UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
20-F
o REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR (g)
OF THE
SECURITIES EXCHANGE ACT OF 1934; or
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended August 31, 2009; or
o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period ________ to ________; or
o SHELL COMPANY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date of
event requiring this shell company report
For
the transition period from September 1, 2008 to August 31, 2009
Commission
File No. 0-30895
EXFO
ELECTRO-OPTICAL ENGINEERING INC. /
EXFO
INGÉNIERIE ÉLECTRO-OPTIQUE INC.
(Exact
name of registrant as specified in its charter)
Canada
(Jurisdiction
of Incorporation or organization)
400
Godin Avenue
Quebec,
Quebec, G1M 2K2, Canada
(418)
683-0211
(Address,
including zip code and telephone number, including area code, of registrant’s
principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Subordinate
Voting Shares without par value
|
NASDAQ
|
|
Subordinate
Voting Shares without par value
|
TSX
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
As of
November 2, 2009, the registrant had 22,749,965 Subordinate Voting Shares
outstanding.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
If this
report is an annual report or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S.
GAAP o
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International
Financial Reporting Standards as issued by
the o
International
Accounting Standards Board
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Other x
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.
Item 17
o Item 18 x
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 of 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes o No x
DISCLOSURE
REGARDING FORWARD-LOOKING INFORMATION
This
annual report contains or incorporates by reference statements which constitute
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
that refer to expectations, projections or other characterizations of future
events and circumstances. 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 those that are
discussed under “Risk Factors” set forth in Item 3D of this annual report.
Assumptions relating to forward-looking statements involve judgments and risks,
all of which are difficult or impossible to predict and many of which are beyond
our control. When used in this annual report, the words “believe”, “anticipate”,
“plan”, “expect”, “intend”, “estimate” or similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain such identifying words. 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.
All
dollar amounts in this annual report are expressed in US dollars, except as
otherwise noted.
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Identity
of Directors, Senior Management and
Advisors
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Not
Applicable.
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Offer
Statistics and Expected Timetable
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Not
Applicable.
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Key
Information
|
The
consolidated statements of earnings data for the years ended August 31, 2005 and
2006 and the consolidated balance sheets data as at August 31, 2005, 2006 and
2007 are derived from our audited consolidated financial statements not included
in this annual report. The consolidated statements of earnings data for each of
the three years ended August 31, 2007, 2008 and 2009 and the
consolidated balance sheets data as at August 31, 2008 and 2009 are
derived from our audited consolidated financial statements that are included
elsewhere in this annual report.
Our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in Canada (“Canadian GAAP”) and significant
differences in measurement and disclosure from generally accepted accounting
principles in United States (“U.S. GAAP”) are set out in note 20 to our
consolidated financial statements included elsewhere in this annual report. The
historical results below are not necessarily indicative of the results to be
expected for any future periods.
The
selected financial data should be read in conjunction with our audited
consolidated financial statements and the related notes included elsewhere in
this annual report, and “Item 5. Operating and Financial Review and Prospects”
of this annual report.
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Years
ended August 31,
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||||||||||||||||||||
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2009
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2008
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2007
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2006
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2005
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||||||||||||||||
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(in
thousands of US dollars, except share and per share data)
|
||||||||||||||||||||
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Consolidated
Statements of Earnings Data:
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||||||||||||||||||||
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Amounts
under Canadian GAAP
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||||||||||||||||||||
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Sales
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$ | 172,878 | $ | 183,790 | $ | 152,934 | $ | 128,253 | $ | 97,216 | ||||||||||
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Cost
of sales (1)
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66,892 | 75,624 | 65,136 | 57,275 | 44,059 | |||||||||||||||
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Gross
margin
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105,986 | 108,166 | 87,798 | 70,978 | 53,157 | |||||||||||||||
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Operating
expenses
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||||||||||||||||||||
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Selling
and administrative
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63,808 | 61,153 | 49,580 | 40,298 | 31,782 | |||||||||||||||
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Net
research and development
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27,698 | 26,867 | 16,668 | 15,404 | 12,190 | |||||||||||||||
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Amortization
of property, plant and equipment
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4,607 | 4,292 | 2,983 | 3,523 | 4,256 | |||||||||||||||
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Amortization
of intangible assets
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5,067 | 3,871 | 2,864 | 4,394 | 4,836 | |||||||||||||||
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Impairment
of long-lived assets
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− | − | − | 604 | − | |||||||||||||||
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Restructuring
and other charges
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1,171 | − | − | − | 292 | |||||||||||||||
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Government
grants
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− | − | (1,079 | ) | (1,307 | ) | − | |||||||||||||
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Impairment
of goodwill
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21,713 | − | − | − | − | |||||||||||||||
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Total
operating expenses
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124,064 | 96,183 | 71,016 | 62,916 | 53,356 | |||||||||||||||
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Earnings
(loss) from operations
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(18,078 | ) | 11,983 | 16,782 | 8,062 | (199 | ) | |||||||||||||
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Interest
income
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597 | 4,639 | 4,717 | 3,253 | 2,524 | |||||||||||||||
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Foreign
exchange gain (loss)
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1,157 | 442 | (49 | ) | (595 | ) | (1,336 | ) | ||||||||||||
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Earnings
(loss) before income taxes and extraordinary gain
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(16,324 | ) | 17,064 | 21,450 | 10,720 | 989 | ||||||||||||||
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Income
taxes
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261 | 1,676 | (20,825 | ) | 2,585 | 2,623 | ||||||||||||||
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Earnings
(loss) before extraordinary gain
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(16,585 | ) | 15,388 | 42,275 | 8,135 | (1,634 | ) | |||||||||||||
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Extraordinary
gain
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− | 3,036 | − | − | − | |||||||||||||||
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Net
earnings (loss) for the year
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$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | ||||||||
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Basic
and diluted earnings (loss) before extraordinary gain
per share
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$ | (0.27 | ) | $ | 0.22 | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | ||||||||
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Basic
and diluted net earnings (loss) per share
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$ | (0.27 | ) | $ | 0.27 | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | ||||||||
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Basic
weighted average number of shares used in per share calculations
(000’s)
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61,845 | 68,767 | 68,875 | 68,643 | 68,526 | |||||||||||||||
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Diluted
weighted average number of shares used in per share calculations
(000’s)
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61,845 | 69,318 | 69,555 | 69,275 | 68,526 | |||||||||||||||
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Other
consolidated statements of earnings data:
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||||||||||||||||||||
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Gross
research and development
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$ | 35,757 | $ | 32,454 | $ | 25,201 | $ | 19,488 | $ | 15,878 | ||||||||||
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Net
research and development
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$ | 27,698 | $ | 26,867 | $ | 16,668 | $ | 15,404 | $ | 12,190 | ||||||||||
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Amounts
under U.S. GAAP
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||||||||||||||||||||
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Net earnings (loss) for the year
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$ | (8,179 | ) | $ | 18,424 | $ | 42,257 | $ | 8,135 | $ | (2,920 | ) | ||||||||
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Basic
and diluted net earnings (loss) per share
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$ | (0.13 | ) | $ | 0.27 | $ | 0.61 | $ | 0.12 | $ | (0.04 | ) | ||||||||
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Basic
weighted average number of shares used in per share calculations
(000’s)
|
61,845 | 68,767 | 68,875 | 68,643 | 68,526 | |||||||||||||||
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Diluted
weighted average number of shares used in per share calculations
(000’s)
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61,845 | 69,318 | 69,555 | 69,275 | 68,526 | |||||||||||||||
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As
at August 31,
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||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
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(in
thousands of US dollars)
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||||||||||||||||||||
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Consolidated
Balance Sheets Data:
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||||||||||||||||||||
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Amounts
under Canadian GAAP
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||||||||||||||||||||
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Cash
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$ | 10,611 | $ | 5,914 | $ | 5,541 | $ | 6,853 | $ | 7,119 | ||||||||||
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Short-term investments
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59,105 | 81,626 | 124,217 | 104,437 | 104,883 | |||||||||||||||
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Total
assets
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240,371 | 293,066 | 279,138 | 219,159 | 190,957 | |||||||||||||||
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Long-term
debt (excluding current portion)
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− | − | − | 354 | 198 | |||||||||||||||
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Share
capital
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104,846 | 142,786 | 150,019 | 148,921 | 521,875 | |||||||||||||||
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Shareholders’ equity
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$ | 208,045 | $ | 259,515 | $ | 250,165 | $ | 196,234 | $ | 173,400 | ||||||||||
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Amounts
under U.S. GAAP
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||||||||||||||||||||
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Cash
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$ | 10,611 | $ | 5,914 | $ | 5,541 | $ | 6,853 | $ | 7,119 | ||||||||||
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Short-term investments
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59,105 | 81,626 | 124,217 | 104,437 | 104,883 | |||||||||||||||
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Total
assets
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236,492 | 280,426 | 268,389 | 212,702 | 182,852 | |||||||||||||||
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Long-term
debt (excluding current portion)
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− | − | − | 354 | 198 | |||||||||||||||
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Share
capital
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417,342 | 568,917 | 599,519 | 598,421 | 597,664 | |||||||||||||||
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Shareholders’ equity
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$ | 204,093 | $ | 246,802 | $ | 239,343 | $ | 189,777 | $ | 165,295 | ||||||||||
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(1)
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The
cost of sales is exclusive of amortization, shown
separately.
|
Not
Applicable.
Not
Applicable.
Fluctuations
in the exchange rates between the Canadian dollar, US dollar and other
currencies may adversely affect our operating results.
Most of
our sales are denominated in US dollars and Euros. However, most of our
operating expenses and capital expenditures are denominated in Canadian dollars
and foreign currencies such as Euros, Sterling Pound (Great Britain), Rupee
(India) and Renminbi (China). As a result, even though we manage to some extent
our exposure to currency risks with forward exchange contracts (to sell US
dollars for Canadian dollars) and certain operating expenses denominated in
currencies other than the Canadian dollar, we are exposed to fluctuations in the
exchange rates between the US dollar on one hand and the Canadian dollar,
Euro and other currencies on the other. For example, the average exchange rate
of the Canadian dollar versus the US dollar was 1.1782 in fiscal 2009 compared
to 1.0071 in fiscal 2008. Moreover, from March 1, 2009 to May 31, 2009, the
Canadian dollar increased 16.4% against the US dollar which negatively affected
our operating results for the third quarter of fiscal 2009. Any further decrease
in the value of the US dollar relative to the Canadian dollar and other
currencies, and any variance between the value of the Canadian dollar and the
contractual rate of our forward exchange contracts, could have a material
adverse effect on our operating results and provide competitive advantages to
our competitors.
If
the global economic recession persists or worsens, our business may continue to
be adversely affected by unfavorable general economic and market
conditions.
Our
business is subject to the effects of general economic conditions in North
America and throughout the world and, more particularly, market conditions in
the telecommunications industry. During fiscal 2009, our operating results were
adversely affected by unfavorable economic conditions and reduced capital
spending in the Americas, Europe, Middle East and Africa (EMEA), and
Asia-Pacific (APAC). The global economic crisis included significant reductions
in available capital and liquidity from banks and other providers of credit,
substantial reductions and/or fluctuations in equity and currency values
worldwide, and concerns that the worldwide economy will endure a prolonged
recessionary period. Due to the unfavorable changes in economic and market
conditions, capital spending was lower among our customers for test and service
assurance solutions and, therefore, demand for our products declined which
adversely affected our revenue level in 2009. Challenging economic and market
conditions also impaired the ability of some customers to pay for the products
and services they purchased. As a result, our reserves for doubtful
accounts receivable increased. In addition, economic condition may also
negatively affect the ability of some of our suppliers to supply us in a timely
fashion.
Further
effects of the global economic crisis, as well as other unforeseeable ones, are
difficult to forecast and mitigate. If unfavorable economic and market
conditions persist, we may continue to experience a material adverse impact
on our business, operating results and financial condition.
We
must continue to overcome significant competition in our targeted industries in
order to gain market share and achieve our growth strategy.
The
market for our primary business activity ─ namely designing, manufacturing,
marketing and selling telecommunications test, measurement and service assurance
equipment ─ is rapidly evolving and is marked by intense competition and
technical innovation. Likewise, the market for our selected life sciences and
industrial solutions is very competitive. We anticipate the pace of change to
remain high or even accelerate for our targeted industries in the future.
We might see the emergence of new competitors or the consolidation of
current competitors, as the markets for telecommunications test, measurement and
service assurance equipment as well as for life sciences and industrial
solutions evolve in response to technical innovations and economic conditions.
Achieving a compound annual growth rate of 20% in sales in the next three
years, as we have targeted in our updated corporate performance objectives, will
largely depend on our ability to gain market share by increasing sales of
current products at existing accounts, expanding into new accounts, introducing
new products and enhancements, and exploiting new market opportunities, all of
which will be challenging given the competitive environment.
During
the past few years, the telecommunications test, measurement and service
assurance industry has witnessed consolidation. IXIA acquired Catapult
Communications and Agilent Technologies’ data networks product testing line
in June 2009 and October 2009, respectively. Danaher Corporation
acquired Tektronix, Inc., in November 2007. Anritsu Corporation acquired
NetTest A/S in August 2005 and JDS Uniphase Corporation (JDSU) acquired
Acterna Corporation in the same month.
Competitors
in test and measurement include global suppliers like Agilent, Anritsu, JDSU,
Spirent and Yokogawa. Other players like AFL Noyes, Anacise, BlueLight
Technologies, Dadi, Digital Lightwave, Electrodata, Empirix, Fluke Networks and
Tektronix, operating divisions within Danaher Corporation, Grandway, Greenlee
Tempo, Ineoquest, IXIA, Kingfisher, Nethawk, Shenick, Shunra, Sunrise Telecom
and VeEX compete against us in niche test and measurement markets. On
the service assurance side, we compete against Agilent, Danaher, Empirix,
Ineoquest, Infovista, IXIA, Nexus Telecom, Radcom, Spirent, TTI Telecom and
Whitbe. Some network equipment manufacturers also sell their in-house service
assurance systems.
Some
competitors may have greater financial, technical and/or marketing resources
than us. Consequently, they may be able to devote greater resources to the
development, marketing, manufacturing, selling and support of their
products in order to capture market share.
Competitors
also may be better positioned than us to capture market share or to acquire
companies and new technologies that would potentially displace our products or
render them obsolete. We cannot predict whether current or future competitors
will develop or market products that offer higher performance, more features, or
are more cost-effective than our current or future products. To remain
competitive and achieve our growth strategy, we must increase our sales and
develop cost-effective products and product enhancements that offer higher
performance and more functionality, in current and new sectors, so that we can
increase our market share. Our failure to do so may harm our business,
results of operations and financial condition.
One
of our customers has accounted for a high percentage of our sales in the past
several years, and any adverse factor affecting this customer or our
relationship with this customer could cause our sales
to decrease.
A Tier-1
carrier in the US accounted for 11.6% of our sales in fiscal 2009, 7.4% in
fiscal 2008, 14.7% in fiscal 2007, 13.8% in fiscal 2006 and 23.3% in fiscal
2005. Although we have reduced our exposure to this customer in recent
years, we may not be able to offset lower sales at this particular account
in the future. Despite the fact that this customer has a supply contract with
us, it could change its purchasing practice, force us to renegotiate prices
and is not obligated to purchase a specific amount of products from us or
provide us with binding purchase forecasts for any period. In addition, our
customers typically purchase our products under individual purchase orders and
may cancel or defer purchases on short notice without
significant penalties.
The loss
of such a customer or the reduction, delay, or cancellation of orders from this
customer or other significant customers could cause our sales and, therefore,
net earnings to decline.
We
have faced pricing pressure on our existing products and expect that this
pressure will continue. If we do not keep lowering our manufacturing costs or
introduce new products with higher margins, our gross margins may decrease and
our operating results may be adversely affected.
We
continue to implement measures to attempt to protect our gross margin, despite
sharp fluctuations between the US and Canadian currencies. In addition,
since September 2007, we began transferring and ramping manufacturing of our
higher-volume, lower-complexity telecom products at a wholly-owned production
facility in Shenzhen, China, with a goal of lowering our production costs.
However, increased competition in the telecommunications test, measurement and
service assurance industry and consolidation among our customers, will likely
result in ongoing downward pressure on average selling prices, which may in turn
negatively affect our gross margins. Pricing pressure can result from a number
of factors such as:
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·
|
increased
competition for business;
|
|
·
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reduced
demand;
|
|
·
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limited
number of potential customers;
|
|
·
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competition
from companies with lower production costs, including companies operating
in lower cost environments;
|
|
·
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introduction
of new products by competitors;
|
|
·
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greater
economies of scale for higher-volume
competitors;
|
|
·
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large
customers, who buy in high volumes, can exert substantial negotiating
leverage over us; and
|
|
·
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resale
of used equipment.
|
In
addition, gross margins may also be negatively affected by increased costs of
raw materials as well as obsolescence and excess costs, product and
customer mix and under-absorption of fixed manufacturing costs.
As
pricing pressure will likely continue to affect our existing products, we may
have to increase the number of units sold to maintain our existing sales levels.
If we are unable to increase our sales levels, lower our manufacturing costs, or
introduce new products with higher margins, our gross margins may decline and
our operating results may suffer.
Our
products may have unforeseen defects that could harm our reputation, impede
market acceptance of our products and negatively impact our business, results of
operations and financial condition.
Given
their complexity, our products may contain undetected software or hardware
defects, inaccurate calibration or compatibility problems, or regulatory
compliance issues, particularly when they are first introduced or when new
versions are released. There can be no assurance that, despite our testing and
diligent efforts, defects will not be found in new products after they have been
fully deployed and operated under peak stress conditions, or that
customized products will meet customer sign-off acceptance requirements. If we
are unable to fix defects or other problems or meet custom requirements, we
could experience, among other things:
|
·
|
costly
repairs;
|
|
·
|
product
returns or recalls;
|
|
·
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damage
to our brand reputation;
|
|
·
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loss
of customers, failure to attract new customers or achieve market
acceptance;
|
|
·
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diversion
of development and engineering
resources;
|
|
·
|
legal
actions by our customers, including claims for consequential damages and
loss of profits; and
|
|
·
|
legal
actions by governmental entities, including actions to impose product
recalls and/or forfeitures.
|
The
occurrence of any one or more of the foregoing could seriously harm our
business, results of operations and financial condition.
We
may not be able to make the acquisitions or strategic alliances needed for the
development of our business or, if we do make such acquisitions or strategic
alliances, we cannot assure you that we will successfully integrate the
businesses, products, technologies and personnel. In addition, such acquisitions
could distract management’s attention from our day-to-day business and
operations. Ultimately, the failure to make strategic acquisitions or the
inability to effectively integrate them could disrupt our overall business and
harm our financial condition.
We intend
to carefully seek businesses, whose products and technologies are complementary
to ours, or which will enable us to expand our markets and/or our market
share. There can be no assurance that we will ultimately make any such
transactions. Our competitors may be in a better position to acquire the same
businesses, products and technologies that we wish to acquire. In addition, our
fluctuating stock price, our cash position, or our ability to raise capital or
issue debt on favorable terms, or at all at the time of an acquisition, may
affect our ability to complete such an acquisition.
In fiscal
2009, we acquired PicoSolve Inc., a test and
measurement company offering the industry’s fastest optical sampling
oscilloscopes for 40G and 100G R&D, manufacturing and deployment
applications We intend to continue making acquisitions of businesses,
products and technologies as part of our overall growth strategy. In the event
of any future acquisition, we could:
|
·
|
issue
shares that would dilute individual shareholder percentage
ownership;
|
|
·
|
incur
debt;
|
|
·
|
assume
liabilities and commitments;
|
|
·
|
incur
significant expenses related to amortization of additional intangible
assets;
|
|
·
|
incur
significant impairment losses of goodwill and intangible assets related to
such acquisitions; and
|
|
·
|
incur
losses from operations.
|
These
acquisitions also involve numerous risks, including:
|
·
|
risk
of not realizing the expected benefits or synergies of such
acquisitions;
|
|
·
|
problems
integrating the acquired operations, technologies, products and
personnel;
|
|
·
|
risks
associated with the transfer of acquired know-how and
technology;
|
|
·
|
unanticipated
costs or liabilities;
|
|
·
|
diversion
of management’s attention from our core
business;
|
|
·
|
adverse
effects on existing business relationships with suppliers and
customers;
|
|
·
|
risks
associated with entering markets in which we have no or limited prior
experience; and
|
|
·
|
potential
loss of key employees, particularly those of acquired
organizations.
|
If
we fail to adapt appropriately to the challenges associated with operating
internationally, the expected growth of our business may be impeded and our
operating results may be affected.
For the
fiscal year ended August 31, 2009, customers outside of the United States and
Canada accounted for 47.2% of our sales. Our international sales will be limited
if we cannot establish and maintain relationships with international
distributors, set up additional foreign operations, expand international sales
channel management, hire additional personnel, develop relationships with
international service providers and operate adequate after-sales support
internationally.
In the
third quarter of fiscal 2007, we established a software development center in
Pune, India, to supplement the efforts of our R&D centers in Quebec
City, Canada, Montreal, Canada, Concord, Canada, and since the third quarter of
fiscal 2008, Boston, Massachusetts, United States. We also began manufacturing
high-volume, low-complexity telecom products at our wholly-owned production
facility in Shenzhen, China, in the first quarter of fiscal 2008 with the
goal of lowering our manufacturing costs.
Even if
we are able to successfully expand our international operations, we may not be
able to maintain or increase international market demand for our products.
Our international operations are subject to a number of risks,
including:
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challenges
in staffing and managing foreign operations due to the limited number of
qualified candidates, employment laws and business practices in foreign
countries, any of which could increase the cost and reduce the efficiency
of operating in foreign countries;
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our
inability to comply with import/export, environmental and other trade
compliance regulations of the countries in which we do business,
together with unexpected changes in such
regulations;
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measures
to ensure that we design, implement and maintain adequate controls over
our financial processes and reporting in the future, especially in light
of setting up new operating companies in India and China or the future
acquisition of companies;
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failure
to adhere to laws, regulations and contractual obligations relating to
customer contracts in various
countries;
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difficulties
in establishing and enforcing our intellectual property
rights;
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inability
to maintain a competitive list of distributors for indirect
sales;
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tariffs
and other trade barriers;
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economic
instability in foreign markets;
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wars,
acts of terrorism and political
unrest;
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language
and cultural barriers;
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lack
of integration of foreign
operations;
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currency
fluctuations;
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potential
foreign and domestic tax
consequences;
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technology
standards that differ from those on which our products are based, which
could require expensive redesign and retention of personnel familiar with
those standards;
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longer
accounts receivable payment cycles and possible difficulties in collecting
payments which may increase our operating costs and hurt our financial
performance; and
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failure
to meet certification requirements.
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Any of
these factors could harm our international operations and negatively affect our
business, results of operations and financial condition. The recurrence of
weakness in these economies or of weakness in other foreign economies could have
a significant negative effect on our future operating results.
We
may make misjudgments in our strategic planning that could have material adverse
effects on our business, results of operations and financial
condition.
We devise
a three-year strategic business plan, which is prepared by management and
approved by our Board of Directors. This strategic plan, reviewed by management
on a regular basis, is mainly based on market research and analysis related to
future market trends and demands. In our strategic plan, we have made and will
continue to make judgments based on our analysis of future market trends and
requirements. These decisions may involve substantial investments in the
development of new product lines, diversification of our business
on a geographic basis, as well as expansion into new market segments —
either organically or through acquisitions. We may make misjudgments in our
strategic planning that could have material adverse effects on our business,
results of operations and financial condition.
Our
quarterly revenues and operating results are subject to significant fluctuations
and you should not rely on them as an indication of our future
performance.
Our sales
and operating results have fluctuated from quarter to quarter in the past and
significant fluctuations may occur in the future, especially following the
acquisition of Brix Networks (renamed EXFO Service Assurance Inc.) in the third
quarter of fiscal 2008. EXFO Service Assurance Inc. offers service assurance
systems that monitor next-generation, converged IP networks. Given that
these systems are more complex and mission-critical than traditional test
equipment, the orders are much larger and the sales cycles are relatively
longer. Therefore, sales levels for our service assurance business could
fluctuate significantly quarter-over-quarter depending on when revenue is
recognized.
In
addition, our sales and operating results generally depend on the volume and
timing of the orders we receive from customers as well as our ability to
fulfill received orders. Our operating expenses, which include manufacturing
overhead costs, selling and administrative, research and development, and
amortization expenses, are relatively fixed in the short term. If we sell fewer
products than anticipated, if there is a delay in the launch of new
products, or if prices for our products decline, we may not be able to
quickly reduce our operating expenses in response to lower sales.
Factors that could affect the amount and timing of our sales, and cause
quarterly fluctuations in our revenue and operating results
include:
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length
of the product sales cycle for certain products, especially those that are
higher priced and more complex;
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timing
of product launches and market acceptance of new products for us as well
as our competitors;
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our
ability to sustain product volumes and high levels of quality across all
product lines;
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timing
of shipments for large orders;
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effect
of seasonality on sales and bookings;
and
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losing
key accounts and not successfully developing new
ones.
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Our sales
and operating results could also be affected by the following factors, some of
which we have little or no control over:
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fluctuating
demand for telecommunications test, measurement and service assurance
equipment as well as life sciences and industrial
solutions;
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changes
in the capital spending and operating budgets of our customers, which may
cause seasonal or other fluctuations in product mix, volume, timing
and number of orders we receive from our
customers;
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order
cancellations or rescheduled delivery
dates;
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pricing
changes by our competitors or
suppliers;
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customer
bankruptcies and difficulties in collecting accounts
receivable;
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restructuring
and impairment charges;
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foreign
exchange rate fluctuations, as a portion of our operating expenses are
denominated in Canadian dollars;
and
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general
economic conditions, including a slowdown or
recession.
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We may in
the future choose to reduce prices, increase spending, or modify our product
portfolio in response to actions by competitors or as an effort to pursue
new market opportunities. These actions may also adversely affect our business
and operating results and may cause our quarterly results to be lower than the
results of previous quarters. Due to these factors, you should not rely on
quarter-to-quarter comparisons of our results of operations as an
indication of our future performance.
If
we are unable to adapt to current and future changes in technology or if we are
unable to introduce new and enhanced products on a timely basis, our
products may become obsolete, which could prevent us from achieving our growth
strategy and adversely affect our operating results.
The
industries that we target are characterized by rapidly evolving technology and
industry standards that result in frequent new product introductions. Any
failure by us to anticipate or respond to new technological developments,
customer requirements or evolving standards could have a material adverse effect
on our business, results of operations and financial condition. The development
of proprietary technology entails significant technical and business risks and
requires substantial expenditures and lead-time. The success of our new product
introductions will depend on several factors, including our
ability to:
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properly
identify and anticipate customer
needs;
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innovate
and develop new products;
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gain
timely market acceptance for new
products;
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manufacture
and deliver our new products on time, in sufficient volume and with
adequate quality;
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price
our products competitively;
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continue
investing in our research and development programs;
and
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anticipate
competitors’ announcements of new
products.
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Failure
to do the above could be exploited by our competitors. If we lose market share
as a result of lapses in our product development, our business would
suffer.
Our
intellectual property and proprietary technology are important to the continued
success of our business. Our failure to protect this proprietary technology may
significantly impair our competitive position.
Our
success and ability to compete depend to a significant extent on our proprietary
technology, with which we attempt to keep others from using the innovations that
are central to our existing and future products. As of August 31,
2009, we own 46 actively maintained granted patents from the U.S. (including one
“design” patent), ten from Canada, four from China, five from Germany (including
one “Utility Model”), four from the United Kingdom, four from France, as
well as a patent in each of four other European countries. In addition,
we have in process 20 US patent applications, seven Canadian patent
applications, two European applications, one application in China, and
one direct national entry in Germany (not via the European application),
and as well five applications under the Patent Cooperation Treaty, which have
not yet entered the national phase. We also rely on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures,
contractual provisions and license agreements to protect our proprietary
technology. We may have to engage in litigation in order to protect our patents
and other intellectual property rights, or to determine the validity or scope of
the proprietary rights of others. Such litigation can be time-consuming and
expensive, regardless of whether we win or lose.
The
process of seeking patent protection can be long and expensive and we cannot be
certain that any currently pending or future applications will actually result
in issued patents, or that, even if patents are issued, they will be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We also rely on trade secret protection for our technology, in
part through confidentiality agreements with our employees, consultants,
distributors and third parties. However, these agreements may be breached or
otherwise not effective and we may not have adequate remedies for any breach or
shortfall of these agreements. In any case, others may come to know about our
trade secrets through a variety of methods. In addition, the laws of some
territories in which we sell our products may not protect our intellectual
property rights to the same extent as do the laws of Canada and the United
States.
Our
intellectual property rights, particularly our existing or future patents, may
be invalidated, circumvented, challenged or required to be licensed to others.
Furthermore, others may develop technologies that are similar or superior to our
technology, duplicate or reverse engineer our technology, or design around the
patents owned or licensed by us. We cannot be sure that the steps that we take
to protect our technology will prevent misappropriation or infringement. If we
fail to protect our technology so that others may copy or use it, we will
be less able to differentiate our products and our sales may
decline.
Others
may claim that our products infringe upon their intellectual property rights, or
they may infringe our intellectual property, and we may expend significant
resources enforcing or defending our rights or suffer competitive
injury.
Litigation
regarding intellectual property rights is common in the technology industry and
third-party infringement claims involving technologies may increase. If an
infringement claim is filed against us, we may be prevented from using some
of our technologies and may incur significant costs to resolve the claim.
Conversely, we may be required to spend significant resources to monitor and
enforce our intellectual property rights.
We could
incur substantial costs in defending ourselves and our customers against
infringement claims or in bringing infringement claims against others.
Litigation could also adversely affect sales of the challenged product or
technology and divert the efforts of our management and technical personnel. In
the event of an infringement claim, we may be required to obtain one
or more licenses from third parties. We cannot assure you that we, or our
customers, could obtain necessary licenses from third parties at a reasonable
cost or at all. If we fail to obtain a license where one is
required, we could incur substantial liabilities and be forced to suspend the
marketing of the challenged products.
If
customers fail to meet their financial commitments to us, it could have a
material adverse effect on our business, results of operations and
financial condition.
Some of
our customers experienced cash flow problems during the global economic
recession and may continue to do so. Consequently, we may have customers who
delay payments or may not be able to meet their financial commitments to us.
Furthermore, they may not order as many products from us as originally
forecasted or they may cancel their orders outright. The failure of
customers to order products would result in decreased revenues for us. If
customers fail to meet their financial commitments to us, it could have a
material adverse effect on our business, results of operations and financial
condition.
As
our customers consolidate, they may reduce or halt purchases of our products,
which would harm our sales and operating results.
Consolidation
in the telecommunications industry could reduce the number of customers to which
our products are sold. Some of our customers have been subject to consolidation
and could obtain products from a vendor other than us, or demand more
favorable terms and conditions from us, which would harm our sales and operating
results. In addition, some customers may merge with or acquire our competitors
and discontinue their relationships with us.
If
we fail to predict our supply requirements accurately, we may have excess
inventory or insufficient inventory, either of which could cause us to incur
additional costs and/or experience manufacturing delays.
We
provide non-binding forecasts of our requirements to some of our suppliers up to
six months prior to scheduled delivery of products to our customers. If we
overestimate our forecasted requirements, we may have excess inventory, which
could harm our relationships with our suppliers due to reduced future orders,
increase our costs and require inventory write-offs. If we underestimate our
requirements, we may have an inadequate inventory of parts, which could
interrupt manufacturing of our products and result in shipment delays. The
likelihood of misjudging our inventory requirements increased with the
onset of the global economic recession and opening of a telecom
manufacturing facility in Shenzhen, China, in September 2007 for high-volume,
low-complexity products. This manufacturing facility complements the low-volume,
high-complexity telecom products produced at our plant in Quebec City,
Canada. In addition, lead times for materials and parts that we order may be
long and depend on factors such as the procedures of, or supply terms with, a
specific supplier and demand for each part at a given
time.
We
depend on a single supplier or a limited number of suppliers for some key
components and materials in our products, which makes us susceptible to supply
shortages or price fluctuations that could adversely affect our operating
results.
We depend
on a limited number of suppliers for some of the parts used to manufacture our
products for which alternative sources may not be readily available. In
addition, all our orders are placed through individual purchase orders and,
therefore, our suppliers may stop supplying parts to us at any time. The
reliance on a single source or limited number of suppliers could result in
increased costs, delivery problems and reduced control over product pricing and
quality. Financial difficulties of suppliers could also affect our ability to
obtain necessary parts in a timely manner. Any interruption or delay in the
supply of any of these parts could significantly harm our ability to meet
scheduled product deliveries to our customers and cause us to lose sales.
Furthermore, the process of qualifying a new manufacturer for complex
parts, designed to our specifications, such as our optical and mechanical parts,
is lengthy and would consume a substantial amount of time of our technical
personnel and management. If we were required to change a supplier in a short
period of time, our business would be disrupted. In addition, we may be
unsuccessful in identifying a new supplier capable of meeting and willing to
meet our needs on terms that we would find acceptable. Consolidation involving
suppliers could further reduce the number of alternatives available to us
and increase the cost of parts, which would make our products less competitive
and result in lower margins.
Our
manufacturing employees in Quebec City, Canada, are unionized. Failure to renew
the collective bargaining agreement may cause disruptions to our manufacturing
process and could adversely affect our operating results.
Our
collective bargaining agreement (CBA) with unionized manufacturing employees in
Quebec City, Canada, expired in February 2009. Negotiations for the renewal of
the CBA are underway, but no agreement has been reached. If we do not conclude
negotiations that are satisfactory to both parties or in the event of a work
stoppage, any extended interruption or delay to scheduled product deliveries to
our customers may cause us to lose sales. Our manufacturing employees in Quebec
City are the only unionized members within the company, and we’ve never had a
work stoppage during the 24-year history of EXFO.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial information or prevent fraud, which could
harm our operating results and cause investors to lose confidence in our
reported financial information.
Effective
internal controls are necessary for us to provide reliable and accurate
financial information and effectively prevent fraud. We devote significant
resources and time to comply with the internal control over financial reporting
requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we assess and that our auditors attest
to the design and operating effectiveness of our controls over financial
reporting. Our compliance with the annual internal control report requirement
for each fiscal year will depend on the effectiveness of our financial reporting
as well as data systems and controls throughout our company and operating
subsidiaries. Furthermore, we cannot be certain that these measures will ensure
that we design, implement and maintain adequate controls over our financial
processes and reporting in the future, especially in the likelihood of acquiring
companies that are not in compliance with Section 404 of the Sarbanes-Oxley Act
of 2002. As well, the complexity of our systems and controls may become more
difficult to manage as we transform our operating structure and
continue to reduce infrastructure costs. To effectively manage these changes, we
will need to continue to improve our operational, financial and management
controls and our reporting systems and procedures. Any failure to implement
required new or improved controls, difficulties encountered in their
implementation or operation, or difficulties in the assimilation of acquired
businesses into our control system could harm our operating results or cause it
to fail to meet our financial reporting obligations. Inferior internal
controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on our share
price and our access to capital.
Regulatory
changes may cause us to incur increased costs.
Changes
in the laws and regulations affecting public companies may increase our expenses
as we may have to devote resources to respond to these new requirements. In
particular, we incurred and may incur additional general administrative expenses
to comply with Section 404 of the Sarbanes-Oxley Act, which requires management
to report on internal controls over financial reporting. In addition, the
process of moving from Canadian GAAP to IFRS, which extends from fiscal
2009 to 2011, will require management’s time and attention, and cause our
general and administrative expenses to increase. Compliance with new rules could
require the further commitment of significant financial resources and result in
the diversion of management’s time and attention from revenue-generating
activities. Finally, the impact of these changes could make it more difficult
for us to attract and retain qualified persons to serve on our Board of
Directors or as executive officers, which could harm our business.
We
require employees and management resources who are knowledgeable about the
specialized nature of our business. If we are unable to attract and retain
sufficient numbers of highly skilled technical, sales, marketing, senior
management and other personnel, our operations and financial results will
suffer.
Due to
the specialized nature of our business, we are highly dependent on the continued
service of and on the ability to attract qualified engineering, sales,
marketing, senior management and other personnel. If we are unable to attract
and retain such qualified personnel, it could have a material adverse effect on
our business, results of operations and financial condition.
We must
also provide significant training for our employee base due to the highly
specialized nature of telecommunications test, measurement, and service
assurance as well as life sciences and industrial technologies. Our current
personnel may be inadequate and we may fail to assimilate and train new
employees. Highly skilled employees with the education and training that we
require – especially employees with significant experience and expertise in
international business development, product management, sales, engineering and
operations – may be difficult to find. Once trained, our employees may also
be hired by our competitors or leave the organization.
Our
insurance may not be sufficient to cover all potential liability. A successful
claim exceeding our policy limits will reduce our cash position, increase our
expenses and have a negative effect on our business, operating results and
financial condition.
Our
products are designed to help network service providers, cable operators and
manufacturers of optical networks and components ensure network reliability. We
also leverage our core telecom technologies for life sciences and industrial
applications. The failure of our products to perform to customer expectations
could give rise to product liability and warranty claims. We carry
insurance for product liability and take accounting reserves for warranty claims
that we consider adequate in view of industry practice.
In
addition, we may face other types of claims by third parties in relation to the
conduct of our business; a successful claim against us for an amount
exceeding our policy limits would force us to use our own resources to pay
the claim, which could result in a reduction of our cash available for other
uses, increase our expenses and have a negative effect on our business, results
of operations and financial condition.
Our
reported financial results could suffer if there is additional impairment of
goodwill.
We are
required to test annually, and review when circumstances warrant, our goodwill
associated to business combinations, and determine if impairment has
occurred. Recoverability of goodwill is determined at the reporting unit level,
using a two-step approach. First, the carrying value of the reporting units is
compared to their fair value. If the carrying value of a reporting unit exceeds
its fair value, the second step is undertaken to determine the amount of the
impairment loss. Impairment of goodwill would result in an incremental charge
which would adversely impact our operating results for the period in which the
impairment was determined to have occurred.
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Following the decrease in our stock price in
June, 2009, we came to the conclusion that the carrying value of one of our
reporting units exceeded its fair value and recorded an impairment charge of
$21.7 million.
The
recent turmoil in credit markets and the broader economy has contributed to
share price and volume fluctuations in global stock markets that have reduced
the market price of many technology stocks, including ours. Further declines in
our stock price or the failure of our stock price to recover from previous
declines, as well as any additional decline in our level of revenues or margins,
could increase the risk that additional goodwill may become impaired in future
periods. We currently have $22.5 million of goodwill on our balance sheet mainly
related to the acquisition of Brix Networks. Any additional impairment of
goodwill would negatively impact our operating results.
We
may become involved in costly and time-consuming litigation that may
substantially increase our costs and harm our business.
We may
from time to time become involved in various lawsuits and legal proceedings. For
example, we are a defendant in a putative securities class action suit filed in
the United States District Court for the Southern District of New York
involving approximately 300 other issuing companies. Litigation is subject to
inherent uncertainties, and an adverse result in these or other matters that may
arise from time to time could have a material adverse effect on our business,
results of operations or financial condition. Any litigation to which we are
subject could require significant involvement of our senior management and may
divert management attention from our business and operations.
If
we suffer loss to our factories or facilities, our operations could be seriously
harmed.
Our
factories and facilities are subject to catastrophic losses due to fire,
vandalism, terrorism or other natural or man-made disasters. We do not have
redundant multiple-site capacity and if any of our facilities or factories
were to experience a catastrophic loss, it would disrupt our operations, delay
production, shipments and revenue and result in large expenses, thereby harming
our results of operation.
Unexpected
declines in our research and development and other tax credits and grants may
have an adverse effect on our business.
Our
historical operating results reflect substantial benefits from programs
sponsored by federal and provincial governments for the support of research and
development activities, as well as in relation to other activities. For example,
research and development tax credits and grants represented 17.2% of our gross
research and development expenses for the year ended August 31,
2009.
If
unexpected changes in the laws or government policies terminate or adversely
modify the Canadian and Quebec government programs, under which we receive the
majority of our research and development and other tax credits and grants, or if
we unexpectedly become unable to participate in or take advantage of these
programs, then our net research and development and other expenses will
materially increase or we may decrease our research and development activities.
In addition, to the extent that we have increased our research and development
activities outside of Canada and Quebec, resulting from the hiring of additional
personnel at our software development center in Pune, India and the acquisition
of Brix Networks, or potential future acquisitions, our increased R&D
activities may not be eligible for these programs. If we were required to
decrease our research and development activities, or were unable to benefit
from other tax credits and grants, this could have a material adverse effect on
our business, results of operations and financial condition.
Changes
in our effective tax rate or adverse outcomes resulting from tax audits may have
an adverse impact on our results.
As an
international corporation, we are subject to taxation in the various
jurisdictions in which we conduct business. Significant judgment is required in
the determination of our worldwide provision for income taxes and this
determination requires the interpretation and application of complex tax laws
and regulations. Our effective tax rate may be adversely impacted by the level
of earnings, by changes in the mix of earnings among companies and countries
which may have different statutory tax rates, by the valuation of our deferred
tax assets, and by changes in tax rules and regulations. We are also
subject to income tax audits and transfer pricing audits in the respective
jurisdictions in which we conduct business and we regularly assess the
likelihood of adverse outcomes resulting from these audits to ascertain the
adequacy of our provisions for income taxes and transfer pricing policies. There
can be no assurance that the outcomes of these tax audits, if any, will not have
an adverse impact on our result and financial condition.
Our
current principal stockholder has effective control over our
business.
As of
November 2, 2009, Germain Lamonde, our Chairman of the Board, President and
Chief Executive Officer, held 94.16% of the voting rights in our stock. By
virtue of such stock ownership, Mr. Lamonde has effective control over all
matters submitted to our stockholders, including the election of our Directors,
and exercises significant control over our policies and affairs. Such
concentration of voting power could have the effect of delaying, deterring or
preventing a change in control or other business combinations that might
otherwise be beneficial to our stockholders and may harm the market price
of our shares.
If
we complete major acquisitions of complementary businesses, products or
technologies, we may need additional capital, and may not be able to raise
additional capital on favorable terms or at all, which could limit our ability
to grow and could increase our costs.
Our
future liquidity and capital requirements are difficult to predict because they
depend on numerous factors, including the success of our existing and new
product offerings as well as competing technological and market developments. As
a result, we may not be able to generate sufficient cash flows from our
operations to meet additional working capital requirements, support additional
capital expenditures or take advantage of acquisition opportunities. In fiscal
2009, the respective cash payments of $6.9 million, $2.4 million and $26.9
million for the purchase of capital assets, the contingent cash consideration
for the acquisition of Brix Networks and the redemption of share capital,
exceeded the $22.6 million provided by cash flows from operations. As at August
31, 2009, we held $69.7 million in cash and short-term
investments.
We may
need to raise additional capital in the future. Our ability to obtain additional
financing will be subject to a number of factors, including market
conditions, effects of the financial crisis, reduced access to credit facilities
and our operating performance. These factors may render the timing, amount,
terms and conditions of additional financing unattractive for us. If we
raise additional funds by selling equity securities, the relative ownership of
our existing investors could be diluted or new investors could obtain terms more
favorable than previous investors. If we raise funds through debt financing,
we could incur significant borrowing costs and meet more restrictive debt
covenants. If we are unable to raise additional funds when needed or at terms
satisfactory to us, our ability to operate and grow our business could
be impeded.
Our
business and operations would suffer in the event of a failure of our
information technology infrastructure.
We rely
upon the capacity, efficiency and security of our information technology
hardware and software infrastructures as well as our ability to expand and
update these infrastructures in response to our evolving needs. Any failure to
manage, expand or update our information technology infrastructures or any
failure in the operation of this infrastructure could harm our
business.
Our
information systems are vulnerable to damages from computer viruses, natural
disasters, unauthorized access and other similar disruptions. Any system
failure, accident or security breach could result in disruptions to our
operations. To the extent that any disruption or security breach results in a
loss or damage to our data, or inappropriate disclosure of our confidential
information, it could harm our business. In addition, these events may force us
to devote more money and resources in order to protect ourselves against damages
caused by these disruptions or security breaches in the future.
Our legal
name and commercial name is EXFO Electro-Optical Engineering Inc. / EXFO
Ingénierie électro-optique inc. Our head office is located at 400 Godin Avenue,
Quebec, Quebec, Canada, G1M 2K2 and our main telephone number is (418) 683-0211.
Our e-mail address is info@EXFO.com and our website is www.EXFO.com.
Information on our website is not incorporated by reference in this annual
report. Our agent for service in the United States is CT Corporation
System, 111 Eighth Avenue, New York, New York 10011. Our Transfer Agent and
Registrar is CIBC Mellon Trust Company, 2001 University Street, Suite 1600,
Montreal, Quebec, Canada, H3A 2A6. This annual report contains trademarks
and registered trademarks of us and other companies.
We were
incorporated on September 18, 1985 pursuant to the Canada Business Corporations Act.
Since that date, we have amended our articles on various occasions mainly
to modify our legal and corporate names and our share capital.
On
December 20, 2000, we acquired all of the shares of EXFO Burleigh Products Group
Inc. (formerly Burleigh Instruments, Inc.) (“EXFO Burleigh”), Burleigh
Instruments GmbH and Burleigh Instruments (U.K.) Ltd. for an aggregate purchase
price of US$189.3 million, comprised of 6,488,816 of our subordinate voting
shares and US$42.5 million in cash pursuant to the terms of an Agreement of
Merger and Plan of Reorganization among us, EXFO Sub, Inc. and the selling
shareholders, dated November 4, 2000, as amended on December 20,
2000. In April 2002, the name of Burleigh
Instruments, Inc. was changed to EXFO Burleigh Products Group
Inc. On November 12, 2002, Burleigh Instruments (UK) Ltd. was
dissolved. EXFO Burleigh is a U.S. company that manufactures precision
scientific instruments used in basic and applied research engineering and
production test applications in a variety of fields.
On March
15, 2001, we acquired all of the shares of EXFO Photonic Solutions Inc.
(formerly EFOS Inc.) (“EXFO Photonic”), a privately held company in Toronto,
Canada, for a total consideration of US$110.1 million, of which US$25.1
million was paid in cash. We also issued 3,700,000 of our subordinate
voting shares in connection with the acquisition.
In September 2001, the name EFOS Inc. was changed to EXFO Photonic
Solutions Inc.
EXFO
Photonic, operating since 1984, is a supplier of precision light-based adhesive
spot curing products as well as curing process control for the global optical
component manufacturing market and other non-telecom markets. Its products
deliver precise doses of the appropriate spectral light into photo-sensitive and
heat-cured adhesives to significantly reduce bonding time and increase
repeatability in optical component and other manufacturing activities. EXFO
Photonic light-based curing technologies are supported by an extensive
understanding of bonding and material sciences and by a broad intellectual
property portfolio. EXFO Photonic, as of November 2, 2009,
has 28 patents and 9 patents pending.
Also on
March 16, 2001, our wholly owned subsidiary, Burleigh Automation Inc. (“Burleigh
Automation”), acquired substantially all the assets of Vanguard Technical
Solutions, Inc., a wholly owned subsidiary of DT Industries, Inc. for a purchase
price of US$600,000 paid in cash. Vanguard, an automation equipment manufacturer
in Tucson, Arizona, specialized in the design and manufacturing of
ultra-precision assembly equipment for sensitive process and critical assembly
challenges on the production floor. This acquisition, which
complemented our acquisition of Burleigh, was planned to fit with our overall
strategy at that time of providing customers with a comprehensive solution
for the assembly, alignment and testing of optical components and subsystems.
Since September 2001, Burleigh Automation has ceased operations and we have
transferred all material intellectual property assets and most of the physical
assets of Burleigh Automation to EXFO Burleigh.
In
November 2001, we acquired all of the shares of Avantas Networks Corporation and
simultaneously changed the name of that company to EXFO Protocol Inc. (“EXFO
Protocol”). We paid a total consideration of US$69.4 million
(or US$95.0 million for the equity minus US$25.6 million of cash in
the hands of the acquired company) to acquire EXFO Protocol. Consideration paid
consisted of 4,374,573 of our subordinate voting shares and US$9.8 million in
cash, net of cash acquired. EXFO Protocol, a company based in Montreal, Canada
operating since 1998 is a supplier of fiber-optic testing and optical network
performance management equipment that supports a wide range of protocols and
data transmission rates.
During
fiscal 2001, we were forced to align our cost structure to market conditions. On
June 27, 2001, we announced the reduction of non-customer-related expenses,
postponement of plans to build a new facility in the Quebec Metro High-Tech
Park, termination of non-cure operations of Nortech, a subsidiary that
specialized in manufacturing fiber-optic temperature sensors and reduction
of our work force by 15%. Our plan to build a new facility has been cancelled
since then.
During
fiscal 2002, we were forced to re-align our cost
structure to market conditions. First, on December 5, 2001, we
announced the lowering of our operating expenses, a freeze in employee salaries,
and the reduction of our workforce by 10%. Then, on
May 15, 2002, we announced a further 20% reduction of our global
workforce in an effort to lower our cost structure. In May 2002, we performed an
assessment of the carrying value of goodwill and intangible assets recorded in
conjunction with the three acquisitions made during the previous 18 months.
Considering the ongoing unfavorable market conditions, we recorded a charge of
US$222.2 million to write down a significant portion of goodwill and a
charge of US$23.7 million to write down a significant portion of
acquired core technology. Also, overall for fiscal 2002, we wrote off
US$18.5 million in excess and obsolete inventories.
In
October 2002, our newly created, wholly owned subsidiary, EXFO Gnubi Products
Group Inc. (“EXFO Gnubi”), acquired substantially all the assets of gnubi communications L.P.,
including its technology, expertise, customer base, inventories and capital
assets. Consideration paid consisted of US$1.9 million in cash and
1,479,290 of our subordinate voting shares. Furthermore, an
additional cash amount of US$241,000, based on sales volumes, was paid in fiscal
2004 in accordance with earn out provisions. With the acquisition of these
assets, EXFO Gnubi, based in Dallas, Texas, continues the operations of gnubi communications, L.P.,
as a supplier of multi-channel telecom and datacom testing solutions serving
optical transport equipment manufacturers and research and development
laboratories. At the time of the asset acquisition, 30 employees of
gnubi communications,
L.P. transferred to EXFO Gnubi.
During
fiscal 2003, we were required to implement further restructuring measures as a
result of depressed spending levels in the telecommunications industry and
economic uncertainty. We reduced our workforce by 30%, rationalized our business
activities and consolidated certain manufacturing operations. These measures
incurred charges of US$4.1 million. The rationalization and consolidation
initiatives involved the reorganization of our business into two new reportable
market segments: Telecom Division and Photonics and Life Sciences Division and
the exiting of the optical component manufacturing automation business. Our
Telecom Division consists of the former Portable and Monitoring and telecom
related Industrial and Scientific product lines. Our Photonics and Life Sciences
Division includes previous non-telecom Industrial and Scientific product lines.
Each division has been structured with its own sales, marketing, manufacturing,
research and development and management teams.
In May
2003, we performed our annual impairment test on goodwill recorded in
conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic and EXFO
Protocol and also reviewed the carrying value of intangible assets related
to these acquisitions. As a result of this assessment, we concluded that the
carrying value of goodwill related to EXFO Burleigh and the carrying value of
intangible assets related to EXFO Burleigh and EXFO Photonic was impaired and we
recorded a charge of US$4.5 million to write down goodwill and a pre-tax charge
of US$2.9 million to write down acquired core technology. Of the total
impairment loss of US$7.4 million, US$6.9 million is related to EXFO
Burleigh for goodwill and acquired core technology and US$0.6 million
is related to EXFO Photonic for acquired core technology.
In
addition, in an effort to simplify our structure and stream-line our operations,
the operations of EXFO Protocol were merged with those of the Corporation as of
September 1, 2003 and effective December 1, 2003, the operations of
EXFO Gnubi were merged with those of EXFO America Inc.
In fiscal
2004, EXFO also closed a public offering of 5.2 million subordinate voting
shares to a syndicate of Canadian-based underwriters for net proceeds of US$29.2
million (CA$38.4 million).
Furthermore
in fiscal 2004, we consolidated our protocol test operations (EXFO Protocol and
EXFO Gnubi) in Montreal, Canada to improve efficiency and reduce
costs.
In March
2004, we renewed our collective bargaining agreement with unionized
manufacturing employees in Quebec City, Canada. This agreement expired in
February 2009.
During
fiscal 2005, our Photonics and Life Sciences Division was renamed the Life
Sciences and Industrial Division to better reflect its market
focus.
During
fiscal 2005, we completed the consolidation of our Life Sciences and Industrial
Division in Toronto, Canada and we recorded US$482,000 in restructuring
expenses. Altogether, we incurred US$2.5 million in restructuring and other
charges since the fourth quarter of 2004 in conjunction with this consolidation
process. Following this process all of the operating activities of EXFO Burleigh
were transferred mainly in Toronto, Canada.
In
January 2006, we acquired substantially all the assets of Consultronics Limited
(“Consultronics”), a leading supplier of test equipment for copper-based
broadband access networks. Consultronics is a privately held company based in
Toronto, Canada with subsidiaries in the United Kingdom and Hungary. We acquired
all of the subsidiaries’ respective issued and outstanding shares. Consultronics
specializes in x-Digital Subscriber Line (xDSL), Internet Protocol TV (IPTV) and
Voice-over-Internet Protocol (VoIP) test solutions for the broadband access
market. We paid consideration equal to approximately US$19.1 million,
including debt assumption and other acquisition-related costs.
In
November 2006, we incorporated EXFO Electro-Optical Engineering India Private
Limited as our wholly-owned subsidiary to establish a software development
center in Pune, India. In October 2007, we acquired substantially all of the
assets of JamBuster Technologies Private Limited, for an immaterial
consideration, a company duly incorporated in Pune, India which is engaged
in the business of software development services.
In April
2007, we established a wholly-owned foreign entity in Shenzhen China, EXFO
Telecom Equipment (Shenzhen) Co. Ltd. for manufacturing purposes. We started
ramping up manufacturing in September 2007 at our Chinese
facility.
On
November 5, 2007, we announced the approval by the Board of Directors of a share
repurchase program, by way of a normal course issuer bid on the open market of
up to 9.9% of our public float (as defined by the Toronto Stock Exchange),
or 2,869,585 shares at the prevailing market price. The period of the normal
course issuer bid commenced on November 8, 2007, and ended on
November 7, 2008. We repurchased a total
of 1,859,835 shares. All shares repurchased under the bid were
cancelled.
In March
2008, we acquired all the issued and outstanding shares of Navtel Communications
Inc. (“Navtel”), a leading provider of Internet Protocol Multimedia
Subsystem (IMS) and Voice-over-Internet Protocol (VoIP) test solutions for
Network Equipment Manufacturers (NEMs) and Network Service Provider (NSP) labs.
Navtel is a privately held company based in Toronto, Canada with subsidiaries in
the Province of Ontario, Canada, United States and Germany. We paid a
consideration of US$11.5 million, or US$11.3 million net of US$145,000
of cash acquired. The total consideration included acquisition-related
costs of US$172,000.
In April
2008, we acquired all the issued and outstanding shares of Brix Networks Inc.
(“Brix”), a global provider of open and extensible converged service
assurance solutions. Brix is a privately held company based near Boston,
Massachusetts, USA with a subsidiary in the United Kingdom. We paid
consideration of US$29.7 million, or US$29.7 million net of
US$12,000 of cash acquired, plus a contingent cash consideration of US$2.4
million, based upon the achievement of a bookings volume in the 12 months
following this acquisition.
On
November 6, 2008, we announced the approval by the Board of Directors of a
renewal of the share repurchase program by way of a normal course issuer bid on
the open market of up to 10% of our public float (as defined by the Toronto
Stock Exchange), or 2,738,518 subordinate voting shares at the prevailing market
price. The period of the normal course issuer bid commenced on November 10, 2008
and ended on November 9, 2009. We repurchased a total of 311,872
shares. All shares repurchased under the bid were cancelled.
On
November 10, 2008 we announced a substantial issuer bid (the “Offer”) to
purchase for cancellation up to 8,823,529 subordinate voting shares
for an aggregate purchase price not to exceed CA$30 million. The Offer was made
by way of a “modified Dutch Auction” pursuant to which shareholders
could tender all or a portion of their shares (i) at a price
not less than CA$3.40 per share and not more than CA$3.90 per share, in
increments of CA$0.05 per share, or (ii) without specifying a purchase
price, in which case their shares would have been purchased at the purchase
price determined in accordance with the Offer. The Offer expired at 5 p.m.
(Eastern Time) on December 16, 2008. We used cash and short-term
investments to fund the purchase of shares. The Offer was not conditional upon
any minimum number of shares being tendered, but it was subject to certain
other conditions. A complete description of the terms and conditions of the
Offer were contained in the Offer to Purchase and Issuer Bid Circular and
related documents filed with the applicable securities regulatory authorities in
Canada and the United States and mailed to holders of shares.
Based on
final reports from CIBC Mellon Trust Company, the depositary for the Offer, we
confirmed that we had taken up and accepted for purchase and cancellation, at a
price of CA$3.90 per share, a total of 7,692,307 subordinate voting
shares for a total cost of CA$30 million (excluding fees and expenses relating
to the Offer) in accordance with the terms of the Offer.
Upon the
approval of the Offer, we had suspended the normal course issuer bid that we had
renewed on November 6, 2008 referred above. The bid was resumed
on January 26, 2009, the date that we begun repurchasing shares under such
bid.
In
February 2009, the collective bargaining agreement effective since March 2004
with unionized manufacturing employees in Quebec City, Canada, expired. We
received the requests of the union in August 2009 and we began the negotiations
for the renewal of the collective bargaining agreement in October 2009. It has
not been renewed as of this day and remains effective until
renewed.
