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 March, 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 March 24, 2003, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the second fiscal quarter
ended February 28, 2003. 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 second fiscal quarter of
the 2003 fiscal year. This press release and information relating to EXFO's
financial condition and results of operations for the second 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: /signed/ Kimberley Okell
--------------------------------------------
Name: Kimberley Okell
Title: Legal Counsel and Corporate Secretary
Date: March 27, 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 EXPECTS IMPROVED RESULTS AFTER SEASONALITY IN SECOND QUARTER
o POSITIVE CASH FLOWS FROM OPERATING ACTIVITIES FOR THIRD CONSECUTIVE QUARTER
o STRONG BALANCE SHEET WITH CASH POSITION OF US$57.8 MILLION
o NEW PRODUCTS ACCOUNT FOR MORE THAN 50% OF SALES IN SECOND QUARTER
o LAUNCHED 13 NEW PRODUCTS SINCE BEGINNING OF FISCAL 2003
QUEBEC CITY, CANADA, March 24, 2003--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO, TSE: EXF) announced today that, as expected, it was affected by
seasonality in the second quarter of fiscal 2003, but forecasted improved sales
for the next quarter.
Sales decreased 17% to US$14.8 million in the second quarter ended February 28,
2003 from US$17.7 million in the first quarter of 2003, but increased 1% from
US$14.6 million in the second quarter of 2002.
"As anticipated, sales dropped in the second quarter due to the seasonal impact
related to the months of December, January and February," said Germain Lamonde,
Chairman, President and CEO of EXFO. "We witnessed less year-end budgetary flush
outs in an already shortened December and many customers delayed their new
budget approvals until February. Recent trends for bookings and quote rates,
however, represent positive signs for the upcoming quarter."
EXFO forecasted sales between US$16.0 million and US$19.0 million and a pro
forma* net loss between US$0.05 and US$0.02 per share for the third quarter of
fiscal 2003, assuming no major changes in the current business environment.
"I believe that our broad product portfolio with 13 new products launched since
the beginning of fiscal 2003, our more than 50% of sales in the last quarter
coming from new products, our well-established base of more than 10,000 modular
platforms, and our strong cash position of US$57.8 million are providing us with
the competitive advantages to continue gaining the favor of our more than 2000
customers worldwide," added Mr. Lamonde.
Pro forma* net loss for the second quarter of fiscal 2003 amounted to US$3.4
million, or US$0.05 per share, compared to a pro forma net loss of US$1.4
million, or US$0.02 per share, for the previous quarter and a pro forma net loss
of US$4.1 million, or US$0.07 per share, for the second quarter of 2002.
Net loss for the second quarter of fiscal 2003 totaled US$4.2 million, or
US$0.07 per share, compared to a net loss of US$2.2 million, or US$0.03 per
share, for the first quarter of 2003 and a net loss of US$22.7 million, or
US$0.37 per share, for the second quarter of 2002.
Cash flows from operating activities, which were positive for a third
consecutive reporting period, reached US$6.6 million in the second quarter of
fiscal 2003 compared to US$2.8 million in the first quarter of 2003 and cash
flows from operating activities used of US$4.7 million in the second quarter of
2002.
Gross margin for the second quarter of fiscal 2003 represented 48.9% of sales
compared to 56.7% for the previous quarter and 51.9% (excluding inventory
write-offs) for the second quarter of 2002.
"The sequential drop in gross margin can be attributed to a larger proportion of
indirect sales outside of North America, less absorption of fixed costs on lower
sales volume, and pricing pressure from financially leveraged vendors," Mr.
Lamonde explained. "But we anticipate our gross margin to range between 50% to
55% in the next quarter and we're pleased with the great progress made in our
protocol-layer test activities."
BUSINESS HIGHLIGHTS
In the second quarter, EXFO launched the patent-pending FTB-5500B Polarization
Mode Dispersion (PMD) Analyzer for the carrier market. This next-generation PMD
Analyzer is the only portable instrument that can characterize PMD levels in
high-speed optical networks by sweeping through erbium-doped fiber amplifiers
(EDFAs).
OPERATING EXPENSES
Selling and administrative expenses amounted to US$7.0 million, or 47.7% of
sales, for the second quarter of fiscal 2003 compared to US$7.6 million, or
42.9% of sales, for the first quarter of 2003 and US$9.3 million, or 63.4% of
sales, for the second quarter of 2002.
Gross research and development expenses totaled US$4.4 million, or 29.9% of
sales, in the second quarter of fiscal 2003 compared to US$4.2 million, or 23.7%
of sales, for the previous quarter and US$4.8 million, or 33.0% of sales, for
the second quarter of 2002.
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 5 p.m. (EST) to review its
second-quarter results for fiscal 2003. To listen to the conference call and
participate in the question period via telephone, dial 1-416-695-6371. 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
March 31, 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 SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(UNAUDITED)
NET LOSS IN ACCORDANCE WITH GAAP $ (4,246) $ (22,675) $ (6,404) $ (41,730)
PRO FORMA ADJUSTMENTS:
AMORTIZATION OF GOODWILL -- 12,409 -- 24,859
AMORTIZATION OF INTANGIBLE ASSETS 1,260 3,469 2,482 6,740
TAX EFFECT ON AMORTIZATION OF
INTANGIBLE ASSETS (440) (1,281) (861) (2,426)
RESTRUCTURING CHARGES AND INVENTORY
WRITE-OFFS -- 6,309 -- 10,219
TAX EFFECT ON RESTRUCTURING CHARGES
AND INVENTORY WRITE-OFFS -- (2,330) -- (3,698)
----------- ----------- ----------- -----------
PRO FORMA NET LOSS $ (3,426) $ (4,099) $ (4,783) $ (6,036)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE
IN ACCORDANCE WITH GAAP $ (0.07) $ (0.37) $ (0.10) $ (0.70)
BASIC AND DILUTED PRO FORMA NET LOSS
PER SHARE $ (0.05) $ (0.07) $ (0.08) $ (0.10)
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 transmission system and optical component 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 increasing global geo-political, economic, competitive and
market uncertainty and our ability to execute successfully in these uncertain
conditions; capital spending levels in the telecommunications sector; 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
FEBRUARY 28, AUGUST 31,
2003 2002
------------------ ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,305 $ 9,128
Short-term investments 50,446 40,553
Accounts receivable
Trade, less allowance for doubtful accounts of $447
($520 as at August 31, 2002) 8,688 9,881
Other 1,636 3,267
Income taxes and tax credits recoverable 4,013 13,473
Inventories (note 5) 21,603 23,822
Prepaid expenses 1,270 1,280
Future income taxes 4,952 1,272
------------------ ------------------
99,913 102,676
INCOME TAXES AND TAX CREDITS RECOVERABLE 5,535 6,234
PROPERTY, PLANT AND EQUIPMENT 26,079 26,246
INTANGIBLES ASSETS (note 7) 15,301 16,464
GOODWILL (note 3) 21,171 17,576
FUTURE INCOME TAXES 12,407 8,730
------------------ ------------------
$ 180,406 $ 177,926
------------------ ------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 6) $ 10,579 $ 10,699
Deferred revenue 203 503
Current portion of long-term debt 106 100
------------------ ------------------
10,888 11,302
DEFERRED GRANTS 596 654
LONG-TERM DEBT 515 564
------------------ ------------------
