items
are denominated in Canadian dollars and we report our results
in US dollars.
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
We
recorded an income tax recovery of $20.8 million in fiscal 2007, compared to
an
income tax expense of $2.6 million in both fiscal 2006 and
2005.
During
fiscal 2003, following the downturn in the telecommunications industry, we
recorded a full valuation allowance against our future income tax assets in
every applicable tax jurisdictions and we wrote-off non-refundable research
and
development tax credits because it was more likely than not that these assets
would not be realized.
Fiscal
2007
Canadian
federal and provinces level and United States federal
level
During
fiscal 2007, after reviewing both available positive and negative evidences,
and
because we were in a cumulative profit position in our parent company
(Canadian federal and provinces level) and in one of our subsidiaries, located
in the United States, and also because we expect to generate sufficient taxable
income in future years, we concluded that it is was more likely than not that
the future income tax assets of our parent company in Canada and a portion
of our future income tax assets in the United States would be realized.
Consequently, we recorded previously unrecognized future income tax assets
in the amount of $24.6 million. From this amount, $16.2 million related to
the Canadian federal level, $3.2 million related to the Canadian provinces
level
and $5.2 million related to the United States federal level.
In
addition, from the global amount of future income tax assets recognized in
fiscal 2007, $6.5 million relate to operating losses carried forward
that expire as follows:
|
Canada
|
||||||||||||
|
Year
of expiry
|
Federal
|
Provinces
|
United
States
|
|||||||||
|
2008
|
$ |
1,230,000
|
$ |
869,000
|
$ |
–
|
||||||
|
2009
|
2,845,000
|
162,000
|
–
|
|||||||||
|
2010
|
4,663,000
|
176,000
|
–
|
|||||||||
|
2014
|
93,000
|
2,000
|
–
|
|||||||||
|
2022
|
–
|
–
|
3,795,000
|
|||||||||
|
2023
|
–
|
–
|
1,671,000
|
|||||||||
|
Indefinite
|
–
|
–
|
7,474,000
|
|||||||||
| $ |
8,831,000
|
$ |
1,209,000
|
$ |
12,940,000
|
|||||||
In
order
to realize these future income tax assets and non-refundable research and
development tax credits, we need to generate approximately $100 million in
pretax earnings at the Canadian federal level, approximately $26 million at
the
Canadian provinces level, and approximately $15 million at the United States
federal level.
Based
on
the existing and expected level of pretax earnings in these tax jurisdictions,
we believe that we should be able to recover all these assets over the next
six years. Historically, pretax earnings for financial reporting purposes have
been close to taxable income in these tax jurisdictions, exclusive of any tax
planning to generate additional taxable income.
Future
income tax assets recognized in 2007 were recorded in the income tax
provision.
United
States federal level and other tax jurisdictions
In
the
United States (federal level), based on available positive and negative
evidences as well as the level and the nature of cumulative profits, we
maintained a valuation allowance of $7.6 million on a portion of our future
income tax assets in this tax jurisdiction because it is more likely than not
that these assets will not be recovered. These future income tax assets consist
of operating losses carried forward; some of these losses expire between 2022
and 2026, while others can be carried forward indefinitely against future years’
taxable income.
In
other
tax jurisdictions where we have future income tax assets, we are still in a
cumulative loss position and available negative evidences outweigh positive
evidences. For these tax jurisdictions, we maintained a full valuation allowance
against our future income tax assets. As at August 31, 2007, the valuation
recorded for these other tax jurisdictions amounted to $4.9 million and mainly
relates to operating losses carried forward, which expire at various dates
over the next 20 years.
Overall,
we maintained a valuation allowance of $12.5 million as at August 31,
2007.
Except
for the reversal of the valuation allowance in fiscal 2007, most of the income
tax expenses recorded in fiscal 2005, 2006 and 2007, 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.
Please
refer to note 16 of our consolidated financial statements included elsewhere
in
this Annual Report for more details on income taxes and a full reconciliation
of
the income tax provision.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Requirements and Capital Resources
As
at
August 31, 2007, cash and short-term investments increased to $129.8 million
from $111.3 million in 2006, while our working capital was $180.4 million.
During fiscal 2007, operating activities generated $14.4 million in cash.
In addition, we recorded an unrealized foreign exchange gain of
$5.8 million on our cash and short-term investments. This unrealized
foreign exchange gain 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. Furthermore,
net proceeds from disposal of capital assets of $3.1 million increased our
cash
position year-over-year. Finally, issuance of subordinate voting shares
generated $802,000 in cash in fiscal 2007 following the exercise of stock
options. On the other hand, we made cash payments of $5.6 million for the
purchase of capital assets.
Our
short-term investments consist of commercial paper issued by seven (nine as
of
August 31, 2006) high-credit quality corporations and trusts;
therefore, we consider the risk of non-performance of these financial
instruments to be remote. None of these debt instruments are expected to be
affected by a liquidity risk; 47% of them are guaranteed by the Government
of
Canada and none of them represent asset-backed commercial
paper. 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,
including the effect of the share repurchase program approved
on November 5, 2007. In addition to these assets, we have unused
available lines of credit of $12.0 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.
The
following table summarizes our commitments as at August 31, 2007:
|
Years
ending August 31,
|
2008
|
2009
|
2010
|
2011
|
2012
and
later
|
Total
|
||||||||||||||||||
|
Operating
leases
|
$ |
2,313,000
|
$ |
2,164,000
|
$ |
2,064,000
|
$ |
1,145,000
|
$ |
641,000
|
$ |
8,327,000
|
||||||||||||
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 $14.4 million in fiscal 2007,
compared to $12.3 million in 2006 and $14.0 million in 2005. Cash
flows provided by operating activities in fiscal 2007 were mainly attributable
to the net earnings after items not affecting cash of $24.6 million, less
the negative net change in non-cash operating items of $10.1 million. Our
accounts receivable, our income taxes and tax credits recoverable as well as
our
inventories increased in fiscal 2007, resulting in negative effects on cash
flows of $5.5 million, $3.4 million and $5.5 million, respectively. However,
our
accounts payable and accrued liabilities increased during fiscal 2007, resulting
in a positive effect on cash flows of $4.1 million. The increase in
sales year-over-year explains the increase in accounts receivable. Also,
one-time recognition of prior years’ non-refundable tax credits of $3.2 million
explains most of the increase in our income taxes and tax credits recoverable
year-over-year. Furthermore, increased sales activities in fiscal 2007 resulted
in higher inventory levels in 2007 in order to sustain these additional sales
activities. However, increased levels of activities in fiscal 2007, compared
to
2006, resulted in an increase in our accounts payable and accrued liabilities
year-over-year.
Cash
flows provided by operating activities in fiscal 2006 were mainly attributable
to the net earnings after items not affecting cash of $16.9 million, less
the negative net change in non-cash operating items of $4.7 million.
Our accounts receivable and our inventories increased in fiscal 2006,
resulting in negative effects on cash flows of $2.6 million and $2.3
million, respectively. The increase in sales year-over-year explains the
increase in accounts receivable. Also, larger sales activities in fiscal 2006
resulted in higher inventory levels in 2006 in order to sustain these increased
sales activities.
Investing
Activities
Cash
flows used by investing activities were $16.1 million in fiscal 2007, compared
to $13.2 million in 2006 and $13.0 million in 2005.
In
fiscal
2007, we acquired $13.6 million worth of short-term investments and paid $5.6
million for the purchase of capital assets. On the other hand, in fiscal
2007, we received net proceeds of $3.1 million from the disposal of capital
assets.
In
fiscal
2006, we made cash payments of $18.1 million and $3.4 million for the
acquisition of Consultronics and the purchase of capital assets, respectively.
In order to finance a part of these payments, we disposed of $8.3 million worth
of short-term investments. We paid the remaining with cash flows from operating
activities and cash on hand.
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
August 31, 2007, 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
|
||||||
|
September
2007 to August 2008
|
$ |
36,900,000
|
1.1295
|
|||||
|
September
2008 to December 2009
|
15,400,000
|
1.1199
|
||||||
As
at
August 31, 2007, the fair value of our forward exchange contracts, which
represents the amount we would receive to settle the contracts, amounted to
an
unrecognized gain of $3.4 million ($5.5 million
as at August 31, 2006).
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 EXFO, four of the
underwriters of our Initial Public Offering and some of our 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 EXFO’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 our underwriters, EXFO and two of our 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 EXFO and two of our 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 EXFO’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 EXFO, 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 EXFO was dismissed. On October 8, 2002, the claims against our
officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In
June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. 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 by January 15, 2006. The settlement fairness
hearing occurred on April 24, 2006, and the court reserved decision at that
time.
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. EXFO’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.
On
April
6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing of that
decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en banc. In light of the Second Circuit
opinion, liaison counsel for all issuer defendants, including EXFO, informed
the
court that this settlement cannot be approved, because the defined
settlement class, like the litigation class, cannot be certified. On
June 25, 2007, the district court entered an order terminating the settlement
agreement. On August 14, 2007, the plaintiffs filed their second consolidated
amended class action complaints against the focus cases and plan to move for
class certification again.
It
is not
possible to predict whether a settlement that complies with the Second Circuit’s
mandate can be negotiated. Therefore, it is not possible to predict the final
outcome of the case, nor to determine the amount of any possible losses. We
will
continue to defend our position in this litigation that the claims against
EXFO,
and our officers, are without merit. Accordingly, no provision for this case
has
been made in the consolidated financial statements
as at August 31, 2007.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
capital
As
at
November 1, 2007, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to 10 votes each and 32,361,561 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 2,601,045 as
at
November 1, 2007. 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 1, 2007:
|
Stock
Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||||||||
|
Chairman
of the Board, President and CEO (one
individual)
|
179,642
|
9 | % | $ |
9.05
|
|||||||
|
Board
of Directors (five individuals)
|
194,375
|
10 |
6.23
|
|||||||||
|
Management
and Corporate Officers (eight individuals)
|
212,139
|
11 |
14.49
|
|||||||||
|
586,156
|
30 | % | $ |
10.08
|
||||||||
|
Restricted
Share Units (RSUs)
|
Number
|
%
of issued and outstanding
|
|
|||||||||
|
Chairman
of the Board, President and CEO (one
individual)
|
89,823
|
15 | % |
|
||||||||
|
Management
and Corporate Officers (ten individuals)
|
292,442
|
48 |
|
|||||||||
|
|
||||||||||||
|
382,265
|
63 | % | ||||||||||
|
Deferred
Share Units (DSUs)
|
Number
|
%
of issued and outstanding
|
|
|||||||||
|
Board
of Directors (five individuals)
|
70,195
|
100 | % |
|
||||||||
OFF-BALANCE
SHEET ARRANGEMENTS
As
at
August 31, 2007, our off-balance sheet arrangements consisted of letters of
guarantee and forward exchange contracts. These off-balance sheet arrangements
are respectively described in detail in notes 12 and 18 to our consolidated
financial statements, included elsewhere in this Annual Report.
VARIABLE
INTEREST ENTITY
As
at
August 31, 2007, 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, 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 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, namely
the
setup of manufacturing facilities in China and a software development center
in
India. This exposes us to certain risks and uncertainties, namely changes in
local laws and regulations, multiple technological standards, protective
legislation, pricing pressure, and the successful setup and activation of new
operations in China and India.
Also,
while strategic acquisitions, like those we have made in the past 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 seven high-credit quality corporations and trusts. Our
cash and forward exchange contracts are held with or issued by high-credit
quality 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)
|
1st
quarter
|
2nd
quarter
|
3rd
quarter
|
4th
quarter
|
Year
ended August 31,
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Sales
|
$ |
35,547
|
$ |
35,207
|
$ |
39,205
|
$ |
42,975
|
$ |
152,934
|
||||||||||
|
Cost
of sales
|
$ |
15,229
|
$ |
14,970
|
$ |
16,828
|
$ |
18,109
|
$ |
65,136
|
||||||||||
|
Gross
margin
|
$ |
20,318
|
$ |
20,237
|
$ |
22,377
|
$ |
24,866
|
$ |
87,798
|
||||||||||
|
Earnings
from operations
|
$ |
2,759
|
$ |
2,081
|
$ |
2,840
|
$ |
9,102
|
$ |
16,782
|
||||||||||
|
Net
earnings
|
$ |
3,533
|
$ |
2,684
|
$ |
2,574
|
$ |
33,484
|
$ |
42,275
|
||||||||||
|
Basic
net earnings per share
(1)
|
$ |
0.05
|
$ |
0.04
|
$ |
0.04
|
$ |
0.49
|
$ |
0.61
|
||||||||||
|
Diluted
net earnings per share
|
$ |
0.05
|
$ |
0.04
|
$ |
0.04
|
$ |
0.48
|
$ |
0.61
|
||||||||||
|
1st
quarter
|
2nd
quarter
|
3rd
quarter
|
4th
quarter
|
Year
ended August 31,
|
||||||||||||||||
|
2006
|
||||||||||||||||||||
|
Sales
|
$ |
27,044
|
$ |
30,066
|
$ |
35,410
|
$ |
35,733
|
$ |
128,253
|
||||||||||
|
Cost
of sales
|
$ |
12,064
|
$ |
13,440
|
$ |
15,453
|
$ |
16,318
|
$ |
57,275
|
||||||||||
|
Gross
margin
|
$ |
14,980
|
$ |
16,626
|
$ |
19,957
|
$ |
19,415
|
$ |
70,978
|
||||||||||
|
Earnings
from operations
|
$ |
683
|
$ |
1,408
|
$ |
3,608
|
$ |
2,363
|
$ |
8,062
|
||||||||||
|
Net
earnings
|
$ |
355
|
$ |
1,366
|
$ |
3,504
|
$ |
2,910
|
$ |
8,135
|
||||||||||
|
Basic
and diluted net earnings per share
|
$ |
0.01
|
$ |
0.02
|
$ |
0.05
|
$ |
0.04
|
$ |
0.12
|
||||||||||
|
1st
quarter
|
2nd
quarter
|
3rd
quarter
|
4th
quarter
|
Year
ended August 31,
|
||||||||||||||||
|
2005
|
||||||||||||||||||||
|
Sales
|
$ |
21,597
|
$ |
23,135
|
$ |
26,180
|
$ |
26,304
|
$ |
97,216
|
||||||||||
|
Cost
of sales
|
$ |
10,225
|
$ |
10,431
|
$ |
11,478
|
$ |
11,925
|
$ |
44,059
|
||||||||||
|
Gross
margin
|
$ |
11,372
|
$ |
12,704
|
$ |
14,702
|
$ |
14,379
|
$ |
53,157
|
||||||||||
|
Earnings
(loss) from operations
|
$ | (1,337 | ) | $ | (182 | ) | $ |
509
|
$ |
811
|
$ | (199 | ) | |||||||
|
Net
earnings (loss)
|
$ | (2,373 | ) | $ |
9
|
$ |
276
|
$ |
454
|
$ | (1,634 | ) | ||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.03 | ) | $ |
−
|
$ |
−
|
$ |
0.01
|
$ | (0.02 | ) | ||||||||
|
(1)
Per share data is calculated independently for each of the quarters
presented. Therefore, the sum of this quarterly information does
not equal
the corresponding annual
information
|
Fourth-Quarter
Results
In
the
fourth quarter of fiscal 2007, sales were $43.0 million, compared to $35.7
million for the same period last year. In fiscal 2007, we posted organic sales
growth due to market-share gains in optical testing and next-generation IP
test
solutions and continued spending in access networks fueled by the competitive
dynamic between telephone and cable companies. In 2007, we built on our dominant
FTTx market position in the Americas by enabling carriers migrating to less
expensive test solutions. Also, in fiscal 2007, sales of protocol test solutions
significantly increased year-over-year making this sector our fastest-growing
line of business in fiscal 2007. Finally, we gained market share in the
fluorescence illumination market in fiscal 2007 and we increased our sales
activities in the curing market year-over-year. However, sales of our
copper-access product line decreased year-over-year. In
fact, this business unit did not perform as well as expected in 2007.
Large-scale IPTV deployments have been delayed until calendar 2008, which
affected sales of this product line during the year.
In
the
fourth quarter of fiscal 2007, gross margin reached 57.9% of global sales,
compared to 54.3% for the same period last year. The significant increase in
global sales year-over-year, record-high sales of protocol test solutions,
which
tend to have better margins than optical ones, as well as reductions of cost
of
goods contributed to the year-over-year increase of the gross margin in the
fourth quarter of fiscal 2007. However, increased pricing pressure as well
as the increased strength of the Canadian dollar, compared to the US dollar,
year-over-year, prevent us from further improving our gross margin.
In
the
fourth quarter of fiscal 2007, earnings from operations amounted to $9.1
million, compared to $2.4 million for the same period last year. Earnings
from operations, in the fourth quarter of fiscal 2007 included $3.2 million
from
the recognition of prior years’ non-refundable research and development tax
credits as well as one-time grant of $1.1 million. These two one-time
items are responsible for a large portion of the year-over-year increase
in earnings from operations in the fourth quarter of fiscal 2007. Increased
sales and gross margin in the fourth quarter of fiscal 2007, compared to the
same period last year further contributed to increase our earnings from
operations year-over-year. However, the increased strength of the Canadian
dollar, compared to the US dollar in the fourth quarter of fiscal 2007, versus
the same period last year prevented us from further increasing our earnings
from
operations.
Net
earnings amounted to $33.5 million or $0.48 per diluted share in the fourth
quarter of fiscal 2007, compared to $2.9 million, or $0.04 per diluted
share for the same period last year. In addition to other explanations above,
in the fourth quarter of fiscal 2007, we recognized $24.6 million worth of
future income tax assets for which a valuation allowance was established
during the downturn in the telecommunications industry in 2003, which
contributed to increase our net earnings year-over-year.
Responsibility
for Financial Information
EXFO
management is responsible for the preparation, integrity and objectivity
of the
consolidated financial statements and other financial information presented
in
this Annual Report. These consolidated financial statements have been prepared
in accordance with Canadian generally accepted accounting principles and
include
some amounts that are based on estimates and judgments. Management has
determined such amounts on a reasonable basis in order to ensure that the
financial statements are presented fairly in all material respects.
EXFO’s
policy is to maintain systems of internal accounting, and administrative
and
disclosure controls—reinforced by standards of conduct and ethics set out in
written policies—to provide reasonable assurance that the financial information
is relevant, accurate and reliable, and that assets are appropriately accounted
for and adequately safeguarded.
The
Board
of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and is ultimately responsible for
reviewing and approving the financial statements. The Board carries out this
responsibility principally through its Audit Committee. The Audit Committee
is
appointed by the Board and is composed of independent outside directors.
The
Committee meets periodically with management and external auditors to review
accounting, auditing and internal control matters. These consolidated financial
statements have been reviewed and approved by the Board of Directors on the
recommendation of the Audit Committee.
The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, the independent auditors, in accordance with the Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States) on behalf of the shareholders. The external
auditors have full and free access to the Audit Committee.
Internal
Control over Financial Reporting
EXFO
management is responsible for establishing and maintaining adequate internal
control over financial reporting. EXFO’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding
the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in Canada.
EXFO’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of
EXFO; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in Canada, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of EXFO; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of EXFO’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial, reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of EXFO’s internal control over
financial reporting based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation,
management concluded that EXFO’s internal control over financial reporting was
effective as of August 31, 2007.
The
company’s internal control over financial reporting as of August 31, 2007 has
been audited by PricewaterhouseCoopers LLP, the independent auditors, based
on
the criteria established in Internal Control—Integrated Framework
issued by the COSO.
| /s/ Germain Lamonde | /s/ Pierre Plamondon |
|
Germain
Lamonde
Chairman,
President and CEO
|
Pierre
Plamondon, CA
Vice-President,
Finance
and
Chief Financial
Officer
|
To
the Shareholders of
EXFO
Electro-Optical Engineering Inc.
We
have
completed an integrated audit of the consolidated financial statements and
internal control over financial reporting of EXFO Electro-Optical Engineering
Inc. as of August 31, 2007 and audits of its August 31, 2006 and August 31,
2005
consolidated financial statements. Our opinions, based on our audits, are
presented below.
Consolidated
financial statements
We
have
audited the accompanying consolidated balance sheets of EXFO Electro-Optical
Engineering Inc. as of August 31, 2007 and 2006, and the related
consolidated statements of earnings, retained earnings and contributed surplus
and cash flows for each of the three years in the period ended August 31, 2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform an
audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit of financial statements includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. A financial statement audit also includes assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of August
31,
2007 and 2006 and the results of its operations and its cash flows for each
of
the three years in the period ended August 31, 2007 in accordance with Canadian
generally accepted accounting principles.
Internal
control over financial reporting
We
have
also audited EXFO Electro-Optical Engineering Inc.'s internal control over
financial reporting as of August 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
the Company's internal control over financial reporting based on our
audit.
We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control
over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of
the company; (ii) provide reasonable assurance that transactions are recorded
as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of August 31, 2007 based on criteria
established in Internal Control – Integrated Framework issued by the
COSO.
/s/
PricewaterhouseCoopers LLP
Chartered
Accountants
Quebec,
Quebec, Canada
October
30, 2007, except as to note 21 which is as of November 5, 2007
Consolidated
Balance Sheets
(in
thousands of US dollars)
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ |
5,541
|
$ |
6,853
|
||||
|
Short-term
investments (notes 8 and 18)
|
124,217
|
104,437
|
||||||
|
Accounts
receivable (notes 8 and 18)
|
||||||||
|
Trade
|
26,699
|
20,891
|
||||||
|
Other
(note 4)
|
2,479
|
2,792
|
||||||
|
Income
taxes and tax credits recoverable (note 15)
|
6,310
|
2,201
|
||||||
|
Inventories
(notes 5 and 8)
|
31,513
|
24,623
|
||||||
|
Prepaid
expenses
|
1,391
|
1,404
|
||||||
|
Future
income taxes (note 16)
|
7,609
|
−
|
||||||
|
205,759
|
163,201
|
|||||||
|
Income
taxes recoverable
|
−
|
476
|
||||||
|
Property,
plant and equipment (notes 6 and 8)
|
18,117
|
17,392
|
||||||
|
Intangible
assets (notes 7 and 8)
|
9,628
|
10,948
|
||||||
|
Goodwill
(note 7)
|
28,437
|
27,142
|
||||||
|
Future
income taxes (note 16)
|
17,197
|
−
|
||||||
| $ |
279,138
|
$ |
219,159
|
|||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (note 9)
|
$ |
22,721
|
$ |
17,337
|
||||
|
Deferred
revenue
|
2,598
|
1,772
|
||||||
|
Current
portion of long-term debt
|
−
|
107
|
||||||
|
25,319
|
19,216
|
|||||||
|
Deferred
revenue
|
3,414
|
2,632
|
||||||
|
Government
grants (note 15)
|
−
|
723
|
||||||
|
Long-term
debt (note 10)
|
−
|
354
|
||||||
|
Future
income taxes (note 16)
|
240
|
−
|
||||||
|
28,973
|
22,925
|
|||||||
|
Commitments
(note 11)
|
||||||||
|
Contingencies
(note 12)
|
||||||||
|
Shareholders’
equity
|
||||||||
|
Share
capital (note 13)
|
150,019
|
148,921
|
||||||
|
Contributed
surplus
|
4,453
|
3,776
|
||||||
|
Retained
earnings (note 13)
|
42,275
|
−
|
||||||
|
Cumulative
translation adjustment
|
53,418
|
43,537
|
||||||
|
250,165
|
196,234
|
|||||||
| $ |
279,138
|
$ |
219,159
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
/s/
Germain Lamonde
|
/s/André
Tremblay
|
| On behalf of the Board |
Germain
Lamonde
|
André
Tremblay
|
|
Chairman,
President and CEO
|
Chairman,
Audit Committee
|
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statement of Earnings
(in
thousands of US dollars, except share and per share
data)
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Sales
(note 19)
|
$ |
152,934
|
$ |
128,253
|
$ |
97,216
|
||||||
|
Cost
of sales (1,2)
|
65,136
|
57,275
|
44,059
|
|||||||||
|
Gross
margin
|
87,798
|
70,978
|
53,157
|
|||||||||
|
Operating
expenses
|
||||||||||||
|
Selling
and administrative (1)
|
49,580
|
40,298
|
31,782
|
|||||||||
|
Net
research and development (1) (notes
15
and 16)
|
16,668
|
15,404
|
12,190
|
|||||||||
|
Amortization
of property, plant and equipment
|
2,983
|
3,523
|
4,256
|
|||||||||
|
Amortization
of intangible assets
|
2,864
|
4,394
|
4,836
|
|||||||||
|
Impairment
of long-lived assets (note 4)
|
–
|
604
|
–
|
|||||||||
|
Government
grants (note 15)
|
(1,079 | ) | (1,307 | ) |
–
|
|||||||
|
Restructuring
and other charges (note 4)
|
–
|
–
|
292
|
|||||||||
|
Total
operating expenses
|
71,016
|
62,916
|
53,356
|
|||||||||
|
Earnings
(loss) from operations
|
16,782
|
8,062
|
(199 | ) | ||||||||
|
Interest
and other income
|
4,717
|
3,253
|
2,524
|
|||||||||
|
Foreign
exchange loss
|
(49 | ) | (595 | ) | (1,336 | ) | ||||||
|
Earnings
before income taxes (note 16)
|
21,450
|
10,720
|
989
|
|||||||||
|
Income
taxes (note 16)
|
||||||||||||
|
Current
|
3,741
|
2,585
|
2,623
|
|||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(24,566 | ) |
–
|
–
|
||||||||
| (20,825 | ) |
2,585
|
2,623
|
|||||||||
|
Net
earnings (loss) for the year
|
$ |
42,275
|
$ |
8,135
|
$ | (1,634 | ) | |||||
|
Basic
and diluted net earnings (loss) per share
|
$ |
0.61
|
$ |
0.12
|
$ | (0.02 | ) | |||||
|
Basic
weighted average number of shares
outstanding (000’s)
|
68,875
|
68,643
|
68,526
|
|||||||||
|
Diluted
weighted average number of shares outstanding (000’s) (note
17)
|
69,555
|
69,275
|
68,526
|
|||||||||
|
(1)
Stock-based compensation costs included
in:
|
||||||||||||
|
Cost
of sales
|
$ |
118
|
$ |
127
|
$ |
143
|
||||||
|
Selling
and administrative
|
633
|
701
|
626
|
|||||||||
|
Net
research and development
|
230
|
204
|
194
|
|||||||||
| $ |
981
|
$ |
1,032
|
$ |
963
|
|||||||
|
(2)
The cost of sales is exclusive of amortization, shown
separately.
|
||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
EXFO Electro-Optical Engineering Inc.
Consolidated
Statements of Retained Earnings (Deficit) and
Contributed Surplus
(in
thousands of US dollars)
|
Retained
earnings (deficit)
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
– Beginning of year
|
$ |
–
|
$ | (381,846 | ) | $ | (380,212 | ) | ||||
|
Add
(deduct)
|
||||||||||||
|
Net
earnings (loss) for the year
|
42,275
|
8,135
|
(1,634 | ) | ||||||||
|
Elimination
of deficit by reduction of share capital (note 13)
|
–
|
373,711
|
–
|
|||||||||
|
Balance
– End of year
|
$ |
42,275
|
$ |
–
|
$ | (381,846 | ) | |||||
|
Contributed
surplus
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
– Beginning of year
|
$ |
3,776
|
$ |
2,949
|
$ |
1,986
|
||||||
|
Add
(deduct)
|
||||||||||||
|
Stock-based
compensation costs
|
973
|
1,027
|
963
|
|||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards (note 13)
|
(296 | ) | (200 | ) |
–
|
|||||||
|
Balance
– End of year
|
$ |
4,453
|
$ |
3,776
|
$ |
2,949
|
||||||
The accompanying notes are an integral part of these
consolidated financial statements.
EXFO Electro-Optical Engineering Inc.
Consolidated
Statements of Cash Flows
(in
thousands of US dollars)
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
earnings (loss) for the year
|
$ |
42,275
|
$ |
8,135
|
$ | (1,634 | ) | |||||
|
Add
(deduct) items not affecting cash
|
||||||||||||
|
Discount
on short-term investments
|
(404 | ) | (229 | ) | (302 | ) | ||||||
|
Stock-based
compensation costs
|
981
|
1,032
|
963
|
|||||||||
|
Amortization
|
5,847
|
7,917
|
9,092
|
|||||||||
|
Impairment
of long-lived assets
|
–
|
604
|
–
|
|||||||||
|
Gain
on disposal of capital assets
|
(117 | ) |
–
|
–
|
||||||||
|
Future
income taxes
|
(24,566 | ) |
–
|
–
|
||||||||
|
Deferred
revenue
|
1,299
|
786
|
977
|
|||||||||
|
Government
grants
|
(752 | ) | (1,307 | ) |
–
|
|||||||
|
24,563
|
16,938
|
9,096
|
||||||||||
|
Change
in non-cash operating items
|
||||||||||||
|
Accounts
receivable
|
(5,468 | ) | (2,637 | ) | (838 | ) | ||||||
|
Income
taxes and tax credits
|
(3,403 | ) |
329
|
6,096
|
||||||||
|
Inventories
|
(5,456 | ) | (2,287 | ) | (699 | ) | ||||||
|
Prepaid
expenses
|
85
|
79
|
544
|
|||||||||
|
Accounts
payable and accrued liabilities
|
4,105
|
(144 | ) | (164 | ) | |||||||
|
14,426
|
12,278
|
14,035
|
||||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Additions
to short-term investments
|
(807,056 | ) | (673,289 | ) | (585,665 | ) | ||||||
|
Proceeds
from disposal and maturity of short-term investments
|
793,435
|
681,500
|
574,207
|
|||||||||
|
Additions
to capital assets
|
(5,547 | ) | (3,378 | ) | (1,501 | ) | ||||||
|
Net
proceeds from disposal of capital assets
|
3,092
|
–
|
–
|
|||||||||
|
Business
combination, net of cash acquired (note 3)
|
–
|
(18,054 | ) |
–
|
||||||||
| (16,076 | ) | (13,221 | ) | (12,959 | ) | |||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Repayment
of long-term debt
|
(472 | ) | (415 | ) | (121 | ) | ||||||
|
Exercise
of stock options
|
802
|
557
|
148
|
|||||||||
|
Share
issue expenses
|
–
|
–
|
(6 | ) | ||||||||
|
330
|
142
|
21
|
||||||||||
|
Effect
of foreign exchange rate changes on cash
|
8
|
535
|
863
|
|||||||||
|
Change
in cash
|
(1,312 | ) | (266 | ) |
1,960
|
|||||||
|
Cash
– Beginning of year
|
6,853
|
7,119
|
5,159
|
|||||||||
|
Cash
– End of year
|
$ |
5,541
|
$ |
6,853
|
$ |
7,119
|
||||||
|
Supplementary
information
|
||||||||||||
|
Interest
paid
|
$ |
57
|
$ |
65
|
$ |
30
|
||||||
|
Income
taxes paid (recovered)
|
$ |
3,527
|
$ |
2,541
|
$ | (669 | ) | |||||
The
accompanying notes are an integral part of these
consolidated financial statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial
Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
1 Nature
of Activities
EXFO
Electro-Optical Engineering Inc. (“EXFO”) designs, manufactures and markets
a comprehensive line of test, measurement and monitoring solutions for the
global telecommunications industry. The Telecom Division, which represents
the
company’s main business activity, offers integrated test solutions to network
service providers, cable operators, system vendors and optical component
manufacturers. The Life Sciences and Industrial Division mainly leverages
core
telecom technologies to offer value-added solutions for life sciences
applications and high-precision assembly processes, such as those required
for
microelectronics, optoelectronics and medical devices. EXFO’s
products are sold in approximately 70 countries around the
world.
