DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This annual report contains or incorporates by reference statements which constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition that refer to expectations, projections or other characterizations of future events and circumstances. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including those that are discussed under “Risk Factors” set forth in Item 3D of this annual report. Assumptions relating to forward-looking statements involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. When used in this annual report, the words “believe”, “anticipate”, “plan”, “expect”, “intend”, “estimate” or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.
All dollar amounts in this annual report are expressed in US dollars, except as otherwise noted.
PART II. .
Item | Identity of Directors, Senior Management and Advisors |
Not Applicable.
Item | Offer Statistics and Expected Timetable |
Not Applicable.
Key Information |
The consolidated statements of earnings data for the years ended August 31, 20032004 and 20042005 and the consolidated balance sheets data as at August 31, 2003, 2004, 2005 and 20052006 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, 2005, 2006, 2007 and 20072008 and the consolidated balance sheets data as at August 31, 20062007 and 20072008 are derived from our audited consolidated financial statements that are included elsewhere in this annual report.
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) and significant differences in measurement and disclosure from generally accepted accounting principles in United States (“U.S. GAAP”) are set out in note 2019 to our consolidated financial statements included elsewhere in this annual report. The historical results below are not necessarily indicative of the results to be expected for any future periods.
The selected financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report, and “Item 5. Operating and Financial Review and Prospects” of this annual report.
Years ended August 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(in thousands of US dollars, except share and per share data) | ||||||||||||||||||||
Consolidated Statements of Earnings Data: | ||||||||||||||||||||
Amounts under Canadian GAAP | ||||||||||||||||||||
| Sales | $ | 152,934 | $ | 128,253 | $ | 97,216 | $ | 74,630 | $ | 61,930 | ||||||||||
Cost of sales (1) | 65,136 | 57,275 | 44,059 | 34,556 | 36,197 | |||||||||||||||
| Gross margin | 87,798 | 70,978 | 53,157 | 40,074 | 25,733 | |||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Selling and administrative | 49,580 | 40,298 | 31,782 | 25,890 | 26,991 | |||||||||||||||
| Net research and development | 16,668 | 15,404 | 12,190 | 12,390 | 15,879 | |||||||||||||||
| Amortization of property, plant and equipment | 2,983 | 3,523 | 4,256 | 4,935 | 5,210 | |||||||||||||||
| Amortization of intangible assets | 2,864 | 4,394 | 4,836 | 5,080 | 5,676 | |||||||||||||||
| Impairment of long-lived assets and goodwill | − | 604 | − | 620 | 7,427 | |||||||||||||||
| Government grants | (1,079 | ) | (1,307 | ) | − | − | − | |||||||||||||
| Restructuring and other charges | − | − | 292 | 1,729 | 4,134 | |||||||||||||||
| Total operating expenses | 71,016 | 62,916 | 53,356 | 50,644 | 65,317 | |||||||||||||||
| Earnings (loss) from operations | 16,782 | 8,062 | (199 | ) | (10,570 | ) | (39,584 | ) | ||||||||||||
| Interest and other income | 4,717 | 3,253 | 2,524 | 1,438 | 1,245 | |||||||||||||||
| Foreign exchange loss | (49 | ) | (595 | ) | (1,336 | ) | (278 | ) | (1,552 | ) | ||||||||||
| Earnings (loss) before income taxes | 21,450 | 10,720 | 989 | (9,410 | ) | (39,891 | ) | |||||||||||||
| Income taxes | (20,825 | ) | 2,585 | 2,623 | (986 | ) | 15,059 | |||||||||||||
| Net earnings (loss) for the year | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | $ | (8,424 | ) | $ | (54,950 | ) | |||||||
| Basic and diluted net earnings (loss) per share | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | $ | (0.13 | ) | $ | (0.87 | ) | |||||||
| Basic weighted average number of shares used in per share calculations (000’s) | 68,875 | 68,643 | 68,526 | 66,020 | 62,852 | |||||||||||||||
| Diluted weighted average number of shares used in per share calculations (000’s) | 69,555 | 69,275 | 68,526 | 66,020 | 62,852 | |||||||||||||||
Other consolidated statements of earnings data: | ||||||||||||||||||||
| Gross research and development | $ | 25,201 | $ | 19,488 | $ | 15,878 | $ | 15,668 | $ | 17,133 | ||||||||||
| Net research and development | $ | 16,668 | $ | 15,404 | $ | 12,190 | $ | 12,390 | $ | 15,879 | ||||||||||
Amounts under U.S. GAAP | ||||||||||||||||||||
| Net earnings (loss) for the year | $ | 42,257 | $ | 8,135 | $ | (2,920 | ) | $ | (9,571 | ) | $ | (48,201 | ) | |||||||
| Basic and diluted net earnings (loss) per share | $ | 0.61 | $ | 0.12 | $ | (0.04 | ) | $ | (0.14 | ) | $ | (0.77 | ) | |||||||
| Basic weighted average number of shares used in per share calculations (000’s) | 68,875 | 68,643 | 68,526 | 66,020 | 62,852 | |||||||||||||||
| Diluted weighted average number of shares used in per share calculations (000’s) | 69,555 | 69,275 | 68,526 | 66,020 | 62,852 | |||||||||||||||
Years ended August 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (in thousands of US dollars, except share and per share data) | ||||||||||||||||||||
| Consolidated Statements of Earnings Data: | ||||||||||||||||||||
| Amounts under Canadian GAAP | ||||||||||||||||||||
| Sales | $ | 183,790 | $ | 152,934 | $ | 128,253 | $ | 97,216 | $ | 74,630 | ||||||||||
Cost of sales (1) | 75,624 | 65,136 | 57,275 | 44,059 | 34,556 | |||||||||||||||
| Gross margin | 108,166 | 87,798 | 70,978 | 53,157 | 40,074 | |||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Selling and administrative | 61,153 | 49,580 | 40,298 | 31,782 | 25,890 | |||||||||||||||
| Net research and development | 26,867 | 16,668 | 15,404 | 12,190 | 12,390 | |||||||||||||||
| Amortization of property, plant and equipment | 4,292 | 2,983 | 3,523 | 4,256 | 4,935 | |||||||||||||||
| Amortization of intangible assets | 3,871 | 2,864 | 4,394 | 4,836 | 5,080 | |||||||||||||||
| Impairment of long-lived assets | − | − | 604 | − | 620 | |||||||||||||||
| Government grants | − | (1,079 | ) | (1,307 | ) | − | − | |||||||||||||
| Restructuring and other charges | − | − | − | 292 | 1,729 | |||||||||||||||
| Total operating expenses | 96,183 | 71,016 | 62,916 | 53,356 | 50,644 | |||||||||||||||
| Earnings (loss) from operations | 11,983 | 16,782 | 8,062 | (199 | ) | (10,570 | ) | |||||||||||||
| Interest income | 4,639 | 4,717 | 3,253 | 2,524 | 1,438 | |||||||||||||||
| Foreign exchange gain (loss) | 442 | (49 | ) | (595 | ) | (1,336 | ) | (278 | ) | |||||||||||
| Earnings (loss) before income taxes and extraordinary gain | 17,064 | 21,450 | 10,720 | 989 | (9,410 | ) | ||||||||||||||
| Income taxes | 1,676 | (20,825 | ) | 2,585 | 2,623 | (986 | ) | |||||||||||||
| Earnings (loss) before extraordinary gain | 15,388 | 42,275 | 8,135 | (1,634 | ) | (8,424 | ) | |||||||||||||
| Extraordinary gain | 3,036 | − | − | − | − | |||||||||||||||
| Net earnings (loss) for the year | $ | 18,424 | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | $ | (8,424 | ) | ||||||||
| Basic and diluted earnings (loss) before extraordinary gain per share | $ | 0.22 | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | $ | (0.13 | ) | ||||||||
| Basic and diluted earnings (loss) per share | $ | 0.27 | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | $ | (0.13 | ) | ||||||||
| Basic weighted average number of shares used in per share calculations (000’s) | 68,767 | 68,875 | 68,643 | 68,526 | 66,020 | |||||||||||||||
| Diluted weighted average number of shares used in per share calculations (000’s) | 69,318 | 69,555 | 69,275 | 68,981 | 66,615 | |||||||||||||||
| Other consolidated statements of earnings data: | ||||||||||||||||||||
| Gross research and development | $ | 32,454 | $ | 25,201 | $ | 19,488 | $ | 15,878 | $ | 15,668 | ||||||||||
| Net research and development | $ | 26,867 | $ | 16,668 | $ | 15,404 | $ | 12,190 | $ | 12,390 | ||||||||||
| Amounts under U.S. GAAP | ||||||||||||||||||||
| Net earnings (loss) for the year | $ | 18,424 | $ | 42,257 | $ | 8,135 | $ | (2,920 | ) | $ | (9,571 | ) | ||||||||
| Basic and diluted net earnings (loss) per share | $ | 0.27 | $ | 0.61 | $ | 0.12 | $ | (0.04 | ) | $ | (0.14 | ) | ||||||||
| Basic weighted average number of shares used in per share calculations (000’s) | 68,767 | 68,875 | 68,643 | 68,526 | 66,020 | |||||||||||||||
| Diluted weighted average number of shares used in per share calculations (000’s) | 69,318 | 69,555 | 69,275 | 68,981 | 66,615 | |||||||||||||||
As at August 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (in thousands of US dollars) | ||||||||||||||||||||
| Consolidated Balance Sheets Data: | ||||||||||||||||||||
| Amounts under Canadian GAAP | ||||||||||||||||||||
| Cash | $ | 5,914 | $ | 5,541 | $ | 6,853 | $ | 7,119 | $ | 5,159 | ||||||||||
| Short-term investments | 81,626 | 124,217 | 104,437 | 104,883 | 83,969 | |||||||||||||||
| Total assets | 293,066 | 279,138 | 219,159 | 190,957 | 172,791 | |||||||||||||||
| Long-term debt (excluding current portion) | − | − | 354 | 198 | 332 | |||||||||||||||