11,999 12,520
------------------ ------------------
CONTINGENCY (note 9)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 492,411 489,611
CONTRIBUTED SURPLUS 1,498 1,487
CUMULATIVE TRANSLATION ADJUSTMENT (2,260) (8,854)
DEFICIT (323,242) (316,838)
------------------ ------------------
168,407 165,406
------------------ ------------------
$ 180,406 $ 177,926
================== ==================
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 THREE MONTHS
ENDED FEBRUARY SIX MONTHS ENDED ENDED FEBRUARY SIX MONTHS ENDED
28, 2003 FEBRUARY 28, 2003 28, 2002 FEBRUARY 28, 2002
------------------ ------------------- ------------------- -------------------
SALES $ 14,753 $ 32,501 $ 14,601 $ 34,739
COST OF SALES* 7,544 15,229 12,885 25,417
------------------ ------------------- ------------------- -------------------
GROSS MARGIN 7,209 17,272 1,716 9,322
------------------ ------------------- ------------------- -------------------
OPERATING EXPENSES
Selling and administrative 7,036 14,644 9,252 19,577
Net research and development (note 8) 3,488 6,799 3,673 6,818
Amortization of property, plant and
equipment 1,510 2,994 1,487 2,835
Amortization of intangible assets 1,260 2,482 3,469 6,740
Restructuring charges (note 4) -- -- 447 857
------------------ ------------------- ------------------- -------------------
TOTAL OPERATING EXPENSES 13,294 26,919 18,328 36,827
------------------ ------------------- ------------------- -------------------
LOSS FROM OPERATIONS (6,085) (9,647) (16,612) (27,505)
Interest income, net 294 550 279 978
Foreign exchange gain (loss) (737) (710) 54 87
------------------ ------------------- ------------------- -------------------
LOSS BEFORE INCOME TAXES AND AMORTIZATION
OF GOODWILL (6,528) (9,807) (16,279) (26,440)
------------------ ------------------- ------------------- -------------------
INCOME TAXES
Current (79) 3,681 (5,241) (7,815)
Future (2,203) (7,084) (772) (1,754)
------------------ ------------------- ------------------- -------------------
(2,282) (3,403) (6,013) (9,569)
------------------ ------------------- ------------------- -------------------
LOSS BEFORE AMORTIZATION OF GOODWILL (4,246) (6,404) (10,266) (16,871)
AMORTIZATION OF GOODWILL (note 2) -- -- 12,409 24,859
------------------ ------------------- ------------------- -------------------
NET LOSS FOR THE PERIOD $ (4,246) $ (6,404) $ (22,675) $ (41,730)
================== =================== =================== ===================
BASIC AND DILUTED LOSS PER SHARE
Loss before amortization of goodwill $ (0.07) $ (0.10) $ (0.17) $ (0.28)
Net loss $ (0.07) $ (0.10) $ (0.37) $ (0.70)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S) 62,998 62,678 61,321 59,822
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 63,436 63,094 61,654 60,198
OUTSTANDING (000'S) (note 10)
* Including inventory write-offs of $5,862 and $9,362 for the three months
and the six months ended February 28, 2002, respectively, nil in 2003 (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
SIX MONTHS ENDED
FEBRUARY 28,
-----------------------------------------
2003 2002
------------------ ------------------
BALANCE - BEGINNING OF PERIOD $ (316,838) $ (8,314)
ADD
Net loss for the period (6,404) (41,730)
------------------ ------------------
BALANCE - END OF PERIOD $ (323,242) $ (50,044)
================== ==================
CONTRIBUTED SURPLUS
SIX MONTHS ENDED
FEBRUARY 28,
-----------------------------------------
2003 2002
------------------ ------------------
BALANCE - BEGINNING OF PERIOD $ 1,487 $ 1,457
ADD
Premium on resale of share capital 11 26
------------------ ------------------
BALANCE - END OF PERIOD $ 1,498 $ 1,483
================== ==================
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 THREE MONTHS
ENDED FEBRUARY SIX MONTHS ENDED ENDED FEBRUARY SIX MONTHS ENDED
28, 2003 FEBRUARY 28, 2003 28, 2002 FEBRUARY 28, 2002
------------------- ------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (4,246) $ (6,404) $ (22,675) $ (41,730)
Add (deduct) items not affecting cash and
cash equivalents
Discount on short-term investments 6 263 1 541
Inventory write-offs -- -- 5,862 9,362
Amortization 2,770 5,476 17,365 34,434
Foreign exchange loss (gain) on
disposal of short-term investments -- (42) 3 (76)
Future income taxes (2,203) (7,084) (772) (1,754)
Change in non-cash operating items
Accounts receivable 3,733 3,358 6,182 15,103
Income taxes and tax credits
recoverable 5,336 10,641 (8,189) (16,300)
Inventories 1,788 3,983 964 (27)
Prepaid expenses 76 107 43 94
Accounts payable and accrued
liabilities (605) (492) (3,225) (5,447)
Deferred revenue (32) (306) (104) (219)
Deferred grants (43) (85) (115) (334)
------------------- ------------------- ------------------- ------------------
6,580 9,415 (4,660) (6,353)
------------------- ------------------- ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (42) (78) (22) (59)
Redemption of share capital (1) (7) -- (2)
Resale of share capital 4 18 -- 28
Share issue expenses -- 4 -- (14)
------------------- ------------------- ------------------- ------------------
(39) (63) (22) (47)
------------------- ------------------- ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (122,436) (211,185) (104,400) (383,046)
Proceeds from disposal of short-term
investments 115,903 203,292 97,555 404,131
Additions to property, plant and equipment
and intangible assets (367) (2,016) (1,162) (4,300)
Business combinations (note 3) (26) (1,867) -- (9,756)
------------------- ------------------- ------------------- ------------------
(6,926) (11,776) (8,007) 7,029
------------------- ------------------- ------------------- ------------------
CHANGE IN CASH AND CASH EQUIVALENTS (385) (2,424) (12,689) 629
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 609 601 (82) (253)
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD 7,081 9,128 20,876 7,729
------------------- ------------------- ------------------- ------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,305 $ 7,305 $ 8,105 $ 8,105
=================== =================== =================== ==================
SUPPLEMENTARY INFORMATION
Interest paid $ 33 $ 86 $ 43 $ 96
Income taxes paid (recovered) $ (4,537) $ (5,462) $ 1,745 $ 6,218
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 February 28, 2003 and for the periods ended
February 28, 2002 and 2003 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 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 the adoption of the standard on 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 SIX MONTHS ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2003
-------------------- --------------------
(UNAUDITED) (UNAUDITED)
Net loss for the period $ (4,246) $ (6,404)
Pro forma adjustment for stock-based compensation costs (106) (163)
-------------------- --------------------
Pro forma net loss for the period $ (4,352) $ (6,567)
==================== ====================
Net loss per share $ (0.07) $ (0.10)
Pro forma net loss per share $ (0.07) $ (0.10)
These options, which have a weighted average fair value of $0.77, will
generate aggregate stock-based compensation costs of $948,400 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 $381,500, $290,800, $180,500, 87,000 and $8,600 over the next five
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 SIX MONTHS ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2003
-------------------- -------------------
(UNAUDITED) (UNAUDITED)
Risk-free interest rate 4.1% 4.2%
Expected volatility 80% 80%
Dividend yield Nil Nil
Weighted average expected life 27 months 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.
