UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of January, 2003
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
465 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 3G7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
On January 7, 2003, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the fiscal quarter ended
November 30, 2002. This report on Form 6-K sets forth the news release relating
to EXFO's announcement and certain information relating to EXFO's financial
condition and results of operations for the first fiscal quarter of the 2003
fiscal year. This press release and information relating to EXFO's financial
condition and results of operations for the first fiscal quarter of the 2003
fiscal year are hereby incorporated as a document by reference to Form F-3
(Registration Statement under the Securities Act of 1933) declared effective as
of July 30, 2001 and to Form F-3 (Registration Statement under the Securities
Act of 1933) declared effective as of March 11, 2002 and to amend certain
material information as set forth in these two Form F-3 documents.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
--------------------------------------
Name: Germain Lamonde
Title: President and Chief
Executive Officer
Date: January 15, 2003
[GRAPHIC OMITTED -- COMPANY LOGO]
EXFO
PRESS RELEASE
================================================================================
1 800 663-3936 info@exfo.com - www.exfo.com Fiber-optic test,
Tel: (418) 683-0211 measurement and
Fax: (418) 683-2170 monitoring equipment
EXFO POSTS SALES GROWTH FOR THIRD CONSECUTIVE QUARTER
o SALES INCREASE OF 3% IN FIRST QUARTER
o GROSS MARGIN IMPROVES TO 57%
o POSITIVE CASH FLOWS FROM OPERATIONS FOR SECOND CONSECUTIVE QUARTER
QUEBEC CITY, CANADA, January 7, 2003--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO, TSE: EXF) announced it has posted sales growth for a third
consecutive quarter following the release today of first-quarter results for
fiscal 2003.
Sales increased 3% to US$17.7 million in the first quarter ended November 30,
2002 from US$17.2 million in the fourth quarter of 2002, but decreased 12% from
US$20.1 million in the first quarter of 2002.
"I am encouraged by this third consecutive growth in sales as well as second
consecutive increase in gross margin and cash flows from operating activities,"
said Germain Lamonde, Chairman, President and CEO of EXFO. "They represent
remarkable achievements in this difficult environment.
"Our strong balance sheet with US$49 million in cash, our focus on innovation
with 45% of sales in the first quarter coming from products that have been on
the market two years or less, and our relentless drive to offer best-in-class
service and support are increasingly making it clear to our global customer base
that EXFO is the long-term partner of choice."
EXFO's pro forma* net loss for the first quarter of fiscal 2003 amounted to
US$1.4 million, or US$0.02 per share, compared to a pro forma net loss of US$1.2
million, or US$0.02 per share, for the fourth quarter of 2002 and a pro forma
net loss of US$1.9 million, or US$0.03 per share, for the first quarter of 2002.
Net loss for the first quarter of fiscal 2003 decreased to US$2.2 million, or
US$0.03 per share, from a net loss of US$3.0 million, or US$0.05 per share, for
the previous quarter and a net loss of US$19.1 million, or US$0.33 per share,
for the first quarter of 2002.
Gross margin for the first quarter of fiscal 2003 climbed to 56.7% from 51.8% in
the fourth quarter of 2002 and 55.1% (excluding an inventory write-off) in the
first quarter of last year.
Cash flows from operations reached US$2.8 million in the first quarter of fiscal
2003 compared to US$300,000 in the previous quarter and cash flows from
operations used of US$1.7 million in the first quarter of 2002.
"I am pleased with the strong commitment of our workforce towards gains in
market share and quality of execution as demonstrated by new product approvals
by several customers and key new products gaining traction in the marketplace,"
Mr. Lamonde added. "We will continue to be creative and remain focused on the
network service provider market, and strategically address the system vendor
market by leveraging our synergies following the gnubi transaction."
BUSINESS HIGHLIGHTS
In the first quarter of fiscal 2003, EXFO announced the acquisition of
substantially all the assets of gnubi communications, L.P., a multi-channel
telecom and datacom testing solutions supplier with an established customer base
of Tier 1 system vendors and R&D labs.
EXFO, which announced it had an established base of more than 10,000 test
platforms on the global market, launched three new products during the first
quarter including the FTB-9310 Channel Selector for commissioning and lighting
channels in dense wavelength-division multiplexing (DWDM) networks; ProBond, a
bonding option for the ProAlign(TM) 5000 Component Assembly Workstation; and the
X-Cite 120 Illumination System for fluorescence microscopy applications.
OPERATING EXPENSES
Selling and administrative expenses amounted to US$7.6 million, or 42.9% of
sales, for the first quarter of fiscal 2003 compared to US$7.1 million, or 41.3%
of sales, for the previous quarter and US$10.3 million, or 51.3% of sales, for
the first quarter of 2002.
Gross research and development expenses totaled US$4.2 million, or 23.7% of
sales, for the first quarter of fiscal 2003 compared to US$3.2 million, or 18.8%
of sales, for the fourth quarter of 2002 and US$4.2 million, or 20.9% of sales,
for the first quarter of 2002.
BUSINESS OUTLOOK
Due to anticipated seasonality, EXFO forecasted sales between US$14.0 million
and US$17.0 million and a pro forma* net loss between US$0.06 and US$0.03 per
share for the second quarter of fiscal 2003.
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 5 p.m. (EST) to review its
first-quarter results for fiscal 2003. To listen to the conference call and
participate in the question period via telephone, dial 1-416-695-9748. Germain
Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President
of Finance and Chief Financial Officer, will participate in the call. An audio
replay of the conference call will be available between 7 a.m. and 11 p.m. until
January 14, 2003. The replay number is 1-416-695-9728. The audio Webcast of the
conference call will also be available on EXFO's Website at WWW.EXFO.COM, under
the Investors section.
*PRO FORMA NET LOSS REPRESENTS NET LOSS EXCLUDING AMORTIZATION OF
GOODWILL AND THE AFTER-TAX EFFECT OF AMORTIZATION OF INTANGIBLE
ASSETS, RESTRUCTURING CHARGES AND INVENTORY WRITE-OFFS. ALL FIGURES
ARE IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE DATA.
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------------
2001 2002
---- ----
(UNAUDITED)
NET LOSS IN ACCORDANCE WITH GAAP $ (19,055) $ (2,158)
PRO FORMA ADJUSTMENTS:
AMORTIZATION OF GOODWILL 12,450 -
AMORTIZATION OF INTANGIBLE ASSETS 3,271 1,222
TAX EFFECT ON AMORTIZATION OF INTANGIBLE ASSETS (1,145) (418)
RESTRUCTURING CHARGES AND INVENTORY WRITE-OFFS 3,910 -
TAX EFFECT ON THE RESTRUCTURING CHARGES AND
INVENTORY WRITE-OFFS (1,368) -
--------------- --------------
PRO FORMA NET LOSS $ (1,937) $ (1,354)
=============== ==============
BASIC AND DILUTED PRO FORMA NET LOSS PER SHARE $ (0.03) $ (0.02)
EXFO PROVIDES PRO FORMA FINANCIAL INFORMATION TO HELP THE INVESTOR
BETTER UNDERSTAND ITS OPERATING RESULTS. THIS INFORMATION IS NOT IN
ACCORDANCE WITH, OR AN ALTERNATIVE FOR, GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND MAY NOT BE COMPARABLE TO SIMILARLY TITLED MEASURES
REPORTED BY OTHER COMPANIES.
ABOUT EXFO
EXFO is a leading designer and manufacturer of fiber-optic test, measurement,
monitoring and automation solutions for the global telecommunications industry.
EXFO markets more than 90 product families to 2000 customers in 70 countries
around the world.
EXFO develops products for two main markets. The Portable and Monitoring
Division provides handheld and modular instruments for the physical-, optical-
and protocol-layer testing needs of telecommunications carriers and network
service providers. The Industrial and Scientific Division offers an extensive
line of high-performance instruments, test automation systems and manufacturing
automation equipment for optical component and transmission system vendors as
well as for research and development labs.
This news release contains forward-looking statements within the meaning of the
U. S. Private Securities Litigation Reform Act of 1995 and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition 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 continued global, economic, competitive and market
uncertainty, capital spending in the telecommunications sector and our ability
to execute successfully in these uncertain conditions; the effects of actions we
have taken in response to such uncertainties; market acceptance of new products
and upcoming new products; limited visibility of customer orders and the timing
thereof; the competitive landscape; and successful integration of our acquired
and to-be-acquired companies. Assumptions relating to the foregoing involve
judgments and risks, all of which are difficult or impossible to predict and
many of which are beyond our control. Other risk factors that may affect our
future performance and operations are detailed in our Annual Report on Form 20-F
and our other filings with the U. S. Securities and Exchange Commission and the
Canadian securities commissions. We believe that the expectations reflected in
the forward-looking statements are reasonable based on information currently
available to us, but we cannot assure you that the expectations will prove to
have been correct. Accordingly, you should not place undue reliance on these
forward-looking statements. These statements speak only as of the date of this
document and shall not be revised or updated to reflect events after the date of
this document.