In
February 2009, we acquired substantially all of the assets of PicoSolve, Inc., a
private test and measurement company offering the industry’s fastest optical
sampling oscilloscopes for
40G and 100G R&D, manufacturing and deployment applications. This company
was founded in 2004 by researchers at Chalmers University of Technology in
Gothenburg, Sweden, and provides ultra-high-speed optical sampling oscilloscopes
to network equipment manufacturers (NEMs) involved in the design and
production of next-generation optical networks. Network service providers (NSPs)
will also require such high-end test equipment for their deployment
initiatives.
On
November 6, 2009 we announced that our Board of Directors approved the second
renewal of our share repurchase program, by way of a normal course
issuer bid on the open market of up to 10% of our public float (as defined
by the Toronto Stock Exchange), or 2,256,431 subordinate voting shares at the
prevailing market price. We expect to use cash, short-term investments or future
cash flow from operations to fund the repurchase of shares. The normal course
issuer bid started on November 10, 2009, and end on November 9, 2010,
or on 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
and without prior notice. All shares repurchased under the bid will be
cancelled. We shall provide to any person or company, upon request to our
Secretary, 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
copy of the notice sent to the Toronto Stock Exchange (TSX) according to our
normal course issuer bid.
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying value of
a reporting unit exceeds its fair value, the second step is performed to
determine the amount of the impairment loss. Following the decrease in our stock
price in June 2009, we came to the conclusion that the carrying value of
one of our reporting units exceeded its fair value and we recorded an impairment
charge of $21.7 million in the third quarter of fiscal 2009, to bring
the goodwill of this reporting unit to its fair value. This reporting unit
reports to the Telecom Division.
We will
be submitting for the approval of our shareholders at our upcoming annual and
special meeting in January 2010, a proposition with respect to an
amendment to our articles of incorporation, for the change of the name of the
corporation to “EXFO Inc.”. We believe that the present name no longer reflects
our actual business activities. We shall provide to any person or company, upon
request to our Secretary, 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 copy of the Management Proxy Circular dated
November 2, 2009 filed on SEDAR and on EDGAR
under Form 6-K.
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Business
Overview
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Company
Overview
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EXFO is a
leading provider of test and service assurance solutions for network service
providers and equipment manufacturers in the global telecommunications industry.
The Telecom Division, which accounts for almost 90% of the company’s revenues,
offers a wide range of innovative solutions to assess optical networks, from the
core to access, as well as next-generation IP infrastructures and related
triple-play services. The Life Sciences and Industrial Division offers solutions
in medical device and opto-electronics assembly, fluorescence microscopy and
other life science sectors.
We were
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 several years, we have enhanced our competitive position through
acquisitions of protocol, copper/xDSL and service assurance test
businesses.
In
February 2009, we closed the acquisition of Sweden-based PicoSolve Inc., a
supplier of ultra-high-speed optical sampling oscilloscopes for 40G and
100G R&D, manufacturing and deployment applications.
In April
2008, we acquired all issued and outstanding shares of Brix Networks Inc.
(renamed EXFO Service Assurance Inc.), for a cash consideration of $32.1
million. Brix Networks, a privately held company located in the Boston (MA)
area, offers VoIP and IPTV service assurance solutions across the three areas
most affecting the success of a real-time service: signaling quality (signaling
path performance), delivery quality (media transport performance) and content
quality (overall quality of experience). Brix Networks’ service assurance
solutions are mainly designed for network service providers (NSPs) and large
enterprises.
In March
2008, we acquired all issued and outstanding shares of Navtel Communications
Inc., for a cash consideration of $11.3 million. Navtel Communications, a
privately held company in Toronto, Canada, is a leading provider of Internet
protocol multimedia subsystem (IMS) and VoIP test solutions for network
equipment manufacturers (NEMs) and NSP labs. Navtel Communications specializes
in testing next-generation IP networks that are increasingly combining wireline
and wireless technologies. Subsequent to the acquisition, Navtel Communications
was merged into the parent company.
In fiscal
2008, we opened our own telecom manufacturing facilities in Shenzhen, China. We
now have two main manufacturing sites for our Telecom Division and one plant for
our Life Sciences Division. Over time, low-volume, high-complexity telecom
products will be manufactured in Quebec City, whereas high-volume,
low-complexity telecom products will be manufactured in Shenzhen.
In fiscal
2008 and 2009, we accelerated the deployment of a software development center in
Pune, India, to supplement the research and development capabilities of our
labs in Boston, Toronto, Montreal and Quebec City. This enables us to benefit
from the wealth of IP expertise in India, to accelerate product development―especially for our
software-intensive protocol test and service assurance solutions―to take advantage
of a lower cost structure.
In
January 2006, we acquired substantially all the assets of Consultronics Limited
(now merged with the parent company) 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, video) over optical and copper links in access
networks.
In
November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol
Inc. and now merged with the parent company), a supplier of protocol-testing and
optical-network performance management equipment for NSPs. This transaction
enabled us to combine optical and protocol test modules inside a single
field-portable test platform in order to help our customers increase revenues
and reduce 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. EXFO Protocol and EXFO Gnubi were consolidated
in Montreal, Canada, in fiscal 2004.
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 for its wavelength measurement
instruments and nanopositioning alignment systems. We also added EFOS Inc.
(renamed EXFO Photonic Solutions Inc.) in March 2001 for its precision
light-based, adhesive spot-curing technology. We have since exited the
optical component manufacturing automation business, and the remaining
operations of EXFO Burleigh have mostly been consolidated with those of
EXFO Photonic Solutions in Toronto, Canada.
We
launched 26 new products in fiscal 2009, including three in the fourth quarter,
compared to 27 in fiscal 2008. Key product introductions in fiscal 2009 included
among others a portable test solution for characterizing 100 Gbit/s
Ethernet and 40/43 Gbit/s SONET/OTN networks; a patent-pending distributed PMD
analyzer that allows network operators to cost-effectively upgrade their
networks to 40G and 100G by measuring the level of potentially debilitating
PMD on each fiber section; new software releases for the IMS InterWatch platform
and Packet Blazer product lines that support the migration of voice and video
applications to the IPv6 (Internet protocol, version 6) addressing scheme; 1
Gbit/s and 10 Gbit/s test probes for carrier Ethernet and mobile backhaul
service assurance applications; and the next-generation FTB-500 multilayer
platform for high-end test applications in the field and central office.
Following the year-end, we released the first turnkey optical modulation
analyzer for complete characterization of signals up to 100 Gbaud. Sales from
products on the market two years or less accounted for 38.4% of total sales in
fiscal 2009.
Overall
for fiscal 2009, sales decreased 5.9% to $172.9 million from $183.8 million in
2008. This decrease in sales mainly resulted from the global economic recession
as well as from currency fluctuations on our sales and the impact of such
fluctuations on our forward exchange contracts since the beginning of the fiscal
year. However, global sales for fiscal 2009 included $25.3 million from Brix
Networks and Navtel Communications, compared to $5.4 million in fiscal
2008, which mitigated in part the decrease in sales year-over-year. These two
acquisitions were closed approximately two months and one month into the third
quarter of fiscal 2008, respectively. Excluding the positive impacts of these
two acquisitions, our sales would have decreased 17.3% in fiscal 2009 compared
to 2008, reflecting the impact of the global economic recession and the
negative effects of the currency fluctuations on our sales and the impact of
such fluctuations on our forward exchange contracts in fiscal 2009,
compared to 2008.
We
reported a GAAP net loss of $16.6 million, or $0.27 per share, in fiscal 2009,
compared to net earnings of $18.4 million, or $0.27 per diluted share,
in fiscal 2008. Net loss for fiscal 2009 included a non-cash pre-tax
impairment of goodwill of $21.7 million. GAAP net loss for fiscal 2009
also included pre-tax charges of $1.2 million in severance expenses
for the 65 employees who were terminated throughout the company. However,
GAAP net loss included a pre-tax R&D tax credits recovery of $1.9 million
and $372,000 for the recognition of previously unrecognized future income tax
assets. Finally, GAAP net loss for fiscal 2009 included $4.3 million in
after-tax amortization of intangible assets and $1.4 million in stock-based
compensation costs. Net earnings for fiscal 2008 included $5.3 million for the
recognition of previously unrecognized future income tax assets, $2.7 million
for income tax recovery following the review of our tax strategy related to the
changes in substantively enacted income tax rates in Canada, $1.5 million
of income tax expense to account for the changes in substantively enacted income
tax rates on our future income tax assets in Canada, an extraordinary gain
of $3.0 million related to the negative goodwill of the Navtel
acquisition, as well as $3.0 million in after-tax amortization of intangible
assets and $1.3 million in stock-based compensation costs.
EBITDA
(net earnings (loss) before interest, income taxes, amortization of property,
plant and equipment, amortization of intangible assets, impairment of goodwill
and extraordinary gain) were at $14.5 million, or 8.4% of sales in fiscal
2009, compared to $20.6 million, or 11.2% of sales in 2008 (see pages
77 and 78 of this document for a comprehensive reconciliation of EBITDA to
GAAP net earnings (loss)). EBITDA for fiscal 2009 included pre-tax charges of
$1.2 million in severance expenses for the 65 employees who were terminated
throughout the company and stock-based compensation costs of $1.4 million.
However, EBITDA included a pre-tax R&D tax credits recovery of $1.9
million.
On
November 6, 2008, we announced that our Board of Directors had authorized a
renewal of our share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of our public float (as defined
by the Toronto Stock Exchange), or 2.7 million subordinate voting shares,
at the prevailing market price. The period of the normal course issuer bid
started on November 10, 2008 and ended on November 9, 2009.
All shares repurchased under the bid were cancelled. In fiscal 2009, we
repurchased 488,786 subordinate voting shares for an aggregate net purchase
price of $1.4 million.
On
November 10, 2008, we announced that our Board of Directors had authorized a
substantial issuer bid (the “Offer”) to purchase for cancellation subordinate
voting shares for an aggregate purchase price not to exceed
CA$30 million. On December 18, 2008, pursuant to the Offer, we purchased
for cancellation 7.7 million subordinate voting shares for the aggregate
purchase price of CA$30 million (US$24.9 million), plus related fees of
$576,000. We used cash and short-term investments to fund the purchase of
shares.
On
November 6, 2009, we announced that our Board of Directors had authorized the
second renewal of our share repurchase program, by way of a normal
course issuer bid on the open market, of up to 10% of our public float
(as defined by the Toronto Stock Exchange), or 2,256,431 million
subordinate voting shares, at the prevailing market price. We expect to use
cash, short-term investments or future cash flows from operations to fund the
repurchase of shares. The period of the normal course issuer bid will start on
November 10, 2009, and end on November 9, 2010,
or on 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 and without prior notice. All shares
repurchased under the bid will be cancelled.
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying value of
a reporting unit exceeds its fair value, the second step is performed to
determine the amount of the impairment loss. Following the decrease in our stock
price in June 2009, we came to the conclusion that the carrying value of
one of our reporting units exceeded its fair value and we recorded an impairment
charge of $21.7 million in the third quarter of fiscal 2009, to bring
the goodwill of this reporting unit to its fair value. This reporting unit
reports to the Telecom Division.
In June
2009, we laid off a number of employees across the organization as part of a
restructuring plan to cope with currently difficult market conditions. This
action resulted in a one-time pre-tax restructuring charge of $1.2
million that was recorded in the fourth quarter of fiscal 2009 but
is expected to deliver about $6 million in annual
savings.
During
the third quarter of fiscal 2009, we were named recipient of the Growth Strategy
Leadership Award by Frost & Sullivan for the fifth consecutive time. The
award is presented to the company whose growth strategy generates the largest
market-share gains in the global fiber-optic test equipment (FOTE) market during
the previous research period. According to Frost & Sullivan, a leading
global growth consulting firm, we captured first place overall in the FOTE
market with a market share of 18.0% in 2008, up from a third-place 12.7% in 2006
(Frost & Sullivan did not grant an award in 2008 for market-share gains in
2007). Frost & Sullivan estimated the FOTE market
to be $567.4 million in 2008, including $247.9 million for the
portable installation and maintenance (I&M) test market. Based on Frost
& Sullivan’s market data, we improved our leadership position in the
portable I&M test market from 25.5% in 2006 to 33.3%
in 2008.
Key
Industry Trends
The
fundamental drivers for increased bandwidth and Internet Protocol (IP)
fixed-mobile convergence in the global telecommunications industry remain
intact, but they were constrained by the economic recession that has forced
network operators and network equipment manufacturers to reduce their capital
and operating expenses in calendar 2008 and 2009. Due to the recession,
several of these players announced significant reductions in capital
expenditures and staffing levels during the course of the year.
Despite
this challenging macro-economic environment, the telecom market dynamics
in 2009 are completely different from those during the industry downturn of
2001. First, there is a myriad of bandwidth-intensive applications
generating strong growth in bandwidth demand, both in wireless and wireline
networks. For example, monthly traffic is at the exabyte level (1 exabyte
equals 1 quintillion bytes) in 2009, while in 2001 there were few
applications outside of regular e-mail delivery. Second, the ongoing demand for
bandwidth has placed a strain on access, metro rings and long-haul routes,
whereas in 2001 there was an overabundance of bandwidth capacity in
optical backbone networks, which drove bandwidth prices down significantly.
Finally, most network operators have healthy balance sheets today, while in 2001
many of them were financially overextended with some declaring
bankruptcy.
According
to Cisco’s Visual Networking Index, global IP traffic will nearly double every
two years (compound annual growth rate of 46%) from 2007-2012, reaching just
under 44 exabytes per month in 2012. Global bandwidth demand is driven by a
wide range of applications including peer-to-peer file sharing, social
networking, Internet gaming as well as various forms of IP video. For
example, according to Cisco, YouTube consumed more bandwidth in 2008 than
traffic crossing the entire US network backbone in 2000.
As
telecommunication networks are being transformed to deliver IP-based voice,
video and data capabilities, legacy SONET/SDH standards, which were first
established in the mid-1980s and implemented until 2005, do not have the payload
flexibility to seamlessly mix and transport these services. Such networks are
not capable of efficiently carrying IP-based services, since they were designed
for public switched telephone network (PSTN), point-to-point voice transmission
only. As a result, new optical transport network (OTN) standards have been
defined to carry IP applications over Ethernet and are at the very
foundation of what the industry is labeling next-generation networks. Network
operators are increasingly turning to
such next-generation, IP-based networks to allow for more flexible and
efficient transport of applications and services, and to offer
customers higher-margin triple-play services ― and even quadruple-play services
― as wireline and wireless technologies become increasingly
interconnected. Finally, as subscribers of these new services reach a critical
mass, network operators are relying on service assurance solutions to ensure
that the quality of service (QoS) and quality of experience (QoE) are
optimal in the post-deployment phase.
As well,
fiber-to-the-home (FTTH) is becoming the access network architecture
of choice for network operators wishing to provide a superior user
experience for a combined video, data and voice offering. This architecture
allows them to meet heightened bandwidth requirements and future-proof their
access networks, as residential bandwidth demands are growing from the 1 to
5 Mbit/s (megabits per second) of the past
to 30 to 100 Mbit/s required for the long term. Some
projects, however, may be delayed due to reduced funding. Hybrid architectures,
combining copper and fiber (fiber-to-the-curb, or FTTC, and
fiber-to-the-node, or FTTN), will also expand in the short term, since they are
less expensive methods to increase bandwidth and can be mass-deployed more
quickly.
FTTH
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as long-term
operating costs are less than FTTC and FTTN. It should be noted that FTTH
deployment costs have largely dropped over the years as increased volume and
improved test tools, like those we offer, are rendering rollouts increasingly
simple and efficient. FTTH is also proving to be a low-cost alternative for
multi-dwelling units (MDUs) as this network architecture can deliver large
amounts of bandwidth at a minimal cost per apartment. We are merely at the early
stages of fiber deployments in access networks, both in North America and
around the world. It is also worth noting that Western Europe and even China
have become increasingly committed to deploying FTTH networks, given their
high-population density.
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. For example, 43 Gbit/s (gigabits per
second) SONET/SDH
is now becoming mainstream, while a few network operators are expected to begin
100 Gbit/s Ethernet field trials later in this calendar year. In the long
run, these solutions will offer a more economical way to add capacity on
saturated network sections, especially if trenches need to be dug in order
to deploy new fiber in metro and long-distance
routes.
These
market dynamics affected telecom test and service assurance suppliers in fiscal
2009. However, the tail-end of the economic recession in the United States and
Western Europe could continue to delay network investments and necessarily
reduce demand for our test and service assurance solutions.
For our
Life Sciences and Industrial Division, key market trends for the niche markets
that we serve include:
|
·
|
Industrial
UV Spot-Curing: Overall, the end-markets for precision assembled products
manufactured with UV curing remains healthy, especially for the assembly
of medical devices, despite weaker economic conditions. The
optoelectronics market, dominated by high-volume manufacturing in Asia has
been significantly affected by the global recession in 2009, but we expect
it to begin to recover in 2010 and it is increasingly adopting
LED (light emitting diode) UV spot curing
equipment.
|
|
·
|
Life
Sciences: The fluorescence microscopy market is stable with the majority
of the growth happening in live cell and quantitative imaging
applications.
|
|
·
|
Industrial
UV Digital Print Ink Curing: The digital print markets that we target are
exhibiting flat growth to light decline, due to the global recession in
2009. However, there are indications that they will resume stronger growth
in 2010 as printing press equipment continues to make the transition from
analog to digital technology.
|
Three-Year
Corporate Objectives
Our goal
is to become a strong market leader in the global telecom test and service
assurance industry, mostly with Network Service Providers (NSPs). We are
committed to offering the most advanced market-driven solutions that help NSPs
efficiently install, commission and run their converged IP fixed-mobile
networks. Given the myriad of applications and resultant explosion in bandwidth
demand, we are increasingly covering the service and applications layers on a
network infrastructure to enable quadruple-play services.
To
achieve our long-term vision, we plan to expand our leadership position in the
portable optical segment, while growing our protocol business even faster to
surpass optical in terms of sales. This plan is largely based on profitable
organic growth, but it will be supported by strategic acquisitions of typically
small to mid-size companies with best-of-class technologies in nascent,
high-growth markets complementary to EXFO’s. We also intend to improve our
competitive position through strategic alliances and partnerships.
In our
fiscal 2008 Annual Report, we had established three corporate performance
objectives to gauge the success of our overall plan over the next three
years:
|
o
|
Increase
sales significantly faster than the industry growth rate (20%
CAGR*)
|
|
o
|
Grow
EBITDA** in dollars faster than sales (>20%
CAGR)
|
|
o
|
Continue
raising gross margin (62%)
|
|
*
|
Compound
annual growth rate
|
|
**
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary
gain.
|
Given the
global economic recession in fiscal 2009, we adjusted our corporate performance
metrics over a new three-year period extending from fiscal 2010 to 2012. We
have maintained our 20% sales CAGR objective, proposed to double EBITDA in
dollars, and raised our gross margin target to 64% for the newly defined
three-year period.
|
Corporate
Performance Objectives for FY 2010-2012
|
||
|
Increase
sales by a CAGR of 20% or more
|
||
|
Raise
gross margin to 64%
|
||
|
Double
EBITDA in dollars
|
We expect
these three-year objectives to guide our actions in upcoming years as we are
committed to maximizing shareholder value, although there can be no assurance
that we will be successful in meeting the objectives.
In fiscal 2009, sales and EBITDA decreased 5.9% and 29.7%,
respectively, compared to 2008. Most of these come from the negative effect
of the global economic recession in fiscal 2009 as well as from currency
fluctuations since the beginning of the fiscal year. However, gross margin
improved to 61.3% in fiscal 2009 from 58.9% in 2008 despite difficult market
conditions and currency fluctuations, due to the contribution of newly
acquired Brix Networks and Navtel Communications. See Item 5 - Operating and
Financial Review and Prospects for a comprehensive analysis of our
sales and gross margin.
The
EXFO Solution
We offer
an extensive range of test, measurement and service assurance solutions to the
global telecommunications industry. Our success has been largely predicated on
our core expertise in producing test equipment for optical telecommunications.
We also leverage this expertise to develop products for life sciences and
high-precision assembly applications. Our solution is based on the following key
attributes:
Modular System
Design. In 1996, we established an industry-first by launching the
original modular optical test platform. This system design consists of a
PC-based, MS Windows-driven platform that can accommodate several test modules
performing various types of measurements. We have since developed additional
compatible test platforms, including the release of the FTB-500 field-testing
platform in 2009, and extended our test module offering for both NSPs and system
manufacturers based on the same modular design. Our modular product design
provides the following advantages:
|
·
|
unlike
stand-alone units, new test modules can be rapidly developed to address
changing industry requirements;
|
|
·
|
as
customers’ testing requirements change, they can purchase additional
modules that are compatible with their previously purchased platforms,
thus protecting their initial
investments;
|
|
·
|
our
standard graphical user interface reduces training costs because customers
are familiar with previously acquired software
products;
|
|
·
|
the
flexibility of our systems allows customers to develop customized and
automated solutions for their specific test
requirements;
|
|
·
|
our
test platforms are PC-based and MS Windows-driven, thus they can support
third-party software solutions.
|
High Degree of
Technological Innovation. We have established a strong reputation for
technological innovation over the last 24 years. We believe this attribute
represents a key differentiator for us within a competitive marketplace.
Following are some of our industry firsts:
|
·
|
the
first PC-based modular test platform for field
applications;
|
|
·
|
the
first all-in-one optical loss test set combining several
instruments;
|
|
·
|
the
first modular platform to combine optical and protocol test
solutions;
|
|
·
|
the
first line of portable test instruments designed for FTTx
testing;
|
|
·
|
the
first fully integrated Ethernet-over-SONET test
solution;
|
|
·
|
the
first distributed PMD analyzer; and
|
|
·
|
the
first portable test solution for characterizing 100 Gbit/s
networks.
|
High-Quality
Products. Product quality is an integral part of our solution.
Our Quebec City, Canada, operations have maintained ISO 9001 certification since
1994 and they are now certified to the new 2000 edition of the standard.
Our manufacturing plant in Shenzhen, China, which started operations in
September 2007, is responsible for the production of high-volume,
low-complexity telecom products. Our Shenzhen plant follows the same corporate
quality standards and was certified ISO-9001 in January 2009. All of our
products meet required industry standards, and some of our products meet
additional voluntary standards, such as those set by Telcordia, formerly
Bellcore, IEC, IETF, ETSI and other industry-leading standards bodies. During
manufacturing, each product has a related quality-assurance plan, with rigorous
checkpoints, to ensure product conformity. Various tasks in the quality
assurance process include quality control, conformity testing, product
documentation, product improvement, regulatory compliance, metrology and
calibration.
Our
product designs comply with Directive 2002/96/EC, a legislation enacted by the
European Union regarding the disposal of waste electrical and electronic
equipment (WEEE), for all products exported to Europe. In regard to the
Directive 2002/96/EC (RoHs), test and measurement manufacturers have been
provided a limited exemption until 2012.
Products
Our test
platforms, namely the AXS-200 SharpTESTER, FTB-200 Compact Platform, FTB-500
Platform, and IQS-600 Intelligent Test System, are at the core of our product
portfolio. The AXS-200 SharpTESTER is a multi-service, multi-medium
handheld test platform designed for characterizing and troubleshooting
commercial and residential access networks. It can easily be configured for
copper/DSL/triple-play, Ethernet or optical testing applications. The FTB-200
Compact Platform is a two-slot portable test unit optimized for
multi-technology, multi-application characterization of metro and access
networks. The newly launched FTB-500, which is available in four-slot and
eight-slot configurations, provides NSPs with a simple, yet efficient way to
perform multiple, advanced test operations for installation, maintenance and
troubleshooting applications. Our IQS-600 platform is designed for manufacturing
and R&D applications. It tests optical as well as transport and data
communications technologies increasingly based on IP. All platforms and related
test modules are supported by integrated and highly intuitive graphical user
interfaces (GUIs), enabling the user to easily store, handle and retrieve test
results and measurement data. In addition, EXFO offers a number of handheld and
benchtop test and measurement products, some of which are modular in
nature.
Following
the acquisition of Navtel Communications in March 2008, we offer the InterWatch
platform series, a line of advanced hardware and software-based test systems
that enable network equipment manufacturers and network service provider labs to
fully test their complex digital telecommunications equipment and services more
quickly and cost-effectively, while helping to ensure interoperability and
reliability. These advanced software and hardware solutions assist customers in
the design, integration, installation and acceptance testing of a broad range of
Internet Protocol Multimedia Subsystem (IMS)/Next-Generation Network (NGN)
telecommunications equipment and services by performing a variety of test
functions:
|
·
|
Design
and feature verification;
|
|
·
|
Interoperability
testing;
|
|
·
|
Load
and stress testing; and
|
|
·
|
Monitoring
and analysis.
|
Following
the acquisition of Brix Networks in April 2008, we also offer comprehensive
service assurance and performance monitoring systems for advanced IP and carrier
Ethernet services such as IPTV, voice-over-IP, IP/MPLS, virtual private networks
(VPNs), video on demand, and video conferencing. The Brix System, a family
of integrated software and hardware components, proactively monitors
quality by providing complete visibility across all IP services, throughout the
lifecycle of the service, and across the entire network.
Within
the Brix System, advanced performance management applications, running on a
central-site software engine, called BrixWorx, analyze and display performance
data collected from the measurement sources, like Brix Verifiers and native
network elements deployed throughout the network being monitored. Brix Verifiers
execute protocol-specific tests to precisely calculate crucial availability and
performance metrics through proactive testing, ongoing monitoring, and the
collection of data directly from infrastructure devices.
BrixWorx
provides all performance data analysis, configuration, and management for the
distributed Brix System, while test suites offer broad and deep visibility into
the performance of converged network services.
Furthermore,
EXFO offers network monitoring systems and test probes used in third-party
network monitoring solutions.
The
following table summarizes the principal types of test instruments for the
telecommunications industry, typical applications and the formats in which we
offer them:
|
Instrument
Type
|
Typical
Application
|
NSP
Market
|
Manufacturer
/R&D
Market
|
||||
|
FTB
500 Modules
|
FTB
200 Modules
|
AXS
200 Modules
|
Handhelds
|
IQS-600
Modules
|
Bench
top Instruments
|
||
|
ADSL/ADSL2+
Service Verification Tool
|
Based
on a DSL “golden modem”, these units are used to test the function, speed
and quality of a DSL service at the subscriber premises.
|
X
|
X
|
||||
|
Broadband
source
|
Used
for testing wavelength-dependent behavior of fiber cables and dense
wavelength division multiplexing (DWDM) optical
components.
|
X
|
X
|
||||
|
Chromatic
dispersion analyzer
|
Measures
increasing levels of chromatic dispersion in high-capacity optical
networks. Chromatic dispersion is a physical phenomenon
inherent to optical fiber and optical components that causes information
bits to spread along a network. This degrades the quality of
the transmission signal and, in turn, limits the transmission speed
carried by optical networks.
|
X
|
|||||
|
Clip-on
coupling device
|
Clips
to an optical fiber and allows non-invasive testing.
|
X
|
|||||
|
Fibre
Channel tester
|
Brings
FC-0, FC-1 and FC-2 logical layer Fibre Channel testing to services
delivered via transport protocols, such as dense wavelength division
multiplexing (DWDM), SONET/SDH and dark fiber. It provides valuable timing
information and buffer credit estimation for Fibre Channel network
deployment.
|
X
|
X
|
X
|
|||
|
Gigabit
Ethernet tester
|
Measures
data integrity for high-speed Internet protocol telecommunications in
metro and edge networks.
|
X
|
X
|
X
|
X
|
||
|
10
Gigabit Ethernet tester
|
Benchmarks
and verifies high-speed 10 Gbit/s Ethernet network performance and
service-level agreements.
|
X
|
X
|
X
|
|||
|
HDTV,
SDTV and IPTV service test instrument
|
Used
to test the quality and functionality of standard and high definition
television signals that are delivered over higher-rate ADSL, ADSL2+ and
VDSL2 transmission technologies.
|
X
|
|||||
|
Laser
spectrum analyzer
|
Performs
high-resolution, spectral characterization of continuous CW laser
sources
|
X
|
|||||
|
Telephone
for traditional voice and VoIP service testing
|
Used
by telephone line and DSL installers to test the proper functioning of
both traditional and next-generation voice and data communication
services.
|
X
|
|||||
|
Live
fiber detector
|
Clips
on to a fiber and is used to detect the presence and direction of a signal
without interrupting the traffic.
|
X
|
|||||
|
Loss
test set
|
Integrates
a power meter and a light source to manually or automatically measure the
loss of optical signal along a fiber.
|
X
|
X
|
X
|
X
|
X
|
X
|
|
Narrowly
tunable laser
|
A
laser that can be precisely tuned to simulate a DWDM light
sources. Used primarily for testing optical
amplifiers.
|
X
|
|||||
|
Next-generation
SONET/SDH analyzer
|
Full
SONET/SDH protocol testing functionality, including support for generic
framing procedure (GFP), virtual concatenation (VCAT), and link-capacity
adjustment scheme (LCAS) next generation enhancements.
|
X
|
X
|
||||
|
Optical
coupler
|
Used
in test system to combine sources or signals. Also uses as
splitters to monitor signals.
|
X
|
|||||
|
Optical
power meter
|
Measures
the power of an optical signal. It is the basic tool for the
verification of transmitters, amplifiers and optical transmission path
integrity.
|
X
|
X
|
X
|
X
|
X
|
|
|
Optical
power reference module
|
Provides
a highly accurate and traceable measurement of power for the calibration
or verification of other power measurement instruments.
|
X
|
|||||
|
Instrument
Type
|
Typical
Application
|
NSP
Market
|
Manufacturer
/R&D
Market
|
||||
|
FTB
500 Modules
|
FTB
200 Modules
|
AXS
200 Modules
|
Handhelds
|
IQS-600
Modules
|
Bench
top Instruments
|
||
|
Optical
return loss meter
|
Combines
a laser and a power meter to measure the amount of potentially degrading
back reflection.
|
X
|
X
|
X
|
X
|
||
|
Optical
spectrum analyzer
|
Produces
a graphical representation of power versus wavelength for an optical
signal. Useful for measuring the drift, power and signal-to-noise ratio
for each wavelength in a DWDM system.
|
X
|
|||||
|
Optical
switch
|
Provides
switching between fibers. Used to provide flexible and automated test
setups such as the measurement of multiple fibers or components with
multiple ports with one instrument.
|
X
|
X
|
||||
|
Optical
time domain reflectometer
(OTDR)
|
Like
a radar, it measures the time of arrival of reflections of an optical
signal to determine the distance to the breaks or points of excessive loss
in a fiber network.
|
X
|
X
|
X
|
|||
|
Passive
component analyzer
|
Characterizes
passive wavelength-selective devices, such as multiplexers, demultiplexers
and add/drop filters, with respect to absolute wavelength in order to
guarantee their performance within dense wavelength division multiplexing
(DWDM) systems.
|
X
|
|||||
|
Passive
optical network (PON) power meter
|
Determines
the power level of various signal types, including continuous (e.g., TV
signal at 1550 nm) and framed (e.g., ATM or Ethernet at 1490 nm or 1310
nm) within a passive optical network. Various baud rates are covered,
ranging from 155 Mbit/s to 2.5 Gbit/s, for both synchronous and
non-synchronous signals.
|
X
|
|||||
|
Polarization-dependent
loss meter
|
Measures
the difference in loss of power for the different states of
polarization.
|
X
|
|||||
|
Polarization
mode dispersion analyzer
|
Measures
the dispersion of light that is caused by polarization. Generally used to
determine the speed-distance limitation of fiber and
cables.
|
X
|
|||||
|
SONET/
SDH analyzer
|
Provides
accurate bit-error rate and performance analysis of SONET/SDH overhead
format that reflects the quality of a transmission system.
|
X
|
X
|
X
|
|||
|
Stable
light source
|
Emitting
diode or lasers used in connection with a power meter to measure signal
loss.
|
X
|
X
|
X
|
X
|
||
|
Synchronization
analyzer
|
Portable,
stand-alone tester for network synchronization analysis and wander
measurement in wireless and wireline transport networks.
|
X
|
|||||
|
Talk
set
|
A
device that attaches to an optical fiber and serves as a temporary voice
link facilitating coordination of work among installation
crews.
|
X
|
X
|
||||
|
Telephone
wire analyzer
|
Used
by telecommunications service providers that have networks that are
comprised mostly or partially of twisted-pair local loops to ensure that
those loops are of sufficient quality to carry higher-frequency signals
required for DSL.
|
X
|
|||||
|
Variable
optical attenuator
|
Used
in network simulation setups to provide calibrated variable reduction of
the strength of an optical signal.
|
X
|
X
|
X
|
|||
|
Visual
fault locator
|
A
visible laser that can be connected to an optical fiber network to help
locate breaks or points of excessive loss.
|
X
|
X
|
X
|
|||
|
Widely
tunable laser
|
Can
produce laser light across a broad range of wavelengths. Used to test DWDM
components and value-added optical modules.
|
X
|
X
|
||||
Products
for Network Service Providers
Test
Equipment
We offer
an extensive range of field-portable test, measurement and monitoring solutions
that are mainly used by network service providers and can also be utilized by
network equipment manufacturers. These products are available as handheld test
instruments, portable platforms with related modules, and as rack-mount chassis
with related modules. Our handheld instruments are durable, compact and easy to
use. Our AXS-200 SharpTESTER platform, which is designed for entry-level field
technicians in access networks, can easily be configured for
copper/DSL/triple-play, Ethernet or optical testing applications. Since the
introduction of the AXS-200 SharpTESTER in 2008, we have released several access
test solutions, such as Ethernet/IP, 30 MHz copper and ADSL2+ triple-play test
modules; several others will be released in upcoming months. Our FTB-200 Compact
Platform, designed for the “super field technician”, holds up to two
interchangeable modules that are fully compatible with our more advanced FTB-500
platform. Test technologies well-suited for the FTB-200 Compact Platform include
a wide range of singlemode and multimode optical time-domain reflectometers
(OTDRs), automated optical loss test sets (OLTSs), SONET/SDH analyzers from DS0
up to OC-192, as well as Gigabit Ethernet (GigE) and 10 Gigabit Ethernet
testers. Our third-generation field-testing platform, the FTB-500,
is available in two configurations. The four-slot model is designed for
datacom testing, OTDR analysis, optical loss, and Ethernet (up to 10 Gbit/s)
testing. The eight-slot model is a high-performance, multiple-protocol unit that
allows users to combine next-generation SONET/SDH functions with Ethernet, Fibre
Channel and optical-layer testing capabilities. It also supports dispersion
characterization (PMD and CD), as well as DWDM/ROADM testing with optical
spectrum analysis. Our portable platforms are PC-centric, Windows-based, highly
flexible and fully scalable. Their large robust touchscreens are very practical
for field use.
Service
Assurance Systems
We also
offer a family of service assurance and performance monitoring solutions,
collectively known as the Brix System, to network service provider labs and
large enterprises. The following describes the software and hardware elements of
the Brix System:
Centralized
Management and Correlation -- BrixWorx
BrixWorx
represents the core of the Brix System. BrixWorx
provides network- and service-wide control, visibility, and analysis for the
fully integrated Brix System. Using the BrixWorx Operations Center user
interface, administrators remotely control each component of the system and can
easily configure and modify all aspects of the geographically distributed
network of Verifiers and third-party measurement sources, including: choosing
the desired performance tests and configuring their parameters, threshold
values, and schedules.
The
BrixWorx unified correlation engine quickly turns data into actionable
information through a visualization layer for service-level agreement (SLA)
conformance, root-cause analysis, troubleshooting, usage patterns, and
trending.
The
highly scalable BrixWorx architecture easily accommodates hundreds of thousands
of Brix Verifier test points and third-party measurement sources.
Visualisation
and Business Intelligence -- BrixView
Seamlessly
integrated with the BrixWorx correlation engine, BrixView enables the flexible
presentation of performance and quality information to all decision makers.
With interactive dashboard views, customizable reporting packages, and
individual content portals, BrixView delivers fast, simple access to information
when it is needed and in the format it is needed for all levels of
users across an organization.
BrixView
produces visualization and reports of varying levels to allow a broad audience
to take the appropriate actions. With the appropriate information, network
operators spend less time working with static charts and spreadsheets, and
business owners and executives have the information and insights they need to
make intelligent decisions and drive business value for the
organization.
Testing
Across the Entire Network -- Brix Verifiers
Installed
at customer premise locations, the Brix Verifiers’ various interfaces include
Ethernet, ATM, and Euro/ISDN PRI. Similarly, Verifier test capacity scales from
the modest requirements of an enterprise branch office running hundreds of tests
to a network core running hundreds of thousands of tests.
In
addition to Brix Verifiers, the Brix System also supports selected third-party
measurement sources. Brix Verifiers are designed for long-term 24x7 deployments
in the lights-out, production networks of service providers and enterprises.
Once a Brix Verifier is deployed, administrators do not need to locally access
it again.
End-to-End
IP/MPLS/Carrier Ethernet Service Assurance: BrixNGN
The
network core is the heart of the service delivery network, and where successful
providers’ service assurance strategies start. To effectively guarantee
end-to-end SLAs and meet customers’ requirements, providers must implement a
service assurance solution that provides visibility from the provider edge and
to end-users, while allowing segmented views of service quality for problem
isolation. By continually monitoring the performance and quality of real-time IP
and carrier Ethernet services, and not just the physical network devices,
BrixNGN provides the most effective service assurance solution.
With
BrixNGN, providers can continuously collect, correlate, analyze, and visualize
critical quality of service (QoS) and quality of experience (QoE) data from
the network core to the customer endpoint for capacity planning, verifying
service turn-ups, and identifying, diagnosing, and quickly resolving network and
service performance issues before customers are impacted—thereby guaranteeing
quality.
The
BrixNGN software module performs proactive monitoring of the network core,
extended Ethernet and IP networks between partners and customers, and data
services, including E-mail, web-based applications, file transfers, and
more. BrixNGN enables early detection and quick resolution of service
affecting issues.
Performance
Monitoring for IP Video: BrixVision
The
BrixVision product line is a family of IPTV service assurance products that
measure the end-to-end quality of IP-based video services and validate the
performance of video broadcast, on-demand channel, over-the-top video, and
video-conferencing quality. The BrixVision product line provides full service
lifecycle performance monitoring for IP Video services such as broadcast TV,
video on demand, gaming, and videoconferencing. BrixVision provides visibility
into service performance using a combination of proactive testing and user
transaction generation, passive monitoring, and the collection of performance
metrics from service delivery or home network devices.
Voice
over IP Testing and Monitoring: BrixCall
BrixCall
provides comprehensive visibility into the performance of live VoIP traffic to
ensure call quality from the network core to customer care. Deployed
in conjunction with the Brix family of Verifiers, BrixCall
is an integrated component of EXFO Service Assurance’s live call
monitoring solution and employs Brix Verifiers to monitor call signaling and
media traffic throughout the network with the advanced BrixCall stream
correlation and analysis engine. The solution delivers a single
detailed Call Quality Report for each call monitored as well as visibility
across all monitored calls.
In
addition, the BrixCall dashboard presents critical information about the current
state of the service, including all performance threshold violations, call
disposition, average Mean Opinion Score (MOS), peak call volume and bandwidth
utilization, answer seizure and network efficiency ratios, and call duration
information.
BrixCall
features the unique Brix Tri-Q Analysis, and graphically displays the impact of
each of the elements that contribute to a user’s satisfaction with a call —
signaling quality, delivery quality, and call quality.
The
following table summarizes the principal service assurance solutions we provide
as well as their typical applications:
|
Service
Assurance Solutions
|
||
|
Product
Type
|
Product
|
Typical
Application
|
|
Software
Products
|
BrixWorx
|
Central
site operations center
|
|
BrixCall
|
Advanced
analysis and correlation of VoIP calls
|
|
|
BrixVision
|
Advanced
analysis and correlation of live video sessions
|
|
|
BrixNGN
|
Network
core and MPLS analysis, correlation and reporting
|
|
|
Brix
Verifier
|
Brix
100M Verifier
|
Customer
premise end point monitoring
|
|
Brix
1000 Verifier
|
Network
edge and lower capacity monitoring
|
|
|
Brix
2500 Verifier
|
Network
core, at a higher capacity
|
|
|
Brix
3500T Verifier
|
PSTN
monitoring
|
|
|
Brix
4100 Verifier family
|
In-network
live voice or video monitoring
|
|
Products
for Network Equipment/Component Manufacturers
Test
Equipment
Our
network equipment/component vendor solutions, mainly built around our IQS-600
platform, are available as test modules or stand-alone benchtop instruments. The
next-generation IQS-600 platform can efficiently run as many as 100 optical test
modules using a single controller unit. The IQS-600 platform is equipped with
the software and hardware technology to support single-button operation for
automated testing. Its system-based approach – one box, several test
modules – combined with an open architecture (PXI, Windows, LabVIEW™,
etc.) and ease of programming, produces a highly flexible test
environment.
The
IQS-600 also provides backward compatibility with recent IQ-generation test
modules, while delivering all the power and advantages of a next-generation
platform. EXFO’s wide selection of high-performance test modules includes
high-speed power meters, light sources, WDM laser sources, tunable laser
sources, variable attenuators, multi-wavelength meters, polarization-dependent
loss (PDL) and optical return loss (ORL) meters, polarization controllers and
optical switches.
Our
system/component vendor solutions also address testing issues that cannot be
handled by standard test modules or stand-alone benchtop instruments. Over the
years, we have developed a number of integrated test systems and offer them as
off-the-shelf solutions to suit a wide range of customer needs. In addition, we
have created a software development kit for developers who prefer writing their
own programs for our instruments. Following is a list of integrated test systems
that we provide for characterizing optical components, subsystems
and networks:
|
· CWDM/FTTH
passive optical component test system
|
Used
to automatically characterize all critical specifications, including
spectral insertion loss, polarization-dependent loss and optical return
loss of a CWDM passive component or a FTTH splitter with a high degree of
accuracy, ease of use and speed.
|
|
· Cable
assembly and component test system
|
Used
to perform insertion loss and mandrel-free reflection measurements with
the highest degree of accuracy and repeatability on short fiber assemblies
(including multifiber patchcords, hybrids and fan-out patchcords) and
components like PLC splitters and fiber arrays.
|
|
· DWDM
passive component test system
|
Used
to automatically characterize all critical specifications, including
spectral insertion loss, polarization-dependent loss and optical return
loss of a DWDM passive component with a high degree of accuracy, ease of
use and speed.
|
Following
the acquisition of PicoSolve Inc. in February 2009, we also offer advanced test
solutions for network equipment manufacturers in the process of developing ultra
high-speed optical networks.
PSO-200
Optical Modulation Analyzer
The
PSO-200 is the first turn-key optical modulation analyzer for complete
characterization of signals up to 100 GBaud. Very high-speed network
transmission is enabled through the efficient modulation of signals, whether it
is phase, amplitude or both. To design 100G systems based on such advanced
modulation schemes and to make sure they are ready for deployment, network
equipment manufacturers (NEMs) have used in-house test solutions, which are
often complex or limited. The introduction of the PSO-200 Optical Modulation
Analyzer changes the picture as engineers working in R&D labs and
manufacturing environments now have access to a turnkey and
comprehensive test instrument that makes bandwidth limitation
irrelevant.
PSO-100
Optical Sampling Oscilloscope Series
The
PSO-100 Series are the industry's fastest sampling oscilloscopes, allowing
characterization of optical signals at data rates up to 640 Gbits/s. The PSO-100
all optical sampling oscilloscopes enable distortion-free, eye-diagram analysis
and pattern visualization within existing high-speed optical
networks.
IMS/VoIP
Test Systems
InterWatch
Product Line
In
addition, we offer a line of hardware modules and SolarisTM
software-based telecommunications test products operating on a common hardware
platform range. This product line consists of the QA-604 platform that was
introduced in April 2009 and the InterWatch R14 system. Our products
simulate both network subscribers and network elements used in emerging IMS and
next-generation networks.
We
maintain a library of software modules that provide test support for a large
number of standardized industry protocols and variants. Our emphasis is on
testing complex, high-level and emerging protocols, including IP Multimedia
Subsystem (IMS) and IP Telephony (Voice over IP or VoIP).
Our
extensive technical know-how and proprietary software development tools enable
us to implement test support for new protocols and protocol variants rapidly in
response to customer needs. With their extensive libraries of software protocol
test modules, large selection of proprietary hardware physical interfaces and
versatile range of hardware platforms, our products are easily configured
to support a wide variety of digital testing functions, thereby reducing a
customer’s need for multiple test systems. In addition, the systems’
multi-protocol, multi-user capabilities allow multiple complex testing
operations to be performed simultaneously, helping our customers
to accelerate their product development cycles.
Our
InterWatch test systems consist of advanced proprietary software together with
our proprietary hardware interface and co-processor cards. When acquiring a
system, customers typically license one or more software modules and purchase
hardware and ongoing software support. Customers may upgrade their systems
by purchasing additional software protocol test modules and additional
hardware interfaces to meet future testing needs. Prices for our systems vary
widely depending upon the overall system configuration parameters, including the
number and type of software protocol modules and the number of physical
interfaces required by the customer.
Applications
The
principal applications of our InterWatch test systems are:
Feature
Verification. Our systems are used to perform feature
verification by simulating one or more network devices and testing a wide
variety of possible scenarios to establish if the device under test can handle
all features specified by the protocol. Users are able to initiate multiple
simultaneous calls across one or many links, create correct call scenarios, send
messages out of sequence to verify error response mechanisms and verify a voice
or data path.
Interoperability
Testing. Our systems are used to simulate one or more network
devices, emulating their actions and responses. By simulating various network
devices, such as digital switches, network access nodes and network databases,
our products assist engineers with the cost-effective development of equipment
that will be compatible with other devices in the networks within which
they will be deployed. This helps ensure that network equipment will
interoperate reliably, thereby reducing costly failures after
installation.
Load and Stress
Testing. Our systems are used to verify that a device under
test can successfully handle its designed traffic capacity and that its
performance will degrade gracefully, rather than fail completely, when stressed
beyond its specifications. The scalable architectures of the systems
significantly improve our ability to address our customers’ growing need to
generate and maintain high traffic volumes for load testing.
Voice and Video Quality Analysis.
Our systems are used to simulate subscribers’ voice and video traffic and
measure the impact on the quality of customer experience (QoE). This type of
testing helps ensure that the network can deliver an acceptable quality of voice
and video to customers even when subjected to large volumes of network
traffic.
Products
for Life Sciences and Industrial Applications
Over the
years, we have developed and acquired a number of core technologies that we
leverage in selected high-precision assembly and life sciences markets. For
example, we offer several light-based curing solutions for optical component
manufacturing applications and have adapted our approach for other industries,
such as semiconductor, microelectronic, and medical device manufacturing,
in order to maximize revenues. Our Omnicure®
systems deliver precise doses of the appropriate spectral light onto
photosensitive adhesives to significantly reduce bonding time and increase
repeatability. These light-based curing systems, supported by patented
optical feedback, thermal control and radiometry technology, produce a
high-quality bonding solution. Our technology and application knowledge place us
at the forefront of this market.
Another
key product line is the X-Cite fluorescence illumination systems for microscope
manufacturers. X-Cite systems deliver excellent image quality and at least
2000 hours of lamp life, which is over 60% longer than previous models and up to
10 times longer than conventional illumination systems.
X-Cite
systems are self-contained illumination units separate from a microscope.
A simple light guide attachment through custom-coupling optics ensures a
uniformly illuminated field of view with no heat from the lamp being transferred
to the microscope. Models range from the basic X-Cite 120XL for routine
imaging applications to the full-featured X-Cite Exacte, designed to provide
maximum illumination stability and control for the most advanced live cell
research.
The
following table summarizes the principal types of high-precision assembly and
life science solutions we provide as well as their typical
applications:
|
Light
Sources and Accessories
|
||
|
Product
Type
|
Product
|
Typical
Application
|
|
UV
Curing Light Sources
|
Omnicure®
S1000
Omnicure®
S1500
Omnicure®
S2000
|
Used
to initiate photo chemical reactions in polymer-based materials for a
variety of end use applications. Examples include adhesive curing for
manufacturing of high value-added items such as medical devices,
micro-electronic and opto-electronic components, displays, and data
storage devices.
|
| UV LED Curing Light Sources | Omnicure® LX300 | |
|
Fluorescent
Light Sources
|
X-Cite®
120XL
X-Cite®
120 PC
X-Cite®
exacte
|
Fluorescence
light source that attaches directly to most microscopes currently sold by
major microscopes manufacturers.
|
|
Optical
Accessories
|
Optional
custom delivery optics used with EXFO UV light sources to tailor the
properties of light beams to end-user
applications.
|
|
|
Light
Sources and Accessories
|
||
|
Product
Type
|
Product
|
Typical
Application
|
|
High
Power Fiber Light Guide
|
|
Provides
an equal distribution of light energy to multiple cure sites with 50% more
throughput than standard fiber
guides.
|
|
UV
LED Curing Pinning System
|
ExcelerateTM
PIN-100
ExcelerateTM
PIN-101
|
Used
to pin (partially cure) UV ink immediately after jetting to enhance the
management of drop size and image integrity, minimizing the unwanted
mixing of drops and providing the highest possible image quality and the
sharpest color
rendering.
|
|
Optical Instruments
|
||
|
Product
Type
|
Product
|
Typical
Application
|
|
Radiometer
|
R5000
R2000
X-Cite®
Radiometer
|
Handheld,
broadband optical radiometers used in conjunction with EXFO UV light
sources to ensure process quality control at the end-user
location.
|
|
Cure-Site
Radiometer
|
Attachments
for the R2000 and R5000 radiometers that enable optical measurements under
customer specific configurations. Examples include the cure-ring
radiometer, which measures the output power of light from an EXFO cure
ring; ideal for applications that requires a uniform 360°
exposure.
|
|
|
Precision
Positioning Instruments
|
||
|
Product
Type
|
Product
Line
|
Typical
Application
|
|
Micromanipulators
|
PCS-6000
Micromanipulators
|
Electrophysiology
research such as patch clamp recording experiments on cells from the brain
and central nervous system.
|
|
PCS-5000
Micromanipulators
|
||
|
Microscope
Platforms
|
Gibraltar
Platform/Stage
|
Stable
mechanical platforms that facilitate cellular research with
micropositioning and microinjection systems.
|
|
Microinjection
Systems
|
MIS-5000
Microinjection manipulator
|
Microinjection
and nuclear transfer for genetics and reproductive sciences
research.
|
Research
and Development
We
believe that our future success largely depends on our ability to maintain and
enhance our core technologies and product functionality. To keep developing new
products and enhancements, it is important that we retain and recruit
highly skilled personnel. Our Telecom Division’s research and development
department is headed by a Vice-President of Research and Development, while
our Life Sciences and Industrial Division has a Director of Research and
Development.
In fiscal
2009, we continued to increase our software development capabilities at our
R&D center in India at a lower cost. We had initially acquired a small
outsourcing company based in Pune, India. Today, this group is our largest
R&D center with 152 employees.
As of
November 2, 2009, our research and development departments included
454 full-time engineers, scientists and technicians, of whom 121 hold
post-graduate degrees. Gross research and development expenditures in fiscal
2009 reached $35.8 million, compared to $32.5 million in 2008 and
$25.2 million in 2007. We launched 26 new products in fiscal 2009
compared to 27 in 2008 and 20 in 2007. Approximately 38% of sales in fiscal 2009
originated from products that have been on the market two years or less compared
to 35% in 2008 and 34% in 2007.
Through
market-oriented product portfolio review processes at our telecom sites in
Quebec City, Canada, Montreal, Canada, Concord, Canada, Chelmsford (MA), USA,
and Pune, India, we ensure that our investments in research and development
are aligned with our market opportunities and customers’ needs. This process
enables us to maximize our returns on R&D investments by focusing
our resources on prioritized projects. Quarterly product portfolio review
meetings enable us to select a realistic, balanced mix of new products and
allocate the necessary resources for their development. All our projects,
including those already underway, are reviewed, given a priority rating and
allocated budgets and resources. Our existing projects can be stopped or
substantially redefined if there have been significant changes in market
conditions, or if the project development schedule or budget have significantly
changed.
To manage
our research projects once they are underway, we use a structured management
process known as the stage-gate approach. The stage-gate approach is based on a
systematic review of a project’s progress at various stages of its life
cycle. The following are the key review stages of the stage-gate
approach:
|
·
|
market
study and research feasibility;
|
|
·
|
product
definition;
|
|
·
|
development
feasibility;
|
|
·
|
development;
|
|
·
|
qualification;
and
|
|
·
|
transfer
to production.
|
At each
stage, we review our project risks, costs and estimated completion time. We
compare our design to anticipated market needs and ensure that our new
product development is synchronized with other internal departments and external
industry events. Adherence to these inter-related portfolio review and
stage-gate processes enabled us to be named winners of the Outstanding Corporate
Innovator Award in 2000 by the U.S.-based Product Development and Management
Association.
We also
maintain research and development programs for our life sciences and industrial
activities in Toronto, Canada. The product development process is managed
using a similar stage-gate process, and projects are reviewed and approved
through a quarterly portfolio review. The future success of our life sciences
and industrial operations largely depends on our ability to maintain and enhance
our core technology in light-based curing, fluorescence illumination systems and
piezoelectric positioning.
Strong
R&D capabilities at our Life Sciences and Industrial Division site in
Toronto, Canada have made it possible to bring a number of successful new
products to market quickly and retain customer intimacy. In the process, it has
enhanced our ability to customize products for special applications and to
develop original equipment manufacturing (OEM) products under partnerships and
exclusive contracts. Outside consultants are often used for added support in
areas like software development, mechanical design and rapid
prototyping.
Customers
Our
global and diversified telecom customer base relies on our test and service
assurance solutions to enable optical networks to perform optimally during
their complete life cycles: research, development, manufacturing, installation,
maintenance and monitoring. We also have selected customers in high-precision
assembly and life science sectors that require our solutions to render them more
efficient in their respective fields. Our telecom customers include network
service providers, cable television companies, public utilities, private network
operators, third-party installers, equipment rental companies, large
enterprises, network equipment manufacturers, component vendors and laboratory
researchers. Our life science and industrial customers consist of major
manufacturers of medical devices, microelectronics, optical displays, electronic
storage systems, photonic components and microscopes, as well as universities,
medical schools, governments, and private and industrial research laboratories.
Our UV digital print customers consist of printing equipment manufacturers who
develop products for label production and product marking. In fiscal 2009, our
top customer accounted for 11.6% of our sales and our top three customers
represented 17.8% of our sales. In comparison, in 2008 our top customer
accounted for 7.4% of sales and our top three customers represented 13.1%, while
in 2007, our top customer accounted for 14.7% of sales and our top three
customers represented 19.6%.
With
regard to geographic distribution, sales to customers in the Americas (US,
Canada, Central and Latin America) represented 57% of our sales in fiscal 2009,
while sales to customers in EMEA (Europe, Middle East and Africa) and
Asia-Pacific accounted for 27% and 16% of sales, respectively. In comparison,
the Americas, EMEA and Asia-Pacific accounted for 56%, 28% and 16% of sales,
respectively, in 2008, and 59%, 27% and 14%, respectively, in 2007.
Sales
We sell
our telecom test, measurement and service assurance solutions through direct and
indirect sales channels in the Americas (US, Canada, Central and South America)
and around the world.
In the
Americas, we use a hybrid model, combining key account management with direct
and indirect sales coverage. We typically use key account managers to serve
large customers that generate high sales volumes or might potentially
represent high sales volumes in the future. These key account managers are
supplemented by regional sales managers, sales engineers, sales
representatives and distributors in US as well as Central and South American
metropolitan areas, and regional sales managers in Canada.
We opt
for a direct sales approach when selling higher-end, highly technical products
to sophisticated buyers. Sales of low- to medium-level complexity products to
less stringent technical buyers are usually done through a manufacturer
representative organization supported by regional sales managers. Our main sales
offices and service centers in the Americas are located in Plano, Texas, Quebec
City, Canada, and Concord, Canada. They are supplemented by a regional presence
in cities across the US, Central and South America, as well as
Canada.
On the
international front, we have sales personnel covering strategic areas such as
the EMEA (Europe, Middle-East and Africa) and APAC (Asia-Pacific) regions. Our
sales network in EMEA is supported by a main office and service center in
Southampton, UK, which maintains our head of European sales operations and also
provides repair and calibration services for our EMEA customers. We also have
additional sales offices in multiple countries across EMEA to serve and support
our various customers and distributors.
As for
APAC, our main sales offices for South East Asia is located in Singapore, while
our main sales representative offices for mainland China are located in Shenzhen
and Beijing, which also acts as a service center to better serve our
customer base in that geographic area. In addition, we have other sales offices
in strategic locations around the world to support our network of distributors
and various customers.
We rely
on a network of more than 90 distributors worldwide to work with us in
supporting mostly our international sales and to participate in a large number
of international events. We believe that the local presence and cultural
attributes of our distributors allow us to better serve our global
markets.
Our
direct telecom sales team consists of a Vice-President of Sales for the Americas
and a Vice-President of International Sales. They are supported by nine regional
sales directors that are leading a widely distributed team of more than 121
people acting as key account managers, regional sales managers, sales engineers
and application engineers. Our sales people are located throughout major
metropolitan areas around the world. This group of sales professionals has on
average more than 15 years of experience in the fields of telecommunications,
fiber optics, or test and measurement. We also have an in-house Customer
Service Group to meet the needs of existing and new customers. This group is
responsible for providing quotations to customers, supporting our sales force,
managing demonstration units, order management, technical support and training
as well as calibration and repair services.
Following
the acquisitions of Navtel Communications and Brix Networks (renamed EXFO
Service Assurance Inc.) in 2008, sales responsibilities within our Telecom
Division were modified. Navtel Communications’ sales team was fully integrated
within the Telecom Division, while EXFO Service Assurance’s sales force remained
stand-alone as its systems are more complex than traditional test equipment and
require longer sales cycles. EXFO Service Assurance, with its main sales office
located in Chelmsford, MA, USA, consists of regionally based account executives
and sales engineers that target carriers, service providers and cable MSOs.
