UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_]
oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934; or
[X]
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2005;2006; or
[_]
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to ________; or
[_]
oSHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report.......
FOR THE TRANSITION PERIOD FROM SEPTEMBERreport
For the transition period from September 1, 2004 TO AUGUST2005 to August 31, 2005
2006
Commission File No. 0-30895
EXFO ELECTRO-OPTICAL ENGINEERING INC. /
EXFO INGENIERIE ELECTRO-OPTIQUEINGÉNIERIE ÉLECTRO-OPTIQUE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
(Exact name of registrant as specified in its charter)
Canada
(Jurisdiction of Incorporation or organization)
400 GODIN AVENUE
VANIER, QUEBECGodin Avenue
Quebec, Quebec, G1M 2K2, CANADA
Canada
(418) 683-0211
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Title of each class | Name of each exchange on which registered |
Subordinate Voting Shares without par value | NASDAQ |
Subordinate Voting Shares without par value | TSX |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Subordinate Voting Shares, no par value
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
As of November 1, 2005,2006, the registrant had 30,672,61731,632,857 Subordinate Voting Shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes oNo x
If this report is an annual report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
Yes oNo x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] xNo [_]
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 [ ] oItem 18 [X]
x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This annual report contains or incorporates by reference statements which constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition that refer to expectations, projections or other characterizations of future events and circumstances. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including those that are discussed under "Risk Factors"“Risk Factors” set forth in Item 3D of this annual report. Assumptions relating to forward-looking statements involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. When used in this annual report, the words “believe”, “anticipate”, “plan”, “expect”, “intend”, “estimate” or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. We undertake no obligation to revise or update any of them to reflect events or circumstances that may occur after the date of this document.
All dollar amounts in this annual report are expressed in US dollars, except as otherwise noted.
Item 1.Identity of Directors, Senior Management and Advisors
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Item 2.Offer Statistics and Expected Timetable
Not Applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
A. | Selected Financial Data |
The consolidated statements of earnings data for the years ended August 31, 20012002 and 20022003 and the consolidated balance sheets data as at August 31, 2001, 2002, 2003 and 20032004 are derived from our audited consolidated financial statements not included in this annual report. The consolidated statements of earnings data for each of the three years ended August 31, 2003, 2004, 2005 and 20052006 and the consolidated balance sheets data as at August 31, 20042005 and 20052006 are derived from our audited consolidated financial statements that are included elsewhere in this annual report.
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada ("(“Canadian GAAP"GAAP”) and significant differences in measurement and disclosure from generally accepted accounting principles in United States ("(“U.S. GAAP"GAAP”) are set out in note 2120 to our consolidated financial statements included elsewhere in this annual report. The historical results below are not necessarily indicative of the results to be expected for any future periods.
The selected financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report, and
"Item“Item 5. Operating and Financial Review and
Prospects"Prospects” of this annual report.
2
| | Years ended August 31, | |
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | (in thousands of US dollars, except share and per share data) | |
Consolidated Statements of Earnings Data: | | | | | | | | | | | |
Amounts under Canadian GAAP | | | | | | | | | | | |
Sales | | $ | 128,253 | | $ | 97,216 | | $ | 74,630 | | $ | 61,930 | | $ | 68,330 | |
Cost of sales (1) | | | 57,275 | | | 44,059 | | | 34,556 | | | 36,197 | | | 52,366 | |
Gross margin | | | 70,978 | | | 53,157 | | | 40,074 | | | 25,733 | | | 15,964 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Selling and administrative | | | 40,298 | | | 31,782 | | | 25,890 | | | 26,991 | | | 33,881 | |
Net research and development | | | 15,404 | | | 12,190 | | | 12,390 | | | 15,879 | | | 12,782 | |
Amortization of property, plant and equipment | | | 3,523 | | | 4,256 | | | 4,935 | | | 5,210 | | | 5,096 | |
Amortization of intangible assets | | | 4,394 | | | 4,836 | | | 5,080 | | | 5,676 | | | 12,451 | |
Impairment of long-lived assets and goodwill | | | 604 | | | − | | | 620 | | | 7,427 | | | 23,657 | |
Government grants | | | (1,307 | ) | | − | | | − | | | − | | | − | |
Restructuring and other charges | | | − | | | 292 | | | 1,729 | | | 4,134 | | | 2,880 | |
Total operating expenses | | | 62,916 | | | 53,356 | | | 50,644 | | | 65,317 | | | 90,747 | |
Earnings (loss) from operations | | | 8,062 | | | (199 | ) | | (10,570 | ) | | (39,584 | ) | | (74,783 | ) |
Interest and other income | | | 3,253 | | | 2,524 | | | 1,438 | | | 1,245 | | | 1,456 | |
Foreign exchange loss | | | (595 | ) | | (1,336 | ) | | (278 | ) | | (1,552 | ) | | (458 | ) |
Earnings (loss) before income taxes and amortization and write-down of goodwill | | | 10,720 | | | 989 | | | (9,410 | ) | | (39,891 | ) | | (73,785 | ) |
Income taxes | | | 2,585 | | | 2,623 | | | (986 | ) | | 15,059 | | | (25,451 | ) |
Earnings (loss) before amortization and write-down of goodwill | | | 8,135 | | | (1,634 | ) | | (8,424 | ) | | (54,950 | ) | | (48,334 | ) |
Amortization of goodwill | | | − | | | − | | | − | | | − | | | 38,021 | |
Write-down of goodwill | | | − | | | − | | | − | | | − | | | 222,169 | |
Net earnings (loss) for the year | | $ | 8,135 | | $ | (1,634 | ) | $ | (8,424 | ) | $ | (54,950 | ) | $ | (308,524 | ) |
Basic and diluted net earnings (loss) per share | | $ | 0.12 | | $ | (0.02 | ) | $ | (0.13 | ) | $ | (0.87 | ) | $ | (5.09 | ) |
Basic weighted average number of shares used in per share calculations (000’s) | | | 68,643 | | | 68,526 | | | 66,020 | | | 62,852 | | | 60,666 | |
Other consolidated statements of earnings data: | | | | | | | | | | | | | | | | |
Gross research and development | | $ | 19,488 | | $ | 15,878 | | $ | 15,668 | | $ | 17,133 | | $ | 17,005 | |
Net research and development | | $ | 15,404 | | $ | 12,190 | | $ | 12,390 | | $ | 15,879 | | $ | 12,782 | |
Amounts under U.S. GAAP | | | | | | | | | | | | | | | | |
Net earnings (loss) for the year | | $ | 8,135 | | $ | (2,920 | ) | $ | (9,571 | ) | $ | (48,201 | ) | $ | (382,893 | ) |
Basic and diluted net earnings (loss) per share | | $ | 0.12 | | $ | (0.04 | ) | $ | (0.14 | ) | $ | (0.77 | ) | $ | (6.31 | ) |
Basic weighted average number of shares used in per share calculations (000’s) | | | 68,643 | | | 68,526 | | | 66,020 | | | 62,852 | | | 60,666 | |
| | As at August 31, | |
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | (in thousands of US dollars) | |
Consolidated Balance Sheets Data: | | | | | | | | | | | |
Amounts under Canadian GAAP | | | | | | | | | | | |
Cash | | $ | 6,853 | | $ | 7,119 | | $ | 5,159 | | $ | 5,366 | | $ | 9,128 | |
Short-term investments | | | 104,437 | | | 104,883 | | | 83,969 | | | 52,010 | | | 40,553 | |
Working capital | | | 143,985 | | | 135,288 | | | 115,141 | | | 76,659 | | | 91,374 | |
Total assets | | | 219,159 | | | 190,957 | | | 172,791 | | | 146,254 | | | 177,926 | |
Long-term debt (excluding current portion) | | | 354 | | | 198 | | | 332 | | | 453 | | | 564 | |
Share capital | | | 148,921 | | | 521,875 | | | 521,733 | | | 492,452 | | | 489,611 | |
Shareholders’ equity | | $ | 196,234 | | $ | 173,400 | | $ | 157,327 | | $ | 129,826 | | $ | 165,406 | |
Amounts under U.S. GAAP | | | | | | | | | | | | | | | | |
Cash | | $ | 6,853 | | $ | 7,119 | | $ | 5,159 | | $ | 5,366 | | $ | 9,128 | |
Short-term investments | | | 104,437 | | | 104,883 | | | 83,969 | | | 52,010 | | | 40,553 | |
Working capital | | | 149,436 | | | 138,225 | | | 117,116 | | | 78,225 | | | 91,305 | |
Total assets | | | 212,702 | | | 182,852 | | | 164,758 | | | 138,020 | | | 161,314 | |
Long-term debt (excluding current portion) | | | 354 | | | 198 | | | 332 | | | 453 | | | 564 | |
Share capital | | | 598,421 | | | 597,664 | | | 596,309 | | | 565,291 | | | 560,943 | |
Shareholders’ equity | | $ | 189,777 | | $ | 165,295 | | $ | 149,294 | | $ | 121,592 | | $ | 150,999 | |
_________________________
YEARS ENDED AUGUST 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales.................................................. $ 97,216 $ 74,630 $ 61,930 $ 68,330 $ 146,013
Cost of sales (1) ..................................... 44,059 34,556 36,197 52,366 56,207
---------- ---------- ---------- ---------- ----------
Gross margin........................................... 53,157 40,074 25,733 15,964 89,806
---------- ---------- ---------- ---------- ----------
Operating expenses
Selling and administrative............................. 31,782 25,890 26,991 33,881 44,975
Net research and development........................... 12,190 12,390 15,879 12,782 13,601
Amortization of property, plant and equipment.......... 4,256 4,935 5,210 5,096 3,267
Amortization of intangible assets...................... 4,836 5,080 5,676 12,451 10,168
Impairment of long-lived assets and goodwill........... -- 620 7,427 23,657 --
Restructuring and other charges........................ 292 1,729 4,134 2,880 3,288
---------- ---------- ---------- ---------- ----------
Total operating expenses............................... 53,356 50,644 65,317 90,747 75,299
---------- ---------- ---------- ---------- ----------
Earnings (loss) from operations........................ (199) (10,570) (39,584) (74,783) 14,507
Interest and other income.............................. 2,524 1,438 1,245 1,456 6,098
Foreign exchange gain (loss) .......................... (1,336) (278) (1,552) (458) 3,327
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes and amortization
and write-down of goodwill......................... 989 (9,410) (39,891) (73,785) 23,932
Income taxes........................................... 2,623 (986) 15,059 (25,451) 8,150
---------- ---------- ---------- ---------- ----------
Earnings (loss) before amortization and write-down of
goodwill......................................... (1,634) (8,424) (54,950) (48,334) 15,782
Amortization of goodwill...............................
-- -- -- 38,021 31,076
Write-down of goodwill.................................
-- -- -- 222,169 --
---------- ---------- ---------- ---------- ----------
Net loss for the year.................................. $ (1,634) $ (8,424) $ (54,950) $ (308,524) $ (15,294)
========== ========== ========== ========== ==========
Basic and diluted net loss per share................... $ (0.02) $ (0.13) $ (0.87) $ (5.09) $ (0.29)
Basic weighted average number of shares used in per
share calculations (000's)......................... 68,526 66,020 62,852 60,666 53,014
OTHER CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Gross research and development......................... $ 15,878 $ 15,668 $ 17,133 $ 17,005 $ 17,601
Net research and development........................... $ 12,190 $ 12,390 $ 15,879 $ 12,782 $ 13,601
AMOUNTS UNDER U.S. GAAP
Net loss for the year.................................. $ (2,920) $ (9,571) $ (48,201) $ (382,893) $ (29,478)
Basic and diluted net loss per share................... $ (0.04) $ (0.14) $ (0.77) $ (6.31) $ (0.56)
Basic weighted average number of shares used in per
share calculations (000's)......................... 68,526 66,020 62,852 60,666 53,014
AS AT AUGUST 31,
-----------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS)
CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash................................................... $ 7,119 $ 5,159 $ 5,366 $ 9,128 $ 7,729
Short-term investments................................. 104,883 83,969 52,010 40,553 66,861
Working capital........................................ 135,288 115,141 76,659 91,374 130,289
Total assets........................................... 190,957 172,791 146,254 177,926 442,577
Long-term debt (excluding current portion) ............ 198 332 453 564 664
Share capital.......................................... 521,875 521,733 492,452 489,611 429,995
Shareholders' equity................................... $ 173,400 $ 157,327 $ 129,826 $ 165,406 $ 414,805
AMOUNTS UNDER U.S. GAAP
Cash................................................... $ 7,119 $ 5,159 $ 5,366 $ 9,128 $ 7,729
Short-term investments................................. 104,883 83,969 52,010 40,553 66,861
Working capital........................................ 138,225 117,116 78,225 91,305 129,987
Total assets........................................... 182,852 164,758 138,020 161,314 499,436
Long-term debt (excluding current portion) ............ 198 332 453 564 664
Share capital.......................................... 597,664 596,309 565,291 560,943 498,121
Shareholders' equity................................... $ 165,295 $ 149,294 $ 121,592 $ 150,999 $ 471,117
- ------------------------
(1) | The cost of sales is exclusive of amortization, shown below.separately. Includes inventory write-offs of nil, nil, nil, $4,121,000 $18,463,000 and nil$18,463,000 for the years ended August 31, 2006, 2005, 2004, 2003 2002 and 2001,2002, respectively, and an unusual gain of $473,000 for the year ended August 31, 2003. |
3
Not Applicable.
Not Applicable.
We must continue to overcome significant competition in our targeted industries in order to gain market share and achieve our growth strategy.
The market for our primary business activity -─ namely designing, manufacturing, sellingmarketing and marketingselling telecommunications test and measurement equipment -─ is rapidly evolving and is marked by intense competition and technical innovation. Likewise, the market for our selected life sciences and industrial solutions is very competitive. We anticipate the pace of change to remain high or even accelerate for our targeted industries in the future. We might see the emergence of new competitors or the consolidation of current competitors, as the markets for telecommunications test and measurement equipment as well as for life sciences and industrial solutions might evolve in response to technical innovations and economic conditions. SurpassingAchieving our key performance indicator of 15%20% sales growth in fiscal 20062007 will largely depend on our ability to gain market share by increasing sales of current products toat existing accounts, expanding into new accounts, introducing new products and product enhancements, and exploiting new market opportunities.
During the past year,couple of years, the telecommunications test and measurement industry has witnessed consolidation. Anritsu Corporation announced the acquisition of NetTest A/S in August 2005 and JDS Uniphase Corporation (JDSU) completed its acquisition of Acterna Corporation during the same month. Agilent Technologies Inc., meanwhile, announced it was divesting divested itself of its semiconductor division to refocus its efforts on test and measurement. With the exception of JDSU (which also sells optical components), these competitors are global test and measurement vendors who complement their broad range of products with telecommunications test and measurement equipment. Similarly, ANDO CorporationSpirent plc, Tektronix, Inc. and Tektronix, Inc.Yokagawa are global test and measurement vendors who compete against us. Other competitors, such as Digital Lightwave Inc., Fluke Networks, an operating division within Danaher Corporation, IXIA, and Sunrise Telecom Inc., compete against us in niche markets. Some competitors in both groups may have greater financial, technical and/or marketing resources than us. Consequently, they may be able to devote greater resources to the development, marketing, manufacturing, selling and support of their products in order to capture market share.
Competitors also may be better positioned than us to capture market share or to acquire companies and new technologies that would potentially displace our products or render them obsolete. We cannot predict whether current or future competitors will develop or market products that offer higher performance, more features, or are more cost-effective than our current or future products. To remain competitive and achieve our growth strategy, we must increase our sales and develop cost-effective products and product enhancements that offer higher performance and more functionality, in current and new sectors, so that we can increase our market share. Our failure to do so may harm our business, results of operations and financial condition.
4
FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE CANADIAN DOLLAR,
Fluctuations in the exchange rates between the Canadian dollar, US DOLLAR AND OTHER CURRENCIES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
dollar and other currencies may adversely affect our operating results.
Most of our sales are denominated in currencies other than the Canadian dollar (principally US dollars and Euros). However, a large portion of our operating expenses and capital expenditures are denominated in Canadian dollars. As a result, even though we manage to some extent our exposure to currency riskrisks with forward exchange contracts and certain operating expenses denominated in currencies other than the Canadian dollar, we are exposed to fluctuations in the exchange rates between the Canadian dollar on the one hand and the US dollar and the Euro on the other. As of October 31, 2005,2006, the Canadian dollar increased approximately 7.5%5.1% versus the US dollar and decreased 1.6%1.3% versus the Euro, compared to October 31, 2004.2005. Any increase in the value of the Canadian dollar relative to other currencies, especially the US dollar, could have a material adverse effect on our operating results and provide strategic advantages to our competitors.
A CUSTOMER HAS ACCOUNTED FOR A HIGH PERCENTAGE OF OUR SALES IN THE
PAST TWO YEARS, AND ANY ADVERSE FACTOR AFFECTING THIS CUSTOMER OR OUR
RELATIONSHIP WITH THIS CUSTOMER COULD CAUSE OUR SALES TO DECREASE.
One of our customers has accounted for a high percentage of our sales in the past few years, and any adverse factor affecting this customer or our relationship with this customer could cause our sales to decrease.
Although our customer base has been well diversified on a historical basis, a Tier-1 carrier in the US accounted for 23.3%13.8% of our sales in fiscal 2006, 23.3% in 2005 and 13.8% in fiscal 2004. Even if this customer has a supply contract with us, it could change its purchasing practice, force us to renegotiate prices and is not obligated to purchase a specific amount of products from us or provide us with binding purchase forecasts for any period. In addition, our customers typically purchase our products under individual purchase orders and may cancel or defer purchases on short notice without significant penalties.
The loss of such a customer or the reduction, delay, or cancellation of orders from this customer or other significant customers could cause our sales and, therefore, net earnings to decline.
RECENT SIGNS OF MARKET STABILITY ARE NOT NECESSARILY INDICATIVE OF
LONG-TERM GROWTH. IF MARKET CONDITIONS SIGNIFICANTLY DETERIORATE OR IF OPTICAL
FIBER IS REPLACED BY ANOTHER MEDIUM AS THE PRIMARY SOLUTION FOR
BANDWIDTH-INTENSIVE APPLICATIONS, DEMAND FOR OUR PRODUCTS MAY DECREASE, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Recent signs of market stability are not necessarily indicative of long-term growth. If market conditions significantly deteriorate or if we fail to implement adequate measures on a timely basis to align our cost structure to such conditions, it could have a material adverse effect on our business, results of operations and financial condition.
Notwithstanding recent signs of market stability and generally increasing demand for our products, average selling prices may decline and revenue and profitability targets may be subject to uncertainty and variability. Any downturn in our markets or in general economic conditions,
additional bankruptcies and decreased capital expenditures,, or if
optical
fiber is replaced by a higher-performance medium, would result in a reduction
in demand forwe fail to adjust our
products as well as low visibility, andcost structure accordingly, could harm our consolidated financial condition, results of operations
cash flows and
stock
price.
WE HAVE FACED PRICING PRESSURE ON OUR EXISTING PRODUCTS AND EXPECT
THAT THIS PRESSURE WILL CONTINUE. IF WE DO NOT CONTROL OUR MANUFACTURING COSTS
OR INTRODUCE NEW PRODUCTS WITH HIGHER MARGINS, OUR GROSS MARGINS MAY DECREASE
AND OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED.
5
business.
We have faced pricing pressure on our existing products and expect that this pressure will continue. If we do not control our manufacturing costs or introduce new products with higher margins, our gross margins may decrease and our operating results may be adversely affected.
We continued implementing measures to protect our gross margin, which reached 54.7%55.3% of sales in fiscal 20052006 compared to 53.7%54.7% in fiscal 2004,2005, despite the negative impact of the exchange rate between US and Canadian currencies. However, increased competitiveness in the telecommunications test and measurement industry will likely result in continuing downward pressure on average selling prices, which may in turn negatively affect our gross margins. Pricing pressure can result from a number of factors such as:
o Increased competition for business;
o Reduced demand;
o
· | Increased competition for business; |
· | Limited number of potential customers; |
· | Competition from companies with lower production costs, including companies operating in lower cost environments; |
· | Introduction of new products by competitors; |
· | Greater economies of scale for higher-volume competitors; |
· | Large customers, who buy in high volumes, can exert substantial negotiating leverage over us; |
· | Resale of used equipment; and |
· | Equipment sales resulting from manufacturing and rental company bankruptcies. |
In addition, gross margins may also be negatively affected by increased costs of raw materials as well as obsolescence and excess costs, product mix and under-absorption of fixed manufacturing costs.
As pricing pressure will likely continue to affect our existing products, we may have to increase the number of units sold to maintain our existing sales levels. If we are unable to increase our sales levels, lower our manufacturing costs, or introduce new products with higher margins, our gross margins may decline and our operating results may suffer.
OUR PRODUCTS MAY HAVE UNFORESEEN DEFECTS THAT COULD HARM OUR
REPUTATION, IMPEDE MARKET ACCEPTANCE OF OUR PRODUCTS AND NEGATIVELY IMPACT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our products may have unforeseen defects that could harm our reputation, impede market acceptance of our products and negatively impact our business, results of operations and financial condition.
As a result of their complexity, our products may contain undetected software or hardware defects, inaccurate calibration or compatibility problems or regulatory compliance issues, particularly when they are first introduced or when new versions are released. There can be no assurance that, despite our testing, defects will not be found in new products after they have been fully deployed and operated under peak stress conditions or that customized products meet customer sign-off acceptance requirements. If we are unable to fix defects or other problems or meet custom requirements, we could experience, among other things:
o Costly repairs;
o Product returns or recalls;
o Damage to our brand reputation;
o Loss of customers, failure to attract new customers or achieve market
acceptance;
o Diversion of development and engineering resources;
o Legal actions by our customers, including claims for consequential
damages and loss of profits; and
o Legal actions by governmental entities, including actions to impose
product recalls and/or forfeitures.
6
· | Product returns or recalls; |
· | Damage to our brand reputation; |
· | Loss of customers, failure to attract new customers or achieve market acceptance; |
· | Diversion of development and engineering resources; |
· | Legal actions by our customers, including claims for consequential damages and loss of profits; and |
· | Legal actions by governmental entities, including actions to impose product recalls and/or forfeitures. |
The occurrence of any one or more of the foregoing could seriously harm our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO MAKE THE NECESSARY ACQUISITIONS NEEDED FOR THE
DEVELOPMENT OF OUR BUSINESS AND ANY ACQUISITION WE MAKE COULD DISRUPT OUR
BUSINESS AND HARM OUR FINANCIAL CONDITION.
We may not be able to make the necessary acquisitions needed for the development of our business or, if we do make such acquisitions, we cannot assure you that we will successfully integrate the businesses, products, technologies and personnel. In addition, such acquisitions could distract management’s attention from our day-to-day business and operations. Ultimately, the failure to make strategic acquisitions or the inability to carry out effective integrations could disrupt our overall business and harm our financial condition.
We intend to carefully seek businesses that meet stringent criteria, products and technologies that are complementary to ours or that will expand our markets. There can be no assurance that we will ultimately make any such acquisition. Our competitors may be in a better position to acquire the same businesses, products and technologies that we wish to acquire. In addition, our fluctuating stock price or our cash position at the time of an acquisition may affect our ability to complete such an acquisition.
We have made strategic acquisitions in the past and we intend to continue making acquisitions of businesses, products and technologies as part of our overall growth strategy. In the event of any future acquisition, we could:
o Issue shares that would dilute individual shareholder percentage
ownership;
o Incur debt;
o Assume liabilities and commitments;
o
· | Issue shares that would dilute individual shareholder percentage ownership; |
· | Assume liabilities and commitments; |
· | Incur significant expenses related to amortization of additional intangible assets; |
· | Incur significant impairment losses of goodwill and intangible assets related to such acquisitions; and |
· | Incur losses from operations. |
These acquisitions also involve numerous risks, including:
o
· | Risk of not realizing the expected benefits or synergies of such acquisitions; |
· | Problems integrating the acquired operations, technologies, products and personnel; |
· | Risks associated with the transfer of acquired know-how and technology; |
· | Unanticipated costs or liabilities; |
· | Diversion of management’s attention from our core business; |
· | Adverse effects on existing business relationships with suppliers and customers; |
· | Risks associated with entering markets in which we have no or limited prior experience; and |
· | Potential loss of key employees, particularly those of acquired organizations. |
Our quarterly revenues and operating results are subject to significant fluctuations and you should not rely on them as an indication of not realizing the expected benefits or synergies of such
acquisition;
o Problems combining the acquired operations, technologies, products
and personnel;
o Risks associated with the transfer of acquired know-how and
technology;
o Unanticipated costs or liabilities;
o Diversion of management's attention from our core business;
o Adverse effects on existing business relationships with suppliers and
customers;
o Risks associated with entering markets in which we have no or limited
prior experience; and
o Potential loss of key employees, particularly those of acquired
organizations.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY INTEGRATE THE
BUSINESSES, PRODUCTS, TECHNOLOGIES OR PERSONNEL OF OUR PAST AND FUTURE
ACQUISITIONS, WHICH MAY HARM OUR BUSINESS.
Mergers and acquisitions of high-technology businesses are inherently
risky. For our past and future transactions to be successful, we must
appropriately integrate the businesses, products, technologies and personnel
already acquired - as well as those of any future acquisitions - with our own
business, product portfolios and personnel in a manner that anticipates or
responds to new technological developments and customer requirements on a
timely basis. In addition, we must coordinate the operations and product
portfolios of newly acquired companies with our own and manage all aspects of
geographically dispersed operations. Integration requires the dedication of
management resources, which may distract their attention from our day-to-day
business and operations. If the integration process takes longer than expected
7
or if we fail to integrate the businesses, we may not be able to realize the
benefits and synergies that we expect from these transactions and may be
required to shut down, rationalize or exit such activities.
All of these factors could materially harm our business, results of
operations and financial condition.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE SUBJECT TO
SIGNIFICANT FLUCTUATIONS AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF
OUR FUTURE PERFORMANCE.
performance.
Our sales and operating results have fluctuated from quarter to quarter in the past and significant fluctuations may occur in the future. In addition, our sales and operating results generally depend on the volume and timing of the orders we receive from customers as well as our ability to fulfill received orders. Our operating expenses, which include selling and administrative, research and development, selling and administrative, and amortization expenses, are relatively fixed in the short term. If we sell fewer products than anticipated, if there is a delay in the launch of new products, or if prices for our products decline, we may not be able to quickly reduce our operating expenses in response to lower sales. Factors that could affect the amount and timing of our sales, and cause quarterly fluctuations in our revenue and operating results include:
o Length of the product sales cycle for certain products, especially
those that are higher priced and more complex;
o Timing of product launches and market acceptance of new products for
us as well as our competitors;
o Our ability to sustain product volumes and high levels of quality
across all product lines;
o Timing of shipments for large orders;
o Effect of potential seasonality in sales; and
o Losing key accounts and not successfully develop new ones.
· | Length of the product sales cycle for certain products, especially those that are higher priced and more complex; |
· | Timing of product launches and market acceptance of new products for us as well as our competitors; |
· | Our ability to sustain product volumes and high levels of quality across all product lines; |
· | Timing of shipments for large orders; |
· | Effect of seasonality on sales and bookings; and |
· | Losing key accounts and not successfully developing new ones. |
Our sales and operating results could also be affected by the following factors, some of which we have little or no control over:
o Fluctuating demand for telecommunications test and measurement
equipment as well as life sciences and industrial solutions;
o Changes in the capital spending and operating budgets of our
customers, which may cause seasonal or other fluctuations in product
mix, volume, timing and number of orders we receive from our
customers;
o Order cancellations or rescheduled delivery dates;
o Pricing changes by our competitors or suppliers;
o Customer bankruptcies and difficulties in collecting accounts
receivable;
o Restructuring and impairment charges; and
o General economic conditions.
· | Fluctuating demand for telecommunications test and measurement equipment as well as life sciences and industrial solutions; |
· | Changes in the capital spending and operating budgets of our customers, which may cause seasonal or other fluctuations in product mix, volume, timing and number of orders we receive from our customers; |
· | Order cancellations or rescheduled delivery dates; |
· | Pricing changes by our competitors or suppliers; |
· | Customer bankruptcies and difficulties in collecting accounts receivable; |
· | Restructuring and impairment charges; and |
· | General economic conditions. |
In addition, we may in the future choose to reduce prices, increase spending, or modify our product portfolio in response to actions by competitors or as an effort to pursue new market opportunities. These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters. Due to these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.
8
IF WE ARE UNABLE TO ADAPT TO CURRENT AND FUTURE CHANGES IN TECHNOLOGY
OR IF WE ARE UNABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS,
OUR PRODUCTS MAY BECOME OBSOLETE, WHICH COULD PREVENT US FROM ACHIEVING OUR
GROWTH STRATEGY AND ADVERSELY AFFECT OUR OPERATING RESULTS.
If we are unable to adapt to current and future changes in technology or if we are unable to introduce new and enhanced products on a timely basis, our products may become obsolete, which could prevent us from achieving our growth strategy and adversely affect our operating results.
The industries that we target are characterized by rapidly evolving technology and industry standards that result in frequent new product introductions. Any failure by us to anticipate or respond to new technological developments, customer requirements or evolving standards could have a material adverse effect on our business, results of operations and financial condition. The development of proprietary technology entails significant technical and business risks and requires substantial expenditures and lead-time. The success of our new product introductions will depend on several factors, including our ability to:
o Properly identify customer needs;
o Innovate and develop new products;
o Gain timely market acceptance for new products;
o Manufacture and deliver our new products on time and in sufficient
volume;
o Price our products competitively;
o Continue investing in our research and development program; and
o Anticipate competitors' announcements of new products.
· | Properly identify and anticipate customer needs; |
· | Innovate and develop new products; |
· | Gain timely market acceptance for new products; |
· | Manufacture and deliver our new products on time and in sufficient volume; |
· | Price our products competitively; |
· | Continue investing in our research and development programs; and |
· | Anticipate competitors’ announcements of new products. |
Failure to do the above could be exploited by our competitors. If we lose market share as a result of lapses in our product development, our business would suffer.
IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES ASSOCIATED WITH
OPERATING INTERNATIONALLY, THE EXPECTED GROWTH OF OUR BUSINESS MAY BE IMPEDED
AND OUR OPERATING RESULTS MAY BE AFFECTED.
If we fail to adapt appropriately to the challenges associated with operating internationally, the expected growth of our business may be impeded and our operating results may be affected.
For the fiscal year ended August 31, 2005,2006, customers outside of the United States and Canada accounted for 35.1%46.8% of our sales. Our international sales will be limited if we cannot establish and maintain relationships with international distributors, set up additional foreign operations, expand international sales channel management, hire additional personnel, develop relationships with international service providers and operate adequate after-sales support internationally. Even if we are able to successfully continue our international operations, we may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including:
o
· | Challenges in staffing and managing foreign operations due to the limited number of qualified candidates, employment laws and practices in foreign countries, any of which could increase the cost and reduce the efficiency of operating in foreign countries; |
· | Our ability to comply with import/export, environmental and other trade compliance regulations of the countries in which we do business, together with unexpected changes in such regulations; |
· | Adhering to laws, regulations and contractual obligations relating to customer contracts in various countries; |
· | Difficulties in establishing and enforcing our intellectual property rights; |
· | Maintaining a competitive list of distributors for indirect sales; |
· | Tariffs and other trade barriers; |
· | Economic instability in foreign markets; |
· | Wars, acts of terrorism and political unrest; |
· | Language and cultural barriers; |
· | Integration of foreign operations; |
· | Potential foreign and domestic tax consequences; |
· | Technology standards that differ from those on which our products are based, which could require expensive redesign and retention of personnel familiar with those standards; |
· | Longer accounts receivable payment cycles and possible difficulties in collecting payments which may increase our operating costs and hurt our financial performance; and |
· | Certification requirements. |
Any of these factors could harm our international operations and negatively affect our business, results of operations and financial condition. The recurrence of weakness in these economies or of weakness in other foreign economies could have a significant negative effect on our future operating results.
OUR PRODUCTS AND ORGANIZATION MAY BE REQUIRED TO CONFORM TO NEW AND
UNFORESEEN REGULATORY REQUIREMENTS THAT COULD INCREASE OUR COSTS AND REDUCE
OUR MARKET SHARE.
Our products are designed to conform to the regulatory requirements
We may make misjudgments in our strategic planning that could have material adverse effects on our business, results of the countries in which they are marketed. In the event that technical
regulations applicable in a given country are in any way changed - such as
those prescribed by the European Union for the disposal of electricaloperations and electronic equipment (Waste Electrical and Electronic Equipment or WEEE) - we
may be required to modify, redesign or recall some or all of our products in
order to continue participating in that market. These changes may prove costly
and time-consuming and could create technical advantages for products marketed
by our competitors. We cannot assure that our products will continue to meet
evolving standards in the future. In addition, failure to comply or delays in
compliance with such regulatory requirements, or delays in receipt of
certifications, could delay the introduction of new products or cause our
existing products to become obsolete. We are also subject to environmental
statutes and regulations. We might not be able to adopt our products in a
timely matter to fully comply with all environmental requirements.
WE MAY MAKE MISJUDGMENTS IN OUR STRATEGIC PLANNING THAT COULD HAVE
MATERIAL ADVERSE EFFECTS ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
financial condition.
We devise an annual strategic business plan, which is prepared by management and approved by our Board of Directors. This strategic plan, reviewed by management on a regular basis, is mainly based on market research and analysis related to future market trends and demands. In our strategic plans, we have made and will continue to make judgments based on our analysis of future market trends and
demands whichrequirements. These decisions may involve
for example,
substantial investments
by us in the development of new product lines,
or the
diversification of our
activities,business on a geographic basis, as well as expansion into new market segments — either organically or through acquisitions.
WE HAVE ADOPTED MEASURES AND MAY ADOPT ADDITIONAL MEASURES THAT ALIGN
OUR COST STRUCTURE TO EXISTING MARKET CONDITIONS. IF DEPRESSED MARKET
CONDITIONS RETURN, IT COULD HAVE MATERIAL ADVERSE LONG-TERM EFFECTS ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We
implemented a number of restructuring plans during the telecom
downturn to re-alignmay make misjudgments in our
cost structure to existing market conditions. Such
plans and, if needed, subsequent plansstrategic planning that could have material adverse
long-term effects on our business, results of operations and financial
condition if we
deplete our pool of highly qualified personnel or are unable to retain key
10
personnel; if we are unable to sustain sufficient research and development
efforts for the launch of new products; if we are unablecondition.
If customers fail to meet the needs of
our customers; if we are incapable of ramping up manufacturing when market
conditions improve; and if we do not ensure a smooth transition in the
consolidation of our operations. In addition, if we failtheir financial commitments to adopt and
implement adequate and pertinent measures on a timely basis to align our cost
structure to further possibly declining market conditions,us, it could have a material adverse long-term effect on our business, results of operations and financial condition.
IF CUSTOMERS FAIL TO MEET THEIR FINANCIAL COMMITMENTS TO US, IT COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Some of our customers have experienced, or may experience, cash flow problems. Consequently, we may have customers who delay payments or may not be able to meet their financial commitments to us. Furthermore, they may not order as many products from us as originally forecasted or they may cancel their orders outright. The failure of customers to order products would result in decreased revenues for us. We attempt to reduce the possibility of large outstanding bills remaining unpaid by carrying out credit checks on customers and by having a diversified customer base. However, there is no assurance that such measures will reduce our exposure to customer credit risks. If customers fail to meet their financial commitments to us, it could have a material adverse effect on our business, results of operations and financial condition.
AS OUR CUSTOMERS CONSOLIDATE, THEY MAY REDUCE OR HALT PURCHASES OF
OUR PRODUCTS, WHICH WOULD HARM OUR SALES AND OPERATING RESULTS.
As our customers consolidate, they may reduce or halt purchases of our products, which would harm our sales and operating results.
Consolidation in the telecommunications industry could reduce the number of customers to which our products are sold. Some of our customers have been subject to consolidation and could obtain products from a vendor other than us, or demand more favorable terms and conditions from us, which would harm our sales and operating results. In addition, some customers may merge with or acquire our competitors and discontinue their relationships with us.
IF WE FAIL TO PREDICT OUR SUPPLY REQUIREMENTS ACCURATELY, WE WILL
HAVE EXCESS INVENTORY OR INSUFFICIENT INVENTORY, EITHER OF WHICH COULD CAUSE
US TO INCUR ADDITIONAL COSTS AND/OR EXPERIENCE MANUFACTURING DELAYS.
If we fail to predict our supply requirements accurately, we will have excess inventory or insufficient inventory, either of which could cause us to incur additional costs and/or experience manufacturing delays.
We provide non-binding forecasts of our requirements to some of our suppliers up to six months prior to scheduled delivery of products to our customers. If we overestimate our forecasted requirements, we may have excess inventory, which could harm our relationships with our suppliers due to reduced future orders, increase our costs and require inventory write-offs. If we underestimate our requirements, we may have an inadequate inventory of parts, which could interrupt manufacturing of our products and result in shipment delays. In addition, lead times for materials and parts that we order may be long and depend on factors such as the procedures of, or supply terms with, a specific supplier and demand for each part at a given time.
WE DEPEND ON A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS FOR
SOME KEY COMPONENTS AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE
TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
11
We depend on a single supplier or a limited number of suppliers for some key components and materials in our products, which makes us susceptible to supply shortages or price fluctuations that could adversely affect our operating results.
We depend on a limited number of suppliers for some of the parts used to manufacture our products for which alternative sources may not be readily available. In addition, all our orders are placed through individual purchase orders and, therefore, our suppliers may stop supplying parts to us at any time. The reliance on a single source or limited number of suppliers could result in increased costs, delivery problems and reduced control over product pricing and quality. Financial difficulties of suppliers could also affect our ability to obtain necessary parts in a timely manner. Any interruption or delay in the supply of any of these parts could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Furthermore, the process of qualifying a new manufacturer for complex parts, designed to our specifications, such as our optical and mechanical parts, is lengthy and would consume a substantial amount of time of our technical personnel and management. If we were required to change manufacturersa supplier in a short period of time, our business would be disrupted. In addition, we may be unsuccessful in identifying a new manufacturersupplier capable of meeting and willing to meet our needs on terms that we would find acceptable. Consolidation involving suppliers could further reduce the number of alternatives available to us and affectincrease the cost of parts, which would make our products less competitive and result in lower margins.
RECENTLY ENACTED REGULATORY CHANGES MAY CAUSE US TO INCUR INCREASED
COSTS.
Recently enacted regulatory changes caused us to incur increased costs.
Recently enacted changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, will
increaseincreased our expenses as we evaluate the implications of new rules and devotedevoted resources to respond to these new requirements. In particular, we expect to
incurincurred additional selling and general administrative expenses as we implementto become compliant with Section 404 of the Sarbanes-Oxley Act, which requires management to report on and our independent external auditor to attest to, our internal controls over financial reporting. Compliance with these new rules could also result in continued diversion of management'smanagement’s time and attention, which could prove to be disruptive to normal business operations. Furthermore, the impact of these changes could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers, which could harm our business.
In March 2005, foreign issuers, such as us, were given an extra
year's grace by
We require employees and management resources who are knowledgeable about the Securities and Exchange Commission to comply with Section
404 of Sarbanes-Oxley, which means August 31, 2006 for EXFO. While we
currently anticipate that we will complete all such actions on time and
according to rules, we cannot at this time provide absolute assurance that all
such actions will be timely completed and in compliance with rules, with the
possible consequence that our external auditors may not be able to provide an
unqualified attestation report under Section 404 of Sarbanes-Oxley, as
amended.
WE ARE SUBJECT TO LAWS, REGULATIONS AND CONTRACTUAL OBLIGATIONS AND
REQUIREMENTS RELATING TO OUR CUSTOMER CONTRACTS, AND OUR FAILURE TO ADDRESS
THESE LAWS, REGULATIONS, OBLIGATIONS AND REQUIREMENTS OR COMPLY THEREWITH
COULD HARM OUR BUSINESS.
We have agreements relating to the salespecialized nature of our products to our
customers and, as a result,business. If we are subjectunable to various statutesattract and regulationsretain sufficient numbers of highly skilled technical, sales, marketing, senior management and contractual obligationsother personnel, our operations and requirements. We are also subject to
environmental statutes and regulations. We may also be subject to
investigation for compliance with such statutes, regulations, obligations and
requirements. Any failure to comply therewith could harm our business.
THE PRICE OF OUR SECURITIES IS VOLATILE AND MAY DECLINE.
12
The market price of our securities has been, and is likely in the
future to be, subject to substantial and rapid fluctuations. Such fluctuations
may be due to factors specific to us, such as changes in our operatingfinancial results contract wins with major customers or new product introductions, or
caused by our competitors, changes in analysts' ratings, or the liquidity of
our stock. Fluctuations in stock price may also be due to factors related to
the global telecommunications industry or the securities markets in general.
These fluctuations have often been unrelated or disproportionate to the
operating performance of the specific companies whose stocks are traded. These
broad market and industry factors may have a material adverse effect on the
market price of our securities, regardless of our actual operating
performance. Shareholders should be willing to incur the risk of such
fluctuations.
WE REQUIRE EMPLOYEES WHO ARE KNOWLEDGEABLE ABOUT THE SPECIALIZED
NATURE OF OUR BUSINESS. IF WE ARE UNABLE TO ATTRACT AND RETAIN SUFFICIENT
NUMBERS OF HIGHLY SKILLED TECHNICAL, SALES, MARKETING, SENIOR MANAGEMENT AND
OTHER PERSONNEL, OUR OPERATIONS AND FINANCIAL RESULTS WILL SUFFER.
will suffer.
Due to the specialized nature of our business, we are highly dependent on the continued service of and on the ability to attract qualified engineering, sales, marketing, senior management and other personnel. If we are unable to attract and retain such qualified personnel, it could have a material adverse effect on our business, results of operations and financial condition.
We must also provide significant training for our employee base due to the highly specialized nature of telecommunications test and measurement as well as life sciences and industrial technologies. Our current personnel may be inadequate and we may fail to assimilate and train new employees. Highly skilled employees with the education and training that we require - especially employees with significant experience and expertise, international business development, product management, sales, engineering and operation - may be difficult to find. Once trained, our employees may also be hired by our competitors or leave the organization.
OUR BUSINESS STRATEGY AND ABILITY TO MAINTAIN OUR COMPETITIVE
POSITION DEPEND ON THE CONTINUED SERVICES OF GERMAIN LAMONDE, OUR CHAIRMAN OF
THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER. HIS LOSS COULD ADVERSELY
AFFECT OUR BUSINESS.
Our abilityintellectual property and proprietary technology are important to maintainthe continued success of our business. Our failure to protect this proprietary technology may significantly impair our competitive position depends to a
significant extent on the efforts and abilities of Germain Lamonde, our
Chairman of the Board, President and Chief Executive Officer. His managerial,
technical and other services could be difficult to replace. We do not have
"key person" life insurance policies covering any employee.
OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY ARE IMPORTANT TO
THE CONTINUED SUCCESS OF OUR BUSINESS. OUR FAILURE TO PROTECT THIS PROPRIETARY
TECHNOLOGY MAY SIGNIFICANTLY IMPAIR OUR COMPETITIVE POSITION.
position.
Our success and ability to compete depend to a significant extent on our proprietary technology, since that is how we attempt to keep others from using the innovations that are central to our existing and future products. We currently hold
3227 actively-maintained granted patents from the U.S.
(including one “design” patent),
six Canadian, six Europeaneight from Canada, two from Germany, two from the United Kingdom, two from France, and one
Chinese-issued
patents and havefrom China. In addition, EXFO has 15
U.S.,US patent applications in process, 14 Canadian
patents applications in process, two from China, one from Germany and
one Europeanthree Patent Cooperation Treaty patent applications
pending, along with two patent applications pending under the Patent
Cooperation.pending. We also rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures, contractual provisions and license agreements to protect our proprietary technology. We may have to engage in litigation in order to protect our patents and other intellectual property
rights, or to determine the validity or scope of the proprietary rights of others. This kind ofSuch litigation can be time-consuming and expensive, regardless of whether we win or lose. Because it is critical to our success that we are able to prevent competitors from copying our innovations, we intend to continue to seek patent andprotection or maintain trade secret protectionsecrets for our technologies.
The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants, distributors and third parties. However, these agreements may be breached or otherwise not effective and we may not have adequate remedies for any breach or shortfall of these agreements. In any case, others may come to know about our trade secrets through a variety of methods. In addition, the laws of some territories in which we sell our products may not protect our intellectual property rights to the same extent as do the laws of Canada and the United States.
Despite our efforts, our
Our intellectual property rights, particularly our existing or future patents, may be invalidated, circumvented, challenged or required to be licensed to others. Furthermore, others may develop technologies that are similar or superior to our technology, duplicate or reverse engineer our technology, or design around the patents owned or licensed by us. We cannot be sure that the steps that we take to protect our technology will prevent misappropriation or infringement. If we fail to protect our technology so that others may copy or use it, we will be less able to differentiate our products and our sales will decline.
OTHERS MAY CLAIM THAT OUR PRODUCTS INFRINGE UPON THEIR INTELLECTUAL
PROPERTY RIGHTS, OR THEY MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY
EXPEND SIGNIFICANT RESOURCES ENFORCING OR DEFENDING OUR RIGHTS OR SUFFER
COMPETITIVE INJURY.
Others may claim that our products infringe upon their intellectual property rights, or they may infringe our intellectual property, and we may expend significant resources enforcing or defending our rights or suffer competitive injury.
Litigation regarding intellectual property rights is common in the technology industry and, for this reason we expect that third-party infringement claims involving technologies may increase. If an infringement claim is filed against us, we may be prevented from using some of our technologies and may incur significant costs to resolve the claim. Conversely, we may be required to spend significant resources to monitor and police our intellectual property rights.
We could incur substantial costs in defending ourselves and our customers against infringement claims or in bringing infringement claims against others. Litigation could also adversely affect sales of the challenged product or technology and divert the efforts of our management and technical personnel. In the event of an infringement claim, we may be required to obtain one or more licenses from third parties. We cannot assure you that we, or our customers, could obtain necessary licenses from third parties at a reasonable cost or at all. If we fail to obtain a license where one is required, we could incur substantial liabilities and be forced to suspend the marketing of the challenged products.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL LIABILITY.
Our insurance may not be sufficient to cover all potential liability. A SUCCESSFUL CLAIM EXCEEDING OUR POLICY LIMITS WILL REDUCE OUR CASH POSITION,
INCREASE OUR EXPENSES AND HAVE A NEGATIVE EFFECT ON OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION.
successful claim exceeding our policy limits will reduce our cash position, increase our expenses and have a negative effect on our business, operating results and financial condition.
Our products are designed to help network service providers, cable operators and manufacturers of optical networks and components ensure network reliability. We also leverage our core telecom technologies for life sciences
14
and industrial applications. The failure of our products to perform to client expectations could give rise to product liability and warranty claims. We carry insurance for product liability and take accounting reserves for warranty claims that we consider adequate in view of industry practice.
In addition, we may face other types of claims by third parties in relation to the conduct of our business; a successful claim against us for an amount exceeding our policy limits would force us to use our own resources to pay the claim, which could result in a reduction of our cash available for other uses, increase our expenses and have a negative effect on our business, results of operations and financial condition.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT
MAY SUBSTANTIALLY INCREASE OUR COSTS AND HARM OUR BUSINESS.
We may become involved in costly and time-consuming litigation that may substantially increase our costs and harm our business.
We may from time to time become involved in various lawsuits and legal proceedings. For example, we are a defendant in a putative securities class action filed in the United States District Court for the Southern District of New York involving approximately 300 other issuing companies. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations or financial condition. Any litigation to which we are subject could require significant involvement of our senior management and may divert management attention from our business and operations.
IF WE SUFFER LOSS TO OUR FACTORIES OR FACILITIES, OUR OPERATIONS
COULD BE SERIOUSLY HARMED.
If we suffer loss to our factories or facilities, our operations could be seriously harmed.
Our factories and facilities are subject to catastrophic loss due to fire, vandalism, terrorism or other natural or man-made disasters. We do not have redundant multiple site capacity and if any of our facilities or factories were to experience a catastrophic loss, it would disrupt our operations, delay production, shipments and revenue and result in large expenses, thereby harming our results of operation.
UNEXPECTED DECLINES IN OUR RESEARCH AND DEVELOPMENT AND OTHER TAX
CREDITS AND GRANTS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Unexpected declines in our research and development and other tax credits and grants may have an adverse effect on our business.
Our historical operating results reflect substantial benefits from programs sponsored by federal and provincial governments for the support of research and development activities, as well as in relation to other activities. For example, research and development tax credits and grants represented 23.2%21.0% of our gross research and development expenses for the year ended August 31, 2005.
2006.
If unexpected changes in the laws or government policies terminate or adversely modify the Canadian and Quebec government programs, under which we receive the majority of our research and development and other tax credits and grants, or if we unexpectedly become unable to participate in or take advantage of these programs, then our net research and development and other expenses will materially increase or we may decrease our research and development activities. In addition, to the extent that we increase our research and development activities outside Canada or Quebec, which could result from, among other things, future acquisitions, the increased activities may not be eligible for these programs. If we were required to decrease our research and development activities, or were unable to benefit from other tax
16
credits and grants, this could have a material adverse effect on our business, results of operations and financial condition.
OUR CURRENT PRINCIPAL STOCKHOLDER HAS EFFECTIVE CONTROL OVER OUR
BUSINESS.
Our current principal stockholder has effective control over our business.
As of November 1, 2005,2006, Germain Lamonde, our Chairman of the Board, President and Chief Executive Officer, held 92.54%92.3% of the voting rights in our stock. By virtue of such stock ownership, Mr. Lamonde has effective control over all matters submitted to our stockholders, including the election of our Directors, and exercises significant control over our policies and affairs. Such concentration of voting power could have the effect of delaying, deterring or preventing a change in control or other business combinations that might otherwise be beneficial to our stockholders.
WE MAY NEED ADDITIONAL CAPITAL, AND MAY NOT BE ABLE TO RAISE
ADDITIONAL CAPITAL ON FAVORABLE TERMS OR AT ALL, WHICH COULD LIMIT OUR ABILITY
TO GROW AND COULD INCREASE OUR COSTS.
If we complete major acquisitions of complementary businesses, products or technologies, we may need additional capital, and may not be able to raise additional capital on favorable terms or at all, which could limit our ability to grow and could increase our costs.
Our future liquidity and capital requirements are difficult to predict because they depend on numerous factors, including the success of our existing and new product offerings as well as competing technological and market developments. As a result, we may not be able to generate sufficient cash flows from our operations to meet additional working capital requirements, support additional capital expenditures or take advantage of acquisition opportunities. Accordingly, we may need to raise additional capital in the future.
Our ability to obtain additional financing will be subject to a number of factors, including market conditions and our operations performance. These factors may render the timing, amount, terms and conditions of additional financing unattractive for us. If we raise additional funds by selling equity securities, the relative ownership of our existing investors could be diluted or the new investors could obtain terms more favorable than previous investors. In February 2004, we closed a public offering of 5.2
million subordinate voting shares to a syndicate of Canadian-based
underwriters for net proceeds of US$29.2 million. If we raise funds through debt financing, we could incur significant borrowing costs. If we are unable to raise additional funds when needed or at terms satisfactory to us, our ability to operate and grow our business could be impeded. OUR BUSINESS AND OPERATIONS WOULD SUFFER IN THE EVENT OF A FAILURE OF
OUR INFORMATION TECHNOLOGY INFRASTRUCTURE.
As at August 31, 2006, we had $111.3 million in cash and short-term investments.
Our business and operations would suffer in the event of a failure of our information technology infrastructure.
We rely upon the capacity, efficiency and security of our information technology hardware and software infrastructures as well as our ability to expand and update these infrastructures in response to our evolving needs. Any failure to manage, expand or update our information technology infrastructures or any failure in the operation of this infrastructure could harm our business.
Despite implementing security measures, our
Our information systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information, it could harm our business. In addition, these events may force us to devote more money and resources in order to protect ourselves against damages caused by these disruptions or security breaches in the future.
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ITEM
Our legal name and commercial name is EXFO Electro-Optical Engineering Inc. /EXFO Ingenierie electro-optiqueIngénierie électro-optique inc. Our head office is located at 400 Godin Avenue, Vanier,Quebec, Quebec, Canada, G1M 2K2 and our main telephone number is (418) 683-0211. Our e-mail address is info@exfo.com and our website is www.exfo.com. Information on our website is not incorporated by reference in this annual report. Our agent for service in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. Our Transfer AgentsAgent and RegistrarsRegistrar is CIBC Mellon Trust Company, 2001 University Street, Suite 1600, Montreal, Quebec, Canada, H3A 2A6. This annual report contains trademarks and registered trademarks of us and other companies.
We were incorporated on September 18, 1985 pursuant to the CANADA
BUSINESS CORPORATIONS ACT. Canada Business Corporations Act. Since that date, we have amended our articles on various occasions mainly to modify our legal and corporate names and our share capital.
On December 20, 2000, we acquired all of the shares of EXFO Burleigh Products Group Inc. (formerly Burleigh Instruments, Inc.) ("(“EXFO Burleigh"Burleigh”), Burleigh Instruments GmBH and Burleigh Instruments (U.K.) Ltd. for an aggregate purchase price of US$189.3 million, comprised of 6,488,816 of our subordinate voting shares and US$42.5 million in cash pursuant to the terms of an Agreement of Merger and Plan of Reorganization among us, EXFO Sub, Inc. and the selling shareholders, dated November 4, 2000, as amended on December 20, 2000. In April 2002, the name of Burleigh Instruments, Inc. was changed to EXFO Burleigh Products Group Inc. On November 12, 2002, Burleigh Instruments (UK) Ltd. was dissolved. EXFO Burleigh is a U.S. company, which was manufacturing precision scientific instruments used in basic and applied research engineering and production test applications in a variety of fields.
On March 15, 2001, we acquired all of the shares of EXFO Photonic Solutions Inc. (formerly EFOS Inc.) ("(“EXFO Photonic"Photonic”), a privately held company in Toronto, Canada, for a total consideration of US$110.1 million, of which US$25.1 million was paid in cash. We also issued 3,700,000 of our subordinate voting shares in connection with the acquisition. In September 2001, the name EFOS Inc. was changed to EXFO Photonic Solutions Inc.
EXFO Photonic, operating since 1984, is a supplier of precision light-based adhesive spot curing products as well as curing process control for the global optical component manufacturing market and other non-telecom markets. Its products deliver precise doses of the appropriate spectral light into photo-sensitive and heat-cured adhesives to significantly reduce bonding time and increase repeatability in optical component and other manufacturing activities. EXFO Photonic light-based curing technologies are supported by an extensive understanding of bonding and material sciences and by a broad intellectual property portfolio, including, as of November 1 2005, 15 patents and 12 patents pending.
Also on March 16, 2001, our wholly owned subsidiary, Burleigh Automation Inc.
("(“Burleigh
Automation"Automation”), acquired substantially all the assets of Vanguard Technical Solutions, Inc., a wholly owned subsidiary of DT Industries, Inc. for a purchase price of US$600,000 paid in cash. Vanguard, an automation equipment manufacturer in Tucson, Arizona, specialized in the design and manufacturing of ultra-precision assembly equipment for sensitive process and critical assembly challenges on the production floor. This acquisition, which complemented our acquisition of Burleigh, was planned to fit with our overall strategy at that time of providing customers with a
17
comprehensive solution for the assembly, alignment and testing of optical components and subsystems. Since September 2001, Burleigh Automation has ceased operations and we have transferred all material intellectual property assets and most of the physical assets of Burleigh Automation to EXFO Burleigh.
In November 2001, we acquired all of the shares of Avantas Networks Corporation and simultaneously changed the name of that company to EXFO Protocol Inc. ("(“EXFO Protocol"Protocol”). We paid a total consideration of US$69.4 million (or US$95.0 million for the equity minus US$25.6 million of cash in the hands of the acquired company) to acquire EXFO Protocol. Consideration paid consisted of 4,374,573 of our subordinate voting shares and US$9.8 million in cash, net of cash acquired. EXFO Protocol, a company based in Montreal, Canada operating since 1998 is a supplier of fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates.
During fiscal 2001, we were forced to align our cost structure to market conditions. On June 27, 2001, we announced the reduction of non-customer-related expenses, postponement of plans to build a new facility in the Quebec Metro High-Tech Park, termination of non-cure operations of Nortech, a subsidiary that specialized in manufacturing fiber-optic temperature sensors and reduction of our work force by 15%.
During fiscal 2002, we were forced tore-align our cost structure to market conditions. First, on December 5, 2001, we announced the lowering of our operating expenses, a freeze in employee salaries, and the reduction of our workforce by 10%. Then, on May 15, 2002, we announced a further 20% reduction of our global workforce in an effort to lower our cost structure. In May 2002, we performed an assessment of the carrying value of goodwill and intangible assets recorded in conjunction with the three acquisitions made during the previous eighteen (18) months. Considering the ongoing unfavourableunfavorable market conditions, we recorded a charge of US$222.2 million to write down a significant portion of goodwill and a charge of US$23.7 million to write down a significant portion of acquired core technology. Also, overall for fiscal 2002, we wrote off US$18.5 million in excess and obsolete inventories.
In August 2002, EXFO Burleigh received confirmation of the extension of its contract with the U.S. Air Force Research Laboratory into phase 2 of a project for the development by EXFO Burleigh of new high-precision actuator system. The contract for phase 2 provided for an additional funding of US$1.7 million and extended through the first quarter of 2005.
In October 2002, our newly created, wholly owned subsidiary, EXFO Gnubi Products Group Inc. ("(“EXFO Gnubi"Gnubi”), acquired substantially all the assets of GNUBI COMMUNICATIONSgnubi communications L.P., including its technology, expertise, customer base, inventories and capital assets. Consideration paid consisted of US$1.9 million in cash and 1,479,290 of our subordinate voting shares. Furthermore, an additional cash amount of US$241,000, based on sales volumes, was paid in fiscal 2004 in accordance with earn out provisions. With the acquisition of these assets, EXFO Gnubi, based in Dallas, Texas, continues the operations of GNUBI COMMUNICATIONS,gnubi communications, L.P., as a supplier of multi-channel telecom and datacom testing solutions serving optical transport equipment manufacturers and research and development laboratories. At the time of the asset acquisition, 30 employees of gnubi communications transferred to EXFO Gnubi.
During fiscal 2003, we were required to implement further restructuring measures as a result of depressed spending levels in the telecommunications industry and geo-political and economic uncertainty. We reduced our workforce by 30%, rationalized our business activities and consolidated certain manufacturing operations. These measures incurred charges of US$4.1 million. The rationalization and consolidation initiatives involved the reorganization of our business into two new reportable market segments:
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Telecom Division and Photonics and Life Sciences Division and the exiting of the optical component manufacturing automation business. Our Telecom Division consists of the former Portable and Monitoring and telecom related Industrial and Scientific product lines. Our Photonics and Life Sciences Division includes previous non-telecom Industrial and Scientific product lines. Each division has been structured with its own sales, marketing, manufacturing, research and development and management teams.
In May 2003, we performed our annual impairment test on goodwill recorded in conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic and EXFO Protocol and also reviewed the carrying value of intangible assets related to these acquisitions. As a result of this assessment, we concluded that the carrying value of goodwill related to EXFO Burleigh and the carrying value of intangible assets related to EXFO Burleigh and EXFO Photonic was impaired and we recorded a charge of US$4.5 million to write down goodwill and a pre-tax charge of US$2.9 million to write down acquired core technology. Of the total impairment loss of US$7.4 million, US$6.9 million is related to EXFO Burleigh for goodwill and acquired core technology and US$0.6 million is related to EXFO Photonic for acquired core technology.
In addition, in an effort to simplify our structure and stream-line our operations, the operations of EXFO Protocol were merged with those of the Corporation as of September 1, 2003 and effective December 1, 2003, the operations of EXFO Gnubi were merged with those of EXFO America Inc.
In fiscal 2004, EXFO also closed a public offering of 5.2 million subordinate voting shares to a syndicate of Canadian-based underwriters for net proceeds of $29.2 million (Cdn$(CA$38.4 million).
Furthermore in fiscal 2004, we consolidated our protocol test operations (EXFO Protocol and EXFO Gnubi) in Montreal, Canada to improve efficiency and reduce costs.
In addition,March 2004, we renewed our collective bargaining agreement with unionized manufacturing employees in Quebec City, Canada. Such agreement will expire in February 2009.
During fiscal 2005, our Photonics and Life Sciences Division was renamed the Life Sciences and Industrial Division to better reflect its market focus.
Finally, during
During fiscal 2005, we completed the consolidation of our Life Sciences and Industrial Division in Toronto and we recorded $482,000 in restructuring expenses. Altogether, we incurred $2.5 million in restructuring and other charges since the fourth quarter of 2004 in conjunction with this consolidation process. Following this process all of the operating activities of EXFO Burleigh were transferred mainly in Toronto.
In January 2006, we acquired substantially all the assets of Consultronics Limited (“Consultronics”), a leading supplier of test equipment for copper-based broadband access networks. Consultronics is a privately held company based in Toronto with subsidiaries in the United Kingdom and Hungary. We acquired all of the subsidiaries’ respective issued and outstanding shares. Consultronics specializes in x-Digital Subscriber Line (xDSL), Internet Protocol TV (IPTV) and Voice-over-Internet Protocol (VoIP) test solutions for the broadband access market. We paid consideration equal to approximately US$19.1 million, including debt assumption and other acquisition-related costs.
Company Overview
EXFO is a recognized
test and measurement expert in the global telecommunications
industry
through the design and manufacture of advanced and innovative test and
measurement solutions.industry. The Telecom Division, which represents our main business activity, offers
afully integrated and complete
range of dedicated and integrated test
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solutions to network service providers (NSPs), cable TV operators, telecom system vendors and component manufacturers in approximately 70 countries. OneWe are the global market leader for portable optical test solutions and a leading supplier of our strong
competitive advantages is ourprotocol and copper access test solutions to enable triple-play services over converged, IP networks. Our PC/Windows-based modular FTB-200; FTB-400 and IQS-500 test platform design - based onplatforms host a PC/Windows-centric architecture - which offers a serieswide range of test modules that
maximizesolutions across optical, physical, data and network layers, while maximizing technology reuse across multipleseveral market segments at minimal redesign
cost. Thesegments. Our Life Sciences and Industrial Division, formerly called the Photonics
and Life Sciences Division, mainlywhich leverages several core telecom technologies, to
offeroffers value-added solutions forin the life sciences applications and high-precision assembly processes, such as those required for microelectronicssectors based on advanced spot-curing, fluorescence microscopy and optoelectronics.
nanopositioning solutions.
We were founded in 1985 in Quebec City, Canada. Our original products were focused on the needs of installers and operators of fiber-optic networks. Customers use these field-portable testing products for the installation, maintenance, monitoring and troubleshooting of optical networks. In 1996, we supplemented our product portfolio with an extensive line of high-end products that are mainly dedicated to research and development as well as manufacturing activities of optical component manufacturers and system vendors.
In January 2006, we acquired substantially all the last fourassets of Consultronics Limited, a leading supplier of test equipment for copper-based broadband access networks. Consultronics, a privately held company based in Toronto with operations in the United Kingdom and Hungary, specializes in x-Digital Subscriber Line (xDSL), Internet Protocol TV (IPTV) and Voice-over-Internet Protocol (VoIP) test solutions for the broadband access market. We paid consideration equal to approximately US$19.1 million, including debt assumption and other acquisition-related costs.
This acquisition enables us to offer customers an end-to-end solution for their broadband access testing needs, extending from the central office to the home or enterprise. Prior to the acquisition, EXFO did not test the “last mile” in fiber-to-the-curb (FTTC) or fiber-to-the-node (FTTN) configurations, which use copper as a medium of transmission. EXFO intends to leverage Consultronics’ strong product portfolio across its global sales channels and create new test solutions by combining the technologies of the respective companies.
In previous years, we have enhanced our competitive position
through the acquisition ofacquired two protocol test businesses in order to expand our product offering and address our customers'customers’ requirements more completely. In November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol Inc.), a supplier of protocol-testing and optical-network performance management equipment for NSPs. This transaction was highly strategic because it enabled us to combine optical and protocol test modules inside a single field-portable test platform to help our customers increase revenues and reduce operating costs. In October 2002, our wholly-owned subsidiary, EXFO Gnubi, purchased substantially all the assets of gnubi communications, L.P., a supplier of multi-channel telecom and datacom testing solutions for the system manufacturer market. These strategic acquisitions, which were consolidated in Montreal in fiscal 2004, enabled us to more than double our addressable market, as we expanded from optical testing to protocol testing applications, and to offer a more complete line of test solutions to our customers.
Previously,
Earlier, we had completed two acquisitions to bolster growth in the optical component manufacturing market. We acquired Burleigh Instruments, Inc. (renamed EXFO Burleigh Products Group Inc.) in December 2000 for its wavelength measurement instruments and nanopositioning alignment systems. We also added EFOS Inc. (renamed EXFO Photonic Solutions Inc.) in March 2001 for its precision light-based, adhesive spot-curing technology. We have since exited the optical component manufacturing automation business.
business and consolidated the rest of these operations under our Life Sciences and Industrial Division in Toronto.
In fiscal 2005,2006, we launched 1518 new products, including aamongst others, the two-slot FTB-200 Compact Platform for multi-layer and multi-medium testing; the handheld AXS-100 OTDR for fiber-to-the-x (FTTx) test applications; SONET/SDH test modules reaching transmission rates up to 10 Gb/s for the FTB-200 Compact Platform; next-generation SONET/SDH analyzer for characterizing converged, IP-based
networks; atest modules reaching 10 Gigabit Ethernet (GigE) test solution to assess quality of
service in core and metro networks; a new software suite for remote Ethernet
testing and commissioning applications; an all-band component analyzer for
FTTx and coarse wavelength-division multiplexing (CWDM) applications in the
manufacturing/R&D market; a series of three handheld test instrumentsGb/s for the installationFTB-400 field-test and maintenance market;IQS-500 R&D/manufacturing platforms; the next-generation CoLT-450P, a handheld IPTV and an optical spectrum analyzer (OSA)
for CWDM applications in metro and access networks. In addition, we formed an
alliance with ADC Telecom to provide a unique remote EthernetxDSL test solution for first-mile applications.
high-speed, copper-based networks; and the PPM-352B-EG Passive Optical Network (PON) Power Meter optimized for Ethernet PON and Gigabit PON architectures.
In 2005,fiscal 2006, we also consolidatedcontinued our leadership positiondominance in the FTTx test market by recognizing significant revenue from two leading carriers in
the United States deploying fiber in their access networks. Our top customer accounted for 23.3%13.8% of sales in 2005. Subsequent to2006.
In the
year-end,first quarter of fiscal 2006, we were
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selected as sole-source supplier for all fiber deployment test applications — including FTTx — by Deutsche Telecom AG - including FTTx.Telekom. In the third quarter of 2006, EXFO was named recipient of the 2006 Growth Strategy Leadership Award by Frost & Sullivan, a leading market research firm in the telecommunications test sector. The award is presented annually to the company whose organic growth strategy generates the largest market-share gains in the global fiber-optic test equipment market in the previous year. Based on a report by Frost & Sullivan, we increased our market share from 10.3% in 2004 to 11.0% in 2005. This marked the third consecutive year that we earned this industry award.