| Share capital | 142,786 | 150,019 | 148,921 | 521,875 | 521,733 | |||||||||||||||
| Shareholders’ equity | $ | 259,515 | $ | 250,165 | $ | 196,234 | $ | 173,400 | $ | 157,327 | ||||||||||
| Amounts under U.S. GAAP | ||||||||||||||||||||
| Cash | $ | 5,914 | $ | 5,541 | $ | 6,853 | $ | 7,119 | $ | 5,159 | ||||||||||
| Short-term investments | 81,626 | 124,217 | 104,437 | 104,883 | 83,969 | |||||||||||||||
| Total assets | 280,426 | 268,389 | 212,702 | 182,852 | 164,758 | |||||||||||||||
| Long-term debt (excluding current portion) | − | − | 354 | 198 | 332 | |||||||||||||||
| Share capital | 568,917 | 599,519 | 598,421 | 597,664 | 596,309 | |||||||||||||||
| Shareholders’ equity | $ | 246,802 | $ | 239,343 | $ | 189,777 | $ | 165,295 | $ | 149,294 | ||||||||||
As at August 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(in thousands of US dollars) | ||||||||||||||||||||
Consolidated Balance Sheets Data: | ||||||||||||||||||||
Amounts under Canadian GAAP | ||||||||||||||||||||
| Cash | $ | 5,541 | $ | 6,853 | $ | 7,119 | $ | 5,159 | $ | 5,366 | ||||||||||
| Short-term investments | 124,217 | 104,437 | 104,883 | 83,969 | 52,010 | |||||||||||||||
| Working capital | 180,440 | 143,985 | 135,288 | 115,141 | 77,408 | |||||||||||||||
| Total assets | 279,138 | 219,159 | 190,957 | 172,791 | 146,254 | |||||||||||||||
| Long-term debt (excluding current portion) | − | 354 | 198 | 332 | 453 | |||||||||||||||
| Share capital | 150,019 | 148,921 | 521,875 | 521,733 | 492,452 | |||||||||||||||
| Shareholders’ equity | $ | 250,165 | $ | 196,234 | $ | 173,400 | $ | 157,327 | $ | 129,826 | ||||||||||
Amounts under U.S. GAAP | ||||||||||||||||||||
| Cash | $ | 5,541 | $ | 6,853 | $ | 7,119 | $ | 5,159 | $ | 5,366 | ||||||||||
| Short-term investments | 124,217 | 104,437 | 104,883 | 83,969 | 52,010 | |||||||||||||||
| Working capital | 183,231 | 149,436 | 138,225 | 117,116 | 78,974 | |||||||||||||||
| Total assets | 268,389 | 212,702 | 182,852 | 164,758 | 138,020 | |||||||||||||||
| Long-term debt (excluding current portion) | − | 354 | 198 | 332 | 453 | |||||||||||||||
| Share capital | 599,519 | 598,421 | 597,664 | 596,309 | 565,291 | |||||||||||||||
| Shareholders’ equity | $ | 239,343 | $ | 189,777 | $ | 165,295 | $ | 149,294 | $ | 121,592 | ||||||||||
| (1) | The cost of sales is exclusive of amortization, shown separately. |
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, marketing and selling telecommunications test, measurement and monitoringservice assurance equipment ─ is rapidly evolving and is marked by intense competition and technical innovation. Likewise, the market for our selected life sciences and industrial solutions is very competitive. We anticipate the pace of change to remain high or even accelerate for our targeted industries in the future. We might see the emergence of new competitors or the consolidation of current competitors, as the markets for telecommunications test, measurement and monitoringservice assurance equipment as well as for life sciences and industrial solutions might evolve in response to technical innovations and economic conditions. Achieving our key performance indicatora compound annual growth rate of 20% for sales growth in fiscal 2008the next three years, as defined in our new corporate performance metrics, will largely depend on our ability to gain market share by increasing sales of current products at existing accounts, expanding into new accounts, introducing new products and product enhancements, and exploiting new market opportunities.
During the past few years, the telecommunications test, measurement and monitoringservice assurance industry has witnessed consolidation. Danaher Corporation acquired Tektronix, Inc., in November 2007. Anritsu Corporation announced the acquisition ofacquired NetTest A/S in August 2005 and JDS Uniphase Corporation (JDSU) completed its acquisition of Acterna Corporation during the same month. Agilent Technologies Inc. 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, measurement and monitoringservice assurance vendors who complement their broad range of products with telecommunications test, measurement and monitoringservice assurance equipment. Similarly, Spirent plc, Tektronix, Inc.plc. and Yokagawa are global test, measurement and monitoringservice assurance vendors who compete against us. Other competitors, such as Digital Lightwave Inc., Fluke Networks anand Tektronix, operating divisiondivisions within Danaher Corporation, IXIA, and Sunrise Telecom Inc., and VeEX Inc. compete against us in separate 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.
Fluctuations in the exchange rates between the Canadian dollar, US dollar and other currencies may adversely affect our operating results.
Most of our sales are denominated in 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 risks with forward exchangeforward-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 one hand and the US dollar and Euro on the other. For example, the average exchange rate of the Canadian dollar versus the US dollar was 1.0071 in fiscal 2007 was 1.1215. As of November2008 compared to 1.1215 in 2007. During the period from September 1, 2007,2008 to October 31, 2008, the Canadian dollar had increased 15.2% versusfluctuated significantly, mainly due to the average exchange rate of the US dollar for fiscal 2007 and had increased 7.2% versus the average exchange rate of the Euro for 2007.turmoil in financial markets. Any increase in the value of the Canadian dollar relative to other currencies, especially the US dollar, and any variance between the value of the Canadian dollar and the contractual rate of our forward-exchange contracts, could have a material adverse effect on our operating results and provide competitive advantages to our competitors.
Our business may be adversely affected by unfavorable general economic and market conditions
Our business is subject to the effects of general economic conditions in North America and throughout the world and, more particularly, market conditions in the telecommunications industry. During fiscal 2008, a weaker global macro-economic environment prompted many network service providers to carefully scrutinize their capital expenditures. Even if network service providers (“NSPs”) reduce their capital expenditures amidst a challenging environment, we believe that it will accelerate the fundamental shift in their capital spending budgets from legacy to next-generation, IP networking as the latter maximizes revenue-generating services and reduces operating costs. We believe that we are very well positioned to enable the deployment of next-generation, IP-based networks. It should be noted, however, that the turmoil in financial markets has rendered it more difficult for NSPs to secure financing for their deployments. In the past, our operating results were adversely affected by reduced telecom capital spending in North America, Europe and Asia and by general unfavorable economic conditions. In particular, sales to network service providers in North America were significantly and adversely affected by a downturn in 2001 in the telecommunications industry. If there is a recession or slowdown in key geographic regions or markets, we may experience a material adverse impact on our business, operating results and financial condition.
One of our customers has accounted for a high percentage of our sales in the past several years, and any adverse factor affecting this customer or our relationship with this customer could cause our sales to decrease.
A Tier-1 carrier in the US accounted for 14.7%7.4% of our sales in fiscal 2008, 14.7% in fiscal 2007, 13.8% in 2006 and 23.3% in 2005. Although we have reduced our exposure to this customer in recent years, we may not be able to offset lower sales at this particular account in the future. 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.
We have faced pricing pressure on our existing products and expect that this pressure will continue. If we do not keep lowering our manufacturing costs or introduce new products with higher margins, our gross margins may decrease and our operating results may be adversely affected.
We continued implementingcontinue to implement measures to protect our gross margin, which reached 57.4% of sales in fiscal 2007 compared to 55.3% in 2006, despite the negative impact of the exchange rate between US and Canadian currencies. In addition, since September 2007, we began transferring and ramping the manufacturing of our higher-volume, lower-complexity telecom products at a wholly-owned production facility in Shenzhen, China, with a goal of lowering our production costs. However, increased competitiveness in the telecommunications test, measurement and monitoringservice assurance 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:
| · | increased competition for business; |
| · | reduced demand; |
| · | 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; and |
| · | resale of used equipment. |
In addition, gross margins may also be negatively affected by increased costs of raw materials as well as obsolescence and excess costs, product and customer mix and under-absorption of fixed manufacturing costs.