Regional sales offices are located in Southampton, England, Singapore and
Beijing, China.
EXFO
Service Assurance sells its solutions mainly through direct channels in the
Americas (US, Canada, Central and Latin America) and around the world. In the
EMEA and Asia/Pac regions, its sales teams work with resellers that have a
strong local presence.
The main
office for our Life Sciences and Industrial Division is located in Toronto,
Canada. We use mixed sales channels to serve various markets supported by this
division, depending on product line and geography. Optical light sources and
related accessories used for industrial applications are sold in North America
through a network of more than 10 manufacturer representatives and,
internationally, through a network of more than 20 distributors. UV light
sources for digital print applications are sold directly to customers globally.
The X-Cite 120 and Exacte Fluorescence Illumination Systems are sold through
value-added reseller agreements with major microscope companies and system
integrators in North America and Europe. Positioning products are sold directly
to customers in North America, which includes the United States and Canada, and
internationally through a network of technical distributors. To gain additional
access to the positioning life science research market in the United States and
Canada, business relationships are in place with major microscope manufacturers,
which include Nikon, Olympus and Zeiss. These companies often combine the sale
of their microscopes with our product.
Product
Management, Marketing/Communications and Global Services
Product
Management
Our
telecom test and measurement Product Management Group consists of one
Vice-President responsible for our Optical, Transport & Datacom, Copper
Access, and IMS/VoIP product lines – as well as directors and product managers
who have various degrees in engineering, science and business administration.
Directors and product managers, under the direction of the Vice-President, are
responsible for all aspects of our telecom marketing program including product
strategy, new product introductions, definition of new features and functions,
pricing, product launches and advertising campaigns. We follow up our marketing
initiatives by attending industry trade shows. Furthermore, we have
a customer relationship management (CRM) system to compile market and
customer information including forecasts, opportunities, leads and competitive
data. We use this information to make strategic business decisions. Finally,
strategic marketing specialists analyze our markets of interests, compile
competitive information and identify macro-trends in our sector.
Our
Service Assurance activities fall under the management of a separate
Vice-President/General Manager, who is supported by a Director and Product
Managers responsible for product strategy, new product introductions, definition
of new features and functions, pricing, product launches and advertising
campaigns.
Our Life
Sciences and Industrial Group consists of a Director – responsible for both life
sciences and precision assembly sectors – as well as product managers who have
various degrees in engineering, science and business administration. Product
managers, under the direction of the Director, are responsible for all aspects
of their business line marketing programs including product strategy, new
product introductions, definition of new features and functions, pricing,
product launches and advertising campaigns.
The
Telecom Division product management group and the Life Sciences and Industrial
Division product management group include 59 and 11 employees,
respectively.
Marketing/Communications
The
Telecom Division’s Marketing-Communications team, which mainly consists of
project managers, marketing writers, translators and graphic artists, supports
our Product Management Group by producing marketing and corporate documentation.
Literature includes specification sheets, application notes, product catalogues,
advertising copy and an electronic corporate newsletter. This
Marketing-Communications team is also responsible for all sales tools required
by our worldwide sales force and for updating the marketing contents of our
website. This team falls under the responsibility of the Vice-President, Telecom
Product Management and Marketing.
The Life
Sciences & Industrial Division’s Marketing-Communications team shares a
variety of marketing initiatives. This group is assisted by product
managers, who provide the technical data and collaborative support required to
produce product specification sheets, catalogues, application notes and
multimedia marketing tools. This Marketing-Communications team is responsible
for all advertising material, Website updates, events planning (including trade
shows) and direct promotional marketing such as mass mailings and
telemarketing. This team also provides the sales tools required by the
Life Sciences and Industrial Division’s worldwide sales channels, including
maintaining our elite partner program. This team falls under the responsibility
of the Director of Marketing for the Life Sciences and Industrial
Division.
Global
Services
EXFO’s
Global Services operation, which falls under the responsibility of a Director,
provides customers with a broad array of support and services worldwide.
This team has direct staff in North America, Europe, and Asia. It also
provides local support in other regions through select partners. Such a strategy
enables EXFO to have a global reach while maintaining strong local
ties.
This
team’s objective is to directly contribute to the customer’s success and to
achieve EXFO’s long-term mission by providing internal and customer-facing
services. Specifically, it fulfills its mission by
offering:
|
·
|
Customer Relationship
Management (CRM) Administration – Business Ownership of EXFO’s CRM
toolset and evolution.
|
|
·
|
Sales Support – Leverage
the effectiveness of its sales force by providing pre-sales and demo
support, as well as guiding customers in purchasing the correct equipment
for their respective applications, issuing quotations, and promoting the
Flexcare extended warranty service and support
program.
|
|
·
|
Order Management –
Accurately process customer orders from entry through fulfillment and
delivery.
|
|
·
|
Customer Service – Serve
as a primary interface for inbound and outbound customer communication.
Provide customers with one central point of contact and work with the
customer from purchasing equipment to helping them arrange for service, if
necessary.
|
|
·
|
Product Support –
Provide expert technical support and deliver product service worldwide.
Directly manage EXFO’s Worldwide Service Centers. Where applicable,
furnish installation and on-site servicing for more complex equipment and
applications.
|
|
·
|
Systems Services –
Provide pre-sale, delivery, post-sale technical support, and system
actualization of EXFO’s test and service assurance
systems.
|
|
·
|
Education Services –
Aggregate expertise, develop material, and deliver free and fee-based
training.
|
|
·
|
Professional Services –
Provide value-added solution services for EXFO’s test and system
customers.
|
Manufacturing
Our
telecom manufacturing operations consist mainly of material planning,
procurement, sub-assembly, final assembly and test, software loading,
calibration, quality control, shipping, billing and customs management.
As at November 2, 2009, we had 314 employees involved in our telecom
manufacturing operations. Most of our telecom manufacturing activities, which
occupy a total of approximately 115,000 square feet, are spread among four
buildings: two in Quebec City, Canada, one in Shenzhen, China, and one in
Chelmsford, MA, USA.
These
manufacturing operations include the following responsibilities:
|
·
|
Production. From
production planning to product shipment, our production department is
responsible for manufacturing high-quality products on time. Factories are
organized in work cells; each cell consists of specialized technicians and
equipment and has full responsibility over a product family. Technicians
are cross-trained and versatile enough, so that they can carry out
specific functions in more than one cell. This allows shorter lead
times by alleviating bottlenecks.
|
|
·
|
Product
Engineering and Quality. This department, which supports
our production cells, acts like a gatekeeper to ensure the quality of
our products and the effectiveness of our manufacturing processes. It is
responsible for the transfer of products from research and development
to manufacturing, product improvement, documentation, metrology, and
the quality control and regulatory compliance process. Quality control
represents a key element in our manufacturing operations. Quality is
assured through product testing at numerous stages in the manufacturing
process to ensure that our products meet stringent industry requirements
and our customers’ performance
requirements.
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·
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Supply-Chain
Management. This department is responsible for sales
forecasting, raw material procurement, material-cost reduction and vendor
performance management. Our products consist of optical, electronic
and mechanical parts, which are purchased from suppliers around the world.
Approximately one-third of our parts are manufactured to our
specifications. Materials represent the biggest portion of our cost of
goods. Our performance is tightly linked to vendor performance, requiring
greater emphasis on this critical aspect of our
business.
|
Our Life
Sciences and Industrial Division’s manufacturing operations occupy 8,000 square
feet in Toronto, Canada and 23 employees were involved in manufacturing
operations as at November 2, 2009 . This group manufactures light sources and
related accessories, fluorescence illumination systems and precise positioning
equipment for the life sciences and high-precision assembly markets. Operations
consist of manufacturing, procurement, warehousing, quality control and
document control managed by various elements of the ISO 9001 certified
quality system. Recognizing the importance of reduced time-to-market for our
solutions, we have focused efforts on designing products with an emphasis
on standardization, modularity, as well as ease of fabrication and
assembly. Following are key manufacturing responsibilities in Toronto,
Canada:
Manufacturing – consists
primarily of assembly and test capabilities in which all major manufacturing
elements are subcontracted to various key suppliers. These components are
integrated into assemblies and tested in order to ensure all operating
specifications have been met for each product manufactured. Cross-training
of assembly technicians for each product group ensures scalability of
manufacturing to meet customer demand. In addition, this group is
responsible for capacity and production planning, which are necessary on an
on-going basis to ensure that adequate resources are available to meet
forecasted and actual demand.
Supply Chain Management – is
responsible for the planning of materials required by manufacturing and
developing key-supplier relationships to ensure materials have been manufactured
to our specifications. This group’s main focus is to work with our worldwide
supplier base to find effective manufacturing and logistic solutions in order
reduce costs and cycle time. Paramount to this process is an effective
communication system that provides timely feedback to our suppliers and forms an
important element of our supplier evaluation system.
Manufacturing Engineering and Quality
Assurance – is responsible for product integrity throughout the
manufacturing cycle. From the release of new products, through our new product
introduction process, and configuration management to manage engineering change,
we ensure consistent manufacturing processes throughout the product life cycle.
In conjunction with the above process, quality is maintained by performing
quality tests at incoming receiving and final product verification. The
responsibility for product quality is shared by all team members throughout the
company and does not reside solely with the quality group.
Competition
The
telecommunications test, measurement and monitoring industry is highly
competitive and subject to rapid change as a result of technological
developments and market conditions. We compete with many different companies,
depending on product family and geographical market. We believe that the main
competitive factors in the industry include the following:
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·
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product
performance and reliability;
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·
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price;
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·
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level
of technological innovation;
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·
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product
lead times;
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·
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breadth
of product offerings;
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·
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ease
of use;
|
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·
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brand-name
recognition;
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·
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customer
service and technical support;
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·
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strength
of sales and distribution relationships;
and
|
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·
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financial
stability.
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Competitors
in test and measurement include global suppliers like Agilent Technologies Inc.,
Anritsu Corporation, JDS Uniphase Corporation, Spirent Communications plc and
Yokogawa Electric Corporation. Other players like AFL Telecommunications LLC,
AnaCise Testnology Corporation, BlueLight Technology Inc., DADI
Telecommunication Equipment CO., Ltd, Digital Lightwave Inc., Electrodata, Inc.,
Empirix, Inc., Fluke Corporation and Tektronix, Inc. (which both are operating
divisions within Danaher Corporation), Shanghai Grandway Telecom Tech. co., Ltd,
Greenlee Textron, Inc., Ineoquest Technologies, Inc., IXIA, Kingfisher
International Pty Ltd, Nethawk Oyj, Shenick Network Systems Limited, Shunra
Software Ltd, Sunrise Telecom Incorporated and VeEX Inc. compete against
us in niche test and measurement markets. On the service assurance
side, we compete against Agilent Technologies Inc., Anritsu Corporation, JDS
Uniphase Corporation, Tektronix, Inc. (which is an operating division within
Danaher Corporation), Empirix, Inc., Ineoquest Technologies, Inc., InfoVista
S.A., IXIA, Nexus Telecom AG, RADCOM Ltd., Spirent Communications plc, TTI
Telecom International Ltd. and Whitbe. Some network equipment manufacturers also
sell their in-house service assurance systems.
Competition
for our life sciences and industrial solutions is quite varied, depending upon
product line. OmniCure‘s competitors, which sell light-based curing products,
include Dymax Corporation, Henkel Corporation in North America
and Europe, as well as Hamamatsu, Photonics K.K., Ushio Inc. and Panasonic
Corporation in Asia. Excelerate, a new brand and product line, competes
globally with products from well established companies such as Dr. Honle,
Nordson and Integration Technologies. With regard to our X-Cite 120 Fluorescence
Illumination System, main competitors consist of microscope manufacturers
who have developed lamp housings for low-wattage mercury burners in-house.
Finally, our motion-control instruments, which are designed for various life
science applications, compete against products from companies like Sutter
Instruments and Narishige.
Regulatory
Environment
In most
countries where our products are sold, our products must comply with the
regulations of one or more governmental entities. These regulations often
are complex and vary from country to country. Depending upon the country and the
relevant product, the applicable regulations may require product testing,
approval, registration, marking and unique design restrictions. Accordingly, we
have appointed a team of engineers who are responsible for ensuring that our
products comply with all applicable regulations.
In the
United States, our products must comply with the regulations of several agencies
of the U.S. federal government, including the Federal Communications Commission
(FCC), the Food and Drug Administration (FDA) and the Occupational Safety and
Health Administration (OSHA). Under the FCC’s regulations, our products must
comply with certain electro magnetic compatibility (EMC) requirements to insure
they do not generate and are immune from electrical noise which could possibly
cause undesirable operation, as well as affect other surrounding devices.
Depending upon the product, compliance with these rules may necessitate applying
for and obtaining an FCC equipment authorization prior to importing into
the United States, or marketing, any units of the relevant product.
Additionally, some of our products must comply with the FDA’s non-medical performance standards
and related rules concerning light-emitting products, such as lasers. The FDA’s
regulations are intended to promote safety by limiting human exposure to harmful
non-iodizing radiation. Similarly, our products must comply with safety
standards adopted by OSHA. Furthermore, for our Life Science and Industrial
Division, certain U.S. states require mandatory product registration and
reporting of Mercury-added products being imported. This registration
is controlled by the Interstate Mercury Education and Reduction
Clearinghouse (IMERC).
Similar
regulations apply in other countries. For example, in Canada our products must
comply with the applicable standards adopted by the Standards Council of Canada
(SCC). These include product safety standards developed by the Canadian
Standards association as well as EMC requirements adopted by Industry Canada.
Countries in the European Union require product compliance as dictated by an
applicable directive, often referred to as CE marking. This includes
testing to ensure compliance with harmonized European Norm (EN) standards for
both product safety and EMC requirements.
In
Europe, with the implementation of the WEEE directives for recycling of
electronic products in selected European Countries (2002-96-CE), we have
appointed a task force committee consisting of our management and employees,
distributors and other partners as the case may be, to ensure full compliance
with regulations and oversee the management, logistics, recycling rate, disposal
services and activities related to recycling of electronic equipment and
products within the member states.
Additionally,
to address the issue of environmental compliance, the European Union has
mandated the Restriction of the Use of Certain Hazardous Substances or "RoHS"
Directive, which applies to all products included within the scope of WEEE
directive with the exception of Categories 8 (Medical devices) and 9 (Monitoring
and control instruments). Mandatory product compliance includes the ban of
certain substances within specified concentrations, unless formally exempted by
the directive. To ensure compliance to this directive, a formal restricted
substances control (RSC) program was implemented for our products included
within the scope of WEEE. This program ensures the design, procurement and
manufacturing of affected products prevents the inclusion of the banned
substances as specified by the RoHS directive.
Other
significant types of regulations not described in this annual report also may
apply, depending upon the relevant product and country of
destination.
Intellectual
Property
Our
success and ability to compete are dependent in part on our ability to develop
and protect our proprietary technology. We file U.S. and international
applications to protect technology, inventions and improvements important to the
development of our business. We also rely on a combination of copyright,
trademark, trade secret rights, licensing and confidentiality
agreements.
As of
August 31, 2009, we held 46 actively maintained granted patents from the U.S.
(including one “design” patent), ten from Canada, four from China, five
from Germany (including one “Utility Model”), four from the United Kingdom,
four from France, as well as a patent in each of four other European
countries. In addition, we have in process 20 US patent applications,
seven Canadian patent applications, two European applications, one
application in China, and one direct national entry in Germany (not via the
European application), and as well as five applications under the Patent
Cooperation Treaty, which have not yet entered the national phase. The
expiration dates of our issued patents range from December 2011 to January
2027.
We
consider eight of our inventions for which patents have either been granted or
are pending to be material. These inventions are:
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·
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a
method and apparatus for measuring a polarization-related parameter of an
optical fiber path, such as the differential group delay, the overall
polarization mode dispersion, or the cumulative polarization mode
dispersion. This invention underlies our FTB-5600 Polarization OTDR and
our FTB-5700 Single-ended Dispersion Analyzer products, and may serve as
the basis for a number of other
potential products;
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·
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a
method and apparatus for characterizing optical power levels in
three-wavelength, bidirectional fiber-to-the-home systems. This invention
describes how the optical power can be measured at the two-downstream and
one upstream wavelengths used to connect a residence or business customer,
while maintaining the signal continuity necessary to keep the home-based
Optical Network Terminal operating. This invention underlies
the two-port version of our PPM-350B PON Power
Meter;
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·
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an
optical spectrum analyzer using optical fibers as input and output
“slits”. This invention forms the basis of our FTB-5240,
FTB-5240B and IQ-5250 products;
|
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·
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a
light-curing system with closed-loop control and work-piece recording
which is at the heart of the spot-curing systems manufactured by EXFO
Photonic Solutions;
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·
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a
special optical design used in some of the X-Cite adaptors to prevent
structure in the beam from reducing the uniformity of illumination at the
microscope objective plane, which is a key patent for our X-Cite
fluorescent illumination system;
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·
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a
method and apparatus to determine the theoretical and practical data rates
for a cable under test. This invention forms the basis of the EXFO
CableSHARK product, describing how two test devices,
communicating with each other via the cable under test, can predict the
performance of a pair of ADSL (Asymmetric Digital Subscriber Line) modems,
and in case of problems, analyze the cause of the modems failing to
synchronize;
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·
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a
method and system for hardware time stamping packetized data to provide
sub-microsecond accuracy in test measurements, which is embedded in the
Brix100M, Brix1000, and Brix2500
Series Verifiers.
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·
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a
method for actively analyzing a data packet delivery path to provide
diagnostics and root cause analysis of network delivery path issues, which
is embedded in BrixCall, BrixNGN, and BrixVision applications of EXFO
Service Assurance.
|
Confidentiality
and proprietary information agreements with our senior management, employees and
others generally stipulate that all confidential information developed or made
known to these individuals by us during the course of their relationship is to
be kept confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all intellectual
property developed by the individual in the course of rendering services to
us belongs exclusively to us. These efforts afford only limited
protection.
As of
November 2, 2009, the following chart presents our corporate structure, the
jurisdiction of incorporation of our subsidiaries and the percentage of
shares (which is also the percentage of voting power) that we hold in those
subsidiaries.
Our head
offices and facilities are located in Quebec City, Province of Quebec, Canada
where we occupy two buildings. These buildings house our executive and
administrative offices, research and development facilities and production
facilities. We also have facilities in Montreal, Province of Quebec, Canada
(formerly EXFO Protocol), in Concord, Ontario, Canada (formerly Consultronics
Limited), in Mississauga, Ontario, Canada (EXFO Photonic Solutions Inc.), in
Chelmsford, Massachusetts, United States (EXFO Service Assurance Inc.), in
Eastleigh, Hampshire, United Kingdom (EXFO Europe Limited), in Shenzhen,
China (EXFO Telecom Equipment (Shenzhen) Co. Ltd.), in Pune, India (EXFO
Electro-Optical Engineering India Private Ltd.) and in Gothenburg, Sweden (EXFO
Sweden Aktiebolag). EXFO Burleigh Products Group Inc.’s facilities located in
Victor, New York, were sold on August 31, 2006.
In
addition, we maintain sales offices and/or have regional sales managers located
in China, Czech Republic, France, Germany, Great Britain, Mexico, Singapore,
Spain, United Arab Emirates and the United States.
During
our 2009 fiscal year, two relocation activities were completed. In September
2008, our Navtel operations were relocated within our Concord, Ontario,
facility. The lease of the vacant building was terminated as per the
original lease agreement in March 2009. In July 2009, our Shenzhen manufacturing
operations were relocated in a brand new and improved facility supporting both
the short- and long-term growth plans.
The
following table sets forth information with respect to the main facilities that
we occupy as of November 2, 2009.
|
Location
|
Use
of Space
|
Square
Footage
|
Type
of Interest
|
|
436
Nolin Street
Quebec
(Quebec)
G1M
1E7
|
Partially
occupied for manufacturing of telecom products
|
44,164 (1)
|
Owned
|
|
400
Godin Avenue
Quebec
(Quebec)
G1M
2K2
|
Fully
occupied for research and development, manufacturing, management and
administration
|
128,800 (2)
|
Owned
|
|
2260
Argentia Road
Mississauga
(Ontario)
L5N
6H7
|
Partially
occupied for research and development, manufacturing of life science and
industrial products, management and administration
|
25,328 (3)
|
Leased
|
|
2650
Marie-Curie
St-Laurent (Quebec)
H4S
2C3
|
Fully
occupied for research and development, management and
administration
|
26,000
|
Leased
|
|
160
Drumlin Circle
Concord
(Ontario)
L4K
3E5
|
Partially
occupied for research and development, product management and
administration
|
23,500 (4)
|
Owned
|
|
285
Mill Road
Chelmsford,
MA 01824
United
States
|
Partially
occupied for research and development, manufacturing, management and
administration
|
23,052 (5)
|
Leased
|
|
Omega
Enterprise Park
Electron
Way, Chandlers Ford,
Eastleigh,
Hampshire S053 4SE
United
Kingdom
|
Fully
occupied for European customer service, sales management and
administration
|
10,000
|
Leased
|
|
Location
|
Use
of Space
|
Square
Footage
|
Type
of Interest
|
|
3rd
Floor, Building 10,
Yu
Sheng Industrial Park
(Gu
Shu Crossing)
No.
467, National Highway 107
Xixiang,
Bao An District
Shenzhen
518126
China
|
Partially
occupied for manufacturing of telecom products
|
56,000 (6)
|
Leased
|
|
113/1,
Lane 4A
Koregaon
Park
Pune
411001
India
|
Fully
occupied for research and development
|
5,986
|
Leased
|
|
Office
No 701, Building 1
The
Cerebrum IT Park
Wadgaon
Sheri, Pune 411014
India
|
Fully
occupied for research and development
|
16,840
|
Leased
|
|
Arvid
Hedvalls Backe 4
SE-411
33 Gothenburg
Sweden
|
Fully
occupied for research and development
|
538
|
Leased
|
|
(1)
|
Approximately
5% of these premises are not
occupied.
|
|
(2)
|
Including
the warehouse space. Premises without the warehouse are approximately
115,000 square feet.
|
|
(3)
|
9,792
square feet have been subleased to a third party. The total square footage
leased is 36,000.
|
|
(4)
|
Approximately
1/3 of these premises are not
occupied.
|
|
(5)
|
7,950
square feet have been subleased to a third party. The total square footage
leased is 31,002.
|
|
(6)
|
Approximately
60% of this premise is occupied.
|
Not
applicable.
|
Operating
and Financial Review and
Prospects
|
This
discussion and analysis contains forward-looking statements within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that
such forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events 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 the effect of the
worldwide recession and the timing of the expected recovery on the telecom
market for our customers and suppliers; fluctuating exchange rates and our
ability to execute in these uncertain conditions; consolidation in the
global telecommunications test, measurement and service assurance industry;
capital spending levels in the telecommunications, life sciences and
high-precision assembly sectors; concentration of sales; 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; our ability
to successfully expand international operations; the retention of key technical
and management personnel; and future economic, competitive, financial and market
condition. 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 this Annual Report, on Form 20-F, including in
Item 3D – Risk Factors, 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.
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, 2007, 2008 and 2009, 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 the consolidated financial condition and
results of operations is dated November 6, 2009.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamental drivers for increased bandwidth and Internet protocol (IP)
fixed-mobile convergence in the global telecommunications industry remain
intact, but they were constrained by an economic recession that forced network
operators and network equipment manufacturers to reduce their capital and
operating expenses in calendar 2009. Several of these players announced
significant reductions in capital expenditures and staffing levels during the
course of the year. Most industry analysts are forecasting, even in the event of
general overall economic conditions, only a moderate improvement rather than a
prompt return to previous revenue levels.
Despite
this challenging macro-economic environment, it should be noted that telecom
market dynamics in 2009 are completely different from those during the
industry downturn of 2001. First, there is a myriad of bandwidth-intensive
applications generating strong growth in bandwidth demand, both in wireless and
wireline networks. For example, monthly traffic is at the exabyte level (1
exabyte equals 1 quintillion bytes) in 2009, while in 2001 there were few
applications outside of regular e-mail delivery. Second, the ongoing demand for
bandwidth has placed a strain on access links, metro rings and long-haul
routes, whereas in 2001 there was an overabundance of bandwidth
capacity in optical backbone networks, which drove bandwidth prices down
significantly. Finally, most network operators have healthy balance sheets
today, while in 2001 many of them were financially overextended with some
declaring bankruptcy.
According
to Cisco’s Visual Networking Index, global IP traffic will nearly double every
two years (compound annual growth rate of 46%) from 2007-2012, reaching just
under 44 exabytes per month in 2012. Global bandwidth demand is driven by a
wide range of applications including peer-to-peer file sharing, social
networking, Internet gaming as well as various forms of IP video. For
example, YouTube consumed more bandwidth in 2008 than traffic crossing the
entire U.S. network backbone in 2000.
As
telecommunication networks are being transformed to deliver IP-based voice,
video and data capabilities, legacy SONET/SDH standards, which were first
established in the mid-1980s and implemented until 2005, do not have the payload
flexibility to seamlessly mix and transport these services. Such networks are
not capable of efficiently carrying IP-based services, since they were designed
for public switched telephone network (PSTN), point-to-point voice transmission
only. As a result, new optical transport network (OTN) standards have been
defined to carry IP applications over Ethernet and are at the very
foundation of what the industry is labeling next-generation networks. Network
operators are increasingly turning to such next-generation, IP-based networks
to allow for more flexible and efficient transport of applications and
services, and to offer customers higher-margin triple-play services ― and even
quadruple-play services ― as wireline and wireless technologies become
increasingly interconnected. Finally, as subscribers of these new services reach
a critical mass, network operators are relying on service assurance
solutions to ensure that the quality of service (QoS) and quality of
experience (QoE) are optimal in the post-deployment phase.
As well,
it is now clear that fiber-to-the-home (FTTH) is becoming the access network
architecture of choice for network operators wishing to provide a superior
user experience for a combined video, data and voice offering. This architecture
allows them to meet heightened bandwidth requirements and future-proof their
access networks, as residential bandwidth demands are growing from the 1 to
5 Mbit/s (megabits per second) of the past
to 30 to 100 Mbit/s required for the long term. Some
projects, however, may be delayed due to reduced funding. Hybrid architectures,
combining copper and fiber (fiber-to-the-curb, or FTTC, and
fiber-to-the-node, or FTTN), will also expand in the short term, since they are
less expensive methods to increase bandwidth and can be mass-deployed more
quickly.
FTTH
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as long-term
operating costs are less than FTTC and FTTN. FTTH deployment costs have largely
dropped over the years as increased volume and improved test tools, like those
we offer, are rendering rollouts increasingly simple and efficient. FTTH is
also proving to be a low-cost alternative for multidwelling units (MDUs) as this
network architecture can deliver large amounts of bandwidth at a minimal cost
per apartment. We are merely at the early stages of fiber deployments
in access networks, both in North America and around the world. It is also worth
noting that Western Europe and even China have become increasingly committed
to deploying FTTH networks, given their high-population
density.
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. For example, 43 Gbit/s (gigabits per
second) SONET/SDH
is now becoming mainstream, while a few network operators are expected to begin
100 Gbit/s Ethernet field trials later in this calendar year. In the long
run, these solutions will offer a more economical way to add capacity on
saturated network sections, especially if trenches need to be dug in order
to deploy new fiber in metro and long-distance
routes.
These
market dynamics affected telecom test and service assurance suppliers in fiscal
2009. However, the tail end of the economic recession in the United States
and Western Europe could potentially continue to delay network investments and
necessarily reduce demand for our test and service
assurance solutions.
COMPANY
OVERVIEW
EXFO is a
leading provider of test and service assurance solutions for network operators
and network equipment manufacturers in the global telecommunications industry.
The Telecom Division, which represents nearly 90% of our business, offers a
wide range of innovative test and service assurance solutions to assess
next-generation and traditional telecom networks. The Life Sciences and
Industrial Division offers solutions in medical-device and opto-electronics
assembly, fluorescence microscopy and other life sciences sectors.
We were
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 several years, we have enhanced our competitive position through
acquisitions of protocol, copper/xDSL and service assurance test
businesses.
In
February 2009, we closed the acquisition of Sweden-based PicoSolve Inc., a
supplier of ultra-high-speed optical sampling oscilloscopes for 40G and
100G R&D, manufacturing and deployment applications.
In April
2008, we acquired all issued and outstanding shares of Brix Networks Inc.
(renamed EXFO Service Assurance Inc.), for a cash consideration of $32.1
million. Brix Networks, a privately held company located in the Boston, MA area,
offers VoIP and IPTV service assurance solutions across the three areas most
affecting the success of a real-time service: signaling quality (signaling path
performance), delivery quality (media transport performance) and content quality
(overall quality of experience). Brix Networks’ service assurance solutions
are mainly designed for network service providers (NSPs) and large
enterprises.
In March
2008, we acquired all issued and outstanding shares of Navtel Communications
Inc., for a cash consideration of $11.3 million. Navtel Communications, a
privately held company in Toronto, Canada, is a leading provider of Internet
protocol multimedia subsystem (IMS) and VoIP test solutions for network
equipment manufacturers (NEMs) and NSP labs. Navtel Communications specializes
in testing next-generation IP networks that are increasingly combining wireline
and wireless technologies. Subsequent to the acquisition, Navtel Communications
was merged into the parent company.
In fiscal
2008, we opened our own telecom manufacturing facilities in Shenzhen, China. We
now have two main manufacturing sites for our Telecom Division and one plant for
our Life Sciences Division. Over time, low-volume, high-complexity telecom
products will be manufactured in Quebec City, whereas high-volume,
low-complexity telecom products will be manufactured in Shenzhen.
In fiscal
2008 and 2009, we accelerated the deployment of a software development center in
Pune, India, to supplement the research and development capabilities of our
labs in Boston, Toronto, Montreal and Quebec City. This enables us to benefit
from the wealth of IP expertise in India, to accelerate product development―especially for our
software-intensive protocol test and service assurance solutions―to take advantage
of a lower cost structure.
In
January 2006, we acquired substantially all the assets of Consultronics Limited
(now merged with the parent company), 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, video) over optical and copper links in access
networks.
In
November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol
Inc. and now merged with the parent company), a supplier of protocol-testing and
optical-network performance management equipment for NSPs. This transaction
enabled us to combine optical and protocol test modules inside a single
field-portable test platform in order to help our customers increase revenues
and reduce 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. EXFO Protocol and EXFO Gnubi were consolidated
in Montreal, Canada, in fiscal 2004.
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 for its wavelength measurement
instruments and nanopositioning alignment systems. We also added EFOS Inc.
(renamed EXFO Photonic Solutions Inc.) in March 2001 for its precision
light-based, adhesive spot-curing technology. We have since exited the
optical component manufacturing automation business, and the remaining
operations of EXFO Burleigh have mostly been consolidated with those of
EXFO Photonic Solutions in Toronto, Canada.
We
launched 26 new products in fiscal 2009, including three in the fourth quarter,
compared to 27 in fiscal 2008. Key product introductions in fiscal 2009 included
among others a portable test solution for characterizing 100 Gbit/s
Ethernet and 40/43 Gbit/s SONET/OTN networks; a patent-pending distributed PMD
analyzer that allows network operators to cost-effectively upgrade their
networks to 40G and 100G by measuring the level of potentially debilitating
PMD on each fiber section; new software releases for the IMS InterWatch platform
and Packet Blazer product lines that support the migration of voice and video
applications to the IPv6 (Internet protocol, version 6) addressing scheme; 1
Gbit/s and 10 Gbit/s test probes for carrier Ethernet and mobile backhaul
service assurance applications; and the next-generation FTB-500 multilayer
platform for high-end test applications in the field and central office.
Following the year-end, we released the first turnkey optical modulation
analyzer for complete characterization of signals up to 100 Gbaud. Sales from
products on the market two years or less accounted for 38.4% of total sales in
fiscal 2009.
Overall
for fiscal 2009, sales decreased 5.9% to $172.9 million from $183.8 million in
2008. This decrease in sales mainly resulted from the global economic recession
as well as from currency fluctuations on our sales and the impact of such
fluctuations on our forward exchange contracts since the beginning of the fiscal
year. However, global sales for fiscal 2009 included $25.3 million from Brix
Networks and Navtel Communications, compared to $5.4 million in fiscal
2008, which mitigated in part the decrease in sales year-over-year. These two
acquisitions were closed approximately two months and one month into the third
quarter of fiscal 2008, respectively. Excluding the positive impact of these two
acquisitions, our sales would have decreased 17.3% in fiscal 2009 compared
to 2008, reflecting the impact of the global economic recession and the
negative effects of the currency fluctuations on our sales and the impact of
such fluctuations on our forward exchange contracts in fiscal 2009,
compared to 2008.
We
reported a GAAP net loss of $16.6 million, or $0.27 per share, in fiscal 2009,
compared to net earnings of $18.4 million, or $0.27 per diluted share,
in fiscal 2008. Net loss for fiscal 2009 included a non-cash pre-tax
impairment of goodwill of $21.7 million. GAAP net loss for fiscal 2009
also included pre-tax charges of $1.2 million in severance expenses
for the 65 employees who were terminated throughout the company. However,
GAAP net loss included a pre-tax R&D tax credits recovery of $1.9 million
and $372,000 for the recognition of previously unrecognized future income tax
assets. Finally, GAAP net loss for fiscal 2009 included $4.3 million in
after-tax amortization of intangible assets and $1.4 million in stock-based
compensation costs. Net earnings for fiscal 2008 included $5.3 million for the
recognition of previously unrecognized future income tax assets, $2.7 million
for income tax recovery following the review of our tax strategy related to the
changes in substantively enacted income tax rates in Canada, $1.5 million
of income tax expense to account for the changes in substantively enacted income
tax rates on our future income tax assets in Canada, an extraordinary gain
of $3.0 million related to the negative goodwill of the Navtel
Communications acquisition, as well as $3.0 million in after-tax
amortization of intangible assets and $1.3 million in stock-based compensation
costs.
EBITDA
(net earnings (loss) before interest, income taxes, amortization of property,
plant and equipment, amortization of intangible assets, impairment of goodwill
and extraordinary gain) were at $14.5 million, or 8.4% of sales in fiscal
2009, compared to $20.6 million, or 11.2% of sales in 2008 (see pages
76 and 77 of this document for a comprehensive reconciliation of EBITDA to
GAAP net earnings (loss)). EBITDA for fiscal 2009 included pre-tax charges of
$1.2 million in severance expenses for the 65 employees who were terminated
throughout the company and stock-based compensation costs of $1.4 million.
However, EBITDA included a pre-tax R&D tax credits recovery of $1.9
million.
On
November 6, 2008, we announced that our Board of Directors had authorized a
renewal of our share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of our public float (as defined
by the Toronto Stock Exchange), or 2.7 million subordinate voting shares,
at the prevailing market price. We have used and expect to continue to use cash,
short-term investments or future cash flows from operations to fund the
repurchase of shares. The period of the normal course issuer bid started on
November 10, 2008, and will end on November 9, 2009. All shares
repurchased under the bid are cancelled. In fiscal 2009, we repurchased
488,786 subordinate voting shares for an aggregate net purchase price
of $1.4 million.
On
November 10, 2008, we announced that our Board of Directors had authorized a
substantial issuer bid (the “Offer”) to purchase for cancellation subordinate
voting shares for an aggregate purchase price not to exceed
CA$30 million. On December 18, 2008, pursuant to the Offer, we purchased
for cancellation 7.7 million subordinate voting shares for the aggregate
purchase price of CA$30 million (US$24.9 million), plus related fees of
$576,000. We used cash and short-term investments to fund the purchase of
shares.
On
November 6, 2009, we announced that our Board of Directors had authorized the
second renewal of our share repurchase program, by way of a normal
course issuer bid on the open market, of up to 10% of our public float
(as defined by the Toronto Stock Exchange), or 2.3 million subordinate
voting shares, at the prevailing market price. We expect to use cash, short-term
investments or future cash flows from operations to fund the repurchase of
shares. The period of the normal course issuer bid will start on November 10,
2009, and end on November 9, 2010,
or on 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 and without prior notice. All shares
repurchased under the bid will be cancelled.
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying value of
a reporting unit exceeds its fair value, the second step is performed to
determine the amount of the impairment loss. Following the decrease in our stock
price in June 2009, we came to the conclusion that the carrying value of
one of our reporting units exceeded its fair value and we recorded an impairment
charge of $21.7 million in the third quarter of fiscal 2009, to bring
the goodwill of this reporting unit to its fair value. This reporting unit
reports to the Telecom Division.
In June
2009, we laid off 65 employees across the organization as part
of a restructuring plan to cope with currently difficult market
conditions. This action resulted in a one-time pre-tax restructuring charge of
$1.2 million that was recorded in the fourth quarter of fiscal 2009, but is
expected to deliver about $6 million in annual savings.
During
the third quarter of fiscal 2009, we were named recipient of the Growth Strategy
Leadership Award by Frost & Sullivan for the fifth consecutive time. The
award is presented to the company whose growth strategy generates the largest
market-share gains in the global fiber-optic test equipment (FOTE) market during
the previous research period. According to Frost & Sullivan, a leading
global growth consulting firm, we captured first place overall in the FOTE
market with a market share of 18.0% in 2008, up from a third-place 12.7% in 2006
(Frost & Sullivan did not grant an award in 2008 for market-share gains in
2007). Frost & Sullivan estimated the FOTE market
to be $567.4 million in 2008, including $247.9 million for the
portable installation and maintenance (I&M) test market. Based on Frost
& Sullivan’s market data, we improved our leadership position in the
portable I&M test market from 25.5% in 2006 to 33.3%
in 2008.
Sales
We sell
our products to a diversified customer base in approximately 95 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.
In fiscal
2007 and 2009, our top customer accounted for 14.7% and 11.6% of global sales,
respectively. In fiscal 2008, no customer accounted for more than 10% of
our global sales, with our top customer representing 7.4% of our global sales.
The significant sales concentration with this Tier-1 carrier in fiscal 2007 was
largely due to our leadership position in the FTTx test market and the fact
that we benefited from aggressive FTTH rollouts from this customer. This sales
concentration significantly decreased in fiscal 2008. However, in fiscal 2009,
sales to this customer were positively impacted by significant orders for
newly acquired Brix service assurance products. Sales levels with this customer
may fluctuate year-over-year, based on available budgets, the allocation of such
budgets and the timing and scope of projects, especially those related to our
service assurance business.
We
believe that we have a vast array of products, a diversified customer base, and
a good spread across geographical areas, which provides us with reasonable
protection against the concentration of sales and credit risk.
Cost
of Sales
The 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 the
cost of sales. However, the 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, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
Three-Year
Strategic Objectives
Our goal
is to become a strong market leader in the global telecom test and service
assurance industry, mostly with network service providers (NSPs). We are
committed to offering the most advanced market-driven solutions that help NSPs
efficiently install, commission and run their converged IP fixed-mobile
networks. Given the myriad of video applications and resultant explosion in
bandwidth demand, we are increasingly covering the service and application
layers on a network infrastructure to enable quadruple-play
services.
To
achieve our long-term vision, we plan to expand our leadership position in the
portable optical segment, while growing our protocol business even faster to
surpass optical sales. This plan is largely based on profitable organic growth
and will be supported by strategic acquisitions of typically small to mid-size
companies with best-of-class technologies in nascent, high-growth markets
complementary to EXFO’s. We also intend to improve our competitive position
through strategic alliances and partnerships.
In our
fiscal 2008 Annual Report, we established three corporate performance objectives
to gauge the success of our overall plan over the next three
years:
|
o
|
Increase
sales significantly faster than the industry growth rate (20%
CAGR*)
|
|
o
|
Grow
EBITDA** in dollars faster than sales (>20%
CAGR)
|
|
o
|
Continue
raising gross margin (62%)
|
|
*
|
Compound
annual growth rate
|
|
**
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary gain (see pages 77 and 78
of this document for a comprehensive reconciliation of EBITDA to GAAP
net earnings (loss)).
|
Given the
global economic recession in fiscal 2009, we have adjusted our corporate
performance metrics over a new three-year period extending from fiscal 2010 to
2012. We have maintained our 20% sales CAGR objective, proposed to double EBITDA
in dollars, and raised our gross margin target to 64% for the newly defined
three-year period.
|
Corporate
Performance Objectives for FY 2010-2012
|
||
|
Increase
sales by a CAGR of 20% or more
|
||
|
Raise
gross margin to 64%
|
||
|
Double
EBITDA in dollars
|
We expect
these three-year objectives to guide our actions in upcoming years as we are
committed to maximizing shareholder value, although there can be no
assurance that we will be successful in meeting
these objectives.
Results
Achieved in Fiscal 2009
In fiscal
2009, sales and EBITDA decreased 5.9% and 29.7%, respectively, compared to 2008.
Most of these come from the negative effect of the global economic
recession in fiscal 2009 as well as from currency fluctuations since the
beginning of the fiscal year. However, gross margin improved to 61.3% in fiscal
2009 from 58.9% in 2008 despite difficult market conditions and currency
fluctuations, due to the contribution of newly acquired Brix Networks and
Navtel Communications. See further in this discussion and analysis for
a comprehensive analysis of our sales and gross margin.
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
the fair value of financial instruments, 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 impairment of goodwill, 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. 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.
Maintenance
contracts generally include the right to unspecified upgrades and enhancements
on a when-and-if available basis and ongoing customer support. Revenue from
these contracts is recognized ratably over the terms of the maintenance
contracts on a straight-line basis.
Revenue
for extended warranties is recognized on a straight-line basis over the warranty
period.
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, when 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.
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 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. Long-lived assets are reviewed for impairment when events
or circumstances indicate that cost may not be recoverable. Impairment
exists when the carrying amount of an asset, or a group of assets is greater
than the 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 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 fair value of its net identifiable
assets.
Future income taxes. We
provide 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 deductions, using substantively enacted income tax rates expected
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 expected volatility of our shares, the expected life of the
awards and the forfeiture rate.
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (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 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding 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 previously found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments or 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.
We
adopted these new standards on September 1, 2008 and provided the required
disclosure in our consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”. 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 adopted this new standard
on September 1, 2008, and its adoption had no material
measurement effect on our consolidated financial statements. The additional
disclosure is provided in our consolidated financial statements.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation”, to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. We adopted these amendments on September 1, 2008, and
their adoption had no material effect on our consolidated financial
statements.
In
January 2009, the CICA issued Emerging Issues Committee 173 (EIC-173), “Credit
Risk and the Fair Value of Financial Assets and Financial Liabilities”.
This abstract clarifies that an entity’s own credit risk and the credit risk of
its counterparty should be taken into account in determining the fair value of
financial assets and liabilities. We adopted this standard on January 20, 2009,
and its adoption had no material effect on our consolidated
financial statements.
To
be adopted after fiscal 2009
In
February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which supersedes Section 3062, “Goodwill and Other Intangible Assets”, and
Section 3450, “Research and Development Costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and
of intangible assets by profit-oriented enterprises. Standards concerning
goodwill remain unchanged from the standards included in Section 3062. This new
section applies to fiscal years beginning on or after October 1,
2008. We will adopt this new standard on September 1, 2009, and
have not yet determined the effects its adoption will have on our consolidated
financial statements.
In
January 2009, the CICA issued Section 1582, “Business Combinations”, which
replaces Section 1581, “Business Combinations”. This new section establishes the
standards for the accounting of business combinations and states that all assets
and liabilities of an acquired business will be recorded at fair value.
Obligations for contingent considerations and contingencies will also be
recorded at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that restructuring
charges will be expensed in the periods after the acquisition date. This
standard applies prospectively to business combinations with acquisition dates
on or after January 1, 2011; earlier adoption is permitted.
In
January 2009, the CICA issued Section 1601, “Consolidated Financial Statements”,
which replaces Section 1600, “Consolidated Financial Statements”, and
establishes the standards for preparing consolidated financial statements. This
new section applies to fiscal years beginning on or after January 1, 2011;
earlier adoption is permitted. We have not yet determined the impact that
adopting this standard will have on our consolidated financial
statements.
In
January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination. This new section applies to fiscal years beginning on or
after January 1, 2011; earlier adoption is permitted as of the beginning of a
fiscal year.
Should we
decide to adopt one of these three new sections earlier, we must adopt all three
on the same date.
In June
2009, the CICA amended section 3862, "Financial Instruments − Disclosures", to
include enhanced disclosures on liquidity risk of financial instruments and
new disclosures on fair value measurements of financial instruments.
The amendments apply to fiscal years ending after September 30, 2009, with
early adoption permitted. We will adopt these amendments on September 1,
2010, and have not yet determined the effects their adoption will have on
our consolidated financial statements.
In
February 2008, the Canadian Accounting Standards Board announced that the use of
International Financial Reporting Standards (IFRS) established by the
International Accounting Standard Board (IASB) will be required for fiscal
years beginning January 1, 2011, for publicly accountable profit-oriented
enterprises. Accordingly, we will adopt these new standards during our fiscal
year beginning on September 1, 2011. The IASB has also stated that during the
transition period, companies will be required to provide comparative data for
the previous year established under IFRS. IFRS issued by the IASB require the
submission of additional information in the financial statements and,
although the conceptual framework of IFRS is similar to Canadian GAAP, companies
must take into account differences in accounting principles. We are currently
evaluating the impact of adopting these new standards on our consolidated
financial statements. In fact, we have completed the diagnostic phase to assess
and scope the significant differences between existing Canadian GAAP and IFRS
and the impact on our consolidated financial statements. Following the
diagnostic phase, we have begun a detailed analysis of the accounting policies
impacted by the adoption of IFRS, which is expected to be completed throughout
fiscal 2010. Some transitional options permitted under IFRS are currently under
analysis. A summary analysis indicates that in most cases, we would opt for a
prospective application when the choice is available. The changeover to IFRS may
result in changes to our accounting and internal control
systems.
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:
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Sales
|
$ | 172,878 | $ | 183,790 | $ | 152,934 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost
of sales (1)
|
66,892 | 75,624 | 65,136 | 38.7 | 41.1 | 42.6 | ||||||||||||||||||
|
Gross
margin
|
105,986 | 108,166 | 87,798 | 61.3 | 58.9 | 57.4 | ||||||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||||||
|
Selling
and administrative
|
63,808 | 61,153 | 49,580 | 36.9 | 33.3 | 32.4 | ||||||||||||||||||
|
Net
research and development (2)
|
27,698 | 26,867 | 16,668 | 16.0 | 14.6 | 10.9 | ||||||||||||||||||
|
Amortization
of property, plant and equipment
|
4,607 | 4,292 | 2,983 | 2.7 | 2.4 | 1.9 | ||||||||||||||||||
|
Amortization
of intangible assets
|
5,067 | 3,871 | 2,864 | 2.9 | 2.1 | 1.9 | ||||||||||||||||||
|
Restructuring
charges
|
1,171 | − | − | 0.7 | − | − | ||||||||||||||||||
|
Government
grants
|
− | − | (1,079 | ) | − | − | (0.7 | ) | ||||||||||||||||
|
Impairment
of goodwill
|
21,713 | − | − | 12.6 | − | − | ||||||||||||||||||
|
Total
operating expenses
|
124,064 | 96,183 | 71,016 | 71.8 | 52.4 | 46.4 | ||||||||||||||||||
|
Earnings
(loss) from operations
|
(18,078 | ) | 11,983 | 16,782 | (10.5 | ) | 6.5 | 11.0 | ||||||||||||||||
|
Interest
income
|
597 | 4,639 | 4,717 | 0.4 | 2.5 | 3.0 | ||||||||||||||||||
|
Foreign
exchange gain (loss)
|
1,157 | 442 | (49 | ) | 0.7 | 0.3 | − | |||||||||||||||||
|
Earnings
(loss) before income taxes and extraordinary gain
|
(16,324 | ) | 17,064 | 21,450 | (9.4 | ) | 9.3 | 14.0 | ||||||||||||||||
|
Income
taxes
|
||||||||||||||||||||||||
|
Current
|
561 | (7,094 | ) | 3,741 | 0.4 | (3.9 | ) | 2.4 | ||||||||||||||||
|
Future
|
72 | 14,094 | − | 0.0 | 7.7 | − | ||||||||||||||||||
|
Recognition
of previously unrecognized future
income tax assets
|
(372 | ) | (5,324 | ) | (24,566 | ) | (0.2 | ) | (2.9 | ) | (16.0 | ) | ||||||||||||
| 261 | 1,676 | (20,825 | ) | 0.2 | 0.9 | (13.6 | ) | |||||||||||||||||
|
Earnings
(loss) before extraordinary gain
|
(16,585 | ) | 15,388 | 42,275 | (9.6 | ) | 8.4 | 27.6 | ||||||||||||||||
|
Extraordinary
gain
|
− | 3,036 | − | − | 1.6 | − | ||||||||||||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | (9.6 | )% | 10.0 | % | 27.6 | % | |||||||||||
|
Basic
and diluted earnings (loss) before extraordinary gain per
share
|
$ | (0.27 | ) | $ | 0.22 | $ | 0.61 | |||||||||||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.27 | ) | $ | 0.27 | $ | 0.61 | |||||||||||||||||
|
Segment
information
|
||||||||||||||||||||||||
|
Sales:
|
||||||||||||||||||||||||
|
Telecom
Division
|
$ | 153,082 | $ | 160,981 | $ | 129,839 | 88.5 | % | 87.6 | % | 84.9 | % | ||||||||||||
|
Life
Sciences and Industrial Division
|
19,796 | 22,809 | 23,095 | 11.5 | 12.4 | 15.1 | ||||||||||||||||||
| $ | 172,878 | $ | 183,790 | $ | 152,934 | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||
|
Earnings
(loss) from operations:
|
||||||||||||||||||||||||
|
Telecom
Division
|
$ | (21,954 | ) | $ | 9,524 | $ | 13,132 | (12.7 | )% | 5.2 | % | 8.6 | % | |||||||||||
|
Life
Sciences and Industrial Division
|
3,876 | 2,459 | 3,650 | 2.2 | 1.3 | 2.4 | ||||||||||||||||||
| $ | (18,078 | ) | $ | 11,983 | $ | 16,782 | (10.5 | )% | 6.5 | % | 11.0 | % | ||||||||||||
|
Research
and development data:
|
||||||||||||||||||||||||
|
Gross
research and development
|
$ | 35,757 | $ | 32,454 | $ | 25,201 | 20.7 | % | 17.7 | % | 16.5 | % | ||||||||||||
|
Net
research and development
(2)
|
$ | 27,698 | $ | 26,867 | $ | 16,668 | 16.0 | % | 14.6 | % | 10.9 | % | ||||||||||||
|
Consolidated
balance sheets data:
|
||||||||||||||||||||||||
|
Total
assets
|
$ | 240,371 | $ | 293,066 | $ | 279,138 | ||||||||||||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
|
(2)
|
Net
research and development expenses for the years ended August 31, 2007 and
2009 include the recognition of previously unrecognized research and
development tax credits of $3,162, or 2.1% of sales, and $1,902, or 1.1%
of sales, respectively.
|
SALES
Fiscal
2009 vs. 2008
In fiscal
2009, our global sales decreased 5.9% to $172.9 million from $183.8 million
in 2008, with an 89%-11% split in favor of our Telecom Division (88%-12% in
2008).
Telecom
Division
In fiscal
2009, sales of our Telecom Division decreased 4.9% to $153.1 million from
$161.0 million in fiscal 2008.
The
following table summarizes information about sales of our Telecom Division for
years ended August 31, 2008 and 2009, in thousands of US
dollars:
|
Year
ended
August 31, 2009
|
Year
ended
August 31, 2008
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
Telecom
Division sales
|
$ | 153,082 | $ | 160,981 | $ | (7,899 | ) | (4.9 | ) % | |||||||
|
(Gains)
losses on forward exchange contracts
|
3,178 | (4,171 | ) | 7,349 | ||||||||||||
|
Telecom
Division sales, excluding gains/losses on forward exchange
contracts
|
156,260 | 156,810 | (550 | ) | (0.4 | ) | ||||||||||
|
Impact
of recent acquisitions (1)
|
(25,327 | ) | (5,423 | ) | (19,904 | ) | ||||||||||
|
Organic
sales
|
$ | 130,933 | $ | 151,387 | $ | (20,454 | ) | (13.5 | ) % | |||||||
|
(1)
|
Includes
Brix Networks and Navtel
Communications.
|
In fiscal
2009, we reported a year-over-year decrease in sales mainly due to the impact of
the worldwide economic recession that affected most of our product lines during
that period. In addition, as a portion of our sales are denominated in
Canadian dollars, euros or British pounds, the increased strength of the US
dollar against these currencies in fiscal 2009, compared to 2008, also had a
negative impact on our sales expressed in US dollars, which contributed to the
decrease in sales compared to the corresponding period last year. This was
amplified by foreign exchange losses on our forward exchange contracts, which
are recorded in reduction of sales. In fact, in fiscal 2009, foreign exchange
losses on our forward exchange contracts amounted to $3.2 million and
accordingly reduced our sales, compared to foreign exchange gains of
$4.2 million in 2008, which increased our sales; this represents
a decrease in sales of $7.3 million year-over-year. Excluding the
impact of gains and losses on forward exchange contracts, our sales would have
been relatively flat year-over-year.
The
decrease in sales in fiscal 2009, compared to the same period last year, was
offset in part by the inclusion of the sales of newly acquired
Brix Networks and Navtel Communications products. In fact, sales of Brix
Network and Navtel Communications amounted to $25.3 million in 2009, compared to
$5.4 million in 2008. Brix Networks and Navtel Communications were acquired two
months and one month into the third quarter of fiscal 2008, respectively.
Excluding sales of Brix Networks and Navtel Communications and the impact of the
foreign exchange gains or losses on our forward exchange contracts, our telecom
sales would have decreased 13.5% organically year-over-year in 2009, reflecting
the impact of the global economic recession and the decrease of the Canadian
dollar, euro and British pound compared to the US dollar.
In fiscal
2009, we posted record-high sales and bookings of protocol test solutions,
including next-generation IP test solutions and product lines of newly acquired
Brix Networks and Navtel Communications. Protocol test solutions sales, buoyed
by network capacity upgrades on wireline and wireless networks, increased 63.1%
year-over-year (organic growth of 4.8% excluding sales of our new acquisitions
of fiscal year 2008) as they reached $54.9 million in 2009, compared to $33.7
million in 2008. Also, they represented more than 35% of our telecom sales in
2009 (more than 20% in 2008). During fiscal 2009, we shipped a multimillion
order to a Tier-1 wireless operator in North America for our service assurance
test solutions, which increased our protocol sales year-over-year. The acquisitions of Brix
Networks and Navtel Communications and the launches of significant strategic
protocol test solutions in fiscal 2008 and 2009 give us a much more
comprehensive offering in this market segment and a better competitive advantage
over the competition.
However,
sales of our optical test solutions decreased 17.5% to $95.5 million, from
$115.7 million in 2008. Also, in fiscal 2009, we posted a year-over-year
sales decrease of 21.8% ($5.8 million in fiscal 2009, compared
to $7.4 million in 2008) for our copper-access test solutions. Our
optical business was more affected by difficult market conditions, as many
network operators deferred capital-intensive deployment decisions on FTTx
rollouts and capacity expansion, opting to increase speed rather than digging
trenches to add new fiber-optic cables. We believe that we still gained market
share in the optical segment despite our year-on-year revenue decline. The
access segment was also severely impacted by the recession, but we believe in
this case that we have likely lost some market share from a small overall market
presence, as our new products have not yet created a significant impact
in the market.
In fiscal
2009, we launched a patent-pending distributed PMD analyzer that allows network
operators to cost-effectively upgrade their networks to 40G and 100G by
measuring the level of potentially debilitating PMD on each fiber section, as
well as the next-generation FTB-500 multilayer platform for high-end test
applications in the field at the central office. In addition,
following the year-end, we released the first turnkey optical modulation
analyzer for complete characterization of signals up to 100 Gbaud. This analyzer
incorporates the technology of newly acquired PicoSolve. These new and
significant products should contribute to our sales in fiscal 2010 and beyond
and help us increase our optical sales in the future.
During
fiscal 2009, our top customer represented 13.1% ($20.0 million) of our telecom
sales, compared to 8.4% ($13.6 million) in 2008.
Life
Sciences and Industrial Division
In fiscal
2009, sales of our Life Sciences and Industrial Division decreased 13.2%
year-over-year at $19.8 million, from $22.8 million in
2008.
A
significant portion of that division’s sales activities are conducted through
original equipment manufacturer (OEM) agreements. Consequently, we are
dependent, to some extent, on the buying pattern of our customers. Moreover,
a significant part of our product offering is related to manufacturing
applications of consumer goods, which have been affected by the current state of
the global economy. Finally, the decrease in the value of the Canadian dollar,
the euro and the British pound versus the US dollar year-over-year had a
negative impact on sales of this division, since a portion of these are
denominated in currencies other than the US dollar and since we report our
results in US dollars.
Fiscal
2008 vs. 2007
In fiscal
2008, our global sales increased 20.2% to $183.8 million, from
$152.9 million in 2007, with an 88%-12% split in favor of our Telecom
Division (85%-15% in 2007).
Telecom
Division
In fiscal
2008, sales of our Telecom Division increased 24.0% to $161.0 million, from
$129.8 million in 2007.
