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 Januery, 2005
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
400 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 2K2
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
On January 12, 2005, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the first fiscal quarter
ended November 30, 2004. This report on Form 6-K sets forth the news release
relating to EXFO's announcement and certain information relating to EXFO's
financial condition and results of operations for the first fiscal quarter of
the 2005 fiscal year. This press release and information relating to EXFO's
financial condition and results of operations for the first fiscal quarter of
the 2005 fiscal year are hereby incorporated as a document by reference to
Form F-3 (Registration Statement under the Securities Act of 1933) declared
effective as of July 30, 2001 and to Form F-3 (Registration Statement under
the Securities Act of 1933) declared effective as of March 11, 2002 and to
amend certain material information as set forth in these two Form F-3
documents.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
-----------------------
Name: Germain Lamonde
Title: President and Chief Executive Officer
Date: January 14, 2005
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[LOGO - EXFO]
Corporate Headquarters > 400 Godin Avenue, Vanier (Quebec) G1M 2K2 CANADA
Tel: 1 418 683-0211 | Fax: 1 418 683-2170 | info@exfo.com
================================================================================
www.exfo.com
------------
EXFO INCREASES SALES AND BOOKINGS FOR A FIFTH CONSECUTIVE QUARTER
o REACHED US$21.6 MILLION AND US$23.3 MILLION IN SALES AND BOOKINGS,
RESPECTIVELY
o GENERATED 42.7% OF SALES FROM PRODUCTS ON THE MARKET TWO YEARS OR LESS
o ENHANCED PROTOCOL TEST OFFERING WITH NEXT-GENERATION SONET/SDH AND VOIP/IP
VIDEO TEST FUNCTIONALITIES
QUEBEC CITY, CANADA, January 12, 2005--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO; TSX: EXF.SV) reported today sales and bookings growth for a
fifth consecutive quarter.
Sales increased 35.3% to US$21.6 million in the first quarter ended November
30, 2004, from US$16.0 million in the first quarter of fiscal 2004 and 1.2%
from US$21.3 million in the fourth quarter of 2004. Net bookings increased
37.9% to US$23.3 million in the first quarter of fiscal 2005 from US$16.9
million in the same period last year and 14.2% from US$20.4 million in the
fourth quarter of 2004.
Gross margin accounted for 52.7% of sales in the first quarter of fiscal 2005
compared to 51.0% in the first quarter of 2004 and 55.1% in the fourth quarter
of 2004.
GAAP net loss in the first quarter of fiscal 2005 totaled US$2.4 million, or
US$0.03 per share, compared to US$2.0 million, or US$0.03 per share, in the
same period last year and US$2.3 million, or US$0.03 per share, in the fourth
quarter of 2004. On a pro forma basis*, net loss in the first quarter of
fiscal 2005 amounted to US$814,000, or US$0.01 per share, compared to US$2.1
million, or US$0.03 per share in the first quarter of 2004 and net earnings of
US$1.4 million, or US$0.02 per share, in the fourth quarter of 2004.
Included in the GAAP and pro forma figures of the first quarter of fiscal 2005
is a foreign-exchange loss of US$1.0 million due to the strength of the
Canadian dollar versus the US dollar.
"I am really pleased with our fifth consecutive quarter of sales and bookings
growth, increases in the mid-30% range for these respective metrics
year-over-year and the recent contract win with an additional US-based Tier-1
network service provider," said Germain Lamonde, EXFO's Chairman, President
and CEO. "On the strength of our continued R&D investments, leadership
position in the fiber-to-the-whatever (FTTx) market, differentiated new
protocol test offering, and increased sales and marketing intensity, we are
confident of achieving our targeted sales growth of 20% year-over-year."
"The sudden 10% increase of the Canadian dollar in the last quarter certainly
affected our profitability, even with our hedging policies," Mr. Lamonde
added. "Nevertheless, we remain more than ever committed to returning to
profitability on a pro forma basis in fiscal 2005."
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[LOGO - EXFO]
SEGMENTED RESULTS
(IN MILLIONS OF US DOLLARS)
SALES EARNINGS (LOSS) FROM OPERATIONS
--------------------------------------- ---------------------------------------
Q1 2005 Q4 2004 Q1 2004 Q1 2005 Q4 2004 Q1 2004
----------- ----------- ---------- ---------- ----------- ----------
BUSINESS SEGMENT
Telecom Division $ 17.4 $ 16.8 $ 12.2 ($1.0) $ 0.0 ($2.4)
Photonics and Life
Sciences Division $ 4.2 $ 4.5 $ 3.8 ($0.3) ($2.1) ($0.7)
----------- ----------- ---------- ---------- ----------- ----------
TOTAL $ 21.6 $ 21.3 $ 16.0 ($1.3) ($2.1) ($3.1)
=========== =========== ========== ========== =========== ==========
OPERATING EXPENSES
Selling and administrative expenses amounted to US$7.4 million, or 34.3% of
sales, for the first quarter of fiscal 2005 compared to US$5.9 million, or
36.7% of sales, for the same period last year and US$6.3 million, or 29.8% of
sales, for the fourth quarter of 2004.
Gross research and development expenses totaled US$3.8 million, or 17.6% of
sales, in the first quarter of fiscal 2005 compared to US$3.6 million, or
22.4% of sales, in the first quarter of 2004 and US$3.6 million, or 17.0% of
sales, in the fourth quarter of 2004.
FIRST-QUARTER BUSINESS HIGHLIGHTS
o Confirming its leadership position in the rapidly growing FTTx test
market, EXFO shipped several FTTx-related orders to a Tier-1 network
service provider who accounted for 25.0% of total sales in the first
quarter of 2005. Subsequent to the quarter-end, EXFO also announced
that a suite of FTTx products has been certified by a second major
US-based network service provider on an exclusive basis for the next
four years.
o Leveraging its ongoing R&D investments, EXFO launched seven products
in the first quarter of 2005, including a next-generation SONET/SDH
analyzer for testing IP networks, an Ethernet test solution with
voice-over-IP (VoIP) test capabilities, and an optical spectrum
analyzer for coarse wavelength division multiplexing (CWDM)
applications in metro and access networks. Sales from new products
that have been on the market two years or less rose to 42.7% of sales
in the first quarter of 2005.
o EXFO's ongoing efforts to renew with profitability were impeded in
the first quarter of 2005 by a 9.6% increase in the Canadian dollar
versus the US dollar. This rapid and significant increase not only
generated a foreign-exchange loss of US$1.0 million, but also flowed
through EXFO's entire statement of earnings since a significant
amount of the company's operating expenses are denominated in
Canadian dollars.
BUSINESS OUTLOOK
EXFO forecasts sales between US$21.0 million and US$24.0 million and a GAAP
net loss between US$0.03 and US$0.00 per share for the second quarter of
fiscal 2005. Excluding stock-based compensation costs, amortization of
intangible assets, restructuring charges and other unusual items, the company
expects to report pro forma net loss/earnings between a loss of US$0.01 per
share and earnings of US$0.02 per share.
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[LOGO - EXFO]
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 10 a.m. (EST) to review its
financial results for fiscal 2004 during the course of its Annual and Special
Meeting of Shareholders and cover first-quarter results for fiscal 2005. To
listen to the conference call and participate in the question period via
telephone, dial 1-416-695-9748. Germain Lamonde, Chairman, President and CEO,
and Pierre Plamondon, CA, Vice-President of Finance and Chief Financial
Officer, will participate in the call. An audio replay of the conference call
will be available between 7 a.m. and 11 p.m. until January 19, 2004. The
replay number is 1-416-695-5275. The audio Webcast of the conference call will
also be available on EXFO's Website at WWW.EXFO.COM, under the Investors
section.
RECONCILIATION OF PRO FORMA NET EARNINGS (LOSS) WITH GAAP NET LOSS
* PRO FORMA NET EARNINGS (LOSS) REPRESENTS NET LOSS EXCLUDING STOCK-BASED
COMPENSATION COSTS, AMORTIZATION OF INTANGIBLE ASSETS, RESTRUCTURING
CHARGES AND AN UNUSUAL TAX RECOVERY. ALL FIGURES ARE IN THOUSANDS OF US
DOLLARS EXCEPT PER SHARE DATA.