FOR MORE INFORMATION:
Vance Oliver
Investor Relations
(418) 683-0211
vance.oliver@exfo.com
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,128 $ 7,081
Short-term investments 40,553 41,518
Accounts receivable
Trade, less allowance for doubtful accounts
of $460 ($520 as at August 31, 2002) 9,881 10,841
Other 3,267 2,631
Income taxes and tax credits recoverable 13,473 10,448
Inventories (note 5) 23,822 22,284
Prepaid expenses 1,280 1,285
Future income taxes 1,272 5,170
--------- ---------
102,676 101,258
INCOME TAXES AND TAX CREDITS RECOVERABLE 6,234 3,874
PROPERTY, PLANT AND EQUIPMENT 26,246 26,291
INTANGIBLES ASSETS (note 7) 16,464 15,959
GOODWILL (note 3) 17,576 20,458
FUTURE INCOME TAXES 8,730 9,751
--------- ---------
$ 177,926 $ 177,591
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 6) $ 10,699 $ 10,638
Deferred revenue 503 226
Current portion of long-term debt 100 124
--------- ---------
11,302 10,988
DEFERRED GRANTS 654 608
LONG-TERM DEBT 564 540
--------- ---------
12,520 12,136
--------- ---------
CONTINGENCY (note 9)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 489,611 492,411
CONTRIBUTED SURPLUS 1,487 1,495
CUMULATIVE TRANSLATION ADJUSTMENT (8,854) (9,455)
DEFICIT (316,838) (318,996)
--------- ---------
165,406 165,455
--------- ---------
$ 177,926 $ 177,591
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
2001 2002
----------- -------------
SALES $ 20,138 $ 17,748
COST OF SALES* 12,532 7,685
-------- --------
GROSS MARGIN 7,606 10,063
-------- --------
OPERATING EXPENSES
Selling and administrative 10,325 7,608
Net research and development (note 8) 3,145 3,311
Amortization of property, plant and equipment 1,348 1,484
Amortization of intangible assets 3,271 1,222
Restructuring charges (note 4) 410 --
-------- --------
TOTAL OPERATING EXPENSES 18,499 13,625
-------- --------
LOSS FROM OPERATIONS (10,893) (3,562)
Interest income, net 699 256
Foreign exchange gain 33 27
-------- --------
LOSS BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL (10,161) (3,279)
-------- --------
INCOME TAXES
Current (2,574) 3,760
Future (982) (4,881)
-------- --------
(3,556) (1,121)
-------- --------
LOSS BEFORE AMORTIZATION OF GOODWILL (6,605) (2,158)
AMORTIZATION OF GOODWILL (note 2) 12,450 --
-------- --------
NET LOSS FOR THE PERIOD $(19,055) $ (2,158)
======== ========
BASIC AND DILUTED LOSS PER SHARE
Loss before amortization of goodwill $ (0.11) $ (0.03)
Net loss $ (0.33) $ (0.03)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S) 58,341 62,359
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S) (note 10) 58,760 62,753
* Including inventory write-offs of $3,500 and nil for the three months ended
November 30, 2001 and 2002, respectively (note 4).
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF DEFICIT
AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
DEFICIT
THREE MONTHS ENDED
NOVEMBER 30,
------------------------------
2001 2002
------------ --------------
BALANCE - BEGINNING OF PERIOD $ (8,314) $(316,838)
ADD
Net loss for the period (19,055) (2,158)
--------- ---------
BALANCE - END OF PERIOD $ (27,369) $(318,996)
========= =========
CONTRIBUTED SURPLUS
THREE MONTHS ENDED
NOVEMBER 30,
------------------------------
2001 2002
------------ --------------
BALANCE - BEGINNING OF PERIOD $1,457 $1,487
ADD
Premium on resale of share capital 26 8
------ ------
BALANCE - END OF PERIOD $1,483 $1,495
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
THREE MONTHS ENDED
NOVEMBER 30,
------------------------
2001 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (19,055) $ (2,158)
Add (deduct) items not affecting cash and
cash equivalents
Discount on short-term investments 540 257
Inventory write-offs 3,500 --
Amortization 17,069 2,706
Foreign exchange gains on disposal of
short-term investments (79) (42)
Future income taxes (982) (4,881)
Change in non-cash operating items
Accounts receivable 8,921 (375)
Income taxes and tax credits recoverable (8,111) 5,305
Inventories (991) 2,195
Prepaid expenses 51 31
Accounts payable and accrued liabilities (2,222) 113
Deferred revenue (115) (274)
Deferred grants (219) (42)
--------- ---------
(1,693) 2,835
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (37) (36)
Redemption of share capital (2) (6)
Resale of share capital 28 14
Share issue expenses (14) 4
--------- ---------
(25) (24)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (278,646) (88,749)
Proceeds from disposal of short-term
investments 306,576 87,389
Additions to property, plant and
equipment and intangible assets (3,138) (1,649)
Business combinations (note 3) (9,756) (1,841)
--------- ---------
15,036 (4,850)
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 13,318 (2,039)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (171) (8)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,729 9,128
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 20,876 $ 7,081
========= =========
SUPPLEMENTARY INFORMATION
Interest paid $ 53 $ 137
Income taxes paid (recovered) $ 4,473 $ (925)
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
1 INTERIM FINANCIAL INFORMATION
The financial information as at November 30, 2002 and for the periods ended
November 30, 2001 and 2002 is unaudited. In the opinion of management, all
adjustments necessary to present fairly the results of these periods in
accordance with generally accepted accounting principles have been included.
The adjustments made were of a normal recurring nature. Interim results may
not necessarily be indicative of results anticipated for the entire year.
These interim consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada and use the same
accounting policies and methods used in the preparation of the company's
most recent annual consolidated financial statements, except for changes as
described in note 2. All disclosures required for annual financial
statements have not been included in these financial statements. These
interim consolidated financial statements should be read in conjunction with
the company's most recent annual consolidated financial statements.
2 NEW ACCOUNTING STANDARDS
In November 2001, the Canadian Institute of Chartered Accountants (CICA)
issued Accounting Guideline No. 13, "Hedging Relationships", which shall be
applied to hedging relationships in effect in fiscal years beginning on or
after July 1, 2003. This new accounting guideline, which the company will
adopt prospectively on September 1, 2003, establishes basic criteria that
must be met before hedge accounting can be used. It also describes the types
of exposures that can be hedged and the types of instruments that qualify as
hedges, sets detailed designation and documentation requirements and
requires formal effectiveness testing. The company has not yet assessed the
impact the adoption of this new guideline will have on its financial
statements. In November 2001, the CICA issued section 3870, "Stock-Based
Compensation and Other Stock-Based Payments", which is effective for fiscal
years beginning on or after January 1, 2002. The new section applies to
awards granted on or after the date of adoption, and requires that
stock-based payments to non-employees and direct awards of stock to
employees be accounted for using a fair value-based method. The new section
also encourages, but does not require, the use of a fair value-based method
to account for stock-based compensation costs arising from awards to
employees. The new section requires pro forma disclosures with respect to
net earnings and net earnings per share if a fair value-based method of
accounting is not adopted for awards granted to employees. The company
adopted this new standard prospectively on September 1, 2002. The company
elected not to account for stock-based compensation costs arising from
awards to employees using the fair value-based method and consequently, the
adoption of this new standard had no impact on the company's financial
results. However, the company complied with the standard by providing the
required pro forma disclosures.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Therefore, if the fair value-based method had been used to account for
stock-based compensation costs related to stock options granted to employees
since September 1, 2002, the net loss and the related net loss per share
figures would be as follows on a pro forma basis:
THREE MONTHS ENDED
NOVEMBER 30, 2002
------------------
(UNAUDITED)
Net loss for the period $ (2,158)
Pro forma adjustment for stock-based
compensation costs (57)
------------------
Pro forma net loss for the period $ (2,215)
==================
Net loss per share $ (0.03)
Pro forma net loss per share $ (0.04)
These options, which have a weighted average fair value of $0.60, will
generate aggregate stock-based compensation costs of $607,700 over their
vesting periods. Those costs will be amortized over their vesting periods
using the graded vesting method resulting in annual stock-based compensation
costs of $260,400, $190,500, $107,500 and $49,300 over the next four fiscal
years.