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)
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. The company adopted section 3062
prospectively on September 1, 2002. Since 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 statements of earnings for the periods ended
February 28, 2002 show 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 $4,663,000
including acquisition-related costs of $162,000. The consideration paid
consisted of $1,867,000 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 the twelve
months following the acquisition.
The cash contingent consideration to be paid upon the realization of the
defined sales volume is accounted for as additional acquisition cost and is
recognized as additional cost of acquired core technology as sales occur.
Since October 7, 2002, the company recognized $100,000 as additional cost of
acquired core technology based on realized sales of EXFO Gnubi.
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 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.
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 2,958
----------------------
Purchase price 4,663
Less: Subordinate voting shares issued 2,796
----------------------
Cash paid $ 1,867
======================
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 six months ended
February 28, 2002. 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. In February
2002, the company incurred additional restructuring charges in order to
align its cost structure to market conditions. The company recorded $447,000
in severance expenses for the additional 57 employees who were terminated,
which are included in the restructuring charges in the statements of
earnings for the periods ended February 28, 2002. The company also recorded
$5,862,000 in additional inventory write-offs for excess and obsolete
inventories, which is included in the cost of sales in the statements of
earnings for the periods ended February 28, 2002. As at February 28, 2003,
severance expenses related to these restructuring plans were fully paid.
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)
5 INVENTORIES
AS AT
AS AT AUGUST 31,
FEBRUARY 28, 2003 2002
--------------------- ----------------------
(UNAUDITED)
Raw materials $ 11,709 $ 13,507
Work in progress 1,337 1,382
Finished goods 8,557 8,933
--------------------- ----------------------
$ 21,603 $ 23,822
===================== ======================
6 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT
AS AT AUGUST 31,
FEBRUARY 28, 2003 2002
--------------------- ----------------------
(UNAUDITED)
Trade $ 4,539 $ 4,738
Salaries and social benefits 3,727 2,638
Warranty 839 849
Tax on capital 604 856
Restructuring charges 372 782
Other 498 836
--------------------- ----------------------
$ 10,579 $ 10,699
===================== ======================
7 INTANGIBLE ASSETS
AS AT FEBRUARY 28, 2003
------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------------- -------------------- --------------------
(UNAUDITED)
Core technology $ 32,770 $ 17,591 $ 15,179
Acquired in-process research and development 4,311 4,311 --
Work force 2,191 2,191 --
Other 543 421 122
------------------- -------------------- --------------------
$ 39,815 $ 24,514 $ 15,301
=================== ==================== ====================
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)
AS AT AUGUST 31, 2002
------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------------- -------------------- --------------------
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
=================== ==================== ====================
8 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS THREE MONTHS
ENDED FEBRUARY SIX MONTHS ENDED ENDED FEBRUARY SIX MONTHS ENDED
28, 2003 FEBRUARY 28, 2003 28, 2002 FEBRUARY 28, 2002
------------------- ------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross research and development 8,622 4,823 9,033
expenses $ 4,415 $ $ $
Research and development tax credits (912) (1,793) (1,075) (2,017)
Government grants (15) (30) (75) (198)
------------------- ------------------- ------------------ ------------------
$ 3,488 $ 6,799 $ 3,673 $ 6,818
=================== =================== ================== ==================
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.
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)
On April 19, 2002, the plaintiffs filed an amended complaint containing
master allegations against all of the underwriters in all of the 310 cases
included in this class action and, also filed an amended complaint
containing allegations specific to four of the company's underwriters, the
company and two of its executive officers. In addition to the allegations
mentioned above, the amended complaint alleges that the underwriters (i)
used their analysts to manipulate the stock market; and (ii) implemented
schemes that allowed issuer insiders to sell their shares rapidly after an
initial public offering and benefit from high market prices. As concerns the
company and its two executive officers in particular, the amended complaint
alleges that (i) the company's registration statement was materially false
and misleading because it failed to disclose the additional commissions and
compensation to be received by underwriters; (ii) the two named executive
officers learned of or recklessly disregarded the alleged misconduct of the
underwriters; (iii) the two named executive officers had motive and
opportunity to engage in alleged wrongful conduct due to personal holdings
of the company's stock and the fact that an alleged artificially inflated
stock price could be used as currency for acquisitions; and (iv) the two
named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and
had the ability to prevent its issuance or cause it to be corrected. The
plaintiffs in this suit seek an unspecified amount for damages suffered.
In July 2002, the issuers filed a motion to dismiss the plaintiffs' amended
complaint and judgment 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 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 final 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 February
28, 2003.
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)
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 THREE MONTHS
ENDED FEBRUARY SIX MONTHS ENDED ENDED FEBRUARY SIX MONTHS ENDED
28, 2003 FEBRUARY 28, 2003 28, 2002 FEBRUARY 28, 2002
------------------- ------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Basic weighted average number of
shares outstanding (000's) 62,998 62,678 61,321 59,822
Stock options (000's) 293 236 64 62
Restricted stock awards (000's) 145 180 269 314
------------------- ------------------- ------------------ ------------------
Diluted weighted average number of
shares outstanding (000's) 63,436 63,094 61,654 60,198
=================== =================== ================== ==================
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) 2,684 2,630 2,654 2,540
=================== =================== ================== ==================
The diluted loss per share for the periods ended February 28, 2002 and 2003,
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.
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.