As pricing pressure will likely continue to affect our existing products, we may have to increase the number of units sold to maintain our existing sales levels. If we are unable to increase our sales levels, lower our manufacturing costs, or introduce new products with higher margins, our gross margins may decline and our operating results may suffer.
Our products may have unforeseen defects that could harm our reputation, impede market acceptance of our products and negatively impact our business, results of operations and financial condition.
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 and diligent effort, 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:
| · | costly repairs; |
| · | 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 or strategic alliances needed for the development of our business or, if we do make such acquisitions or strategic alliances, we cannot assure you that we will successfully integrate the businesses, products, technologies and personnel. In addition, such acquisitions could distract management’s attention from our day-to-day business and operations. Ultimately, the failure to make strategic acquisitions or the inability to carry out effective integrations could disrupt our overall business and harm our financial condition.
We intend to carefully seek businesses, whose products and technologies are complementary to ours, or which will enable us to expand our markets and/or our market share. There can be no assurance that we will ultimately make any such transactions. Our competitors may be in a better position to acquire the same businesses, products and technologies that we wish to acquire. In addition, our fluctuating stock price, our cash position or our ability to raise capital or issue debt on favorable terms or at all at the time of an acquisition may affect our ability to complete such an acquisition.
We have made two strategic acquisitions in the pastfiscal 2008, namely of Navtel Communications and Brix Networks, 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:
| · | issue shares that would dilute individual shareholder percentage ownership; |
| · | incur debt; |
| · | assume liabilities and commitments; |
| · | incur significant expenses related to amortization of additional intangible assets; |
| · | incur significant impairment losses of goodwill and intangible assets related to such acquisitions; and |
| · | incur losses from operations. |
These acquisitions also involve numerous risks, including:
| · | risk of not realizing the expected benefits or synergies of such acquisitions; |
| · | problems integrating the acquired operations, technologies, products and personnel; |
| · | risks associated with the transfer of acquired know-how and technology; |
| · | unanticipated costs or liabilities; |
| · | diversion of management’s attention from our core business; |
| · | adverse effects on existing business relationships with suppliers and customers; |
| · | risks associated with entering markets in which we have no or limited prior experience; and |
| · | potential loss of key employees, particularly those of acquired organizations. |
If we fail to adapt appropriately to the challenges associated with operating internationally, the expected growth of our business may be impeded and our operating results may be affected.
For the fiscal year ended August 31, 2007,2008, customers outside of the United States and Canada accounted for 45.5%49.0% of our sales. Our international sales will be limited if we cannot establish and maintain relationships with international distributors, set up additional foreign operations, expand international sales channel management, hire additional personnel, develop relationships with international service providers and operate adequate after-sales support internationally.
In the third quarter of fiscal 2007, we began establishingestablished a software development center in Pune, India, to supplement the efforts of our three R&D centers in Quebec City, Canada, Montreal, Canada, Concord, Canada, and Concord, Canada.since the third quarter of fiscal 2008, Boston, United States. We also began manufacturing high-volume, low-complexity telecom products at our wholly-owned production facility in Shenzhen, China, in the first quarter of fiscal 2008 with the goal of lowering our manufacturing costs.
Even if we are able to successfully expand our international operations, we may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including:
| · | challenges in staffing and managing foreign operations due to the limited number of qualified candidates, employment laws and business practices in foreign countries, any of which could increase the cost and reduce the efficiency of operating in foreign countries; |
| · | our inability to comply with import/export, environmental and other trade compliance regulations of the countries in which we do business, together with unexpected changes in such regulations; |
| · | measures to ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future, especially in light of setting up new operating companies in India and China or the likely future acquisition of companies; |
| · | failure to adhere to laws, regulations and contractual obligations relating to customer contracts in various countries; |
| · | difficulties in establishing and enforcing our intellectual property rights; |
| · | inability to maintain 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; |
| · | lack of integration of foreign operations; |
| · | currency fluctuations; |
| · | 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 |
| · |
Any of these factors could harm our international operations and negatively affect our business, results of operations and financial condition. The recurrence of weakness in these economies or of weakness in other foreign economies could have a significant negative effect on our future operating results.
We may make misjudgments in our strategic planning that could have material adverse effects on our business, results of operations and financial condition.
We devise an annuala three-year strategic business plan, which is prepared by management and approved by our Board of Directors. This strategic plan, reviewed by management on a regular basis, is mainly based on market research and analysis related to future market trends and demands. In our strategic plans,plan, we have made and will continue to make judgments based on our analysis of future market trends and requirements. These decisions may involve substantial investments in the development of new product lines, diversification of our business on a geographic basis, as well as expansion into new market segments — either organically or through acquisitions. We may make misjudgments in our strategic planning that could have material adverse effects on our business, results of operations and financial condition.
Our quarterly revenues and operating results are subject to significant fluctuations and you should not rely on them as an indication of our future performance.
Our sales and operating results have fluctuated from quarter to quarter in the past and significant fluctuations may occur in the future. future, especially following the acquisition of Brix Networks (renamed EXFO Service Assurance Inc.). EXFO Service Assurance Inc. offers service assurance systems that monitor next-generation, converged IP networks. Given that these systems are more complex and mission-critical than traditional test equipment, the orders are much larger and the sales cycles are relatively longer.
In addition, our sales and operating results generally depend on the volume and timing of the orders we receive from customers as well as our ability to fulfill received orders. Our operating expenses, which include manufacturing overhead costs, selling and administrative, research and development, and amortization expenses, are relatively fixed in the short term. If we sell fewer products than anticipated, if there is a delay in the launch of new products, or if prices for our products decline, we may not be able to quickly reduce our operating expenses in response to lower sales. Factors that could affect the amount and timing of our sales, and cause quarterly fluctuations in our revenue and operating results include:
| · | 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:
| · | fluctuating demand for telecommunications test, measurement and |
| · | 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; |
| · | foreign exchange rate fluctuations, as a portion of our operating expenses are denominated in Canadian dollars; and |
| · | general economic |
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:
| · | 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, |
| · | 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.
Our intellectual property and proprietary technology are important to the continued success of our business. Our failure to protect this proprietary technology may significantly impair our competitive position.
Our success and ability to compete depend to a significant extent on our proprietary technology, with which we attempt to keep others from using the innovations that are central to our existing and future products. We currently hold 3741 actively-maintained granted patents from the United States (including one “design” patent), eightseven from Canada, threefour from Germany (including one "Utility Model"), twofour from the United Kingdom, twothree from France, and onetwo from China. In addition, EXFO has ninetwenty US patent applications in process, nineeleven Canadian patents applications in process, twothree European applications in process, two fromthree in China, two fromdirect national entries (not via the European application) in Germany, and one fromin Russia, and fourthese applications being either direct national or regional submissions or submissions as applications under the Patent Cooperation Treaty patent applications pending.Treaty. We also rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures, contractual provisions and license agreements to protect our proprietary technology. We may have to engage in litigation in order to protect our patents and other intellectual property rights, or to determine the validity or scope of the proprietary rights of others. Such litigation can be time-consuming and expensive, regardless of whether we win or lose.
The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants, distributors and third parties. However, these agreements may be breached or otherwise not effective and we may not have adequate remedies for any breach or shortfall of these agreements. In any case, others may come to know about our trade secrets through a variety of methods. In addition, the laws of some territories in which we sell our products may not protect our intellectual property rights to the same extent as do the laws of Canada and the United States.
Our intellectual property rights, particularly our existing or future patents, may be invalidated, circumvented, challenged or required to be licensed to others. Furthermore, others may develop technologies that are similar or superior to our technology, duplicate or reverse engineer our technology, or design around the patents owned or licensed by us. We cannot be sure that the steps that we take to protect our technology will prevent misappropriation or infringement. If we fail to protect our technology so that others may copy or use it, we will be less able to differentiate our products and our sales may decline.
Others may claim that our products infringe upon their intellectual property rights, or they may infringe our intellectual property, and we may expend significant resources enforcing or defending our rights or suffer competitive injury.
Litigation regarding intellectual property rights is common in the technology industry and 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 enforce our intellectual property rights.
We could incur substantial costs in defending ourselves and our customers against infringement claims or in bringing infringement claims against others. Litigation could also adversely affect sales of the challenged product or technology and divert the efforts of our management and technical personnel. In the event of an infringement claim, we may be required to obtain one or more licenses from third parties. We cannot assure you that we, or our customers, could obtain necessary licenses from third parties at a reasonable cost or at all. If we fail to obtain a license where one is required, we could incur substantial liabilities and be forced to suspend the marketing of the challenged products.
If customers fail to meet their financial commitments to us, it could have a material adverse effect on our business, results of operations and financial condition.