Frost & Sullivan also presented EXFO with its Product Differentiation Innovation Award in 2006. We received this award in recognition of our ground-breaking solutions offered in the next-generation and legacy SONET/SDH test equipment market. Basically, we developed a single SONET/SDH solution with a multi-platform approach to meet various customer needs, market segments and price points.
Finally, we recorded a foreign exchangeforeign-exchange loss of $1.3$0.6 million in fiscal 20052006 due to the significant increase in the value of the Canadian dollar versus the US dollar during that year. In addition to this foreign exchange loss, our P&L (profits and losses) line items in 20052006 were also negatively affected by the appreciation of the Canadian dollar, since a significant portion of our expenses are incurred in Canadian dollars while we report our results in US dollars.
In
Key Industry Trends and Strategy
Global market demand for telecom test and measurement equipment should remain strong in the third quarter of fiscal 2005, EXFO was named recipientyears to come as most NSPs are increasing capital expenditures to upgrade their networks for converged IP services and triple-play offerings. These market forces create needs for differentiated test solutions to help NSPs accelerate deployment and ensure service quality in their network build-outs.
Expecting IPTV to drive IP migration
With the ongoing globalization of the 2005 Growth Strategy Leadership Award by Frost & Sullivan, a leading market
research firmworld’s economy and the emergence of new consumer markets, NSPs are poised to capitalize on growing demand for communications and entertainment services. Early in the telecommunications test sector. The award is presented
annually2006, some small telecom operators launched broadcast-quality video services based on IP communications. This technology, better known as IPTV, allows telephone companies (telcos) to the company whose visionary growth strategy generates the largest
market-share gains in the global fiber-optic test equipment market in the
previous year. Basedefficiently offer TV, HDTV and interactive TV services to their broadband subscribers. Tier-1 and Tier-2 telcos are expected to launch similar IPTV services on a report by Frost & Sullivan, we increased our market
sharelarge-scale basis starting in 2007. While Web-based streaming video is offered for free on a best-effort basis, IPTV, whom many regard as the broadband “killer application,” will require a high level of performance to assure a quality user experience. NSPs, after all, don’t want customer churn to prevent a meaningful return on their massive investments.
To deliver a wide range of differentiated IP services, NSPs will continue transforming their legacy, circuit-switched networks into highly efficient, flexible and scalable packet-based IP architectures. Telcos and cablecos have already proven they can generate significant revenues from 8.4%higher-margin services on hybrid networks, while reducing operating costs. IPTV should only accelerate the migration towards fully converged, IP-based networks, since it typically allows NSPs to nearly double average revenue per user (ARPU).
Extra bandwidth in 2003 to 10.3% in 2004. This markedaccess networks
The increasing reliance on telecom and IP-related services will continue driving bandwidth consumption, thus pushing the second consecutive
year that we earned this industry award.
Finally, during fiscal 2005, we completed the consolidationdeployment of our
Life Sciences and Industrial Division in Toronto and we recorded $482,000 in
restructuring expenses. Altogether, we incurred $2.5 million in restructuring
and other charges since the fourth quarter of 2004 in conjunction with this
consolidation process.
INDUSTRY OVERVIEW
Leading telecom operators (telcos), mostly in the United States,
accelerated fiber deployments deeper in theirinto access networks during the last
year because of competition from cable TV operators (cablecos) to offer
consumers bundled voice, data and video services. This broadband competitionnetworks. Competition between telcos and cablecos contributed to an increase in wireline capital
expenditures in 2005, especially inhas intensified as triple-play offerings are announced almost daily. Hybrid architectures combining copper and fiber (FTTC and FTTN) will keep expanding worldwide, since this is the United States.
Leading US telcos, along with a number of Tier-IIquickest and Tier-III
players, opted for an assortment of deployment strategies, including
fiber-to-the-node (FTTN), fiber-to-the-curb (FTTC), fiber-to-the-home (FTTH)
or its equivalent fiber-to-the premises (FTTP), depending on their estimates
of how much bandwidth will be required to meet the challenge from the
cablecos. These deployments, which fall under the generic FTTx name, are not
as prevalent in Europe and Asia. However, test trials are underway in these
regions as a meansleast expensive method to increase revenues by delivering video services to
undercut competition. Note that Japan and Korea already have FTTx deployment
programs, aimed at delivering 100 Mb/s to every home, well underway.
As the demand for broadband services increases worldwide, voice, data
and video are becoming mere applications on converged, IP-based networks.
Telcos around the worldbandwidth. To remain competitive with cablecos, telcos are migrating from public switched telephone networks
(PSTN)former ADSL, to packet-based, IP networks in ordercurrent ADSL2+, and onto future VDSL2+ technologies as interoperability becomes demonstrable. Telcos, however, will increasingly opt for all-fiber, PON-based architectures (FTTP) to achieve substantial reductions
inmeet heightened bandwidth requirements and to future-proof their networks. These decisions will be taken not only for green-field deployments and high-rise buildings, but on a larger scale as operating expensescosts are less than FTTC and increased profitability. British Telecom Group, for
example, announced it will spend (British Pound)10 billion over five years on
its 21st Century Network to reduce operating expenses by up to (British
Pound)1.0 billion per year through a single network carrying voice, dataFTTN architectures and video signals.
Legacy SONET/SDH networks were designedcost of deployments are falling. We are still in the late 1970searly stages of building access networks around the world.
Expanding metro and long-haul networks
Metro network deployments, taking advantage of carrier-grade Ethernet and metro-Ethernet technologies are moving ahead to
carry
voice traffic. Their efficiency however can often times drop to as low as 30%
when combining voice, data and video services. Next-generation networks, such
as those announced by British Telecom, represent a major technological
improvement, since they can deliver triple-play services at near 100%
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efficiency, regardless of the payload content, while significantly reducing
the cost of operating and maintaining networks.
These key market trends affected multiple segments of the global
telecommunications supply chainhandle large increases in 2005. System manufacturers benefited from
orders by both telcos and cablecos for next-generation, converged IP networks
as well as from major investments by telcosbandwidth consumption in access networks. ComponentThese network upgrades, in turn, will eventually place a strain on long-haul networks, where excess capacity created by massive overspending in the late-90s is gradually being consumed. NSPs are more than ever committed to deploying next-generation SONET/SDH transport technologies, while 40 Gb/s deployments are not far behind.
Positioning
We anticipated these market trends and directed a significant part of our R&D efforts to bring NSPs the distinctive product offerings they have come to expect from EXFO for installation and maintenance applications and, increasingly, for network quality assurance. In addition, we have increased interaction with system vendors, saw incremental demand for optical components that support FTTxboth in terms of partnerships and IP-based systems. Someproduct offerings, since they are the key players defining and designing the networks of the future. Consequently, we have widened our competitive advantage, based on our FTB-200, FTB-400 and IQS-500 modular platforms and broad suite of test modules, and measurement equipment vendors attracted the
attention of telcos, cablecos, system manufacturers and component vendors,
especially ones offeringdeveloped new test solutions for converged, IP networking. We are confident that we will commercially leverage our technological leadership in installation and maintenance applications — up to 10 Gb/s Ethernet and 10 Gb/s next-generation SONET/SDH testing.
On the optical networking and/or FTTx
applications.
KEY INDUSTRY TRENDS AND STRATEGY
As a market-driven company,testing side, we tryhave strengthened our market position for access networks both in terms of new network architectures (FTTH, FTTC, FTTN) and technologies (BPON, GPON, EPON). We expect to identifyenhance our presence with an expanded offering for twisted copper pair testing of IPTV and VoIP services in the key industry
trends in order to leverage technological discontinuitieslast mile now that Consultronics has been fully integrated and convert them
into value-creating market opportunities. Following are key market trends for
fiscal 2006 and beyond and how we intend towill take advantage of them.
BROADBAND COMPETITION LEADING TO ACCESS INVESTMENTS
Intense competition between telcosour technical expertise in optical testing for upcoming deployments of 40 Gb/s systems in long-haul networks. In general, we will expand our product offering from access to core, touching on various levels of the network to fuel our long-term growth.
Expertise in life sciences and cablecos continues unabated in
North America. Both industries are competing to increase revenue and
profitability through bundled offerings, while reducing churn. This broadband
competition is prompting massive capital investments in access networks in
order to increase bandwidth, flexibility and scalability, while continuing
metro ring expansion. Telcos are deploying fiber-to-the-node (FTTN; ~20 Mb/s),
fiber-to-the-curb (FTTC; ~40 Mb/s) or fiber-to-the-premises (FTTP; ~100 Mb/s),
depending on estimates of which video compression techniques will be adopted
and how much bandwidth will be required to meet the challenge from the
cablecos (~40 Mb/s). The closer the fiber is to the premises and the higher
the transmission rates, the better it is for EXFO, which offers the most
comprehensive line of FTTx test solutions on the market. Following agreements
with Verizon and SBC Communications, we are increasingly leveraging our
leadership in passive optical network (PON) testing and broad portfolio of
FTTx-ready technologies outside North America, given our long-established
customer relationships in Europe and Asia. We are participating in several
FTTx trials worldwide and recently were selected as sole-source supplier for
all fiber deployment test applications by Deutsche Telecom AG - including
FTTx. While our FTTx market penetration was excellent in 2005, we believe this
is just the beginning of a long-term deployment trend.
MIGRATION TOWARDS CONVERGED, IP-BASED NETWORKING
Network operators around the world are migrating from public switched
telephone networks (PSTN) to packet-based, Internet protocol (IP) networks in
order to achieve substantial reductions in operating expenses and increased
profitability. For example, British Telecom Group announced it will spend
(British Pound)10 billion over five years on its 21CN initiative (21st Century
Network) to reduce operating expenses by up to (British Pound)1 billion per
year, while enabling revenue expansion into differentiated, higher-margin new
services - all thanks to a single network carrying voice, data and video
signals.
Legacy SONET/SDH networks were designed in the late 1970s to optimize
voice traffic, but they can drop to 30% efficiency when data and video
applications are added. Next-generation networks, such as those announced by
British Telecom, represent a major technological improvement, since they can
deliver triple-play services at almost 100% efficiency while significantly
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reducing operating and maintenance costs.
Anticipating this market opportunity, we shifted our focus from
legacy SONET/SDH and Ethernet technologies to next-generation protocol test
solutions aimed at the deployment of converged, IP-based networks. Product
launches in 2005 included a next-generation SONET/SDH analyzer, featuring the
latest in generic framing procedure (GFP), virtual concatenation (VCAT) and
link-capacity adjustment scheme (LCAS); a 10 Gigabit Ethernet (GigE) test
solution, a remote Ethernet tester to ensure quality of service (QoS); and
additional Ethernet test capabilities to help carriers operate their
high-performance core, metro and edge networks. We also formed an alliance
with ADC Telecom to provide a unique remote Ethernet test solution for
first-mile applications. Subsequent to the year-end, we launched 10 GigE and
Fibre Channel test solutions for the system vendor market.
Given the protocol test market is significantly larger than the
optical test market, our rich product pipeline in protocol testing, and four
consecutive quarters of sales growth in protocol testing with the last quarter
exceeding 10% of Telecom Division revenues, we have high expectations for this
product line. We expect that protocol sales will outgrow optical sales to
eventually account for 50% of our Telecom Division revenues, even though our
optical segment will continue to increase.
industrial markets
On the life sciences and industrial side:
Fluorescence imaging is one of the fastest-growing segments of the
microscope industry. To take advantage of this market opportunity,side, we plan to continue leveraging technologies developed or acquired for optical component manufacturing applications in non-telecom markets. We have partnered with major microscope manufacturersachieved promising results in the last two yearslife sciences and industrial markets.
· | Our OmniCure product line, focused on UV spot-curing applications, has enjoyed significant growth within the medical and optoelectronics industries. These diverse markets, largely influenced by the miniaturization trend, are expanding worldwide with Asia showing the largest year-over-year growth. |
· | Our X-Cite series, an add-on illumination system for high-end microscopes, has entrenched itself as a market leader in various research areas. The global fluorescence microscopy market is growing in mid single digits, while live cell and quantitative imaging are increasingly gaining traction. |
· | Our Burleigh nano-positioning product line, mainly designed for cellular micromanipulation, continues to demonstrate strong brand-name recognition and loyal following with electrophysiologists. It targets a stable growth market focused on fundamental neuroscience and drug discovery. |
Fiscal 2007 Corporate Objectives
EXFO remains committed to deliverbest practices in corporate governance and, as such, we are pleased to provide the leading fluorescence illumination system in North America. We're now
seeking similar penetration in Europe and Asia through regional partnerships
with microscope manufacturers.
The aging baby-boomer market is placing stringent demands on
manufacturers of medical equipment for devices like in-vitro balloon
catheters, hearing aids and asthma inhalers. Similarly, high-tech consumers
are pushing for the continued miniaturization of devices such as digital
cameras, personal digital assistants (PDAs) and cellular phones. Given the
demand for higher volumes and miniature sizes, manufacturers of medical and
electronic devices are requiring exceptional control and repeatability for
their precision assembly applications. EXFO has responded to this dual trend
by bringing to market an automated spot-curing platform that can be controlled
via a personal computer.
KEY PERFORMANCE INDICATORS FOR FISCAL 2006
As expected, our strategic directionsfollowing performance metrics for fiscal 2006, and
consequently our key performance indicators (KPIs), will2007. Please note that these management goals should not be radically
different from those in 2005. Since weconfused with, and are highly focused on creating value
for our shareholders, delivering the highest levelnot intended to be, guidance.
· | Grow revenues by 20% year-over-year. We were among the last companies to be impacted by the telecommunications downturn in 2001 and first to recover with sales growth of 20.5% in fiscal 2004, 30.3% in 2005 and 31.9% in 2006, including 12 consecutive quarters of growth. This recovery was accomplished mainly through market-share gains, since our end-markets reportedly experienced negative growth in fiscal 2004 and increased in the mid single digits in 2005 and 2006. We will strive to maintain a high growth rate in 2007 by seeking to further increase our market share in telecom testing, especially in the rapidly growing protocol test segment, and by seeking to leverage core technologies in targeted life sciences and industrial markets. |
· | Generate a GAAP earnings from operations of 7%. Our bottom-line improved faster than our top-line in the last few years with a GAAP earnings from operations of 6.3% in fiscal 2006. We expect that our GAAP earnings from operations will continue to improve in 2007 as we expect that higher-margin protocol revenues, better absorption of fixed costs on higher sales volumes, specific internal initiatives, and currency stability will come into play. |
· | Derive 35% of sales from new products (on the market two years or less). Despite missing this aggressive innovation target in recent years, our new products, with their built-in superior performance and lower cost of goods, contributed significantly to raising our gross margin and earnings from operations. We are maintaining this innovation metric for 2007 based on our market-driven focus and enhanced portfolio of new products (18 new products) released in the past year. |
The EXFO we remain attuned to customer and market
requirements, not to technology for the sake of it. This
ambitious innovation target is fully aligned with our
fundamental goals of differentiating ourselves from the
competition, increasing market share and revenue, as well as
improving gross margin and profitability.
THE EXFO SOLUTION
Solution
We offer an extensive range of test and measurement solutions to the global telecommunications industry. Our success has been largely predicated on our core expertise in optical telecommunications. We also leverage this expertise to develop products for life sciences and high-precision assembly applications. Our solution is based on the following key attributes:
MODULAR SYSTEM DESIGN.
Modular System Design. In 1996, we established an industry firstindustry-first by launching the original modular optical test platform. This system design consists of a PC-based, Windows-driven platform that can accommodate several test modules performing various types of measurements. We have since developed new compatible test platforms and extended our test module offering for both NSPs and system manufacturers based on the same modular design. Our modular design provides the following advantages:
o Unlike stand-alone units, new test modules can be rapidly
developed to address changing industry requirements.
o As customers' testing requirements change, they can purchase
additional modules that are compatible with their previously
purchased platforms, thus protecting their initial investments.
o Our standard graphical user interface reduces training costs
because customers are familiar with previously acquired software
products.
o
· | Unlike stand-alone units, new test modules can be rapidly developed to address changing industry requirements. |
· | As customers’ testing requirements change, they can purchase additional modules that are compatible with their previously purchased platforms, thus protecting their initial investments. |
· | Our standard graphical user interface reduces training costs because customers are familiar with previously acquired software products. |
· | The flexibility of our systems allows customers to develop customized and automated solutions for their specific test requirements. |
· | Our test platforms are PC-based and Windows-driven, thus they can support third-party software solutions. |
High Degree of our systems allows customers to develop
customized and automated solutions for their specific test
requirements.
o Our test platforms are PC-based and Windows-driven, thus they
can support third-party software solutions.
HIGH DEGREE OF TECHNOLOGICAL INNOVATION.Technological Innovation. We have established a strong reputation for technological innovation over the last 2021 years. In fact, we believe this attribute represents a key differentiator for us within a competitive marketplace. Following are some of our industry firsts:
24
o The first PC-based modular test platform for field applications;.
o The first all-in-one optical loss test set combining several
instruments;.
o The first portable polarization mode dispersion (PMD) analyzer;
o The first modular platform to combine optical and protocol test
solutions; and
o · | The first PC-based modular test platform for field applications; |
· | The first all-in-one optical loss test set combining several instruments; |
· | The first portable polarization mode dispersion (PMD) analyzer; |
· | The first modular platform to combine optical and protocol test solutions; |
· | The first line of portable test instruments designed for FTTx testing; and |
· | The first fully integrated Ethernet-over-SONET test solution. |
High-Quality Products. Product quality is an integral part of our solution. Our Quebec City-basedCity, Canada, operations have maintained ISO 9001 certification since 1994 and they are now certified to the new 2000 edition of the standard, as are our Toronto, Canada, and Concord, Canada, operations. Our manufacturing plant in Montreal, Quebec,Canada, received ISO 9001/2000 certification on November 16, 2005. All of our products meet required industry standards, and some of our products meet additional voluntary standards, such as those set by Telcordia, formerly Bellcore, IEC, and other industry-leading standards bodies. During manufacturing, each product has a related quality assurance plan, with rigorous checkpoints, to ensure product conformity. Various tasks in the quality assurance process among all our facilities include quality control, conformity testing, product documentation, product improvement, regulatory compliance, metrology and calibration.
Our product designs comply with Directive 2002/96/EC, a legislation enacted by the European Union regarding the disposal of waste electrical and electronic equipment (WEEE), for all products exported to Europe. In regard to the Directive 2002/96/EC (RoHs), we and other test and measurement manufacturers have been warranted an unlimited exemption.
PRODUCTS
Products
Our test platforms, namely the new FTB-200 Compact Platform, FTB-400 Universal Test System (UTS), and IQS-500 Intelligent Test System (ITS) and EPX Multi-Channel Test Systems,, are at the core of our product portfolio. The FTB-200 Compact Platform, which was launched in January 2006, is a two-slot portable test unit optimized for multi-technology, multi-application characterization of metro and access networks. The FTB-400 field-testing platform provides NSPs with a simple, yet efficient way to perform multiple, advanced test operations for installation, maintenance and troubleshooting applications. Our IQS-500 ITS, and EPX Multi-Channel Test Systems, which are
designed for manufacturing and R&D applications, test convergingtests optical as well as telecom and datacom networkstechnologies increasingly based on IP technology. All platforms and related test modules are supported by integrated and highly intuitive graphical user interfaces (GUIs), enabling the user to easily store, handle and retrieve a large amount of data. In addition, EXFO offers a number of purpose-built hand-held and benchtop test and measurement products, some of which are modular in nature. Furthermore, EXFO offers network monitoring systems and test heads used in third-party network monitoring solutions.
The following table summarizes the principal types of test instruments for the telecommunications industry, typical applications and the formatformats in which we offer them:
FORMAT
--------------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION | | Format |
Instrument Type | Typical Application | NSP MARKET MANUFACTURER/Market | Manufacturer/R&D MARKET
- ----------------- -------------------------------- ---------------------- -------------------------------------
Market |
| | FTB 400 Modules | FTB 200 Modules | Handhelds | IQS-500
UTS MODULES HANDHELDS ITS MODULES EPX MODULES INSTRUMENTS
----------- --------- ----------- ----------- -----------
Modules | Benchtop Instruments |
ADSL/ADSL2+ Service Verification Tool | Based on a DSL “golden modem”, these units are used to test the function, speed and quality of a DSL service at the subscriber premises. | | | X | | |
| | | | | | |
Broadband source | Used for testing wavelength
dependentwavelength-dependent behavior of fiber cables and DWDM optical com-
ponents. components. | | | | X | X
Channel selector Selects and isolates any
International Telecommunication
Union (ITU) DWDM channel in the
CBand for bit-error-rate testing X X
and protocol-layer analysis.
|
25
FORMAT
--------------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION NSP MARKET MANUFACTURER/R&D MARKET
- ----------------- -------------------------------- ---------------------- -------------------------------------
FTB 400 IQS-500
UTS MODULES HANDHELDS ITS MODULES EPX MODULES INSTRUMENTS
----------- --------- ----------- ----------- -----------
| | | | | | |
Chromatic dispersion analyzer | Measures increasing levels of dispersion chromatic dispersion in high-
analyzer capacityhigh-capacity optical networks. Chrom-
aticChromatic dispersion is a physical phenomenon inherent to optical fiber and optical components that causes information bits to spread X along a network. This degrades the quality of the transmission signal and, in turn, limits the transmission speed carried by optical networks. | X | | | | |
| | | | | | |
Clip-on coupling device | Clips to an optical fiber and X
device allows non-invasive testing. | | | X | | |
| | | | | | |
| | Format |
Instrument Type | Typical Application | NSP Market | Manufacturer/R&D Market |
| | FTB 400 Modules | FTB 200 Modules | Handhelds | IQS-500 Modules | Benchtop Instruments |
Fibre Channel tester | Brings FC-0, FC-1 and FC-2 tester logical layer FiberFibre Channel testing to services delivered via transport protocols, such as DWDM, SONET/SDH and dark fiber. It provides valuable timing information and buffer credit X X
estimation for FiberFibre Channel network deployment. | X | | | X | |
| | | | | | |
Gigabit Ethernet tester | Measures data integrity for
tester high-speed Internet protocol telecommunications in metro and edge networks. | X | X | | X | |
| | | | | | |
10 Gigabit Ethernet tester | Benchmarks and verifies high-speed 10 Gbit/s Ethernet network performance and service-level agreements. | X | X | | X | |
| | | | | | |
HDTV, SDTV and IPTV service test instrument | Used to test the quality and functionality of standard and high definition television signals that are delivered over higher-rate ADSL, ADSL2+ and VDSL2 transmission technologies. | | | X | | |
| | | | | | |
Laser wavelength meter | Performs high-accuracy, absolute meter wavelength measurements of con-
tinuouscontinuous wave (CW) and/or pulsed X
laser sources
sources. | | | | | X |
| | | | | | |
Laser spectrum analyzer | Performs high-resolution, spec
analyzer tralspectral characterization of con- X continuous CW laser sources | | | | | X |
| | | | | | |
Telephone for traditional voice and VoIP service testing | Used by telephone line and DSL installers to test the proper functioning of both traditional and next-generation voice and data communication services. | | | X | | |
| | | | | | |
Live fiber detector | Clips on to a fiber and is used to detect the presence and direction of a signal without interrupting the traffic. | | | X | | |
| | | | | | |
Loss test set | Integrates a power meter and a light source to manually or automatically measure the loss X X X X
of optical signal along a fiber. | X | X | X | X | X |
| | | | | | |
Multiwavelength meter | Measures the power and drift meter for multiple wavelengths in a X X X
DWDM system. | X | | | X | X |
Narrowly tunable laser | A laser that can be precisely
laser tuned to simulate a DWDM light sources. Used primarily infor testing optical amplifiers. | | | | X | |
| | | | | | |
Next-generation SONET/SDH analyzer | Full SONET/SDH protocol testing
SONET/SDH analyzer functionality, including support for GFP, V.CAT, and X X
LCAS next generation enhancements. | X | | | X | |
| | | | | | |
Optical amplifier | Boosts the power of laser sources. Used for the testing and calibration of test systems. | | | | X | |
| | | | | | |
Optical coupler | Used in test system to combine sources or signals. Also used X
as splitters to monitor signals. | | | | X | |
26
FORMAT
--------------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION | | Format |
Instrument Type | Typical Application | NSP MARKET MANUFACTURER/Market | Manufacturer/R&D MARKET
- ----------------- -------------------------------- ---------------------- -------------------------------------
Market |
| | FTB 400 Modules | FTB 200 Modules | Handhelds | IQS-500
UTS MODULES HANDHELDS ITS MODULES EPX MODULES INSTRUMENTS
----------- --------- ----------- ----------- -----------
Modules | Benchtop Instruments |
Optical fiber parameter analyzer | Measures the geometric and
parameter analyzer light guiding properties of an optical fiber. Used in new fiber research and development X
and quality control applica-
tions.
applications. | | | | | X |
| | | | | | |
Optical power meter | Measures the power of an optical signal. It is the basic tool for the verification of transmitters, amplifiers and X X X X
optical transmission path integrity. | X | X | X | X | X |
| | | | | | |
Optical power reference module | Provides a highly accurate and
reference module traceable measurement of power for the calibration or X
verification of other power measurement instruments. | | | | X | |
| | | | | | |
Optical return loss meter | Combines a laser and a power
loss meter meter to measure the amount of potentially degrading back reflection. | X | X | X | X
reflection.
| |
| | | | | | |
Optical spectrum analyzer | Produces a graphical
analyzer representation of power versus wavelength for an optical signal. Useful for measuring the drift, power and signal-to-noise ratio for each wavelength in a X X
DWDM system. | X | | | | |
| | | | | | |
Optical switch | Provides switching between fibers. Used to provide flexible and automated test setups such as the measurement of multiple fibers or X X
components with multiple ports with one instrument. | X | | | X | |
| | | | | | |
Optical time domain reflectometer (OTDR) | Like a radar, it measures the domain time of arrival of reflections reflectometer of an optical signal to
(OTDR) determine the distance to the breaks or points of excessive X
loss in a fiber network. | X | X | X | | |
| | | | | | |
Optical waveguide analyzer | Provides the refractive index
analyzer profile of glass and fused silica-based devices used in next generation networks. | | | | | X |
| | | | | | |
Passive component analyzer | Characterizes passive
analyzer wavelength-selective devices, such as multiplexers, demultiplexers and add/drop filters, with respect to absolute wavelength in order to guarantee their performance X
within DWDM systems. | | | | | X |
| | | | | | |
Passive optical network (PON) power meter | Determines the power level of network (PON) differentvarious signal types,
power meter including continuous (e.g., TV signal at 1550 nm) and framed (e.g., ATM or Ethernet at 1490 nm or 1310 nm) within a passive optical network. Various baud rates are covered, ranging from 155 Mb/Mbit/s to 2.5 Gb/Gbit/s, for both synchronous and non-synchronous signals. | | | X
signals.
Polarization- | | |
| | | | | | |
Polarization-dependent loss meter | Measures the difference in loss
dependent loss of power for the different X
meter states of polarization. | | | | X | |
| | | | | | |
Polarization mode dispersion analyzer | Measures the dispersion of
dispersion analyzer light that is caused by polarization. Generally used to determine the speed-distance X X
limitation of fiber and cables. |
27
FORMAT
--------------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION NSP MARKET MANUFACTURER/R&D MARKET
- ----------------- -------------------------------- ---------------------- -------------------------------------
FTB 400 IQS-500
UTS MODULES HANDHELDS ITS MODULES EPX MODULES INSTRUMENTS
----------- --------- ----------- ----------- -----------
X | | | | | | | | | | | |
SONET/SDH analyzer | Provide accurate bit-error rate
analyzer and performance analysis of SONET/SDH overhead format that reflect the quality of a X X X
transmission system. | X | X | | X | |
| | Format |
Instrument Type | Typical Application | NSP Market | Manufacturer/R&D Market |
| | FTB 400 Modules | FTB 200 Modules | Handhelds | IQS-500 Modules | Benchtop Instruments |
Stable light source | Emitting diode or lasers used in connection with a power X X X X
meter to measure signal loss. | X | | X | X | X |
| | | | | | |
Synchronization analyzer | Portable, stand-alone tester
analyzer for network synchronization analysis and wander measurement X
in wireless and wireline transport networks. | | | | | X |
| | | | | | |
Talk set | A device that attaches to an optical fiber and serves as a temporary voice link X X
facilitating coordination of work among installation crews. | X | | X | | |
| | | | | | |
Telephone wire analyzer | Used by telecommunications service providers that have networks that are comprised mostly or partially of twisted-pair local loops to ensure that those loops are of sufficient quality to carry higher-frequency signals required for DSL. | | | X | | |
| | | | | | |
Variable optical attenuator | Used in network simulation
attenuator setups to provide calibrated variable reduction of the X X X
strength of an optical signal. | | | X | X | X |
| | | | | | |
Visual fault locator | A visible laser that can be
locator connected to an optical fiber network to help locate breaks X X
or points of excessive loss. | X | X | X | | |
| | | | | | |
Widely tunable laser | Can produce laser light across
laser a broad range of wavelengths. Used to test DWDM components and X X
value-added optical modules. | | | | X | X |
PRODUCTS FOR NETWORK SERVICE PROVIDERS
Products for Network Service Providers
We offer an extensive range of field-portable optical test, measurement and monitoring solutions that are mainly used by NSPs, but can also be utilized by system vendors. These products are available as handheld test instruments, portable platforms with related modules, and as rack-mount chassis with related modules. Our handheld instruments are durable, compact and easy to use. Our new FTB-200 Compact Platform, designed for the “super field technician”, holds up to two interchangeable modules that are fully compatible with the highly entrenched FTB-400 platform. Test technologies well-suited for the FTB-200 Compact Platform include a wide range of singlemode and multimode optical time-domain reflectometers (OTDRs), automated optical loss test sets (OLTSs), SONET/SDH analyzers from DS0 up to OC-192, as well as Gigabit Ethernet (GigE) testers. Our second-generation field-testing platform, the FTB-400 UTS, is available in three configurations: Thethe two-slot optionmodel is ideal for OTDR, OLTS and GigE applications, whileapplications; the four-slot model offers a high-speed bus, ideal for extensive datacom testing and dedicated OTDR, loss and Ethernet (up to 10 Gigabit) testing; the seven-slot optionmodel is used for dispersion characterization (PMD and CD), DWDM testing (OSA and MWM) and protocol (SONET/SDH/datacom) testing.testing; Our newest addition, the the eight-slot option,model is a high-performance, multiple-protocol configuration that allows users to combine next-generation SONET/SDH functions with Ethernet, Fibre Channel and optical-layer testing capabilities. Our portable platforms are PC-centric, Windows-based, highly flexible and fully scalable. Their large robust touchscreens are very practical for field use.
In addition,fiscal 2006, we offerlaunched SONET/SDH test solutions for our three platforms ─ namely our FTB-200 Compact Platform, FTB-400 Universal Test System and IQS-500 Intelligent Test System ─ for transmission rates reaching 10 Gbit/s.
We also introduced the FTB-100 Mini-OTDR with an integrated power
meter option.AXS-100 OTDR for FTTx test applications. This cost-effective platformhandheld instrument delivers EXFO’s leading-edge technology for fault location inside a very compact and lightweight unit. Optimized for testing short links within access networks, it can be used at the optical network terminal, drop terminal, fiber distribution hub (where the splitter is located) or at the central office.
This flexible OTDR is offered in various wavelength configurations, including 1550 nm and 1310/1550 nm. Special-filtered 1625 nm and 1650 nm models are also available for live-fiber FTTx troubleshooting. One-button, automated testing generates acquisitions within five seconds, while as many as 500 acquisitions can be stored.
As well, we released the PPM-352B-EG Passive Optical Network (PON) Power Meter in 2006 for service activation and troubleshooting tasks on broadband PON (BPON), Ethernet PON (EPON) and Gigabit PON (GPON) architectures.
As a result of the acquisition of Consultronics’ assets in January 2006 we added test and measurement solutions for copper-based narrowband and broadband networks to our product portfolio. Consultronics not only provides DSL testing solutions and solutions for testing twisted copper pair in access networks, but also value-added IPTV, VoIP, and IP Data testing technologies which are increasingly required for triple-play deployments. EXFO also gained a Network Quality Monitoring System (NQMS) solution from Consultronics that is used for the surveillance voice-over-Internet Protocol (VoIP) and voice-band services. This solution is being tailored to complement EXFO’s Remote Fiber Test System for monitoring a network service provider’s fiber plant. Other test solutions offered by Consultronics also brought additional experience and a limited customer base from its Gigabit Ethernet Analyzer offering, as well as a portable test solution for T1, E1, DS3, and data communications.
Since this acquisition, we have introduced the CoLT-450P, a handheld tester for service verification and for assessing the Quality of Service of multi-channel HDTV based on IPTV as well as the enhanced CoVALT for installing and troubleshooting DSL circuits that carry data and VoIP services.
Subsequent to the year-end, we launched the LFD-300/TG-300 FiberFinder™ for the efficient and safe management of live and dark optical fibers. This handy device helps field technicians with
basic OTDR testing capabilities.
In 2005, we launched a new family of value-added handhelds to perform
optical loss testingensure that live fibers are not inadvertently disconnected in the outside plant environment. Furthermore, we
expanded our OTDR product line by adding a new four-lambda OTDR to better suit
the installers' market.
PRODUCTS FOR SYSTEM/COMPONENT MANUFACTURERS
crowded fiber cabinets and patch panels.
Products for System/Component Manufacturers
Our system/component vendor solutions, mainly built around our IQS-500 ITS,
and EPX platforms, are available as test modules or stand-alone benchtop instruments. The next-generation IQS-500 platform can efficiently run as many as 100 optical test modules using a single controller unit. The IQS-500 platform is equipped with the software and hardware technology to support single-button operation for automated testing. Its system-based
28
approach--oneapproach - one box, several test modules--combinedmodules - combined with an open architecture (PXI, Windows, LabVIEW(TM)LabVIEW™, etc.) and ease of programming, produces a highly flexible test environment.The IQS-500 also provides backward compatibility with recent IQ-generation test modules, while delivering all the power and advantages of a next-generation platform. EXFO'sEXFO’s wide selection of high-performance test modules includes high-speed power meters, light sources, WDM laser sources, tunable laser sources, variable attenuators, optical spectrum analyzers,
polarization mode dispersion (PMD) analyzers, multi-wavelength meters, channel
selectors, polarization dependentpolarization-dependent loss (PDL) and optical return loss (ORL) meters, polarization controllers and optical switches.
The highly flexible EPX platforms are available in two formats. With
up to 17 protocol test modules per unit, the EPX16 performs numerous tasks
within one hardware platform. The EPX8 uses the same upgradeable,
multi-channel design in a smaller footprint. Combining multiple rates,
protocols and channels within a single unit, these systems are ideal for
cross-connect, ADM, DWDM, production and load testing. Direct Ethernet access
capability and a Java-based GUI make the EPX platforms powerful test solutions
that are easy to use. Other user-friendly features include saving and
restoring test configurations, connecting remotely with a Web browser,
scripting, logging and sharing test resources with other users.
In 2005,2006, we introduced a new FTTH/CWDM passive componentsuite of next-generation SONET/SDH test modules as well as 10 Gigabit Ethernet modules targeted for system that allows manufacturers to measure insertion loss (IL),
polarization-dependent loss (PDL)manufacturing and optical return loss (ORL) inR&D applications. Following the year-end, we released a single
test sequence.
Ournext-generation IQS-12001B Cable Assembly and Component Test System for production testing of short fiber assemblies and fiber-to-the-x (FTTx) components.
As evidenced by the release of our IQS-12001B Cable Assembly and Component Test System, our system/component vendor products alsosolutions address testing issues that cannot be handled by standard test modules or stand-alone bench-topbenchtop instruments. We have developed a number of integrated test systems and offer them as off-the-shelf solutions to suit a wide range of customer needs. In addition, we have created a software development kit for developers who prefer writing their own programs for our instruments. Following is a list of integrated test systems that we provide for characterizing optical components, sub-systemssubsystems and networks:
o
·CWDM/FTTH passive optical component test system | Used to automatically characterize
component test system all critical specifications, including spectral insertion loss, polarization-dependent loss and optical return loss of a CWDM passive component or a FTTH splitter with a high degree of accuracy, ease of use and speed. |
·Cable assembly and component test system | Used to perform insertion loss and mandrel-free reflection measurements with the highest degree of accuracy and repeatability on short fiber assemblies (including multifiber patchcords, hybrids and fan-out patchcords) and components like PLC splitters and fiber arrays. |
·DWDM passive component test system | Used to automatically characterize all critical specifications, including spectral insertion loss, polarization-dependent loss and optical return loss of a DWDM passive component with a high degree of accuracy, ease of use and speed. |
Products for life sciences and optical return loss of a CWDM
passive component or a FTTH
splitter with a high degree of
accuracy, ease of use and speed.
o Multifiber test system Used for quality-assurance testing
of multifiber patchcords and
interconnect assemblies. These
devices, including hybrid and
fan-out patchcords, are commonly
used in fiber systems.
o Cable assembly test system Used to perform insertion loss and
mandrel-free reflection measure-
ments with the highest degree of
accuracy and repeatability on
short fiber assemblies.
29
o Optical calibration test Used to calibrate power meters,
system light sources, variable
attenuators and optical time
domain reflectometers.
o DWDM passive component test Used to automatically characterize
system all critical specifications,
including spectral insertion loss,
polarization-dependent loss and
optical return loss of a DWDM
passive component with a high
degree of accuracy, ease of use
and speed.
PRODUCTS FOR LIFE SCIENCES AND INDUSTRIAL APPLICATIONS
industrial applications Over the years, we have developed and acquired a number of core technologies that we leverage in selected high-precision assembly and life sciences markets. For example, we offer several light-based curing solutions for optical component manufacturing and have optimized our approach for other industries, such as semiconductor, microelectronic, and medical device manufacturing, in order to maximize revenues. Our Novacure(R)Novacure®, Acticure(R)Acticure®, and Omnicure(R)Omnicure® systems deliver precise doses of the appropriate spectral light onto photosensitive adhesives to significantly reduce bonding time and increase repeatability. These light-based curing systems, supported by patented optical feedback, thermal control, and radiometry technology, produce a high-quality bonding solution that is unmatched in the industry. Our technology and application knowledge place us at the forefront of this market.
In 2005, our X-Cite(TM)2006, we released the new X-Cite® 120 XL Fluorescence Illumination System which
offers 1,500for microscope manufacturers. This next-generation X-Cite 120 XL system, replacing the highly successful X-Cite 120, delivers excellent image quality and at least 2000 hours of lamp life, established itself aswhich is over 60% longer than the leading
fluorescence microscopy solution in North America. We have created
partnershipsprevious model and up to 10 times longer than conventional illumination systems.
The X-Cite 120 XL is a self-contained illumination unit separate from a microscope. A simple light guide attachment through custom-coupling optics ensures a uniform field of view with major microscope manufacturers, who resell this microscope
accessoryno heat from the lamp being transferred to their new and installed basethe sample. The output intensity of customers through their own sales
channels.
On the light-based curing side, we introduced an automated
spot-curing platform,X-Cite 120 XL system can also be adjusted from the OmniCure(TM) Series 2000 that can be controlled via
a personal computer.
optional front-panel control.
The following table summarizes the principal types of high-precision assembly and life science solutions we provide and their typical applications:
- -------------------------------------------------------------------------------------------------------------
LIGHT SOURCES AND ACCESSORIES
- -------------------------------------------------------------------------------------------------------------
PRODUCT TYPE PRODUCT TYPICAL APPLICATION
- -------------------------------------------------------------------------------------------------------------
Light Sources and Accessories |
Product Type | Product | Typical Application |
UV Light Sources Novacure(R) | Novacure® Acticure® Omnicure® S1000 Omnicure® S2000 | Used to initiate photo chemistrychemical reactions in
Acticure(R) polymer-based materials for a variety of end use Omnicure(R) S1000 applications such asapplications. Examples include adhesive curing for
Omnicure(R) S2000 manufacturing of high value-added items such as medical devices, micro-electronic and opto-electronic components, displays, and data storage devices.
- -------------------------------------------------------------------------------------------------------------
|
Fluorescent Light Sources X-Cite(R) | X-Cite® 120XL X-Cite® 120 PC | Fluorescence light source that attaches directly X-Cite(R) 120 PC to most microscopes currently sold by Nikon,
Zeiss, Olympus and Leica.
- -------------------------------------------------------------------------------------------------------------
major microscopes manufacturers. |
Computer Control Module | ACS-1000 | Electronic interface module used to connect EXFO UV light sources to computers or computer networks for process automation.
- -------------------------------------------------------------------------------------------------------------
|
30
- -------------------------------------------------------------------------------------------------------------
LIGHT SOURCES AND ACCESSORIES
- -------------------------------------------------------------------------------------------------------------
PRODUCT TYPE PRODUCT TYPICAL APPLICATION
- -------------------------------------------------------------------------------------------------------------
Optical Accessories | | Optional custom delivery optics used with EXFO UV light sources to tailor the properties of the light beam to end-user applications.
- -------------------------------------------------------------------------------------------------------------
|
High Power Fiber Light Guide | | Provides an equal distribution of light energy to multiple cure sites with 50% more throughput than standard fiber guides
- -------------------------------------------------------------------------------------------------------------
OPTICAL INSTRUMENTS
- -------------------------------------------------------------------------------------------------------------
PRODUCT TYPE PRODUCT TYPICAL APPLICATION
- -------------------------------------------------------------------------------------------------------------
guides. |
OpticalInstruments |
Product Type | Product | Typical Application |
Radiometer | R5000 R2000 | Handheld, broadband optical radiometerradiometers used in conjunction with EXFO UV light sources to ensure process quality control at the end-user location.
Cure-Ring |
Cure-Site Radiometer Measures | | Attachments for the R2000 and R5000 radiometers that enable optical measurements under customer specific configurations. Examples include the cure-ring radiometer, which measures the output power of light from an EXFO cure ring; ideal for applications that requires a uniform 360(degree) exposure
- -------------------------------------------------------------------------------------------------------------
360° exposure. |
Precise Motors/Stages | IW-700 Inchworm Motors High resolution | High-resolution optical alignment, fiber-optic
TSE-820 Inchworm Stages alignment, semiconductor positioning, materials research. |
TSE-820 Inchworm Stages |
UHVL Inchworm Motors research
- -------------------------------------------------------------------------------------------------------------
PRECISION POSITIONING INSTRUMENTS
- -------------------------------------------------------------------------------------------------------------
PRODUCT TYPE PRODUCT LINE TYPICAL APPLICATION
- -------------------------------------------------------------------------------------------------------------
|
Precision Positioning Instruments |
Product Type | Product Line | Typical Application |
Micromanipulators | PCS-6000 Micromanipulators | Electrophysiology research such as patch clamp PCS-5000 Micromanipulators recording experiments on cells from the brain and central nervous system
- -------------------------------------------------------------------------------------------------------------
system. |
PCS-5000 Micromanipulators |
Microscope Platforms | Gibraltar Platform/Stage Applications using upright microscopes
- -------------------------------------------------------------------------------------------------------------
| Stable mechanical platforms that facilitate cellular research with micropositioning and microinjection systems. |
Microinjection Systems | MIS-5000 Microinjection Manipulator | Microinjection and nuclear transfer for genetics Manipulator and reproductive sciences research
research. |
PiezoDrill Inertial Impact Drill
- -------------------------------------------------------------------------------------------------------------
|
Microelectrode Positioner | LSS-8000 Inchworm System | Electrophysiology research such as intracellular recording experiments
- -------------------------------------------------------------------------------------------------------------
|
RESEARCH AND DEVELOPMENT
Research and Development
We believe that our future success largely depends on our ability to maintain and enhance our core technology and product functionality. To keep developing new products and enhancements, it is important that we retain and recruit highly skilled personnel. Our Telecom
Division'sDivision’s research and development department is headed by a Vice-President of Research and Development, while our Life Sciences and Industrial Division has a Director of Research and Development. As of November 1,
2005,2006, our research and development departments included
188264 full-time engineers, scientists and technicians, of whom
2646 hold post-graduate degrees. Gross research and development expenditures in fiscal
20052006 reached
$15.9$19.5 million, compared to
$15.9 million in 2005 and $15.7 million in
2004 and $17.1 million in 2003.2004. We launched
1518 new products in fiscal
20052006 compared to
15 in 2005 and 20 in
2004 and 15 in 2003.2004. Approximately
42%37% of sales in fiscal
20052006 originated from products that have been on the market two years or less
31
compared to 42% in 2005 and 32% in 2004 and 49% in 2003.
2004.Through market-oriented product portfolio review processes at our telecom sites in Quebec City, Canada, and Montreal, Canada, and most recently, Concord, Canada, following the acquisition of Consultronics in 2006, we ensure that our investments in research and development are aligned with our market opportunities and customers'customers’ needs. This process enables us to maximize our returns on R&D investments by focusing our resources on prioritized projects. Quarterly product portfolio review meetings enable us to choose a realistic, balanced mix of new products and allocate the necessary resources for their development. All our projects, including those already underway, are reviewed, given a priority rating and allocated budgets and resources. Our existing projects can be stopped or substantially redefined if there have been significant changes in market conditions, or if the project development schedule or budget have significantly changed.
To manage our research projects once they are underway, we use a structured management process known as the stage-gate approach. The stage-gate approach is based on a systematic review of a project'sproject’s progress at various stages of its life cycle. The following are the key review stages of the stage-gate approach:
o market study and research feasibility;
o product definition;
o development feasibility;
o development;
o qualification; and
o transfer to production.
· | market study and research feasibility; |
· | development feasibility; |
· | transfer to production. |
At each stage, we review our project risks, costs and estimated completion time. We compare our design to anticipated market needs and ensure that our new product development is synchronized with other internal departments and external industry events. Adherence to these inter-related portfolio review and stage-gate processes enabled us to be named winners of the Outstanding Corporate Innovator Award in 2000 by the U.S.-based Product Development and Management Association.
We also maintain research and development programs for our life science and industrial activities in Toronto, Canada. The product development process is managed using a similar stage-gate process, and projects are reviewed and approved through a quarterly portfolio review. The future success of our life science and industrial operations largely depends on our ability to maintain and enhance our core technology in light-based curing, fluorescence illumination systems and piezoelectric positioning.
Strong R&D capabilities
at our Life Sciences and Industrial Division site in Toronto have made it possible to bring a number of successful new products to market quickly and retain customer intimacy. In the process, it has enhanced our ability to customize products for special applications and to develop original equipment manufacturing (OEM) products under partnerships and exclusive contracts. Outside consultants are often used for added support in areas like software development, mechanical design and rapid prototyping.
32
CUSTOMERS
Customers
Our global and diversified telecom customer base relies on our test and measurement solutions to enable optical networks to perform impeccably during their complete life cycles: research, development, manufacturing, installation, maintenance and real-time monitoring. We also have selected customers in high-precision assembly and life science sectors that require our solutions to render them more efficient in their respective fields. Our telecom customers include carriers, cable television companies, public utilities, private network operators third-party installers, equipment rental companies, system manufacturers, component vendors and laboratory researchers. Our life science and industrial customers consist of major manufacturers of medical devices, microelectronics, optical displays, electronic storage systems, and photonic components and microscopes, as well as universities, medical schools, governments, as well asand private and industrial research laboratories. In fiscal 2005,2006, our top customer accounted for 23.3%13.8% of our sales and our top three customers represented 28.4%19.4% of our sales. In comparison, in 2005 our top customer accounted for 23.3% of sales and our top three customers represented 28.4%, while in 2004, our top customer accounted for 13.8% of sales and top three customers 20.8% in 2004,
while in 2003, our top customer accounted for 9.2% of sales and our top three customers 17.5%represented 20.8%.
With regard to geographic distribution, sales to customers in the Americas (US, Canada and Central & South America) represented 68%60% of our sales in fiscal 2005,2006, while sales to customers in EMEA (Europe, Middle East and Africa) and Asia-Pacific accounted for 25% and 15% of sales, respectively. In comparison, the Americas, EMEA and Asia-Pacific accounted for 68%, 20% and 12% of sales, respectively. In
2004respectively, in 2005, and 2003, the sales split was 66% for the Americas,, 18% for EMEA and 16%
for Asia-Pacific.
SALES
, respectively, in 2004.
Sales
We sell our telecom test and measurement solutions through direct and indirect sales channels in North America and around the world.
In North America, we use a hybrid model, combining key account management with direct and indirect sales coverage. We typically use key account managers to serve large customers that generate high sales volumes or might potentially represent high sales volumes in the future. These key account managers are supplemented by regional sales managers, sales engineers, sales representatives and distributors in US metropolitan areas and regional sales managers in Canada.
We opt for a direct sales approach when selling higher-end, highly technical products to sophisticated buyers. Sales of low- to medium-level complexity products to less stringent technical buyers are usually done through a manufacturer representative organization supported by regional sales managers. Our main sales offices and service centers in North America are located in Addison, Texas, and Quebec City, Canada, and Concord, Canada. They are supplemented by a regional presence in cities across the US and Canada.
On the international front, we have sales personnel covering strategic areas such as EMEA (Europe, Middle East and Africa), APAC (Asia-Pacific region) and Latin America. Our sales network in EMEA is supported by a main office and service center in Paris, France,Southampton, UK, which maintains our head of European sales operations and also provides repair and calibration services for our EMEA customers. We also have additional sales offices in multiple countries across EMEA to serve and support our various customers and distributors.
As for APAC, our main sales offices for South East Asia is located in Singapore, while our main
sales representative office for mainland China is located in Beijing, China, which also acts as a service center to better serve our customer base
33
in the whole Asia-Pacific region.that geographic area. In addition, we have other sales offices in strategic locations around the world to support our network of distributors and various customers.We rely on a network of more than 90 distributors worldwide to work with us in supporting mostly our international sales and to participate in a large number of our international events. We believe that the local presence and cultural attributes of our distributors allow us to better serve our global markets.
Our direct telecom sales team consists of a Vice-President of GlobalNorth American Sales and a Vice-President of International Sales. They are supported by fiveseven regional sales Directorsdirectors that are leading a widely distributed team of more than 5565 people acting as key account managers, regional sales managers, sales engineers and application engineers. They are located throughout major metropolitan areas around the world. This group of sales professionals has on average more than 12 years of experience in the fields of telecommunications, fiber optics, or test and measurement. We also have an in-house Customer Service Group to meet the needs of existing and new customers. This group is responsible for providing quotations to customers, supporting our sales force, managing demonstration units, order management, technical support and training as well as calibration and repair services.
The main office for our Life Sciences and Industrial Division is located in Toronto, Canada. We use mixed sales channels to serve various markets supported by this division, depending on product line and geography. Optical light sources and related accessories used for industrial applications are sold in North America through a network of more than 10 manufacturer representatives and, internationally, through a network of more than 20 distributors. The X-Cite 120 Fluorescence Illumination System is sold through value-added reseller agreements with major microscope companies and system integrators in North America;America and Europe; negotiations are underway to extend these agreements worldwide. Nanopositioning products are sold directly to customers in North America, which includes the United States and Canada, and internationally through a network of technical distributors. To gain additional access to the nanopositioning life science research market in the United States and Canada, distributor agreements are in place with major microscope manufacturers, which include Leica, Nikon, Olympus and Zeiss. These companies often combine the sale of their microscopes with our product.
PRODUCT MANAGEMENT, MARKETING/COMMUNICATIONS AND CUSTOMER SUPPORT
PRODUCT MANAGEMENT
Product Management, Marketing/Communications and Customer Support
Product Management
Our telecom Product Management Group consists of two Vice-Presidents -
- one responsible for our Optical
and Protocol product
linelines and the other for
our ProtocolCopper Access product
linelines - as well as product managers who have various degrees in engineering, science and business administration. Product managers, under the direction of the respective Vice-Presidents, are responsible for all aspects of our telecom marketing program including product strategy, new product introductions, definition of new features and functions, pricing, product launches and advertising campaigns. We follow up our marketing initiatives by attending industry trade shows. Furthermore, we have a customer relationship management (CRM) system to compile market and customer information including forecasts, opportunities, leads and competitive data. We use this information to make strategic business decisions. Finally, strategic marketing specialists analyze our markets, compile competitive information and identify macro-trends in our sector.
34
Our Life Sciences and Industrial Group consists of a Director - responsible for both life sciences and precision assembly sectors - as well as product managers who have various degrees in engineering, science and business administration. Product managers, under the direction of the Director, are responsible for all aspects of their business line marketing programs including product strategy, new product introductions, definition of new features and functions, pricing, product launches and advertising campaigns.
MARKETING/COMMUNICATIONS
Marketing/Communications
The Telecom Division'sDivision’s Marketing-Communications team, which consists mainly of project managers, marketing writers, translators and graphic artists, supports our Product Management Group by producing marketing and corporate documentation. Literature includes specification sheets, application notes, product catalogues, advertising copy and an electronic corporate newsletter. This Marketing-Communications team is also responsible for all sales tools required by our worldwide sales force and for updating the marketing contents of our website.
Website.
The Life Sciences & Industrial Division'sDivision’s Marketing-Communications team shares a variety of marketing initiatives. This group is assisted by product managers, who provide the technical data and collaborative support required to produce product specification sheets, catalogues, application notes and multimedia marketing tools. This Marketing-Communications team is also responsible for all advertising material, Website updates, events planning (including trade shows) and direct promotional marketing such as mass mailings and telemarketing. This team also provides the sales tools required by the Life Sciences and Industrial Division'sDivision’s worldwide sales channels, including maintaining our elite partner program.
CUSTOMER SUPPORT
Customer Support
Customer support is deemed a corporate mandate at EXFO. As such, our Customer Support Group handles requests from customers worldwide. Our Customer Support Department consists of three distinct units: Inside Sales, Technical Support and After-Sales Service.
Inside Sales is mainly responsible for guiding customers in purchasing the correct equipment for their respective applications, issuing quotations and promoting our Flexcare service program. In order to provide customers with one central point of contact, our service representatives work with the customer from purchasing equipment to helping them service the equipment, if necessary. These services are provided in English, French, Spanish and Chinese.
Within our Technical Support team, we have agents who provide troubleshooting support to our customers as well as trainers and installers who offer on-site servicing for more complex equipment.
To offer superior after-sales service worldwide, we have service centers based in North America, Europe and Asia. These service centers provide technical support, software upgrades, calibration and repairs for our customers.
MANUFACTURING
Manufacturing
Our
telecom manufacturing operations consist mainly of material planning, procurement, sub-assembly, final assembly and test, software loading, calibration, quality assurance, shipping, billing and customs management. As of November 1,
2005,2006, we had
250294 employees involved in our
telecom manufacturing
35
operations. Most of our manufacturing activities, which occupy a total of approximately 61,300115,000 square feet, are spread among four buildings in three cities.Our Telecom Division occupies 50,00096,000 square feet in Quebec City, Canada, spanning two sites, and 3,3007,000 square feet in Montreal, Canada, and 12,000 square feet in Concord, Canada. These manufacturing operations include the following responsibilities:
o PRODUCTION.
· | Production. From production planning to product shipment, our production department is responsible for manufacturing high-quality products on time. Factories are organized in work cells; each cell consists of specialized technicians and equipment and has full responsibility over a product family. Technicians are cross-trained and versatile enough, so that they can carry out specific functions in more than one cell. This allows shorter lead times by alleviating bottlenecks. |
· | Product Engineering and Quality. This department, which supports our production cells, acts like a gatekeeper to ensure the quality of our products and the effectiveness of our manufacturing processes. It is responsible for the transfer of products from research and development to manufacturing, product improvement, documentation, metrology, and the quality assurance and regulatory compliance process. Quality assurance represents a key element in our manufacturing operations. Quality is assured through product testing at numerous stages in the manufacturing process to ensure that our products meet stringent industry requirements and our customers’ performance requirements. Our quality assurance program has been certified ISO 9001/2000 at all Telecom sites. |
Table of specialized technicians and equipment and has full
responsibility over a product family. Technicians are cross-trained
and versatile enough, so that they can carry out specific functions
in more than one cell. This allows shorter lead times by alleviating
bottlenecks.
o PRODUCT ENGINEERING AND QUALITY. This department, which supports our
production cells, acts like a gatekeeper to ensure the quality of our
products and the effectiveness of our manufacturing processes. It is
responsible for the transfer of products from research and
development to manufacturing, product improvement, documentation,
metrology, and the quality assurance and regulatory compliance
process. Quality assurance represents a key element in our
manufacturing operations. Quality is assured through product testing
at numerous stages in the manufacturing process to ensure that our
products meet stringent industry requirements and our customers'
performance requirements. Our quality assurance program has been
certified ISO 9001/2000 at our two locations in Quebec City, Canada
and our Montreal site received the same certification on November 16,
2005.
o SUPPLY-CHAIN MANAGEMENT. This department is responsible for sales
forecasting, raw material procurement, material-cost reduction and
vendor performance management. Our products consist of optical,
electronic and mechanical parts, which are purchased from suppliers
around the world. Approximately one-third of our parts are
manufactured to our specifications. Materials represent the biggest
portion of our cost of goods and will continue to grow as we rely
more and more on outsourcing our manufacturing. Our performance is
tightly linked to vendor performance, requiring greater emphasis on
this critical aspect of our business.
Contents · | Supply-Chain Management. This department is responsible for sales forecasting, raw material procurement, material-cost reduction and vendor performance management. Our products consist of optical, electronic and mechanical parts, which are purchased from suppliers around the world. Approximately one-third of our parts are manufactured to our specifications. Materials represent the biggest portion of our cost of goods and will continue to grow as we rely more and more on outsourcing our manufacturing. Our performance is tightly linked to vendor performance, requiring greater emphasis on this critical aspect of our business. |
Our Life Sciences and Industrial Division'sDivision’s manufacturing operations occupy 8,000 square feet in Toronto, Canada. This group manufactures light sources and related accessories, fluorescence illumination systems and precise positioning equipment for the life sciences and high-precision assembly markets. Operations consist of manufacturing, procurement, warehousing, quality control and document control managed by various elements of the ISO 9001 certified quality system. Recognizing the importance of reduced time-to-market for our solutions, we have focused efforts on designing products with an emphasis on standardization, modularity, as well as ease of fabrication and assembly. Following are key manufacturing responsibilities in Toronto:
MANUFACTURING
Manufacturing - consists primarily of assembly and test capabilities wherein which all major manufacturing elements are subcontracted to various key suppliers. These components are integrated into assemblies and tested in order to ensure all operating specifications have been met for each product manufactured. CapacityCross-training of assembly technicians for each product group ensures scalability of manufacturing to meet customer demand. In addition, this group is responsible for capacity and production planning, which are utilizednecessary on an ongoing
36
on-going basis to ensure that adequate resources are available to meet forecasted and actual demand.
PROCUREMENT Supply Chain Management - activities are focused onis responsible for the planning of materials required by manufacturing and developing key suppliers that
are ablekey-supplier relationships to manufacture componentsensure materials have been manufactured to our specificationsspecifications. This group’s main focus is to work with our worldwide supplier base to find effective manufacturing and ensuring the most
competitive price has been attained. Supplierlogistic solutions in order reduce costs and cycle time. Paramount to this process is an effective communication system that provides timely feedback to our suppliers and forms an important element of our supplier evaluation system.
Manufacturing Engineering and Quality Assurance - is the joint
departmental effort of operations, engineering and the quality group.
WAREHOUSE/RECEIVING - in-coming inspection and warehousing of
components usedresponsible for product realization, alongintegrity throughout the manufacturing cycle. From the release of new products, through our new product introduction process, and configuration management to manage engineering change, we ensure consistent manufacturing processes throughout the product life cycle. In conjunction with shipping and custom
transactions, are controlled in this area.
DOCUMENT CONTROL - configuration control on all released productsthe above process, quality is maintained by managing the system for engineering change.
QUALITY CONTROL - Receiving inspection,performing quality tests at incoming receiving and final product verification,
control of non-conformingverification. The responsibility for product control of inspection, testquality is shared by all team members throughout the company and measurement
equipment are control by in area.
COMPETITION
does not reside solely with the quality group.
Competition
The telecommunications test and measurement industry is highly competitive and subject to rapid change as a result of technological developments and market conditions. We compete with many different companies, depending on product family and geographical market. We believe that the main competitive factors in the industry include the following:
o product performance and reliability;
o price;
o
· | product performance and reliability; |
· | level of technological innovation; |
· | breadth of product offerings; |
· | brand-name recognition; |
· | customer service and technical support; |
· | strength of sales and distribution relationships; and |
Generally, competitors fall into two categories. The first category consists of global test and measurement vendors, who complement their broad range of products with opticaltelecom test and measurement equipment. These companies include Agilent Technologies, Inc., Ando Corporation, Anritsu Corporation, JDS Uniphase Corporation, Spirent plc, and Tektronix, Inc., and Yokogawa.
The second category refers to niche companies in the telecom test and measurement industry. These companies typically have limited product lines and in some cases may be geographically limited in their customer base. Such companies include Digital Lightwave Inc., IxiaFluke Networks, an operating division within Danaher Corporation, IXIA, and Sunrise Telecom Incorporated.
Inc.
Competition for our life sciences and industrial solutions is quite varied, depending upon product line. Competitors that sell light-based curing products include Hamamatsu, Ushio and Matsushita (Panasonic) in Asia, with Hamamatsu increasing its presence in North America. With regard to our X-Cite 120 Fluorescence Illumination System, main competitors consist of microscope manufacturers who have developed lamp housings for low-wattage mercury burners
37
in-house. Finally, our motion control Life Science instruments, which are designed for various life science applications, compete against products from companies like Sutter Instruments and Narishige.
REGULATORY ENVIRONMENT
Regulatory Environment
In most countries where our products are sold, our products must comply with the regulations of one or more governmental entities. These regulations often are complex and vary from country to country. Depending upon the country and the relevant product, the applicable regulations may require product testing, approval, registration, marking and unique design restrictions. Accordingly, we have appointed a team of engineers who are responsible for ensuring that our products comply with all applicable regulations.
In the United States, our products must comply with the regulations of several agencies of the U.S. federal government, including the Federal Communications Commission (FCC), the Food and Drug Administration (FDA) and the Occupational Safety and Health Administration (OSHA). Under the FCC'sFCC’s regulations, our products must comply with certain electro magnetic compatibility (EMC) requirements to insure they do not generate and are immune from electrical noise which could possibly cause undesirable operation, as well as affect other surrounding devices. Depending upon the product, compliance with these rules may necessitate applying for and obtaining an FCC equipment authorization prior to importing into the United States, or marketing, any units of the relevant product. Additionally, some of our products must comply with the FDA'sFDA’s non-medicalperformance standards and related rules concerning light-emitting products, such as lasers. The FDA'sFDA’s regulations are intended to promote safety by limiting human exposure to harmful non-iodizing radiation. Similarly, our products must comply with safety standards adopted by OSHA.
Similar regulations apply in other countries. For example, in Canada our products must comply with the applicable standards adopted by the Standards Council of Canada (SCC). These include product safety standards developed by the Canadian Standards association as well as EMC requirements adopted by Industry Canada. Countries in the European Union require product compliance as dictated by an applicable directive, often referred to as CE marking. This includes testing to ensure compliance with harmonized European Norm (EN) standards for both product safety and EMC requirements. Other significant types of regulations not described in this annual report also may apply, depending upon the relevant product and country of destination.
In Europe, with the implementation of the WEEE directives for recycling of electronic products in selected European Countries (2002-96-CE), we have appointed a task force committee consisting of our management and employees, distributors and other partners as the case may be, to ensure full compliance with regulations and oversee the management, logistics, recycling rate, disposal services and activities related to recycling of electronic equipment and products within the member states.
INTELLECTUAL PROPERTY
Intellectual Property
Our success and ability to compete are dependent in part on our ability to develop and protect our proprietary technology. We file U.S. and
Canadian patentinternational applications to protect technology, inventions and improvements important to the development of our business. We also rely on a combination of copyright, trademark, trade secret rights, licensing and confidentiality agreements.
38
We currently hold 32
As of August 31, 2006, EXFO held 27 actively maintained granted patents from the U.S. (including one “design” patent), sixeight from Canada, two from Germany, two from the United Kingdom, two from France, and one from China-issued
patents and we haveChina. In addition, EXFO has 15 from U.S.,US patent applications in process, 14 from Canada,Canadian patent applications in process, two from China, one from Germany and twothree Patent Cooperation Treaty patent applications pending. These issued and pending patents cover various aspects of our products and processes. The expiration dates of our issued patents range from April 19,
2011October 3, 2008 to October 5, 2025.
We consider eight of our inventions for which patents have either been granted or are pending to be material. These inventions are:
o a method and apparatus for identification and characterization
· | a method and apparatus for “non-intrusive” live-fiber detection and monitoring, for which a PCT patent application has been filed. This invention permits a fiber “clip-on” device to be attached to a cabled fiber, essentially guaranteeing that the induced bending loss to a live-traffic link will never exceed 1 dB. This is a key invention for our new LFD-250, LFD-300, and TG-300 products, announced in September 2006, subsequent to the end of the 2006 fiscal year. |
· | the measurement of attenuation of optical fibers using bidirectional transmission of information via the fiber for which patents were granted in the United States and Canada. This invention forms the basis of our FOT-930 and FTB-3920 products; |
· | a method and apparatus for characterizing optical power levels in three-wavelength, bidirectional fiber-to-the-home systems. This invention describes how the optical power can be measured at the two-downstream and one upstream wavelengths used to connect a residence or business customer, while maintaining the signal continuity necessary to keep the home-based Optical Network Terminal operating. US and PCT patent applications have been filed and are in process. This invention forms the basis of the two-port version of our PPM-350B PON Power Meter. |
· | an optical spectrum analyzer using optical fibers as input and output “slits”. This invention forms the basis of our FTB-5240, FTB-5240B and IQ-5250 products. A patent has been granted in the US, UK, Germany, France, and China, and an application is in process in Canada. |
· | a light-curing system with closed-loop control and work-piece recording which is at the heart of the spot-curing systems manufactured by EXFO Photonic Solutions and for which patents were granted in the United States and Canada; |
· | a special optical design used in some of the X-Cite adaptors to prevent structure in the beam from reducing the uniformity of illumination at the microscope objective plane, which is a key patent for our X-Cite fluorescent illumination system. A US patent has recently been granted. |
· | portable test gear for TDM and packet-based communications for which patent applications have been filed in Canada, the United States and pursuant to the Patent Cooperation Treaty form the basis of the technology used by EXFO Protocol for a number of its protocol testing products. |
· | a method and apparatus to determine the theoretical and practical data rates for a cable under test. This invention forms the basis of the EXFO CableSHARK product, describing how two test devices, communicating with each other via the cable under test, can predict the performance of a pair of ADSL (Asymmetric Digital Subscriber Line) modems, and in case of problems, analyze the cause of the modems failing to synchronize. This patent has been granted in the US and in Canada. |
Table of multiple fibers using an OTDR. This invention targets
fiber-to-the-home testing applications where a single technician
needs to verify that the multiple fibers in a distribution cable are
correctly identified and then measure their loss;
o the measurement of attenuation of optical fibers using bidirectional
transmission of information via the fiber for which patents were
granted in the United States and Canada. This invention forms the
basis of our FOT-930 and FTB-3920 products;
o a method and apparatus for characterizing optical power levels in
three-wavelength, bidirectional fiber-to-the-home systems. This
invention describes how the optical power can be measured at the
two-downstream and one upstream wavelengths used to connect a
residence or business customer, while maintaining the signal
continuity necessary to keep the home-based Optical Network Terminal
operating. A PCT patent application has been filed and is in process.