The
following table summarizes information about sales of our Telecom Division for
the years ended August 31, 2007 and 2008, in thousands of US
dollars:
|
Year
ended
August 31, 2008
|
Year
ended
August 31, 2007
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
Telecom
Division sales
|
$ | 160,981 | $ | 129,839 | $ | 31,142 | 24.0 | % | ||||||||
|
Gains
on forward exchange contracts
|
(4,171 | ) | (1,280 | ) | 2,891 | |||||||||||
|
Telecom
Division sales, excluding gains on forward exchange
contracts
|
156,810 | 128,559 | 28,251 | 22.0 | ||||||||||||
|
Impact
of recent acquisitions
(1)
|
(5,423 | ) | − | (5,423 | ) | - | ||||||||||
|
Organic
sales
|
$ | 151,387 | $ | 128,559 | $ | 22,828 | 17.8 | % | ||||||||
|
(1)
|
Includes
Brix Networks and Navtel
Communications.
|
In fiscal
2008, we posted sales growth because of the market acceptance of our
next-generation IP test solutions and continued market-share gains in optical
test solutions, revenue from newly acquired Brix
Networks and Navtel Communications, continued spending in access networks fueled
by the competitive dynamic between telephone and cable companies, as well as the
positive impact of our forward exchange contract gains.
In fiscal
2008, sales of our optical test solutions increased 11.5% to $115.7 million,
from $103.8 million in 2007. In addition, in fiscal 2008, we posted
record-high sales and bookings of protocol test solutions, including
next-generation IP test solutions and product lines of newly acquired Brix
Networks and Navtel Communications. Protocol test solutions represented our
fastest-growing product line with a year-over-year sales increase of 97.4%
(organic growth of 65.6% excluding sales of $5.4 million from our new
acquisitions of fiscal year 2008) as they reached $33.7 million in 2008,
compared to $17.1 million in 2007. Also, they represented more than
20% of our telecom sales in 2008 (more than 10% in 2007).
However,
in fiscal 2008, we posted a year-over-year sales decrease of 3.9% ($7.4 million
in fiscal 2008, compared to $7.7 million in 2007) for our
copper-access test solutions given that our highly competitive new product
offering is only just starting to establish itself on the market and that
large-scale IPTV deployments have been delayed, which affected our sales in
fiscal 2008 to some extent. During fiscal 2008, we launched new added-value
products that integrate Consultronics (copper-access) core knowledge and
intellectual property; namely, the new AXS-200 SharpTESTER. Also, in 2008 we
launched a new test module housed inside the AXS-200 SharpTESTER platform, which
differentiates our access network offering from those of other vendors. The
AXS-200/630 triple-play test set, which leverages the benefits of Broadcom’s
customer premises equipment (CPE) multimode VDSL2 chipset, enables the
installation and troubleshooting of ADSL2+ and VDSL2 access networks with the
highest level of interoperability. A large portion of our sales of
copper-access products in fiscal 2007 were made to a Tier-1 carrier in the
United States. In fiscal 2008, sales of copper-access test solutions made to
this customer significantly decreased compared to 2007, which means that we were
able to diversify our customer base year-over-year
It should
be noted, however, that in fiscal 2007 we benefited from aggressive FTTH
rollouts from our top customer, and that sales to this customer represented
17.3% ($22.5 million) of our telecom sales, compared to 8.4%
($13.6 million) in 2008. Excluding sales to this customer, our telecom
sales would have increased 37.3% in fiscal 2008, compared
to 2007.
In fiscal
2008, foreign exchange gains on our forward exchange contracts, which are
included in our telecom sales, amounted to $4.2 million, compared to $1.3
million in 2007. In fiscal 2008, the average value of the Canadian dollar
increased 11.4% versus the US dollar compared to 2007, which contributed to the
increase in the foreign exchange gains on our forward exchange contracts
year-over-year.
Life
Sciences and Industrial Division
In fiscal
2008, sales of our Life Sciences and Industrial Division decreased 1.2%
year-over-year at $22.8 million, from $23.1 million in
2007.
A
significant portion of that division’s sales activities are conducted through
original equipment manufacturer (OEM) agreements. Consequently, we are
dependent, to some extent, on the buying pattern of our customers. In
particular, one of our major OEM customers significantly reduced its purchases
of our products following the launch of its own solution that competes against
our products. Excluding sales to this customer, sales of this division would
have increased 3.5% year-over-year.
Net
bookings
Overall,
for the two divisions, net accepted orders slightly decreased 2.2%
year-over-year to $180.5 million in fiscal 2009 from a record-high
$184.6 million in 2008, for a book-to-bill ratio of 1.04 in fiscal 2009. Despite
the negative impact on our bookings of the global economic recession and
currency fluctuations in fiscal 2009, bookings only decreased 2.2%
year-over-year, because of the contribution of Brix Networks and Navtel
Communications, which we acquired two months and one month into the third
quarter of fiscal 2008, respectively.
Geographic
distribution
Fiscal
2009 vs. 2008
In fiscal
2009, sales to the Americas, Europe, Middle-East and Africa (EMEA) and
Asia-Pacific (APAC) accounted for 57%, 27% and 16% of global sales,
respectively, compared to 56%, 28% and 16%, respectively
in 2008.
In fiscal
2009, we reported sales decreases (in dollars) in every geographic area. In
fact, sales to the Americas, EMEA and APAC decreased (in dollars) 3.3%, 10.7%
and 6.6%, respectively.
In the
Americas, the decrease in sales in fiscal 2009, compared to 2008, comes
from the United States where we posted a year-over-year decrease in sales
of 8.9%. The current global economic recession has forced NSPs and NEMs to
reduce their capital and operating expenses and several customers have announced
significant reductions in capital expenditures and staffing levels for calendar
year 2009 in anticipation of lower revenue streams; this directly affected
our sales in the United States in fiscal 2009, compared to 2008. Also, in fiscal
2009, we recorded significant foreign exchange losses on our forward exchange
contracts, which are included in our sales to the Americas for the most part,
compared to forward exchange gains in 2008. Excluding the impact
of gains and losses on our forward exchange contracts, sales to the United
States would have decreased 3.8% year-over-year. The decrease in sales to
the United States in fiscal 2009 was offset in part by an increase of 31.4% of
sales made in Canada, despite the negative impact of a weaker Canadian
dollar versus the US dollar year-over-year on our Canadian-dollar-denominated
sales. The recession also affected Latin America, where sales decreased 8.7%
year-over-year. Finally, the contribution of Brix Networks and Navtel
Communications in fiscal 2009 also mitigated the effect of the recession and the
currencies on our sales in the United States, as a significant portion of Brix
and Navtel sales are made in the United States and Canada.
The
decrease in sales in the EMEA market, in dollars, in fiscal 2009, compared to
2008, is also due to the impact of the global recession as we are
witnessing caution from many of our customers with their fiscal year budgets
(calendar 2009). While we see this as a delay and a change in spending
patterns, we expect that investments in next-generation access and transport
networks will not be affected in the long term, and we are positioning ourselves
to capitalize on that, with recent additions to our product portfolio and
sales strategy. In fact, due to the recession, many Tier-1 carriers in EMEA have
postponed or significantly reduced the speed of the migration of their
traditional circuit-switched core networks to higher-speed, dense
wavelength-division multiplexing (DWDM) and next-generation packet-based
architectures, which negatively impacted the sales of our products. Also, as a
portion of the orders in this region are denominated in euros or British
pounds, the strength of the US dollar against these currencies in fiscal 2009
had a negative impact on our sales expressed in US dollars for this region,
which contributed to the decrease in sales compared to 2008.
In the
APAC market, sales to China were almost flat year-over-year, despite the
recession and the negative impact of currency fluctuations. In fact, the
recession in China has been less severe than in the rest of the world, and
we were able to mitigate its impact on our sales in that region. However,
the rest of Asia has been affected by the general economic conditions and the
currency fluctuations, and our sales to the rest of Asia have decreased 9.3%
in fiscal 2009 compared to 2008. In the APAC market, despite the recession,
we are committed to carrying out our strategy to seek to increase our market
share with products and solutions developed and targeted for this important
market, as well as to expand our market presence.
Fiscal
2008 vs. 2007
In fiscal
2008, sales to the Americas, EMEA and APAC accounted for 56%, 28% and 16% of
global sales, respectively, compared to 59%, 27% and 14%, respectively in
2007.
In fiscal
2008, we reported sales increases (in dollars) in every geographic area. In
fact, sales to the Americas, EMEA and APAC increased (in dollars) 12.8%, 26.3%
and 40.1%, respectively, which resulted in a larger percentage of
sales coming from international markets.
In the
Americas, the increase in sales in fiscal 2008, compared to the same period
last year, comes from every region; we posted a sales growth of 47.8%, 7.9% and
16.7% in Canada, the United States and Latin America, respectively. In the
United States, despite the decrease in sales to our top customer year-over-year,
we were able to increase our sales. Additionally, Brix Networks and
Navtel Communications contributed to the increase in sales in the United States
and in Canada year-over-year as most of their sales are made in these two
countries. As mentioned above, during fiscal 2007, we benefited from
aggressive FTTH rollouts from our top customer, and sales to this customer
represented 14.7% ($22.5 million) of our global sales in fiscal 2007, compared
to 7.4% ($13.6 million) this year. We believe that we did not lose market
share with this particular customer in fiscal 2008; in fact, we
believe we have expanded market share as we successfully got additional
product-line approvals to partially offset the decline in optical business.
Excluding sales to this customer, sales to the United States would have
increased 28.7% in dollars year-over-year; this shows that, overall, we have
diversified our customer base year-over-year in this region. Finally, sales
to Latin America fluctuate depending on the timing and scope of our customers’
projects.
The
increase in sales in the EMEA market, in dollars, in fiscal 2008, compared to
2007, resulted from our continued strategy from the past several years
to aggressively develop this market, to consistently invest in sales
resources, and to develop stronger support and service operations in this
region. In addition, many Tier-1 carriers in EMEA were migrating their
traditional circuit-switched core networks to higher-speed, dense
wavelength-division multiplexing (DWDM) and next-generation packet-based
architectures, which created a market demand for our protocol test
solutions as well as our DWDM, ROADM and fiber characterization test kits.
Furthermore, we leveraged our FTTx leadership gained in the United States
to provide consultancy with many of the early adopters in this field
in EMEA.
In APAC,
we saw the continued return on investment of some specific optical, protocol as
well as life sciences and industrial products developed and targeted for
this important market. This increasingly competitive range, coupled with our
steadily expanding market presence, is responsible for the higher sales
in this region in fiscal 2008, compared to 2007.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, network equipment manufacturers, wireless operators,
cable TV operators, optical system and component manufacturers, as well as
customers in the life sciences and high-precision assembly sectors. In fiscal
2009, our top customer accounted for 11.6% ($20.0 million) of our global sales,
and our top three customers accounted for 17.8% of our global sales. In
fiscal 2008, no customer accounted for more than 10% of our global sales, and
our top three customers accounted for 13.1% of our global sales.
GROSS
MARGIN
Gross
margin amounted to 61.3%, 58.9% and 57.4% of sales in fiscal 2009, 2008 and
2007, respectively.
Fiscal
2009 vs. 2008
Despite
the negative impact on the gross margin of foreign exchange losses on our
forward exchange contracts, which have reduced our sales, we were able to
significantly increase our gross margin by 2.4% year-over-year.
The increase
in our gross margin in fiscal 2009, compared to 2008, can be explained by
the following factors.
First, in
fiscal 2009, our gross margin was positively affected by the significant
increase in sales of our protocol test solutions year-over-year, including
those of newly acquired Brix Networks and Navtel Communications, as these
products have better margins than our other test solutions.
Second,
during fiscal 2009, the value of the Canadian dollar significantly fluctuated
compared to the US dollar, which impacted our gross margin for this period,
compared to the same period last year. In fact, since the beginning of
fiscal 2009, the value of the Canadian dollar significantly decreased compared
to the US dollar; this resulted in a lower cost of goods sold
expressed in US dollars in the statement of earnings, thus increasing our
gross margin year-over-year. However, the increase in the procurement costs of
our raw materials purchased in US dollars, as a result of
the recent and significant decrease in the value of the Canadian dollar
compared to the US dollar, started to materialize in fiscal 2009 and will
continue to do so over time, in line with the inventory turnover rate,
as these raw materials are included in the cost of goods sold of
products manufactured with these parts.
Furthermore,
the operation of our manufacturing facilities in China resulted in a larger
portion of our sales coming from products manufactured in China; those products
have a lower cost than those manufactured in our facilities in Canada, thus
resulting in an improvement in gross margin in fiscal 2009 compared to
2008.
However,
foreign exchange losses on our forward exchange contracts recorded in fiscal
2009 ($3.2 million), which are included in our sales, had a negative
impact of 0.7% on our gross margin during this period, compared to the positive
impact of our foreign exchange gains of $4.2 million, or 1.0% on the gross
margin in 2008, thus reducing our gross margin year-over-year.
In
addition, a lower overall sales volume in fiscal 2009 compared to 2008 resulted
in decreased manufacturing activities and in lower absorption of our fixed
manufacturing costs, thus negatively impacting our gross margin
year-over-year.
On an
ongoing basis and when technically possible, we adjust the design of our
products to reuse excess inventory. Over the past few years, we experienced
higher sales than expected on some product lines and consumed such excess
inventory. Consequently, we were able to reuse excess inventories that were
written off in previous years. Excess inventory reuse accounted for $154,000 or
0.1% of sales in fiscal 2009, compared to $1.2 million, or 0.7%
of sales in 2008.
Fiscal
2008 vs. 2007
The
increase in our gross margin in fiscal 2008, compared to 2007, can be explained
by the following factors. First, in fiscal 2008, our gross margin was positively
affected by the significant increase in sales of our protocol test solutions
year-over-year, including those of Brix Networks and Navtel Communications,
as these products have better margins than our other test solutions. In
addition, the significant increase in global sales, year-over-year, resulted in
an increase in manufacturing activities, allowing us to better absorb our fixed
manufacturing costs. 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. Also, our cost of goods was positively
affected by lower costs for raw materials due to the significant increase in the
value of the Canadian dollar, compared to the US dollar in previous
quarters, as most of these costs are incurred in US dollars.
However,
the shift in sales between the Americas in favor of APAC had a negative impact
on our gross margin year-over-year. In fact, sales to APAC tend to have lower
margins than sales to the Americas since we are facing higher pricing pressure
in the APAC region. In addition, we are facing continued aggressive pricing
pressure worldwide. Furthermore, in fiscal 2008, a stronger Canadian dollar,
compared to the US dollar year-over-year, prevented us from further
improving our gross margin as most of our overhead costs and a portion of
our raw material purchases are denominated in Canadian dollars. Finally, the
startup of our own manufacturing activities in China in 2008, resulted
in additional expenses, which reduced our gross margin in fiscal 2008,
compared to 2007.
Excess
inventory reuse accounted for $1.2 million, or 0.7% of sales in fiscal
2008, compared to $1.7 million, or 1.1% of sales in
2007.
Outlook
for fiscal 2010
Based on
the expected sales growth in fiscal 2010, the expected increase in sales of
protocol products, the cost-effective design of our products, our manufacturing
activities in China and our tight control on operating costs, we expect our
gross margin to continue to improve in the future. 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 operations of our
manufacturing facilities in China and increases in product offerings by other
suppliers in our industry. Finally, any increase in the strength of the Canadian
dollar, compared to the US dollar, would have a negative impact on our
gross margin in fiscal 2010 and beyond.
SELLING
AND ADMINISTRATIVE EXPENSES
Selling
and administrative expenses were $63.8 million, $61.2 million and $49.6 million
for fiscal 2009, 2008 and 2007, respectively. As a percentage of sales, selling
and administrative expenses amounted to 36.9%, 33.3% and 32.4% for fiscal 2009,
2008 and 2007, respectively.
Fiscal
2009 vs. 2008
Brix
Networks and Navtel Communications, which were acquired two months and one month
into the third quarter of fiscal 2008, respectively, contributed for all of
fiscal 2009 to our selling and administrative expenses, which caused these
expenses to increase compared to 2008. In addition, selling expenses for Brix
Networks and Navtel Communications tend to be higher in percentage of sales
than the rest of our business, as their sales cycle is much longer and
complex than our other product lines.
In
addition, during fiscal 2009, despite the challenging market conditions and
currency fluctuations, we maintained our sales and marketing activities for
most of the year to develop our markets and to support the launches
of several products.
However,
in fiscal 2009, the substantial and sudden decrease in the average value of the
Canadian dollar, compared to the US dollar year-over-year, had a significant
positive impact on our selling and administrative expenses, since
a large portion of these expenses is denominated in Canadian dollars and
since these expenses increased year-over-year. Also, the restructuring plan
implemented in the fourth quarter of fiscal 2009 has, to some extent, decreased
our selling and administrative expenses.
Also, in
fiscal 2008, we discontinued certain product lines, which led to the layoff
of some of our sales and marketing personnel, resulting in severance
expenses in 2008.
In fiscal
2009, our selling and administrative expenses increased in percentage
of sales compared to 2008. This increase is explained by the impact of the
acquisitions of Brix Networks and Navtel Communications—whose selling expenses
tend to be higher and whose products deliver better margins than the
rest of our product lines—and by the reduction of our sales levels due to the
worldwide recession, despite the significant decrease in the average value of
the Canadian dollar compared to the US dollar year-over-year.
Fiscal
2008 vs. 2007
In fiscal 2008,
we continued intensifying our sales and marketing activities to
develop our markets and leverage our significant research and development
investments; this resulted in higher sales and marketing expenditures (including
number of additional employees and expenses to support the launch of several new
products and to increase brand-name recognition), compared to
2007.
Also, Brix Networks and
Navtel Communications contributed about four months and five months,
respectively, in fiscal 2008, which caused our selling and administrative
expenses to increase compared to 2007.
The substantial increase in
the average value of the Canadian dollar compared to the US dollar also had
a significant negative impact on our selling and administrative expenses
since a large portion of these expenses are denominated in Canadian dollars and
since these expenses increased year-over-year as our sales
grew.
In
addition, the setup in 2008 of manufacturing facilities in China and
a software development center in India contributed to increasing our
administrative expenses year-over-year.
Finally, in fiscal
2008, we discontinued certain product lines, which led to the layoff
of some of our sales and marketing personnel, resulting in severance
expenses during that year.
However,
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; this did not occur to the same
extent in 2008, resulting in higher selling expenses for 2007, compared to
2008.
In fiscal
2008, and despite an increase in sales, our selling and administrative expenses
increased in percentage of sales compared to 2007. The significant
increase in the average value of the Canadian dollar compared to the
US dollar year-over-year, the setup of our manufacturing facilities in
China and R&D center in India, as well as the impact of the
acquisitions of Brix Networks and Navtel Communications—whose selling expenses
tend to be higher as their products deliver better margins compared to
the rest of our product lines—contributed to the increase in these expenses
as a percentage of sales.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect our selling and administrative expenses to increase in
dollars and range between 33% and 35%. In particular, in fiscal 2010,
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, monitoring and service assurance 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 increase in the
strength of the Canadian dollar would also cause our selling and administrative
expenses to increase, as a large portion of these expenses are incurred
in Canadian dollars.
RESEARCH
AND DEVELOPMENT EXPENSES
Gross
research and development expenses
Gross
research and development expenses totaled $35.8 million, $32.5 million and $25.2
million for fiscal 2009, 2008 and 2007, respectively. As a percentage of sales,
gross research and development expenses amounted to 20.7%, 17.7% and 16.5%
for fiscal 2009, 2008 and 2007, respectively, while net research and development
expenses accounted for 16.0%, 14.6% and 10.9% of sales for these respective
years. Net research and development expenses for fiscal 2007 and 2009 included
the recognition of non-refundable research and development tax credits in the
amount of $3.2 million, or 2.1% of sales, and $1.9 million, or 1.1% of
sales, respectively.
Fiscal 2009 vs.
2008
Brix
Networks and Navtel Communications, which were acquired two months and one month
into the third quarter of fiscal 2008, respectively, contributed to our
gross research and development expenses during the entire year in fiscal
2009; this caused these expenses to increase both in dollars and in percentage
of sales, compared to 2008. Indeed, Brix Networks and Navtel Communications
tend to incur higher research and development expenses in percentage
of sales, compared to our other product lines, as their products are more
software-intensive, although they deliver higher margins than most of our
other product lines.
In
addition, we intensified our research and development activities by hiring
additional employees, namely in our software development center in Pune,
India, which resulted in increased gross research and development expenses
in fiscal 2009, compared to 2008.
However,
during fiscal 2009, the significant and rapid decrease in the average value of
the Canadian dollar, compared to the US dollar year-over-year, had a substantial
positive effect on our gross research and development expenses, as a significant
portion of these expenses are denominated in Canadian dollars and also because
these expenses increased year-over-year.
Also, in
fiscal 2008, we closed down our R&D operations in Budapest, Hungary, and
certain R&D projects, which resulted in severance expenses during fiscal
2008.
The
increase in our gross research and development expenses as a percentage of sales
year-over-year is mainly due to a lower sales volume and the impact of the
acquisitions of Brix Networks and Navtel Communications.
Fiscal 2008 vs.
2007
In fiscal 2008, the
significant increase in the average value of the Canadian dollar, compared to
the US dollar year-over-year, had a significant and negative effect on our
gross research and development expenses as a significant portion of
these expenses are denominated in Canadian dollars and also because these
expenses increased year-over-year. In
addition, we intensified our research and development activities, which included
hiring additional employees, resulting in more gross research and development
expenses in both divisions in fiscal 2008, compared to 2007. Furthermore,
Brix Networks and
Navtel Communications contributed for about four months and five months,
respectively, in fiscal 2008, which caused our gross research and
development expenses to increase compared to 2007. It should be noted that
Brix Networks and Navtel Communications tend to incur higher research and
development expenses in percentage of sales, compared to our other
product lines as their products are more software-intensive; however, they
deliver higher margins than most of our other product lines. Also, we
established a research and development center focused on software
development in Pune, India, which resulted in increased expenses
year-over-year. Finally, in fiscal 2008, we closed down our R&D operations
in Budapest, Hungary, and certain R&D projects, which resulted in severance
expenses during that year and caused our fiscal 2008 expenses to increase
year-over-year.
The
increase in our gross research and development expenses as a percentage of sales
year-over-year is mainly due to the negative effect of the increased value
of the Canadian dollar versus the US dollar year-over-year, the impact of the
acquisitions of Brix Networks and Navtel Communications, as well as the
severance expenses incurred in fiscal 2008.
Tax
credits
Tax
credits from the Canadian federal and provincial governments for research and
development activities were $8.1 million, $5.6 million and $8.5 million for
fiscal 2009, 2008 and 2007, respectively. As a percentage
of gross research and development expenses, tax credits were 22.5%, 17.2%
and 33.9% for fiscal 2009, 2008 and 2007, respectively.
Fiscal
2009 vs. 2008
During
fiscal 2009, after reviewing both available positive and negative evidence, and
because we were in a cumulative profit position in one of our
subsidiaries, and also because we expected to generate sufficient taxable income
in future years at the subsidiary level, we concluded that it was more likely
than not that deferred non-refundable research and development tax credits of
this subsidiary would be realizable. Consequently, we recognized previously
unrecognized non-refundable research and development tax credits in the amount
of $1.9 million. Also, increased research and development activities
in Canada in fiscal 2009 compared to 2008, where we are eligible for tax
credits, resulted in increased tax credits year-over-year.
However,
all our research and development tax credits are denominated in Canadian
dollars. The significant decrease in the average value of the Canadian
dollar, compared to the US dollar, in fiscal 2009, compared to 2008, had
a negative impact on these tax credits once expressed in US
dollars.
Excluding
the recognition of previously unrecognized research and development tax credits,
tax credits would have represented 17.2% of gross research and development
expenses in fiscal 2009, a level comparable to 2008.
Fiscal
2008 vs. 2007
In fiscal
2007, tax credits included $3.2 million, or 12.5% of gross research and
development expenses, for the recognition of non-refundable research and
development tax credits. Excluding this unusual revenue, tax credits would
have increased $216,000 in fiscal 2008, compared to 2007.
This
increase in the dollar amount of our tax credits in fiscal 2008, compared to
2007, is due to the increased strength of the Canadian dollar, compared to the
US dollar year-over-year, since these credits are solely earned on research
and development expenses incurred in Canada. However, the decrease
in research and development tax credits as a percentage of gross research
and development expenses is mainly due to the fact that since the beginning
of fiscal 2008, the portion of gross research and development incurred in
Canada, where we are entitled to tax credits, was lower than last year following
the establishment of our new software development center in India as well
as the acquisition of Brix Networks, which is located in the United States. Our
research and development activities conducted outside Canada are not entitled to
tax credits.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect our research and development expenses to increase in
dollars, and range between 15% and 17% of sales, given our focus on innovation,
the addition of software features in our products, our desire to gain market
share and our goal to exceed customer needs and expectations. Also, we are
increasingly taking advantage of talent pools around the world through our
software research and development center in Pune, India. Finally, any
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
In fiscal
2009, amortization of property, plant and equipment was $4.6 million, compared
to $4.3 million in 2008 and $3.0 million in 2007.
Fiscal
2009 vs. 2008
The
increased activities of our own manufacturing facility in China, the
upgrade of our IT systems and the impact of the acquisitions of Brix
Networks and Navtel Communications (acquired in the third quarter of fiscal
2008) resulted in an increase in our amortization expenses in fiscal
2009, compared to 2008. However, the significant decrease in the average value
of the Canadian dollar versus the US dollar in fiscal 2009, compared
to 2008, limited the increase in our amortization expenses
year-over-year as a significant portion of these expenses is
denominated in Canadian dollars.
Fiscal
2008 vs. 2007
The startup
of our own manufacturing and research and development facilities in
China and India, the upgrade of our IT systems, and the impact of the
acquisitions of Brix Networks and Navtel Communications, which contributed for
about four months and five months in fiscal 2008, respectively, resulted
in an increase in our amortization expenses in fiscal 2008 compared to
2007. In addition, the
increase in the average value of the Canadian dollar versus the US dollar in
fiscal 2008, compared to 2007, contributed to the increase in our
amortization expenses year-over-year as most of these expenses are denominated
in Canadian dollars.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, as well as our budgeted additions to capital assets, we
expect the amortization of property, plant and equipment to increase
in dollars. Also, any 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 expenses 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 $5.1 million, $3.9 million and $2.9 million for fiscal 2009,
2008 and 2007, respectively.
Fiscal
2009 vs. 2008
The
increase in amortization expenses in fiscal 2009, compared to 2008, is mainly
due to the acquisition of Brix Networks core technology in the third
quarter of 2008. However, the significant decrease in the average value of the
Canadian dollar versus the US dollar in fiscal 2009, compared to 2008, limited
the increase in our amortization expenses year-over-year
as a significant portion of these expenses are denominated
in Canadian dollars.
Fiscal
2008 vs. 2007
The
increase in amortization expenses in fiscal 2008, compared to 2007, is mainly
due to the acquisition of Brix Networks core technology in the third
quarter of 2008 and to the increased strength of the Canadian dollar compared to
the US dollar.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect the amortization of intangible assets to increase in
dollars. Also, any 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 expenses are denominated
in Canadian dollars.
RESTRUCTURING
CHARGES
During
fiscal 2009, we implemented a restructuring plan to align our cost structure to
the current economic and market conditions. Under that plan, we recorded charges
of $1.2 million in severance expenses for the 65 employees who were
terminated throughout the company. These charges are included in the
restructuring charges in the statement of earnings for the year ended August 31,
2009.
GOVERNMENT
GRANTS
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 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.
IMPAIRMENT
OF GOODWILL
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying
value of a reporting unit exceeds its fair value, the second step is performed
to determine the amount of the impairment loss. Following the decrease in our
stock price in June 2009, we came to the conclusion that the carrying value
of one of our reporting units exceeded its fair value and we recorded an
impairment charge of $21.7 million in fiscal 2009, to bring the goodwill of
this reporting unit to its fair value. This reporting unit reports to the
Telecom Division. The fair value of the reporting unit was determined based on a
combination of market capitalization and discounted cash flows. Discounted cash
flows were estimated using periods ranging between 5 to 7 years and a discount
rate of 18%.
This
impairment resulted in a future income tax recovery of $2.1
million.
INTEREST
INCOME
Our
interest income mainly resulted from our short-term investments, less interests
and bank charges. Interest income amounted to $597,000, $4.6 million and $4.7
million for fiscal 2009, 2008 and 2007, respectively.
Fiscal
2009 vs. 2008
The
decrease in interest income in fiscal 2009, compared to 2008, is mainly due to
the decrease in our cash and short-term investments following the cash payment
of $41.0 million for the acquisitions of Brix Networks and Navtel Communications
in the third quarter of fiscal 2008, the repurchase of share capital
amounting to $34.9 million over the last two years, in accordance with
our share buy-back programs, as well as the significant reduction in
interest rates year-over-year. In addition, the significant decrease in the
average value of the Canadian dollar, compared to the US dollar
year-over-year, contributed to the decrease in our interest income in fiscal
2009, compared to 2008, as it is denominated in Canadian dollars.
Fiscal
2008 vs. 2007
The
slight decrease in interest income in fiscal 2008, compared to 2007, is mainly
due to the decrease of our cash and short-term investments following the
cash payment of $41.0 million for the acquisitions of Brix Networks and
Navtel Communications, the redemption of share capital for $8.1 million in
accordance with our share buy-back program, as well as the general reduction in
interest rates year-over-year. However, the significant increase in the average
value of the Canadian dollar, compared to the US dollar year-over-year,
contributed to the increase in our interest income in fiscal 2008, compared to
2007, as it is denominated in Canadian dollars. In addition, in fiscal
2008, we received interest of $241,000 by the Canadian tax authorities following
the recovery during that period of prior years’ income tax
receivable.
Outlook
for fiscal 2010
Assuming
no acquisitions paid in cash are made in fiscal 2010 and relative stability in
interest rates, we expect our interest income to decrease in 2010 as our
average cash position is expected to be lower in fiscal 2010, considering the
cash used in fiscal 2009, namely for the consideration paid for the acquisition
of capital assets and the redemption of share capital. This should be slightly
mitigated by cash flows from operating activities in 2010.
FOREIGN
EXCHANGE GAIN (LOSS)
Foreign
exchange gains and losses are mainly the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
The
foreign exchange gain amounted to $1.2 million and $442,000 in fiscal 2009 and
2008, respectively, compared to foreign exchange losses of $49,000 for
2007.
Fiscal
2009 vs. 2008
During
fiscal 2009, we witnessed huge volatility in the value of the Canadian dollar
as it fluctuated compared to the US dollar, which overall
resulted in a foreign exchange gain of $1.2 million. In fact, the period-end
value of the Canadian dollar decreased 3.1% to CA$1.0967 = US$1.00 at the end of
fiscal 2009, compared to CA$1.0626 = US$1.00 at the end of
2008.
Fiscal
2008 vs. 2007
In fiscal
2008, we also witnessed volatility in the value of the Canadian dollar as it
fluctuated compared to the US dollar, which overall resulted in a
foreign exchange gain of $442,000. The average exchange rate was CA$1.0071 =
US$1.00 in fiscal 2008, compared to a year-end exchange rate of CA$1.0564 =
US$1.00 as at August 31, 2007, and CA$1.0626 = US$1.00 as at
August 31, 2008.
It should be noted that
foreign exchange rate fluctuations also flow through the P&L line items
as a significant portion of our operating items are denominated in
Canadian dollars, and we report our results in US dollars.
Consequently, the significant decrease in the average value of the Canadian
dollar in fiscal 2009, compared to 2008, resulted in a significant and positive
impact on our financial results. This was amplified by the fact that our
operating activities incurred in Canadian dollars increased year-over-year. In
fact, the average value of the Canadian dollar in fiscal 2009 was CA$1.1782
= US$1.00 compared to CA$1.0071 = US$1.00 in 2008, representing a decrease
of 14.5% in the average value of the Canadian dollar year-over-year. In
fiscal 2008, the average value of the Canadian dollar was CA$1.0071 =
US$1.00 compared to CA$1.1215 = US$1.00 in 2007, representing an increase
of 11.4% in the average value of the Canadian dollar year-over-year. This
had a significant and negative impact on our financial
results.
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
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 income tax expenses of $261,000 and $1.7 million in fiscal 2009 and
2008, respectively, compared to an income tax recovery
of $20.8 million in 2007.
Fiscal
2007
During
fiscal 2007, after reviewing both available positive and negative evidence, and
because we were in a cumulative profit position in the parent company
(Canadian federal and provinces levels) and in one of our subsidiaries, located
in the United States, and also because we expected to generate sufficient
taxable income in future years, we 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 our future income
tax assets in the United States would be realizable. Consequently, we reversed a
portion of our valuation allowance against future income tax assets in the
amount of $24.6 million. From this amount, $16.2 million were related to
the Canadian federal level, $3.2 million were related to the Canadian provincial
levels and $5.2 million were related to the United States level. Future
income tax assets recognized in 2007 were recorded in the income tax provision
in the statement of earnings for that year.
However,
in the United States (federal level), based on available positive and negative
evidence as at August 31, 2007, as well as the level
and the nature of cumulative and expected 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 was more likely than
not that these assets would not be recovered. These future income tax assets
consisted of operating losses carried forward.
In other
tax jurisdictions where we have future income tax assets, we were still in a
cumulative loss position as at August 31, 2007, and available negative
evidence outweighed positive evidence. Consequently, for these tax
jurisdictions, we maintained a full valuation allowance against our future
income tax assets. As at August 31, 2007, the valuation
allowance recorded for these tax jurisdictions amounted to $4.9 million and
mainly related to deferred operating losses.
Except
for the reversal of the valuation allowance in fiscal 2007, most of the income
tax expenses recorded in fiscal 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.
Fiscal
2008
During
fiscal 2008, reductions to the Canadian federal statutory tax rate were
substantively enacted. Therefore, Canadian federal future income tax assets
decreased by $1.5 million and generated a future income tax expense
in the same amount during the year.
In
addition, during fiscal 2008, taking into account these new Canadian federal
substantively enacted tax rates, we reviewed our tax strategy for the
future use of our Canadian federal operating losses, research and development
expenses, certain timing differences and research and development tax credits to
minimize income taxes payable on future years’ taxable income.
Consequently, we amended our prior year’s income tax returns to generate a
net operating loss to be carried back to prior years, which reinstated
previously used research and development tax credits. This resulted in an
increase of $2.7 million in both our tax-related assets in the balance sheet and
future income tax recovery in the statement of earnings for the year ended
August 31, 2008.
Finally,
during fiscal 2008, considering the expected positive impact the acquisitions of
Brix Networks and Navtel Communications will have on future years’ taxable
income at the United States federal level, and because actual taxable income in
the United States is greater than initially expected, we concluded that it was
more likely than not that all future income tax assets of our existing
consolidated U.S. group would be recovered. Consequently, we reversed our
valuation allowance against future income tax assets in the amount of $7.6
million. The portions of the valuation allowance that were reversed, and
that were attributable to the effects of the Brix Networks and Navtel
Communications acquisitions—in the amount of $652,000 and
$1.6 million, respectively—were included in the purchase price
allocation of the related acquired businesses. The remainder of the reversal, in
the amount of $5.3 million, has been recorded in income taxes
in the statement of earnings for the year ended
August 31, 2008.
Fiscal
2009
During
fiscal 2009, after reviewing both available positive and negative evidence, and
because we were in a cumulative profit position in one of our
subsidiaries, and also because we expected to generate sufficient taxable income
in future years at the subsidiary level, we concluded that it was more likely
than not that future income tax assets of this subsidiary would be realizable.
Consequently, we reversed the valuation allowance against future income tax
assets in the amount of $372,000. Future income tax assets recognized in
2009 were recorded in the income tax provision in the statement of earnings
for that year.
As at
August 31, 2009, our net future income tax assets amounted to $24.1 million, and
our non-refundable research and development tax credits amounted to $26.4
million. In order to realize these future income tax assets and non-refundable
research and development tax credits, we need to generate approximately $207
million in pretax earnings at the Canadian federal level, approximately $39
million at the Canadian provincial levels, and approximately $36 million at
the United States federal level.
Valuation
allowance
As at
August 31, 2008 and 2009, we were in a cumulative loss position in certain of
our subsidiaries and negative evidence outweighed positive evidence. For these
subsidiaries, we maintained a full valuation allowance against our future income
tax assets. As at August 31, 2009, the valuation allowance for these
subsidiaries amounted to $15.5 million and mainly related to operating
losses. Of the valuation allowance of $15.5 million, $10.3 million
related to Brix Networks. In the event that we reverse a portion of or
all the valuation allowance related to Brix Networks, the amount of such
reversal would reduce the amount of goodwill recognized for this
acquisition.
Please
refer to note 17 of our consolidated financial statements included elsewhere in
this document for more details on income taxes and a full reconciliation of the
income tax provision.
EXTRAORDINARY
GAIN
In
conjunction with the acquisition of Navtel Communications, we recorded negative
goodwill in the amount of $3.0 million. This negative goodwill has
been recorded as an extraordinary gain in the statement of earnings for
fiscal 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
requirements and capital resources
As at
August 31, 2009, cash and short-term investments totaled $69.7 million, while
our working capital was at $108.1 million. Our cash and short-term
investments decreased $17.8 million in fiscal 2009, compared to 2008,
mainly due to the cash payments of $6.9 million, $2.4 million and $26.9 million
for the purchases of capital assets, the contingent cash consideration for the
acquisition of Brix Networks and the repurchase of share capital, respectively.
We also recorded an unrealized foreign exchange loss on our cash and
short-term investments of $4.2 million. This unrealized foreign
exchange loss resulted from the translation, in US dollars, of our
Canadian-dollar-denominated cash and short-term investments and was included in
the accumulated other comprehensive income in the balance sheet. On the other
hand, operating activities generated cash flows of $22.6 million.
Our
short-term investments consist of commercial paper issued by 11 (10 as at
August 31, 2008) high-credit quality corporations and trusts; therefore, we
consider the risk of non-performance of these financial instruments
to be limited. None of these debt instruments are expected to be
affected by a significant liquidity risk; 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 our normal course issuer bid. In addition to these
assets, we have unused available lines of credit totaling $14.2 million for
working capital and other general corporate purposes, as well as unused lines of
credit of $16.5 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.
As at
August 31, 2009, our commitments under operating leases amounted to $3.3 million
in 2010, $1.6 million in 2011, $741,000 in 2012, $250,000 in 2013 and
$356,000 in 2014 and after, for total commitments
of $6.2 million.
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 $22.6 million in fiscal 2009,
compared to $12.7 million in 2008 and $14.4 million in
2007.
Fiscal
2009 vs. 2008
Cash
flows provided by operating activities in fiscal 2009 were attributable to the
net earnings after items not affecting cash of $16.5 million, and to the
positive net change in non-cash operating items of $6.1 million.
The positive net change in non-cash operating items was mainly due to the
positive effect on cash of the decrease of $9.7 million of our accounts
receivable, the positive effect on cash of the decrease of $2.6 million of our
inventories, offset in part by the negative effect on cash of the increase of
$3.4 million of our income taxes and tax credit recoverable, as well as the
negative effect on cash of the decrease of $2.4 million of our accounts payable
and accrued liabilities. The decrease of our accounts receivable is directly
attributable to the decrease in sales year-over-year and the timing of sales
during the year. The decrease in our inventories is mainly due to lower activity
levels year-over-year and a shift in product mix in favor of software-intensive
products requiring less material and parts than our traditional ones.
The increase in our income taxes and tax credits is mainly due to the
increase in our tax credits recoverable that were earned during the year but not
yet recovered, as well as the fact that we recognized at the end of the
year previously unrecognized R&D tax credits. The decrease in our
accounts payable and accrued liabilities is due to the timing of certain
purchases and payments.
Fiscal
2008 vs. 2007
Cash
flows provided by operating activities in fiscal 2008 were attributable to the
net earnings after items not affecting cash of $33.6 million, offset in part by
the negative net change in non-cash operating items of $20.9 million.
The negative net change in non-cash operating items was mainly due to the
negative effect on cash of the increase of $4.3 million of our accounts
receivable, the negative effect on cash of the increase of $12.8 million of our
income tax and tax credits recoverable, the negative effect on cash of the
increase of $2.2 million of our inventories, as well as the negative effect on
cash of the decrease of $1.4 million of our accounts payable and accrued
liabilities. The increase of our accounts receivable is directly attributable to
the increase in sales year-over-year. The increase in our income taxes and
tax credits is mainly due to the increase in our tax credits recoverable that
were earned during the year but not yet recovered, as well as the effect of the
change in our tax strategy, explained elsewhere in this document. This increase
was mostly offset by the positive effect on cash of the decrease of our future
income tax assets (in items not affecting cash), which also resulted from the
change in the tax strategy. The increase in our inventories resulted from
expected increased sales activities for the next quarters. The decrease
in our accounts payable and accrued liabilities is due to the timing of
certain purchases and payments.
Investing
activities
Cash
flows provided by investing activities amounted to $8.8 million in fiscal 2009,
compared to cash flows used of $4.2 million in 2008 and $16.1 million in
2007.
Fiscal
2009 vs. 2008
In fiscal
2009, we disposed (net of acquisitions) of $18.1 million worth of
short-term investments but paid $6.9 million for the purchase
of capital assets and $2.4 million for a contingent consideration
on a business combination.
Fiscal
2008 vs. 2007
In fiscal
2008, we disposed (net of acquisitions) of $43.3 million worth of
short-term investments to pay for the cash consideration of $41.0 million
for the two business combinations closed during the year. Also, we paid
$6.5 million for the purchase of capital assets.
Financing
activities
Cash
flows used by financing activities amounted to $26.8 million in fiscal 2009,
compared to $8.0 million in 2008 and cash flows provided of $330,000 in
2007.
Fiscal
2009 vs. 2008
In fiscal
2009, we repurchased share capital for a cash consideration of $26.9 million.
However, during that year, exercise of stock options generated
$56,000.
Fiscal
2008 vs. 2007
In fiscal
2008, we repurchased share capital for a cash consideration of $8.1 million.
However, during that year, exercise of stock options generated
$61,000.
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, 2009, 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
2009 to August 2010
|
$27,600,000
|
1.1019
|
||
|
September
2010 to August 2011
|
$14,600,000
|
1.1221
|
||
|
September
2011
|
$1,000,000
|
1.1278
|
As at
August 31, 2009, the fair value of our forward exchange contracts, which
represents the amount we would receive or pay to settle the contracts based
on the forward exchange rate at year end, represented net gains of $530,000
($62,000 as at August 31, 2008).
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 EXFO’s Initial Public
Offering; and (ii) the underwriters allegedly entering into agreements with
customers whereby shares issued in connection with EXFO’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 predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of EXFO’s 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 our two executive officers in particular,
the amended complaint alleges that (i) EXFO’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 it 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 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.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court 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 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’s 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, on
September 27, 2007, again moved for class certification.
On November 12, 2007, certain defendants in the focus cases moved
to dismiss the second consolidated amended class action complaints. On March 26,
2008, the district court denied the motions to dismiss, except as to Section 11
claims raised by those plaintiffs who sold their securities for a price in
excess of the initial offering price and those who purchased outside of the
previously certified class period. Briefing on the class certification motion
was completed in May 2008. That motion was withdrawn without prejudice on
October 10, 2008.
On
April 2, 2009, a stipulation and agreement of settlement between the
plaintiffs, issuer defendants and underwriter defendants was submitted to the
Court for preliminary approval. The Court granted the plaintiffs’ motion for
preliminary approval and preliminarily certified the settlement classes
on June 10, 2009. The settlement fairness hearing was held on
September 10, 2009. On October 6, 2009, the Court entered an opinion granting
final approval to the settlement and directing that the Clerk of the Court close
these actions. Notices of appeal of the opinion granting final approval have
been filed. Given that the settlement remains subject to appeal as of the date
of issuance of our financial statements, the ultimate outcome of the
contingency is uncertain. However, based on the settlement approved on
October 6, 2009, and the related insurance against such claims, we have
determined the impact to our financial position and results of operations
as at and for the year ended August 31, 2009
to be immaterial.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
capital
As at
November 6, 2009, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to 10 votes each and 22,749,965 subordinate voting shares outstanding.
The multiple voting shares and the subordinate voting shares are unlimited as to
number and without par value. On December 18, 2008, we repurchased 7.7 million
subordinate voting shares for a total consideration of CA$30 million (US$24.9
million), plus related fees of $576,000, in accordance with our substantial
issuer bid program. In addition, in fiscal 2009, we redeemed
488,786 subordinated voting shares for a total net consideration of $1.4
million based on our normal course issuer bid share buy-back
program.
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 3,121,132 as at
August 31, 2009. 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 August 31, 2009:
|
Stock Options
|
Number
|
%
of issued
and
outstanding
|
Weighted
average exercise price
|
|||||||||
|
Chairman
of the Board, President and CEO (one individual)
|
179,642 | 11 | % | $ | 9.05 | |||||||
|
Board
of Directors (four individuals)
|
148,807 | 9 | 6.19 | |||||||||
|
Management
and Corporate Officers (eight individuals)
|
212,139 | 12 | 14.49 | |||||||||
| 540,588 | 32 | % | $ | 10.40 | ||||||||
|
Restricted Share Units
(RSUs)
|
Number
|
% of issued
and
outstanding
|
||||||
|
Chairman
of the Board, President and CEO (one individual)
|
140,459 | 10 | % | |||||
|
Management
and Corporate Officers (eleven individuals)
|
479,887 | 36 | ||||||
| 620,346 | 46 | % | ||||||
|
Deferred Share Units
(DSUs)
|
Number
|
% of issued
and
outstanding
|
||||||
|
Board
of Directors (five individuals)
|
114,924 | 100 | % | |||||
OFF-BALANCE
SHEET ARRANGEMENTS
As at
August 31, 2009, our off-balance sheet arrangements consisted of letters of
guarantee. As at August 31, 2009, our letters of guarantee
amounted to $5.5 million; these letters of guarantee expire at various
dates through fiscal 2016. From this amount, we had $1.1 million worth of
letters of guarantee for our own selling and purchasing requirements, which were
for the most part reserved from one of our lines of credit. The remainder, in
the amount of $4.4 million, was used to secure our line of credit in CNY
(Chinese currency). This line of credit was unused as at August 31,
2009.
VARIABLE
INTEREST ENTITY
As of
August 31, 2009, we did not have interests in any variable interest
entities.
NON-GAAP
FINANCIAL MEASURE
We
provide a non-GAAP financial measure (EBITDA*) as supplemental information
regarding our operational performance. We use EBITDA for the purposes of
evaluating our historical and prospective financial performance, as well as our
performance relative to our competitors. This measure also helps us to plan and
forecast future periods as well as to make operational and strategic decisions.
We believe that providing this information to our investors,
in addition to the GAAP measures, allows them to see the company’s results
through the eyes of management, and to better understand our
historical and future financial performance.
The
presentation of this additional information is not prepared in accordance with
GAAP. Therefore, the information may not necessarily be comparable to that of
other companies and should be considered as a supplement
to, not a substitute for, the corresponding measures calculated
in accordance with GAAP.
The
following table summarizes the reconciliation of EBITDA to GAAP net earnings
(loss), in thousands of US dollars:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
GAAP
net earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Add
(deduct):
|
||||||||||||
|
Amortization
of property, plant and equipment
|
4,607 | 4,292 | 2,983 | |||||||||
|
Amortization
of intangible assets
|
5,067 | 3,871 | 2,864 | |||||||||
|
Impairment
of goodwill
|
21,713 | – | – | |||||||||
|
Interest
income
|
(597 | ) | (4,639 | ) | (4,717 | ) | ||||||
|
Income
taxes
|
261 | 1,676 | (20,825 | ) | ||||||||
|
Extraordinary
gain
|
– | (3,036 | ) | – | ||||||||
|
EBITDA
for the year
|
$ | 14,466 | $ | 20,588 | $ | 22,580 | ||||||
|
EDITDA
in percentage of sales
|
8.4 | % | 11.2 | % | 14.8 | % | ||||||
|
*
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary
gain.
|
|
Directors,
Senior Management and
Employees
|
|
Directors
and Senior Management
|
The
following table sets forth information about our executive officers, senior
managers and Directors as of November 2, 2009.
|
Name
and Municipality of Residence
|
Positions
with EXFO
|
|
|
PIERRE-PAUL
ALLARD
Pleasanton,
California
|
Independent
Director
|
|
|
JON
BRADLEY
Worminghall,
United Kingdom
|
Vice-President,
Telecom Sales, International
|
|
|
STEPHEN
BULL
Quebec
City, Quebec
|
Vice-President,
Research and Development, Telecom Division
|
|
|
NORMAND
DUROCHER
St-Sauveur,
Quebec
|
Vice-President,
Human Resources
|
|
|
ALLAN
FIRHOJ
Georgestown,
Ontario
|
Vice-President
and General Manager, Life Sciences and Industrial
Division
|
|
|
ÉTIENNE
GAGNON
Quebec
City, Quebec
|
Vice-President,
Telecom Product Management and Marketing
|
|
|
LUC
GAGNON
St-Augustin-de-Desmaures,
Quebec
|
Vice-President,
Telecom Manufacturing Operations and Customer Service
|
|
|
VIVIAN
HUDSON
Beaconsfield,
Quebec
|
Vice-President
and General Manager, EXFO Service Assurance Business
Unit
|
|
|
GERMAIN
LAMONDE
St-Augustin-de-Desmaures,
Quebec
|
Chairman
of the Board, President and Chief Executive Officer
|
|
|
PIERRE
MARCOUILLER
Magog,
Quebec
|
Independent
Director
|
|
|
GUY
MARIER
Lakefield
Gore, Quebec
|
Independent
Lead Director
|
|
|
PIERRE
PLAMONDON
Quebec
City, Quebec
|
Vice-President,
Finance and Chief Financial Officer
|
|
|
BENOIT
RINGUETTE
Boischatel,
Quebec
|
General
Counsel and Corporate Secretary
|
|
|
DAVID
A. THOMPSON
Newton,
North Carolina
|
Independent
Director
|
|
|
ANDRÉ
TREMBLAY
Outremont,
Quebec
|
Independent
Director
|
|
|
DANA
YEARIAN
Lake
Forest, Illinois
|
Vice-President,
Telecom Sales, Americas
|
The
address of each of our executive officers, senior managers and Directors is c/o
EXFO Electro-Optical Engineering Inc., 400 Godin Avenue, Quebec, Quebec, Canada.
The following is a brief biography of each of our executive officers, senior
managers and Directors.
Pierre-Paul Allard was
appointed a member of our Board of Directors in September 2008 and has been a
board member of many other technology companies in Canada and in the US. Today,
he is also an active philanthropist for l’Institut de Cardiologie de
Québec. Mr. Allard is presently Area Vice-President, Sales for Cisco
Systems Inc., where he has held several management positions over the years.
Currently, he is responsible for sales and field operations of Cisco’s Global
Enterprise Client segment, focusing on new market opportunities, accelerated
revenue growth and increased customer satisfaction. Prior to joining Cisco, Mr.
Allard worked for IBM Canada for 12 years. In 2002, Mr. Allard co-chaired the
Canadian e-Business Initiative, a private-public partnership aiming
to measure the role e-Business plays in increasing productivity levels, job
creation and competitive position. In 1998, he was the laureate of the
Arista-Sunlife Award, for Top Young Entrepreneur in Large Enterprise, by the
Montreal Chamber of Commerce. In 2003, he received the Queen’s Golden Jubilee
Medal, which highlights significant contributions to Canada. In the same year,
he was also awarded the prestigious Trudeau Medal from the University of Ottawa,
School of Management. Pierre-Paul Allard holds a bachelor’s and masters’ degree
in Business Administration from the University of Ottawa, School of Management,
in Canada.
Jon Bradley was appointed
Vice-President, Telecom Sales - International for EXFO in March 2007.
He is responsible for managing telecom sales, both direct and
indirect, and for the execution of sales strategies in the international arena.
He manages an accomplished and diverse sales and distribution team. As a
member of the Strategy and Management Committees, he also develops corporate
strategy for EXFO. Prior to his appointment as Vice-President,
International Telecom Sales, Dr. Bradley held the position of Sales
Director for the Europe, Middle East and Africa (EMEA) territory from 2003 to
2007, and Regional Sales Manager from 1999 to 2003. Before joining EXFO in 1999,
Dr. Bradley was employed as Sales and Marketing Director by Queensgate
Instruments (UK) from 1997 to 1999 and as Sales Engineer by Lambda Photometrics
(UK) from September 1993 to September 1997. Dr. Bradley holds an
honors degree in chemistry, as well as a Ph.D. in Raman spectroscopy from the
University of Durham in the United Kingdom.
Stephen Bull was appointed
our Vice-President, Research and Development, Telecom Division
in December 1999. He joined us in July 1995 and held the
positions of Assistant Director-Engineering from September 1997 to December 1999
and Group Leader (Engineering Management) from July 1995 to September 1997. From
June 1990 to March 1995, Mr. Bull held the position of General Manager and
Managing Director for Space Research Corporation, a military engineering company
in Belgium. Mr. Bull holds a bachelor’s degree in Electrical Engineering
from Laval University in Quebec City, Canada.
Normand Durocher was
appointed Vice-President of Human Resources in April 2004. In addition
to managing our human resources team, his main responsibility is to develop
and implement a human resources plan that supports EXFO’s business strategy. Mr.
Durocher began his career in labor relations in the Cable division
of Nortel and then took on several key roles at Nortel Networks and
Nordx/CDT, all relating to human resources and operations. Since then, Normand
Durocher has accumulated more than 25 years’ experience in operations and human
resources management within the telecommunications industry. Prior to joining
EXFO, Mr. Durocher ran his own human resources consulting business. Normand
Durocher holds a Bachelor of Science from the University de Montreal and
also completed the Advanced Human Resources program at Dalhousie University in
Halifax, Nova Scotia, Canada.
Allan Firhoj was appointed
Vice-President and General Manager, Life Sciences and Industrial Division
in July 2003. Prior to that, he held the position of General Manager of
EXFO Photonic Solutions Inc. since November 2001. He is responsible for the
overall strategic direction and management of the Life Sciences and Industrial
Division. Mr. Firhoj joined EFOS Inc. in 1996, where he was responsible for
Sales, Marketing and Business Development of the Dental Curing-Products
Division. Following the sale of this division to Dentsply International in 1997,
he was appointed Director of Marketing and Business Development. Mr. Firhoj
continued in this capacity until being appointed to the position of General
Manager of EXFO Photonic Solutions Inc. Prior to joining us,
Mr. Firhoj spent six years with The Horn Group, a plastics business
involved in medical devices/instrumentation and office communication equipment.
He successively held the positions of ISO 9000 Implementation Manager, Technical
Sales Manager as well as Marketing and Business Development Manager.
In this latter role, he successfully contributed to increasing sales in
their medical market by an annual average of 60% during a three-year
period. Mr. Firhoj holds a bachelor’s degree in Political Science from
Bishop’s University in Lennoxville, Quebec.
Étienne Gagnon was appointed
Vice-President, Telecom Product Management and Marketing in May 2003 and,
in May 2007, he took on the responsibility of all our telecom business units –
Optical; Transport and Datacom; and Access. As such, he is responsible for
EXFO’s general marketing direction on both the product level and communications
level. Mr. Étienne Gagnon is not related to Mr. Luc Gagnon. For nearly three
years, before returning to EXFO in early 2003, Mr. Gagnon was Vice-President of
Sales and Marketing at TeraXion, an optical component manufacturer based in
Quebec City. Mr. Gagnon began his career as a design engineer for
Bombardier/Canadair, where he worked on the Canadian Regional Jet project
between 1990 and 1993. Later, he held the position of Business Development
Manager for France Telecom in Hungary. In 1994, he joined EXFO’s European office
as a Regional Sales Manager, and in 1996, he was brought back to Quebec City to
head the OSP marketing group. Mr. Gagnon then went on to become the director of
our Outside Plant division in 1998, and remained in that function until he
joined TeraXion in 2000. Etienne Gagnon holds a bachelor’s degree in
mechanical engineering from the University of Montreal’s School of Engineering,
and a master’s degree in European business from the Ecole nationale supérieure des
télécommunications in France.
Luc Gagnon was appointed
Vice-President, Telecom Manufacturing Operations in May 2003 and,
in May 2007, he also took on the vice-presidency of the Customer
Services department. Mr. Luc Gagnon is not related to Mr. Étienne
Gagnon. He is responsible for ensuring the smooth operation of all manufacturing
activities, which include production, purchasing, product engineering, quality
assurance, planning, manufacturing engineering, product configuration,
transportation and customs, as well as material resources. In addition, he
maintains an ongoing and efficient relation between the manufacturing
process and the end customer. Prior to his nomination in 2003, Mr. Gagnon
held the position of Production Director since 2000. Before joining EXFO, he had
similar roles in several other high-technology companies. He worked for Mendes
from 1999 to 2000, for C-MAC from 1997 to 1999, for STERIS from 1993 to
1997 and for MITEL from 1991 to 1993. Luc Gagnon holds a bachelor’s degree in
electrical engineering and master’s degree in engineering, both from the Université de Sherbrooke, in
Canada.
Vivian Hudson was nominated
Vice-President and General Manager for EXFO’s Service Assurance business unit in
September 2008. Prior to joining EXFO, Ms. Hudson held various general
management positions at Nortel, including those of General Manager for the
Systems Integration unit for the Microsoft-Nortel Innovative Communications
Alliance; the GSM business in France; and the High-Capacity Optical Networks
group. Ms. Hudson first began at Nortel in 1990 and worked through the
ranks, namely in European Marketing (based in the UK and in France),
Optical Product Management, Wireless Operations, as well as Optical and Wireless
General Management. Prior to this, she held positions at Bell Canada as a
business/services planner, at Canadian Pacific as a telecommunications
networking end user, and at DMR as a telecommunications consultant.
A recognized global high-tech business leader, Ms. Hudson has also pursued
sustainable development activities in the telecommunications area and
serves on several boards. Namely, she is a governor of Carleton University’s
Board of Governors and sits on the board of Shad International. She also holds
the ICD.D designation from the Institute of Corporate Directors of Canada.
Vivian Hudson holds a Bachelor of Science from Université Laval
in Quebec City, and a Master of Business Administration from McGill
University in Montreal.
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 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.
Pierre Marcouiller has served
as our Director since May 2000. Mr. Marcouiller is Chairman of the Board and CEO
of Camoplast Inc. an industrial manufacturer specialized in rubber tracks,
undercarriage systems, composite and plastic components aimed at recreational,
agricultural, automotive and industrial markets. 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.