The fair value of options granted was estimated using the Black-Scholes
options valuation model with the following weighted average assumptions:
THREE MONTHS ENDED
NOVEMBER 30, 2002
------------------
(UNAUDITED)
Risk-free interest rate 4.2%
Expected volatility 80%
Dividend yield Nil
Weighted average expected life 29 months
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options and awards which have no vesting
restrictions, and are fully transferable. In addition, option and award
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the company's
employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In August 2001, the CICA issued section 3062 "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning on or after January
1, 2002. Section 3062 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations ceased
upon the adoption of this section. For any acquisitions completed after June
30, 2001, goodwill is not amortized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The company adopted section 3062 prospectively from September 1, 2002. Upon
the adoption of this new section, goodwill recorded prior to July 1, 2001,
is no longer subject to amortization. Also, under the transitional
provisions of the section, the company performed an initial impairment test
to identify goodwill impairment using a fair value-based method. Under the
new section, a goodwill impairment exists when the carrying value of a
reporting unit exceeds its fair value. For the purposes of the impairment
test, the company allocated its existing goodwill to its reporting units and
completed an evaluation of the fair value of such reporting units. Based on
the comparison of the fair value of the reporting units to their carrying
value, goodwill of the reporting units was not considered impaired.
Goodwill will also be tested for impairment on an annual basis or more
frequently if events or circumstances occur that more likely than not reduce
the fair value of a reporting unit below its carrying value. Any impairment
loss arising from this test will be charged to earnings in the period in
which it is incurred.
This change in accounting policy has been applied prospectively and
consequently, the amounts presented for prior periods have not been
restated. The consolidated statement of earnings for the three months ended
November 30, 2001 shows the net loss and the net loss per share figures
before the amortization of goodwill.
3 BUSINESS COMBINATION
On October 7, 2002, a newly created wholly-owned subsidiary of the company,
EXFO Gnubi Products Group Inc. ("EXFO Gnubi"), acquired substantially all
the assets of GNUBI COMMUNICATIONS, L.P., a U.S. company which supplies
multi-channel telecom and datacom testing solutions for optical transport
equipment manufacturers as well as research and development laboratories.
This acquisition was made to fully complement the company's offering, to
enhance its competitive position with network service providers and system
vendors as well as to expand its presence in the data communications test
market.
This acquisition was settled for a total consideration valued at $4,637,000
including acquisition-related costs of $136,000. The consideration paid
consisted of $1,841,000 in cash, $2,796,000 by the issuance of 1,479,290
subordinate voting shares and a cash contingent consideration up to a
maximum of $2,900,000, based on sales volume of EXFO Gnubi for fiscal 2003.
The cash contingent consideration to be paid upon the realization of the
defined sales volume will be accounted for as additional acquisition cost
and will be recognized as additional cost of acquired core technology as
sales occur.
The fair value of the subordinate voting shares issued was determined based
on the market price of the shares beginning three days before and ending
three days after the number of shares became fixed based on a formula, being
September 10, 2002.
This acquisition has been accounted for using the purchase method and,
consequently, the results of operations of the acquired business have been
included in the consolidated statement of earnings of the company since
October 7, 2002, being the date of acquisition.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM 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, has been allocated
based on the estimated fair value of net assets at the date of acquisition
as follows:
(UNAUDITED)
Assets acquired
Current assets $ 755
Property, plant and equipment 334
Core technology 750
Current liabilities assumed (134)
-------------
Net identifiable assets acquired 1,705
Goodwill 2,932
-------------
Purchase price 4,637
Less: Subordinate voting shares issued 2,796
-------------
Cash paid $ 1,841
=============
Core technology, which represents the existing technology that has reached
technological feasibility, is amortized on a straight-line basis over its
estimated useful life of five years. Goodwill, which will be fully
deductible for income tax purposes, is not amortized but will be reviewed
for impairment on an annual basis or more frequently if events or
circumstances occur that more likely than not reduce the fair value of EXFO
Gnubi below its carrying value.
4 RESTRUCTURING CHARGES AND INVENTORY WRITE-OFFS
In November 2001, the company incurred restructuring charges to reduce costs
and increase efficiency. The company recorded $410,000 in severance expenses
for the 101 employees who were terminated, which are included in the
restructuring charges in the statement of earnings for the three months
ended November 30, 2001. The company also recorded $3,500,000 in inventory
write-offs for excess and obsolete inventories, which are included in the
cost of sales in the statement of earnings for that same period. As at
November 30, 2002, these severance expenses were fully paid.
5 INVENTORIES
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
----------- -------------
(UNAUDITED)
Raw materials $ 13,507 $ 12,578
Work in progress 1,382 1,206
Finished goods 8,933 8,500
----------- -------------
$ 23,822 $ 22,284
=========== =============
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
6 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
------------ --------------
(UNAUDITED)
Trade $ 4,738 $ 4,592
Salaries and social benefits 2,638 3,442
Commissions 283 202
Tax on capital 856 490
Warranty 849 833
Restructuring charges 782 676
Other 553 403
------------ ---------------
$ 10,699 $ 10,638
============ ===============
7 INTANGIBLE ASSETS
AS AT AUGUST 31, 2002
-----------------------------------------------------------------
COST ACCUMULATED NET
AMORTIZATION
------------------- -------------------- -------------------
Core technology $ 31,086 $ 14,816 $ 16,270
Acquired in-process research
and development 4,195 4,195 -
Work force 2,148 2,148 -
Other 498 304 194
------------------- -------------------- --------------------
$ 37,927 $ 21,463 $ 16,464
=================== ==================== ====================
AS AT NOVEMBER 30, 2002
------------------------------------------------------------------
COST ACCUMULATED NET
AMORTIZATION
------------------- -------------------- --------------------
(UNAUDITED)
Core technology $ 31,767 $ 15,953 $ 15,814
Acquired in-process research
and development 4,185 4,185 -
Work force 2,141 2,141 -
Other 501 356 145
------------------- -------------------- --------------------
$ 38,594 $ 22,635 $ 15,959
=================== ==================== ====================
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
8 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2001 2002
------------------ -------------------
(UNAUDITED) (UNAUDITED)
Gross research and development expenses $ 4,210 $ 4,207
Research and development tax credits (942) (881)
Government grants (123) (15)
------------------ -------------------
$ 3,145 $ 3,311
================== ===================
9 CONTINGENCY
On November 27, 2001, a class action suit was filed in the United States
District Court for the Southern District of New York against the company,
four of the underwriters of its Initial Public Offering and some of its
executive officers pursuant to the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder and sections 11, 12 and 16 of the Securities
Act of 1933. This class action alleges that the company's registration
statement and prospectus filed with the Securities and Exchange Commission
on June 29, 2000, contained material misrepresentations and/or omissions
resulting from (i) the underwriters allegedly soliciting and receiving
additional, excessive and undisclosed commissions from certain investors in
exchange for which they allocated material portions of the shares issued in
connection with the company's Initial Public Offering; and (ii) the
underwriters allegedly entering into agreements with customers whereby
shares issued in connection with the company's Initial Public Offering would
be allocated to those customers in exchange for which customers agreed to
purchase additional amounts of shares in the after market at pre-determined
prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing
master allegations against all of the underwriters in all of the 310 cases
included in this class action and, also filed an amended complaint
containing allegations specific to four of the company's underwriters, the
company and two of its executive officers. In addition to the allegations
mentioned above, the amended complaint alleges that the underwriters (i)
used their analysts to manipulate the stock market; and (ii) implemented
schemes that allowed issuer insiders to sell their shares rapidly after an
initial public offering and benefit from high market prices. As concerns the
company and its two executive officers in particular, the amended complaint
alleges that (i) the company's registration statement was materially false
and misleading because it failed to disclose the additional commissions and
compensation to be received by underwriters; (ii) the two named executive
officers learned of or recklessly disregarded the alleged misconduct of the
underwriters; (iii) the two named executive officers had motive and
opportunity to engage in alleged wrongful conduct due to personal holdings
of the company's stock and the fact that an alleged artificially inflated
stock price could be used as currency for acquisitions; and (iv) the two
named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and
had the ability to
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
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 on October 8, 2002, the claims against its officers were
dismissed pursuant to the terms of Reservation of Rights and Telling
Agreements entered into with the plaintiffs.