ACTUAL RESULTS
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
2004 2003
------- -------
(UNAUDITED)
NET LOSS IN ACCORDANCE WITH GAAP $(2,373) $(2,008)
PRO FORMA ADJUSTMENTS:
STOCK-BASED COMPENSATION COSTS 137 5
AMORTIZATION OF INTANGIBLE ASSETS 1,222 1,285
RESTRUCTURING CHARGES 200 --
UNUSUAL TAX RECOVERY -- (1,406)
------- -------
PRO FORMA NET LOSS $ (814) $(2,124)
======= =======
BASIC AND DILUTED NET LOSS PER SHARE IN
ACCORDANCE WITH GAAP $ (0.03) $ (0.03)
BASIC AND DILUTED PRO FORMA NET LOSS PER SHARE $ (0.01) $ (0.03)
OUTLOOK
THREE MONTHS ENDING
FEBRUARY 28, 2005
--------------------
(UNAUDITED)
BASIC AND DILUTED NET LOSS PER SHARE IN
ACCORDANCE WITH GAAP FROM $ (0.03) TO $ 0.00
PRO FORMA ADJUSTMENTS:
STOCK-BASED COMPENSATIONS COSTS 0.00 0.00
AMORTIZATION OF INTANGIBLE ASSETS 0.02 0.02
RESTRUCTURING CHARGES 0.00 0.00
------- -------
BASIC AND DILUTED PRO FORMA NET EARNING
(LOSS) PER SHARE FROM $ (0.01) TO $ 0.02
======= =======
EXFO DISCLOSES PRO FORMA FINANCIAL DATA IN ORDER TO PROVIDE SUPPLEMENTAL
INFORMATION REGARDING ITS RESULTS OF OPERATIONS AND TO ENHANCE INVESTORS'
OVERALL UNDERSTANDING OF ITS CORE FINANCIAL PERFORMANCE AND ITS PROSPECTS FOR
THE FUTURE. EXFO BELIEVES THAT INVESTORS BENEFIT FROM SEEING ITS RESULTS
THROUGH THE EYES OF MANAGEMENT IN ADDITION TO SEEING THE GAAP INFORMATION.
THIS NON-GAAP INFORMATION FACILITATES MANAGEMENT'S COMPARISON OF CURRENT
RESULTS WITH THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND STRATEGIC PLAN
AND WITH THOSE OF ITS PEERS. THIS INFORMATION IS NOT IN ACCORDANCE WITH, OR AN
ALTERNATIVE TO, GAAP AND MAY NOT BE COMPARABLE TO SIMILARLY TITLED MEASURES
REPORTED BY OTHER COMPANIES.
[GRAPHIC OMITTED]
[LOGO - EXFO]
ABOUT EXFO
EXFO is a recognized test and measurement expert in the global telecommuni-
cations industry through the design and manufacture of advanced and innovative
solutions as well as best-in-class customer support. The Telecom Division,
which represents the company's main business activity, offers fully integrated
and complete test solutions to network service providers, system vendors and
component manufacturers in approximately 70 countries. One of EXFO's strongest
competitive advantages is its PC/Windows-based modular platforms that host a
wide range of tests across optical, physical, data and network layers, while
maximizing technology reuse across several market segments. The Photonics and
Life Sciences Division mainly leverages core telecom technologies to offer
value-added solutions in the life sciences and high-precision assembly
sectors. For more information about EXFO, visit www.exfo.com.
FORWARD-LOOKING STATEMENTS
This news release contains forward-looking statements within the meaning of
the U. S. Private Securities Litigation Reform Act of 1995 and we intend that
such forward-looking statements be subject to the safe harbors created
thereby. Forward-looking statements are statements other than historical
information or statements of current condition 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 economic
uncertainty; capital spending levels in the telecommunications, life sciences
and high-precision assembly sectors; fluctuating exchange rates and our
ability to execute in these uncertain conditions; the effects of the
additional actions we have taken in response to such economic uncertainty
(including workforce reductions, ability to quickly adapt cost structures with
anticipated levels of business, ability to manage inventory levels with market
demand); market acceptance of our new products and other upcoming products;
limited visibility with regards to customer orders and the timing of such
orders; our ability to successfully integrate our acquired and to-be-acquired
businesses; the retention of key technical and management personnel; and
future economic, competitive and market conditions. Assumptions relating to
the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report on Form 20-F and our other filings with the U. S. Securities
and Exchange Commission and the Canadian securities commissions. We believe
that the expectations reflected in the forward-looking statements are
reasonable based on information currently available to us, but we cannot
assure you that the expectations will prove to have been correct. Accordingly,
you should not place undue reliance on these forward-looking statements. These
statements speak only as of the date of this document and shall not be revised
or updated to reflect events after the date of this document.
-30-
FOR MORE INFORMATION
Vance Oliver
Manager, Investor Relations
(418) 683-0913, Ext. 3733 VANCE.OLIVER@EXFO.COM
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEETYEARS
(in thousands of US dollars)
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
------------ ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 4,848 $ 5,159
Short-term investments 93,726 83,969
Accounts receivable
Trade, less allowance for doubtful accounts of $575
($510 as at August 31, 2004) 12,850 12,080
Other 1,887 1,532
Income taxes and tax credits recoverable 7,954 7,836
Inventories (note 4) 17,959 15,371
Prepaid expenses 1,660 1,513
--------- ---------
140,884 127,460
INCOME TAXES AND TAX CREDITS RECOVERABLE 879 449
PROPERTY, PLANT AND EQUIPMENT 16,212 15,442
LONG-LIVED ASSET HELD FOR SALE 1,600 1,600
INTANGIBLE ASSETS 9,141 9,447
GOODWILL 20,344 18,393
--------- ---------
$ 189,060 $ 172,791
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 5) $ 12,863 $ 11,393
Deferred revenue 1,132 805
Current portion of long-term debt 122 121
--------- ---------
14,117 12,319
DEFERRED REVENUE 1,403 1,123
DEFERRED GRANTS 1,870 1,690
LONG-TERM DEBT 303 332
--------- ---------
17,693 15,464
--------- ---------
CONTINGENCY (note 8)
SHAREHOLDERS' EQUITY
Share capital 521,819 521,733
Contributed surplus 2,123 1,986
Cumulative translation adjustment 30,010 13,820
Deficit (382,585) (380,212)
--------- ---------
171,367 157,327
--------- ---------
$ 189,060 $ 172,791
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTSYEARS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2004 2003
-------- --------
SALES $ 21,597 $ 15,962
COST OF SALES (1,2) 10,225 7,815
-------- --------
GROSS MARGIN 11,372 8,147
-------- --------
OPERATING EXPENSES
Selling and administrative(1) 7,413 5,857
Net research and development(1) (note 6) 2,780 2,829
Amortization of property, plant and equipment 1,094 1,321
Amortization of intangible assets 1,222 1,285
Restructuring charges (note 3) 200 --
-------- --------
TOTAL OPERATING EXPENSES 12,709 11,292
-------- --------
LOSS FROM OPERATIONS (1,337) (3,145)
Interest and other income 724 156
Foreign exchange loss (1,035) (470)
-------- --------
LOSS BEFORE INCOME TAXES (1,648) (3,459)
-------- --------
INCOME TAXES (note 7) 725 (1,451)
-------- --------
NET LOSS FOR THE PERIOD $ (2,373) $ (2,008)
======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.03) $ (0.03)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) 68,463 63,058
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) (note 9) 68,990 63,657
(1) STOCK-BASED COMPENSATION COSTS INCLUDED IN:
Cost of sales $ 25 $ --
Selling and administrative 87 5
Net research and development 25 --
-------- --------
$ 137 $ 5
======== ========
(2) The cost of sales is exclusive of amortization, shown seperately.