This invention forms the basis of the two-port version of our
PPM-350B PON Power Meter.
o a method and apparatus to determine optical phase delay, which forms
the basis of our new FTB-5800 product for the measurement of
chromatic dispersion in field-installed optical fibers. A US patent
has been granted, and applications have been submitted in Canada,
Europe (pursuant to PCT), and China;
o an optical spectrum analyzer using optical fibers as input and output
"slits". This invention forms the basis of our FTB-5240, FTB-5240B
and IQ-5250 products. A US patent and a Chinese patent have been
granted and applications are in process in the United States, Canada,
and Europe (pursuant to PCT);
o the light-curing system with closed-loop control and work-piece
recording which is at the heart of the spot-curing systems
manufactured by EXFO Photonic Solutions and for which patents were
granted in the United States and Canada;
o Intelli-lampTM patents used in the spot curing and fluorescence
microscopy illumination systems optimize lamp performance in EXFO
Photonic Solutions systems. Two patents have been granted in the US,
and applications are pending in Canada and Germany.
o the portable test gear for TDM and packet-based communications for
which patent applications have been filed in Canada, the United
States and pursuant to the Patent Cooperation Treaty form the basis
of the technology used by EXFO Protocol for a number of its protocol
testing products.
Contents Confidentiality and proprietary information agreements with our senior management, employees and others generally stipulate that all confidential information developed or made known to these individuals by us during the course of their relationship is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements also generally provide that all intellectual property developed by the individual in the course of rendering services to us belongs exclusively to us. These efforts afford only limited protection.
39
As of November 1,
2005,2006, the following chart presents our corporate structure, the jurisdiction of incorporation of our subsidiaries and the percentage of shares that we hold in those subsidiaries.
[GRAPHIC OMITTED -- ORGANIZATIONAL CHART]
--------------------
EXFO Electro-Optical
Engineering Inc.
18/09/1985
(Canada)
Operating
--------------------
|
|
|
100% 100% 100% 100% 100% 100% 100% 100%
- -- --------------- ------------- -------------- ------------ ---------- ---------------- ---------------- ----------------
| EXFO UK Limited EXFO Photonic GEXFO GAP Optique EXFO Asia Nortech Fibronic EXFO Protocol Burleigh
| (United Kingdom) Solutions Inc. Distribution SA Pacific Inc. Inc.(formerly) Instruments GmbH
| Dissolved (formerly Efos Internationale 17/05/1994 PTE Ltd. 14/08/1991 Avantas Networks (Germany)
| 25/11/2003 Inc.) Inc. (Switzerland) 18/01/2001 (Canada) Corporation) Non-operating
| 20/02/1984 17/12/1992 Non-Operating (Singapore) Non-operating 02/11/2001
| (Ontario) (Quebec) Operating (Canada)
| Operating Holding Dissolved
| 12/09/2003
| | |
| -------------------------------------------- -------------
| 100% 100% 100% 100%
| ------------------ ----------- ---------- -------------
| EXFO Spain Holding EXFO Europe EXFO USA Nortech
| S.L. 08/02/1994 SARL Inc. Fibronic Inc.
| (Spain) 08/02/1994 07/12/2000 (Texas)
| Holding (France) (Delaware) Dissolved
| Operating Holding 07/09/2001
| | |
| ------------------- ------------------------------------------
| 100% 100% 100% 100%
| ------------------- ------------ --------- -------------
| EXFO International EXFO America EXFO EXFO Gnubi
| Services Management Inc. Burleigh Products
| LLC 15/12/1992 Products Group Inc.
| 22/11/2000 (Delaware) Group Inc. 04/09/2002
| (Hungary)-Operating Operating 25/08/1972 (Delaware)
| (New York) Non-Operating
| Non-Operating
| / \
| -------------------------------------------
| 71.5% 100%
| ------------- -------------
| Burleigh Burleigh
| 28.5% Instruments Automaton
- ----------------------------------- (UK) Ltd. Inc.
(United (Delaware)
Kingdom) Non-Operating
Dissolved
12/11/2002
Our mainhead offices and facilities are located in Quebec City, Canada where we now occupy two buildings. These buildings house our executive and administrative offices, research and development facilities and production facilities. We also have facilities in Montreal, Canada (formerly EXFO Protocol) and, in Concord, Ontario, Canada (formerly Consultronics Limited), in Toronto, Canada (EXFO Photonic). and our Copper Access business unit (Telecom Division) has operations in Budapest, Hungary and Southampton, United Kingdom. EXFO Burleigh'sBurleigh’s facilities
are located in Victor, New York, and are presently for sale.
were sold on August 31, 2006.
In addition, we maintain sales offices and/or have regional sales managers located in China, France, Germany, Great Britain, Italy, Japan, Mexico, Singapore, Spain, United Arab Emirates and the United States.
In September 2002, we obtained ownership of one of the buildings housing production facilities in Quebec City that was previously leased from a company controlled by
EXFO'sEXFO’s president and chief executive officer. In September 2003, due to down-sizing efforts, we were able to move all of our Quebec City activities into two buildings, rather than three. Though we no longer occupy the facilities at 465 Godin Avenue in
Vanier,Quebec City, we remain bounded by the lease until November 30, 2006. However, on September 1, 2004, we were released from our obligations under the lease with a final payment of $194,000 (CA$250,000).
40
The following table sets forth information with respect to the main facilities that we occupy as of November 1, 2005.
2006.
LOCATION USE OF SPACE SQUARE FOOTAGE TYPE OF INTEREST
-------- ------------ -------------- ----------------
Location | Use of Space | Square Footage | Type of Interest |
436 Nolin Street Quebec (Quebec) | Manufacturing of telecom products | 44,164 | Owned
Vanier (Quebec)
|
400 Godin Avenue Quebec (Quebec) | Research and Development, Manufacturing, 128,800 Owned
Vanier (Quebec) Executivedevelopment, manufacturing, management and Administrative
administration | 128,800 | Owned |
2260 Argentia Road Mississauga (Ontario) | Partially occupied for research and development, manufacturing of life science and industrial products and administration | 25,328 (1) | Leased |
2650 Marie-Curie, St-Laurent (Quebec) | Research and 25,328 (1) development, manufacturing and administration | 26,000 | Leased
Mississauga |
160 Drumlin Circle Concord (Ontario) Development, Manufacturing | Fully occupied building for research and development, manufacturing of Life
Science and IndustrialEXFO’s Copper Access Business Unit products, and
Administrative
2650 Marie-Curie product management, administration | 23,500 | Owned |
Vármegye utca 3-5 (Ausztria Ház) Budapest, Hungary | Research and Development, Manufacturing 26,000 Leased
St-Laurent (Quebec)development, services (installation, training, support and Administrative
7647 Main Street Fishers Unoccupied 0 (2) Owned
Victor (New York)
maintenance) and administration | 2,500 | Leased |
Omega Enterprise Park Electron Way, Chandlers Ford, Hampshire England | Partially occupied for European customer service, sales management, administration and research and development | 10,000 | Leased |
1) 10,672 square feet have been subleased to a third party. The total square
footage leased is 36,000.
2) The total square footage owned is 40,000, is unoccupied(1) | 10,672 square feet have been subleased to a third party. The total square footage leased is 36,000. |
Not applicable.
Item 5.Operating and is presently
for sale.
41
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Review and Prospects The following discussion and analysis of the consolidated financial condition and results of operations of EXFO Electro-Optical Engineering Inc. for the fiscal years ended August 31, 2003, 2004, 2005 and 2005,2006, should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report.annual report. Our consolidated financial statements are reported in US dollars and have been prepared in accordance with generally accepted accounting principles in Canada, or Canadian GAAP. Significant differences in measurement and disclosure from generally accepted accounting principles in the United States, or U.S. GAAP, are set out in note 2120 to our consolidated financial statements. Our measurement currency is the Canadian dollar although we report our financial statements in US dollars.
The following discussion and analysis of financial condition and results of operations is dated November 3, 2005.
1, 2006.
All dollar amounts are expressed in US dollars, except as otherwise noted.
INDUSTRY OVERVIEW
Leading
Global market demand for telecom test and measurement equipment should remain strong in the years to come as most network service providers (NSPs) are increasing capital expenditures to upgrade their networks for converged Internet protocol (IP) services and triple-play (voice, data and video) offerings. These market forces create needs for differentiated test solutions to help NSPs accelerate deployment and ensure service quality in their network build-outs.
With the ongoing globalization of the world’s economy and the emergence of new consumer markets, NSPs are poised to capitalize on growing demand for communications and entertainment services. Early in 2006, some smaller telecom operators launched broadcast-quality video services based on IP communications. This technology, better known as IPTV, allows telephone companies (telcos), mostly to efficiently offer TV, HDTV and interactive TV services to their broadband subscribers. Tier-1 and Tier-2 telcos are expected to launch similar IPTV services on a large-scale basis starting in 2007. While Web-based streaming video is offered for free on a best-effort basis, IPTV, whom many regard as the United States,
acceleratedbroadband “killer application,” will require a high level of performance to ensure a quality user experience. NSPs, after all, don’t want customer churn to prevent a meaningful return on their massive investments.
To deliver a wide range of differentiated IP services, NSPs will continue transforming their legacy, circuit-switched networks into highly efficient, flexible and scalable packet-based IP architectures. Telcos and cablecos have already proven that they can generate significant revenues from higher-margin services on hybrid networks, while reducing operating costs. IPTV should only accelerate the migration towards fully converged, IP-based networks, since it typically allows NSPs to nearly double average revenue per user (ARPU).
The increasing reliance on telecom and IP-related services will continue driving bandwidth consumption, thus pushing the deployment of fiber deployments deeper in theirinto access networks during the last
year because they are involved in a triple-play war (even quadruple-play with
wireless telephony) against cable TV operators (cablecos) to offer consumers
bundled voice, data and video services. This broadband warnetworks. Competition between telcos and cablecos contributed to an increase in wireline capital expenditures in 2005,
especially inhas intensified as triple-play offerings are announced almost daily. Hybrid architectures combining copper and fiber (fiber-to-the-curb, or FTTC and fiber-to-the-node, or FTTN), will keep expanding worldwide, since this is the United States.
Leading US telcos, along with a number of Tier-IIquickest and Tier-III
players, opted for an assortment of deployment strategies, including
fiber-to-the-node (FTTN), fiber-to-the-curb (FTTC), fiber-to-the-home (FTTH)
or its equivalent fiber-to-the premises (FTTP), depending on the bets they
placed in terms of how much bandwidth will be required to meet the challenge
from the cablecos. These deployments, which fall under the generic FTTx name,
are not as prevalent in Europe and Asia. However, test trials are underway in
these regions as a meansleast expensive method to increase revenues by delivering video services to
undercut competition. Note that Japan and Korea already have FTTx deployment
programs, aimed at delivering 100 Mb/s to every home, well underway.
As the demand for broadband services increases worldwide, voice, data
and video are becoming mere applications on converged, IP-based networks.
Telcos around the worldbandwidth. To remain competitive with cablecos, telcos are migrating from public switched telephone networks
(PSTN)former asymmetric digital subscriber line (ADSL), to packet-based, IP networks in ordercurrent ADSL2+, and onto future very-high-data-rate digital subscriber line 2+ (VDSL2+) technologies as interoperability becomes demonstrable. Telcos, however, will increasingly opt for all-fiber, passive optical network (PON)-based architectures (fiber-to-the-premises, or FTTP) to achieve substantial reductions
inmeet heightened bandwidth requirements and to future-proof their networks. These decisions will apply not only to green-field deployments and high-rise buildings, but also to larger-scale rollouts as operating expensescosts are less than FTTC and increased profitability. British Telecom Group, for
example, announced it will spend (British Pound)10 billion over five years on
its 21st Century Network to reduce operating expenses by up to (British Pound)
1.0 billion per year through a single network carrying voice, dataFTTN and video
signals.
Legacy SONET/SDH networks were designedcost of deployments are falling. We are still in the late 1970searly stages of building access networks around the world.
Metro network deployments, taking advantage of carrier-grade Ethernet and metro-Ethernet technologies are moving ahead to
carry
voice traffic. Their efficiency however can often times drophandle large increases in bandwidth consumption in access networks. These network upgrades, in turn, will eventually place a strain on long-haul networks, where excess capacity created by massive overspending in the late-90s is gradually being consumed. NSPs are more than ever committed to
as low as 30%
when combining voice, data and video services. Next-generation networks, such
as those announced by British Telecom, represent a major technological
improvement, since they can deliver triple-play services at near 100%
efficiency, regardless of the payload content,deploying next-generation SONET/SDH transport technologies, while
significantly reducing
the cost of operating and maintaining networks.
42
40 Gb/s deployments are not far behind.
These key market trends affected multiple segments of the global telecommunications supply chain in 2005.fiscal 2006. System manufacturersvendors benefited from orders by both telcos and cablecos for next-generation, converged IP networks as well as from major investments by telcos in access networks. Component vendors saw incrementalincreased demand for optical components that support FTTx and IP-based systems. Some test and measurement equipment vendors attracted the attention of telcos, cablecos, system manufacturers and component vendors, especially ones offering test solutions for IP optical networking and/or FTTx applications.
COMPANY OVERVIEW
EXFO is a recognized test and measurement expert in the global telecommunications industry
through the design and manufacture of advanced and innovative test and
measurement solutions.industry. The Telecom Division, which represents our main business activity, offers afully integrated and complete range of dedicated and integrated test solutions to network service providers (NSPs), cable TV operators, telecom system vendors and component manufacturers in approximately 70 countries. OneWe are the global market leader for portable optical test solutions and a leading supplier of our strong
competitive advantages is ourprotocol and copper access test solutions to enable triple-play services over converged, IP networks. Our PC/Windows-based modular FTB-200, FTB-400 and IQS-500 test platforms design, based onhost a PC/Windows-centric architecture, which offers a serieswide range of test modules that
maximizesolutions across optical, physical, data and network layers, while maximizing technology reuse across multipleseveral market segments at minimal redesign
cost. Thesegments. Our Life Sciences and Industrial Division, formerly called Photonics and
Life Sciences Division, mainlywhich leverages several core telecom technologies, to offeroffers value-added solutions forin the life sciences applications and high-precision assembly processes,sectors, such as those required for microelectronics and optoelectronics. This year marked EXFO's 20th anniversary, as the company wasThese solutions are based on advanced spot-curing, fluorescence microscopy and nanopositioning solutions.
We were founded in 1985 in Quebec City, Canada. Our original products were focused on the needs of installers and operators of fiber-optic networks. Customers use these field-portable testing products for the installation, maintenance, monitoring and troubleshooting of optical networks. In 1996, we supplemented our product portfolio with an extensive line of high-end products that are mainly dedicated to research and development as well as manufacturing activities of optical component manufacturers and system vendors.
In
Over the last fourpast several years, we have enhanced our competitive position through the acquisition of two protocol test businesses in order to expand our product offering and address our customers'customers’ requirements more completely. In November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol Inc.), a supplier of protocol-testing and optical-network performance management equipment for NSPs. This transaction was highly strategic because it enabled us to combine optical and protocol test modules inside a single field-portable test platform to help our customers increase revenues and reduce operating costs. In October 2002, our wholly-owned subsidiary, EXFO Gnubi, purchased substantially all the assets of GNUBI COMMUNICATIONS,gnubi communications, L.P., a supplier of multi-channel telecom and datacom testing solutions for the system manufacturer market. These strategic acquisitions, which were consolidated in Montreal, Canada, in fiscal 2004, enabled us to more than double our addressable market, as we expanded from optical testing to protocol testing applications, and to offer a more complete line of test solutions to our customers.
During the second quarter of 2006, we announced and subsequently completed the acquisition of substantially all the assets of Consultronics Limited. Based in Toronto, Canada, and with operations in Southampton, United Kingdom, and Budapest, Hungary, Consultronics is a leading supplier of test equipment for copper-based broadband access networks. It ranked among the top three vendors in handheld x-digital subscriber line (xDSL) testing with a global market share of 13.4%, according to an industry report from Frost & Sullivan, a leading authority in the fiber-optic test and measurement industry. Consultronics also boasts a rich product portfolio for testing next-generation technologies, such as IPTV (Internet Protocol TV) and VoIP (Voice-over-Internet Protocol), which are critical for network service providers in their deployment of triple-play services (voice, data, video) over optical and copper links in access networks. Other test solutions offered by Consultronics include network monitoring probes for VoIP and legacy telephone networks, Gigabit Ethernet analyzers for remote testing applications, as well as protocol and physical characterization instruments for local copper loops (copper access networks). This acquisition is a strategic initiative to position EXFO as a genuine one-stop shop for broadband access and triple-play testing, since it greatly complements our market leadership in the FTTx market.
This acquisition was settled for a total cash consideration valued at $19.1 million, or $18.8 million net of cash acquired. Total consideration included acquisition-related costs of $1.5 million. The estimated fair value of acquired intangible assets amounts to $8.7 million. These intangible assets, namely core technology, are amortized on a straight-line basis over their estimated useful life of five years. Consultronics, which is now part of our Telecom Division, contributed about seven months to our consolidated financial results in fiscal 2006.
Previously, we had completed two acquisitions to bolster growth in the optical component manufacturing market. We acquired Burleigh Instruments, Inc. (renamed EXFO Burleigh Products Group Inc.) in December 2000 for its wavelength measurement instruments and nanopositioning alignment systems. We also added EFOS Inc. (renamed EXFO Photonic Solutions Inc.) in March 2001 for its precision light-based, adhesive spot-curing technology. We have since exited the optical component manufacturing automation
business.
43
In fiscal 2005, we launched 15 new products, including a
next-generation SONET/SDH analyzer for characterizing converged, IP-based
networks; a 10 Gigabit Ethernet (GigE) test solution to assess qualitybusiness and EXFO Burleigh’s operations have been mostly consolidated with those of serviceEXFO Photonic in core and metro networks; a new software suite for remote Ethernet
testing and commissioning applications; an all-band component analyzer for
FTTx and coarse wavelength-division multiplexing (CWDM) applications inToronto, Canada.
During the manufacturing/R&D market; a seriesfirst quarter of three handheld test instruments for the
installation and maintenance market; and an optical spectrum analyzer (OSA)
for CWDM applications in metro and access networks. In addition, we formed an
alliance with ADC Telecom to provide a unique remote Ethernet test solution
for first-mile applications.
In 2005, we also consolidated our leadership position in the FTTx
test market by recognizing significant revenue from two leading U.S. carriers
deploying fiber in their access networks. Our top customer accounted for 23.3%
of sales in 2005. Subsequent to the year-end,2006, we were selected as sole-source supplier by Deutsche Telekom for all its fiber deployment test applications by Deutsche Telecom AG - including FTTx.
We recorded a foreign exchange loss of $1.3 million in fiscal 2005
due to the significant increase
Early in the value of the Canadian dollar versus the
US dollar during that year. In addition to this foreign exchange loss, our P&L
(profits and losses) line items in 2005 were also negatively affected by the
appreciation of the Canadian dollar, since a significant portion of our
expenses are incurred in Canadian dollars while we report our results in US
dollars.
In the thirdfourth quarter of fiscal 2005, EXFO was named recipient of the
2005 Growth Strategy Leadership Award by2006, Frost & Sullivan a leading market
research firm in the telecommunications test sector. The award is presented
annuallyreleased new market-share numbers for calendar 2005. According to the industry report, EXFO was the only company whose visionaryto report significant organic growth strategy generates the largest
market-share gains in the global fiber-optic test equipment (FOTE) market, moving from 10.3% in 2004 to 11.0% in 2005 for third place overall in the previous year.FOTE market. Based on athis report, by Frost & Sullivan, we increasedestimate that we improved our leadership position in our core installation and maintenance test market sharesegment from 8.4%22.2% in 2004 to 23.0% in 2005.
We launched 18 new products in fiscal 20032006, including among others the two-slot FTB-200 Compact Platform for multi-layer and multi-medium testing; the handheld AXS-100 OTDR for fiber-to-the-x (FTTx) test applications; SONET/SDH test modules measuring transmission rates up to 10.3%10 Gb/s for the FTB-200 Compact Platform; next-generation SONET/SDH test modules for the FTB-400 field-test and IQS-500 R&D/manufacturing platforms; 10 Gigabit Ethernet and Fibre Channel test solutions for our IQS-500 R&D/manufacturing platform; the next-generation CoLT-450P, a handheld IPTV and xDSL test solution for high-speed, copper-based networks; and the PPM-352B-EG Passive Optical Network (PON) Power Meter, optimized for Ethernet PON and Gigabit PON architectures.
In fiscal 2006, in 2004. This marked the second
consecutive year that we earned this industry award.
Finally, during fiscaladdition to reporting significant growth in sales with $128.3 million, compared to $97.2 million in 2005, we completed the consolidationrenewed with GAAP profitability and reported GAAP net earnings of our
Life Sciences and Industrial Division$8.1 million, or $0.12 per diluted share, compared to a net loss of $1.6 million, or $0.02 per diluted share in Toronto and we recorded $482,000 in
restructuring expenses. Altogether, we incurred $2.5 million in restructuring
and other charges since2005. Also, the fourth quarter of 2004fiscal 2006 marked the seventh consecutive quarter of GAAP profitability. GAAP net earnings in conjunction with this
consolidation process.
SALES
fiscal 2006 included $4.4 million in amortization of intangible assets, $1.0 million in stock-based compensation costs, $604,000 in impairment of long-lived assets and non-recurring grant revenue of $1.3 million.
Sales
We sell our products to a diversified customer base in approximately 70 countries through our direct sales force and indirectly, through
distribution channels.channel partners like sales representatives and distributors. Most of our sales are denominated in US dollars and Euros.
Historically, it has been very unusual to have any customer account
for more than 10% of our sales. However, in both
Over the last three fiscal 2004 and 2005,years, we had one customer that accounted for 13.8% and 23.3%more than 10% of our global sales respectively. Inwith 13.8%, 23.3% and 13.8% in fiscal 2006, 2005 our top three customers accounted for 28.4%, compared to 20.8% in
2004.and 2004, respectively. We believe the significant sales concentration in fiscal 2005 iswas largely due to our leadership position in the FTTx test market, as a large portion of our sales to our top customer was for a series of products related to FTTx deployment. Although this sales concentration significantly decreased in fiscal 2006, as this customer migrated to lower-priced test solutions, we still maintained our leadership position with this customer, while strongly developing other accounts, especially on the international scene. This allowed us to reach a level of concentration closer to our historical pattern, which reflectsthe improved diversification of our customer base. All in all, our year-over-year sales growth in fiscal 2006 stands at 48.2% (excluding the major account mentioned above). We expect this sales concentration to further decrease in fiscal 2006,2007, as we continue efforts to diversify our customer base.
44
Despite the fact that we had one customer that accounted for a
substantial part of our sales in fiscal 2005, webase and expend on international markets.
We believe that we have a vast array of products and a diversified customer base, both in terms of industry sector and geographical area, which provides us with reasonable protection against concentration of sales and credit risk.
COST OF SALES
Cost of Sales
Cost of sales includes raw materials, salaries and related expenses for direct and indirect manufacturing personnel (net of government grants) as well as overhead costs. Excess, obsolete and scrapped materials are also included in cost of sales. However, cost of sales is exclusive of amortization, which is shown separately in the statements of earnings.
OPERATING EXPENSES
Operating Expenses
We classify our operating expenses into three main categories: selling and administrative expenses, research and development expenses and amortization expenses.
Selling and administrative expenses consist primarily of salaries and related expenses for personnel, (net of government grants), sales commissions, travel expenses, marketing programs, professional services, information systems, human resources and other corporate expenses.
Gross research and development expenses consist primarily of salaries and related expenses for engineers and other technical personnel, material component costs as well as fees paid to third-party consultants. We are eligible to receive research and development tax credits and government grants on research and development activities carried out in Canada. All related research and development tax credits and government grants are recorded as a reduction of gross research and development expenses. Tax credit write-offs
are also included in net research and development expenses.
Operating charges related to our restructuring plans have beenand impairment of long-lived assets are recorded as a separate component of operating expenses. These chargesCharges related to restructuring plans consist primarily of severance expenses, costs to exit leased facilities as well as write-offs of long-lived assets.
OUR STRATEGY
STRATEGIC OBJECTIVES FOR FISCAL 2005
Strategic Objectives for Fiscal 2006
In our fiscal 2004 Annual Report,2005 annual report, we had established three strategic objectives for fiscal 2005.2006. We planned to increase sales through market-share gains, maximize profitability and focus on innovation. The following section reviews our strategic objectives for fiscal 20052006 and the results achieved for each of these objectives.
INCREASE SALES THROUGH MARKET-SHARE GAINS
Increase sales through market-share gains
In fiscal
2005,2006, we focused on continued market-share gains to achieve
medium- and long-term growth. We posted our second-best sales performance in history, growing sales
30.3%31.9% to
$97.2$128.3 million in
2006, thus outperforming our revised growth metric of 25%. Given strong sales growth in our two Divisions and the Consultronics acquisition, we raised our growth metric from 15% to 25% midway through the fiscal
2005, compared to a stated goal of 20%.year. Considering that the telecommunications market
slightly improvedincreased in the mid single digits in fiscal
2005,2006, this is a clear indication that we gained market share overall. For
45
fiscal 2005,2006, our Telecom Division and our Life Sciences and Industrial Division reported strong sales increases of 36.1%34.0% and 8.6%22.1%, respectively.
MAXIMIZE PROFITABILITY
Maximize profitability
Returning to profitability remainswas a top priority at EXFO. Infor EXFO in fiscal 2005,2006. During the year, we substantially reduced ourposted earnings from operations of $8.1 million, or 6.3% of sales, compared to a loss from operations from $10.6 million in
fiscal 2004 toof $199,000 in 2005. The lossThis also compares to our stated goal of earnings from operations incurredof 5% for fiscal 2006. This marks the first year where EXFO generated earnings from operations since fiscal 2001, when the telecommunications industry went through a major downturn. To that point, EXFO had historically been profitable. This significant improvement in earnings from operations is even more impressive considering the strengthening of the Canadian dollar compared to the US dollar (7.3% increase in fiscal 2005 includes restructuring2006 in terms of average rate), and other chargesthe significant pricing pressure we faced during the year. Also, earnings from operations for fiscal 2006 included additional amortization expenses for intangible assets of $292,000, recorded$1.0 million following the acquisition of Consultronics in conjunction with the consolidation of theJanuary 2006. However, earnings from operations of our Life Sciences2006 included a non-recurring gain of $703,000, comprised of grant revenue of $1.3 million, and Industrial Division and stock-based compensation costsan impairment loss for long-lived assets of $963,000.
FOCUS ON INNOVATION
$604,000.
Focus on innovation
In fiscal 2005,2006, innovation was a key driver at EXFO. We maintained a significant level of research and development investments and introduced 1518 new products to the marketplace. We invested $15.9$19.5 million, or 15.2% of sales, in gross research and development expenses, an amount similarcompared to 2004.$15.9 million, or 16.3% of sales in 2005. Net of research and development tax credits, those expenses stand at 12.0 % and 12.5% in fiscal 2006 and 2005, respectively. In fiscal 2005, 42.4%2006, 37.1% of our sales originated from products that have been on the market for two years or less, which is slightly below our statedaggressive goal of 45%40% for fiscal 2006 and the 42.4% level reached in 2005. While
we slightly missed our target, this represents a significant improvement over
the prior year (31.7%), thanksOur successful FTTx products, moving down to the 20 new products broughtdenominator part of the ratio as they have been on the market for more than two years, still strongly contributed to the
marketplaceour sales performance. However, we believe this innovation mark reached in fiscal 2004 - several of which were released2006 is well above the market average.
Strategic Objectives for Fiscal 2007
Global market demand for telecom test and measurement equipment should remain strong in the second half
of the fiscal year - and the 15 new ones launched in fiscal 2005.
STRATEGIC OBJECTIVES FOR FISCAL 2006
For fiscal 2006, we believe general market conditions will moderately
improveyears to come as carriers around the world will intensify triple-play investments in
an effort to bolster revenues and/or provide a defensive/offensive measure in
the telcos vs. cablecos battle to deliver video, data and voice services to
residential and business customers. This ongoing trend will prompt increasedmost network service providers (NSPs) are increasing capital expenditures (CAPEX) mainlyto upgrade their networks for converged IP services and triple-play offerings. These market forces create needs for differentiated test solutions to help NSPs accelerate deployment and ensure service quality in the accesstheir network market, likely over
several yearsbuild-outs. In fiscal 2007, we will strengthen our competitive position by leveraging revenue and earnings from operations, both organically and through strategic and selected acquisitions if stringent criteria are met.
As we remain committed to come. On a more global basis, the migration of these services
onto a single, IP-based network to reduce operating expenditures will
instigate increased CAPEXbest practice in the network core. On the strength of our
market-driven R&D program,financial reporting, once again this year, we are well-positioned for these latest industry
trends.
As one might expect,providing our investors with our strategic directions, and therefore ourobjectives for fiscal 2007 along with key performance indicators, will not be radically different frommetrics. The strategic objectives for fiscal 2007 are the continuity of those of 2005.
Since2006. As always, we are highly focused on creating value for our shareholders, providing the highest degree of profitable growth is at the heart of our actions. Wegrowth. In fiscal 2007, we intend to maintain our long-term focus on profitable growth by increasing sales in both divisions through further market-share gains; maximize profitability through proper execution and efficiency of our cost-reduction programs; and focus on innovation to positively position the organization for the long-term growth opportunities that exist in our space.
INCREASE SALES THROUGH MARKET-SHARE GAINS
Increase sales through market-share gains
In fiscal
2007, we intend to continue increasing sales through market-share gains. We were among the last companies to be impacted by the telecommunications downturn in 2001 and the first to recover with significant sales growth of 20.5% in fiscal 2004, 30.3% in 2005 and 31.9% in 2006,
we will continue focusing onincluding 12 consecutive quarters of growth. This remarkable recovery was accomplished mainly through market-share gains,
and
growing faster thansince our
end markets. In fiscal 2005, our 30.3% salesend-markets reportedly experienced negative growth in
a slightly increasing market condition clearly indicated that we gained market
share. As mentioned earlier, EXFO was named recipient of the 2005 Growth
Strategy Leadership Award by Frost & Sullivan.The award is presented annually
to the company whose visionary growth strategy generates the largest
market-share gainsfiscal 2004 and increased in the
global fiber-optic test equipmentmid single digits in 2005 and 2006. On the strength of our past and current research and development investment as well as our market
position in
the
previous year. Based on Frost & Sullivan,key areas, we
increasedintend to maintain a high growth rate in 2007; more specifically, we aim to achieve this by further increasing our market share
from
8.4% in
fiscal 2003 to 10.3%telecom testing - especially in
2004. For fiscal 2006, we intend once again to
46
grow sales faster than the marketrapidly growing protocol test segment - and by leveraging our sustained R&D investmentscore technologies in areas such as next-generation Internet protocol (IP)targeted life sciences and FTTx testing, by
intensifying our sales and marketing efforts, both domestic and international,
as well as by strengthening and expanding our business relationships with
major accounts.
MAXIMIZE PROFITABILITY
Profitability remains a top priority andindustrial markets.
Maximize profitability
In fiscal 2007, we expect that sales growth
combined with a strongwill focus on operations will increaseaccelerating our profitability by increasing our earnings from operations, according to our expected sales growth and our strong focus on operations.In the last few years, our bottom-line improved even faster than our top-line with earnings from operations of 6.3% of sales in fiscal 2006, assuming no acquisition.
FOCUS ON INNOVATION
In fiscal 2006, innovationwhich included a non-recurring gain of 0.5%. We remain confident that our earnings from operations will continue to be a major growth vehicle
for us,improve as it significantly drives not only revenuevarious factors are expected to come into play namely, higher-margin protocol and profitability but also
allows uscopper access revenues; better absorption of fixed costs on higher sales volumes; specific internal initiatives; and currency stability. This assumes no acquisitions.
Focus on innovation
For fiscal 2007, we will keep our focus on innovation by devoting significant efforts to better position ourselves in the long term. We remain convinceddevelopment of new and differentiated solutions that our commitment to innovation will pay off in the long term and support ourlong-term growth and profitability targets as demonstrated duringwell as deliver added-value to our customers. Over the last fiscal
year. We have maintained a significant level of R&D investment since the
telecom peak in 2001 and brought 15past few years, our new products, with their built-in superior performance and lower cost of goods, contributed significantly to the marketplaceraising our gross margin and earnings from operations, while being able to overcome considerable pricing pressure in our industry. In fiscal 2005. Now that2007, we intend to significantly increase our net R&D investmentsinvestment in research and development activities in dollars and slightly as a percentage of sales are right in
line with our long-term model, wesales. We also intend for fiscal 2006 and beyond, to increase our investment in R&D activities in proportionincreasingly take advantage of talent pools around the world to our sales growth.cost-effectively design innovative test solutions. Our numerous but focused R&Dresearch and development initiatives should enable our new products to continue gaining traction with customers and lead to further growth, market-share gains and increased profitability in the coming years.
KEY PERFORMANCE INDICATORS
Key Performance Indicators
As measures to assess the realization of our strategic plan and its objectives, we have set out three consolidated key performance indicators for fiscal 2006.2007. They are summarized as follows:
- ----------------------------------------------------------------------------------------
STRATEGIC OBJECTIVES FOR FISCAL 2006 KEY PERFORMANCE INDICATORS FOR FISCAL 2006
- ----------------------------------------------------------------------------------------
Strategic objectives for fiscal 2007 | Key performance indicators for fiscal 2007 |
Increase sales through market-share gains 15% | 20% sales growth year-over-year
- ----------------------------------------------------------------------------------------
|
Maximize profitability 5% | 7% in earnings from operations
- ----------------------------------------------------------------------------------------
|
Focus on innovation 40% | 35% of sales from new products (on the market two years or less)
- ----------------------------------------------------------------------------------------
|
CAPABILITY TO DELIVER RESULTS
Capability to Deliver Results
At EXFO, we believe that we have the capabilities to deliver expected results thanks to outstanding products, an excellent reputation in the marketplace, a sound financial position, as well as an experienced workforce and management team.
47
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's
Management’s discussion and analysis of financial conditions and results of operations is based on our consolidated financial statements included elsewhere in this Annual Report.annual report. As previously mentioned, they have been prepared in accordance with Canadian GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition, the allowance for doubtful accounts, the amount of tax credits recoverable, the allowance for excess and obsolete inventories, research and
development tax credits and government grants, impairmentthe useful lives of capital assets, the valuation of long-lived assets, and goodwill,the valuation allowance of future income tax assets, warranty
obligations, restructuring charges, contingenciesthe amount of certain accrued liabilities and other obligations,deferred revenue as well as stock-based compensation costs. We base our estimates and assumptions on historical experience and on other factors that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
The following summarizes our critical accounting policies as well as other policies that require the most significant judgment and estimates in the preparation of our consolidated financial statements.
REVENUE RECOGNITION.
Revenue recognition. For products in which software is incidental, we recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. In addition, provisions are made for estimated returns, warranties and support obligations.
For products in which software is not incidental, revenues are separated into two categories: product and post-contract customer support (PCS) revenues, based upon vendor-specific objective evidence of fair value. Product revenues for these sales are recognized as described above. PCS revenues are deferred and recognized ratably over the years of the support arrangement. PCS revenues are recognized at the time the product is delivered when provided within one year of delivery; the costs of providing this support are insignificant (and accrued at the time of delivery) and no software upgrades are provided.
For all sales, we use a binding purchase order as evidence that a sales arrangement exists.
Delivery generally occurs when the product is handed over to a transporter for shipment.
At the time of the transaction, we assess whether the price associated with our revenue transaction is fixed and determinable, and whether or not collection is reasonably assured. We assess whether the price is fixed and determinable based on the payment terms associated with the transaction. We assess collection based on a number of factors, including past transaction history and the creditworthiness of the customer. Generally, collateral or other security is not requested from customers.
48
Most sales arrangements do not generally include acceptance clauses. However, if a sales arrangement does include an acceptance provision, acceptance occurs upon the earliest of the receipt of a written customer acceptance or the expiration of the acceptance period. For these sales arrangements, the sale is recognized when acceptance occurs.
Revenue for extended warranties is recognized on a straight-line basis over the warranty period.
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
Allowance for doubtful accounts. We estimate collectibility of accounts receivable on an ongoing basis by reviewing balances outstanding over a certain period of time. We determine our allowance for doubtful accounts receivable based on our historical accounts receivable collection experience and on the information that we have about the status of our accounts receivable balances. If the financial conditions of our customers deteriorate, resulting in an impairment of their ability to make required payments, additional allowance may be required, which could adversely affect our future results.
ALLOWANCE FOR EXCESS AND OBSOLETE INVENTORIES.
Allowance for excess and obsolete inventories. We state our inventories at the lower of cost, determined on an average cost basis and replacement cost or net realizable value, and we provide reserves for excess and obsolete inventories. We determine our reserves for excess and obsolete inventories based on the quantities we have on hand versus expected needs for these inventories, so as to support future sales of our products. It is possible that additional inventory reserves may occur if future sales are less than our forecasts or if there is a significant shift in product mix compared to our forecasts, which could adversely affect our future results.
RESEARCH AND DEVELOPMENT TAX CREDITS AND GOVERNMENT GRANTS.
Research and development tax credits and government grants. We record research and development tax credits and government grants based on our interpretation of tax laws and grant programs, especially regarding related eligible projects and expenses, and when there is reasonable assurance that we have complied and will continue to comply with all conditions and laws. Also, our judgment and estimates are based on historical experience. It is possible, however, that the tax authorities or the sponsors of the grant programs have a different interpretation of laws and application of conditions related to the programs or that we do not comply with all conditions related to grants in the future, which could adversely affect our future results. Furthermore, a significant part of our tax credits are refundable against income taxes payable, causing their ultimate realization to be dependent upon the generation of taxable income. If we obtain information that causes our forecast of future taxable income to change or if actual taxable income differs from our forecast, we may have to revise the carrying value of these tax credits, which would affect our results in the period in which the change was made. We review the recoverability of such tax credits on a quarterly basis.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL.
Impairment of long-lived assets and goodwill. We assess impairment of goodwill on an annual basis, or more frequently, if events or circumstances indicate that it might be impaired. Recoverability of goodwill is determined at the reporting unitreporting-unit level using a two-step approach. First, the carrying value of a reporting unit is compared to its fair value, which is determined based on a combination of discounted future cash flows and a market approach. If the carrying value of a reporting unit exceeds its fair value, the second step is performed. In this step, the amount of impairment loss, if any, represents the excess of the carrying value of goodwill over its fair value and the loss is charged to earnings in the period in which it is incurred. For the purposes of this impairment test, the fair value of goodwill is estimated in the same way as goodwill is determined in business combinations; that is, the excess of the fair value of a reporting unit over the estimated fair value of its net identifiable assets.
49
We assess impairment of long-lived assets when events or circumstances indicate that costs may not be recoverable. Impairment exists when the carrying value of an asset, or a group of assets, is greater than the pre-tax undiscounted future cash flows expected to be provided by the asset or the group of assets. The amount of impairment loss, if any, is the excess of the carrying value over the fair value. We assess fair value of long-lived assets based on discounted future cash flows.
FUTURE INCOME TAXES.
Future income taxes. We account for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities, using enacted income tax rates for the years in which the differences are expected to reverse. In assessing the recoverability of our future income tax assets, we consider whether it is more likely than not that some or all of the future income tax assets will not be realized. The ultimate realization of our future income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences will become deductible. As at August 31, 2005,2006, we had established a full valuation allowance against our future income tax assets. The valuation allowance will be reversed once management will have concluded that realization of future income tax assets is more likely than not.
STOCK-BASED COMPENSATION COSTS. Since September 1, 2003, we
Stock-based compensation costs. We account for all forms of employee stock-based compensation using the fair value-based method. This method requires that we make estimates about the risk-free interest rate, the expected volatility of our shares and the expected life of the awards.
On September 1, 2004, we prospectively adopted
In January 2005, the following new Canadian Institute of Chartered Accountants (CICA) handbook sections:
o Section 1100, "Generally Accepted Accounting Principles"
o Section 1400, "General Standards of Financial Statement Presentation"
Furthermore, in January 2005, the CICA issued four new accounting standards in relation to financial instruments: Section 3855, "Financial Instruments - Recognition and measurement"Measurement"; Section 3865, "Hedges"; Section 1530, "Comprehensive Income"; and Section 3251, "Equity". These
Section 3855 expands on Section 3860, "Financial Instruments - Disclosure and Presentation", by prescribing when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented in the financial statements.
Section 3865 provides an alternative to Section 3855 for entities that choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline 13, "Hedging Relationships", and on the hedging guidance in Section 1650, "Foreign Currency Translation", by specifying how hedge accounting is applied and what disclosures it requires.
Section 1530, "Comprehensive Income", introduces a new standardsrequirement to temporarily present certain gains and losses outside net income.
Consequently, Section 3250, "Surplus", has been revised as Section 3251, "Equity".
Sections 1530, 3251, 3855 and 3865 apply to fiscal years beginning on or after October 1,
2006, and we2006. We will adopt
themthese new standards on September 1, 2007.
Please refer toWhile we are currently assessing the effects of these new standards, impacts consistent with the adjustments described under note
2 to our20 item b) of these consolidated financial statements
included elsewhere in this Annual Report for further information about these
new standards and their impact on our financial statements.
50
are expected.
RESULTS OF OPERATIONS
The following table sets forth certain Canadian GAAP consolidated financial statements data in thousands of US dollars, except per share data and as a percentage of sales for the years indicated:
CONSOLIDATED STATEMENTS OF
EARNINGS DATA: 2005 2004 2003 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Sales............................. $ 97,216 $ 74,630 $ 61,930 100.0% 100.0% 100.0%
Cost of sales (1)................. 44,059 34,556 36,197 45.3 46.3 58.4
- -----------------------------------------------------------------------------------------------------------------------
Gross margin ..................... 53,157 40,074 25,733 54.7 53.7 41.6
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses
Selling and administrative...... 31,782 25,890 26,991 32.7 34.7 43.6
Net research and development ... 12,190 12,390 15,879 12.5 16.6 25.6
Amortization of property, plant
and equipment ............... 4,256 4,935 5,210 4.4 6.6 8.4
Amortization of intangible
assets ...................... 4,836 5,080 5,676 5.0 6.8 9.2
Impairment of long-lived assets
and goodwill................. -- 620 7,427 -- 0.8 12.0
Restructuring and other charges. 292 1,729 4,134 0.3 2.3 6.7
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses.......... 53,356 50,644 65,317 54.9 67.8 105.5
- -----------------------------------------------------------------------------------------------------------------------
Loss from operations.............. (0.2) (14.1) (63.9)
(199) (10,570) (39,584)
Interest and other income......... 2,524 1,438 1,245 2.6 1.9 2.0
Foreign exchange loss............. (1,336) (278) (1,552) (1.4) (0.4) (2.5)
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 989 (9,410) (39,891) 1.0 (12.6) (64.4)
Income taxes...................... 2,623 (986) 15,059 2.7 (1.3) 24.3
- -----------------------------------------------------------------------------------------------------------------------
Net loss for the year............. $ (1,634) $ (8,424) $ (54,950) (1.7)% (11.3)% (88.7)%
=======================================================================================================================
Basic and diluted net loss
per share....................... $ (0.02) $ (0.13) $ (0.87)
Segment information
Sales:
Telecom Division............... $ 80,120 $ 58,882 $ 48,753 82.4% 78.9% 78.7%
Life Sciences and
Industrial Division.......... 17,096 15,748 13,177 17.6% 21.1% 21.3%
- -----------------------------------------------------------------------------------------------------------------------
$ 97,216 $ 74,630 $ 61,930 100.0% 100.0% 100.0%
=======================================================================================================================
Operating earnings (loss): (2)
Telecom Division............... $ 763 $ (5,557) $ -- 0.8% (7.4)% --%
Life Sciences and Industrial
Division..................... (962) (5,013) -- (1.0) (6.7) --
- -----------------------------------------------------------------------------------------------------------------------
$ (199) $ (10,570) $ -- (0.2)% (14.1)% --%
=======================================================================================================================
Research and development data:
Gross research and development.. $ 15,878 $ 15,668 $ 17,133 16.3% 21.0% 27.7%
Net research and development.... $ 12,190 $ 12,390 $ 15,879 12.5% 16.6% 25.6%
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS DATA:
Total assets...................... $ 190,957 $ 172,791 $ 146,254
=======================================================================================================================
(1) The cost of sales is exclusive of amortization, shown separately. Including inventory write-offs of $4,121,000 and
an unusual gain of $473,000 for the year ended August 31, 2003.
(2) Comparative information for fiscal 2003 for the loss from operations is not available and is impracticable to
determine.
51
Consolidated statements of earnings data: | | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
Sales | | $ | 128,253 | | $ | 97,216 | | $ | 74,630 | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales (1) | | | 57,275 | | | 44,059 | | | 34,556 | | | 44.7 | | | 45.3 | | | 46.3 | |
Gross margin | | | 70,978 | | | 53,157 | | | 40,074 | | | 55.3 | | | 54.7 | | | 53.7 | |
Operating expenses | | | | | | | | | | | | | | | | | | | |
Selling and administrative | | | 40,298 | | | 31,782 | | | 25,890 | | | 31.4 | | | 32.7 | | | 34.7 | |
Net research and development | | | 15,404 | | | 12,190 | | | 12,390 | | | 12.0 | | | 12.5 | | | 16.6 | |
Amortization of property, plant and equipment | | | 3,523 | | | 4,256 | | | 4,935 | | | 2.7 | | | 4.4 | | | 6.6 | |
Amortization of intangible assets | | | 4,394 | | | 4,836 | | | 5,080 | | | 3.4 | | | 5.0 | | | 6.8 | |
Impairment of long-lived assets | | | 604 | | | − | | | 620 | | | 0.5 | | | − | | | 0.8 | |
Government grants | | | (1,307 | ) | | − | | | − | | | (1.0 | ) | | − | | | − | |
Restructuring and other charges | | | − | | | 292 | | | 1,729 | | | − | | | 0.3 | | | 2.3 | |
Total operating expenses | | | 62,916 | | | 53,356 | | | 50,644 | | | 49.0 | | | 54.9 | | | 67.8 | |
Earnings (loss) from operations | | | 8,062 | | | (199 | ) | | (10,570 | ) | | 6.3 | | | (0.2 | ) | | (14.1 | ) |
Interest and other income | | | 3,253 | | | 2,524 | | | 1,438 | | | 2.5 | | | 2.6 | | | 1.9 | |
Foreign exchange loss | | | (595 | ) | | (1,336 | ) | | (278 | ) | | (0.5 | ) | | (1.4 | ) | | (0.4 | ) |
Earnings (loss) before income taxes | | | 10,720 | | | 989 | | | (9,410 | ) | | 8.3 | | | 1.0 | | | (12.6 | ) |
Income taxes | | | 2,585 | | | 2,623 | | | (986 | ) | | 2.0 | | | 2.7 | | | (1.3 | ) |
Net earnings (loss) for the year | | $ | 8,135 | | $ | (1,634 | ) | $ | (8,424 | ) | | 6.3 | % | | (1.7 | )% | | (11.3 | )% |
Basic and diluted net earnings (loss) per share | | $ | 0.12 | | $ | (0.02 | ) | $ | (0.13 | ) | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Segment information | | | | | | | | | | | | | | | | | | | |
Sales: | | | | | | | | | | | | | | | | | | | |
Telecom Division | | $ | 107,376 | | $ | 80,120 | | $ | 58,882 | | | 83.7 | % | | 82.4 | % | | 78.9 | % |
Life Sciences and Industrial Division | | | 20,877 | | | 17,096 | | | 15,748 | | | 16.3 | | | 17.6 | | | 21.1 | |
| | $ | 128,253 | | $ | 97,216 | | $ | 74,630 | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Operating earnings (loss): | | | | | | | | | | | | | | | | | | | |
Telecom Division | | $ | 6,679 | | $ | 763 | | $ | (5,557 | ) | | 5.2 | % | | 0.8 | % | | (7.4)% | |
Life Sciences and Industrial Division | | | 1,383 | | | (962 | ) | | (5,013 | ) | | 1.1 | | | (1.0 | ) | | (6.7 | ) |
| | $ | 8,062 | | $ | (199 | ) | $ | (10,570 | ) | | 6.3 | % | | (0.2 | )% | | (14.1 | )% |
Research and development data | | | | | | | | | | | | | | | | | | | |
Gross research and development | | $ | 19,488 | | $ | 15,878 | | $ | 15,668 | | | 15.2 | % | | 16.3 | % | | 21.0 | % |
Net research and development | | $ | 15,404 | | $ | 12,190 | | $ | 12,390 | | | 12.0 | % | | 12.5 | % | | 16.6 | % |
| | | | | | | | | | | | | | | | | | | |
Consolidated balance sheets data: | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 219,159 | | $ | 190,957 | | $ | 172,791 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
(1) The cost of sales is exclusive of amortization, shown separately. | | | | | | |
SALES
FISCAL
Fiscal 2006 vs. 2005
In fiscal 2006, our global sales increased 31.9% to $128.3 million from $97.2 million in 2005, VS.with an 84%-16% split in favor of our Telecom Division.
Telecom Division
In fiscal 2006, sales of our Telecom Division increased 34.0% to $107.4 million from $80.1 million in 2005.
In fiscal 2006, we leveraged our portfolio of new products and an increased demand for our test solutions, especially in Europe, Middle East and Africa (EMEA) and Asia-Pacific (APAC), to increase our year-over-year sales in our Telecom Division. We also consolidated our dominant FTTx market position in the Americas by enabling a Tier-1 carrier to migrate to less expensive test solutions. Although revenues were down at this customer year-over-year, we maintained our market share through the sales of cost-effective test solutions, such as our handheld AXS-100 OTDR, to help it reduce cost of deployments. In addition, the positive spending environment, as well as the market share we believe that we gained in fiscal 2006 for our optical and protocol products, helped us increase our sales of that Division year-over-year. Also, Consultronics contributed about seven months to our Telecom Division, which had a positive impact on our consolidated sales during fiscal 2006. Consultronics’ results have been included in our consolidated statement of earnings since the closing of the acquisition on January 26, 2006. Finally, in fiscal 2006, our top customer accounted for 16.5% of our Telecom sales, compared to 28.2% of sales in 2005, reflecting the diversification of our customer base. In fact, excluding sales to our top customer, our sales to this Division would have increased 56.0% in fiscal 2006, compared to 2005.
Although, in the past few years, our market share in the protocol test market has been modest, our protocol-product results in the second half of fiscal 2006 increased substantially year-over-year, making this sector our fastest-growing line of business. We expect continued strong growth in fiscal 2007 based on our solid product offering in next-generation solutions, which are at the basis of the whole trend toward IP convergence. During the second half of fiscal 2006, we reached a key milestone for our protocol-product development program. More specifically, this consisted in the launch of legacy and next-generation SONET/SDH network test modules for our FTB-200, FTB-400 and IQS-500 platforms. These latest product launches, combined with our existing offering for Ethernet testing (from 10 Mb/s up to 10 Gb/s), Gigabit Ethernet, Fibre Channel test solutions, provide us with an extensive product portfolio to compete against the incumbent players in protocol testing, especially in the network service provider (NSP) market segment, but also to a lesser degree, with system vendors. Among many key differentiators, we believe EXFO now offers the most complete and advanced compact test solutions combining legacy and next-generation SONET/SDH as well as Ethernet test modules for rates up to 10 Gb/s within the same portable platform (i.e., our FTB-400 mainframe and GP-404 module receptacle). In fiscal 2006, sales of our protocol products, which almost doubled compared to 2005, increased to their highest historical levels, representing well above 10% of our optical sales. Based on these data points and given the much larger addressable market for protocol test solutions, we believe that protocol test revenues will increase and grow faster than our optical revenues. On a medium- to long-term basis, we anticipate that revenues from these segments will eventually be equal.
As our newly acquired copper access product line is now better leveraged by EXFO’s global sales channels and improved innovation processes, we intend to strengthen our offering in this market segment.
Life Sciences and Industrial Division
In fiscal 2006, sales of our Life Sciences and Industrial Division increased 22.1% to $20.9 million from $17.1 million in 2005. The increase in sales in fiscal 2006, compared to 2005, is mainly due to increased sales activities in the curing market as well as market-share gains in the fluorescence illumination market, following our efforts to expand international markets, mainly in Europe and Asia.
Overall, for the two divisions, net accepted orders increased 27.2% to $129.4 million in fiscal 2006 from $101.7 million in 2005, for a book-to-bill ratio of 1.01 in fiscal 2006. Our increase of 27.2% in net accepted orders in fiscal 2006, compared to 2005 reflects the impact of the Consultronics acquisition, an increased demand for our test solutions (especially in EMEA and APAC regions), market-share gains in the telecommunications and life sciences markets as well as the improvement in the telecommunications market environment.
Fiscal 2005 vs. 2004
In fiscal 2005, our global sales increased 30.3% to $97.2 million from $74.6 million in 2004, with an 82%-18% split in favor of our Telecom Division.
TELECOM DIVISION
Telecom Division
In fiscal 2005, sales of our Telecom Division increased 36.1% to $80.1 million from $58.9 million in 2004. 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 fiscal 2005, we consolidated our leadership position in the FTTx test market by recognizing significant revenue from two leading U.S. carriers deploying fiber in their access networks. Our largesttop customer, who purchased several orders of FTTx test equipment, accounted for 28.2% of telecom sales in fiscal 2005 (17.5% in 2004). In addition, the positive spending environment helped us increase our sales in 2005.
Although sales of our protocol test products increased sequentially each quarter in fiscal 2005 and reached more than 10% of Telecom Division revenues in the fourth quarter of 2005, they still fell below 10% for the whole fiscal year. Our penetration of the protocol test market has been modest since, in
2003, we refocused our efforts onto next-generation solutions, which are at
the basis of the whole trend toward IP convergence. We expect that protocol
sales will equal optical sales on a medium- to long-term basis given that the
protocol test market is more than double the size of the optical test market,
our rich product pipeline in protocol testing,
Life Sciences and increasing customer
traction. We remain confident that the solid product portfolio we are building
for this crucial end-market will lead to long-term growth for EXFO.
LIFE SCIENCES AND INDUSTRIAL DIVISION
Industrial Division
In fiscal 2005, sales of our Life Sciences and Industrial Division increased 8.6% to $17.1 million from $15.7 million in 2004. The increase in sales in fiscal 2005, compared to 2004, is mainly due to market-share gains in the fluorescence illumination market as well as increased sales activities in the curing market.
Overall, for the two divisions, net accepted orders increased 35.6%
to $101.7 million in fiscal
Geographic distribution
Fiscal 2006 vs. 2005 from $75.0 million in 2004. Our net
book-to-bill ratio rose to 1.05 in fiscal 2005, from 1.00 in 2004. The
increased demand for our test solutions for FTTx applications, market-share
gains in the telecommunications and life sciences markets as well as the
slight improvement in the telecommunications market environment helped us
increase our bookings year-over-year.
For the upcoming quarters, we expect the sales split between the two
divisions to remain in the same range as for fiscal 2005.
FISCAL 2004 VS. 2003
In fiscal 2004, our global sales increased 20.5% to $74.6 million
from $61.9 million in 2003, with a 79%-21% split in favor of our Telecom
Division.
52
TELECOM DIVISION
In fiscal 2004, sales of our Telecom Division increased 20.8% to
$58.9 million from $48.8 million in 2003. In 2004, despite a relatively stable
carrier spending environment compared to the previous year, we continued to
gain market share, which helped us increase our sales year-over-year. We
believe these market-share gains are mainly attributable to our optical
field-testing products, which represent our traditional core business, since
sales of our protocol-layer test solutions represented just over 10% of our
Telecom sales in fiscal 2004. In addition, we benefited from a slight recovery
in the telecom system and optical manufacturing markets. Finally, revenues
from FTTx test solutions were higher than expected, especially with a leading
U.S. carrier, which contributed to our sales increase.
LIFE SCIENCES AND INDUSTRIAL DIVISION
In fiscal 2004, sales of our Life Sciences and Industrial Division
increased 19.5% to $15.7 million from $13.2 million in 2003. The increase in
sales is due to the greater demand for our high-precision assembly solutions.
GEOGRAPHIC DISTRIBUTION
During fiscal 2005,2006, sales to the Americas, Europe-Middle East-Africa (EMEA) and Asia-Pacific (APAC) accounted for 60%, 25% and 15% of global sales, respectively, compared to 68%, 20% and 12%, respectively in 2005. Although our sales increased in dollars in every geographic area, we made greater progress in EMEA and APAC in fiscal 2006, compared to 2005, where we gained market share in both Divisions. Global sales to these two markets increased 66.9% and 66.4%, respectively in fiscal 2006, compared to 2005. In comparison, our sales to the Americas increased 15.6% year-over-year.
The significant increase in sales in the EMEA market is mainly due to improved market penetration by both divisions, following our efforts to develop this market in the last several quarters. Namely, since the second quarter of fiscal 2006, we were selected as sole-source supplier by a Tier-1 network service provider for all its fiber deployment test applications - including FTTx, further increasing our sales to this market year-over-year.
Over the last several quarters, we strengthened our product offering in APAC, specifically by implementing a multi-tiered platform strategy to meet different customer demands and different price points and by expanding our sales and marketing activities in this region. Our increased focus on and interaction with this market, combined with our enhanced capability to win tenders (which may vary in number and importance) contributed to our growth in the APAC region.
In the Americas, sales to our top customer, who is located in the United States, decreased in fiscal 2006, compared to 2005 as it migrated to lower-priced test solutions, thus affecting our sales to the Americas year-over-year. However, we were able to leverage our customer base and increase our sales to this region in fiscal 2006, compared to 2005. Also, Consultronics, whose customers are mainly in the Americas, helped increase our sales to the Americas in fiscal 2006. In fact, excluding sales to our top customer, our sales to the Americas would have increased 35.1% year-over-year, which is quite remarkable considering that our end-markets increased in mid single digits in 2006.
Fiscal 2005 vs. 2004
During fiscal 2005, sales to the Americas, EMEA and APAC accounted for 68%, 20% and 12% of global sales, respectively.respectively, compared to 66%, 18% and 16%, respectively in 2004. Our sales to the Americas, which increased 34% year-over-year, benefited from the recent deployments of fiber deeper in access networks (mainly in the United States). Our sales to EMEA increased more significantly (42%) year-over-year, mainly due to market-share gains in both divisions, following our efforts to develop this important end-market. Finally, our sales to APAC remained flat in dollars year-over-year. A significant portion of our sales to this region of the world are made through price-driven tenders that may vary in number and importance from quarter to quarter. Also, the competitive landscape in this market led to pricing pressure, which prevented us from increasing our sales year-over-year.
The geographic distribution of our sales remained unchanged as a
percentage of sales in fiscal 2004, compared to 2003, since all geographic
areas had the same growth level. Sales to Americas, EMEA and APAC accounted
for 66%, 18% and 16% of global sales, respectively, for both fiscal years.
Through our two divisions, we sell our products to a broad range of customers, including network service providers,NSPs, cable TV operators, optical system and component manufacturers, as well as customers in the life sciences and high-precisonhigh-precision assembly sectors. In fiscal 2004 and 2005, one customer
represented more than 10% of2006, our sales with 13.8% of sales ($10.3 million) in
fiscal 2004 and 23.3% of sales ($22.6 million) in 2005. During 2003, notop customer accounted for more than 10%13.8% of our sales.total sales, compared to 23.3% in 2005 and 13.8% in 2004. In fiscal 2005,2006, our top three customers accounted for 28.4%19.4% of our global sales, compared to 28.4% in fiscal 2005 and 20.8% in 2004. Our significant sales increase, despite the fact that our revenue from our top customer was significantly reduced is a good sign that we continued to strengthen our market acceptance, diversify our customer base and reduce our sales concentration with a single customer. This also indicates that our second and third most important customers, who may vary from quarter to quarter, have gained in importance as we continue our diversification efforts.
GROSS MARGIN
Gross margin amounted to 54.7%55.3%, 53.7%54.7% and 41.6%53.7% of sales for fiscal 2006, 2005 and 2004, respectively.
Fiscal 2006 vs. 2005
The increase in our gross margin in fiscal 2006, compared to 2005 can be explained by the following factors. First, we succeeded in increasing the market acceptance of our new products (designed in the last few years) on which we had focused our research and 2003, respectively.
53
FISCALdevelopment efforts to simultaneously create lower cost of goods and the most advanced solutions. Second, the significant rise in sales year-over-year resulted in an increase in manufacturing activities, allowing us to better absorb our fixed manufacturing costs. Also, we were able to reduce our cost of goods sold by better leveraging our supplier base. Furthermore, streamlined operations following our consolidation action in fiscal 2005 VS.and continued cost-reduction programs allowed us to further improve our gross margin. However, the shift in the geographic distribution of our sales resulted in more sales, in percentage of total sales, made to the EMEA and APAC markets, where gross margins tend to be lower as most of our sales to these markets are made through distribution channels. In addition, we are facing aggressive pricing pressure worldwide. Furthermore, in fiscal 2006, we incurred one-time charges related to the integration of Consultronics manufacturing activities, which reduced our gross margin year-over-year. Finally, a stronger Canadian dollar, compared to the US dollar, prevented us from further improving our gross margin as some cost of sales items are denominated in Canadian dollars.
On an ongoing basis, we adjust the design of our products and, over the past few years, we experienced higher sales than expected. Consequently, we were able to reuse excess inventories that were written off during the telecom downturn in 2001 and 2002. Excess inventory reuse accounted for approximately $1.2 million, or 0.9% of sales in fiscal 2006, compared to approximately $1.6 million, or 1.7% of sales in 2005 and approximately $600,000, or 0.8% of sales in 2004. Inventory write-offs recorded during the telecom downturn were based on our best estimate at that time.
Fiscal 2005 vs. 2004
The increase in our gross margin in fiscal 2005, compared to 2004, can be explained by the following factors. First, we were able to reduce our cost of goods sold by better leveraging our supplier base and by developing innovative new products with a cost-effective design. Also, the significant rise in sales (30.3% year-over-year) 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 2005 and cost-reduction programs allowed us to further improve our gross margin. In addition, the shift in the geographic distribution of our sales resulted in more sales made to the Americas market, where gross margins tend to be higher because we sell direct to the customers. However, a stronger Canadian dollar, compared to the US dollar, prevented us, to some extent, from further improving our gross margin as some cost of sales elements are denominated in Canadian dollars. As well, the different customer mix and aggressive pricing pressure observed in fiscal 2005 also prevented us from further improving our gross margin.
Over the past months, we adjusted the design of some of our products
and we experienced higher sales than expected. Consequently, we were able to
reuse excess inventories that were written off during the telecom downturn
Outlook for approximately $1.6 million in fiscal 2005, or 1.7% of sales, compared to
approximately $600,000 or 0.8% of sales in 2004. Inventory write-offs recorded
during the telecom downturn were based on management best estimate at that
time.
FISCAL 2004 VS. 2003
The increase in our gross margin in fiscal 2004, compared to 2003,
can be explained by several factors. First, the rise in sales (20.5%
year-over-year) helped increase our gross margin. Increased manufacturing
activities allowed us to better absorb our fixed manufacturing costs. In
addition, our cost-reduction measures, the consolidation of manufacturing
sites and our enhanced efficiency further contributed to the increase in gross
margin. 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 gross margin recorded in fiscal 2003 included a charge of $4.1
million, or 6.7% of sales, for excess and obsolete inventories and an unusual
gain of $473,000, or 0.7% of sales.
OUTLOOK FOR FISCAL 2006
Fiscal 2007
Considering the expected sales growth in
2006,fiscal 2007, the
effectexpected increase in sales of
our
recent consolidation actions,protocol products (which tend to generate higher margins), the cost-effective design of our products,
and
our tight control on operating costs
as well as the full contribution of Consultronics, whose products have slightly higher margin than our existing ones, we expect our gross margin to improve in
fiscal 2006.2007 and beyond. However, our gross margin may fluctuate quarter-over-quarter as our sales may fluctuate. Furthermore, our gross margin can be negatively affected by increased competitive pricing pressure,
customer concentration and/or consolidation, increased obsolescence costs, shifts in
customer and product mix, under-absorption of fixed manufacturing costs and increases in product offerings by other suppliers in our industry. Finally,
a potentialany further increase in the strength of the Canadian dollar would have a negative impact on our gross margin in
2006.
54
fiscal 2007.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses were $40.3 million, $31.8 million $25.9 million
and $27.0$25.9 million for fiscal 2006, 2005 2004 and 2003,2004, respectively. As a percentage of sales, selling and administrative expenses amounted to 32.7%31.4%, 34.7%32.7% and 43.6%34.7% for fiscal 2006, 2005 and 2004, and 2003,
respectively.
FISCAL
Fiscal 2006 vs. 2005 VS. 2004
The increase in our selling and administrative expenses in dollars in fiscal 2005,2006, compared to 2004,2005, is mainly due to our decision to significantly increase our sales activities to better leverage the significant R&Dresearch and development investments of the prior years, which resulted in highest sales and marketing
expenditures (including head-counts). In addition, our significant increase in
revenues allowed us to reduce our selling and administrative expenses on a
percentage basis. In addition, our commission expenses increased
year-over-year, especially due to the increase in sales to the Americas
market; which resulted in higher sales and marketing expenditures (including head-counts)number of employees). In addition, our commission expenses increased year-over-year due to the increase in sales. Furthermore, a stronger Canadian dollar, compared to the US dollar year-over-year, caused our selling and administrative expenses to increase, as more than half of these are incurred in Canadian dollars. Finally, in fiscal 2006, Consultronics contributed about seven months to our selling and administrative expenses, increasing these expenses year-over-year.
Fiscal 2005 vs. 2004
During fiscal 2005, we also significantly increased our sales activities around the world, which resulted in higher sales and marketing expenditures. In addition, increased sales activities, especially in the Americas market, resulted in higher commission expenses year-over-year. Furthermore, as witnessed in fiscal 2006, the strengthening of the Canadian dollar, compared to the US dollar year-over-year, caused our selling and administrative expenses to increase. Also, stock-based compensation costs were higher in fiscal 2005 ($626,000) than in 2004 ($265,000), further increasing our selling and administrative expenses year-over-year. Finally, costs to comply with Section 404 of the Sarbanes-Oxley Act of 2002 further increased our SG&A (sellingselling and administrative)administrative expenses year-over-year. However,
For both fiscal 2005 and 2006, we were able to mitigate the increase in our selling and administrative expenses as well as reduce these expenses in percentage of sales year-over-year due to tight cost-control measures and the
consolidation of our Life Sciences and industrial Division.measures. In addition, our significant increase in revenues allowed us to reduce our selling and administrative expenses on a percentage basis.