Management believes that the company and its executive officers have fully
complied with all applicable securities laws and that the claims against it
are without merit. The company has referred this matter to its insurers and
is vigorously defending its position in this litigation. However, at this
time, it is not possible to predict the outcome of this case, nor determine
the amount of possible losses. Accordingly, no provision for this case has
been made in the consolidated financial statements as of November 30, 2002.
10 LOSS 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 used in the diluted loss per share calculation:
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2001 2002
------------------ -------------------
(UNAUDITED) (UNAUDITED)
Basic weighted average number of shares
outstanding (000's) 58,341 62,359
Stock options (000's) 60 179
Restricted stock awards (000's) 359 215
------------------ -------------------
Diluted weighted average number of shares
outstanding (000's) 58,760 62,753
================== ===================
Stock options excluded from the calculation
of diluted earnings per share because the
exercise price was greater than the average
market price of the common shares (000's) 2,428 2,577
================== ===================
The diluted loss per share for the three months ended November 30, 2001 and
2002, was the same as the basic loss per share since the dilutive effect of
stock options and restricted stock awards should not be included in the
calculation; otherwise, the effect would be anti-dilutive. Accordingly,
diluted loss per share for those periods was calculated using the basic
weighted average number of shares outstanding.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
11 DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim consolidated financial statements are prepared in accordance
with Canadian GAAP which differ in certain respects from U.S. GAAP. Note 19
to the company's most recent annual consolidated financial statements
describes the significant differences between Canadian and U.S. GAAP that
affect the company. This note describes significant additional changes
occurring since the most recent consolidated annual financial statements and
provides a quantitative analysis of the significant differences. All
disclosures required in annual financial statements under U.S. GAAP have not
been provided in these interim consolidated financial statements.
RECONCILIATION OF NET LOSS TO CONFORM WITH U.S. GAAP
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2001 2002
------------------ -------------------
(UNAUDITED) (UNAUDITED)
Net loss for the period in accordance with Canadian GAAP $ (19,055) $ (2,158)
Non-cash stock-based compensation costs related to stock option plan (207) (53)
Non-cash stock-based compensation costs related to stock purchase plan (127) (71)
Non-cash stock-based compensation costs related to restricted stock award
plan (912) (347)
Unrealized losses on forward exchange contracts (266) -
Future income taxes on forward exchange contracts 88 -
Acquired in-process research and development (1,260) -
Future income taxes on acquired in-process research and development (46) -
Amortization of intangible assets - 239
Future income taxes on amortization of intangible assets - (80)
Amortization of goodwill (3,242) -
------------------ -------------------
Net loss for the period in accordance with U.S. GAAP (25,027) (2,470)
Other comprehensive loss
Foreign currency translation adjustments (5,096) (601)
------------------ -------------------
Comprehensive loss $ (30,123) $ (3,071)
================== ===================
Basic and diluted net loss per share in accordance with
U.S. GAAP $ (0.43) $ (0.04)
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
SHAREHOLDERS' EQUITY
As a result of the aforementioned adjustment to net loss, significant
differences with respect to shareholders' equity under U.S. GAAP are as
follows:
SHARE CAPITAL
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
--------------------- ----------------------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 489,611 $ 492,411
Stock-based compensation costs related to stock purchase
plan
Current period (64) (45)
Cumulative effect of prior periods 2,542 5,748
Reclassification from other capital upon exercise of restricted stock
awards 3,270 -
Shares issued upon business combinations 65,584 65,584
--------------------- ----------------------
Share capital in accordance with U.S. GAAP $ 560,943 $ 563,698
===================== ======================
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
--------------------- ----------------------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with Canadian
GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Cumulative effect of prior periods (7,968) (2,867)
Amortization for the period 4,698 578
Reduction of stock-based compensation costs 403 41
--------------------- ----------------------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (2,867) $ (2,248)
===================== ======================
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
OTHER CAPITAL
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
--------------------- ----------------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Cumulative effect of prior periods 12,350 7,693
Reduction of stock-based compensation costs (1,387) (103)
Reclassification to share capital upon exercise of restricted stock
awards (3,270) -
--------------------- ----------------------
Other capital in accordance with U.S. GAAP $ 7,693 $ 7,590
===================== ======================
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
DEFICIT
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
--------------------- ----------------------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $(316,838) $(318,996)
Stock-based compensation costs related to stock-based compensation
plans
Current period (3,650) (471)
Cumulative effect of prior periods (6,924) (10,574)
Unrealized gains on forward exchange contracts, net of related future
income taxes
Current period 232 -
Cumulative effect of prior periods 117 349
Future income taxes on acquired in-process research and development
Current period (444) -
Cumulative effect of prior periods (936) (1,380)
Write-down of goodwill and intangible assets
Current period (62,557) -
Cumulative effect of prior periods - (62,557)
Future income taxes on write-down of intangible assets
Current period (1,154) -
Cumulative effect of prior periods - (1,154)
Amortization of intangible assets
Current period 239 239
Cumulative effect of prior periods - 239
Future income taxes on amortization of intangible assets
Current period (80) (80)
Cumulative effect of prior periods - (80)
Amortization of goodwill
Current period (9,263) -
Cumulative effect of prior periods (8,453) (17,716)
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
--------------------- ----------------------
Deficit in accordance with U.S. GAAP $(408,695) $(411,165)
===================== ======================
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE LOSS
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2002 2002
--------------------- ----------------------
(UNAUDITED)
Foreign currency translation adjustments
Balance - Beginning of period $ (9,349) $ (9,870)
Change during the period (521) (601)
--------------------- ----------------------
Balance - End of period $ (9,870) $ (10,471)
===================== ======================
BALANCE SHEETS
The following table summarizes the significant differences in balance sheet
items between Canadian GAAP and U.S. GAAP.
AS AT AUGUST 31, 2002 AS AT NOVEMBER 30, 2002
--------------------------------------- ----------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Intangible assets
Cost $ 37,927 $ 30,301 $ 38,594 $ 30,981
Accumulated amortization (21,463) (17,030) (22,635) (17,992)
------------------ -------------------- -------------------- -------------------
$ 16,464 $ 13,271 $ 15,959 $ 12,989
================== ==================== ==================== ===================
Goodwill
Cost $ 87,025 $ 92,747 $ 89,821 $ 95,532
Accumulated amortization (69,449) (87,251) (69,363) (87,346)
------------------ -------------------- -------------------- -------------------
$ 17,576 $ 5,496 $ 20,458 $ 8,186
================== ==================== ==================== ===================
Shareholders' equity
Share capital $ 489,611 $ 560,943 $ 492,411 $ 563,698
Contributed surplus 1,487 1,487 1,495 1,495
Cumulative translation
adjustment (8,854) - (9,455) -
Deferred stock-based
compensation costs - (2,867) - (2,248)
Other capital - 7,693 - 7,590
Deficit (316,838) (408,695) (318,996) (411,165)
Accumulated other
comprehensive loss - (9,870) - (10,471)
------------------ -------------------- -------------------- -------------------
$ 165,406 $ 148,691 $ 165,455 $ 148,899
================== ==================== ==================== ===================
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM 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 periods ended November 30, 2001 and 2002, there are no significant
differences between the statements of cash flows under Canadian GAAP as
compared to U.S. GAAP.
UNAUDITED PRO FORMA INFORMATION ON BUSINESS COMBINATION
Under U.S. GAAP, pro forma information must be provided as though the
business combination had occurred at the beginning of the reported periods.
The following unaudited pro forma information reflects the results of
operations as if the acquisition of substantially all the assets of GNUBI
COMMUNICATIONS, L.P., had been completed on September 1, 2001 and 2002.
Such information is not necessarily indicative of the actual results which
would have been achieved, nor is it necessarily indicative of future
consolidated results of the company.
THREE MONTHS ENDED
NOVEMBER 30,
----------------------------------
2001 2002
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Sales $ 23,346 $ 17,948
Net loss $ (26,337) $ (2,668)
Basis and diluted net loss per share $ (0.44) $ (0.04)
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standard Board (FASB) issued SFAS 142
"Goodwill and Other Intangible Assets", which is effective for fiscal years
beginning on or after January 1, 2002. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon the adoption of this statement. For any
acquisitions completed after June 30, 2001, goodwill is not amortized. The
company adopted SFAS 142 prospectively on September 1, 2002. Upon the
adoption of this new statement, goodwill recorded prior to July 1, 2001, is
no longer subject to amortization. Also, under the transitional provisions
of the SFAS 142, the company performed an initial impairment test to
identify goodwill impairment using a fair value-based method. Under SFAS
142, a goodwill impairment exists when the carrying value of a reporting
unit exceeds its fair value. For the purposes of the impairment test, the
company allocated its existing goodwill to its reporting units and completed
an evaluation of the fair value of such reporting units. Based on the
comparison of the fair value of the reporting units to their carrying value,
goodwill of the reporting units was not considered impaired.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Goodwill will also be tested for impairment on an annual basis or more
frequently if events or circumstances occur that more likely than not reduce
the fair value of a reporting unit below its carrying value. Any impairment
loss arising from this test will be charged to earnings in the period in
which it is incurred.