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTSYEARS OF DEFICIT
AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
DEFICIT
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------
2004 2003
--------- ---------
BALANCE - BEGINNING OF PERIOD $(380,212) $(371,788)
ADD
Net loss for the period (2,373) (2,008)
--------- ---------
BALANCE - END OF PERIOD $(382,585) $(373,796)
--------- ---------
CONTRIBUTED SURPLUS
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------
2004 2003
--------- ---------
BALANCE - BEGINNING OF PERIOD $ 1,986 $ 1,519
ADD
Premium on resale of share capital -- 6
Stock-based compensation costs 137 5
--------- ---------
BALANCE - END OF PERIOD $ 2,123 $ 1,530
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTSYEARS OF CASH FLOWS
(in thousands of US dollars)
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (2,373) $ (2,008)
Add (deduct) items not affecting cash
Discount on short-term investments (150) 231
Stock-based compensation costs 137 5
Amortization 2,316 2,606
Deferred revenue 385 531
Deferred grants -- (122)
-------- --------
315 1,243
Change in non-cash operating items
Accounts receivable 290 (1,861)
Income taxes and tax credits 346 (3,147)
Inventories (947) 850
Prepaid expenses 16 730
Accounts payable and accrued liabilities 459 (791)
-------- --------
479 (2,976)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (65,086) (79,925)
Proceeds from disposal of short-term investments 64,330 82,841
Additions to property, plant and equipment and intangible assets (577) (405)
-------- --------
(1,333) 2,511
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (28) (25)
Exercise of stock options 86 61
Redemption of share capital -- (2)
Resale of share capital -- 8
-------- --------
58 42
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 485 379
-------- --------
CHANGE IN CASH (311) (44)
CASH - BEGINNING OF PERIOD 5,159 5,366
-------- --------
CASH - END OF PERIOD $ 4,848 $ 5,322
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
1 INTERIM FINANCIAL INFORMATION
The financial information as at November 30, 2004, and for the
three-month periods ended November 30, 2003 and 2004, 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 in Canada 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
On September 1, 2004, the company prospectively adopted the Canadian
Institute of Chartered Accountants (CICA) handbook sections 1100 and
1400, "Generally Accepted Accounting Principles" and "General Standards
of Financial Statements Presentation". Among other things, these new
sections define generally accepted accounting principles (GAAP),
establish the relative authority of various types of CICA Accounting
Standards Board pronouncements and clarify the role of "industry
practice" in applying GAAP. The adoption of these new standards had no
significant impact on the financial statements of the company.
3 RESTRUCTURING AND OTHER CHARGES
During the three months ended November 30, 2004, the company incurred
$200,000 in restructuring charges to continue the consolidation of the
Photonics and Life Sciences Division. The company expects to incur an
additional $800,000 mainly in the second and third quarters of fiscal
2005 for a total of $2,700,000 in charges related to this consolidation
process.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Changes in the restructuring charges payable are as follows:
Balance as at Balance as at
August 31, November 30,
2004 Additions Payments Adjustments 2004
------------- ---------- ---------- ----------- -------------
FISCAL 2004 PLAN (unaudited) (unaudited) (unaudited) (unaudited)
Severance expenses $ 467 $ -- $ (1) $ -- $ 466
Other -- 200 (184) -- 16
------ ------ ------ ------ ------
467 200 (185) -- 482
------ ------ ------ ------ ------
FISCAL 2003 PLAN
Severance expenses 109 -- -- -- 109
Exited leased facilities 386 -- (180) -- 206
Other 197 -- -- -- 197
------ ------ ------ ------ ------
692 -- (180) -- 512
------ ------ ------ ------ ------
Fiscal 2001 plan
Exited leased facilities 10 -- -- -- 10
------ ------ ------ ------ ------
Total for all plans (note $1,169 $ 200 $ (365) $ -- $1,004)
====== ====== ====== ====== ======
4 INVENTORIES
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
------------ ----------
(UNAUDITED)
Raw materials $ 8,517 $ 7,244
Work in progress 1,886 1,370
Finished goods 7,556 6,757
------- -------
$17,959 $15,371
======= =======
5 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
------------ ----------
(UNAUDITED)
Trade $ 5,538 $ 4,484
Salaries and social benefits 4,466 3,932
Restructuring charges (note 3) 1,004 1,169
Tax on capital 662 526
Warranty 452 390
Other 741 892
------- -------
$12,863 $11,393
======= =======
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Changes in the warranty provision are as follows:
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
2004 2003
------- -------
(UNAUDITED)
Balance - Beginning of period $ 390 $ 687
Provision 159 105
Settlement (131) (420)
Foreign currency translation adjustment 34 34
----- -----
Balance - End of period $ 452 $ 406
----- -----
6 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
2004 2003
------- -------
(UNAUDITED)
Gross research and development expenses $ 3,799 $ 3,573
Research and development tax credits and grants (1,019) (744)
------- -------
$ 2,780 $ 2,829
------- -------
7 INCOME TAXES
During the three months ended November 30, 2004, the company recorded
income taxes of $725,000, representing income tax payable in some
specific tax jurisdictions.
Since fiscal 2003, the company has been recording a full valuation
allowance against its future income tax assets because it is more likely
than not that these assets will not be recovered. This caused its income
tax rate to be distorted in relation to its pre-tax accounting income.
8 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. Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which are
included in a single coordinated proceeding in the Southern District of
New York (the "IPO
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Litigations"). This class action alleges that the company's registration
statement and prospectus filed with the Securities and Exchange
Commission on June 29, 2000, contained material misrepresentations and/or
omissions resulting from (i) the underwriters allegedly soliciting and
receiving additional, excessive and undisclosed commissions from certain
investors in exchange for which they allocated material portions of the
shares issued in connection with the company's Initial Public Offering;
and (ii) the underwriters allegedly entering into agreements with
customers whereby shares issued in connection with the company's Initial
Public Offering would be allocated to those customers in exchange for
which customers agreed to purchase additional amounts of shares in the
after-market at pre-determined prices.
On April 19, 2002, the plaintiffs filed two amended complaints: one
containing master allegations against all of the underwriters in the IPO
Litigations, and the other 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. The
Court granted the company's motion to dismiss the claims against it under
Section 11 of the Securities Act. The Court denied the company's motion
to dismiss the claims against it under Rule 10b-5. In October 2002, the
claims against its officers were dismissed without prejudice pursuant to
the terms of the Reservation of Rights and Tolling Agreements entered
into with the plaintiffs.
In June 2003, a committee of the company's Board of Directors
conditionally approved a proposed settlement between the issuer
defendants, the individual defendants, and the plaintiffs. On June 25,
2004, the Plaintiffs moved for Preliminary Approval of the settlement,
and the Underwriter defendants have opposed that motion. If approved, the
settlement would provide, among other things, a release of the company
and of the individual defendants for the conduct alleged in the action to
be wrongful in the amended complaint. The company would agree to
undertake other responsibilities under the settlement, including agreeing
to assign away, not assert, or release certain potential claims the
company may have against its underwriters. Any direct financial impact of
the proposed settlement is expected to be borne by the company's
insurance carriers.
Since the settlement process is subject to a fairness hearing and final
court approval, it is possible that it could fail. Therefore, it is not
possible to predict the final outcome of the case, nor determine the
amount of any possible losses. If the settlement process fails, the
company will continue to defend its position in this litigation that the
claims against it, and its officers, are without merit. Accordingly, no
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
provision for this case has been made in the consolidated financial
statements as at November 30, 2004.
9 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:
THREE MONTHS ENDED
NOVEMBER 30,
-------------------------
2004 2003
------ ------
(UNAUDITED)
Basic weighted average number of shares outstanding (000's) 68,463 63,058
Dilutive effect of stock options (000's) 473 456
Dilutive effect of restricted stock awards (000's) 54 143
------ ------
Diluted weighted average number of shares outstanding (000's) 68,990 63,657
====== ======
Stock options excluded from the calculation of the diluted weighted
average number of shares because their exercise price was greater than
the average market price of the common shares (000's) 1,811 1,970
====== ======
The diluted loss per share for the periods ended November 30, 2003 and
2004, 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.