Guy Marier has served as our
Director since January 2004. Formerly President of Bell Québec
(1999 to 2003), Guy Marier completed his successful 33-year career at
Bell as Executive Vice-President of the Project Management Office, before
retiring at the end of 2003. From 1988 to 1990, Mr. Marier headed Bell Canada
International’s investments and projects in Saudi Arabia and, for the three
following years, served as President of Télébec. He then returned to the
parent company to hold various senior management positions. Guy Marier holds
a Bachelor of Arts from the University of Montreal and a Bachelor of
Business Administration from the Université du Québec à
Montréal.
Pierre Plamondon has been our
Vice-President, Finance and Chief Financial Officer since January 1996. Prior to
joining us, Mr. Plamondon served as Senior Manager for Price Waterhouse, now
PricewaterhouseCoopers LLP, from September 1981 to December 1995 in Canada and
France. Pierre Plamondon holds a bachelor’s degree in business
administration and a license in accounting, both from Laval University in Quebec
City, Canada. Mr. Plamondon has been a member of the Canadian Institute of
Chartered Accountants since 1983 and a member of the Board of Directors of
SOVAR Inc. (Société de valorisation des applications de la recherche de
l’Université Laval) since December 2000.
Benoit Ringuette has
been our in-house Legal Counsel and Corporate Secretary since April
2004. Prior to joining EXFO, Mr. Ringuette practiced mainly in
commercial, corporate and securities law from 1998 to 2003 as an associate
in the law firms of O’Brien, Flynn Rivard in Quebec City and Desjardins Ducharme
Stein Monast in Quebec City. Mr. Ringuette has been a member of
the Quebec Bar since 1998. Mr. Ringuette holds a bachelor’s degree in Civil Law
and a master’s degree in Business Administration (MBA) from Laval University in
Quebec City, Canada.
David A. Thompson has served
as our Director since June 2000. Dr. David A. Thompson Retired Vice-President
and Director of Technology, Corning Cable Systems. David A. Thompson most
recently served as Vice-President and Director of Hardware & Equipment
Technology at Corning Cable Systems, where he held this position since 2001
until retiring from Corning in 2008. Prior to this, he held several technical
management roles at Corning Incorporated starting in 1976. He has
been a member of the Board of Directors of EXFO Corporation since July 2000 and
also continues to serve on the engineering advisory group at the University of
North Carolina in Charlotte. Dr. Thompson joined Corning Incorporated in
1976 in glass chemistry research developing new specialty glasses for
television, optical lenses, solar mirrors and optical fibers. He
served in several global business management and strategic planning roles for
Corning in both R&D and the Telecommunications Division between 1988 and
1999. He was technical director for the creation of optical amplifier
and optical components for Corning and in creation of the Samsung-Corning
Micro-Optics joint venture. He later, in 1999, was named
Vice-President for the Strategic Planning & Innovation Effectiveness on
return to the Corning RD&E Division. David A. Thompson holds a Bachelor of
Science degree in chemistry from The Ohio State University and a masters and
doctorate in inorganic chemistry from the University of Michigan and he attended
the MIT Sloan School for technology leaders. He holds over 20 patents and has
over two dozen technical publications in the areas of inorganic chemistry, glass
technology and telecommunications. He is a member of several
professional and honor societies and has chaired numerous technical society
groups during his career.
André Tremblay has served as
our Director since June 2000. Mr. Tremblay is
President and CEO of Terrestar Solutions Inc., a leading edge provider of
satellite telecommunication services in Canada. He is also 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.
Dana Yearian was appointed
our Vice President, Telecom Sales - Americas in March 2007. Prior to this
appointment, Mr. Yearian held the position of Vice-President, Telecom Sales −
North America. He is responsible for managing telecom sales, both direct and
indirect, and the execution of sales strategies across North, Central and South
America. Mr. Yearian oversees all sales-related functions for the EXFO sales
organization throughout this territory, including sales operations, global
account management and partner programs. As a member of the Strategy and
Management committees, he also helps develop corporate strategy. Prior to
joining EXFO, Mr. Yearian held senior executive sales positions at Spirent
Communications Service Assurance Division and Acterna Corp. Mr. Yearian
also held various executive positions; namely, at Toshiba America, Silicon
Sensors (Advanced Photonix, Inc.), and Impell Corporation (ABB Ltd.). Mr.
Yearian holds a bachelor's degree in electrical engineering from the Illinois
Institute of Technology in Chicago and has completed MBA course work at DePaul
University, also in Chicago, Illinois, USA.
Term
of Executive Officers
Executive
officers are appointed annually by the Board of Directors and serve until their
successors are appointed and qualified or until earlier resignation or
removal.
Director
Compensation
In the
financial year ended August 31, 2009, each director who was not an employee 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. The significant terms
of the DSU Plan of the Corporation is described herein under the section
entitled “Long-Term Incentive Compensation – Deferred Share Unit
Plan”.
|
Annual
Retainer for Directors (1)
|
CA$50,000
|
(2)
|
US$42,438
|
(3)
|
|
Annual
Retainer for Lead Director
|
CA$5,000
|
US$4,244
|
(3)
|
|
|
Annual
Retainer for Committee Chairman
|
CA$5,000
|
US$4,244
|
(3)
|
|
|
Annual
Retainer for Committee Members
|
CA$3,000
|
US$2,546
|
(3)
|
|
|
Fees
for all Meetings Attended per day in Person
|
CA$1,000
|
US$849
|
(3)
|
|
|
Fees
for all Meetings Attended per day by Telephone
|
CA$500
|
US$424
|
(3)
|
|
(1)
|
All
the Directors elected to receive 50% of their Annual Retainer in form of
DSUs.
|
|
(2)
|
The
Annual Retainer for Mr. Pierre-Paul Allard and Dr. David A. Thompson is
US$50,000 (CA$58,910).
|
|
(3)
|
The
compensation information has been converted from Canadian dollars to U.S.
dollars based upon an average foreign exchange rate of CA$1.1782 =
US$1.00 for the financial year ended August 31,
2009.
|
In the
financial year ended August 31, 2009, the Directors who are not employees of the
Corporation received the following compensation in the form
indicated:
|
Name
|
Fees
earned
($) (1)
|
Share-based
awards
($) (2)
|
Option-
based
awards
($)
|
Non-equity
incentive
plan
compensation
($)
|
Pension
value
($)
|
All
other
compensation
($)
|
Total
($)
|
|
Pierre-Paul
Allard (3)
|
34,138 (US)
40,222 (CA)
|
25,000 (US)
29,455 (CA)
|
–
|
–
|
–
|
–
|
59,138 (US)
69,677 (CA)
|
|
Pierre
Marcouiller (4)
|
33,101 (US)
39,000 (CA)
|
21,219 (US)
25,000 (CA)
|
–
|
–
|
–
|
–
|
54,320 (US)
64,000 (CA)
|
|
Guy
Marier (5)
|
39,043 US)
46,000 (CA)
|
21,219 (US)
25,000 (CA)
|
–
|
–
|
–
|
–
|
60,262 (US)
71,000 (CA)
|
|
David
A. Thompson (6)
|
36,459 (US)
42,955 (CA)
|
25,000 (US)
29,455 (CA)
|
–
|
–
|
–
|
–
|
61,459 (US)
72,410 (CA)
|
|
André
Tremblay (7)
|
33,526 (US)
39,500 (CA)
|
21,219 (US)
25,000 (CA)
|
–
|
–
|
–
|
–
|
54,745 (US)
64,500 (CA)
|
|
(1)
|
The
compensation information has been converted from Canadian dollars to US
dollars based upon an average foreign exchange rate of CA$1.1782 =
US$1.00 for the financial year ended August 31, 2009 except for Mr.
Pierre-Paul Allard and Mr. David A. Thompson who are paid in U.S.
dollar for the portion of their annual retainer for
Directors.
|
|
(2)
|
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 (for grants of DSUs prior to
January 1, 2009) or the Bank of Canada (for grants of DSUs
on or after January 1, 2009) 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.
|
|
(3)
|
Mr.
Pierre-Paul Allard is a Director of the Corporation and member of the
Human Resources Committee and the Audit Committee since January 14, 2009.
He received the Annual Retainer for Directors, the Annual Retainer for the
Human Resources Committee and Audit Committee Members (pro rated as of
January 14, 2009) and received the fees for attending 5 days of meetings
in person, 4 days of meetings by
telephone.
|
|
(4)
|
Mr.
Pierre Marcouiller is a Director of the Corporation and a member of the
Human Resources Committee and the Audit Committee. He received the
Annual Retainer for Directors, the Annual Retainer for the Human Resources
Committee and Audit Committee Members and received the fees for attending
6 days of meetings in person, 4 days of meetings by
telephone.
|
|
(5)
|
Mr.
Guy Marier is a Director of the Corporation and a member of the Audit
Committee and the Chairman of the Human Resources Committee and the Lead
Director. He received the Annual Retainer for Directors, the Annual
Retainer for the Human Resources Committee Chairman, the Annual Retainer
for Audit Committee Members, the Annual Retainer for Lead Director and
received the fees for attending 6 days of meetings in person, 4 days
of meetings by telephone.
|
|
(6)
|
Dr.
David A. Thompson is a Director of the Corporation, a member of the Audit
Committee and the Human Resources Committee. He received the Annual
Retainer for Directors, the Annual Retainer for Human Resource Committee
Members, the Annual Retainer for Audit Committee Members and received the
fees for attending 5 days of meetings in person, 4 days of meetings by
telephone.
|
|
(7)
|
Mr.
André Tremblay is a Director of the Corporation, a member of the Human
Resources Committee and Chairman of the Audit Committee. He received the
Annual Retainer for Directors, the Annual Retainer for Human Resources
Committee Members, the Annual Retainer for Audit Committee Chairman and
received the fees for attending 4 days of meetings in person, 4 days
of meetings by telephone.
|
Director
Incentive Plan Awards
The
significant terms of all plan-based awards and non equity incentive plan awards,
issued or vested, or under which options have been exercised, during the
year, or outstanding at the end of the financial year are described herein under
section entitled “Compensation Discussion and Analysis – Long-Term Incentive
Plan”.
Outstanding
share-based awards and option-based award
The
following sets out for each non-employee director of the Corporation all awards
outstanding as at August 31, 2009, if any, including awards granted before
August 31, 2009.
|
Option-based
Awards (Options)
|
Share-based
Awards (DSUs)
|
|||||
|
Name
|
Number of securities
underlying
unexercised
options
(#)
(1)
|
Option
exercise
price
(US$)
(2)
|
Option
expiration
date
|
Value
of
unexercised
in-the-money
options
(US$) (3)
|
Number of shares
or units of shares
that
have not
vested
(#)
|
Market
or payout
value
of share-based
awards
that have
not
vested (US$) (4)
|
|
Pierre-Paul
Allard
|
–
|
–
|
–
|
–
|
7,866
|
23,598
|
|
Pierre
Marcouiller
|
2,000
|
26.00
|
June
29, 2010
|
–
|
23,778
|
71,334
|
|
400
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
17,966
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
1,037
|
12.69
|
Dec.
1, 2011
|
–
|
|||
|
2,479
|
5.65
|
Mar.
1, 2012
|
–
|
|||
|
12,500
|
1.58
|
Sept.
25, 2012
|
17,750
|
|||
|
12,500
|
3.51
|
Oct.
27, 2013
|
–
|
|||
|
Guy
Marier
|
12,500
|
4.65
|
Mar.
24, 2014
|
–
|
23,778
|
71,334
|
|
David
A. Thompson
|
2,000
|
26.00
|
June
29, 2010
|
–
|
26,963
|
80,889
|
|
400
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
15,334
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
12,500
|
1.58
|
Sept.
25, 2012
|
17,750
|
|||
|
12,500
|
3.51
|
Oct.
27, 2013
|
–
|
|||
|
André
Tremblay
|
2,000
|
26.00
|
June
29, 2010
|
–
|
32,539
|
97,617
|
|
400
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
17,291
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
12,500
|
1.58
|
Sept.
25, 2012
|
17,750
|
|||
|
12,500
|
3.51
|
Oct.
27, 2013
|
–
|
|
(1)
|
The
unexercised 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 options will be exercised or any gain
realized.
|
|
(2)
|
Prices
noted are the grant date exercise price for each option under each
award.
|
|
(3)
|
Indicates
an aggregate value of “in-the-money” unexercised options held at the
financial year ended August 31, 2009. “In-the-money” options are options
for which the market value of the underlying securities is higher than the
exercise price. 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 Share at August
31, 2009 which was US$3.00 (CA$3.29). The market value of the Subordinate
Voting Shares was calculated by 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, 2009 using the noon
buying rate of the Bank of Canada to convert the NASDAQ National Market
closing price to Canadian dollars as
required.
|
|
(4)
|
The
value of unvested DSUs at the financial year-end is the market value of
the Subordinate Voting Shares on August 31, 2009, which was
US$3.00 (CA$3.29). The market value of the Subordinate Voting Shares was
calculated by 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, 2009 using the noon buying rate of the
Bank of Canada to convert the NASDAQ National Market closing price to
Canadian dollars as required. 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.
|
In the
financial year that ended August 31, 2009, all of the options of non-employee
directors that became exercisable were not “in-the-money”, none of the DSUs
of non-employee directors vested and the non-employee directors did not receive
any non-equity incentive compensation from the Corporation.
Executive
Compensation
The
Summary Compensation Table below shows compensation information during the most
recently completed financial year for the Corporation’s Chief Executive Officer
(“CEO”), Chief Financial Officer (“CFO”) and each of the three most highly
compensated executive officers whose total compensation was, individually, more
than $150,000 (the “NEOs”). The Corporation’s NEOs for the financial year ending
August 31, 2009 were Mr. Germain Lamonde (CEO), Mr. Pierre Plamondon (CFO),
Mr. Jon Bradley,
Vice-President, Telecom Sales, International, Mr. Dana Yearian, Vice-President,
Telecom Sales, Americas, and Mr. Stephen Bull, Vice-President, Research and
Development, Telecom Division. This information includes the US dollar
value of base salaries, share-based and option-based awards, non-equity
incentive plan compensations, pension value and all other compensation,
if any, whether paid or deferred.
|
Name
and
Principal
Position
|
Financial
Year
|
Salary
(1)
($)
|
Share-
Based
Awards
(2)
($)
|
Option-
based
awards
(3)
($)
|
Non-equity
incentive
plan
compensation ($)
|
Pension
value
($)
|
All
other compensation
(5)
|
Total
Compensation
($)
|
|||||||
|
Annual
incentive
plans
(4)
|
Long-term
incentive
plans
|
||||||||||||||
|
Germain
Lamonde,
President
and
Chief
Executive
Officer
|
2009
|
314,887
371,000
|
(US)
(CA)
|
153,999
192,499
|
(US)
(CA)
|
–
|
135,335
159,452
|
(US)
(CA)
|
(6)
|
–
|
–
|
–
|
604,221
722,951
|
(US)
(CA)
|
|
|
Pierre
Plamondon,
Vice-President,
Finance
and
Chief
Financial
Officer
|
2009
|
186,726
220,000
|
(US)
(CA)
|
96,720
120,900
|
(US)
(CA)
|
–
|
51,033
60,127
|
(US)
(CA)
|
(7)
|
–
|
–
|
5,033
5,930
|
(US)
(CA)
|
339,512
406,957
|
(US)
(CA)
|
|
Jon
Bradley,
Vice-President,
Telecom
Sales,
International
|
2009
|
133,799
157,642
86,100
|
(US)
(CA)
(£)
|
99,691
124,614
61,649
|
(US)
(CA)
(£)
|
–
|
65,578
77,264
42,200
|
(US)
(CA)
(£)
|
(8)
|
–
|
–
|
–
|
299,068
359,520
189,949
|
(US)
(CA)
(£)
|
|
|
Dana
Yearian,
Vice-President,
Telecom
Sales,
Americas
|
2009
|
190,000
223,858
|
(US)
(CA)
|
114,451
143,063
|
(US)
(CA)
|
–
|
97,508
114,884
|
(US)
(CA)
|
(9)
|
–
|
–
|
6,536
7,701
|
(US)
(CA)
|
408,495
489,506
|
(US)
(CA)
|
|
Stephen
Bull,
Vice-President,
Research
and
Development
|
2009
|
156,343
184,203
|
(US)
(CA)
|
73,903
92,379
|
(US)
(CA)
|
–
|
35,771
42,145
|
(US)
(CA)
|
(10)
|
–
|
–
|
4,065
4,789
|
(US)
(CA)
|
270,082
323,516
|
(US)
(CA)
|
|
(1)
|
Base
salary earned in the financial year, regardless when paid. 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$1.1782 = US$1.00 for the financial year ended August 31, 2009.
The compensation information for UK resident has been converted from
British Pounds to US dollars based upon an average foreign exchange
rate of £0.6435 = US$1.00 for the financial year ended August 31, 2009 and
the conversion from US dollars to Canadian dollars is made as
described above. The currency conversions cause these reported salaries to
fluctuate from year-to-year because of the fluctuations in exchange
rates.
|
|
(2)
|
Indicates
the dollar amount based on the grant date fair value of the RSUs awarded
under the Long-Term Incentive Plan for the financial year . The grant date
fair value is equal to 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 (for
grants of RSUs prior to January 1, 2009) or the Bank of Canada (for grants
of RSUs on or after January 1, 2009) on the grant date to
convert the NASDAQ National Market closing price to Canadian dollars.
Grants of RSUs to NEOs are detailed under section “Compensation Discussion
& Analysis – Long-Term Incentive
Plan”.
|
|
(3)
|
Indicates
the dollar amount, if any, based on the grant date fair value of the
Subordinate Voting Share options or Share Appreciation Rights awarded
under the Long-Term Incentive Plan for the financial year . The grant date
fair value is equal to 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 (for grants
of options or SARs prior to January 1, 2009) or the Bank of Canada
(for grants of options or SARs on or after January 1, 2009) on
the grant date to convert the NASDAQ National Market closing price to
Canadian dollars. Grants of Subordinate Voting Share options or Share
Appreciation Rights to NEOs are detailed under section “Compensation
Discussion & Analysis – Long-Term Incentive
Plan”.
|
|
(4)
|
Indicates
the total bonus earned during the financial year whether paid during the
financial year or payable on a later
date.
|
|
(5)
|
Indicates
the amount contributed by the Corporation during the financial year
indicated to the Deferred Profit Sharing Plan as detailed under section
“Compensation Discussion & Analysis – Deferred Profit Sharing Plan” or
401K Plan as detailed under section “Compensation Discussion &
Analysis – 401K Plan”, as applicable, for the benefit of the NEO.
Mr. Lamonde is not eligible to participate in the Deferred
Profit Sharing Plan and Mr. Bradley did not
participate.
|
|
(6)
|
US$77,918
(CA$91,803) paid during the financial year ended August 31, 2009 and
US$57,417 (CA$67,649) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(7)
|
US$29,404
(CA$34,643) paid during the financial year ended August 31, 2009 and
US$21,629 (CA$25,484) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(8)
|
US$58,192
(CA$68,562) paid during the financial year ended August 31, 2009 and
US$7,386 (CA$8,702) earned in the financial year ended August 31, 2009 but
paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(9)
|
US$74,160
(CA$87,375) paid during the financial year ended August 31, 2009 and
US$23,348 (CA$27,509) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(10)
|
US$22,864
(CA$26,938) paid during the financial year ended August 31, 2009 and
US$12,907 (CA$15,207) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
Incentive
Plan Awards
The
significant terms of all plan-based awards and non-equity incentive plan awards,
issued or vested, or under which options have been exercised, during the
financial year, or outstanding at the end of the financial year are described
herein under the section entitled “Compensation Discussion and Analysis –
Long-Term Incentive Plan” and “Compensation Discussion and Analysis – Short Term
Incentive Compensation”.
Outstanding
share-based awards and option based awards
The
following sets out for each NEO all option and Restricted Share Units (“RSUs”)
awards outstanding as at August 31, 2009, if any, including
those granted before August 31, 2009.
|
Option-based
Awards (Options)
|
Share-based
Awards (RSUs)
|
|||||
|
Name
|
Number of securities
underlying
unexercised options
(#)
(1)
|
Option
exercise
price
(US$)
(2)
|
Option
expiration
date
|
Value
of
unexercised
in-
the-money
options
(US$) (3)
|
Number of shares
or units of shares
that
have not
vested
(#)
|
Market
or payout
value
of share-based
awards
that have
not
vested (US$) (4)
|
|
Germain
Lamonde
|
25,402
|
26.00
|
June
29, 2010
|
–
|
140,459
|
421,377
|
|
5,080
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
70,000
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
50,000
|
1.58
|
Sept.
25, 2012
|
71,000
|
|||
|
17,942
|
4.51
|
Feb.
1, 2015
|
–
|
|||
|
11,218
|
4.76
|
Dec.
6, 2015
|
–
|
|||
|
Pierre
Plamondon
|
8,700
|
26.00
|
June
29, 2010
|
–
|
72,922
|
218,766
|
|
10,000
|
45.94
|
Sept.
13, 2010
|
–
|
|||
|
5,000
|
34.07
|
Oct.
11, 2010
|
–
|
|||
|
9,240
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
19,000
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
20,000
|
1.58
|
Sept.
25, 2012
|
28,400
|
|||
|
5,383
|
5.13
|
Oct.
26, 2014
|
–
|
|||
|
3,653
|
4.76
|
Dec.
6, 2015
|
–
|
|||
|
Jon
Bradley
|
5,000
|
45.94
|
Sept.
13, 2010
|
–
|
50,281
|
150,843
|
|
5,000
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
1,000
|
12.22
|
Jan.
3, 2012
|
–
|
|||
|
1,500
|
3.19
|
Jan.
7, 2013
|
–
|
|||
|
10,000
|
3.50
|
Dec.
17, 2013
|
–
|
|||
|
4,000
|
4.51
|
Feb.
1, 2015
|
–
|
|||
|
Dana
Yearian
|
–
|
–
|
–
|
–
|
65,699
|
197,097
|
|
Stephen
Bull
|
900
|
26.00
|
June
29, 2010
|
–
|
61,765
|
185,295
|
|
5,000
|
45.94
|
Sept.
13, 2010
|
–
|
|||
|
2,930
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
15,000
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
1,795
|
5.13
|
Oct.
26, 2014
|
–
|
|||
|
1,803
|
4.76
|
Dec.
6, 2015
|
–
|
|||
|
(1)
|
The
unexercised 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 options will be exercised or any gain
realized.
|
|
(2)
|
Prices
noted are the grant date exercise price for each option under each
award.
|
|
(3)
|
Indicates
an aggregate value of “in the money” unexercised options held at the
financial year ended August 31, 2009. “In-the-money” options are options
for which the market value of the underlying securities is higher than the
exercise price. 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 Share at August
31, 2009, which was US$3.00 (CA$3.29). The market value of the Subordinate
Voting Shares was calculated by 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, 2009 using the noon
buying rate of the Bank of Canada to convert the NASDAQ National Market
closing price to Canadian dollars as required. This value has been
converted from Canadian to US dollars based upon the foreign exchange
rate on August 31, 2009 of 1.0967.
|
|
(4)
|
The
value of unvested RSUs at the financial year-end is the market value of
the Subordinate Voting Shares on August 31, 2009, which was
US$3.00 (CA$3.29). The market value of the Subordinate Voting Shares was
calculated by using the highest of the closing prices of the Subordinate
Voting Shares on the Toronto Stock Exchange and on the NASDAQ National
Market on August 31, 2009 using the noon buying rate of the
Bank of Canada to convert the NASDAQ National Market closing price to
Canadian dollars as required. The actual gains on vesting will depend on
the value of the Subordinate Voting Shares on the date of vesting. There
can be no assurance that these values will be
realized.
|
Incentive
plan awards – value vested or earned during the year
The
following table summarizes, for each of the NEOs, the value of option based
awards, if any vested during the financial year ended August 31, 2009, the value
of share-based awards vested during the financial year ended August 31, 2009, if
any, and the value of non-equity incentive plan compensation earned during the
financial year ended August 31, 2009, if any.
|
Name
|
Option-based
awards – value
vested
during the year (US$) (1)
|
Share-based
awards – value
vested
during the year (US$) (2)
|
Non-equity
incentive plan
compensation
– Value earned
during
the year (US$) (3)
|
|
Germain
Lamonde
|
–
|
32,235
|
135,335
|
|
Pierre
Plamondon
|
–
|
43,189
|
51,033
|
|
Jon
Bradley
|
–
|
7,114
|
65,578
|
|
Dana
Yearian
|
–
|
5,068
|
97,508
|
|
Stephen
Bull
|
–
|
37,875
|
35,771
|
|
(1)
|
Indicates
the aggregate dollar value that would have been realized on the vesting
date if the options under the option-based awards had been exercised on
the vesting date. The value of option-based awards vested during the year
at the vesting date is the difference between its exercise or base price
and the market value of the underlying Subordinate Voting Share on the
date of the vesting. The market value of the Subordinate Voting Shares was
calculated by using the highest of the closing prices of the Subordinate
Voting Shares on the Toronto Stock Exchange and on the NASDAQ National
Market on the date of the vesting using the noon buying rate of the Bank
of Canada to convert the NASDAQ National Market closing price to Canadian
dollars as required.
|
|
(2)
|
The
aggregate dollar value realized is equivalent to the market value of the
securities underlying the RSUs at vesting. This value, as the case may be,
has been converted from Canadian dollars to US dollars based upon the noon
buying rate of the Bank of Canada on the day
of vesting.
|
|
(3)
|
Includes
total non-equity incentive plan compensation earned by each NEO in respect
to the financial year ended on August 31, 2009 (as indicated under
the “Summary Compensation Table”)
|
Termination
and Change of Control Benefits
We have
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 equal to 24 months of the current rate
of remuneration (base salary, STIP compensation and benefits) and the
immediate 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, he will be entitled to
severance payments equal to 24 months of remuneration (base salary, STIP
compensation and benefits) and to the immediate vesting of all stock options and
RSUs. If Mr. Lamonde voluntarily resigns he will be entitled to immediate
vesting of all stock options and RSUs.
We have
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 equal to 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 equal to 18 months
of remuneration (base salary, STIP compensation and benefits) and to the
immediate vesting of all stock options and RSUs.
We have
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 equal to 2 months of the current base salary per year of
service as a Vice-President of the Corporation (a minimum of 4 months of
current base salary but 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 equal to 2 months of remuneration (base
salary, SIP compensation and benefits) per year of service as a
Vice-President of the Corporation (a minimum of 6 months of remuneration but in
no case exceeding 18 months of remuneration) and to the immediate vesting
of all stock options and RSUs.
We have
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 equal to 2 months of the current base salary per year of service but in
no case exceeding 12 months. 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 equal
to 12 months (for 0-5 years of service) or 18 months of remuneration
(base salary, SIP compensation and benefits) (for more than 5 years of services)
and to the immediate vesting of all stock options and RSUs.
We have
an employment agreement with Stephen Bull, the Corporation’s Vice-President,
Research and Development, Telecom Division. The agreement is for an
indeterminate period and the compensation is reviewed annually. In the
event of termination of Mr. Bull’s employment without cause, Mr. Bull will
be entitled to severance payments equal to 12 months of the current base
salary. In addition, in the event Mr. Bull’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 equal to 18 months of remuneration
(base salary, STIP compensation and benefits) and to the immediate vesting of
all stock options and RSUs.
The
following table outlines the estimated incremental payments NEOs would be
entitled to receive if a termination payment event occurred on
August 31, 2009 which includes all payments, payables and benefits that would
be given by the Corporation to an NEO upon such termination payment
event.
|
Named
Executive Officer
|
Termination
Payment Event
|
|||||
|
Without Cause ($) (1)
|
Change of Control ($)
(2)
(3)
|
Voluntary
($)
|
||||
|
Germain
Lamonde
|
1,519,847
1,644,130
|
(US) (4)
(CA)
|
1,519,847
1,644,130
|
(US)
(CA)
|
492,377
501,610
|
(US) (5)
(CA)
|
|
Pierre
Plamondon
|
294,710
323,077
|
(US)
(CA)
|
633,826
693,040
|
(US)
(CA)
|
–
|
|
|
Jon
Bradley
|
78,293
89,497
|
(US)
(CA)
|
235,213
261,839
|
(US)
(CA)
|
–
|
|
|
Dana
Yearian
|
146,195
168,073
|
(US)
(CA)
|
391,923
444,869
|
(US)
(CA)
|
–
|
|
|
Stephen
Bull
|
231,253
266,354
|
(US)
(CA)
|
494,562
554,795
|
(US)
(CA)
|
–
|
|
|
(1)
|
The
aggregate amount disclosed includes an evaluation of the amount that the
NEO would have been entitled to should a termination of employment
without cause have occurred on August 31, 2009 and includes, as the case
may be for each NEO, the base salary that would have been received and
total value of RSUs and options that would have vested (with the exception
of Mr. Lamonde’s evaluation which is described in note 4 below). The
amount for base salary compensation is calculated according to those
amounts provided under the section entitled “Summary Compensation Table”
included in this Annual Report. The amount for the total value attached to
the vesting of RSUs and options determined pursuant to the Long-Term
Incentive Plan as described in the section entitled ‘’Long-Term Incentive
Compensation’’ – ‘’Long-Term Incentive Plan’’
for termination without
cause.
|
|
(2)
|
A
“Change of Control” is 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.
|
|
(3)
|
The
aggregate amount disclosed includes, as the case may be for each NEO, an
evaluation of the amount that the NEO would have been entitled to should a
termination of employment for Change of Control have occurred on August
31, 2009 and includes, as the case may be, namely, the base salary, STIP
or SIP compensation and total value of RSUs and options that would have
vested. The amount for base salary and STIP or SIP compensation are
calculated according to those amounts provided under the section entitled
“Summary Compensation Table” included in this Annual Report, the total
value attached to the vesting of RSUs and options is calculated according
to those amounts provided in the columns named “Value of unexercised
in-the-money options” and “Market or payout value of share-based awards
that have not vested” of the table included under the heading
entitled – “Outstanding share-based awards and option-based
awards”.
|
|
(4)
|
The
aggregate amount disclosed includes an evaluation of the amount that Mr.
Lamonde would have been entitled to should a termination
of employment without cause have occurred on August 31, 2009 and
includes: the base salary, STIP compensation, and total value of RSUs
and options that would have vested. The amount for base salary and STIP
compensation are calculated according to those amounts provided under
the section entitled “Summary Compensation Table” included in this Annual
Report; the total value attached to the vesting of RSUs and options are
calculated according to those amounts provided in the columns named “Value
of unexercised in-the-money options” and “Market or payout value of
share-based awards that have not vested” of the table included under the
heading entitled – “Outstanding share-based awards and option-based
awards”.
|
|
(5)
|
The
aggregate amount disclosed includes an evaluation of the amount that Mr.
Lamonde would have been entitled to should a voluntary termination
of employment have occurred on August 31, 2009 and includes: the
total value of RSUs and options that would have vested. The amount
for the total value attached to the vesting of RSUs and options are
calculated according to those amounts provided in the columns named “Value
of unexercised in-the-money options” and “Market or payout value of
share-based awards that have not vested” of the table included under
the heading entitled – “Outstanding share-based awards and option-based
awards”
|
Compensation
Discussion & Analysis
This
Compensation Discussion & Analysis mainly focuses on: (i) significant
elements of the Corporation’s executive compensation program; (ii) principles on
which the Corporation makes compensation decisions and determines the amount of
each element of executive and director compensation; and (iii) an analysis of
the material compensation decisions made by the Human Resources Committee for
the financial year ended August 31, 2009.
The
following is a discussion of the compensation arrangements with the
Corporation’s NEOs.
Members
of the Human Resources Committee
During
the financial year ended August 31, 2009, the Human Resources Committee was
composed of Mr. Guy Marier, as Chairman, Mr. Pierre-Paul Allard
(starting January 14, 2009), Mr. Pierre Marcouiller, Mr. David A. Thompson
and Mr. 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 in applicable securities legislation.
Mandate
of the Human Resources Committee
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 shareholders’ 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 may be
shared between the Board of Directors and the Human Resources Committee. During
the period from September 1, 2008 to August 31, 2009 these functions have
exclusively been performed by the Human Resources Committee.
The Human
Resources Committee has reviewed and discussed with management the compensation
disclosure in this document, and has recommended to the Board of Directors that
the disclosure be included in this document.
Since
September 1, 2008 and prior to November 2, 2009, the Human Resources Committee
held 5 meetings and at three of those meetings executive compensation was
discussed. On October 15, 2008 and October 13, 2009, the Human
Resources Committee met to discuss and approve the compensation plans of
executive officers for the financial years beginning on September 1, 2008 and
2009. On June 30, 2009 the Human Resources Committee met to discuss the
Executive Compensation Survey prepared by Mercer (Canada) Ltd. (“Mercer”) that
provided certain recommendations with respect to the target compensation (base
salary, short-term compensation and long-term compensation) that should be aimed
by the Corporation for its executive officers. The Human Resources
Committee meetings were attended by all the members of the Committee, except Mr.
Tremblay who was absent at two meetings.
Compensation
Plan Control - Compensation Consultant and Internal 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.
The benchmarking activities are further detailed below under the heading
“Benchmarking”.
In 2004,
the Corporation engaged Mercer to conduct a full market benchmarking and review
of the Corporation’s executive compensation plans. The analysis of Mercer was
based on three elements: (i) base salary; (ii) variable compensation;
and (iii) long-term incentive compensation and indicated that the base salary
and variable compensation of the executive officers were competitive with the
reference group identified by Mercer but indicated that the long-term
incentive compensation element was weak compared to the reference group. In
order to overcome such weakness Mercer recommended the introduction
of a Long-Term Incentive Plan. Following such recommendations, the
Corporation decided to align the overall compensation of the executive officers
with the median compensation offered in a comparative market and also introduced
an amendment to the Stock Option Plan creating the Long-Term Incentive Plan
pursuant to which the Corporation may grant Restricted Share Units
to executive officers. Such Plan was approved by the shareholders
of the Corporation on January 12, 2005.
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 provided information about the following topics in 2006: (i)
job classification structure & salary scales (Define Job positions vs.
comparable market including salary scale); and (ii) development of
compensation management policies & practices (to manage employee progression
through the salary scale).
In 2007,
the Corporation engaged two human resources consultants, Mercer and AON
Corporation, to advise whether the compensation positioning of the
Corporation was still aligned with the comparative market. Both consultants
confirmed that the Corporation’s position was still aligned with the comparative
market and both also recommended that the Corporation’s compensation scheme
should gradually evolve from the fiftieth percentile to the sixtieth percentile.
The recommendations of both consultants were followed and the Corporation
decided to gradually align the compensation positioning from the fiftieth
percentile to the sixtieth percentile (hereinafter in this Annual Report
referred to as the “Target Compensation Positioning”) over the next three
years.
In 2008,
the Corporation engaged Hewitt Associates LLC to conduct a world-wide market
analysis for selected international positions. The survey included annual
base salary, bonuses and commission plans.
In 2009,
the Corporation engaged Mercer to review the compensation positioning of the
Corporation. Mercer confirmed that the majority of the Corporation’s
compensation scheme (base salary, short-term compensation and long-term
compensation) was still aligned with the comparative market but some adjustments
were proposed to be made for certain executive officers. Considering
the overall economic situation, the adjustments proposed by Mercer will be
postponed.
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 financial year ended August 31, 2009, this practice
continued and certain compensation adjustments were made.
Benchmarking
The
target compensation levels of the Corporation are determined in relation to the
compensation levels of the peer companies of the Corporation and in
consideration of the results of the Corporation. The reference companies were
determined using the market data for Canada, United States and the United
Kingdom from the following sources: 2008 Canadian Mercer benchmark Database, US
Mercer benchmark database and 2008 Mercer United Kingdom benchmark database.
Although the Corporation was not provided with the list of the companies
identified in the peer group, the peer group was determined in accordance with
the following elements: (i) companies operating in Canada where the
attraction and retention of skilled candidates is crucial in order to
fulfill the Corporation’s strategy; (ii) companies that are in the
high-technology, telecommunications and durable-manufacturing of goods
industries and (iii) that have a median annual revenue of 200-300 million
US dollars. The report provided by Mercer compared the Corporation’s
compensation levels with the compensation levels of the peer group for each of
the following core compensation elements: base salary, sum of base salary and
annual short-term incentives and the sum of base salary, annual short-term
incentives and long-term incentives.
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 the results of the Corporation
and individual results based on specific quantitative and qualitative
objectives established at the start of each financial year in keeping
with the Corporation’s long-term strategic
objectives.
|
|
·
|
Aligned
with shareholder interests: An important portion 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 the Corporation’s
results.
|
|
·
|
Individually
equitable: Compensation levels are also designed to reflect individual
factors such as scope of responsibility, experience, and performance
against individual
measures.
|
Compensation
Elements
The
significant elements of the Corporation’s 2009 executive compensation program
were (i) Base Salary, (ii) the Short Term Incentive Plan, and (iii)
the stock-based incentive compensation delivered through the Long-Term Incentive
Plan. In addition to the foregoing, the Corporation also offered benefit plans
and, if applicable, contributed to a Deferred Profit-Sharing Plan or a 401K
Plan. To determine appropriate compensation levels for each pay component,
the Human Resources Committee considered all key elements of the executive
compensation program. The Committee did not assign specific weightings to any
key element of the Corporation’s 2009 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 Target
Compensation Positioning 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 executive
officer on an annual basis at the beginning of each financial year 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 executive officers with the
opportunity to earn annual bonuses based on the Corporation’s financial
performance and the achievement of strategic corporate and product line
objectives established on a yearly basis as well as the achievement of personal
objectives. The STIP’s objectives are aimed to reward seven elements: three
elements are shareholder oriented (sales, gross margins and EBITDA), two are
customer oriented (on time delivery and quality), one is based on the growth
metrics of the Corporation compared to the growth rate of the competition and
one is based on personal objectives.
Target
payout levels for NEOs eligible for incentive bonuses in the year ended
August 31, 2009 were established to be in line with the objective
of the Committee to align compensation with the Target Compensation Positioning
offered in the reference group. The minimum, target and maximum payouts to
executive officers under the STIP (expressed as a percentage of their base
salary) for the financial year ended August 31, 2009 were
as follows:
Our
President and Chief Executive Officer, Mr. Germain Lamonde, had a short term
incentive target of 55% of his annual base salary. That bonus was based on
the achievement of financial, strategic and personal objectives as shown in the
following table.
Our Chief
Financial Officer, Mr. Pierre Plamondon, had a short term incentive target of
35% of his annual base salary. That bonus was based on the achievement of
financial, strategic and personal objectives as shown in the following
table.
Our
Vice-President, Research and Development, Telecom Division, Mr. Stephen Bull,
had a short term incentive target of 32.5% of his annual base salary. That bonus
was based on the achievement of financial, strategic and personal objectives as
shown in the following table.
|
Measure
(1)
|
Weighting
for Mr. Lamonde, Mr. Plamondon and Mr. Bull
|
|
|
Sales
(2)
|
35%
|
|
|
EBITDA
(2)
|
20%
|
|
|
Gross
margin (2)
|
20%
|
|
|
Customer
satisfaction (quality and on time delivery) (3)
|
25%
|
|
|
Growth
metrics (4)
|
10%
|
|
|
Personal
objectives (multiplier) (5)
(6)
|
0%
- 125%
|
|
|
(1)
|
Sales,
EBITDA, Gross margin and Customer satisfaction measures are established to
provide a metric from 0% to 150% (and up to an additional
10% for the Growth measures) 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.
|
|
(2)
|
Upon
attainment of 40% of the target objective, the NEO begins to be
compensated for this element and can be compensated up to the
attainment of 150% of the target
objective.
|
|
(3)
|
The
compensation for this element is pro-rated up to the attainment of 150% of
the target objective.
|
|
(4)
|
If
the Corporation’s growth rate is higher by 10% than the growth rate of
target competitive companies, then the Corporation’s growth rate exceeding
10% (up to a maximum of 10%) will be added to the metric
determined above in note 1.
|
|
(5)
|
The
compensation for this element is pro-rated up to the attainment of 125% of
the target objective.
|
|
(6)
|
The
personal objectives of each NEO are based on the position and role he
has with the Corporation. Such personal objectives are based mostly
on the attainment of departmental objectives and the others objectives are
based on the attainment of personal management objectives all of which
attainments are determined by an evaluation of the individual’s supervisor
or the Human Resources Committee, as the case may be.
|
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 target compensation. The target
compensation is the sum of base salary (60%) and target SIP (40%). The SIP is
based 45% on the achievement of revenue targets (billings), 45% on margin
targets and 10% on personal objectives. The compensation rate for the attainment
of revenue targets (billings) is equal to the total billings potential amount of
commission on the total billings quotas defined at the beginning of the
financial year. This rate is lower for the attainment of 62.5% or less
of the objective and the regular rate for the attainment from greater than
62.5% to 100% of the objective. An accelerator is applied after 100%
attainment of the objective. The commission rate for the attainment of the
margin targets is equal to the total margins potential on the total margins
quotas defined at the beginning of the financial year. This rate is used
for all margins up to 100% attainment of the objective and an accelerator
is applied after 100% attainment of the objective. The compensation for
personal objectives is a maximum amount based on the quarterly achievement
of the sales target for their specific territory. It is pro-rated between 70%
and 100% achievement and no compensation will be attributed to this element
if less than 70% of the objective is attained. Additional bonuses are also
available; one based on revenues of recent acquisitions and the other
on reduction of cost per order dollar. Accordingly, a total sales
achievement figure target of recent acquisitions and a commission rate are
determined at the beginning of the financial year. The commission rate is
applied when total sales achievement figure of recent acquisitions exceeds 50%
of the target. A reduction of cost per order dollar figure target is determined
at the beginning of the financial year. The compensation for the attainment of
the reduction of cost per order dollar figure target is a maximum amount
based on the achievement of such target and is pro-rated
up to 100% achievement.
Long-Term
Incentive Compensation
· Long-Term
Incentive Plan
We have a
Long-Term Incentive Plan, the principal component of our long-term incentive
compensation, for our Directors, executive officers, employees and consultants
and those of our subsidiaries as determined by our Board of Directors, to
attract and retain competent Directors, executive officers, employees and
consultants motivated to work toward ensuring our success and to encourage them
to acquire our shares. A copy of the Long-Term Incentive Plan has been filed as
exhibit 4.35 to our fiscal year 2005 Annual Report on Form 20-F.
Introduced
in May 2000, amended in October 2004 and effective in January 2005, the
Long-Term Incentive Plan (“LITP”), 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 and to further attract, motivate and retain all of
its employees, including the NEOs. 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, 2009, 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 Target Compensation Positioning offered
in the reference group. Each executive officer is entitled to receive annually
from 25% to 30% of his base salary in RSUs except for the Corporation’s CEO
that is entitled to receive annually up to 55% of his base salary in RSUs,
subject to other grants of RSUs that may be granted from time to time
as an additional incentive to all executive officers. As disclosed
under the section “Summary Compensation Table” hereof, the NEOs were granted
RSUs during the last financial 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 grants
mentioned above.
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 exercise price 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 (for grants of options prior to January 1, 2009)
or the Bank of Canada (for grants of options on or after January 1, 2009)
on the grant date to convert the NASDAQ National Market closing price to
Canadian dollars. Any option issued is non-transferable. At
August 31, 2009, there were a total of 1,666,589 options
granted to all LTIP participants and outstanding pursuant to the Long-Term
Incentive Plan having a weighted average exercise price of US$13.78
(CA$20.57) per option.
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. The grant date market value is
equal to 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 (for grants of RSUs prior to January 1, 2009) or the
Bank of Canada (for grants of RSUs on or after January 1, 2009) on the grant
date to convert the NASDAQ National Market closing price to Canadian dollars. At
the end of financial year ended August 31, 2009, there were a total of
1,339,619 RSUs granted and outstanding pursuant to the Long-Term Incentive Plan
having a weighted average fair value at the time of grant of US$4.21 (CA$4.74)
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
10.6% of the Corporation’s issued and outstanding voting shares as of November
2, 2009. 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, which represents 1,137 498 issued and outstanding
Subordinate Voting Shares as of November 2, 2009.
Some
options granted to directors and employees vest on the first anniversary date of
their grant. Some options granted in the financial years 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 at 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, 2009, vest at a rate of
1/2 annually commencing on the third anniversary date of the grants in October
2008, January 2009, April 2009 and July 2009. Some RSUs granted in the financial
year ended August 31, 2009, vest at a rate of 1/3 annually commencing on the
third anniversary date of the grant in January 2009. Some RSUs granted
in the financial year ended August 31, 2008, vest at a rate of 1/2 annually
commencing on the third anniversary date of the grants in October 2007,
January 2008, April 2008 and July 2008. 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 five financial years vest on the fifth anniversary date
of each grant respectively in October 2008, October 2007,
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 any
vesting dates fall 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, the RSUs shall: a) vest on the fifth trading day the
RSU holder is entitled to trade after such black-out period or restrictive
period or b) if the RSU holder decides, prior to such vesting date,
to pay his/her income tax without using any of the Subordinate Voting Shares’
proceeds, then and only then, the vesting date shall remain the one determined
on the granting date for such RSUs.
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); and (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.
· Restricted
Share Unit Grants in Last Financial Year
The
aggregate number of Restricted Share Units (RSUs) granted during the financial
year ended August 31, 2009 was 685,972 having a weighted average fair
value at the time of grant of US$2.69 (CA$3.38) 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 August 31, 2009, there were a total
of 1,339,619 RSUs granted and outstanding pursuant to the Long-Term
Incentive Plan having a weighted average fair value at the time of grant
of US$4.21 (CA$4.74) per RSU.
The RSUs
may be redeemed for actual Subordinate Voting Shares or the equivalent in cash
at the discretion of the Board of Directors of the Corporation on the
vesting dates established by the Board of Directors of the Corporation at the
time of grant in its sole discretion.
Therefore,
the value at vesting of a RSU, when converted to Subordinate Voting Shares, is
equivalent to the market value of a Subordinate Voting Share at the time the
conversion takes place and is taxable as an employment income. The table below
shows information regarding RSU grants made under the Long-Term Incentive Plan
during the financial year ended August 31, 2009.
During
the financial year ended August 31, 2009, the following RSUs were
granted:
|
RSUs
#
|
Fair
Value at the Time
of
Grant US$/RSU
|
Vesting (1)
|
|
|
71,003
|
2.36
|
50%
on the third and fourth anniversary dates of the grant
in October 2008
|
|
|
216,685
|
2.36
|
100%
on the fifth anniversary date of the grant in October 2008 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 namely related to long-term growth of
revenue and profitability, as determined by the Board of Directors of the
Corporation are fully attained
|
|
|
135,584
|
2.36
|
100%
on the fifth anniversary date of the grant in October 2008 subject to
early vesting up to 100% on the third anniversary date of the grant if
performance objectives namely related to long-term growth of revenue and
profitability, as determined by the Board of Directors of the Corporation
are fully attained
|
|
|
243,700
|
3.22
|
50%
on the third and fourth anniversary dates of the grant in January
2009
|
|
|
5,000
|
3.22
|
1/3
on the third, fourth and fifth anniversary dates of the grant
in January 2009
|
|
|
11,000
|
3.52
|
50%
on the third and fourth anniversary dates of the grant in April
2009
|
|
|
3,000
|
2.99
|
50%
on the third and fourth anniversary dates of the grant in July
2009
|
|
|
(1)
|
All
RSUs first vesting cannot be earlier than the third anniversary date of
their grant.
|
During
the financial year ended August 31, 2009, the following RSUs were granted to the
following NEOs:
|
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
|
65,254
|
9.51%
|
2.36
|
100%
on the fifth anniversary date of the grant in October 2008 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
|
40,983
|
5.97%
|
2.36
|
20,664
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 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)
|
|
|
20,339
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting of 100% on the third
anniversary date of the grant if the objectives are fully attained (3)
|
|||||
|
Jon
Bradley
|
42,242
|
6.16%
|
2.36
|
16,826
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 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)
|
|
|
25,416
of the RSUs will vest 100% on the fifth anniversary date of the grant in
October 2008 subject to early vesting of 100% on the third anniversary
date of the grant if the objectives are fully attained (3)
|
|||||
|
Dana
Yearian
|
48,496
|
7.07%
|
2.36
|
23,072
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 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)
|
|
|
25,424
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting of 100% on the third
anniversary date of the grant if the objectives are fully attained (3)
|
|||||
|
Stephen
Bull
|
31,315
|
4.57%
|
2.36
|
17,756
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 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)
|
|
|
13,559
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting of 100% on the third
anniversary date of the grant if the objectives are fully attained (3)
|
|||||
|
(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, 2009 vest on the fifth
anniversary date of the grant in October 2008 but are subject to
early vesting on the third and fourth anniversary date of the grant on the
attainment of performance objectives, 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 early vesting shall be
subject to the attainment of performance objectives. Such performance
objectives are based on the attainment of a sales growth metric combined
with profitability metric. The sales growth metric is determined according
to the Compound Annual Growth Rate (CAGR) of the sales of the Corporation
(SALES CAGR). The profitability metric is determined according to the
Compound Annual Growth Rate (CAGR) of the Corporation’s net earnings
before interest, income taxes, amortization of property, plant and
equipment, amortization of intangible assets, impairment of goodwill and
extraordinary gain (EBITDA) (EBITDA CAGR). Accordingly, the first early
vesting performance objectives will be attained, calculated on a pro-rated
basis, as of: i) 100% for SALES CAGR of 20% or more and 0%
for SALES CAGR of 10% or less for the three fiscal years from the date of
grant and cumulated with ii) 100% for EBITDA CAGR of 20% or more and
0% for EBITDA CAGR of 10% or less for the three fiscal years form the date
of grant. The second early vesting performance objectives will be attained
on the same premises as described above but for the four fiscal years from
the date of grant.
|
|
(3)
|
Those
RSUs granted in the financial year ended August 31, 2009 vest on the fifth
anniversary date of the grant in October 2008 but are subject to
early vesting on the third anniversary date of the grant on the attainment
of performance objectives, related to a target cumulative sales of
Service Assurance (formerly Brix Networks Inc.) and Navtel’s products and
services, as determined by the Board of Directors of the
Corporation. Accordingly, subject to the attainment of performance
objectives, the early vesting is 100% of the units on the third
anniversary date of the grant.
|
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, 2009:
|
Number
of RSUs
|
%
of Issued and
Outstanding
RSUs
|
Weighted
Average Fair Value at
the
Time of Grant $US/RSU
|
|
|
President
and CEO (one individual)
|
140,459
|
10.48%
|
4.19
|
|
Board
of Directors (five individuals)
|
–
|
–
|
–
|
|
Management
and Corporate Officers (eleven individuals)
|
479,887
|
35.82%
|
3.74
|
|
·
|
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, 2009. At August 31, 2009, there were
a total of 1,666,589 Subordinate Voting Shares covered by options
granted and outstanding pursuant to the Long-Term Incentive Plan having a
weighted average exercise price of US$13.78 (CA$20.57) per option.
The
following table summarizes information about stock options granted to the
members of the Board of Directors, and to Management and Corporate Officers of
the Corporation and its subsidiaries as at August 31,
2009:
|
Number
of
Options
|
%
of Issued and
Outstanding
Options
|
Weighted
Average Exercise
Price
($US/Security)
|
|
|
President
and CEO (one individual)
|
179,642
|
10.78%
|
9.05
|
|
Board
of Directors (four individuals)
|
148,807
|
8.93%
|
6.19
|
|
Management
and Corporate Officers (eight individuals)
|
212,139
|
12.73%
|
14.49
|
· 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 the Corporation’s
non-employee directors with those of its shareholders. A copy of the
Deferred Share Unit Plan has been filed as exhibit 4.36 to our fiscal year 2005
Annual Report on Form 20-F.
Under the
Deferred Share Unit Plan, non-employee directors may elect to 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 (for grants of
DSUs prior to January 1, 2009) or the Bank of Canada (for grants of DSUs on or
after January 1, 2009) 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. DSUs
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 10.6% of the total
issued and outstanding voting shares.
· 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, 2009 was 35,739. 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 (for grants of DSUs prior to January 1, 2009) or the Bank of Canada
(for grants of DSUs on or after January 1, 2009) 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 the
Subordinate Voting Shares when a DSU is converted to such Subordinate Voting
Shares. As at August 31, 2009, there were a total of 114,924 DSUs
credited to directors pursuant to the Deferred Share Unit Plan having a weighted
average fair value at the time of grant of US$4.62
(CA$5.18).
During
the financial year ended August 31, 2009, the following DSUs were granted to the
non-employee members of the Board of Directors:
|
DSUs
#
|
Weighted
Average Fair Value at the
Time
of Grant US$/DSU
|
Vesting
|
|
35,739
|
3.19
|
At
the time director cease to be a member of the Board of the
Corporation
|
The
following table summarizes information about DSUs granted to the non-employee
members of the Board of Directors as at November 2,
2009:
|
Number
of DSUs
|
%
of Issued and
Outstanding
DSUs
|
Weighted
Average Fair Value
at
the Time of Grant $US/DSU
|
|
|
Board
of Directors (five individuals)
|
114,924
|
100%
|
4.62
|
· Number
of Subordinate Voting Shares reserved for future issuance
During
the financial year ended August 31, 2009, 35,739 DSUs and 685,972 RSUs 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 of which the maximum number of Subordinate
Voting Shares issuable shall not exceed 6,306,153 Subordinate Voting
Shares, which represents 10.6% of the Corporation’s issued and outstanding
voting shares as at November 2, 2009.
As of November 2, 2009, the number of Subordinate Voting
Shares reserved for future issuance is 2,128,866 representing 3.6% of the
Corporation’s issued and outstanding voting shares as at November 2,
2009.
· 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 stock-based compensation 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 (for grants
of SARs prior to January 1, 2009) or the Bank of Canada (for grants of
SARs on or after January 1, 2009) 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 grants in October 2007 and
October 2008. 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.
As of
November 2, 2009, there were 44,374 SARs outstanding.
Benefits
and Perquisites
All
eligible employees of the Corporation, including the NEOs, are eligible to
participate in the Corporation’s benefits program, which includes, life
insurance, extended health and dental coverage, short and long-term disability
coverage, accidental death and dismemberment (AD&D) and emergency travel
assistance. Although the majority of costs of the benefits are paid by the
Corporation, employees (including the NEOs) are also required to contribute to
obtain such benefits.
With the
exception of car allowances that are provided to the Corporation’s CEO,
Vice-President, Telecom Sales, Americas and Vice-President, Telecom Sales,
International, executive officers, including other NEOs, do not receive any
perquisites. The value of the perquisites for each of the NEOs, is less than
$50,000 or 10% of total annual salary and bonus for the financial year and,
as such is not included in the table provided under the heading “Summary
Compensation Table” and in the table provided under the heading “Termination and
Change of Control Benefits”.
Deferred
Profit-Sharing Plan
The
Corporation maintains a deferred profit-sharing plan (“DPSP”) for certain
eligible Canadian resident employees, including NEOs but excluding the
Corporation’s CEO under which the Corporation may elect to contribute
an amount equal to 2% 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, 2007, 2008 and 2009, amounted
to US$419,000, US$531,000 and US$504,000, respectively. The amounts
contributed to the DPSP are invested at the employee’s will in the
investment vehicles offered by Standard Life, the Corporation’s fund
administrator. Withdrawals of funds from the DPSP account are not permitted. In
the event of termination of the employment, if the employee has been a
member of the DPSP for more than 2 years, the employee is entitled
to receive the funds accumulated in his DPSP account.
401K
Plan
The
Corporation maintains a 401K plan for eligible United States resident employees
of its subsidiaries. Employees become eligible to participate in the 401K plan
on the date they are hired. Employees may elect to defer their current
compensation up to the lesser of 1% of eligible compensation or the statutorily
prescribed annual limit and have the deferral contributed to the 401K plan. The
401K plan permits, but does not require the Corporation to make additional
matching contributions to the 401K plan on behalf of the eligible participants,
subject to a maximum of 50% of the first 6% of the participant’s
current compensation subject to certain legislated maximum contribution limits.
Accordingly, the Corporation contributes up to 3% of the participant’s current
compensation, subject to certain legislated maximum contribution limits. In
the years ended August 31, 2007, 2008 and 2009, the Corporation made an
aggregate of US$166,000, US$216,000 and US$356,000 respectively, in Safe Harbor
Contributions to the 401K plan. Contributions by participants or by the
Corporation to the 401K plan and income earned on plan contributions are
generally not taxable to the participant until withdrawn and contributions by
the Corporation are generally deductible by the Corporation when made. At the
direction of each participant, the trustees of the 401K plan invest the assets
of the 401K plan in selected investment options. As of
August 31, 2009, the Corporation made an aggregate
of US$2,098,000 in Safe Harbor Contributions to the 401K plan. A
participant may have access to the assets of the plan under the following
limited circumstances: (i) termination of employment; (ii) permitted
withdrawals; and (iii) limited loans.
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.
Indemnification
of Directors and Executive Officers and Limitation of Liability
Our
by-laws require us, subject to the limitations provided by law, to indemnify our
present or former Directors and officers or any persons who act or acted at our
request as Directors or officers of a body corporate for all costs, losses,
charges and expenses that arose or may arise by reason of their status as
Directors or officers of us or such body corporate. A policy of
Directors’ and officers’ liability insurance is maintained by us, which insures
our Directors and officers and those of our subsidiaries against liability
incurred by, arising from or against them for certain of their acts, errors or
omissions. Accordingly, we maintain 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$169,250
from September 30, 2009 to September 30, 2010, is paid by the Corporation. The
aggregate limit of liability in respect of any and all claims is US$10 million
per year, subject to a deductible of US$250,000. A separate excess director
and officer liability policy (Chubb Executive Elite) with aggregate limit of
US$5 million provides broad form side A coverage, featuring
difference-in-conditions (DIC) drop-down coverage that fills in potential
coverage gaps that may exist under restrictive or unresponsive underlying
insurance. This specific policy provides coverage for personal directors and
officers liability if the organization fails or refuses to indemnify, or is
financially unable to do so, or is prevented by law from indemnifying and will
also respond if the primary D&O policy limit is consumed.