The following table summarizes the impact of this change in accounting
policy on the net loss and the net loss per share for the comparative
previous period on a pro forma basis:
THREE MONTHS ENDED
NOVEMBER 30, 2001
------------------
(UNAUDITED)
Net loss for the period $ (25,027)
Add back:
Amortization of goodwill for the period 15,692
------------------
Pro forma net loss for the period $ (9,335)
==================
Pro forma basic and diluted net loss per share $ (0.16)
In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligation", which is effective for fiscal years beginning on or after June
15, 2002. This standard requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The company
adopted this new standard prospectively on September 1, 2002 and its
adoption had no impact on the company's financial statements.
In October 2001, the FASB issued SFAS 144 "Accounting for Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS 121 and the provisions
of APB 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" with regard to reporting the
effects of a disposal of a segment of a business. SFAS 144 retains many of
the provisions of SFAS 121, but significantly changes the criteria that
would have to be met to classify an asset as held for disposal such that
long-lived assets to be disposed of other than by sale are considered held
and used until disposed of. In addition, SFAS 144 retains the basic
provisions of APB 30 for presentation of discontinued operations in the
statement of earnings but broadens that presentation to a component of an
entity. This new standard is effective for fiscal years beginning on or
after December 15, 2001. The company adopted this new standard prospectively
on September 1, 2002, and its adoption had no impact on the company's
financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
This new standard is effective for fiscal years beginning on or after May
15, 2002, or for transactions occurring after May 15, 2002 related to SFAS
13, paragraph 8 and 9 (c). This statement rescinds SFAS 4 "Reporting Gains
and Losses from Extinguishment of Debt" and an amendment of that Statement,
SFAS 64 "Extinguishments of Debt Made to Satisfy Sinking-Funds
Requirements". This Statement also rescinds SFAS 44 "Accounting for
Intangible Assets of Motor Carriers". This Statement amends
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
SFAS 13 "Accounting for Leases" to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The company adopted this new standard prospectively on September
1, 2002, and its adoption had no impact on the company's financial
statements.
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF No. 94-3, "Liability Recognition of Certain Employee
Termination Benefits and Other Costs to Exit an Activity". This Statement
improves financial reporting by requiring that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. This Statement
specifies that a liability for a cost associated with an exit or disposal
activity is incurred when the definition of a liability in SFAS 6 is met.
This Statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The company will adopt this new standard
prospectively on January 1, 2003, and its adoption will have no impact on
the company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS MAY CONTAIN 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" OR
"CONTINUE" OR THE NEGATIVE OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS, INCLUDING CONTINUED GLOBAL ECONOMIC UNCERTAINTY,
CAPITAL SPENDING IN THE TELECOMMUNICATIONS SECTOR AND OUR ABILITY TO EXECUTE
SUCCESSFULLY IN THESE UNCERTAIN CONDITIONS; THE EFFECTS OF THE ADDITIONAL
ACTIONS WE HAVE TAKEN IN RESPONSE TO SUCH ECONOMIC UNCERTAINTY (INCLUDING
WORKFORCE REDUCTIONS, ABILITY TO QUICKLY ADAPT COST STRUCTURES TO ALIGN WITH
DECREASED LEVELS OF BUSINESS, ABILITY TO MANAGE INVENTORY LEVELS TO ADAPT TO
SLOWDOWNS); MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND OTHER UPCOMING NEW
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 COMPANIES; THE COMPETITIVE LANDSCAPE; THE RETENTION OF KEY
TECHNICAL AND MANAGEMENT PERSONNEL; AND FUTURE ECONOMIC, COMPETITIVE AND MARKET
CONDITIONS. ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS AND RISKS,
ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH
ARE BEYOND OUR CONTROL. OTHER RISK FACTORS THAT MAY AFFECT OUR FUTURE
PERFORMANCE AND OUR OPERATIONS ARE DETAILED IN OUR ANNUAL REPORT ON FORM 20-F
AND OUR OTHER FILINGS WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND THE
CANADIAN SECURITIES COMMISSIONS. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE BASED ON INFORMATION
CURRENTLY AVAILABLE TO US, 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. IN ANY EVENT, THESE STATEMENTS SPEAK ONLY AS OF THE
DATE OF THIS DOCUMENT. WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE ANY OF
THEM TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
ALL DOLLAR AMOUNTS ARE EXPRESSED IN US DOLLARS, EXCEPT AS OTHERWISE NOTED.
OVERVIEW
The fiber-optic telecommunications industry is still experiencing
difficult times. Established telecommunications carriers continued to reduce
their capital expenditures to improve short-term financials and reduce debt
loads, while a number of others have filed for bankruptcy. Lower spending levels
have produced a trickle-down effect throughout the fiber-optic industry,
including in research and development, manufacturing, installation and
maintenance, as well as network monitoring companies. Test, measurement,
monitoring and automation equipment vendors, in turn, have been negatively
affected due to the dramatic reduction in the deployment of optical networks.
However, vendors with extensive product portfolios, which include all-in-one
protocol-, optical- and physical-layer test solutions, continued to market their
products to network service providers, who needed to upgrade their networks to
higher transmission rates, add DWDM channels or maintain their existing
networks. Likewise, test, measurement and automation vendors, whose products
increase efficiency and reduce
1
costs on the production floor, still attracted the attention of system and
optical component manufacturers, who kept investing in their research and
development programs to stay ahead of the competition.
In October 2002, we completed, through our newly created wholly-owned
subsidiary EXFO Gnubi Products Group Inc., the previously announced acquisition
of substantially all the assets of GNUBI COMMUNICATIONS, L.P., a multi-channel
telecom and datacom testing solutions supplier with an established customer base
of Tier 1 system vendors and research and development laboratories. This
acquisition was made to fully complement our offering, to enhance our
competitive position with network service providers and system vendors as well
as to expand our presence in the data communications test market. This
acquisition was settled for a total consideration of $4.6 million. The
consideration paid consisted in $1.8 million in cash, $2.8 million by the
issuance of 1.5 million subordinate voting shares and a cash contingent
consideration up to a maximum of $2.9 million, based on sales volume for 2003.
This acquisition has been accounted for using the purchase method and resulted
in goodwill of $2.9 million.
During the first quarter of 2003, we reached a base of more than 10,000
test platforms on the global market and we launched three new products including
the FTB-9310 Channel Selector for commissioning and lighting channels in dense
wavelength-division multiplexing (DWDM) networks; ProBond, a bonding option for
the ProAlign(TM) 5000 Component Assembly Workstation; and the X-Cite 120
Illumination System for fluorescence microscopy applications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a complete description of our critical accounting policies and
estimates, please refer to the critical accounting policies and estimates in our
most recent annual report filed with securities commissions. The following
details the changes in critical accounting policies that occured since our most
recent annual report.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS. We assess impairment of
goodwill on an annual basis or more frequently if events or circumstances occur
that more likely than not reduce the fair value of a reporting unit below its
carrying value. Goodwill impairment exists when the carrying value of a
reporting unit exceeds its fair value. The amount of impairment loss, if any, is
the excess of the carrying value of goodwill over its fair value. On September
1, 2002, upon the adoption of section 3062 of the Canadian Institute of
Chartered Accountants Handbook (CICA), we performed an initial impairment test
of goodwill based on a fair value method. For the purposes of this test, we
allocated our existing goodwill to our reporting units and completed an
evaluation of the fair value of such reporting units. For the purposes of the
evaluation of the fair value of reporting units, we used future discounted cash
flows to estimate the fair value of each reporting unit. The periods used for
the cash flows were ten and eleven years, with annual growth rates ranging from
10% to 30% and discount rates ranging from 15% to 18%. The assumptions used
reflect our best estimates. Based on the comparison of the fair value of the
reporting units to their carrying value, goodwill was not considered impaired.
Furthermore, we assess impairment of intangible assets when events or
circumstances indicate that costs may not be recoverable. Impairment exists when
the carrying value of the asset is greater than the pre-tax undiscounted future
cash flows expected to be provided by the asset. The amount of impairment loss,
if any, is the excess of the carrying value over its fair value.