10 SEGMENT INFORMATION
The company is organized under two reportable segments: the Telecom
Division and the Photonics and Life Sciences Division. The Telecom
Division offers integrated test solutions to network service providers,
system vendors and component manufacturers throughout the global
communications industry. The Photonics and Life Sciences Division mainly
leverages developed and acquired core telecom technologies for high-tech
industrial manufacturing and research markets.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The following tables sets out information by segment:
THREE MONTHS ENDED NOVEMBER 30, 2004
-----------------------------------------------------
PHOTONICS AND LIFE
TELECOM DIVISION SCIENCES DIVISION TOTAL
---------------- ------------------- ----------
(UNAUDITED)
Sales $ 17,431 $ 4,166 $ 21,597
Loss from operations $ (980) $ (357) $ (1,337)
Unallocated items
Interest and other income 724
Foreign exchange loss (1,035)
--------
Loss before income taxes (1,648)
Income taxes 725
--------
Net loss $ (2,373)
========
THREE MONTHS ENDED NOVEMBER 30, 2003
-----------------------------------------------------
PHOTONICS AND LIFE
TELECOM DIVISION SCIENCES DIVISION TOTAL
---------------- ------------------- ----------
(UNAUDITED)
Sales $ 12,142 $ 3,820 $ 15,962
Loss from operations $ (2,380) $ (765) $ (3,145)
Unallocated items
Interest and other income 156
Foreign exchange loss (470)
--------
Loss before income taxes (3,459)
Income taxes (1,451)
--------
Net loss $(2,008)
========
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
------------- ----------
(UNAUDITED)
TOTAL ASSETS
Telecom Division $ 65,672 $ 59,463
Photonics and Life Sciences Division 15,981 15,915
Unallocated assets 107,407 97,413
--------- ----------
189,060 $ 172,791
========= ==========
Unallocated assets are comprised of cash, short-term investments and
income taxes and tax credits recoverable.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
11 DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim consolidated financial statements are prepared in
accordance with Canadian GAAP and significant differences in measurement
and disclosure from U.S. GAAP are set out in note 20 to the company's
most recent annual consolidated financial statements. This note describes
significant additional changes occurring since the most recent annual
consolidated financial statements and provides a quantitative analysis of
all significant differences. All disclosures required in annual financial
statements under U.S. GAAP have not been provided in these interim
consolidated financial statements.
RECONCILIATION OF NET LOSS TO CONFORM WITH U.S. GAAP
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2004 2003
-------- --------
(UNAUDITED)
Net loss for the period in accordance with Canadian GAAP $ (2,373) $ (2,008)
Stock-based compensation costs related to stock option plan -- 98
Stock-based compensation costs related to stock purchase plan -- (61)
Stock-based compensation costs related to restricted stock award plan -- (173)
Unrealized gains on forward exchange contracts 209 601
-------- --------
Net loss for the period in accordance with U.S. GAAP (2,164) (1,543)
Other comprehensive income
Unrealized gains on forward exchange contracts 1,036 --
Foreign currency translation adjustments 15,129 7,614
-------- --------
Comprehensive income $ 14,001 $ 6,071
======== ========
Basic and diluted net loss per share in accordance with U.S. GAAP $ (0.03) $ (0.02)
SHAREHOLDERS' EQUITY
As a result of the aforementioned adjustments to net loss and other
comprehensive income, significant differences with respect to
shareholders' equity under U.S. GAAP are as follow:
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
SHARE CAPITAL
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
------------ ---------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 521,819 $ 521,733
Stock-based compensation costs related to stock purchase plan
Current period -- (47)
Cumulative effect of prior periods 2,356 2,403
Reclassification from other capital upon exercise of restricted
stock awards
Current period -- 1,784
Cumulative effect of prior periods 6,636 4,852
Shares issued upon business combinations
Cumulative effect of prior periods 65,584 65,584
--------- ---------
Share capital in accordance with U.S. GAAP $ 596,395 $ 596,309
========= =========
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
NOVEMBER 30, AUGUST 31,
20004 2004
------------ -----------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with Canadian GAAP $ -- $ --
Stock-based compensation costs related to stock-based compensation plans
Current period (122) (1,463)
Cumulative effect of prior periods (31,039) (29,576)
Amortization for the period
Current period 156 1,718
Cumulative effect of prior periods 14,813 13,095
Reduction of stock-based compensation costs
Current period 24 84
Cumulative effect of prior periods 15,287 15,203
-------- --------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (881) $ (939)
======== ========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
OTHER CAPITAL
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
----------- ------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ -- $ --
Stock-based compensation costs related to stock-based compensation plans
Current period 122 1,463
Cumulative effect of prior periods 28,357 26,894
Reduction of stock-based compensation costs
Current period (43) (439)
Cumulative effect of prior periods (17,052) (16,613)
Reclassification to share capital upon exercise of restricted stock awards
Current period -- (1,784)
Cumulative effect of prior periods (6,636) (4,852)
--------- ----------
Other capital in accordance with U.S. GAAP $ 4,748 $ 4,669
========= ==========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
DEFICIT
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
--------- ----------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $(382,585) $(380,212)
Stock-based compensation costs related to stock-based compensation
plans
Current period -- (867)
Cumulative effect of prior periods (12,273) (11,406)
Unrealized gains (losses) on forward exchange contracts, net income
taxes
Current period 209 (280)
Cumulative effect of prior periods 1,171 1,451
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
Future income taxes on acquired in-process research and development
Cumulative effect of prior periods (1,380) (1,380)
Amortization of intangible assets, net of income taxes
Cumulative effect of prior periods 712 712
Write-down of goodwill and intangible assets, net of income taxes
Cumulative effect of prior periods (55,225) (55,225)
Valuation allowance on future income tax assets
Cumulative effect of prior periods (252) (252)
Amortization of goodwill
Cumulative effect of prior periods (17,716) (17,716)
--------- ---------
Deficit in accordance with U.S. GAAP $(466,323) $(464,159)
========= =========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE INCOME
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2004 2004
------- ----------
(UNAUDITED)
Accumulated other comprehensive income in accordance with Canadian GAAP
Foreign currency translation adjustments $ -- $ --
Current period 15,129 5,969
Cumulative effect of prior periods 11,188 5,219
Unrealized gains on forward exchange contracts
Current period 1,036 689
Cumulative effect of prior periods 689 --
------- -------
Accumulated other comprehensive income in accordance with U.S. GAAP $28,042 $11,877
======= =======
BALANCE SHEETS
The following table summarizes the significant differences in balance sheet
items between Canadian GAAP and U.S. GAAP.
AS AT NOVEMBER 30, 2004 AS AT AUGUST 31, 2004
-------------------------------- --------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Goodwill
Cost $ 98,633 $ 106,032 $ 93,967 $ 102,138
Accumulated amortization (78,289) (96,757) (75,574) (93,753)
--------- --------- --------- ---------
$ 20,344 $ 9,275 $ 18,393 $ 8,385
========= ========= ========= =========
Shareholders' equity
Share capital $ 521,819 $ 596,395 $ 521,733 $ 596,309
Contributed surplus 2,123 1,537 1,986 1,537
Cumulative translation
adjustement 30,010 -- 13,820 --
Deficit (382,585) (466,323) (380,212) (464,159)
Deferred stock-based
compensation costs -- (881) -- (939)
Other capital -- 4,748 -- 4,669
Accumulated other
comprehensive income -- 28,042 -- 11,877
--------- --------- --------- ---------
$ 171,367 $ 163,518 $ 157,327 $ 149,294
========= ========= ========= =========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSYEARS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
RESEARCH AND DEVELOPMENT TAX CREDITS
During the three months ended November 30, 2003 and 2004, net research
and development expenses under Canadian GAAP included tax credits that
are refundable against taxable income of $400,000 and $582,000,
respectively. Under U.S. GAAP, these credits would have been recorded in
the income taxes. This difference had no impact on the net loss and net
loss per share figures for the reporting periods.