Board
of Directors
Our
Directors are elected at the annual meeting of shareholders for one-year terms
and serve until their successors are elected or appointed, unless they resign or
are removed earlier. Our articles of incorporation provide for a Board of
Directors of a minimum of three (3) and a maximum of twelve (12) Directors. Our
Board of Directors presently consists of six Directors. Under the Canada Business Corporations
Act, twenty-five percent of the Directors and of the members of any
committee of the Board of Directors must be resident Canadians. We have
no arrangements with any of our Directors providing for the payment of
benefits upon their termination of service as Director except for the
vesting of their respective Deferred Share Units as detailed above.
The
following table and notes set out the name of each of the individuals proposed
to be nominated at the Annual and Special Meeting of shareholders 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
|
16,139
|
36,643,000(1)
|
|
|
Pierre-Paul
Allard (2)
Independent
Director
|
Area
Vice-President, Sales
Cisco
Systems Inc. (3)
|
Pleasanton,
California,
USA
|
September
2008
|
8,000
|
-
|
|
|
Pierre
Marcouiller (4)
(5)
Independent
Director
|
Chairman
of the Board and
Chief
Executive Officer,
Camoplast
Inc. (6)
|
Magog,
Quebec,
Canada
|
May
2000
|
5,000
|
-
|
|
|
Guy
Marier (4)
(7)
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
|
|
|
David A. Thompson, Ph.D.(4)
(5)
Independent
Director
|
Executive
Consultant (8)
|
Newton,
North
Carolina,
USA
|
June
2000
|
2,100
|
-
|
|
|
André
Tremblay (5)
(9)
Independent
Director
|
President
and Chief Executive Officer,
Terrestar
Solutions Inc. (10)
|
Outremont,
Quebec,
Canada
|
May
2000
|
6,650 (11)
|
-
|
|
|
(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 and the Human Resources Committee since January
2009.
|
|
(3)
|
Cisco
Systems Inc. is a leading network equipment manufacturer in the global
telecommunications industry.
|
|
(4)
|
Member
of the Audit Committee.
|
|
(5)
|
Member
of the Human Resources Committee.
|
|
(6)
|
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.
|
|
(7)
|
Chairman
of the Human Resources Committee since October
2008.
|
|
(8)
|
Mr.
David A. Thompson has recently retired from his position as Vice-President
and Director of Technology, Corning Cable Systems. 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 science industries.
|
|
(9)
|
Chairman
of the Audit Committee.
|
|
(10)
|
Terrestar
Solutions Inc. is a leading edge provider of satellite telecommunication
services in Canada.
|
|
(11)
|
Mr.
Tremblay exercises control over this number of Subordinate Voting Shares
through 9104-5559 Quebec inc., a company controlled by Mr.
Tremblay.
|
During
the fiscal year ended August 31, 2009, the Board met a total of ten (10) times.
Each member attended all meetings except Mr. André Tremblay who was absent two
(2) times and Mr. Pierre-Paul Allard and Mr. David A. Thompson who were
absent one time each.
Committees
of the Board of Directors
Our Board
of Directors has established an audit committee, a human resources committee and
a disclosure committee.
Our audit
committee will recommend a firm to be appointed as independent auditors to audit
financial statements and to perform services related to the audit, review the
scope and results of the audit with the independent auditors, review with
management and the independent auditors our annual operating results and
consider the adequacy of the internal accounting procedures and the effect of
the procedures relating to the auditors’ independence. Further to changes to
NASDAQ corporate governance rules and Securities and Exchange rules flowing from
the adoption of the Sarbanes-Oxley Act, our audit
committee charter is being revised every financial year to ensure that we comply
with all new requirements. Accordingly, in March 2005, the Board
updated and adopted an Audit Committee Charter. A copy of this Audit Committee
Charter has been filed as Exhibit 11.6 to our fiscal year 2005 Annual Report on
Form 20-F and is also readily available from EXFO’s website
at www.EXFO.com. The audit committee revised such Charter in October 2009
but no amendment was required. The audit committee is composed of five
independent Directors: Pierre Marcouiller, Guy Marier, David A. Thompson, André
Tremblay and Mr. Pierre-Paul Allard since January 2009.
The chairperson of the audit committee is André Tremblay.
During
the fiscal year ended August 31, 2009, the Audit Committee met a total of four
(4) times and attendance was exemplary as all members attended all
meetings.
Our human
resources committee will evaluate, review and supervise our procedures with
regards to human resources and will assess the performance of our executive
officers and the chief executive officer. This committee will also review
annually the remuneration of the Directors and will recommend to the Board of
Directors general remuneration policies regarding salaries, bonuses and other
forms of remuneration for our Directors, executive officers and employees as a
whole. Finally, the human resources committee will review our organizational
structure annually and the development and maintenance of a succession plan.
Accordingly, in March 2005, the Board updated and adopted a Human Resources
Committee Charter which integrates the Compensation Committee Charter and the
Nominating and Governance Committee Charter. A copy of this Human Resources
Committee Charter has been filed as Exhibit 11.7 to our fiscal year 2005 Annual
Report on Form 20-F and is also readily available from EXFO’s website
at www.EXFO.com. The human resources committee is composed of four
independent Directors: Pierre-Paul Allard since January 2009, Pierre
Marcouiller, Guy Marier, David A. Thompson and André Tremblay. The
chairperson of the Human Resources Committee is Mr. Guy
Marier.
During
the fiscal year ended August 31, 2009, the Human Resources committee met a total
of four (4) times and all members attended all meetings, except Mr. André
Tremblay who was absent two (2) times.
The
disclosure committee is responsible for overseeing our disclosure practices.
This committee consists of the chief executive officer, the chief financial
officer, the manager of investor relations, the manager of financial reporting
and accounting as well as our legal counsel and corporate
secretary.
In
addition, in order to deal with issues arising from our implication in the IPO
class action suit, in October 2002, our Board of Directors appointed a
litigation committee composed of four of our independent Directors.
Furthermore,
our independent Directors hold regularly scheduled meetings at which
non-independent directors and members of management are not in attendance. The
independent Directors hold as many meeting, as needed, annually and any
Director may request such meeting at any time. During the fiscal year ended
August 31, 2009, three (3) meetings of independent Directors without
management occurred.
|
Employees
|
We have
fostered a corporate culture where growth and change are strongly encouraged. In
fact, employees are constantly evolving with the rapid pace of technology to
meet new challenges and realities. We believe that we possess a good
cross-section of experience and youth to handle these inevitable changes in the
industry.
As of
November 2, 2009, we had a total of 1,182 employees, up from a total of 1,205
on November 3, 2008. We have 708 employees in Canada,
primarily based in Quebec, and 474 employees based outside of Canada.
454 are involved in research and development, 337 in manufacturing, 204 in
sales and marketing, 93 in general administrative positions and
117 in communications and customer support. We have agreements with
almost all of our employees covering confidentiality and non-competition. Only
manufacturing employees based in Quebec City plants are represented by a
collective bargaining agreement, which expired in 2009. It has not been renewed
as of this day and remains effective until renewed. We have never experienced
a work stoppage. We believe that relations with our employees and
bargaining unit are good.
|
Share
Ownership
|
The
following table presents information regarding the ownership of Subordinate
Voting Shares, Exercisable “in-the-money” and “out-the-money” options and the
beneficial ownership of our share capital as at November 2, 2009 by
our Chief Executive Officer, Chief Financial Officer, our Directors, our three
other most highly compensated executive officers, our other executive officers
as a group, all of our Directors and executive officers as a group.
Each
multiple voting share is convertible at the option of the holder into one
subordinate voting share. Holders of our subordinate voting shares are entitled
to one (1) vote per share and holders of our multiple voting shares are entitled
to ten (10) votes per share.
|
Name
|
Subordinate
Voting
Shares
Owned
|
Currently
Exercisable Options Owned
as at
November 2, 2009
|
Total
Subordinate
Voting
Shares
Beneficially
Owned (3)
|
Multiple
Voting
Shares
Beneficially
Owned
(3)
|
Total
Percentage
of
Voting Power
|
||||||
|
In-the-money
(1)
|
Out-the-money
(2)
|
||||||||||
|
Number
|
Percent
|
Number
|
Percent
|
Number
|
Percent
|
Number
|
Percent
|
Number
|
Percent
|
Percent
|
|
|
Germain
Lamonde
|
16,139
|
*
|
50,000
|
3.06%
|
129,642
|
7.93%
|
195,781
|
*
|
36,643,000 (4)
|
100
|
94.20
|
|
Pierre
Plamondon
|
66,076
(5)
|
*
|
20,000
|
1.22%
|
60,976
|
3.73%
|
147,052
|
*
|
–
|
–
|
*
|
|
Pierre-Paul
Allard
|
8,000
|
*
|
–
|
*
|
–
|
*
|
8,000
|
*
|
–
|
–
|
*
|
|
Pierre
Marcouiller
|
5,000
|
*
|
12,500
|
*
|
36,382
|
2.23%
|
53,882
|
*
|
–
|
–
|
*
|
|
Guy
Marier
|
1,000
|
*
|
–
|
*
|
12,500
|
*
|
13,500
|
*
|
–
|
–
|
*
|
|
David
A. Thompson
|
2,100
|
*
|
12,500
|
*
|
30,234
|
1.85%
|
44,834
|
*
|
–
|
–
|
*
|
|
André
Tremblay
|
6,650 (6)
|
*
|
12,500
|
*
|
32,191
|
1.97%
|
51,341
|
*
|
–
|
–
|
*
|
|
Jon
Bradley
|
–
|
*
|
–
|
*
|
26,500
|
1.62%
|
26,500
|
*
|
–
|
–
|
*
|
|
Dana
Yearian
|
1,051
|
*
|
–
|
*
|
–
|
*
|
1,051
|
*
|
–
|
–
|
*
|
|
Stephen
Bull
|
38,635
|
*
|
–
|
*
|
27,428
|
1.68%
|
66,063
|
*
|
–
|
–
|
*
|
|
Other
executive
officers
as a
group
|
41,003
(7)
|
*
|
15,000
|
*
|
62,235
|
3.81%
|
118,238
|
*
|
–
|
–
|
*
|
|
All
of our
Directors
and
executive
officers
as a
group
|
185,654
|
*
|
122,500
|
7.49%
|
418,088
|
25.58%
|
726,242
|
3.09%
|
36,643,000
|
100
|
94.34
|
|
*
|
Less
than 1%.
|
|
(1)
|
“In-the-money”
options are options for which the market value of the underlying
securities is higher than the exercise price at which such securities may
be bought from the Corporation. As of November 2, 2009 the market value of
a Subordinate Voting Share was
US$3.64.
|
|
(2)
|
“Out-the-money”
options are options for which the market value of the underlying
securities is lower than the price of which such securities may be bought
from the Corporation.
|
|
(3)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Options that are currently exercisable or exercisable within sixty (60)
days as at November 2, 2009 (including options that have an exercise price
above the market price) are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person. Accordingly, DSUs and RSUs are not
included.
|
|
(4)
|
The
number of shares held by Germain Lamonde includes 1,900,000 multiple
voting shares held of record by Fiducie Germain Lamonde and 34,743,000
multiple voting shares held of record by G. Lamonde Investissements
Financiers inc.
|
|
(5)
|
The
number of shares held by Pierre Plamondon includes 6,874 subordinate
voting shares held of record by Fiducie Pierre
Plamondon.
|
|
(6)
|
The
number of subordinate voting shares held of record by André Tremblay is
held by 9104-5559 Québec Inc, a company controlled
by Mr. Tremblay.
|
|
(7)
|
The
number of shares held by Allan Firhoj includes 14,000 subordinate voting
shares held of record by his wife, Claudia
Firhoj.
|
The
following table presents information regarding stock options held as of
November 2, 2009 by our Chief Executive
Officer, Chief Financial Officer, our Directors, our three other most highly
compensated executive officers and our other executive officers as a
group.
|
Name
|
Securities
Under Options Granted (1)
(#)
|
Exercise
Price (2)
(US$/Security)
|
Expiration
Date
|
|
Germain
Lamonde
|
25,402
5,080
70,000
50,000
17,942
11,218
|
$26.00
$22.25
$9.13
$1.58
$4.51
$4.76
|
June
29, 2010
January
10, 2011
October
10, 2011
September
25, 2012
February
1, 2015
December
6, 2015
|
|
Pierre
Plamondon
|
8,700
10,000
5,000
9,240
19,000
20,000
5,383
3,653
|
$26.00
$45.94
$34.07
$22.25
$9.13
$1.58
$5.13
$4.76
|
June
29, 2010
September
13, 2010
October
11, 2010
January
10, 2011
October
10, 2011
September
25, 2012
October
26, 2014
December
6, 2015
|
|
Name
|
Securities
Under Options Granted (1)
(#)
|
Exercise
Price (2)
(US$/Security)
|
Expiration
Date
|
|
Pierre-Paul
Allard
|
−
|
−
|
−
|
|
Pierre
Marcouiller
|
2,000
400
17,966
1,037
2,479
12,500
12,500
|
$26.00
$22.25
$9.13
$12.69
$5.65
$1.58
$3.51
|
June
29, 2010
January
10, 2011
October
10, 2011
December
1, 2011
March
1, 2012
September
25, 2012
October
27, 2013
|
|
Guy
Marier
|
12,500
|
$4.65
|
March
24, 2014
|
|
David
A. Thompson
|
2,000
400
15,334
12,500
12,500
|
$26.00
$22.25
$9.13
$1.58
$3.51
|
June
29, 2010
January
10, 2011
October
10, 2011
September
25, 2012
October
27, 2013
|
|
André
Tremblay
|
2,000
400
17,291
12,500
12,500
|
$26.00
$22.25
$9.13
$1.58
$3.51
|
June
29, 2010
January
10, 2011
October
10, 2011
September
25, 2012
October
27, 2013
|
|
Jon
Bradley
|
5,000
5,000
1,000
1,500
10,000
4,000
|
$45.94
$22.25
$12.22
$3.19
$3.50
$4.51
|
September
13, 2010
January
10, 2011
January
3, 2012
January
7, 2013
December
17, 2013
February
1, 2015
|
|
Dana
Yearian
|
−
|
−
|
−
|
|
Stephen
Bull
|
900
5,000
2,930
15,000
1,795
1,803
|
$26.00
$45.94
$22.25
$9.13
$5.13
$4.76
|
June
29, 2010
September
13, 2010
January
10, 2011
October
10, 2011
October
26, 2014
December
6, 2015
|
|
Other
Executive Officers as a group
|
3,000
4,000
3,250
10,000
18,000
15,000
5,000
9,259
2,000
7,726
|
$45.94
$34.07
$22.25
$23.40
$9.13
$1.58
$3.19
$5.13
$4.51
$4.76
|
September
13, 2010
October
11, 2010
January
10, 2011
March
15, 2011
October
10, 2011
September
25, 2012
January
7, 2013
October
26, 2014
February
1, 2015
December
6, 2015
|
|
(1)
|
Underlying
securities: subordinate voting
shares
|
|
(2)
|
The
exercise price of options granted is determined based on the highest of
the closing prices of the subordinate voting shares on the Toronto Stock
Exchange and the NASDAQ National Market on the last trading day preceding
the grant date, using the noon buying rate of the Federal Reserve
Bank of New York on the grant date to convert the NASDAQ National Market
closing price to Canadian dollars,
as required.
|
The
following table presents information regarding Deferred Share Units and
Restricted Share Units held by our Chief Executive Officer, our Chief Financial
Officer, our Directors, our three other most highly compensated executive
officers, our other executive officers as a group, all of our Directors and
executive officers as a group, as at November 2, 2009.
|
Name
|
DSUs
|
RSUs
|
||||
|
Number
|
Percentage
|
Estimated
Average Value at the time of grant US$/DSU (1)
|
Number
|
Percentage
|
Fair
Value at the time of grant US$/RSU (2)
|
|
|
Germain
Lamonde
|
–
|
–
|
–
|
4,843 (3)
|
0.32%
|
4.69
|
|
–
|
–
|
–
|
15,105
(4)
|
0.99%
|
4.76
|
|
|
–
|
–
|
–
|
23,826
(5)
|
1.56%
|
6.02
|
|
|
–
|
–
|
–
|
29,910
(6)
|
1.95%
|
6.28
|
|
|
–
|
–
|
–
|
65,254
(7)
|
4.26%
|
2.36
|
|
|
–
|
–
|
–
|
66,081
(8)
|
4.32%
|
3.74
|
|
|
Pierre
Plamondon
|
–
|
–
|
–
|
1,453 (3)
|
0.09%
|
4.69
|
|
–
|
–
|
–
|
3,000 (9)
|
0.20%
|
4.69
|
|
|
–
|
–
|
–
|
4,919 (4)
|
0.32%
|
4.76
|
|
|
–
|
–
|
–
|
7,924 (5)
|
0.52%
|
6.02
|
|
|
–
|
–
|
–
|
3,000 (10)
|
0.20%
|
6.02
|
|
|
–
|
–
|
–
|
9,637 (6)
|
0.63%
|
6.28
|
|
|
–
|
–
|
–
|
20,644
(7)
|
1.35%
|
2.36
|
|
|
–
|
–
|
–
|
20,339
(11)
|
1.33%
|
2.36
|
|
|
–
|
–
|
–
|
16,794
(8)
|
1.10%
|
3.74
|
|
|
Pierre-Paul
Allard
|
7,866 (12)
|
6.8%
|
4.62
|
–
|
–
|
–
|
|
Pierre
Marcouiller
|
23,778 (12)
|
20.7%
|
4.62
|
–
|
–
|
–
|
|
Guy
Marier
|
23,778 (12)
|
20.7%
|
4.62
|
–
|
–
|
–
|
|
David
A. Thompson
|
26,963 (12)
|
23.5%
|
4.62
|
–
|
–
|
–
|
|
André
Tremblay
|
32,539 (12)
|
28.3%
|
4.62
|
–
|
–
|
–
|
|
Jon
Bradley
|
–
|
–
|
–
|
666 (13)
|
0.04%
|
4.51
|
|
–
|
–
|
–
|
1,250 (14)
|
0.08%
|
5.59
|
|
|
–
|
–
|
–
|
6,122 (6)
|
0.40%
|
6.28
|
|
|
–
|
–
|
–
|
16,826
(7)
|
1.10%
|
2.36
|
|
|
–
|
–
|
–
|
25,416
(11)
|
1.66%
|
2.36
|
|
|
–
|
–
|
–
|
10,367
(8)
|
0.68%
|
3.74
|
|
|
Dana
Yearian
|
–
|
–
|
–
|
3,333 (15)
|
0.22%
|
5.16
|
|
–
|
–
|
–
|
6,246 (5)
|
0.41%
|
6.02
|
|
|
–
|
–
|
–
|
7,225 (6)
|
0.47%
|
6.28
|
|
|
–
|
–
|
–
|
23,072
(7)
|
1.51%
|
2.36
|
|
|
–
|
–
|
–
|
25,424
(11)
|
1.66%
|
2.36
|
|
|
–
|
–
|
–
|
15,241
(8)
|
1.00%
|
3.74
|
|
|
Stephen
Bull
|
–
|
–
|
–
|
968 (3)
|
0.06%
|
4.69
|
|
–
|
–
|
–
|
3,000 (9)
|
0.20%
|
4.69
|
|
|
–
|
–
|
–
|
3,237 (4)
|
0.21%
|
4.76
|
|
|
–
|
–
|
–
|
5,551 (5)
|
0.36%
|
6.02
|
|
|
–
|
–
|
–
|
6,667 (10)
|
0.44%
|
6.02
|
|
|
–
|
–
|
–
|
7,340 (6)
|
0.48%
|
6.28
|
|
|
–
|
–
|
–
|
17,756
(7)
|
1.16%
|
2.36
|
|
|
–
|
–
|
–
|
13,559
(11)
|
0.89%
|
2.36
|
|
|
–
|
–
|
–
|
14,061
(8)
|
0.92%
|
3.74
|
|
|
Other
executive officers as a group
|
–
|
–
|
–
|
3,273 (3)
|
0.21%
|
4.69
|
|
–
|
–
|
–
|
3,150 (9)
|
0.21%
|
4.69
|
|
|
–
|
–
|
–
|
11,752
(4)
|
0.77%
|
4.76
|
|
|
–
|
–
|
–
|
375 (14)
|
0.02%
|
5.59
|
|
|
–
|
–
|
–
|
20,370
(5)
|
1.33%
|
6.02
|
|
|
–
|
–
|
–
|
5,335 (10)
|
0.35%
|
6.02
|
|
|
–
|
–
|
–
|
15,033
(16)
|
0.98%
|
6.42
|
|
|
–
|
–
|
–
|
1,750 (17)
|
0.11%
|
6.42
|
|
|
–
|
–
|
–
|
21,585
(6)
|
1.41%
|
6.28
|
|
|
–
|
–
|
–
|
1,750 (18)
|
0.11%
|
4.16
|
|
|
–
|
–
|
–
|
62,945
(7)
|
4.11%
|
2.36
|
|
|
–
|
–
|
–
|
40,677
(11)
|
2.66%
|
2.36
|
|
|
–
|
–
|
–
|
5,000 (19)
|
0.33%
|
3.22
|
|
|
–
|
–
|
–
|
52,142
(8)
|
3.41%
|
3.74
|
|
|
Name
|
DSUs
|
RSUs
|
|||||
|
Number
|
Percentage
|
Estimated
Average Value at the time of grant US$/DSU (1)
|
Number
|
Percentage
|
Fair
Value at the time of grant US$/RSU (2)
|
||
|
All
of the directors and executive officers as a group
|
–
|
–
|
–
|
10,537 (3)
|
0.69%
|
4.69
|
|
|
–
|
–
|
–
|
9,150 (9)
|
0.60%
|
4.69
|
||
|
–
|
–
|
–
|
666 (13)
|
0.04%
|
4.51
|
||
|
–
|
–
|
–
|
35,013 (4)
|
2.29%
|
4.76
|
||
|
–
|
–
|
–
|
1,625 (14)
|
0.11%
|
5.59
|
||
|
–
|
–
|
–
|
3,333 (15)
|
0.22%
|
5.16
|
||
|
–
|
–
|
–
|
63,917 (5)
|
4.18%
|
6.02
|
||
|
–
|
–
|
–
|
15,002 (10)
|
0.98%
|
6.02
|
||
|
–
|
–
|
–
|
15,033 (16)
|
0.98%
|
6.42
|
||
|
–
|
–
|
–
|
1,750 (17)
|
0.11%
|
6.42
|
||
|
–
|
–
|
–
|
81,819 (6)
|
5.35%
|
6.28
|
||
|
–
|
–
|
–
|
1,750 (18)
|
0.11%
|
4.16
|
||
|
–
|
–
|
–
|
206,497
(7)
|
13.49%
|
2.36
|
||
|
–
|
–
|
–
|
125,415
(11)
|
8.19%
|
2.36
|
||
|
–
|
–
|
–
|
5,000 (19)
|
0.33%
|
3.22
|
||
|
–
|
–
|
–
|
174,686
(8)
|
11.41%
|
3.74
|
||
|
114,924
|
100%
|
4.62
|
751,193
|
49.08%
|
3.79
|
||
|
(1)
|
The
estimated average value at the time of grant of a DSU is the average of
the estimated value at the time of grant of a DSU which 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 (for grants of DSUs prior to January
1, 2009) or the Bank of Canada (for grants of DSUs on or after January 1,
2009) 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.
|
|
(2)
|
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.
|
|
(3)
|
Those
RSUs will vest on the fifth anniversary date of the grant in January 2005
but are subject to early vesting on the third and fourth anniversary date
of the grant on the attainment of performance objectives as determined by
the Board of Directors. 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.
|
|
(4)
|
Those
RSUs will vest on the fifth anniversary date of the grant in December 2005
but are subject to early vesting on the third and fourth anniversary date
of the grant on the attainment of performance objectives as determined by
the Board of Directors. 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 will 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 as determined by
the Board of Directors. 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.
|
|
(6)
|
Those
RSUs will vest on the fifth anniversary date of the grant in October 2007
but are subject to early vesting on the third and fourth anniversary date
of the grant on the attainment of performance objectives as determined by
the Board of Directors. 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.
|
|
(7)
|
Those
RSUs will vest on the fifth anniversary date of the grant in October 2008
but are subject to early vesting on the third and fourth anniversary date
of the grant on the attainment of performance objectives as determined by
the Board of Directors. 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.
|
|
(8)
|
Those
RSUs will vest on the fifth anniversary date of the grant in October 2009
but are subject to early vesting on the third and fourth anniversary date
of the grant on the attainment of performance objectives as determined by
the Board of Directors. 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.
|
|
(9)
|
Those
RSUs will vest at a rate of 55%, 35% and 10%, on the third, fourth and
fifth anniversary dates of the grant in
January 2005.
|
|
(10)
|
Those
RSUs will vest at a rate of 1/3 annually commencing on the third
anniversary date of the grant in
October 2006.
|
|
(11)
|
Those
RSUs will vest on the fifth anniversary date of the grant in October 2008
but are subject to early vesting on the third anniversary date of the
grant on the attainment of performance objectives as determined by the
Board of Directors. Accordingly, subject to the attainment
of performance objectives, the early vesting is up to 100% of the
units on the third anniversary date of the
grant.
|
|
(12)
|
Those
DSUs will vest at the time Director ceases to be a member of the Board of
the Corporation.
|
|
(13)
|
Those
RSUs will vest at a rate of 1/3 annually commencing on the third
anniversary date of the grant in February
2005.
|
|
(14)
|
Those
RSUs will vest at a rate of 1/2 annually commencing on the third
anniversary date of the grant in
February 2006.
|
|
(15)
|
Those
RSUs will vest at a rate of 1/3 annually commencing on the third
anniversary date of the grant in August
2006.
|
|
(16)
|
Those
RSUs will vest at a rate of 1/3 annually commencing on the third
anniversary date of the grant in January
2007.
|
|
(17)
|
Those
RSUs will vest at a rate of 1/2 annually commencing on the third
anniversary date of the grant in January
2007.
|
|
(18)
|
Those
RSUs will vest at a rate of 1/2 annually commencing on the third
anniversary date of the grant in January
2008.
|
|
(19)
|
Those
RSUs will vest at a rate of 1/2 annually commencing on the third
anniversary date of the grant in January
2009.
|
|
|
Escrowed
Securities
|
The following table presents
information regarding the number of securities of each class of the Corporation
held, to our knowledge as at November 2, 2009, in escrow and the percentage
outstanding securities of that class.
|
Designation
of Class
|
Number
of Securities held in escrow
|
Percentage
of Class
|
||
|
Subordinate
Voting Shares
|
nil
|
nil
|
||
|
Multiple
Voting Shares
|
nil
|
nil
|
The
following table presents information regarding the beneficial ownership of our
share capital as at November 2, 2009 by persons or groups of
affiliated persons known by us to own more than 5% of our voting
shares.
|
Multiple
Voting Shares Beneficially Owned (1)
|
Subordinate
Voting Shares Beneficially Owned (1)
|
Total
Percentage of
Voting
Power
|
|||
|
Name
|
Number
|
Percent
|
Number
|
Percent
|
Percent
|
|
Germain
Lamonde (2)
|
36,643,000
|
100%
|
192,977
|
0.84%
|
94.16%
|
|
Fiducie
Germain Lamonde (3)
|
1,900,000
|
5%
|
Nil
|
Nil
|
4.88%
|
|
G.
Lamonde Investissements Financiers inc. (4)
|
34,743,000 | 95% | Nil | Nil | 89.27% |
|
Renaissance
Technologies LLC
|
Nil
|
Nil
|
1,379,200
|
5.72%
|
*
|
| * |
Less
than 1%
|
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Options that are currently exercisable (including options that have an
exercise price above the market price) are deemed to be outstanding and to
be beneficially owned by the person holding such options for the purpose
of computing the percentage ownership of such person, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
|
|
(2)
|
The
number of shares held by Germain Lamonde includes 1,900,000 multiple
voting shares held of record by Fiducie Germain Lamonde and 34,743,000
multiple voting shares held of record by G. Lamonde Investissements
Financiers inc.
|
|
(3)
|
Fiducie
Germain Lamonde is a family trust for the benefit of Mr. Lamonde and
members of his family.
|
|
(4)
|
G.
Lamonde Investissements Financiers inc. is a company controlled by Mr.
Lamonde.
|
|
|
Each
multiple voting share is convertible at the option of the holder into one
subordinate voting share. Holders of our subordinate voting shares are entitled
to one vote per share and holders of our multiple voting shares are entitled to
ten votes per share.
As at
November 17, 2009, 22,749,965 subordinate voting shares were outstanding.
Approximately 98.1% (22,332,622) of our subordinate voting shares were held
in bearer form and the remainder (417,343 subordinate voting shares) was held
by 182 record holders. As at November 17, 2009, we believe
approximately 76.72% of our outstanding subordinate voting shares were held in
the United States.
Indebtedness
of Directors, Executive Officers and Employees
Until
February 2007, we have guaranteed the repayment of a loan granted to an employee
by a financial institution for the purchase of our Class “F” shares that were
converted into subordinate voting shares immediately prior to our initial public
offering. As of August 31, 2006, the total principal amount guaranteed by us
was $37,400.
Except as
disclosed in this section, none of our directors, executive officers, associates
or affiliates had any material interest in any transaction with us during the
past three years or in any proposed transaction which has materially affected or
could materially affect us.
See Item
18, “Financial Statements” for certain other information required by this
item.
Valuation
and qualifying accounts are as follows (in thousands of
US dollars):
Allowance
for doubtful accounts
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
– Beginning of year
|
$ | 305 | $ | 206 | $ | 451 | ||||||
|
Addition
charged to earnings
|
979 | 204 | 42 | |||||||||
|
Write-offs
of uncollectible accounts
|
(45 | ) | (53 | ) | (271 | ) | ||||||
|
Recovery
of uncollectible accounts
|
(19 | ) | (52 | ) | (16 | ) | ||||||
|
Balance
– End of year
|
$ | 1,220 | $ | 305 | $ | 206 | ||||||
Valuation
allowance on future income tax assets
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
– Beginning of year
|
$ | 15,529 | $ | 12,492 | $ | 38,543 | ||||||
|
Change
in valuation allowance
|
412 | (4,927 | ) | (28,646 | ) | |||||||
|
Business
combination
|
− | 8,195 | − | |||||||||
|
Foreign
currency translation adjustment
|
(483 | ) | (231 | ) | 2,595 | |||||||
|
Balance
– End of year
|
$ | 15,458 | $ | 15,529 | $ | 12,492 | ||||||
Export
Sales
Export
and domestic sales in thousands of US dollars and as a percentage of total sales
are as follows:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Export
Sales
|
$ | 154,198 | 89 | % | $ | 169,571 | 92 | % | $ | 143,315 | 94 | % | ||||||||||||
|
Domestic
Sales
|
18,680 | 11 | 14,219 | 8 | 9,619 | 6 | ||||||||||||||||||
| $ | 172,878 | 100 | % | $ | 183,790 | 100 | % | $ | 152,934 | 100 | % | |||||||||||||
Legal
Proceedings
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.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court 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.
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’s 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, on
September 27, 2007, again moved for class certification.
On November 12, 2007, certain defendants in the focus cases moved
to dismiss the second consolidated amended class action complaints.
On March 26, 2008, the district court denied the motions to
dismiss, except as to Section 11 claims raised by those plaintiffs who sold
their securities for a price in excess of the initial offering price and those
who purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008.
On
April 2, 2009, a stipulation and agreement of settlement between the
plaintiffs, issuer defendants and underwriter defendants was submitted to the
Court for preliminary approval. The Court granted the plaintiffs’ motion for
preliminary approval and preliminarily certified the settlement classes
on June 10, 2009. The settlement fairness hearing was held on
September 10, 2009. On October 6, 2009, the Court entered an opinion granting
final approval to the settlement and directing that the Clerk of the Court close
these actions. Notices of appeal of the opinion granting final approval have
been filed. Given that the settlement remains subject to appeal as of the date
of issuance of our financial statements, the ultimate outcome of the
contingency is uncertain. However, based on the settlement approved on
October 6, 2009, and the related insurance against such claims, we have
determined the impact to our financial position and results of operations
as at and for the year ended August 31, 2009
to be immaterial.
There are
no other legal or arbitration proceedings pending or threatened of which we are
aware which may have or have had a significant effect on our financial
position.
Dividend
Policy
We do not
currently anticipate paying dividends for at least the three next years. Our
current intention is to reinvest any earnings in our business long-term growth.
Any future determination by us to pay dividends will be at the discretion of our
Board of Directors and in accordance with the terms and conditions of any
outstanding indebtedness and will depend on our financial condition, results of
operations, capital requirements and such other functions as our Board of
Directors considers relevant.
No
significant changes occurred since the date of our annual consolidated financial
statements included elsewhere in this annual report.
Not
Applicable, except for Item 9A (4) and Item 9C.
|
Offer
and Listing Details
|
|
NASDAQ
(US$)
|
TSX
(CA$)
|
|||
|
High
|
Low
|
High
|
Low
|
|
|
September
1, 2004 to August 31, 2005
|
5.51
|
3.92
|
6.90
|
4.92
|
|
September
1, 2005 to August 31, 2006
|
8.69
|
4.32
|
9.60
|
5.15
|
|
September
1, 2006 to August 31, 2007
|
7.57
|
4.89
|
8.85
|
5.55
|
|
September
1, 2007 to August 31, 2008
|
7.28
|
3.92
|
7.35
|
3.97
|
|
September
1, 2008 to August 31, 2009
|
4.73
|
2.13
|
5.16
|
2.50
|
|
2008
1st Quarter
|
7.28
|
5.10
|
7.35
|
5.01
|
|
2008
2nd Quarter
|
5.50
|
3.92
|
5.54
|
3.97
|
|
2008
3rd Quarter
|
6.14
|
4.06
|
6.00
|
4.04
|
|
2008
4th Quarter
|
5.47
|
3.96
|
5.59
|
4.15
|
|
2009
1st Quarter
|
4.57
|
2.13
|
4.86
|
2.50
|
|
2009
2nd Quarter
|
3.96
|
2.42
|
4.95
|
3.00
|
|
2009
3rd Quarter
|
4.73
|
2.48
|
5.16
|
3.23
|
|
2009
4th Quarter
|
4.66
|
2.74
|
5.08
|
3.26
|
|
2009
May
|
4.73
|
3.84
|
5.16
|
4.55
|
|
2009
June
|
4.66
|
3.14
|
5.08
|
3.70
|
|
2009
July
|
3.36
|
2.74
|
3.67
|
3.26
|
|
2009
August
|
3.18
|
2.99
|
3.45
|
3.29
|
|
2009
September
|
3.85
|
2.81
|
4.13
|
3.10
|
|
2009
October
|
3.79
|
3.35
|
4.00
|
3.57
|
|
2009
November
|
3.78
|
3.64
|
3.99
|
3.94
|
|
(until
November 17)
|
||||
|
Markets
|
Our
subordinate voting shares have been quoted on the NASDAQ National Market under
the symbol EXFO and listed on The Toronto Stock Exchange under the symbol EXF
since our initial public offering on June 29, 2000. Prior to that time,
there was no public market for our subordinate voting shares. The table above
sets forth, for the periods indicated, the high and low closing sales prices per
subordinate voting share as reported on the NASDAQ National Market and the
Toronto Stock Exchange.
On
November 17, 2009, the last reported sale price for our subordinate voting
shares on the NASDAQ National Market was US$3.75 per share and the last reported
sale price for our subordinate voting shares on the Toronto Stock Exchange was
CA$3.98 per share.
Not
Applicable
Incorporated
by reference to our registration statement on Form F-1 dated
June 9, 2000 (File No. 333-38956) and its amendment filed as
Exhibit 10.1 to our fiscal year 2009 Annual Report on Form 20-F.
|
Material
Contracts
|
Except as
otherwise disclosed in this annual report and our financial statements and notes
included elsewhere in this annual report, we have no other material
contracts.
|
Exchange
Controls
|
Subject
to the following paragraph, there is no law or governmental decree or regulation
in Canada that restricts the export or import of capital, or affects the
remittance of dividends, interest or other payments to non-resident holders of
our subordinate voting shares, other than withholding tax
requirements.
There is
no limitation imposed by Canadian law or by our articles of incorporation or our
other charter documents on the right of a non-resident to hold or vote
subordinate voting shares, other than as provided by the Investment Canada Act, the
North American Free Trade
Agreement Implementation Act (Canada) and the World Trade Organization Agreement
Implementation Act. The Investment Canada Act
requires notification and, in certain cases, advance review and approval
by the Government of Canada of an investment to establish a new Canadian
business by a non-Canadian or of the acquisition by a “non-Canadian” of
“control” of a “Canadian business”, all as defined in the Investment Canada Act.
Generally, the threshold for review will be higher in monetary terms for
a member of the World Trade Organization or North American Free Trade
Agreement.
|
Taxation
|
United
States Taxation
The
information set forth below under the caption “United States Taxation” is a
summary of the material U.S. federal income tax consequences of the ownership
and disposition of subordinate voting shares by a U.S. Holder, as
defined below. These discussions are not a complete analysis or listing of all
of the possible tax consequences of such transactions and do not address all tax
considerations that may be relevant to particular holders in light of their
personal circumstances or to persons that are subject to special tax rules. In
particular, the information set forth under the caption “United States Taxation”
deals only with U.S. Holders that hold subordinate voting shares as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the “Code”), and who do not at any time own individually, nor
are treated as owning, 10% or more of the total combined voting power of all
classes of our stock entitled to vote. In addition, this description of U.S. tax
consequences does not address the tax treatment of special classes of U.S.
Holders, such as financial institutions, regulated investment companies, traders
in securities who elect to mark-to-market their securities, tax-exempt entities,
insurance companies, partnerships, persons holding subordinate voting shares as
part of a hedging, integrated or conversion transaction or as part of a
“straddle,” U.S. expatriates, persons subject to the alternative minimum tax,
persons who acquired their subordinate voting shares through the exercise or
cancellation of employee stock options or otherwise as compensation for
services, dealers or traders in securities or currencies and holders whose
“functional currency” is not the U.S. dollar. This summary does not address U.S.
estate and gift tax consequences or tax consequences under any state and local
tax laws or non-U.S. tax laws.
As used
in this section, the term “U.S. Holder” means a beneficial owner of subordinate
voting shares that is for U.S. federal income tax purposes:
|
|
(a)
|
an
individual citizen or resident of the United
States;
|
|
|
(b)
|
a
corporation created or organized under the laws of the United States or
any state thereof and the District of
Columbia;
|
|
|
(c)
|
an
estate the income of which is subject to United States federal income
taxation regardless of its source;
|
|
|
(d)
|
a
trust if (1) a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons as
described in Section 7701 (a) (30) of the Code have authority to control
all substantial decisions of the trust or (2) the trust has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person; or
|
|
|
(e)
|
any
other person whose worldwide income or gain is otherwise subject to U.S.
federal income taxation on a net income
basis;
|
If a
partnership or other flow-through entity holds subordinate voting shares, the
U.S. federal income tax treatment of a partner will generally depend upon the
status of the partner or other owner and upon the activities of the partnership
or other flow-through entity. If you are a partner of a partnership
holding subordinate voting shares, you should consult your tax
advisor.
Holders
of subordinate voting shares who are not U.S. Holders, sometimes referred to as
“Non-U.S. Holders”, should also consult their own tax advisors, particularly as
to the applicability of any tax treaty.
The
following discussion is based upon:
|
·
|
U.S.
judicial decisions;
|
|
·
|
administrative
pronouncements;
|
|
·
|
existing
and proposed Treasury regulations;
and
|
|
·
|
the
Canada – U.S. Income Tax Treaty.
|
Any of
the above is subject to change, possibly with retroactive effect, so as to
result in U.S. federal income tax consequences different from those
discussed below. We have not requested, and will not request, a ruling from the
U.S. Internal Revenue Service (the “IRS”) with respect to any of the U.S.
federal income tax consequences described below, and as a result, there can be
no assurance that the IRS will not disagree with or challenge any of the
conclusions we have reached and describe here.
The
following discussion is for general information only and is not intended to be,
nor should it be construed to be, legal or tax advice to any holder of
subordinate voting shares and no opinion or representation with respect to the
U.S. federal income tax consequences to any holder is made. Holders
of subordinate voting shares are urged to consult their tax advisors as to the
particular consequences to them under U.S. federal, state, local and applicable
non-U.S. tax laws of the acquisition, ownership and disposition of subordinate
voting shares.
Dividends
Subject
to the discussion of passive foreign investment companies below, the gross
amount of any distribution paid by us to a U.S. Holder will generally be subject
to U.S. federal income tax as foreign source dividend income to the extent paid
out of our current or accumulated earnings and profits, as determined under
U.S. federal income tax principles. Such income will be includable in the
gross income of a U.S. Holder on the day received by the U.S.
Holder. The amount of any distribution of property other than cash
will be the fair market value of such property on the date of the distribution.
In the case of a taxable corporate U.S. Holder, such dividends will be taxable
as ordinary income and will not be eligible for the corporate dividends received
deduction, which is generally allowed to U.S. corporate shareholders on
dividends received from a domestic corporation. In the case of a non-corporate
U.S. Holder, including individuals, such dividends should generally be eligible
for a maximum tax rate of 15% for dividends received before January 1,
2011, provided such holder holds the subordinate voting shares for at least 60
days and certain other conditions are satisfied, including, as we believe to be
the case, that we are not a “passive foreign investment company”. To the extent
that an amount received by a U.S. Holder exceeds such holder’s allocable
share of our current and accumulated earnings and profits, such excess will be
applied first to reduce such U.S. Holder’s tax basis in his subordinate voting
shares, thereby increasing the amount of gain or decreasing the amount of loss
recognized on a subsequent disposition of the subordinate voting shares. Then,
to the extent such distribution exceeds such U.S. Holder’s tax basis, it will be
treated as capital gain. We do not currently maintain calculations of our
earnings and profits for U.S. federal income tax purposes.
The gross
amount of distributions paid in Canadian dollars, or any successor or other
foreign currency, will be included in the income of such U.S. Holder in a U.S.
dollar amount calculated by reference to the spot exchange rate in effect on the
day the distributions are paid regardless of whether the payment is in fact
converted into U.S. dollars. If the Canadian dollars, or any
successor or other foreign currency, are converted into U.S. dollars on the date
of the payment, the U.S. Holder should not be required to recognize any foreign
currency gain or loss with respect to the receipt of Canadian dollars as
distributions. The U.S. Holder will have a basis in any Canadian dollars or
other foreign currency distributed equal to their U.S. dollar value on the
payment date. If, instead, the Canadian dollars are converted at a
later date, any currency gains or losses resulting from the conversion of the
Canadian dollars will be treated as U.S. source ordinary income or loss.
U.S. Holders are urged to consult their own tax advisors concerning the U.S. tax
consequences of acquiring, holding and disposing of Canadian
dollars.
A U.S.
Holder may be entitled to deduct, or claim a foreign tax credit for, Canadian
taxes that are withheld on dividends received by the U.S. Holder, subject to
applicable limitations in the Code. The limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes of income. For
this purpose, such dividends should generally constitute foreign source “passive
category income”, or, in the case of certain U.S. Holders, “general
category income”. The rules governing the foreign tax credit are complex, and
additional limitations on the credit apply to individuals receiving dividends
from non-U.S. corporations if the dividends are eligible for the 15% maximum tax
rate on dividends described above. U.S. Holders are urged to
consult their tax advisors regarding the availability of the foreign tax credit
under their particular circumstances.
A
Non-U.S. Holder of subordinate voting shares generally will not be subject to
U.S. federal income or withholding tax on dividends received on
subordinate voting shares unless such income is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business in the United
States.
Sale
or Exchange
A U.S.
Holder’s initial tax basis in the subordinate voting shares will generally be
cost to the holder. A U.S. Holder’s adjusted tax basis in the
subordinate voting shares will generally be the same as cost, but may differ for
various reasons including the receipt by such holder of a distribution that was
not made up wholly of earnings and profits as described above under the heading
“Dividends.” Subject to the discussion of passive foreign investment companies
below, gain or loss realized by a U.S. Holder on the sale or other disposition
of subordinate voting shares will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference (if any) between the
U.S. Holder’s adjusted tax basis (determined in U.S. dollars) in the
subordinate voting shares and the U.S. dollar value of the amount realized on
the disposition of such subordinate voting shares. Capital gains of
non-corporate U.S. Holders, including individuals, derived with respect to a
sale, exchange or other disposition prior to January 1, 2011 of subordinate
voting shares held for more than one year are subject to a maximum federal
income tax rate of 15%. The deductibility of capital losses is subject to
limitations. In the case of a non-corporate U.S. Holder, the federal tax
rate applicable to capital gains will depend upon:
|
·
|
the
holder’s holding period for the subordinate voting shares, with a
preferential rate available for subordinate voting shares held for more
than one year; and
|
|
·
|
the
holder’s marginal tax rate for ordinary
income.
|
Any gain
realized will generally be treated as U.S. source gain, and loss realized by
a U.S. Holder generally also will be treated as from sources within the
United States.
The
ability of a U.S. Holder to utilize foreign taxes as a credit to offset U.S.
taxes is subject to complex limitations and conditions. The consequences of the
separate limitation calculation will depend upon the nature and sources of each
U.S. Holder’s income and the deductions allocable thereto. Alternatively, a
U.S. Holder may elect to claim all foreign taxes paid as an itemized deduction
in lieu of claiming a foreign tax credit. A deduction does not reduce U.S. tax
on a dollar-for-dollar basis like a tax credit, but the availability of the
deduction is not subject to the same conditions and limitations applicable to
foreign tax credits.
If a U.S.
Holder receives any foreign currency on the sale of subordinate voting shares,
such U.S. Holder may recognize ordinary income or loss as a result of currency
fluctuations between the date of the sale of subordinate voting shares and the
date the sale proceeds are converted into U.S. dollars.
A
Non-U.S. Holder of subordinate voting shares generally will not be subject to
U.S. federal income or withholding tax on any gain realized on the sale or
exchange of such subordinate voting shares unless:
|
·
|
such
gain is effectively connected with the conduct by such Non-U.S. Holder of
a trade or business in the United States;
or
|
|
·
|
in
the case of any gain realized by an individual Non-U.S. Holder, such
Non-U.S. Holder is present in the United States for 183 days or more
in the taxable year of such sale and certain other conditions are
met.
|
Passive
Foreign Investment Company
We
believe that our subordinate voting shares should not currently be treated as
stock of a passive foreign investment company for United States federal income
tax purposes, but this conclusion is a factual determination made annually and
thus may be subject to change based on future operations as well as the
composition and valuation of our assets. In particular, a significant
portion of our gross assets are comprised of cash and short-term investments,
which the PFIC rules treat as passive without regard to the purpose for which we
hold those assets. If the proportion of these passive assets were to
increase relative to the fair market value of our other assets, we may be
treated as a passive foreign investment company. In general, we will be a
passive foreign investment company with respect to a U.S. Holder if, for any
taxable year in which the U.S. Holder holds our subordinate voting shares,
either:
|
·
|
at
least 75% of our gross income for the taxable year is passive income;
or
|
|
·
|
at
least 50% of the average value of our assets is attributable to assets
that produce or are held for the production of passive
income.
|
For this
purpose, passive income includes, among other things, income such
as:
|
·
|
dividends;
|
|
·
|
interest;
|
|
·
|
rents
or royalties, other than certain rents or royalties derived from the
active conduct of trade or
business;
|
|
·
|
annuities;
and
|
|
·
|
gains
from assets that produce passive
income.
|
If a
non-U.S. corporation owns at least 25% by value of the stock of another
corporation, the non-U.S. corporation is treated for purposes of the passive
foreign investment company tests as owning its proportionate share of the assets
of the other corporation and as receiving directly its proportionate share of
the other corporation’s income.
If we are
treated as a passive foreign investment company, a U.S. Holder that did not make
a qualified electing fund election, if available, or a mark-to-market election,
as described below, would be subject to special rules with respect
to:
|
·
|
any
gain realized on the sale or other disposition of subordinate voting
shares; and
|
|
·
|
any
“excess distribution” by us to the U.S.
Holder.
|
Generally,
“excess distributions” are any distributions to the U.S. Holder in respect of
the subordinate voting shares during a single taxable year that are greater than
125% of the average annual distributions received by the U.S. Holder in respect
of the subordinate voting shares during the three preceding taxable years or, if
shorter, the U.S. Holder’s holding period for the subordinate voting
shares.
Under the
passive foreign investment company rules,
|
·
|
the
gain or excess distribution would be allocated ratably over the U.S.
Holder’s holding period for the subordinate voting
shares;
|
|
·
|
the
amount allocated to the taxable year in which the gain or excess
distribution was realized and to taxable years prior to the first year in
which we were classified as a PFIC would be taxable as ordinary income;
and
|
|
·
|
the
amount allocated to each other prior year would be subject to tax as
ordinary income at the highest tax rate in effect for that year, and the
interest charge generally applicable to underpayments of tax would be
imposed in respect of the tax attributable to each such
year.
|
A U.S.
Holder owning actually or constructively “marketable stock” of a passive foreign
investment company may be able to avoid the imposition of the passive foreign
investment company tax rules described above by making a mark-to-market
election. Generally, pursuant to this election, a U.S. Holder would include in
ordinary income or, subject to the following sentence, loss, for each taxable
year during which such stock is held, an amount equal to the difference as of
the close of the taxable year between the fair market value of its stock and its
adjusted tax basis in such stock. Any mark-to-market loss is treated
as an ordinary deduction, but only to the extent of the ordinary income that the
U.S. Holder has included pursuant to the election in prior taxable
years. The electing U.S. Holder’s basis in its stock would be
adjusted to reflect any of these income or loss amounts. Holders
desiring to make the mark-to-market election should consult their tax advisors
with respect to the application and effect of making such election.
In the
case of a U.S. Holder who does not make a mark-to-market election, the special
passive foreign investment company tax rules described above will not apply to
such U.S. Holder if the U.S. Holder makes an election to have us treated as
a qualified electing fund and we provide certain required information to
holders. For a U.S. Holder to make a qualified electing fund election, we
would have to satisfy certain reporting requirements. We have not determined
whether we will undertake the necessary measures to be able to satisfy such
requirements in the event that we were treated as a passive foreign investment
company.
A U.S.
Holder that makes a qualified electing fund election will be currently taxable
on its pro rata share of our ordinary earnings and net capital gain, at ordinary
income and capital gains rates, respectively, for each of our taxable years,
regardless of whether or not distributions were received. The U.S. Holder’s
basis in the subordinate voting shares will be increased to reflect taxed but
undistributed income. Distributions of income that had previously been taxed
will result in a corresponding reduction of basis in the subordinate voting
shares and will not be taxed again as a distribution to the U.S. Holder. U.S.
Holders desiring to make a qualified electing fund election should consult their
tax advisors with respect to the advisability of making such
election.
United
States Backup Withholding and Information Reporting
A U.S.
Holder will generally be subject to information reporting with respect to
dividends paid on, or proceeds of the sale or other disposition of, our
subordinate voting shares that are paid within the United States or through some
U.S. related financial intermediaries to U.S. Holders, unless the U.S. Holder is
a corporation or comes within certain other categories of exempt recipients.
A U.S. Holder that is not an exempt recipient will generally be subject to
backup withholding with respect to the proceeds from the sale or the disposition
of, or with respect to dividends on, subordinate voting shares unless the
U.S. Holder timely provides a taxpayer identification number and complies
with the other applicable requirements of the backup withholding rules. A U.S
Holder who fails to provide a correct taxpayer identification number may be
subject to penalties imposed by the United States Internal Revenue
Service.
Non-U.S.
Holders will generally be subject to information reporting and possible backup
withholding with respect to the proceeds of the sale or other disposition of
subordinate voting shares effected within the United States, unless the holder
certifies to its foreign status or otherwise establishes an exemption and the
broker does not have actual knowledge or reason to know that the holder is a
U.S. Holder. Payments of dividends on or proceeds from the sale of
subordinate voting shares within the United States by a payor within the United
States to a non-exempt U.S. or Non-U.S. Holder will be subject to backup
withholding if such holder fails to provide appropriate certification. In the
case of such payments by a payor within the United States to a foreign
partnership other than a foreign partnership that qualifies as a
“withholding foreign partnership” within the meaning of such Treasury
regulations, the partners of such partnership will be required to provide the
certification discussed above in order to establish an exemption from backup
withholding tax and information reporting requirements.
Backup
withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a refund or credit against a
holder’s U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
Canadian
Federal Income Tax Considerations
The
following is a summary of the material Canadian federal income tax
considerations generally applicable to a U.S. person who holds
subordinate voting shares and who, for the purposes of the Income Tax Act (Canada) (the
“ITA”), and the Canada-United
States Income Tax Convention (1980) (the “Convention”), as applicable and
at all relevant times:
|
·
|
is
resident in the United States and not resident in
Canada,
|
|
·
|
holds
the subordinate voting shares as capital
property,
|
|
·
|
does
not have a “permanent establishment” or “fixed base” in Canada, as defined
in the Convention; and
|
|
·
|
deals
at arm’s length with us. Special rules, which are not discussed below, may
apply to “financial institutions”, as defined in the ITA, and to
non-resident insurers carrying on an insurance business in Canada and
elsewhere.
|
This
discussion is based on the current provisions of the ITA and the Convention and
on the regulations promulgated under the ITA, all specific proposals to amend
the ITA or the regulations promulgated under the ITA announced by or on behalf
of the Canadian Minister of Finance prior to the date of this annual report and
the current published administrative practices of the Canada Customs and Revenue
Agency. It does not otherwise take into account or anticipate any changes in law
or administrative practice nor any income tax laws or considerations of any
province or territory of Canada or any jurisdiction other than Canada, which may
differ from the Canadian federal income tax consequences described in this
document.
Under the
ITA and the Convention, dividends paid or credited, or deemed to be paid or
credited, on the subordinate voting shares to a U.S. person who owns less than
10% of the voting shares will be subject to Canadian withholding tax at the rate
of 15% of the gross amount of those dividends or deemed dividends. If a U.S.
person is a corporation and owns 10% or more of the voting shares, the rate is
reduced from 15% to 5%. Subject to specified limitations, a U.S. person may be
entitled to credit against U.S. federal income tax liability for the amount of
tax withheld by Canada.
Under the
Convention, dividends paid to specified religious, scientific, charitable and
similar tax exempt organizations and specified organizations that are resident
and exempt from tax in the United States and that have complied with specified
administrative procedures are exempt from this Canadian withholding
tax.
A capital
gain realized by a U.S. person on a disposition or deemed disposition of the
subordinate voting shares will not be subject to tax under the ITA unless the
subordinate voting shares constitute taxable Canadian property within the
meaning of the ITA at the time of the disposition or deemed disposition. In
general, the subordinate voting shares will not be “taxable Canadian property”
to a U.S. person if they are listed on a prescribed stock exchange, which
includes The Toronto Stock Exchange, unless, at any time within the five-year
period immediately preceding the disposition, the U.S. person, persons with whom
the U.S. person did not deal at arm’s length, or the U.S. person together with
those persons, owned or had an interest in or a right to acquire more than 25%
of any class or series of our shares.
If the
subordinate voting shares are taxable Canadian property to a U.S. person, any
capital gain realized on a disposition or deemed disposition of those
subordinate voting shares will generally be exempt from tax by virtue of the
Convention if the value of the subordinate voting shares at the time of the
disposition or deemed disposition is not derived principally from real property,
as defined by the Convention, situated in Canada. The determination as to
whether Canadian tax would be applicable on a disposition or deemed disposition
of the subordinate voting shares must be made at the time of the disposition or
deemed disposition.
Holders
of subordinate voting shares are urged to consult their own tax advisors to
determine the particular tax consequences to them, including the application and
effect of any state, local or foreign income and other tax laws, of the
acquisition, ownership and disposition of subordinate voting
shares.
|
Dividends
and Paying Agents
|
Not
Applicable.
|
Statement
by Experts
|
Not
Applicable.
|
Documents
on Display
|
Any
statement in this annual report about any of our contracts or other documents is
not necessarily complete. If the contract or document is filed as an exhibit to
the registration statement, the contract or document is deemed to modify the
description contained in this annual report. You must review the exhibits
themselves for a complete description of the contract or
document.
You may
review a copy of our filings with the SEC, including exhibits and schedules
filed with it, at the SEC’s public reference facilities at 100 F Street, N.E.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 233
Broadway, New York, New York 10279 and at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain
copies of such materials from the Public Reference Section of the SEC, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. The SEC maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
You may
read and copy any reports, statements or other information that we file with the
SEC at the addresses indicated above and you may also access them electronically
at the Web site set forth above. These SEC filings are also available to the
public from commercial document retrieval services.
We are
required to file reports and other information with the SEC under the Securities
Exchange Act of 1934. Reports and other information filed by us with the SEC may
be inspected and copied at the SEC’s public reference facilities described
above. As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements and our
officers, Directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. Under the Exchange Act, as a foreign private issuer, we are not required to
publish financial statements as frequently or as promptly as United States
companies.
See Item
4.C. of this annual report.
Market
Risk
Currency
Risk
Our
measurement currency is the Canadian dollar. We are exposed to currency risks
due to the export of our Canadian-manufactured products, the large majority
of which are denominated in US dollars. These risks are partially hedged by
operating expenses denominated in US dollars, the purchase of raw materials
in US dollars and forward exchange contracts. The increased strength of the
Canadian dollar, compared to the US dollar, over the last couple of years caused
our operating expenses to increase as some of these expenses are denominated in
Canadian dollars. Any further increase in the value of the Canadian dollar in
the upcoming months will negatively affect our results of
operations.