2
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations for the three months ended November 30, 2001 and 2002
should be read in conjunction with our interim consolidated financial statements
and the related notes thereto. All figures are expressed in thousands of US
dollars, except per share data and as otherwise noted. Our interim consolidated
financial statements have been prepared in accordance with Canadian GAAP, which
conform in all material respects with U.S. GAAP, except as described in note 11
to our interim consolidated financial statements.
THREE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------- ----------------------
2001 2002 2001 2002
--------- -------- ---------- ---------
(UNAUDITED) UNAUDITED)
Sales $ 20,138 $ 17,748 100.0% 100.0%
Cost of sales 12,532 7,685 62.2 43.3
-------- -------- ---------- ---------
Gross margin* 7,606 10,063 37.8 56.7
-------- -------- ---------- ---------
Operating expenses
Selling and administrative 10,325 7,608 51.3 42.9
Net research and development 3,145 3,311 15.6 18.7
Amortization of property, plant
and equipment 1,348 1,484 6.7 8.3
Amortization of intangible assets 3,271 1,222 16.3 6.9
Restructuring charges 410 -- 2.0 --
-------- -------- ---------- ---------
Total operating expenses 18,499 13,625 91.9 76.8
-------- -------- ---------- ---------
Loss from operations (10,893) (3,562) (54.1) (20.1)
Interest income, net 699 256 3.5 1.4
Foreign exchange gain 33 27 0.1 0.2
-------- -------- ---------- ---------
Loss before income taxes and amortization
of goodwill (10,161) (3,279) (50.5) (18.5)
Income taxes (3,556) (1,121) (17.7) (6.3)
-------- -------- ---------- ---------
Loss before amortization of goodwill (6,605) (2,158) (32.8) (12.2)
Amortization of goodwill 12,450 -- 61.8 --
-------- -------- ---------- ---------
Net loss for the period $(19,055) $ (2,158) (94.6)% (12.2)%
======== ======== ========== =========
Basic and diluted net loss per share $ (0.33) $ (0.03)
Research and development data:
Gross research and development $ 4,210 $ 4,207 20.9% 23.7%
Net research and development $ 3,145 $ 3,311 15.6% 18.7%
Other data:**
Pro forma net loss $ (1,937) $ (1,354) (9.6)% (7.7)%
Basic and diluted pro forma net loss per share $ (0.03) $ (0.02)
* Including inventory write-offs of $3,500 and nil for the three months ended
November 30, 2001 and 2002, respectively. Excluding inventory write-offs of
$3,500 for the three months ended November 30, 2001, gross margin would
have reached 55.1% for that period. This latter information is a non-GAAP
measure.
** Net loss excluding amortization of goodwill and the after-tax effect of
amortization of intangible assets and restructuring charges as well as
inventory write-offs. This information may not be comparable to similarly
titled measures reported by other companies because it is non-GAAP
information.
3
SALES
For the three months ended November 30, 2002, sales decreased 11.9% to
$17.7 million from $20.1 million for the same period last year. The decrease in
sales directly relates to a reduced demand for our products and pricing pressure
attributable to the severe downturn in the telecommunications industry. The
fiber-optic telecommunications industry is still experiencing difficult times.
Established telecommunications carriers continued to reduce their capital
expenditures to improve short-term financials and reduce debt loads, while a
number of others have filed for bankruptcy. Lower spending levels have produced
a trickle-down effect throughout the fiber-optic industry, including in research
and development, manufacturing, installation and maintenance, as well as network
monitoring companies. Test, measurement, monitoring and automation equipment
vendors, in turn, have been negatively affected due to the dramatic reduction in
the deployment of optical networks. Consequently, both our Portable and
Monitoring products and our Industrial and Scientific products suffered from
this lack of demand and pricing pressure. With regard to sales distribution, it
was a 66%-34% split in favor of our Portable and Monitoring products for the
three months ended November 30, 2002, compared to 62%-38% in favor of our
Portable and Monitoring products for the same period last year. We expect the
sales split to remain the same in the upcoming quarters, given gray market and
the state of the component vendor market that affect sales of our Industrial and
Scientific products.
Net accepted orders increased 24% to $15.8 million in the first quarter
of 2003 from $12.7 million for the same period last year. Our net book-to-bill
ratio increased to 0.89 in the first quarter of 2003, compared to 0.63 for the
same period last year. Order cancellations amounted approximately to $414,000
for the first quarter of 2003. Without these cancellations, our book-to-bill
ratio would have reached 0.91.
North American sales accounted for 61% and 57% of global sales for the
three months ended November 30, 2002 and 2001, respectively. International sales
represented 39% and 43% of global sales for the three months ended November 30,
2002 and 2001, respectively. The shift in the geographic distribution of our
sales is directly related to an increase of our sales to the American market and
a decrease of our sales to the Asian market. For the three months ended November
30, 2002, sales to the American market amounted to 58%, compared to 52% for the
same period last year, while sales to the Asian market were 13% in the first
quarter of 2003, compared to 17% for the same period last year. Most of our
sales to the Asian market are made with through tenders, which may vary in
number and significance from quarter to quarter.
We sell our products to a broad range of customers including
telecommunications carriers, network service providers, optical component and
system manufacturers, as well as research and development laboratories. For the
three months ended November 30, 2002, we had only one 10% customer, with 12.9%
of our sales, while our three most significant customers represented 24.1% of
our sales for that same period. No customer accounted for more than 7.5% of our
sales for the same period last year.
GROSS MARGIN
Gross margin amounted to 56.7% of sales for the three months ended
November 30, 2002, compared to 37.8% for the same period last year.
The percentage increase is due to the following reasons. First of all,
during the first quarter of 2002, we recorded $3.5 million in inventory
write-offs for excess and obsolete
4
inventories. Excluding this special charge, gross margin would have reached
55.1% of sales for that period. Secondly, in the first quarter of 2002, we were
just at the beginning of our restructuring efforts, while in the first quarter
of 2003, we took full advantage of our restructuring actions taken during fiscal
2002, with lower manufacturing costs and increased efficiency. Thirdly, the
shift in the geographic distribution of our sales in the third quarter of 2003
resulted in more sales in North America where gross margin tends to be higher
and less sales made in Asia where gross margin tends to be lower
We expect our gross margin to fluctuate for the upcoming quarters as
our sales may fluctuate. Our gross margin can be negatively affected by
competitive pricing pressure, increase in obsolescence costs, shifts in product
mix, reductions in government grants, under-absorption of fixed manufacturing
costs and increases in product offerings by other suppliers in the fiber-optic
test, measurement, monitoring and automation industry.
SELLING AND ADMINISTRATIVE
For the three months ended November 30, 2002, selling and
administrative expenses were $7.6 million, or 42.9% of sales, compared to $10.3
million, or 51.3% of sales for the same period last year. The dollar decrease is
directly related to lower expenses resulting from our restructuring plans mainly
implemented during fiscal 2002 and lower commission expenses since our sales
decreased quarter over quarter. However, this decrease was offset in part by the
impact of the acquisitions of EXFO Protocol in November 2001 and EXFO Gnubi in
October 2002. Overall, despite the decrease in sales in the first quarter of
2003 compared to the same period last year and the effects of the acquisitions
of EXFO Protocol and EXFO Gnubi, we were able to reduce our selling and
administrative expenses as a percentage of sales by over 8%, mainly because of
our recent restructuring efforts.
Considering the challenging market conditions, we will continue to
maintain our selling and administrative expenses at an acceptable level without
impeding our efforts to strategically position our company, improve our sales,
as well as provide quality service to customers and integrate our acquired
businesses.
RESEARCH AND DEVELOPMENT
For the three months ended November 30, 2002, gross research and
development expenses totaled $4.2 million, or 23.7% of sales, compared to $4.2
million, or 20.9% of sales for the same period last year. The stability in gross
research and development dollars quarter over quarter is due to the effects of
our recent restructuring actions offset by the effects of the acquisitions of
EXFO Protocol and EXFO Gnubi, which, combined, carried out a significant level
of research and development activities.
The percentage increase reflects our strong focus on innovation despite
the decrease in sales. We firmly believe that innovation and new product
introductions are the key to gaining market share in this current economic
environment and ensuring the long-term growth and profitability of the company.
In the first quarter of 2003, 45% of sales originated from products that have
been on the market for two years or less. For the first quarter of 2002, this
number reached 56% of sales.