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 2003 and 2004, there were no
significant differences between the statements of cash flows under
Canadian GAAP as compared to U.S. GAAP.
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board has issued
Statement of Financial Position (SFAS) 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4. The amendments made by SFAS 151 will
improve financial reporting by clarifying that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. This SFAS is
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The company will adopt this new statement on
September 1, 2005 and does not expect this to have a significant impact
on its financial statements.
On September 1, 2003, the company prospectively adopted SFAS 123,
"Accounting for Stock-Based Compensation", under the revised transition
provisions of SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". Upon the adoption of SFAS 123 and SFAS 148,
the company recognized stock-based compensation costs for stock options
granted to employees since September 1, 2003, using the fair value-based
method. The company adopted this Statement in order to conform to the
newly adopted rules under Canadian GAAP As a result of the adoption of
the fair value-based method, the accounting for stock-based compensation
under Canadian GAAP and U.S. GAAP is the same for awards granted after
September 1, 2003.
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 ECONOMIC
UNCERTAINTY, CAPITAL SPENDING LEVELS IN THE TELECOMMUNICATIONS AND HIGH-TECH
INDUSTRIAL MANUFACTURING SECTORS, FLUCTUATING EXCHANGE RATES AND OUR ABILITY
TO EXECUTE IN THESE UNCERTAIN CONDITIONS; THE EFFECTS OF THE ADDITIONAL
ACTIONS WE HAVE TAKEN IN RESPONSE TO SUCH ECONOMIC UNCERTAINTY (INCLUDING
WORKFORCE REDUCTIONS, THE QUICK ADAPTATION OF OUR COST STRUCTURES TO ALIGN
WITH ANTICIPATED LEVELS OF BUSINESS, THE MANAGEMENT OF OUR INVENTORY LEVELS
ACCORDING TO MARKET DEMAND); MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND OTHER
UPCOMING PRODUCTS; LIMITED VISIBILITY WITH REGARDS TO CUSTOMER ORDERS AND THE
TIMING OF SUCH ORDERS; OUR ABILITY TO SUCCESSFULLY INTEGRATE OUR ACQUIRED AND
TO-BE-ACQUIRED BUSINESSES; THE RETENTION OF KEY TECHNICAL AND MANAGEMENT
PERSONNEL; AND FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS. ASSUMPTIONS
RELATING TO THE FOREGOING INVOLVE JUDGMENTS AND RISKS, ALL OF WHICH ARE
DIFFICULT OR IMPOSSIBLE TO PREDICT 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 COMMISSION. 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.
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IS DATED JANUARY 5, 2005.
ALL DOLLAR AMOUNTS ARE EXPRESSED IN US DOLLARS, EXCEPT AS OTHERWISE
NOTED.
INDUSTRY OVERVIEW
The global telecommunications market environment continued to improve
in the first quarter of fiscal 2005, especially in the United States,
following a major announcement by the Federal Communications Commission (FCC).
The FCC, which regulates the telecommunications industry in the United States,
ruled that network service providers (NSPs) will not have to share their
optical links (at reduced prices) with other carriers for fiber-to-the-curb
(FTTC) and fiber-to-the-node (FTTN) deployments as it had done earlier for
fiber-to-the-premises (FTTP) deployments. These latest announcements prompted
immediate responses by U.S.-based, Tier-1 NSPs, who publicly announced they
will accelerate their fiber deployments deeper into access networks.
1
While fiber deployments in access networks are stronger in the North American
market (with the exception of Japan and Korea), the shift to converged
Internet protocol (IP)-based networks is a worldwide phenomenon. NSPs, on a
global basis, are turning to a single, IP-based network architecture that
carries voice, data and video services in order to drastically reduce costs.
These key market trends affected multiple segments of the global
telecommunications supply chain. System manufacturers benefited from NSP
orders for next-generation, converged IP networks and fiber deployments in
access areas. Component vendors began seeing incremental demand for optical
components that support IP-based systems. Some test and measurement equipment
vendors, whose products enable customers to reduce capital expenditures
(CAPEX) and operating expenses (OPEX), attracted the attention of NSPs, system
manufacturers and component vendors, especially ones offering test solutions
for IP optical networking and/or FTTx (FTTP, FTTC, FTTN) applications.
COMPANY OVERVIEW
Sales reached $21.6 million in the first quarter of 2005, of which
25.0% was shipped to a U.S.-based, Tier-1 NSP. Historically, sales to our top
customer represented less than 10% of total sales on a quarterly basis, but in
two of the last three quarters, one customer has accounted for more than 25.0%
of our sales.
We believe this unusual sales concentration is largely due to our
leadership position in the FTTx test market. A number of NSPs are initiating
major deployments of FTTx networks in order to offer their end-customers
bundled voice, data and video services.
In the first quarter of 2005, we launched seven new products,
including a next-generation SONET/SDH analyzer for testing data-centric IP
networks, a Gigabit Ethernet test solution with voice-over-IP (VoIP) test
capabilities, and an optical spectrum analyzer (OSA) for coarse wavelength
division multiplexing (CWDM) applications in metro and access networks.
We recorded a foreign exchange loss of $1.0 million, or $0.02 per
share, due to the significant depreciation of the US dollar, compared to the
Canadian dollar during the first quarter of fiscal 2005. In addition to this
foreign exchange loss, our P&L line items were also negatively affected by
this depreciation of the US dollar a significant portion of our expenses are
incurred in Canadian dollars and we report our results in US dollars.
We incurred $200,000 in restructuring charges to continue the
consolidation of our Photonics and Life Sciences Division in the first quarter
of 2005. We had sustained $1.7 million in restructuring and other charges in
the fourth quarter of 2004 and we expect to incur an additional $800,000 in
the second and third quarter of 2005 for a total of $2.7million in charges
related to this consolidation process. We estimate that we will derive $1.5
million in annual savings from these streamlined operations.
During the first quarter of fiscal 2005, some conditions of the
formal offer to buy one of our buildings, received at the beginning of this
quarter, were not met and this offer has been declined. Consequently,
management has decided to withdraw the building from the market.
2
OUR STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER RESULTS
For a complete description of our strategy and related key
performance indicators as well as our capability to deliver results, please
refer to the corresponding sections in our most recent Annual Report filed
with the securities commissions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a complete description of our critical accounting policies and
estimates, please refer to the corresponding section in our most recent Annual
Report filed with the securities commissions.
During the first quarter of fiscal 2005, we have adopted the
following new Canadian Institute of Chartered Accountants handbook sections:
o Section 1100, "Generally Accepted Accounting Principles"
o Section 1400, "General Standards of Financial Statement
Presentation"
3
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial
condition and results of operations for the three months ended November 30,
2003 and 2004, should be read in conjunction with our interim consolidated
financial statements and the related notes thereto. Our interim consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (Canadian GAAP) and significant differences in
measurement and disclosure from United States generally accepted accounting
principles (U.S. GAAP) are set out in note 11 to our interim consolidated
financial statements. Our functional currency is the Canadian dollar although
we report our financial statements in US dollars. The following tables set
forth certain interim consolidated statements of earnings data in thousands of
US dollars, except per share data, and as a percentage of sales for the
periods indicated:
THREE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
-------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Sales $ 21,597 $ 15,962 100.0% 100.0%
Cost of sales 10,225 7,815 47.3 49.0
-------- -------- ------- -------
Gross margin 11,372 8,147 52.7 51.0
-------- -------- ------- -------
Operating expenses
Selling and administrative 7,413 5,857 34.3 36.7
Net research and development 2,780 2,829 12.9 17.7
Amortization of property, plant and
equipment 1,094 1,321 5.1 8.3
Amortization of intangible assets 1,222 1,285 5.7 8.0
Restructuring charges 200 -- 0.9 --
-------- -------- ------- -------
Total operating expenses 12,709 11,292 58.9 70.7
-------- -------- ------- -------
Loss from operations (1,337) (3,145) (6.2) (19.7)
Interest and other income 724 156 3.4 0.9
Foreign exchange loss (1,035) (470) (4.8) (2.9)
-------- -------- ------- -------
Loss before income taxes (1,648) (3,459) (7.6) (21.7)
Income taxes (recovery) 725 (1,451) 3.4 (9.1)
-------- -------- ------- -------
Net loss for the period $ (2,373) $ (2,008) (11.0)% (12.6)%
======== ======== ======= =======
Basic and diluted net loss per share $ (0.03) $ (0.03)
Segment information:
Sales:
Telecom Division $ 17,431 $ 12,142 80.7% 76.1%
Photonics and Life Sciences Division 4,166 3,820 19.3 23.9
-------- -------- ------- -------
$ 21,597 $ 15,962 100.0% 100.0%
======== ======== ======= =======
Loss from operations:
Telecom Division $ (980) $ (2,380) (4.5)% (14.9)%
Photonics and Life Sciences Division (357) (765) (1.7) (4.8)
-------- -------- ------- -------
$ (1,337) $ (3,145) (6.2)% (19.7)%
======== ======== ======= =======
Research and development data:
Gross research and development $ 3,799 $ 3,573 17.6% 22.4%
Net research and development $ 2,780 $ 2,829 12.9% 17.7%
OTHER STATEMENTS OF EARNINGS DATA: (1)
Pro forma net loss $ (814) $ (2,124) (3.8)% (13.3)%
Basic and diluted pro forma net loss per share $ (0.01) $ (0.03)
(1) Net loss excluding stock-based compensation costs, amortization of
intangible assets, restructuring charges as well as an unusual income tax
recovery. This information may not be comparable to similarly titled measures
reported by other companies because it is non-GAAP information. Please refer
to the "Net loss and pro forma net loss" section included further in this
document.