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)
RECONCILIATION OF NET LOSS TO CONFORM WITH U.S. GAAP
THREE MONTHS THREE MONTHS
ENDED FEBRUARY SIX MONTHS ENDED ENDED FEBRUARY SIX MONTHS ENDED
28, 2003 FEBRUARY 28, 2003 28, 2002 FEBRUARY 28, 2002
------------------- ------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net loss for the period in accordance
with Canadian GAAP $ (4,246) $ (6,404) $ (22,675) $ (41,730)
Non-cash stock-based compensation
costs related to stock option plan (2) (55) (224) (431)
Non-cash stock-based compensation
costs related to stock purchase
plan (69) (140) (232) (359)
Non-cash stock-based compensation
costs related to restricted stock
award plan (221) (568) (1,115) (2,027)
Unrealized gains (losses) on forward
exchange contracts -- -- 46 (220)
Future income taxes on forward
exchange contracts -- -- (15) 73
Acquired in-process research and
development -- -- 420 (840)
Future income taxes on acquired
in-process research and development -- -- (133) (179)
Amortization of intangible assets 239 478 -- --
Future income taxes on amortization of
intangible assets (80) (160) -- --
Amortization of goodwill -- -- (3,237) (6,479)
------------------- ------------------- ------------------ ------------------
Net loss for the period in accordance
with U.S. GAAP (4,379) (6,849) (27,165) (52,192)
Other comprehensive income (loss)
Foreign currency translation
adjustments 7,195 6,594 (5,805) (10,901)
------------------- ------------------- ------------------ ------------------
Comprehensive income (loss) $ 2,816 $ (255) $ (32,970) $ (63,093)
=================== =================== =================== ==================
Basic and diluted net loss per share
in accordance with
U.S. GAAP $ (0.07) $ (0.11) $ (0.44) $ (0.87)
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 adjustments to net loss, significant
differences with respect to shareholders' equity under U.S. GAAP are as
follows:
SHARE CAPITAL
AS AT AS AT
FEBRUARY 28, AUGUST 31,
2003 2002
--------------------- ----------------------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 492,411 $ 489,611
Stock-based compensation costs related to stock purchase
plan
Current period (88) (64)
Cumulative effect of prior periods 5,748 2,542
Reclassification from other capital upon exercise of restricted stock
awards 1,582 3,270
Shares issued upon business combinations 65,584 65,584
--------------------- ----------------------
Share capital in accordance with U.S. GAAP $ 565,237 $ 560,943
===================== ======================
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
FEBRUARY 28, AUGUST 31,
2003 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 (2,867) (7,968)
Amortization for the period 996 4,698
Reduction of stock-based compensation costs 73 403
--------------------- ----------------------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (1,798) $ (2,867)
===================== ======================
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
FEBRUARY 28, AUGUST 31,
2003 2002
--------------------- ----------------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ -- $ --
Stock-based compensation costs related to stock-based compensation
plans
Cumulative effect of prior periods 7,693 12,350
Reduction of stock-based compensation costs (218) (1,387)
Reclassification to share capital upon exercise of restricted stock
awards (1,582) (3,270)
--------------------- ----------------------
Other capital in accordance with U.S. GAAP $ 5,893 $ 7,693
===================== ======================
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
FEBRUARY 28, AUGUST 31,
2003 2002
--------------------- ----------------------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $ (323,242) $ (316,838)
Stock-based compensation costs related to stock-based compensation
plans
Current period (763) (3,650)
Cumulative effect of prior periods (10,574) (6,924)
Unrealized gains on forward exchange contracts, net of related
future income taxes
Current period -- 232
Cumulative effect of prior periods 349 117
Future income taxes on acquired in-process research and development
Current period -- (444)
Cumulative effect of prior periods (1,380) (936)
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 478 239
Cumulative effect of prior periods 239 --
Future income taxes on amortization of intangible assets
Current period (160) (80)
Cumulative effect of prior periods (80) --
Amortization of goodwill
Current period -- (9,263)
Cumulative effect of prior periods (17,716) (8,453)
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
--------------------- ----------------------
Deficit in accordance with U.S. GAAP $ (413,236) $ (406,387)
===================== ======================
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
FEBRUARY 28, AUGUST 31,
2003 2002
--------------------- ----------------------
(UNAUDITED)
Foreign currency translation adjustments
Balance - Beginning of period $ (9,870) $ (9,349)
Change during the period 6,594 (521)
--------------------- ----------------------
Balance - End of period $ (3,276) $ (9,870)
===================== ======================
BALANCE SHEETS
The following table summarizes the significant differences in balance sheet
items between Canadian GAAP and U.S. GAAP.
AS AT FEBRUARY 28, 2003 AS AT AUGUST 31, 2002
--------------------------------------- ----------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Intangible assets
Cost $ 39,815 $ 32,034 $ 37,927 $ 30,301
Accumulated amortization (24,514) (19,487) (21,463) (17,030)
------------------- ------------------- ------------------- --------------------
$ 15,301 $ 12,547 $ 16,464 $ 13,271
------------------- ------------------- ------------------- --------------------
Goodwill
Cost $ 91,620 $ 97,009 $ 87,025 $ 92,747
Accumulated amortization (70,449) (88,318) (69,449) (87,251)
------------------- ------------------- ------------------- --------------------
$ 21,171 $ 8,691 $ 17,576 $ 5,496
=================== =================== =================== ====================
Shareholders' equity
Share capital $ 492,411 $ 565,237 $ 489,611 $ 560,943
Contributed surplus 1,498 1,498 1,487 1,487
Cumulative translation
adjustment (2,260) -- (8,854) --
Deferred stock-based
compensation costs -- (1,798) -- (2,867)
Other capital -- 5,893 -- 7,693
Deficit (323,242) (413,236) (316,838) (406,387)
Accumulated other
comprehensive loss -- (3,276) -- (9,870)
------------------- ------------------- ------------------- --------------------
$ 168,407 $ 154,291 $ 165,406 $ 150,999
=================== =================== =================== ====================
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 February 28, 2002 and 2003, 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 THREE MONTHS
ENDED FEBRUARY SIX MONTHS ENDED ENDED FEBRUARY SIX MONTHS ENDED
28, 2003 FEBRUARY 28, 2003 28, 2002 FEBRUARY 28, 2002
------------------- ------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Sales $ 14,753 $ 32,701 $ 16,290 $ 39,636
Net loss $ (4,379) $ (7,047) $ (30,031) $ (57,064)
Basis and diluted net loss per share $ (0.07) $ (0.11) $ (0.48) $ (0.93)
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. Since 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 periods on a pro forma basis:
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, 2002 FEBRUARY 28, 2002
-------------------- --------------------
(UNAUDITED) (UNAUDITED)
Net loss for the period $ (27,165) $ (52,192)
Add back:
Amortization of goodwill for the period 15,646 31,338
-------------------- --------------------
Pro forma net loss for the period $ (11,519) $ (20,854)
==================== ====================
Pro forma basic and diluted net loss per share $ (0.19) $ (0.35)
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
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)
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 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 adopted this new standard
prospectively on January 1, 2003, and its adoption had no impact on the
company's financial statements.