2 Summary
of Significant Accounting Policies
Basis
of presentation
These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (“GAAP”) in Canada, and significant
differences in measurement and disclosure from U.S. GAAP are set out in note
20.
These consolidated financial statements include the accounts of the company
and
its domestic and international subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Accounting
estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements,
as
well as the reported amounts of revenues and expenses during the reporting
years. Significant estimates include the allowance for doubtful accounts
receivable, the amount of tax credits recoverable, the provision for excess
and
obsolete inventories, the useful lives of capital assets, the valuation of
long-lived assets, the valuation allowance for future income taxes, the amount
of certain accrued liabilities and deferred revenue as well as stock-based
compensation costs. Actual results could differ from those
estimates.
Reporting
currency
The
measurement currency of the company is the Canadian dollar. The company has
adopted the US dollar as its reporting currency. The financial statements
are translated into the reporting currency using the current rate method. Under
this method, the financial statements are translated into the reporting currency
as follows: assets and liabilities are translated at the exchange rate in effect
on the date of the balance sheet, while revenues and expenses are translated
at
the monthly average exchange rate. Foreign exchange gains and losses arising
from such translation are included in the cumulative translation adjustment
in
shareholders’ equity. Cumulative translation adjustment solely consists of
such gains and losses.
In
the
event that management decides to declare dividends, such dividends would be
declared in Canadian dollars.
Foreign
currency translation
Foreign
currency transactions
Transactions
denominated in currencies other than the measurement currency are translated
into the measurement currency as follows: monetary assets and liabilities are
translated at the exchange rate in effect on the date of the balance sheet,
and
revenues and expenses are translated at the exchange rate in effect on the
date
of the transaction. Non-monetary assets and liabilities are translated at
historical rates. Foreign exchange gains and losses arising from such
translation are reflected in the statements of earnings.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Integrated
foreign operations
The
financial statements of integrated foreign operations are remeasured into the
measurement currency using the temporal method. Under this method, monetary
assets and liabilities are remeasured at the exchange rate in effect on the
date
of the balance sheet. Non-monetary assets and liabilities are remeasured at
historical rates, unless such assets and liabilities are carried at market
value, in which case, they are remeasured at the exchange rate in effect on
the
date of the balance sheet. Revenues and expenses are remeasured at the monthly
average exchange rate. Foreign exchange gains and losses arising from such
remeasurement are reflected in the statements of earnings.
Forward
exchange contracts
Forward
exchange contracts are utilized by the company to manage its foreign currency
exposure. The company’s policy is not to utilize those derivative financial
instruments for trading or speculative purposes.
The
company’s 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 hedged sales are
recorded.
Realized
and unrealized foreign exchange gains or losses associated with forward exchange
contracts, which have been terminated or cease to be effective prior to
maturity, are deferred in the balance sheet and recognized in the earnings
of
the period in which the underlying hedged transaction is
recognized.
Short-term
investments
Short-term
investments are valued at the lower of cost and market value. Cost consists
of
acquisition cost plus amortization of discount or less amortization of premium.
All investments with original terms to maturity of three months or less and
that
are not required for the purposes of meeting short-term cash requirements are
classified as short-term investments.
Inventories
Inventories
are valued on an average cost basis, at the lower of cost and replacement cost
for raw materials and at the lower of cost and net realizable value for work
in
progress and finished goods.
Property,
plant and equipment and amortization
Property,
plant and equipment are recorded at cost, less related government grants and
research and development tax credits. Amortization is provided on a
straight-line basis over the estimated useful lives as follows:
|
Term
|
||
|
Land
improvements
|
5
years
|
|
|
Buildings
|
25
years
|
|
|
Equipment
|
2
to 10 years
|
|
|
Leasehold
improvements
|
The
lesser of useful life and remaining lease
term
|
Intangible
assets, goodwill and amortization
Intangible
assets primarily include the cost of core technology and software, net of
accumulated amortization. Core technology represents existing technology that
was acquired in business combinations and that has reached technological
feasibility. Amortization is provided on a straight-line basis over the
estimated useful lives of five years for core technology and four and ten years
for software.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Goodwill
represents the excess of the purchase price of acquired businesses over the
estimated fair value of net identifiable assets acquired. Goodwill is not
amortized but must be tested for impairment on an annual basis or more
frequently if events or circumstances indicate that it might be impaired.
Recoverability of goodwill is determined at the reporting unit level using
a
two-step approach. First, the carrying value of a reporting unit is compared
to
its fair value, which is usually determined based on a combination of discounted
future cash flows and a market approach. If the carrying value of a reporting
unit exceeds its fair value, the second step is performed. In this step, the
amount of impairment loss, if any, represents the excess of the carrying value
of goodwill over its fair value, and the loss is charged to earnings in the
period in which it is incurred. For the purposes of this impairment test, the
fair value of goodwill is estimated in the same way as goodwill is determined
in
business combinations; that is, the excess of the fair value of a reporting
unit
over the estimated fair value of its net identifiable assets.
The
company elected to perform its annual impairment test in May of each fiscal
year
for all its existing reporting units.
Impairment
of long-lived assets
Long-lived
assets are reviewed for impairment when events or circumstances indicate that
cost may not be recoverable. Impairment exists when the carrying value of an
asset or group of assets is greater than the undiscounted future cash flows
expected to be provided by the asset or group of assets. The amount of
impairment loss, if any, is the excess of the carrying value over the fair
value. The company assesses fair value of long-lived assets based on discounted
future cash flows.
Warranty
The
company offers its customers warranties of one to three years, depending on
the
specific products and terms of the purchase agreement. The company’s typical
warranties require it to repair or replace defective products during the
warranty period at no cost to the customer. Costs related to original warranties
are accrued at the time of shipment, based upon estimates of expected rework
and
warranty costs to be incurred. Costs associated with separately priced extended
warranties are expensed as incurred.
Revenue
recognition
For
products in which software is incidental, the company recognizes revenue when
persuasive evidence of an arrangement exists, the product has been delivered,
the price is fixed or determinable, and collection of the resulting receivable
is reasonably assured. In addition, provisions are made for estimated returns,
warranties and support obligations.
For
products in which software is not incidental, revenues are separated into two
categories: product and post-contract customer support (PCS) revenues, based
upon vendor-specific objective evidence of fair value. Product revenues for
these sales are recognized as described above. PCS revenues are deferred and
recognized ratably over the years of the support arrangement. PCS revenues
are
recognized at the time the product is delivered when provided substantially
within one year of delivery, the costs of providing this support are
insignificant (and accrued at the time of delivery), and no (or infrequent)
software upgrades or enhancements are provided.
For
all
sales, the company uses a binding purchase order as evidence that a sales
arrangement exists.
Delivery
generally occurs when the product is handed over to a transporter for
shipment.
At
the
time of the transaction, the company assesses whether the price associated
with
its revenue transaction is fixed or determinable and whether or not collection
is reasonably assured. The company assesses whether the price is fixed or
determinable based on the payment terms associated with the transaction. The
company assesses collection based on a number of factors, including past
transaction history and the creditworthiness of the customer. Generally,
collateral or other security is not requested from customers.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Most
sales arrangements do not generally include acceptance clauses. However, when
a
sales arrangement does include an acceptance provision, acceptance occurs upon
the earliest of receipt of a written customer acceptance or expiration of the
acceptance period. For these sales arrangements, the sale is recognized when
acceptance occurs.
Revenue
for extended warranties is recognized on a straight-line basis over the warranty
period.
Advertising
costs
Advertising
costs are expensed as incurred.
Government
grants
Grants
related to operating expenses are included in earnings when the related expenses
are incurred. Grants related to capital expenditures are deducted from the
related assets. Grants are included in earnings or deducted from the related
assets, provided there is reasonable assurance that the company has complied
and
will comply with all the conditions related to the grant.
Research
and development expenses
All
expenses related to research, as well as development activities that do not
meet
generally accepted criteria for deferral are expensed as incurred, net of
related tax credits and government grants. Development expenses that meet
generally accepted criteria for deferral, in accordance with the Canadian
Institute of Chartered Accountants (CICA) handbook Section 3450, “Research and
Development”, are capitalized, net of related tax credits and government grants,
and are amortized against earnings over the estimated benefit period. Research
and development expenses are mainly comprised of salaries and related expenses,
material costs as well as fees paid to third-party consultants.
As
at
August 31, 2007, the company had not deferred any development
costs.
Income
taxes
The
company provides for income taxes using the liability method of tax allocation.
Under this method, future income tax assets and liabilities are determined
based
on deductible or taxable temporary differences between financial statement
values and tax values of assets and liabilities as well as the carry forward
of
unused tax losses and reductions, using enacted or substantively enacted income
tax rates expected to be in effect for the years in which the assets are
expected to be realized or the liabilities to be settled.
The
company establishes a valuation allowance against future income tax assets
if,
based on available information, it is more likely than not that some or all
of
the future income tax assets will not be realized.
Earnings
per share
Basic
earnings per share are determined using the weighted average number of common
shares outstanding during the year.
Diluted
earnings per share are determined using the weighted average number of common
shares outstanding during the year, plus the effect of dilutive potential common
shares outstanding during the year. This method requires that diluted earnings
per share be calculated (using the treasury stock method) as if all dilutive
potential common shares had been exercised at the latest at the beginning of
the
year or on the date of issuance, as the case may be, and that the funds obtained
thereby (plus an amount equivalent to the unamortized portion of related
stock-based compensation costs) be used to purchase common shares of the company
at the average market price of the common shares during the year.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Stock-based
compensation costs
Since
September 1, 2003, the company accounts for all forms of employee stock-based
compensation using the fair value-based method. Stock-based compensation costs
are amortized to expense over the vesting periods.
Prior
to
fiscal 2004, no stock-based compensation costs were recognized for employee
stock-based compensation. However, the company is required to disclose pro
forma
information with respect to net earnings (loss) and net earnings (loss) per
share as if stock-based compensation costs were recognized in the financial
statements for all reporting years using the fair value-based method for
unvested outstanding stock options granted prior to September 1, 2003
(note 14).
New
accounting standards and pronouncements
To
be
adopted after fiscal 2007
In
January 2005, the 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.
Section 3855 is to be applied retroactively without restatement of prior
years' financial statements. Any adjustment to financial assets and
liabilities as at September 1, 2007 will be reflected as an adjustment to
retained earnings or accumulated other comprehensive income. Section 3865
also does not permit restatement of prior year's financial statements. Any
gains or losses on hedge relationships that no longer qualify are to be
reflected in retained earnings as at September 1, 2007. Any gains or
losses of hedging instruments are adjusted to retained earnings or the component
of accumulated other comprehensive income associated with the hedged items.
The company
will adopt these new standards on September 1, 2007 and impacts consistent
with
the adjustments described under note 20 items a) and c) will affect the
consolidated financial statements.
In
December 2006, the CICA issued three new sections, which provide a complete
set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 is the Canadian equivalent to International Financial Reporting Standards
(IFRS) 7, “Financial Instruments − Disclosures”, and replaces the
disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard places
increased emphasis on disclosures about risks associated with both recognized
and unrecognized financial instruments and how these risks are managed. It
is
also intended to remove any duplicate disclosures and simplify the disclosures
about concentrations of risk, credit risk, liquidity risk and price risk
currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Section
1535 converges with the capital disclosures amendments to International
Accounting Standards (IAS) 1, “Presentation of Financial Statements”. Section
1535 applies to all entities regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital
and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1,
2007.
The company will adopt these new standards on September 1, 2008, and is
currently assessing the effects these new standards will have on its
consolidated financial statements.
In
June
2007, the CICA issued Section 3031, “Inventories” to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in
the
value of inventories. The new standard applies to fiscal years beginning on
or
after January 1, 2008. The company will adopt this new standard on September
1,
2008, and is currently assessing the effects this new standard will have on
its
consolidated financial statements.
3 Business
Combination
On
January 26, 2006, the company acquired substantially all the assets of
Consultronics Limited. Based in Toronto, Canada, and with operations in the
United Kingdom and Hungary, Consultronics was a privately held company
specializing in x-Digital Subscriber Line (xDSL), Internet Protocol TV and
Voice-over-Internet Protocol (VoIP) test solutions for broadband access
networks.
This
acquisition was settled for a total cash consideration valued at $19,093,000
or
$18,838,000 net of $255,000 of cash acquired. The purchase price allocation
took
into account severance expenses of $660,000 (note 4) for the termination of
employees of the acquired business, as well as other acquisition-related costs
of $822,000.
This
acquisition was accounted for using the purchase method and, consequently,
the
results of operations of the acquired business have been included in the
consolidated statements of earnings of the company since January 26, 2006,
being
the date of acquisition.
The
purchase price, including acquisition-related costs, was allocated based on
the
estimated fair value of acquired net assets at the date of acquisition as
follows:
|
Assets
acquired
|
||||
|
Current
assets, net of cash acquired
|
$ |
5,135
|
||
|
Property,
plant and equipment
|
3,115
|
|||
|
Core
technology
|
8,709
|
|||
|
Current
liabilities assumed
|
(2,826 | ) | ||
|
Loans
assumed
|
(402 | ) | ||
|
Net
identifiable assets acquired
|
13,731
|
|||
|
Goodwill
|
5,107
|
|||
|
Purchase
price, net of cash acquired
|
$ |
18,838
|
||
Acquired
core technology is amortized on a straight-line basis over its estimated useful
life of five years.
This
business, including acquired goodwill, reports to the Telecom Division. Acquired
goodwill is deductible for tax purposes.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
4 Special
Charges
Impairment
of long-lived assets
Year
ended August 31, 2006
In
June
2006, the company entered into an agreement to sell one of its buildings
(located in Rochester, NY) along with some equipment, and it recorded an
impairment charge of $604,000 in the third quarter of fiscal 2006. The
impairment charge represented the excess of the carrying value of these assets
over the expected net selling price of $1,200,000. The sale of these assets
was
finalized in the fourth quarter of 2006 for the expected net selling price,
which was received in November 2006. These assets were related to the Life
Science and Industrial Division.
Restructuring
and other charges
Year
ended August 31, 2005
During
fiscal 2004, the company approved a restructuring plan to consolidate the
operations of its Life Sciences and Industrial Division, transferring its
Rochester, NY, operations mainly to its facilities in Toronto, Canada. This
consolidation process, which started in August 2004, was completed during fiscal
2005.
Overall,
for that process, the company incurred $2,515,000 in restructuring and other
charges, from which $2,033,000 was recorded in fiscal 2004 and the remaining
$482,000 was recorded in 2005. The overall costs, which were recorded in the
restructuring and other charges in the statements of earnings of the
corresponding years, are detailed as follows: $855,000 for severance expenses
for the layoff of all employees at the Rochester facilities, $1,261,000 mainly
for the impairment of the building in Rochester, and the remaining $399,000
for
other expenses such as training and recruiting expenses and transfer of
assets.
Finally,
in fiscal 2005, the company recorded adjustments of $190,000 to the fiscal
2003
plan because actual charges, mainly for leased equipment, were lower than
expected.
The
following tables summarize changes in the restructuring charges payable since
August 31, 2004:
Year
ended August 31, 2007
|
Balance
as at
August
31,
2006
|
Additions
|
Payments
|
Adjustments
|
Balance
as at
August
31,
2007
|
||||||||||||||||
|
Fiscal 2006 plan
|
||||||||||||||||||||
|
Severance expenses (note 3)
|
$ |
631
|
$ |
−
|
$ | (631 | ) | $ |
−
|
$ |
−
|
|||||||||
|
Fiscal 2003 plan
|
||||||||||||||||||||
|
Exited leased facilities
|
60
|
−
|
(60 | ) |
−
|
−
|
||||||||||||||
|
Total for all plans (note 9)
|
$ |
691
|
$ |
−
|
$ | (691 | ) | $ |
−
|
$ |
−
|
|||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Year
ended August 31, 2006
|
Balance
as at
August
31,
2005
|
Additions
|
Payments
|
Adjustments
|
Balance
as at
August
31,
2006
|
||||||||||||||||
|
Fiscal 2006 plan
|
||||||||||||||||||||
|
Severance expenses (note 3)
|
$ |
–
|
$ |
660
|
$ | (29 | ) | $ |
–
|
$ |
631
|
|||||||||
|
Fiscal 2003 plan
|
||||||||||||||||||||
|
Exited leased facilities
|
150
|
–
|
(90 | ) |
–
|
60
|
||||||||||||||
|
Total for all plans (note 9)
|
$ |
150
|
$ |
660
|
$ | (119 | ) | $ |
–
|
$ |
691
|
|||||||||
Year
ended August 31, 2005
|
Balance
as at
August
31,
2004
|
Additions
|
Payments
|
Adjustments
|
Balance
as at
August
31,
2005
|
||||||||||||||||
|
Fiscal 2004 plan
|
||||||||||||||||||||
|
Severance expenses
|
$ |
467
|
$ |
83
|
$ | (550 | ) | $ |
−
|
$ |
−
|
|||||||||
|
Other
|
−
|
399
|
(399 | ) |
−
|
−
|
||||||||||||||
|
467
|
482
|
(949 | ) |
−
|
−
|
|||||||||||||||
|
Fiscal 2003 plan
|
||||||||||||||||||||
|
Severance expenses
|
109
|
−
|
(77 | ) | (32 | ) |
−
|
|||||||||||||
|
Exited leased facilities
|
386
|
−
|
(229 | ) | (7 | ) |
150
|
|||||||||||||
|
Other
|
197
|
−
|
(46 | ) | (151 | ) |
−
|
|||||||||||||
|
692
|
−
|
(352 | ) | (190 | ) |
150
|
||||||||||||||
|
Fiscal 2001 plan
|
||||||||||||||||||||
|
Exited leased facilities
|
10
|
−
|
(10 | ) |
−
|
−
|
||||||||||||||
|
Total for all plans
|
$ |
1,169
|
$ |
482
|
$ | (1,311 | ) | $ | (190 | ) | $ |
150
|
||||||||
5 Inventories
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Raw
materials
|
$ |
16,898
|
$ |
14,353
|
||||
|
Work
in progress
|
1,387
|
1,043
|
||||||
|
Finished
goods
|
13,228
|
9,227
|
||||||
| $ |
31,513
|
$ |
24,623
|
|||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
6 Property,
Plant and Equipment
|
As
at August 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Cost
|
Accumulated
amortization
|
Cost
|
Accumulated
amortization
|
|||||||||||||
|
Land
and land improvements
|
$ |
2,265
|
$ |
1,177
|
$ |
4,249
|
$ |
1,082
|
||||||||
|
Buildings
|
12,300
|
3,516
|
14,417
|
6,262
|
||||||||||||
|
Equipment
|
33,184
|
25,710
|
33,562
|
28,263
|
||||||||||||
|
Leasehold
improvements
|
3,236
|
2,465
|
2,788
|
2,017
|
||||||||||||
|
50,985
|
$ |
32,868
|
55,016
|
$ |
37,624
|
|||||||||||
|
Less:
|
||||||||||||||||
|
Accumulated
amortization
|
32,868
|
37,624
|
||||||||||||||
| $ |
18,117
|
$ |
17,392
|
|||||||||||||
As
at
August 31, 2007, the carrying value of property, plant and equipment, which
were
in the process of being installed and which were not yet amortized, amounted
to
$1,488,000.
As
at
August 31, 2005, 2006 and 2007, unpaid purchases of property, plant and
equipment amounted to $111,000, $176,000 and $464,000,
respectively.
7 Intangible
Assets and Goodwill
|
As
at August 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Cost
|
Accumulated
amortization
|
Cost
|
Accumulated
amortization
|
|||||||||||||
|
Core
technology
|
$ |
50,014
|
$ |
43,298
|
$ |
47,629
|
$ |
38,972
|
||||||||
|
Software
|
8,083
|
5,171
|
6,781
|
4,490
|
||||||||||||
|
58,097
|
$ |
48,469
|
54,410
|
$ |
43,462
|
|||||||||||
|
Less:
|
||||||||||||||||
|
Accumulated
amortization
|
48,469
|
43,462
|
||||||||||||||
| $ |
9,628
|
$ |
10,948
|
|||||||||||||
Estimated
amortization expense for intangible assets in each of the next five fiscal
years
will amount to $2,705,000 in 2008, $2,658,000 in 2009, $2,606,000 in 2010,
$1,392,000 in 2011 and $196,000 in 2012.
Additions
to intangible assets for the years ended August 31, 2005, 2006 and 2007 amounted
to $236,000, $9,190,000 and $1,156,000, respectively.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Changes
in the carrying value of goodwill are as follows:
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance
– Beginning of year
|
$ |
27,142
|
$ |
20,370
|
||||
|
Addition
from business combination (note 3)
|
−
|
5,107
|
||||||
|
Foreign
currency translation adjustment
|
1,295
|
1,665
|
||||||
|
Balance
– End of year (note 19)
|
$ |
28,437
|
$ |
27,142
|
||||
8 Credit
Facilities
The
company has a line of credit that provides for advances of up to CA$10,000,000
(US$9,466,000). This line of credit bears interest at prime rate (prime rate
in
2006). As at August 31, 2007, this line of credit was
unused.
The
company also has another line of credit, which provides for advances of up
to
CA$4,500,000 (US$4,260,000) for letters of guarantee. As at August 31, 2007,
an
amount of CA$1,811,000 (US$1,714,000) was reserved from this line of credit
(note 12).
Finally,
the company has a third line of credit of $12,000,000 for the foreign currency
exposure related to its forward exchange contracts. As at August 31, 2007,
an
amount of $701,000 was reserved from this line of credit.
These
lines of credit are renewable annually. Short-term investments, accounts
receivable, inventories and all tangible and intangible assets of the company
are pledged as collateral against these lines of credit.
9 Accounts
Payable and Accrued Liabilities
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Trade
|
$ |
11,749
|
$ |
7,487
|
||||
|
Salaries
and social benefits
|
7,929
|
5,991
|
||||||
|
Warranty
|
800
|
1,006
|
||||||
|
Commissions
|
824
|
835
|
||||||
|
Restructuring
charges (note 4)
|
−
|
691
|
||||||
|
Other
|
1,419
|
1,327
|
||||||
| $ |
22,721
|
$ |
17,337
|
|||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Changes
in the warranty provision are as follows:
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance
– Beginning of year
|
$ |
1,006
|
$ |
725
|
||||
|
Provision
|
801
|
895
|
||||||
|
Settlements
|
(1,007 | ) | (645 | ) | ||||
|
Addition
from business combination
|
−
|
31
|
||||||
|
Balance
– End of year
|
$ |
800
|
$ |
1,006
|
||||
10 Long-Term
Debt
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Loans
collateralized by equipment, bearing interest at 4.9%, fully repaid
in
fiscal 2007
|
$ |
−
|
$ |
461
|
||||
|
Less:
Current portion
|
−
|
107
|
||||||
| $ |
−
|
$ |
354
|
|||||
11 Commitments
The
company entered into operating leases for certain of its premises and equipment,
which expire at various dates through September 2012. As at August 31, 2007,
minimum rentals payable under these operating leases in each of the next five
years will amount to $2,313,000 in 2008, $2,164,000 in 2009, $2,064,000 in
2010,
$1,145,000 in 2011 and $598,000 in 2012. Total commitments for these operating
leases amount to $8,327,000.
For
the
years ended August 31, 2005, 2006 and 2007, rental expenses amounted to
$1,370,000, $1,523,000 and $1,847,000, respectively.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
12
Contingencies
Class
action
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
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. 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 by January 15, 2006. The settlement
fairness hearing occurred on April 24, 2006, and the court reserved
decision at that time.
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.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
On
April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en banc. In light of the Second Circuit
opinion, liaison counsel for all issuer defendants, including the company,
informed the court that this settlement cannot be approved, because the defined
settlement class, like the litigation class, cannot be certified. On
June 25, 2007, the district court entered an order terminating the settlement
agreement. On August 14, 2007, the plaintiffs filed their second
consolidated amended class action complaints against the focus cases and plan
to
move for class certification again.
It
is not
possible to predict whether a settlement that complies with the Second Circuit’s
mandate can be negotiated. Therefore, it is not possible to predict the
final outcome of the case, nor to determine the amount of any possible losses.
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 consolidated financial statements
as at August 31, 2007.
Letters
of guarantee
As
at
August 31, 2007, in the normal course of its operations, the company had
outstanding letters of guarantee for its own selling and purchase requirements
in the amount of CA$1,811,000 (US$1,714,000), which expire at various dates
through fiscal 2010; these letters of guarantee were reserved from one of the
lines of credit (note 8).
13 Share
Capital
Authorized –
unlimited as to number, without par value
|
|
Subordinate
voting and participating, bearing a non-cumulative dividend to be
determined by the Board of Directors, ranking
pari passu with multiple voting
shares
|
|
|
Multiple
voting and participating, entitling to ten votes each, bearing
a
non-cumulative dividend to be determined by the Board of Directors,
convertible at the holder’s option into subordinate voting shares on a
one-for- one basis, ranking pari passu with subordinate voting
shares
|
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
The
following table summarizes the share capital activity since August 31,
2004:
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total amount
|
||||||||||||||||
|
Balance
as at August 31, 2004
|
37,900,000
|
$ |
1
|
30,540,483
|
$ |
521,732
|
$ |
521,733
|
||||||||||||
|
Exercise
of stock options (note 14)
|
–
|
–
|
71,699
|
148
|
148
|
|||||||||||||||
|
Redemption
of restricted stock awards
|
–
|
–
|
53,592
|
–
|
–
|
|||||||||||||||
|
Share
issue expenses
|
–
|
–
|
–
|
(6 | ) | (6 | ) | |||||||||||||
|
Balance
as at August 31, 2005
|
37,900,000
|
1
|
30,665,774
|
521,874
|
521,875
|
|||||||||||||||
|
Exercise
of stock options (note 14)
|
–
|
–
|
182,425
|
557
|
557
|
|||||||||||||||
|
Redemption
of restricted share units (note 14)
|
–
|
–
|
4,770
|
–
|
–
|
|||||||||||||||
|
Conversion
of multiple voting shares into subordinate voting shares
|
(757,000 | ) |
–
|
757,000
|
–
|
–
|
||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
–
|
–
|
–
|
200
|
200
|
|||||||||||||||
|
Elimination
of deficit by reduction of share capital (1)
|
–
|
–
|
–
|
(373,711 | ) | (373,711 | ) | |||||||||||||
|
Balance
as at August 31, 2006
|
37,143,000
|
1
|
31,609,969
|
148,920
|
148,921
|
|||||||||||||||
|
Exercise
of stock options (note 14)
|
–
|
–
|
250,528
|
802
|
802
|
|||||||||||||||
|
Redemption
of restricted share units (note 14)
|
–
|
–
|
1,064
|
–
|
–
|
|||||||||||||||
|
Conversion
of multiple voting shares into subordinate voting shares
|
(500,000 | ) |
–
|
500,000
|
–
|
–
|
||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
–
|
–
|
–
|
296
|
296
|
|||||||||||||||
|
Balance
as at August 31, 2007
|
36,643,000
|
$ |
1
|
32,361,561
|
$ |
150,018
|
$ |
150,019
|
||||||||||||
|
(1)
|
On
August 31, 2006, upon the approval of the Board of Directors, the
company
eliminated its deficit against its share
capital.
|
14 Stock-Based
Compensation Plans
The
maximum number of additional subordinate voting shares issuable under the
Long-Term Incentive Plan and the Deferred Share Unit Plan cannot exceed
6,306,153 shares. The maximum number of subordinate voting shares that may
be
granted to any individual on an annual basis cannot exceed 5% of the number
of
outstanding subordinate voting shares. The company settles stock options and
redeems restricted share units and deferred share units through the issuance
of
common shares from treasury.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Long-term
incentive plan
In
May
2000, the company established a Stock Option Plan for directors, executive
officers and employees and those of the company’s subsidiaries, as determined by
the Board of Directors. In January 2005, the company made certain amendments
to
the existing Stock Option Plan, including the renaming of the plan to Long-Term
Incentive Plan, which includes stock options and restricted share units. This
plan was approved by the shareholders of the company.