FISCAL 2004 VS. 2003
In fiscal 2004, thanks to our restructuring actions and tight
cost-control measures, we were able to reduce our selling and administrative
expenses by 4% year-over-year, while our sales increased 20.5% in that same
period. However, several factors prevented us from further reducing these
expenses year-over-year. A higher sales volume in fiscal 2004, compared to
2003, caused our commission and marketing expenses to increase. In addition,
since September 1, 2003, we account
Outlook for stock-based compensation costs related
to awards granted to our employees, which caused our selling and
administrative expenses to increase year-over-year. Furthermore, in fiscal
2003, we recorded an unusual gain of $239,000 related to a grant recovery.
Finally, a stronger Canadian dollar, compared to the US dollar year-over-year,
further increased our selling and administrative expenses, as more than half
of these are incurred in Canadian dollars.
OUTLOOK FOR FISCAL 2006
Fiscal 2007
For fiscal
2006,2007, we expect our selling and administrative expenses to increase in dollars,
and remainwhile remaining relatively stable as a percentage of sales. In particular,
in fiscal 2007, we will have the full impact of the acquisition of Consultronics on our selling and administrative expenses. Also, we expect our commission expenses to increase as sales volume increases.
Also,Furthermore, 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,
a potentialany further increase in the strength of the Canadian dollar would also cause our selling and administrative expenses to
increase.
55
increase, as more than half of these expenses are incurred in Canadian dollars.
RESEARCH AND DEVELOPMENT
GROSS RESEARCH AND DEVELOPMENT EXPENSES
Gross research and development expenses
Gross research and development expenses totaled $19.5 million, $15.9 million $15.7
million and $17.1$15.7 million for fiscal 2006, 2005 2004 and 2003,2004, respectively. As a percentage of sales, gross research and development expenses amounted to 16.3%15.2%, 21.0%16.3% and 27.7%21.0% for fiscal 2006, 2005 2004 and 2003,2004, respectively, while net research and development expenses accounted for 12.5%12.0%, 12.5% and 16.6% and 25.6%of sales for these respective periods.
FISCAL
Fiscal 2006 vs. 2005 VS.
The increase in our gross research and development expenses in dollars in fiscal 2006, compared to 2005, is due to the following reasons. First, in fiscal 2006, Consultronics contributed about seven months to our gross research and development expenses, which caused these expenses to increase year-over-year. In addition, in fiscal 2006, our gross research and development expenses were negatively affected by the increased strength of the Canadian dollar, compared to the US dollar year-over-year. This can be explained by the fact that, following the consolidation of most of our research and development activities in Canada, the majority of our expenses are incurred in Canadian dollars. Finally, mix and timing of research and development projects in fiscal 2006 resulted in more gross research and development expenses during that year compared to 2005 for both divisions.
The decrease in gross research and development expenses as a percentage of sales in fiscal 2006, compared to 2005, is directly related to the significant increase in sales year-over-year.
Fiscal 2005 vs. 2004
We incurred
As mentioned above, we incur most of our gross research and development expenses in Canadian dollars as we have consolidated most of our research and development
activities in Canada.dollars. 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 in fiscal 2005, compared to 2004. However, this increase was mostly offset by the decrease in our gross research and development expenses in our Life Sciences and Industrial Division following the consolidation of this Divisiondivision in Toronto. The decrease in our gross research and development expenses as a percentage of sales in fiscal 2005 compared to 2004, is directly attributable to the significant increase in sales year-over-year while these expenses remained relatively flat.
FISCAL 2004 VS. 2003
The decrease in our gross research
Tax credits and development expenses in fiscal
2004, compared to 2003, both in dollars and as percentage of sales, can be
explained by several factors. First, our restructuring actions, the
consolidation of our protocol operations in Montreal, as well as tight
cost-control measures, contributed to the reduction of our gross research and
development expenses year-over-year. In addition, before the end of the year,
we refocused the research and development activities of our Life Sciences and
Industrial Division. Finally, mix and timing of our research and development
projects, especially in our Telecom Division, caused our gross research and
development expenses to decrease year-over-year. On the other hand, a stronger
Canadian dollar, compared to the US dollar year-over-year, increased our gross
research and development expenses, as most of these are incurred in Canadian
dollars.
TAX CREDITS AND GRANTS
grants
Tax credits and grants from the Canadian federal and provincial governments for research and development activities were $4.1 million, $3.7 million $3.3
million and $3.6$3.3 million for fiscal 2006, 2005 and 2004, respectively. As a percentage of gross research and 2003,development expenses, tax credits and grants amounted to 21.0%, 23.2% and 20.9% for fiscal 2006, 2005 and 2004, respectively.
FISCAL
Fiscal 2006 vs. 2005 VS.
The increase in our tax credits in dollars in fiscal 2006, compared to 2005, is mainly related to the increase in our eligible gross research and development expenses in Canada, since we were also entitled to similar grant programs and tax credits year-over-year. In addition, the increased strength of the Canadian dollar, compared to the US dollar, year-over-year, resulted in higher tax credits since these credits are earned in Canada. However, our tax credits decreased as a percentage of gross research and development expense. Indeed, following the acquisition of Consultronics, we incurred less gross expenses entitling to tax credits since a part of Consultronics research and development activities were held outside Canada and Quebec. In addition, a mix of research and development projects resulted in a lower proportion of expenses being eligible to tax credits in fiscal 2006, compared to 2005.
Fiscal 2005 vs. 2004
The increase in our tax credits in fiscal 2005, compared to 2004, 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 research and development activities in Canada, we incurred most of our research and development expenses in Canada, where we are entitled to research and development tax credits.
56
FISCAL 2004 VS. 2003
The decreaseIn addition, the increased strength of the Canadian dollar, compared to the US dollar, year-over-year, resulted in ourhigher tax credits and grantssince these credits are earned in fiscal 2004, compared
to 2003, is mainly related to the decrease in our eligible gross research and
development expenses incurred in Canada, since we were entitled to similar tax
credits year-over-year.
Canada.
We still invested significantly in research and development activities in fiscal 20052006 as we firmly believe that innovation and new product introductions are key in gaining market share in the current economic environment and ensuring the long-term growth and profitability of the
company.
OUTLOOK FOR FISCAL 2006
EXFO.
Outlook for Fiscal 2007
For fiscal 2006,2007, we expectintend to significantly increase our gross research and development expenses in proportion to our revenues, as a reflectiondollars and slightly in percentage of sales, given our focus on innovation, our desire to gain market share, and our goal to exceed customer needs and expectations. Also, a potentialexpectations and the full impact of the acquisition of Consultronics. We also intend to increasingly take advantage of talent pools around the world to cost-effectively design innovative test solutions. Finally, any further increase in the strength of the Canadian dollar would cause our net research and development expenses to increase, as most of these are incurred in Canadian dollars.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
For fiscal 2005,2006, amortization of property, plant and equipment was $4.3$3.5 million, compared to $4.3 million in 2005 and $4.9 million in 2004 and $5.2 million in 2003.2004. The decrease in amortization expenses inover the last two fiscal 2005, compared to 2004,years, despite the significant increase in the strength of the Canadian dollar compared to the US dollar as well as the acquisition of Consultronics in 2006 is mainly due to the fact that some of our property, plant and equipment became fully amortized during fiscal 2004.
OUTLOOK FOR FISCAL 2006
over the last three years.
Outlook for Fiscal 2007
For fiscal 2006,2007, despite a potential increase in the strength of the Canadian dollar and the full impact of the acquisition of Consultronics, we expect the amortization of property, plant and equipment to decrease compared to 20052006 considering that some of these assets became fully amortized in 20052006 or will become fully amortized in 2006.
2007.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the business combinations we completed over the past fewseveral years, we recorded intangible assets, primarily consisting of core technology. These intangible assets resulted in amortization expenses of $4.4 million, $4.8 million $5.1 million and $5.7$5.1 million for fiscal 2006, 2005 2004 and 2003,2004, respectively. The decrease in amortization expenses in the last two fiscal 2005,years, despite the increased strength of the Canadian dollar compared to 2004,the US dollar and the acquisition of Consultronics in 2006 is mainly due to the fact that some of our core technologies became fully amortized during fiscal 2005.
The decrease2005 and 2006; namely, those related to the acquisition of EXFO Burleigh and EXFO Photonics Solutions.
Outlook for Fiscal 2007
For fiscal 2007, despite a potential increase in
amortization expenses in fiscal 2004, compared to
2003, is the
resultstrength of the
$2.9 million impairment charge recorded inCanadian dollar and the
third quarterfull impact of
fiscal 2003.
57
OUTLOOK FOR FISCAL 2006
For fiscal 2006,the acquisition of Consultronics, we expect the amortization of intangible assets to approximate $3.3$3.0 million assumingconsidering that some core technologies will become fully amortized in 2007; namely, those related to our protocol business. This assumes no acquisitions arewill be made during this period.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
FISCAL 2003
Fiscal 2006
In May 2003,June 2006, we performedentered into an agreement to sell our annual impairment test of goodwill for
all our reporting units, except for newly acquired EXFO Gnubi. Also,
considering market conditionsbuilding located in the telecommunications industry and the
persisting unfavorable conditions affecting our subsidiaries' industries at
that time, we reviewed the carrying value of intangible assets related to
these reporting units, consisting primarily of acquired core technology.
As a result of this assessment, we concluded that the carrying value
of goodwill related to EXFO Burleigh and the carrying value of intangible
assets related to EXFO Burleigh and EXFO Photonic Solutions were impaired,Rochester, New York, along with some equipment and we recorded an impairment charge of $4.5 million$604,000 in the third quarter of fiscal 2006, representing the excess of the carrying value of these assets over the net expected selling price of $1.2 million. The sale of these assets was finalized in the fourth quarter of 2006 for the net expected selling price. This amount is included in the other receivables in the balance sheet as at August 31, 2006, and will be recovered in the first quarter of fiscal 2007. These assets report to write down goodwillthe Life Sciences and a
pre-tax impairment charge of $2.9 million to write down acquired core
technology. Of the total impairment charge of $7.4 million, $6.9 millionIndustrial Division. As at August 31, 2005, this building was related to EXFO Burleigh for goodwill and acquired core technology and
$555,000 was related to EXFO Photonic Solutions for acquired core technology.
The write-down of goodwill and acquired core technology of EXFO
Burleigh was required, considering that we exited the optical component
manufacturing automation business, whose revenue potential representedshown as a
long-term prospect. The write-down of acquired core technology from EXFO
Photonic Solutions was required because revenue potential related to this long-lived asset was less than expectedheld for sale in the short and medium term due to
the state of the market at the time.
However, no impairment of goodwill and intangible assets was required
for EXFO Protocol since we believed that revenue potential from the
protocol-layer testing market would remain strong in the short and medium
term.
For the purposes of estimating fair value, we used a combination of
discounted future cash flows and a market approach (sales multiples). The
discounted future cash flows were estimated using periods ranging between
eight and ten years, discount rates ranging between 15% and 20%, and an annual
growth rate ranging between nil and 35%. The sales multiples used in the
market approach ranged between 0.7 and 2.3. The assumptions used reflected our
best estimates.
FISCALbalance sheet.
Fiscal 2004 AND 2005
In fiscal 2004, we put one of our buildings located in Quebec City,
Canada, up for sale and received, at the beginning of
fiscal 2005, a formal purchase offer for this building. Based on that offer, we concluded that the building was impaired and we recorded an impairment charge of $620,000 in fiscal 2004, representing the excess of the carrying value of the building over its expected selling price. However, during the first quarter of fiscal 2005, some conditions of the formal offer were not met and the offer was declined. During fiscal 2005, we withdrew the building from the market.
As at August 31, 2004,
the building was not shown as a long-lived asset held for sale in the balance
58
sheet because it was still used and, consequently, it was not available for
immediate sale. This building reports to the Telecom Division.
In May 2004 and 2005,of each of the reporting years, we performed our annual impairment test for goodwill and concluded that it was not impaired. Goodwill will be reviewed for impairment in May 2006,2007, or prior if events or circumstances indicate it might be impaired.
GOVERNMENT GRANTS
During 1998, we entered into an agreement with the Quebec Minister of Industry, Commerce, Science and Technology (“The Minister”). Pursuant to this agreement, the Minister agreed to contribute, in the form of grants, up to CA$2.2 million (US$2.0 million) over the period from January 1, 1998, through December 31, 2002, payable based on the number of full-time jobs created during that period.
Since the beginning of the program, we have claimed and received the maximum amount of CA$2.2 million. However, these grants were subject to the condition that jobs created pursuant to the agreement be maintained for a period of at least five years from the date of creation. Since the beginning of the program, we deferred in the balance sheet CA$1.5 million (US$1.3 million) until we received the final approval by the sponsor of the program related to jobs created. In fiscal 2006, the sponsor of the program granted us with its final approval and we recorded non-recurring revenue of CA$1.5 million (US$1.3 million) in the earnings from operations in the statement of earnings of that period.
RESTRUCTURING AND OTHER CHARGES
FISCAL 2003
In fiscal 2003, we implemented a restructuring plan to align our cost
structure with market conditions. Under that plan, we recorded charges of $4.1
million, including $2.8 million in severance expenses for the 172 employees
who were terminated throughout the company, $512,000 for impaired long-lived
assets
Fiscal 2004 and $855,000 for future payments on exited leased facilities located
around the world. Our estimation of the fair value of such future payments
took into account the estimated sublease rentals over the remaining terms of
the exited leases.
FISCAL 2004 AND 2005
In fiscal 2004, the Board of Directors approved a restructuring plan to consolidate the operations of our Life Sciences and Industrial Division, transferring EXFO Burleigh'sour Rochester, New York, operations mainly to EXFO Photonic Solutions facilities in Toronto. The consolidation process, which started in August 2004, was completed during fiscal 2005.
Overall, for that process, we incurred $2.5 million in restructuring and other charges, from which $2.0 million werewas recorded in fiscal 2004 and the remaining of $482,000 werewas recorded in fiscal 2005. The overall costs, which were recorded in the restructuring and other charges in the statements of earnings of the corresponding years, are detailed as follows: $855,000 for severance expenses for the layoff of all employees of EXFO Burleigh;at the Rochester facilities; $1.3 million mainly for the impairment of the EXFO Burleigh building; and the remaining $399,000 for other expenses such as training and recruiting expenses and transfer of assets.
The EXFO Burleigh building was put up for sale in fiscal 2004, but it
is not yet sold because of the difficult real estate market in Rochester, NY.
The building is available for sale in its present condition and we expect to
sell the property within the next twelve months. Consequently, in accordance
with CICA handbook, section 3475, "Disposal of Long-Lived Assets and
Discontinued Operations", it was shown in the balance sheet as a long-lived
asset held for sale. The fair value used to determine the impairment loss of
the building represents our best estimate of its selling price based upon the
municipal valuation. Since September 1, 2004, the building is no longer
amortized.
Finally, in fiscal 2005 and 2004, we recorded adjustments of $190,000 and $304,000, respectively, to the fiscal 2003 planand 2001 plans because actual charges, mainly for leased equipment, were lower than expected.
Our restructuring plans and cost-reduction measures represented our best efforts to respond to the difficult market conditions of
the pastrecent years. Although we believe that such restructuring actions were appropriate and delivered the expected results, changes in market or industry conditions may lead us to incur additional restructuring actions and cost-reduction measures in the coming years.
59
INTEREST AND OTHER INCOME
Our interest income mainly resulted from our short-term investments, less interests and bank charges. Interest and other income amounted to $3.3 million, $2.5 million $1.4 million and $1.2$1.4 million for fiscal 2006, 2005 and 2004, and 2003,
respectively. The increase in our interest income in fiscal 2006, compared to 2005, is mainly due to the increase in interest rates year-over-year. Also, despite the cash payment of $18.1 million for the acquisition of Consultronics in January 2006, our average cash position increased in fiscal 2006 due to cash flows from operating activities, which contributed to the further increase in interest revenue year-over-year.
The increase in interest income in fiscal 2005, compared to 2004, is due in part to the increase in our average cash and short-term investmentsposition following our public offering in February 2004, the cash flows from operating activities and the increase in interest rates year-over-year. Also, in
Outlook for fiscal 2005, we recovered R&D tax credits earned in previous years and we were
granted $249,000 in interest by the tax authorities.
In fiscal 2004, we recorded one-time revenue of $265,000 for the sale
of non-core technologies. Without this revenue, interest and other income
would have been relatively flat compared to 2003.
2007
Assuming no acquisitions are made in fiscal 2006,2007, we expect our interest income to increase during that fiscal year shouldremain relatively flat, compared to 2006, assuming stability in interest rates
increase and because our cash and short-term investments should increase with
cash flows from operating activities.
rates.
FOREIGN EXCHANGE LOSS
Foreign exchange loss amounted to $1.3 million, $278,000 and $1.6
million for fiscal 2005, 2004 and 2003, respectively.
Foreign exchange gains and losses are the result of the translation of operating activities denominated in currencies other than the Canadian dollar.
Foreign exchange loss amounted to $595,000, $1.3 million and $278,000 for fiscal 2006, 2005 and 2004, respectively.
The significant exchange losslosses recorded duringin fiscal 2005 isand 2006 are the result of the significant increase in the value of the Canadian dollar, compared to the US dollar, during these periods. However, the increase in the value of the Canadian dollar was more significant in fiscal 2005, compared to 2006, which resulted in a higher exchange loss in 2005. For instance, the year-end exchange rate was Cdn$CA$1.3167 = US$1.00 in fiscal 2004, compared to Cdn$CA$1.1889 = US$1.00 in 2005, representing an increase of nearly 10%10.7% year-over-year. This compares to a year-end exchange rate of CA$1.1066 = US$1.00 in the valuefiscal 2006, which resulted in an increase of 7.4%, compared to 2005. Also, the Canadian
dollar. The average exchange rate for fiscal 2005 was Cdn$CA$1.2315 = US$1.00 in fiscal 2005, compared to Cdn$1.3301CA$1.1481 = US$1.00 in 2004.
2006. On the other hand, higher levels of activity in fiscal 2006, compared to 2005, contributed to the increase in exchange loss in 2006.
During the same period last year,fiscal 2004, the Canadian dollar value remained relatively stable compared to the US dollar, throughout the year, resulting in a slight exchange loss during that period. In addition, higher levels of activity in fiscal 2005,
compared to 2004, further increased the foreign exchange loss in 2005.
year.
It should be noted that additional foreign exchange rate fluctuations flow through the P&L line items as a significant portion of our operating elementsitems are denominated in Canadian dollars, and and we report our results in US dollars.
We manage our exposure to currency risks with forward exchange contracts. In addition, some of our Canadian
entities'entities’ operating activities are denominated in US dollars or other currencies, which further hedges
this
risk.these risks. However,
a potentialany further increase in the value of the Canadian dollar, compared to the US dollar, would have a negative impact on our operating results.
60
INCOME TAXES
Our income tax expense was $2.6 million forin fiscal 2006 and 2005, compared to an income tax recovery of $986,000 for 2004, and anin 2004.
Most of the income tax expense of
$15.1 million for 2003.
The income tax expenseexpenses recorded in fiscal 2005 representsand 2006 represent income taxes payable in some specific tax jurisdictions, mainly at the Canadian federal level. Income taxes payable at this specific level, iswhich are reduced by research and development tax credits that are recorded against gross research and development expenses.
expenses in the statements of earnings.
The income tax recovery recorded in fiscal 2004 is mainly due to the $1.4 million of unusual income tax recovery recorded during that year, offset in part by income taxes payable in some specific tax jurisdictions, mainly at the Canadian Federalfederal level. The income taxes payable at the Canadian federal level, were also reduced by research and development tax credits recorded against gross research and development expenses. The unusual tax recovery was due to the receipt, during that period, of income taxes paid in previous periods following the reception of a tax assessment.
Since fiscal 2003, we have been recording
We record 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 managementwe will have concluded that realization of future income tax assets is more likely than not. Consequently, our income tax rates are distorted compared to statutory rates. Please refer to note 16 of our consolidated financial statements included elsewhere in this Annual Reportannual report for a full reconciliation of the income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS AND CAPITAL RESOURCES
Cash Requirements and Capital Resources
As at August 31, 2005,2006, cash and short-term investments consisted of $112.0$111.3 million, almost flat compared to 2005, while our working capital was at $135.3$144.0 million. Our cash and
short-term investments increased $22.9During fiscal 2006, operating activities generated $12.3 million in fiscal 2005, compared to
2004, mainly due to the cash flows from operating activities of $14.0 million
as well ascash. In addition, we recorded an unrealized foreign exchange gain of $10.0$7.9 million on our cash and short-term investments. However, this increase was partially offset by the
cash payment of $1.5 million for the purchase of property, plant and equipment
as well as intangible assets. TheThis unrealized foreign exchange gain resulted from the translation, in US dollars, of our Canadian dollar-denominatedCanadian-dollar-denominated cash and short-term investments and was recorded in the cumulative translation adjustment in the balance sheet. On the other hand, we made cash payments of $18.1 million and $3.4 million for the acquisition of Consultronics and for the purchase of property, plant and equipment, respectively.
Our short-term investments consist of commercial paper issued by sixnine (six as of August 31, 2005) quality, high-credit quality corporations and trusts; therefore, we consider the risk of non-performance of these financial instruments to be remote. For the purposes of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis. These short-term investments will be used for working capital and other general corporate purposes, including other potential acquisitions.
We believe that our cash
on handbalances and short-term investments
combined
with an available line of credit of $5.8 million, will be sufficient to meet our liquidity and capital requirements for the foreseeable future.
In addition to these assets, we have unused available lines of credit of $11.2 million for working capital and other general corporate purposes and an unused line of credit of $11.2 million for foreign currency exposure related to forward exchange contracts. However, possible
additional operating losses and/or possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing. There can be no assurance that additional debt or equity
61
financing will be available when required or, if available, that it can be secured on satisfactory terms. Our linelines of credit bearsbear interest at prime rate.
The following table summarizes our commitments as at August 31,
2005:
YEARS ENDING 2010 AND
AUGUST 31, 2006 2007 2008 2009 LATER TOTAL
- -------------------------------------------------------------------------------------------------------------
Long-term debt $ 134,000 $ 147,000 $ 51,000 $ -- $ -- $ 332,000
Operating
leases 1,050,000 952,000 632,000 584,000 1,029,000 4,247,000
- -------------------------------------------------------------------------------------------------------------
Total
commitments $ 1,184,000 $ 1,099,000 $ 683,000 $ 584,000 $ 1,029,000 $ 4,579,000
=============================================================================================================
SOURCES AND USES OF CASH
2006:Year ending August 31, | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 and later | | | Total | |
| | | | | | | | | | | | | | | | | | | |
Long-term debt | | $ | 107,000 | | $ | 113,000 | | $ | 118,000 | | $ | 123,000 | | $ | − | | $ | 461,000 | |
Operating leases | | | 1,748,000 | | | 1,223,000 | | | 1,177,000 | | | 1,200,000 | | | 1,540,000 | | | 6,888,000 | |
| | | | | | | | | | | | | | | | | | | |
Total commitments | | $ | 1,855,000 | | $ | 1,336,000 | | $ | 1,295,000 | | $ | 1,323,000 | | $ | 1,540,000 | | $ | 7,349,000 | |
Sources and Uses of Cash
We finance our operations and meet our capital expenditure requirements mainly through cash flows from operating activities, the use of our cash and short-term investments as well as the issuance of subordinate voting shares.
In fiscal 2004, pursuant to a public offering in Canada, we issued
5.2 million subordinate voting shares for net proceeds of $29.2 million
(Cdn$38.4 million) after deducting underwriting commissions of $1.2 million
(Cdn$1.6 million). These net proceeds were recorded as short-term investments.
Cash flows provided by financing activities in fiscal 2004 were attributable
to the net proceeds of this offering.
OPERATING ACTIVITIES
Operating Activities
Cash flows provided by operating activities amountedwere $12.3 million in fiscal 2006, compared to $14.0 million in fiscal 2005 compared toand $751,000 in 20042004. Cash flows provided by operating activities in fiscal 2006 were mainly attributable to the net earnings before items not affecting cash of $16.9 million, less the negative net change in non-cash operating items of $4.7 million. Our accounts receivable and $5.6our inventories increased in fiscal 2006, resulting in negative effects on cash flows of $2.6 million and $2.3 million, respectively. The increase in 2003.
sales year-over-year explains the increase in accounts receivable. Also, larger sales activities in fiscal 2006 resulted in higher inventory levels in 2006 in order to sustain these increased sales activities.
Cash flows provided by operating activities in fiscal 2005 were mainly attributable to the net earnings
afterbefore items not affecting cash of $9.1 million and the positive net change in non-cash operating items of $4.9 million. This net change in non-cash operating items is mainly due to the decrease of $6.1 million
ofin our income taxes and tax credits recoverable following the
collection,recovery, during
thethat year, of income taxes and tax credits
recoverable from previous periods. On the other hand, our accounts receivable
increased by $838,000 and our inventories increased by
$699,000.$838,000 and $699,000, respectively. The increase
ofin our accounts receivable is related to the increase in
sales.sales year-over-year. Our inventories slightly increased despite the significant rise in sales due to tight inventory management.
Cash flows provided by operating activities in fiscal 2004 were
mainly attributable to the net earnings after items not affecting cash of $5.7
million, offset in part by the net increase of our non-cash operating items of
$4.9 million; that is, our accounts receivable increased by $2.7 million, our
income taxes and tax credits recoverable increased by $2.5 million and our
inventories decreased by $1.0 million. The increase in our accounts receivable
is directly related to the significant sales growth in fiscal 2004. The
increase in our income taxes and tax credits recoverable is mainly due to the
payment during the year of income taxes and to the recognition, during the
year, of research and development tax credits not yet recovered. On the other
hand, our increased sales level combined with tight inventory management
enabled us to reduce our inventories overall.
62
We have delivered positive cash flows from operating activities for
the last three fiscal years, despite the fact that we posted a net loss in
each of these years.
INVESTING ACTIVITIES
Investing Activities
Cash flows used by investing activities totaledwere $13.2 million in fiscal 2006, compared to $13.0 million in fiscal 2005 compared toand $29.7 million in 20042004.
In fiscal 2006, we made cash payments of $18.1 million and $9.9$3.4 million in 2003.
for the acquisition of Consultronics and the purchase of property, plant and equipment, respectively. In order to finance a part of these payments, we disposed of $8.2 million worth of short-term investments. We paid the remaining with cash flows from operating activities and cash on hand.
In fiscal 2005, we acquired $11.5 million worth of short-term investments with cash flows from operating activities and cash on-hand and paid $1.5 million for the purchase of property, plant and equipment as well as intangible assets.
In fiscal 2004, we acquired $28.6 million worth of short-term
investments with the net proceeds of the public offering. In addition, we paid
$1.1 million for the purchase of property, plant and equipment as well as
intangible assets.
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 hedged sales are recorded.
As at August 31, 2005,2006, we held forward exchange contracts to sell US dollars at various forward rates, which are summarized as follows:
CONTRACTUAL WEIGHTED AVERAGE
EXPIRY DATES AMOUNTS CONTRACTUAL FORWARD RATES
- ------------------------------------------------------------------------------
September 2005 to August 2006 $ 26,000,000 1.2630
September 2006 to November 2007 7,600,000 1.2500
Expiry dates: | | Contractual amounts | | Weighted average contractual forward rates |
September 2006 to August 2007 | | $ | 37,000,000 | | 1.1676 |
September 2007 to June 2009 | | | 26,800,000 | | 1.1261 |
As at August 31,
2005,2006, the fair value of our forward exchange contracts, which represents the difference between their contractual amounts and their current trading value, amounted to an unrecognized gain of
$2.9
million.
RELATED-PARTY TRANSACTIONS
In fiscal 2003, we acquired a building from a company owned by the
President of EXFO for a cash consideration of $930,000. This transaction was
measured at the fair market value since it was not conducted during the normal
course of operations, the change in ownership interest in the building was
substantive and the fair market value was supported by independent appraisal.
63
In addition, for the years ended August 31, 2003 and 2004, we leased
facilities from the company owned by the President of EXFO. The annual rental
expense amounted to $331,000 and nil, respectively. The rental expense for
fiscal 2003 included $234,000 for future payments on an exited leased
facility. As$5.5 million ($2.9 million as at August 31, 2004, restructuring charges payable included
$194,000 due to the company owned by the President of EXFO in connection with
this exited leased facility. In September 2004, EXFO was released from its
obligations under that lease, and it paid the full amount due to the related
company. These rental expenses were measured at the fair market value since
they were incurred during the normal course of operations.
2005).
CONTINGENCY
As discussed in note 12 to our consolidated financial statements included elsewhere in this Annual Report,annual report, EXFO 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'sEXFO’s stock in the after-market.
In June 2003, a committee of the EXFO'sEXFO’s Board of Directors conditionally approved a proposed settlement between the issuer defendants, the individual defendants, and the plaintiffs. If approved, the settlement would provide, among other things, a release of the EXFO and of the individual defendants for the conduct alleged in the action to be wrongful in the amended complaint. EXFO would agree to undertake other responsibilities under the settlement, including agreeing to assign away, not assert, or release certain potential claims EXFO may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by EXFO'sEXFO’s insurance carriers.
On June 25, 2004, the Plaintiffs moved for Preliminary Approvalpreliminary approval of the settlement. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the Notice Administrator for the settlement and ordered that the notice of the settlement be distributed to all settlement class members beginning on November 15, 2005, and completed by January 15, 2006. The2005. A settlement fairness hearing was held on April 24, 2006; however, no ruling has been set for April 26, 2006. Followingissued yet by the hearing, ifcourt. If the court determines that the settlement is fair to the class members, the settlement will be approved. ThereThe settlement provides that, if the plaintiffs do not obtain any recovery from the underwriter defendants, the members of the class action would receive an amount not expected to exceed $2,507,678. Any direct financial impact plus any legal fees are expected to be borne by EXFO’s insurance carriers. However, there can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all. Therefore, it is not possible to predict the final outcome of the case, nor to determine the amount of any possible losses. If the settlement process fails, EXFO will continue to defend its position in this litigation that the claims against it, and its officers, are without merit. Accordingly, no provision for this case has been made in the consolidated financial statements as at August 31, 2005.
64
2006.
SHARE CAPITAL AND STOCK-BASEDSTOCK-BASED COMPENSATION PLANS
SHARE CAPITAL
Share capital
As at November 3, 2005,1, 2006, EXFO had 37,900,00037,143,000 multiple voting shares outstanding, entitling to ten10 votes each and 30,674,61731,632,857 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and without par value.
LONG-TERM INCENTIVE PLAN
In January 2005, EXFO made certain amendments to the existing Stock
Option Plan, including the renaming of the plan to
Long-Term Incentive Plan which now includes restricted share units (RSUs) in addition to stock options.
RSUs are "phantom" shares that rise and fall in value based on the value of
EXFO's subordinate voting shares and are redeemable for actual subordinate
voting shares or cash, at the discretion of the Board of Directors, on the
vesting dates established by the Board of Directors at the time of grant. The
vesting dates are subject to a minimum of three years and a maximum of ten
years from the award date. RSUs granted under the plan expire at the latest
ten years from the date of grant.
DEFERRED SHARE UNIT PLAN
In January 2005, EXFO established a Deferred Share Unit (DSU) Plan
for the members of the Board of Directors as part of their annual retainer
fees. Each DSU entitles the Board members to receive one subordinate voting
share. DSUs are acquired on the date of grant and will be redeemed in
subordinate voting shares when the Board member will cease to act as Director
of EXFO.
The aggregate number of subordinate voting shares covered by stock options, RSUsrestricted share units (RSUs) and DSUsdeferred share units (DSUs) granted under the Long-Term Incentive Plan and the Deferred Share Unit Plan was 2,963,6782,882,369 as at August 31, 2005.November 1, 2006. The maximum number of subordinate voting shares issuable under these two plans cannot exceed 6,306,153 shares. The following tables summarize information about stock options, RSUs and DSUs granted to the members of theour Board of Directors and to Management and Corporate Officers of the companyus and itsour subsidiaries as at August 31,
2005:
November 1, 2006:
Stock Options | | Number | | % of issued and outstanding | | Weighted average exercise price |
Chairman of the Board, President and CEO (one individual) | | 179,642 | | 7% | | $ | 9.05 |
Board of Directors (five individuals) | | 194,375 | | 8% | | $ | 6.23 |
Management and Corporate Officers (eight individuals) | | 313,836 | | 13% | | $ | 15.42 |
| | 687,853 | | 28% | | $ | 11.16 |
Restricted Share Units (RSUs) | | Number | | % of issued and outstanding |
Chairman of the Board, President and CEO (one individual) | | 59,913 | | 14% |
Management and Corporate Officers (ten individuals) | | 255,616 | | 60% |
| | 315,529 | | 74% |
WEIGHTED
Deferred Share Units (DSUs) | | Number | | % OF ISSUED AND AVERAGE
STOCK OPTIONS NUMBER OUTSTANDING EXERCISE PRICE
- --------------------------------------------- --------------- ----------------- ---------------
Chairman of the Board, Presidentissued and CEO
(one individual) 168,424 6% $ 9.34
outstanding |
Board of Directors (five individuals) 194,375 7% $ 6.23
Management and Corporate Officers
(nine individuals) 340,091 12% $ 14.39
--------------- ----------------- ---------------
702,890 25% $ 10.92
=============== ================= ===============
| | 43,290 | | 100% |
65
RESTRICTED SHARE UNITS NUMBER % OF ISSUED AND
OUTSTANDING
- -------------------------------------------- --------------- -----------------
Chairman of the Board, President and CEO
(one individual) 13,089 7%
Management and Corporate Officers
(nine individuals) 151,096 86%
--------------- -----------------
164,185 93%
=============== =================
DEFERRED SHARE UNITS NUMBER % OF ISSUED AND
OUTSTANDING
- -------------------------------------------- --------------- -----------------
Board of Directors (five individuals) 23,734 100%
=============== =================
OFF-BALANCE SHEET ARRANGEMENTS
As ofat August 31, 2005,2006, our off-balance sheet arrangements consisted of letters of guarantee and forward exchange contracts, whichcontracts. These off-balance sheet arrangements are respectively described in detailsdetail in notenotes 12 and 18 to our consolidated financial statements, included elsewhere in this Annual Report.
annual report.
VARIABLE INTEREST ENTITY
As of August 31,
2005,2006, we did not have
significant interests in any variable interest entities.
66
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Item 6. | Directors, Senior Management and Employees |
A. | Directors and Senior Management |
The following table sets forth information about our executive officers, senior managers and Directors as of November 1, 2005.
2006.
NAME AND MUNICIPALITY OF RESIDENCE POSITIONS WITHName and Municipality of Residence | | Positions with EXFO
- ----------------------------------- ----------------------------------------------------------
|
STEPHEN BULL Quebec City, Quebec | | Vice-President, Research and Development, Telecom Division
Cap-Rouge, Quebec
|
NORMAND DUROCHER St-Sauveur, Quebec | | Vice-President, Human Resources
St-Sauveur, Quebec
|
ALLAN FIRHOJ Georgestown, Ontario | | Vice-President and General Manager, Life Sciences and Georgestown, Ontario Industrial Division
BENOIT FLEURY |
ROBERT FITTS Minesing, Ontario | | Vice-President, Protocol-Layer Product Management and
Saint-Lazare, - Copper Access Products |
ÉTIENNE GAGNON Quebec Business Development
ETIENNE GAGNON City, Quebec | | Vice-President, Optical-Layer Product Management - Optical and Sillery, Quebec Customer Service
Protocol Products |
LUC GAGNON St-Augustin-de-Desmaures, Quebec | | Vice-President, Telecom Manufacturing Operations
St-Augustin-de-Desmaures, |
JUAN-FELIPE GONZÁLEZ Montreal, Quebec
JUAN-FELIPE GONZALEZ | | Vice-President, Global Telecom Sales Montreal, Quebec
- International |
GERMAIN LAMONDE Quebec City, Quebec | | Chairman of the Board, President and Chief Executive Cap-Rouge, Quebec Officer |
PIERRE MARCOUILLER Magog, Quebec | | Independent Director
Magog, Quebec
|
GUY MARIER Independent Director
Lakefield Gore, Quebec | | Independent Director |
PIERRE PLAMONDON, CA Quebec City, Quebec | | Vice-President, Finance and Chief Financial Officer |
BENOIT RINGUETTE Quebec City, Quebec
BENOIT RINGUETTE | | Corporate Secretary and Legal Counsel
Quebec City, Quebec
|
DAVID A. THOMPSON Independent Director
Newton, North Carolina
ANDRE TREMBLAY | | Independent Director |
ANDRÉ TREMBLAY Outremont, Quebec | | Independent Director |
MICHAEL UNGER Richmond Hill, Ontario | | Independent Lead Director
Woodbridge, Ontario
|
DANA YEARIAN Lake Forest, Illinois | | Vice-President, Telecom Sales - North America |
The address of each of our executive officers, senior managers and Directors is c/o EXFO Electro-Optical Engineering Inc., 400 Godin Avenue,
Vanier,Quebec, Quebec, Canada. The following is a brief biography of each of our executive officers, senior managers and Directors.
67
STEPHEN BULL
Stephen Bull was appointed our Vice-President, Research and Development in December 1999. He joined us in July 1995 and held the positions of Assistant Director-Engineering from September 1997 to December 1999 and Group Leader (Engineering Management) from July 1995 to September 1997. From June 1990 to March 1995, Mr. Bull held the position of General Manager and Managing Director for Space Research Corporation, a military engineering company in Belgium. Mr. Bull holds a bachelor'sbachelor’s degree in Electrical Engineering from Laval University in Quebec City, Canada.
NORMAND DUROCHER
Normand Durocher was appointed Vice-President of Human Resources in April 2004. In addition to managing the company'sour human resources team, his main responsibility is to develop and implement a human resources plan that supports EXFO'sEXFO’s business strategy. Mr. Durocher began his career in labor relations in the Cable division of Nortel and then took on several key roles at Nortel Networks and Nordx/CDT, all relating to human resources and operations. Since then, Normand Durocher has accumulated more than 25 years'years’ experience in operations and human resources management within the telecommunications industry. Prior to joining EXFO, Mr. Durocher ran his own human resources consulting business. Normand Durocher holds a Bachelor of Science from the UniversiteUniversité de MontrealMontréal and also completed the Advanced Human Resources program at Dalhousie University in Halifax, Nova Scotia, Canada
ALLAN FIRHOJ
Allan Firhoj was appointed Vice-President and General Manager, Life Sciences and Industrial Division in July 2003. Prior to that, he held the position of General Manager of EXFO Photonic Solutions Inc. since November 2001. He is responsible for the overall strategic direction and management of the Life Sciences and Industrial Division. Mr. Firhoj joined EFOS Inc. in 1996, where he was responsible for Sales, Marketing and Business Development of the Dental Curing-Products Division. Following the sale of this division to Dentsply International in 1997, he was appointed Director of Marketing and Business Development. Mr. Firhoj continued in this capacity until being appointed to the position of General Manager of EXFO Photonic Solutions Inc. Prior to joining the company,us, Mr. Firhoj spent six years with The Horn Group, a plastics business involved in medical devices/instrumentation and office communication equipment. He successively held the positions of ISO 9000 Implementation Manager, Technical Sales Manager as well as Marketing and Business Development Manager. In this latter role, he successfully contributed to increasing sales in their medical market by an annual average of 60% during a three-year period. Mr. Firhoj holds a bachelor'sbachelor’s degree in Political Science from Bishop'sBishop’s University in Lennoxville, Quebec.
BENOIT FLEURY
Robert Fitts has been Vice-President, Product Management - Copper Access Products, since our acquisition of Consultronics in January 2006. His main role is to establish the marketing direction of the copper access product line, which includes defining the features of these products so as to ensure their success with customers. Prior to his appointment with us, Mr. Fitts was Executive Vice-President at Consultronics, where he began his accomplished and long-standing career 23 years earlier. Mr. Fitts has extensive experience in the telecommunications testing industry and, more specifically, has been an active participant in the field of local-loop testing, DSL, IPTV and VoIP. Robert Fitts attended the University of Guelph in Ontario, Canada, and has a degree in electrical engineering (computer option) technology from Fleming College, near Toronto, Canada. Mr. Fitts is also a graduate of the executive program at Queens University School of Business, located in Kingston, Ontario.
Étienne Gagnon was appointed Vice-President, Protocol-Layer Product Management - Optical and Business Development forProtocol Products in June 2006. Prior to that he had been our protocol-layer product line in
February 2004. His main responsibility consists in defining the product line
strategy and developing strategic partnerships to enhance our presence in this
market segment. Mr. Fleury has 20 years of experience in the optical
telecommunications industry. He began his career as a systems engineer at
Northern Telecom, and then progressed to various key positions in the areas of
product management, operations engineering, product development, account
marketing and product marketing - all associated with Nortel's leading optical
systems. From 2001 to 2003, prior to joining EXFO, Mr. Fleury was
Vice-President of Product Line Management and Marketing at Ceyba, an
Ottawa-based optical systems startup. Mr. Fleury holds a bachelor's degree in
Electrical Engineering from McGill University as well as a master's degree,
also in Electrical Engineering, from Concordia University. He also completed a
Marketing Management Program from Duke University.
68
ETIENNE GAGNON was appointed Vice-President of Optical-Layer Product Management and Customer Service insince May 2003. Mr. EtienneÉtienne Gagon is not related to Mr. Luc Gagnon. He is responsible for EXFO'sEXFO’s general marketing direction, on both the product level and communications level, and also oversees our customer service department. For nearly three years, before returning to EXFO in early 2003, Mr. Gagnon was Vice-President of Sales and Marketing at TeraXion, an optical component manufacturer based in Quebec City. Mr. Gagnon began his career as a design engineer for Bombardier/Canadair, where he worked on the Canadian Regional Jet project between 1990 and 1993. Later, he held the position of Business Development Manager for France Telecom in Hungary. In 1994, he joined EXFO'sEXFO’s European office as a Regional Sales Manager, and in 1996, he was brought back to Quebec City to head the OSP marketing group. Mr. Gagnon then went on to become the Director of our Outside Plant division in 1998, and remained in that function until he joined TeraXion in 2000. Mr. Gagnon holds a bachelor'sbachelor’s degree in Mechanical Engineering from the Ecole Polytechnique School of Engineering (University of Montreal), and a master'smaster’s degree in European Business from the Ecole nationale superieuresupérieure des telecommunicationstélécommunications in France.
LUC GAGNON
Luc Gagnon was appointed Vice-President, Telecom Manufacturing Operations in May 2003. Mr. Luc Gagnon is not related to Mr. EtienneÉtienne Gagnon. He is responsible for ensuring the smooth operation of all manufacturing activities, which include production, purchasing, product engineering, quality assurance, planning, manufacturing engineering, product configuration, transportation and customs, as well as material resources. Prior to his recent nomination, Mr. Gagnon held the position of Production Director since 2000. Before joining EXFO, he had similar roles in several other high-technology companies. He worked for Mendes from 1999 to 2000, for C-MAC from 1997 to 1999, for STERIS from 1993 to 1997 and for MITEL from 1991 to 1993. Mr. Gagnon holds a bachelor'sbachelor’s degree in electrical engineering and master'smaster’s degree in engineering, both from the UniversiteUniversité de Sherbrooke, in Canada.
JUAN-FELIPE GONZALEZ assumed the position of
Juan-Felipe González was appointed Vice-President, Global Telecom Sales - International in July 2003.August 2006. Prior to that he had been our Vice-President, Global Telecom Sales since July 2003 and our Vice-President, International Sales since September 1998. From January 1997 to September 1998, he was our International Sales Director and, from September 1993 to January 1997, our Sales Manager for Latin America and the Caribbean. Prior to joining us in September 1993, Mr. GonzalezGonzález was Marketing and Sales Director at Reyde, Barcelona, a plastics technical product corporation in Spain. Mr. GonzalezGonzález holds a bachelor'sbachelor’s degree in Industrial Chemistry from Complutense University of Madrid in Spain and a master'smaster’s degree in Business Administration from the School of Industrial Organization in Spain.
GERMAIN LAMONDE,
Germain Lamonde, a company founder, has been Chairman of the Board, President and CEO of EXFO since its inception in 1985. Mr. Lamonde is responsible for the overall management and direction of EXFO and its subsidiaries. Mr. Lamonde has served on the boards of several organizations such as the Canadian Institute for Photonic Innovations, the Pole QCA Economic Development Corporation and the National Optics Institute of Canada. He is also a founding member and Governor of the Canadian-based International Institute of Telecommunications and an Emeritus Member of the Canadian Academy of Engineering. Mr. Lamonde holds a bachelor'sbachelor’s degree in physics engineering from the University of Montreal'sMontreal’s School of Engineering, a master'smaster’s degree in optics from Laval University, and is also a graduate of the Ivey Executive Program offered by the University of Western Ontario.
PIERRE MARCOUILLER
Pierre Marcouiller has served as our Director since May 2000. Mr. Marcouiller is Chairman of the Board and Chief Executive Officer of Camoplast Inc., an international manufacturer specialized in industrial manufacturing of rubber tracks, molded composite and thermoplastic components and off-road tracked vehicles. He is the founder and has been the sole shareholder of Nexcap Inc., an investment company in the manufacturing sector, since December 69
1996. Mr. Marcouiller worked with Venmar Ventilation Inc., a private ventilation equipment manufacturer, from January 1983 to December 1996. From 1991 to 1996, he was the controlling shareholder of Venmar, where he also held the position of President and General Manager from 1986 to 1996. Mr. Marcouiller is also a Director of Heroux-DevtekHéroux-Devtek Inc., a public company specialized in the design, development and manufacturing of aerospace, defense and industrial products; more specifically in landing gear, aerostructure and gas turbine components. Mr. Marcouiller also holds Directorships in other privately held companies. Pierre Marcouiller holds a bachelor'sbachelor’s degree in business administration from UniversiteUniversité du QuebecQuébec in Trois-RivieresTrois-Rivières and a MBA from UniversiteUniversité de Sherbrooke, both in Canada.
GUY MARIER
Guy Marier has served as our Director since January 2004. Formerly President of Bell QuebecQuébec between 1999 and 2003, Guy Marier completed his successful 33-year career at Bell as Executive Vice-President of the Project Management Office of Bell Quebec,Québec, before retiring at the end of 2003. Mr. Marier began at Bell Canada in 1970 and quickly became an executive. From 1988 to 1990, he headed up Bell Canada International'sInternational’s investments and projects in Saudi Arabia and, for the three following years, served as President of Telebec,Télébec, a subsidiary of Bell Canada. He then returned to the parent company to hold various senior management positions. Mr. Marier was appointed to our Board of Directors in January 2004 and also sits on the Board of Bell Nordiq, a wholly-owned subsidiary of Bell Canada that manages the business and affairs of both TelebecTélébec L.P. and NorthernTel L.P. Mr. Marier holds a bachelor of Arts from the University of Montreal and a Bachelor of Business Administration from the UNIVERSITE DU QUEBEC A MONTREAL.
PIERRE PLAMONDON Université du Québec à Montréal.
Pierre Plamondon has been our Vice-President, Finance and Chief Financial Officer since January 1996 and was a Director from December 1999 to May 2000. Prior to joining us, Mr. Plamondon served as senior manager for Price Waterhouse, from September 1981 to December 1995 in Canada and France. Mr. Plamondon holds a bachelor'sbachelor’s degree in Business Administration and a license in Accounting, both from Laval University in Quebec City, Canada. Mr. Plamondon has been a member of the Canadian Institute of Chartered Accountants since 1983 and a member of the Board of Directors of SOVAR Inc. (Societe(Société de valorisation des applications de la recherche de l'Universitel’Université Laval) since December 2000.
BENOIT RINGUETTE
Benoit Ringuette has been our in-house Legal Counsel and Corporate Secretary since April 2004. Prior to joining EXFO, Mr. Ringuette practiced mainly in commercial, corporate and securities law from 1998 to 2003 as an associate in the law firms of O'Brien,O’Brien, Flynn Rivard in Quebec City and Desjardins Ducharme Stein Monast in Quebec City. Mr. Ringuette has been a member of the Quebec Bar since 1998. Mr. Ringuette holds a bachelor'sbachelor’s degree in Civil Law from Laval University in Quebec City, Canada.
DAVID
David A. THOMPSON Thompson has served as our Director since June 2000. Dr. David A. Thompsonis currently Vice-President and Director of Hardware & Equipment Technology Strategy at Corning Cable Systems, where he has held this position since January 2002. Prior to this nomination, he acted as Corning Incorporated'sIncorporated’s Division Vice-President for the Strategic Planning & Innovation Effectiveness in Research, Development and Engineering. Dr. Thompson first joined Corning Incorporated'sIncorporated’s Research and Development Division in 1976 as a Senior Chemist in glass research. He then took on several technology Directorship and strategic planning roles for Corning'sCorning’s Component and Photonics Technologies Divisions between 1988 and 1998; and, in 1999, he was appointed technical leader for the creation of the new Samsung-Corning Micro-Optics joint venture. David A. Thompson holds a Bachelor of Science in chemistry from Ohio State University and a doctorate in inorganic chemistry from the University of Michigan. He holds 13 patents and has over 20 technical publications in the areas of inorganic chemistry, glass technology and telecommunications.
70
ANDRE TREMBLAY
André Tremblay has served as our Director since June 2000. AndreMr. Tremblay is a Founder and Managing Partner of Trio Capital Inc, a private equity fund management company. He has more than 20 years experience in the telecommunications industry, where he hashaving been actively involved in the conception, financing and management of several companies. As a special advisor to the President of Telesystem Ltd., and as President of Telesystem Enterprises Ltd. from 1992 to 1998, he managed a portfolio of telecommunication companies. For almost 10 years, Mr. Tremblayhe served as President and Chief Executive Officer of Microcell Telecommunications, Inc.,a wireless network and service provider, which he led from its formationinception on through the different phases of its evolution. HeDuring that time, he has also provided early-stage financing, along with strategic advice and direction, for start-up technology firmsfirms. In 2005, he was appointed by Canada’s Industry Minister as member of the Telecommunications Policy Review Panel to make recommendations on how to modernize Canada’s telecommunication policies and sits on the Boards of
Directors of a number of corporations and non-profit organizations. Andreregulatory framework. André Tremblay holds bachelor'sbachelor’s degrees in management and in accounting from Laval University, a master'smaster’s degree in taxation from the UniversiteUniversité de Sherbrooke, and is also a graduate of Harvard Business School'sSchool’s Advanced Management Program.
MICHAEL UNGER
Michael Unger has served as our Director since May 2000. He worked with Nortel Networks Limited, now Nortel Networks Corporation, from 1962 to 2000. Mr. Unger'sUnger’s most recent position was President of Nortel'sNortel’s Optical Networks Business Unit, a position he held from May 1998 to April 2000. Prior to this appointment, Mr. Unger was Nortel'sNortel’s Group Vice-President, Transport Networks from March 1990 to May 1998. Mr. Unger also serves on the Board of Directors and Human Resources Committee of Tundra Semiconductor Corporation, a publicly traded company with its shares listed on The Toronto Stock Exchange that designs, develops and markets networking and network access technology for use by communications infrastructure equipment companies. He is also a memberchairs the Audit Committee of Nakina Systems and serves on the BoardBoards and Committees of Directors of a number ofseveral other privately-held companies active in the areas of photonic and optical components, optical network systems and solutions for cable operators and other communications service providers. Mr. Unger holds a bachelor's degree inBachelor of Science from Concordia University and has successfully completed several accounting credits, also given by Concordia University in Montreal, Canada. TERM OF EXECUTIVE OFFICERS
In addition, Mr. Unger holds an executive MBA from the University of Western Ontario.
Dana Yearian was appointed our Vice President, Telecom Sales − North America in August, 2006. He is responsible for managing telecom sales, both direct and indirect, and the execution of sales strategies across North America. Mr. Yearian oversees all sales-related functions for EXFO North America including sales operations, global account management, and partner programs. As a member of the Strategy and Management committees, he also develops corporate strategy for us. From 2005 to 2006, Mr. Yearian held the position of Vice-President of Sales at Spirent Communications Service Assurance Division. In 2003, Mr. Yearian founded The Katrixx Group which provided consulting and contracting services to high-technology companies. Before founding his company, Mr. Yearian worked as Vice President of Sales at Acterna Corp from 1991 to 2003. He led both North American and International sales and support operations of Acterna’s multiple testing solutions. Prior to working for Acterna, Mr. Yearian held various executive positions at Toshiba America, Silicon Sensors (Advanced Photonix, Inc.), and Impell Corporation (ABB Ltd.). Dana Yearian holds a bachelor's degree in electrical engineering from the Illinois Institute of Technology, Chicago, Illinois and has completed MBA course work at DePaul University.
Term of Executive Officers
Executive officers are appointed annually by the Board of Directors and serve until their successors are appointed and qualified or until earlier resignation or removal.
Director Compensation
In the financial year ended August 31, 2005,2006, each director who arewas not employeesan employee of the Corporation or any of its subsidiaries received the level of compensation set forth in the table below as annual compensation payable in a combination of cash and Deferred Share Units ("DSU"(“DSU”) as chosen by the Director pursuant to the Deferred Share Unit Plan.
- --------------------------------------------------------------------------------------------
Annual Retainer for Directors: (1) CDN$50,000(2) | CA$50,000 (2) | US$40,600 43,550 (3)
- --------------------------------------------------------------------------------------------
|
Annual Retainer for Committee Chairman: CDN$ | CA$5,000 | US$4,060 4,355 (3)
- --------------------------------------------------------------------------------------------
|
Annual Retainer for Committee Members: CDN$ | CA$3,000 | US$2,436 2,613 (3)
- --------------------------------------------------------------------------------------------
|
Fees for all Meetings Attended per day in Person: CDN$ | CA$1,000 | US$812 871 (3)
- --------------------------------------------------------------------------------------------
|
Fees for all Meetings Attended per day by Telephone: CDN$ | CA$500 | US$406 436 (3) |
(1) | All the Directors elected to receive 50% of their Annual Retainer in form of Deferred Share Units. |
(2) | The Annual Retainer for Mr. David A. Thompson is US$50,000 (CA$57,405). |
(3) - ------------------------- ------------------------------------------------------------------
| The compensation information has been converted from Canadian dollars to U.S. dollars based upon an average foreign exchange rate of CA$1.1481 = US$1.00 for 2006. |
- -------------------------
(1) All the Directors elected to receive 50%In the financial year ended August 31, 2005,2006, the Directors who arewere not employees received the following compensation in the form indicated:
Name | Annual Compensation Paid in Cash (US$) (1) | Annual Compensation Paid in DSUs (#) (2) | Estimated Value of DSUs at the time of grant (US$) (3) | Total Attendance Fees Paid in Cash (US$) (1) |
Pierre Marcouiller (4) | 27,001 | 3,812 | 21,775 | 6,533 |
Guy Marier (4) | 27,001 | 3,812 | 21,775 | 6,968 |
David A. Thompson (5) | 27,613 | 4,308 | 25,000 | 3,049 |
André Tremblay (6) | 28,743 | 3,812 | 21,775 | 6,097 |
Michael Unger (7) | 28,743 | 3,812 | 21,775 | 6,533 |
- --------------------------------------------------------------------------------------------------------------------
ANNUAL FAIR VALUE OF DSUS AT TOTAL ATTENDANCE
COMPENSATION PAID ANNUAL COMPENSATION THE TIME OF GRANT FEES PAID IN CASH
NAME IN CASH (US$) | |
(1) PAID IN DSUS (#) (2) (US$)(3) (US$) (1)
- --------------------------------------------------------------------------------------------------------------------
Pierre Marcouiller (4) 25,173 4,537 20,300 4,466
- --------------------------------------------------------------------------------------------------------------------
Guy Marier (5) 25,173 4,537 20,300 4,466
- --------------------------------------------------------------------------------------------------------------------
Dr. | The compensation information has been converted from Canadian dollars to U.S. dollars based upon an average foreign exchange rate of CA$1.1481 = US$1.00 for 2006, except for Mr. David A. Thompson who is paid in U.S. dollars for the portion of his annual retainer for Director. The Annual Compensation includes, as the case may be, the retainer for Director, Committee Members and Committee Chairman. |
(2) | Indicates the number of Subordinate Voting Shares granted under the Deferred Share Unit Plan. A DSU is converted in a Subordinate Voting Share when a Director ceases to be a member of the Board. |
(3) | The estimated value at the time of grant of a DSU is determined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required. The value at vesting of a DSU is equivalent to the market value of a Subordinate Voting Share when a DSU is converted to such Subordinate Voting Share. |
(4) | Member of the Audit Committee and the Human Resources Committee. |
(5) | Member of the Human Resources Committee. |
(6) 27,440 5,586 25,000 3,256
- --------------------------------------------------------------------------------------------------------------------
Andre Tremblay | Member of the Human Resources Committee and Chairman of the Audit Committee. |
(7) 26,797 4,537 20,300 4,466
- --------------------------------------------------------------------------------------------------------------------
Michael Unger (8) 26,797 4,537 20,300 4,466
- --------------------------------------------------------------------------------------------------------------------
| Member of the Audit Committee, Chairman of the Human Resources Committee and Lead Director. |
- --------------------------
(1) The compensation information has been converted from Canadian dollars to
U.S. dollars based upon an average foreign exchange rate of $CDN1.2315 =
US$1.00 for 2005 except for Mr. David A. Thompson who is paid in US
currency. The Annual
Executive Compensation includes, as the case may be, the
retainer for Director, Committee Members and Committee Chairman.
(2) Indicates the number of Subordinate Voting Shares granted under the
Deferred Share Unit Plan. A DSU is converted in a Subordinate Voting
Share when a Director ceases to be a member of the Board.
(3) The value at the time of grant of a DSU is determined based on the
highest of the closing prices of the Subordinate Voting Shares on the
Toronto Stock Exchange and the NASDAQ National Market on the last trading
day preceding the grant date, using the noon buying rate of the Federal
Reserve Bank of New York on the grant date to convert the NASDAQ National
Market closing price to Canadian dollars, as required. The value at
vesting of a DSU is equivalent to the market value of a Subordinate
Voting Share when a DSU is converted to such Subordinate Voting Share.
(4) Member of the Audit Committee and the Human Resources Committee.
(5) Member of the Audit Committee and the Human Resources Committee.
(6) Member of the Human Resources Committee.
(7) Member of the Human Resources Committee and Chairman of the Audit
Committee.
(8) Member of the Audit Committee, Chairman of the Human Resources Committee
and Lead Director.
EXECUTIVE COMPENSATION
The table below shows compensation information during the three most recently completed financial years for Mr. Germain Lamonde, the Chairman of the Board, President and Chief Executive Officer of the Corporation, Mr. Pierre Plamondon, the Vice-President Finance and Chief Financial Officer, the three other most highly compensated executive officers of the Corporation and its subsidiaries who were serving the Corporation at the end of the financial year (collectively, the "Named Executive Officers"). This information includes the US dollar value of base salaries, bonus awards and long-term incentive plan payments, the number of options or Restricted Share Units ("RSUs"(“RSUs”) granted, and other compensation, if any, whether paid or deferred.
Name and Principal Position | Financial Years | Salary (1) ($) | Bonus (2) ($) | Other Annual Compensation ($) | Securities Under Options (3) (#) | Restricted Share Units (4) (#) | All Other Compensation ($) |
Germain Lamonde, President and Chief Executive Officer | 2006 | 271,753 (US) 312,000 (CA) | 147,558 (US) 169,412 (CA) | − | 11,218 | 21,477 | − |
2005 | 243,605 (US) 300,000 (CA) | 121,729 (US) 149,909 (CA) | − | 17,942 | 13,089 | − |
2004 | 206,751 (US) 275,000 (CA) | 57,115 (US) 75,969 (CA) | − | − | − | − |
Pierre Plamondon, Vice-President Finance and Chief Financial Officer | 2006 | 165,691 (US) 190,230 (CA) | 60,167 (US) 69,078 (CA) | − | 3,653 | 6,994 | 4,283 (US) (5) 4,918 (CA) |
2005 | 151,441 (US) 186,500 (CA) | 48,735 (US) 60,017 (CA) | − | 5,383 | 33,927 | 2,316 (US) (5) 2,852 (CA) |
2004 | 135,328 (US) 180,000 (CA) | 17,451 (US) 23,211 (CA) | − | − | − | 1,429 (US) (5) 1,901 (CA) |
Name and Principal Position | Financial Years | Salary (1) ($) | Bonus (2) ($) | Other Annual Compensation ($) | Securities Under Options (3) (#) | Restricted Share Units (4) (#) | All Other Compensation ($) |
Juan-Felipe Gonzalez, Vice-President Telecom Sales - International | 2006 | 272,518 (US) 312,878 (CA) | 12,891 (US) 14,800 (CA) | − | 3,505 | 6,716 | − |
2005 | 246,323 (US) 303,347 (CA) | 6,015 (US) 7,407 (CA) | − | 5,482 | 33,998 | − |
2004 | 231,597 (US) 308,047 (CA) | 563,867 (US) 750,000 (CA) (6) | − | − | − | − |
Allan Firhoj, Vice-President and General Manager, Life Sciences and Industrial Division | 2006 | 139,361 (US) 160,000 (CA) | 40,632 (US) 46,650 (CA) | − | 2,404 | 4,602 | − |
2005 | 123,153 (US) 151,663 (CA) | 18,355 (US) 22,604 (CA) | − | 2,512 | 12,443 | − |
2004 | 107,796 (US) 143,379 (CA) | 18,890 (US) 25,125 (CA) | − | − | − | − |
Dana Yearian, Vice-President Telecom Sales - North America | 2006 | 173,424 (US) (7) 199,109 (CA) | − − | − | − | 5,000 | 236 (US) (5) 270 (CA) |
2005 | − − | − − | − | − | − | - |
2004 | - - | - - | - | - | - | - |
- ------------------------------------------------------------------------------------------------------------------------
OTHER ANNUAL SECURITIES RESTRICTED ALL OTHER
NAME AND PRINCIPAL FINANCIAL SALARY | | | | | | | |
(1) COMPENSATION UNDER OPTIONS SHARE COMPENSATION
POSITION YEARS ($) BONUS | The compensation information for Canadian residents has been converted from Canadian dollars to U.S. dollars based upon an average foreign exchange rate of CA$1.1481 = US$1.00 for 2006, CA$1.2315 = US$1.00 for 2005 and CA$1.3301 = US$1.00 for 2004. The currency conversions cause these reported salaries to fluctuate from year-to-year because of the fluctuation in exchange rate. |
(2) ($) ($) | A portion of the bonus amounts is paid in cash in the year for which they are awarded and the balance is paid in cash in the year following the financial year for which they are awarded. |
(3) (#) UNITS | Indicates the number of Subordinate Voting Shares underlying the options granted under the Long-Term Incentive Plan during the financial year indicated. |
(4) ($)
- ------------------------------------------------------------------------------------------------------------------------
Germain | Indicates the number of Restricted Share Units granted under the Long-Term Incentive Plan during the financial year indicated. |
(5) | Indicates the amount contributed by the Corporation during the financial year indicated to the Deferred Profit Sharing Plan, as applicable, for the benefit of the Named Executive Officer. Mr. Lamonde 2005 243,605 (US) 121,729 (US) -- 17,942 13,089 --
Presidentis not eligible to participate in the Deferred Profit Sharing Plan and Chief 300,000 (CDN) 149,909 (CDN)
Executive Officer
2004 206,751 (US) 57,115 (US) -- -- -- --
275,000 (CDN) 75,969 (CDN)Mr. Gonzalez did not participate. |
(6) | Pursuant to the terms of his employment agreement, Mr. Juan-Felipe Gonzalez receive a cash payment of CA$750,000 because he did not voluntarily resign and was not dismissed with cause prior to September 2003. An amount of CA$500,000 was disbursed on October 17 2003 185,848 (US) 25,247 (US) -- 50,000 -- --
275,000 (CDN) 37,359 (CDN)
- ------------------------------------------------------------------------------------------------------------------------
|
72
- ------------------------------------------------------------------------------------------------------------------------
OTHER ANNUAL SECURITIES RESTRICTED ALL OTHER
NAME AND PRINCIPAL FINANCIAL SALARY (1) COMPENSATION UNDER OPTIONS SHARE COMPENSATION
POSITION YEARS ($) BONUS (2) ($) ($) (3) (#) UNITS (4) ($)
- ------------------------------------------------------------------------------------------------------------------------
Pierre Plamondon, 2005 151,441 (US) 48,735 (US) -- 5,383 33,927 2,316 (US)(5)
Vice-President 186,500 (CDN) 60,017 (CDN) 2,852 (CDN)
Finance and Chief
Financial Officer 2004 135,328 (US) 17,451 (US) -- -- -- 1,429 (US)(5)
180,000 (CDN) 23,211 (CDN) 1,901 (CDN)
2003 118,267 (US) 9,547 (US) -- 25,000 -- 866 (US)(5)
175,000 (CDN) 14,127 (CDN) 1,281 (CDN)
- ------------------------------------------------------------------------------------------------------------------------
Juan-Felipe 2005 246,323 (US) 6,015 (US) -- 5,482 33,998 --
Gonzalez, 303,347 (CDN) 7,407 (CDN)
Vice-President,
Global Telecom Sales 2004 231,597 (US) 563,867 (US) -- -- -- --
308,047 (CDN) 750,000 (CDN)(6)
2003 163,896 (US) 7,500 (US) -- 30,000 -- --
- ------------------------------------------------------------------------------------------------------------------------
Stephen Bull 2005 121,803 (US) 32,559 (US) -- 3,589 32,618 1,758 (US)(5)
Vice-President 150,000 (CDN) 40,097 (CDN) 2,165 (CDN)
Research &
Development 2004 112,773 (US) 12,437 (US) -- -- -- 16,221 (US)the remaining CA$250,000 was disbursed on January 25, 2004.
(7) 150,000 (CDN) 16,543 (CDN) 21,576 (CDN)
2003 81,098 (US) 8,138 (US) -- 15,000 -- 588 (US)(5)
120,000 (CDN) 12,042 (CDN) 871 (CDN)
- ------------------------------------------------------------------------------------------------------------------------
Etienne Gagnon 2005 113,683 (US) 34,389 (US) -- 3,158 9,804 1,067 (US)(5)
Vice-President, 140,000 (CDN) 42,349 (CDN) 1,314 (CDN)
Optical-Layer
Product Management 2004 99,241 (US) 7,540 (US) -- -- -- --
and Customer Service 132,000 (CDN) 11,157 (CDN)
2003 81,098 (US)(8) 2,550 (US) -- 20,000 -- --
120,000 (CDN) 4,013 (CDN)
- ------------------------------------------------------------------------------------------------------------------------
| This amount represents Mr. Yearian’s annual base salary. Since Mr. Yearian joined the Corporation on August 14, 2006, the base salary paid to Mr. Yearian for the financial year ended August 31, 2006 amounted to US$7,851 (CA$9,014). |
- ----------------------
(1) The compensation information for Canadian residents has been converted
from Canadian dollars to U.S. dollars based upon an average foreign
exchange rate of CDN$1.2315 = US$1.00 for 2005, CDN$1.3301 = US$1.00 for
2004 and CDN$1.4797 = US$1.00 for 2003. The currency conversions cause
these reported salaries to fluctuate from year-to-year because of the
fluctuation in exchange rate.
(2) A portion of the bonus amounts is paid in cash in the year for which they
are awarded and the balance is paid in cash in the year following the
financial year for which they are awarded.
(3) Indicates the number of Subordinate Voting Shares underlying the options
granted under the Long-Term Incentive Plan during the financial year
indicated.