Some of our customers 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. If customers fail to meet their financial commitments to us, it could have a material adverse effect on our business, results of operations and financial condition.
As our customers consolidate, they may reduce or halt purchases of our products, which would harm our sales and operating results.
Consolidation in the telecommunications industry could reduce the number of customers to which our products are sold. Some of our customers have been subject to consolidation and could obtain products from a vendor other than us, or demand more favorable terms and conditions from us, which would harm our sales and operating results. In addition, some customers may merge with or acquire our competitors and discontinue their relationships with us.
If we fail to predict our supply requirements accurately, we may have excess inventory or insufficient inventory, either of which could cause us to incur additional costs and/or experience manufacturing delays.
We provide non-binding forecasts of our requirements to some of our suppliers up to six months prior to scheduled delivery of products to our customers. If we overestimate our forecasted requirements, we may have excess inventory, which could harm our relationships with our suppliers due to reduced future orders, increase our costs and require inventory write-offs. If we underestimate our requirements, we may have an inadequate inventory of parts, which could interrupt manufacturing of our products and result in shipment delays. The likelihood of misjudging our inventory requirements increased in the past year with the opening of a telecom manufacturing facility in Shenzhen, China, for high-volume, low-complexity products. This manufacturing facility complements the low-volume, high-complexity telecom products produced at our plant in Quebec City, Canada. In addition, lead times for materials and parts that we order may be long and depend on factors such as the procedures of, or supply terms with, a specific supplier and demand for each part at a given time.
We depend on a single supplier or a limited number of suppliers for some key components and materials in our products, which makes us susceptible to supply shortages or price fluctuations that could adversely affect our operating results.
We depend on a limited number of suppliers for some of the parts used to manufacture our products for which alternative sources may not be readily available. In addition, all our orders are placed through individual purchase orders and, therefore, our suppliers may stop supplying parts to us at any time. The reliance on a single source or limited number of suppliers could result in increased costs, delivery problems and reduced control over product pricing and quality. Financial difficulties of suppliers could also affect our ability to obtain necessary parts in a timely manner. Any interruption or delay in the supply of any of these parts could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Furthermore, the process of qualifying a new manufacturer for complex parts, designed to our specifications, such as our optical and mechanical parts, is lengthy and would consume a substantial amount of time of our technical personnel and management. If we were required to change a supplier in a short period of time, our business would be disrupted. In addition, we may be unsuccessful in identifying a new supplier capable of meeting and willing to meet our needs on terms that we would find acceptable. Consolidation involving suppliers could further reduce the number of alternatives available to us and increase the cost of parts, which would make our products less competitive and result in lower margins.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial information or prevent fraud, which could harm our operating results and cause investors to lose confidence in our reported financial information.
Effective internal controls are necessary for us to provide reliable and accurate financial information and effectively prevent fraud. We have devoteddevote significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404 underof the Sarbanes-Oxley Act of 2002 requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting as well as data systems and controls throughout our company and operating subsidiaries. Furthermore, we cannot be certain that these measures will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future, especially in the light of setting up new operating companies in Indiahaving acquired Navtel Communications and ChinaBrix Networks or the likely future acquisition of companies that are not in compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As well, the complexity of our systems and controls may become more difficult to manage as we transform our operating structure and continue to reduce infrastructure costs. To effectively manage these changes, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, difficulties encountered in their implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause it to fail to meet our financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on our share price and our access to capital.
Regulatory changes may cause us to incur increased costs.
Changes in the laws and regulations affecting public companies may increase our expenses as we may have to devote resources to respond to these new requirements. In particular, we incurred and may incur additional general administrative expenses to comply with Section 404 of the Sarbanes-Oxley Act, which requires management to report on internal controls over financial reporting. In addition, the process of moving from Canadian GAAP to IFRS, which will extend from fiscal 2009 to 2011, will require management’s time and attention, and cause our general and administrative expenses to increase. Compliance with new rules could also require the further commitment of significant financial resources and result in the diversion of management’s time and attention from revenue-generating activities. Finally, the impact of these changes could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers, which could harm our business.
We require employees and management resources who are knowledgeable about the specialized nature of our business. If we are unable to attract and retain sufficient numbers of highly skilled technical, sales, marketing, senior management and other personnel, our operations and financial results will suffer.
Due to the specialized nature of our business, we are highly dependent on the continued service of and on the ability to attract qualified engineering, sales, marketing, senior management and other personnel. If we are unable to attract and retain such qualified personnel, it could have a material adverse effect on our business, results of operations and financial condition.
We must also provide significant training for our employee base due to the highly specialized nature of telecommunications test, measurement, and monitoringservice assurance as well as life sciences and industrial technologies. Our current personnel may be inadequate and we may fail to assimilate and train new employees. Highly skilled employees with the education and training that we require – especially employees with significant experience and expertise, 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 insurance may not be sufficient to cover all potential liability. A successful claim exceeding our policy limits will reduce our cash position, increase our expenses and have a negative effect on our business, operating results and financial condition.
Our products are designed to help network service providers, cable operators and manufacturers of optical networks and components ensure network reliability. We also leverage our core telecom technologies for life sciences and industrial applications. The failure of our products to perform to 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 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.
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 sitemultiple-site capacity and if any of our facilities or factories were to experience a catastrophic loss, it would disrupt our operations, delay production, shipments and revenue and result in large expenses, thereby harming our results of operation.
Unexpected declines in our research and development and other tax credits and grants may have an adverse effect on our business.
Our historical operating results reflect substantial benefits from programs sponsored by federal and provincial governments for the support of research and development activities, as well as in relation to other activities. For example, research and development tax credits and grants represented 33.9%17.2% of our gross research and development expenses for the year ended August 31, 2007.2008.
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 increasehave increased our research and development activities outside of Canada orand Quebec, resulting from the establishmenthiring of additional personnel at our software development center in Pune, India and acquisition of Brix Networks, or among other things,potential future acquisitions, our increased R&D activities may not be eligible for these programs. If we were required to decrease our research and development activities, or were unable to benefit from other tax credits and grants, this could have a material adverse effect on our business, results of operations and financial condition.
Changes in our effective tax rate or adverse outcomes resulting from tax audits may have an adverse impact on our results.
As an international corporation, we are subject to taxation in the various jurisdictions in which we conduct business. Significant judgment is required in the determination of our worldwide provision for income taxes and this determination requires the interpretation and application of complex tax laws and regulations. Our effective tax rate may be adversely impacted by the level of earnings, by changes in the mix of earnings betweenamong companies and countries which may have different statutory tax rates, inby the valuation of our deferred tax assets, and by changes in tax rules and regulations. We are also subject to income tax audits and transfer pricing audits in the respective jurisdictions in which we conduct business and we regularly assess the likelihood of adverse outcomes resulting from these tax audits to ascertain the adequacy of our provisionprovisions for income taxes.taxes and transfer pricing policies. There can be no assurance that the outcomes of these tax audits will not have an adverse impact on our result and financial condition.
Our current principal stockholder has effective control over our business.
As of November 1, 2007,3, 2008, Germain Lamonde, our Chairman of the Board, President and Chief Executive Officer, held 91.9%92.29% 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.
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,In fiscal 2008, the acquisitions of Navtel Communications ($11.3 million) and Brix Networks ($29.7 million), combined with $6.5 million in capital expenses, exceeded the $13.8 million provided by cash flows from operations. As at August 31, 2008, we held $87.5 million in cash and short-term investments.
We may need to raise additional capital in the future.
Our ability to obtain additional financing will be subject to a number of factors, including market conditions, effects of the financial crisis, reduced access to credit facility 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. 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. As at August 31, 2007, we had $129.8 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.
Our information systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information, it could harm our business. In addition, these events may force us to devote more money and resources in order to protect ourselves against damages caused by these disruptions or security breaches in the future.
Our legal name and commercial name is EXFO Electro-Optical Engineering Inc. / EXFO Ingénierie électro-optique inc. Our head office is located at 400 Godin Avenue, Quebec, Quebec, Canada, G1M 2K2 and our main telephone number is (418) 683-0211. Our e-mail address is info@EXFO.com and our website is www.EXFO.com. Information on our website is not incorporated by reference in this annual report. Our agent for service in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. Our Transfer Agent and Registrar is CIBC Mellon Trust Company, 2001 University Street, Suite 1600, Montreal, Quebec, Canada, H3A 2A6. This annual report contains trademarks and registered trademarks of us and other companies.
We were incorporated on September 18, 1985 pursuant to the Canada Business Corporations Act. Since that date, we have amended our articles on various occasions mainly to modify our legal and corporate names and our share capital.