We enter
into forward exchange contracts to manage the risk of exchange rate fluctuations
between the Canadian and US dollar on cash flows related to anticipated future
revenue streams denominated in US dollars. We do not enter into forward
exchange contracts for hedging purposes.
The
following table summarizes the forward exchange contracts in effect as at
August 31, 2009, classified by expected transaction dates, none of which
exceed three fiscal years, as well as the notional amounts of such
contracts (in thousands of US dollars) along with the weighted average
contractual forward rates under such contracts. The notional amounts of such
contracts are used to calculate the contractual payments to be made under these
contracts.
|
Years
ending August 31,
|
||||||||||||
|
2010
|
2011
|
2012
|
||||||||||
| Forward exchange contracts to sell US dollars in exchange for Canadian dollars | ||||||||||||
|
Contractual
amounts
|
$ | 27,600 | $ | 14,600 | $ | 1,000 | ||||||
|
Weighted
average contractual forward rates
|
1.1019 | 1.1221 | 1.1278 | |||||||||
Fair
Value
The fair
value of forward exchange contracts, which represents the amount we would
receive or pay to settle the contracts based on the exchange rate at year end,
amounted to net gains of $530,000 as at August 31, 2009 ($62,000 as at
August 31, 2008).
The
following table summarizes significant financial assets and liabilities that are
subject to currency risk as at August 31, 2009:
|
Carrying/nominal
amount
(in
thousands
of
US dollars)
|
Carrying/nominal
amount
(in
thousands
of
euros)
|
|||||||
|
Financial
assets
|
||||||||
|
Cash
|
$ | 6,040 | € | 779 | ||||
|
Accounts
receivable
|
17,402 | 2,642 | ||||||
| 23,442 | 3,421 | |||||||
|
Financial
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
5,718 | 332 | ||||||
|
Forward
exchange contracts
|
5,600 | − | ||||||
| 11,318 | 332 | |||||||
|
Net
exposure
|
$ | 12,124 | € | 3,089 | ||||
The
period-end value of the Canadian dollar compared to the US dollar was CA$1.0967
= US$1.00 as at August 31, 2009.
The
period-end value of the Canadian dollar compared to the euro was CA$1.5741 =
€1.00 as at August 31, 2009.
The
following sensitivity analysis summarizes the effect that a change in the value
of the Canadian dollar (compared to US dollar and euro) on financial
assets and liabilities denominated in US dollars and euros, would have on net
earnings, net earnings per diluted share and comprehensive income, based on the
foreign exchange rates as at August 31, 2009:
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would decrease (increase) net earnings by
$1.2 million or $0.02 per diluted
share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the euro would decrease (increase) net earnings by $445,000,
or $0.01 per diluted share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would increase (decrease) comprehensive
income by $2.5 million.
|
The
impact of the change in the value of the Canadian dollar compared to the US
dollar and the euro on these financial assets and liabilities is recorded in the
foreign exchange gain or loss line item in our consolidated statements of
earnings, except for outstanding forward contracts, which impact is recorded in
comprehensive income. The change in the value of the Canadian dollar
compared to the US dollar and the euro also impacts our balances of income tax
and tax credits recoverable or payable and future income tax assets and
liabilities related to integrated foreign subsidiaries; this may result in
additional and significant foreign exchange gain or loss. However, these assets
and liabilities are not considered financial instruments and are excluded from
the sensitivity analysis above. The foreign exchange rate fluctuations also flow
through the statements of earnings line items, as a significant
portion of our operating expenses is denominated in Canadian dollars, and
we report our results in US dollars; that effect is not reflected in
the sensitivity analysis above.
Interest
rate risk
We are
exposed to interest rate risks through our short-term investments. Short-term
investments consist of the following (in
thousands of US dollars):
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Commercial
paper denominated in Canadian dollars, bearing interest at annual rates
of 0.2% to 0.6% in 2009 and 2.80% to 3.32% in 2008, maturing between
September 2009 and December 2009 in fiscal 2009, and
September 2008 and February 2009 in fiscal 2008
|
$ | 45,109 | $ | 81,626 | ||||
|
Bankers
acceptance denominated in Canadian dollars, bearing interest at an annual
rate of 0.2%, maturing between September and October
2009
|
13,996 | − | ||||||
| $ | 59,105 | $ | 81,626 | |||||
The fair
value of short-term investments based on market value amounted to $81.6 million
and $59.1 million as at August 31, 2008 and 2009,
respectively.
An
increase (decrease) of 0.5% in the interest rate of our short-term investments
would increase (decrease) net earnings by $204,000, or $0.00 per diluted
share.
Due to
their short-term maturity of usually three months or less, our short-term
investments are not subject to significant fair value interest rate risk.
Accordingly, change in fair value has been nominal to the degree that amortized
cost has historically approximated the fair value. Any change in fair value of
our short-term investments, all of which are classified as available
for sale, is recorded in other comprehensive income.
Cash,
accounts receivable and accounts payable and accrued liabilities are
non-interest-bearing financial assets and liabilities. Accounts receivable
and accounts payable are financial instruments whose carrying value approximates
their fair value due to their short-term maturity.
Credit
risk
Financial
instruments that potentially subject us to credit risk consist primarily of
cash, short-term investments, accounts receivable and forward exchange contracts
(with a positive fair value). As at August 31, 2009, our short-term
investments consist of debt instruments issued by 11 (10 as at August 31, 2008)
high-credit quality corporations and trusts. None of these debt instruments are
expected to be affected by a significant liquidity risk, and none of
them represent asset-backed commercial paper. 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 limited.
Generally,
we do not require collateral or other security from our customers for trade
accounts receivable; however, credit is extended to customers following an
evaluation of creditworthiness. In addition, we perform ongoing credit reviews
of all our customers and establishes an allowance for doubtful accounts
receivable when accounts are determined to be uncollectible. Allowance for
doubtful accounts amounted to $305,000 and $1.2 million
as at August 31, 2008 and 2009, respectively. Bad debt
expense (recovery) amounted to $(52,000), $148,000 and $967,000 for the years
ended August 31, 2007, 2008 and 2009, respectively.
For the
years ended August 31, 2007 and 2009, one customer represented more than
10% of global sales with 14.7% ($22.5 million) and 11.6% ($20.0 million),
respectively. This customer purchased from the Telecom Division. In fiscal 2008,
no customer represented more than 10% of sales.
The
following table summarizes the age of trade accounts receivable as at
August 31, 2009 (in thousands of US dollars):
|
Current
|
$ | 16,489 | ||
|
Past
due, 0 to 30 days
|
3,551 | |||
|
Past
due, 31 to 60 days
|
1,464 | |||
|
Past
due, more than 60 days
|
2,662 | |||
|
Total
accounts receivable
|
24,166 | |||
|
Allowance
for doubtful accounts
|
(1,220 | ) | ||
| $ | 22,946 | |||
Liquidity
risk
Liquidity
risk is defined as the potential that we cannot meet our obligations as they
become due.
The
following table summarizes the contractual maturity of our financial liabilities
as at August 31, 2009 (in thousands of US
dollars):
|
0-12
months
|
13-24
months
|
25-36
months
|
||||||||||
|
Accounts
payable and accrued liabilities
|
$ | 20,946 | $ | − | $ | − | ||||||
|
Forward
exchange contracts
|
||||||||||||
|
Outflow
|
27,600 | 14,600 | 1,000 | |||||||||
|
Inflow
|
(27,730 | ) | (14,938 | ) | (1,028 | ) | ||||||
|
Total
|
$ | 20,816 | $ | (338 | ) | $ | (28 | ) | ||||
In
addition, we have a share repurchase program that may require additional cash
outflows during fiscal 2010 and 2011. Also, we have an outstanding contingent
consideration payable upon the acquisition of assets, which is not yet recorded
in the financial statements and may require additional cash outflows in upcoming
years.
As at
August 31, 2009, we had $69.7 million in cash and short-term
investments and $25.7 million in accounts receivable. In addition to
these financial assets, we have unused available lines of credit totaling
$14.2 million for working capital and other general corporate purposes,
including potential acquisitions and our share repurchase program as well
as unused lines of credit of $16.5 million for foreign currency exposure
related to our forward exchange contracts.
Not
Applicable.
|
Defaults,
Dividends Arrearages and
Delinquencies
|
Not
Applicable.
Not
Applicable.
|
Controls
and Procedures
|
(a)
Evaluation of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as at the end of the
period covered by this annual report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective as at August 31,
2009.
(b)
Management’s Annual Report on 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 generally accepted accounting
principles in Canada.1
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
generally accepted accounting principles 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.
|
1
|
Our consolidated financial
statements are prepared in accordance with generally accepted accounting
principles in Canada (“Canadian GAAP”) and significant differences in
measurement and disclosure from generally accepted accounting principles
in United States (“U.S. GAAP”) are set out in note 20 to our consolidated
financial statements included elsewhere in this annual
report.
|
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 at August 31,
2009.
(c)
Attestation Report of the Registered Public Accounting Firm
Our
independent registered public accounting firm, PricewaterhouseCoopers LLP,
audited the effectiveness of EXFO’s internal control over financial reporting as
at August 31, 2009, as stated in its attestation report, which is included
on pages F-1 and F-2 of this Annual Report on Form 20-F.
(d)
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
period covered by this annual report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
|
[Reserved]
|
|
Audit
Committee Financial Expert
|
Our Board
of Directors has determined that Mr. André Tremblay, CA, chairman of our Audit
Committee, is an Audit Committee financial expert. Mr. Tremblay is
independent of management. For a description of Mr. Tremblay’s
education and experience, please refer to Item 6A. The other members of the
Audit Committee are Mr. Pierre Marcouiller, Mr. Guy Marier, Mr. David A.
Thompson, Mr. Pierre-Paul Allard, who joined in January 2009, all of whom are
independent. For a description of their respective education and
experience, please also refer to Item 6A.
In 2003,
we adopted a code of ethics that applies to our chief executive officer, our
chief financial officer and our manager of financial reporting and accounting. A
copy of this code of ethics has been filed as exhibit 11.1 to our fiscal
year 2005 Annual Report on Form 20-F. In March 2005, the Board updated and
adopted the following policies:
|
·
|
Board
of Directors Corporate Governance
Guidelines;
|
|
·
|
Code
of Ethics for our Principal Executive Officer and Senior Financial
Officers;
|
|
·
|
Ethics
and Business Conduct Policy;
|
|
·
|
Statement
of Reporting Ethical Violations (Whistle
Blower).
|
A copy of
those policies has been filed respectively as exhibits 11.2 through 11.5
inclusively to our fiscal year 2005 Annual Report on Form 20-F. All these
policies are also readily available on our website at www.EXFO.com.
Accordingly, we believe that our corporate governance practices are in alignment
to current regulatory requirements. We will provide without charge to each
person, on the written or oral request of such person, a copy of our code
of ethics. Requests for such copies should be directed to us at the
following address: 400 Godin Avenue, Quebec, Quebec, G1M 2K2, Canada,
Attention: Corporate Secretary, telephone number
(418) 683-0211.
Audit
Fees
During
the financial years ended August 31, 2008 and August 31, 2009, our principal
accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $329,000
and $448,000 respectively for the audit of our annual consolidated
financial statements and services in connection with statutory and regulatory
filings.
Audit-Related
Fees
During
the financial years ended August 31, 2008 and August 31, 2009, our principal
accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $38,000
and $63,000, respectively for audit related fees.
Tax
Fees
During
the financial years ended August 31, 2008 and August 31, 2009, our principal
accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $142,000
and $207,000, respectively for services related to tax compliance, tax advice
and tax planning.
All
Other Fees
Not
applicable.
Audit
Committee Pre-Approval Policies and Procedures
On
September 25, 2002, our Audit Committee adopted a policy requiring prior
approval by the Audit Committee of the annual audit plan which has been
integrated in the Audit Committee Charter (refer to Item 6C for further details
on the Audit Committee Charter). In the event any adjustments to audit plan may
be required during the course of a financial year, such adjustments shall be
approved by the chairman of the Audit Committee, acting alone, and shall be
reported to the full Audit Committee at its next meeting.
In the
case of non-audit services (excluding tax matters), the policy provides that
proposals shall be submitted to the chairman of the Audit Committee and our
chief financial officer at the same time and the chairman of the Audit Committee
will be responsible for approval of such proposal, subject to any modifications
that he may require. The chairman will make a report to the full Audit
Committee at its next meeting.
As
concerns tax services to be provided by our principal accountant, our policy
provides that the principal accountant will present to the Audit Committee for
pre-approval, on or before the beginning of each financial year,
an engagement for tax matters that are foreseeable for the upcoming year
and the Audit Committee shall be responsible for pre-approval thereof,
subject to any modifications it may make to such proposals. In the event tax
services are required that were not pre-approved by the Audit Committee, the
procedure set forth in the previous paragraph will apply.
During
the financial year ended on August 31, 2009, 100% of tax fees were approved by
the Audit Committee pursuant to this policy. During the financial year ended on
August 31, 2009, only full-time permanent employees of our principal accountant,
PricewaterhouseCoopers LLP, performed work to audit our financial
statements.
Not
Applicable.
Issuer
Purchases of Equity Securities
On
November 5, 2007 we announced the approval of the establishment of a share
repurchase program effective from November 8, 2007 to November 7, 2008, by way
of a normal course issuer bid on the open market of up to 2,869,585
subordinate voting shares (“2007 NCIB”). On November 6, 2008 we announced the
approval of the renewal of the share repurchase program effective from
November 10, 2008 to November 9, 2009, by way of normal course issuer bid
on the open market, of up to 2,738,518 subordinate voting shares (“2008 NCIB”).
On November 10, 2008 we announced the approval of a substantial issuer bid
by way of a “modified Dutch Auction” to purchase for cancellation up to
8,823,529 subordinate voting shares for an aggregate not to exceed
US$30 million, such offer was effective until December 16, 2008 (“2008
SIB”). Following the announcement of the 2008 SIB, we suspended our 2008 NCIB
and it was resumed on January 26, 2009. On November 6, 2009, we announced
the approval of the renewal of the share repurchase program effective from
November 10, 2009 and provided to expire on November 9, 2010, by way of a normal
course issuer bid on the open market
of up to 2,256,431 subordinate voting shares. As of the date
of this filing, this program is still in effect (“2009 NCIB”).
Since
November 2007, we spent approximately US$34.9 million (including fees) to
repurchase 9,864,014 subordinate voting shares, out of which
approximately US$8 million were spent to repurchase shares in fiscal
year 2008, US$1.4 million were spent in fiscal year 2009 and US$25.5 million
were spent to repurchase shares under the 2008 SIB.
|
Period
|
(a)
Total Number
of
Shares (or
Units)
Purchased
(#)
|
(b)
Average Price
Paid
per Share (or Units)
|
(c)
Total Number of Shares
(or
Units) Purchased as Part
of
Publicly Announced
Plans
or Programs
(#)
|
(d)
Maximum Number of
Shares
(or Units) that May
Yet
Be Purchased Under the
Plans
or Programs
(#)
|
|
|
NASDAQ
(US$)
|
TSX
(CA$)
|
||||
|
From
Nov. 1, 2007
|
29,200
|
5.95
|
5.66
|
29,200
|
2,840,385
|
|
to
Nov. 30, 2007
|
|||||
|
From
Apr. 1, 2008
|
189,126
|
5.57
|
5.67
|
189,126
|
2,651,259
|
|
to
Apr. 30, 2008
|
|||||
|
From
May 1, 2008
|
374,281
|
5.74
|
5.79
|
374,281
|
2,276,978
|
|
to
May 31, 2008
|
|||||
|
From
Jul. 1, 2008
|
979,962
|
4.34
|
4.39
|
979,962
|
1,297,016
|
|
To
Jul. 31, 2008
|
|||||
|
From
Aug. 1, 2008
|
113,351
|
4.28
|
4.49
|
113,351
|
1,183,665
|
|
To
Aug. 31, 2008
|
|||||
|
From
Oct. 1, 2008
|
176,915
|
4.43
|
3.03
|
176,915
|
1,006,750
|
|
To
Oct. 31, 2008
|
|||||
|
From
Dec. 1, 2008
|
7,692,307 (1)
|
–
(1)
|
– (1)
|
7,692,307
|
– (2)
|
|
To
Dec. 31, 2008
|
|||||
|
From
Jan. 1, 2009
|
20,172
|
3.18
|
3.83
|
20,172
|
2,718,346
|
|
To
Jan. 31, 2009
|
|||||
|
From
Feb. 1, 2009
|
32,900
|
3.43
|
4.41
|
32,900
|
2,685,446
|
|
to
Feb. 28, 2009
|
|||||
|
From
Jul. 1, 2009
|
93,000
|
2.95
|
3.41
|
93,000
|
2,592,446
|
|
To
Jul. 31, 2009
|
|||||
|
From
Aug. 1, 2009
|
165,800
|
3.14
|
3.48
|
165,800
|
2,426,646
|
|
To
Aug. 31, 2009
|
|||||
|
Total
|
9,867,014
|
9,867,014
|
|||
|
(1)
|
Represents
the number of subordinate voting shares repurchased under the 2008 SIB on
December 17, 2008 at an average price of CA$3.90 (US$3.23). The average
price has been converted from Canadian dollars to US dollars based upon
the noon buying rate of the Bank of Canada on the date the
subordinate voting shares were
purchased.
|
|
(2)
|
As
identified above, the 2008 NCIB was suspended upon the announcement of the
2008 SIB, therefore the number of shares that may be repurchased
under the 2008 NCIB are not identified. This value is nil as all
subordinate voting shares approved for repurchase under the 2008 SIB were
repurchased on the same day, none remained to be purchased on December 31,
2008.
|
Not
Applicable.
The
Corporation’s corporate governance practices do not differ significantly from
the standards and guidelines that have been set by the regulatory agencies. A
copy of the Corporation’s Corporate Governance Policy is published on the
corporate web site and has been filed as Exhibits 11.1 to 11.7 inclusively to
our fiscal year 2005 Annual Report on Form 20-F.
|
Financial
Statements
|
Not
Applicable.
|
Financial
Statements
|
See pages
F-3 to F-43.
|
Item 19.
|
Exhibits
|
|
Number
|
Exhibit
|
|
1.1
|
Amended
Articles of Incorporation of EXFO (incorporated by reference to Exhibit
3.1 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
|
|
1.2
|
Amended
By-laws of EXFO (incorporated by reference to Exhibit 1.2 of EXFO’s annual
report on Form-20F dated January 15, 2003, File No.
000-30895).
|
|
1.3
|
Amended
and Restated Articles of Incorporation of EXFO (incorporated by reference
to Exhibit 1.3 of EXFO’s annual report on Form 20-F dated January 18,
2001, File No. 000-30895).
|
|
2.1
|
Form
of Subordinate Voting Share Certificate (incorporated by reference to
Exhibit 4.1 of EXFO’s Registration Statement on Form F-1 filed on June 9,
2000, File No. 333-38956).
|
|
2.2
|
Form
of Registration Rights Agreement between EXFO and Germain Lamonde dated
July 6, 2000 ) (incorporated by reference to Exhibit 10.13 of
EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No.
333-38956).
|
|
3.1
|
Form
of Trust Agreement among EXFO, Germain Lamonde, GEXFO Investissements
Technologiques inc., Fiducie Germain Lamonde and G. Lamonde
Investissements Financiers inc. (incorporated by reference to Exhibit
4.2 of EXFO’s Registration Statement on Form F-1 filed on June
9, 2000, File No. 333-38956).
|
|
4.1
|
Agreement
of Merger and Plan of Reorganization, dated as of November 4, 2000, by and
among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments, Inc., Robert G.
Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall
(incorporated by reference to Exhibit 4.1 of EXFO’s annual report on Form
20-F dated January 18, 2001, File No. 000-30895).
|
|
4.2
|
Amendment
No. 1 to Agreement of Merger and Plan of Agreement, dated as of December
20, 2000, by and among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments,
Inc., Robert G. Klimasewski, William G. May, Jr., David J. Farrell and
William S. Gornall (incorporated by reference to Exhibit 4.2 of EXFO’s
annual report on Form 20-F dated January 18, 2001, File No.
000-30895).
|
|
4.3
|
Agreement
of Merger, dated as of August 20, 2001, by and among EXFO, Buyer Sub, and
Avantas Networks Corporation and Shareholders of Avantas Networks
corporation (incorporated by reference to Exhibit 4.3 of EXFO’s annual
report on Form 20-F dated January 18, 2002, File No.
000-30895).
|
|
4.4
|
Amendment
No. 1 dated as of November 1, 2002 to Agreement of Merger, dated as of
August 20, 2001, by and among EXFO, 3905268 Canada Inc., Avantas Networks
Corporation and Shareholders of Avantas Networks (incorporated by
reference to Exhibit 4.4 of EXFO’s annual report on Form 20-F dated
January 18, 2002, File No. 000-30895).
|
|
4.5
|
Offer
to purchase shares of Nortech Fibronic Inc., dated February 6, 2000 among
EXFO, Claude Adrien Noel, 9086-9314 Québec inc., Michel Bédard, Christine
Bergeron and Société en Commandite Capidem Québec Enr. and Certificate of
Closing, dated February 7, 2000 among the same parties (including summary
in English) (incorporated by reference to Exhibit 10.2 of EXFO’s
Registration Statement on Form F-1 filed on June 9, 2000, File No.
333-38956).
|
|
4.6
|
Share
Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical
Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation
(incorporated by reference to Exhibit 4.1 of EXFO’s Registration Statement
on Form F-3 filed on July 13, 2001, File No. 333-65122).
|
|
4.7
|
Amendment
Number One, dated as of March 15, 2001, to Share Purchase Agreement, dated
as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John
Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by reference to
Exhibit 4.2 of EXFO’s Registration Statement on Form F-3 filed on July 13,
2001, File No. 333-65122).
|
|
4.8
|
Share
Purchase Agreement, dated as of November 2, 2001 between JDS Uniphase Inc.
and 3905268 Canada Inc. (incorporated by reference to Exhibit 4.8 of
EXFO’s annual report on Form 20-F dated January 18, 2002, File No.
000-30895).
|
|
4.9
|
Intellectual
Property Assignment and Sale Agreement between EFOS Inc., EXFO
Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS
Corporation. (incorporated by reference to Exhibit 4.3 of EXFO’s
Registration Statement on Form F-3 filed on July 13, 2001, File No.
333-65122).
|
|
4.10
|
Offer
to acquire a building, dated February 23, 2000, between EXFO and Groupe
Mirabau inc. and as accepted by Groupe Mirabau inc. on February 24, 2000
(including summary in English) (incorporated by reference to Exhibit 10.3
of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File
No. 333-38956).
|
|
4.11
|
Lease
Agreement, dated December 1, 1996, between EXFO and GEXFO Investissements
Technologiques inc., as assigned to 9080-9823 Québec inc. on September 1,
1999 (including summary in English) (incorporated by reference to Exhibit
10.4 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
|
|
4.12
|
Lease
Agreement, dated March 1, 1996, between EXFO and GEXFO Investissements
Technologiques inc., as assigned to 9080-9823 Québec inc. on September 1,
1999 (including summary in English) (incorporated by reference to Exhibit
10.5 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
|
|
4.13
|
Lease
renewal of the existing leases between 9080-9823 Québec inc. and EXFO,
dated November 30, 2001(incorporated by reference to Exhibit 4.13 of
EXFO’s annual report on Form 20-F dated January 18, 2002, File No.
000-30895).
|
|
4.14
|
Loan
Agreement between EXFO and GEXFO Investissements Technologiques inc.,
dated May 11, 1993, as assigned to 9080-9823 Québec inc. on September
1, 1999 (including summary in English) (incorporated by
reference to Exhibit 10.9 of EXFO’s Registration Statement on Form F-1
filed on June 9, 2000, File No. 333-38956).
|
|
4.15
|
Resolution
of the Board of Directors of EXFO, dated September 1, 1999, authorizing
EXFO to acquire GEXFO Distribution Internationale inc. from GEXFO
Investissements Technologiques inc. (including summary in English)
(incorporated by reference to Exhibit 10.10 of EXFO’s Registration
Statement on Form F-1 filed on June 9, 2000, File No.
333-38956).
|
|
4.16
|
Form
of Promissory Note of EXFO issued to GEXFO Investissements Technologiques
inc. dated June 27, 2000 ) (incorporated by reference to
Exhibit 10.12 of EXFO’s Registration Statement on Form F-1 filed on June
9, 2000, File No. 333-38956).
|
|
4.17
|
Term
Loan Offer, dated March 28, 2000, among EXFO and National Bank of Canada
as accepted by EXFO on April 3, 2000 (including summary in English)
(incorporated by reference to Exhibit 10.11 of EXFO’s Registration
Statement on Form F-1 filed on June 9, 2000, File No.
333-38956).
|
|
4.18
|
Employment
Agreement of Germain Lamonde dated May 29, 2000 (incorporated by reference
to Exhibit 10.15 of EXFO’s Registration Statement on Form F-1 filed on
June 9, 2000, File No. 333-38956).
|
|
4.19
|
Employment
Agreement of Bruce Bonini dated as of September 1, 2000 (incorporated by
reference to Exhibit 4.24 of EXFO’s annual report on Form 20-F dated
January 18, 2002, File No. 000-30895).
|
|
4.20
|
Employment
Agreement of Juan-Felipe Gonzalez dated as of September 1, 2000
(incorporated by reference to Exhibit 4.25 of EXFO’s annual report on Form
20-F dated January 18, 2002, File No. 000-30895).
|
|
4.21
|
Employment
Agreement of David J. Farrell dated as of December 20, 2000 (incorporated
by reference to Exhibit 4.26 of EXFO’s annual report on Form 20-F dated
January 18, 2002, File No. 000-30895).
|
|
4.22
|
Deferred
Profit Sharing Plan, dated September 1, 1998 (incorporated by reference to
Exhibit 10.6 of EXFO’s Registration Statement on Form F-1 filed on June 9,
2000, File No. 333-38956).
|
|
4.23
|
Stock
Option Plan, dated May 25, 2000 (incorporated by Reference to Exhibit 10.7
of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File
No. 333-38956).
|
|
4.24
|
Share
Plan, dated April 3, 2000 (incorporated by reference to Exhibit 10.8 of
EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No.
333-38956).
|
|
4.25
|
Directors’
Compensation Plan (incorporated by reference to Exhibit 10.17 of EXFO’s
Registration Statement on Form F-1 filed on June 9, 2000, File No.
333-38956).
|
|
4.26
|
Restricted
Stock Award Plan, dated December 20, 2000 (incorporated by reference to
Exhibit 4.21 of EXFO’s annual report on Form 20-F dated January 18, 2001,
File No. 000-30895).
|
|
4.27
|
Asset
Purchase Agreement by and Among EXFO
Electro-Optical Engineering Inc., EXFO Gnubi Products Group Inc., gnubi
communications, L.P., gnubi communications General Partner, LLC, gnubi
communications Limited Partner, LLC, gnubi communications, Inc., Voting
Trust created by The Irrevocable Voting Trust Agreement Among Carol
Abraham Bolton, Paul Abraham and James Ray Stevens, James Ray Stevens and
Daniel J. Ernst dated September 5, 2002 (incorporated by reference to
Exhibit 4.30 of EXFO’s annual report on Form 20-F dated January 15, 2003,
File No. 000-30895).
|
|
4.28
|
EXFO
Protocol Inc. Executive Employment Agreement with Sami Yazdi signed
November 2, 2001 (incorporated by reference to Exhibit 4.28 of EXFO’s
annual report on Form 20-F dated January 15, 2003, File No.
000-30895).
|
|
4.29
|
Second
Amending Agreement to the Employment Agreement of Bruce Bonini dated as of
September 1, 2002, (incorporated by reference to Exhibit 4.29 of EXFO’s
annual report on Form 20-F dated January 15, 2004, File No.
000-30895).
|
|
4.30
|
Severance
and General Release Agreement with Bruce Bonini dated August 8, 2003,
(incorporated by reference to Exhibit 4.30 of EXFO’s annual report on Form
20-F dated January 15, 2004, File No. 000-30895).
|
|
4.31
|
Separation
Agreement and General Release with Sami Yazdi dated April 1, 2003,
(incorporated by reference to Exhibit 4.31 of EXFO’s annual report on Form
20-F dated January 15, 2004, File No. 000-30895).
|
|
4.32
|
Executive
Employment Agreement of James Stevens dated as of October 4, 2003,
(incorporated by reference to Exhibit 4.32 of EXFO’s annual report on Form
20-F dated January 15, 2004, File No. 000-30895).
|
|
4.33
|
Termination
Terms for John Holloran Jr. dated May 28, 2003, (incorporated by reference
to Exhibit 4.33 of EXFO’s annual report on Form 20-F dated January 15,
2004, File No. 000-30895).
|
|
4.34
|
Employment
Agreement of Pierre Plamondon dated as of September 1, 2002, (incorporated
by reference to Exhibit 4.34 of EXFO’s annual report on Form 20-F dated
January 15, 2004, File No. 000-30895).
|
|
4.35
|
Long-Term
Incentive Plan, dated May 25, 2000, amended in October 2004 and effective
January 12, 2005 (incorporated by reference to Exhibit 4.35 of EXFO’s
annual report on Form 20-F dated November 29, 2005, File No.
000-30895).
|
|
4.36
|
Deferred
Share Unit Plan, effective January 12, 2005 (incorporated by reference to
Exhibit 4.36 of EXFO’s annual report on Form 20-F dated November 29, 2005,
File No. 000-30895).
|
|
4.37
|
Asset
Purchase Agreement by and Among EXFO Electro-Optical Engineering Inc.,
Consultronics Limited., Andre Rekai, Consultronics Europe Limited,
Consultronics Development Kft. and Consultronics Inc. dated January 5,
2006 (incorporated by reference to Exhibit 4.37 of EXFO’s annual report on
Form 20-F dated November 23, 2006, File No. 000-30895).
|
|
4.38
|
Share
Repurchase Program by Way of Normal Course Issuer Bid dated November 6,
2007 (incorporated by reference to EXFO’s report on Form 6-K dated
November 6, 2007, file No. 000-30895).
|
|
4.39
|
Share
Purchase Agreement by and Among EXFO Electro-Optical Engineering Inc.,
Navtel Communications Inc. and Vengrowth Investment Fund, BDC Capital Inc.
and others, dated March 26, 2008 (incorporated by reference to Exhibit
4.38 of EXFO’s annual report on Form 20-F dated November 26, 2008, File
No. 000-30895).
|
|
4.40
|
Agreement
and Plan of Merger by and among Gexfo Distribution Internationale Inc.,
EXFO Service Assurance Inc. and Brix Networks, Inc. and Charles River
Ventures, LLC dated April 2, 2008 (incorporated by reference to EXFO’s
Material Change Report on Form 6-K dated May 2, 2008, File No.
000-30895).
|
|
4.41
|
Issuer
Tender Offer, Letter of Transmittal and Notice of Guaranteed Delivery
dated November 10, 2008 (incorporated by reference as Exhibits (a) (1)
(i), (a) (1) (ii) and (a) (1) (iii) to EXFO’s Schedule TO dated November
10, 2008, File No. 000-30895).
|
|
4.42
|
Renewal
of EXFO’s Share Repurchase Program by Way of Normal Course Issuer Bid
dated November 6, 2008 (incorporated by reference to EXFO’s report on Form
6-K dated November 6, 2008, file No. 000-30895).
|
|
4.43
|
Final
results of Issuer Bid Tender Offer, dated December 18, 2009 (incorporated
by reference to EXFO’s Material Change Report on Form 6-K dated December
19, 2008, file No. 000-30895).
|
|
4.44
|
Share
Transfer Agreement by and among GEXFO Distribution Internationale Inc. and
AWS Holding AB (PicoSolve AB) and Patent Transfer Agreement by and among
EXFO Electro-Optical Engineering Inc. and Starta Eget Boxen 11629 AB dated
February 5, 2009.
|
|
4.45
|
Renewal
of EXFO’s Share Repurchase Program by Way of Normal Course Issuer Bid
dated November 10, 2009 (incorporated by reference to EXFO’s report on
Form 6-K dated November 6, 2009, file No. 000-30895).
|
|
8.1
|
Subsidiaries
of EXFO (list included in Item 4C of this annual report).
|
|
10.1
|
Certificate
of Amendment, Canada Business Corporations Act.
|
|
11.1
|
Code
of Ethics for senior financial officers, (incorporated by reference to
Exhibit 11.1 of EXFO’s annual report on Form 20-F dated November 29, 2005,
File No. 000-30895).
|
|
11.2
|
Board
of Directors Corporate Governance Guidelines (incorporated by reference to
Exhibit 11.2 of EXFO’s annual report on Form 20-F dated November 29, 2005,
File No. 000-30895).
|
|
11.3
|
Code
of Ethics for our Principal Executive Officer and Senior Financial
Officers (incorporated by reference to Exhibit 11.3 of EXFO’s annual
report on Form 20-F dated November 29, 2005, File No.
000-30895).
|
|
11.4
|
Ethics
and Business Conduct Policy (incorporated by reference to Exhibit 11.4 of
EXFO’s annual report on Form 20-F dated November 29, 2005, File No.
000-30895).
|
|
11.5
|
Statement
of Reporting Ethical Violations (Whistle Blower) (incorporated by
reference to Exhibit 11.5 of EXFO’s annual report on Form 20-F dated
November 29, 2005, File No. 000-30895).
|
|
11.6
|
Audit
Committee Charter (incorporated by reference to Exhibit 11.6 of EXFO’s
annual report on Form 20-F dated November 29, 2005, File No.
000-30895).
|
|
11.7
|
Human
Resources Committee Charter (incorporated by reference to Exhibit 11.7 of
EXFO’s annual report on Form 20-F dated November 29, 2005, File No.
000-30895).
|
|
12.1
|
Certification
of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
12.2
|
Certification
of the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
13.1
|
Certification
of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
13.2
|
Certification
of the Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
| By: | /s/ Germain Lamonde |
| Name: | Germain Lamonde |
| Title: |
Chairman
of the Board, President
and Chief Executive Officer
|
| Date: | November 25, 2009 |
Exhibit
12.1
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I,
Germain Lamonde, certify that:
|
1.
|
I
have reviewed this Annual Report on Form 20-F of EXFO Electro-Optical
Engineering Inc. ("EXFO");
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of EXFO as of,
and for, the periods presented in this
report;
|
|
4.
|
EXFO's
other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for EXFO and have:
|
|
a.
|
Designed
such disclosure controls and procedures or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that
material information relating to EXFO, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
c.
|
Evaluated
the effectiveness of EXFO's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
and
|
|
d.
|
Disclosed
in this report any change in EXFO's internal control over financial
reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially
affect, EXFO's internal control over financial
reporting.
|
|
5.
|
EXFO's
other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to EXFO's
auditors and the audit committee of EXFO's board of
directors:
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect EXFO's ability to record, process,
summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in EXFO’s internal control over
financial reporting.
|
Date:
November 25, 2009
/s/ Germain
Lamonde
Germain
Lamonde
Chairman
of the Board,
President
and Chief Executive Officer
(Principal
Executive Officer)
Exhibit
12.2
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code), the undersigned
officer of EXFO Electro-Optical Engineering Inc., hereby
certifies, that:
|
1.
|
The
Annual Report of Form 20-F for the year ended August 31, 2009 of EXFO
fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934;
and
|
|
2.
|
The
information contained in this Annual Report fairly presents, in all
material respects, the financial condition and results of operations of
EXFO.
|
Date: November
25, 2009
/s/ Germain
Lamonde
Germain
Lamonde
Chairman
of the Board,
President
and Chief Executive Officer
(Principal
Executive Officer)
The
foregoing certification is being furnished solely pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part
of the Report or as separate disclosure document.
Exhibit
13.1
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Pierre
Plamondon, certify that:
|
1.
|
I
have reviewed this Annual Report on Form 20-F of EXFO Electro-Optical
Engineering Inc. ("EXFO");
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of EXFO as of,
and for, the periods presented in this
report;
|
|
4.
|
EXFO's
other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for EXFO and have:
|
|
a.
|
Designed
such disclosure controls and procedures or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that
material information relating to EXFO, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
c.
|
Evaluated
the effectiveness of EXFO's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
and
|
|
d.
|
Disclosed
in this report any change in EXFO's internal control over financial
reporting that occurred during the period covered by the annual report
that has materially affected, or is reasonably likely to materially
affect, EXFO's internal control over financial
reporting.
|
|
5.
|
EXFO's
other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to EXFO's
auditors and the audit committee of EXFO's board of
directors:
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect EXFO's ability to record, process,
summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in EXFO's internal control over
financial reporting.
|
Date:
November 25, 2009
/s/ Pierre
Plamondon
Pierre
Plamondon, CA
Vice-President
Finance
and Chief
Financial Officer
(Principal
Financial Officer)
Exhibit
13.2
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code), the undersigned
officer of EXFO Electro-Optical Engineering Inc., hereby
certifies, that:
|
1.
|
The
Annual Report of Form 20-F for the year ended August 31, 2009 of EXFO
fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934;
and
|
|
2.
|
The
information contained in this Annual Report fairly presents, in all
material respects, the financial condition and results of operations of
EXFO.
|
Date: November
25, 2009
/s/ Pierre
Plamondon
Pierre
Plamondon, CA
Vice-President
Finance
and Chief
Financial Officer
(Principal
Financial Officer)
The
foregoing certification is being furnished solely pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part
of the Report or as separate disclosure document.
Report
of the Independent Registered Public Accounting Firm
To
the Shareholders of
EXFO
Electro-Optical Engineering Inc.
We have
completed integrated audits of the consolidated financial statements and
internal control over financial reporting of EXFO Electro-Optical
Engineering Inc. as at August 31, 2009, 2008 and 2007. 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 at August 31, 2009
and 2008, and the related consolidated statements of earnings,
comprehensive income (loss) and accumulated other comprehensive income, retained
earnings and contributed surplus and cash flows for each of the
years in the three-year period ended August 31, 2009. We have also audited
the financial statement schedule, Valuation and Qualifying Accounts, in Item
8.A. of this Annual Report on Form 20-F. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based
on our audits.
We
conducted our audits of the Company's financial statements 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 at August 31,
2009 and 2008 and the results of its operations and its cash flows for each of
the years in the three-year period ended August 31, 2009 in accordance with
Canadian generally accepted accounting principles. Furthermore, in our opinion,
the financial statement schedule, Valuation and Qualifying Accounts, in Item
8.A. of this Annual Report on Form 20-F presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
Internal
control over financial reporting
We have
also audited EXFO Electro-Optical Engineering Inc.'s internal control over
financial reporting as at August 31, 2009, 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
effectiveness of 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. An audit of internal
control over financial reporting includes obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we consider 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 at August 31, 2009 based on criteria
established in Internal
Control — Integrated Framework issued by the COSO.
/s/
PricewaterhouseCoopers LLP
Chartered
Accountants
Quebec,
Quebec, Canada
October
13, 2009, except Note 21 which is as of November 6, 2009
1
Chartered accountant auditor permit No. 18144
EXFO
Electro-Optical Engineering Inc.
Consolidated
Balance Sheets
(in thousands
of US dollars)
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 10,611 | $ | 5,914 | ||||
|
Short-term
investments (note 6)
|
59,105 | 81,626 | ||||||
|
Accounts
receivable (note 6)
|
||||||||
|
Trade
|
22,946 | 31,473 | ||||||
|
Other
|
2,752 | 4,753 | ||||||
|
Income
taxes and tax credits recoverable
|
2,353 | 4,836 | ||||||
|
Inventories
(note 7)
|
30,863 | 34,880 | ||||||
|
Prepaid
expenses
|
2,043 | 1,774 | ||||||
|
Future
income taxes (note 17)
|
5,538 | 9,140 | ||||||
| 136,211 | 174,396 | |||||||
|
Tax
credits recoverable
|
26,762 | 20,657 | ||||||
|
Forward exchange contracts
(note 6)
|
428 | − | ||||||
|
Property, plant and equipment
(note 8)
|
19,100 | 19,875 | ||||||
|
Intangible assets (note
9)
|
16,859 | 19,945 | ||||||
|
Goodwill (notes 3, 4 and
9)
|
22,478 | 42,653 | ||||||
|
Future income taxes
(note 17)
|
18,533 | 15,540 | ||||||
| $ | 240,371 | $ | 293,066 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (note 11)
|
$ | 21,650 | $ | 24,713 | ||||
|
Deferred
revenue
|
6,481 | 5,079 | ||||||
| 28,131 | 29,792 | |||||||
|
Deferred
revenue
|
4,195 | 3,759 | ||||||
| 32,326 | 33,551 | |||||||
|
Commitments (note
12)
|
||||||||
|
Contingencies (note
13)
|
||||||||
|
Shareholders’
equity
|
||||||||
|
Share
capital (note 14)
|
104,846 | 142,786 | ||||||
|
Contributed
surplus
|
17,758 | 5,226 | ||||||
|
Retained
earnings (note 14)
|
43,909 | 60,494 | ||||||
|
Accumulated
other comprehensive income
|
41,532 | 51,009 | ||||||
| 208,045 | 259,515 | |||||||
| $ | 240,371 | $ | 293,066 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
On
behalf of the Board
/s/ Germain Lamonde
GERMAIN
LAMONDE
Chairman,
President and CEO
|
/s/ André Tremblay
ANDRÉ
TREMBLAY
Chairman,
Audit Committee
|
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statements of Earnings
(in thousands
of US dollars, except share and per share data)
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Sales (note
19)
|
$ | 172,878 | $ | 183,790 | $ | 152,934 | ||||||
|
Cost of sales (1,
2) (note 7)
|
66,892 | 75,624 | 65,136 | |||||||||
|
Gross
margin
|
105,986 | 108,166 | 87,798 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Selling
and administrative (1)
|
63,808 | 61,153 | 49,580 | |||||||||
|
Net
research and development (1)
(notes 16 and 17)
|
27,698 | 26,867 | 16,668 | |||||||||
|
Amortization
of property, plant and equipment
|
4,607 | 4,292 | 2,983 | |||||||||
|
Amortization
of intangible assets
|
5,067 | 3,871 | 2,864 | |||||||||
|
Restructuring
charges (note 4)
|
1,171 | – | – | |||||||||
|
Government
grants (note 16)
|
– | – | (1,079 | ) | ||||||||
|
Impairment
of goodwill (note 4)
|
21,713 | – | – | |||||||||
|
Total
operating expenses
|
124,064 | 96,183 | 71,016 | |||||||||
|
Earnings
(loss) from operations
|
(18,078 | ) | 11,983 | 16,782 | ||||||||
|
Interest
income
|
597 | 4,639 | 4,717 | |||||||||
|
Foreign
exchange gain (loss)
|
1,157 | 442 | (49 | ) | ||||||||
|
Earnings (loss) before income
taxes and extraordinary gain (note 17)
|
(16,324 | ) | 17,064 | 21,450 | ||||||||
|
Income taxes (note
17)
|
||||||||||||
|
Current
|
561 | (7,094 | ) | 3,741 | ||||||||
|
Future
|
72 | 14,094 | – | |||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(372 | ) | (5,324 | ) | (24,566 | ) | ||||||
| 261 | 1,676 | (20,825 | ) | |||||||||
|
Earnings
(loss) before extraordinary gain
|
(16,585 | ) | 15,388 | 42,275 | ||||||||
|
Extraordinary gain (note
3)
|
– | 3,036 | – | |||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Basic
and diluted earnings (loss) before extraordinary gain per
share
|
$ | (0.27 | ) | $ | 0.22 | $ | 0.61 | |||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.27 | ) | $ | 0.27 | $ | 0.61 | |||||
|
Basic
weighted average number of shares outstanding (000’s)
|
61,845 | 68,767 | 68,875 | |||||||||
|
Diluted weighted average number
of shares outstanding (000’s) (note 18)
|
61,845 | 69,318 | 69,555 | |||||||||
|
(1) Stock-based compensation costs
included in:
|
||||||||||||
|
Cost
of sales
|
$ | 137 | $ | 148 | $ | 118 | ||||||
|
Selling
and administrative
|
858 | 830 | 633 | |||||||||
|
Net
research and development
|
414 | 294 | 230 | |||||||||
| $ | 1,409 | $ | 1,272 | $ | 981 | |||||||
|
(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 Comprehensive Income (Loss)
and Accumulated Other
Comprehensive Income
(in thousands
of US dollars)
|
Comprehensive
income (loss)
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Foreign
currency translation adjustment
|
(10,671 | ) | (2,289 | ) | 9,881 | |||||||
|
Changes
in unrealized losses on short-term investments
|
22 | 31 | – | |||||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
(1,467 | ) | 962 | – | ||||||||
|
Reclassification
of realized gains (losses) on forward exchange contracts in net earnings
(loss)
|
3,167 | (3,915 | ) | – | ||||||||
|
Future
income tax effect of the above items
|
(528 | ) | 909 | – | ||||||||
|
Comprehensive
income (loss)
|
$ | (26,062 | ) | $ | 14,122 | $ | 52,156 | |||||
|
Accumulated
other comprehensive income
|
||||||||
|
Years
ended August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior years
|
$ | 51,129 | $ | 53,418 | ||||
|
Current
year
|
(10,671 | ) | (2,289 | ) | ||||
| 40,458 | 51,129 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Cumulative
effect of prior years
|
(96 | ) | 1,948 | |||||
|
Current
year, net of realized gains (losses) and future income
taxes
|
1,172 | (2,044 | ) | |||||
| 1,076 | (96 | ) | ||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Cumulative
effect of prior years
|
(24 | ) | (55 | ) | ||||
|
Current
year, net of future income taxes
|
22 | 31 | ||||||
| (2 | ) | (24 | ) | |||||
|
Accumulated
other comprehensive income
|
$ | 41,532 | $ | 51,009 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to
$111,503 and $85,441 as at August 31, 2008 and 2009, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statements of Retained Earnings and Contributed Surplus
(in thousands
of US dollars)
|
Retained
earnings
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
– Beginning of year
|
$ | 60,494 | $ | 42,275 | $ | – | ||||||
|
Add
(deduct)
|
||||||||||||
|
Cumulative
effect of prior years
|
– | 55 | – | |||||||||
|
Net
earnings (loss) for the year
|
(16,585 | ) | 18,424 | 42,275 | ||||||||
|
Premium
on redemption of share capital (note 14)
|
– | (260 | ) | – | ||||||||
|
Balance
– End of year
|
$ | 43,909 | $ | 60,494 | $ | 42,275 | ||||||
|
Contributed
surplus
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
– Beginning of year
|
$ | 5,226 | $ | 4,453 | $ | 3,776 | ||||||
|
Add
(deduct)
|
||||||||||||
|
Stock-based
compensation costs
|
1,407 | 1,287 | 973 | |||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards (note 14)
|
(540 | ) | (514 | ) | (296 | ) | ||||||
|
Discount
on redemption of share capital (note 14)
|
11,665 | – | – | |||||||||
|
Balance
– End of year
|
$ | 17,758 | $ | 5,226 | $ | 4,453 | ||||||
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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Add
(deduct) items not affecting cash
|
||||||||||||
|
Change
in discount on short-term investments
|
597 | 1,035 | (404 | ) | ||||||||
|
Stock-based
compensation costs
|
1,409 | 1,272 | 981 | |||||||||
|
Amortization
|
9,674 | 8,163 | 5,847 | |||||||||
|
Deferred
revenue
|
1,706 | 47 | 1,299 | |||||||||
|
Government
grants
|
– | – | (752 | ) | ||||||||
|
Loss
(gain) on disposal of capital assets
|
237 | – | (117 | ) | ||||||||
|
Impairment
of goodwill (note 4)
|
21,713 | – | – | |||||||||
|
Future
income taxes
|
(300 | ) | 8,770 | (24,566 | ) | |||||||
|
Extraordinary
gain (note 3)
|
– | (3,036 | ) | – | ||||||||
|
Change
in unrealized foreign exchange gain
|
(1,955 | ) | (1,093 | ) | (65 | ) | ||||||
| 16,496 | 33,582 | 24,498 | ||||||||||
|
Change
in non-cash operating items
|
||||||||||||
|
Accounts
receivable
|
9,654 | (4,338 | ) | (5,468 | ) | |||||||
|
Income
taxes and tax credits
|
(3,391 | ) | (12,833 | ) | (3,403 | ) | ||||||
|
Inventories
|
2,624 | (2,166 | ) | (5,456 | ) | |||||||
|
Prepaid
expenses
|
(350 | ) | (127 | ) | 85 | |||||||
|
Accounts
payable and accrued liabilities
|
(2,409 | ) | (1,416 | ) | 4,105 | |||||||
| 22,624 | 12,702 | 14,361 | ||||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Additions
to short-term investments
|
(438,460 | ) | (717,020 | ) | (807,056 | ) | ||||||
|
Proceeds
from disposal and maturity of short-term investments
|
456,612 | 760,310 | 793,435 | |||||||||
|
Additions
to capital assets
|
(6,945 | ) | (6,508 | ) | (5,547 | ) | ||||||
|
Net
proceeds from disposal of capital assets
|
– | – | 3,092 | |||||||||
|
Business
combinations, net of cash acquired (note 3)
|
(2,414 | ) | (41,016 | ) | – | |||||||
| 8,793 | (4,234 | ) | (16,076 | ) | ||||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Repayment
of long-term debt
|
– | – | (472 | ) | ||||||||
|
Redemption
of share capital (note 14)
|
(26,871 | ) | (8,068 | ) | – | |||||||
|
Exercise
of stock options
|
56 | 61 | 802 | |||||||||
| (26,815 | ) | (8,007 | ) | 330 | ||||||||
|
Effect
of foreign exchange rate changes on cash
|
95 | (88 | ) | 73 | ||||||||
|
Change
in cash
|
4,697 | 373 | (1,312 | ) | ||||||||
|
Cash
– Beginning of year
|
5,914 | 5,541 | 6,853 | |||||||||
|
Cash
– End of year
|
$ | 10,611 | $ | 5,914 | $ | 5,541 | ||||||
|
Supplementary
information
|
||||||||||||
|
Interest
paid
|
$ | 23 | $ | 55 | $ | 57 | ||||||
|
Income
taxes paid
|
$ | 86 | $ | 759 | $ | 3,527 | ||||||
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
line of test and service assurance solutions for network service providers and
equipment manufacturers in the global telecommunications industry.
The Telecom Division, which represents the company’s main business
activity, offers a wide range of innovative solutions to assess optical
networks, from the core to access, as well as next-generation IP infrastructures
and related triple-play services. The Life Sciences and Industrial Division
offers solutions for medical-device and opto-electronics assembly, fluorescence
microscopy and other life sciences sectors. EXFO’s products are sold in
approximately 95 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 fair value of financial
instruments, 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
impairment of goodwill, 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. The cumulative
foreign currency translation adjustment arising from such translation is
included in accumulated other comprehensive income in
shareholders’ equity.
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 relevant 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
relevant 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. Forward exchange contracts, which qualify for hedge accounting as per
the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3865,
“Hedges”, are entered into by the company to hedge anticipated
US-dollar-denominated sales and the related accounts receivable. The company’s
policy is not to utilize those derivative financial instruments for trading or
speculative purposes.
In
accordance with the requirements of the CICA Handbook Section 3855, “Financial
Instruments – Recognition and Measurement”, adopted by the company on September
1, 2007, the company’s forward exchange contracts are recorded at fair
value in the balance sheet, and changes in their fair value are reported
in comprehensive income. Any ineffective portion is recognized immediately
in the statements of earnings. Upon the recognition of related hedged sales,
accumulated changes in fair value are reclassified in sales in the statements of
earnings.
Prior to
the adoption of Section 3855 on September 1, 2007, the company’s forward
exchange contracts qualified for hedge accounting; therefore, foreign exchange
translation gains and losses on these contracts were recognized as an adjustment
of the revenues when the corresponding hedged sales were
recorded.
Short-term
investments
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.
In
accordance with the requirements of the CICA Handbook Section 3855, “Financial
Instruments – Recognition and Measurement”, adopted by the company on September
1, 2007, short-term investments are classified as available-for-sale securities;
therefore, they are carried at fair value in the balance sheet, and any changes
in their fair value are reflected in comprehensive income. Upon the
disposal of these assets, accumulated changes in their fair value are
reclassified in the statements of earnings.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
Inventories
Inventories
are valued on an average cost basis, at the lower of cost and net realizable
value.
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
|
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)
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 10
years for software.
Goodwill
represents the excess of the purchase price of acquired businesses over the 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 fair value of its net
identifiable assets.
The
company performs its annual impairment test in the third quarter of each fiscal
year for all its existing reporting units (note 4).
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 amount/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. 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.
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)
Maintenance
contracts generally include the right to unspecified upgrades and enhancements
on a when-and-if available basis and ongoing customer support. Revenue from
these contracts is recognized ratably over the terms of the maintenance
contracts on a straight-line basis.
Revenue
for extended warranties is recognized on a straight-line basis over the warranty
period.
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.
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.
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 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, 2009, 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 deductions, using 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.
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)
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.
Stock-based
compensation costs
The
company accounts for stock-based compensation on stock options, restricted share
units and deferred share units, using the fair value-based method. The company
accounts for stock-based compensation on stock appreciation rights, using the
intrinsic value method. Stock-based compensation costs are amortized to expense
over the vesting periods.
New
accounting standards and pronouncements
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (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 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding 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 previously found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments or 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.
The
company adopted these new standards on September 1, 2008 (notes 5 and
6).
In June
2007, the CICA issued Section 3031, “Inventories”. 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 adopted this new standard on
September 1, 2008, and its adoption had no material measurement effect on
the consolidated financial statements. The additional disclosure is shown in
note 7.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation”, to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. The company adopted these amendments on
September 1, 2008, and their adoption had no material effect on the
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)
In
January 2009, the CICA issued Emerging Issues Committee 173 (EIC-173), “Credit
Risk and the Fair Value of Financial Assets and Financial Liabilities”. This
abstract clarifies that an entity’s own credit risk and the credit risk of its
counterparty should be taken into account in determining the fair value of
financial assets and liabilities. The company adopted this standard on January
20, 2009, and its adoption had no material effect on the consolidated
financial statements.
To
be adopted after fiscal 2009
In
February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which supersedes Section 3062, “Goodwill and Other Intangible Assets” and
Section 3450, “Research and Development Costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards concerning goodwill
remain unchanged from the standards included in Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008. The
company will adopt this new standard on September 1, 2009, and has not yet
determined the effects its adoption will have on the consolidated financial
statements.
In
January 2009, the CICA issued Section 1582, “Business Combinations”, which
replaces Section 1581, “Business Combinations”. This new section establishes the
standards for the accounting of business combinations and states that all assets
and liabilities of an acquired business will be recorded at fair value.
Obligations for contingent consideration and contingencies will also be recorded
at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that restructuring
charges will be expensed in the periods after the acquisition date.
This standard applies prospectively to business combinations with acquisition
dates on or after January 1, 2011; earlier adoption is
permitted.
In January 2009, the CICA issued
Section 1601, “Consolidated Financial Statements”, which replaces Section 1600,
“Consolidated Financial Statements”, and establishes the standards for preparing
consolidated financial statements. This new section applies to fiscal years
beginning on or after January 1, 2011; earlier adoption is permitted. The
company has not yet determined the impact that adopting this standard will have
on the consolidated financial statements.
In
January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination. This new section applies to fiscal years beginning on or
after January 1, 2011; earlier adoption is permitted as of the beginning of
a fiscal year.
Should
the company decide to adopt one of these three new sections ealier, it must
adopt all three on the same date.
In June
2009, the CICA amended section 3862, "Financial Instruments − Disclosures", to
include enhanced disclosures
on liquidity risk of financial instruments and new disclosures on fair
value measurements of financial instruments.
The amendments apply to fiscal years ending after September 30, 2009, with early
adoption permitted. The company will adopt these amendments on September 1,
2010, and has not yet determined the effects its adoption will have on the
consolidated financial statements.
3 Business
Combinations
Navtel
Communications Inc.
On March
26, 2008, the company acquired all issued and outstanding shares of Navtel
Communications Inc. Based in Toronto, Canada, Navtel Communications Inc.
was a privately held company specializing in tests for next-generation Internet
protocol networks. On March 26, 2008, Navtel Communications Inc. was liquidated
into the parent company.
This
acquisition was settled for a total cash consideration of $11,477,000, or
$11,332,000 net of $145,000 of cash acquired. The total consideration included
acquisition-related costs of $172,000.
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)
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 financial statements of the company since March 26, 2008, 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, net of cash acquired
|
||||
|
Accounts
receivable
|
$ | 776 | ||
|
Inventories
|
447 | |||
|
Other
current assets
|
320 | |||
|
Tax
credits
|
7,074 | |||
|
Core
technology
|
2,919 | |||
|
Future
income tax assets
|
8,586 | |||
|
Current
liabilities assumed
|
||||
|
Accounts
payable and accrued liabilities
|
(431 | ) | ||
|
Deferred
revenue
|
(523 | ) | ||
|
Future
income tax liabilities
|
(2,737 | ) | ||
|
Net
identifiable assets acquired
|
16,431 | |||
|
Purchase
price, net of cash acquired
|
11,332 | |||
|
Excess
of the fair value of net identifiable assets acquired over the purchase
price
|
$ | (5,099 | ) | |
The
excess of the fair value of the net identifiable assets acquired over the
purchase price in the amount of $5,099,000 has been eliminated in part by
fully reducing the value assigned to acquired core technology and related future
income tax liabilities. The remaining excess in the amount of
$3,036,000 has been presented as an extraordinary gain in the statement of
earnings for the year ended August 31, 2008. The basic and diluted extraordinary
gain per share amounted to $0.05 for the year ended August 31,
2008.
This
business reports to the Telecom Division.
Brix
Networks Inc. (renamed EXFO Service Assurance Inc.)