In November 2002, the FASB issued FIN 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and
107 and Rescission of FASB Interpretation No. 34", with disclosure
requirements effective for periods ending after December 15, 2002 and
recognition and measurement requirements effective on a prospective basis
for guarantees that are issued or modified after December 31, 2002.
FIN 45 provides a definition and examples of a guarantee and requires
disclosure of the nature of the guarantee, the maximum potential amount of
future payments, the carrying amount of the related liability, if any, the
recourse provisions and assets held as collateral under the terms of the
guarantee and the extent to which the proceeds of collateral would cover the
maximum potential liability.
It also clarifies the requirement of SFAS 5, "Accounting for Contingencies",
relating to the guarantor's accounting for, and disclosure of, the issuance
of certain types of guarantees. It requires that the guarantor recognize a
liability for the guarantee at its inception equal to its fair value at that
time and that the liability is reduced as the risk under the guarantee
reduces. The liability may be reduced at the end of the guarantee period, on
a systematic amortization basis or as the fair value changes as appropriate.
The company has adopted the disclosure requirements of FIN 45 for the three
months ended February 28, 2003.
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)
In December 2002, the FASB issued Statement 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", revising the transition and
disclosure provisions of SFAS 123. SFAS 148 allows companies to adopt SFAS
123 under three different methods. In addition, SFAS 148 requires increased
disclosure for all companies, including those choosing not to adopt the
accounting provision of SFAS 123. The transition and disclosure changes are
effective for fiscal years ending after December 15, 2002. The company will
disclose the information required in its annual 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 INCREASING GLOBAL GEO-POLITICAL AND
ECONOMIC UNCERTAINTY AND OUR ABILITY TO EXECUTE SUCCESSFULLY IN THESE UNCERTAIN
CONDITIONS; CAPITAL SPENDING LEVELS IN THE TELECOMMUNICATIONS SECTOR; 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, GEO-POLITICAL, 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 continues to be a very
challenging environment. Many established telecommunications carriers pushed
back the approval of their capital expenditure (CAPEX) budgets or reduced their
CAPEX spending outright to improve their short-term financial situations, while
a number of others filed for bankruptcy. Some of these financially leveraged
carriers, in turn, resurfaced as new entities with lessened debt loads and
reduced pricing strategies in order to attract former and new customers. These
latest developments rendered competition even more fierce with more carriers
chasing fewer spending dollars.
Lower spending levels necessarily produced a trickle-down effect
throughout the fiber-optic industry; namely, for optical system and component
manufacturers as well as for test, measurement, monitoring and automation
equipment vendors. Manufacturers were negatively affected by the significant
reduction in the deployment of long-haul optical networks, but benefited from
some activity in metro and access networks.
1
Test, measurement, monitoring and automation equipment vendors also felt the
impact of reduced carrier spending. However, they continued to market their
products to carriers, who upgraded some of their existing long-haul networks or
deployed new metro and access networks. Likewise, test, measurement, monitoring
and automation equipment vendors still attracted the attention of a number of
manufacturers, who kept investing in their research and development programs to
stay ahead of the competition.
During the second quarter of 2003, we launched the FTB-5500B
Polarization Mode Dispersion (PMD) Analyzer, an essential test instrument for
upgrading optical networks to 10 Gb/s and deploying a cascade of amplifiers.
This patent-pending PMD Analyzer represents the only portable instrument that
can characterize PMD levels in a network by sweeping through erbium-doped fiber
amplifiers (EDFAs). Our PMD Analyzer can test an entire link with the utmost
accuracy and repeatability in less than five seconds.
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 $4.7 million. The
consideration paid consisted in $1.9 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 the
twelve months following the acquisition. This acquisition has been accounted for
using the purchase method and resulted in goodwill of $3.0 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 occurred 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 this
evaluation, we used future discounted cash flows to estimate the fair value of
2
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.
3
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations for the three months and the six months ended February 28,
2002 and 2003, 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 SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
(UNAUDITED)
Sales $ 14,753 $ 14,601 $ 32,501 $ 34,739
Cost of sales 7,544 12,885 15,229 25,417
--------------- ---------------- --------------- ----------------
Gross margin* 7,209 1,716 17,272 9,322
--------------- ---------------- --------------- ----------------
Operating expenses
Selling and administrative 7,036 9,252 14,644 19,577
Net research and development 3,488 3,673 6,799 6,818
Amortization of property, plant and
equipment 1,510 1,487 2,994 2,835
Amortization of intangible assets 1,260 3,469 2,482 6,740
Restructuring charges -- 447 -- 857
--------------- ---------------- --------------- ----------------
Total operating expenses 13,294 18,328 26,919 36,827
--------------- ---------------- --------------- ----------------
Loss from operations (6,085) (16,612) (9,647) (27,505)
Interest income, net 294 279 550 978
Foreign exchange gain (loss) (737) 54 (710) 87
--------------- ---------------- --------------- ----------------
Loss before income taxes and amortization of
goodwill (6,528) (16,279) (9,807) (26,440)
Income tax recovery (2,282) (6,013) (3,403) (9,569)
--------------- ---------------- --------------- ----------------
Loss before amortization of goodwill (4,246) (10,266) (6,404) (16,871)
Amortization of goodwill -- 12,409 -- 24,859
--------------- ---------------- --------------- ----------------
Net loss for the period $ (4,246) $ (22,675) $ (6,404) $ (41,730)
=============== ================ =============== ================
Basic and diluted net loss per share $ (0.07) $ (0.37) $ (0.10) $ (0.70)
Research and development data:
Gross research and development $ 4,415 $ 4,823 $ 8,622 $ 9,033
Net research and development $ 3,488 $ 3,673 $ 6,799 $ 6,818
Other data:**
Pro forma net loss $ (3,426) $ (4,099) $ (4,783) $ (6,036)
Basic and diluted pro forma net loss per share $ (0.05) $ (0.07) $ (0.08) $ (0.10)
* Including inventory write-offs of $5,862 and $9,362 for the three months
and the six months ended February 28, 2002, respectively, nil in 2003.
** Net loss excluding amortization of goodwill and the after-tax effect of
amortization of intangible assets, restructuring charges and inventory
write-offs. This information may not be comparable to similarly titled
measures reported by other companies because it is non-GAAP information.
Please refer to page 13 of this document for the detailed quantitative
reconciliation.