Stock
Options
The
exercise price of stock options granted under the Long-Term Incentive Plan
is
the market price of the common shares on the date of grant. Stock options
granted under the plan generally expire ten years from the date of grant and
vest over a four-year period, being the required period of service from
employees, generally with 25% vesting on an annual basis commencing on the
first
anniversary of the date of grant. The Board of Directors may accelerate the
vesting of any or all outstanding stock options upon the occurrence of a change
of control.
The
following table summarizes stock option activity since August 31,
2004:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
|||||||||||||||||||
|
(CA$)
|
(CA$)
|
(CA$)
|
||||||||||||||||||||||
|
Outstanding
– Beginning of year
|
2,439,375
|
$ |
20
|
2,763,759
|
$ |
19
|
2,934,518
|
$ |
21
|
|||||||||||||||
|
Granted
|
−
|
−
|
31,992
|
6
|
246,233
|
6
|
||||||||||||||||||
|
Exercised
|
(250,528 | ) | (4 | ) | (182,425 | ) | (4 | ) | (71,699 | ) | (3 | ) | ||||||||||||
|
Forfeited
|
(259,459 | ) | (32 | ) | (173,951 | ) | (18 | ) | (345,293 | ) | (27 | ) | ||||||||||||
|
Outstanding
– End of year
|
1,929,388
|
$ |
21
|
2,439,375
|
$ |
20
|
2,763,759
|
$ |
19
|
|||||||||||||||
|
Exercisable
– End of year
|
1,746,699
|
$ |
22
|
1,852,870
|
$ |
25
|
1,650,404
|
$ |
28
|
|||||||||||||||
The
intrinsic value of stock options exercised during fiscal 2005, 2006 and 2007,
was CA$214,000 (US$174,000), CA$552,000 (US$481,000) and CA$833,000
(US$743,000), respectively.
The
weighted average grant-date fair value of stock options granted during fiscal
2005 and 2006 amounted to CA$5.68, and CA$5.50, respectively.
Expected
forfeitures are immaterial to the company and are not reflected in the table
above.
As
at
August 31, 2007, unrecognized stock-based compensation costs of unvested stock
options amounted to $159,000. The weighted average period over which they are
expected to be recognized is 1.5 year.
The
fair
value of stock options granted in fiscal 2005 and 2006 was estimated using
the
Black-Scholes options valuation model with the following weighted average
assumptions:
|
Years
ended August 31,
|
||||
|
2006
|
2005
|
|||
|
Risk-free
interest rate
|
3.9%
|
3.6%
|
||
|
Expected
volatility
|
87%
|
95%
|
||
|
Dividend
yield
|
Nil
|
Nil
|
||
|
Expected
life
|
66
months
|
66
months
|
||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
The
factors considered in developing assumptions used in the Black-Scholes option
valuation model are the following:
The
risk-free interest rate is based on the interest rate on Government of Canada
bonds for maturities consistent with the expected life of the stock options.
The
historical volatility of the company’s common shares price is used to establish
the expected share price volatility. Finally, the company estimates the expected
life of the stock options based on historical data related to employees’
exercise of stock options.
The
company is required to make pro forma disclosures of net earnings (loss) and
net
earnings (loss) per share for any periods included in the financial statements,
as if the fair value-based method of accounting had been applied to outstanding
unvested awards granted prior to September 1, 2003. Consequently, if
the fair value-based method had been applied to unvested stock options granted
prior to September 1, 2003, and outstanding as at August 31, 2005,
2006 and 2007, the net earnings (loss) per share and the pro forma net earnings
(loss) per share would have been the same for all reporting years.
The
following table summarizes information about stock options as at August 31,
2007:
|
Stock
options outstanding
|
Stock
options exercisable
|
|||||||||||||||||||||||||||
|
Exercise
price
|
Number
|
Weighted
average
exercise
price
|
Intrinsic
value
|
Weighted
average
remaining
contractual
life
|
Number
|
Weighted
average
exercise
price
|
Intrinsic
value
|
Weighted
average
remaining
contractual
life
|
||||||||||||||||||||
|
(CA$)
|
(CA$)
|
(CA$)
|
(CA$)
|
(CA$)
|
||||||||||||||||||||||||
| $ |
2.50
to $3.36
|
280,625
|
$ |
2.51
|
$ |
1,280
|
5.1
years
|
280,625
|
$ |
2.51
|
$ |
1,280
|
5.1
years
|
|||||||||||||||
| $ |
3.96
to $5.84
|
429,404
|
5.11
|
841
|
6.7
years
|
285,133
|
5.01
|
587
|
6.4
years
|
|||||||||||||||||||
| $ |
6.22
to $9.02
|
157,316
|
6.58
|
116
|
6.4
years
|
118,898
|
6.70
|
83
|
6.3
years
|
|||||||||||||||||||
| $ |
14.27
to $20.00
|
412,296
|
15.61
|
−
|
4.1
years
|
412,296
|
15.61
|
−
|
4.1
years
|
|||||||||||||||||||
| $ |
29.70
to $43.00
|
468,926
|
36.36
|
−
|
3.2
years
|
468,926
|
36.36
|
−
|
3.2
years
|
|||||||||||||||||||
| $ |
51.25
to $68.17
|
143,391
|
66.58
|
−
|
3.0
years
|
143,391
|
66.58
|
−
|
3.0
years
|
|||||||||||||||||||
| $ |
83.66
|
37,430
|
83.66
|
−
|
3.0
years
|
37,430
|
83.66
|
−
|
3.0
years
|
|||||||||||||||||||
|
1,929,388
|
$ |
20.78
|
$ |
2,237
|
4.7
years
|
1,746,699
|
$ |
22.38
|
$ |
1,950
|
4.4
years
|
|||||||||||||||||
Restricted
Share Units (RSUs)
RSUs
are
“phantom” shares that rise and fall in value based on the value of the company’s
subordinate voting shares and are redeemable for actual subordinate voting
shares or cash at the discretion of the Board of Directors as determined on
the
date of grant. Vesting dates are also established by the Board of Directors
on
the date of grant. The vesting dates are subject to a minimum term of three
years and a maximum term of ten years from the award date, being the required
period of service from employees. RSUs granted under the plan expire at the
latest ten years from the date of grant. Fair value of RSUs equals the market
price of the common shares on the date of grant. This plan was approved by
the
shareholders of the company.
The
following table summarizes RSUs activity since January 2005:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Outstanding
– Beginning of year
|
327,877
|
176,185
|
–
|
|||||||||
|
Granted
|
219,002
|
173,803
|
176,185
|
|||||||||
|
Redeemed
|
(1,064 | ) | (4,770 | ) |
–
|
|||||||
|
Forfeited
|
(57,800 | ) | (17,341 | ) |
–
|
|||||||
|
Outstanding
– End of year
|
488,015
|
327,877
|
176,185
|
|||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
None
of
the RSUs outstanding as at August 31, 2005, 2006 and 2007, were redeemable.
As
at August 31, 2007, the weighted average remaining contractual life of
the outstanding RSUs was 8.5 years. The weighted average grant-date fair
value of RSUs granted during fiscal 2005, 2006 and 2007 amounted to CA$5.72,
CA$6.18 and CA$7.48, respectively.
As
at
August 31, 2007, the intrinsic value of RSUs outstanding was CA$3,450,000
(US$3,266,000).
Expected
forfeitures are immaterial to the company and are not reflected in the table
above.
As
at
August 31, 2007, unrecognized stock-based compensation costs of unvested RSUs
amounted to $1,843,000. The weighted average period over which they are expected
to be recognized is 3.4 years.
Deferred
share unit plan
In
January 2005, the company established a Deferred Share Unit (DSU) Plan for
the
members of the Board of Directors as part of their annual retainer fees. Each
DSU entitles the Board members to receive one subordinate voting share. DSUs
are
acquired on the date of grant and will be redeemed in subordinate voting shares
when the Board member will cease to be Director of the company. This plan was
approved by the shareholders of the company.
The
following table summarizes DSU activity since January 2005:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Outstanding
– Beginning of year
|
43,290
|
23,734
|
–
|
|||||||||
|
Granted
|
21,428
|
19,556
|
23,734
|
|||||||||
|
Outstanding
– End of year
|
64,718
|
43,290
|
23,734
|
|||||||||
None
of
the DSUs outstanding as at August 31, 2005, 2006 and 2007 were redeemable.
The
weighted average grant-date fair value of DSUs granted during fiscal 2005,
2006
and 2007 amounted to CA$5.50, CA$6.56 and CA$7.00.
As
at
August 31, 2007, the intrinsic value of DSUs outstanding was CA$458,000
(US$433,000).
Stock
appreciation rights plan
In
August
2001, the company established the Stock Appreciation Rights Plan for certain
employees. Under that plan, eligible employees are entitled to receive a cash
amount equivalent to the difference between the market price of the common
shares on the date of exercise and the exercise price determined on the date
of
grant. Stock appreciation rights granted under the plan generally expire ten
years from the date of grant and vest over a four-year period, being the
required period of service from employees, with 25% vesting on an annual basis
commencing on the first anniversary of the date of grant. This plan was approved
by the shareholders of the company.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
The
following table summarizes stock appreciation rights activity since August
31,
2004:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Number
|
Weighted
average exercise
price
|
Number
|
Weighted
average exercise
price
|
Number
|
Weighted
average exercise
price
|
|||||||||||||||||||
|
Outstanding
– Beginning of year
|
24,500
|
$ |
11
|
19,000
|
$ |
12
|
13,000
|
$ |
16
|
|||||||||||||||
|
Granted
|
5,200
|
6
|
5,500
|
6
|
6,000
|
4
|
||||||||||||||||||
|
Forfeited
|
(2,000 | ) | (2 | ) |
–
|
–
|
–
|
–
|
||||||||||||||||
|
Outstanding
– End of year
|
27,700
|
$ |
11
|
24,500
|
$ |
11
|
19,000
|
$ |
12
|
|||||||||||||||
|
Exercisable
– End of year
|
13,875
|
$ |
15
|
11,000
|
$ |
18
|
7,500
|
$ |
24
|
|||||||||||||||
The
following table summarizes information about stock appreciation rights as at
August 31, 2007:
|
Stock
appreciation
rights
outstanding
|
Stock
appreciation rights exercisable
|
||||||
|
Exercise
price
|
Number
|
Weighted
average remaining contractual life
|
Number
|
||||
|
$4.51
to $6.50
|
22,700
|
7.9
years
|
8,875
|
||||
|
$22.25
|
2,500
|
3.4
years
|
2,500
|
||||
|
$45.94
|
2,500
|
3.0
years
|
2,500
|
||||
|
27,700
|
6.6
years
|
13,875
|
|||||
15 Other
Disclosures
Net
research and development expenses
Net
research and development expenses comprise the following:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Gross
research and development expenses
|
$ |
25,201
|
$ |
19,488
|
$ |
15,878
|
||||||
|
Research
and development tax credits and grants
|
(5,371 | ) | (4,084 | ) | (3,688 | ) | ||||||
|
Recognition
of previously unrecognized research and development tax credits (note
16)
|
(3,162 | ) |
–
|
–
|
||||||||
| $ |
16,668
|
$ |
15,404
|
$ |
12,190
|
|||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Government
grants
During
1998, the company entered into an agreement with the Quebec Minister of
Industry, Commerce, Science and Technology (“The Minister”). Pursuant to this
agreement, the Minister agreed to contribute, in the form of grants, up to
CA$2,220,000 over the period from January 1, 1998, through December 31, 2002,
payable based on the number of full-time jobs created during that
period.
The
above
grants were subject to the condition that jobs created pursuant to the agreement
be maintained for a period of at least five years from the date of creation.
Since the beginning of the program, the company had deferred in the balance
sheet CA$1,450,000 (US$1,307,000) from the amounts received until it received
the final approval by the sponsor of the program related to jobs created. In
fiscal 2006, the sponsor of the program granted the company with its final
approval and the company recorded CA$1,450,000 (US$1,307,000) in the earnings
from operations in the statement of earnings of fiscal 2006.
Furthermore,
until December 31, 2006, companies operating in the Quebec City area were
eligible for a refundable credit granted by the Quebec provincial government.
This credit was earned based on the increase of eligible production and
marketing salaries incurred in the Quebec City area at a rate of 40%. From
the
total amount claimed by the company under this program, a sum of CA$1,142,000
(US$1,079,000) was deferred in the balance sheet until the company received
the
final approval of eligible salaries by the sponsor of the program. In fiscal
2007, the sponsor of the program granted the company with its final approval,
and the company recorded CA$1,142,000 (US$1,079,000) in the earnings from
operations in the statement of earnings of fiscal 2007.
Following
is a summary of the classification of these and certain other grants and credits
(government grants) in the statements of earnings of the reporting
years:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cost
of sales
|
$ |
186
|
$ |
262
|
$ |
89
|
||||||
|
Selling
and administrative
|
$ |
11
|
$ |
76
|
$ |
32
|
||||||
|
Net
research and development
|
$ |
9
|
$ |
4
|
$ |
22
|
||||||
|
Government
grants
|
$ |
1,079
|
$ |
1,307
|
$ |
–
|
||||||
Defined
contribution plans
The
company maintains separate defined contribution plans for certain eligible
employees. These plans, which are accounted for on an accrual basis, are
summarized as follows:
|
·
|
Deferred
profit-sharing plan
|
The
company maintains a plan for certain eligible Canadian resident employees,
under
which the company may elect to contribute an amount equal to 2% (1% prior to
June 2005) of an employee’s gross salary, provided that the employee has
contributed at least 2% of his gross salary to a tax-deferred registered
retirement savings plan. Cash contributions to this plan and expenses for the
years ended August 31, 2005, 2006 and 2007, amounted to CA$221,000 (US$179,000),
CA$363,000 (US$316,000) and CA$470,000 (US$419,000), respectively.
|
·
|
401K
plan
|
The
company maintains a 401K plan for eligible U.S. resident employees. Under this
plan, the company must contribute an amount equal to 3% of an employee’s current
compensation. During the years ended August 31, 2005, 2006 and 2007, the company
recorded cash contributions and expenses totaling $134,000, $126,000 and
$166,000, respectively.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
16 Income
Taxes
During
fiscal 2003, following the downturn in the telecommunications industry, the
company recorded a full valuation allowance on its future income tax assets
in
every applicable tax jurisdictions and we wrote off non-refundable research
and
development tax credits because it was more likely than not that these assets
would not be realized.
On
an
ongoing basis, the company reviews available positive and negative evidences
to
evaluate the recoverability of its future income tax assets and deferred
non-refundable research and development tax credits.
During
fiscal 2007, after reviewing both available positive and negative evidences,
and
because the company is in a cumulative profit position in the parent company
(Canadian federal and provinces level) and in one of its subsidiaries, located
in the United States, and also because the company expects to generate
sufficient taxable income in future years, management concluded that it was
more
likely than not that future income tax assets and deferred non-refundable
research and development tax credits of the parent company and a portion of
the
company’s future income tax assets in the United States would be realizable.
Consequently, it reversed a portion of its valuation allowance against future
income tax assets in the amount of $24,566,000 and recognized previously
unrecognized non-refundable research and development tax credits in the amount
of $3,162,000 (note 15). Future income tax assets recognized in 2007 were
recorded in the income tax provision, while research and development tax credits
were recorded against gross research and development expenses in the statement
of earnings.
However,
in the United States (federal level), based on available positive and negative
evidences as well as the level and the nature of cumulative profits, the company
maintained a valuation allowance of $7,568,000 on a portion of its future income
tax assets in this tax jurisdiction because it is more likely than not that
these assets will not be recovered. These future income tax assets consist
of
deferred operating losses; some of these losses expire between 2022 and 2026,
while others can be carried forward indefinitely against future years’ taxable
income.
In
other
tax jurisdictions where the company has future income tax assets, the company
is
still in a cumulative loss position and available negative evidences outweigh
positive evidences. For these tax jurisdictions, the company maintains a full
valuation allowance against its future income tax assets. As at August 31,
2007,
the valuation allowance recorded by the company for these tax jurisdictions
amounted to $4,924,000 and mainly relates to deferred operating losses, which
expire at various dates over the next 20 years.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
The
reconciliation of the income tax provision calculated using the combined
Canadian federal and provincial statutory income tax rate with the income tax
provision in the financial statements is as follows:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory
tax
rate (32% in 2007 and 2006 and 31% in 2005)
|
$ |
6,864
|
$ |
3,430
|
$ |
307
|
||||||
|
Increase
(decrease) due to:
|
||||||||||||
|
Foreign
income taxed at different rates
|
(12 | ) | (85 | ) | (580 | ) | ||||||
|
Non-taxable
income
|
(109 | ) | (207 | ) | (827 | ) | ||||||
|
Non-deductible
expenses
|
692
|
527
|
784
|
|||||||||
|
Tax
deductions
|
–
|
–
|
(81 | ) | ||||||||
|
Change
in tax rates
|
105
|
497
|
–
|
|||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
45
|
61
|
(209 | ) | ||||||||
|
Other
|
236
|
239
|
(146 | ) | ||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(24,566 | ) |
–
|
–
|
||||||||
|
Utilization
of previously unrecognized future income tax
assets
|
(4,080 | ) | (1,877 | ) |
–
|
|||||||
|
Unrecognized future
income tax assets on temporary deductible differences and unused
tax
losses and deductions
|
–
|
–
|
3,375
|
|||||||||
| $ | (20,825 | ) | $ |
2,585
|
$ |
2,623
|
||||||
|
The
income tax provision consists of the following:
|
||||||||||||
|
Current
|
||||||||||||
|
Canadian
|
$ |
3,568
|
$ |
2,573
|
$ |
2,513
|
||||||
|
Other
|
173
|
12
|
110
|
|||||||||
|
3,741
|
2,585
|
2,623
|
||||||||||
|
Future
|
||||||||||||
|
Canadian
|
3,726
|
2,687
|
(1,445 | ) | ||||||||
|
United
States
|
428
|
(601 | ) | (1,723 | ) | |||||||
|
Other
|
(74 | ) | (209 | ) | (207 | ) | ||||||
|
4,080
|
1,877
|
(3,375 | ) | |||||||||
|
Valuation
allowance
|
||||||||||||
|
Canadian
|
(23,092 | ) | (2,687 | ) |
1,445
|
|||||||
|
United
States
|
(5,628 | ) |
601
|
1,723
|
||||||||
|
Other
|
74
|
209
|
207
|
|||||||||
| (28,646 | ) | (1,877 | ) |
3,375
|
||||||||
| (24,566 | ) |
–
|
–
|
|||||||||
| $ | (20,825 | ) | $ |
2,585
|
$ |
2,623
|
|
|||||
|
Details
of the company’s income taxes:
|
||||||||||||
|
Earnings
(loss) before income taxes
|
||||||||||||
|
Canadian
|
$ |
19,634
|
$ |
13,202
|
$ |
3,092
|
||||||
|
United
States
|
1,059
|
(2,103 | ) | (953 | ) | |||||||
|
Other
|
757
|
(379 | ) | (1,150 | ) | |||||||
| $ |
21,450
|
$ |
10,720
|
$ |
989
|
|||||||
Except
for the reversal of the valuation allowance recorded in fiscal 2007, most of
the
company’s income tax provision for fiscal 2005, 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.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Significant
components of the company’s future income tax assets and liabilities are as
follows:
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Future
income tax assets
|
||||||||
|
Long-lived
assets
|
$ |
4,304
|
$ |
4,453
|
||||
|
Provisions
and accruals
|
6,257
|
7,315
|
||||||
|
Deferred
revenue
|
1,005
|
486
|
||||||
|
Share
issue expenses
|
106
|
531
|
||||||
|
Research
and development expenses
|
10,422
|
8,527
|
||||||
|
Losses
carried forward
|
17,230
|
18,118
|
||||||
|
39,324
|
39,430
|
|||||||
|
Valuation
allowance
|
(12,492 | ) | (38,543 | ) | ||||
|
26,832
|
887
|
|||||||
|
Future
income tax liabilities
|
||||||||
|
Research
and development tax credits
|
(2,026 | ) | (887 | ) | ||||
|
Provisions
and accruals
|
(240 | ) |
–
|
|||||
| (2,266 | ) | (887 | ) | |||||
|
Future
income tax assets, net
|
$ |
24,566
|
$ |
–
|
||||
As
at
August 31, 2007, the company had available operating and capital losses in
several tax jurisdictions, against which a valuation allowance of $10,663,000
was recorded. The following table summarizes the year of expiry of these losses
by tax jurisdiction:
|
Canada
|
|
United
States
|
||||||||||
|
Year
of expiry
|
Federal
|
Provinces
|
and
Other
|
|||||||||
|
2008
|
$ |
1,230
|
$ |
869
|
$ |
–
|
||||||
|
2009
|
2,845
|
162
|
–
|
|||||||||
|
2010
|
4,663
|
176
|
–
|
|||||||||
|
2014
|
177
|
84
|
–
|
|||||||||
|
2015
|
1,181
|
1,181
|
–
|
|||||||||
|
2022
|
–
|
–
|
3,795
|
|||||||||
|
2023
|
–
|
–
|
7,499
|
|||||||||
|
2024
|
–
|
–
|
4,564
|
|||||||||
|
2025
|
–
|
–
|
5,217
|
|||||||||
|
2026
|
1,081
|
1,081
|
2,308
|
|||||||||
|
2027
|
1,103
|
1,103
|
–
|
|||||||||
|
Indefinite
|
1,523
|
1,855
|
17,610
|
|||||||||
| $ |
13,803
|
$ |
6,511
|
$ |
40,993
|
|||||||
As
at
August 31, 2007, in addition to operating and capital losses, the company had
available research and development expenses in Canada amounting to $47,717,000
at the federal level and $9,352,000 at the provinces level, against which a
valuation allowance of $1,331,000 was recorded. These expenses can be carried
forward indefinitely against future years’ taxable income in their respective
tax jurisdiction.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Finally,
as at August 31, 2007, the company had non-refundable research and development
tax credits at the Canadian federal level in the amount of $3,815,000 that
can
be carried forward against future years’ income taxes payable over the next 20
years. As at August 31, 2007, from this amount, $653,000 was not recorded in
the
financial statements.
17 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:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Basic
weighted average number of shares
outstanding
(000’s)
|
68,875
|
68,643
|
68,526
|
|||||||||
|
Plus
dilutive effect of:
|
||||||||||||
|
Stock
options (000’s)
|
448
|
502
|
422
|
|||||||||
|
Restricted
share units (000’s)
|
179
|
99
|
8
|
|||||||||
|
Deferred
share units (000’s)
|
53
|
31
|
8
|
|||||||||
|
Restricted
stock awards (000’s)
|
−
|
−
|
17
|
|||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,555
|
69,275
|
68,981
|
|||||||||
|
Stock
awards excluded from the calculation of the diluted weighted average
number of shares outstanding because their exercise price was greater
than
the average market price of the common shares (000’s)
|
1,207
|
1,628
|
1,962
|
|||||||||
The
diluted net loss per share for the year ended August 31, 2005, was the same
as
the basic net loss per share since the dilutive effect of stock options,
restricted share units, deferred share units and restricted stock awards should
not be included in the calculation; otherwise, the effect would be
anti-dilutive. Accordingly, the diluted net loss per share for this
year was calculated using the basic weighted average number of shares
outstanding.
18 Financial
Instruments
Short-term
investments
Short-term
investments consist of the following:
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Commercial
paper denominated in Canadian dollars, bearing interest at annual
rates of
3.98% to 4.67% in 2007 and 3.92% to 4.31% in 2006, maturing on different
dates between September 2007 and January 2008 in fiscal 2007, and
September 2006 and January 2007 in fiscal 2006
|
$ |
124,217
|
$ |
104,437
|
||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Fair
value
Cash,
accounts receivable, accounts payable and accrued liabilities as well as
long-term debt, are financial instruments whose carrying values approximate
their fair values.
The
fair
value of short-term investments, based on market value, amounted to $104,437,000
and $124,217,000 as at August 31, 2006 and 2007, respectively.
The
fair
value of forward exchange contracts, which represents the amount that the
company would receive to settle the contracts, amounted to unrecognized gains
of
$5,451,000 and $3,422,000 as at August 31, 2006 and 2007, respectively. The
carrying value of these contracts amounted to $555,000 as at August 31,
2007.
Credit
risk
Financial
instruments that potentially subject the company to credit risk consist
primarily of cash, short-term investments, accounts receivable and forward
exchange contracts. The company’s short-term investments consist of debt
instruments issued by seven (nine in 2006) high-credit quality corporations
and
trusts. None of these debt instruments are expected to be affected by a
liquidity risk and 47% of them are guaranteed by the Government of Canada.
The
company’s cash and forward exchange contracts are held with or issued by
high-credit quality financial institutions; therefore, the company considers
the
risk of non-performance on these instruments to be remote.
Generally,
the company does not require collateral or other security from customers for
trade accounts receivable; however, credit is extended to customers following
an
evaluation of creditworthiness. In addition, the company performs ongoing credit
reviews of all its customers and establishes an allowance for doubtful accounts
receivable when accounts are determined to be uncollectible. Allowance for
doubtful accounts amounted to $451,000 and $206,000 as at
August 31, 2006 and 2007, respectively.
Interest
rate risk
As
at
August 31, 2007, the company’s exposure to interest rate risk is summarized
as follows:
|
Cash
|
Non-interest
bearing
|
|
|
Short-term
investments
|
As
described above
|
|
|
Accounts
receivable
|
Non-interest
bearing
|
|
|
Accounts
payable and accrued liabilities
|
Non-interest
bearing
|
Forward
exchange contracts
The
company is exposed to currency risks as a result of its export sales of products
manufactured in Canada, the majority of which are denominated in US dollars.
These risks are partially hedged by forward exchange contracts and certain
operating expenses. As at August 31, 2006 and 2007, the company held
contracts to sell US dollars at various forward rates, which are summarized
as
follows:
|
Contractual
amounts
|
Weighted
average contractual forward rates
|
|||||||
|
As
at August 31, 2006
|
||||||||
|
September
2006 to August 2007
|
$ |
37,000
|
1.1676
|
|||||
|
September
2007 to June 2009
|
26,800
|
1.1261
|
||||||
|
As
at August 31, 2007
|
||||||||
|
September
2007 to August 2008
|
$ |
36,900
|
1.1295
|
|||||
|
September
2008 to December 2009
|
15,400
|
1.1199
|
||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
19 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 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
reporting structure reflects how the company manages its business and how it
classifies its operations for planning and measuring performance.
The
following tables present information by segment:
|
Year
ended August 31, 2007
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ |
129,839
|
$ |
23,095
|
$ |
152,934
|
||||||
|
Earnings
from operations
|
$ |
13,132
|
$ |
3,650
|
$ |
16,782
|
||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
and other income
|
4,717
|
|||||||||||
|
Foreign
exchange loss
|
(49 | ) | ||||||||||
|
Earnings
before income taxes
|
21,450
|
|||||||||||
|
Income
taxes
|
(20,825 | ) | ||||||||||
|
Net
earnings for the year
|
$ |
42,275
|
||||||||||
|
Recognition
of previously unrecognized research and development tax credits (note
15)
|
$ | (3,162 | ) | $ |
−
|
$ | (3,162 | ) | ||||
|
Government
grants (note 15)
|
$ | (1,079 | ) | $ |
−
|
$ | (1,079 | ) | ||||
|
Amortization
of capital assets
|
$ |
5,557
|
$ |
290
|
$ |
5,847
|
||||||
|
Stock-based
compensation costs
|
$ |
886
|
$ |
95
|
$ |
981
|
||||||
|
Capital
expenditures
|
$ |
5,424
|
$ |
123
|
$ |
5,547
|
||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
|
Year
ended August 31, 2006
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ |
107,376
|
$ |
20,877
|
$ |
128,253
|
||||||
|
Earnings
from operations
|
$ |
6,679
|
$ |
1,383
|
$ |
8,062
|
||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
and other income
|
3,253
|
|||||||||||
|
Foreign
exchange loss
|
(595 | ) | ||||||||||
|
Earnings
before income taxes
|
10,720
|
|||||||||||
|
Income
taxes
|
2,585
|
|||||||||||
|
Net
earnings for the year
|
$ |
8,135
|
||||||||||
|
Government
grants (note 15)
|
$ | (1,307 | ) | $ |
−
|
$ | (1,307 | ) | ||||
|
|
||||||||||||
|
Amortization
of capital assets
|
$ |
6,689
|
$ |
1,228
|
$ |
7,917
|
||||||
|
Stock-based
compensation costs
|
$ |
962
|
$ |
70
|
$ |
1,032
|
||||||
|
Impairment
of long-lived assets (note 4)
|
$ |
−
|
$ |
604
|
$ |
604
|
||||||
|
Capital
expenditures
|
$ |
3,049
|
$ |
329
|
$ |
3,378
|
||||||
|
Year
ended August 31, 2005
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ |
80,120
|
$ |
17,096
|
$ |
97,216
|
||||||
|
Earnings
(loss) from operations
|
$ |
763
|
$ | (962 | ) | $ | (199 | ) | ||||
|
Unallocated
items:
|
||||||||||||
|
Interest
and other income
|
2,524
|
|||||||||||
|
Foreign
exchange loss
|
(1,336 | ) | ||||||||||
|
Earnings
before income taxes
|
989
|
|||||||||||
|
Income
taxes
|
2,623
|
|||||||||||
|
Net
loss for the year
|
$ | (1,634 | ) | |||||||||
|
Amortization
of capital assets
|
$ |
6,504
|
$ |
2,588
|
$ |
9,092
|
||||||
|
Stock-based
compensation costs
|
$ |
897
|
$ |
66
|
$ |
963
|
||||||
|
Capital
expenditures
|
$ |
1,408
|
$ |
93
|
$ |
1,501
|
||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Total
assets by reportable segment are detailed as follows:
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Telecom
Division
|
$ |
109,065
|
$ |
93,853
|
||||
|
Life
Sciences and Industrial Division
|
9,199
|
11,339
|
||||||
|
Unallocated
assets
|
160,874
|
113,967
|
||||||
| $ |
279,138
|
$ |
219,159
|
|||||
Unallocated
assets consist of cash, short-term investments, income taxes and tax credits
recoverable and future income taxes.