On December 20, 2000, we acquired all of the shares of EXFO Burleigh Products Group Inc. (formerly Burleigh Instruments, Inc.) (“EXFO Burleigh”), Burleigh Instruments GmbH and Burleigh Instruments (U.K.) Ltd. for an aggregate purchase price of US$189.3 million, comprised of 6,488,816 of our subordinate voting shares and US$42.5 million in cash pursuant to the terms of an Agreement of Merger and Plan of Reorganization among us, EXFO Sub, Inc. and the selling shareholders, dated November 4, 2000, as amended on December 20, 2000. In April 2002, the name of Burleigh Instruments, Inc. was changed to EXFO Burleigh Products Group Inc. On November 12, 2002, Burleigh Instruments (UK) Ltd. was dissolved. EXFO Burleigh is a U.S. company that manufactures precision scientific instruments used in basic and applied research engineering and production test applications in a variety of fields.
On March 15, 2001, we acquired all of the shares of EXFO Photonic Solutions Inc. (formerly EFOS Inc.) (“EXFO Photonic”), a privately held company in Toronto, Canada, for a total consideration of US$110.1 million, of which US$25.1 million was paid in cash. We also issued 3,700,000 of our subordinate voting shares in connection with the acquisition. In September 2001, the name EFOS Inc. was changed to EXFO Photonic Solutions Inc.
EXFO Photonic, operating since 1984, is a supplier of precision light-based adhesive spot curing products as well as curing process control for the global optical component manufacturing market and other non-telecom markets. Its products deliver precise doses of the appropriate spectral light into photo-sensitive and heat-cured adhesives to significantly reduce bonding time and increase repeatability in optical component and other manufacturing activities. EXFO Photonic light-based curing technologies are supported by an extensive understanding of bonding and material sciences and by a broad intellectual property portfolio, including,portfolio. EXFO Photonic, as of November 1 2005, 153, 2008, has 26 patents and 128 patents pending.
Also on March 16, 2001, our wholly owned subsidiary, Burleigh Automation Inc. (“Burleigh Automation”), acquired substantially all the assets of Vanguard Technical Solutions, Inc., a wholly owned subsidiary of DT Industries, Inc. for a purchase price of US$600,000 paid in cash. Vanguard, an automation equipment manufacturer in Tucson, Arizona, specialized in the design and manufacturing of ultra-precision assembly equipment for sensitive process and critical assembly challenges on the production floor. This acquisition, which complemented our acquisition of Burleigh, was planned to fit with our overall strategy at that time of providing customers with a comprehensive solution for the assembly, alignment and testing of optical components and subsystems. Since September 2001, Burleigh Automation has ceased operations and we have transferred all material intellectual property assets and most of the physical assets of Burleigh Automation to EXFO Burleigh.
In November 2001, we acquired all of the shares of Avantas Networks Corporation and simultaneously changed the name of that company to EXFO Protocol Inc. (“EXFO Protocol”). We paid a total consideration of US$69.4 million (or US$95.0 million for the equity minus US$25.6 million of cash in the hands of the acquired company) to acquire EXFO Protocol. Consideration paid consisted of 4,374,573 of our subordinate voting shares and US$9.8 million in cash, net of cash acquired. EXFO Protocol, a company based in Montreal, Canada operating since 1998 is a supplier of fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates.
During fiscal 2001, we were forced to align our cost structure to market conditions. On June 27, 2001, we announced the reduction of non-customer-related expenses, postponement of plans to build a new facility in the Quebec Metro High-Tech Park, termination of non-cure operations of Nortech, a subsidiary that specialized in manufacturing fiber-optic temperature sensors and reduction of our work force by 15%. Our plan to build a new facility has been cancelled since then.
During fiscal 2002, we were forced 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 18 months. Considering the ongoing unfavorable market conditions, we recorded a charge of US$222.2 million to write down a significant portion of goodwill and a charge of US$23.7 million to write down a significant portion of acquired core technology. Also, overall for fiscal 2002, we wrote off US$18.5 million in excess and obsolete inventories.
In 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”), acquired substantially all the assets of gnubi communications L.P., including its technology, expertise, customer base, inventories and capital assets. Consideration paid consisted of US$1.9 million in cash and 1,479,290 of our subordinate voting shares. Furthermore, an additional cash amount of US$241,000, based on sales volumes, was paid in fiscal 2004 in accordance with earn out provisions. With the acquisition of these assets, EXFO Gnubi, based in Dallas, Texas, continues the operations of gnubi communications, L.P., as a supplier of multi-channel telecom and datacom testing solutions serving optical transport equipment manufacturers and research and development laboratories. At the time of the asset acquisition, 30 employees of gnubi communications, L.P. transferred to EXFO Gnubi.
During fiscal 2003, we were required to implement further restructuring measures as a result of depressed spending levels in the telecommunications industry and economic uncertainty. We reduced our workforce by 30%, rationalized our business activities and consolidated certain manufacturing operations. These measures incurred charges of US$4.1 million. The rationalization and consolidation initiatives involved the reorganization of our business into two new reportable market segments: Telecom Division and Photonics and Life Sciences Division and the exiting of the optical component manufacturing automation business. Our Telecom Division consists of the former Portable and Monitoring and telecom related Industrial and Scientific product lines. Our Photonics and Life Sciences Division includes previous non-telecom Industrial and Scientific product lines. Each division has been structured with its own sales, marketing, manufacturing, research and development and management teams.
In May 2003, we performed our annual impairment test on goodwill recorded in conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic and EXFO Protocol and also reviewed the carrying value of intangible assets related to these acquisitions. As a result of this assessment, we concluded that the carrying value of goodwill related to EXFO Burleigh and the carrying value of intangible assets related to EXFO Burleigh and EXFO Photonic was impaired and we recorded a charge of US$4.5 million to write down goodwill and a pre-tax charge of US$2.9 million to write down acquired core technology. Of the total impairment loss of US$7.4 million, US$6.9 million is related to EXFO Burleigh for goodwill and acquired core technology and US$0.6 million is related to EXFO Photonic for acquired core technology.
In addition, in an effort to simplify our structure and stream-line our operations, the operations of EXFO Protocol were merged with those of the Corporation as of September 1, 2003 and effective December 1, 2003, the operations of EXFO Gnubi were merged with those of EXFO America Inc.
In fiscal 2004, EXFO also closed a public offering of 5.2 million subordinate voting shares to a syndicate of Canadian-based underwriters for net proceeds of $29.2US$29.2 million (CA$38.4 million).
Furthermore in fiscal 2004, we consolidated our protocol test operations (EXFO Protocol and EXFO Gnubi) in Montreal, Canada to improve efficiency and reduce costs.
In March 2004, we renewed our collective bargaining agreement with unionized manufacturing employees in Quebec City, Canada. 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.
During fiscal 2005, we completed the consolidation of our Life Sciences and Industrial Division in Toronto, Canada and we recorded $482,000US$482,000 in restructuring expenses. Altogether, we incurred $2.5US$2.5 million in restructuring and other charges since the fourth quarter of 2004 in conjunction with this consolidation process. Following this process all of the operating activities of EXFO Burleigh were transferred mainly in Toronto, Canada.
In January 2006, we acquired substantially all the assets of Consultronics Limited (“Consultronics”), a leading supplier of test equipment for copper-based broadband access networks. Consultronics is a privately held company based in Toronto, Canada with subsidiaries in the United Kingdom and Hungary. We acquired all of the subsidiaries’ respective issued and outstanding shares. Consultronics specializes in x-Digital Subscriber Line (xDSL), Internet Protocol TV (IPTV) and Voice-over-Internet Protocol (VoIP) test solutions for the broadband access market. We paid consideration equal to approximately US$19.1 million, including debt assumption and other acquisition-related costs.
In November 2006, we incorporated EXFO Electro-Optical Engineering India Private Limited as our wholly-owned subsidiary to establish a software development center in Pune, India. In October 2007, we acquired substantially all of the assets of JamBuster Technologies Private Limited, for an unmaterialimmaterial consideration, a company duly incorporated in Pune, India which is engaged in the business of software development services.
In April 2007, we established a wholly-owned foreign entity in Shenzhen China, EXFO Telecom Equipment (Shenzhen) Co. Ltd. for manufacturing purposes. We started ramping up manufacturing in September 2007 at our Chinese facility.
On November 5, 2007, the Board of Directors approved a share repurchase program, by way of a normal course issuer bid on the open market of up to 9.9% of our public float (as defined by the Toronto Stock Exchange), or 2,869,585 shares at the prevailing market price. The period of the normal course issuer bid commenced on November 8, 2007, and ended on November 7, 2008. We repurchased a total of 1,859,835 shares. All shares repurchased under the bid were cancelled. We shall provide to any person or company, upon request to our Secretary, at 400 Godin Avenue, Quebec, Province of Quebec, Canada, G1M 2K2, phone number (418) 683-0913 ext. 3704 or fax number (418) 683-9839 a copy of the notice sent to the Toronto Stock Exchange (TSX) according to its normal course issuer bid.
In March 2008, we acquired all the issued and outstanding shares of Navtel Communications Inc. (“Navtel”), a leading provider of Internet Protocol Multimedia Subsystem (IMS) and Voice-over-Internet Protocol (VoIP) test solutions for Network Equipment Manufacturers (NEMs) and Network Service Provider (NSP) labs. Navtel is a privately held company based in Toronto, Canada with subsidiaries in the Province of Ontario, Canada, United States and Germany. We paid consideration equal to approximately US$11,477,000, or US$11,332,000 net of US$145,000 of cash acquired. The total consideration included acquisition-related costs of US$172,000.