(4) Indicates the number of Restricted Share Units granted under the
Long-Term Incentive Plan during the financial year indicated.
(5) Indicates the amount contributed by the Corporation during the financial
year indicated to the Deferred Profit Sharing Plan, as applicable, for
the benefit of the Named Executive Officer. Mr. Lamonde is not eligible
to participate in the Deferred Profit Sharing Plan and Mr. Gonzalez did
not participate.
(6) Pursuant to the terms of his employment agreement, Mr. Juan-Felipe
Gonzalez did receive a cash payment of CDN$750,000 since he did not
voluntarily resign and was not dismissed with cause prior to September
2003. An amount of CDN$500,000 was disbursed on October 17, 2003 and the
remaining CDN$250,000 was disbursed on January 25, 2004.
(7) Indicates the amount paid by the Corporation during the financial year
for relocation allowance (CDN$20,000) (US$15,036) plus the amount
referred in note 5 above (CDN$1,576) (US$1,185).
(8) This amount represents Mr. Gagnon annual base salary. Since Mr. Gagnon
joined the Corporation in January 13, 2003, the base salary paid to Mr.
Gagnon for the financial year ended August 31, 2003 amounted to US$49,906
(CDN$73,846).
EMPLOYMENT AGREEMENTS
Employment Agreements
We have an employment agreement with Mr. Germain Lamonde. The agreement is for an indeterminate period and the compensation is reviewed annually. In the event of the termination of Mr.
Lamonde'sLamonde’s employment without cause, Mr. Lamonde will be entitled to severance payments (in no case exceeding 24 months of remuneration) and the vesting of all stock options and
73
RSUs. In addition, in the event that Mr. Lamonde'sLamonde’s employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation'sCorporation’s assets or of the majority of our share capital or if Mr. Lamonde voluntarily resigns, he will be entitled to the vesting of all stock options and RSUs.
We also have employment agreements with Mr. Pierre Plamondon, Mr. Juan-Felipe Gonzalez, Mr. Stephen BullDana Yearian and Mr. Etienne Gagnon.
Allan Firhoj.
The employment agreement with Mr. Pierre Plamondon, our Vice-President, Finance and Chief Financial Officer is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Plamondon'sPlamondon’s employment without cause, Mr. Plamondon will be entitled to severance payments which in no case exceeding 18 months of the current base salary. In addition, in the event Mr. Plamondon'sPlamondon’s employment is terminated following a merger or an acquisition by a third party of substantially all of our assets or of the majority of its share capital, he will be entitled to the immediate vesting of all stock options and RSUs.
The agreement with Mr. Gonzalez provided for Mr. Gonzalez'sGonzalez’s employment as Vice-President Global Telecom Sales.Sales - International. In the event Mr. Gonzalez'sGonzalez’s employment terminates for any reason whatsoever and he is unable to accept new employment due to his non-competition obligations to us, Mr. Gonzalez may receive compensation for a period of 18 months following the date of termination in amounts varying from 5% to 50% of his base monthly salary at the time of termination depending on the cause of the termination. The employment agreement is for an indeterminate period and compensation is reviewed annually.
The employment agreement with Mr. Stephen Bull,Allan Firhoj, our Vice-President Research and DevelopmentGeneral Director, Life Sciences and Industrial Division is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Bull'sFirhoj’s employment without cause, Mr. BullFirhoj will be entitled to severance payments (in no case exceeding 12 months of the current base salary). In addition, in the event Mr. Firhoj’s employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation’s assets or of the majority of its share capital, he will be entitled to the immediate vesting of all stock options and RSUs.
The employment agreement with Mr. Dana Yearian, our Vice-President, Telecom Sales - North America is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Yearian’s employment without cause, Mr. Yearian will be entitled to severance payments (in no case exceeding 18 months of the current base salary). In addition, in the event Mr. Bull'sYearian’s employment is terminated following a merger or an acquisition by a third party of substantially all of ourthe Corporation’s assets or of the majority of ourits share capital, he will be entitled to the immediate vesting of all stock options and RSUs.
The employment agreement with Mr. Etienne Gagnon,
Key Elements and Policies for Compensation of Executive Officers
Our executive compensation plans are designed to attract, retain and motivate key executives who directly impact our Vice-President,
Optical-Layer Product Management and Customer Service is for an indeterminate
periodlong-term success and the creation of shareholder value. In determining executive compensation, is reviewed annually. In the eventCommittee considers the following four principles:
· | Performance-based: Executive compensation levels reflect both corporation and individual results based on specific quantitative and qualitative objectives established at the start of each financial year in keeping with our long-term strategic objectives. |
· | Aligned with shareholder interests: A significant proportion of incentive compensation for executives is composed of equity awards to ensure that executives are aligned with the principles of sustained long-term shareholder value growth. |
· | Market competitive: Compensation of executives is designed to be externally competitive when compared against executives of comparable peer companies, and in consideration of our results relative to the results of peers. |
· | Individually equitable: Compensation levels are also designed to reflect individual factors such as scope of responsibility, experience, and performance against individual measures. |
The key elements of termination
of Mr. Gagnon's employment without cause, Mr. Gagnon's will be entitled to
severance payments (in no case exceeding 18 monthsour 2006 executive compensation program were base salary, the Short Term Incentive Plan, and stock-based incentive compensation delivered through the Long Term Incentive Plan. To determine appropriate compensation levels for each pay component, the Committee considered all elements of the currentexecutive compensation program. The Committee did not assign specific weightings to any key element of our 2006 executive compensation program.
Base Salaries
In establishing the base salary). In addition,salaries of senior officers, including the President and Chief Executive Officer, we take into consideration responsibilities, job descriptions and salaries paid by other similar Canadian organizations for positions similar in magnitude, scope and complexity. The Committee’s objective is to align executive compensation levels with the median compensation offered within a reference group of comparable companies that are similar in size to the Corporation, with a particular focus on those within the high-technology/telecommunications and manufacturing-durable goods industries. The Committee reviews the base salary of each senior officer on an annual basis and recommends that our Board approve appropriate adjustments, if required, within the salary range in order to maintain a competitive position within the market place.
Short-Term Incentive Compensation
The short-term incentive plan (“STIP”) provides senior executives with the opportunity to earn annual bonuses based on our financial performance and the achievement of strategic corporate and business unit objectives established on a yearly basis.
Target payout levels for Named Executive Officers eligible for incentive bonuses in the event Mr. Gagnon's employment is terminated
following a merger or an acquisition by a third party of substantially all of
our assets oryear ended August 31, 2006 were established to be in line with the objective of the majorityCommittee to align compensation with the median compensation offered in the reference group. The minimum, target and maximum payouts to senior officers under the STIP (expressed as a percentage of their base salary) for 2006 were as follows:
Our President and Chief Executive Officer, Mr. Germain Lamonde, has a short term incentive target of 50% of his annual base salary. That bonus is based on the achievement of financial, strategic and individual objectives as shown in the following table.
Our Chief Financial Officer, Mr. Pierre Plamondon, has a short term incentive target of 35% of his annual base salary. That bonus is based on the achievement of financial, strategic and individual objectives as shown in the following table.
Our Vice-President and General Manager, Life Sciences and Industrial Division, Mr. Allan Firhoj, has a short term incentive target of 30% of his annual base salary. That bonus is based on the achievement of financial, strategic and individual objectives as shown in the following table.
Measure | Weighting Mr. Lamonde and Mr. Plamondon | Weighting Mr. Firhoj |
Sales | 35% | 30% |
Earnings | 15% | 25% |
Gross margin | 25% | 25% |
Customer satisfaction (quality and on time delivery) | 25% | 20% |
Personal objectives (multiplier) | 0% - 125% | 0% - 125% |
Our Vice-President, Telecom Sales - International, Mr. Juan-Felipe Gonzalez, and Vice-President, Telecom Sales - North America, Mr. Dana Yearian, do not participate in the short term incentive plan that is available to our share capital, he will be entitled toother senior executives. Instead, Mr. Gonzalez and Mr. Yearian participate in our sales incentive plan (SIP). Under the immediate vestingSIP, Mr. Gonzales and Mr. Yearian have target incentives of all stock options40% of their annual base salaries. The SIP is based 40% on the achievement of revenue targets (billings), 40% on margin targets and RSUs.
LONG-TERM INCENTIVE COMPENSATION
LONG-TERM INCENTIVE PLAN
20% on sales quotas achievements.
Long-Term Incentive Compensation
Long-Term Incentive Plan
We have a Long-Term Incentive Plan for our Directors, executive officers, employees and consultants and those
orof our subsidiaries as determined by our Board of Directors, to attract and retain competent Directors, executive officers, employees and consultants motivated to work toward ensuring our success and to encourage them to acquire our shares.
74
A copy of the Long-Term Incentive Plan has been filed as exhibit 4.35 to last year annual report.
The principal component of the long-term incentive compensation offered by usthat we offer is made up of the Long-Term Incentive Plan for Directors,directors, officers, employees and consultants of the Corporationus and itsour subsidiaries.
Introduced in May 2000, amended in October 2004 and effective in January 2005, the Long-Term Incentive Plan is designed to motivate Directors,provide directors, officers, employees and consultants with an incentive to share interestcreate value and accordingly ensures that their interests are aligned with those of our shareholders
over the long-term. A copy of the Long-Term Incentive Plan has been filed as
exhibit 4.35 to this annual report. Itshareholders. The LTIP is subject to Human Resources Committee review to ensure maintenance of its market competitiveness. Our Board has full and complete authority to interpret the Plan and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration of the Plan, provided that such interpretations, rules, regulations and determinations are consistent with the rules of all stock exchanges on which our securities are then traded and with all relevant securities legislation.
The Long-Term Incentive Plan provides for the issuance of options to purchase Subordinate Voting Shares and the issuance of Restricted Share Units ("RSUs"(“RSUs”) redeemable for actual Subordinate Voting Shares or the equivalent in cash to Directors,directors, officers, employees and consultants. Our Board of Directors, upon recommendation of the Human Resources Committee, designates the recipients of options or RSUs and determines the number of Subordinate Voting Shares covered by each option or RSU, the dates of vesting, the expiry date and any other conditions relating to these options or RSUs, in each case in accordance with the applicable legislation of the securities regulatory authorities. During the financial year ended August 31, 2005, options2006, target awards for eligible officers under the LTIP were established to be in line with the objective of the Committee to align compensation with the median compensation offered in the reference group. A portion of the target RSU awards are fixed, in order to encourage executive retention over the longer term, and RSUs were grantedthe balance are made at, above, or below target levels based on merit.
merit, as determined by each executive's individual performance over the previous year.
The exercise price of the options is determined by our Board of Directors at the time of granting the options, subject to compliance with the rules of all stock exchanges on which the Subordinate Voting Shares are listed and with all relevant securities legislation. In any event, the price at which the Subordinate Voting Shares may be purchased may not be lower than the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars. Any option issued is non-transferable. The aggregate numberAt the end of subordinate voting shares covered by options
granted during theour financial year ended August 31, 2005 was 246,233 at a
weighted average exercise price of $4.59 (CDN$5.68) per subordinate voting
share. At the end of the financial year ended August 31, 2005,2006, there were 2,763,759 subordinate voting shares covered bya total of 2,439,375 options granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average exercise price of US$12.87 (CDN$19.22) per option. Since August 31, 2005 and until
November 15, 2005 no options were granted.
13.56 (CA$20.26).
The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. At the end of financial year ended August 31, 2005,2006, there were a total of 176,185327,877 RSUs granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average fair value at the time of grant of US$4.68 (CDN$5.72)5.03 (CA$5.95) per RSU. Since August
31, 2005 and until November 15, 2005 we did not grant any RSUs.
The maximum number of Subordinate Voting Shares that are issuable under the Plan shall not exceed 6,306,153 Subordinate Voting Shares, which represents 9.2% of our issued and outstanding voting shares as of November 1,
75
2005.2006. The maximum number of Subordinate Voting Shares that may be granted to any one individual shall not exceed 5% of the number of outstanding Subordinate Voting Shares.
Some options granted to Directors and employees vest on the first anniversary date of their grant. Some options granted in the financial year ended August 31, 2004 and 2005 vest at a rate of 12.5% six (6) months after the date of grant, 12.5% twelve (12) months after the date of grant and 25% annually thereafter commencing on the second anniversary date of the grant in October 2005. Otherwise all options vest a rate of 25% annually commencing on the first anniversary date of the grant. All options may be exercised in whole or in part once vested. All of the options that are granted under the Plan must be exercised within a maximum period of ten (10) years following the date of their grant or they will be forfeited.
All RSUs first vesting can notcannot be earlier than the third anniversary date of their grant. Some RSUs granted in the financial year ended August 31, 2006 vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in February 2006 and in June 2006 and others at a rate of 1/3 annually commencing on the third anniversary date of the grant in August 2006. Some RSUs granted in the financial year ended August 31, 2005 vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in February 2005 and others at a rate of 55%, 35% and 10%, on the third, fourth and fifth anniversary dates of the grant in January 2005. Some RSUs granted in the financial yearyears ended August 31, 2006 and August 31, 2005 vest on the fifth anniversary date of the grant respectively in December 2005 and in January 2005 but are subject to early vesting on the third and fourth anniversary dates of the grant on the attainment of performance objectives as determined by our Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. If such vesting date falls into any black-out period or any other restrictive period during which the RSU holder is not entitled to trade our Subordinate Voting Shares, then the units shall vest on the first trading day the RSU holder is entitled to trade after such black-out period or restrictive period.
Any option granted pursuant to the Long-Term Incentive Plan will lapse (i) immediately upon the termination of the relationship with us or one of our subsidiaries for a good and sufficient cause for employees or officers or at the date on which an employee or an officer resigns or leaves his employment with us or one of our subsidiaries (or within 30 days if the holder'sholder’s employment is terminated for reasons not related to cause); and (ii) 30 days after a Director ceases to be a member of our Board of Directors or one of our subsidiaries. In the event of retirement or disability, any option held by an employee lapses 30 days after the date of any such disability or retirement. In the event of death, any option held by the optionee lapses 6 months after the date of death.
Any RSU granted pursuant to the Long-Term Incentive Plan will lapse (i) immediately, where vesting of a unit is subject to the attainment of performance objectives, if such performance objectives have not been attained (or postponed at a further vesting date as determined by theour Board of Directors)Directors.); (ii) immediately, whether or not subject to attainment of performance objectives, upon the termination of the relationship with us or one of our subsidiaries for a good and sufficient cause for employees or officers or at the date on which an employee or an officer resigns or leaves his employment with us or one of our subsidiaries.
Any RSU granted pursuant to the Long-Term Incentive Plan will vest immediately, to a certain proportion as determined by the Plan, upon the termination of the relationship of an employee or officer with us or one of our subsidiaries (i) for reasons not related to cause; (ii) because of death or permanent disability and (iii) retirement.
76
The following table summarizes information about stock options granted to the members of
theour Board of Directors, and to Management and Corporate Officers of us and our subsidiaries as at August 31,
2005:
- --------------------------------------------------------------------------------------------------------------
% OF ISSUED AND WEIGHTED AVERAGE EXERCISE
NUMBER OF OPTIONS OUTSTANDING OPTIONS PRICE ($US/SECURITY)
- --------------------------------------------------------------------------------------------------------------
President and CEO (one individual) 168,424 6.09% 9.34
- --------------------------------------------------------------------------------------------------------------
Board of Directors (five individuals) 194,375 7.03% 6.23
- --------------------------------------------------------------------------------------------------------------
Management and Corporate Officers
(nine individuals) 340,091 12.31% 14.39
- --------------------------------------------------------------------------------------------------------------
2006: | Number of Options | % of Issued and Outstanding Options | Weighted Average Exercise Price ($US/Security) |
President and CEO (one individual) | 179,642 | 7.36% | 9.05 |
Board of Directors (five individuals) | 194,375 | 7.97% | 6.23 |
Management and Corporate Officers (eight individuals) | 313,836 | 12.87% | 15.42 |
The following table summarizes information about RSUs granted to the members of the Board of Directors and to Management and Corporate Officers of us and our subsidiaries as at August 31, 2005:
2006:
| Number of RSUs | % of Issued and Outstanding RSUs | Weighted Average Fair Value at the Time of Grant $US/RSU |
President and CEO (one individual) | 34,566 | 10.54% | 4.73 |
Board of Directors (five individuals) | - | - | - |
Management and Corporate Officers (ten individuals) | 184,161 | 56,17% | 4.66 |
Compensation of Chief Executive Officer
In establishing Mr. Lamonde’s compensation for the year ending August 31, 2006, the Corporation relied on a study completed by an independent consulting firm (Mercer Human Resource Consulting). Such study indicated average salaries and bonuses, median salaries and bonuses and maximum salaries and bonuses paid to chief executive officers by Canadian and American computer hardware and software companies as well as by a specific group of companies active in the fiber optics industry identified by the Corporation that it considers to be the best available comparisons. It was decided that Mr. Lamonde’s compensation should reflect the median of Canadian computer hardware and software companies and of the specific group of companies in fiber optics identified by the Corporation. In the financial year ended August 31, 2006, Mr. Lamonde’s compensation was adjusted accordingly.
In the financial year ended August 31, 2006, the bonus portion of Mr. Lamonde’s compensation was tied to the financial and strategic objectives of the Corporation based on the following factors:
Measure | Weighting ALL |
Sales | 35% |
Earnings | 15% |
Gross margin | 25% |
Customer satisfaction (quality and on time delivery) | 25% |
Personal objectives (multiplier) | 0% - ------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE FAIR
% OF ISSUED AND VALUE AT THE TIME OF
NUMBER OF RSUS OUTSTANDING RSUS GRANT $US/RSU
- ------------------------------------------------------------------------------------------------------------
President and CEO (one individual) 13,089 7.43% 4.69
- ------------------------------------------------------------------------------------------------------------
Board of Directors (five individuals) -- -- --
- ------------------------------------------------------------------------------------------------------------
Management and Corporate Officers 151,096 85.76% 4.69
(nine individuals)
- ------------------------------------------------------------------------------------------------------------
125% |
DEFERRED SHARE UNIT PLAN
Mr. Lamonde’s bonus is payable in the same proportion at which the Corporation attains such objectives. When the objectives are exceeded, the bonus is higher; when objectives are not met, the bonus is lower.
Deferred Share Unit Plan
Introduced in October 2004 and effective as of January 2005, the Deferred Share Unit Plan is designed to align more closely the interests of its non-employee Directors with those of our shareholders. A copy of the Deferred Share Unit Plan has been filed as exhibit 4.36 to thislast year annual report.
Under the Deferred Share Unit Plan, non-employee Directors shall receive up to 100 % of their retainer fees in the form of Deferred Share Units ("DSUs"(“DSUs”), each of which has a fair value at the time of grant equal to the market value of a Subordinate Voting Share at the time DSUs are credited to the Directors. The value of a DSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place. DUSs attract dividends in the form of additional DSUs at the same rate as dividends on Subordinate Voting Share. When a Director ceases to be a member of our Board of Directors, the DSUs are either converted and paid in Subordinate Voting Shares purchased on the open market or issued by us. Such Subordinate Voting Shares issued by us will be issued from the same pool of Subordinate Voting Shares reserved for issuance pursuant to the Long-Term Incentive Plan, which is 9.2% of the total issued and outstanding voting shares.
The following table summarizes information about DSUs granted to the non-employee members of our Board of Directors as at August 31,
2005:
77
- ---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE FAIR
% OF ISSUED AND VALUE AT THE TIME OF
NUMBER OF DSUS OUTSTANDING DSUS GRANT $US/DSU
- ---------------------------------------------------------------------------------------------------------
Board of Directors (five individuals) 23,734 100% 4.47
- ---------------------------------------------------------------------------------------------------------
DEFERRED SHARE UNIT GRANTS IN LAST FINANCIAL YEAR
2006: | Number of DSUs | % of Issued and Outstanding DSUs | Weighted Average Fair Value at the Time of Grant $US/DSU |
Board of Directors (five individuals) | 43,290 | 100% | 5.07 |
Deferred Share Unit Grants in Last Financial Year
The aggregate number of Deferred Share Units ("DSUs"(“DSUs”) credited to non-employee Directorsdirectors during the financial year ended August 31, 20052006 was 23,734.19,556. The fairestimated value at the time of grant of a DSU is equaldetermined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required. The value at vesting of a DSU is equivalent to the market value of a Subordinate Voting Share at the time DSUs are creditedwhen a DSU is converted to the
Directors.such Subordinate Voting Share. At the end of the financial year ended August 31, 2005,2006, there were a total of 23,73443,290 DSUs credited to Directorsdirectors pursuant to the Deferred Share Unit Plan having a fairan estimated value at the time of grant of US$105,998
(CDN$130,421)219,662 (CA$258,617).
DSUs attract dividends in the form of additional DSUs at the same rate as dividends on Subordinate Voting Shares. The DSUs are converted and paid in Subordinate Voting Shares at the time a Directordirector ceases to be a member of our Board of Directors.
Therefore, the value at vesting of a DSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place. The table below shows information regarding DSU grants made under the Deferred Share Unit Plan during the financial year ended August 31, 2005.
2006.
During the financial year ended August 31,
2005,2006, the following DSUs were granted to the
Directors:
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE FAIR VALUE
DSUS # AT THE TIME OF GRANT US$/DSU VESTING
- -------------------------------------------------------------------------------------------
23,734 4.47 At the time Director cease to be a member of the
Board of the Corporation
- -------------------------------------------------------------------------------------------
RESTRICTED SHARE UNIT GRANTS IN LAST FINANCIAL YEAR
directors:
DSUs # | Weighted Average Fair Value at the Time of Grant US$/DSU | Vesting |
19,556 | 5.81 | At the time Director cease to be a member of the Board of the Corporation |
Restricted Share Unit Grants in Last Financial Year
The aggregate number of Restricted Share Units (RSUs) granted during the financial year ended August 31, 20052006 was 176,185.173,803, having a weighted average fair value at the time of grant of US$5.39 (CA$6.18) per RSU. The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. At the end of the financial year ended August 31, 2005,2006, there were a total of 176,185327,877 RSUs granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average fair value at the time of grant of US$4.68 (CDN$5.72)5.03 (CA$5.95) per RSU. All RSUs first vesting can not be earlier than the third anniversary date of their grant. Some RSUs granted in the financial year ended August 31, 2006, vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in February 2006 and in June 2006 and others at a rate of 1/3 annually on the third, fourth and fifth anniversary dates of the grant in August 2006. Some RSUs granted in the financial year ended August 31, 2005 vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in February 2005 and others at a rate of 55%, 35% and 10%, on the third, fourth and fifth anniversary dates of the grant in January 2005. Some RSUs granted in the financial yearyears ended August 31, 2006 and August 31, 2005 vest on the fifth anniversary date of the grant respectively in December 2005 and in January 2005 but are subject to early vesting on the third and fourth anniversary dates of the grant on the attainment of performance objectives as determined by our Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant.
RSUs attract dividends in the form of additional RSUs at the same rate as dividends on Subordinate Voting Shares. The RSUs are redeemed for actual Subordinate Voting Shares or the equivalent in cash at the discretion
78
of our Board of Directors on the vesting dates established by our Board of Directors at the time of grant in its sole discretion.
Therefore, the value at vesting of a RSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place. The table below shows information regarding RSU grants made under the Long-Term Incentive Plan during the financial year ended August 31, 2005.
2006.
During the financial year ended August 31, 2005,2006, the following RSUs were granted:
- --------------------------------------------------------------------------------
FAIR VALUE AT
THE TIME OF
RSUS # GRANT S$/RSU VESTING (1)
- --------------------------------------------------------------------------------
129,000 4.69 55%, 35% and 10%, on the third, fourth and
fifth anniversary dates of the grant in January
2005 (2)
- --------------------------------------------------------------------------------
35,185 4.69 100% on the fifth anniversary date of the grant
in January 2005 subject to early vesting up to
1/3 on the third anniversary date of the grant
and up to 50% of the remaining units on the
fourth anniversary date of the grant if the
performance objectives are fully attained (3)
- --------------------------------------------------------------------------------
12,000 4.51 1/3 on each of the third, fourth and fifth
anniversary dates of the grant in February 2005
(4)
- --------------------------------------------------------------------------------
- -------------
(1) All RSUs first vesting can not be earlier than the third anniversary date
of their grant.
(2) Those RSUs granted in the financial year ended August 31, 2005 vest at a
rate of 55%, 35% and 10% on the third, fourth and fifth anniversary dates
of the grant in January 2005.
(3) Those RSUs granted in the financial year ended August 31, 2005 vest on
the fifth anniversary date of the grant in January 2005 but are subject
to early vesting on the third and fourth anniversary dates of the grant
on the attainment of performance objectives as determined by our Board of
Directors. Accordingly, subject to the attainment of performance
objectives, the first early vesting is up to 1/3 of the units on the
third anniversary date of the grant and the second early vesting is up to
50% of the remaining units on the fourth anniversary date of the grant.
(4) Those RSUs granted in the financial year ended August 31, 2005 vest at a
rate of 1/3 annually commencing on the third anniversary date of the
grant in February 2005.
NUMBER OF SUBORDINATE VOTING SHARES RESERVED FOR FUTURE ISSUANCE
RSUs # | Fair Value at the Time of Grant US$/RSU | Vesting (1) |
61,253 | 4.76 | 100% on the fifth anniversary date of the grant in December 2005 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained. (2) |
86,700 | 5.59 | 50% on the third and fourth anniversary dates of the grant in February 2006. (3) |
1,500 | 6.50 | 50% on the third and fourth anniversary dates of the grant in February 2006. (3) |
13,850 | 6.58 | 50% on the third and fourth anniversary dates of the grant in February 2006. (3) |
3,500 | 5.90 | 50% on the third and fourth anniversary dates of the grant in June 2006. (4) |
2,000 | 6.27 | 50% on the third and fourth anniversary dates of the grant in June 2006. (4) |
5,000 | 5.16 | 1/3 on each of the third, fourth and fifth anniversary dates of the grant in August 2006 (5) |
(1) | All RSUs first vesting cannot be earlier than the third anniversary date of their grant. |
(2) | Those RSUs granted in the financial year ended August 31, 2006 vest on the fifth anniversary date of the grant in December 2005 but are subject to early vesting on the third and fourth anniversary dates of the grant on the attainment of performance objectives as determined by our Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
(3) | Those RSUs granted in the financial year ended August 31, 2006 vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in February 2006. |
(4) | Those RSUs granted in the financial year ended August 31, 2006 vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in June 2006. |
(5) | Those RSUs granted in the financial year ended August 31, 2006 vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in August 2006. |
During the financial year ended August 31, 2005, 23,7342006, the following RSUs were granted to the following Named Executive Officers:
Name | RSUs # | Percentage of Net Total of RSUs Granted to Employees in Financial Year (%) | Fair Value at the Time of Grant US$/RSU | Vesting (1) |
Germain Lamonde | 21,477 | 12.36 | 4.76 | 100% on the fifth anniversary date of the grant in December 2005 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained. (2) |
Pierre Plamondon | 6,994 | 4.02 | 4.76 | 100% on the fifth anniversary date of the grant in December 2005 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained. (2) |
Name | RSUs # | Percentage of Net Total of RSUs Granted to Employees in Financial Year (%) | Fair Value at the Time of Grant US$/RSU | Vesting (1) |
Juan-Felipe Gonzalez | 6,716 | 3.86 | 4.76 | 100% on the fifth anniversary date of the grant in December 2005 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained. (2) |
Allan Firhoj | 4,602 | 2.65 | 4.76 | 100% on the fifth anniversary date of the grant in December 2005 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained. (2) |
Dana Yearian | 5,000 | 2.88 | 5.16 | 1/3 on each of third, fourth and fifth anniversary dates of the grant in August 2006. (3) |
(1) | All RSUs first vesting cannot be earlier than the third anniversary date of their grant. |
(2) | Those RSUs granted in the financial year ended August 31, 2006 vest on the fifth anniversary date of the grant in December 2005 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by our Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
(3) | Those RSUs granted in the financial year ended August 31, 2006 vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in August 2006. |
Number of Subordinate Voting Shares reserved for future issuance
During the financial year ended August 31, 2006, 19,556 Deferred Share Units, 176,185173,803 Restricted Share Units and 246,23331,992 options were granted to Directors,directors, officers and employees. Such awards were issued from the same pool of Subordinate Voting Shares reserved for issuance pursuant to the Long-Term Incentive Plan which is 9.2%9,2% of the total and outstanding voting shares.shares as of November 1, 2006. Therefore, as of November 1, 20052006 the number of Subordinate Voting Shares reserved for future issuance is 3,182,504.
SHARE PURCHASE PLAN
3,423,784.
Share Purchase Plan
In September 1998, we established a stock purchase plan for officers, Directors and key employees as amended in April 2000. A total of 707,264 subordinate voting shares were issued and fully paid under the 1998 Stock Purchase Plan, having a weighted average cash consideration of $0.67 (CA$0.98) per share. The plan provides that all shares issued under the plan are restricted as to sale and transferability for a minimum period of five years upon the date of acquisition.
On April 3, 2000, we adopted a share plan that replaced the 1998 Stock Purchase Plan. No additional shares will be issued under the share plan. The share plan established restrictions on the rights of the holders of subordinate voting shares who hold those shares as a result of the conversion of the Class
"F"“F” shares issued under the 1998 Stock Purchase Plan. The share
79
plan also required the subordinate voting shares to be held in trust by a trustee until August 31, 2004, except for 249,977 subordinate voting shares that were released between October 21, 2003 and January 20, 2004. The share plan also provided for the earlier release of shares in the event that the employment of a holder of shares is terminated or upon the occurrence of a change of control. The share plan did not permit any transfer, except within the trust to a registered retirement savings plan or a registered retirement income fund or to a trustee in bankruptcy. The share plan also established the conditions pursuant to which the shares of a shareholder are to be sold by the trustee on the public market. As of August 31, 2004, all the remaining subordinate voting shares that were held in trust under the share plan were released.
RESTRICTED STOCK AWARD PLAN
Restricted Stock Award Plan
The EXFO Electrical-Optical Engineering Restricted Stock Award Plan (the "RSAP") was established to provide a means through which employees of EXFO Burleigh Products Group Inc. can be granted awards of restricted shares ("Restricted Shares") of Subordinate Voting Shares to promote retention and foster identity of interest between stockholders and employees of EXFO Burleigh Products Group Inc.
The effective date of the RSAP was December 20, 2000. The expiration date of the RSAP is the business day next following the final grant of Restricted Shares under the RSAP, which was December 20, 2000. However, the administration of the RSAP did continue until all awards of Restricted Shares have been forfeited or settled. The aggregate number of shares subject to the RSAP was 360,000. Stock awards granted under the RSAP vest over a 4 year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. The last vesting occurred on December 20, 2004, the Human Resources Committee administered the RSAP until that date. Therefore the administration of the RSAP terminated on December 20, 2004.
Awards of Restricted Shares were subject to forfeiture and restrictions on transfer until the Restricted Shares became vested at which point a stock certificate was issued to a participant with respect to the number of vested shares, which are then freely transferable. Restricted Shares become vested, subject to a participant's continued employment with us or our affiliates, on each of the first four anniversaries of the date of grant of an award of Restricted Shares.
Upon a participant's termination of employment with us or any of our affiliates due to the participant's death, disability or retirement on or after age 60, the participant's award of restricted shares became fully vested and was no longer subject to forfeiture. However, the transfer restrictions remained in place until the occurrence of the vesting dates originally contemplated by the award.
Upon the voluntary resignation of a participant, the termination of a participant's employment for cause, the termination of a participant who is not designated a member of EXFO Burleigh Products Group Inc. "Management Team" without cause prior to a change in control of us or a termination without cause of a participant who is designated a member of EXFO Burleigh Products Group Inc. Management Team that is initiated by EXFO Burleigh Products Group Inc. prior to a change in control of us, the unvested portion of the participant's award of Restricted Shares were forfeited. However the RSAP provided discretion to the Human Resources Committee in the application of the forfeiture provisions where a change in circumstances rendered such action appropriate. During the financial year ended August 31, 2005, EXFO Burleigh
80
Products Group Inc. was required to lay off the remaining of the participants (excluding a few that were transferred to our other offices) as a result of a consolidation due to a sharp downturn in its market. The Human Resources Committee decided that the awards of RSAP participants affected by the lay-offs would not be subject to forfeiture, though the transfer restrictions remained in place until the occurrence of the vesting dates originally contemplated by the award.
Upon the termination without cause of a participant who was designated a member of EXFO Burleigh Products Group Inc. Management Team that was initiated by us or a termination of a participant's employment without cause following a change in control of the Corporation,us, a participant's award of Restricted Stock became fully vested and all restrictions lapsed.
In the event of a change in control, the committee administering the RSAP could in its discretion remove restrictions on Restricted Shares or provide for the cancellation of awards in exchange for payment in respect of the Restricted Shares subject to an award.
STOCK APPRECIATION RIGHTS PLAN
Stock Appreciation Rights Plan
On August 4, 2001, we established a Stock Appreciation Rights Plan ("(“SAR Plan"Plan”) for the benefit of certain employees residing in countries where the granting of options under the Stock Option Plan is not feasible in our opinion. The Board has full and complete authority to interpret the SAR Plan and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration of the SAR Plan.
Under the SAR Plan, eligible employees are entitled to receive a cash amount equivalent to the difference between the market price of the Subordinate Voting Shares on the date of exercise and the exercise price determined on the date of grant. No Subordinate Voting Shares are issuable under the SAR Plan.
Our Board of Directors has delegated to Management the task of designating the recipients of stock appreciation rights, the date of vesting, the expiry date and other conditions. Under the terms of the SAR Plan, the exercise price of the stock appreciation rights may not be lower than the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars. Stock appreciation rights are non-transferable.
The stock appreciation rights vest over a four-year period, with 25% vesting annually commencing on the first anniversary date of the date of grant. Once vested, stock appreciation rights may be exercised between the second and the fifteenth business day following each release of our quarterly financial results. All of the stock appreciation rights that are granted under the SAR Plan may be exercised within a maximum period of 10 years following the date of their grant. Any stock appreciation rights granted under the SAR Plan will lapse immediately upon the termination of the relationship with us or one of our subsidiaries for a good and sufficient cause or at the date on which an employee resigns or leaves his employment with us or one of our subsidiaries (or within 30 days if the holder is dismissed without cause). In the event of retirement or disability, any stock appreciation right held by an employee lapses 30 days after the date of any such disability or retirement. In the event of death, any stock appreciation right lapses 6 months after the date of death.
As of November 1,
2005,2006, there were
19,000 SAR's24,500 SAR’s outstanding.
81
DEFERRED PROFIT SHARING PLAN
Deferred Profit Sharing Plan
We maintain a deferred profit sharing plan for certain eligible Canadian resident employees. Under this plan, we may contribute an amount equal to 1% until May 31, 2005 and 2% starting June 1, 2005, of each employee'semployee’s gross salary to that employee'semployee’s individual deferred profit sharing plan to the extent that such employee contributes at least 2% of his or her gross salary to his or her individual tax-deferred registered retirement savings plan. As a cost control measure, we temporarily suspended our
contributions under this plan commencing in June 2002 and re-established
contributions commencing January 2003. In the year ended August 31, 2005,2006, the aggregate amount of contributions under the plan was $179,000$316,000 (CA$221,000)363,000). Mr. Germain Lamonde is not entitled to participate in this plan.
401(K) PLAN
401(k) Plan
We maintain a 401(k) plan for eligible United States resident employees of our subsidiaries. Employees become eligible to participate in the 401(k) plan on the first day of the month following the completion of three months of continuous service. Employees may elect to defer their current compensation up to the lesser of 1% of eligible compensation or the statutorily prescribed annual limit and have the deferral contributed to the 401(k) plan. The 401(k) plan permits, but does not require us to make additional matching contributions to the 401(k) plan on behalf of the eligible participants, subject to a maximum of 50% of the first 6% of the participant'sparticipant’s current compensation subject to certain legislated maximum contribution limits. In the year ended August 31, 2005,2006, we made an aggregate of $134,000$126,000 in matching contributions to the 401(k) plan. Contributions by employees or by us to the 401(k) plan and income earned on plan contributions are generally not taxable to the employees until withdrawn and contributions by us are generally deductible by us when made. At the direction of each participant, the trustees of the 401(k) plan invest the assets of the 401(k) plan in selected investment options.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Indemnification of Directors and Executive Officers and Limitation of Liability
Our by-laws require us, subject to the limitations provided by law, to indemnify our present or former Directors and officers or any persons who act or acted at our request as Directors or officers of a body CORPORATE corporatefor all costs, losses, charges and expenses that arose or may arise by reason of their status as Directors or officers of us or such body corporate. A policy of Directors'Directors’ and officers'officers’ liability insurance is maintained by us which insures our Directors and officers and those of our subsidiaries against liability incurred by, arising from or against them for certain of their acts, errors or omissions. Accordingly, we maintain insurance protection against liability incurred by our officers and Directors as well as those of our subsidiaries in the performance of their duties. The entire premium, amounting to US$245,000228,000 from September 30, 20052006 to September 30, 2006,2007, is paid by us. The aggregate limit of liability in respect of any and all claims is US$10 million per year. The policy provides for the indemnification of Directors and officers in the case of claims for which we have not indemnified or are not permitted by law to indemnify them, and for the reimbursement of us, subject to a deductible of US$100,000, except for securities claims where the deductible is US$500,000.
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Board of Directors
Our Directors are elected at the annual meeting of shareholders for one-year terms and serve until their successors are elected or appointed, unless they resign or are removed earlier. Our articles of incorporation provide for a Board of Directors of a minimum of three (3) and a maximum of twelve (12) Directors. Our Board of Directors presently consists of six Directors. Under the CANADA BUSINESS CORPORATIONS ACT,Canada Business Corporations Act, twenty-five percent of the Directors and of the members of any committee of the Board of Directors must be resident Canadians. We have no arrangements with any of our Directors providing for the payment of benefits upon their termination of service as Director except for the vesting of their respective Deferred Share Units as detailed above.
The following table and notes set out the name of each of the individuals who served as a director of the Corporation during the last year term, all other positions and offices with the Corporation and its subsidiaries now held by each such individual, if any, the principal occupation or employment of each such individual, their respective period of service as a director.
Name and Position or Office with the Corporation | Principal Occupation or Employment | Residence | Director Since |
Germain Lamonde Chairman of the Board, President and Chief Executive Officer | Chairman of the Board, President and Chief Executive Officer, EXFO Electro-Optical Engineering Inc. | Quebec City, Quebec, Canada | September 1985 |
Pierre Marcouiller (1) (2) Independent Director | Chairman of the Board and Chief Executive Officer, Camoplast Inc. (a supplier of automotive and recreational vehicle parts) | Magog, Quebec, Canada | May 2000 |
Guy Marier (1) (2) Independent Director | Executive Consultant | Lakefield Gore, Quebec, Canada | January 2004 |
André Tremblay (2) (3) Independent Director | Founder and Managing Partner, Trio Capital Inc. (a private equity fund management company) | Outremont, Quebec, Canada | May 2000 |
Dr. David A. Thompson, Ph.D. (2) Independent Director | Vice-President& Director, Hardware & Equipment Technology Strategy, Corning Cable Systems (involved in manufacturing innovative products for the telecommunications industry) (5) | Newton, North Carolina, USA | June 2000 |
Michael Unger (1) (4) Independent Lead Director | Executive Consultant | Richmond Hill, Ontario, Canada | May 2000 |
(1) | Member of the Audit Committee. |
(2) | Member of the Human Resources Committee. |
(3) | Chair of the Audit Committee. |
(4) | Chair of the Human Resources Committee. |
(5) | Corning Incorporated is a diversified technology company that concentrate its efforts on high-impact growth opportunities. Corning combines its expertise in specialty glass, ceramic materials, polymers and the manipulation of the properties of light, with strong process and manufacturing capabilities to develop, engineer and commercialize significant innovative products for the telecommunications, flat panel display, environmental, semiconductor, and life sciences industries. |
Since September 1, 20042005 until November 1, 2005,2006, the Board met a total of seven (7)eight (8) times. Attendance at all meetings was perfect, except Mr. David A. Thompson who was absent twothree (3) times and Mr. AndreAndré Tremblay who was absent one time.
COMMITTEES OF THE BOARD OF DIRECTORS
Committees of the Board of Directors
Our Board of Directors has established an audit committee, a human resources committee and a disclosure committee.
Our audit committee will recommend a firm to be appointed as independent auditors to audit financial statements and to perform services related to the audit, review the scope and results of the audit with the independent auditors, review with management and the independent auditors our annual operating results and consider the adequacy of the internal accounting procedures and the effect of the procedures relating to the auditors'auditors’ independence. Further to changes to NASDAQ corporate governance rules and Securities and Exchange rules flowing from the adoption of the SARBANES-OXLEY
ACT,Sarbanes-Oxley Act, our audit committee charter is being revised every financial year to ensure that we comply with all new requirements. Accordingly, in March 2005, the Board updated and adopted an Audit Committee Charter. A copy of this Audit Committee Charter has been filed as Exhibit 11.6 to thelast year annual report and is also readily available from EXFO'sEXFO’s website at www.exfo.com. The audit committee revised such Charter in October 2006 but no amendment was required. The audit committee is composed of four independent Directors: AndreAndré Tremblay, Michael Unger, Guy Marier and Pierre Marcouiller. The chairperson of the audit committee is AndreAndré Tremblay.
During the fiscal year ended August 31, 2005,2006, the Audit Committee met a total of four (4)five (5) times and attendance was perfect at all meetings, as all
members attended all meetings.
except Mr. Michael Unger who was absent one time.
Our human resources committee will evaluate, review and supervise our procedures with regards to human resources and will assess the performance of our executive officers and the chief executive officer. This committee will also review annually the remuneration of the Directors and will recommend to the Board of Directors general remuneration policies regarding salaries, bonuses and other forms of remuneration for our Directors, executive officers and employees as a whole. Finally, the human resources committee will review our organizational structure annually and the development and maintenance of a succession plan. Accordingly, in March 2005, the Board updated and adopted a Human Resources Committee Charter which integrates the Compensation Committee Charter and the Nominating and Governance Committee Charter. A copy of this Human Resources Committee Charter has been filed as Exhibit 11.7 to
thelast year annual report and is also readily available from
EXFO'sEXFO’s website at www.exfo.com. The
83
human resources committee is composed of five independent Directors: Pierre Marcouiller, Guy Marier, David A. Thompson, AndreAndré Tremblay and Michael Unger. The chairperson of the human resources committee is Michael Unger.
During the fiscal year ended August 31, 2005,2006, the Human Resources committee met a total of twofive (5) times and attendance was perfect at all meetings, with the excepton of one meeting missed byexcept Mr. David A. Thompson.
Thompson who was absent four (4) times and Mr. André Tremblay who was absent one time.
The disclosure committee is responsible for overseeing our disclosure practices. This committee consists of the chief executive officer, the chief financial officer, the manager of investor relations, the manager of financial reporting and accounting as well as our legal counsel and corporate secretary.
In addition, in order to deal with issues arising from our implication in the IPO class action suit, in October 2002, our Board of Directors appointed a litigation committee composed of four of our independent Directors.
We have fostered a corporate culture where growth and change are strongly encouraged. In fact, employees are constantly evolving with the rapid pace of technology to meet new challenges and realities. We believe that we possess a good cross-section of experience and youth to handle these inevitable changes in the industry.
As of November 1, 2005,2006, we had a total of 685862 employees, up from a total of 649685 on December 15, 2004.November 1, 2005. We have 614762 employees in Canada, primarily based in Quebec, and 71100 employees based outside of Canada. 194264 are involved in research and development, 250294 in manufacturing, 128163 in sales and marketing, 7281 in general administrative positions and 4160 in communications and customer support. We have agreements with almost all of our employees covering confidentiality and non-competition. Only manufacturing employees based in Quebec City plants are represented by a collective bargaining agreement, which expires in 2009. We have never experienced a work stoppage. We believe that relations with our employees and bargaining unit are good.
The following table presents information regarding the ownership of Subordinate Voting Shares, Exercisable "in-the-money"“in-the-money” and "out-the-money"“out-the-money” options and the beneficial ownership of our share capital as of November 1, 20052006 by our Chief Executive Officer, Chief Financial Officer, our Directors, our three other most highly compensated executive officers, our other executive officers as a group and all of our Directors and executive officers as a group.
Each multiple voting share is convertible at the option of the holder into one subordinate voting share. Holders of our subordinate voting shares are entitled to one (1) vote per share and holders of our multiple voting shares are entitled to ten (10) votes per share.
84
Name | Subordinate Voting Shares Owned | Currently Exercisable Options Owned as of November 1, 2006 | Total Subordinate Voting Shares Beneficially Owned (3) | Multiple Voting Shares Beneficially Owned (3) | Total Percentage of Voting Power |
In-the-money (1) | Out-the-money (2) |
Number | Percent | Number | Percent | Number | Percent | Number | Percent | Number | Percent | Percent |
Germain Lamonde (4) | 483,500 | * | 50,000 | * | 104,968 | * | 638,468 | * | 37,143,000 | 100 | 92.3 |
Pierre Plamondon | 35,427 (5) | * | 20,000 | * | 54,631 | * | 110,058 | * | − | − | * |
Pierre Marcouiller | 5,000 | * | 21,875 | * | 23,882 | * | 50,757 | * | − | − | * |
Guy Marier | 1,000 | * | − | * | 6,250 | * | 7,250 | * | − | − | * |
David A. Thompson | 2,100 | * | 21,875 | * | 17,734 | * | 41,709 | * | − | − | * |
André Tremblay | 6,650 (6) | * | 21,875 | * | 19,691 | * | 48,216 | * | − | − | * |
Michael Unger | − | * | 21,875 | * | 20,568 | * | 42,443 | * | − | − | * |
Name | Subordinate Voting Shares Owned | Currently Exercisable Options Owned as of November 1, 2006 | Total Subordinate Voting Shares Beneficially Owned (3) | Multiple Voting Shares Beneficially Owned (3) | Total Percentage of Voting Power |
In-the-money (1) | Out-the-money (2) |
Number | Percent | Number | Percent | Number | Percent | Number | Percent | Number | Percent | Percent |
Juan-Felipe Gonzalez | 40,100 | * | 7,500 | * | 85,271 | * | 132,871 | * | − | − | * |
Allan Firhoj | − | * | 3,750 | * | 18,837 | * | 22,587 | * | − | − | * |
Dana Yearian | − | * | − | * | − | * | − | * | − | − | * |
Other executive officers as a group | 35,025 | * | 35,000 | * | 50,764 | * | 120,789 | * | − | − | * |
All of our Directors and executive officers as a group | 608,802 | * | 203,750 | * | 402,596 | 1.3 | 1,215,148 | 3.8 | 37,143,000 | 100 | 92.5 |
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL
CURRENTLY EXERCISABLE OPTIONS SUBORDINATE TOTAL
NAME SUBORDINATE OWNED AS OF NOVEMBER | | | | | | | | | | | |
(1) | “In-the-money” options are options for which the market value of the underlying securities is higher than the price at which such securities may be bought from the Corporation. As of November 1, 2005 VOTING SHARES MULTIPLE VOTING PERCENTAGE
VOTING SHARES --------------------------------- BENEFICIALLY SHARES BENEFICIALLY OF VOTING
OWNED IN-THE-MONEY(1) OUT-THE-MONEY(2) OWNED 2006 the market value of a Subordinate Voting Share was US$4.90. |
(2) | “Out-the-money” options are options for which the market value of the underlying securities is lower than the price of which such securities may be bought from the Corporation. |
(3) OWNED (3) POWER
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------
| Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Options that are currently exercisable (including options that have an exercise price above the market price) are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Accordingly, DSUs and RSUs are not included. |
(4) | The number of shares held by Germain Lamonde 93,000 * 37,500 * 100,482 * 230,982 * 37,900,000 100 92.6
(4)
- ----------------------------------------------------------------------------------------------------------------------------includes 1,900,000 multiple voting shares held of record by Fiducie Germain Lamonde, 35,243,000 multiple voting shares and 483,500 subordinate voting shares held of record by G. Lamonde Investissements Financiers inc. |
(5) | The number of shares held by Pierre Plamondon 35,427(5) * 18,750 * 53,285 * 107,462 * -- -- *
- ----------------------------------------------------------------------------------------------------------------------------includes 6,874 subordinate voting shares held of record by Fiducie Pierre 5,000 * 15,625 * 23,003 * 43,628 * -- -- *
Marcouiller
- ----------------------------------------------------------------------------------------------------------------------------
Guy Marier 1,000 * -- * 3,125 * 4,125 * -- -- *
- ----------------------------------------------------------------------------------------------------------------------------
David A. 2,100 * 15,625 * 17,734 * 35,459 * -- -- *
Thompson
- ----------------------------------------------------------------------------------------------------------------------------
AndrePlamondon. |
(6) | The number of subordinate voting shares held of record by André Tremblay 6,650(6) * 15,625 * 19,691 * 41,966 * -- -- *
- ----------------------------------------------------------------------------------------------------------------------------
Michael Unger -- * 15,625 * 20,568 * 36,193 * -- -- *
- ----------------------------------------------------------------------------------------------------------------------------
Juan-Felipe 50,752 * 7,500 * 80,150 * 138,402 * -- -- *
Gonzalez
- ----------------------------------------------------------------------------------------------------------------------------
Stephen Bull 21,573 * 11,255 * 24,727 * 57,550 * -- -- *
- ----------------------------------------------------------------------------------------------------------------------------
Etienne Gagnon 5,000 * 5,000 * 789 * 10,789 * -- -- *
- ----------------------------------------------------------------------------------------------------------------------------
Other executive
officers asis held by 9104-5559 Québec Inc, a 8,452 * 18,750 * 45,169 * 72,371 * -- -- *
group
- ----------------------------------------------------------------------------------------------------------------------------
All of our
Directors and
executive 228,954 * 161,250 * 388,723 1.3 778,927 2.5 37,900,000 100 92.7
officers as a
group
- ----------------------------------------------------------------------------------------------------------------------------
company controlled by Mr. Tremblay. |
- ---------------- ----------
* Less than 1%.
(1) "In-the-money" options are options for which the market value of the
underlying securities is higher than the price at which such securities
may be bought from the Corporation. As of November 1, 2005 the market
value of a Subordinate Voting Share was US$4.43.
(2) "Out-the-money" options are options for which the market value of the
underlying securities is lower than the price of which such securities
may be bought from the Corporation.
(3) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Options that are currently exercisable (including options
that have an exercise price above the market price) are deemed to be
outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Accordingly, DSUs and RSUs
are not included.
(4) The number of shares held by Germain Lamonde includes 1,900,000 multiple
voting shares held of record by Fiducie Germain Lamonde, 36,000,000
multiple voting shares held of record by G. Lamonde Investissements
Financiers inc. and 93,000 subordinate voting shares held of record by
Placements Lamonde SENC.
(5) The number of shares held by Pierre Plamondon includes 6,874 subordinate
voting shares held of record by Fiducie Pierre Plamondon.
(6) The number of subordinate voting shares held of record by Andre Tremblay
is held by 9104-5559 Quebec Inc, a company controlled by Mr. Tremblay.
85
The following table presents information regarding stock options held as of November 1, 2005 2006by our Chief Executive Officer, Chief Financial Officer, our Directors, our three other most highly compensated executive officers and our other executive officers as a group.
SECURITIES UNDER OPTIONS EXERCISE PRICE Name | Securities Under Options Granted (1) (#) | Exercise Price (2)
NAME GRANTED (1) (#) (US$/SECURITY) EXPIRATION DATE
- -------------------------------- ------------------------ ------------------ -------------------
Security) | Expiration Date |
Germain Lamonde................. Lamonde | 25,402 $26.00 5,080 70,000 50,000 17,942 11,218 | $26.00 $22.25 $9.13 $1.58 $4.51 $4.76 | June 29, 2010
5,080 $22.25 January 10, 2011
70,000 $9.13 October 10, 2011
50,000 $1.58 September 25, 2012
17,942 $4.51 February 1, 2015 December 6, 2015 |
Pierre Plamondon................ Plamondon | 8,700 $26.00 10,000 5,000 9,240 19,000 25,000 5,383 3,653 | $26.00 $45.94 $34.07 $22.25 $9.13 $1.58 $5.13 $4.76 | June 29, 2010
10,000 $45.94 September 13, 2010
5,000 $34.07 October 11, 2010
9,240 $22.25 January 10, 2011
19,000 $9.13 October 10, 2011
25,000 $1.58 September 25, 2012
5,383 $5.13 October 26, 2014
Pierre Marcouiller.............. 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
17,966 $9.13 October 10, 2011
1,037 $12.69 December 1, 2011
2,479 $5.65 March 1, 2012
12,500 $1.58 September 25, 2012
12,500 $3.51 October 27, 2013
Guy Marier...................... 12,500 $4.65 March 24, 2014
David A. Thompson............... 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
15,334 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
12,500 $3.51 October 27, 2013
Andre Tremblay.................. 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
17,291 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
12,500 $3.51 October 27, 2013
Michael Unger................... 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
18,168 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
12,500 $3.51 October 27, 2013
Juan Felipe Gonzalez............ 6,900 $26.00 June 29, 2010
15,000 $45.94 September 13, 2010
15,000 $34.07 October 11, 2010
15,630 $22.25 January 10, 2011
15,000 $9.13 October 10, 2011
15,000 $12.22 January 3, 2012
15,000 $1.58 September 25, 2012
5,482 $5.13 October 26, 2014
Stephen Bull.................... 900 $26.00 June 29, 2010
5,000 $45.94 September 13, 2010
2,930 $22.25 January 10, 2011
15,000 $9.13 October 10, 2011
15,000 $1.58 September 25, 2012
3,589 $5.13 October 26, 2014
6, 2015 |
86
Name | Securities Under Options Granted (1) (#) | Exercise Price (2) (US$/Security) | Expiration Date |
Pierre Marcouiller | 2,000 400 17,966 1,037 2,479 12,500 12,500 | $26.00 $22.25 $9.13 $12.69 $5.65 $1.58 $3.51 | June 29, 2010 January 10, 2011 October 10, 2011 December 1, 2011 March 1, 2012 September 25, 2012 October 27, 2013 |
Guy Marier | 12,500 | $4.65 | March 24, 2014 |
David A. Thompson | 2,000 400 15,334 12,500 12,500 | $26.00 $22.25 $9.13 $1.58 $3.51 | June 29, 2010 January 10, 2011 October 10, 2011 September 25, 2012 October 27, 2013 |
André Tremblay | 2,000 400 17,291 12,500 12,500 | $26.00 $22.25 $9.13 $1.58 $3.51 | June 29, 2010 January 10, 2011 October 10, 2011 September 25, 2012 October 27, 2013 |
Michael Unger | 2,000 400 18,168 12,500 12,500 | $26.00 $22.25 $9.13 $1.58 $3.51 | June 29, 2010 January 10, 2011 October 10, 2011 September 25, 2012 October 27, 2013 |
Juan Felipe Gonzalez | 6,900 15,000 15,000 15,630 15,000 15,000 7,500 5,482 3,505 | $26.00 $45.94 $34.07 $22.25 $9.13 $12.22 $1.58 $5.13 $4.76 | June 29, 2010 September 13, 2010 October 11, 2010 January 10, 2011 October 10, 2011 January 3, 2012 September 25, 2012 October 26, 2014 December 6, 2015 |
Allan Firhoj | 10,000 8,000 3,750 2,512 2,404 | $23.40 $9.13 $1.58 $5.13 $4.76 | March 15, 2011 October 10, 2011 September 25, 2012 October 26, 2014 December 6, 2015 |
Dana Yearian | − | − | − |
Other Executive Officers as a group | 900 8,000 4,000 6,180 25,000 30,000 10,000 12,369 2,000 8,728 | $26.00 $45.94 $34.07 $22.25 $9.13 $1.58 $3.19 $5.13 $4.51 $4.76 | June 29, 2010 September 13, 2010 October 11, 2010 January 10, 2011 October 10, 2011 September 25, 2012 January 7, 2013 October 26, 2014 February 1, 2015 December 6, 2015 |
SECURITIES UNDER OPTIONS EXERCISE PRICE (2)
NAME GRANTED (1) (#) (US$/SECURITY) EXPIRATION DATE
- -------------------------------- ------------------------ ------------------ -------------------
Etienne Gagnon.................. 15,000 $3.19 January 7, 2013
3,158 $5.13 October 26, 2014
Other Executive Officers as a 3,000 $45.94 September 13, 2010
group........................... 4,000 $34.07 October 11, 2010
3,250 $22.25 January 10, 2011
10,000 $23.40 March 15, 2011
18,000 $9.13 October 10, 2011
26,250 $1.58 September 25, 2012
15,000 $4.65 March 24, 2014
12,679 $5.13 October 26, 2014
2,000 $4.51 February 1, 2015
| | | |
| | | |
- ---------------------------------
(1) Underlying securities: subordinate voting shares
(2) The exercise price of options granted is determined based on the highest of the closing prices of the subordinate voting shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required.
The following table presents information regarding Deferred Share Units and Restricted Share Units held by our Chief Executive Officer, our Chief Financial Officer, our Directors, our three other most highly compensated executive officers, our other executive officers as a group and all of our Directors and executive officers as a group.
group as of November 1, 2006.
Name | DSUs | RSUs |
Number | Percentage | Estimated Average Value at the time of grant US$/DSU (1) | Number | Percentage | Fair Value at the time of grant US$/RSU (2) |
Germain Lamonde | − | − | − | 13,089 (3) | 3.1% | 4.69 |
| − | − | − | 21,477 (4) | 5.0% | 4.76 |
| − | − | − | 25,347 (5) | 5.9% | 6.02 |
Pierre Plamondon | − | − | − | 3,927 (3) | 1.0% | 4.69 |
| − | − | − | 30,000 (6) | 7.0% | 4.69 |
| − | − | − | 6,994 (4) | 1.6% | 4.76 |
| − | − | − | 8,430 (5) | 2.0% | 6.02 |
| − | − | − | 4,500 (7) | 1.1% | 6.02 |
Pierre Marcouiller | 8,349 (8) | 19.3% | 5.07 | − | − | − |
Guy Marier | 8,349 (8) | 19.3% | 5.07 | − | − | − |
David A. Thompson | 9,894 (8) | 22.8% | 5.07 | − | − | − |
André Tremblay | 8,349 (8) | 19.3% | 5.07 | − | − | − |
Michael Unger | 8,349 (8) | 19.3% | 5.07 | − | − | − |
Juan-Felipe Gonzalez | − | − | − | 3,998 (3) | 0.9% | 4.69 |
| − | − | − | 30,000 (6) | 7.0% | 4.69 |
| − | − | − | 6,716 (4) | 1.6% | 4.76 |
Allan Firhoj | − | − | − | 2,443 (3) | 0.6% | 4.69 |
| − | − | − | 10,000 (6) | 2.3% | 4.69 |
| − | − | − | 4,602 (4) | 1.1% | 4.76 |
| − | − | − | 6,145 (5) | 1.4% | 6.02 |
Dana Yearian | − | − | − | 5,000 (9) | 1.2% | 5.16 |
| − | − | − | 6,645 (5) | 1.6% | 6.02 |
Other executive officers as a group | − | − | − | 9,023 (3) | 2.1% | 4.69 |
− | − | − | 51,500 (6) | 12.1% | 4.69 |
− | − | − | 16,708 (4) | 3.9% | 4.76 |
| − | − | − | 25,235 (5) | 5.9% | 6.02 |
| − | − | − | 20,500 (7) | 4.8% | 6.02 |
All of the directors and executive officers as a group | − | − | − | 32,480 (3) | 7.6% | 4.69 |
− | − | − | 121,500 (6) | 28.4% | 4.69 |
− | − | − | 56,497 (4) | 13.2% | 4.76 |
| − | − | − | 71,802 (5) | 16.8% | 6.02 |
| 43,290 | 100% | 5.07 | 25,000 (7) | 5.9% | 6.02 |
- ----------------------------------------------------------------------------------------------------------------------
DSUS RSUS
- ----------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE FAIR FAIR VALUE AT
VALUE AT THE THE TIME OF
TIME OF GRANT GRANT
NAME NUMBER PERCENTAGE US$/ | | | | | | |
| | | | | | |
(1) | The estimated average value at the time of grant of a DSU (1) NUMBER PERCENTAGE US$/RSU (2)
- ----------------------------------------------------------------------------------------------------------------------
Germain Lamonde -- -- -- 13,089 (3) 7.4% 4.69
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- 3,927 (3) 2.2% 4.69
Pierre Plamondon ------------------------------------------------------------------------------------------------
-- -- -- 30,000 (4) 17.0% 4.69
- ----------------------------------------------------------------------------------------------------------------------
Pierre Marcouiller 4,537 (5) 19.1% 4.47 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Guy Marier 4,537 (5) 19.1% 4.47 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
David A. Thompson 5,586 (5) 23.6% 4.47 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Andre Tremblay 4,537 (5) 19.1% 4.47 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Michael Unger 4,537 (5) 19.1% 4.47 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- 3,998 (3) 2.3% 4.69
Juan-Felipe Gonzalez ------------------------------------------------------------------------------------------------
-- -- -- 30,000 (4) 17.0% 4.69
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- 2,618 (3) 1.5% 4.69
Stephen Bull ------------------------------------------------------------------------------------------------
-- -- -- 30,000 (4) 17.0% 4.69
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- 2,304 (3) 1.3% 4.69
Etienne Gagnon ------------------------------------------------------------------------------------------------
-- -- -- 7,500 (4) 4.3% 4.69
- ----------------------------------------------------------------------------------------------------------------------
Other executives -- -- -- 9,249 (3) 5.2% 4.69
officers as a group ------------------------------------------------------------------------------------------------
-- -- -- 31,500 (4) 17.9% 4.69
- ----------------------------------------------------------------------------------------------------------------------
Allis the average of the directorsestimated value at the time of grant of a DSU which is determined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and executive officersthe NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required. The value at vesting of a group -- -- -- 35,185 DSU is equivalent to the market value of a Subordinate Voting Share when a DSU is converted to such Subordinate Voting Share. |
(2) | The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. |
(3) 20.0% 4.69
- ----------------------------------------------------------------------------------------------------------------------
23,734 100% 4.47 129,000 | Those RSUs will vest on the fifth anniversary date of the grant in January 2005 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
(4) 73.2% 4.69
- ----------------------------------------------------------------------------------------------------------------------
| Those RSUs will vest on the fifth anniversary date of the grant in December 2005 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
- -------------------------
(1) The weighted average fair value(5) | Those RSUs will vest on the fifth anniversary date of the grant in October 2006 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
(6) | Those RSUs will vest at a rate of 55%, 35% and 10%, on the third, fourth and fifth anniversary dates of the grant in January 2005. |
(7) | Those RSUs will vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in October 2006. |
(8) | Those DSUs will vest at the time Director cease to be a member of the Board of the Corporation. |
(9) | Those RSUs will vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in August 2006. |
Escrowed Securities
The following table presents information regarding the number of securities of each class of the Corporation held, to the Corporation'sour knowledge as of November 1, 2005,2006, in escrow and the percentage outstanding securities of that class.
DESIGNATION OF CLASS NUMBER OF SECURITIES HELD IN ESCROW PERCENTAGE OF CLASS
-------------------- ----------------------------------- -------------------
Designation of Class | | Number of Securities held in escrow | | Percentage of Class |
Subordinate Voting Shares 493,096 (1) 1.6%
| | nil | | nil |
Multiple Voting Shares -- --
| | nil | | nil |
- ---------------------
(1) CIBC Mellon Trust Company is the Escrow agent. The shares held in Escrow
will be released to shareholder on October 4, 2006.
88
ITEM
The following table presents information regarding the beneficial ownership of our share capital as of November 1, 20052006 by persons or groups of affiliated persons known by us to own more than 5% of our voting shares.
| | Multiple Voting Shares Beneficially Owned (1) | | Subordinate Voting Shares Beneficially Owned (1) | | Total Percentage of Voting Power | |
| | | | | | | |
Name | | Number | | Percent | | Number | | Percent | | Percent | |
| | | | | | | | | | | |
Germain Lamonde (2) | | | 37,143,000 | | | 100 | % | | 483,500 | | | 1.53 | % | | 92.27 | % |
Fiducie Germain Lamonde (3) | | | 1,900,000 | | | 5 | % | | Nil | | | Nil | | | 4.71 | % |
G. Lamonde Investissements Financiers inc. (4) | | | 35,243,000 | | | 95 | % | | Nil | | | Nil | | | 87.44 | % |
FMR Corporation (5) | | | Nil | | | Nil | | | 4,624,700 | | | 14.62 | % | | 1.15 | % |
Kern Capital Management, LLC (6) | | | Nil | | | Nil | | | 4,596,700 | | | 14.53 | % | | 1.14 | % |
TOTAL PERCENTAGE OF
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES -------------------
BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1) VOTING POWER
------------------------- -------------------------- -------------------
NAME NUMBER PERCENT NUMBER PERCENT PERCENT
- ---------------------------- ---------- --------- ---------- ---------- -------------------
Germain Lamonde (2) 37,900,000 100% 230,982 | | | | | | |
| | | | | | |
* 92.57%
Fiducie Germain Lamonde (3) 1,900,000 5% Nil Nil 4.64%
G. Lamonde Investissements
Financiers inc. (4) 36,000,000 95% Nil Nil 87.88%
Placements Lamonde, SENC (5) Nil Nil 93,000 * *
Kern Capital Management, LLC (6) Nil Nil 4,658,000 15.19% 1.14%
FMR Corporation (7) Nil Nil 4,597,100 14.99% 1.12%
Skyline Asset Management LP (8) Nil Nil 1,893,100 6.17% *
- ---------------------------
* Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Options that are currently exercisable (including options that have an exercise price above the market price) are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) The number of shares held by Germain Lamonde includes 1,900,000 multiple
voting shares held of record by Fiducie Germain Lamonde and 36,000,000
multiple voting shares held of record by G. Lamonde Investissements
Financiers inc. and 93,000 subordinate voting shares held of record by
Placements Lamonde, SENC.
(3) Fiducie Germain Lamonde is a family trust for the benefit of Mr. Lamonde
and members of his family.
(4) G. Lamonde Investissements Financiers inc. is a company controlled by Mr.
Lamonde.
(5) Placements Lamonde, SENC is a parternship controlled by Mr. Lamonde.
(6) As of September 30, 2005, Kern Capital Management LLC controls the voting
rights attached to this number of subordinate voting shares through
relationships with several clients and does not beneficially own directly
this number of subordinate voting shares.
(7) As of September 30, 2005, Fidelity Management and Research Company, a
wholly owned subsidiary of FMR Corporation, is the beneficial owner of
this number of subordinate voting shares as a result of acting as
investment advisor to various investment companies.
(8) As of September 30, 2005, Skyline Asset Management LP apparently controls
the voting rights attached to this number of subordinate voting shares
but we were unable to obtain a confirmation from Skyline.