Carrying
value of goodwill by reportable segment is detailed as follows:
|
As
at August 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Telecom
Division
|
$ |
23,622
|
$ |
22,545
|
||||
|
Life
Sciences and Industrial Division
|
4,815
|
4,597
|
||||||
| $ |
28,437
|
$ |
27,142
|
|||||
Sales
to
external customers by geographic region are detailed as follows:
|
Years
ended August 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
United
States
|
$ |
73,679
|
$ |
59,457
|
$ |
56,282
|
||||||
|
Canada
|
9,619
|
8,767
|
6,830
|
|||||||||
|
Latin
America
|
7,592
|
8,380
|
3,127
|
|||||||||
|
Americas
|
90,890
|
76,604
|
66,239
|
|||||||||
|
Europe-Middle
East-Africa
|
41,270
|
32,379
|
19,396
|
|||||||||
|
Asia-Pacific
|
20,774
|
19,270
|
11,581
|
|||||||||
| $ |
152,934
|
$ |
128,253
|
$ |
97,216
|
|||||||
Sales
were allocated to geographic regions based on the country of residence of the
related customers. In fiscal 2005, 2006 and 2007, one customer represented
more
than 10% of sales with 23.3% of sales ($22,629,000) in fiscal 2005, 13.8% of
sales ($17,706,000) in 2006 and 14.7% of sales ($22,480,000) in 2007. For fiscal
2005, 2006 and 2007, this customer purchased from the Telecom
Division.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Long-lived
assets by geographic region are detailed as follows:
|
As
at August 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Property,
plant and equipment
|
Intangible
assets
|
Goodwill
|
Property,
plant and equipment
|
Intangible
assets
|
Goodwill
|
|||||||||||||||||||
|
Canada
|
$ |
16,434
|
$ |
9,580
|
$ |
24,801
|
$ |
17,364
|
$ |
10,690
|
$ |
23,670
|
||||||||||||
|
United
States
|
13
|
21
|
3,636
|
28
|
258
|
3,472
|
||||||||||||||||||
|
China
|
1,670
|
27
|
−
|
−
|
−
|
−
|
||||||||||||||||||
| $ |
18,117
|
$ |
9,628
|
$ |
28,437
|
$ |
17,392
|
$ |
10,948
|
$ |
27,142
|
|||||||||||||
20 United
States Generally Accepted Accounting Principles
As
a
registrant with the Securities and Exchange Commission in the United States
(SEC), the company is required to reconcile its financial statements for
significant differences in measurement and disclosure between generally accepted
accounting principles as applied in Canada (Canadian GAAP) and those applied
in
the United States (U.S. GAAP). Furthermore, additional significant disclosures
required under U.S. GAAP and Regulation S-X of the SEC are also provided in
the
accompanying financial statements and notes. The following summarizes the
significant quantitative differences between Canadian and U.S. GAAP, as
well as other significant disclosures required under U.S. GAAP and
Regulation S-X of the SEC not already provided in the accompanying financial
statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Reconciliation
of net earnings (loss) to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported net earnings (loss) and net earnings (loss) per share under Canadian
GAAP as compared to U.S. GAAP. Refer to corresponding explanatory notes in
the Reconciliation Items section.
|
Years
ended August 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||
|
Net
earnings (loss) for the year in accordance with Canadian
GAAP
|
$ |
42,275
|
$ |
8,135
|
$ | (1,634 | ) | |||||||||
|
Unrealized
losses on available-for-sale securities
|
a | ) |
55
|
–
|
–
|
|||||||||||
|
Stock-based
compensation costs related to stock appreciation rights
|
b | ) | (73 | ) |
–
|
–
|
||||||||||
|
Unrealized
losses on forward exchange contracts
|
c | ) |
–
|
–
|
(1,286 | ) | ||||||||||
|
Net
earnings (loss) for the year in accordance with U.S. GAAP
|
42,257
|
8,135
|
(2,920 | ) | ||||||||||||
|
Other
comprehensive income (loss)
|
||||||||||||||||
|
Foreign
currency translation adjustment
|
9,218
|
12,322
|
15,669
|
|||||||||||||
|
Unrealized
losses on available-for-sale securities
|
a | ) | (55 | ) |
–
|
–
|
||||||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
c | ) | (1,548 | ) |
5,394
|
2,313
|
||||||||||
|
Reclassification
of realized gains on forward exchange contracts in net earnings
(loss)
|
c | ) | (1,039 | ) | (2,880 | ) | (65 | ) | ||||||||
|
Future
income taxes on unrealized gains on forward exchange
contracts
|
d | ) | (916 | ) |
–
|
–
|
||||||||||
|
Comprehensive
income
|
$ |
47,917
|
$ |
22,971
|
$ |
14,997
|
||||||||||
|
|
||||||||||||||||
|
Basic
and diluted net earnings (loss) per share in accordance with U.S.
GAAP
|
$ |
0.61
|
$ |
0.12
|
$ | (0.04 | ) | |||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,875
|
68,643
|
68,526
|
|||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,555
|
69,275
|
68,526
|
|||||||||||||
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.
Refer to the corresponding explanatory note in the Reconciliation Items
section.
|
As
at August 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ |
250,165
|
$ |
196,234
|
$ |
173,400
|
||||||||||
|
Forward
exchange contracts
|
c | ) |
2,864
|
5,451
|
2,937
|
|||||||||||
|
Goodwill
|
e | ) | (12,697 | ) | (11,908 | ) | (11,042 | ) | ||||||||
|
Future
income tax assets
|
d | ) | (916 | ) |
–
|
–
|
||||||||||
|
Stock
appreciation rights
|
b | ) | (73 | ) |
–
|
–
|
||||||||||
|
|
||||||||||||||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ |
239,343
|
$ |
189,777
|
$ |
165,295
|
||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
The
following table summarizes the shareholders’ equity activity under U.S. GAAP
since August 31, 2004:
|
Share
capital
|
Contributed
surplus
|
Deficit
|
Deferred
stock-based compensation costs
|
Other
capital
|
Accumulated
other comprehensive income
|
Shareholders’
equity
|
||||||||||||||||||||||
|
Balance
as at August 31, 2004
|
$ |
596,309
|
$ |
1,537
|
$ | (464,159 | ) | $ | (939 | ) | $ |
4,669
|
$ |
11,877
|
$ |
149,294
|
||||||||||||
|
Net
loss for the year
|
−
|
−
|
(2,920 | ) |
−
|
−
|
−
|
(2,920 | ) | |||||||||||||||||||
|
Stock-based
compensation costs
|
1,213
|
−
|
−
|
(776 | ) |
425
|
−
|
862
|
||||||||||||||||||||
|
Foreign
currency translation adjustment
|
−
|
−
|
−
|
−
|
−
|
15,669
|
15,669
|
|||||||||||||||||||||
|
Unrealized
gains on forward exchange contracts
|
−
|
−
|
−
|
−
|
−
|
2,248
|
2,248
|
|||||||||||||||||||||
|
Exercise
of stock options (note 13)
|
148
|
−
|
−
|
−
|
−
|
−
|
148
|
|||||||||||||||||||||
|
Share
issue expenses (note 13)
|
(6 | ) |
−
|
−
|
−
|
−
|
−
|
(6 | ) | |||||||||||||||||||
|
Balance
as at August 31, 2005
|
597,664
|
1,537
|
(467,079 | ) | (1,715 | ) |
5,094
|
29,794
|
165,295
|
|||||||||||||||||||
|
Net
earnings for the year
|
−
|
−
|
8,135
|
−
|
−
|
−
|
8,135
|
|||||||||||||||||||||
|
Stock-based
compensation costs
|
−
|
−
|
−
|
−
|
954
|
−
|
954
|
|||||||||||||||||||||
|
Reclassification upon
adoption of SFAS 123(R)
|
−
|
−
|
−
|
1,715
|
(1,715 | ) |
−
|
−
|
||||||||||||||||||||
|
Foreign
currency translation adjustment
|
−
|
−
|
−
|
−
|
−
|
12,322
|
12,322
|
|||||||||||||||||||||
|
Unrealized
gains on forward exchange contracts
|
−
|
−
|
−
|
−
|
−
|
2,514
|
2,514
|
|||||||||||||||||||||
|
Exercise
of stock options (note 13)
|
557
|
−
|
−
|
−
|
−
|
−
|
557
|
|||||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
(note 13)
|
200
|
−
|
−
|
−
|
(200 | ) |
−
|
−
|
||||||||||||||||||||
|
Balance
as at August 31, 2006
|
598,421
|
1,537
|
(458,944 | ) |
−
|
4,133
|
44,630
|
189,777
|
||||||||||||||||||||
|
Net
earnings for the year
|
−
|
−
|
42,257
|
−
|
−
|
−
|
42,257
|
|||||||||||||||||||||
|
Stock-based
compensation costs
|
−
|
−
|
−
|
−
|
847
|
−
|
847
|
|||||||||||||||||||||
|
Foreign
currency translation adjustment
|
−
|
−
|
−
|
−
|
−
|
9,218
|
9,218
|
|||||||||||||||||||||
|
Unrealized
losses on
available-for-sale
securities
|
−
|
−
|
−
|
−
|
−
|
(55 | ) | (55 | ) | |||||||||||||||||||
|
Unrealized
losses on forward exchange contracts
|
−
|
−
|
−
|
−
|
−
|
(2,587 | ) | (2,587 | ) | |||||||||||||||||||
|
Future
income taxes on unrealized gains on forward exchange
contracts
|
−
|
−
|
−
|
−
|
−
|
(916 | ) | (916 | ) | |||||||||||||||||||
|
Exercise
of stock options (note 13)
|
802
|
−
|
−
|
−
|
−
|
−
|
802
|
|||||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock awards
(note 13)
|
296
|
−
|
−
|
−
|
(296 | ) |
−
|
−
|
||||||||||||||||||||
|
Balance
as at August 31, 2007
|
$ |
599,519
|
$ |
1,537
|
$ | (416,687 | ) | $ |
−
|
$ |
4,684
|
$ |
50,290
|
$ |
239,343
|
|||||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
Accumulated
other comprehensive income consists of the following:
|
As
at August 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||
|
Foreign
currency translation adjustment
|
||||||||||||||||
|
Current
year
|
$ |
9,218
|
$ |
12,322
|
$ |
15,669
|
||||||||||
|
Cumulative
effect of prior years
|
39,179
|
26,857
|
11,188
|
|||||||||||||
|
48,397
|
39,179
|
26,857
|
||||||||||||||
|
Unrealized
losses on available-for-sale securities
|
a | ) | ||||||||||||||
|
Current
year
|
(55 | ) |
−
|
−
|
||||||||||||
|
Unrealized
gains on forward exchange contracts
|
c | ) | ||||||||||||||
|
Current
year
|
(2,587 | ) |
2,514
|
2,248
|
||||||||||||
|
Cumulative
effect of prior years
|
5,451
|
2,937
|
689
|
|||||||||||||
|
2,864
|
5,451
|
2,937
|
||||||||||||||
|
Future
income taxes on unrealized gains on forward exchange
contracts
|
d | ) | ||||||||||||||
|
Current
year
|
(916 | ) |
−
|
−
|
||||||||||||
| $ |
50,290
|
$ |
44,630
|
$ |
29,794
|
|||||||||||
Statements
of cash flows
For
the
years ended August 31, 2005, 2006 and 2007, 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.
Reconciliation
items
|
a)
|
Short-term
investments
|
Under
U.S. GAAP, short-term investments would be classified as “available-for-sale
securities” and carried at their fair value and any changes in their fair value
would be reflected in other comprehensive income. Under Canadian GAAP,
short-term investments are carried at the lower of cost and market value and
any
unrealized loss is reflected in the statements of earnings.
|
b)
|
Stock-based
compensation costs related to stock appreciation
rights
|
Under
U.S. GAAP, stock-based compensation costs related to stock appreciation rights
must be measured using the fair value-based method at the end of each period.
The company uses the Black-Scholes options valuation model to measure the fair
value of its stock appreciation rights, based on the same assumptions than
those
used for stock options. Changes in the fair value of these awards must be
charged to earnings. Under Canadian GAAP, stock appreciation rights are measured
using the intrinsic value method, based on the market price of the common shares
at the end of each period, and changes in the intrinsic value of these awards
are charged to earnings.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
|
c)
|
Forward
exchange contracts
|
The
forward exchange contracts entered into by the company prior to September 1,
2003, did not qualify for hedge accounting treatment under Statement of
Financial Accounting Standard (SFAS) 133, “Accounting for Derivative
Instruments and Hedging Activities”; accordingly, changes in the fair value of
these derivatives were recorded in earnings. However, since September 1, 2003,
the company has been maintaining the documentation for the designation,
documentation and assessment of the effectiveness of its forward exchange
contracts, for the purposes of applying hedge accounting.
Consequently,
under U.S. GAAP, the forward exchange contracts entered into by the company
after September 1, 2003 qualify for hedge accounting treatment and are
recorded at fair value in the balance sheet and changes in their fair value
are
reported in other comprehensive income. Upon the recognition of the hedged
sales, accumulated changes in fair value are reclassified in the statements
of
earnings.
Under
Canadian GAAP, foreign exchange contracts qualifying for hedge accounting are
not recognized on the balance sheet and foreign exchange translation gains
and
losses on these contracts are only recognized as an adjustment of the revenue
when the corresponding hedged sales are recorded.
Based
on
the portfolio of forward exchange contracts as at August 31, 2007, the company
estimates that the portion of the unrealized gains on forward exchange contracts
as of August 31, 2007, which will be realized and reclassified from
other comprehensive income to net earnings over the next fiscal year amounts
to
$2,514,000.
|
d)
|
Future
income taxes
|
In
fiscal
2007, considering the effect of the adjustments described in item c), future
income tax assets would have been $916,000 lower than under Canadian
GAAP.
|
e)
|
Goodwill
|
Under
U.S. GAAP, until the adoption of SFAS 142, “Goodwill and Other Intangible
Assets”, when assets being tested for recoverability were acquired in business
combinations accounted for by the purchase method, the goodwill that arose
in
that transaction had to be included as part of the assets grouping in
determining recoverability. The intangible assets tested for recoverability
prior to the adoption of SFAS 142 were acquired in business combinations that
were accounted for using the purchase method and, consequently, the company
allocated goodwill to those assets on a pro rata basis using the relative fair
values of the long-lived assets and identifiable intangible assets acquired
as
determined at the date of acquisition. The carrying value of goodwill identified
with the impaired intangible assets was written down before any reduction was
made to the intangible assets.
Under
Canadian GAAP, no allocation of goodwill was required and each asset was tested
for recoverability separately based on its pre-tax undiscounted future cash
flows over its expected period of use.
This
created a permanent difference in the carrying value of goodwill under Canadian
GAAP and U.S. GAAP
|
f)
|
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 in the statements or
earnings. Under U.S. GAAP, tax credits that are refundable against taxable
income are recorded in the income taxes. These tax credits amounted to
$2,169,000, $2,546,000 and $6,639,000 for fiscal 2005, 2006 and 2007,
respectively. This difference has no impact on the net earnings (loss) and
the
net earnings (loss) per share figures for the reporting years.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
|
g)
|
Elimination
of deficit by reduction of share
capital
|
As
at
August 31, 2006, under Canadian GAAP, the company proceeded to eliminate its
deficit against its share capital (note 13). However, under U.S. GAAP, such
elimination is not permitted, which creates a permanent difference of
$373,711,000 in the deficit and the share capital between the Canadian GAAP
and
U.S. GAAP figures. This difference has no impact on the total amount of the
shareholders’ equity.
|
h)
|
New
accounting standards and
pronouncements
|
Adopted
in fiscal 2006
In
December 2004, the FASB issued SFAS 123(R), “Share-Based Payments”. This
statement supersedes ABP 25, “Accounting for Stock Issued to Employees” and
related implementation guidance, and revises SFAS 123 in a number of areas.
Under SFAS 123(R), all forms of share-based payment to employees result in
compensation cost recognized in financial statements. This statement is
effective for fiscal years beginning after June 15, 2005. The company adopted
this statement on September 1, 2005, using the modified prospective application
method of transition and its adoption had no significant impact on its financial
statements.
Adopted
in fiscal 2007
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3”. This statement
replaces APB 20, “Accounting Changes”, and SFAS 3, “Reporting
Accounting Changes in Interim Financial Statements”, and changes the
requirements for the accounting for 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. The company
adopted this new statement on September 1, 2006, and its adoption had no effect
on its consolidated financial statements.
To
be
adopted after fiscal 2007
In
June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”,
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 its adoption is not expected
to have significant impacts on its consolidated 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 consolidated financial statements.
On
February 15, 2007, the FASB issued SFAS 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115”, which permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
this statement apply only to entities that elect the fair value option. However,
the amendment to SFAS 115, “Accounting for Certain Investments in Debt and
Equity Securities”, applies to all entities with available-for-sale and trading
securities. This statement is effective for fiscal years beginning after
November 15, 2007, but the company has not yet determined if it will adopt
this
statement, nor the impact it might have on its financial statements. Should
the
company decide to adopt SFAS 159, it will be adopted on
September 1, 2008.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per
share data and as otherwise noted)
21 Subsequent
Event
On
November 5, 2007, the Board of Directors of the company approved a share
repurchase program, by way of a normal course issuer bid on the open market,
of
up to 9.9% of the company’s public float (as defined by the Toronto Stock
Exchange), or 2,869,585 subordinate voting shares, at the prevailing market
price. The company expects to use cash, short-term investments or future cash
flows from operations to fund the repurchase of shares. The normal course issuer
bid will start on November 8, 2007, and end on November 7, 2008, or on
an earlier date if the company repurchases the maximum number of shares
permitted under the bid. The program does not require the company to repurchase
any specific number of shares, and it may be modified, suspended or terminated
at any time and without prior notice. All shares repurchased by the company
under the bid will be canceled.
|
Germain
Lamonde
Chairman
of the Board,
President
and CEO, EXFO
Electro-Optical
Engineering Inc.
|
Dr.
David A. Thompson 2
Vice-President
and Director
Hardware
& Equipment Technology
Corning
Cable Systems
|
|
|
Germain
Lamonde, a company founder, has been Chairman of the Board, President
and
CEO of EXFO since its inception in his apartment in 1985.
Mr. Lamonde, who is responsible for the overall management and
strategic direction of EXFO and its subsidiaries and divisions,
has grown
the company from the ground up into a global leader in the
telecommunications test and measurement industry. Mr. Lamonde
has served
on the boards of several organizations such as the Canadian Institute
for
Photonic Innovations, the Pole QCA Economic Development Corporation
and
the National Optics Institute of Canada to name a few. Germain
Lamonde
holds a bachelor’s degree in physics engineering from the University of
Montreal’s School of Engineering (École Polytechnique), a master’s degree
in optics from Laval University, and is also a graduate of the
Ivey
Executive Program offered by the University of Western
Ontario.
|
David
A. Thompson has served as our Director since June 2000. Dr. David
A.
Thompson is currently Vice- President and Director of Hardware
&
Equipment Technology at Corning Cable Systems, where he has held
this
position since January 2006. Prior to this, he was Vice-President
and
Director of Hardware & Equipment Technology Strategy for Corning Cable
Systems from January 2002 to December 2005. Dr. Thompson first joined
Corning Incorporated in 1976 as a Senior Chemist in glass research.
He
then took on several technology directorships and strategic planning
roles
for Corning’s Component and Photonics Technologies Division between 1988
and 1998; and, in 1999, he was appointed technical leader for
the creation
of the new Samsung-Corning Micro-Optics joint venture. His last
position
at Corning prior to transferring to Corning Cable Systems in
January 2002
was Division Vice-President for the Strategic Planning & Innovation
Effectiveness in Research, Development and Engineering. David
A. Thompson
holds a Bachelor of Science in chemistry from Ohio State University
and a
doctorate in inorganic chemistry from the University of Michigan.
He holds
18 patents and has over 20 technical publications in the areas
of
inorganic chemistry, glass technology and telecommunications.
|
|
|
Pierre
Marcouiller 1,2
Chairman
of the Board and CEO,
Camoplast
Inc.
|
André
Tremblay 1,2
Founder
and Managing Partner, Trio Capital
|
|
|
Pierre
Marcouiller is Chairman of the Board and CEO of Camoplast Inc.,
an
industrial manufacturer specializing in rubber tracks, molded
composites,
thermoplastic components and off-road tracked vehicles. Prior
to joining
Camoplast, Mr. Marcouiller was President and General Manager
of Venmar
Ventilation Inc. (1988-1996), where he was the controlling shareholder
from 1991 to 1996. Mr. Marcouiller is also a Director of Canam Group
Inc., an industrial company specialized in the design and fabrication
of
construction products and solutions in the commercial, industrial,
institutional, residential, and bridge and highway infrastructures
markets. Mr. Marcouiller also holds directorships in other privately
held companies. Pierre Marcouiller holds a bachelor’s degree in business
administration from the Université du Québec à Trois-Rivières and
an MBA from the Université de Sherbrooke.
|
André
Tremblay is a Founder and Managing Partner of Trio Capital Inc.,
a private
equity fund management company. He has more than 20 years’ experience in
the telecommunications industry, having been actively involved
in the
conception, financing and management of several companies. As
a special
advisor to the President of Telesystem Ltd., and as President
of
Telesystem Enterprises Ltd. from 1992 to 1998, he managed a portfolio
of
telecommunication companies under control. For almost 10 years,
he served
as President and Chief Executive Officer of Microcell Telecommunications,
a wireless network and service provider, which he led from its
inception
on through the different phases of its evolution. During that
time, he has
also provided early-stage financing, along with strategic advice
and
direction, for start-up technology firms. In 2005, he was appointed
by
Canada’s Industry Minister as member of the Telecommunications Policy
Review Panel to make recommendations on how to modernize Canada’s
telecommunication policies and regulatory framework. André Tremblay holds
bachelor’s degrees in management and in accounting from Laval University,
a master’s degree in taxation from the Université de Sherbrooke,
and is also a graduate of Harvard Business School’s Advanced Management
Program.
|
|
|
Guy
Marier 1,2,3
Corporate
Director
|
Michael
Unger 1,2
Executive
Consultant
|
|
|
Guy
Marier has served as our Director since January 2004. Formerly
President
of Bell Québec between 1999 and 2003, Guy Marier completed his successful
33-year career at Bell as Executive Vice-President of the Project
Management Office of Bell, before retiring at the end of 2003.
Mr. Marier
began at Bell Canada in 1970 and quickly became an executive.
From 1988 to
1990, he headed up Bell Canada International’s investments and projects in
Saudi Arabia and, for the three following years, served as President
of
Télébec, a subsidiary of Bell Canada. He then returned to the parent
company to hold various senior management positions. Mr. Marier
was
appointed to our Board of Directors in January 2004. Mr. Marier
holds a
Bachelor of Arts from the University of Montreal and a Bachelor
of
Business Administration from the Université du Québec à
Montréal.
|
Michael
Unger had a distinguished career with Nortel Networks (1962 to
2000),
where he held a number of key executive positions in the switching
and
transmission business units over the years. Mr. Unger’s most recent
position was President of Nortel’s Optical Networks Business Unit (1998 to
2000). Prior to this appointment, he was Nortel’s Group Vice-President,
Transport Networks (1990 to 1998). Currently, Mr. Unger serves
on the
boards of directors and committees of several companies active
in the
areas of network management software, photonic and optical components,
optical network systems and solutions for cable operators, as
well as
other communications network service providers. Namely, he is
a board
member and chairs the audit committee of Nakina Systems, and
he is also
part of the board of directors and human resources committee
of Tundra
Semiconductor Corporation. Michael Unger holds a Bachelor of
Science from
Concordia University and has successfully completed several accounting
credits, also given by Concordia University in Montreal, Canada.
In
addition, Mr. Unger holds an executive MBA from the University of
Western Ontario.
|
(1)
Audit Committee
(2)
Human Resources Committee
(3)
Independent Lead Director
|
Germain
Lamonde
Chairman,
President and
Chief
Executive Officer
|
Étienne
Gagnon
Vice-President,
Telecom
Product
Management and Marketing
|
|
|
Stephen
Bull
Vice-President,
Research and Development
Telecom
Division
|
Luc
Gagnon
Vice-President,
Telecom Manufacturing
Operations
and Customer Service
|
|
|
Jon
Bradley
Vice-President,
Telecom Sales
International
|
Pierre
Plamondon, CA
Vice-President,
Finance and
Chief
Financial Officer
|
|
|
Normand
Durocher
Vice-President,
Human
Resources
|
Dana
Yearian
Vice-President,
Telecom Sales
Americas
|
|
|
Allan
Firhoj
Vice-President
and General Manager
Life
Sciences and Industrial Division
|
Benoît
Ringuette
General
Counsel and
Corporate
Secretary
|
|
|
Robert
Fitts
Vice-President,
Corporate
Development
|
Corporate
governance practices have always been a priority at EXFO. The Corporation
implemented and/or updated several corporate policies during fiscal 2005
and,
since then, the following policies and charters have been in force: the Ethics
and Business Conduct Policy; Code of Ethics for Our Principal Executive Officer
and Senior Financial Officers; Board of Directors Corporate Governance
Guidelines; Statement on Reporting Ethical Violations (“whistle-blowing”); Audit
Committee Charter; Human Resources Committee Charter; Disclosure Guidelines;
Securities Trading Policy; and Policy Regarding Hiring Employees and Former
Employees of Independent Auditor. All these policies are readily available
from
EXFO’s website, with the exception of our Disclosure Guidelines and Securities
Trading Policy.
In
addition to the above-mentioned policies, the Board of Directors and management
continued to keep abreast of new Canadian and U.S. regulatory
requirements.
The
Audit
Committee was also very active throughout the year, ensuring compliance with
the
U.S. Securities and Exchange Commission and the Canadian Securities authorities
with respect to i) disclosure controls and procedures; ii) internal control
over
financial reporting that apply to Canadian companies with shares registered
in
the U.S.
As
achieving best practices in corporate governance is an ongoing process in
an
ever-changing context, this past year, the Board of Directors also reviewed
procedures to monitor the effectiveness of the Board. The Board of Directors
believes that EXFO’s corporate governance practices do comply with current
regulatory requirements. As new guidelines come into effect, we will
continue to comply with these requirements. Further details about our corporate
governance practices, policies and guidelines are published in the Management
Proxy Circular and on EXFO’s website.
Pursuant
to the General By-Laws of the Corporation, the present Board members were
elected at our last Annual Meeting of Shareholders, held on January 10,
2007.
Responsibilities
of the Board
The
Board
is responsible for the stewardship of our business and affairs by reviewing,
discussing and approving our strategic direction and organizational structure,
as well as for the review and approval of management’s strategic plan on an
annual basis. The Board also identifies the principal risks of our business
and
reviews our risk management systems on an annual and ongoing basis.
In
addition to matters requiring Board approval under applicable laws, the Board
grants final approval with respect to each of the following: (i) the strategic
direction of EXFO; (ii) material contracts, acquisitions or dispositions
of our
assets; and (iii) the annual operational plan, as well as capital and operating
budgets.
The
Board
of Directors assumes direct responsibility for corporate governance practices
and for monitoring the powers, the mandates and the performance of the
committees.
The
Board
is also responsible for the establishment and functioning of all Board
committees, the appointment of members to serve on such committees, their
compensation and their good standing. At regularly scheduled meetings of
the
Board, the Directors receive, consider and discuss committee
reports.
During
the fiscal year ended August 31, 2007, the Board met a total of six (6) times.
Attendance was exemplary, as all members attended all meetings except for
Mr.
Marcouiller and Mr. Thompson, who were absent for
one (1) meeting.
In
January 2007, Mr. Guy Marier was designated to act as Independent Lead Director,
replacing Mr. Michael Unger, who held this position since 2002. As such,
he is
responsible for ensuring that the Board properly discharges its duties,
independent of management. The Lead Director is required to hold as many
Board
of Directors meetings as necessary without management members present, and
additional meetings of independent Board members may be held at any member's
request.
As
per
its Human Resources Committee Charter (which integrates the Compensation
Committee Charter and the Nominating and Governance Committee Charter), the
Corporation also has a formal procedure in place for recruiting new
Directors.
Composition
of the Board
Our
articles of incorporation provide for a Board of Directors with a minimum
of
three (3) and a maximum of twelve (12) Directors. Our Board presently consists
of six (6) Directors, five (5) of whom are independent of management and
free
from any interest and any business or other relationship which could, or
could
reasonably be perceived to, materially interfere with a Director’s ability to
act with a view to the best interests of EXFO, other than interests arising
from
non-significant shareholding. Our Directors are elected at the Annual General
Meeting of Shareholders for one-year terms and serve until their successors
are
elected or appointed, unless they resign or are removed earlier.
Our
Chairman of the Board and Chief Executive Officer, Mr. Germain Lamonde, is
a
majority shareholder of EXFO as he has the ability to exercise a majority
of the
votes for the election of the Board of Directors. Since the other five (5)
Board
members do not have interests in EXFO or relationships with either EXFO or
Mr.
Lamonde, except for non-significant shareholding in the company, we believe
that
the interests of investors in EXFO, other than Mr. Lamonde’s, are fairly
represented.
Committees
of the Board
Board
committees play a significant role in the discharge of Board duties and
obligations; committee chairs submit items for Board agendas and report on
committee activities. The members of these committees are appointed annually,
and the Board may appoint additional ad hoc committees periodically, as needed.