4
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
(UNAUDITED)
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 51.1 88.2 46.9 73.2
--------------- ---------------- --------------- ----------------
Gross margin* 48.9 11.8 53.1 26.8
--------------- ---------------- --------------- ----------------
Operating expenses
Selling and administrative 47.7 63.4 45.1 56.4
Net research and development 23.6 25.2 20.9 19.6
Amortization of property, plant and
equipment 10.2 10.2 9.2 8.2
Amortization of intangible assets 8.6 23.7 7.6 19.4
Restructuring charges -- 3.1 -- 2.4
--------------- ---------------- --------------- ----------------
Total operating expenses 90.1 125.6 82.8 106.0
--------------- ---------------- --------------- ----------------
Loss from operations (41.2) (113.8) (29.7) (79.2)
Interest income, net 2.0 1.9 1.7 2.8
Foreign exchange gain (loss) (5.0) 0.4 (2.2) 0.3
--------------- ---------------- --------------- ----------------
Loss before income taxes and amortization of
goodwill (44.2) (111.5) (30.2) (76.1)
Income tax recovery (15.4) (41.2) (10.5) (27.5)
--------------- ---------------- --------------- ----------------
Loss before amortization of goodwill (28.8) (70.3) (19.7) (48.6)
Amortization of goodwill -- 85.0 -- 71.5
--------------- ---------------- --------------- ----------------
Net loss for the period (28.8)% (155.3)% (19.7)% (120.1)%
=============== ================ =============== ================
Research and development data:
Gross research and development 29.9% 33.0% 26.5% 26.0%
Net research and development 23.6% 25.2% 20.9% 19.6%
Other data:**
Pro forma net loss (23.2)% (28.1)% (14.7)% (17.4)%
* Including inventory write-offs of 40.1% and $26.9% for the three months and
the six months ended February 28, 2002, respectively. Excluding these
inventory write-offs, gross margin would have reached 51.9% and 53.8% of
sales for the three months and the six months ended February 28, 2002,
respectively. This latter information is a non-GAAP measure.
** Net loss excluding amortization of goodwill and the after-tax effect of
amortization of intangible assets, restructuring charges and inventory
write-offs. This information may not be comparable to similarly titled
measures reported by other companies because it is non-GAAP information.
5
SALES
For the three months ended February 28, 2003, sales increased 1.0% to
$14.8 million from $14.6 million for the same period last year. In 2003 and
2002, our second quarters were affected by seasonality issues because we
witnessed less year-end budgetary flush-out in December; many network service
providers delayed their budget approvals until February. In addition, there are
two weeks less of sales during this quarter due to the holiday season.
The fiber-optic telecommunications industry continues to be a very
challenging environment. Many established telecommunications carriers pushed
back the approval of their capital expenditure (CAPEX) budgets or reduced their
CAPEX spending outright to improve their short-term financial situations, while
a number of others filed for bankruptcy. Some of these financially leveraged
carriers, in turn, resurfaced as new entities with lessened debt loads and
reduced pricing strategies in order to attract former and new customers. These
latest developments rendered competition even more fierce with more carriers
chasing fewer spending dollars.
Lower spending levels necessarily produced a trickle-down effect
throughout the fiber-optic industry; namely, for optical system and component
manufacturers as well as for test, measurement, monitoring and automation
equipment vendors. Manufacturers were negatively affected by the significant
reduction in the deployment of long-haul optical networks, but benefited from
some activity in metro and access networks.
Test, measurement, monitoring and automation equipment vendors also
felt the impact of reduced carrier spending. However, they continued to market
their products to carriers, who upgraded some of their existing long-haul
networks or deployed new metro and access networks. Likewise, test, measurement,
monitoring and automation equipment vendors still attracted the attention of a
number of manufacturers, who kept investing in their research and development
programs to stay ahead of the competition.
With regard to sales distribution, it was a 64%-36% split in favor of
our Portable and Monitoring products for the three months ended February 28,
2003, compared to 50%-50% for the same period last year. We expect the sales
split to remain relatively unchanged in upcoming quarters, given the state of
the telecommunications industry.
Net accepted orders decreased 11% to $11.8 million in the second
quarter of 2003 from $13.3 million for the same period last year. Our net
book-to-bill ratio decreased to 0.80 in the second quarter of 2003, compared to
0.91 for the same period last year.
North American sales accounted for 51% and 48% of global sales for the
three months ended February 28, 2003 and 2002, respectively. International sales
represented 49% and 52% of global sales for the three months ended February 28,
2003 and 2002, respectively. In the second quarter of 2003 and 2002, we have
seen the geographic distribution of our sales near 50%-50% between North America
and the rest of the world, which differs from preceding quarters. A large
portion of our products to the North American market is sold to network service
providers, who delayed their budget approvals until February the last two years
due to difficult market conditions.
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 February 28, 2003,
6
no customer accounted for more than 4.5% of our sales, with our top three
customers representing 12.2 % of our sales. For the three months ended February
28, 2002, no customer accounted for more than 4.6% of our sales.
For the six months ended February 28, 2003, sales decreased 6.4% to
$32.5 million from $34.7 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. Despite
the acquisitions of EXFO Protocol and EXFO Gnubi, we were not able to maintain
our sales level year over year.
With regard to sales distribution, it was a 66%-34% split in favor of
our Portable and Monitoring products for the six months ended February 28, 2003,
compared to 57%-43% in favor of our Portable and Monitoring products for the
same period last year.
Net accepted orders increased 6% to $27.6 million in the first half of
2003 from $26.0 million for the same period last year. Our net book-to-bill
ratio increased to 0.85 in the first half of 2003, compared to 0.75 for the same
period last year.
North American sales accounted for 57% and 53% of global sales for the
six months ended February 28, 2003, and 2002, respectively. International sales
represented 43% and 47% of global sales for the six months ended February 28,
2003 and 2002, respectively. The shift in the geographic distribution of our
sales is due to the decrease in sales to the Asian market, where most of our
sales are made through tenders, which may vary in number and significance from
period to period.
For the six months ended February 28, 2003, no customer accounted for
more than 8.7% of our sales, with our top three customers representing 18.4 % of
our sales. For the six months ended February 28, 2002, no customer accounted for
more than 5.9% of our sales.
GROSS MARGIN
Gross margin amounted to 48.9% of sales for the three months ended
February 28, 2003, compared to 11.8% for the same period last year.
The percentage increase is due to the fact that, during the second
quarter of 2002, we recorded $5.9 million in inventory write-offs for excess and
obsolete inventories. Excluding this special charge, gross margin would have
reached 51.9% of sales for that period, resulting in a decrease of 3% of our
gross margin in the second quarter of 2003. That percentage decrease is mainly
due to pricing pressure and the shift in product mix. Portable and Monitoring
products represented a larger portion of our sales in the second quarter of
2003, compared to the same period last year; these products tend to be
lower-margin products. However, this decrease was offset in part by the shift in
the geographic distribution of our sales. In the second quarter of 2003, this
shift resulted in more sales in North America, where gross margins tend to be
higher, and less sales made internationally, where gross margins tend to be
lower.