4
SALES
For the three months ended November 30, 2004, our global sales
increased 35.3% to $21.6 million from $16.0 million for the same period last
year, with an 81%-19% split in favor of our Telecom Division.
TELECOM DIVISION
For the three months ended November 30, 2004, sales of our Telecom
Division increased 43.6% to $17.4 million from $12.1 million for the same
period last year. Since the second half of fiscal 2004, we have benefited from
an increased demand for our test solutions following the deployment of fiber
deeper into access networks (FTTx), in particular from a U.S.-based, Tier-1
NSP customer, who accounted for 31% of our telecom sales in this quarter. In
addition, the positive spending environment helped us increase sales this
quarter.
Over the last few months, we have been offering new and enhanced
extented-warranty programs, which significantly increased our
extended-warranty sales. Revenues from these sales are deferred and recognized
over the warranty period, causing our deferred revenue in the balance sheet to
increase.
PHOTONICS AND LIFE SCIENCES DIVISION
For the three months ended November 30, 2004, sales of our Photonics
and Life Sciences Division increased 9.1% to $4.2 million from $3.8 million
for the same period last year. The increase in sales is due to market share
gain in the illumination market.
Overall, for the two divisions, net accepted orders increased 38% to
$23.3 million in the first quarter of fiscal 2005 from $16.9 million for the
same period last year. The slight improvement in the telecommunications market
environment, the increased demand for our FTTx test solutions as well as
market-share gains in the telecommunications and life sciences markets helped
us increase our bookings year-over-year. Our net book-to-bill ratio rose to
1.08 in the first quarter of 2005, from 1.06 for the same period last year. In
the previous quarter, the net book-to-bill ratio reached 0.96.
GEOGRAPHIC DISTRIBUTION
For the three months ended November 30, 2004, sales to the Americas,
Europe-Middle East-Africa (EMEA) and to the Asia-Pacific (APAC) region
accounted for 71%, 18% and 11% of global sales, respectively. For the
corresponding period last year, sales to the Americas, EMEA and APAC accounted
for 65%, 17% and 18% of global sales, respectively. Our sales to the Americas,
which increased 48% year-over-year, benefited from the recent deployments of
fiber deeper into the access networks, which, as mentionned above, occurred
mainly in the United States. Our sales to EMEA also increased significantly
(47%) year-over-year, mainly due to market share gains in both divisions. Our
sales to APAC decreased 19% year-over-year. Most of our sales to this maket
are made through tenders that may vary in number and importance from quarter
to quarter.
Through our two divisions, we sell our products to a broad range of
customers, including NSPs, optical component and system manufacturers, as well
as high-tech industrial manufacturers and research and development
laboratories. During the three months ended November 30, 2004, a large portion
of our sales was attributed to a single customer, accounting for 25.0% of our
total sales. During that same period, our top three customers accounted for
5
30.6% of sales. For the corresponding period last year, no customer accounted
for more than 8.4% of sales and our top three customers accounted for 17.0% of
sales.
Considering the sales level and the net book-to-bill ratio for the
first quarter of fiscal 2005 as well as the benefits expected from our recent
product introductions, we still believe that we will achieve our KPI; that is,
20% sales growth year-over-year in a stable telecommunications market.
GROSS MARGIN
Gross margin amounted to 52.7% of sales for the three months ended
November 30, 2004, compared to 51.0% for the same period last year.
The increase in our gross margin can be explained by the following
factors. First, we were able to reduce our cost of goods sold with lower
purchasing price of various commodities we buy. In addition, the significant
rise in sales resulted in an increase in manufacturing activities allowing us
to better absorb our fixed manufacturing costs. Furthermore, streamlined
operations following our consolidation actions in fiscal 2004 and
cost-reduction programs allowed us to improve our gross margin year-over-year.
However, a stronger Canadian dollar, compared to the US dollar year-over-year,
prevented us, to some extent, from further improving our gross margin as some
cost of sales elements are denominated in Canadian dollars. Finally, the
customer mix and pricing pressure observed in the first quarter of fiscal 2005
also prevented us from further improving our gross margin.
Considering the current state of the telecommunications industry, our
cost reduction measures, our tight control on operating costs as well as our
expected sales growth, we believe that our gross margin will improve in fiscal
2005, compared to 2004. However, our gross margin may fluctuate
quarter-over-quarter as our sales may fluctuate. Furthermore, any additional
increase in the strength of the Canadian dollar over the next quarters will
have a negative impact on our gross margin. Finally, our gross margin can be
negatively affected by increased competitive pricing pressure, customer
concentration, increased obsolescence costs, shifts in product mix,
under-absorption of fixed manufacturing costs and increases in product
offerings by other suppliers in our industry.
SELLING AND ADMINISTRATIVE
For the three months ended November 30, 2004, selling and
administrative expenses were $7.4 million, or 34.3% of sales, compared to $5.9
million, or 36.7% of sales for the same period last year.
The increase in our selling and administrative expenses (in dollars)
is mainly related to the significant increase in our sales, which caused our
commission expenses to increase year-over-year, and to the increase of sales
and marketing expenditures (including additional personal), resulting from our
strategic decision to expand our sales organization in order to better
leverage the various leading technologies developed over the past fiscal
years. In addition, a stronger Canadian dollar, compared to the US dollar
year-over-year, further increased our selling and administrative expenses, as
more than half of our selling and administrative expenses are incurred in
Canadian dollars. Furthermore, stock-based compensation costs as well as
expenses related to compliance with the Sarbanes-Oxley Act of 2002 were higher
than in fiscal 2004, further increasing our selling and administrative
expenses year-over-year. However, we were able to mitigate the increase in our
selling and administrative
6
expenses as well as reduce our selling and administrative expenses in
percentage of sales year-over-year due to tight cost-control measures and our
recent consolidation actions.
For the upcoming quarters, we expect our selling and administrative
expenses to increase in dollars and be relatively stable as a percentage of
sales. In particular, we expect our commission expenses to increase as sales
volume increases. Also, considering our goal of becoming the leading player in
the telecom test and measurement space, we will intensify our sales and
marketing efforts, both domestic and international, which will also cause our
expenses to rise. Finally, any further increase in the strength of the
Canadian dollar will also cause our selling and administrative expenses to
increase, as more than half of these expenses are incurred in Canadian
dollars.
RESEARCH AND DEVELOPMENT
For the three months ended November 30, 2004, gross research and
development expenses totaled $3.8 million, or 17.6% of sales, compared to $3.6
million, or 22.4% of sales for the same period last year.