In April 2008, we acquired all the issued and outstanding shares of Brix Networks Inc. (“Brix”), a global provider of open and extensible converged service assurance solutions. Brix is a privately held company based near Boston, USA with a subsidiary in the United Kingdom. We paid consideration equal to approximately US$29,696,000, or US$29,684,000 net of US$12,000 of cash acquired, plus a contingent cash consideration of up to a maximum of US$7,537,000, based upon the achievement of a bookings volume exceeding US$16,000,000 up to US$40,000,000 in the 12 months following this acquisition.
On November 6, 2008 we announced the renewal of a share repurchase program, by way of a normal course issuer bid on the open market of up to 10% of our public float (as defined by the Toronto Stock Exchange), or 2,738,518 subordinate voting shares at the prevailing market price. We expect to use cash, short-term investments or future cash flow from operations to fund the repurchase of shares. The normal course issuer bid will start on November 8, 2007,10, 2008, and end on November 7, 2008,9, 2009, or on an earlier date if we repurchase the maximum number of shares permitted under the bid. The program does not requiredrequire that we repurchase any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid will be cancelled. We shall provide to any person or company, upon request to our Secretary, at 400 Godin Avenue, Quebec, Province of Quebec, Canada, G1M 2K2, phone number (418) 683-0913 ext. 3704 or fax number (418) 683-9839 a copy of the notice sent to the Toronto Stock Exchange (TSX) according to its normal course issuer bid.
On November 10, 2008 we announced a substantial issuer bid (the “Offer”) to purchase for cancellation up to 8,823,529 shares for an aggregate purchase price not to exceed CA$30 million. The Offer is being made by way of a “modified Dutch Auction” pursuant to which shareholders may tender all or a portion of their shares (i) at a price not less than CA$3.40 per share and not more than CA$3.90 per share, in increments of CA$0.05 per share, or (ii) without specifying a purchase price, in which case their shares will be purchased at the purchase price determined in accordance with the Offer. The Offer will expire at 5 p.m. (Eastern time) on December 16, 2008, unless withdrawn, extended or varied by us. We expect to use cash, short-term investments or future cash flow from operations to fund the repurchase of shares. The Offer is not conditional upon any minimum number of shares being tendered, but it is subject to certain other conditions. A complete description of the terms and conditions of the Offer is contained in the Offer to Purchase and Issuer Bid Circular and related documents filed with the applicable securities regulatory authorities in Canada and the United States and mailed to holders of shares on or about November 10, 2008. We shall provide to any person or company, upon request to our Secretary, at 400 Godin Avenue, Quebec, Province of Quebec, Canada, G1M 2K2, phone number (418) 683-0913 ext. 3704 or fax number (418) 683-9839 a copy of such documentation sent to the Toronto Stock Exchange (TSX) according to its normal course issuer bid.
Upon the approval of the Offer, we suspended the normal course issuer bid that we had renewed on November 6, 2008 referred above, until 20 business days after the expiration of the Offer.
| Business Overview |
Company Overview
EXFO is a testleading provider of testing, measuring and measurement expertmonitoring solutions for network service providers and equipment manufacturers in the global telecommunications industry, especially in the portable test market segment. Ourindustry. The Telecom Division, which represents aboutmore than 85% of our business, offers a fullwide range of testinnovative solutions extending across the full technology lifecycle― from design to technology deployment and monitoring systems toonto service assurance―and covering all the layers of a network service providers, cable TV operators, telecom system vendors and component manufacturers in approximately 70 countries. We are the global market leader for portable optical test solutions with an estimated 25.5% market share and a leading supplier of protocol and access test solutionsinfrastructure to enable triple-play deploymentsservices and next-generation, converged IP networking. Our Windows-based modular AXS-200, FTB-200, FTB-400 and IQS-500 test platforms host a wide range of modular test solutions across optical, physical, data and network layers, while maximizing technology reuse across several market segments. OurThe Life Sciences and Industrial Division offers value-added light-based solutions in high-precision medical devicemedical-device and opto-electronics assembly, sectors, and advanced fluorescence microscopy, UV printing ink curing and electrophysiology solutions for theother life sciences sector.
We were founded in 1985 in Quebec City, Canada. Our original products were focused on the needs of installers and operators of fiber-optic networks. Customers use these field-portable testing products for the installation, maintenance, monitoring and troubleshooting of optical networks. In 1996, we supplemented our product portfolio with an extensive line of high-end products that are mainly dedicated to research and development as well as manufacturing activities of optical component manufacturers and system vendors.
Over the past several years, we have enhanced our competitive position and breadth of products through acquisitionsthe acquisition of companies that specialize in transport and data communications testing higherlayer protocol testing and emulation, copper/xDSL testing and network communications service assurance.
In April 2008, we acquired all issued and outstanding shares of Brix Networks Inc. (renamed EXFO Service Assurance Inc.), for a cash consideration of US$29.7 million, plus a contingent cash consideration of up to a maximum of US$7.5 million, based on booking levels exceeding US$16 million up to US$40 million in the 12 months following the closing of the deal. Brix Networks, a privately held company located in the Boston (MA) area, offers VoIP and IPTV service assurance solutions across the three areas most affecting the success of a real-time service: signaling quality (signaling path performance), delivery quality (media transport performance) and content quality (overall quality of experience). Brix Networks’ service assurance solutions are mainly designed for network service providers (NSPs) and large enterprises.
In March 2008, we acquired all issued and outstanding shares of Navtel Communications Inc., for a cash consideration of US$11.3 million. Navtel Communications, a privately held company in Toronto, Canada, is a leading provider of IMS and VoIP(based on SIP Protocol) test solutions for network equipment manufacturers (NEMs) and NSP labs. Navtel Communications specializes in testing next-generation IP networks that are increasingly combining wireline and wireless technologies. Subsequent to the acquisition, Navtel Communications was merged into the parent company.
In fiscal 2008, we opened our own telecom manufacturing facilities in Shenzhen, China. We now have two main manufacturing sites for our Telecom Division and one smaller plant for our Life Sciences and Industrial Division. Over time, low-volume, high-complexity telecom products will be manufactured in Quebec City, whereas high-volume, low-complexity telecom products will be manufactured in Shenzhen.
In fiscal 2008, we accelerated the deployment of a software development center in Pune, India, to supplement the research and development capabilities of our R&D labs in Boston, Toronto, Montreal and Quebec City. This will enable us to benefit from the wealth of IP expertise in India, to accelerate product development―especially for our software-intensive protocol test businesses. solutions―to take advantage of a lower cost structure.
In January 2006, we acquired substantially all the assets of Consultronics Limited, a leading supplier of test equipment for copper-based broadband access networks, for a total cash consideration of $19.1US$19.1 million. In addition toAbove and beyond copper/xDSL test solutions, Consultronics had 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 NSPs in their deployment of triple-play services (voice, data, video) over optical and copper links in access networks. This acquisition was a strategic initiative to position EXFO as a one-stop shop forstrong supplier of broadband access and triple-play testing because it complemented our market leadership in the optical FTTx (fiber-to-the-X) test market.
In November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol Inc. and which has since been merged with EXFO), a supplier of protocol-testingtransport and optical-network performance managementdatacom testing 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 in order to help our customers increase revenues and reduce operating costs. In October 2002, our wholly-owned subsidiary, EXFO Gnubi, purchased substantially all the assets of gnubi communications, L.P., a supplier of multi-channelmultichannel telecom and datacom testing solutions for the system manufacturer market.market. These strategic acquisitions, acquisitions―which were consolidated in Montreal, Canada, in fiscal 2004, 2004―enabled us to more than double our addressable market, as we expanded from optical testing to protocoltransport and datacom (Layers 1-3) testing applications, and to offer a more complete line of test solutions to our customers.
Previously, we had completed two acquisitions to bolster growth in the optical component manufacturing market. We acquired Burleigh Instruments, Inc. (renamed EXFO Burleigh Products Group Inc.) in December 2000 for its wavelength measurement instruments and nanopositioning alignment systems. We also added EFOS Inc. (renamed EXFO Photonic Solutions Inc.) in March 2001 for its precision light-based, adhesive spot-curing technology. We have since exited the optical component manufacturing automation business, and the remaining operations of EXFO Burleigh’s operationsBurleigh have mostly been mostly consolidated with those of EFOS Inc.EXFO Photonic Solutions in Toronto, Canada. These consolidated businesses now fall under our Life Sciences and Industrial Division.