(2) | The number of shares held by Germain Lamonde includes 1,900,000 multiple voting shares held of record by Fiducie Germain Lamonde and 35,243,000 multiple voting shares and 483,500 subordinate voting shares held of record by G. Lamonde Investissements Financiers inc.. |
(3) | Fiducie Germain Lamonde is a family trust for the benefit of Mr. Lamonde and members of his family. |
(4) | G. Lamonde Investissements Financiers inc. is a company controlled by Mr. Lamonde. |
(5) | As of September 30, 2006, Fidelity Management and Research Company, a wholly owned subsidiary of FMR Corporation, is the beneficial owner of this number of subordinate voting shares as a result of acting as investment advisor to various investment companies. |
(6) | As of September 30, 2006, Kern Capital Management LLC controls the voting rights attached to this number of subordinate voting shares through relationships with several clients and does not beneficially own directly this number of subordinate voting shares. |
Each multiple voting share is convertible at the option of the holder into one subordinate voting share. Holders of our subordinate voting shares are entitled to one vote per share and holders of our multiple voting shares are entitled to ten votes per share.
As of November 21,
2005, 30,674,6172006, 31,648,107 subordinate voting shares were outstanding. Approximately 96%
(29,525,530)(30,579,891) of our subordinate voting shares were held in bearer form and the remainder
(1,149,087(1,068,216 subordinate voting shares) was held by
178165 record holders. As of November 21,
2005,2006, we believe approximately
58%57% of our outstanding subordinate voting shares were held in the United States.
89
Indebtedness of Directors, Executive Officers and Employees
We have guaranteed the repayment of a loan granted to an employee by a financial institution for the purchase of our Class "F"“F” shares that were converted into subordinate voting shares immediately prior to our initial public offering. As of August 31, 20052006 and November 1, 2005,2006, the total principal amount guaranteed by us was $56,200.
$37,400.
Except as disclosed in this section, none of our Directors, executive officers, associates or affiliates had any material interest in any transaction with us during the past three years or in any proposed transaction which has materially affected or could materially affect us.
LEASES
Leases
Until September 1, 2004, we had a lease agreement with G. Lamonde Investissements financiers inc., a company controlled by Mr. Germain Lamonde, for premises located at 465 Godin Avenue in Vanier,Quebec City, Quebec. Until September 1, 2003, these premises were used for our executive and administrative offices which were, since then, moved into a building that we own. For fiscal year 2004, this space was unoccupied.This lease was renewed in December 2001 for five years, with all terms and conditions remaining the same. However, on September 1, 2004, we were released from our obligations under the lease with a final payment of $194,000 (CA$250,000). The annual rent for this lease was $CA144,000.
LOCATION SQUARE FOOTAGE ANNUAL RENT EXPIRY DATE
-------- -------------- ----------- -----------
465 Godin 24,000 CA$144,000 November 30, 2006
Location | Square Footage | Annual Rent | Expiry Date |
465 Godin | 24,000 | CA$144,000 | November 30, 2006 |
Based on third-party valuations of the property values, we believe this lease agreement was at prevailing market terms.
In September 2002, we acquired from G. Lamonde Investissements financiers inc. the building located at 436 Nolin Street that houses some of our manufacturing activities. Previous to this acquisition, we had a lease agreement with this company for these premises. We paid CA$1,450,000 for the building and this purchase price is based on an independent third party valuation and the transaction was approved by our audit committee and the Board of Directors with Mr. Lamonde abstaining.
90
ITEM
A. | Consolidated Statements and Other Financial Information |
See Item 18, "Financial Statements"“Financial Statements” for certain other information required by this section.
item.
Valuation and qualifying accounts as well as Export sales are as follows (in thousands of US dollars);
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED AUGUST 31,
-------------------------------------------------------
2005 2004 2003
--------------- -------------- --------------
Balance - Beginning of year $ 510 $ 568 $ 520
Addition charged to earnings 316 403 619
Write-offs of uncollectible accounts (23) (48) (288)
Recovery of uncollectible accounts (464) (456) (315)
Foreign currency translation adjustment 13 43 32
--------------- -------------- --------------
Balance - End of year $ 352 $ 510 $ 568
=============== ============== ==============
VALUATION ALLOWANCE ON FUTURE INCOME TAX ASSETS
YEARS ENDED AUGUST 31,
-------------------------------------------------------
2005 2004 2003
--------------- -------------- --------------
Balance - Beginning of year $ 32,613 $ 28,846 $ 359
Addition charged to earnings 3,375 3,954 28,385
Foreign currency translation adjustment 2,418 (187) 102
--------------- -------------- --------------
Balance - End of year $ 38,406 $ 32,613 $ 28,846
=============== ============== ==============
EXPORT SALES
Export and domestic sales in thousands of US dollars and as a percentage of
total sales are as follows:
YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------
2005 2004 2003
------------------------ ------------------------ ------------------------
Export Sales $ 90,386 93% $ 68,812 92% $ 57,124 92%
Domestic Sales 6,830 7 5,818 8 4,806 8
------------------------ ------------------------ ------------------------
$ 97,216 100% $ 74,630 100% $ 61,930 100%
======================== ======================== ========================
91
LEGAL PROCEEDINGS
:
Allowance for doubtful accounts
| | Years ended August 31, | |
| | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
Balance - Beginning of year | | $ | 352 | | $ | 510 | | $ | 568 | |
Addition charged to earnings | | | 108 | | | 316 | | | 403 | |
Write-offs of uncollectible accounts | | | (123 | ) | | (23 | ) | | (48 | ) |
Recovery of uncollectible accounts | | | (111 | ) | | (464 | ) | | (456 | ) |
Business combination | | | 218 | | | − | | | − | |
Foreign currency translation adjustment | | | 7 | | | 13 | | | 43 | |
| | | | | | | | | | |
Balance - End of year | | $ | 451 | | $ | 352 | | $ | 510 | |
Valuation allowance on future income tax assets
| | Years ended August 31, | |
| | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
Balance - Beginning of year | | $ | 38,406 | | $ | 32,613 | | $ | 28,846 | |
Addition (reduction) charged to earnings | | | (1,877 | ) | | 3,375 | | | 3,954 | |
Foreign currency translation adjustment | | | 2,014 | | | 2,418 | | | (187 | ) |
| | | | | | | | | | |
Balance - End of year | | $ | 38,543 | | $ | 38,406 | | $ | 32,613 | |
Export Sales
Export and domestic sales in thousands of US dollars and as a percentage of total sales are as follows:
| | Years ended August 31, | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | | | | | | | |
Export Sales | | $ | 119,486 | | | 93 | % | $ | 90,386 | | | 92 | % | $ | 68,812 | | | 92 | % |
Domestic Sales | | | 8,767 | | | 7 | | | 6,830 | | | 8 | | | 5,818 | | | 8 | |
| | | | | | | | | | | | | | | | | | | |
| | $ | 128,253 | | | 100 | % | $ | 97,216 | | | 100 | % | $ | 74,630 | | | 100 | % |
Legal Proceedings
On November 27, 2001, a class action suit was filed in the United States District Court for the Southern District of New York against 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'scompany’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'scompany’s Initial Public Offering; and (ii) the underwriters allegedly entering into agreements with customers whereby shares issued in connection with the company'scompany’s Initial Public Offering would be allocated to those customers in exchange for which customers agreed to purchase additional amounts of shares in the after-market at pre-determined prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing master allegations against all of the underwriters in all of the 310 cases included in this class action and also filed an amended complaint containing allegations specific to four of the company'scompany’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'scompany’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'scompany’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'plaintiffs’ amended complaint and judgmenta decision was rendered on February 19, 2003. Only one of the claims against the company was dismissed. On October 8, 2002, the claims against its officers were dismissed pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs.
In June 2003, a committee of the company'scompany’s Board of Directors conditionally approved a proposed settlement between the issuer defendants, the individual defendants, and the plaintiffs. 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
On June 25, 2004, the Plaintiffs moved for Preliminary Approvalpreliminary approval of the settlement. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications.
92
On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005, and completed by January 15, 2006. The2005. A settlement fairness hearing was held on April 24, 2006; however, no ruling has been set for April 26, 2006. Followingissued yet by the hearing, ifcourt. If the court determines that the settlement is fair to the class members, the settlement will be approved. ThereThe settlement provides that, if the plaintiffs do not obtain any recovery from the underwriter defendants, the members of the class action would receive an amount not expected to exceed $2,507,678. Any direct financial impact plus any legal fees are expected to be borne by the company’s insurance carriers. However, there can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all. Therefore, it is not possible to predict the final outcome of the case, nor to determine the amount of any possible losses. If the settlement process fails, the company will continue to defend its position in this litigation that the claims against it, and its officers, are without merit. Accordingly, no provision for this case has been made in the consolidated financial statements as at August 31, 2005.
2006.
There are no other legal or arbitration proceedings pending or threatened of which we are aware which may have or have had a significant effect on our financial position.
DIVIDEND POLICY
Dividend Policy
We do not currently anticipate paying dividends for at least the three next years. Our current intention is to reinvest any earnings in our business long-term growth. Any future determination by us to pay dividends will be at the discretion of our Board of Directors and in accordance with the terms and conditions of any outstanding indebtedness and will depend on our financial condition, results of operations, capital requirements and such other functions as our Board of Directors considers relevant.
B. SIGNIFICANT CHANGES
No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this
Annual Report.
93
ITEMannual report.
Not Applicable, except for Item 9A (4) and Item 9C.
NASDAQ (US$) TSX (CDN$)
HIGH LOW HIGH LOW
September 1, 2000 to August 31, 2001 57.75 11.80 85.00 17.82
September 1, 2001 to August 31, 2002 15.00 1.35 23.80 2.05
September 1, 2002 to August 31, 2003 3.63 1.40 5.60 2.30
September 1, 2003 to August 31, 2004 7.09 2.71 9.15 3.75
September 1, 2004 to August 31, 2005 5.51 3.92 6.90 4.92
2004 1st Quarter 4.26 2.71 5.53 3.75
2004 2nd Quarter 7.09 3.29 9.15 4.40
2004 3rd Quarter 5.23 4.08 6.90 5.68
2004 4th Quarter 5.38 4.11 6.95 5.50
2005 1st Quarter 5.51 4.27 6.90 5.73
2005 2nd Quarter 5.24 4.29 6.42 5.35
2005 3rd Quarter 4.99 3.93 6.05 4.95
2005 4th Quarter 5.00 3.92 6.10 4.92
2005 May 4.28 3.93 5.30 4.95
2005 June 4.62 3.92 5.71 4.92
2005 July 4.91 4.12 6.05 5.12
2005 August 5.00 4.61 6.10 5.53
2005 September 5.00 4.76 5.92 5.60
2005 October 5.05 4.32 5.89 5.15
2005 November 4.75 4.43 5.71 5.24
(until November 21)
| | Nasdaq (US$) | | TSX (CA$) | |
| | High | | Low | | High | | Low | |
| | | | | | | | | |
September 1, 2001 to August 31, 2002 | | | 15.00 | | | 1.35 | | | 23.80 | | | 2.05 | |
September 1, 2002 to August 31, 2003 | | | 3.63 | | | 1.40 | | | 5.60 | | | 2.30 | |
September 1, 2003 to August 31, 2004 | | | 7.09 | | | 2.71 | | | 9.15 | | | 3.75 | |
September 1, 2004 to August 31, 2005 | | | 5.51 | | | 3.92 | | | 6.90 | | | 4.92 | |
September 1, 2005 to August 31, 2006 | | | 8.69 | | | 4.32 | | | 9.60 | | | 5.15 | |
| | | | | | | | | | | | | |
2005 1st Quarter | | | 5.51 | | | 4.27 | | | 6.90 | | | 5.73 | |
2005 2nd Quarter | | | 5.24 | | | 4.29 | | | 6.42 | | | 5.35 | |
2005 3rd Quarter | | | 4.99 | | | 3.93 | | | 6.05 | | | 4.95 | |
2005 4th Quarter | | | 5.00 | | | 3.92 | | | 6.10 | | | 4.92 | |
| | | | | | | | | | | | | |
2006 1st Quarter | | | 5.05 | | | 4.32 | | | 5.92 | | | 5.15 | |
2006 2nd Quarter | | | 6.70 | | | 4.39 | | | 7.64 | | | 5.16 | |
2006 3rd Quarter | | | 8.69 | | | 6.44 | | | 9.60 | | | 7.18 | |
2006 4th Quarter | | | 7.01 | | | 4.86 | | | 7.80 | | | 5.45 | |
| | | | | | | | | | | | | |
2006 May | | | 8.69 | | | 6.44 | | | 9.56 | | | 7.18 | |
2006 June | | | 7.01 | | | 5.21 | | | 7.80 | | | 5.81 | |
2006 July | | | 6.03 | | | 5.20 | | | 6.72 | | | 5.85 | |
2006 August | | | 5.66 | | | 4.86 | | | 6.30 | | | 5.45 | |
2006 September | | | 5.85 | | | 5.32 | | | 6.63 | | | 5.91 | |
2006 October | | | 6.13 | | | 4.93 | | | 6.90 | | | 5.55 | |
2006 November | | | 5.73 | | | 4.89 | | | 6.60 | | | 5.55 | |
(until November 21)
Our subordinate voting shares have been quoted on the NASDAQ National Market under the symbol EXFO and listed on The Toronto Stock Exchange under the symbol EXF.SVEXF since our initial public offering on June 29, 2000. Prior to that time, there was no public market for our subordinate voting shares. The following table sets forth, for the periods indicated, the high and low closing sales prices per subordinate voting share as reported on the NASDAQ National Market and the Toronto Stock Exchange.
On November 21,
2005,2006, the last reported sale price for our subordinate voting shares on the NASDAQ National Market was US$
4.725.57 per share and the last reported sale price for our subordinate voting shares on the Toronto Stock Exchange was CA$
5.626.39 per share.
94
ITEM
Not Applicable
Incorporated by reference to our registration statement on Form F-1 dated June 9, 2000 (File No. 333-38956).
Except as otherwise disclosed in this annual report and our financial statements and notes included elsewhere in this annual report, we have no other material contracts.
Subject to the following paragraph, there is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to non-resident holders of our subordinate voting shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by our articles of incorporation or our other charter documents on the right of a non-resident to hold or vote subordinate voting shares, other than as provided by the INVESTMENT CANADA ACT,Investment Canada Act, the NORTH AMERICAN FREE TRADE AGREEMENT IMPLEMENTATION
ACT North American Free Trade Agreement Implementation Act (Canada) and the WORLD TRADE ORGANIZATION AGREEMENT IMPLEMENTATION ACT.World Trade Organization Agreement Implementation Act. The INVESTMENT CANADA ACT Investment Canada Act requires notification and, in certain cases, advance review and approval by the Government of Canada of an investment to establish a new Canadian business by a non-Canadian or of the acquisition by a "non-Canadian"“non-Canadian” of "control"“control” of a "Canadian business"“Canadian business”, all as defined in the INVESTMENT CANADA ACT.Investment Canada Act. Generally, the threshold for review will be higher in monetary terms for a member of the World Trade Organization or North American Free Trade Agreement.
United States Taxation
The information set forth below under the caption
"United“United States
Taxation"Taxation” is a summary of the material U.S. federal income tax consequences of the ownership and disposition of subordinate voting shares by a U.S. Holder, as defined below. These discussions are not a complete analysis or listing of all of the possible tax consequences of such transactions and do not address all tax considerations that may be relevant to particular holders in light of their personal circumstances or to persons that are subject to special tax rules. In particular, the information set forth under the caption
"United“United States
Taxation"Taxation” deals only with U.S. Holders that hold subordinate voting shares as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, and who do not at any time own individually, nor are treated as owning 10% or more of the total combined voting power of all classes of our stock entitled to vote. In addition, this description of U.S. tax consequences does not address the tax treatment of special classes of U.S. Holders, such as financial institutions, regulated investment companies, traders in securities who elect to mark-to-market their securities, tax-exempt
95
entities, insurance companies, partnerships, persons holding subordinate voting shares as part of a hedging, integrated or conversion transaction or as part of a "straddle,"“straddle,” U.S. expatriates, persons subject to the alternative minimum tax, persons who acquired their subordinate voting shares through the exercise or cancellation of employee stock options or otherwise as compensation for services, dealers or traders in securities or currencies and holders whose "functional currency"“functional currency” is not the U.S. dollar. This summary does not address estate and gift tax consequences or tax consequences under any foreign, state or local laws other than as provided in the section entitled "Canadian“Canadian Federal Income Tax Considerations"Considerations” provided below.
As used in this section, the term "U.S. Holder"“U.S. Holder” means a beneficial owner of subordinate voting shares that is for U.S. federal income tax puposes:
(a) an individual citizen or resident of the United States;
(b) a corporation created or organized under the laws of the United
States or any state thereof and the District of Columbia;
(c) an estate the income of which is subject to United States
federal income taxation regardless of its source;
(d) a trust if (1) a court within the United States is able to
exercise primary jurisdiction over its administration and one or
more U.S. persons have authority to control all substantial
decisions of the trust or (2) the trust has a valid election in
effect under applicable U.S. Treasury regulations to be treated
as a U.S. person; or
(e) any other person whose worldwide income or gain is otherwise
subject to U.S. federal income taxation on a net income basis;
purposes:
| (a) | an individual citizen or resident of the United States; |
| (b) | a corporation created or organized under the laws of the United States or any state thereof and the District of Columbia; |
| (c) | an estate the income of which is subject to United States federal income taxation regardless of its source; |
| (d) | a trust if (1) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have authority to control all substantial decisions of the trust or (2) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or |
| (e) | any other person whose worldwide income or gain is otherwise subject to U.S. federal income taxation on a net income basis; |
If a partnership or other flow-through entity holds subordinate voting shares, the U.S. federal income tax treatment of a partner will generally depend upon the status of the partner or other owner and upon the activities of the partnership or other flow-through entity. If you are a partner of a partnership holding subordinate voting shares, you should consult your tax advisor.
Holders of subordinate voting shares who are not U.S. Holders, sometimes referred to as "Non-U.S. Holders"“Non-U.S. Holders”, should also consult their own tax advisors, particularly as to the applicability of any tax treaty.
The following discussion is based upon:
o the Internal Revenue Code;
o U.S. judicial decisions;
o administrative pronouncements;
o existing and proposed Treasury regulations; and
o the Canada -- U.S. Income Tax Treaty.
· | the Internal Revenue Code; |
· | U.S. judicial decisions; |
· | administrative pronouncements; |
· | existing and proposed Treasury regulations; and |
· | the Canada - U.S. Income Tax Treaty. |
Any of the above is subject to change, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. We have not requested, and will not request, a ruling from the U.S. Internal Revenue Service with respect to any of the U.S. federal income tax consequences described below, and as a result, there can be no assurance that the U.S. Internal Revenue Service will not disagree with or challenge any of the conclusions we have reached and describe here.
96
The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder of subordinate voting shares and no opinion or representation with respect to the U.S. federal income tax consequences to any holder is made. Holders of subordinate voting shares are urged to consult their tax advisors as to the particular consequences to them under U.S. federal, state, local and applicable foreign tax laws of the acquisition, ownership and disposition of subordinate voting shares.
DIVIDENDS
Subject to the discussion of passive foreign investment companies below, the gross amount of any distribution paid by us to a U.S. Holder will generally be subject to U.S. federal income tax as foreign source dividend income to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income will be includable in the gross income of a U.S. Holder on the day received by the U.S. Holder. The amount of any distribution of property other than cash will be the fair market value of such property on the date of the distribution. In the case of a taxable corporate U.S. Holder, such dividends will be taxable as ordinary income and will not be eligible for the corporate dividends received deduction, which is generally allowed to U.S. corporate shareholders on dividends received from a domestic corporation. In the case of an individual U.S. Holder, under recently enacted tax legislation such dividends should generally be eligible for a maximum tax rate of 15% for dividends received before January 1, 2009,2011, provided such holder holds the subordinate voting shares for at least 60 days and certain other conditions are satisfied, including, as we believe to be the case, that we are not a "passive“passive foreign investment company"company”. To the extent that an amount received by a U.S. Holder exceeds such holder'sholder’s allocable share of our current and accumulated earnings and profits, such excess will be applied first to reduce such U.S. Holder'sHolder’s tax basis in his subordinate voting shares, thereby increasing the amount of gain or decreasing the amount of loss recognized on a subsequent disposition of the subordinate voting shares. Then, to the extent such distribution exceeds such U.S. Holder'sHolder’s tax basis, it will be treated as capital gain. We do not currently maintain calculations of our earnings and profits for U.S. federal income tax purposes.
The gross amount of distributions paid in Canadian dollars, or any successor or other foreign currency, will be included in the income of such U.S. Holder in a U.S. dollar amount calculated by reference to the spot exchange rate in effect on the day the distributions are paid regardless of whether the payment is in fact converted into U.S. dollars. If the Canadian dollars, or any successor or other foreign currency, are converted into U.S. dollars on the date of the payment, the U.S. Holder should not be required to recognize any foreign currency gain or loss with respect to the receipt of Canadian dollars as distributions. If, instead, the Canadian dollars are converted at a later date, any currency gains or losses resulting from the conversion of the Canadian dollars will be treated as U.S. source ordinary income or loss for foreign tax credit purposes. U.S. Holders are urged to consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of Canadian dollars.
A U.S. Holder may be entitled to deduct, or claim a foreign tax credit for, Canadian taxes that are withheld on dividends received by the U.S. Holder, subject to applicable limitations in the Code. Any amounts recognized as dividends will generally constitute foreign source
"passive income"“passive income” or, in the case of certain U.S. Holders,
"financial“financial services
income"income” for U.S. foreign tax credit purposes. A U.S. Holder will have a basis in any Canadian dollars distributed equal to their U.S. dollar value on the payment date. The rules governing the foreign tax credit are complex, and additional limitations on the credit apply to individuals receiving dividends from foreign corporations if the dividends are eligible for the 15% maximum tax rate on dividends
97
described above. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
A Non-U.S. Holder of subordinate voting shares generally will not be subject to U.S. federal income or withholding tax on dividends received on subordinate voting shares unless such income is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States.
SALE OR EXCHANGE
Sale or Exchange
A U.S. Holder'sHolder’s initial tax basis in the subordinate voting shares will generally be cost to the holder. A U.S. Holder'sHolder’s adjusted tax basis in the subordinate voting shares will generally be the same as cost, but may differ for various reasons including the receipt by such holder of a distribution that was not made up wholly of earnings and profits as described above under the heading "Dividends."“Dividends.” Subject to the discussion of passive foreign investment companies below, gain or loss realized by a U.S. Holder on the sale or other disposition of subordinate voting shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference (if any) between the U.S. Holder'sHolder’s adjusted tax basis (determined in U.S. dollars) in the subordinate voting shares and the U.S. dollar value of the amount realized on the disposition of such subordinate voting shares. Capital gains of non-corporate taxpayers, including individuals, derived with respect to a sale, exchange or other disposition prior to January 1, 20092011 of subordinate voting shares held for more than one year are subject to a maximum federal income tax rate of 15%. The deductibility of capital losses is subject to limitations. In the case of a non-corporate U.S. Holder, the federal tax rate applicable to capital gains will depend upon:
o the holder's holding period for the subordinate voting shares,
with a preferential rate available for subordinate voting shares
held for more than one year; and
o the holder's marginal tax rate for ordinary income.
· | the holder’s holding period for the subordinate voting shares, with a preferential rate available for subordinate voting shares held for more than one year; and |
· | the holder’s marginal tax rate for ordinary income. |
Any gain realized will generally be treated as U.S. source gain and loss realized by a U.S. Holder generally also will be treated as from sources within the United States.
The ability of a U.S. Holder to utilize foreign taxes as a credit to offset U.S. taxes is subject to complex limitations and conditions. The consequences of the separate limitation calculation will depend upon the nature and sources of each U.S. Holder'sHolder’s income and the deductions allocable thereto. Alternatively, a U.S. Holder may elect to claim all foreign taxes paid as an itemized deduction in lieu of claiming a foreign tax credit. A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit, but the availability of the deduction is not subject to the same conditions and limitations applicable to foreign tax credits.
If a U.S. Holder receives any foreign currency on the sale of subordinate voting shares, such U.S. Holder may recognize ordinary income or loss as a result of currency fluctuations between the date of the sale of subordinate voting shares and the date the sale proceeds are converted into U.S. dollars.
A Non-U.S. Holder of subordinate voting shares generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such subordinate voting shares unless:
o such gain is effectively connected with the conduct by such
Non-U.S. Holder of a trade or business in the United States; or
98
o in the case of any gain realized by an individual Non-U.S.
Holder, such Non-U.S. Holder is present in the United States for
183 days or more in the taxable year of such sale and certain
other conditions are met.
FOREIGN PERSONAL HOLDING COMPANY
· | such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States; or |
· | in the case of any gain realized by an individual Non-U.S. Holder, such Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of such sale and certain other conditions are met. |
Foreign Personal Holding Company
Under recently enacted legislation, the foreign personal holding company rules are repealed for taxable years of U.S. shareholders ending after December 31, 2004.
PASSIVE FOREIGN INVESTMENT COMPANY
Passive Foreign Investment Company
We believe that our subordinate voting shares should not currently be treated as stock of a passive foreign investment company for United States federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change based on future operations as well as the composition and valuation of our assets. In particular, a significant portion of our gross assets are comprised of cash and short-term investments, which the PFIC rules treat as passive without regard to the purpose for which we hold those assets. If the proportion of these passive assets were to increase relative to the fair market value of our other assets, we may be treated as a passive foreign investment company. In general, we will be a passive foreign investment company with respect to a U.S. Holder if, for any taxable year in which the U.S. Holder holds our subordinate voting shares, either:
o at least 75% of our gross income for the taxable year is passive
income; or
o at least 50% of the average value of our assets is attributable
to assets that produce or are held for the production of passive
income.
· | at least 75% of our gross income for the taxable year is passive income; or |
· | at least 50% of the average value of our assets is attributable to assets that produce or are held for the production of passive income. |
For this purpose, passive income includes income such as:
o dividends;
o interest;
o rents or royalties, other than certain rents or royalties
derived from the active conduct of trade or business;
o annuities; or
o gains from assets that produce passive income.
· | rents or royalties, other than certain rents or royalties derived from the active conduct of trade or business; |
· | gains from assets that produce passive income. |
If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the passive foreign investment company tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation'scorporation’s income.
If we are treated as a passive foreign investment company, a U.S. Holder that did not make a qualified electing fund election or, if available, a mark-to-market election, as described below, would be subject to special rules with respect to:
o any gain realized on the sale or other disposition of
subordinate voting shares; and
o any "excess distribution" by us to the U.S. Holder.
· | any gain realized on the sale or other disposition of subordinate voting shares; and |
· | any “excess distribution” by us to the U.S. Holder. |
Generally,
"excess distributions"“excess distributions” are any distributions to the U.S. Holder in respect of the subordinate voting shares during a single taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder in respect of the subordinate voting shares during the
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three preceding taxable years or, if shorter, the U.S. Holder'sHolder’s holding period for the subordinate voting shares.
Under the passive foreign investment company rules,
o the gain or excess distribution would be allocated ratably over
the U.S. Holder's holding period for the subordinate voting
shares;
o the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary
income;
o the amount allocated to each prior year, with certain
exceptions, would be subject to tax at the highest tax rate in
effect for that year; and
o
· | the gain or excess distribution would be allocated ratably over the U.S. Holder’s holding period for the subordinate voting shares; |
· | the amount allocated to the taxable year in which the gain or excess distribution was realized would be taxable as ordinary income; |
· | the amount allocated to each prior year, with certain exceptions, would be subject to tax at the highest tax rate in effect for that year; and |
· | the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each such year. |
A U.S. Holder owning actually or constructively "marketable stock"“marketable stock” of a passive foreign investment company may be able to avoid the imposition of the passive foreign investment company tax rules described above by making a mark-to-market election. Generally, pursuant to this election, such holder would include in ordinary income, for each taxable year during which such stock is held, an amount equal to the increase in value of the stock, which increase will be determined by reference to the value of such stock at the end of the current taxable year compared with their value as of the end of the prior taxable year. Holders desiring to make the mark-to-market election should consult their tax advisors with respect to the application and effect of making such election.
In the case of a U.S. Holder who does not make a mark-to-market election, the special passive foreign investment company tax rules described above will not apply to such U.S. Holder if the U.S. Holder makes an election to have us treated as a qualified electing fund and we provide certain required information to holders. For a U.S. Holder to make a qualified electing fund election, we would have to satisfy certain reporting requirements. We have not determined whether we will undertake the necessary measures to be able to satisfy such requirements in the event that we were treated as a passive foreign investment company.
A U.S. Holder that makes a qualified electing fund election will be currently taxable on its pro rata share of our ordinary earnings and net capital gain, at ordinary income and capital gains rates, respectively, for each of our taxable years, regardless of whether or not distributions were received. The U.S. Holder'sHolder’s basis in the subordinate voting shares will be increased to reflect taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the subordinate voting shares and will not be taxed again as a distribution to the U.S. Holder. U.S. Holders desiring to make a qualified electing fund election should consult their tax advisors with respect to the advisability of making such election.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
United States Backup Withholding and Information Reporting
A U.S. Holder will generally be subject to information reporting with respect to dividends paid on, or proceeds of the sale or other disposition of, our subordinate voting shares that are paid within the United States or through some U.S. related financial intermediaries to U.S. Holders, unless the U.S. Holder is a corporation or comes within certain other categories of exempt recipients. A U.S. Holder that is not an exempt recipient will generally be subject to backup withholding with respect to the proceeds from the sale or the disposition of, or with respect to dividends on, subordinate
100
voting shares unless the U.S. Holder provides a taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules. In addition, backup withholding may apply if the U.S. Holder fails to provide an accurate taxpayer identification number, or to report interest and dividends required to be shown on its federal income tax returns. Backup withholding is not an additional tax. Any amount withheld under these rules will be creditable against the U.S. Holder'sHolder’s U.S. federal income tax liability or refundable to the extent that it exceeds such liability. A U.S Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the United States Internal Revenue Service.
Non-U.S. Holders will generally be subject to information reporting and possible backup withholding with respect to the proceeds of the sale or other disposition of subordinate voting shares effected within the United States, unless the holder certifies to its foreign status or otherwise establishes an exemption and the broker does not have actual knowledge or reason to know that the holder is a U.S. holder. Payments of dividends on or proceeds from the sale of subordinate voting shares within the United States by a payor within the United States to a non-exempt U.S. or Non-U.S. Holder will be subject to backup withholding if such holder fails to provide appropriate certification. In the case of such payments by a payor within the United States to a foreign partnership other than a foreign partnership that qualifies as a "withholding“withholding foreign partnership"partnership” within the meaning of such Treasury regulations, the partners of such partnership will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Canadian Federal Income Tax Considerations
The following is a summary of the material Canadian federal income tax considerations generally applicable to a U.S. person who holds subordinate voting shares and who, for the purposes of the INCOME TAX ACT Income Tax Act (Canada) (the "ITA"“ITA”), and the CANADA-UNITED STATES INCOME TAX CONVENTION Canada-United States Income Tax Convention (1980) (the "Convention"“Convention”), as applicable and at all relevant times:
o is resident in the United States and not resident in Canada,
o holds the subordinate voting shares as capital property,
o does not have a "permanent establishment" or "fixed base" in
Canada, as defined in the Convention; and
o deals at arm's length with us. Special rules, which are not
discussed below, may apply to "financial institutions", as
defined in the ITA, and to non-resident insurers carrying on an
insurance business in Canada and elsewhere.
· | is resident in the United States and not resident in Canada, |
· | holds the subordinate voting shares as capital property, |
· | does not have a “permanent establishment” or “fixed base” in Canada, as defined in the Convention; and |
· | deals at arm’s length with us. Special rules, which are not discussed below, may apply to “financial institutions”, as defined in the ITA, and to non-resident insurers carrying on an insurance business in Canada and elsewhere. |
This discussion is based on the current provisions of the ITA and the Convention and on the regulations promulgated under the ITA, all specific proposals to amend the ITA or the regulations promulgated under the ITA announced by or on behalf of the Canadian Minister of Finance prior to the date of this annual report and the current published administrative practices of the Canada Customs and Revenue Agency. It does not otherwise take into account or anticipate any changes in law or administrative practice nor any income tax laws or considerations of any province or territory of Canada or any jurisdiction other than Canada, which may differ from the Canadian federal income tax consequences described in this document.
Under the ITA and the Convention, dividends paid or credited, or deemed to be paid or credited, on the subordinate voting shares to a U.S. person who owns less than 10% of the voting shares will be subject to Canadian
101
withholding tax at the rate of 15% of the gross amount of those dividends or deemed dividends. If a U.S. person is a corporation and owns 10% or more of the voting shares, the rate is reduced from 15% to 5%. Subject to specified limitations, a U.S. person may be entitled to credit against U.S. federal income tax liability for the amount of tax withheld by Canada.
Under the Convention, dividends paid to specified religious, scientific, charitable and similar tax exempt organizations and specified organizations that are resident and exempt from tax in the United States and that have complied with specified administrative procedures are exempt from this Canadian withholding tax.
A capital gain realized by a U.S. person on a disposition or deemed disposition of the subordinate voting shares will not be subject to tax under the ITA unless the subordinate voting shares constitute taxable Canadian property within the meaning of the ITA at the time of the disposition or deemed disposition. In general, the subordinate voting shares will not be "taxable“taxable Canadian property"property” to a U.S. person if they are listed on a prescribed stock exchange, which includes The Toronto Stock Exchange, unless, at any time within the five-year period immediately preceding the disposition, the U.S. person, persons with whom the U.S. person did not deal at arm'sarm’s length, or the U.S. person together with those persons, owned or had an interest in or a right to acquire more than 25% of any class or series of our shares.
If the subordinate voting shares are taxable Canadian property to a U.S. person, any capital gain realized on a disposition or deemed disposition of those subordinate voting shares will generally be exempt from tax by virtue of the Convention if the value of the subordinate voting shares at the time of the disposition or deemed disposition is not derived principally from real property, as defined by the Convention, situated in Canada. The determination as to whether Canadian tax would be applicable on a disposition or deemed disposition of the subordinate voting shares must be made at the time of the disposition or deemed disposition.
Holders of subordinate voting shares are urged to consult their own tax advisors to determine the particular tax consequences to them, including the application and effect of any state, local or foreign income and other tax laws, of the acquisition, ownership and disposition of subordinate voting shares.
Not Applicable.
Not Applicable.
Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, the contract or document is deemed to modify the description contained in this annual report. You must review the exhibits themselves for a complete description of the contract or document.
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You may review a copy of our filings with the SEC, including exhibits and schedules filed with it, at the SEC'sSEC’s public reference facilities at 100 F Street, N.E., Washington, D.C. 20549 and at the regional offices of the SEC located at 233 Broadway, New York, New York 10279 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such materials from the Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC maintains a Web site (HTTP:(http://WWW.SEC.GOV) www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Although we make many of our filings with the SEC electronically as a foreign private issuer, we are not obligated to do so.
You may read and copy any reports, statements or other information that we file with the SEC at the addresses indicated above and you may also access them electronically at the Web site set forth above. These SEC filings are also available to the public from commercial document retrieval services.
We are required to file reports and other information with the SEC under the Securities Exchange Act of 1934. Reports and other information filed by us with the SEC may be inspected and copied at the SEC'sSEC’s public reference facilities described above. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our officers, Directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Under the Exchange Act, as a foreign private issuer, we are not required to publish financial statements as frequently or as promptly as United States companies.
See Item 4.C. of this annual report.
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ITEM
Market Risk
Currency Risk
Our functionalmeasurement currency is the Canadian dollar. We are exposed to currency risks due to the export of our Canadian-manufactured products, the large majority of which are denominated in US dollars. These risks are partially hedged by operating expenses denominated in US dollars, the purchase of raw materials in US dollars and forward exchange contracts. The increased strength of the Canadian dollar, compared to the US dollar, over the last twocouple of 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 upcoming months will negatively affect our results of operations.
We enter into forward exchange contracts to manage the risk of exchange rate fluctuations between the Canadian and US dollar on cash flows related to anticipated future revenue streams denominated in US dollars. We do not enter into forward exchange contracts for hedging purposes.
Considering the significant increase in the value of the Canadian dollar compared to the US dollar during fiscal 2005, we entered into additional forward exchange contracts to protect our results of operations. As at August 31, 2004,2005, we held forward exchange contracts to sell US dollars at various forward exchange rates with a contractual value of $15.9$33.6 million compared to $33.6$63.8 million as at August 31, 2005.
2006.
The following table summarizes the forward exchange contracts in effect as at August 31,
2005,2006, classified by expected transaction dates, none of which exceed three fiscal years, as well as the notional amounts of such contracts (in thousands of US dollars) along with the weighted average contractual exchange rates under such contracts. The notional amounts of such contracts are used to calculate the contractual payments to be made under these contracts.
YEARS ENDING AUGUST 31,
------------------------------------
2006 2007 2008
---------- ---------- ----------
Forward exchange contracts to sell US
dollars in exchange
for Canadian dollars
Contractual amounts................................... $ 26,000 $ 7,000 $ 600
Weighted average contractual exchange rates........... 1.2630 1.2516 1.2314
FAIR VALUE
| | Years ending August 31, | |
| | 2007 | | 2008 | | 2009 | |
| | | | | | | |
Forward exchange contracts to sell US dollars in exchange for Canadian dollars Contractual amounts | | $ | 37,000 | | $ | 17,800 | | $ | 9,000 | |
Weighted average contractual exchange rates | | | 1.1676 | | | 1.1388 | | | 1.1010 | |
Fair Value
The fair value of forward exchange contracts, which represents the difference between their contractual amounts and their current trading values, amounted to an unrecognized gain of
$2,937,000$5,451,000 as at August 31,
2005.
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INTEREST RATE RISK
2006 ($2,937,000 as at August 31, 2005).
Interest rate risk
We are exposed to the impact of interest rate changes and changes in the market values of our available-for-sale securities.short-term investments. We do not use derivative financial instruments for our available-for-sale securities.short-term investments. As at August 31, 2005,2006, our available-for-sale securitiesshort-term investments consist of debt instruments issued by six (sevennine (six in 2004)2005) high-credit quality corporations and trusts. These debt instruments bear interest at fixed rates and may have their fair market value adversely impacted due to a rise in interest rates. However, due to their very short-term maturity, we consider this risk to be insignificant. For the purposes of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis. These available-for-sale securitiesshort-term investments will be used for working capital and other general corporate purposes, including potential acquisitions.
CREDIT RISK
Credit risk
Financial instruments that potentially subject us to credit risk consist primarily of our cash, our short-term investments, our accounts receivable and our forward exchange contracts. As mentioned in the interest rate risk section, our short-term investments consist of debt instruments issued by high-credithigh credit quality, corporations and trusts. Our cash and forward exchange contracts are held with or issued by high-credithigh credit quality, financial institutions; therefore, we consider the risk of non-performance on these instruments to be remote.
Generally, we do not require collateral or other security from customers for trade accounts receivable; however, credit is extended to customers following an evaluation of creditworthiness. In addition, we perform ongoing credit reviews of all our customers and establish an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Allowance for doubtful accounts amounted to
$510,000$352,000 and
$352,000$451,000 as at August 31,
20042005 and
2005,2006, respectively.
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ITEM
Not Applicable.
Not Applicable.
ITEM
Not Applicable.
ITEM
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as ofat the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Office have concluded that these disclosure controls and procedures are effective.
(b) Management’s Annual Report on Internal Control over Financial Reporting
EXFO management is responsible for establishing and maintaining adequate internal control over financial reporting. EXFO’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in Canada.1
EXFO’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of EXFO; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles generally accepted in Canada, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of EXFO; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of EXFO’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
1 Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) and significant differences in measurement and disclosure from generally accepted accounting principles in United States (“U.S. GAAP”) are set out in note 20 to our consolidated financial statements included elsewhere in this annual report.
The recent acquisition of Consultronics Limited has been excluded from management’s assessment of internal controls as at August 31, 2006, because it was acquired by the company on January 26, 2006, and it was not possible for management to conduct an assessment of Consultronics’ internal control over financial reporting in the period between the consummation date and the date of management’s assessment. The acquired business of Consultronics represented less than 10% of the company’s total consolidated assets and revenues as at and for the year ended August 31, 2006.
Management conducted an evaluation of the effectiveness of EXFO’s internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that EXFO’s internal control over financial reporting was effective as at August 31, 2006.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM
Item 16A.Audit Committee Financial Expert
Our Board of Directors has determined that Mr. AndreAndré Tremblay, CA, chairman of our audit committee is an audit committee financial expert. Mr. Tremblay is independent of management. For a description of Mr. Tremblay'sTremblay’s education and experience, please refer to Item 6A. The other members of the Audit Committee are Mr. Pierre Marcouiller, Mr. Guy Marier and Mr. Michael Unger which are all Independent. For a description of their respective education and experience, please also refer to Item 6A.
ITEM 16B. CODE OF ETHICS
In 2003, we adopted a code of ethics that applies to our chief executive officer, our chief financial officer and our manager of financial reporting and accounting. A copy of this code of ethics has been filed as exhibit 11.1 to thislast year annual report. In March 2005, the Board updated and adopted the following policies:
o Board of Directors Corporate Governance Guidelines;
o Code of Ethics for our Principal Executive Officer and Senior
Financial Officers;
o Ethics and Business Conduct Policy;
o Statement of Reporting Ethical Violations (Whistle Blower).
· | Board of Directors Corporate Governance Guidelines; |
· | Code of Ethics for our Principal Executive Officer and Senior Financial Officers; |
· | Ethics and Business Conduct Policy; |
· | Statement of Reporting Ethical Violations (Whistle Blower). |
A copy of those policies has been filed respectively as exhibits 11.2 tothrough 11.5 inclusively to thislast year annual report. All these policies are also readily available on our website at www.exfo.com. Accordingly, we believe that our corporate governance practices are in alignment to current regulatory requirements.
As reported at item 7B of this annual report, previous to the coming into force of the requirement for a code of ethics, we had entered into a lease agreement with G. Lamonde Investissements financiers inc., a company controlled by our chief executive officer, for premises located at 465 Godin Avenue in Vanier,Quebec City, Quebec and on September 1, 2004, we were released from our obligations under this lease with a final payment of $194,000. In addition, in September 2002, we acquired from G. Lamonde Investissements financiers inc. the building located at 436 Nolin Street. The purchase price paid was based on an independent third party valuation and the transaction was approved by our audit committee and Board of Directors with Mr. Lamonde abstaining.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Item 16C.Principal Accountant Fees and Services
Audit Fees
During the financial years ended August 31,
20042005 and August 31,
2005,2006, our principal accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of
$189,000$214,000 and
$214,000,$247,000 respectively for the audit of our annual consolidated financial statements and services in connection with statutory and regulatory filings.
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AUDIT-RELATED FEES
Audit-Related Fees
During the financial years ended August 31, 20042005 and August 31, 2005,2006, our principal accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of nil$62,000 and $62,000,$148,000, respectively for services mainly related to Sarbanes-Oxley Act.
TAX FEES
Tax Fees
During the financial years ended August 31, 20042005 and August 31, 2005,2006, our principal accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $301,000$185,000 and $185,000,$210,000, respectively for services related to tax compliance, tax advice and tax planning.
ALL OTHER FEES
All Other Fees
Not applicable.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Audit Committee Pre-Approval Policies and Procedures
On September 25, 2002, our audit committee adopted a policy requiring prior approval by the audit committee of the annual audit plan and fees.fees which has been integrated in the Audit Committee Charter (refer to Item 6C for further details on the Audit Committee Charter. In the event any adjustments to audit fees may be required during the course of a financial year, such adjustments shall be approved by the chairman of the audit committee, acting alone, and shall be reported to the full audit committee at its next meeting.
In the case of non-audit fees (excluding tax matters), the policy provides that proposals shall be submitted to the chairman of the audit committee and our chief financial officer at the same time and the chairman of the audit committee will be responsible for approval of such proposal, subject to any modifications that he may require. The chairman will make a report to the full audit committee at its next meeting.
As concerns tax services to be provided by our principal accountant, our policy provides that the principal accountant will present to the audit committee for pre-approval, on or before the beginning of each financial year, an engagement for tax matters that are foreseeable for the upcoming year and the audit committee shall be responsible for pre-approval thereof, subject to any modifications it may make to such proposals. In the event tax services are required that were not pre-approved by the audit committee, the procedure set forth in the previous paragraph will apply.
During the financial year ended on August 31, 2005,2006, 100% of tax fees were approved by the audit committee pursuant to this policy. During the financial year ended on August 31, 2005,2006, only full-time permanent employees of our principal accountant, PricewaterhouseCoopers LLP, performed work to audit our financial statements.
ITEM
Not Applicable.
ITEM
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-2 to F-42.
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ITEM
NUMBER EXHIBIT
- -------------- ---------------------------------------------------------------------------------------------------
Number | Exhibit |
1.1 | Amended Articles of Incorporation of EXFO (incorporated by reference to Exhibit 3.1 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
1.2 | Amended By-laws of EXFO (incorporated by reference to Exhibit 1.2 of EXFO'sEXFO’s annual report on Form-20F dated January 15, 2003, File No. 000-30895). |
1.3 | Amended and Restated Articles of Incorporation of EXFO (incorporated by reference to Exhibit 1.3 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
2.1 | Form of Subordinate Voting Share Certificate (incorporated by reference to Exhibit 4.1 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
2.2 | Form of Registration Rights Agreement between EXFO and Germain Lamonde dated July 6, 2000)2000 ) (incorporated by reference to Exhibit 10.13 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
3.1 | Form of Trust Agreement among EXFO, Germain Lamonde, GEXFO Investissements Technologiques inc., Fiducie Germain Lamonde and G. Lamonde Investissements Financiers inc. (incorporated by reference to Exhibit 4.2 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.1 | Agreement of Merger and Plan of Reorganization, dated as of November 4, 2000, by and among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewki, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.1 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
4.2 | Amendment No. 1 to Agreement of Merger and Plan of Agreement, dated as of December 20, 2000, by and among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.2 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
4.3 | Agreement of Merger, dated as of August 20, 2001, by and among EXFO, Buyer Sub, and Avantas Networks Corporation and Shareholders of Avantas Networks corporation (incorporated by reference to Exhibit 4.3 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.4 | Amendment No. 1 dated as of November 1, 2002 to Agreement of Merger, dated as of August 20, 2001, by and among EXFO, 3905268 Canada Inc., Avantas Networks Corporation and Shareholders of Avantas Networks (incorporated by reference to Exhibit 4.4 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.5 | Offer to purchase shares of Nortech Fibronic Inc., dated February 6, 2000 among EXFO, Claude Adrien Noel, 9086-9314 QuebecQuébec inc., Michel Bedard,Bédard, Christine Bergeron and SocieteSociété en Commandite Capidem QuebecQuébec Enr. and Certificate of Closing, dated February 7, 2000 among the same parties (including summary in English) (incorporated by reference to Exhibit 10.2 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.6 | Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation (incorporated by reference to Exhibit 4.1 of EXFO'sEXFO’s Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122). |
4.7 | Amendment Number One, dated as of March 15, 2001, to Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by reference to Exhibit 4.2 of EXFO'sEXFO’s Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122). |
4.8 | Share Purchase Agreement, dated as of November 2, 2001 between JDS Uniphase Inc. and 3905268 Canada Inc. (incorporated by reference to Exhibit 4.8 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.9 | Intellectual Property Assignment and Sale Agreement between EFOS Inc., EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by reference to Exhibit 4.3 of EXFO'sEXFO’s Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122). |
4.10 | Offer to acquire a building, dated February 23, 2000, between EXFO and Groupe Mirabau inc. and as accepted by Groupe Mirabau inc. on February 24, 2000 (including summary in English) (incorporated by reference to Exhibit 10.3 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.11 | Lease Agreement, dated December 1, 1996, between EXFO and GEXFO Investissements Technologiques inc., as assigned to 9080-9823 QuebecQuébec inc. on September 1, 1999 (including summary in English) (incorporated by reference to Exhibit 10.4 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
110
NUMBER EXHIBIT
- -------------- ---------------------------------------------------------------------------------------------------
4.12 | Lease Agreement, dated March 1, 1996, between EXFO and GEXFO Investissements Technologiques inc., as assigned to 9080-9823 QuebecQuébec inc. on September 1, 1999 (including summary in English) (incorporated by reference to Exhibit10.5Exhibit 10.5 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.13 | Lease renewal of the existing leases between 9080-9823 QuebecQuébec inc. and EXFO, dated November 30, 2001(incorporated by reference to Exhibit 4.13 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.14 | Loan Agreement between EXFO and GEXFO Investissements Technologiques inc., dated May 11, 1993, as assigned to 9080-9823 QuebecQuébec inc. on September 1, 1999 (including summary in English) (incorporated by reference to Exhibit 10.9 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.15 | Resolution of the Board of Directors of EXFO, dated September 1, 1999, authorizing EXFO to acquire GEXFO Distribution Internationale inc. from GEXFO Investissements Technologiques inc. (including summary in English) (incorporated by reference to Exhibit 10.10 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.16 | Form of Promissory Note of EXFO issued to GEXFO Investissements Technologiques inc. dated June 27, 2000 ) (incorporated by reference to Exhibit 10.12 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.17 | Term Loan Offer, dated March 28, 2000, among EXFO and National Bank of Canada as accepted by EXFO on April 3, 2000 (including summary in English) (incorporated by reference to Exhibit 10.11 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.18 | Employment Agreement of Germain Lamonde dated May 29, 2000 (incorporated by reference to Exhibit 10.15 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.19 | Employment Agreement of Bruce Bonini dated as of September 1, 2000 (incorporated by reference to Exhibit 4.24 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.20 | Employment Agreement of Juan-Felipe Gonzalez dated as of September 1, 2000 (incorporated by reference to Exhibit 4.25 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.21 | Employment Agreement of David J. Farrell dated as of December 20, 2000 (incorporated by reference to Exhibit 4.26 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
4.22 | Deferred Profit Sharing Plan, dated September 1, 1998 (incorporated by reference to Exhibit 10.6 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.23 | Stock Option Plan, dated May 25, 2000 (incorporated by Reference to Exhibit 10.7 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.24 | Share Plan, dated April 3, 2000 (incorporated by reference to Exhibit 10.8 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.25 Directors' | Directors’ Compensation Plan (incorporated by reference to Exhibit 10.17 of EXFO'sEXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
4.26 | Restricted Stock Award Plan, dated December 20, 2000 (incorporated by reference to Exhibit 4.21 of EXFO'sEXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
4.27 | Asset Purchase Agreementby and Among EXFO Electro-Optical Engineering Inc., EXFO Gnubi Products Group Inc., gnubi communications, L.P., gnubi communications General Partner, LLC, gnubi communications Limited Partner, LLC, gnubi communications, Inc., Voting Trust created by The Irrevocable Voting Trust Agreement Among Carol Abraham Bolton, Paul Abraham and James Ray Stevens, James Ray Stevens and Daniel J. Ernst dated September 5, 2002 (incorporated by reference to Exhibit 4.30 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2003, File No. 000-30895). |
4.28 | EXFO Protocol Inc. Executive Employment Agreement with Sami Yazdi signed November 2, 2001 (incorporated by reference to Exhibit 4.28 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2003, File No. 000-30895). |
4.29 | Second Amending Agreement to the Employment Agreement of Bruce Bonini dated as of September 1, 2002, (incorporated by reference to Exhibit 4.29 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
4.30 | Severance and General Release Agreement with Bruce Bonini dated August 8, 2003, (incorporated by reference to Exhibit 4.30 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
4.31 | Separation Agreement and General Release with Sami Yazdi dated April 1, 2003, (incorporated by reference to Exhibit 4.31 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
4.32 | Executive Employment Agreement of James Stevens dated as of October 4, 2003, (incorporated by reference to Exhibit 4.32 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
111
NUMBER EXHIBIT
- -------------- ---------------------------------------------------------------------------------------------------
4.33 | Termination Terms for John Holloran Jr. dated May 28, 2003, (incorporated by reference to Exhibit 4.33 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
4.34 | Employment Agreement of Pierre Plamondon dated as of September 1, 2002, (incorporated by reference to Exhibit 4.34 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
4.35 | Long-Term Incentive Plan, dated May 25, 2000, amended in October 2004 and effective January 12, 2005.
2005 (incorporated by reference to Exhibit 4.35 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
4.36 | Deferred Share Unit Plan, effective January 12, 2005.
2005 (incorporated by reference to Exhibit 4.36 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
4.37 | Asset Purchase Agreement by and Among EXFO Electro-Optical Engineering Inc., Consultronics Limited., Andre Rekai, Consultronics Europe Limited, Consultronics Development Kft. and Consultronics Inc. dated January 5, 2006. |
8.1 | Subsidiaries of EXFO (list included in Item 4C of this annual report). |
11.1 | Code of Ethics for senior financial officers, (incorporated by reference to Exhibit 11.1 of EXFO'sEXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
11.2 | Board of Directors Corporate Governance Guidelines.
Guidelines (incorporated by reference to Exhibit 11.2 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
11.3 | Code of Ethics for our Principal Executive Officer and Senior Financial Officers.
Officers (incorporated by reference to Exhibit 11.3 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
11.4 | Ethics and Business Conduct Policy.
Policy (incorporated by reference to Exhibit 11.4 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
11.5 | Statement of Reporting Ethical Violations (Whistle Blower) (incorporated by reference to Exhibit 11.5 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
11.6 | Audit Committee Charter.
Charter (incorporated by reference to Exhibit 11.6 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
11.7 | Human Resources Committee Charter.
Charter (incorporated by reference to Exhibit 11.7 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
12.1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
12.2 | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
13.1 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
13.2 | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
112
The registrant hereby certifies that it meets all of the requirements for filing on Form 20 -F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ /s/ Germain Lamonde
--------------------------------
Name:Germain Lamonde
Title: Chairman of the Board, President and Chief Executive Officer
Date:November 23, 2005.
113
CERTIFICATIONS
I, Germain Lamonde, Chairman2006.
Report of Independent Auditors
To the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this annual report on Form 20-FShareholders of
EXFO Electro-Optical Engineering Inc. ("EXFO");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of EXFO as of, and for, the periods presented in this report;
4. EXFO's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for EXFO and
have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to EXFO, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of EXFO's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this
report based on such evaluation;and
c) Disclosed in this report any change in EXFO's internal
control over financial reporting that occurred during the
period covered by the annual report that has materially
affected, or is reasonably likely to materially affect,
EXFO's internal control over financial reporting.
5. EXFO's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to EXFO's auditors and the audit committee of EXFO's Board of
Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
EXFO's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in EXFO's
internal control over financial reporting.
114
Date: November 23, 2005.
/s/ Germain Lamonde
-------------------------------------
Germain Lamonde
Chairman of the Board,
President and Chief Executive Officer
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of EXFO, hereby certifies, to such officer's knowledge,
that:
1. The annual report of Form 20-F for the year ended August 31, 2005 of EXFO
fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in this annual report fairly presents, in all
material respects, the financial condition and results of operations of
EXFO.
Date: November 23, 2005.
/s/ Germain Lamonde
-------------------------------------
Germain Lamonde
Chairman of the Board,
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code) and is not being
filed as part of the Report or as separate disclosure document.
115
I, Pierre Plamondon, Vice-President Finance and Chief Financial
Officer, certify that:
1. I have reviewed this annual report on Form 20-F of EXFO
Electro-Optical Engineering Inc. ("EXFO");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of EXFO as of, and for, the periods presented in this report;
4. EXFO's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for EXFO and
have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to EXFO, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of EXFO's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this
report based on such evaluation;
c) Disclosed in this report any change in EXFO's internal
control over financial reporting that occurred during the
period covered by the annual report that has materially
affected, or is reasonably likely to materially affect,
EXFO's internal control over financial reporting.
5. EXFO's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to EXFO's auditors and the audit committee of EXFO's Board of
Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
EXFO's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in EXFO's
internal control over financial reporting.
116
Date: November 23, 2005.
/s/ Pierre Plamondon
----------------------------
Pierre Plamondon, CA
Vice-President Finance
and Chief Financial Officer
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of EXFO, hereby certifies, to such officer's knowledge,
that:
1. The annual report of Form 20-F for the year ended August 31, 2005 of EXFO
fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in this annual report fairly presents, in all
material respects, the financial condition and results of operations of
EXFO.
Date: November 23, 2005.
/s/ Pierre Plamondon
----------------------------
Pierre Plamondon, CA
Vice-President Finance
and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code) and is not being
filed as part of the Report or as separate disclosure document.
117
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
EXFO ELECTRO-OPTICAL ENGINEERING INC.
We have audited the consolidated balance sheets of EXFO ELECTRO-OPTICAL ENGINEERING INC.Electro-Optical Engineering Inc. as at August 31, 20052006 and 20042005 and the consolidated statements of earnings, deficit and contributed surplus and cash flows for each of the three years in the three-year period ended August 31, 2005.2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 20052006 and 20042005 and the results of its operations and its cash flows for each of the three
years in the three-year period ended August 31, 20052006 in accordance with Canadian generally accepted accounting principles. Furthermore, in our opinion, the financial statement schedules on the changes in the allowance for doubtful accounts and in the valuation allowance of future income tax assets included in Form 20-F present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PriceWaterhouseCoopers
/s/ PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Chartered Accountants
Quebec, Quebec, Canada
September 30, 2005
COMMENTS BY AUDITORS FOR
October 25, 2006
Comments by Auditors for U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
Readers on Canada-U.S. Reporting Differences
In the United States of America, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparability of the Company's financial statements, such as the changes described in note 2 to the consolidated financial statements. Our report to the Shareholders dated September 30, 2005October 25, 2006 is expressed in accordance with Canadian reporting standards which do not require a reference to such changes in accounting principles in the auditors' report when the changes are properly accounted for and adequately disclosed in the financial statements.
/s/ PriceWaterhouseCoopers
/s/ PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Chartered Accountants
Quebec, Quebec, Canada
September 30, 2005
October 25, 2006
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEETS
(inElectro-Optical Engineering Inc.
Consolidated Balance Sheets
(in thousands of US dollars)
AS AT AUGUST 31,
-----------------------------
2005 2004
--------- ---------
ASSETS
CURRENT ASSETS
Cash $ 7,119 $ 5,159
Short-term investments (notes 8 and 18) 104,883 83,969
Accounts receivable (notes 8 and 18)
Trade 13,945 12,080
Other 2,007 1,532
Income taxes and tax credits recoverable (notes 4 and 8) 2,392 7,836
Inventories (notes 4, 5 and 8) 17,749 15,371
Prepaid expenses 1,112 1,513
--------- ---------
149,207 127,460
INCOME TAXES AND TAX CREDITS RECOVERABLE (notes 4 and 8) 459 449
PROPERTY, PLANT AND EQUIPMENT (notes 4, 6 and 8) 13,719 15,442
LONG-LIVED ASSET HELD FOR SALE (note 4) 1,600 1,600
INTANGIBLE ASSETS (notes 4, 7 and 8) 5,602 9,447
GOODWILL (notes 4 and 7) 20,370 18,393
--------- ---------
$ 190,957 $ 172,791
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 9) $ 12,201 $ 11,393
Deferred revenue 1,584 805
Current portion of long-term debt 134 121
--------- ---------
13,919 12,319
DEFERRED REVENUE 1,568 1,123
GOVERNMENT GRANTS (note 15) 1,872 1,690
LONG-TERM DEBT (note 10) 198 332
--------- ---------
17,557 15,464
--------- ---------
COMMITMENTS (note 11)
CONTINGENCIES (note 12)
SHAREHOLDERS' EQUITY
Share capital (note 13) 521,875 521,733
Contributed surplus 2,949 1,986
Deficit (381,846) (380,212)
Cumulative translation adjustment 30,422 13,820
--------- ---------
173,400 157,327
--------- ---------
$ 190,957 $ 172,791
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
| | As at August 31, | |
| | | | | |
| | 2006 | | 2005 | |
| | | | | |
Assets | | | | | |
Current assets | | | | | |
Cash | | $ | 6,853 | | $ | 7,119 | |
Short-term investments (notes 8 and 18) | | | 104,437 | | | 104,883 | |
Accounts receivable (notes 8 and 18) | | | | | | | |
Trade | | | 20,891 | | | 13,945 | |
Other (note 4) | | | 2,792 | | | 2,007 | |
Income taxes and tax credits recoverable (note 8) | | | 2,201 | | | 2,392 | |
Inventories (notes 5 and 8) | | | 24,623 | | | 17,749 | |
Prepaid expenses | | | 1,404 | | | 1,112 | |
| | | | | | | |
| | | 163,201 | | | 149,207 | |
| | | | | | | |
Income taxes recoverable | | | 476 | | | 459 | |
| | | | | | | |
Property, plant and equipment (notes 4, 6 and 8) | | | 17,392 | | | 13,719 | |
| | | | | | | |
Long-lived asset held for sale (note 4) | | | − | | | 1,600 | |
| | | | | | | |
Intangible assets (notes 7 and 8) | | | 10,948 | | | 5,602 | |
| | | | | | | |
Goodwill (note 7) | | | 27,142 | | | 20,370 | |
| | | | | | | |
| | $ | 219,159 | | $ | 190,957 | |
Liabilities | | | | | | | |
| | | | | | | |
Current liabilities | | | | | | | |
Accounts payable and accrued liabilities (note 9) | | $ | 17,337 | | $ | 12,201 | |
Deferred revenue | | | 1,772 | | | 1,584 | |
Current portion of long-term debt | | | 107 | | | 134 | |
| | | | | | | |
| | | 19,216 | | | 13,919 | |
| | | | | | | |
Deferred revenue | | | 2,632 | | | 1,568 | |
| | | | | | | |
Government grants (note 15) | | | 723 | | | 1,872 | |
| | | | | | | |
Long-term debt (note 10) | | | 354 | | | 198 | |
| | | | | | | |
| | | 22,925 | | | 17,557 | |
| | | | | | | |
Commitments (note 11) | | | | | | | |
| | | | | | | |
Contingencies (note 12) | | | | | | | |
| | | | | | | |
Shareholders’ Equity | | | | | | | |
| | | | | | | |
Share capital (note 13) | | | 148,921 | | | 521,875 | |
Contributed surplus | | | 3,776 | | | 2,949 | |
Deficit (note 13) | | | − | | | (381,846 | ) |
Cumulative translation adjustment | | | 43,537 | | | 30,422 | |
| | | | | | | |
| | | 196,234 | | | 173,400 | |
| | | | | | | |
| | $ | 219,159 | | $ | 190,957 | |
The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(inElectro-Optical Engineering Inc.
Consolidated Statements of Earnings
(in thousands of US dollars, except share and per share data)
YEARS ENDED AUGUST 31,
----------------------------------------------
2005 2004 2003
-------- -------- --------
SALES (note 19) $ 97,216 $ 74,630 $ 61,930
COST OF SALES (1,2) 44,059 34,556 36,197
-------- -------- --------
GROSS MARGIN 53,157 40,074 25,733
-------- -------- --------
OPERATING EXPENSES
Selling and administrative (1) 31,782 25,890 26,991
Net research and development (1) (notes 4 and 15) 12,190 12,390 15,879
Amortization of property, plant and equipment 4,256 4,935 5,210
Amortization of intangible assets 4,836 5,080 5,676
Impairment of long-lived assets and goodwill (note 4) -- 620 7,427
Restructuring and other charges (note 4) 292 1,729 4,134
-------- -------- --------
TOTAL OPERATING EXPENSES 53,356 50,644 65,317
-------- -------- --------
LOSS FROM OPERATIONS (199) (10,570) (39,584)
Interest and other income 2,524 1,438 1,245
Foreign exchange loss (1,336) (278) (1,552)
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES (note 16) 989 (9,410) (39,891)
INCOME TAXES (notes 4 and 16) 2,623 (986) 15,059
-------- -------- --------
NET LOSS FOR THE YEAR $ (1,634) $ (8,424) $(54,950)
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.13) $ (0.87)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S) 68,526 66,020 62,852
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S)
(note 17) 68,981 66,615 63,317
(1) STOCK-BASED COMPENSATION
COSTS INCLUDED IN: (note 14)
Cost of sales $ 143 $ 62 $ --
Selling and administrative 626 265 --
Net research and development 194 122 --
-------- -------- --------
$ 963 $ 449 $ --
======== ======== ========
(2) The cost of sales is exclusive of amortization, shown separately. The cost of sales for the year ended
August 31, 2003 includes inventory write-offs of $4,121 (note 4).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
| | Years ended August 31, | |
| | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Sales (note 19) | | $ | 128,253 | | $ | 97,216 | | $ | 74,630 | |
| | | | | | | | | | |
Cost of sales (1,2) | | | 57,275 | | | 44,059 | | | 34,556 | |
| | | | | | | | | | |
Gross margin | | | 70,978 | | | 53,157 | | | 40,074 | |
| | | | | | | | | | |
Operating expenses | | | | | | | | | | |
Selling and administrative (1) | | | 40,298 | | | 31,782 | | | 25,890 | |
Net research and development (1) (note 15) | | | 15,404 | | | 12,190 | | | 12,390 | |
Amortization of property, plant and equipment | | | 3,523 | | | 4,256 | | | 4,935 | |
Amortization of intangible assets | | | 4,394 | | | 4,836 | | | 5,080 | |
Impairment of long-lived assets (note 4) | | | 604 | | | | | | 620 | |
Government grants (note 15) | | | (1,307 | ) | | | | | | |
Restructuring and other charges (note 4) | | | − | | | 292 | | | 1,729 | |
| | | | | | | | | | |
Total operating expenses | | | 62,916 | | | 53,356 | | | 50,644 | |
| | | | | | | | | | |
Earnings (loss) from operations | | | 8,062 | | | (199 | ) | | (10,570 | ) |
| | | | | | | | | | |
Interest and other income | | | 3,253 | | | 2,524 | | | 1,438 | |
Foreign exchange loss | | | (595 | ) | | (1,336 | ) | | (278 | ) |
| | | | | | | | | | |
Earnings (loss) before income taxes (note 16) | | | 10,720 | | | 989 | | | (9,410 | ) |
| | | | | | | | | | |
Income taxes (note 16) | | | 2,585 | | | 2,623 | | | (986 | ) |
| | | | | | | | | | |
Net earnings (loss) for the year | | $ | 8,135 | | $ | (1,634 | ) | $ | (8,424 | ) |
| | | | | | | | | | |
Basic and diluted net earnings (loss) per share | | $ | 0.12 | | $ | (0.02 | ) | $ | (0.13 | ) |
| | | | | | | | | | |
Basic weighted average number of shares outstanding (000’s) | | | 68,643 | | | 68,526 | | | 66,020 | |
| | | | | | | | | | |
Diluted weighted average number of shares outstanding (000’s) (note 17) | | | 69,275 | | | 68,981 | | | 66,615 | |
| | | | | | | | | | |
(1) Stock-based compensation costs included in: | | | | | | | | | | |
Cost of sales | | $ | 127 | | $ | 143 | | $ | 62 | |
Selling and administrative | | | 701 | | | 626 | | | 265 | |
Net research and development | | | 204 | | | 194 | | | 122 | |
| | | | | | | | | | |
| | $ | 1,032 | | $ | 963 | | $ | 449 | |
| | | | | | | | | | |
(2) The cost of sales is exclusive of amortization, shown separately. |
The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF DEFICIT AND CONTRIBUTED SURPLUS
(inElectro-Optical Engineering Inc.