In fiscal 2005, most of our gross research and development expenses
were incurred in Canadian dollars as we have consolidated most of our R&D
activities in Canada. Consequently, the significant increase in the strength
of the Canadian dollar, compared to the US dollar year-over-year, caused our
gross research and development expenses to increase year-over-year.
Nonwithstanding the increased strength of the Canadian dollar, our gross
research and development expenses would have decreased year-over-year (in
absolute dollar amount), mainly due to the mix and timing of R&D projects and
the consolidation of our R&D activities. The decrease in our gross research
and development expenses, as a percentage of sales is directly related to the
significant increase in our sales year-over-year.
We still invested significantly in research and development
activities in the first quarter of fiscal 2005, mainly in our Telecom
Division, as we firmly believe that innovation and new product introductions
are key to gaining market share in the current economic environment and to
ensuring the long-term growth and profitability of the company.
For the three months ended November 30, 2004, tax credits and grants
from the Canadian federal and provincial governments for research and
development activities were $1.0 million, or 26.8% of gross research and
development expenses, compared to $744,000, or 20.8% of gross research and
development expenses for the same period last year. The increase in our tax
credits and grants is mainly related to the increase in our eligible gross
research and development expenses in Canada, since we were entitled to similar
grant programs and tax credits year-over-year. Following the consolidation of
our R&D activities in Canada, we incurred most of our R&D expenses in Canada,
where we are entitled to R&D tax credits and grants.
In the first quarter of fiscal 2005, 43% of sales originated from
products that have been on the market for two years or less. For the first
quarter of 2004, this number reached 38% of sales. The 2005 figure is slightly
below our fiscal 2005 objective of 45%. With the help of the 20 new products
brought to the market place in fiscal 2004 - several of which were released in
the second half of the fiscal year - and the seven new ones lauched in the
first quarter of fiscal 2005, we remain confident that we will achieve our KPI
of 45% for fiscal 2005.
7
We expect to continue investing significantly in research and
development activities in the upcoming quarters, reflecting our focus on
innovation, our desire to gain market share and our goal to exceed customer
needs and expectations.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
For the three months ended November 30, 2004, amortization of
property, plant and equipment was $1.1 million, compared to $1.3 million for
the same period last year. The decrease in the amortization expense
year-over-year, despite the significant increase in the strength of Canadian
dollar compared to the US dollar, is mainly due to the fact the some of our
property, plant and equipment have become fully amortized during fiscal 2004.
RESTRUCTURING CHARGES
For the three months ended November 30, 2004, restructuring charges
amounted to $200,000. These charges were recorded in conjunction with the
transfer of EXFO Burleigh's operations mainly to Toronto. This consolidation
process started in the last quarter of fiscal 2004 and will extend through the
third quarter of 2005. In the first quarter of 2004, we had no restructuring
charges.
INTEREST AND OTHER INCOME
For the three months ended November 30, 2004, interests and other
income amounted to $724,000, compared to $156,000 for the same period last
year. During the first quarter of fiscal 2005, we finally cashed R&D tax
credits claimed in fiscal 2001 and we were granted $162,000 in interest by the
tax authorities. In addition, our interest income was higher in the first
quarter of 2005 than during the same period last year because of the increase
in our cash position following our public offering in February 2004 and the
increase in interest rates. Furthermore, in the first quarter of 2005, we
recorded $125,000 for sale of excess assets. Finally, in the first quarter of
fiscal 2004, we recorded an interest expense of $169,000 in relation to a tax
assessment.
FOREIGN EXCHANGE LOSS
For the three months ended November 30, 2004, the foreign exchange
loss amounted to $1.0 million, compared to $470,000 for the same period last
year.
Foreign exchange gains and losses are the result of the translation
of operating activities denominated in currencies other than the Canadian
dollar. During the three months ended November 30, 2004, the Canadian dollar
value increased significantly and rapidly compared to the US dollar (increase
of CA$0.13, or 9.6%), resulting in a significant foreign exchange loss during
this quarter. During the same period last year, the Canadian dollar value also
increased significantly compared to the US dollar (increase of CA$0.09, or
6.3%), resulting in a significant but less important exchange loss during that
period. The increase in our foreign exchange loss year-over-year, in
percentage, was greater than the increase in the value of the Canadian dollar,
in percentage, as we had a higher level of activity in the first quarter of
fiscal 2005, compared to the same period last year.
We manage our exposure to currency risk with forward exchange
contracts. In addition, some of our operating activities are denominated in
currencies other than the Canadian dollar, which further hedges this risk.
However, any further increase in the value of the Canadian
8
dollar, compared to the US dollar, will continue to have a negative impact on
our operating results.
INCOME TAXES
For the three months ended November 30, 2004, we recorded an income
tax expense of $725,000, compared to an income tax recovery of $1.5 million
for the same period last year. The income tax expense recorded in the first
quarter of fiscal 2005 represented income taxes payable in some specific tax
jurisdictions. The income tax recovery recorded in the first quarter of fiscal
2004 was mainly due to the $1.4 million unusual recovery of income taxes paid
in previous periods.
Since fiscal 2003, we have been recording a full valuation allowance
against our future income tax assets because it is more likely than not that
these assets will not be recovered. The valuation allowance will be reversed
once management will have concluded that realization of future income tax
assets is more likely than not. Consequently, our future periods' income tax
rates will be distorted compared to statutory rates.
NET LOSS AND PRO FORMA NET LOSS
Net loss amounted to $2.4 million and $2.0 million for the three
months ended November 30, 2004 and 2003, respectively. In terms of per share
amounts, we recorded a net loss of $0.03 for each of the three months ended
November 30, 2004 and 2003, respectively.
Also, 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 stock-based compensation costs, amortization of intangible
assets, restructuring charges as well as an unusual income tax recovery.
Pro forma net loss amounted to $814,000 and $2.1 million for the
three months ended November 30, 2004 and 2003, respectively. In terms of pro
forma per share amounts, we recorded a net loss of $0.01 and $0.03 for the
three months ended November 30, 2004 and 2003, respectively.
Pro forma net loss is reconciled as follows:
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------
2004 2003
---------- ----------
(unaudited) (unaudited)
Net loss according to GAAP $ (2,373) $ (2,008)
Pro forma adjustments:
Stock-based compensation costs 137 5
Amortization of intangible assets 1,222 1,285
Restructuring charges 200 -
Unusual income tax recovery - (1,406)
--------- ----------
Pro forma net loss $ (814) $ (2,124)
--------- ----------
Basic and diluted net loss per share $ (0.03) $ (0.03)
Basic and diluted pro forma net loss per share $ (0.01) $ (0.03)
9
One of the three main objectives of our strategic plan was to
maximize profitability. We believe that such an objective will be achieved by
being profitable on a pro forma basis. In the first quarter of fiscal 2005, we
fell short of our objective, mainly because of the negative impact of the
increased strength of the Canadian dollar. However, we remain confident that
we will attain this strategic objective for fiscal 2005.
We disclose pro forma financial data in order to provide supplemental
information regarding our results of operations and to enhance our investors'
overall understanding of our core financial performance and our prospects for
the future. We believe that our investors benefit from seeing our results
through the eyes of management in addition to seeing the GAAP information.
This non-GAAP information facilitates management's comparison of current
results with the company's historical results of operations and strategic plan
and with those of our peers. This information is not in accordance with, or an
alternative to, GAAP and should be considered in addition to, but not as a
substitute for, other measures of financial performance reported in accordance
with GAAP, such as net loss. As a result, our pro forma net loss may not be
comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations and meet our capital expenditure
requirements mainly through cash flows from operating activities, the use of
our cash and short-term investments as well as the issuance of subordinate
voting shares.