EXFO has a practice of permitting the Board, any committee thereof, and any
individual Director to hire independent, external advisors at our expense.
The
Audit Committee and the Human Resources Committee are entirely comprised
of
independent Directors.
The
following is a general description of the composition and general duties
of each
Board committee, as contained in its mandate as at fiscal year ended August
31,
2007.
Audit
Committee
The
Corporation’s Audit Committee Charter ensures full compliance with all
applicable regulations. As such, the Audit Committee reviews interim in-house
financial statements and annual audited financial statements and related
disclosure documents, including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, with management and
external auditors and approves them prior to public release. The Audit Committee
is also responsible for reviewing our internal control systems with regard
to
finance, accounting, legal compliance and ethical behavior. The Committee
meets
regularly with external auditors, with and without management, to consider
the
scope and results of their audits, including analysis of the adequacy of
the
internal controls and the effect of the procedures relating to the outside
auditors’ independence. The Committee also recommends to the shareholders the
selection of external auditors for their appointment by the shareholders.
The Audit Committee is comprised of the following independent Directors:
Mr. Pierre Marcouiller, Mr. Guy Marier, Mr. André Tremblay and Mr. Michael
Unger. The Chair of the Audit Committee is Mr. Tremblay. During the fiscal
year
ended August 31, 2007, the Audit Committee met a total of four (4) times
and
attendance was exemplary as all members attended all meetings, except for
Mr.
Marcouiller, who was absent for one (1) meeting.
Human
Resources Committee
The
Corporation’s Human Resources Committee Charter, which integrates the
Compensation Committee Charter and the Nominating and Governance Committee
Charter, ensures full compliance with all applicable regulations.
In
accordance with these charters, the Human Resources Committee is responsible
for
assessing the performance and establishing the annual compensation of all
our
senior officers, including the CEO.
This
Committee also reviews and submits to the Board the salary structure and
the
short-term and long-term incentive compensation programs for all our
employees.
The
Committee is responsible for the review and approval of the employees who
will
receive restricted share units (RSUs) and stock options to purchase EXFO
shares
in accordance with policies established by the Board and the terms of the
Long-Term Incentive Plan. In addition, the Committee reports annually to
the
Board regarding the organizational structure and succession plan for senior
management. The remuneration to be paid by EXFO to the Directors, either
in cash
or in the form of deferred share units (DSUs) pursuant to the Deferred Share
Unit Plan, is recommended to the Board by the Human Resources Committee.
The
Human Resources Committee is comprised of the following independent Directors:
Mr. Pierre Marcouiller, Mr. Guy Marier, Dr. David A. Thompson, Mr. André
Tremblay and Mr. Michael Unger. The Chair of the Human Resources Committee
is
Mr. Unger. During the fiscal year ended August 31, 2007, the Human Resources
Committee met a total of four (4) times and attendance was satisfactory,
as all
members attended all meetings except for Mr. Marcouiller, who was absent
for one
(1) meeting and Mr. Thompson who was absent for two (2) meetings.
Disclosure
Committee
The
Disclosure Committee is responsible for overseeing our disclosure practices,
as
per the Corporation’s Disclosure Guidelines, which ensure full compliance with
all applicable regulations. The Disclosure Committee consists of the Chief
Executive Officer, Chief Financial Officer, Investor Relations Manager, Manager
of Financial Reporting and Accounting, as well as General Counsel and Corporate
Secretary.
During
the year ended August 31, 2007, the Disclosure Committee ensured that the
corporate governance policies adopted by the Board of Directors were made
publicly available. This was done by posting the following documents on our
website: The Audit Committee Charter; Board of Directors Corporate Governance
Guidelines; Code of Ethics for Our Principal Executive Officer and Senior
Financial Officers; Ethics and Business Conduct Policy; Human Resources
Committee Charter; Statement on Reporting Ethical Violations; and Hiring
Employees and Former Employees of Independent Auditor. The Disclosure Committee
also ensured that a contact to the Lead Director and the General Counsel
was
made available via the Corporation’s website.
Shareholder/Investor
Communications and Feedback
The
Chief
Financial Officer assumes responsibility for investor relations. He is
responsible for facilitating communications between senior management and
EXFO’s
shareholders and financial analysts. Information to shareholders is disseminated
through annual and quarterly reports, press releases, proxy circular, the
Annual
General Shareholders’ Meeting and investor presentations. EXFO receives and
responds to all shareholders’ inquiries in an appropriate and timely manner. In
communications to senior management, the Chief Financial Officer also provides
feedback from shareholders.
Securities
Trading Policy
The
Securities Policy is one of the necessary measures to prevent trading by
persons
in possession of Material Information. The Corporation’s Securities Policy
ensures full compliance with applicable regulations.
Asymmetric
Digital Subscriber Line (ADSL): Transmission technology that consists
of modems attached to twisted-pair copper wiring that transmit from 1.5 Mbit/s
to 8 Mbit/s downstream (to the subscriber) and up to 1.5 Mbit/s upstream,
depending on line distance.
Broadband
Passive Optical Network (BPON): A type of PON technology that uses
asynchronous transfer mode (ATM) and that adds support for WDM, dynamic and
higher upstream bandwidth allocation. A typical BPON provides 622 Mbit/s
of
downstream bandwidth and 155 Mbit/s of upstream traffic. See Passive Optical
Network.
Digital
Subscriber Line (DSL): The generic term that refers to the entire
family of DSL technologies. DSL refers to digital modems placed at either
end of
a local loop. DSL bypasses the circuit-switched lines that make up that network
and yields much faster data transmission rates than analog modem
technologies.
Ethernet:
Protocol for data networking. Ethernet networks typically operate at 10,
100 or
1000 Mbit/s.
Ethernet
Passive Optical Network (EPON): A type of PON technology that runs on
the Ethernet protocol. EPON is applicable for data-centric networks, as well
as
full-service voice, data and video networks. See Passive Optical
Network.
ETSI
TR 101 290: Published by the European Telecommunications Standards
Institute, ETSI TR 101 290 is a document defining digital video broadcasting
and
related measurement guidelines.
Fiber-to-the-x
(FTTx): The x in fiber-to-the-x is a variable indicating the point at
which the fiber in a network stops and copper (coaxial or twisted-pair) cabling
takes over. The further the fiber goes, the wider the bandwidth, the quicker
the
speed, and the more applications and services can be offered.
Fiber-to-the-Home
(FTTH): Network in which the deployment of fiber runs all the way from
the central-office telephone switch to the subscriber’s premises or
home.
Fiber-to-the-Curb
(FTTC): Network in which fiber is installed typically within 1000 feet
of the premises, leaving the curb-to-building section made out of twisted-pair
copper cable.
Fiber-to-the-Node
(FTTN): Network in which fiber is used for part, but not all, of the
link from the fiber distribution hub to the end-user. An optical-to-electrical
conversion takes place at an active device called a node, which typically
serves
a neighborhood or geographically similar area. Most current cable TV and
telephony networks have FTTN architectures.
Gigabit
Passive Optical Network (GPON): A further evolution of PON technology.
The GPON is optimized to support higher data rates, greater distances and
higher
split ratios than other PON technologies, and it is particularly useful for
delay-sensitive traffic such as voice and video communications. See Passive
Optical Network.
Internet
Protocol (IP): Method or protocol by which data is sent from one
computer to another on the Internet. Each computer on the Internet has at
least
one IP address that uniquely identifies it from all other computers on the
Internet. Because of these standardized IP addresses, the gateway receiving
the
data can keep track of, recognize and route messages appropriately.
Internet
Protocol Television (IPTV): Delivers scheduled TV programs and
video-on-demand (VOD) via the IP protocol and digital streaming techniques
used
to watch video on the Internet (instead of signals being delivered through
traditional broadcast and cable formats). In order to receive and decode
the
images in real time, the user requires either an IPTV set-top box or a computer
and software-based media player.
Optical
Time-Domain Reflectometer (OTDR): Instrument for evaluating optical
fiber based on detecting and measuring backscattered (reflected) light. Used
to
measure fiber length and attenuation, evaluate splice and connector joints,
locate faults and certify cabling systems.
Nanometer-Scale
Positioning: Also known as nanopositioning. A positioning technique
used during optical component manufacturing to align components with a precision
measured in nanometers (one billionth of a meter).
Passive
Optical Network (PON): Network in which fiber-optic cabling (instead of
copper) brings signals all or most of the way to the end-user. It is described
as passive because no active equipment (electrically powered) is required
between the central office (or hub) and the customer premises. Depending
on
where the PON terminates, the system can be described as an FTTx network,
which
typically allows a point-to-point or point-to-multipoint connection from
the
central office to the subscriber’s premises; in a point-to-multipoint
architecture, a number of subscribers (for example, up to 32) can be connected
to just one of the various feeder fibers located in a fiber distribution
hub,
dramatically reducing network installation, management and maintenance
costs.
Piezoelectric
(PZT) Technology: Technology of piezoelectricity, which refers to the
electrical field created by some ceramic materials when subjected to pressure.
Precision positioning devices use the inverse effect; that is, when an electric
field is applied to a piezoelectric material, it changes shape, and this
shape
change is used to create precise mechanical movements.
Protocol:
A formal set of rules governing the format, timing, sequencing and error
control
of data exchange across a network. Many protocols may be required and used
on a
single network.
SDH:
Synchronous Digital Hierarchy. Standardized by the International
Telecommunication Union (ITU-TSS). A protocol for transmitting information
over optical fiber.
SONET:
Synchronous Optical NETwork. Standardized by the American National Standards
Institute (ANSI). A protocol for backbone networks capable of transmitting
at extremely high speeds and accommodating gigabit-level bandwidth.
Spot
Curing: Technology by which a dose of energy of a specific wavelength
band and irradiance is used to cause an adhesive, encapsulant or sealant
to
change from a liquid to a solid in a small area.
Very-High-Data-Rate
Digital Subscriber Line (VDSL): A developing technology that promises
much higher data rates over relatively short distances (up to 52 Mbit/s over
lines up to 1,000 ft or 300 m in length). It is envisioned that VDSL may
emerge
somewhat after ADSL is widely deployed and coexist with it.
Voice-over-Internet-Protocol
(VoIP): Refers to communications services— voice, facsimile and/or
voice-messaging applications—that are transported via the Internet, rather than
the public switched telephone network. In an Internet-based telephone call,
the
voice signals are converted to digital format and compressed/translated into
Internet protocol (IP) packets for transmission over the Internet; the process
is reversed at the receiving end.
The
subordinate voting shares of EXFO are listed on the Toronto Stock Exchange
under
the stock symbol “EXF” and on the NASDAQ Global Market under the stock symbol
“EXFO”.
Annual
General Meeting
The
Annual General Meeting of Shareholders of EXFO Electro-Optical Engineering
Inc.
will be held on January 9, 2008, 10 a.m., at the TSX Broadcast &
Conference Centre, The Exchange Tower (Gallery Room), 130 King Street West,
Toronto, Ontario.
Transfer
Agents and Registrars
|
Canada
CIBC
Mellon Trust Company
320
Bay Street
Banking
Hall
Toronto,
Ontario M5H 4A6
Tel.:
(416) 643-5000
|
United
States
Mellon
Investor Services, LLC
Newport
Office Center, 27th Floor
480
Washington Boulevard
Jersey
City, New Jersey 07310
Tel.:
(201) 680-6578
|
|
|
Independent
Auditors
PricewaterhouseCoopers
LLP
Place
de la Cité, Tour Cominar
2640
Laurier Boulevard, Suite 1700
Quebec
City, Quebec G1V 5C2
Tel.:
(418) 522-7001
|
||
|
Contact
Information
|
||
|
General
Access
EXFO
Electro-Optical Engineering Inc.
400
Godin Avenue
Quebec
City, Quebec G1M 2K2
Tel.:
(418) 683-0211
E-mail:
ir@EXFO.com
www.EXFO.com
|
Investor
Relations
Vance
Oliver
Manager,
Investor Relations
Tel.:
(418) 683-0913, Ext. 3733
E-mail:
vance.oliver@EXFO.com
|
The
Annual Report is available in English and in French, both in print and on
our
website at www.EXFO.com.
We
will
provide to any person or company, upon request to the Secretary of the
Corporation, at 400 Godin Avenue, Quebec City, Quebec, Canada, G1M 2K2, phone
number (418) 683-0913, ext. 3704 or fax number (418) 683-9839, a copy of
the
notice sent to the Toronto Stock Exchange (TSX) according to our normal course
issuer bid.
Stock
Performance for Fiscal 2007
Notes
|
EXFO
Corporate Headquarters
400
Godin Avenue
Quebec
City (Quebec) G1M 2K2 CANADA
Tel.:
1 800 663-3936 (USA and Canada) or 1 418 683-0211
Fax:
1 418 683-2170
|
EXFO
Asia-Pacific
151
Chin Swee Road, #03-29
Manhattan
House SINGAPORE 169876
Tel.:
+65 6333 8241
Fax:
+65 6333 8242
|
|
|
•
Transport and Datacom Business Unit
2650
Marie-Curie Avenue West
St-Laurent
(Quebec) H4S 2C3 CANADA
Tel.:
1 888 972-7666 (USA and Canada) or 1 514 856-2222
Fax:
1 514 856-2232
|
EXFO
China
•
Manufacturing Facilities
Hua
Chuang Da Industrial Park
Building
D, 2/F, Hangcheng Blvd,
Gushu,
Xixiang, Shenzhen 51126 CHINA
|
|
|
• Access
Business Unit
160
Drumlin Circle
Concord
(Ontario) L4K 3E5 CANADA
Tel:
1 905 738-3741
Fax:
1 905 738-3712
|
•
Sales Office—Shenzhen
No.
88 Fuhua First Road
Central
Tower, Room 801
Futian
District
Shenzhen
518048, P. R. CHINA
Tel.:
+86 (755) 8203 2300
Fax:
+86 (755) 8203 2306
|
|
|
EXFO
Photonic Solutions Inc.
2260
Argentia Road
Mississauga
(Ontario) L5N 6H7 CANADA
Tel.:
1 905 821-2600
Fax:
1 905 821-2055
|
•
Sales Office—Beijing
Beijing
New Century Hotel Office Tower
Room
1754-1755
No.
6 Southern Capital Gym Road
Beijing
100044 P. R. CHINA
Tel.:
+86 (10) 6849 2738
Fax:
+86 (10) 6849 2662
|
|
|
EXFO
America
3701
Plano Parkway, Suite 160
Plano,
TX 75075 USA
Tel.:
1 800 663-3936 or 1 972 907-1505
Fax:
1 972 836-0164
|
EXFO
Japan
4-6-3-202
Akasaka, Minato-ku
Tokyo
107-0052, JAPAN
Tel.:
+81-3-5562-5344
Fax:
+81-3-5562-5777
|
|
|
EXFO
Europe
Omega
Enterprise Park, Electron Way
Chandlers
Ford, Hampshire S053 4SE ENGLAND
Tel.:
+44 2380 246810
Fax:
+44 2380 246801
|
||
|
EXFO
India
113/1
Lane 4A
Koregaon
Park
Pune
411 001 INDIA
Tel.:
+91 20 4018 6615
Fax:
+91 20 2605 5020
|
|
EXFO
|
|
|
www.EXFO.com
|
EXPERTISE
REACHING OUT
|
|
©
2007 EXFO Electro-Optical Engineering Inc.
All
rights reserved. Printed in Canada.
|
Quebec
City, Canada, November 1, 2007
RE:
Annual General Meeting of Shareholders
Dear
Shareholder:
Fiscal
2007 proved to be another good year with market-share gains for a 22nd consecutive
reporting period, while being recognized with a fourth consecutive Growth
Strategy Leadership Award from Frost & Sullivan for gains in optical
testing. We delivered sales growth of 19.2% for record sales of
US$152.9 million in 2007, largely due to strong performances from our
optical and protocol businesses and significant inroads into the Americas
as
well as Europe, Middle East, and Africa (EMEA) markets.
I
am also
quite pleased with our long-term profitability results, especially with how
we
coped with a 32.1% increase in the Canadian dollar in the last five fiscal
years—certainly a major headwind. During that five-year period, our earnings
growth exceeded sales growth each and every year and our gross margin improved
annually as well. In 2007, more specifically, we increased our net earnings
78.8% year-over-year even if tax-related items are excluded.
Fiscal
2007 was a defining year on many levels for EXFO, as demonstrated by the
following performance highlights:
Performance
Highlights
|
·
|
Increased
sales 19.2% to a record high of US$152.9
million
|
|
·
|
Delivered
sales growth of 20.9% and 10.6% for our Telecom and Life Sciences
&
Industrial Divisions, respectively
|
|
·
|
Grew
optical sales 19.9% and earned a fourth consecutive Growth Strategy
Leadership Award from Frost & Sullivan for largest market-share gains
in optical testing
|
|
·
|
Bolstered
protocol sales 48.2% to an all-time high of US$17.1
million
|
|
·
|
Posted
a sales CAGR of 20.1% over the last 10
years
|
|
·
|
Improved
GAAP net earnings to US$42.3 million* compared to US$8.1 million
in
2006
|
|
·
|
Achieved
11.0% in GAAP earnings from operations (or 8.2% excluding a one-time
R&D tax credit of US$3.2 million and a government grant recovery
of
US$1.1 million) vs. 6.3% in 2006
|
|
·
|
Generated
a record high of US$14.4 million in cash flows from operating
activities
|
|
·
|
Derived
33.7% of sales from new products (on the market two years or
less)
|
*
It
should be noted that we recognized US$24.6 million in previously unrecognized
future income tax assets and US$3.2 million in R&D tax credits in the fourth
quarter of fiscal 2007. These tax-related items increased our GAAP net earnings
in 2007. Excluding these unusual items, we still would have improved our
net
earnings by 78.8% year-over-year.
Fiscal
2008 Corporate Objectives
Against
this backdrop, I am pleased to provide the following performance metrics
for
fiscal 2008. These are goals established by the Board of Directors for our
management team and should not be misinterpreted as guidance.
|
·
|
Grow
revenues by 20% year-over-year
|
|
·
|
Generate
8% in GAAP earnings from operations
|
|
·
|
Derive
30% of sales from new products (on the market two years or
less)
|
I
will
discuss these objectives in greater detail at our upcoming Annual General
Meeting of Shareholders. Please consider this letter as a formal invitation
to
attend our Meeting, which will be held on January 9, 2008, 10 a.m., at
the TSX Broadcast & Conference Centre, The Exchange Tower (Gallery Room),
130 King Street West, Toronto, Ontario.
Details
of the business to be conducted at the Meeting are provided in the attached
Management Proxy Circular and Notice of Annual General Meeting of
Shareholders.
It
is
important that your shares be represented at the Meeting. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY
RETURN
THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
If
you
send in your proxy card and then decide to attend the Meeting to vote your
shares in person, you may still do so. Your proxy is revocable in accordance
with the procedures set forth in the Management Proxy Circular.
On
behalf
of the Board of Directors, I would like to express our appreciation for your
continued interest in EXFO. We look forward to seeing you at the
Meeting.
Sincerely,
/s/
Germain Lamonde
Germain
Lamonde
Chairman,
President and
Chief
Executive Officer
EXFO
Electro-Optical Engineering Inc.
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
_________________________
NOTICE
OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
NOTICE
IS HEREBY GIVEN that the Annual General Meeting (the "Meeting") of
shareholders of EXFO Electro-Optical Engineering Inc. (the "Corporation")
will
be held at 10:00 a.m. (Eastern Standard Time), on Wednesday, January 9, 2008,
at
the Toronto Stock Exchange Broadcast & Conference Centre, The Exchange Tower
(Gallery Room), 130 King Street West, Toronto, Ontario, Canada for the following
purposes:
|
1.
|
to
receive the consolidated financial statements of the Corporation
for the
financial year ended August 31, 2007, and the Auditor’s report
thereon;
|
|
2.
|
to
elect Directors of the Corporation;
|
|
3.
|
to
appoint PricewaterhouseCoopers LLP as auditors and to authorize
the Audit
Committee to fix their
remuneration;
|
|
4.
|
to
transact such further or other business as may properly come before
the
Meeting or any adjournment or adjournments
thereof.
|
Enclosed
is a copy of the 2007 Annual Report of the Corporation including the
consolidated financial statements and the Auditor’s Report thereon, together
with the Management Proxy Circular and a form of Proxy.
DATED
at
Quebec, Province of Quebec, this 1st day of
November,
2007.
BY
ORDER OF THE BOARD OF DIRECTORS
/s/ Benoit Ringuette
Benoit
Ringuette
Secretary
Shareholders
unable to attend the Meeting are requested to complete the enclosed proxy
form
and return it in the envelope provided. To be valid, proxies must reach the
office of CIBC Mellon Trust Company, no later than the last day prior to
the
date of the Meeting or any reconvening of the Meeting in case of adjournment.
Shareholders may also have the proxy form delivered to the Chairman of the
Meeting prior to the time of voting on the day of the Meeting or any adjournment
thereof.
MANAGEMENT
PROXY CIRCULAR OF THE CORPORATION
FOR
THE
ANNUAL GENERAL MEETING OF SHAREHOLDERS
THIS
PROXY IS SOLICITED BY THE MANAGEMENT OF THE CORPORATION
The
undersigned shareholder of EXFO ELECTRO-OPTICAL ENGINEERING INC. hereby appoints
(CHECK EITHER (A) or (B)):
|
o (A)
|
Mr.
Germain Lamonde of St-Augustin-de-Desmaures, Quebec, or failing
him, Mr.
Pierre Plamondon of Quebec, Quebec;
|
o (B) ___________________________________________
of ______________________________________________;
(Name) (Address)
as
the
representative of the undersigned to attend, act and vote on behalf of the
undersigned at the Annual General Meeting of the shareholders (the
"Meeting") of the Corporation to be held at the Toronto Stock Exchange Broadcast
& Conference Centre, The Exchange Tower (Gallery Room), 130 King Street
West, Toronto, Ontario, Canada, on January 9, 2008, at 10:00 o’clock a.m.
(Eastern Standard Time) and at any adjournments of such
meeting.
The
undersigned wishes that all shares represented by this proxy be voted in
accordance with the instructions hereinbelow. All shares represented by this
proxy will be voted for or be the subject of abstentions, as specified by
the
shareholder. However, in the absence of instructions, the shares represented
by
proxy will be voted in favor of each of the proposals set forth
herein.
|
|
(MARK
WITH AN X)
|
|
To
elect Germain Lamonde, Pierre Marcouiller, Guy Marier, David A.
Thompson,
André Tremblay and Michael Unger, whose cities of residence are indicated
in the Management Proxy Circular, as Directors of the
Corporation.
|
FOR
ABSTENTION
|
o
o
|
|
To
appoint PricewaterhouseCoopers LLP as auditors and to authorize
the Audit
Committee to fix their remuneration.
|
FOR
ABSTENTION
|
o
o
|
A
DISCRETIONARY POWER IS HEREBY CONFERRED as to any amendment or change made
to
the matters mentioned in the Notice of Meeting or as to such other matters
as
may legally come before the Meeting. The Management of the Corporation is
not
aware of any amendments, changes or other matters that may come before the
Meeting.
|
*
A shareholder is entitled to appoint, to attend and act for and
on behalf
of such shareholder at the Meeting, a person other than the person
mentioned in (A) herein above and may do so by checking (B) hereinabove
and adding the name of such other person in the space reserved
for such
purpose.
|
DATED
this day
of
__________________________________________
SIGNATURE
OF SHAREHOLDER
[ ]
name
of shareholder
[ ]
|
This
proxy must be signed by the shareholder or his proxyholder authorized in
writing
or, if the shareholder is a corporation, under its corporate seal, by a duly
authorized officer or proxyholder of the corporation. Please remember to
date
and sign this proxy. If this proxy is not dated, it will be deemed to bear
the
date of its mailing by Management.
YOU
ARE REFERRED TO THE MANAGEMENT PROXY CIRCULAR APPENDED.
Français
au verso
NOTICE
OF
ANNUAL GENERAL
MEETING
OF SHAREHOLDERS
And
MANAGEMENT
PROXY CIRCULAR
November
1, 2007
EXFO
Electro-Optical Engineering Inc.
MANAGEMENT
PROXY CIRCULAR
SOLICITATION
OF PROXIES
This
Management Proxy Circular is provided in connection with the solicitation
by the
Management of EXFO Electro-Optical Engineering Inc. (the "Corporation"
or
"EXFO") of proxies to be used at the Annual Meeting of Shareholders (the
"Meeting") of the Corporation to be held at the time and place and for
the
purposes stated in the accompanying Notice of Meeting and at any adjournment
thereof. Unless otherwise indicated, the information contained herein is
given
as of November 1, 2007.
It
is
expected that the solicitation will be made primarily by mail but proxies
may
also be solicited personally by officers, employees or agents of the
Corporation. The Corporation may also reimburse brokers and other persons
holding shares in their names or in the names of nominees, for their costs
incurred in sending proxy material to principals and obtaining their proxies.
The cost of solicitation will be borne by the Corporation and is expected
to be
nominal.
APPOINTMENT
AND REVOCATION OF PROXIES AND ATTENDANCE OF BENEFICIAL
SHAREHOLDERS
The
persons named in the enclosed Form of Proxy (the "Form of Proxy") are officers
of the Corporation. A shareholder
desiring to appoint some other person (who need not be a shareholder) to
represent him or her at the Meeting may do so by inserting such person’s name in
the blank space provided in the Form of Proxy and checking item
(B).
To
be
valid, proxies must be received at the Montreal, Canada office of CIBC
Mellon
Trust Company, 2001 University Street, Suite 1600, Montreal, Quebec,
Canada, H3A 2A6, the transfer agent of the Corporation, no later than the
close of business on the last business day preceding the day of the Meeting
or
any adjournment thereof, or proxies may be delivered to the Chairman of
the
Meeting on the day of the Meeting or any adjournment thereof. A beneficial
shareholder who completes a Form of Proxy and who wishes to attend and
vote at
the Meeting personally must appoint himself or herself proxy holder in
the
foregoing manner.
A
proxy
given pursuant to this solicitation may be revoked by instrument in writing
executed by the shareholder or by his or her attorney authorized in writing
if
such instrument is deposited either at the registered office of the Corporation
to the attention of the Secretary no later than the close of business on
the
last business day preceding the day of the Meeting or any adjournment thereof
or
with the Chairman of the Meeting on the day of the Meeting or any adjournment
thereof.
VOTING
OF PROXIES
The
shares represented by proxies appointing the persons, or any one of them,
designated by Management thereon to represent the shareholder at the Meeting
will be voted in accordance with the instructions given by the shareholder.
Unless otherwise indicated, the voting rights attaching to the
shares
represented by a Form of Proxy will be voted “FOR” in respect of all the
proposals described herein.
The
Form
of Proxy confers discretionary authority upon the persons named therein
with
respect to amendments or variations to matters identified in the accompanying
Notice of Meeting. As at the date hereof, Management is not aware that
any other
matter is to be presented at the Meeting. If, however, other matters properly
come before the Meeting, the persons designated in the Form of Proxy will
vote
thereon in accordance with their judgment pursuant to the discretionary
authority conferred by such proxy with respect to such matters.
VOTING
SHARES AND PRINCIPAL HOLDERS THEREOF
As
at
November 1, 2007, 32,361,561 Subordinate Voting Shares and 36,643,000 Multiple
Voting Shares were outstanding, being the only classes of shares entitled
to be
voted at the Meeting. Each holder of Subordinate Voting Shares is entitled
to
one vote and the holder of Multiple Voting Shares is entitled to 10 votes
for
each share registered in his or her name at the close of business on November
12, 2007, being the date fixed by the Board of Directors for the purpose
of
determining registered shareholders entitled to receive the accompanying
Notice
of Meeting and to vote (the “Record Date”). A list of shareholders
entitled to vote as of the Record Date, showing the number of shares held
by
each shareholder, shall be prepared within 10 days of the Record Date.
This list
of shareholders will be available for inspection during normal business
hours at
the Montreal, Canada office of CIBC Mellon Trust Company, the transfer
agent of
the Corporation, 2001 University Street, Suite 1600, Montreal, Quebec,
Canada,
H3A 2A6, and at the Meeting.
Unless
otherwise indicated, the resolutions submitted to a vote at the Meeting
must be
passed by a majority of the votes cast by the holders of Subordinate Voting
Shares and Multiple Voting Shares, as a single class, present at the Meeting
in
person or by proxy and voting in respect of all resolutions to be voted
on by
the shareholders of the Corporation.
To
the
knowledge of executive officers and directors of the Corporation, as of
November
1, 2007, the only persons who are beneficial owners or who exercise control
or
direction, directly or indirectly, over shares carrying more than 10% of
the
voting rights attaching to any class of shares of the Corporation
are:
|
Name
of Shareholder
|
Number
of Subordinate Voting Shares
|
Percentage
of Voting Rights Attached to All Subordinate Voting
Shares
|
Number
of Multiple Voting Shares (1)
|
Percentage
of Voting Rights Attached to All Multiple Voting
Shares
|
Percentage
of Voting Rights Attached to All Subordinate and Multiple Voting
Shares
|
|
Germain
Lamonde
|
−
|
−
|
36,643,000
(2)
|
100%
|
91,89%
|
|
Pyramis
Global Advisors, LLC
|
3,581,400
(3)
|
11,07%
|
-
|
-
|
0,90%
|
|
(1)
|
The
holder of Multiple Voting Shares is entitled to 10 votes for
each
share.
|
|
(2)
|
Mr.