Consolidated Statements of Deficit and Contributed Surplus
(in thousands of US dollars)
DEFICIT
YEARS ENDED AUGUST 31,
-------------------------------------------------
2005 2004 2003
--------- --------- ---------
BALANCE - BEGINNING OF YEAR $(380,212) $(371,788) $(316,838)
ADD
Net loss for the year (1,634) (8,424) (54,950)
--------- --------- ---------
BALANCE - END OF YEAR $(381,846) $(380,212) $(371,788)
========= ========= =========
CONTRIBUTED SURPLUS
YEARS ENDED AUGUST 31,
-------------------------------------------------
2005 2004 2003
--------- --------- ---------
BALANCE - BEGINNING OF YEAR $1,986 $1,519 $1,487
ADD
Premium on resale of share capital -- 18 32
Stock-based compensation costs 963 449 --
------ ------ ------
BALANCE - END OF YEAR $2,949 $1,986 $1,519
====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
Deficit | | | | | | | |
| | | | | | | |
| | Years ended August 31, | |
| | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Balance - Beginning of year | | $ | (381,846 | ) | $ | (380,212 | ) | $ | (371,788 | ) |
| | | | | | | | | | |
Deduct (add) | | | | | | | | | | |
Net earnings (loss) for the year | | | 8,135 | | | (1,634 | ) | | (8,424 | ) |
Elimination of deficit by reduction of share capital (note 13) | | | 373,711 | | | − | | | − | |
| | | | | | | | | | |
Balance - End of year | | $ | − | | $ | (381,846 | ) | $ | (380,212 | ) |
Contributed surplus | | | | | | | |
| | | | | | | |
| | Years ended August 31, | |
| | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Balance - Beginning of year | | $ | 2,949 | | $ | 1,986 | | $ | 1,519 | |
| | | | | | | | | | |
Add (deduct) | | | | | | | | | | |
Stock-based compensation costs | | | 1,027 | | | 963 | | | 449 | |
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards (note 13) | | | (200 | ) | | − | | | − | |
Premium on resale of share capital | | | − | | | − | | | 18 | |
| | | | | | | | | | |
Balance - End of year | | $ | 3,776 | | $ | 2,949 | | $ | 1,986 | |
The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(inElectro-Optical Engineering Inc.
Consolidated Statements of Cash Flows
(in thousands of US dollars)
YEARS ENDED AUGUST 31,
------------------------------------------------
2005 2004 2003
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (1,634) $ (8,424) $ (54,950)
Add (deduct) items not affecting cash
Discount on short-term investments (302) 197 (96)
Stock-based compensation costs 963 449 --
Inventory and tax credit write-offs -- -- 6,418
Amortization 9,092 10,015 10,886
Impairment of long-lived assets and goodwill -- 620 7,427
Restructuring and other charges -- 1,261 512
Future income taxes -- -- 10,138
Deferred revenue 977 1,404 (24)
Government grants -- 154 817
--------- --------- ---------
9,096 5,676 (18,872)
Change in non-cash operating items
Accounts receivable (838) (2,677) 3,957
Income taxes and tax credits 6,096 (2,464) 13,489
Inventories (699) 1,016 7,925
Prepaid expenses 544 (449) (569)
Accounts payable and accrued liabilities (164) (351) (349)
--------- --------- ---------
14,035 751 5,581
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (585,665) (653,348) (401,105)
Proceeds from disposal and maturity of short-term
investments 574,207 624,722 395,699
Additions to property, plant and equipment and
intangible assets (1,501) (851) (2,652)
Business combination -- (241) (1,867)
--------- --------- ---------
(12,959) (29,718) (9,925)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (121) (109) (133)
Net proceeds of offering (note 13) -- 29,164 --
Share issue expenses (6) (137) --
Exercise of stock options 148 254 45
Redemption of share capital -- (5) (16)
Resale of share capital -- 23 48
--------- --------- ---------
21 29,190 (56)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 863 (430) 638
--------- --------- ---------
CHANGE IN CASH 1,960 (207) (3,762)
CASH - BEGINNING OF YEAR 5,159 5,366 9,128
--------- --------- ---------
CASH - END OF YEAR $ 7,119 $ 5,159 $ 5,366
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid $ 30 $ 408 $ 417
Income taxes paid (recovered) $ (669) $ 120 $ (10,351)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
| | Years ended August 31, | |
| | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | |
Cash flows from operating activities | | | | | | | |
Net earnings (loss) for the year | | $ | 8,135 | | $ | (1,634 | ) | $ | (8,424 | ) |
Add (deduct) items not affecting cash | | | | | | | | | | |
Discount on short-term investments | | | (229 | ) | | (302 | ) | | 197 | |
Stock-based compensation costs | | | 1,032 | | | 963 | | | 449 | |
Amortization | | | 7,917 | | | 9,092 | | | 10,015 | |
Impairment of long-lived assets | | | 604 | | | − | | | 620 | |
Restructuring and other charges | | | − | | | − | | | 1,261 | |
Government grants | | | (1,307 | ) | | − | | | 154 | |
Deferred revenue | | | 786 | | | 977 | | | 1,404 | |
| | | 16,938 | | | 9,096 | | | 5,676 | |
| | | | | | | | | | |
Change in non-cash operating items | | | | | | | | | | |
Accounts receivable | | | (2,637 | ) | | (838 | ) | | (2,677 | ) |
Income taxes and tax credits | | | 329 | | | 6,096 | | | (2,464 | ) |
Inventories | | | (2,287 | ) | | (699 | ) | | 1,016 | |
Prepaid expenses | | | 79 | | | 544 | | | (449 | ) |
Accounts payable and accrued liabilities | | | (144 | ) | | (164 | ) | | (351 | ) |
| | | | | | | | | | |
| | | 12,278 | | | 14,035 | | | 751 | |
Cash flows from investing activities | | | | | | | | | | |
Additions to short-term investments | | | (673,289 | ) | | (585,665 | ) | | (653,348 | ) |
Proceeds from disposal and maturity of short-term investments | | | 681,500 | | | 574,207 | | | 624,722 | |
Additions to property, plant and equipment and intangible assets | | | (3,378 | ) | | (1,501 | ) | | (851 | ) |
Business combinations, net of cash acquired | | | (18,054 | ) | | − | | | (241 | ) |
| | | | | | | | | | |
| | | (13,221 | ) | | (12,959 | ) | | (29,718 | ) |
Cash flows from financing activities | | | | | | | | | | |
Repayment of long-term debt | | | (415 | ) | | (121 | ) | | (109 | ) |
Net proceeds of offering (note 13) | | | − | | | − | | | 29,164 | |
Exercise of stock options | | | 557 | | | 148 | | | 254 | |
Share issue expenses | | | − | | | (6 | ) | | (137 | ) |
Redemption of share capital | | | − | | | − | | | (5 | ) |
Resale of share capital | | | − | | | − | | | 23 | |
| | | | | | | | | | |
| | | 142 | | | 21 | | | 29,190 | |
| | | | | | | | | | |
Effect of foreign exchange rate changes on cash | | | 535 | | | 863 | | | (430 | ) |
| | | | | | | | | | |
Change in cash | | | (266 | ) | | 1,960 | | | (207 | ) |
| | | | | | | | | | |
Cash - Beginning of year | | | 7,119 | | | 5,159 | | | 5,366 | |
| | | | | | | | | | |
Cash - End of year | | $ | 6,853 | | $ | 7,119 | | $ | 5,159 | |
| | | | | | | | | | |
Supplementary information | | | | | | | | | | |
Interest paid | | $ | 65 | | $ | 30 | | $ | 408 | |
Income taxes paid (recovered) | | $ | 2,541 | | $ | (669 | ) | $ | 120 | |
The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
1 NATURE OF ACTIVITIES
Nature of Activities
EXFO Electro-Optical Engineering Inc. ("EXFO"(“EXFO”) designs, manufactures and markets a comprehensive line of test and measurement solutions for the global telecommunications industry. The Telecom Division, which represents the company'scompany’s main business activity, offers integrated test solutions to network service providers, cable operators, system vendors and optical component manufacturers. The Life Sciences and Industrial Division mainly leverages core telecom technologies to offer value-added solutions for life sciences applications and high-precision assembly processes, such as those required for microelectronics, optoelectronics and medical devices. EXFO'sEXFO’s products are sold in approximately 70 countries around the world.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Summary of Significant Accounting Policies
Basis of presentation
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"(“GAAP”) in Canada and significant differences in measurement and disclosure from U.S. GAAP are set out in note 21.20. These consolidated financial statements include the accounts of the company and its domestic and international subsidiaries. All significant intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
Accounting estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant estimates include the allowance for doubtful accounts receivable, the amount of tax credits recoverable, the provision for excess and obsolete inventories, the useful lives of capital assets, the valuation of intangiblelong-lived assets, and goodwill,the future income taxes valuation allowance, the amount of certain accrued liabilities and deferred revenue as well as stock-based compensation costs. Actual results could differ from those estimates.
REPORTING CURRENCY
Reporting currency
The functionalmeasurement currency of the company is the Canadian dollar. The company has adopted the US dollar as its reporting currency. The financial statements are translated into the reporting currency using the current rate method. Under this method, the financial statements are translated into the reporting currency as follows: assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet, while revenues and expenses are translated at the monthly average exchange rate. AllForeign exchange gains and losses resultingarising from thesuch translation of the
financial statements from the functional currency to the reporting
currency are included in the cumulative translation adjustment in shareholders'shareholders’ equity.
In the event that management decides to declare dividends, such dividends would be declared in Canadian dollars.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
FOREIGN CURRENCY TRANSLATION
FOREIGN CURRENCY TRANSACTIONS
Foreign currency translation
Foreign currency transactions
Transactions denominated in currencies other than the functionalmeasurement currency are translated into the functionalmeasurement currency as follows: monetary assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet, and revenues and expenses are translated at the exchange rate in effect on the date of the transaction. Non-monetary assets and liabilities are translated at historical rates. GainsForeign exchange gains and losses arising from such translation are reflected in the statements of earnings.
FOREIGN SUBSIDIARIES
Foreign subsidiaries
The financial statements of integrated foreign operations are remeasured into the functionalmeasurement currency using the temporal method. Under this method, monetary assets and liabilities are remeasured at the exchange rate in effect on the date of the balance sheet. Non-monetary assets and liabilities are remeasured at historical rates, unless such assets and liabilities are carried at market, in which case, they are translatedremeasured at the exchange rate in effect on the date of the balance sheet. Revenues and expenses are remeasured at the monthly average exchange rate. GainsForeign exchange gains and losses resultingarising from such remeasurement are reflected in the statements of earnings. FORWARD EXCHANGE CONTRACTS
The company has no self-sustaining foreign subsidiary for which the functional currency is not the US dollar.
Forward exchange contracts
Forward exchange contracts are utilized by the company to manage its foreign currency exposure. The company'scompany’s policy is not to utilize those derivative financial instruments for trading or speculative purposes.
The company'scompany’s forward exchange contracts, which are used to hedge anticipated US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign exchange translation gains and losses on these contracts are recognized as an adjustment of the revenues when the corresponding hedged sales are recorded.
Realized and unrealized foreign exchange gains or losses associated with forward exchange contracts, which have been terminated or cease to be effective prior to maturity, are deferred in the balance sheet and recognized in the earnings of the period in which the underlying hedged transaction is recognized.
SHORT-TERM INVESTMENTS
Short-term investments
Short-term investments are valued at the lower of cost and market value. Cost consists of acquisition cost plus amortization of discount or less amortization of premium. All investments with original maturity of three months or less and that are not required for the purposes of meeting short-term cash requirements are classified as short-term investments.
INVENTORIES
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Inventories
Inventories are valued on an average cost basis, at the lower of cost and replacement cost for raw materials and at the lower of cost and net realizable value for work in progress and finished goods.
F-7
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share
Property, plant and per share dataequipment and as otherwise noted)
PROPERTY, PLANT AND EQUIPMENT AND AMORTIZATION
amortization
Property, plant and equipment are recorded at cost less related government grants and research and development tax credits. Amortization is provided on a straight-line basis over the estimated useful lives as follows:
TERM
Land improvements 5 years
Buildings 25 years
Equipment 2 to 10 years
Leasehold improvements
| | Term |
Land improvements | | 5 years |
Buildings | | 25 years |
Equipment | | 2 to 10 years |
Leasehold improvements | | The lesser of useful life and remaining lease term |
Intangible assets, goodwill and remaining lease term
INTANGIBLE ASSETS, GOODWILL AND AMORTIZATION
amortization
Intangible assets primarily include the cost of core technology and software, net of accumulated amortization. Core technology represents the existing technology acquired in business combinations that has reached technological feasibility. Amortization is provided on a straight-line basis over the estimated useful lives of five years for core technology and four and ten years for software.
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of net identifiable assets acquired. Goodwill is not amortized but must be tested for impairment on an annual basis or more frequently if events or circumstances indicate that it might be impaired. Recoverability of goodwill is determined at the reporting unit level using a two-step approach. First, the carrying value of a reporting unit is compared to its fair value, which is determined based on a combination of discounted future cash flows and a market approach. If the carrying value of a reporting unit exceeds its fair value, the second step is performed. In this step, the amount of impairment loss, if any, represents the excess of the carrying value of goodwill over its fair value and the loss is charged to earnings in the period in which it is incurred. For the purposes of this impairment test, the fair value of goodwill is estimated in the same way as goodwill is determined in business combinations; that is, the excess of the fair value of a reporting unit over the estimated fair value of its net identifiable assets.
The company elected to perform its annual impairment test in May of each fiscal year for all its existing reporting units and it recorded an
impairment charge for goodwill in fiscal 2003 (note 4).
IMPAIRMENT OF LONG-LIVED ASSETS
units.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when events andor circumstances indicate that cost may not be recoverable. Impairment exists when the carrying value of an asset or group of assets is greater than the undiscounted future cash flows expected to be provided by the asset or group of assets. The amount of impairment loss, if any, is the excess of the carrying value over the fair value. The company assesses fair value of long-lived assets based on discounted future cash flows.
The company recorded impairment charges for long-lived assets in fiscal
2003 and 2004 (note 4).
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
WARRANTY
Warranty
The company offers its customers warranties of one to three years, depending on the specific products and terms of the purchase agreement. The company'scompany’s typical warranties require it to repair or replace defective products during the warranty period at no cost to the customer. Costs related to original warranties are accrued at the time of shipment, based upon estimates of expected rework and warranty costs to be incurred. Costs associated with separately priced extended warranties are expensed as incurred.
REVENUE RECOGNITION
Revenue recognition
For products in which software is incidental, the company recognizes revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. In addition, provisions are made for estimated returns, warranties and support obligations.
For products in which software is not incidental, revenues are separated into two categories: product and post-contract customer support (PCS) revenues, based upon vendor-specific objective evidence of fair value. Product revenues for these sales are recognized as described above. PCS revenues are deferred and recognized ratably over the years of the support arrangement. PCS revenues are recognized at the time the product is delivered when provided within one year of delivery; the costs of providing this support are insignificant (and accrued at the time of delivery) and no software upgrades are provided.
For all sales, the company uses a binding purchase order as evidence that a sales arrangement exists.
Delivery generally occurs when the product is handed over to a transporter for shipment.
At the time of the transaction, the company assesses whether the price associated with its revenue transaction is fixed and determinable and whether or not collection is reasonably assured. The company assesses whether the price is fixed and determinable based on the payment terms associated with the transaction. The company assesses collection based on a number of factors, including past transaction history and the creditworthiness of the customer. Generally, collateral or other security is not requested from customers.
Most sales arrangements do not generally include acceptance clauses. However, when a sales arrangement does include an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period. For these sales arrangements, the sale is recognized when acceptance occurs.
Revenue for extended warranties is recognized on a straight-line basis over the warranty period.
ADVERTISING COSTS
Advertising costs
Advertising costs are expensed as incurred.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
GOVERNMENT GRANTS
Government grants
Grants related to operating expenses are included in earnings when the related expenses are incurred. Grants related to capital expenditures are deducted from the related assets. Grants related to job creation and
training programs for extended periods are deferred and amortized on a
straight-line basis over the minimum period during which the created job
must be maintained or training provided. Grants are included in earnings or deducted from the related assets, provided there is reasonable assurance that the company has complied and will comply with all the conditions related to the grant.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses
All expenses related to research, as well as development activities that do not meet generally accepted criteria for deferral are expensed as incurred, net of related tax credits and government grants. Development expenses that meet generally accepted criteria for deferral, in accordance with the Canadian Institute of Chartered Accountants (CICA) handbook Section 3450, "Research“Research and Development"Development”, are capitalized, net of related tax credits and government grants, and are amortized against earnings over the estimated benefit period. Research and development expenses are mainly comprised of salaries and related expenses, material costs as well as fees paid to third-party consultants.
As at August 31, 2005,2006, the company had not deferred any development costs.
INCOME TAXES
Income taxes
The company provides for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities, using enacted income tax rates for the years in which the differences are expected to reverse.
The company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized. Since 2003, the company records a full valuation allowance against future income tax assets (notes 4 and(note 16).
EARNINGS PER SHARE
Earnings per share
Basic earnings per share are determined using the weighted average number of common shares outstanding during the year.
Diluted earnings per share are determined using the weighted average number of common shares outstanding during the year, plus the effect of dilutive potential common shares outstanding during the year. This method requires that diluted earnings per share be calculated (using the treasury stock method) as if all dilutive potential common shares had been exercised at the latest at the beginning of the year or on the date of issuance, as the case may be, and that the funds obtained thereby (plus an amount equivalent to the unamortized portion of related stock-based compensation costs) be used to purchase common shares of the company at the average market price of the common shares during the year.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
STOCK-BASED COMPENSATION COSTS
Stock-based compensation costs
Since September 1, 2003, the company accounts for all forms of employee stock-based compensation using the fair value-based method. Stock-based compensation costs are amortized to expense over the vesting periods.
Prior to fiscal 2004, no stock-based compensation costs were recognized for employee stock-based compensation. However, the company is required to disclose pro forma information with respect to net lossearnings (loss) and net lossearnings (loss) per share as if stock-based compensation costs were recognized in the financial statements for all reporting years using the fair value-based method for outstanding stock options granted prior to September 1, 2003 (note 14).
NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
ADOPTED IN FISCAL 2005
On September 1, 2004, the company prospectively adopted the CICA handbook
Sections 1100
New accounting standards and 1400, "Generally Accepted Accounting Principles" and
"General Standards of Financial Statement 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 impact on the financial statements of the company.
TO BE ADOPTED AFTER FISCAL 2005
In January 2005, the CICA issued four new accounting standards in relation to financial instruments: Section 3855, "Financial Instruments - Recognition and measurement"; Section 3865, "Hedges"; Section 1530, "Comprehensive Income"; and Section 3251, "Equity".
Section 3855 expands on Section 3860, "Financial Instruments - Disclosure and Presentation", by prescribing when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented in the financial statements.
Section 3865 provides an alternative to Section 3855 for entities that choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline 13, "Hedging Relationships", and on the hedging guidance in Section 1650, "Foreign Currency Translation", by specifying how hedge accounting is applied and what disclosures it requires.
Section 1530, "Comprehensive Income", introduces a new requirement to temporarily present certain gains and losses outside net income.
Consequently, Section 3250, "Surplus", has been revised as Section 3251, "Equity".
Sections 1530, 3251, 3855 and 3865 apply to fiscal years beginning on or after October 1, 2006. The company will adopt these new standards on September 1, 2007. While the company is currently assessing the effects of these new standards, impacts consistent with the adjustments described under note 2120 item b) of these consolidated financial statements are expected.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
3 BUSINESS COMBINATION
GNUBI COMMUNICATIONS, L.P.
Business Combination
On October 7, 2002, a newly created wholly-owned subsidiary ofJanuary 26, 2006, the company EXFO Gnubi Products Group Inc. ("EXFO Gnubi"), acquired substantially all the assets of GNUBI COMMUNICATIONS, L.P.Consultronics Limited. Based in Toronto, Canada, and with operations in the United Kingdom and Hungary, Consultronics was a privately held company specializing in x-Digital Subscriber Line (xDSL), a U.S.
company supplying multi-channel telecomInternet Protocol TV and datacom testingVoice-over-Internet Protocol (VoIP) test solutions for optical transport equipment manufacturers as well as research and
development laboratories.
broadband access networks.
This acquisition was settled for a total cash consideration valued at $4,904,000 including$19,093,000 or $18,838,000 net of $255,000 of cash acquired. The total consideration includes severance expenses of $660,000 for the termination of employees of the acquired business as well as other acquisition-related costs of $162,000. The$822,000. As at August 31, 2006, a portion of the total consideration, paid consistedin the amount of $2,108,000 in cash (including$816,000, was not yet paid. From this amount, $631,000 is related to severance expenses and has been recorded as restructuring charges payable (note 4), while the remainder of $185,000, relating to acquisition-related costs, has been recorded as an account payable related to a cash
contingent consideration of $241,000,business combination (note 9). Severance expenses will be fully paid in fiscal 2004, based on EXFO
Gnubi sales volume for the twelve months following the acquisition) and
the issuance of 1,479,290 subordinate voting shares, valued at
$2,796,000.
The cash contingent consideration was accounted for as an additional
acquisition cost and was allocated to acquired core technology.
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.
2007.
This acquisition was accounted for using the purchase method and, consequently, the results of operations of the acquired business have been included in the consolidated statement of earnings of the company since October 7, 2002,January 26, 2006, being the date of acquisition.
During fiscal 2004, EXFO Gnubi's operations were consolidated with the
parent company's operations in Montreal, Canada.
The purchase price, including acquisition-related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:
Assets
Assets acquired | | | |
Current assets | | $ | 5,135 | |
Property, plant and equipment | | | 3,115 | |
Core technology | | | 8,709 | |
Current liabilities assumed | | | (2,826 | ) |
Loans assumed | | | (402 | ) |
Net identifiable assets acquired | | | 13,731 | |
Goodwill | | | 5,107 | |
Purchase price, net of cash acquired | | $ | 18,838 | |
Acquired core technology is amortized on a straight-line basis over its estimated useful life of five years.
This business, including acquired 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 ongoodwill, reports to the date of acquisition $ 1,867
==========Telecom Division. Acquired goodwill is deductible for income tax purposes.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
4 SPECIAL CHARGES
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
2003
In May 2003, the company performed its annual impairment test on goodwill
for all its reporting units, except for newly acquired EXFO Gnubi. Also,
considering market conditions in the telecommunications industry and the
persisting unfavorable conditions affecting the subsidiaries' industries
at the time, the company reviewed the carrying valueSpecial Charges
Impairment of intangiblelong-lived assets
related to these reporting units, consisting primarily of acquired core
technology.
As a result of this assessment, the company concluded that the carrying
value of goodwill related to EXFO Burleigh and the carrying value of
intangible assets related to EXFO Burleigh and EXFO Photonic Solutions
was impaired, and it recorded a charge of $4,505,000 to write down
goodwill and a pre-tax charge of $2,922,000 to write down acquired core
technology. Of the total impairment loss of $7,427,000, $6,872,000 was
related to EXFO Burleigh for goodwill and acquired core technology, and
$555,000 was related to EXFO Photonic Solutions for acquired core
technology.
For the purposes of estimating the fair values, the company used a
combination of discounted future cash flows and a market approach (sales
multiples). The discounted future cash flows were estimated using periods
ranging between eight and ten years, discount rates ranging between 15%
and 20% and annual growth rates ranging between nil and 35%. The sales
multiples used in the market approach ranged between 0.7 and 2.3.
The assumptions supporting the estimates of the fair values and the
undiscounted future cash flows, including industry conditions, reflected
management's best estimations.
Fiscal 2004
In fiscal 2004, the company put one of its buildings (located in Quebec City) up for sale and received, at the beginning of fiscal 2005, a formal purchase offer for this building. Based on that offer, the company concluded that the building was impaired and it recorded an impairment loss of $620,000 in fiscal 2004, representing the excess of the carrying value of the building over its expected selling price. However, during the first quarter of fiscal 2005, some conditions of the formal purchase offer were not met and the offer was declined. During fiscal 2005, the company withdrew the building from the market. As at August 31, 2004,market and continued to use it. This building reported to the Telecom Division.
Fiscal 2006
In June 2006, the company entered into an agreement to sell its building
(located in Rochester, NY) along with some equipment and it recorded an impairment charge of $604,000 in the third quarter of fiscal 2006, representing the excess of the carrying value of these assets over the net expected selling price of $1,200,000. The sale of these assets was
not shown as a long-lived asset heldfinalized in the fourth quarter of 2006 for
salethe net expected selling price. This amount is included in the other receivables in the balance sheet
becauseas at August 31, 2006, and it
was still used bywill be recovered in the
company and, consequently, it was
not available for immediate sale. This building reportsfirst quarter of fiscal 2007. These assets report to the
TelecomLife Science and Industrial Division.
F-13
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
RESTRUCTURING AND OTHER CHARGES AND INVENTORY WRITE-OFFS
2003
During fiscal 2003, the company implemented a restructuring plan to align
its cost structure to market conditions. Under that plan, the company
recorded charges of $4,134,000, including $2,767,000 in severance
expenses for the 172 employees who were terminated throughout the
company, $512,000 for impaired long-lived assets and $855,000 for future
payments on exited leased facilities. Those charges were included in the
restructuring
Restructuring and other charges in the statement of earnings for the year
ended August 31, 2003. In addition, the company recorded $4,121,000 in
inventory write-offs for excess
Fiscal 2004 and obsolete inventories, which were
included in the cost of sales in the statement of earnings for that same
year.
2004 AND 2005
During fiscal 2004, the company approved a restructuring plan to consolidate the operations of its Life Sciences and Industrial Division, transferring EXFO Burleigh'sits Rochester, NY, operations mainly to EXFO Photonic Solutionsits facilities in Toronto. This consolidation process, which started in August 2004, was completed during fiscal 2005.
Overall, for that process, the company incurred $2,515,000 in restructuring and other charges, from which $2,033,000 werewas recorded in fiscal 2004 and the remaining $482,000 werewas recorded in fiscal 2005. The overall costs, which were recorded in the restructuring and other charges in the statements of earnings of the corresponding years, are detailed as follows: $855,000 for severance expenses for the layoff of all employees of EXFO Burleigh,at the Rochester facilities, $1,261,000 mainly for the impairment of the EXFO
Burleigh building in Rochester and the remaining $399,000 for other expenses such as training and recruiting expenses and transfer of assets.
The EXFO Burleigh building was put up for sale in fiscal 2004, but it is
not yet sold because of the difficult real estate market in Rochester,
NY. The building is available for sale in its present condition and
management expects to sell the property within the next twelve months.
Consequently, in accordance with CICA handbook, section 3475, "Disposal
of Long-Lived Assets and Discontinued Operations", it was shown in the
balance sheet as a long-lived asset held for sale. The fair value used to
determine the impairment loss of the building represents the company's
best estimate of its selling price based upon the municipal valuation.
Since September 1, 2004, the building is no longer amortized.
Finally, in fiscal 2005
and 2004, the company recorded adjustments of $190,000
and $304,000, respectively to the fiscal 2003
planand 2001 plans because actual charges, mainly for leased equipment, were lower than expected.
F-14
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following
table summarizestables summarize changes in the restructuring charges payable since August 31,
2002:
YEAR ENDED AUGUST 31, 2005
BALANCE AS AT BALANCE AS AT
AUGUST 31, AUGUST 31,
2004 ADDITIONS PAYMENTS ADJUSTMENTS 2005
------------- --------- ---------- ------------ --------------
FISCAL 2004 PLAN
Severance expenses $ 467 $ 83 $ (550) $ -- $ --
Other -- 399 (399) -- --
------- ------- ------- ------- -------
467 482 (949) -- --
------- ------- ------- ------- -------
FISCAL 2003 PLAN
Severance expenses 109 -- (77) (32) --
Exited leased facilities 386 -- (229) (7) 150
Other 197 -- (46) (151) --
------- ------- ------- ------- -------
692 -- (352) (190) 150
------- ------- ------- ------- -------
FISCAL 2001 PLAN
Exited leased facilities 10 -- (10) -- --
------- ------- ------- ------- -------
10 -- (10) -- --
------- ------- ------- ------- -------
Total for all plans (note 9) $ 1,169 $ 482 $(1,311) $ (190) $ 150
======= ======= ======= ======= =======
YEAR ENDED AUGUST 31, 2004
BALANCE AS AT BALANCE AS AT
AUGUST 31, AUGUST 31,
2003 ADDITIONS PAYMENTS ADJUSTMENTS 2004
------------- --------- ---------- ------------ --------------
FISCAL 2004 PLAN
Severance expenses $ -- $ 772 $ (305) $ -- $ 467
------- ------- ------- ------- -------
-- 772 (305) -- 467
------- ------- ------- ------- -------
FISCAL 2003 PLAN
Severance expenses 1,233 -- (870) (254) 109
Exited leased facilities 748 -- (362) -- 386
Other 295 -- (90) (8) 197
------- ------- ------- ------- -------
2,276 -- (1,322) (262) 692
------- ------- ------- ------- -------
FISCAL 2002 PLANS
Other 68 -- (68) -- --
------- ------- ------- ------- -------
68 -- (68) -- --
------- ------- ------- ------- -------
FISCAL 2001 PLAN
Exited leased facilities 124 -- (72) (42) 10
------- ------- ------- ------- -------
124 -- (72) (42) 10
------- ------- ------- ------- -------
Total for all plans (note 9) $ 2,468 $ 772 $(1,767) $ (304) $ 1,169
======= ======= ======= ======= =======
F-15
2003:
Year ended August 31, 2006
| | Balance as at August 31, 2005 | | Additions | | Payments | | Adjustments | | Balance as at August 31, 2006 | |
Fiscal 2006 plan (note 3) | | | | | | | | | | | |
Severance expenses | | $ | − | | $ | 660 | | $ | (29 | ) | $ | − | | $ | 631 | |
| | | | | | | | | | | | | | | | |
Fiscal 2003 plan | | | | | | | | | | | | | | | | |
Exited leased facilities | | | 150 | | | − | | | (90 | ) | | − | | | 60 | |
| | | | | | | | | | | | | | | | |
Total for all plans (note 9) | | $ | 150 | | $ | 660 | | $ | (119 | ) | $ | − | | $ | 691 | |
Year ended August 31, 2005
| | Balance as at August 31, 2004 | | Additions | | Payments | | Adjustments | | Balance as at August 31, 2005 | |
Fiscal 2004 plan | | | | | | | | | | | |
Severance expenses | | $ | 467 | | $ | 83 | | $ | (550 | ) | $ | − | | $ | − | |
Other | | $ | − | | $ | 399 | | $ | (399 | ) | $ | − | | $ | − | |
| | | 467 | | | 482 | | | (949 | ) | | − | | | − | |
| | | | | | | | | | | | | | | | |
Fiscal 2003 plan | | | | | | | | | | | | | | | | |
Severance expenses | | | 109 | | | − | | | (77 | ) | | (32 | ) | | − | |
Exited leased facilities | | | 386 | | | − | | | (229 | ) | | (7 | ) | | 150 | |
Other | | | 197 | | | − | | | (46 | ) | | (151 | ) | | − | |
| | | 692 | | | − | | | (352 | ) | | (190 | ) | | 150 | |
| | | | | | | | | | | | | | | | |
Fiscal 2001 plan | | | | | | | | | | | | | | | | |
Exited leased facilities | | | 10 | | | − | | | (10 | ) | | − | | | − | |
| | | | | | | | | | | | | | | | |
Total for all plans (note 9) | | $ | 1,169 | | $ | 482 | | $ | (1,311 | ) | $ | (190 | ) | $ | 150 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
YEAR ENDED AUGUST 31, 2003
BALANCE AS AT BALANCE AS AT
AUGUST 31, AUGUST 31,
2002 ADDITIONS PAYMENTS ADJUSTMENTS 2003
------------- --------- ---------- ------------ --------------
FISCAL 2003 PLAN
Severance expenses $ -- $ 2,767 $(1,534) $ -- $ 1,233
Exited leased facilities -- 855 (107) -- 748
Other -- 512 (217) -- 295
------- ------- ------- ------- -------
-- 4,134 (1,858) -- 2,276
------- ------- ------- ------- -------
FISCAL 2002 PLANS
Severance expenses 231 -- (231) -- --
Other 68 -- -- -- 68
------- ------- ------- ------- -------
299 -- (231) -- 68
------- ------- ------- ------- -------
FISCAL 2001 PLAN
Exited leased facilities 483 -- (359) -- 124
------- ------- ------- ------- -------
483 -- (359) -- 124
------- ------- ------- ------- -------
Total for all plans $ 782 $ 4,134 $(2,448) $ -- $ 2,468
======= ======= ======= ======= =======
FUTURE INCOME TAX ASSETS AND RESEARCH AND DEVELOPMENT TAX CREDITS
RECOVERABLE
During fiscal 2003, the company reviewed the carrying value of its future
income tax assets and its research and development tax credits
recoverable. Considering market conditions and because the company
recorded losses in fiscal 2002 and 2003, it concluded that it was more
likely than not that its future income tax assets and some of its
non-refundable research and development tax credits were not recoverable
and that a valuation allowance and a write-off were required.
Accordingly, the company recorded a full valuation allowance of
$28,385,000 against its future income tax assets, mainly related to the
parent company, EXFO Protocol and EXFO Burleigh and wrote off $2,297,000
in non-refundable research and development tax credits related to EXFO
Protocol. The valuation allowance was included in the income taxes in the
statement of earnings for the year Year ended August 31, 2003 (note 16).
Research and development tax credit write-offs were included in the net
research and development expenses in the statement2004
| | Balance as at August 31, 2003 | | Additions | | Payments | | Adjustments | | Balance as at August 31, 2004 | |
Fiscal 2004 plan | | | | | | | | | | | |
Severance expenses | | $ | − | | $ | 772 | | $ | (305 | ) | $ | − | | $ | 467 | |
| | | | | | | | | | | | | | | | |
Fiscal 2003 plan | | | | | | | | | | | | | | | | |
Severance expenses | | | 1,233 | | | − | | | (870 | ) | | (254 | ) | | 109 | |
Exited leased facilities | | | 748 | | | − | | | (362 | ) | | − | | | 386 | |
Other | | | 295 | | | − | | | (90 | ) | | (8 | ) | | 197 | |
| | | 2,276 | | | − | | | (1,322 | ) | | (262 | ) | | 692 | |
| | | | | | | | | | | | | | | | |
Fiscal 2002 plans | | | | | | | | | | | | | | | | |
Other | | | 68 | | | − | | | (68 | ) | | − | | | − | |
| | | | | | | | | | | | | | | | |
Fiscal 2001 plan | | | | | | | | | | | | | | | | |
Exited leased facilities | | | 124 | | | − | | | (72 | ) | | (42 | ) | | 10 | |
Total for all plans | | $ | 2,468 | | $ | 772 | | $ | (1,767 | ) | $ | (304 | ) | $ | 1,169 | |
5Inventories
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Raw materials | | $ | 14,353 | | $ | 9,373 | |
Work in progress | | | 1,043 | | | 934 | |
Finished goods | | | 9,227 | | | 7,442 | |
| | | | | | | |
| | $ | 24,623 | | $ | 17,749 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
6 PROPERTY, PLANT AND EQUIPMENT
AS AT AUGUST 31,
--------------------------------------------------------------------------------
2005 2004
-------------------------------------- --------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
--------------- ------------------- --------------- -------------------
Land and land improvements $ 3,179 $ 815 $ 2,868 $ 558
Buildings 9,206 2,250 8,311 1,699
Equipment 33,216 29,553 29,110 23,422
Leasehold improvements 2,395 1,659 2,110 1,278
--------------- ------------------- --------------- -------------------
47,996 $ 34,277 42,399 $ 26,957
=================== ===================
Less:
Accumulated amortization 34,277 26,957
--------------- ---------------
$ 13,719 $ 15,442
=============== ===============
6Property, Plant and Equipment
| | As at August 31, | |
| | | | | | | | | |
| | 2006 | | 2005 | |
| | | | | | | | | |
| | | Cost | | | Accumulated amortization | | | Cost | | | Accumulated amortization | |
| | | | | | | | | | | | | |
Land and land improvements | | $ | 4,249 | | $ | 1,082 | | $ | 3,179 | | $ | 815 | |
Buildings | | | 14,417 | | | 6,262 | | | 9,206 | | | 2,250 | |
Equipment | | | 33,562 | | | 28,263 | | | 33,216 | | | 29,553 | |
Leasehold improvements | | | 2,788 | | | 2,017 | | | 2,395 | | | 1,659 | |
| | | | | | | | | | | | | |
| | | 55,016 | | $ | 37,624 | | | 47,996 | | $ | 34,277 | |
| | | | | | | | | | | | | |
Less: | | | | | | | | | | | | | |
Accumulated amortization | | | 37,624 | | | | | | 34,277 | | | | |
| | | | | | | | | | | | | |
| | $ | 17,392 | | | | | $ | 13,719 | | | | |
As at August 31,
20042005 and
2005,2006, unpaid purchases of property, plant and equipment amounted to
$358,000$111,000 and
$111,000,$176,000, respectively.
7 INTANGIBLE ASSETS AND GOODWILL
AS AT AUGUST 31,
--------------------------------------------------------------------------------
2005 2004
-------------------------------------- --------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
--------------- ------------------- --------------- -------------------
Core technology $ 35,554 $ 32,214 $ 32,815 $ 25,733
Software 6,607 4,345 5,847 3,482
--------------- ------------------- --------------- -------------------
42,161 $ 36,559 38,662 $ 29,215
=================== ===================
Less:
Accumulated amortization 36,559 29,215
--------------- ---------------
$ 5,602 $ 9,447
=============== ===============
7Intangible Assets and Goodwill
| | As at August 31, | |
| | | | | | | | | |
| | 2006 | | 2005 | |
| | | | | | | | | |
| | | Cost | | | Accumulated amortization | | | Cost | | | Accumulated amortization | |
| | | | | | | | | | | | | |
Core technology | | $ | 47,629 | | $ | 38,972 | | $ | 35,554 | | $ | 32,214 | |
Software | | | 6,781 | | | 4,490 | | | 6,607 | | | 4,345 | |
| | | | | | | | | | | | | |
| | | 54,410 | | $ | 43,462 | | | 42,161 | | $ | 36,559 | |
| | | | | | | | | | | | | |
Less: | | | | | | | | | | | | | |
Accumulated amortization | | | 43,462 | | | | | | 36,559 | | | | |
| | | | | | | | | | | | | |
| | $ | 10,948 | | | | | $ | 5,602 | | | | |
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Amortization expenses for intangible assets in each of the next five fiscal years will amount to $3,190,000 in 2006, $893,000$2,877,000 in 2007, $429,000$2,337,000 in 2008, $352,000$2,252,000 in 2009, $2,200,000 in 2010 and $325,000$1,099,000 in 2010.
2011.
Changes in the carrying value of goodwill are as follows:
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Balance - Beginning of year | | $ | 20,370 | | $ | 18,393 | |
Addition from business combination (note 3) | | | 5,107 | | | − | |
Foreign currency translation adjustment | | | 1,665 | | | 1,977 | |
| | | | | | | |
Balance - End of year (note 19) | | $ | 27,142 | | $ | 20,370 | |
8Credit Facilities
The company has a line of credit that provides for advances of up to CA$10,000,000 (US$9,037,000). This line of credit bears interest at prime rate (prime rate in 2005). As at August 31, 2006, this line of credit was unused.
The company also has another line of credit, which provides for advances of up to CA$4,500,000 (US$4,067,000) for letters of guarantee. As at August 31, 2006, an amount of CA$2,073,000 (US$1,873,000) was reserved from this line of credit (note 12).
Finally, the company has a third line of credit of $12,000,000 for the foreign currency exposure related to its forward exchange contracts. As at August 31, 2006, an amount of $751,000 was reserved from this line of credit.
These lines of credit are renewable annually. Short-term investments, accounts receivable, inventories and all tangible and intangible assets of the company are pledged as collateral against these lines of credit.
9Accounts Payable and Accrued Liabilities
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Trade | | $ | 7,487 | | $ | 5,781 | |
Salaries and social benefits | | | 5,991 | | | 4,526 | |
Warranty | | | 1,006 | | | 725 | |
Commissions | | | 835 | | | 211 | |
Restructuring charges (note 4) | | | 691 | | | 150 | |
Business combination (note 3) | | | 185 | | | − | |
Other | | | 1,142 | | | 808 | |
| | | | | | | |
| | $ | 17,337 | | $ | 12,201 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Changes in the
carrying value of goodwillwarranty provision are as follows:
AS AT AUGUST 31,
----------------------------
2005 2004
------------ ------------
Balance - Beginning of year $ 18,393 $ 17,673
Foreign currency translation adjustment 1,977 720
------------ ------------
Balance - End of year (note 19) $ 20,370 $ 18,393
============ ============
8 CREDIT FACILITIES
The company has a line of credit which provides for advances of up to
Cdn$10,000,000 (US$8,411,000). This line of credit, which is renewable
annually, bears interest at prime rate (prime rate in 2004). Short-term
investments, accounts receivable, inventories and all tangible and
intangible assets of the company were pledged as collateral against this
line of credit.
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Balance - Beginning of year | | $ | 725 | | $ | 390 | |
Provision | | | 895 | | | 869 | |
Settlements | | | (708 | ) | | (583 | ) |
Addition from business combination | | | 31 | | | − | |
Foreign currency translation adjustment | | | 63 | | | 49 | |
| | | | | | | |
Balance - End of year | | $ | 1,006 | | $ | 725 | |
10Long-Term Debt
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Loans collateralized by equipment, bearing interest at 4.9%, repayable in monthly installments of $10,600 including principal and interest, maturing in 2010 | | $ | 461 | | $ | − | |
Loans collateralized by equipment, bearing interest at 9.6%, fully repaid in fiscal 2006 | | | − | | | 332 | |
| | | | | | | |
| | | 461 | | | 332 | |
| | | | | | | |
Less: Current portion | | | 107 | | | 134 | |
| | | | | | | |
| | $ | 354 | | $ | 198 | |
As at August 31,
2005, an amount of Cdn$3,163,000
(US$2,661,000) was reserved from this line of credit for letters of
guarantee and forward exchange contracts.
9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AUGUST 3
------------------------------
2005 2004
------------ --------------
Trade $ 5,781 $ 4,484
Salaries and social benefits 4,526 3,932
Warranty 725 390
Tax on capital 538 526
Restructuring charges (notes 4 and 20) 150 1,169
Other 481 892
------------ --------------
$ 12,201 $ 11,393
============ ==============
Changes in the warranty provision are as follows:
AS AT AUGUST 31,
------------------------------
2005 2004
------------ --------------
Balance - Beginning of year $ 390 $ 687
Provision 869 564
Settlements (583) (889)
Foreign currency translation adjustment 49 28
------------ --------------
Balance - End of year $ 725 $ 390
============ ==============
F-18
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
10 LONG-TERM DEBT
AS AT AUGUST 31,
------------------------------
2005 2004
------------ --------------
Loans collateralized by equipment, bearing interest at 9.6%,
repayable in monthly instalments of $13,000 including
principal and interest, maturing in 2008 $ 332 $ 453
Less: Current portion 134 121
------------ --------------
$ 198 $ 332
============ ==============
As at August 31, 2005,2006, minimum principal repayments required in each of the next threefour years will amount to $134,000 in 2006, $147,000$107,000 in 2007, $113,000 in 2008, $118,000 in 2009 and $51,000$123,000 in 2008.
2010.
11 COMMITMENTS
Commitments
The company entered into operating leases for certain of its premises and equipment, which expire at various dates through May 2011.September 2013. As at August 31, 2005,2006, minimum rentals payable under these operating leases in each of the next five years will amount to $1,050,000 in 2006, $952,000$1,748,000 in 2007, $632,000$1,223,000 in 2008, $584,000$1,177,000 in 2009, $1,200,000 in 2010 and $594,000$990,000 in 2010. As at August 31,
2005, the2011 for total commitment under these operating leases amounts to
$4,247,000.
commitments of $6,888,000.
For the years ended August 31, 2003, 2004, 2005 and 2005,2006, rental expenses amounted to $1,718,000, $1,219,000, $1,370,000 and $1,370,000, respectively (note
20).
$1,523,000, respectively.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
12 CONTINGENCIES
CLASS ACTION
Contingencies
Class action
On November 27, 2001, a class action suit was filed in the United States District Court for the Southern District of New York against the company, four of the underwriters of its Initial Public Offering and some of its executive officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of 1933. This class action alleges that the company'scompany’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'scompany’s Initial Public Offering; and (ii) the underwriters allegedly entering into agreements with customers whereby shares issued in connection with the company'scompany’s Initial Public Offering would be allocated to those customers in exchange for which customers agreed to purchase additional amounts of shares in the after-market at pre-determined prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing master allegations against all of the underwriters in all of the 310 cases included in this class action and also filed an amended complaint containing allegations specific to four of the
company'scompany’s underwriters, the company and two of its executive officers. In addition to the allegations mentioned above, the amended complaint alleges that the
F-19
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted) 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'scompany’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'scompany’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'plaintiffs’ amended complaint and judgmenta decision was rendered on February 19, 2003. Only one of the claims against the company was dismissed. On October 8, 2002, the claims against its officers were dismissed pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
In June 2003, a committee of the company'scompany’s Board of Directors conditionally approved a proposed settlement between the issuer defendants, the individual defendants, and the plaintiffs. 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.
On June 25, 2004, the Plaintiffs moved for Preliminary Approvalpreliminary approval of the settlement. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005, and completed by January 15, 2006. The2005. A settlement fairness hearing was held on April 24, 2006; however, no ruling has been set for April 26, 2006. Followingissued yet by the hearing, ifcourt. If the court determines that the settlement is fair to the class members, the settlement will be approved. ThereThe settlement provides that, if the plaintiffs do not obtain any recovery from the underwriter defendants, the members of the class action would receive an amount not expected to exceed $2,507,678. Any direct financial impact plus any legal fees are expected to be borne by the company’s insurance carriers. However, there can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all. Therefore, it is not possible to predict the final outcome of the case, nor to 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 August 31, 2005.
LETTERS OF GUARANTEE
2006.
Letters of guarantee
As at August 31,
2005,2006, in the normal course of its operations, the company had outstanding letters of guarantee of
Cdn$1,418,000CA$2,073,000 (US$
1,193,000)1,873,000), which expire at various dates through fiscal
20082010 and that were reserved from
one of the
linelines of
credit.
F-20
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
credit (note 8).
13 SHARE CAPITAL
Share Capital
Authorized - unlimited as to number, without par value
Subordinate voting and participating, bearing a non-cumulative dividend to be determined by the Board of Directors, ranking pari passu with multiple voting shares
Multiple voting and participating, entitling to ten votes each, bearing a non-cumulative dividend to be determined by the Board of Directors, convertible at the
holder'sholder’s option into subordinate voting shares on a one-for-one basis, ranking pari passu with subordinate voting shares
The following table summarizes the share capital activity since August
31, 2002:
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES
--------------------------------- -------------------------------
TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
Balance as at August 31, 2002 37,900,000 $ 1 23,565,185 $ 489,610 $ 489,611
Business combination (note 3) - - 1,479,290 2,796 2,796
Exercise of stock options (note 14) - - 25,498 45 45
Exercise of stock awards (note 14) - - 69,935 - -
Redemption - - (21,515) (16) (16)
Resale - - 21,515 16 16
---------------- --------------- --------------- --------------- --------------
Balance as at August 31, 2003 37,900,000 1 25,139,908 492,451 492,452
Public offering (1) - - 5,200,000 29,164 29,164
Exercise of stock options (note 14) - - 111,071 254 254
Exercise of stock awards (note 14) - - 89,504 - -
Redemption - - (5,340) (5) (5)
Resale - - 5,340 5 5
Share issue expenses - - - (137) (137)
---------------- --------------- --------------- --------------- --------------
Balance as at August 31, 2004 37,900,000 1 30,540,483 521,732 521,733
Exercise of stock options (note 14) - - 71,699 148 148
Exercise of stock awards (note 14) - - 53,592 - -
Share issue expenses - - - (6) (6)
---------------- --------------- --------------- --------------- --------------
Balance as at August 31, 2005 37,900,000 $ 1 30,665,774 $ 521,874 $ 521,875
================ =============== =============== =============== ==============
(1) On February 12, 2004, pursuant
EXFO Electro-Optical Engineering Inc.
Notes to a Canadian public offering, the
company issued 5,200,000 subordinate voting shares for net proceeds
of $29,164,000 (Cdn$38,438,400), after deduction of underwriting
commission of $1,215,000 (Cdn$1,601,000). The net proceeds of this
offering were invested in commercial paper that is presented in the
short-term investments in the balance sheet (note 18).
F-21
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularConsolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes the share capital activity since August 31, 2003:
| | Multiple voting shares | | Subordinate voting shares | | | |
| | Number | | Amount | | Number | | Amount | | Total amount | |
| | | | | | | | | | | |
Balance as at August 31, 2003 | | | 37,900,000 | | $ | 1 | | | 25,139,908 | | $ | 492,451 | | $ | 492,452 | |
| | | | | | | | | | | | | | | | |
Public offering (1) | | | − | | | − | | | 5,200,000 | | | 29,164 | | | 29,164 | |
Exercise of stock options (note 14) | | | − | | | − | | | 111,071 | | | 254 | | | 254 | |
Exercise of restricted stock awards (note 14) | | | − | | | − | | | 89,504 | | | − | | | − | |
Redemption | | | − | | | − | | | (5,340 | ) | | (5 | ) | | (5 | ) |
Resale | | | − | | | − | | | 5,340 | | | 5 | | | 5 | |
Share issue expenses | | | − | | | − | | | − | | | (137 | ) | | (137 | ) |
| | | | | | | | | | | | | | | | |
Balance as at August 31, 2004 | | | 37,900,000 | | | 1 | | | 30,540,483 | | | 521,732 | | | 521,733 | |
| | | | | | | | | | | | | | | | |
Exercise of stock options (note 14) | | | − | | | − | | | 71,699 | | | 148 | | | 148 | |
Exercise of restricted stock awards (note 14) | | | − | | | − | | | 53,592 | | | − | | | − | |
Share issue expenses | | | − | | | − | | | − | | | (6 | ) | | (6 | ) |
| | | | | | | | | | | | | | | | |
Balance as at August 31, 2005 | | | 37,900,000 | | | 1 | | | 30,665,774 | | | 521,874 | | | 521,875 | |
| | | | | | | | | | | | | | | | |
Exercise of stock options (note 14) | | | − | | | − | | | 182,425 | | | 557 | | | 557 | |
Exercise of restricted share units (note 14) | | | − | | | − | | | 4,770 | | | − | | | − | |
Conversion of multiple voting shares into subordinate voting shares | | | (757,000 | ) | | − | | | 757,000 | | | − | | | − | |
Reclassification of stock-based compensation cost to share capital upon exercise of stock awards | | | − | | | − | | | − | | | 200 | | | 200 | |
Elimination of deficit by reduction of share capital (2) | | | − | | | − | | | − | | | (373,711 | ) | | (373,711 | ) |
| | | | | | | | | | | | | | | | |
Balance as at August 31, 2006 | | | 37,143,000 | | $ | 1 | | | 31,609,969 | | $ | 148,920 | | $ | 148,921 | |
(1) | On February 12, 2004, pursuant to a Canadian public offering, the company issued 5,200,000 subordinate voting shares for net proceeds of $29,164,000 (CA$38,438,400), after deduction of underwriting commission of $1,215,000 (CA$1,601,000). |
(2) | Upon the approval of the Board of Directors dated August 31, 2006, the company eliminated its deficit against its share capital. |
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
14 STOCK-BASED COMPENSATION PLANS
Stock-Based Compensation Plans
The maximum number of additional subordinate voting shares issuable under the Long-Term Incentive Plan and the Deferred Share Unit Plan cannot exceed 6,306,153 shares. The maximum number of subordinate voting shares that may be granted to any individual on an annual basis cannot exceed 5% of the number of outstanding subordinate voting shares.
LONG-TERM INCENTIVE PLAN
Long-term incentive plan
In May 2000, the company established a Stock Option Plan for Directors,directors, executive officers employees and consultantsemployees and those of the company'scompany’s subsidiaries, as determined by the Board of Directors. In January 2005, the company made certain amendments to the existing Stock Option Plan, including the renaming of the plan to Long-Term Incentive Plan, which includes stock options and restricted share units.
STOCK OPTIONS
Stock Options
The exercise price of stock options granted under the Long-Term Incentive Plan is the market price of the common shares on the date of grant. Stock options granted under the plan generally expire ten years from the date of
grant. Stock options granted under the plangrant and generally vest over a four-year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. The Board of Directors may accelerate the vesting of any or all outstanding stock options upon the occurrence of a change of control.
The following table summarizes stock option activity since August 31, 2002:
YEARS ENDED AUGUST 31,
-------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
(CDN$) (CDN$) (CDN$)
Outstanding - Beginning of year 2,934,518 $ 21 3,176,613 $ 23 2,597,574 $ 34
Granted 246,233 6 536,500 5 1,268,450 3
Exercised (71,699) (3) (111,071) (3) (25,498) (3)
Forfeited (345,293) (27) (667,524) (23) (663,913) (25)
------------- ------------ ------------ ----------- ------------ -----------
Outstanding - End of year 2,763,759 $ 19 2,934,518 $ 21 3,176,613 $ 23
============= ============ ============ =========== ============ ===========
Exercisable - End of year 1,650,404 $ 28 1,331,707 $ 32 1,068,595 $ 33
============= ============ ============ =========== ============ ===========
The following table summarizes stock option activity since August 31, 2003:
| | Years ended August 31, | |
| | | | | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | | | | | | | |
| | Number | | Weighted average exercise price | | Number | | Weighted average exercise price | | Number | | Weighted average exercise price | |
| | | | (CA$) | | | | (CA$) | | | | (CA$) | |
Outstanding - Beginning of year | | | 2,763,759 | | $ | 19 | | | 2,934,518 | | $ | 21 | | | 3,176,613 | | $ | 23 | |
Granted | | | 31,992 | | | 6 | | | 246,233 | | | 6 | | | 536,500 | | | 5 | |
Exercised | | | (182,425 | ) | | (4 | ) | | (71,699 | ) | | (3 | ) | | (111,071 | ) | | (3 | ) |
Forfeited | | | (173,951 | ) | | (18 | ) | | (345,293 | ) | | (27 | ) | | (667,524 | ) | | (23 | ) |
| | | | | | | | | | | | | | | | | | | |
Outstanding - End of year | | | 2,439,375 | | $ | 20 | | | 2,763,759 | | $ | 19 | | | 2,934,518 | | $ | 21 | |
| | | | | | | | | | | | | | | | | | | |
Exercisable - End of year | | | 1,852,870 | | $ | 25 | | | 1,650,404 | | $ | 28 | | | 1,331,707 | | $ | 32 | |
The intrinsic value of stock options exercised during the year ended August 31, 2006, was CA$552,000.
The weighted average grant-date fair value of stock options granted during fiscal 2004, 2005 and 20052006 amounted to $2.73, $3.51 and $3.51,$4.76, respectively.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The fair value of stock
optionsawards granted in fiscal
2003 (for pro forma
only), 2004,
2005 and
20052006 was estimated using the Black-Scholes options valuation model with the following weighted average assumptions:
YEARS ENDED AUGUST 31,
-------------------------------------------------------
2005 2004 2003
-------------- ---------------- -----------------
Risk-free interest rate 3.6% 2.7% 4.8%
Expected volatility 95% 100% 80%
Dividend yield Nil Nil Nil
Expected life 66 months 49 months 36 months
If
| | Years ended August 31, |
| | | | | | |
| | 2006 | | 2005 | | 2004 |
| | | | | | |
Risk-free interest rate | | 3.9% | | 3.6% | | 2.7% |
Expected volatility (based on historical volatility) | | 87% | | 95% | | 100% |
Dividend yield | | Nil | | Nil | | Nil |
Expected life | | 66 months | | 66 months | | 49 months |
The company is required to make pro forma disclosures of net earnings (loss) and net earnings (loss) per share for any periods included in the financial statements, as if the fair value-based method of accounting had been applied to outstanding unvested awards granted prior to September 1, 2003. Consequently, if the fair value-based method had been applied to unvested stock options granted prior to September 1, 2003, and outstanding as at August 31, 2003, 2004, 2005 and 2005,2006, the net lossearning (loss) per share and the pro forma net lossearning (loss) per share would have been the same for all reporting years.
The following table summarizes information about stock options as
follows on a pro forma basis:
YEARS ENDED AUGUST 31,
----------------------------------------------------------
2005 2004 2003
------------------ ------------------ ------------------
Net loss for the year $ (1,634) $ (8,424) $ (54,950)
Pro forma adjustment for stock-based compensation costs 131 (174) (683)
------------------ ------------------ ------------------
Pro forma net loss for the year $ (1,503) $ (8,598) $ (55,633)
================== ================== ==================
Basic and diluted net loss per share $ (0.02) $ (0.13) $ (0.87)
Basic and diluted pro forma net loss per share $ (0.02) $ (0.13) $ (0.88)
The following table summarizes information about stock options as at August 31, 2005:
STOCK OPTIONS OUTSTANDING STOCKS OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE PRICE NUMBER EXERCISE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE
(CDN$) (CDN$) (CDN$)
$2.50 to $3.36 542,054 $ 2.50 7.1 years 226,993 $ 2.50
$3.96 to $5.60 620,342 5.04 5.2 years 122,275 4.78
$6.22 to $9.02 243,770 6.53 8.4 years 70,397 7.01
$14.27 to $20.00 507,446 15.87 6.2 years 380,592 15.87
$29.70 to $43.00 600,846 36.29 5.2 years 600,846 36.29
$51.25 to $68.17 205,771 65.83 5.0 years 205,771 65.83
$83.66 43,530 83.66 5.0 years 43,530 83.66
--------------- ------------------ -------------------- --------------- -------------------
2,763,759 $ 19.22 6.0 years 1,650,404 $ 28.28
=============== ================== ==================== =============== ===================
F-23
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
RESTRICTED SHARE UNITS (RSUS)
at August 31, 2006:
| | Stock options outstanding | | Stock options exercisable | |
| | | | | | | | | | | | | | | |
Exercise price | | | Number | | | Weighted average exercise price | | | Aggregate intrinsic value | | | Weighted average remaining contractual life | | | Number | | | Weighted average exercise price | | | Aggregate intrinsic value | |
(CA$) | | | | | | (CA$ | ) | | (CA$ | ) | | | | | | | | (CA$ | ) | | (CA$ | ) |
$2.50 to $3.36 | | | 419,655 | | $ | 2.50 | | $ | 1,402 | | | 6.1 years | | | 273,313 | | $ | 2.50 | | $ | 913 | |
$3.96 to $5.84 | | | 547,687 | | | 5.07 | | | 422 | | | 7.6 years | | | 206,464 | | | 4.92 | | | 190 | |
$6.22 to $9.02 | | | 193,200 | | | 6.52 | | | − | | | 7.4 years | | | 94,260 | | | 6.82 | | | − | |
$14.27 to $20.00 | | | 476,396 | | | 15.78 | | | − | | | 5.2 years | | | 476,396 | | | 15.78 | | | − | |
$29.70 to $43.00 | | | 564,436 | | | 36.27 | | | − | | | 4.2 years | | | 564,436 | | | 36.27 | | | − | |
$51.25 to $68.17 | | | 199,771 | | | 65.76 | | | − | | | 4.0 years | | | 199,771 | | | 65.76 | | | − | |
$83.66 | | | 38,230 | | | 83.66 | | | − | | | 4.0 years | | | 38,230 | | | 83.66 | | | − | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2,439,375 | | $ | 20.26 | | $ | 1,824 | | | 5.7 years | | | 1,852,870 | | $ | 25.19 | | $ | 1,103 | |
Restricted Share Units (RSUs)
RSUs are "phantom"“phantom” shares that rise and fall in value based on the value of the company'scompany’s subordinate voting shares and are redeemable for actual subordinate voting shares or cash at the discretion of the Board of Directors on the vesting dates established by the Board of Directors at the time of grant. The vesting dates are subject to a minimum term of three years and a maximum term of ten years from the award date. RSUs granted under the plan expire at the latest ten years from the date of grant.
During fiscal 2005,
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes RSUs activity since January 2005:
| | Years ended August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Outstanding - Beginning of year | | | 176,185 | | | − | |
Granted | | | 173,803 | | | 176,185 | |
Exercised | | | (4,770 | ) | | − | |
Forfeited | | | (17,341 | ) | | − | |
| | | | | | | |
Outstanding - End of year | | | 327,877 | | | 176,185 | |
None of the company granted 176,185 RSUs that were outstanding as at August 31, 2005. However, none of them2005 and 2006 were exercisable
at that date.redeemable. As at August 31, 2005,2006, the weighted average remaining contractual life of the outstanding RSUs was 9.48.9 years. The weighted average grant-date fair value of these RSUs was $4.68.
DEFERRED SHARE UNIT PLAN
granted during fiscal 2005 and 2006 amounted to $4.68 and $5.39, respectively.
Deferred share unit plan
In January 2005, the company established a Deferred Share Unit (DSU) Plan for the members of the Board of Directors as part of their annual retainer fees. Each DSU entitles the Board members to receive one subordinate voting share. DSUs are acquired on the date of grant and will be redeemed in subordinate voting shares when the Board member will cease to be Director of the company.
During fiscal 2005,
The following table summarizes DSU activity since January 2005:
| | Years ended August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Outstanding - Beginning of year | | | 23,734 | | | − | |
Granted | | | 19,556 | | | 23,734 | |
| | | | | | | |
Outstanding - End of year | | | 43,290 | | | 23,734 | |
None of the company granted 23,734 DSUs that were outstanding as at August 31, 2005 to the members of the Board of Directors.and 2006 were redeemable. The weighted average grant-date fair value of these DSUs was $4.47.
STOCK APPRECIATION RIGHTS PLAN
granted during fiscal 2005 and 2006 amounted to $4.47 and $5.81.
Stock appreciation rights plan
In August 2001, the company established the Stock Appreciation Rights Plan for certain employees. Under that plan, eligible employees are entitled to receive a cash amount equivalent to the difference between the market price of the common shares on the date of exercise and the exercise price determined on the date of grant. Stock appreciation rights granted under the plan generally expire ten years from the date of grant.
Stock appreciation rightsgrant and vest over a four-year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant.
Considering the market price
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes stock appreciation rights activity since August 31,
2002:
YEARS ENDED AUGUST 31,
-------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
Outstanding - Beginning of year 13,000 $ 16 9,000 $ 24 10,000 $ 26
Granted 6,000 4 6,000 5 5,000 2
Forfeited - - (2,000) (19) (6,000) (9)
----------- --------- ---------- ---------- ---------- ----------
Outstanding - End of year 19,000 $ 12 13,000 $ 16 9,000 $ 24
=========== ========= ========== ========== ========== ==========
Exercisable - End of year 7,500 $ 24 4,250 $ 30 3,500 $ 30
=========== ========= ========== ========== ========== ==========
The following table summarizes information about stock appreciation
rights as at August 31, 2005:
STOCK APPRECIATION STOCK APPRECIATION
RIGHTS OUTSTANDING RIGHTS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
EXERCISE PRICE NUMBER LIFE NUMBER
$2.10 2,000 7.6 years 1,000
$4.51 to $4.65 12,000 9.0 years 1,500
$22.25 2,500 5.4 years 2,500
$45.94 2,500 5.0 years 2,500
----------------- ---------------------- -----------------------------
19,000 7.9 years 7,500
================= ====================== =============================
RESTRICTED STOCK AWARD PLAN
2003:
| | Years ended August 31, | |
| | | | | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| | | | | | | | | | | | | |
| | | Number | | | Weighted average exercise price | | | Number | | | Weighted average exercise price | | | Number | | | Weighted average exercise price | |
| | | | | | | | | | | | | | | | | | | |
Outstanding - Beginning of year | | | 19,000 | | $ | 12 | | | 13,000 | | $ | 16 | | | 9,000 | | $ | 24 | |
Granted | | | 5,500 | | | 6 | | | 6,000 | | | 4 | | | 6,000 | | | 5 | |
Forfeited | | | − | | | − | | | − | | | − | | | (2,000 | ) | | (19 | ) |
| | | | | | | | | | | | | | | | | | | |
Outstanding - End of year | | | 24,500 | | $ | 11 | | | 19,000 | | $ | 12 | | | 13,000 | | $ | 16 | |
| | | | | | | | | | | | | | | | | | | |
Exercisable - End of year | | | 11,000 | | $ | 18 | | | 7,500 | | $ | 24 | | | 4,250 | | $ | 30 | |
The following table summarizes information about stock appreciation rights as at August 31, 2006:
| | Stock appreciation rights outstanding | | Stock appreciation rights exercisable | |
| | | | | | | |
Exercise price | | | Number | | | Weighted average remaining contractual life | | | Number | |
| | | | | | | | | | |
$2.21 | | | 2,000 | | | 6.6 years | | | 1,500 | |
$4.51 to $6.50 | | | 17,500 | | | 8.4 years | | | 4,500 | |
$22.25 | | | 2,500 | | | 4.4 years | | | 2,500 | |
$45.94 | | | 2,500 | | | 4.0 years | | | 2,500 | |
| | | | | | | | | | |
| | | 24,500 | | | 7.4 years | | | 11,000 | |
Restricted stock award plan
In December 2000, the company established a Restricted Stock Award Plan for employees of EXFO Burleigh. This plan expired in December 2004. Each stock award entitled employees to receive one subordinate voting share at a purchase price of nil. Stock awards granted under the plan vested over a four-year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. According to the plan, upon the involuntary termination of a member of the defined management team, all outstanding restricted stock awards granted to such an employee automatically vested.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes restricted stock awards activity since August 31,
2002:
YEARS ENDED AUGUST 31,
----------------------------------------------------------
2005 2004 2003
------------------ ------------------ ------------------
Outstanding - Beginning of year 53,592 143,096 215,249
Exercised (53,592) (89,504) (69,935)
Forfeited - - (2,218)
------------------ ------------------ ------------------
Outstanding - End of year - 53,592 143,096
================== ================== ==================
2003:
| | Years ended August 31, | |
| | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
Outstanding - Beginning of year | | | 53,592 | | | 143,096 | |
Exercised | | | (53,592 | ) | | (89,504 | ) |
| | | | | | | |
Outstanding - End of year | | | − | | | 53,592 | |
15 OTHER DISCLOSURES
NET RESEARCH AND DEVELOPMENT EXPENSES
Other Disclosures
Net research and development expenses
Net research and development expenses comprise the following:
YEARS ENDED AUGUST 31,
------------------------------------------------------
2005 2004 2003
----------------- ---------------- -----------------
Gross research and development expenses $ 15,878 $ 15,668 $ 17,133
Research and development tax credits and grants (3,688) (3,278) (3,551)
Research and development tax credit write-offs
(note 4) - - 2,297
----------------- ---------------- -----------------
$ 12,190 $ 12,390 $ 15,879
================= ================ =================
Tax credits written off in fiscal 2003 can be carried forward against
future years' income taxes payable over the next eight years.
GOVERNMENT GRANTS
| | Years ended August 31, | |
| | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
Gross research and development expenses | | $ | 19,488 | | $ | 15,878 | | $ | 15,668 | |
Research and development tax credits and grants | | | (4,084 | ) | | (3,688 | ) | | (3,278 | ) |
| | | | | | | | | | |
| | $ | 15,404 | | $ | 12,190 | | $ | 12,390 | |
Government grants
During 1998, the company entered into an agreement with the Quebec Minister of Industry, Commerce, Science and Technology (the "Minister"(“The Minister”). Pursuant to this agreement, the Minister agreed to contribute, in the form of grants, up to a maximum of Cdn$CA$2,220,000 (US$1,867,000)1,995,000) over the period from January 1, 1998, through December 31, 2002, payable based on the number of full-time jobs created during that period.