On April
22, 2008, the company acquired all issued and outstanding shares of Brix
Networks Inc. (renamed EXFO Service Assurance Inc.). Based in the Boston, MA
area, Brix Networks Inc. was a privately held company offering VoIP and IPTV
test solutions across the three areas that most affect the success of a
real-time service: signaling quality (signaling path performance), delivery
quality (media transport performance) and content quality (overall quality of
experience).
This
acquisition was settled for a cash consideration of $29,696,000, or $29,684,000
net of $12,000 of cash acquired, plus a contingent cash consideration of
$2,414,000; this contingent cash consideration was paid in fiscal 2009 based
upon the achievement of a certain bookings volume during the 12 months following
the acquisition. The amount paid for the contingent cash consideration increased
goodwill.
The
purchase price allocation took into account severance expenses of $497,000 (note
4) for the termination of employees of the acquired business.
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 financial statements of the company since April 22, 2008, being the
date of acquisition.
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
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, net of cash acquired
|
||||
|
Accounts
receivable
|
$ | 1,106 | ||
|
Inventories
|
1,229 | |||
|
Other
current assets
|
488 | |||
|
Capital
assets
|
1,097 | |||
|
Core
technology
|
13,765 | |||
|
Future
income tax assets
|
1,641 | |||
|
Current
liabilities assumed
|
||||
|
Accounts
payable and accrued liabilities
|
(2,565 | ) | ||
|
Deferred
revenue
|
(2,445 | ) | ||
|
Net
identifiable assets acquired
|
14,316 | |||
|
Goodwill
|
15,368 | |||
|
Purchase
price, net of cash acquired
|
$ | 29,684 | ||
Intangible
assets are amortized on a straight-line basis over their estimated useful life
of five years.
Future
income tax assets at the acquisition date amounted to $13,701,000 and were
mainly comprised of net operating losses and research and development expenses
carried forward. A valuation allowance of $8,195,000 was recorded against these
assets at the acquisition date. In the event that the company would reverse a
portion or all of the valuation allowance, the amount of such reversal would
reduce the amount of goodwill recognized at the date of
acquisition.
This
business, including acquired goodwill, reports to the Telecom Division. Acquired
goodwill is not deductible for tax purposes.
4 Special
Charges
Impairment
of goodwill
Fiscal
2009
In the
third quarter of fiscal 2009, the company performed its annual impairment test
for goodwill for all reporting units. Recoverability of goodwill is determined
at the reporting unit level, using a two-step approach. First, the carrying
value of the reporting units is compared to their fair value. If the
carrying value of a reporting unit exceeds its fair value, the second step is
performed to determine the amount of the impairment loss. Following the decrease
in the company’s stock price in June 2009, the company came to the
conclusion that the carrying value of one of its reporting units exceeded its
fair value, and it recorded an impairment charge of $21,713,000 in fiscal
2009, to bring the goodwill of this reporting unit to its fair value.
This reporting unit reports to the Telecom Division.
This
impairment resulted in a future income tax recovery of $2,070,000.
Restructuring
charges
Fiscal
2009
During
fiscal 2009, the company implemented a restructuring plan to align its cost
structure to the current economic and market conditions. Under that plan, the
company recorded charges of $1,171,000 in severance expenses for the
65 employees who were terminated throughout the company. These charges are
included in the restructuring charges in the statement of earnings for the year
ended August 31, 2009. As at August 31, 2009, the accrued liabilities related to
the severance expenses amounted to $24,000.
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 tables summarize changes in restructuring charges payable since August
31, 2006:
Year
ended August 31, 2009
|
Balance
as at
August 31, 2008
|
Additions
|
Payments
|
Balance
as at
August 31, 2009
|
|||||||||||||
|
Fiscal
2009 plan
|
||||||||||||||||
|
Severance
expenses
|
$ | − | $ | 1,171 | $ | (1,147 | ) | $ | 24 | |||||||
|
Fiscal
2008 plan
|
||||||||||||||||
|
Severance
expenses (note 3)
|
292 | − | (292 | ) | − | |||||||||||
|
Total
for all plans (note 11)
|
$ | 292 | $ | 1,171 | $ | (1,439 | ) | $ | 24 | |||||||
Year
ended August 31, 2008
|
Balance
as at
August 31, 2007
|
Additions
|
Payments
|
Balance
as at
August 31, 2008
|
|||||||||||||
|
Fiscal
2008 plan (notes 3 and 11)
|
||||||||||||||||
|
Severance
expenses
|
$ | − | $ | 497 | $ | (205 | ) | $ | 292 | |||||||
Year
ended August 31, 2007
|
Balance
as at
August 31, 2006
|
Additions
|
Payments
|
Balance
as at
August 31, 2007
|
|||||||||||||
|
Fiscal
2006 plan
|
||||||||||||||||
|
Severance
expenses
|
$ | 631 | $ | − | $ | (631 | ) | $ | − | |||||||
|
Fiscal
2003 plan
|
||||||||||||||||
|
Exited
leased facilities
|
60 | − | (60 | ) | − | |||||||||||
|
Total
for all plans
|
$ | 691 | $ | − | $ | (691 | ) | $ | − | |||||||
5 Capital
Disclosures
The
company is not subject to any external restrictions on its capital.
The
company’s objectives when managing capital are:
|
·
|
To
maintain a flexible capital structure, which optimizes the cost of capital
at acceptable risk;
|
|
·
|
To
sustain future development of the company, including research and
development activities, market development, and potential acquisitions of
complementary businesses or products;
and
|
|
·
|
To
provide the company’s shareholders with an appropriate return on their
investment.
|
The
company defines its capital as shareholders’ equity, excluding accumulated other
comprehensive income. Accumulated other comprehensive income’s main components
are the cumulative foreign currency translation adjustment, which is the result
of the translation of the company’s consolidated financial statements into
US dollars (the reporting currency) as well as after-tax unrealized gains
(loss) on forward exchange contracts.
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
capital of the company amounted to $208,506,000 and $166,513,000 as at August
31, 2008 and 2009, respectively.
Of the
capital, as at August 31, 2009, an amount of $69,716,000 represented cash and
short-term investments ($87,540,000 as at August 31, 2008), a portion
of which can be considered in excess of the company’s current and expected needs
(except for potential acquisitions of businesses). The company has
consequently been repurchasing shares from the open market via a normal course
issuer bid through the facilities of the Toronto Stock Exchange and NASDAQ.
Furthermore, on December 18, 2008, pursuant to a substantial issuer bid
(note 14), the company purchased for cancellation 7,692,307 subordinate
voting shares for an aggregate purchase price of CA$30,000,000 (US$24,879,000),
plus related fees of $576,000.
6 Financial
Instruments
Market
risk
Currency
risk
The
principal measurement currency of the company is the Canadian dollar. The
company is exposed to currency risks as a result of its export sales
of products manufactured in Canada and China, the majority of which are
denominated in US dollars and euros. These risks are partially hedged
by forward exchange contracts (US dollars) and certain operating expenses (US
dollars and euros).
As at
August 31, 2009, the company held contracts to sell US dollars for Canadian
dollars at various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted average contractual
forward
rates
|
|||||||
|
September
2009 to August 2010
|
$ | 27,600 | 1.1019 | ||||||
|
September
2010 to August 2011
|
14,600 | 1.1221 | |||||||
|
September
2011
|
1,000 | 1.1278 | |||||||
|
Total
|
$ | 43,200 | 1.1093 | ||||||
These
contracts are designated and accounted for as cash flow hedges.
The fair
value of forward exchange contracts, which represents the amount that the
company would receive or pay to settle the contracts based on the forward
exchange rate at period end, amounted to net gains of $62,000 as at August 31,
2008 and net gains of $530,000
as at August 31, 2009.
As at
August 31, 2009, forward exchange contracts, in the amount of
$874,000, are presented as current assets in other receivable in the balance
sheet, forward exchange contracts, in the amount of $428,000, are presented
as long-term assets in forward exchange contracts in the balance sheet, and
forward exchange contracts, in the amount of $704,000, are presented
as current liabilities in the accounts payable and accrued liabilities in the
balance sheet (note 11). As at August 31, 2008, forward
exchange contracts, in the amount of $614,000, are presented as current assets
in other receivable in the balance sheet and forward exchange contracts, in the
amount of $714,000, are presented as current liabilities in the
accounts payable and accrued liabilities in the balance sheet (note
11).
Based on
the portfolio of forward exchange contracts as at August 31, 2009, the company
estimates that the portion of the unrealized gains on these contracts as of that
date, which will be realized and reclassified from accumulated other
comprehensive income to net earnings over the next 12 months, amounts to
$170,000.
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 significant financial assets and liabilities that are
subject to currency risk as at August 31, 2009:
|
Carrying/nominal
amount
(in
thousands
of
US dollars)
|
Carrying/nominal
amount
(in
thousands
of
euros)
|
|||||||
|
Financial
assets
|
||||||||
|
Cash
|
$ | 6,040 | € | 779 | ||||
|
Accounts
receivable
|
17,402 | 2,642 | ||||||
| 23,442 | 3,421 | |||||||
|
Financial
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
5,718 | 332 | ||||||
|
Forward
exchange contracts
|
5,600 | − | ||||||
| 11,318 | 332 | |||||||
|
Net
exposure
|
$ | 12,124 | € | 3,089 | ||||
The
period-end value of the Canadian dollar compared to the US dollar was CA$1.0967
= US$1.00 as at August 31, 2009.
The
period-end value of the Canadian dollar compared to the euro was CA$1.5741 =
€1.00 as at August 31, 2009.
The
following sensitivity analysis summarizes the effect that a change in the value
of the Canadian dollar (compared to US dollar and euro) on financial
assets and liabilities denominated in US dollars and euros, would have on net
earnings, net earnings per diluted share and comprehensive income, based on the
foreign exchange rates as at August 31, 2009:
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would decrease (increase) net earnings by
$1,205,000 or $0.02 per diluted
share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the euro would decrease (increase) net earnings by $445,000,
or $0.01 per diluted share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would increase (decrease) comprehensive income
by $2,500,000.
|
The
impact of the change in the value of the Canadian dollar compared to the US
dollar and the euro on these financial assets and liabilities is recorded in the
foreign exchange gain or loss line item in the consolidated statements of
earnings, except for outstanding forward contracts, which impact is recorded in
comprehensive income. The change in the value of the Canadian dollar
compared to the US dollar and the euro also impacts the company’s balances of
income tax and tax credits recoverable or payable and future income tax
assets and liabilities related to integrated foreign subsidiaries; this may
result in additional and significant foreign exchange gain or loss. However,
these assets and liabilities are not considered financial instruments and are
excluded from the sensitivity analysis above. The foreign exchange rate
fluctuations also flow through the statements of earnings line items, as a
significant portion of the company’s operating expenses is denominated
in Canadian dollars, and the company reports its results in US dollars;
that effect is not reflected in the sensitivity
analysis above.
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)
Interest
rate risk
The
company is exposed to interest rate risks through its short-term investments.
Short-term investments consist of the following:
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Commercial
paper denominated in Canadian dollars, bearing interest at annual rates of
0.2% to 0.6% in 2009 and 2.80% to 3.32% in 2008, maturing between
September 2009 and December 2009 in fiscal 2009, and September 2008 and
February 2009 in fiscal 2008
|
$ | 45,109 | $ | 81,626 | ||||
|
Bankers
acceptance denominated in Canadian dollars, bearing interest at an annual
rate of 0.2%, maturing between September and October 2009
|
13,996 | − | ||||||
| $ | 59,105 | $ | 81,626 | |||||
The fair
value of short-term investments based on market value amounted to $81,626,000
and $59,105,000 as at August 31, 2008 and 2009,
respectively.
An
increase (decrease) of 0.5% in the interest rate of the company’s short-term
investments would increase (decrease) net earnings by $204,000, or $0.00 per
diluted share.
Due to
their short-term maturity of usually three months or less, the company’s
short-term investments are not subject to significant fair value interest
rate risk. Accordingly, change in fair value has been nominal to the degree that
amortized cost has historically approximated the fair value. Any change in fair
value of the company’s short-term investments, all of which are
classified as available for sale, is recorded in other comprehensive
income.
Cash,
accounts receivable and accounts payable and accrued liabilities are
non-interest-bearing financial assets and liabilities. Accounts receivable
and accounts payable are financial instruments whose carrying value approximates
their fair value due to their short-term maturity.
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 (with a positive fair value). As at
August 31, 2009, the company’s short-term investments consist of debt
instruments issued by 11 (10 as at August 31, 2008) high-credit quality
corporations and trusts. None of these debt instruments are expected
to be affected by a significant liquidity risk, and none of them
represent asset-backed commercial paper. 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 limited.
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 $305,000 and $1,220,000
as at August 31, 2008 and 2009, respectively. Bad debt
expense (recovery) amounted to $(52,000), $148,000 and $967,000 for the years
ended August 31, 2007, 2008 and 2009, respectively.
For the
years ended August 31, 2007 and 2009, one customer represented more than
10% of global sales with 14.7% ($22,480,000) and 11.6% ($20,049,000),
respectively. This customer purchased from the Telecom Division. In fiscal 2008,
no customer represented more than 10% of sales.
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 age of trade accounts receivable as at
August 31 2009:
|
Current
|
$ | 16,489 | ||
|
Past
due, 0 to 30 days
|
3,551 | |||
|
Past
due, 31 to 60 days
|
1,464 | |||
|
Past
due, more than 60 days
|
2,662 | |||
|
Total
accounts receivable
|
24,166 | |||
|
Allowance
for doubtful accounts
|
(1,220 | ) | ||
| $ | 22,946 | |||
Changes
in the allowance for doubtful accounts are as follows:
|
Years
ended August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
– Beginning of year
|
$ | 305 | $ | 206 | ||||
|
Addition
charged to earnings
|
979 | 204 | ||||||
|
Write-off
of uncollectible accounts
|
(45 | ) | (53 | ) | ||||
|
Recovery
of uncollectible accounts
|
(19 | ) | (52 | ) | ||||
|
Balance
– End of year
|
$ | 1,220 | $ | 305 | ||||
Liquidity
risk
Liquidity
risk is defined as the potential that the company cannot meet its obligations as
they become due.
The
following table summarizes the contractual maturity of the company’s financial
liabilities as at August 31, 2009:
|
0-12
months
|
13-24
months
|
25-36
months
|
||||||||||
|
Accounts
payable and accrued liabilities
|
$ | 20,946 | $ | − | $ | − | ||||||
|
Forward
exchange contracts
|
||||||||||||
|
Outflow
|
27,600 | 14,600 | 1,000 | |||||||||
|
Inflow
|
(27,730 | ) | (14,938 | ) | (1,028 | ) | ||||||
|
Total
|
$ | 20,816 | $ | (338 | ) | $ | (28 | ) | ||||
In
addition, the company has a share repurchase program that may require additional
cash outflows during fiscal 2010 and 2011 (note 14). Also, the company has an
outstanding contingent consideration payable upon the acquisition of assets,
which is not yet recorded in the financial statements and may require additional
cash outflows in upcoming years (note 13).
As at
August 31, 2009, the company had $69,716,000 in cash and short-term
investments and $25,698,000 in accounts receivable. In addition to these
financial assets, the company has unused available lines of credit totaling
$14,169,000 for working capital and other general corporate purposes, including
potential acquisitions and its share repurchase program as well as unused
lines of credit of $16,465,000 for foreign currency exposure related to its
forward exchange contracts (note 10).
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)
7 Inventories
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 14,497 | $ | 17,651 | ||||
|
Work
in progress
|
1,955 | 1,961 | ||||||
|
Finished
goods
|
14,411 | 15,268 | ||||||
| $ | 30,863 | $ | 34,880 | |||||
The cost
of sales comprised almost exclusively the amount of inventory recognized as an
expense during the reporting periods, except for the related amortization, which
is shown separately in operating expenses.
Inventory
write-down amounted to $3,586,000, $2,651,000 and $3,332,000 for the years ended
August 31, 2007, 2008 and 2009, respectively.
On an
ongoing basis and when technically possible, the company adjusts the design of
its products to reuse excess inventory; over the past few years, the company
experienced higher sales than expected on some product lines and consumed such
excess inventory. Consequently, it was able to reuse excess inventories that
were written off in previous years. Excess inventory reuse accounted for
$1,700,000, $1,200,000 and $154,000 for the years ended August 31, 2007, 2008
and 2009, respectively.
8 Property,
Plant and Equipment
|
As
at August 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Cost
|
Accumulated
amortization
|
Cost
|
Accumulated
amortization
|
|||||||||||||
|
Land
and land improvements
|
$ | 2,224 | $ | 1,157 | $ | 2,295 | $ | 1,184 | ||||||||
|
Buildings
|
12,374 | 4,354 | 12,319 | 3,985 | ||||||||||||
|
Equipment
|
37,824 | 28,852 | 36,423 | 27,083 | ||||||||||||
|
Leasehold
improvements
|
4,751 | 3,710 | 3,698 | 2,608 | ||||||||||||
| 57,173 | $ | 38,073 | 54,735 | $ | 34,860 | |||||||||||
|
Less:
|
||||||||||||||||
|
Accumulated
amortization
|
38,073 | 34,860 | ||||||||||||||
| $ | 19,100 | $ | 19,875 | |||||||||||||
As at
August 31, 2007, 2008 and 2009, unpaid purchases of property, plant and
equipment amounted to $464,000, $414,000 and $348,000,
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)
9 Intangible
Assets and Goodwill
Intangible
assets
|
As
at August 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Cost
|
Accumulated
amortization
|
Cost
|
Accumulated
amortization
|
|||||||||||||
|
Core
technology
|
$ | 63,490 | $ | 49,316 | $ | 62,933 | $ | 45,981 | ||||||||
|
Software
|
9,193 | 6,508 | 8,631 | 5,638 | ||||||||||||
| 72,683 | $ | 55,824 | 71,564 | $ | 51,619 | |||||||||||
|
Less:
|
||||||||||||||||
|
Accumulated amortization
|
55,824 | 51,619 | ||||||||||||||
| $ | 16,859 | $ | 19,945 | |||||||||||||
Estimated
amortization expense for intangible assets in each of the next five fiscal years
amounts to $5,564,000 in 2010, $4,355,000 in 2011, $3,442,000 in 2012,
$2,392,000 in 2013 and $416,000 in 2014.
Additions
to intangible assets for the years ended August 31, 2007, 2008 and 2009 amounted
to $1,156,000, $14,828,000 and $2,600,000, respectively.
Goodwill
Changes
in the carrying value of goodwill are as follows:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
|||||||||||||||||||
|
Balance
– Beginning of year
|
$ | 37,866 | $ | 4,787 | $ | 42,653 | $ | 23,622 | $ | 4,815 | $ | 28,437 | ||||||||||||
|
Addition
from business combinations (note 3)
|
2,414 | − | 2,414 | 15,368 | − | 15,368 | ||||||||||||||||||
|
Impairment
(note 4)
|
(21,713 | ) | − | (21,713 | ) | − | − | − | ||||||||||||||||
|
Foreign
currency translation adjustment
|
(727 | ) | (149 | ) | (876 | ) | (1,124 | ) | (28 | ) | (1,152 | ) | ||||||||||||
|
Balance
– End of year (note 19)
|
$ | 17,840 | $ | 4,638 | $ | 22,478 | $ | 37,866 | $ | 4,787 | $ | 42,653 | ||||||||||||
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)
| 10 | Credit Facilities |
The
company has lines of credit that provide for advances of up to CA$15,000,000
(US$13,677,000) and up to $2,000,000. These lines of credit bear
interest at the Canadian prime rate. As at August 31, 2009, an amount
of CA$6,040,356 (US$5,508,000) was drawned from theses lines of credit for
letters of guarantee (note 13). These lines of credit are
subject to a negative pledge whereby the company has agreed with the bank
not to pledge its assets to any other
party.
The
company also has another line of credit, which provides for advances of up to
US$4,000,000. This line of credit bears interest at the Chinese prime rate for
advances made in CNY and at LIBOR plus 3.5% for advances made in US dollars.
As at August 31, 2009, this line of credit was unused.
Finally,
the company has lines of credit of $19,935,000 for the foreign currency risk
exposure related to its forward exchange contracts (note 6). As at
August 31, 2009, an amount of $3,470,000 was reserved from these lines
of credit.
These
lines of credit are renewable annually and
unsecured.
| 11 | Accounts Payable and Accrued Liabilities |
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Trade
|
$ | 9,063 | $ | 10,303 | ||||
|
Salaries
and social benefits
|
8,863 | 8,888 | ||||||
|
Warranty
|
699 | 974 | ||||||
|
Commissions
|
647 | 761 | ||||||
|
Restructuring
charges (note 4)
|
24 | 292 | ||||||
|
Forward
exchange contracts (note 6)
|
704 | 714 | ||||||
|
Other
|
1,650 | 2,781 | ||||||
| $ | 21,650 | $ | 24,713 | |||||
Changes
in the warranty provision are as follows:
|
Years
ended August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
– Beginning of year
|
$ | 974 | $ | 800 | ||||
|
Provision
|
590 | 655 | ||||||
|
Addition
from business combinations
|
− | 175 | ||||||
|
Settlements
|
(865 | ) | (656 | ) | ||||
|
Balance
– End of year
|
$ | 699 | $ | 974 | ||||
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 | Commitments |
The
company entered into operating leases for certain of its premises and equipment,
which expire at various dates through August 2015. As at August 31, 2009,
minimum rental expenses of these operating leases in each of the next five years
will amount to $3,262,000 in 2010, $1,567,000 in 2011, $741,000 in 2012,
$250,000 in 2013 and $189,000 in 2014. Total commitments for these operating
leases amount to $6,176,000.
For the
years ended August 31, 2007, 2008 and 2009, rental expenses amounted to
$1,847,000, $2,427,000 and $2,736,000, respectively.
| 13 | Contingencies |
|
|
a)
|
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 predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants 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.
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)
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court 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.
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’s 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, on September 27, 2007, again moved for class
certification. On November 12, 2007, certain defendants in the
focus cases moved to dismiss the second consolidated amended class action
complaints. On March 26, 2008, the district court denied the motions to dismiss,
except as to Section 11 claims raised by those plaintiffs who sold their
securities for a price in excess of the initial offering price and those who
purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008.
On
April 2, 2009, a stipulation and agreement of settlement between the
plaintiffs, issuer defendants and underwriter defendants was submitted to the
Court for preliminary approval. The Court granted the plaintiffs’ motion for
preliminary approval and preliminarily certified the settlement classes
on June 10, 2009. The settlement fairness hearing was held
on September 10, 2009. On October 6, 2009, the Court entered an opinion
granting final approval to the settlement and directing that the Clerk of
the Court close these actions. Notices of appeal of the opinion granting final
approval have been filed. Given that the settlement remains subject to appeal as
of the date of issuance of these financial statements, the ultimate outcome
of the contingency is uncertain. However, based on the
settlement approved on October 6, 2009, and the related insurance against such
claims, management has determined the impact to its financial position and
results of operations as at and for the year ended August 31, 2009 to be
immaterial.
|
|
b)
|
Letters
of guarantee
|
As at
August 31, 2009, in the normal course of its operations, the company had
outstanding letters of guarantee in the amount of $5,508,000, which expire at
various dates through fiscal 2016. From this amount, the company had $1,108,000
worth of letters of guarantee for its own selling and purchase requirements,
which were for the most part reserved from one of the lines of credit (note 10).
The remainder in the amount of $4,400,000 was used by the company to secure its
line of credit in CNY. This line of credit was unused
as at August 31, 2009 (note 10).
|
|
c)
|
Contingent
cash consideration
|
Following
the purchase of assets in fiscal 2009, the company has a contingent cash
consideration of up to $1,000,000, payable based upon the achievement of a
certain booking volume in the next 24 months following the
purchase.
| 14 | 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 10 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,
2006:
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
Balance
as at August 31, 2006
|
37,143,000 | $ | 1 | 31,609,969 | $ | 148,920 | $ | 148,921 | ||||||||||||
|
Exercise
of stock options (note 15)
|
– | – | 250,528 | 802 | 802 | |||||||||||||||
|
Redemption
of restricted share units (note 15)
|
– | – | 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 | |||||||||||||||
|
Exercise
of stock options (note 15)
|
– | – | 18,500 | 61 | 61 | |||||||||||||||
|
Redemption
of restricted share units (note 15)
|
– | – | 65,870 | – | – | |||||||||||||||
|
Redemption
of deferred share units (note 15)
|
– | – | 20,695 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 514 | 514 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (1,682,921 | ) | (7,808 | ) | (7,808 | ) | ||||||||||||
|
Balance
as at August 31, 2008
|
36,643,000 | 1 | 30,783,705 | 142,785 | 142,786 | |||||||||||||||
|
Exercise
of stock options (note 15)
|
– | – | 27,500 | 56 | 56 | |||||||||||||||
|
Redemption
of restricted share units (note 15)
|
– | – | 106,190 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 540 | 540 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (8,181,093 | ) | (38,536 | ) | (38,536 | ) | ||||||||||||
|
Balance
as at August 31, 2009
|
36,643,000 | $ | 1 | 22,736,302 | $ | 104,845 | $ | 104,846 | ||||||||||||
|
a)
|
On
November 6, 2008, the company announced that its Board of Directors had
authorized a renewal of its share repurchase program, by way of a normal
course issuer bid on the open market, of up to 10% of its public float
(as defined by the Toronto Stock Exchange), or 2,738,518 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 period of the normal
course issuer bid commenced on November 10, 2008, and will end
on November 9, 2009. All shares repurchased under the bid
are cancelled. In fiscal 2009, the company redeemed
488,786 subordinate voting shares for an aggregate net purchase price
of $1,416,000.
|
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)
|
b)
|
On
November 10, 2008, the company announced that its Board of Directors had
authorized a substantial issuer bid (the “Offer”) to purchase for
cancellation subordinate voting shares for an aggregate purchase price not
to exceed CA$30,000,000. On December 18, 2008, pursuant to the Offer,
the company purchased for cancellation 7,692,307 subordinate voting
shares for the aggregate purchase price of CA$30,000,000 (US$24,879,000),
plus related fees of $576,000. The company used cash and short-term
investments to fund the purchase of
shares.
|
|
c)
|
On
November 6, 2009, the company announced that its Board of Directors had
authorized the second renewal of its share repurchase program, by way
of a normal course issuer bid on the open market, of up to 10%
of its public float (as defined by the Toronto Stock Exchange),
or 2,256,431 million 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 period of the normal course issuer bid will start on November 10,
2009, and end on November 9, 2010,
or on an earlier date if the company repurchases
the maximum number of shares permitted under the bid. The program does not
require that the company repurchases any specific number of shares,
and it may be modified, suspended or terminated at any time and
without prior notice. All shares repurchased under the bid will
be cancelled.
|
| 15 | 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.
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 10 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.
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 option activity since August 31,
2006:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
|||||||||||||||||||
|
(CA$)
|
(CA$)
|
(CA$)
|
||||||||||||||||||||||
|
Outstanding – Beginning of year
|
1,821,481 | $ | 21 | 1,929,388 | $ | 21 | 2,439,375 | $ | 20 | |||||||||||||||
|
Exercised
|
(27,500 | ) | 3 | (18,500 | ) | 3 | (250,528 | ) | 4 | |||||||||||||||
|
Forfeited
|
(1,000 | ) | 6 | (8,750 | ) | 6 | (37,869 | ) | 5 | |||||||||||||||
|
Expired
|
(126,392 | ) | 26 | (80,657 | ) | 29 | (221,590 | ) | 37 | |||||||||||||||
|
Outstanding
– End of year
|
1,666,589 | $ | 21 | 1,821,481 | $ | 21 | 1,929,388 | $ | 21 | |||||||||||||||
|
Exercisable
– End of year
|
1,660,090 | $ | 21 | 1,762,969 | $ | 21 | 1,746,699 | $ | 22 | |||||||||||||||
The
intrinsic value of stock options exercised during fiscal 2007, 2008 and 2009 was
$743,000, $43,000 and $23,000, respectively.
Expected
forfeitures are immaterial to the company and are not reflected in the table
above.
The
following table summarizes information about stock options as at August 31,
2009:
|
Stock
options outstanding
|
Stock
options exercisable
|
|||||||||||||||||||||||||||
|
Exercise price
|
Number
|
Weighted
average
exercise
price
|
Intrinsic
value
|
Weighted
average
remaining
contractual
life
|
Number
|
Weighted
average
exercise
price
|
Intrinsic
value
|
Weighted
average
remaining
contractual
life
|
||||||||||||||||||||
|
(CA$)
|
(CA$)
|
(CA$)
|
(CA$)
|
(CA$)
|
||||||||||||||||||||||||
| $2.50 | 232,625 | $ | 2.50 | $ | 184 |
3.1
years
|
232,625 | $ | 2.50 | $ | 184 |
3.1
years
|
||||||||||||||||
| $3.96 to $5.60 | 383,404 | 5.11 | – |
4.7
years
|
376,905 | 5.11 | – |
4.7
years
|
||||||||||||||||||||
| $6.22 to $9.02 | 142,516 | 6.54 | – |
4.4
years
|
142,516 | 6.54 | – |
4.4
years
|
||||||||||||||||||||
| $14.27 to $20.00 | 354,928 | 15.57 | – |
2.1
years
|
354,928 | 15.57 | – |
2.1
years
|
||||||||||||||||||||
| $29.70 to $43.00 | 401,263 | 36.54 | – |
1.2
year
|
401,263 | 36.54 | – |
1.2
year
|
||||||||||||||||||||
| $51.25 to $68.17 | 119,523 | 66.26 | – |
1.0
year
|
119,523 | 66.26 | – |
1.0
year
|
||||||||||||||||||||
| $83.66 | 32,330 | 83.66 | – |
1.0
year
|
32,330 | 83.66 | – |
1.0
year
|
||||||||||||||||||||
| 1,666,589 | $ | 20.57 | $ | 184 |
2.7
years
|
1,660,090 | $ | 20.63 | $ | 184 |
2.7
years
|
|||||||||||||||||
Restricted
Share Units (RSUs)
RSUs are
“phantom” shares that rise and fall in value based on the market price 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 10 years from the award date, being the
required period of service from employees. 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.
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 RSU activity since August 31, 2006:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Outstanding
– Beginning of year
|
847,791 | 488,015 | 327,877 | |||||||||
|
Granted
|
685,972 | 469,847 | 219,002 | |||||||||
|
Redeemed
|
(106,190 | ) | (65,870 | ) | (1,064 | ) | ||||||
|
Forfeited
|
(87,954 | ) | (44,201 | ) | (57,800 | ) | ||||||
|
Outstanding
– End of year
|
1,339,619 | 847,791 | 488,015 | |||||||||
None of
the RSUs outstanding, as at August 31, 2007, 2008 and 2009, were redeemable. The
weighted average grant-date fair value of RSUs granted during fiscal 2007, 2008
and 2009 amounted to $6.48, $5.46 and $2.69, respectively.
As at
August 31, 2009, the intrinsic value of RSUs outstanding was
$4,019,000.
Expected
forfeitures are immaterial to the company and are not reflected in the table
above.
As at
August 31, 2009, unrecognized stock-based compensation costs of unvested RSUs
amounted to $2,995,000. The weighted average period over which they are
expected to be recognized is 3.2 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 ceases to be Director of the
company. This plan was approved by the shareholders of the company.
The
following table summarizes DSU activity since August 31, 2006:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Outstanding
– Beginning of year
|
79,185 | 64,718 | 43,290 | |||||||||
|
Granted
|
35,739 | 35,162 | 21,428 | |||||||||
|
Redeemed
|
− | (20,695 | ) | – | ||||||||
|
Outstanding
– End of year
|
114,924 | 79,185 | 64,718 | |||||||||
None of
the DSUs outstanding as at August 31, 2007, 2008 and 2009 were redeemable. The
weighted average grant-date fair value of DSUs granted during fiscal 2007, 2008
and 2009 amounted to $6.29, $5.14 and $3.19.
As at
August 31, 2009, the intrinsic value of DSUs outstanding was
$345,000.
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 10
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,
2006:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
|||||||||||||||||||
|
Outstanding – Beginning of year
|
30,700 | $ | 10 | 27,700 | $ | 11 | 24,500 | $ | 11 | |||||||||||||||
|
Granted
|
9,674 | 2 | 3,000 | 6 | 5,200 | 6 | ||||||||||||||||||
|
Forfeited
|
− | − | – | – | (2,000 | ) | 2 | |||||||||||||||||
|
Outstanding
– End of year
|
40,374 | $ | 8 | 30,700 | $ | 10 | 27,700 | $ | 11 | |||||||||||||||
|
Exercisable
– End of year
|
24,475 | $ | 11 | 19,550 | $ | 12 | 13,875 | $ | 15 | |||||||||||||||
The
following table summarizes information about stock appreciation rights as at
August 31, 2009:
|
Stock
appreciation
rights
outstanding
|
Stock appreciation
rights exercisable
|
||||||||||
|
Exercise price
|
Number
|
Weighted
average
remaining contractual
life
|
Number
|
||||||||
| $2.36 | 9,674 |
9.2
years
|
− | ||||||||
| $4.51 to $6.50 | 25,700 |
6.2
years
|
19,475 | ||||||||
| $22.25 | 2,500 |
1.4
year
|
2,500 | ||||||||
| $45.94 | 2,500 |
1.0
year
|
2,500 | ||||||||
| 40,374 |
6.3
years
|
24,475 | |||||||||
| 16 | Other Disclosures |
Net
research and development expenses
Net
research and development expenses comprise the following:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Gross
research and development expenses
|
$ | 35,757 | $ | 32,454 | $ | 25,201 | ||||||
|
Research
and development tax credits and grants
|
(6,157 | ) | (5,587 | ) | (5,371 | ) | ||||||
|
Recognition
of previously unrecognized research and development tax credits (note
17)
|
(1,902 | ) | – | (3,162 | ) | |||||||
| $ | 27,698 | $ | 26,867 | $ | 16,668 | |||||||
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
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 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.
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 employees residing in Canada,
under which the company may elect to contribute an amount equal to 2% 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, 2007,
2008 and 2009, amounted to $419,000, $531,000 and $504,000,
respectively.
|
·
|
401K
plan
|
The
company maintains a 401K plan for eligible employees residing in the U.S. Under
this plan, the company must contribute an amount equal to 3% of an employee’s
current compensation. During the years ended August 31, 2007, 2008 and
2009, the company recorded cash contributions and expenses totaling $166,000,
$216,000 and $356,000, respectively.
| 17 | Income Taxes |
Fiscal
2007
During
fiscal 2007, after reviewing both available positive and negative evidence, and
because the company was 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 expected 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 16). 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 for that year.
However,
in the United States (federal level), based on available positive and negative
evidence as at August 31, 2007, as well as the level and the nature of
cumulative and expected 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 was more likely than not that these assets
would not be recovered. These future income tax assets consisted of operating
losses carried forward.
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)
In other
tax jurisdictions where the company has future income tax assets, the company
was still in a cumulative loss position as at August 31, 2007, and available
negative evidence outweighed positive evidence. Consequently, for these tax
jurisdictions, the company maintained 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 related to deferred operating losses.
Fiscal
2008
During
fiscal 2008, reductions to the Canadian federal statutory tax rate were
substantively enacted. Therefore, Canadian federal future income tax assets
decreased by $1,524,000, and generated a future income tax expense in the
same amount during the year.
In
addition, during fiscal 2008, taking into consideration these new Canadian
federal substantively enacted tax rates, the company reviewed its tax strategy
for the future use of its Canadian federal operating losses, research and
development expenses, certain timing differences and research and development
tax credits to minimize income taxes payable on future years’ taxable income.
Consequently, it amended its prior year’s income tax returns to generate a net
operating loss to be carried back to prior years, which reinstated
previously used research and development tax credits. This resulted
in an increase of its tax-related assets of $2,715,000 and an income
tax recovery of the same amount in the statement of earnings for the year
ended August 31, 2008.
Finally,
during fiscal 2008, considering the expected positive impact of the acquisitions
of Navtel Communications Inc. and Brix Networks Inc. on future years’ taxable
income at the United States (federal) level, and because actual taxable income
in the United States was greater than initially expected, management concluded
that it was more likely than not that all future income tax assets of its
existing consolidated U.S. group would be recovered. Consequently, it reversed
its valuation allowance against future income tax assets in the amount of
$7,617,000. The portion of the valuation allowance that was reversed, and that
was attributable to the effects of the Navtel Communications Inc. and Brix
Networks Inc. acquisitions, in the amount of $652,000 and
$1,641,000, respectively, was included in the purchase price allocation of the
related acquired businesses. The remainder of the reversal, in the amount of
$5,324,000, has been recorded in income taxes in the statement of earnings
for the year ended August 31, 2008.
Fiscal
2009
During
fiscal 2009, after reviewing both available positive and negative evidence, and
because the company was in a cumulative profit position in one of its
subsidiaries, and also because the company expected to generate sufficient
taxable income in future years at the subsidiary level, management concluded
that it was more likely than not that future income tax assets and deferred
non-refundable research and development tax credits of this subsidiary would be
realizable. Consequently, it reversed the valuation allowance against future
income tax assets in the amount of $372,000 and recognized previously
unrecognized non-refundable research and development tax credits in the amount
of $1,902,000 (note 16). Future income tax assets recognized in 2009 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 for that 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)
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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate (31% in 2009 and 2008 and 32% in 2007)
|
$ | (5,060 | ) | $ | 5,290 | $ | 6,864 | |||||
|
Increase
(decrease) due to:
|
||||||||||||
|
Foreign
income taxed at different rates
|
63 | 147 | (12 | ) | ||||||||
|
Non-taxable
income
|
(211 | ) | (448 | ) | (109 | ) | ||||||
|
Non-deductible
expenses
|
5,200 | 998 | 692 | |||||||||
|
Change
in tax rates
|
– | 1,522 | 105 | |||||||||
|
Change
in tax strategy
|
– | (2,715 | ) | – | ||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
95 | 32 | 45 | |||||||||
|
Other
|
638 | 378 | 236 | |||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(372 | ) | (5,324 | ) | (24,566 | ) | ||||||
|
Utilization
of previously unrecognized future income tax
assets
|
(937 | ) | (1,872 | ) | (4,715 | ) | ||||||
|
Unrecognized future
income tax assets on temporary deductible differences and unused tax
losses and deductions
|
845 | 3,668 | 635 | |||||||||
| $ | 261 | $ | 1,676 | $ | (20,825 | ) | ||||||
|
The
income tax provision consists of the following:
|
||||||||||||
|
Current
|
||||||||||||
|
Canada
|
$ | 62 | $ | (7,474 | ) | $ | 3,568 | |||||
|
Other
|
499 | 380 | 173 | |||||||||
| 561 | (7,094 | ) | 3,741 | |||||||||
|
Future
|
||||||||||||
|
Canada
|
2,307 | 12,111 | 3,726 | |||||||||
|
United
States
|
(2,511 | ) | 376 | 428 | ||||||||
|
Other
|
368 | (189 | ) | (74 | ) | |||||||
| 164 | 12,298 | 4,080 | ||||||||||
|
Valuation
allowance
|
||||||||||||
|
Canada
|
(1,005 | ) | 812 | (23,092 | ) | |||||||
|
United
States
|
604 | (4,545 | ) | (5,628 | ) | |||||||
|
Other
|
(63 | ) | 205 | 74 | ||||||||
| (464 | ) | (3,528 | ) | (28,646 | ) | |||||||
| (300 | ) | 8,770 | (24,566 | ) | ||||||||
| $ | 261 | $ | 1,676 | $ | (20,825 | ) | ||||||
|
Details
of the company’s income taxes:
|
||||||||||||
|
Earnings
(loss) before income taxes and extraordinary gain
|
||||||||||||
|
Canada
|
$ | (11,344 | ) | $ | 18,347 | $ | 19,634 | |||||
|
United
States
|
(5,026 | ) | (748 | ) | 1,059 | |||||||
|
Other
|
46 | (535 | ) | 757 | ||||||||
| $ | (16,324 | ) | $ | 17,064 | $ | 21,450 | ||||||
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,
|
||||||||
|
2009
|
2008
|
|||||||
|
Future
income tax assets
|
||||||||
|
Long-lived
assets
|
$ | 5,195 | $ | 3,696 | ||||
|
Provisions
and accruals
|
3,946 | 3,475 | ||||||
|
Deferred
revenue
|
1,659 | 1,466 | ||||||
|
Research
and development expenses
|
12,340 | 12,424 | ||||||
|
Losses
carried forward
|
28,165 | 29,890 | ||||||
| 51,305 | 50,951 | |||||||
|
Valuation
allowance
|
(15,458 | ) | (15,529 | ) | ||||
| 35,847 | 35,422 | |||||||
|
Future
income tax liabilities
|
||||||||
|
Research
and development tax credits
|
(7,118 | ) | (5,607 | ) | ||||
|
Long-lived
assets
|
(4,658 | ) | (5,135 | ) | ||||
| (11,776 | ) | (10,742 | ) | |||||
|
Future
income tax assets, net
|
$ | 24,071 | $ | 24,680 | ||||
As at
August 31, 2009, the company had available operating and capital losses in
several tax jurisdictions, against which a valuation allowance of
$13,161,000 was recorded. The valuation allowance includes $8,263,000 for which
subsequently recognized benefits will be allocated to reduce goodwill (note
3).
The
following table summarizes the year of expiry of these losses by tax
jurisdiction:
|
Canada
|
United
States
|
|||||||||||
|
Year
of expiry
|
Federal
|
Provincial
|
and
other
|
|||||||||
|
2013
|
$ | – | $ | – | $ | 604 | ||||||
|
2014
|
– | – | 451 | |||||||||
|
2015
|
1,084 | 1,084 | 291 | |||||||||
|
2019
|
– | – | 68 | |||||||||
|
2020
|
– | – | 3,471 | |||||||||
|
2021
|
– | – | 10,202 | |||||||||
|
2022
|
– | – | 9,191 | |||||||||
|
2023
|
– | – | 6,356 | |||||||||
|
2024
|
– | – | 6,706 | |||||||||
|
2025
|
– | – | 6,525 | |||||||||
|
2026
|
980 | 980 | 3,302 | |||||||||
|
2027
|
1,244 | 1,244 | 1,376 | |||||||||
|
2028
|
– | – | 2,447 | |||||||||
|
Indefinite
|
17,361 | 17,680 | 17,461 | |||||||||
| $ | 20,669 | $ | 20,988 | $ | 68,451 | |||||||
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)
As at
August 31, 2009, in addition to operating and capital losses, the company had
available research and development expenses in Canada amounting to $41,919,000
at the federal level and $31,344,000 at the provincial level; in the United
States, research and development expenses amounted to $4,680,000. A valuation
allowance of $1,872,000 was recorded against these assets for which subsequently
recognized benefits will be allocated to reduce goodwill (note 3).
In Canada, these expenses can be carried forward indefinitely against future
years’ taxable income in their respective tax jurisdiction, and in the United
States, these expenses can be carried forward against taxable income of fiscal
years 2013 to 2016.
Finally,
as at August 31, 2009, the company had non-refundable research and development
tax credits at the Canadian federal level in the amount of $26,432,000 that can
be carried forward against future years’ income taxes payable over the next
20 years.
| 18 | 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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Basic
weighted average number of shares
outstanding
(000’s)
|
61,845 | 68,767 | 68,875 | |||||||||
|
Plus
dilutive effect of:
|
||||||||||||
|
Stock
options (000’s)
|
131 | 291 | 448 | |||||||||
|
Restricted
share units (000’s)
|
311 | 181 | 179 | |||||||||
|
Deferred
share units (000’s)
|
94 | 79 | 53 | |||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
62,381 | 69,318 | 69,555 | |||||||||
|
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)
|
1,602 | 1,404 | 1,207 | |||||||||
For the
year ended August 31, 2009, the diluted amount per share was the same amount as
the basic amount per share since the dilutive effect of stock options,
restricted share units and deferred share units was not included in the
calculation; otherwise, the effect would have been anti-dilutive. Accordingly,
the diluted amount per share for this period was calculated using the basic
weighted average number of shares outstanding.
| 19 | Segment Information |
The
company is organized under two reportable segments. The Telecom Division,
which represents the company’s main business activity, offers a wide range of
innovative solutions to assess optical networks, from the core to access, as
well as next-generation IP infrastructures and related triple-play
services. The Life
Sciences and Industrial Division offers solutions for medical-device and
opto-electronics assembly, fluorescence microscopy and other life sciences
sectors.
The
reporting structure reflects how the company manages its business and how it
classifies its operations for planning and measuring performance.
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 tables present information by segment:
|
Year
ended August 31, 2009
|
||||||||||||
|
Telecom Division
|
Life Sciences and
Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ | 153,082 | $ | 19,796 | $ | 172,878 | ||||||
|
Earnings
(loss) from operations
|
$ | (21,954 | ) | $ | 3,876 | $ | (18,078 | ) | ||||
|
Unallocated
items:
|
||||||||||||
|
Interest
income
|
597 | |||||||||||
|
Foreign
exchange gain
|
1,157 | |||||||||||
|
Loss
before income taxes
|
(16,324 | ) | ||||||||||
|
Income
taxes
|
261 | |||||||||||
|
Net
loss for the year
|
$ | (16,585 | ) | |||||||||
|
Recognition
of previously unrecognized research and development tax credits (note
17)
|
$ | − | $ | (1,902 | ) | $ | (1,902 | ) | ||||
|
Restructuring
charges (note 4)
|
$ | 963 | $ | 208 | $ | 1,171 | ||||||
|
Amortization
of capital assets
|
$ | 9,486 | $ | 188 | $ | 9,674 | ||||||
|
Stock-based
compensation costs
|
$ | 1,300 | $ | 109 | $ | 1,409 | ||||||
|
Impairment
of goodwill (note 4)
|
$ | 21,713 | $ | − | $ | 21,713 | ||||||
|
Capital
expenditures
|
$ | 6,782 | $ | 163 | $ | 6,945 | ||||||
|
Year
ended August 31, 2008
|
||||||||||||
|
Telecom Division
|
Life Sciences and
Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ | 160,981 | $ | 22,809 | $ | 183,790 | ||||||
|
Earnings
from operations
|
$ | 9,524 | $ | 2,459 | $ | 11,983 | ||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
income
|
4,639 | |||||||||||
|
Foreign
exchange gain
|
442 | |||||||||||
|
Earnings
before income taxes and extraordinary gain
|
17,064 | |||||||||||
|
Income
taxes
|
1,676 | |||||||||||
|
Earnings
before extraordinary gain
|
15,388 | |||||||||||
|
Extraordinary
gain
|
3,036 | |||||||||||
|
Net
earnings for the year
|
$ | 18,424 | ||||||||||
|
Amortization
of capital assets
|
$ | 7,999 | $ | 164 | $ | 8,163 | ||||||
|
Stock-based
compensation costs
|
$ | 1,171 | $ | 101 | $ | 1,272 | ||||||
|
Capital
expenditures
|
$ | 6,327 | $ | 181 | $ | 6,508 | ||||||
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, 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
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
17)
|
$ | (3,162 | ) | $ | − | $ | (3,162 | ) | ||||
|
Government
grants (note 16)
|
$ | (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 | ||||||
Total
assets by reportable segment are detailed as follows:
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Telecom
Division
|
$ | 135,015 | $ | 170,429 | ||||
|
Life
Sciences and Industrial Division
|
10,267 | 9,803 | ||||||
|
Unallocated
assets
|
95,089 | 112,834 | ||||||
| $ | 240,371 | $ | 293,066 | |||||
Unallocated
assets are comprised of cash, short-term investments, other receivable on
forward exchange contracts as well as future income taxes.
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)
Sales to
external customers by geographic region are detailed as follows:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
United
States
|
$ | 72,379 | $ | 79,471 | $ | 73,679 | ||||||
|
Canada
|
18,681 | 14,219 | 9,619 | |||||||||
|
Latin
America
|
8,086 | 8,858 | 7,592 | |||||||||
|
Americas
|
99,146 | 102,548 | 90,890 | |||||||||
|
China
|
13,455 | 13,960 | 9,329 | |||||||||
|
Other
|
13,745 | 15,148 | 11,445 | |||||||||
|
Asia-Pacific
|
27,200 | 29,108 | 20,774 | |||||||||
|
Europe,
Middle-East and Africa
|
46,532 | 52,134 | 41,270 | |||||||||
| $ | 172,878 | $ | 183,790 | $ | 152,934 | |||||||
Sales
were allocated to geographic regions based on the country of residence of the
related customers.
Long-lived
assets by geographic region are detailed as follows:
|
As
at August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Property,
plant
and equipment
|
Intangible
assets
|
Goodwill
|
Property,
plant
and equipment
|
Intangible
assets
|
Goodwill
|
|||||||||||||||||||
|
Canada
|
$ | 15,013 | $ | 7,086 | $ | 4,638 | $ | 15,916 | $ | 7,479 | $ | 23,007 | ||||||||||||
|
United
States
|
1,015 | 9,687 | 17,840 | 918 | 12,397 | 19,646 | ||||||||||||||||||
|
China
|
2,033 | 32 | − | 1,965 | 16 | − | ||||||||||||||||||
|
Other
|
1,039 | 54 | − | 1,076 | 53 | − | ||||||||||||||||||
| $ | 19,100 | $ | 16,859 | $ | 22,478 | $ | 19,875 | $ | 19,945 | $ | 42,653 | |||||||||||||
| 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,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||
|
Net
earnings (loss) for the year in accordance with Canadian
GAAP
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||||||
|
Impairment
of goodwill
|
a | ) | 8,406 | − | − | |||||||||||
|
Unrealized
losses on available-for-sale securities
|
b | ) | − | − | 55 | |||||||||||
|
Stock-based
compensation costs related to stock appreciation rights
|
c | ) | – | – | (73 | ) | ||||||||||
|
Net
earnings (loss) for the year in accordance with U.S. GAAP
|
$ | (8,179 | ) | $ | 18,424 | $ | 42,257 | |||||||||
|
Out
of which:
|
||||||||||||||||
|
Earnings
(loss) before extraordinary gain
|
$ | (8,179 | ) | $ | 15,388 | $ | 42,257 | |||||||||
|
Extraordinary
gain
|
$ | – | $ | 3,036 | $ | – | ||||||||||
|
Basic
and diluted earnings (loss) before extraordinary gain per share in
accordance with U.S. GAAP
|
$ | (0.13 | ) | $ | 0.22 | $ | 0.61 | |||||||||
|
Basic
and diluted net earnings (loss) per share in accordance with
U.S. GAAP
|
$ | (0.13 | ) | $ | 0.27 | $ | 0.61 | |||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
61,845 | 68,767 | 68,875 | |||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
61,845 | 69,318 | 69,555 | |||||||||||||
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,
|
||||||||||||
|
2009
|
2008
|
|||||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 208,045 | $ | 259,515 | ||||||||
|
Goodwill
|
a | ) | (3,879 | ) | (12,640 | ) | ||||||
|
Stock
appreciation rights
|
c | ) | (73 | ) | (73 | ) | ||||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 204,093 | $ | 246,802 | ||||||||
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)
Statements
of cash flows
For the
years ended August 31, 2007, 2008 and 2009, 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)
|
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 asset 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.
As a
result of this difference, goodwill under U.S. GAAP was lower compared to
Canadian GAAP. Consequently, the amount of goodwill impairment recorded in
fiscal 2009 was lower under U.S. GAAP as compared to the amount recorded under
Canadian GAAP.
|
b)
|
Short-term
investments
|
Upon the
adoption by the company of the CICA Handbook Section 3855 on September 1, 2007,
existing GAAP differences between Canadian GAAP and U.S. GAAP with respect to
accounting for short-term investments were eliminated. Under Canadian GAAP,
prior to the adoption of Section 3855 on September 1, 2007, short-term
investments were carried at the lower of cost and market value and any
unrealized loss was reflected in the statements of earnings. Under U.S. GAAP,
short-term investments are classified as “available-for-sale securities” and
carried at their fair value and any changes in their fair value are
reflected in comprehensive income consistent with the accounting treatment
required by Section 3855.
|
c)
|
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.
|
d)
|
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 income taxes
otherwise payable are recorded in the income taxes. These tax credits amounted
to $6,639,000, $3,692,000 and $5,565,000 for fiscal 2007, 2008 and 2009,
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)
|
e)
|
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. 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.
|
f)
|
New
accounting standards and
pronouncements
|
Adopted
in fiscal 2009
In
September 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. In February 2008, the FASB amended SFAS 157 to exclude
leasing transactions and to delay the effective date by one year for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis. This
statement is effective for fiscal years beginning after
November 15, 2007. The company adopted this statement
on September 1, 2008, and its adoption had no significant impact
on the consolidated financial statements.
In
February 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 allows entities 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. The company
adopted this statement on September 1, 2008, and it did not elect
to use the fair value option as of the date of adoption.
In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles”, which is intended to improve financial reporting by
identifying a consistent framework for selecting accounting principles
to be used in preparing financial statements that are presented in
conformity with U.S. GAAP for non-governmental entities. The guidance in SFAS
162 replaces that which is prescribed by the American Institute of Certified
Public Accountants’ (“AICPA”) Statement on Auditing Standards (“SAS”) No. 69,
“The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting Principles, for
Nongovernmental Entities”. SFAS 162 became effective in January 2009,
and the adoption of this standard had no significant impact on the consolidated
financial statements.
In May
2009, the FASB issued SFAS 165, “Subsequent Events”. This statement introduces
the concept of financial statements being available to be issued. It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, i.e., whether that date represents the date
when the financial statements were issued or were available to be issued. This
statement is effective for financial statements issued for fiscal years and
interim periods ending after June 15, 2009. The adoption of this standard had no
significant impact on the consolidated financial statements.
To
be adopted after fiscal 2009
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations”,
and SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51”. These new standards will
significantly change the accounting and reporting for business combination
transactions and noncontrolling (minority) interests in consolidated
financial statements. SFAS 141(R) and SFAS 160 are required to be
adopted simultaneously and are effective for the first annual reporting period
beginning on or after December 15, 2008. Earlier adoption is prohibited.
The company will adopt these statements on September 1, 2009, and is currently
evaluating the impact that the adoption of SFAS 141(R) and SFAS 160
will have on its 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)
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective
Date of FASB Statement No. 157” (FSP FAS 157-2). FSP FAS 157-2 defers the
implementation of SFAS No. 157 for certain non-financial assets and
non-financial liabilities. The aspects that have been deferred by FSP FAS 157-2
will be effective for the company beginning in the first quarter of fiscal year
2010. The company is currently evaluating the impact that FSP FAS 157-2
will have on its consolidated financial statements.
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133”, which will
require entities to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flow. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The company will
adopt this statement on September 1, 2009, and is currently evaluating the
impact its adoption will have on the note disclosures related to derivative
instruments and hedging activities.
In April
2008, the FASB issued the FASB staff position (FSP) FAS 142-3, “Determination of
the Useful Life of Intangible Assets”. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under SFAS
142, “Goodwill and Other Intangible Assets”. The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141 (revised 2007), “Business Combinations”, and
other U.S. generally accepted accounting principles (GAAP). This FSP shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years.
Early adoption is prohibited. The guidance for determining the useful life of a
recognized intangible asset in paragraphs 7–11 of this FSP shall be applied
prospectively to intangible assets acquired after the effective date.
The disclosure requirements in paragraphs 13–15 shall be applied
prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The company will adopt this FSP
on September 1, 2009, and is currently evaluating the impact its adoption
will have on the consolidated financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB)
APB 28-1 (“FSP FAS 107-1 and APB 28-1”), “Interim Disclosures about Fair
Value of Financial Instruments”. FSP FAS 107-1 and APB 28-1 amends SFAS
107, “Disclosures about Fair Value of Financial Instruments”, to require
disclosures about fair value of financial instruments for annual and
interim reporting periods of publicly traded companies and amends APB 28,
“Interim Financial Reporting” to require those disclosures in summarized
financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1
are effective for reporting periods ending after June 15, 2009. The company
will adopt these statements on September 1, 2009 and is currently evaluating the
impact their adoption will have on the consolidated
financial statements.
In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 09-3,
“Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That
Include Software Elements” (“EITF 09-3”). EITF 09-3 amends Statement of Position
(“SOP”) 97-2, “Software Revenue Recognition”, to exclude tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality. EITF 09-3 applies to
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early application permitted
with EITF 08-1. The company expects to adopt this standard in the first
quarter of fiscal 2011. The company is currently evaluating the impact EITF 09-3
will have on the 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)
In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 08-1,
“Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1
amends EITF 00-21, “Revenue Arrangements with Multiple Deliverables”,
to require an entity to use an estimated selling price when
vendor-specific objective evidence or acceptable third-party evidence does
not exist for any products or services included in a multiple
element arrangement. The arrangement consideration should be allocated among the
products and services based upon their relative
selling prices, thus eliminating the use of the residual method of allocation.
EITF 08-01 also requires expanded qualitative and quantitative disclosures
regarding significant judgments made and changes in applying the guidance. EITF
08-1 applies to fiscal years beginning after June
15, 2010, with early application permitted. The company expects to adopt the
standard in the first quarter of fiscal 2011. The company is currently
evaluating the impact EITF 08-1 will have on the financial
statements.
In
June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards
CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162” (“SFAS 168”). SFAS 168 modifies the U.S. GAAP hierarchy
created by FASB Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, (“SFAS 162”) by establishing only two levels of GAAP:
authoritative and non-authoritative. FASB Accounting Standards Codification will
become the single source of authoritative U.S. accounting and reporting
standards, along with rules and interpretative releases of the SEC which are
considered sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification would become non-authoritative. SFAS 168 will not result in any
accounting changes. This Statement applies to interim and annual reporting
periods ending after September 15, 2009. The company will adopt this
standard in the first quarter of fiscal 2010 and its adoption will have no
material impact on the interim and annual consolidated
financial statements.
| 21 | Subsequent Events |
Subsequent
events have been evaluated until October 13, 2009, which is the date the
consolidated financial statements of the company were available to be
issued, except for notes 13 a) and 14 c), which are dated November 6,
2009.
F-43