Lamonde exercises control over this number of Multiple Voting
Shares
through G. Lamonde Investissements Financiers inc., a company
controlled by Mr. Lamonde and through Fiducie Germain Lamonde, a
family trust for the benefit of Mr. Lamonde’s
family.
|
|
(3)
|
As
of June 30, 2007, Pyramis Global Advisors, LLC, an indirect wholly-owned
subsidiary of FMR Corporation (Fidelity Management and Research
Company),
is the beneficial owner of this number of subordinate voting
shares as a
result of acting as investment advisor to various investment
companies.
|
ELECTRONIC
DELIVERY
The
Corporation has a voluntary program for e-mail notification to our shareholders
that documents which must be delivered pursuant to securities legislation
are
available on EXFO’s website. Every year, EXFO delivers documentation
to shareholders, such as this Management Proxy Circular and its Annual
Report
that must be delivered to shareholders of a public company by
law. EXFO has made this process more convenient for its shareholders,
as shareholders who so wish, may be notified by e-mail when the Corporation’s
documentation is posted in the "Investors" section on its website
(www.EXFO.com). Accordingly such documentation will not be sent in
paper form by mail. The Corporation believes that electronic delivery
will benefit the environment and reduce its costs. Shareholders who
do not consent to receive documentation by e-mail will continue to receive
such
documentation by mail.
Registered
shareholders can consent to electronic delivery by completing and returning
the
consent form accompanying this Circular to CIBC Mellon Trust
Company. Unregistered shareholders (i.e. shares are held through
a securities broker, bank, trust company or other nominee) can consent
to
electronic delivery by completing and returning the appropriate form received
from the applicable intermediary.
BUSINESS
TO BE TRANSACTED AT THE MEETING
Presentation of the Financial Statements
The
consolidated financial statements of the Corporation for the financial
year
ended August 31, 2007 and the Auditors’ report thereon contained in
EXFO’s Annual Report accompanying this Circular will be submitted to
shareholders at the Meeting but no vote with respect thereto is required
or
proposed to be taken.
Election
of the Directors
According
to the articles of the Corporation, the Board of Directors shall consist
of a
minimum of three (3) and a maximum of twelve (12) directors. At the
Meeting, Management proposes the six (6) persons named hereafter on pages
3 and
4 as nominees for election as directors to hold office until the next annual
meeting or until the office is otherwise vacated in accordance with the
Corporation’s by-laws.
Management
does not anticipate that any of the nominees will be unable, or for any
reason
whatsoever, be reluctant to fulfill their duties as directors. Should this
occur
for any reason whatsoever before the election, the persons named in the
Form of
Proxy reserve the right to vote for another nominee of their choice unless
the
shareholder specified on the Form of Proxy to abstain from voting for the
election of the directors. The election of the directors must be approved
by a majority of the votes cast on the matter at the Meeting.
Appointment
and Remuneration of Auditors
A
firm of
auditors is to be appointed by vote of the shareholders at the Meeting
to serve
as auditors of the Corporation until the close of the next annual
meeting. The Audit Committee is to be authorized to fix the
remuneration of the auditors so appointed. The Board of Directors and
Management, upon the advice of the Audit Committee, recommend that
PricewaterhouseCoopers LLP be re-appointed as Auditors of the
Corporation. The re-appointment of PricewaterhouseCoopers LLP must be
approved by a majority of the votes cast on the matter at the
Meeting.
NOMINEES
FOR ELECTION AS DIRECTORS AND THEIR BENEFICIAL OWNERSHIP OF VOTING
SECURITIES
The
following table and notes set out the name of each of the individuals whom
is
proposed to be nominated at the Meeting for election as a director of the
Corporation, all other positions and offices with the Corporation now held
by
each such individual, if any, the principal occupation or employment of
each
such individual, their respective period of service as a director and the
approximate number of shares of the Corporation beneficially owned by each
such
individual or over which each of them exercised control or
direction.
|
Name
and Position or Office
with
the Corporation
|
Principal
Occupation or Employment
|
Residence
|
Director
Since
|
Number
of Subordinate Voting Shares
|
Number
of Multiple Voting Shares
|
|
Germain
Lamonde
Chairman
of the Board, President and Chief Executive Officer
|
Chairman
of the Board, President and Chief Executive Officer, EXFO Electro-Optical
Engineering Inc.
|
St-Augustin-de-Desmaures,
Quebec,
Canada
|
September
1985
|
−
|
36,643,000
(1)
|
|
Pierre
Marcouiller (2)
(3)
Independent
Director
|
Chairman
of the Board and Chief Executive Officer,
Camoplast
Inc. (4)
|
Magog,
Quebec,
Canada
|
May
2000
|
5,000
|
−
|
|
Guy
Marier (2)
(3)
Independent
Lead Director
|
Executive
Consultant
|
Lakefield
Gore, Quebec,
Canada
|
January
2004
|
1,000
|
−
|
|
Name
and Position or Office
with
the Corporation
|
Principal
Occupation or Employment
|
Residence
|
Director
Since
|
Number
of Subordinate Voting Shares
|
Number
of Multiple Voting Shares
|
|
André
Tremblay (2)
(3)
Independent
Director
|
Founder
and Managing Partner, Trio Capital Inc., a private equity
fund
|
Outremont,
Quebec,
Canada
|
May
2000
|
6,650
(5)
|
−
|
|
Dr.
David A. Thompson, Ph.D.(3)
Independent
Director
|
Vice-President &
Director, Hardware & Equipment Technology, Corning Cable
Systems (6)
|
Newton,
North
Carolina,
USA
|
June
2000
|
2,100
|
−
|
|
Michael
Unger (2)
(3)
Independent
Director
|
Executive
Consultant
|
Richmond
Hill, Ontario,
Canada
|
May
2000
|
−
|
−
|
|
(1)
|
Mr.
Lamonde exercises control over this number of Multiple Voting
Shares
through G. Lamonde Investissements Financiers inc., a company
controlled by Mr. Lamonde and through Fiducie Germain Lamonde, a
family trust for the benefit of Mr. Lamonde’s
family.
|
|
(2)
|
Member
of the Audit Committee.
|
|
(3)
|
Member
of the Human Resources Committee.
|
|
(4)
|
Camoplast
Inc. designs, develops and manufactures specialized components,
sub-systems and assemblies for the world leading original equipment
manufacturers (OEMs) of both on- and off-road vehicles in a
variety of
markets including automotive, agricultural, construction and
industrial,
defense and powersports.
|
|
(5)
|
Mr.
Tremblay exercises control over this number of Subordinate
Voting Shares
through 9104-5559 Quebec inc. a company controlled by Mr.
Tremblay.
|
|
(6)
|
Corning
Incorporated is a diversified technology company that concentrates
its
efforts on high-impact growth opportunities. Corning combines
its
expertise in specialty glass, ceramic materials, polymers and
the
manipulation of the properties of light, with strong process
and
manufacturing capabilities to develop, engineer and commercialize
significant innovative products for the telecommunications,
flat panel
display, environmental, semiconductor, and life sciences
industries.
|
The
information as to Subordinate Voting Shares and Multiple Voting Shares
beneficially owned or over which the above-named individuals exercise control
or
direction is not within the direct knowledge of the Corporation and has
been
furnished by the respective individual.
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation
of Directors
In
the
financial year ended August 31, 2007, each director who are not employees
of the
Corporation or any of its subsidiaries received the level of compensation
set
forth in the table below as annual compensation payable in a combination of
cash and Deferred Share Units (“DSUs”) as chosen by the director pursuant to the
Deferred Share Unit Plan.
|
Annual
Retainer for Directors (1)
|
CA$50,000
|
(2)
|
US$44,583
(3)
|
|
Annual
Retainer for Lead Director
|
CA$5,000
|
US$4,458
(3)
|
|
|
Annual
Retainer for Committee Chairman
|
CA$5,000
|
US$4,458
(3)
|
|
|
Annual
Retainer for Committee Members
|
CA$3,000
|
US$2,675
(3)
|
|
|
Fees
for all Meetings Attended per day in Person
|
CA$1,000
|
US$892
(3)
|
|
|
Fees
for all Meetings Attended per day by Telephone
|
CA$500
|
US$446
(3)
|
|
(1)
|
All
the Directors elected to receive 50% of their Annual Retainer
in form of
Deferred Share Units except Mr. André Tremblay who elected to receive 100%
of his Annual Retainer in form of Deferred Share
Units.
|
|
(2)
|
The
Annual Retainer for Mr. David A. Thompson is US$50,000
(CA$56,075).
|
|
(3)
|
The
compensation information has been converted from Canadian dollars
to U.S.
dollars based upon an average foreign exchange rate of CA$1.1215
= US$1.00
for 2007.
|
In
the
financial year ended August 31, 2007 and as of November 1, 2007, the Directors
who are not employees received the following compensation in the form
indicated:
|
Name
|
Annual
Compensation Paid in Cash (US$) (1)
|
Annual
Compensation Paid in DSUs (#) (2)
|
Estimated
Value of DSUs at the time of grant (US$) (3)
|
Total
Attendance Fees Paid in Cash (US$) (1)
|
|
Pierre
Marcouiller (4)
|
27,642
|
3,586
|
22,292
|
4,012
|
|
Guy
Marier (5)
|
30,490
|
3,586
|
22,292
|
4,904
|
|
Dr.
David A. Thompson (6)
|
27,675
|
3,975
|
25,000
|
4,283
|
|
André
Tremblay (7)
|
7,133
|
7,172
|
44,583
|
5,796
|
|
Michael
Unger (8)
|
29,425
|
8,586(9)
|
53,544
|
5,796
|
|
(1)
|
The
compensation information has been converted from Canadian dollars
to U.S.
dollars based upon an average foreign exchange rate of CA$1.1215
= US$1.00
for 2007 except for Mr. David A. Thompson who is paid in U.S.
dollar for
the portion of his annual retainer for Director. The Annual
Compensation includes, as the case may be, the retainer for Director,
Lead
Director, Committee Members and Committee
Chairman.
|
|
(2)
|
Indicates
the number of Subordinate Voting Shares granted under the Deferred
Share
Unit Plan. A DSU is converted in a Subordinate Voting Share when a
Director ceases to be a member of the
Board.
|
|
(3)
|
The
estimated value at the time of grant of a DSU is determined based
on the
highest of the closing prices of the Subordinate Voting Shares
on the
Toronto Stock Exchange and the NASDAQ National Market on the
last trading
day preceding the grant date, using the noon buying rate of the
Federal
Reserve Bank of New York on the grant date to convert the NASDAQ
National
Market closing price to Canadian dollars, as required. The value
at
vesting of a DSU is equivalent to the market value of a Subordinate
Voting
Share when a DSU is converted to such Subordinate Voting
Share.
|
|
(4)
|
Member
of the Audit Committee and the Human Resources
Committee.
|
|
(5)
|
Member
of the Audit Committee and the Human Resources Committee and
Lead
Director.
|
|
(6)
|
Member
of the Human Resources Committee.
|
|
(7)
|
Member
of the Human Resources Committee and Chairman of the Audit
Committee.
|
|
(8)
|
Member
of the Audit Committee and Chairman of the Human Resources
Committee.
|
|
(9)
|
Mr.
Unger received 5,000 DSUs in the financial year ended August
31, 2007 for
his past contribution as Lead
Director.
|
Compensation of Named Executive Officers
The
table
below shows compensation information during the three most recently completed
financial years for Mr. Germain Lamonde, the Chairman of the Board,
President and Chief Executive Officer of the Corporation, Mr. Pierre
Plamondon, the Vice-President Finance and Chief Financial Officer and the
three
other most highly compensated executive officers of the Corporation and its
subsidiaries who were serving the Corporation at the end of the financial
year,
and one other executive officer of the Corporation who would have been included
within the three most highly compensated executive officers had he been in
the
employ of the Corporation, or a subsidiary, at the year end (collectively,
the
"Named Executive Officers"). This information includes the U.S. dollar value
of
base salaries, bonus awards and long-term incentive plan grants, the number
of
options or Restricted Share Units granted, and other compensation, if any,
whether paid or deferred.
|
Name
and Principal
Position
|
Financial
Years
|
Salary
(1)
($)
|
Bonus
(2) ($)
|
Other
Annual Compensation ($) (3)
|
Securities
Under Options (4)
(#)
|
Restricted
Share Units (5) (#)
|
All
Other
Compensation
($)
|
|
Germain
Lamonde,
President
and Chief Executive Officer
|
2007
|
294,334 (US)
330,096 (CA)
|
131,145 (US)
147,080 (CA)
|
-
|
-
|
25,347
|
-
|
|
2006
|
271,753 (US)
312,000 (CA)
|
147,558 (US)
169,412 (CA)
|
-
|
11,218
|
21,477
|
-
|
|
|
2005
|
243,605 (US)
300,000 (CA)
|
121,729 (US)
149,909 (CA)
|
-
|
17,942
|
13,089
|
-
|
|
|
Pierre
Plamondon,
Vice-President
Finance and Chief Financial Officer
|
2007
|
173,862 (US)
194,986 (CA)
|
56,906 (US)
63,820 (CA)
|
-
|
-
|
12,930
|
4,836 (US) (6)
5,423 (CA)
|
|
2006
|
165,691 (US)
190,230 (CA)
|
60,167 (US)
69,078 (CA)
|
-
|
3,653
|
6,994
|
4,283 (US) (6)
4,918 (CA)
|
|
|
2005
|
151,441 (US)
186,500 (CA)
|
48,735 (US)
60,017 (CA)
|
-
|
5,383
|
33,927
|
2,316 (US) (6)
2,852 (CA)
|
|
Name
and Principal
Position
|
Financial
Years
|
Salary
(1)
($)
|
Bonus
(2) ($)
|
Other
Annual Compensation ($) (3)
|
Securities
Under Options (4)
(#)
|
Restricted
Share Units (5) (#)
|
All
Other
Compensation
($)
|
|
Dana
Yearian,
Vice-President,
Telecom Sales - Americas
|
2007
|
250,592 (US)
281,039 (CA)
|
8,326 (US)
9,338 (CA)
|
-
|
-
|
6,645
|
566 (US) (6)
634 (CA)
|
|
2006
|
7,851 (US) (7)
9,014 (CA)
|
-
-
|
-
|
-
|
5,000
|
236 (US) (6)
270 (CA)
|
|
|
2005
|
-
-
|
-
-
|
-
|
-
|
-
|
-
|
|
|
Jon
Bradley,
Vice-President,
Telecom Sales - International
|
2007
|
226,991 (US)
254,571 (CA)
116,011 (£) (8)
|
19,470 (US)
21,836 (CA)
9,951 (£)
|
-
|
-
|
-
|
-
|
|
2006
|
194,908 (US)
223,774 (CA)
108,778
(£)
|
12,684 (US)
14,563 (CA)
7,079 (£)
|
-
|
-
|
2,500
|
-
|
|
|
2005
|
129,726 (US)
159,758 (CA)
70,258 (£)
|
13,400 (US)
16,502 (CA)
7,257 (£)
|
-
|
4,000
|
2,000
|
-
|
|
|
Allan
Firhoj,
Vice-President
and General Manager, Life Sciences and Industrial Division
|
2007
|
148,373 (US) (9)
166,400 (CA)
|
58,969 (US)
66,133 (CA)
|
-
|
-
|
21,178
|
-
|
|
2006
|
139,361 (US)
160,000 (CA)
|
40,632 (US)
46,650 (CA)
|
-
|
2,404
|
4,602
|
-
|
|
|
2005
|
123,153 (US)
151,663 (CA)
|
18,355 (US)
22,604 (CA)
|
-
|
2,512
|
12,443
|
-
|
|
Named
Executive Officer Not in the Employ of the Corporation at Year
End
|
|
Juan-Felipe
Gonzalez,
Vice-President,
Telecom Sales - International
|
2007
|
195,508 (US) (10)
219,262 (CA)
|
9,237 (US)
10,359 (CA)
|
-
|
-
|
-
|
-
|
|
2006
|
272,518 (US)
312,878 (CA)
|
12,891 (US)
14,800 (CA)
|
-
|
3,505
|
6,716
|
-
|
|
|
2005
|
246,323 (US)
303,347 (CA)
|
6,015 (US)
7,407 (CA)
|
-
|
5,482
|
33,998
|
-
|
|
(1)
|
The
compensation information for Canadian residents has been converted
from
Canadian dollars to U.S. dollars based upon an average foreign
exchange
rate of CA$1.1215 = US$1.00 for 2007, CA$1.1481 = US$1.00 for
2006 and
CA$1.2315 = US$1.00 for 2005. The currency conversions cause
these
reported salaries to fluctuate from year-to-year because of
the
fluctuation in exchange rate.
|
|
(2)
|
A
portion of the bonus amounts is paid in cash in the year for
which they
are awarded and the balance is paid in cash in the year following
the
financial year for which they are
awarded.
|
|
(3)
|
Indicates
only an aggregate amount if such amount is equivalent or greater
than
$50,000 and 10% of the total of the annual salary and bonus
of the Named
Executive Officer for the financial year ended August 31,
2007.
|
|
(4)
|
Indicates
the number of Subordinate Voting Shares underlying the options
granted
under the Long-Term Incentive Plan during the financial year
indicated.
|
|
(5)
|
Indicates
the number of Restricted Share Units granted under the Long-Term
Incentive
Plan during the financial year
indicated.
|
|
(6)
|
Indicates
the amount contributed by the Corporation during the financial
year
indicated to the Deferred Profit Sharing Plan or 401K Plan,
as applicable,
for the benefit of the Named Executive Officer. Mr. Lamonde
is not
eligible to participate in the Deferred Profit Sharing Plan
and
Mr. Gonzalez did not
participate.
|
|
(7)
|
This
amount represents the salary paid to Mr. Yearian from August
14, 2006
until August 31, 2006 which is based on an annual salary amounted
to
US$173,424 (CA$199,109) for the financial year ended August
31,
2006.
|
|
(8)
|
The
compensation information for UK resident has been converted
from British
Pound to U.S. dollars based upon an average foreign exchange
rate of
£1.9566 = US$1.00 for 2007, £1.7918 = US$1.00 for 2006 and £1.8464 =
US$1.00 for 2005, for the conversion from U.S. dollars to Canadian
dollars, please refer to note 1 above. The currency conversions
cause
these reported salaries to fluctuate from year-to-year because
of the
fluctuation in exchange rate.
|
|
(9)
|
Mr.
Firhoj also received an amount of US$690 (CA$615) for untaken
vacations
during the financial year ended August 31,
2007.
|
|
(10)
|
This
amount represents the salary paid to Mr. Gonzalez from September
1st,
2006 until
March 1st,
2007 which
is based on an annual salary amounted to US$258,789 (CA$290,232)
for the
financial year ended August 31,
2007.
|
Other
than its Long-Term Incentive Plan, Deferred Share Unit Plan, Restricted Stock
Award Plan and Stock Appreciation Rights Plan, which are described below
in the
"Report on Executive Compensation by the Human Resources Committee – Long-Term
Incentive Compensation", the Corporation does not have any other formal
long-term incentive plans for its directors, officers and
employees.
Deferred
Profit Sharing Plan
The
Corporation maintains a deferred profit sharing plan for certain eligible
Canadian resident employees. Under this plan, the Corporation may contribute
an
amount equal to 1% until May 31, 2005 and 2% from June 1, 2005 of each
employee’s gross salary to that employee’s individual deferred profit sharing
plan to the extent that such employee contributes at least 2% of his or her
gross salary to his or her individual tax-deferred registered retirement
savings
plan. In the financial year ended August 31, 2007, the aggregate amount of
contributions paid under the plan was US$419,000 (CA$470,000). Mr.
Germain Lamonde is not entitled to participate in this plan.
401K
Plan
The
Corporation maintains a 401K plan for eligible United States resident employees
of its subsidiaries. Under this plan, the Corporation must contribute
an amount equivalent to 3% of an employee’s current compensation, subject to
certain legislated maximum contribution limits. During the financial
year ended August 31, 2007, the Corporation paid contributions totaling
US$166,000.
Deferred
Share Unit Grants in Last Financial Year
The
aggregate number of Deferred Share Units (“DSUs”) credited to non-employee
directors during the financial year ended August 31, 2007 and as of
November 1, 2007 was 26,905. The estimated value at the time of grant of
a DSU is determined based on the highest of the closing prices of the
Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ National
Market on the last trading day preceding the grant date, using the noon buying
rate of the Federal Reserve Bank of New York on the grant date to convert
the
NASDAQ National Market closing price to Canadian dollars, as required. The
value
at vesting of a DSU is equivalent to the market value of a Subordinate
Voting Share when a DSU is converted to such Subordinate Voting Share. As
of
November 1, 2007, there were a total of 70,195 DSUs credited to directors
pursuant to the Deferred Share Unit Plan having an estimated value at the
time
of grant of US$389,672 (CA$442,017).
DSUs
attract dividends in the form of additional DSUs at the same rate as dividends
on Subordinate Voting Shares. The DSUs are converted and paid in Subordinate
Voting Shares at the time a director ceases to be a member of the
Board.
Therefore,
the value at vesting of a DSU, when converted to Subordinate Voting Shares,
is
equivalent to the market value of a Subordinate Voting Share at the time
the
conversion takes place. The table below shows information regarding DSU grants
made under the Deferred Share Unit Plan during the financial year ended August
31, 2007 and as of November 1, 2007. See “Report on Executive Compensation
by the Human Resources Committee – Long-Term Incentive Compensation – Deferred
Share Unit Plan” for a description of the Deferred Share Unit Plan.
During
the financial year ended August 31, 2007 and as of November 1, 2007, the
following DSUs were granted to the directors:
|
DSUs
#
|
Weighted
Average Estimated Value at the
Time
of Grant US$/DSU
|
Vesting
|
|
26,905
|
6.32
|
At
the time director cease to be a member of the Board of the
Corporation
|
Restricted
Share Unit Grants in Last Financial Year
The
aggregate number of Restricted Share Units (RSUs) granted during the financial
year ended August 31, 2007 was 219,002 having a weighted average fair value
at the time of grant of US$6.48 (CA$7.48) per RSU. The fair value at the
time of
grant of a RSU is equal to the market value of Subordinate Voting Shares
at the
time RSUs are granted. At the end of the financial year ended
August 31, 2007, there were a total of 488,015 RSUs granted and
outstanding pursuant to the Long-Term Incentive Plan having a weighted average
fair value at the time of grant of US$5.67 (CA$6.62) per RSU. All RSUs first
vesting cannot be earlier than the third anniversary date of their grant.
Some
RSUs granted in the financial year ended August 31, 2007, vest at a rate
of 1/2
annually commencing on the third anniversary date of the grants in September
2006, January 2007 and July 2007 and others at a rate of 1/3 annually on
the third, fourth and fifth anniversary dates of the grants in September
2006,
October 2006 and January 2007. Some RSUs granted in the financial year
ended August 31, 2006, vest at a rate of 1/2 annually commencing on
the third anniversary date of the grant in February 2006 and in June 2006
and
others at a rate of 1/3 annually on the third, fourth and fifth anniversary
dates of the grant in August 2006. Some RSUs granted in the financial year
ended
August 31, 2005 vest at a rate of 1/3 annually commencing on the third
anniversary date of the grant in February 2005 and others at a rate of 55%,
35%
and 10%, on the third, fourth and fifth anniversary dates of the grant in
January 2005. Some RSUs granted during the last three financial years vest
on
the fifth anniversary date of each grant respectively in October 2006, December
2005 and in January 2005. However, these RSUs are subject to early vesting
on
the third and fourth anniversary dates of the grant on the attainment of
performance objectives, namely related to long term growth of revenue and
profitability, as determined by the Board of Directors of the Corporation.
Accordingly, subject to the attainment of performance objectives, the first
early vesting is up to 1/3 of the units on the third anniversary date of
the
grant and the second early vesting is up to 50% of the remaining units on
the
fourth anniversary date of the grant.
The
RSUs
are redeemed for actual Subordinate Voting Shares or the equivalent in cash
at
the discretion of the Board of Directors of the Corporation on the vesting
dates
established by the Board of Directors of the Corporation at the time of grant
in
its sole discretion.
Therefore,
the value at vesting of a RSU, when converted to Subordinate Voting Shares,
is
equivalent to the market value of a Subordinate Voting Share at the time
the
conversion takes place. The table below shows information regarding RSU grants
made under the Long-Term Incentive Plan during the financial year ended August
31, 2007. See “Report on Executive Compensation by the Human Resources Committee
– Long-Term Incentive Compensation – Long-Term Incentive Plan” for a description
of the Long-Term Incentive Plan.
During
the financial year ended August 31, 2007, the following RSUs were
granted:
|
RSUs
#
|
Fair
Value at the Time of
Grant
US$/RSU
|
Vesting (1)
|
|
2,000
|
5.38
|
1/3
on each of the third, fourth and fifth anniversary dates of the
grant in
September 2006 (2)
|
|
1,200
|
5.83
|
50%
on the third and fourth anniversary dates of the grant in September
2006
(3)
|
|
71,802
|
6.02
|
100%
on the fifth anniversary date of the grant in October 2011 subject
to
early vesting up to 1/3 on the third anniversary date of the grant
and up
to 50% of the remaining units on the fourth anniversary date of
the grant
if the performance objectives are fully attained (4)
|
|
25,000
|
6.02
|
1/3
on each of the third, fourth and fifth anniversary dates of the
grant in
October 2006 (5)
|
|
22,550
|
6.42
|
1/3
on each of the third, fourth and fifth anniversary dates of the
grant in
January 2007 (6)
|
|
34,250
|
6.42
|
50%
on the third and fourth anniversary dates of the grant in January
2007 (7)
|
|
60,200
|
7.32
|
50%
on the third and fourth anniversary dates of the grant in January
2007 (7)
|
|
2,000
|
7.14
|
50%
on the third and fourth anniversary dates of the grant in July
2007 (8)
|
|
(1)
|
All
RSUs first vesting cannot be earlier than the third anniversary
date of
their grant.
|
|
(2)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest at
a rate of
1/3 annually commencing on the third anniversary date of the grant
in
September 2006.
|
|
(3)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest at
a rate of
1/2 annually commencing on the third anniversary date of the grant
in
September 2006.
|
|
(4)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest on
the fifth
anniversary date of the grant in October 2011 but are subject to
early vesting on the third and fourth anniversary dates of the
grant on
the attainment of performance objectives, namely related to long term
growth of revenue and profitability, as determined by the Board
of Directors of the Corporation. Accordingly, subject to the
attainment of performance objectives, the first early vesting is up
to 1/3 of the units on the third anniversary date of the grant
and the
second early vesting is up to 50% of the remaining units on the
fourth
anniversary date of the grant.
|
|
(5)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest at
a rate of
1/3 annually commencing on the third anniversary date of the grant
in
October 2006.
|
|
(6)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest at
a rate of
1/3 annually commencing on the third anniversary date of the grant
in
January 2007.
|
|
(7)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest at
a rate of
1/2 annually commencing on the third anniversary date of the grant
in
January 2007.
|
|
(8)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest at
a rate of
1/2 annually commencing on the third anniversary date of the grant
in July
2007.
|
During
the financial year ended August 31, 2007, the following RSUs were granted
to the
following Named Executive Officers:
|
Name
|
RSUs
#
|
Percentage
of Net Total of RSUs Granted to Employees in Financial
Year
(%)
|
Fair
Value at the Time of Grant US$/RSU
|
Vesting
(1)
|
|
Germain
Lamonde
|
25,347
|
11.57%
|
6.02
|
100%
on the fifth anniversary date of the grant in October 2006 subject to
early vesting up to 1/3 on the third anniversary date of the
grant and up
to 50% of the remaining units on the fourth anniversary date
of the grant
if the performance objectives are fully attained (2)
|
|
Pierre
Plamondon
|
8,430
|
3.85%
|
6.02
|
100%
on the fifth anniversary date of the grant in October 2006 subject to
early vesting up to 1/3 on the third anniversary date of the
grant and up
to 50% of the remaining units on the fourth anniversary date
of the grant
if the performance objectives are fully attained (2)
|
|
Pierre
Plamondon
|
4,500
|
2.05%
|
6.02
|
1/3
on each of third, fourth and fifth anniversary dates of the grant
in
October 2006 (3)
|
|
Dana
Yearian
|
6,645
|
3.03%
|
6.02
|
100%
on the fifth anniversary date of the grant in October 2006 subject to
early vesting up to 1/3 on the third anniversary date of the
grant and up
to 50% of the remaining units on the fourth anniversary date
of the grant
if the performance objectives are fully attained (2)
|
|
Jon
Bradley
|
−
|
−
|
−
|
−
|
|
Allan
Firhoj
|
6,145
|
2.81%
|
6.02
|
100%
on the fifth anniversary date of the grant in October 2006 subject to
early vesting up to 1/3 on the third anniversary date of the
grant and up
to 50% of the remaining units on the fourth anniversary date
of the grant
if the performance objectives are fully attained (2)
|
|
Allan
Firhoj
|
15,033
|
6.86%
|
6.42
|
1/3
on each of third, fourth and fifth anniversary dates of the grant
in
January 2007 (4)
|
|
Named
Executive Officer Not in the Employ of the Corporation at year
End
|
|
Juan-Felipe
Gonzalez
|
−
|
−
|
−
|
−
|
|
(1)
|
All
RSUs first vesting cannot be earlier than the third anniversary
date of
their grant.
|
|
(2)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest
on the fifth
anniversary date of the grant in October 2006 but are subject to
early vesting on the third and fourth anniversary date of the
grant on the
attainment of performance objectives, namely related to long term
growth of revenue and profitability, as determined by the Board
of Directors of the Corporation. Accordingly, subject to the
attainment of performance objectives, the first early vesting
is up
to 1/3 of the units on the third anniversary date of the grant
and the
second early vesting is up to 50% of the remaining units on the
fourth
anniversary date of the grant.
|
|
(3)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest
at a rate of
1/3 annually commencing on the third anniversary date of the
grant in
October 2006.
|
|
(4)
|
Those
RSUs granted in the financial year ended August 31, 2007 vest
at a rate of
1/3 annually commencing on the third anniversary date of the
grant in
January 2007.
|
Aggregated
RSUs vested in Last Financial Year and Financial Year-End RSU
Values
The
following table summarizes, for each of the Named Executive Officers, the
number
of RSUs, if any, vested during the financial year ended August 31, 2007,
the
aggregate value realized upon vesting and the total number of unvested
RSUs, if any, held at August 31, 2007. Value realized upon vesting is
the market value of the Subordinate Voting Shares on the vesting date. The
value
of unvested RSUs at financial year-end is the market value of the Subordinate
Voting Shares on August 31, 2007, which was US$6.66 per share. These values,
unlike the amounts set forth in the column "Aggregate Value Realized", have
not
been and may never be realized. The actual gains on vesting will depend on
the
value of the Subordinate Voting Shares on the date of vesting. There can
be no
assurance that these values will be realized. See “Report on Executive
Compensation by the Human Resources Committee – Long-Term Incentive Compensation
– Long-Term Incentive Plan.”
|
Name
|
Securities
Acquired on Vesting (#)
|
Aggregate
Value Realized (US$) (1)
|
Unvested
RSUs
at
August 31, 2007 (#)
|
Value
of Unvested RSUs
at
August 31, 2007 (US$) (2)
(3)
|
|
Germain
Lamonde
|
-
|
-
|
59,913
|
401,417
|
|
Pierre
Plamondon
|
-
|
-
|
53,851
|
360,802
|
|
Dana
Yearian
|
-
|
-
|
11,645
|
78,022
|
|
Jon
Bradley
|
-
|
-
|
4,500
|
30,150
|
|
Allan
Firhoj
|
-
|
-
|
38,223
|
256,094
|
|
Named
Executive Officer Not in the Employ of the Corporation at year
End
|
|
Juan-Felipe
Gonzalez
|
-
|
-
|
Cancelled (4)
|
Cancelled (4)
|
|
(1)
|
The
aggregate value realized is equivalent to the market value of
the
securities underlying the RSUs at vesting. This value, as the
case maybe,
has been converted from Canadian dollars to U.S. dollars based
upon the
average foreign exchange rate on the day of
vesting.
|
|
(2)
|
The
value of RSUs is calculated using the highest of the closing
prices of the
Subordinate Voting Shares on the Toronto Stock Exchange and on
the NASDAQ
National Market on August 31, 2007 using the noon buying rate
of the
Federal Reserve Bank of New York to convert the NASDAQ National
Market
closing price to Canadian dollars, as
required.
|
|
(3)
|
The
actual gains on vesting will depend on the value of the Subordinate
Voting
Shares on the date of vesting. There can be no assurance that
these values
will be realized.
|
|
(4)
|
In
accordance with the terms of the Long-Term Incentive Plan, unvested
RSUs
that had been attributed to this person were cancelled upon his
departure
date.
|
Option
Grants in Last Financial Year
There
were no options to purchase the Corporation’s Subordinate Voting Shares granted
during the financial year ended August 31, 2007. At the end of the financial
year ended August 31, 2007, there were a total of 1,929,388 Subordinate
Voting Shares covered by options granted and outstanding pursuant to the
Long-Term Incentive Plan having a weighted average exercise price of US$18.53
(CA$20.78). See “Report on Executive Compensation by the Human Resources
Committee - Long-Term Incentive Compensation” for a description of the Long-Term
Incentive Plan.