We launched 2027 new products in fiscal 2008, including seven in the fourth quarter, compared to 20 in fiscal 2007. Key product introductions included amongst others Internet protocol television (IPTV) test capabilities for our Packet Blazer Ethernet product line; a very high-speed digital subscriber loop, version 2 (VDSL2) test module to characterize IPTV and high-definition television (HDTV) over copper access links; a 10 Gigabit Ethernet module for our FTB-200 Compact Platform; a multi-purpose series of optical time domain reflectometers (OTDRs) for testing access, metro and long-haul networks; a next-generation Cable Assembly and Component Test System for production testing of short fiber assemblies and FTTx components, and the NQMS suite of quality assurance systems for the real-time monitoring of packet signals and fiber links. Products on the market two years or less accounted for 33.7% of sales in fiscal 2007.
Overall for fiscal 2008, we increased sales 20.2% to $183.8 million from $152.9 million in 2007. Global sales for fiscal 2008 included $5.4 million from newly acquired Brix Networks and Navtel Communications since their acquisitions in the third quarter of 2008. GAAP net earnings reached $18.4 million, or $0.27 per diluted share, including $5.3 million for the recognition of previously unrecognized future income tax assets in the United States, $2.7 million for income tax recovery following the review of our tax strategy related to recently substantively enacted income tax rates in Canada, $1.5 million of income tax expense to account for the recently substantively enacted income tax rate on our future income tax assets in Canada, an extraordinary gain of $3.0 million related to the negative goodwill on the Navtel acquisition, as well as $3.0 million in after-tax amortization of intangible assets and $1.3 million in stock-based compensation costs. In 2007, GAAP net earnings reached $42.3 million, or $0.61 per diluted share, including $24.6 million in recognition of previously unrecognized future income taxes, $3.2 million in recognition of previously unrecognized research and development tax credits, $2.9 million in amortization of intangible assets, $1.1 million from a government grant recovery and $1.0 million in stock-based compensation costs.
In fiscal 2008, we faced a substantial and sudden increase in the value of the Canadian dollar versus the US dollar. The average value of the Canadian dollar increased 11.4% in fiscal 2008, compared to the same period last year. Given that most of our sales are denominated in US dollars but a significant portion of our expenses are denominated in Canadian dollars, our financial results were negatively affected.
On November 5, 2007, the Board of Directors approved a share repurchase program, by way of normal course issuer bid on the open market, up to 9.9% of our public float (as defined by the Toronto Stock Exchange), or 2.9 million of subordinate voting shares, at the prevailing market price. The period of the normal course issuer bid commenced on November 8, 2007 and ended on November 7, 2008. All shares repurchased under the bid were cancelled. We redeemed 1.9 million subordinate voting shares for a total consideration of $8.5 million under that program.
On November 6, 2008, we announced a renewal of our share repurchase program, by way of a normal course issuer bid on the open market, of up to 10% of our public float (as defined by the Toronto Stock Exchange), or 2,738,518 subordinate voting shares, at the prevailing market price. We expect to use cash, short-term investments or future cash flows from operations to fund the repurchase of shares. The period of the normal course issuer bid starts on November 10, 2008, and will end on November 9, 2009, or on an earlier date if we repurchase the maximum number of shares permitted under the bid. The program does not require that we repurchase any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid will be cancelled.
Upon the approval of the Offer, we suspended the normal course issuer bid referred to above, until 20 business days following the expiration of the Offer.
Key Industry Trends
The basic fundamentals of the global telecom industry remain solid for the moment. However, it is still unknown what impact the financial crisis might have on the global economy and the telecom downturnindustry in 2003, would be recovered. As a result, we recognized US$24.6 million in previously unrecognized income tax assets and US$3.2 million in previously unrecognized R&D tax credits in the fourth quarter of fiscal 2007. These future income tax assets and tax credits relate to our operations in Canada andparticular, especially in the United States.
Global Internet bandwidth grewdemand is growing very rapidly, due to a myriad of applications like video, Web gaming, etc. TeleGeography Research estimated that bandwidth demand has grown at a compound annual growth rate (CAGR) of 45%54% from 20032004 to 2006, according to TeleGeography Research. We believe this2008. This trend is likely to remain steady if not accelerate,in the years to come with the upcoming anticipation and explosiondeployments of IPTV (Internet protocol television) and, HD-IPTV (high-definition Internet protocol television), as this and increased online video streaming, since these applications, among others, will consume a significantcolossal amount of additional bandwidth. As a result, telecom companiestelcos and cable TV companiescablecos are investing substantially in their access networks in order to provide differentiated, revenue-generating services to attract and retain consumers who are increasingly relying on broadband network services for their work, entertainment and everyday activities. From a telecom companytelco perspective, we believeit is likely that fiber-to-the-premises (FTTP)fiber-to-the-home (FTTH) will become the access network architecture of choice whichthat will allow them to meet heightened bandwidth requirements and future-proof their access networks, as residential bandwidth requirements are growing from the 1 to 5 Mbit/s (megabits per second) of the past to the 30 to 100 Mbit/s required in the future to assure multiple HD-IPTV channels, online gaming, high-speed content-rich Internet, VoIP (voice-over-Internet-protocol) telephony, and a myriad of additional IP-based applications. We believe hybridlong-term. Hybrid architectures, combining copper and fiber (fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also keepcontinue expanding in the short term, becausesince they are less expensiveless-expensive methods to increase bandwidth and can be mass-deployed faster.
These investment decisions are applicable not only to green-field deployments and high-rise buildings, but also to larger-scale rollouts as long-term operating costs are less than FTTC and FTTN. The cost of deploying FTTH has largely been fallingdecreasing over the last threefew years as volume increased and deployment tools, like those we offer, are making the task increasingly effective. Wesimple and efficient. Networks are only atin the early stages of fiber deployments in access networks in both in the Americas and around the world. In addition, Western Europe and China have become increasingly committed to deploying FTTH networks, given their high population density. Both Japan and South Korea have already adopted fiber to the home as a mainstream method of broadband residential service.
As bandwidth growth in access networks continues to increase it has begun placing a strain on metro rings and core networks. It is also driving the need for higher-speed technologies, such astechnologies; for example, 43 Gbit/s(gigabits (gigabits per second)SONET/SDH (which should start in 2008)is now increasingly deployed and becoming mainstream, while 100 Gbit/s Ethernet (a longer-term trend), becauseis in early field trials. The deployment of these solutions areis expected to be significantly more economical especially if customers willit alleviates the need for trenches need to be forced to dig trenchesdug in order to deploy new fiber in metro or long-distance routes.
As telecommunication networks are being transformed to provide IP-based voice, video and data capabilities, the legacy SONET/SDH networks,standards, which were designedfirst established in the 1980s and 1990smid-1980s and implemented until 2005, do not have the payload flexibility to seamlessly and efficiently mix and transport video with voice and data. These networks will not be capable of efficiently carrying these emerging IP-based services, assince they are based on design standards aimed at PSTNdesigned for public switched telephone network (PSTN), point-to-point voice transmission only.transmission. As a result, with new SONET/SDH standards, which are part of what the industry is labeling next-gen networks, telcos operators are increasingly turning to more flexible and future-proofnext-generation, IP-based next-generation networks to allow for more versatileflexible and efficient transport of a whole new range of applications and services, and to offer customers higher-margin triple-play services―and even quadruple-play services―as wireline and wireless technologies become increasingly interconnected. Finally, as subscribers of these new services while reducing their operating costs.reach a critical mass, telcos are relying on service assurance solutions to ensure that the quality of service (QoS) and quality of experience (QoE) demanded by users are optimal in the post-deployment phase.
These market dynamics positively affected telecom test, measurement and service assurance suppliers in fiscal 2008; however, deteriorating macro-economic conditions in the United States could instigate a slowdown in capital spending among customers, which would necessarily reduce demand for our test, measurement and service assurance solutions.
In terms of our Life Sciences and Industrial Division, our strategy to leverage telecom technologies into fluorescence microscopy and industrial assembly markets delivered annual sales growth of 10.6% in fiscal 2007. We intend to maintain our focus on heightened resolution and miniaturizationkey market trends in thesefor the niche markets while keeping operating costs to a minimum.
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Three-Year Corporate Objectives
Our vision is to become a strong market leader in the global telecom test, measurement and service assurance industry―offering market-driven solutions mainly for network service providers and increasingly covering the service and application layers of the network infrastructure―to enable triple-play services and next-generation, converged IP networking.
We do not intend to become a one-stop shop for our customers, but rather continue to be a strong player in selected, high-growth and synergistic markets. We will follow this roadmap by offering best-in-class solutions that anticipate market needs, while focusing on the highest level of customer satisfaction.
To achieve our long-term vision, we plan to expand our leadership position in the portable Optical segment, while growing our Transport and Data communications testing (Protocol) business even faster to surpass the Optical segment in terms of sales. This plan is based first and foremost on organic growth, but it will be supported by strategic acquisitions of small to mid-size companies with best-in-class technologies in nascent, high-growth markets that are complementary to us. We also intend to improve our competitive position through strategic alliances and partnerships.