5
For the three months ended November 30, 2002, tax credits and grants
from federal, provincial and state governments for research and development
activities were $896,000, or 21.3% of gross research and development expenses,
compared to $1.1 million, or 25.3% of gross research and development expenses
for the same period last year. Our tax credits and grants decreased in dollars
despite the fact that our gross research and development expenses remained flat
quarter over quarter. The primary reason for that decrease is the end of certain
government grant programs and because of the recent acquisition of U.S.-based
GNUBI, as we carried out more research and development activities in the U.S.,
where such activities are not eligible for tax credits.
In terms of net research and development expenses, they amounted to
18.7% and 15.6% of sales for the three months ended November 30, 2002 and 2001,
respectively. Although we intend to reduce our research and development expenses
as a percentage of sales in the future, we expect to continue investing heavily
in research and development in the upcoming year, reflecting our focus on
innovation, our desire to gain market share and our goal to exceed customer
needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the four strategic acquisitions that we made over
the last two fiscal years and in the first quarter of 2003, we recorded $61.9
million in intangible assets, primarily consisting of core technology. These
intangible assets, which are amortized over periods from five months to five
years from the date of acquisitions, resulted in amortization expenses of $1.2
million and $3.3 million for the three months ended November 30, 2002 and 2001,
respectively.
Intangible assets related to the acquisitions of EXFO Burleigh and EXFO
Photonic Solutions have been reviewed for impairment in May 2002 and this
resulted in a pre-tax write-down charge of $23.7 million in the third quarter of
2002. Considering this write-down, the amortization of intangible assets
decreased by approximately $1.6 million in the first quarter of 2003, compared
to the same period last year. Also, as at August 31, 2002, acquired in-process
research and development and work force related to the acquisitions made over
the last two fiscal years were fully amortized.
RESTRUCTURING CHARGES
During the three months ended November 30, 2001, we implemented a
structured plan to reduce our costs. Under that plan, we recorded $410,000 in
severance expenses for the 101 employees who were terminated. During the first
quarter of 2003, no such action was needed.
Our past cost-cutting measures represented our best efforts to respond
to the difficult market conditions. However, these efforts may be inappropriate
or insufficient. Our actions in this regard may not be successful in achieving
the cost reductions or other benefits expected, may be insufficient to align our
cost structure to market conditions, or may be more costly or extensive than
anticipated.
6
INTEREST INCOME, NET
Net interest income amounted to $256,000 and $699,000 for the three
months ended November 30, 2002 and 2001, respectively. The decrease in our net
interest income in the first quarter of 2003 compared to the same period last
year is directly related to the use of short-term investments to finance the
strategic acquisitions of EXFO Protocol and EXFO Gnubi, our operating activities
of fiscal 2002 and the purchases of property, plant and equipment.
We expect our net interest income to remain relatively flat over the
next quarters.
FOREIGN EXCHANGE GAIN
Foreign exchange gain amounted to $27,000 and $33,000 for the three
months ended November 30, 2002 and 2001, respectively.
These foreign exchange gains are the result of the translation of
operating activities denominated in currencies other than the Canadian dollar.
We manage our exposure to currency risk with forward exchange contracts
and operating activities denominated in currencies other than the Canadian
dollar.
INCOME TAXES
Our effective income tax recovery rate was 34.2% and 35.0% for the
three months ended November 30, 2002 and 2001, respectively. The slight decrease
in our effective income tax recovery rate is the result of valuation allowances
taken on newly created future income tax assets of one of our subsidiaries,
because it is more likely than not that these assets will not be recovered.
As at November 30, 2002, future income tax assets were $14.9 million
and mainly relate to tax losses, provisions and accruals as well as research and
development expenses. Our current forecasts demonstrate that most of the future
income tax assets should be recovered over the next three fiscal years. However,
if we obtain information that causes our forecast of future taxable income to
change or if actual future taxable income differs from our forecast, we may have
to revise the carrying value of our future income tax assets, which would affect
our net earnings in the period in which the change was made. We review the
recoverability of our future income tax assets on a quarterly basis.
Research and development expenses and most of the provisions and
accruals can be carried forward indefinitely against future years taxable
income. The Canadian tax losses, which represent $3.8 million in future income
tax assets, expire over the next seven years while U.S. tax losses, which
represent $3.8 million in future income tax assets, expire in 19 and 20 years.
Furthermore, as at November 30, 2002, income taxes and tax credits
recoverable were $14.3 million. The current portion, amounting to $10.4 million,
consists of income taxes recoverable upon the carry-back of the fiscal 2002 tax
losses, as well as refundable research and development tax credits earned in
previous periods. The long-term portion, amounting to
7
$3.9 million, represents research and development tax credits, as well as tax
deductions that can be carried back against previous years taxable income.
AMORTIZATION OF GOODWILL
In conjunction with the four strategic acquisitions that we made over the last
two fiscal years and in the first quarter of 2003, we recorded $312.0 million in
goodwill. The goodwill related to the acquisitions of EXFO Burleigh and EXFO
Photonic Solutions was amortized over five years until August 31, 2002. This
resulted in amortization expense of $12.5 million in the first quarter of 2002.
The acquisitions of EXFO Protocol and EXFO Gnubi have been accounted for using
new accounting standards contained in sections 1581 and 3062 of the CICA and,
consequently, goodwill resulting from these acquisitions was not amortized.
As of September 1, 2002, goodwill related to the acquisitions of EXFO
Burleigh and EXFO Photonic Solutions is no longer amortized under new accounting
standards. Consequently, we no longer have amortization expense for goodwill.
NET LOSS
Net loss amounted to $2.2 million and $19.1 million for the three
months ended November 30, 2002 and 2001, respectively. In terms of per share
amounts, we recorded a net loss of $0.03 and $0.33 for the three months ended
November 30, 2002 and 2001, respectively.
PRO FORMA NET LOSS
As a measure to assess financial performance, we use pro forma net loss
and pro forma net loss per share. Pro forma net loss represents net loss
excluding amortization of goodwill and the after-tax effect of amortization of
intangible assets, restructuring charges as well as inventory write-offs.
Pro forma net loss amounted to $1,4 million and $1.9 million for the
three months ended November 30, 2002 and 2001, respectively. In terms of pro
forma per share amounts, we recorded a net loss of $0.02 and $0.03 for the three
months ended November 30, 2002 and 2001, respectively.
Pro forma net loss is reconciled as follows:
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------
2001 2002
---------- ---------
(UNAUDITED)
Net loss in accordance with GAAP $(19,055) $ (2,158)
Pro forma adjustments:
Amortization of goodwill 12,450 --
Amortization of intangible assets 3,271 1,222
Tax effect on amortization of intangible assets (1,145) (418)
Restructuring charges and inventory write-offs 3,910 --
Tax effect on the restructuring charges and
inventory write-offs (1,368) --
-------- --------
Pro forma net loss $ (1,937) $ (1,354)
======== ========
Basic and diluted pro forma net loss per share $ (0.03) $ (0.02)
8
We provide pro forma financial information to help the investor better
understand our operating results. This information is not in accordance with, or
an alternative for, generally accepted accounting principles and may not be
comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
We finance our major investments and meet our capital expenditure
requirements mainly through cash flows from operations, the use of cash and cash
equivalents and short-term investments and the issuance of subordinate voting
shares.
CASH POSITION AND SHORT-TERM INVESTMENTS
As at November 30, 2002, cash and cash equivalents as well as
short-term investments consisted of $48.6 million. Our working capital was at
$90.3 million. Our cash and cash equivalents and short-term investments
decreased by $1.1 million in the first quarter of 2003. Although operating
activities generated $2.8 million in this quarter, we had to use cash on hand to
finance the payments of $1.8 million and $1.6 million, respectively, for the
acquisition of GNUBI and the purchases of property, plant and equipment.
As at November 30, 2002, total commitments under operating leases and
long-term debt over the next twelve months amounted to $1.5 million. Also, in
accordance with the assets purchase agreement for the acquisition of GNUBI, we
may have to pay a contingent cash consideration up to $2.9 million in December
2003. On the other hand, we should recover $10,4 million in income taxes and tax
credits over the next twelve months.
OPERATING ACTIVITIES
Cash flows provided by operating activities were $2.8 million for the
three months ended November 30, 2002, compared to cash flows used of $1.7
million for the same period last year. Cash flows provided by operating
activities in the first quarter of 2003 were primarily due to the net loss after
items not affecting cash and cash equivalents of $4.1 million, mainly offset by
the decrease of income taxes and tax credits recoverable of $5.3 million and the
decrease of inventories of $2.2 million. The decrease in our income taxes and
tax credits recoverable is related to the recovery, during the quarter, of
income taxes and research and development tax credits recoverable from previous
periods, while the decrease in our inventories is due to our efforts to maintain
them at the lowest acceptable level considering the continued slowdown in our
industry.