Aggregated
Option Exercises in Last Financial Year and Financial Year End Option
Values
The
following table summarizes, for each of the Named Executive Officers, the
number
of stock options, if any, exercised during the financial year ended August
31,
2007, the aggregate value realized upon exercise and the total number of
unexercised options, if any, held at August 31, 2007. Value realized
upon exercise is the difference between the market value of the underlying
Subordinate Voting Shares on the exercise date and the exercise or base price
of
the option. The value of unexercised in-the-money options at financial year-end
is the difference between its exercise or base price and the market value
of the
underlying Subordinate Voting Shares on August 31, 2007, which was US$6.66
(CA$7.07) per share. These values, unlike the amounts set forth in the column
“Aggregate Value Realized,” have not been, and may never be, realized. The
underlying options have not been, and may never be exercised, and actual
gains,
if any, on exercise will depend on the value of the Subordinate Voting Shares
on
the date of exercise. There can be no assurance that these values will be
realized. Unexercisable options are those that have been held for less than
the
time required for vesting. See “Report on Executive Compensation by the Human
Resources Committee – Long-Term Incentive Compensation.”
|
Name
|
Securities
Acquired on Exercise (#)
|
Aggregate
Value Realized (US$) (1)
(4)
|
Unexercised
Options
at
August 31, 2007
|
Value
of Unexercised
“In-the-Money”
Options at
August
31, 2007 (2)
(3)
(4)
|
||
|
Exercisable
(#)
|
Unexercisable
(#)
|
Exercisable
(US$)
|
Unexercisable
(US$)
|
|||
|
Germain
Lamonde
|
-
|
-
|
162,258
|
17,384
|
233,041
|
24,996
|
|
Pierre
Plamondon
|
-
|
-
|
75,545
|
5,431
|
89,925
|
6,086
|
|
Dana
Yearian
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Jon
Bradley
|
-
|
-
|
22,000
|
4,500
|
23,011
|
8,537
|
|
Allan
Firhoj
|
5,188
|
21,093
|
18,000
|
3,478
|
-
|
3,934
|
|
Named
Executive Officer Not in the Employ of the Corporation at year
End
|
||||||
|
Juan-Felipe
Gonzalez
|
11,118
|
39,437
|
Cancelled
(5)
|
Cancelled
(5)
|
-
|
-
|
|
(1)
|
The
aggregate value realized is equivalent to the difference between
the
market value of the securities underlying the options at exercise
and the
exercise price of the options. This value, as the case maybe,
has been
converted from Canadian dollars to U.S. Dollars based upon
the average
foreign exchange rate on the day of the
exercise.
|
|
(2)
|
“In-the-money”
options are options for which the market value of the underlying
securities is higher than the price at which such securities
may be bought
from the Corporation.
|
|
(3)
|
The
value of unexercisable “in-the-money” options is calculated using the
highest of the closing prices of the Subordinate Voting Shares
on the
Toronto Stock Exchange and on the NASDAQ National Market on
August 31,
2007 using the noon buying rate of the Federal Reserve Bank
of New York to
convert the NASDAQ National Market closing price to Canadian
dollars, as
required, less the exercise price of “in-the-money”
options.
|
|
(4)
|
This
value has been converted from Canadian to US dollars based
upon the
foreign exchange rate on August 31, 2007 of
1.056.
|
|
(5)
|
In
accordance with the terms of the Long-Term Incentive Plan,
unexercised
options that had been attributed to this person were cancelled
upon his
departure date.
|
Number of Subordinate Voting Shares reserved for future issuance
During
the financial year ended August 31, 2007, 26,905 Deferred Share Units (and
as of
November 1, 2007) and 219,002 Restricted Share Units were granted to
directors, officers and employees. Such awards were issued from the same
pool of
Subordinate Voting Shares reserved for issuance pursuant to the Long-Term
Incentive Plan which is 9.1% of the total and outstanding voting shares as
of November 1, 2007. Therefore, as of November 1, 2007 the number of Subordinate
Voting Shares reserved for future issuance is 3,060,490.
Termination
of Employment, Change in Responsibilities and Employment
Contracts
The
Corporation has an employment agreement with Mr. Germain Lamonde. The agreement
is for an indeterminate period and the compensation is reviewed annually.
In the
event of the termination of Mr. Lamonde’s employment without cause, Mr.
Lamonde will be entitled to severance payments (in no case exceeding
24 months of remuneration) and the vesting of all stock options and
RSUs. In addition, in the event that Mr. Lamonde’s employment is
terminated following a merger or an acquisition by a third party of
substantially all of the Corporation’s assets or of the majority of its share
capital or if Mr. Lamonde voluntarily resigns, he will be entitled to the
vesting of all stock options and RSUs.
The
Corporation also has employment agreements with Mr. Pierre Plamondon, Mr.
Jon
Bradley, Mr. Allan Firhoj and Mr. Dana Yearian.
The
Corporation has an employment agreement with Mr. Pierre Plamondon, the
Corporation’s Vice-President, Finance and Chief Financial Officer. The agreement
is for an indeterminate period and the compensation is reviewed annually.
In the
event of termination of Mr. Plamondon’s employment without cause, Mr. Plamondon
will be entitled to severance payments (in no case exceeding 12 months of
the
current base salary). In addition, in the event Mr. Plamondon’s employment is
terminated following a merger or an acquisition by a third party of
substantially all of the Corporation’s assets or of the majority of its share
capital, he will be entitled to severance payments (in no case exceeding
18
months remuneration plus health benefits) and to the immediate vesting of
all
stock options and RSUs.
The
Corporation has an employment agreement with Mr. Dana Yearian, the Corporation’s
Vice-President, Telecom Sales - Americas. The agreement is for an indeterminate
period and the compensation is reviewed annually. In the event of termination
of
Mr. Yearian’s employment without cause, Mr. Yearian will be entitled to
severance payments (in no case exceeding 12 months of the current base salary).
In addition, in the event Mr. Yearian’s employment is terminated following a
merger or an acquisition by a third party of substantially all of the
Corporation’s assets or of the majority of its share capital, he will be
entitled to severance payments (in no case exceeding 18 months remuneration
plus
health benefits) and to the immediate vesting of all stock options and
RSUs.
The
Corporation has an employment agreement with Mr. Jon Bradley, the Corporation’s
Vice-President, Telecom Sales - International. The agreement is for an
indeterminate period and the compensation is reviewed annually. In the event
of
termination of Mr. Bradley’s employment without cause, Mr. Bradley will be
entitled to severance payments (in no case exceeding 12 months of the current
base salary). In addition, in the event Mr. Bradley’s employment is terminated
following a merger or an acquisition by a third party of substantially all
of
the Corporation’s assets or of the majority of its share capital, he will be
entitled to severance payments (in no case exceeding 18 months remuneration
plus
health benefits) and to the immediate vesting of all stock options and
RSUs.
The
Corporation has an employment agreement with Mr. Allan Firhoj, the
Vice-President and General Manager, Life Sciences and Industrial Division.
The
agreement is for an indeterminate period and the compensation is reviewed
annually. In the event of termination of Mr. Firhoj’s employment without cause,
Mr. Firhoj will be entitled to severance payments (in no case exceeding 12
months of the current base salary). In addition, in the event Mr. Firhoj’s
employment is terminated following a merger or an acquisition by a third
party
of substantially all of the Corporation’s assets or of the majority of its share
capital, he will be entitled to the immediate vesting of all stock options
and RSUs.
REPORT
ON EXECUTIVE COMPENSATION BY THE HUMAN RESOURCES COMMITTEE
Members
of the Human Resources Committee
During
the financial year ended August 31, 2007, the Human Resources Committee was
composed of Michael Unger, as Chairman, Pierre Marcouiller, Guy Marier, David
A.
Thompson and André Tremblay, none of whom were officers or employees, or former
officers or employees of the Corporation or its subsidiaries. All of the
members
of the Human Resources Committee are considered “independent”, as defined by the
Canadian Securities Administration Guidelines.
Human
Resources Committee Mandate
The
Human
Resources Committee of the Board of Directors is responsible for establishing
the annual compensation and overseeing the assessment of the performance
of all
the Corporation’s executive officers, including the President and Chief
Executive Officer. This Committee also reviews and submits to the Board the
salary structure and the short-term and long-term incentive compensation
programs for all employees of the Corporation. The Committee also evaluates
and
makes recommendations to the Board regarding the compensation of directors,
including the number of Deferred Share Units credited to the non-employee
directors pursuant to the Deferred Share Unit Plan. The Committee’s
goal is to develop and monitor executive compensation programs that are
consistent with strategic business objectives and shareholder interests.
Though
the Committee is responsible for the review and approval of the employees
that
will receive Restricted Share Units or options to purchase shares of the
Corporation, in accordance with policies established by the Board and the
terms
of the Long-Term Incentive Plan, these functions have been shared by the
Board
of Directors and the Human Resources Committee during the period from
September 1, 2006 to August 31, 2007.
Since
September 1, 2006, the Human Resources Committee held five (5) meetings prior
to
November 1, 2007, which were attended by all the members of the Committee,
except Mr. Thompson who was absent at three (3) meetings and
Mr. Marcouiller who was also absent at one (1) meeting.
Key
Elements and Policies for Compensation of Executive
Officers
The
Corporation’s executive compensation plans are designed to attract, retain and
motivate key executives who directly impact the Corporation’s long-term success
and the creation of shareholder value. In determining executive compensation,
the Committee considers the following four principles:
|
·
|
Performance-based:
Executive compensation levels reflect both corporation and individual
results based on specific quantitative and qualitative objectives
established at the start of each financial year in keeping with
Corporation’s long-term strategic
objectives.
|
|
·
|
Aligned
with shareholder interests: A significant proportion of incentive
compensation for executives is composed of equity awards to ensure
that executives are aligned with the principles of sustained long-term
shareholder value growth.
|
|
·
|
Market
competitive: Compensation of executives is designed to be
externally competitive when compared against executives of comparable
peer
companies, and in consideration of Corporation results relative
to the
results of peers.
|
|
·
|
Individually
equitable: Compensation levels are also designed to reflect
individual factors such as scope of responsibility, experience,
and
performance against individual
measures.
|
The
key
elements of the Corporation’s 2007 executive compensation program were Base
Salary, the Short Term Incentive Plan, and stock-based incentive compensation
delivered through the Long Term Incentive Plan. To determine
appropriate compensation levels for each pay component, the Committee considered
all elements of the executive compensation program. The Committee did not
assign
specific weightings to any key element of the Corporation’s 2007 executive
compensation program.
Base
Salaries
In
establishing the base salaries of senior officers, including the President
and
Chief Executive Officer, the Corporation takes into consideration
responsibilities, job descriptions and salaries paid by other similar Canadian
organizations for positions similar in magnitude, scope and complexity. The
Committee’s objective is to align executive compensation levels with the median
compensation offered within a reference group of comparable companies that
are
similar in size to the Corporation, with a particular focus on those within
the
High-Technology/Telecommunications and Manufacturing-Durable Goods
industries. The Committee reviews the base salary of each senior officer on
an annual basis and recommends that the Board approve appropriate adjustments,
if required, within the salary range in order to maintain a competitive
position within the market place.
Short-Term
Incentive Compensation
The
short-term incentive plan (“STIP”) provides senior executives with the
opportunity to earn annual bonuses based on the Corporation’s financial
performance and the achievement of strategic corporate and business unit
objectives established on a yearly basis.
Target
payout levels for Named Executive Officers eligible for incentive bonuses
in the
year ended August 31, 2007 were established to be in line with
the objective of the Committee to align compensation with the median
compensation offered in the reference group. The minimum, target and maximum
payouts to senior officers under the STIP (expressed as a percentage of their
base salary) for 2007 were as follows:
Our
President and Chief Executive Officer, Mr. Germain Lamonde, has a short term
incentive target of 50% of his annual base salary. That bonus is based on
the
achievement of financial, strategic and individual objectives as shown in
the
following table.
Our
Chief
Financial Officer, Mr. Pierre Plamondon, has a short term incentive target
of
35% of his annual base salary. That bonus is based on the achievement of
financial, strategic and individual objectives as shown in the following
table.
Our
Vice-President and General Manager, Life Sciences and Industrial Division,
Mr.
Allan Firhoj, has a short term incentive target of 30% of his annual base
salary. That bonus is based on the achievement of financial, strategic and
individual objectives as shown in the following table.
|
Measure
(1)
|
Weighting
Mr. Lamonde and Mr. Plamondon
|
Weighting
Mr. Firhoj
|
|
|
Sales
|
35%
|
30%
|
|
|
Earnings
|
15%
|
25%
|
|
|
Gross
margin
|
25%
|
25%
|
|
|
Customer
satisfaction (quality and on time delivery)
|
25%
|
20%
|
|
|
Personal
objectives (multiplier)
|
0%
- 125%
|
0%
- 125%
|
|
|
(1)
|
Sales,
Earnings, Gross margin and Customer satisfaction measures are established
to provide a metric from 0% to 150% and such a metric is multiplied
by the
personal objectives measure. This result is then multiplied by
the short
term incentive target % of the individual annual base
salary.
|
Our
Vice-President, Telecom Sales - International, Mr. Jon Bradley, and
Vice-President, Telecom Sales - Americas, Mr. Dana Yearian, do not participate
in the short term incentive plan that is available to the company’s other senior
executives. Instead, Mr. Bradley and Mr. Yearian participate in the company’s
sales incentive plan (SIP). Under the SIP, Mr. Bradley and Mr. Yearian have
target incentives of 40% of their annual base salaries. The SIP is based
40% on the achievement of revenue targets (billings), 40% on margin targets
and 20% on sales quotas achievements.
Long-Term
Incentive Compensation
Long-Term
Incentive Plan
The
principal component of the long-term incentive compensation offered by the
Corporation is made up of the Long-Term Incentive Plan for directors, officers,
employees and consultants of the Corporation and its subsidiaries. As
disclosed under the caption ‘’Restricted Share Unit Grants in Last Financial
Year’’, the Named Executive Officers were granted RSUs during the last fiscal
year. The Corporation did not take into account the amount and terms of
outstanding options or RSUs neither the restrictions on resale of such units,
when determining the grant mentioned above.
Introduced
in May 2000, amended in October 2004 and effective in January 2005, the
Long-Term Incentive Plan is designed to provide directors, officers,
employees and consultants with an incentive to create value and accordingly
ensures that their interests are aligned with those of the Corporation’s
shareholders. The LTIP is subject to Human Resources Committee review to
ensure
maintenance of its market competitiveness. The Board has full and complete
authority to interpret the Plan and to establish the rules and regulations
applying to it and to make all other determinations it deems necessary or
useful
for the administration of the Plan, provided that such interpretations, rules,
regulations and determinations are consistent with the rules of all stock
exchanges on which the securities of the Corporation are then traded and
with all relevant securities legislation.
The
Long-Term Incentive Plan provides for the issuance of options to purchase
Subordinate Voting Shares and the issuance of Restricted Share Units (“RSUs”)
redeemable for actual Subordinate Voting Shares or the equivalent in cash
to
directors, officers, employees and consultants. The Board of Directors upon
recommendation of the Human Resources Committee designates the recipients
of
options or RSUs and determines the number of Subordinate Voting Shares covered
by each option or RSU, the dates of vesting, the expiry date and any other
conditions relating to these options or RSUs, in each case in accordance
with
the applicable legislation of the securities regulatory authorities. During
the
financial year ended August 31, 2007, target awards for eligible officers
under the LTIP were established to be in line with the objective of the
Committee to align compensation with the median compensation offered in the
reference group. A portion of the target RSU awards are fixed, in order to
encourage executive retention over the longer term, and the balance
are made at, above, or below target levels based on merit,
as determined by each executive's individual performance over the previous
year.
The
exercise price of the options is determined by the Board of Directors at
the
time of granting the options, subject to compliance with the rules of all
stock
exchanges on which the Subordinate Voting Shares are listed and with all
relevant securities legislation. In any event, the price at which the
Subordinate Voting Shares may be purchased may not be lower than the highest
of
the closing prices of the Subordinate Voting Shares on the Toronto Stock
Exchange and the NASDAQ National Market on the last trading day preceding
the
grant date, using the noon buying rate of the Federal Reserve Bank of New
York
on the grant date to convert the NASDAQ National Market closing price to
Canadian dollars. Any option issued is non-transferable. At the end
of financial year ended August 31, 2007, there were a total of
1,929,388 options granted and outstanding pursuant to the Long-Term Incentive
Plan having a weighted average exercise price of US$18.53
(CA$20.78).
The
fair
value at the time of grant of a RSU is equal to the market value of Subordinate
Voting Shares at the time RSUs are granted. At the end of financial year
ended
August 31, 2007, there were a total of 488,015 RSUs granted and outstanding
pursuant to the Long-Term Incentive Plan having a weighted average fair value
at
the time of grant of US$5.67 (CA$6.62) per RSU.
The
maximum number of Subordinate Voting Shares that are issuable under the Plan
shall not exceed 6,306,153 Subordinate Voting Shares, which represents 9.1%
of the Corporation’s issued and outstanding voting shares as of November 1,
2007. The maximum number of Subordinate Voting Shares that may be
granted to any one individual shall not exceed 5% of the number of outstanding
Subordinate Voting Shares.
Some
options granted to Directors and employees vest on the first anniversary
date of
their grant. Some options granted in the financial year ended August 31,
2004
and 2005 vest at a rate of 12.5% six (6) months after the date of grant,
12.5% twelve (12) months after the date of grant and 25% annually
thereafter commencing on the second anniversary date of the grant in October
2005. Otherwise all options vest a rate of 25% annually commencing on the
first
anniversary date of the grant. All options may be exercised in whole or in
part
once vested. All of the options that are granted under the Plan must be
exercised within a maximum period of ten (10) years following the date
of their grant or they will be forfeited.
All
RSUs
first vesting cannot be earlier than the third anniversary date of their
grant.
Some RSUs granted in the financial year ended August 31, 2007, vest at a
rate of
1/2 annually commencing on the third anniversary date of the grants in September
2006, January 2007 and July 2007 and others at a rate of 1/3 annually on
the third, fourth and fifth anniversary dates of the grants in September
2006,
October 2006 and January 2007. Some RSUs granted in the financial year ended
August 31, 2006 vest at a rate of 1/2 annually commencing on the third
anniversary date of the grant in February 2006 and in June 2006 and others
at a
rate of 1/3 annually commencing on the third anniversary date of the grant
in
August 2006. Some RSUs granted in the financial year ended August 31, 2005
vest
at a rate of 1/3 annually commencing on the third anniversary date of the
grant
in February 2005 and others at a rate of 55%, 35% and 10%, on the third,
fourth and fifth anniversary dates of the grant in January 2005. Some RSUs
granted during the last three financial years vest on the fifth anniversary
date
of each grant respectively in October 2006, December 2005 and in January
2005. However, these RSUs are subject to early vesting on the third and fourth
anniversary dates of the grant on the attainment of performance objectives,
namely related to long term growth of revenue and profitability, as determined
by the Board of Directors of the Corporation. Accordingly, subject to the
attainment of performance objectives, the first early vesting is up to 1/3
of
the units on the third anniversary date of the grant and the second early
vesting is up to 50% of the remaining units on the fourth anniversary date
of
the grant. If such vesting date falls into any black-out period or any other
restrictive period during which the RSU holder is not entitled to trade the
Corporation’s Subordinate Voting Shares, then the units shall vest on the first
trading day the RSU holder is entitled to trade after such black-out period
or
restrictive period.
Any
option granted pursuant to the Long-Term Incentive Plan will lapse (i)
immediately upon the termination of the relationship with the Corporation
or one
of its subsidiaries for a good and sufficient cause for employees or officers
or
at the date on which an employee or an officer resigns or leaves his employment
with the Corporation or one of its subsidiaries (or within 30 days if the
holder’s employment is terminated for reasons not related to cause); and
(ii) 30 days after a Director ceases to be a member of the Board of
Directors of the Corporation or one of its subsidiaries. In the event of
retirement or disability, any option held by an employee lapses 30 days after
the date of any such disability or retirement. In the event of death,
any option held by the optionee lapses 6 months after the date of
death.
Any
RSU
granted pursuant to the Long-Term Incentive Plan will lapse (i) immediately,
where vesting of a unit is subject to the attainment of performance objectives,
if such performance objectives have not been attained (or postponed at a
further vesting date as determined by the Board of Directors); (ii) immediately,
whether or not subject to attainment of performance objectives, upon the
termination of the relationship with the Corporation or one of its subsidiaries
for a good and sufficient cause for employees or officers or at the date
on
which an employee or an officer resigns or leaves his employment with the
Corporation or one of its subsidiaries.
Any
RSU
granted pursuant to the Long-Term Incentive Plan will vest immediately, to
a
certain proportion as determined by the Plan, upon the termination of the
relationship of an employee or officer with the Corporation or one of its
subsidiaries (i) for reasons not related to cause; (ii) because of death
or
permanent disability and (iii) retirement.
The
following table summarizes information about stock options granted to the
members of the Board of Directors, and to Management and Corporate Officers
of
the Corporation and its subsidiaries as at August 31, 2007:
|
Number
of Options
|
%
of Issued and
Outstanding
Options
|
Weighted
Average Exercise Price ($US/Security)
|
||||||||||
|
President
and CEO (one individual)
|
179,642
|
9.31 | % |
9.05
|
||||||||
|
Board
of Directors (five individuals)
|
194,375
|
10.07 | % |
6.23
|
||||||||
|
Management
and Corporate Officers (eight individuals)
|
212,139
|
11.00 | % |
14.49
|
||||||||
The
following table summarizes information about RSUs granted to the members
of the
Board of Directors and to Management and Corporate Officers of the Corporation
and its subsidiaries as at August 31, 2007:
|
Number
of RSUs
|
%
of Issued and
Outstanding
RSUs
|
Weighted
Average Fair Value at the Time of Grant
$US/RSU
|
||||||||||
|
President
and CEO (one individual)
|
59,913
|
12.28 | % |
5.28
|
||||||||
|
Board
of Directors (five individuals)
|
-
|
-
|
-
|
|||||||||
|
Management
and Corporate Officers (ten individuals)
|
236,185
|
48.40 | % |
5.25
|
||||||||
Compensation
of Chief Executive Officer
In
establishing Mr. Lamonde’s compensation for the year ending August 31, 2007, the
Corporation relied on a study completed by an independent consulting firm
(Mercer Human Resource Consulting). Such study indicated average salaries
and
bonuses, median salaries and bonuses and maximum salaries and bonuses paid
to
chief executive officers by Canadian and American computer hardware and software
companies as well as by a specific group of companies active in the fiber
optics
industry identified by the Corporation that it considers to be the best
available comparisons. It was decided that Mr. Lamonde’s compensation
should reflect the median of Canadian computer hardware and software companies
and of the specific group of companies in fiber optics identified by the
Corporation. In the financial year ended August 31, 2007, Mr.
Lamonde’s compensation was adjusted accordingly.
In
the
financial year ended August 31, 2007, the bonus portion of Mr. Lamonde’s
compensation was tied to the financial and strategic objectives of the
Corporation based on the following factors:
|
Measure
(1)
|
Weighting
ALL
|
|
|
Sales
|
35%
|
|
|
Earnings
|
15%
|
|
|
Gross
margin
|
25%
|
|
|
Customer
satisfaction (quality and on time delivery)
|
25%
|
|
|
Personal
objectives (multiplier)
|
0%
- 125%
|
|
|
(1)
|
Sales,
Earnings, Gross margin and Customer satisfaction measures are established
to provide a metric from 0% to 150% and such a metric is multiplied
by the
personal objectives measure. This result is then multiplied by
the short
term incentive target % of the individual annual base
salary.
|
Mr. Lamonde’s
bonus is payable in the same proportion at which the Corporation attains
such
objectives. When the objectives are exceeded, the bonus is higher;
when objectives are not met, the bonus is lower.
Deferred
Share Unit Plan
Introduced
in October 2004 and effective as of January 2005, the Deferred Share Unit
Plan
is designed to align more closely the interests of its non-employee directors
with those of the Corporation’s shareholders.
Under
the
Deferred Share Unit Plan, non-employee directors shall receive up to 100
% of
their retainer fees in the form of Deferred Share Units (“DSUs”), each of which
has an estimated value determined based on the highest of the closing
prices of the Subordinate Voting Shares on the Toronto Stock Exchange and
the
NASDAQ National Market on the last trading day preceding the grant date,
using
the noon buying rate of the Federal Reserve Bank of New York on the grant
date to convert the NASDAQ National Market closing price to Canadian dollars,
as required. The value at vesting of a DSU is equivalent to the market
value of a Subordinate Voting Share when a DSU is converted to such
Subordinate Voting Share. The value of a DSU, when converted to
Subordinate Voting Shares, is equivalent to the market value of a Subordinate
Voting Share at the time the conversion takes place. DUSs attract dividends
in
the form of additional DSUs at the same rate as dividends on Subordinate
Voting
Share. When a director ceases to be a member of the Board, the
DSUs are either converted and paid in Subordinate Voting Shares purchased
on the
open market or issued by the Corporation. Such Subordinate Voting Shares
issued
by the Corporation will be issued from the same pool of Subordinate Voting
Shares reserved for issuance pursuant to the Long-Term Incentive Plan, which
is
9.1% of the total issued and outstanding voting shares.
The
following table summarizes information about DSUs granted to the non-employee
members of the Board of Directors as at November 1, 2007:
|
Number
of DSUs
|
%
of Issued and
Outstanding
DSUs
|
Weighted
Average Estimated Value at the Time of Grant
$US/DSU
|
|
|
Board
of Directors (five individuals)
|
70,195
|
100%
|
5.55
|
Restricted
Stock Award Plan
The
EXFO
Electrical-Optical Engineering Restricted Stock Award Plan (the "RSAP") was
established to provide a means through which employees of EXFO Burleigh
Products Group Inc. can be granted awards of restricted shares ("Restricted
Shares") of Subordinate Voting Shares to promote retention and foster identity
of interest between stockholders and employees of EXFO Burleigh Products
Group
Inc.
The
effective date of the RSAP was December 20, 2000. The expiration date
of the RSAP is the business day next following the final grant of Restricted
Shares under the RSAP, which was December 20, 2000. However, the
administration of the RSAP did continue until all awards of Restricted Shares
have been forfeited or settled. The aggregate number of shares
subject to the RSAP was 360,000. Stock awards granted under the RSAP
vest over a 4 year period, with 25% vesting on an annual basis
commencing on the first anniversary of the date of grant. The last vesting
occurred on December 20, 2004; the Human Resources Committee administered
the
RSAP until that date. Therefore the administration of the RSAP terminated
on
December 20, 2004.