Since the period.
The abovebeginning of the program, the company has claimed and received the maximum amount of CA$2,220,000. However, these grants arewere subject to the condition that jobs created pursuant to the agreement be maintained for a period of at least five years from the date of creation. Should this condition not be met by the company,
the Minister may enforce various recourse options, which include
suspension or cancellation of the agreement or repayment of amounts
received by the company. Since the beginning of thisthe program, the company has claimed the maximum amount of Cdn$2,200,000 (US$1,867,000), of which
Cdn$770,000 (US$647,000) was credited to earnings. The balance of
Cdn$1,450,000 (US$1,220,000) was included in government grantsdeferred in the balance sheet. This latter amount will be recognized uponsheet CA$1,450,000 (US$1,307,000) from the amounts received until it received the final approval by the sponsor of the program.
program related to jobs created. In fiscal 2006, the sponsor of the program granted the company with its final approval and the company recorded a non-recurring revenue of CA$1,450,000 (US$1,307,000) in the earnings from operations in the statement of earnings of fiscal 2006.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Furthermore, since 2000, companies operating in the Quebec City area are eligible for a refundable credit granted by the Quebec provincial government. This credit is earned based on the increase of eligible production and marketing salaries incurred in the Quebec City area at a rate of 40%. Since 2000,From the total amount received by the company has claimed a total of Cdn$5,815,000
(US$4,891,000)so far under this program, of which Cdn$5,041,000 (US$4,239,000)
was credited to earnings, the balance of Cdn$CA$774,000 (US$652,000)700,000) was deferred and was included in government grants in the balance sheet. This latter amount will be recognized in the statement of earnings upon the final approval of eligible salaries by the sponsor of the program. Should repayments of any amounts received pursuant to these agreementsthis program be required, such repayments, less related deferred revenue, will be charged to earnings as the amount of any repayment becomes known.
Following is a summary of the classification of these and certain other grants and credits (government grants) in the statements of earnings of the reporting years.
Cost of sales for the years ended August 31, 2003, 2004, 2005 and 2005,2006, is net of government grants of $518,000, $3,000, $89,000 and $89,000,$262,000, respectively.
Selling and administrative expenses for the years ended August 31, 2003,
2004, 2005 and 2005,2006, are net of government grants of $286,000, $5,000, $32,000 and $32,000,$76,000, respectively.
Research and development expenses for the years ended August 31, 2003,
2004, 2005 and 2005,2006, are net of government grants of $45,000, $80,000, $22,000 and $22,000,$4,000, respectively.
DEFINED CONTRIBUTION PLANS
Defined contribution plans
The company maintains separate defined contribution plans for certain eligible employees. These plans, which are accounted for on an accrual basis, are summarized as follows:
o Deferred profit-sharing plan
· | Deferred profit-sharing plan |
The company maintains a plan for certain eligible Canadian resident employees, under which the company may elect to contribute an amount equal to 1% (until May 2005 and 2% thereafter)(1% prior to June 2005) of an employee'semployee’s gross salary, provided that the employee has contributed at least 2% of his/her gross salary to a tax-deferred registered retirement savings plan. Cash contributions to this plan and expenses for the years ended August 31, 2003, 2004, 2005 and 2005,2006, amounted to Cdn$93,000
(US$63,000), Cdn$CA$141,000 (US$106,000) and Cdn$, CA$221,000 (US$179,000) and CA$363,000 (US$316,000), respectively.
o 401K plan
The company maintains a 401K plan for eligible U.S. resident employees. Under this plan, the company must contribute an amount equal to 3% of an employee'semployee’s current compensation. During the years ended August 31, 2003, 2004, 2005 and 2005,2006, the company recorded cash contributions and expenses totaling $253,000, $187,000, $134,000 and $134,000,$126,000, respectively.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
16 INCOME TAXES
Income Taxes
The reconciliation of the income tax provision calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the financial statements is as follows:
F-28
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
YEARS ENDED AUGUST 31,
-----------------------------------------------------
2005 2004 2003
---------------- ----------------- ----------------
Income tax provision at combined Canadian federal and provincial $ 307 $ (3,011) $ (13,563)
statutory tax rate (31% in 2005, 32% in 2004 and 34% in 2003)
Increase (decrease) due to:
Foreign income taxed at different rates (580) (767) (999)
Non-taxable income (827) (128) (298)
Non-deductible expenses 784 1,205 1,609
Tax deductions (81) (169) (80)
Reduction of Canadian federal statutory tax rate - 274 92
Effect of consolidation of subsidiaries (209) (1,384) 184
Previous year tax recovery upon a tax assessment - (1,406) (645)
Other (146) 446 374
Change in valuation allowance 3,375 3,954 28,385
---------------- ----------------- ----------------
$ 2,623 $ (986) $ 15,059
---------------- ----------------- ----------------
The income tax provision consists of the following:
Current
Canadian $ 2,513 $ (577) $ 4,829
United States 6 - (247)
Other 104 (409) 339
---------------- ----------------- ----------------
2,623 (986) 4,921
Future
Canadian (1,445) (1,104) (13,553)
United States (1,723) (2,448) (4,307)
Other (207) (402) (387)
================ ================= ================
(3,375) (3,954) (18,247)
Valuation allowance
Canadian 1,445 1,104 20,359
United States 1,723 2,448 7,374
Other 207 402 652
---------------- ----------------- ----------------
3,375 3,954 28,385
---------------- ----------------- ----------------
$ 2,623 $ (986) $ 15,059
================ ================= ================
Details of the company's income taxes:
Earnings (loss) before income taxes
Canadian $ 3,092 $ (7,740) $ (20,449)
United States (953) (5,879) (13,116)
Other (1,150) 4,209 (6,326)
---------------- ----------------- ----------------
$ 989 $ (9,410) $ (39,891)
================ ================= ================
| | Years ended August 31, | |
| | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
Income tax provision at combined Canadian federal and provincial statutory tax rate (32% in 2006, 31% in 2005 and 32% in 2004) | | $ | 3,430 | | $ | 307 | | $ | (3,011 | ) |
| | | | | | | | | | |
Increase (decrease) due to: | | | | | | | | | | |
Foreign income taxed at different rates | | | (85 | ) | | (580 | ) | | (767 | ) |
Non-taxable income | | | (207 | ) | | (827 | ) | | (128 | ) |
Non-deductible expenses | | | 527 | | | 784 | | | 1,205 | |
Tax deductions | | | − | | | (81 | ) | | (169 | ) |
Change in enacted rates | | | 497 | | | − | | | 274 | |
Effect of consolidation of subsidiaries | | | 61 | | | (209 | ) | | (1,384 | ) |
Previous year tax recovery | | | − | | | − | | | (1,406 | ) |
Other | | | 239 | | | (146 | ) | | 446 | |
Change in valuation allowance | | | (1,877 | ) | | 3,375 | | | 3,954 | |
| | | | | | | | | | |
| | $ | 2,585 | | $ | 2,623 | | $ | (986 | ) |
The income tax provision consists of the following: | | | | | | | | | | |
Current | | | | | | | | | | |
Canadian | | $ | 2,573 | | $ | 2,513 | | $ | (577 | ) |
Other | | | 12 | | | 110 | | | (409 | ) |
| | | | | | | | | | |
| | | 2,585 | | | 2,623 | | | (986 | ) |
Future | | | | | | | | | | |
Canadian | | | 2,687 | | | (1,445 | ) | | (1,104 | ) |
United States | | | (601 | ) | | (1,723 | ) | | (2,448 | ) |
Other | | | (209 | ) | | (207 | ) | | (402 | ) |
| | | | | | | | | | |
| | | 1,877 | | | (3,375 | ) | | (3,954 | ) |
| | | | | | | | | | |
Valuation allowance | | | | | | | | | | |
Canadian | | | (2,687 | ) | | 1,445 | | | 1,104 | |
United States | | | 601 | | | 1,723 | | | 2,448 | |
Other | | | 209 | | | 207 | | | 402 | |
| | | | | | | | | | |
| | | (1,877 | ) | | 3,375 | | | 3,954 | |
| | | | | | | | | | |
| | $ | 2,585 | | $ | 2,623 | | $ | (986 | ) |
| | | | | | | | | | |
Details of the company’s income taxes: | | | | | | | | | | |
Earnings (loss) before income taxes | | | | | | | | | | |
Canadian | | $ | 13,202 | | $ | 3,092 | | $ | (7,740 | ) |
United States | | | (2,103 | ) | | (953 | ) | | (5,879 | ) |
Other | | | (379 | ) | | (1,150 | ) | | 4,209 | |
| | $ | 10,720 | | $ | 989 | | $ | (9,410 | ) |
Most of the
company'scompany’s income tax provision for fiscal 2005
and 2006 represents income taxes payable at the Canadian federal level, which are reduced by research and development tax credits that are recorded against gross research and development
expenses.
F-29
expenses in the statements of earnings.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Significant components of the
company'scompany’s future income tax assets and liabilities are as follows:
AS AT AUGUST 31,
-----------------------------------------
2005 2004
------------------ -------------------
Future income tax assets
Long-lived assets $ 4,902 $ 3,291
Provisions and accruals 7,406 8,755
Government grants 209 188
Deferred revenue 318 336
Share issue expenses 590 657
Research and development expenses 7,292 5,064
Losses carried forward 18,424 15,110
------------ ------------
39,141 33,401
Valuation allowance (38,406) (32,613)
------------ ------------
735 788
Future income tax liabilities
Research and development tax credits (735) (788)
------------ ------------
Future income tax assets, net $ - $ -
============ ============
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Future income tax assets | | | | | | | |
Long-lived assets | | $ | 4,453 | | $ | 4,902 | |
Provisions and accruals | | | 7,315 | | | 7,406 | |
Government grants | | | − | | | 209 | |
Deferred revenue | | | 486 | | | 318 | |
Share issue expenses | | | 531 | | | 590 | |
Research and development expenses | | | 8,527 | | | 7,292 | |
Losses carried forward | | | 18,118 | | | 18,424 | |
| | | | | | | |
| | | 39,430 | | | 39,141 | |
Valuation allowance | | | (38,543 | ) | | (38,406 | ) |
| | | | | | | |
| | | 887 | | | 735 | |
| | | | | | | |
Future income tax liabilities | | | | | | | |
Research and development tax credits | | | (887 | ) | | (735 | ) |
| | | | | | | |
Future income tax assets, net | | $ | − | | $ | − | |
As at August 31,
2005,2006, the company had available operating losses in several tax jurisdictions, against which a full valuation allowance of
$18,424,000$18,118,000 was
established.recorded. The following table summarizes the year of expiry of these operating losses by tax jurisdiction:
CANADA UNITED STATES
YEAR OF EXPIRY FEDERAL PROVINCIAL AND OTHER
--------------- ---------------- -----------------
2006 $ 63,000 $ - $ -
2007 1,710,000 73,000 206,000
2008 5,614,000 61,000 1,916,000
2009 5,921,000 3,563,000 571,000
2010 4,211,000 2,211,000 257,000
2014 81,000 - -
2015 1,775,000 1,778,000 -
2022 - - 9,025,000
2023 - - 10,517,000
2024 - - 6,818,000
2025 - - 8,207,000
Indefinite 2,041,000 2,349,000 1,750,000
--------------- ---------------- -----------------
$ 21,416,000 $ 10,035,000 $ 39,267,000
=============== ================ =================
In | | Canada | | United States | |
Year of expiry | | Federal | | Provinces | | and Other | |
| | | | | | | |
2008 | | $ | 1,252 | | $ | 92 | | $ | 1,857 | |
2009 | | | 5,186 | | | 394 | | | 599 | |
2010 | | | 4,677 | | | 327 | | | 266 | |
2011 | | | 168 | | | 86 | | | - | |
2013 | | | - | | | - | | | 876 | |
2015 | | | 1,666 | | | 1,670 | | | - | |
2022 | | | - | | | - | | | 9,406 | |
2023 | | | - | | | - | | | 11,621 | |
2024 | | | - | | | - | | | 6,700 | |
2025 | | | - | | | - | | | 6,690 | |
2026 | | | 1,694 | | | 1,696 | | | 2,737 | |
Indefinite | | | 1,702 | | | 1,775 | | | 1,996 | |
| | | | | | | | | | |
| | $ | 16,345 | | $ | 6,040 | | $ | 42,748 | |
As at August 31, 2006, in addition to operating losses,
as at August 31, 2005, the company had available research and development expenses in Canada amounting to
$24,420,000$33,745,000 at the federal level and
$20,668,000$15,276,000 at the provincial level, against which a full valuation allowance of
$7,292,000$8,527,000 was
established.recorded. These expenses can be carried forward indefinitely against future
years'years’ taxable income in their respective tax jurisdiction.
F-30
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Finally, as at August 31, 2006, the company had available research and development tax credits at the Canadian federal level in the amount of $3,697,000 that can be carried forward against future years’ income taxes payable over the next ten years. These tax credits were not recorded in the balance sheet as at August 31, 2006.
17 LOSS PER SHARE
Earnings per Share
The following table summarizes the reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding:
YEARS ENDED AUGUST 31,
-----------------------------------------------------
2005 2004 2003
--------------- ------------- -----------
Basic weighted average number of shares
outstanding (000's) 68,526 66,020 62,852
Dilutive effect of stock options (000's) 422 502 301
Dilutive effect of restricted stock awards (000's) 17 93 164
Dilutive effect of deferred share units (000's) 8 - -
Dilutive effect of restricted share units (000's) 8 - -
--------------- ------------- -----------
Diluted weighted average number of shares outstanding (000's) 68,981 66,615 63,317
=============== ============= ===========
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) 1,962 2,128 2,533
=============== ============= ===========
| | Years ended August 31, | |
| | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
Basic weighted average number of shares outstanding (000’s) | | | 68,643 | | | 68,526 | | | 66,020 | |
Plus dilutive effect of: | | | | | | | | | | |
Stock options (000’s) | | | 502 | | | 422 | | | 502 | |
Deferred share units (000’s) | | | 31 | | | 8 | | | − | |
Restricted share units (000’s) | | | 99 | | | 8 | | | − | |
Restricted stock awards (000’s) | | | − | | | 17 | | | 93 | |
| | | | | | | | | | |
Diluted weighted average number of shares outstanding (000’s) | | | 69,275 | | | 68,981 | | | 66,615 | |
| | | | | | | | | | |
Stock awards excluded from the calculation of the diluted weighted average number of shares outstanding because their exercise price was greater than the average market price of the common shares (000’s) | | | 1,628 | | | 1,962 | | | 2,128 | |
The diluted net loss per share for the years ended August 31,
2003, 2004 and 2005, was the same as the basic net loss per share since the dilutive effect of stock options,
deferred share units, restricted
stock awards, deferred share units and restricted
share unitsstock awards should not be included in the calculation; otherwise, the effect would be anti-dilutive. Accordingly, diluted net loss per share for those years was calculated using the basic weighted average number of shares outstanding.
18 FINANCIAL INSTRUMENTS
SHORT-TERM INVESTMENTS
F-31
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
18Financial Instruments
Short-term investments
Short-term investments consist of the following:
AS AT AUGUST 31,
---------------------------------
2005 2004
------------- ------------
Commercial paper denominated in Canadian dollars, bearing
interest at annual rates of 2.44% to 2.75% in 2005
and 2.00% to 2.14% in 2004, maturing on different
dates between September 2005 and January 2006 in
fiscal 2005, and October 2004 and January 2005 in
fiscal 2004 $ 104,883 $ 65,359
Mutual funds denominated in Canadian dollars - 18,610
------------- ------------
$ 104,883 $ 83,969
============= ============
F-32
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
FAIR VALUE
the following:
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Commercial paper denominated in Canadian dollars, bearing interest at annual rates of 3.92% to 4.31% in 2006 and 2.44% to 2.75% in 2005, maturing on different dates between September 2006 and January 2007 in fiscal 2006, and September 2005 and January 2006 in fiscal 2005 | | $ | 104,437 | | $ | 104,883 | |
Fair value
Cash, accounts receivable, as well as accounts payable and accrued liabilities as well as long-term debt, are financial instruments whose carrying values approximate their fair values.
The fair value of the long-term debt amounted to $481,000 and $344,000 as
at August 31, 2004 and 2005.
The fair value of short-term investments, based on market value, amounted to $83,969,000$104,883,000 and $104,883,000$104,437,000 as at August 31, 20042005 and 2005,2006, respectively.
The fair value of forward exchange contracts, which represents the difference between their contractual amounts and their current trading value, amounted to an unrecognized gaingains of $1,975,000$2,937,000 and $2,937,000$5,451,000 as at August 31, 20042005 and 2005,2006, respectively.
CREDIT RISK
Credit risk
Financial instruments that potentially subject the company to credit risk consist primarily of cash, short-term investments, accounts receivable and forward exchange contracts. The company'scompany’s short-term investments consist of debt instruments issued by six (sevennine (six in 2004)2005) quality high-credit
quality corporations and trusts. The company'scompany’s cash and forward exchange contracts are held with or issued by quality high-credit quality financial institutions; therefore, the company considers the risk of non-performance on these instruments to be remote.
Generally, the company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended to customers following an evaluation of creditworthiness. In addition, the company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Allowance for doubtful accounts amounted to $510,000$352,000 and $352,000$451,000 as at August 31, 20042005 and 2005,2006, respectively.
INTEREST RATE RISK
As at August 31, 2005, the company's exposure
EXFO Electro-Optical Engineering Inc.
Notes to interest rate risk is
summarized as follows:
Cash Non-interest bearing
Short-term investments As described above
Accounts receivable Non-interest bearing
Accounts payable and accrued liabilities Non-interest bearing
Long-term debt As described in note 10
F-33
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularConsolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
FORWARD EXCHANGE CONTRACTS
Interest rate risk
As at August 31, 2006, the company’s exposure to interest rate risk is summarized as follows:
Cash | | Non-interest bearing |
Short-term investments | | As described above |
Accounts receivable | | Non-interest bearing |
Accounts payable and accrued liabilities | | Non-interest bearing |
Long-term debt | | As described in note 10 |
Forward exchange contracts
The company is exposed to currency risks as a result of its export sales of products manufactured in Canada, substantially all of which are denominated in US dollars. These risks are partially hedged by forward exchange contracts and certain operating expenses. As at August 31,
20042005 and
2005,2006, the company held contracts to sell US dollars at various forward rates, which are summarized as follows:
CONTRACTUAL WEIGHTED AVERAGE
AMOUNTS CONTRACTUAL FORWARD RATES
----------- -------------------------
As at August 31, 2004
September 2004 to August 2005 $ 7,480 1.5427
September 2005 to March 2007 8,400 1.3622
As at August 31, 2005
September 2005 to August 2006 $ 26,000 1.2630
September 2006 to November 2007 7,600 1.2500
| | Contractual amounts | | Weighted average contractual forward rates | |
| | | | | |
As at August 31, 2005 | | | | | |
September 2005 to August 2006 | | $ | 26,000 | | | 1.2630 | |
September 2006 to November 2007 | | | 7,600 | | | 1.2500 | |
As at August 31, 2006 | | | | | | | |
September 2006 to August 2007 | | $ | 37,000 | | | 1.1676 | |
September 2007 to June 2009 | | | 26,800 | | | 1.1261 | |
19 SEGMENT INFORMATION
In September 2003, theSegment Information
The company reorganized its businessis organized under two reportable segments: the Telecom Division and the Life Sciences and Industrial Division. The Telecom Division offers integrated test solutions to network service providers, cable operators, system vendors and component manufacturers throughout the global telecommunications industry. The Life Sciences and Industrial Division mainly leverages developed and acquired core telecom technologies for high-precision assembly and research sectors.
The reporting structure reflects how the company manages its business and how it classifies its operations for planning and measuring performance.
Until August 31, 2003, the company was organized under one reportable
segment, being the development, manufacturing and marketing
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following tables present information by segment:
YEAR ENDED AUGUST 31, 2005
---------------------------------------------------------------------
LIFE SCIENCES AND
TELECOM DIVISION INDUSTRIAL DIVISION TOTAL
---------------- ------------------- -------------
Sales $ 80,120 $ 17,096 $ 97,216
Earnings (loss) from operations $ 763 $ (962) $ (199)
Unallocated items:
Interest and other income 2,524
Foreign exchange loss (1,336)
-------------
Earnings before income taxes 989
Income taxes 2,623
-------------
Net loss for the year $ (1,634)
=============
Amortization of capital assets $ 6,504 $ 2,588 $ 9,092
================ ============= =============
Stock-based compensation costs $ 897 $ 66 $ 963
================ ============= =============
Capital expenditures $ 1,408 $ 93 $ 1,501
================ ============= =============
YEAR ENDED AUGUST 31, 2004
---------------------------------------------------------------------
LIFE SCIENCES AND
TELECOM DIVISION INDUSTRIAL DIVISION TOTAL
---------------- ------------------- -------------
Sales $ 58,882 $ 15,748 $ 74,630
Loss from operations $ (5,557) $ (5,013) $ (10,570)
Unallocated items:
Interest and other income 1,438
Foreign exchange loss (278)
-------------
Loss before income taxes (9,410)
Income taxes (986)
-------------
Net loss for the year (8,424)
=============
Amortization of capital assets $ 6,643 $ 3,372 $ 10,015
================ ============= =============
Stock-based compensation costs $ 417 $ 32 $ 449
================ ============= =============
Impairment of long-lived assets (note 4) $ 620 $ - $ 620
================ ============= =============
Restructuring and other charges (note 4) $ - $ 1,261 $ 1,261
================ ============= =============
Capital expenditures $ 607 $ 244 $ 851
================ ============= =============
F-35
| | Year ended August 31, 2006 | |
| | | | | | | |
| | Telecom Division | | Life Sciences and Industrial Division | | Total | |
| | | | | | | |
Sales | | $ | 107,376 | | $ | 20,877 | | $ | 128,253 | |
Earnings from operations | | $ | 6,679 | | $ | 1,383 | | $ | 8,062 | |
Unallocated items: | | | | | | | | | | |
Interest and other income | | | | | | | | | 3,253 | |
Foreign exchange loss | | | | | | | | | (595 | ) |
| | | | | | | | | | |
Earnings before income taxes | | | | | | | | | 10,720 | |
Income taxes | | | | | | | | | 2,585 | |
| | | | | | | | | | |
Net earnings for the year | | | | | | | | $ | 8,135 | |
| | | | | | | | | | |
Government grants (note 15) | | $ | (1,307 | ) | $ | − | | $ | (1,307 | ) |
| | | | | | | | | | |
Amortization of capital assets | | $ | 6,689 | | $ | 1,228 | | $ | 7,917 | |
| | | | | | | | | | |
Stock-based compensation costs | | $ | 962 | | $ | 70 | | $ | 1,032 | |
| | | | | | | | | | |
Impairment of long-lived assets (note 4) | | $ | − | | $ | 604 | | $ | 604 | |
| | | | | | | | | | |
Capital expenditures | | $ | 3,049 | | $ | 329 | | $ | 3,378 | |
| | Year ended August 31, 2005 | |
| | | | | | | |
| | Telecom Division | | Life Sciences and Industrial Division | | Total | |
| | | | | | | |
Sales | | $ | 80,120 | | $ | 17,096 | | $ | 97,216 | |
Earnings (loss) from operations | | $ | 763 | | $ | (962 | ) | $ | (199 | ) |
Unallocated items: | | | | | | | | | | |
Interest and other income | | | | | | | | | 2,524 | |
Foreign exchange loss | | | | | | | | | (1,336 | ) |
| | | | | | | | | | |
Earnings before income taxes | | | | | | | | | 989 | |
Income taxes | | | | | | | | | 2,623 | |
| | | | | | | | | | |
Net loss for the year | | | | | | | | $ | (1,634 | ) |
| | | | | | | | | | |
Amortization of capital assets | | $ | 6,504 | | $ | 2,588 | | $ | 9,092 | |
| | | | | | | | | | |
Stock-based compensation costs | | $ | 897 | | $ | 66 | | $ | 963 | |
| | | | | | | | | | |
Capital expenditures | | $ | 1,408 | | $ | 93 | | $ | 1,501 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
YEAR ENDED AUGUST 31, 2003
---------------------------------------------------------------------
LIFE SCIENCES AND
TELECOM DIVISION INDUSTRIAL DIVISION TOTAL
---------------- ------------------- -------------
Sales $ 48,753 $ 13,177 $ 61,930
Comparative information for fiscal 2003 for the loss from operations and
related information as well as capital expenditures is not provided for
each reportable segment because this information is not available and is
impracticable to determine.
| | Year ended August 31, 2004 | |
| | | | | | | |
| | Telecom Division | | Life Sciences and Industrial Division | | Total | |
| | | | | | | |
Sales | | $ | 58,882 | | $ | 15,748 | | $ | 74,630 | |
Loss from operations | | $ | (5,557 | ) | $ | (5,013 | ) | $ | (10,570 | ) |
Unallocated items: | | | | | | | | | | |
Interest and other income | | | | | | | | | 1,438 | |
Foreign exchange loss | | | | | | | | | (278 | ) |
| | | | | | | | | | |
Loss before income taxes | | | | | | | | | (9,410 | ) |
Income taxes | | | | | | | | | (986 | ) |
| | | | | | | | | | |
Net loss for the year | | | | | | | | $ | (8,424 | ) |
| | | | | | | | | | |
Amortization of capital assets | | $ | 6,643 | | $ | 3,372 | | $ | 10,015 | |
| | | | | | | | | | |
Stock-based compensation costs | | $ | 417 | | $ | 32 | | $ | 449 | |
| | | | | | | | | | |
Impairment of long-lived assets (note 4) | | $ | 620 | | $ | − | | $ | 620 | |
| | | | | | | | | | |
Restructuring and other charges (note 4) | | $ | − | | $ | 1,261 | | $ | 1,261 | |
| | | | | | | | | | |
Capital expenditures | | $ | 607 | | $ | 244 | | $ | 851 | |
Total assets by reportable segment are detailed as follows:
AS AT AUGUST 31,
------------------------------------
2005 2004
------------ -------------
Telecom Division $ 64,655 $ 60,284
Life Sciences and Industrial Division 11,449 15,094
Unallocated assets 114,853 97,413
------------ -------------
$ 190,957 $ 172,791
============ =============
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Telecom Division | | $ | 93,853 | | $ | 64,655 | |
Life Sciences and Industrial Division | | | 11,339 | | | 11,449 | |
Unallocated assets | | | 113,967 | | | 114,853 | |
| | | | | | | |
| | $ | 219,159 | | $ | 190,957 | |
Unallocated assets are comprised of cash, short-term investments and income taxes and tax credits recoverable.
Carrying value
Table of goodwill by reportable segment is detailed as follows:
AS AT AUGUST 31,
------------------------------------
2005 2004
------------ -------------
Telecom Division $ 16,092 $ 14,530
Life Sciences and Industrial Division 4,278 3,863
------------ -------------
$ 20,370 $ 18,393
============ =============
Sales to external customers by geographic region are detailed as follows:
YEARS ENDED AUGUST 31,
-------------------------------------------------
2005 2004 2003
----------- ----------- ----------
United States $ 56,282 $ 40,019 $ 31,561
Canada 6,830 5,818 4,806
Latin America 3,127 3,547 4,467
----------- ----------- ----------
66,239 49,384 40,834
Europe, Middle East and Africa 19,396 13,706 11,092
Asia-Pacific 11,581 11,540 10,004
----------- ----------- ----------
$ 97,216 $ 74,630 $ 61,930
=========== =========== ==========
F-36
Contents EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Carrying value of goodwill by reportable segment is detailed as follows:
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Telecom Division | | $ | 22,545 | | $ | 16,092 | |
Life Sciences and Industrial Division | | | 4,597 | | | 4,278 | |
| | | | | | | |
| | $ | 27,142 | | $ | 20,370 | |
Sales to external customers by geographic region are detailed as follows:
| | Years ended August 31, | |
| | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
United States | | $ | 59,457 | | $ | 56,282 | | $ | 40,019 | |
Canada | | | 8,767 | | | 6,830 | | | 5,818 | |
Latin America | | | 8,380 | | | 3,127 | | | 3,547 | |
| | | | | | | | | | |
| | | 76,604 | | | 66,239 | | | 49,384 | |
Europe, Middle East and Africa | | | 32,379 | | | 19,396 | | | 13,706 | |
Asia-Pacific | | | 19,270 | | | 11,581 | | | 11,540 | |
| | | | | | | | | | |
| | $ | 128,253 | | $ | 97,216 | | $ | 74,630 | |
Sales were allocated to geographic regions based on the country of residence of the related customers. In fiscal 2004, 2005 and 2005,2006, one customer represented more than 10% of sales with 13.8% of sales ($10,325,000) in fiscal 2004, and 23.3% of sales ($22,629,000) in fiscal 2005. In fiscal 2003, no
single customer accounted for 10%2005 and 13.8% of sales or more.($17,706,000) in 2006. For fiscal 2004, 2005 and 2005,2006, the most important customer purchased from the Telecom Division.
Long-lived assets by geographic region are detailed as follows:
AS AT AUGUST 31,
--------------------------------
2005 2004
------------- ------------
Canada $ 35,690 $ 37,948
United States 5,601 6,934
------------- ------------
$ 41,291 $ 44,882
============= ============
| | As at August 31, | |
| | | | | |
| | | 2006 | | | 2005 | |
| | | | | | | |
Canada | | $ | 51,724 | | $ | 35,690 | |
United States | | | 3,758 | | | 5,601 | |
| | | | | | | |
| | $ | 55,482 | | $ | 41,291 | |
Long-lived assets consist of property, plant and equipment, the long-lived asset held for sale, intangible assets and goodwill.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
20 RELATED PARTY TRANSACTIONS
In fiscal 2003, the company acquired a building from a company owned by
the President of EXFO for a cash consideration of $930,000. This
transaction was measured at the fair market value since it was not
conducted during the normal course of operations, the change in ownership
interest in the building was substantive and the fair market value was
supported by an independent appraisal.
For the years ended August 31, 2003 and 2004, the company leased
facilities from the company owned by the President of EXFO. The annual
rental expense amounted to $331,000 and nil, respectively. The rental
expense for fiscal 2003 included $234,000 for future payments on an
exited leased facility; this expense was recorded in the restructuring
and other charges in the statement of earnings for that year (notes 4 and
9). As at August 31, 2004, restructuring charges payable included
$194,000 due to the company owned by the President of the EXFO in
connection with this exited leased facility. However, in September 2004,
EXFO was released from its obligations under that lease, and it paid the
full amount due to the related company. These rental expenses were
measured at the fair market value since they were incurred during the
normal course of operations.
21 UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
United States Generally Accepted Accounting Principles
As a registrant with the Securities and Exchange Commission in the United States (SEC), the company is required to reconcile its financial statements for significant differences between generally accepted accounting principles as applied in Canada (Canadian GAAP) and those applied in the United States (U.S. GAAP). Furthermore, additional significant disclosures required under U.S. GAAP and Regulation S-X of the SEC are also provided in the accompanying financial statements and
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
notes. The following summarizes the significant quantitative differences between Canadian and U.S. GAAP, as well as other significant disclosures required under U.S. GAAP and Regulation S-X of the SEC not already provided in the accompanying financial statements.
RECONCILIATION OF NET LOSS TO CONFORM TO
Reconciliation of net earnings (loss) to conform to U.S. GAAP
The following summary sets out the significant differences between the
company'scompany’s reported net
lossearnings (loss) and net
lossearnings (loss) per share under Canadian GAAP as compared to U.S. GAAP. Please
seerefer to corresponding explanatory notes in the Reconciliation Items section.
YEARS ENDED AUGUST 31,
------------------------------------------------
2005 2004 2003
----------- ----------- -----------
Net loss for the year in accordance with Canadian GAAP $ (1,634) $ (8,424) $ (54,950)
Stock-based compensation costs a) - (867) (832)
Unrealized gains (losses) on forward exchange contracts b) (1,286) (280) 1,645
Amortization of intangible assets c) - - 832
Write-down of goodwill and intangible assets c) - - 6,178
Income tax effect on reconciliation items - - (1,074)
----------- ----------- -----------
Net loss for the year in accordance with
U.S. GAAP (2,920) (9,571) (48,201)
Other comprehensive income (loss)
Foreign currency translation adjustment 15,669 5,969 15,089
Unrealized gains on forward exchange contracts b) 2,313 689 -
Reclassification of losses on forward exchange contracts in
net loss b) (65) - -
----------- ----------- -----------
Comprehensive income (loss) $ 14,997 $ (2,913) $ (33,112)
=========== =========== ===========
Basic and diluted net loss per share in accordance $ (0.04) $ (0.14) $ (0.77)
with U.S. GAAP
Basic weighted average number of shares outstanding (000's) 68,526 66,020 62,852
F-38
| | | | Years ended August 31, | |
| | | | | | | | | |
| | | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | |
Net earnings (loss) for the year in accordance with Canadian GAAP | | | | | $ | 8,135 | | $ | (1,634 | ) | $ | (8,424 | ) |
Stock-based compensation costs | | | a | ) | | − | | | − | | | (867 | ) |
Unrealized losses on forward exchange contracts | | | b | ) | | − | | | (1,286 | ) | | (280 | ) |
| | | | | | | | | | | | | |
Net earnings (loss) for the year in accordance with U.S. GAAP | | | | | | 8,135 | | | (2,920 | ) | | (9,571 | ) |
| | | | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | 12,322 | | | 15,669 | | | 5,969 | |
Unrealized gains on forward exchange contracts | | | b | ) | | 5,394 | | | 2,313 | | | 689 | |
Reclassification of realized gains on forward exchange contracts in net earnings (loss) | | | b | ) | | (2,880 | ) | | (65 | ) | | − | |
Comprehensive income (loss) | | | | | $ | 22,971 | | $ | 14,997 | | $ | (2,913 | ) |
| | | | | | | | | | | | | |
Basic and diluted net earnings (loss) per share in accordance with U.S. GAAP | | | | | $ | 0.12 | | $ | (0.04 | ) | $ | (0.14 | ) |
| | | | | | | | | | | | | |
Basic weighted average number of shares outstanding (000’s) | | | | | | 68,643 | | | 68,526 | | | 66,020 | |
Diluted weighted average number of shares outstanding (000’s) | | | | | | 69,275 | | | 68,981 | | | 66,615 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
RECONCILIATION OF SHAREHOLDERS' EQUITY TO CONFORM TO
Reconciliation of shareholders’ equity to conform to U.S. GAAP
The following summary sets out the significant differences between the
company'scompany’s reported
shareholders'shareholders’ equity under Canadian GAAP as compared to U.S. GAAP. Please
seerefer to the corresponding explanatory
notesnote in the Reconciliation Items section.
AS AT AUGUST 31,
---------------------------------------------------
2005 2004 2003
-------------- ------------- -------------
Shareholders' equity in accordance with Canadian GAAP $ 173,400 $ 157,327 $ 129,826
Forward exchange contracts b) 2,937 1,975 1,566
Goodwill c) (11,042) (10,008) (9,771)
Other - - (29)
-------------- ------------- -------------
Shareholders' equity in accordance with U.S. GAAP $ 165,295 $ 149,294 $ 121,592
============== ============= =============
F-39
| | | | As at August 31, | |
| | | | | | | | | |
| | | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | |
Shareholders’ equity in accordance with Canadian GAAP | | | | | $ | 196,234 | | $ | 173,400 | | $ | 157,327 | |
Forward exchange contracts | | | b | ) | | 5,451 | | | 2,937 | | | 1,975 | |
Goodwill | | | | | | (11,908 | ) | | (11,042 | ) | | (10,008 | ) |
| | | | | | | | | | | | | |
Shareholders’ equity in accordance with U.S. GAAP | | | | | $ | 189,777 | | $ | 165,295 | | $ | 149,294 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes the
shareholders'shareholders’ equity activity under U.S. GAAP since August 31,
2002:
DEFERRED ACCUMULATED
STOCK-BASED OTHER
SHARE CONTRIBUTED COMPENSATION OTHER COMPREHENSIVE SHAREHOLDERS'
CAPITAL SURPLUS DEFICIT COSTS CAPITAL INCOME (LOSS) EQUITY
---------- ---------- ---------- ------------ --------- ------------- ------------
Balance as at August
31, 2002 $ 560,943 $ 1,487 $(406,387) $ (2,867) $ 7,693 $ (9,870) $ 150,999
Net loss for the year - - (48,201) - - - (48,201)
Stock-based
compensation costs a) 1,507 - - 1,589 (2,264) - 832
Foreign currency
transaction adjustment - - - - - 15,089 15,089
Business combination
(note 13) 2,796 - - - - - 2,796
Exercise of stock
options (note 13) 45 - - - - - 45
Premium on resale of
share capital - 32 - - - - 32
---------- --------- --------- ---------- --------- ---------- ----------
Balance as at August
31, 2003 565,291 1,519 (454,588) (1,278) 5,429 5,219 121,592
Net loss for the year - - (9,571) - - - (9,571)
Stock-based a)
compensation costs e) 1,737 - - 339 (760) - 1,316
Foreign currency
transaction adjustment - - - - - 5,969 5,969
Unrealized gains on
forward exchange
contracts b) - - - - - 689 689
Public offering (note 13) 29,164 - - - - - 29,164
Exercise of stock
options (note 13) 254 - - - - - 254
Share issue expenses
(note 13) (137) - - - - - (137)
Premium on resale of
share capital - 18 - - - - 18
---------- --------- --------- ---------- --------- ---------- ----------
Balance as at August
31, 2004 596,309 1,537 (464,159) (939) 4,669 11,877 149,294
Net loss for the year - - (2,920) - - - (2,920)
Stock-based a)
compensation costs e) 1,213 - - (776) 425 - 862
Foreign currency
transaction adjustment - - - - - 15,669 15,669
Unrealized gains on
forward exchange
contracts b) - - - - - 2,248 2,248
Exercise of stock
options (note 13) 148 - - - - - 148
Share issue expenses
(note 13) (6) - - - - - (6)
---------- --------- --------- ---------- --------- ---------- ----------
Balance as at August
31, 2005 $ 597,664 $ 1,537 $(467,079) $ (1,715) $ 5,094 $ 29,794 $ 165,295
========== ========= ========= ========== ========= ========== ==========
F-40
2003: | | Share capital | | Contributed surplus | | Deficit | | Deferred stock-based compensation costs | | Other capital | | Accumulated other comprehensive income | | Shareholders’ equity | |
| | | | | | | | | | | | | | | |
Balance as at August 31, 2003 | | $ | 565,291 | | $ | 1,519 | | $ | (454,588 | ) | $ | (1,278 | ) | $ | 5,429 | | $ | 5,219 | | $ | 121,592 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net loss for the year | | | − | | | − | | | (9,571 | ) | | − | | | − | | | − | | | (9,571 | ) |
Stock-based compensation costs | | | 1,737 | | | − | | | − | | | 339 | | | (760 | ) | | − | | | 1,316 | |
Foreign currency translation adjustment | | | − | | | − | | | − | | | − | | | − | | | 5,969 | | | 5,969 | |
Unrealized gains on forward exchange contracts | | | − | | | − | | | − | | | − | | | − | | | 689 | | | 689 | |
Public offering (note 13) | | | 29,164 | | | − | | | − | | | − | | | − | | | − | | | 29,164 | |
Exercise of stock options (note 13) | | | 254 | | | − | | | − | | | − | | | − | | | − | | | 254 | |
Share issue expenses (note 13) | | | (137 | ) | | − | | | − | | | − | | | − | | | − | | | (137 | ) |
Premium on resale of share capital | | | − | | | 18 | | | − | | | − | | | − | | | − | | | 18 | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as at August 31, 2004 | | | 596,309 | | | 1,537 | | | (464,159 | ) | | (939 | ) | | 4,669 | | | 11,877 | | | 149,294 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net loss for the year | | | − | | | − | | | (2,920 | ) | | − | | | − | | | − | | | (2,920 | ) |
Stock-based compensation costs | | | 1,213 | | | − | | | − | | | (776 | ) | | 425 | | | − | | | 862 | |
Foreign currency translation adjustment | | | − | | | − | | | − | | | − | | | − | | | 15,669 | | | 15,669 | |
Unrealized gains on forward exchange contracts | | | − | | | − | | | − | | | − | | | − | | | 2,248 | | | 2,248 | |
Exercise of stock options (note 13) | | | 148 | | | − | | | − | | | − | | | − | | | − | | | 148 | |
Share issue expenses (note 13) | | | (6 | ) | | − | | | − | | | − | | | − | | | − | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as at August 31, 2005 | | | 597,664 | | | 1,537 | | | (467,079 | ) | | (1,715 | ) | | 5,094 | | | 29,794 | | | 165,295 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net earnings for the year | | | − | | | − | | | 8,135 | | | − | | | − | | | − | | | 8,135 | |
Stock-based compensation costs | | | − | | | − | | | − | | | 344 | | | 610 | | | − | | | 954 | |
Foreign currency translation adjustment | | | − | | | − | | | − | | | − | | | − | | | 12,322 | | | 12,322 | |
Unrealized gains on forward exchange contracts | | | − | | | − | | | − | | | − | | | − | | | 2,514 | | | 2,514 | |
Exercise of stock options (note 13) | | | 557 | | | − | | | − | | | − | | | − | | | − | | | 557 | |
Reclassification of stock-based compensation costs upon exercise of stock awards (note 13) | | | 200 | | | − | | | − | | | − | | | (200 | ) | | − | | | − | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as at August 31, 2006 | | $ | 598,421 | | $ | 1,537 | | $ | (458,944 | ) | $ | (1,371 | ) | $ | 5,504 | | $ | 44,630 | | $ | 189,777 | |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Accumulated other comprehensive income
(loss) is comprised of the following:
AS AT AUGUST 31,
------------------------------------------------
2005 2004 2003
----------- ----------- ------------
Foreign currency translation adjustment
Current year $ 15,669 $ 5,969 $ 15,089
Cumulative effect of prior years 11,188 5,219 (9,870)
----------- ----------- ------------
26,857 11,188 5,219
Unrealized gains on forward exchange contracts
Current year 2,248 689 -
Cumulative effect of prior years 689 - -
----------- ----------- ------------
2,937 689 -
----------- ----------- ------------
$ 29,794 $ 11,877 $ 5,219
=========== =========== ============
STATEMENTS OF CASH FLOWS
| | | | As at August 31, | |
| | | | | | | | | |
| | | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | |
Current year | | | | | $ | 12,322 | | $ | 15,669 | | $ | 5,969 | |
Cumulative effect of prior years | | | | | | 26,857 | | | 11,188 | | | 5,219 | |
| | | | | | | | | | | | | |
| | | | | | 39,179 | | | 26,857 | | | 11,188 | |
Unrealized gains on forward exchange contracts | | | b | ) | | | | | | | | | |
Current year | | | | | | 2,514 | | | 2,248 | | | 689 | |
Cumulative effect of prior years | | | | | | 2,937 | | | 689 | | | − | |
| | | | | | | | | | | | | |
| | | | | | 5,451 | | | 2,937 | | | 689 | |
| | | | | | | | | | | | | |
| | | | | $ | 44,630 | | $ | 29,794 | | $ | 11,877 | |
Statements of cash flows
For the years ended August 31, 2003, 2004, 2005 and 2005,2006, there were no significant differences between the statements of cash flows under Canadian GAAP as compared to U.S. GAAP, except for the subtotal before change in non-cash operating items, whose presentation is not permitted under U.S. GAAP.
RECONCILIATION ITEMS
Reconciliation items
a) ACCOUNTING FOR STOCK-BASED COMPENSATION
Accounting for stock-based compensation
Until August 31, 2003, and to conform to U.S. GAAP, the company measured stock-based compensation costs using the intrinsic value method (APB 25, "Accounting for Stock Issued to Employees"). However, since September 1, 2003, and as described in item e) below, the company accounts for stock-based compensation costs for awards granted after that date, using the fair value-based method to conform to Statement of Financial Accounting Standard (SFAS) 123, "Accounting“Accounting for Stock-Based Compensation"Compensation” and subsequently, SFAS123(R), “Share-Based Payments”.
STOCK PURCHASE PLAN
Stock Purchase Plan
Under APB 25, compensation costs related to the stock purchase plan were measured as the difference between the fair value of the purchased stock and the purchase price paid by plan participants. Compensation costs were amortized to expense over a period of five years, being the restriction period. This plan terminated at the time of the Initial Public Offering on June 29, 2000. Compensation costs related to this plan became fully amortized during fiscal 2004.
F-41
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
LONG-TERM INCENTIVE PLAN (FORMELY STOCK OPTION PLAN)
Long-Term Incentive Plan
Until August 31, 2003, and under APB 25, compensation costs related to the long-term incentive plan were measured as the difference between the market price of the underlying stock at the date of grant and the exercise price of the stock option. These compensation costs were amortized to expense over the estimated vesting period up to a maximum of four years. Compensation costs related to stock options granted prior to September 1, 2003, and accounted for under APB 25 became fully amortized during fiscal 2004.
RESTRICTED STOCK AWARD PLAN
Restricted Stock Award Plan
Under APB 25, compensation costs related to the restricted stock award plan were measured as the difference between the market price of the underlying stock at the date of grant and the exercise price of the stock award, which iswas nil. These compensation costs were amortized to expense over the estimated vesting period up to a maximum of four years, being the acquisition period. Compensation costs related to this plan, which were accounted for under APB 25, became fully amortized during fiscal 2004.
Until August 31, 2003, no compensation costs were recognized for these stock-based compensation plans under Canadian GAAP.
b) FORWARD EXCHANGE CONTRACTS
Forward exchange contracts
The forward exchange contracts entered into by the company prior to September 1, 2003, dodid not qualify for hedge accounting treatment under SFAS 133, "Accounting“Accounting for Derivative Instruments and Hedging Activities"Activities”; accordingly, changes in the fair value of these derivatives arewere charged to earnings. However, on September 1, 2003, the company implemented the documentation for the designation, documentation and assessment of the effectiveness of its forward exchange contracts, for the purposes of applying hedge accounting. With this documentation in place, the forward exchange contracts entered into by the company aftersince September 1, 2003, qualify for hedge accounting treatment under U.S. GAAP. Consequently, under U.S. GAAP, changes in the fair value of these contracts are charged to other comprehensive income. Upon the recognition of the hedged sales, accumulated changes in fair value are reclassified in the statements of earnings.
Under Canadian GAAP, foreign exchange translation gains and losses on forward exchange contracts are recognized as an adjustment of the revenue when the corresponding sales are recorded, regardless of whether the contracts were entered into before or after September 1, 2003.
The
Based on the portfolio of forward exchange contracts as at August 31, 2006, the company estimates
to $950,000that the
amountportion of
the unrealized gain on forward exchange contracts as of August 31,
20052006, and that will be
realized and reclassified to net earnings over the next
twelve months.
F-42
fiscal year amounts to $2,872,000.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabularElectro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
c) WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS
2003
In fiscal 2003, CanadianResearch and U.S. GAAP were harmonized to eliminate
the existing differences in the assessment and measurement of
impairment loss for goodwill and intangible assets. Thus, in fiscal
2003, goodwill and intangible assets were tested for impairment
using similar methodologies. However, considering that the existing
carrying value of goodwill and intangible assets was lower under
U.S. GAAP than under Canadian GAAP, the required impairment loss
under U.S. GAAP was lower and a permanent difference in the carrying
value of goodwill exists between Canadian and U.S. GAAP.
Upon the impairment test, under U.S. GAAP, the company recorded a
charge of $872,000 to write down the goodwill of EXFO Burleigh and a
pre-tax charge of $377,000 to write down the acquired core
technology of EXFO Burleigh, compared to a write-down of $4,505,000
for goodwill and a write-down of $2,922,000 for intangible assets
under Canadian GAAP, creating a reconciliation item of $6,178,000 in
the statement of earnings for the year ended August 31, 2003.
Furthermore, considering differences in the carrying value of
intangible assets between Canadian GAAP and U.S. GAAP due to
impairment losses, adjustments to the amortization of such assets
and related future income taxes were also required in fiscal 2003.
d) RESEARCH AND DEVELOPMENT TAX CREDITS
development tax credits
Under Canadian GAAP, all research and development tax credits are recorded as a reduction of gross research and development expenses.expenses in the statements or earnings. Under U.S. GAAP, tax credits that are refundable against taxable income are recorded in the income taxes. These tax credits amounted to $1,761,000, $2,169,000 and $2,169,000$2,546,000 for fiscal 2004, 2005 and 2005,2006, respectively.
In fiscal 2003, we had a net expense of $176,000 following the
write-off of tax credits. This difference hadhas no impact on the net lossearnings (loss) and the net lossearnings (loss) per share figures for the reporting years.
e) NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
ADOPTED IN FISCAL 2004 AND STILL APPLICABLE IN 2005
On September 1, 2003,
d) | Elimination of deficit by reduction of share capital |
As at August 31, 2006, under Canadian GAAP, the company
prospectively adopted SFAS 123,
"Accounting for Stock-Based Compensation",proceeded to eliminate its deficit against its share capital (note 13). However, under
U.S. GAAP, such elimination is not permitted, which creates a permanent difference of $373,711,000 in the
revised
transition provisions of SFAS 148, "Accounting for Stock-Based
Compensation - Transitiondeficit and
Disclosure". Upon the
adoption of SFAS
123 and SFAS 148,share capital between 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
isfigures. This difference has no impact on the
same for awards granted on or after
September 1, 2003.
F-43
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amountstotal amount of the shareholders’ equity.
e) | New accounting standards and pronouncements |
Adopted in thousands of US dollars, except share and per share data
and as otherwise noted)
TO BE ADOPTED AFTER FISCAL 2005
fiscal 2006
In November 2004, the Financial Accounting Standard Board (FASB) issued SFAS 151, "Inventory Costs"“Inventory Costs”, an amendment to ARB No. 43, Chapter 4. The amendments made by SFAS 151 will improveimproves financial reporting by clarifying that any abnormal amount of idle facility expenses, 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 adoptadopted this new statement on September 1, 2005, and its adoption will havehad no significant impact on its financial statements.
In December 2004, the FASB issued SFAS 123(R), "Share-Based
Payments"“Share-Based Payments”. This statement supersedes ABP 25, "Accounting“Accounting for Stock Issued to Employees"Employees” and related implementation guidance, and revises SFAS 123 in a number of areas. Under SFAS 123(R), all forms of share-based payment to employees result in compensation cost recognized in financial statements. This statement is effective for fiscal years beginning after June 15, 2005. The company will adoptadopted this statement on September 1, 2005, using the modified prospective application method of transition and its adoption will havehad no significant impact on its financial statements.
Under U.S. GAAP, until August 31, 2003, the company elected to measure compensation costs related to grants of stock options and stock awards using the intrinsic value method of accounting. In this instance, however, under SFAS 123(R), the company is required to make pro forma disclosures of net earnings (loss) and net earnings (loss) per share for any periods included in the financial statements that ended prior to the adoption of SFAS 123(R) (i.e., fiscal 2004 and 2005) as if the fair value-based method of accounting had been applied to outstanding unvested awards granted prior to September 1, 2003. Consequently, if the fair value-based method had been applied to these awards, the pro forma net earnings (loss) per share would have been the same as the net earnings (loss) per share for all reporting periods.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The fair value of options or awards granted was estimated using the Black-Scholes options pricing model.
To be adopted after fiscal 2006
In May 2005, the FASB issued SFAS 154, "Accounting“Accounting Changes and Errors Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"3”. This statement replaces APB Opinion No. 20, "Accounting Changes"“Accounting Changes”, and FASB Statement No.SFAS 3, "Reporting“Reporting Accounting Changes in Interim Financial Statements"Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. In general, this statement requires a company to account for the adoption of a new accounting policy by applying the new principle to prior accounting periods as if that principle had always been adopted. This statement is effective for accounting changes or corrections of errors in fiscal years beginning after December 15, 2005.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under U.S. GAAP, until August 31, 2003,
In June 2006, the
company electedFASB issued FASB Interpretation No. 48 (FIN 48), “Accounting to
measure
compensation costs related to grants of stock options and stock awards
usingUncertainty in Income Taxes”, which clarifies the
intrinsic value method of accounting. In this instance,
however, underaccounting for uncertainties in income taxes recognized in accordance with SFAS
123, the company is required to make pro forma
disclosures of net loss, and net loss per share as if the fair
value-based method of accounting had been applied to awards granted prior
to September 1, 2003. Consequently, if the fair value-based method had
been applied to these awards, the pro forma net loss per share would have
been the same as the net loss per share in fiscal 2005, lower than the
net loss per share in 2004 (by $0.01) and higher than the net loss per
share in 2003 (by $0.01)109, “Accounting for Income Taxes”. The
fair value of options or awards granted was estimated using the
Black-Scholes options pricing model.
F-44
TABLE OF CONTENTS
PART I.......................................................................2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS......2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE....................2
ITEM 3. KEY INFORMATION............................................2
A. SELECTED FINANCIAL DATA................................2
B. CAPITALIZATION AND INDEBTEDNESS........................4
C. REASONS FOR THE OFFER AND USE OF PROCEEDS..............4
D. RISK FACTORS...........................................4
ITEM 4. INFORMATION ON THE COMPANY................................17
A. HISTORY AND DEVELOPMENT OF THE COMPANY................17
B. BUSINESS OVERVIEW.....................................19
C. ORGANIZATIONAL STRUCTURE..............................40
D. PROPERTY, PLANT AND EQUIPMENT.........................40
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..............42
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................67
A. DIRECTORS AND SENIOR MANAGEMENT.......................67
B. COMPENSATION..........................................71
C. BOARD PRACTICES.......................................83
D. EMPLOYEES.............................................84
E. SHARE OWNERSHIP.......................................84
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.........89
A. MAJOR SHAREHOLDERS....................................89
B. RELATED PARTY TRANSACTIONS............................90
ITEM 8. FINANCIAL INFORMATION.....................................91
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION...........................................91
B. SIGNIFICANT CHANGES...................................93
ITEM 9. OFFER AND LISTING.........................................94
ITEM 10. ADDITIONAL INFORMATION...................................95
A. SHARE CAPITAL.........................................95
B. MEMORANDUM AND ARTICLES OF ASSOCIATION................95
C. MATERIAL CONTRACTS....................................95
D. EXCHANGE CONTROLS.....................................95
E. TAXATION..............................................95
F. DIVIDENDS AND PAYING AGENTS..........................102
G. STATEMENT BY EXPERTS.................................102
H. DOCUMENTS ON DISPLAY.................................102
I. SUBSIDIARY INFORMATION...............................103
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK..............................................104
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...106
PART II....................................................................106
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES.........106
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS..............................106
ITEM 15. CONTROLS AND PROCEDURES..................................106
ITEM 16. [RESERVED]...............................................107
ITEM 16A. AUDIT COMMITTE FINANCIAL EXPERT..............107
ITEM 16B. CODE OF ETHICS...............................107
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.......107
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS
FOR AUDIT COMMITTEES.........................108
ITEM 16E. PURCHASES OF EQUITIES SECURITIES
BY THE ISSUER AND AFFILIATED
PURCHASERS...................................108
PART III...................................................................109
ITEM 17. FINANCIAL STATEMENTS.....................................109
ITEM 18. FINANCIAL STATEMENTS.....................................109
ITEM 19. EXHIBITS.................................................110
EXHIBIT INDEX
- --------------------------------------------------------------------------------
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
1.1 Amended Articles of Incorporation of EXFO (incorporated by
reference to Exhibit 3.1 of EXFO's Registration Statement on
Form F-1 filed on June 9, 2000, File No. 333-38956).
1.2 Amended By-laws of EXFO (incorporated by reference to Exhibit
1.2 of EXFO's annual report on Form-20F dated Januaryinterpretation is effective for fiscal years beginning after December 15, 2003, File No. 000-30895).
1.3 Amended and Restated Articles of Incorporation of EXFO
(incorporated by reference to Exhibit 1.3 of EXFO's annual
report on Form 20-F dated January 18, 2001, File No.
000-30895).
2.1 Form of Subordinate Voting Share Certificate (incorporated by
reference to Exhibit 4.1 of EXFO's Registration Statement on
Form F-1 filed on June 9, 2000, File No. 333-38956).
2.2 Form of Registration Rights Agreement between EXFO and
Germain Lamonde dated July 6, 2000) (incorporated by
reference to Exhibit 10.13 of EXFO's Registration Statement
on Form F-1 filed on June 9, 2000, File No. 333-38956).
3.1 Form of Trust Agreement among EXFO, Germain Lamonde, GEXFO
Investissements Technologiques inc., Fiducie Germain Lamonde
and G. Lamonde Investissements Financiers inc. (incorporated
by reference to Exhibit 4.2 of EXFO's Registration Statement
on Form F-1 filed on June 9, 2000, File No. 333-38956).
4.1 Agreement of Merger and Plan of Reorganization, dated as of
November 4, 2000, by and among EXFO, EXFO Sub, Inc., EXFO
Burleigh Instruments, Inc., Robert G. Klimasewki, William G.
May, Jr., David J. Farrell and William S. Gornall
(incorporated by reference to Exhibit 4.1 of EXFO's annual
report on Form 20-F dated January 18, 2001, File No.
000-30895).
4.2 Amendment No. 1 to Agreement of Merger and Plan of Agreement,
dated as of December 20, 2000, by and among EXFO, EXFO Sub,
Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewski,
William G. May, Jr., David J. Farrell and William S. Gornall
(incorporated by reference to Exhibit 4.2 of EXFO's annual
report on Form 20-F dated January 18, 2001, File No.
000-30895).
4.3 Agreement of Merger, dated as of August 20, 2001, by and
among EXFO, Buyer Sub, and Avantas Networks Corporation and
Shareholders of Avantas Networks corporation (incorporated by
reference to Exhibit 4.3 of EXFO's annual report on Form 20-F
dated January 18, 2002, File No. 000-30895).
4.4 Amendment No. 1 dated as of November 1, 2002 to Agreement of
Merger, dated as of August 20, 2001, by and among EXFO,
3905268 Canada Inc., Avantas Networks Corporation and
Shareholders of Avantas Networks (incorporated by reference
to Exhibit 4.4 of EXFO's annual report on Form 20-F dated
January 18, 2002, File No. 000-30895).
4.5 Offer to purchase shares of Nortech Fibronic Inc., dated
February 6, 2000 among EXFO, Claude Adrien Noel, 9086-9314
Quebec inc., Michel Bedard, Christine Bergeron and Societe en
Commandite Capidem Quebec Enr. and Certificate of Closing,
dated February 7, 2000 among the same parties (including
summary in English) (incorporated by reference to Exhibit
10.2 of EXFO's Registration Statement on Form F-1 filed on
June 9, 2000, File No. 333-38956).
4.6 Share Purchase Agreement, dated as of March 5, 2001, among
EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn
Harvey and EFOS Corporation (incorporated by reference to
Exhibit 4.1 of EXFO's Registration Statement on Form F-3
filed on July 13, 2001, File No. 333-65122).
4.7 Amendment Number One, dated as of March 15, 2001, to Share
Purchase Agreement, dated as of March 5, 2001, among EXFO
Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey
and EFOS Corporation. (incorporated by reference to Exhibit
4.2 of EXFO's Registration Statement on Form F-3 filed on
July 13, 2001 File No. 333-65122).
4.8 Share Purchase Agreement, dated as of November 2, 2001
between JDS Uniphase Inc. and 3905268 Canada Inc.
(incorporated by reference to Exhibit 4.8 of EXFO's annual
report on Form 20-F dated January 18, 2002, File No.
000-30895).
4.9 Intellectual Property Assignment and Sale Agreement between
EFOS Inc., EXFO Electro-Optical Engineering, Inc., John
Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by
reference to Exhibit 4.3 of EXFO's Registration Statement on
Form F-3 filed on July 13, 2001 File No. 333-65122).
4.10 Offer to acquire a building, dated February 23, 2000, between
EXFO and Groupe Mirabau inc. and as accepted by Groupe
Mirabau inc. on February 24, 2000 (including summary in
English) (incorporated by reference to Exhibit 10.3 of EXFO's
Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
4.11 Lease Agreement, dated December 1, 1996, between EXFO and
GEXFO Investissements Technologiques inc., as assigned to
9080-9823 Quebec inc.2006. The company will adopt this interpretation on September 1, 1999 (including summary
in English) (incorporated by reference to Exhibit 10.4 of
EXFO's Registration Statement2007, and has not yet assessed the impact its adoption will have on Form F-1 filed on June 9,
2000, File No. 333-38956).
- --------------------------------------------------------------------------------
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
4.12 Lease Agreement, dated March 1, 1996, between EXFO and GEXFO
Investissements Technologiques inc., as assigned to 9080-9823
Quebec inc. on September 1, 1999 (including summary in
English) (incorporated by reference to Exhibit 10.5 of EXFO's
Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
4.13 Lease renewal of the existing leases between 9080-9823 Quebec
inc. and EXFO, dated November 30, 2001(incorporated by
reference to Exhibit 4.13 of EXFO's annual report on Form
20-F dated January 18, 2002, File No. 000-30895).
4.14 Loan Agreement between EXFO and GEXFO Investissements
Technologiques inc., dated May 11, 1993, as assigned to
9080-9823 Quebec inc. on September 1, 1999 (including summary
in English) (incorporated by reference to Exhibit 10.9 of
EXFO's Registration Statement on Form F-1 filed on June 9,
2000, File No. 333-38956).
4.15 Resolution of the Board of Directors of EXFO, dated September
1, 1999, authorizing EXFO to acquire GEXFO Distribution
Internationale inc. from GEXFO Investissements Technologiques
inc. (including summary in English) (incorporated by
reference to Exhibit 10.10 of EXFO's Registration Statement
on Form F-1 filed on June 9, 2000, File No. 333-38956).
4.16 Form of Promissory Note of EXFO issued to GEXFO
Investissements Technologiques inc. dated June 27, 2000 )
(incorporated by reference to Exhibit 10.12 of EXFO's
Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
4.17 Term Loan Offer, dated March 28, 2000, among EXFO and
National Bank of Canada as accepted by EXFO on April 3, 2000
(including summary in English) (incorporated by reference to
Exhibit 10.11 of EXFO's Registration Statement on Form F-1
filed on June 9, 2000, File No. 333-38956).
4.18 Employment Agreement of Germain Lamonde dated May 29, 2000
(incorporated by reference to Exhibit 10.15 of EXFO's
Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
4.19 Employment Agreement of Bruce Bonini dated as of September 1,
2000 (incorporated by reference to Exhibit 4.24 of EXFO's
annual report on Form 20-F dated January 18, 2002, File No.
000-30895).
4.20 Employment Agreement of Juan-Felipe Gonzalez dated as of
September 1, 2000 (incorporated by reference to Exhibit 4.25
of EXFO's annual report on Form 20-F dated January 18, 2002,
File No. 000-30895).
4.21 Employment Agreement of David J. Farrell dated as of December
20, 2000 (incorporated by reference to Exhibit 4.26 of EXFO's
annual report on Form 20-F dated January 18, 2002, File No.
000-30895).
4.22 Deferred Profit Sharing Plan, dated September 1, 1998
(incorporated by reference to Exhibit 10.6 of EXFO's
Registration Statement on Form F-1 filed on June 9, 2000,
File No. 333-38956).
4.23 Stock Option Plan, dated May 25, 2000 (incorporated by
Reference to Exhibit 10.7 of EXFO's Registration Statement on
Form F-1 filed on June 9, 2000, File No. 333-38956).
4.24 Share Plan, dated April 3, 2000 (incorporated by reference to
Exhibit 10.8 of EXFO's Registration Statement on Form F-1
filed on June 9, 2000, File No. 333-38956).
4.25 Directors' Compensation Plan (incorporated by reference to
Exhibit 10.17 of EXFO's Registration Statement on Form F-1
filed on June 9, 2000, File No. 333-38956).
4.26 Restricted Stock Award Plan, dated December 20, 2000
(incorporated by reference to Exhibit 4.21 of EXFO's annual
report on Form 20-F dated January 18, 2001, File No.
000-30895).
4.27 Asset Purchase Agreement by and Among EXFO Electro-Optical
Engineering Inc., EXFO Gnubi Products Group Inc., gnubi
communications, L.P., gnubi communications General Partner,
LLC, gnubi communications Limited Partner, LLC, gnubi
communications, Inc., Voting Trust created by The Irrevocable
Voting Trust Agreement Among Carol Abraham Bolton, Paul
Abraham and James Ray Stevens, James Ray Stevens and Daniel
J. Ernst dated September 5, 2002 (incorporated by reference
to Exhibit 4.30 of EXFO's annual report on Form 20-F dated
January 15, 2003, File No. 000-30895).
4.28 EXFO Protocol Inc. Executive Employment Agreement with Sami
Yazdi signed November 2, 2001 (incorporated by reference to
Exhibit 4.28 of EXFO's annual report on Form 20-F dated
January 15, 2003, File No. 000-30895).
4.29 Second Amending Agreement to the Employment Agreement of
Bruce Bonini dated as of September 1, 2002, (incorporated by
reference to Exhibit 4.29 of EXFO's annual report on Form
20-F dated January 15, 2004, File No. 000-30895).
4.30 Severance and General Release Agreement with Bruce Bonini
dated August 8, 2003, (incorporated by reference to Exhibit
4.30 of EXFO's annual report on Form 20-F dated January 15,
2004, File No. 000-30895).
- --------------------------------------------------------------------------------
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
4.31 Separation Agreement and General Release with Sami Yazdi
dated April 1, 2003, (incorporated by reference to Exhibit
4.31 of EXFO's annual report on Form 20-F dated January 15,
2004, File No. 000-30895).
4.32 Executive Employment Agreement of James Stevens dated as of
October 4, 2003, (incorporated by reference to Exhibit 4.32
of EXFO's annual report on Form 20-F dated January 15, 2004,
File No. 000-30895).
4.33 Termination Terms for John Holloran Jr. dated May 28, 2003,
(incorporated by reference to Exhibit 4.33 of EXFO's annual
report on Form 20-F dated January 15, 2004, File No.
000-30895).
4.34 Employment Agreement of Pierre Plamondon dated as of
September 1, 2002, (incorporated by reference to Exhibit 4.34
of EXFO's annual report on Form 20-F dated January 15, 2004,
File No. 000-30895).
4.35 Long-Term Incentive Plan, dated May 25, 2000, amended in
October 2004 and effective January 12, 2005.
4.36 Deferred Share Unit Plan, effective January 12, 2005.
8.1 Subsidiaries of EXFO (list included in Item 4C of this annual
report).
11.1 Code of Ethics for seniorits financial officers, (incorporated
by reference to Exhibit 11.1 of EXFO's annual report on Form
20-F dated January 15, 2004, File No. 000-30895).
11.2 Board of Directors Corporate Governance Guidelines.
11.3 Code of Ethics for our Principal Executive Officer and Senior
Financial Officers.
11.4 Ethics and Business Conduct Policy.
11.5 Statement of Reporting Ethical Violations (Whistle Blower).
11.6 Audit Committee Charter.
11.7 Human Resources Committee Charter.
12.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
12.2 Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
13.1 Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
13.2 Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.statements.