During the first quarter of 2003, the major items not affecting cash
and cash equivalents consisted of amortization expenses of $2.7 million and
future income tax recovery of $4.9 million.
FINANCING ACTIVITIES
Cash flows used by financing activities were $24,000 and $25,000 for
the three months ended November 30, 2002 and 2001, respectively. Cash flows used
by financing activities in the first quarter of 2003 were mainly due to the
repayment of our long-term debt.
9
As at November 30, 2002, we had credit facilities that provide for
advances of up to CA$10 million (US$6.4 million) under a line of credit. This
line of credit bears interest at prime rate.
The annual minimum principal repayments of our long-term debt over the
next five fiscal years range from $100,000 to $146 000 a year.
INVESTING ACTIVITIES
Cash flows used by investing activities were $4.9 million for the three
months ended November 30, 2002, compared to cash flows provided of $15.0 million
for the same period last year.
In the first quarter of 2003, we acquired for $1.4 million in
short-term investments and we paid $1.8 million and $1.6 million, respectively,
for the acquisition of GNUBI and the purchases of property, plant and equipment.
OUTLOOK
There can be no assurance as to whether and when we will return to
profitability or that our sales will return to prior levels. However, we believe
that our cash balances and short-term investments, combined with cash flows from
operations and available credit facilities, will be sufficient to meet our
expected liquidity and capital requirements for at least the next 12 months. On
the other hand, possible additional operating losses and/or possible investments
in or acquisitions of complementary businesses, products or technologies may
require additional financing prior to such time. There can be no assurance that
additional debt or equity financing will be available when required or, if
available, it can be secured on satisfactory terms.
STOCK OPTION PLAN
The aggregate number of subordinate voting shares covered by options
granted under the stock option plan was 3,530,965 as at November 30, 2002. The
weighted average exercise price of those stock options was $16.31 compared to
the market price of $3.53 per share as at November 30, 2002. The maximum number
of subordinate voting shares issuable under the plan cannot exceed 4,470,961
shares. 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 company and its subsidiaries as at November 30, 2002:
WEIGHTED
% OF ISSUED AVERAGE
AND EXERCISE
NUMBER OUTSTANDING PRICE
--------- ------------- ----------
Chairman of the Board, President and CEO
(one individual) 150,482 4.26% $ 9.91
Board of Directors (four individuals) 131,875 3.74% $ 7.41
Management and Corporate Officers
(ten individuals) 639,155 18.10% $ 15.36
--------- ------------- ----------
921,512 26.10% $ 13.33
========= ============= ==========
10
On September 1, 2002, we adopted prospectively the new section 3870 of
the CICA, "Stock-Based Compensation and Other Stock-Based Payments" and the new
rules of this section apply to awards granted after that date. As permitted by
the CICA, we choose not account for the stock-based compensation costs arising
from awards to employees, but we complied with the required pro forma
disclosures with respect to net earnings and net earnings per share in our
interim consolidated financial statements. During the first quarter of 2003, we
granted 1,009,550 options to our employees with an average exercise price of
$1.59. Using the Black-Scholes valuation model, the weighted average fair value
per option is $0.60 and the aggregate stock-based compensation costs for these
options is $607,700. These compensation costs will be amortized using the graded
vesting method over the vesting period being four years, resulting in
stock-based compensation costs of $260,400, $190,500, $107,500 and $49,300 over
the next four fiscal years, respectively. The stock-based compensation costs of
these options for the first quarter of 2003 was $57,000, which resulted in a pro
forma net loss of $2,215,000, compared to the net loss of $2,158,000 and a pro
forma net loss per share of $0.04, compared to a net loss per share of $0.03.
Like many other companies, we do not believe that the use of the
Black-Scholes option valuation model provides a reliable single measure of the
fair value of our employees' stock options and stock awards mainly because this
model was developed for use in estimating fair value of traded options and
because it requires the input of highly subjective assumptions, including the
expected stock price volatility. For example, as at August 31, 2002 and using
this model, our 2,597,574 outstanding options with an average exercise price of
$22 would have generated aggregate stock-based compensation costs of
$26,589,000. As at August 31, 2002, none of the vested options issued by EXFO
were exercised because the market price of the company's common shares at that
date was well below the exercise price.
NEW ACCOUNTING STANDARDS
In November 2001, the CICA issued section 3870, "Stock-Based
Compensation and Other Stock-Based Payments", which is effective for fiscal
years beginning on or after January 1, 2002. The new section applies to awards
granted on or after the date of adoption, and requires that stock-based payments
to non-employees and direct awards of stock to employees be accounted for using
a fair value-based method. The new section also encourages, but does not
require, the use of a fair value-based method to account for stock-based
compensation costs arising from awards to employees. The new section requires
pro forma disclosures with respect to net earnings and net earnings per share if
a fair value-based method of accounting is not adopted for awards granted to
employees. We adopted this new standard prospectively on September 1, 2002. We
elected not to account for stock-based compensation costs arising from awards to
our employees using the fair value-based method and consequently, the adoption
of this new standard had no impact on our financial results.
However, we complied with the standard by providing the required pro
forma disclosures.
In August 2001, the CICA issued section 3062 "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning on or after
January 1, 2002. Section 3062 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, ceased upon
the adoption of this section.
11
For any acquisitions completed after June 30, 2001, goodwill is not
amortized.
We adopted section 3062 prospectively from September 1, 2002. Upon the
adoption of this new section, goodwill recorded prior to July 1, 2001, is no
longer subject to amortization. Also, under the transitional provisions of the
section, we performed an initial impairment test to identify goodwill impairment
using a fair value-based method. Under the new section, a goodwill impairment
exists when the carrying value of a reporting unit exceeds its fair value. For
the purposes of the impairment test, we allocated its existing goodwill to its
reporting units and completed an evaluation of the fair value of such reporting
units. Based on the comparison of the fair value of the reporting units to their
carrying value, goodwill of the reporting units was not considered impaired.
Goodwill will also be tested for impairment on an annual basis or more
frequently if events or circumstances occur that more likely than not reduce the
fair value of a reporting unit below its carrying value. Any impairment loss
arising from this test will be charged to earnings in the period in which it is
incurred.
RISKS AND UNCERTAINTIES
Over the past few years, we have been able to manage our activities,
focus on research and development of new and innovative products, penetrate
international markets and close important strategic acquisitions. However, we
operate in a highly competitive field that is in constant evolution and, as a
result, we encounter various risks and uncertainties that must be given
appropriate consideration in our strategic management policies.
The main risks and uncertainties related to the fiber-optic test,
measurement, monitoring and automation industry involve the rapid development of
new products that have short life cycles and require extensive research and
development; the difficulty of retaining highly skilled employees as well as
offering them effective training programs; and the ability to quickly adapt our
cost structure to changing market conditions in order to achieve profitability.
In addition, given our strategic goals for growth and competitive
positioning in our industry, we are expanding into international markets. This
exposes us to certain risks and uncertainties related to changes in local laws
and regulations, multiple technological standards, protective legislation and
pricing pressure.
Furthermore, while the important strategic acquisitions we have made
are essential to our long-term growth, they also expose us to certain risks and
uncertainties related to the rapid and effective integration of these businesses
as well as their products, technologies and personnel.
We are also exposed to currency risks as a result of the export of our
products manufactured in Canada, substantially all of which are denominated in
US dollars. These risks are partially hedged by the operating expenses
denominated in US dollars, the purchase of raw materials in US dollars and
forward exchange contracts.
12
The economic slowdown in our industry could also result in some of our
customers experiencing difficulties and, consequently, this could have a
negative effect on our results especially in terms of future sales and
recoverability of accounts receivable. However, the sectorial and geographic
diversity of our customer base provides us with a reasonable level of protection
in this area. Finally, other financial instruments, which potentially subject us
to credit risks, consist mainly of cash and cash equivalents, short-term
investments and forward exchange contracts. Our short-term investments consist
of debt instruments issued by high-credit quality corporations and trusts. Our
cash and cash equivalents and forward exchange contracts are held with or issued
by high-credit quality financial institutions; therefore, we consider the risk
of non-performance on these instruments to be remote.
For a more complete understanding of risk factors that may affect us,
please refer to the risk factors set forth in our disclosures documents
published with securities commissions.