Awards
of
Restricted Shares were subject to forfeiture and restrictions on transfer
until
the Restricted Shares became vested at which point a stock certificate was
issued to a participant with respect to the number of vested shares, which
are
then freely transferable. Restricted Shares become vested, subject to
a participant's continued employment with the Corporation or its affiliates,
on
each of the first four anniversaries of the date of grant of an award of
Restricted Shares.
Upon
a
participant's termination of employment with the Corporation or any of its
affiliates due to the participant's death, disability or retirement on or
after
age 60, the participant's award of restricted shares became fully vested
and was
no longer subject to forfeiture. However, the transfer restrictions
remained in place until the occurrence of the vesting dates originally
contemplated by the award.
Upon
the
voluntary resignation of a participant, the termination of a participant's
employment for cause, the termination of a participant who is not designated
a
member of EXFO Burleigh Products Group Inc. "Management Team" without cause
prior to a change in control of the Corporation or a termination without
cause
of a participant who is designated a member of EXFO Burleigh Products Group
Inc.
Management Team that is initiated by EXFO Burleigh Products Group Inc. prior
to
a change in control of the Corporation, the unvested portion of the
participant's award of Restricted Shares were forfeited. However the
RSAP provided discretion to the Human Resources Committee in the application
of
the forfeiture provisions where a change in circumstances rendered such action
appropriate. During the financial year ended August 31, 2005, EXFO
Burleigh Products Group Inc. was required to lay off the remaining of the
participants (excluding a few that were transferred to our other offices)
as a
result of a consolidation due to a sharp downturn in its market. The
Human Resources Committee decided that the awards of RSAP participants affected
by the lay-offs would not be subject to forfeiture, though the transfer
restrictions remained in place until the occurrence of the vesting dates
originally contemplated by the award.
Upon
the
termination without cause of a participant who was designated a member of
EXFO
Burleigh Products Group Inc. Management Team that was initiated by the
Corporation or a termination of a participant's employment without cause
following a change in control of the Corporation, a participant's award of
Restricted Stock became fully vested and all restrictions lapsed.
In
the
event of a change in control, the committee administering the RSAP could
in its
discretion remove restrictions on Restricted Shares or provide for the
cancellation of awards in exchange for payment in respect of the Restricted
Shares subject to an award.
Stock
Appreciation Rights Plan
On
August
4, 2001, the Corporation established a Stock Appreciation Rights Plan (“SAR
Plan”) for the benefit of certain employees residing in countries where the
granting of options under the Long-Term Incentive Plan is not feasible in
the
opinion of the Corporation. The Board has full and complete authority
to interpret the SAR Plan and to establish the rules and regulations applying
to
it and to make all other determinations it deems necessary or useful for
the
administration of the SAR Plan.
Under
the
SAR Plan, eligible employees are entitled to receive a cash amount equivalent
to
the difference between the market price of the Subordinate Voting Shares
on the
date of exercise and the exercise price determined on the date of
grant. No Subordinate Voting Shares are issuable under the SAR
Plan.
The
Board
of Directors has delegated to Management the task of designating the recipients
of stock appreciation rights, the date of vesting, the expiry date and other
conditions. Under the terms of the SAR Plan, the exercise price of
the stock appreciation rights may not be lower than the highest of the closing
prices of the Subordinate Voting Shares on the Toronto Stock Exchange and
on the
NASDAQ National Market on the last trading day preceding the grant date,
using
the noon buying rate of the Federal Reserve Bank of New York on the grant
date
to convert the NASDAQ National Market closing price to Canadian
dollars. Stock appreciation rights are non-transferable.
The
stock
appreciation rights vest over a four-year period, with 25% vesting annually
commencing on the first anniversary date of the date of grant. However, since
October 2007, some stock appreciation rights vest at a rate of 50% annually
commencing on the third anniversary date of the grant in October 2007. Once
vested, stock appreciation rights may be exercised between the second and
the
fifteenth business day following each release of the Corporation’s quarterly
financial results. All of the stock appreciation rights that are
granted under the SAR Plan may be exercised within a maximum period of
10 years following the date of their grant. Any stock
appreciation rights granted under the SAR Plan will lapse immediately upon
the
termination of the relationship with the Corporation or one of its subsidiaries
for a good and sufficient cause or at the date on which an employee resigns
or
leaves his employment with the Corporation or one of its subsidiaries (or
within
30 days if the holder is dismissed without cause). In the event
of retirement or disability, any stock appreciation right held by an employee
lapses 30 days after the date of any such disability or
retirement. In the event of death, any stock appreciation right
lapses 6 months after the date of death.
Compensation
Plan Control and Review
As
a
general practice, the Corporation’s relative position in terms of compensation
levels is determined annually through studies performed by independent
consulting firms using a selected reference market of comparable companies.
In
addition, internal pay equity studies are a key factor to complete the
compensation review process and indicate where necessary adjustments may
be
required. During the fiscal year ended August 31, 2007, this practice
continued and certain compensation adjustments that became necessary were
made.
Conclusion
By
way of
application of the Corporation’s executive compensation policy, an important
part of executive compensation is linked to corporate performance and long-term
value creation. The Human Resources Committee continuously reviews executive
compensation programs to ensure that they maintain their competitiveness
and
continue to focus on the Corporation’s objectives, values and business
strategies.
Depending
on specific circumstances, the Committee may also recommend employment terms
and
conditions that deviate from the policies and the execution by the Corporation
or its subsidiaries of employment contracts on a case-by-case
basis.
By
the
Human Resources Committee:
Michael
Unger, Chairman
Pierre
Marcouiller
Guy
Marier
David
A.
Thompson
André
Tremblay
PERFORMANCE
GRAPH
The
performance graph presented below compares the cumulative total shareholder
return of a $100 investment in the Subordinate Voting Shares and the cumulative
total return of the S&P/TSX Stock Index for the five (5) years period
commencing August 31, 2002 and ending August 31, 2007.
The
Corporation’s Stock Performance
(August
31, 2002 to August 31, 2007)
DIRECTORS
AND OFFICERS’ LIABILITY INSURANCE
The
Corporation maintains insurance protection against liability incurred by
its
officers and directors as well as those of its subsidiaries in the
performance of their duties. The entire premium, amounting to US$165,000
from
September 30, 2007 to September 30, 2008, is paid by the Corporation. The
aggregate limit of liability in respect of any and all claims is US$10
million per year. The policy provides for the indemnification of directors
and
officers in the case of claims for which the Corporation has not indemnified
or
is not permitted by law to indemnify them, and for the reimbursement of the
Corporation, subject to a deductible of US$250,000.
REPORT
ON CORPORATE GOVERNANCE PRACTICES
Recent
Corporate Governance Developments in Canada
In
January 2004, the Canadian Securities Administrators (the “CSA”) adopted
Multilateral Instrument 52-110 — Audit Committees, which was amended as of June
30, 2005 (“MI 52-110”). MI 52-110 sets forth certain requirements
regarding audit committee composition and responsibilities, as well as reporting
obligations with respect to audit-related matters. The disclosure of the
MI
52-110 requirements is included in our 2007 Annual Information Form in Form
20-F
available as described below.
Effective
June 30, 2005, the CSA also adopted National Instrument 58-101 —
Disclosure of Corporate Governance Practices (“NI 58-101”) and National
Policy 58-201 — Effective Corporate Governance (“NP 58-201” and,
together with MI 52-110, the “CSA Corporate Governance Standards”).
NP 58-201 provides guidance to Canadian issuers with respect to corporate
governance practices, while NI 58-101 requires issuers to make certain
disclosures regarding their governance practices. The CSA Corporate Governance
Standards, particularly NI 58-101 and NP 58-201, have replaced the
former guidelines of the Toronto Stock Exchange that had, prior to the coming
into force of the CSA Corporate Governance Standards, served as the primary
source of codified recommendations in respect of corporate governance
practices in Canada.
EXFO’s
Corporate Governance Practices
In
accordance with NI 58-101, we are required to disclose information with
respect to our system of corporate governance. Over the past few years, we
have
undertaken a comprehensive review of our corporate governance practices in
order
to best comply with and, whenever practicable, exceed the CSA
Standards.
We
updated and adopted in March 2005 a number of charters and policies, including
an Audit Committee Charter; a Board of Directors Corporate Governance
Guidelines, a Code of Ethics for our Principal Executive Officer and Senior
Financial Officers, a Disclosure Guidelines, an Ethics and Business Conduct
Policy, a Human Resources Committee Charter, a Securities Trading Policy
and a
Statement on Reporting Ethical Violations (Whistle Blower). We also adopted
in
October 2006 a policy regarding Hiring Employees and Former Employees of
Independent Auditor. We refer to our Board and Committee Charters as our
“Corporate Governance Rules”.
We
are of
the view that adopting and implementing good corporate governance practices
is a
cornerstone of our corporate and management practices and policies and that
our
existing corporate governance practices already meet or surpass the prevailing
corporate governance standards. We further believe that the measures we have
adopted with respect to corporate governance comply substantially with the
CSA
Standards.
We
encourage our shareholders to consult our Corporate Governance Rules and
Ethics
and Business Conduct Policy available on our website at www.EXFO.com and
also
available in print to any shareholder who requests copies by contacting our
Corporate Secretary.
Our
2007
Annual Information Form in Form 20-F (also filed with the SEC), which will
be
available on or before November 29, 2007 and which may be obtained upon request
from our Corporate Secretary or at www.sedar.com, will also contain certain
information with respect to our corporate governance practices.
We
are
dedicated to updating our corporate governance practices on an ongoing basis
in
order to respond to the evolution of best practices. We and our Board of
Directors are of the view that our corporate governance practices, as summarized
in the Schedule A attached to this Management Proxy Circular, are in substantial
compliance with the CSA Corporate Governance Standards. Copies of our Corporate
Governance Rules and all related policies (including those mentioned above)
are
available on our website at www.EXFO.com as mentioned in Schedule
A.
ADDITIONAL
INFORMATION
Additional
information relating to the Corporation is on SEDAR at www.sedar.com. The
Corporation shall provide to any person or company, upon request to the
Secretary of the Corporation, at 400 Godin Avenue, Quebec, Province of Quebec,
Canada, G1M 2K2, phone number (418) 683-0913 ext. 3704 or fax number
(418) 683-9839:
|
(a)
|
one
copy of the Annual Report on Form 20-F of the Corporation filed
with the
Securities and Exchange Commission (the “SEC”) in the United States
pursuant to the Securities Exchange Act of 1934, and with
securities commissions or similar
authorities;
|
|
(b)
|
one
copy of the comparative consolidated financial statements of the
Corporation for its most recently completed financial year and
the
Auditors report thereon, included in the Annual Report of the Corporation
and one copy of any interim consolidated financial statements of
the
Corporation subsequent to the consolidated financial statements
for its
most recently completed financial
year;
|
|
(c)
|
one
copy of this Management Proxy
Circular.
|
Additional
information relating to the Corporation is also included in the Corporation’s
Annual Report for the year ended August 31, 2007. The Annual Report containing
the consolidated audited financial statements, the report of the auditor
and management’s discussion and analysis is being mailed to shareholders with
the Notice of Meeting and this Management Proxy Circular. Additional
copies of the Annual Report are available on SEDAR at www.sedar.com and may
be obtained free of charge from the Corporation upon request and will be
available at the Meeting.
DIRECTORS’
APPROVAL
The
contents and the sending of this Management Proxy Circular have been approved
by
the Directors of the Corporation.
DATED
at
Quebec, Province of Quebec, Canada, this 1st day of
November,
2007.
/s/
Benoit Ringuette
Benoit
Ringuette
Corporate
Secretary
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
400
Godin
Avenue
Quebec,
Province of Quebec, Canada, G1M 2K2
SCHEDULE A
|
CSA
Guidelines
|
EXFO
Electro-Optical Engineering’s Corporate Governance
Practices
|
|
1. Board
of Directors
|
|
|
(a) Disclose
the identity of directors who are independent.
|
The
following directors are independent:
Mr.
Pierre Marcouiller
Mr.
Guy Marier
Mr.
André Tremblay
Dr.
David A. Thompson
Mr.
Michael Unger
|
|
(b) Disclose
the identity of directors who are not independent, and describe
the basis
for that determination.
|
Mr.
Germain Lamonde – non-independent – is President and Chief Executive
Officer of the Corporation and a majority shareholder of the Corporation
as he has the ability to exercise a majority of the votes for the
election
of the Board of Directors.
|
|
(c) Disclose
whether or not a majority of directors are independent. If a majority
of
directors are not independent, describe what the board of directors
does
to facilitate its exercise of independent judgement in carrying
out its
responsibilities.
|
The
majority of directors are independent (5 out of 6).
|
|
(d) If
a director is presently a director of any other issuer that is
a reporting
issuer (or the equivalent) in a jurisdiction or a foreign jurisdiction,
identify both the director and the other issuer.
|
Michael
Unger is a director of Tundra Semiconductor Corporation, a publicly
listed corporation of Ottawa, Ontario, Canada. Pierre Marcouiller
is a
Director of Canam Group Inc., a publicly listed corporation of
Saint-Georges de Beauce, Quebec, Canada.
|
|
(e) Disclose
whether or not the independent directors hold regularly scheduled
meetings
at which non-independent directors and members of management are
not in
attendance. If the independent directors hold such meetings, disclose
the
number of meetings held since the beginning of the issuer’s most recently
completed financial year. If the independent directors do not hold
such
meetings, describe what the board does to facilitate open and candid
discussion among its independent directors.
|
The
independent Directors hold as many meeting, as needed, annually
and any
Director may request such meeting at any time. Since September
1, 2006 and
prior to November 1, 2007, three (3) meetings of independent Directors
without management occurred.
|
|
(f) Disclose
whether or not the chair of the board is an independent director.
If the
board has a chair or lead director who is an independent director,
disclose the identity of the independent chair or lead director,
and
describe his or her role and responsibilities. If the board has
neither a
chair that is independent nor a lead director that is independent,
describe what the board does to provide leadership for its independent
directors.
|
The
Chair of the Board is not an independent director. During the financial
year ended August 31, 2002, the Board of Directors designated Mr.
Michael
Unger to act as the independent “Lead Director” and in January 2007, Mr.
Guy Marier was designated to act as the independent “Lead Director” in
replacement of Mr. Unger.
The
Lead Director is an outside and unrelated director appointed by
the Board
of Directors to ensure that the Board can perform its duties in
an
effective and efficient manner independent of management. The appointment
of a Lead Director is part of EXFO’s ongoing commitment to good corporate
governance. The Lead Director will namely:
· provide
independent leadership to the Board;
· select
topics to be included in the Board of Directors meetings;
· facilitate
the functioning of the Board independently of the Corporation’s
management;
· maintain
and enhance the quality of the Corporation’s corporate governance
practices;
· in
the absence of the Executive Chair, act as chair of meetings of
the
Board;
· recommend,
where necessary, the holding of special meetings of the
Board;
· serve
as Board ombudsman, so as to ensure that questions or comments
of
individual directors are heard and addressed;
· manage
and investigate any report received through the Corporation website
pursuant to the Corporation’s Statement on reporting Ethical Violations
and Ethics and Business Conduct Policy;
· work
with the Board of Directors to facilitate the process for developing,
monitoring and evaluating specific annual objectives for the Board
each
year.
|
||||||
|
(g) Disclose
the attendance record of each director for all board meetings held
since
the beginning of the issuer’s most recently completed financial
year.
|
The
table below indicates the directors’ record of attendance at meetings of
the Board of Directors and its committees during the financial
year ended
August 31, 2007:
|
||||||
|
Director
|
Board
meetings
attended
|
Audit
Committee
meetings
attended
|
Human
Resources Committee meetings attended
|
Independent
Directors meetings attended
|
Total
Board and
Committee
meetings
attendance
rate
|
||
|
Lamonde,
Germain
|
6
of 6
|
n/a
|
n/a
|
n/a
|
100%
|
||
|
Marcouiller,
Pierre
|
5
of 6
|
3
of 4
|
3
of 4
|
3
of 3
|
82%
|
||
|
Marier,
Guy
|
6
of 6
|
4
of 4
|
4
of 4
|
3
of 3
|
100%
|
||
|
Thompson,
David
|
5
of 6
|
n/a
|
2
of 4
|
2
of 3
|
69%
|
||
|
Tremblay,
André
|
6
of 6
|
4
of 4
|
4
of 4
|
3
of 3
|
100%
|
||
|
Unger,
Michael
|
6
of 6
|
4
of 4
|
4
of 4
|
3
of 3
|
100%
|
||
|
Attendance
Rate:
|
94%
|
94%
|
85%
|
93%
|
92%
|
||
|
2. Board
Mandate – Disclose the text of the board’s written mandate.
If the board does not have a written mandate, describe how the
board
delineates its role and responsibilities.
|
|
|
(a) Assuring
the integrity of the executive officers and creating a culture
of
integrity throughout the organisation.
|
The
Board is committed to maintaining the highest standards of integrity
throughout the organisation. Accordingly, the Board adopted an
Ethics and
Business Conduct Policy and a Statement on Reporting Ethical Violations
(“Whistleblower Policy”) which are available on EXFO website at www.
EXFO.com to all employees and formerly distributed to every new
employees
of the Corporation.
|
|
(b) Adoption
of a strategic planning process
|
The
Board provides guidance for the development of the strategic planning
process and approves the process and the plan developed by management
annually. In addition, the Board carefully reviews the strategic
plan and
deals with strategic planning matters that arise during the
year.
|
|
(c) Identification
of principal risks and implementing of risk management
systems
|
The
Board works with management to identify the Corporation’s principal risks
and manages these risks through regular appraisal of management’s
practices on an ongoing basis.
|
|
(d) Succession
planning including appointing, training and monitoring senior
management
|
The
Human Resources Committee is responsible for the elaboration and
implementation of a succession planning process and its updates
as
required. The Human Resources Committee is responsible to monitor
and
review the performance of the Chief Executive Officer and that
of all
other senior officers.
|
|
(e) Communications
policy
|
The
Chief Financial Officer of the Corporation is responsible for
communications between Management and the Corporation’s current and
potential shareholders and financial analysts. The Board adopted
and
implemented Disclosure Guidelines to ensure consistency in the
manner that
communications with shareholders and the public are managed. The
Audit
Committee reviews press releases containing the quarterly results
of the
Corporation prior to release. In addition, all material press releases
of
the Corporation are reviewed by the President and Chief Executive
Officer,
Chief Financial Officer, Investor Relations Manager, Manager of
Financial
Reporting and Accounting and Internal Legal Counsel. The Disclosure
Guidelines have been established in accordance with the relevant
disclosure requirements under applicable Canadian and United States
securities laws.
|
|
(f) Integrity
of internal control and management information systems
|
The
Audit Committee has the responsibility to review the Corporation’s systems
of internal controls regarding finance, accounting, legal compliance
and
ethical behaviour. The Audit Committee meets with the Corporation’s
external auditors on a quarterly basis. Accordingly, the Corporation
fully
complies with Sarbanes-Oxley Act requirements within the required
period
of time.
|
|
(g) Approach
to corporate governance including developing a set of corporate
governance
principles and guidelines that are specifically applicable to the
issuer
|
The
Board assumes direct responsibility for the monitoring of the Board’s
corporate governance practices, the functioning of the Board and
the
powers, mandates and performance of the committees. These responsibilities
were previously assumed by the Human Resources Committee. Accordingly,
the
Board updated and adopted in March 2005 the following policies
to fully
comply with these responsibilities:
· Audit
Committee Charter*;
· Board
of Directors Corporate Governance Guidelines*;
· Code
of Ethics for our Principal Executive Officer and Senior Financial
Officers*;
· Disclosure
Guidelines;
· Ethics
and Business Conduct Policy*;
· Human
Resources Committee Charter*;
· Securities
Trading Policy;
· Statement
on Reporting Ethical Violations (Whistle Blower)*;
· Policy
Regarding Hiring Employees and Former Employees of Independent
Auditor*.
The
Board also adopted in October 2006 the Policy Regarding Hiring
Employees
and Former Employees of Independent Auditors which is also available
on
EXFO website at www.EXFO.com.
*
available on EXFO website at www.EXFO.com.
|
|
(h) Expectations
and responsibilities of Directors, including basic duties and
responsibilities with respect to attendance at board meetings and
advance
review of meeting materials
|
The
Board is also responsible for the establishment and functioning
of all
Board committees, their compensation and their good standing. At
regularly
scheduled meetings of the Board, the Directors receive, consider
and
discuss committee reports. The Directors also receive in advance
of any
meeting, all documentation required for the upcoming meetings and
they are
expected to review and consult this documentation.
|
|
3. Position
Descriptions
|
|
|
(a) Disclose
whether or not the board has developed written position descriptions
for
the chair of the board and the chair of each board committee. If
the board
has not developed written position descriptions for the chair and/or
the
chair of each board committee, briefly describe how the board delineates
the role and responsibilities of each such position.
|
There
is no specific mandate for the Board, however the Board of Directors
is,
by law, responsible for managing the business and affairs of the
Corporation. Any responsibility which is not delegated to senior
management or to a committee of the Board remains the responsibility
of
the Board. Accordingly, the chair of the Board, of the Audit Committee
and
of the Human Resources Committee will namely:
· provide
leadership to the Board or Committee;
· ensure
that the Board or Committee can perform its duties in an effective
and
efficient manner;
· facilitate
the functionary of the Board or Committee;
· promote
best practices and high standards of corporate governance.
|
|
(b) Disclose
whether or not the board and CEO have developed a written position
description for the CEO. If the board and CEO have not developed
such a
position description, briefly describe how the board delineates
the role
and responsibilities of the CEO.
|
No
written position description has been developed for the CEO. The
President
and Chief Executive Officer, along with the rest of management
placed
under his supervision, is responsible for meeting the corporate
objectives
as determined by the strategic objectives and budget as they are
adopted
each year by the Board of Directors.
|
|
4. Orientation
and Continuing Education
|
|
|
(a) Briefly
describe what measures the board takes to orient new directors
regarding
(i) the
role of the board, its committees and its directors, and
(ii) the
nature and operation of the issuer’s business.
|
The
Human Resources Committee Charter foresees that the Human Resource
Committee maintain an orientation program for New Directors.
Presentations
and reports relating to the Corporation’s business and affairs are
provided to new Directors. In addition, new Board members meet
with senior
management of the Corporation to review the business and affairs
of the
Corporation.
|
|
(b) Briefly
describe what measures, if any, the board takes to provide continuing
education for its directors. If the board does not provide continuing
education, describe how the board ensures that its directors maintain
the
skill and knowledge necessary to meet their obligations as
directors.
|
The
Human Resources Committee Charter foresees that the Human Resources
Committee maintains a continuing education programs for
Directors.
|
|
5. Ethical
Business Conduct
|
|
|
(a) Disclose
whether or not the board has adopted a written code for the directors,
officers and employees. If the board has adopted a written
code:
i. disclose
how a person or company may obtain a copy of the code;
ii. describe
how the board monitors compliance with its code, or if the board
does not
monitor compliance, explain whether and how the board satisfies
itself
regarding compliance with its code; and
|
The
Corporation is committed to maintaining the highest standard of
business
conduct and ethics. Accordingly, the Board updated and established
(i) a
Board of Directors Corporate Governance Guidelines (ii) a Code
of Ethics
for our Principal Executive Officer and senior Financial Officers
(iii)
Ethics and Business Conduct Policy and (iv) a Statement on Reporting
Ethical Violations “Whistleblower Policy” which are available on the
Corporation’s website at www. EXFO.com.
The
Board of Directors will determine, or designate appropriate persons
to
determine, appropriate actions to be taken in the event of a violation
of
the Code of Ethics for our Principal Executive Officer and senior
Financial Officers. Someone that does not comply with this Code
of Ethics
will be subject to disciplinary measures, up to and including discharge
from the Corporation. Furthermore, a compliance affirmation must be
filled in a written form agreeing to abide by the policies of the
Code of
Ethics.
|
|
iii. provide
a cross-reference to any material change report filed since the
beginning
of the issuer’s most recently completed financial year that pertains to
any conduct of a director or executive officer that constitutes
a
departure from the code.
|
No
material change report has been required or filed during our financial
year ended August 31, 2007 with respect to any conduct constituting
a
departure from our Code of Ethics.
|
|
(b) Describe
any steps the board takes to ensure directors exercise independent
judgement in considering transactions and agreements in respect
of which a
director or executive officer has a material interest.
|
Activities
that could give rise to conflicts of interest are prohibited. Board
members should contact the Lead Director or in-house legal counsel
regarding any issues relating to possible conflict of interest.
If such
event occurs, the implicated Board member will not participate
in the
meeting and discussion with respect to such possible conflict of
interest
and will not be entitled to vote on such matter. Senior executives
should
also contact the in-house legal counsel regarding any issues relating
to
possible conflict of interest.
|
|
(c) Describe
any other steps the board takes to encourage and promote a culture
of
ethical business conduct.
|
The
Corporation has instituted and follows a “Whistleblower Policy” where each
member of the Board as well as any senior officer, every employee
of the
Corporation and any person is invited and encouraged to report
anything
appearing or suspected of being non-ethical to our Lead Director,
in
confidence. The Lead Director has the power to hire professional
assistance to conduct an internal investigation should he so fell
required.
|
|
6. Nomination
of Directors
|
|
|
(a) Describe
the process by which the board identifies new candidates for board
nomination.
|
The
Board adopted and implemented a Human Resources Committee Charter
which
integrates the Compensation Committee Charter and the Nominating
and
Governance Committee Charter. The Human Resources Committee is
responsible
for nomination, assessment and compensation of directors and
Officers.
|
|
(b) Disclose
whether or not the board has a nominating committee composed entirely
of
independent directors. If the board does not have a nominating
committee
composed entirely of independent directors, describe what steps
the board
takes to encourage an objective nomination process.
|
The
Human Resources Committee consists of five members all of who are
independent Directors. The Chairman of the Human Resources Committee
is
Mr. Michael Unger.
The
Human Resources Committee Charter namely foresees:
· The
Committee to identify individuals qualified to become members of
the
Board, to conduct background checks respecting such individuals,
to
recommend that the Board select the director nominees for the next
annual
meeting of shareholders;
|
|
(c) If
the board has a nominating committee, describe the responsibilities,
powers and operation of the nominating committee.
|
|
7. Compensation
|
|
|
(a) Describe
the process by which the board determines the compensation for
the
issuer’s directors and officers.
|
The
Human Resources Committee reviews periodically compensation policies
in
light of market conditions, industry practice and level of
responsibilities. Only independent Directors are compensated for
acting as
a Director of the Corporation.
|
|
(b) Disclose
whether or not the board has a compensation committee composed
entirely of
independent directors. If the board does not have a compensation
committee
composed entirely of independent directors, describe what steps
the board
takes to ensure an objective process for determining such
compensation.
|
The
Human Resources Committee consists of five members all of who are
independent Directors. The Chairman of the Human Resources Committee
is
Mr. Michael Unger.
|
|
(c) If
the board has a compensation committee, describe the
responsibilities, powers and operation of the compensation
committee.
|
The
Human Resources Committee Charter namely foresees:
· The
Committee to review and approve on an annual basis with respect
to the
annual compensation of all senior officers;
· The
Committee to review and approve, on behalf of the Board of Directors
(“the
Board”) or in collaboration with the Board as applicable, on the basis
of
the attribution authorized by the Board, to whom options to purchase
shares of the Corporation, RSUs or DSUs shall be offered as the
case may
be and if so, the terms of such options, RSUs or DSUs in accordance
with
the terms of the Corporation’s Long-Term Incentive Plan or the Deferred
Share Unit Plan provided that no options, RSUs or DSUs shall be
granted to
members of this committee without the approval of the Board;
· The
committee to recommend to the Board from time to time the remuneration
to
be paid by the Corporation to Directors;
· The
Committee to make recommendations to the Board with respect to
the
Corporation’s incentive compensation plans and equity-based
plans.
|
|
(d) If
a compensation consultant or advisor has, at any time since the
beginning
of the issuer’s most recently completed financial year, been retained to
assist in determining compensation for any of the issuer’s directors and
officers, disclose the identity of the consultant or advisor and
briefly
summarize the mandate for which they have been retained. If the
consultant
or advisor has been retained to perform any other work for the
issuer,
state that fact and briefly describe the nature of the work.
|
In
2004, the Corporation hired Mercer Human Resource Consulting to
conduct a
full market benchmarking and review of the Corporation’s executive
compensation plans. In 2006, Mercer provided data regarding market
competitive annual base salary increases, which were applied to
the
executive compensation structure developed in 2004. In addition,
Mercer
completed mandates on the following topics in 2006:
· Job
classification structure & salary scales (Define Job positions vs.
comparable market including salary scale);
· Development
of compensation management policies & practices (to manage employee
progression through the salary scale).
In
2007, Mercer Human Resource Consulting and AON had conducted a
full market
analysis for Corporate executive compensation plan. Both
companies provide data regarding market competitive annual base
salary
increases and also data regarding annual bonus.
|
|
8. Other
Board Committees – If the board has standing committees
other than the audit, compensation and nominating committees identify
the
committees and describe their function.
|
The
Board has no other standing committee.
|
|
9. Assessments –
Disclose whether or not the board, its committees and individual
directors
are regularly assessed with respect to their effectiveness and
contribution. If assessments are regularly conducted, describe
the process
used for the assessments. If assessments are not regularly conducted,
describe how the board satisfies itself that the board, its committees,
and its individual directors are performing effectively.
|
The
Board assumes direct responsibility for the monitoring of the Board’s
corporate governance practices, the functioning of the Board and
the
powers, mandates and performance of the Committee. The Human Resources
Committee, composed solely of independent Directors, initiates
a
self-evaluation of the Board’s performance on an annual
basis.
|
Page
125
of 125