Gross margin amounted to 53.1% of sales for the six months ended
February 28, 2003, compared to 26.8% for the same period last year.
The percentage increase is due to the fact that, during the first half
of 2002, we recorded $9.4 million in inventory write-offs for excess and
obsolete inventories. Excluding this special
7
charge, gross margin would have reached 53.8% of sales for that period,
resulting in a slight decrease of 0.7% of our gross margin in the first half of
2003. That percentage decrease is mainly explained by the competitive landscape
leading to pricing pressure and margin erosion, and by the fact that Portable
and Monitoring products represented a larger portion of our sales in the first
half of 2003, compared to the same period last year; these products tend to be
lower-margin products. However, our restructuring efforts in 2002 and our
increased efficiency helped us mitigate these factors.
We expect our gross margin to fluctuate in 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 February 28, 2003, selling and
administrative expenses were $7.0 million, or 47.7% of sales, compared to $9.3
million, or 63.4% 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 the second and the third quarter of 2002. However,
this decrease was slightly offset by the impact of the acquisition EXFO Gnubi in
October 2002. Overall, despite the acquisition EXFO Gnubi, we were able to
reduce our selling and administrative expenses as a percentage of sales by over
15%, mainly because of our recent restructuring efforts.
For the six months ended February 28, 2003, selling and administrative
expenses were $14.6 million, or 45.1% of sales, compared to $19.6 million, or
56.4% 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 the second and the third quarter of 2002 and from lower
commission expenses since our sales decreased year over year. However, this
decrease was offset in part by the impact of the acquisitions of EXFO protocol
and EXFO Gnubi in November 2001 and October 2002, respectively. Overall, despite
the slight decrease in sales in the first half 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 11%, 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 February 28, 2003, gross research and
development expenses totaled $4.4 million, or 29.9% of sales, compared to $4.8
million, or 33.0% of sales for the same period last year. The decrease in gross
research and development dollars quarter over quarter is due to the effects of
our recent restructuring actions offset in part by the effects of the
acquisition of EXFO Gnubi, which carried out research and development
activities.
8
The percentage decrease can be explained by the fact that in the second quarter
of 2002, we were just at the beginning of our restructuring efforts, and gross
research and development expenses were not yet fully affected by those efforts.
However, despite challenging market conditions, we continue investing heavily in
research and development, which 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 second quarter of 2003, 58% of sales originated from products that have
been on the market for two years or less. For the second quarter of 2002, this
number reached 50% of sales.
For the three months ended February 28, 2003, tax credits and grants
from federal, provincial and state governments for research and development
activities were $927,000, or 21.0% of gross research and development expenses,
compared to $1.2 million, or 23.8% of gross research and development expenses
for the same period last year. The decrease in our tax credits and grants, in
dollars amounts, is mainly related to the decrease in our gross research and
development expenses. The primary reasons for the percentage decrease are the
end of certain government grant programs and the recent acquisition of
U.S.-based EXFO 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
23.6% and 25.2% of sales for the three months ended February 28, 2003 and 2002,
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.
For the six months ended February 28, 2003, gross research and
development expenses totaled $8.6 million, or 26.5% of sales, compared to $9.0
million, or 26.0% of sales for the same period last year. The decrease in gross
research and development dollars year over year is due to the effects of our
recent restructuring actions, mostly offset by the effects of the acquisitions
of EXFO Protocol and EXFO Gnubi, which carried out a significant level of our
research and development activities. The slight percentage increase is the
result of the acquisitions of EXFO Protocol and EXFO Gnubi. In the first half of
2003, 51% of sales originated from products that have been on the market for two
years or less. For the first half of 2002, this number reached 50% of sales.
For the six months ended February 28, 2003, tax credits and grants from
federal, provincial and state governments for research and development
activities were $1.8 million, or 21.1% of gross research and development
expenses, compared to $2.2 million, or 24.5% of gross research and development
expenses for the same period last year. The primary reasons for the percentage
decrease are the end of certain government grant programs and 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
20.9% and 19.6% of sales for the six months ended February 28, 2003 and 2002,
respectively.
9
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 $62
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 $1.3
million and $3.5 million for the three months ended February 28, 2003 and 2002,
respectively, and of $2,5 million and $6,7 million for the six months ended
February 28, 2003 and 2002, respectively.
Intangible assets related to the acquisitions of EXFO Burleigh and EXFO
Photonic Solutions were 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 each of the first two quarters of 2003, compared
to the same periods 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
In November 2002, 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.
Furthermore, in February 2002, we implemented an additional structured
plan to further reduce our costs and align them to market conditions. We
recorded $447,000 in severance expenses for the additional 57 employees who were
terminated.
During the first half of 2003, no such actions were needed and these
severance expenses were fully paid.
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.
INTEREST INCOME, NET
Net interest income amounted to $294,000 and $279,000 for the three
months ended February 28, 2003 and 2002, respectively. The slight increase in
our net interest income in the second quarter of 2003, compared to the same
period last year is directly related to the increase in our short-term
investments as well as increase in interest rates.
Net interest income amounted to $550,000 and $978,000 for the six
months ended February 28, 2003 and 2002, respectively. The decrease in our net
interest income in the first half 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.
10
We expect our net interest income to increase over the next quarters as
our cash and cash equivalents and our short-term investments increased in the
last quarter.
FOREIGN EXCHANGE GAIN (LOSS)
Foreign exchange loss amounted to $737,000 for the three months ended
February 28, 2003, compared to a foreign exchange gain of $54,000 for the same
period last year. Foreign exchange loss amounted to $710,000 for the six months
ended February 28, 2003, compared to a foreign exchange gain of $87,000 for the
same period last year.
The foreign exchange gains or losses are the result of the translation
of operating activities denominated in currencies other than the Canadian
dollar. During the second quarter of 2003, the Canadian dollar value increased
significantly, as compared to the US dollar resulting in a significant foreign
exchange loss during the second quarter of 2003.
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 35.0% and 36.9% for the
three months ended February 28, 2003 and 2002, respectively and 34.7% and 36.2%
for the six months ended February 28, 2003 and 2002, respectively.
The decrease in our effective income tax recovery rate for both periods
is explained by the fact that, last year, operating loss was carried back for
tax purposes and applied against specific prior years' taxable income that was
taxed at higher rates.
As at February 28, 2003, future income tax assets were $17.4 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 $6.1 million in future income
tax assets, expire over the next seven years, while U.S. tax losses, which
represent $4.6 million in future income tax assets, expire in 19 and 20 years.
Furthermore, as at February 28, 2003, income taxes and tax credits
recoverable were $9.5 million. The current portion, amounting to $4.0 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 $5.5 million, represents
current and previous periods' research and development tax credits
11
refundable in future years, 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 $12.4 million and $24.9 million in the
first two quarters of 2002, respectively. 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 handbook 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 $4.2 million and $22.7 million for the three
months ended February 28, 2003 and 2002, respectively. In terms of per share
amounts, we recorded a net loss of $0.07 and $0.37 for the three months ended
February 28, 2003 and 2002, respectively.