As at November 30, 2004 cash and short-term investments consisted of
$98.6 million, while our working capital was at $126.8 million. Our cash and
short-term investments increased $9.4 million compared to August 31, 2004,
mainly due to an unrealized foreign exchange gain of $9.3 million on cash and
short-term investments as well as cash flows from operating activities of
$479,000. However, the increase in cash and short-term investment was offset
in part by the cash payments of $577,000 for the purchase of property, plant
and equipment. The unrealized foreign exchange gain resulted from the
translation in US dollars of our Canadian-dollar-denominated cash and
short-term investments, and was recorded in the cumulative translation
adjustment in the balance sheet.
We believe that our cash balances and short-term investments,
combined with an available line of credit of $5.5 million, will be sufficient
to meet our liquidity and capital requirements for the foreseeable future.
However, possible additional operating losses and/or possible investment in or
acquisition of complementary businesses, products or technologies may require
additional financing. There can be no assurance that additional debt or equity
financing will be available when required or, if available, it can be secured
on satisfactory terms. Our line of credit bears interest at prime rate.
OPERATING ACTIVITIES
Cash flows provided by operating activities were $479,000 for the
three months ended November 30, 2004, compared to cash flows used of $3.0
million for the same period last year. Cash flows provided by operating
activities in the first quarter of fiscal 2005 were mainly attributable to the
net earnings after items not affecting cash of $315,000 and the positive net
change in non-cash operating items of $164,000.
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INVESTING ACTIVITIES
Cash flows used by investing activities were $1.3 million for the
three months ended November 30, 2004, compared to cash flows provided of $2.5
million for the same period last year. In the first quarter of fiscal 2005, we
sold $756,000 worth of short-term investments and paid $577,000 for the
purchase of property, plant and equipment.
FORWARD EXCHANGE CONTRACTS
We utilize forward exchange contracts to manage our foreign currency
exposure. Our policy is not to utilize those derivative financial instruments
for trading or speculative purposes.
Our forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign
exchange translation gains and losses on these contracts are recognized as an
adjustment of the revenues when the corresponding sales are recorded.
As at January 5, 2005, we held contracts to sell US dollars at
various forward rates, which are summarized as follows:
WEIGHTED AVERAGE
EXPIRY DATES: CONTRACTUAL AMOUNTS CONTRACTUAL FORWARD RATES
------------------- -------------------------
January 2005 to August 2005 7,200 1.4217
September 2005 to November 2007 14,400 1.3030
As at January 5, 2005, these forward exchange contracts generated
deferred unrealized gains of US$2.1 million. Deferred unrealized gains were
calculated using exchange rate of CA$1.2252 = US$1.00 as at January 5, 2005.
CONTINGENCY
As discussed in note 8 to our interim consolidated financial
statements, the company was named as a defendant in a U.S. securities class
action related to its initial public offering (IPO) in June 2000. The
complaints allege that the prospectus and the registration statement for the
IPO failed to disclose that the underwriters allegedly received excessive
commissions and that the underwriters and some investors collaborated in order
to inflate the price of EXFO's stock in the aftermarket.
In June 2003, a committee of the company's Board of Directors
conditionally approved a proposed settlement between the issuer defendants,
the individual defendants, and the plaintiffs. On June 25, 2004, the
Plaintiffs moved for Preliminary Approval of the settlement, and the
Underwriter defendants have opposed that motion. If approved, the settlement
would provide, among other things, a release of the company and of the
individual defendants for the conduct alleged in the action to be wrongful in
the amended complaint. The company would agree to undertake other
responsibilities under the settlement, including agreeing to assign away, not
assert, or release certain potential claims the company may have against its
underwriters. Any direct financial impact of the proposed settlement is
expected to be borne by the company's insurance carriers.
11
Since the settlement process is subject to a fairness hearing and
final court approval, it is possible that it could fail. Therefore, it is not
possible to predict the final outcome of the case, nor determine the amount of
any possible losses. If the settlement process fails, the company will
continue to defend its position in this litigation that the claims against it,
and its officers, are without merit. Accordingly, no provision for this case
has been made in the consolidated financial statements as at November 30,
2004.
SHARE CAPITAL AND STOCK-BASED COMPENSATION PLANS
SHARE CAPITAL
As at December 31, 2004, EXFO had 37,900,000 multiple voting shares
outstanding, entitling to ten votes each and 30,640,349 subordinate voting
shares outstanding. The multiple voting shares and the subordinate voting
shares are unlimited as to number and without par value.
STOCK OPTION PLAN
The aggregate number of subordinate voting shares covered by options
granted under the stock option plan was 2,794,668 as at November 30, 2004. The
weighted average exercise price of those stock options was $13.74 compared to
the market price of $5.20 per share as at November 30, 2004. The maximum
number of subordinate voting shares issuable under the plan cannot exceed
6,306,153 shares. The following table summarizes information about stock
options granted to the members of the Board of Directors and to Management and
Corporate Officers of the company and its subsidiaries as at November 30,
2004:
% OF ISSUED WEIGHTED
AND AVERAGE
NUMBER OUTSTANDING EXERCISE PRICE
----------- ----------- --------------
Chairman of the Board, President and CEO
(one individual) 150,482 5.4% $ 9.91
Board of Directors (five individuals) 194,375 7.0% $ 6.23
Management and Corporate Officers
(eight individuals) 345,591 12.4% $ 14.17
----------- ----------- --------------
690,448 24.8% $ 11.01
=========== =========== ==============
RESTRICTED STOCK AWARD PLAN
In addition to the stock option plan, we maintain a restricted stock
award plan for some U.S.-based employees. The aggregate number of subordinate
voting shares covered by restricted stock awards was 53,592 as at November 30,
2004. Each restricted stock award entitles employees to receive one
subordinate voting share at a purchase price of nil. All restricted stock
awards vested on December 20, 2004.
RISKS AND UNCERTAINTIES
Over the past few years, we have managed our business in a difficult
environment; focused on research and development programs for new and
innovative products aimed at expected growth pockets in our sector; continued
the development of our domestic and international markets; and made strategic
acquisitions. However, we operate in a highly
12
competitive sector that is in constant evolution and, as a result, we
encounter various risks and uncertainties that must be given appropriate
consideration in our strategic management policies.
Firstly, we are exposed to currency risks due to the export of our
Canadian-manufactured products, the large majority of which are denominated in
US dollars for sale. These risks are partially hedged by operating expenses
denominated in US dollars, the purchase of raw materials in US dollars and
forward exchange contracts. The increased strength of the Canadian dollar,
compared to the US dollar, over the last two years caused our operating
expenses, as well as our foreign exchange loss, to increase. Any further
increase in the value of the Canadian dollar in the coming months will
negatively affect our results of operations.
Secondly, risks and uncertainties related to the telecommunications
test and measurement industry involve the rapid development of new products
that may have short life cycles and require extensive research and
development; the difficulty of adequately predicting market size and trends;
the difficulty of retaining highly skilled employees; and the ability to
quickly adapt our cost structure to changing market conditions in order to
achieve profitability.
In addition, given our strategic goals for growth and competitive
positioning in our industry, we are continuously expanding into international
markets. This exposes us to certain risks and uncertainties related to changes
in local laws and regulations, multiple technological standards, protective
legislation and pricing pressure.
Furthermore, while strategic acquisitions, like those we have made in
the past and possibly others in the future, are essential to our long-term
growth, they also expose us to certain risks and uncertainties related to the
rapid and effective integration of these businesses as well as their products,
technologies and personnel.
The economic environment of our industry could also result in some of
our customers experiencing difficulties and, consequently, this could have a
negative effect on our results especially in terms of future sales and
recoverability of accounts receivable. However, the sectorial and geographic
diversity of our customer base provides us with a reasonable level of
protection in this area. Finally, other financial instruments, which
potentially subject us to credit risks, consist mainly of cash, short-term
investments and forward exchange contracts. Our short-term investments consist
of debt instruments issued by high-credit quality corporations and trusts. Our
cash and forward exchange contracts are held with or issued by high-credit
quality financial institutions; therefore, we consider the risk of
non-performance on these instruments to be remote.
For a more complete understanding of risk factors that may affect us,
please refer to the risk factors set forth in our disclosure documents
published with securities commissions at www.sedar.com in Canada or
www.edgar.com in the U.S.
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