Net loss amounted to $6.4 million and $41.7 million for the six months
ended February 28, 2003 and 2002, respectively. In terms of per share amounts,
we recorded a net loss of $0.10 and $0.70 for the six months ended February 28,
2003 and 2002, 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 and inventory write-offs.
Pro forma net loss amounted to $3.4 million and $4.1 million for the
three months ended February 28, 2003 and 2002, respectively. In terms of pro
forma per share amounts, we recorded a net loss of $0.05 and $0.07 for the three
months ended February 28, 2003 and 2002, respectively. Pro forma net loss
amounted to $4.8 million and $6.0 million for the six months ended February 28,
2003 and 2002, respectively. In terms of pro forma per share amounts, we
recorded a net loss of $0.08 and $0.10 for the six months ended February 28,
2003 and 2002, respectively.
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Pro forma net loss is reconciled as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
(UNAUDITED)
Net loss in accordance with GAAP $ (4,246) $ (22,675) $ (6,404) $ (41,730)
Pro forma adjustments:
Amortization of goodwill -- 12,409 -- 24,859
Amortization of intangible assets 1,260 3,469 2,482 6,740
Tax effect on amortization of intangible assets (440) (1,281) (861) (2,426)
Restructuring charges and inventory write-offs -- 6,309 -- 10,219
Tax effect on restructuring charges and
inventory write-offs -- (2,330) -- (3,698)
--------------- ---------------- --------------- ----------------
Pro forma net loss $ (3,426) $ (4,099) (4,783) (6,036)
=============== ================ =============== ================
Basic and diluted net loss per share $ (0.07) $ (0.37) $ (0.10) $ (0.70)
Basic and diluted pro forma net loss per share $ (0.05) $ (0.07) $ (0.08) $ (0.10)
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 February 28, 2003, cash and cash equivalents as well as
short-term investments consisted of $57.8 million. Our working capital was at
$89.0 million. Our cash and cash equivalents and short-term investments
increased by $9.2 million since November 30, 2002, this was mainly due to cash
flows from operations of $6.6 million and an unrealized foreign exchange gain of
$3.0 million on cash and cash equivalents and short-term investments. This
unrealized foreign exchange gain results from the translation of our financial
statements in US dollars and is recorded in the cumulative translation
adjustment in the balance sheet.
As at February 28, 2003, 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 EXFO 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 $4.0 million in income taxes
and tax credits over the next twelve months.
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OPERATING ACTIVITIES
Cash flows provided by operating activities were $6.6 million for the
three months ended February 28, 2003, compared to cash flows used of $4.7
million for the same period last year. Cash flows provided by operating
activities in the second quarter of 2003 were primarily due to the decrease of
accounts receivable of 3.7 million, the decrease of income taxes and tax credits
recoverable of $5.3 million and the decrease of inventories of $1.8 million,
less the net loss after items not affecting cash and cash equivalents of $3.7
millions. The decrease in our accounts receivable is related to the decrease in
our sales level, the recovery of government grants during the quarter and the
slight improvement in our days of sales outstanding (DSOs). 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. 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 second quarter of 2003, the major items not affecting cash
and cash equivalents consisted of amortization expenses of $2.8 million and
future income tax recovery of $2.2 million.
Cash flows provided by operating activities were $9.4 million for the
six months ended February 28, 2003, compared to cash flows used of $6.4 million
for the same period last year. Cash flows provided by operating activities in
the second half of 2003 were primarily due to the decrease of accounts
receivable of $3.4 million, the decrease of income taxes and tax credits
recoverable of $10.6 million and the decrease of inventories of $4.0 million,
less the net loss after items not affecting cash and cash equivalents of $7.8
million. The decrease in our accounts receivable is related to the decrease in
our sales level and the recovery, during the semester, of government grants. The
decrease in our income taxes and tax credits recoverable is related to the
recovery, during the semester, of income taxes and research and development tax
credits recoverable from previous periods. 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 half of 2003, the major items not affecting cash and
cash equivalents consisted of amortization expenses of $5.5 million and future
income tax recovery of $7.1 million.
FINANCING ACTIVITIES
Cash flows used by financing activities were $39,000 and $22,000 for
the three months ended February 28, 2003 and 2002, respectively and $63,000 and
$47,000 for the six months ended February 28, 2003 and 2002, respectively. Cash
flows used by financing activities in these periods were mainly due to the
repayment of our long-term debt.
As at February 28, 2003, we had credit facilities that provide for
advances of up to CA$10 million (US$6.7 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.
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INVESTING ACTIVITIES
Cash flows used by investing activities were $6.9 million and $8.0
million for the three months ended February 28, 2003 and 2002, respectively.
In the second quarter of 2003, we acquired $6.5 million in short-term
investments and we paid $367,000 for the purchases of property, plant and
equipment and intangible assets. We used our cash flows from operations to
acquire short-term investments.
Cash flows used by investing activities were $11.8 million for the six
months ended February 28, 2003, compared to cash flow provided by investing
activities of $7.0 million for the same period last year.
In the first half of 2003, we acquired for $7.9 million in short-term
investments and we paid $1.9 million and $2.0 million, respectively, for the
acquisition of EXFO Gnubi and the purchases of property, plant and equipment and
intangible assets. We used our cash flows from operating activities to finance
our investing activities.
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 3,711,740 as at February 28, 2003. The
weighted average exercise price of those stock options was $15.46, compared to
the market price of $2,20 per share as at February 28, 2003. 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 February 28, 2003:
WEIGHTED
% OF ISSUED AVERAGE
AND EXERCISE
NUMBER OUTSTANDING PRICE
--------------- --------------- --------------
Chairman of the Board, President and CEO
(one individual) 150,482 4.05% $ 9.91
Board of Directors (four individuals) 131,875 3.55% $ 7.41
Management and Corporate Officers
(ten individuals) 639,155 17.22% $ 15.36
--------------- --------------- --------------
921,512 24.82% $ 13.33
=============== =============== ==============
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On September 1, 2002, we adopted prospectively the new section 3870 of
the CICA handbook, "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 half of 2003, we
granted 1,233,950 options to our employees with an average exercise price of
$1.94. Using the Black-Scholes valuation model, the weighted average fair value
per option is $0.77 and the aggregate stock-based compensation costs for these
options is $948,400. 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 $381,500, $290,800, $180,500, $87,000 and
$8,600 over the next five fiscal years, respectively.
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.
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.
For any acquisitions completed after June 30, 2001, goodwill is not
amortized.
We adopted section 3062 prospectively on September 1, 2002. Since 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, 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
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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.
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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.