Following our practice of benchmarking performance, we have established three corporate performance objectives to measure the success of our three-year plan ending at the close of fiscal 2011. These long-term objectives are intended to replace the performance goals that the company provided on an annual basis. These new objectives reflect the clear direction management is taking towards long-term value creation.
| Objective | Three-Year Metric |
| Increase sales significantly faster than the industry growth rate | 20% CAGR |
Grow EBITDA* in dollars faster than sales | >20% CAGR |
| Continue raising gross margin | 62% |
| * | EBITDA is defined as net earnings before interest, income taxes, amortization of property, plant and equipment, amortization of intangible assets, and extraordinary gain. |
The EXFO Solution
We offer an extensive range of test, measurement and monitoringservice assurance solutions to the global telecommunications industry. Our success has been largely predicated on our core expertise in producing test equipment for optical telecommunications. We also leverage this expertise to develop products for life sciences and high-precision assembly applications. Our solution is based on the following key attributes:
Modular System Design. In 1996, we established an industry-first by launching the original modular optical test platform. This system design consists of a PC-based, MS Windows-driven platform that can accommodate several test modules performing various types of measurements. We have since developed newadditional compatible test platforms and extended our test module offering for both NSPs and system manufacturers based on the same modular design. Our modular product design provides the following advantages:
| · | unlike stand-alone units, new test modules can be rapidly developed to address changing industry requirements; |
| · | as customers’ testing requirements change, they can purchase additional modules that are compatible with their previously purchased platforms, thus protecting their initial investments; |
| · | our standard graphical user interface reduces training costs because customers are familiar with previously acquired software products; |
| · | the flexibility of our systems allows customers to develop customized and automated solutions for their specific test requirements; |
| · | our test platforms are PC-based and MS Windows-driven, thus they can support third-party software solutions. |
High Degree of Technological Innovation. We have established a strong reputation for technological innovation over the last 2223 years. In fact, we believe this attribute represents a key differentiator for us within a competitive marketplace. Following are some of our industry firsts:
| · | the first PC-based modular test platform for field applications; |
| · | the first all-in-one optical loss test set combining several instruments; |
| · | the first 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, Canada, operations have maintained ISO 9001 certification since 1994 and they are now certified to the new 2000 edition of the standard. Our manufacturing plant in Shenzhen, China, which started operations in September 2007, is responsible for the production of high-volume, low-complexity telecom products. Quality controlQuality-control responsibilities for products manufactured in China will remain in Quebec City until the Shenzhen facility obtains full ISO-9000 certification. All of our products meet required industry standards, and some of our products meet additional voluntary standards, such as those set by Telcordia, formerly Bellcore, IEC, IETF, ETSI and other industry-leading standards bodies. During manufacturing, each product has a related quality-assurance plan, with rigorous checkpoints, to ensure product conformity. Various tasks in the quality assurance process include quality control, conformity testing, product documentation, product improvement, regulatory compliance, metrology and calibration.
Our product designs comply with Directive 2002/96/EC, a legislation enacted by the European Union regarding the disposal of waste electrical and electronic equipment (WEEE), for all products exported to Europe. In regard to the Directive 2002/96/EC (RoHs), test and measurement manufacturers have been provided an unlimited exemption.a limited exemption until 2012.
Products
Our test platforms, namely the new AXS-200 SharpTESTER, FTB-200 Compact Platform, FTB-400 Universal Test System (UTS), and IQS-500IQS-600 Intelligent Test System (ITS), are at the core of our product portfolio. The AXS-200 SharpTESTER, which was launched in September 2007, is a multi-service, multi-medium handheld test platform designed for characterizing and troubleshooting commercial and residential access networks. It can easily be configured for copper/DSL/triple-play, Ethernet or optical testing applications. The FTB-200 Compact Platform is a two-slot portable test unit optimized for multi-technology, multi-application characterization of metro and access networks. The FTB-400 field-testing platform provides NSPsnetwork service providers with a simple, yet efficient way to perform multiple, advanced test operations for installation, maintenance and troubleshooting applications. Our IQS-500IQS-600 ITS, which was launched in the second quarter of 2008, is designed for manufacturing and R&D applications,applications. It tests optical as well as telecomtransport and datacomdata communications technologies increasingly based on IP technology.IP. All platforms and related test modules are supported by integrated and highly intuitive graphical user interfaces (GUIs), enabling the user to easily store, handle and retrieve a large amount oftest results and measurement data. In addition, EXFO offers a number of purpose-built hand-heldhandheld and benchtop test and measurement products, some of which are modular in nature.
Following the acquisition of Navtel Communications in March 2008, we offer the InterWatch platform series, a line of advanced hardware and software-based test systems that enable network equipment manufacturers and network service provider labs to fully test their complex digital telecommunications equipment and services more quickly and cost-effectively, while helping to ensure interoperability and reliability. These advanced software and hardware solutions assist customers in the design, integration, installation and acceptance testing of a broad range of Internet Protocol Multimedia Subsystem (IMS)/Next-Generation Network (NGN) telecommunications equipment and services by performing a variety of test functions:
| · | Design and feature verification; |
| · | Interoperability testing; |
| · | Load and stress testing; and |
| · | Monitoring and analysis. |
Following the acquisition of Brix Networks in April 2008, we also offer various Brix Solutions, a comprehensive service assurance and performance monitoring systems for advanced IP services such as IPTV, voice-over-IP, virtual private networks (VPNs), video on demand, and video conferencing. The Brix System, a family of integrated software and hardware components, proactively monitors quality by providing complete visibility across all IP services, throughout the lifecycle of the service, and across the entire network.
In the Brix Solutions, advanced performance management applications, running on a central-site software engine, called BrixWorx, analyze and display performance data collected from the measurement sources, Brix Verifiers, deployed throughout the network being monitored. Brix Verifiers execute protocol-specific tests to precisely calculate crucial availability and performance metrics through proactive testing, ongoing monitoring, and the collection of data directly from infrastructure devices.
BrixWorx provides all performance data analysis, configuration, and management for the distributed Brix System, while test suites offer broad and deep visibility into the performance of converged network services.
Furthermore, EXFO offers network monitoring systems and test probes used in third-party network monitoring solutions.
The following table summarizes the principal types of test instruments for the telecommunications industry, typical applications and the formats in which we offer them:
Instrument Type | Typical Application | NSP Market | Manufacturer /R&D Market | ||||
FTB 400 Modules | FTB 200 Modules | AXS 200 Modules | Handhelds | Modules | |||
| ADSL/ADSL2+ Service Verification Tool | Based on a DSL “golden modem”, these units are used to test the function, speed and quality of a DSL service at the subscriber premises. | X | X | ||||
| Broadband source | Used for testing wavelength-dependent behavior of fiber cables and dense wavelength division multiplexing (DWDM) optical components. | X | X | ||||
| Chromatic dispersion analyzer | Measures increasing levels of chromatic dispersion in high-capacity optical networks. Chromatic dispersion is a physical phenomenon inherent to optical fiber and optical components that causes information bits to spread along a network. This degrades the quality of the transmission signal and, in turn, limits the transmission speed carried by optical networks. | X | |||||
| Clip-on coupling device | Clips to an optical fiber and allows non-invasive testing. | X | |||||
| Fibre Channel tester | Brings FC-0, FC-1 and FC-2 logical layer Fibre Channel testing to services delivered via transport protocols, such as dense wavelength division multiplexing (DWDM), SONET/SDH and dark fiber. It provides valuable timing information and buffer credit estimation for Fibre Channel network deployment. | X | X | X | |||
| Gigabit Ethernet tester | Measures data integrity for high-speed Internet protocol telecommunications in metro and edge networks. | X | X | X | X | ||
| 10 Gigabit Ethernet tester | Benchmarks and verifies high-speed 10 Gbit/s Ethernet network performance and service-level agreements. | X | X | X | |||
| HDTV, SDTV and IPTV service test instrument | Used to test the quality and functionality of standard and high definition television signals that are delivered over higher-rate ADSL, ADSL2+ and VDSL2 transmission technologies. | X | |||||
| Laser | |||||||
| Performs high-resolution, spectral characterization of continuous CW laser sources | X | ||||||
| Telephone for traditional voice and VoIP service testing | Used by telephone line and DSL installers to test the proper functioning of both traditional and next-generation voice and data communication services. | X | |||||
| Live fiber detector | Clips on to a fiber and is used to detect the presence and direction of a signal without interrupting the traffic. | X | |||||
| Loss test set | Integrates a power meter and a light source to manually or automatically measure the loss of optical signal along a fiber. | X | X | X | X | ||
| X | X | ||||||
| Narrowly tunable laser | A laser that can be precisely tuned to simulate a DWDM light sources. Used primarily for testing optical amplifiers. | X | |||||
| Next-generation SONET/SDH analyzer | Full SONET/SDH protocol testing functionality, including support for generic framing procedure (GFP), virtual concatenation (VCAT), and link-capacity adjustment scheme (LCAS) next generation enhancements. | X | X | ||||
| Optical | |||||||
| Used in test system to combine sources or signals. Also uses as splitters to monitor signals. | X | ||||||
| Optical power meter | Measures the power of an optical signal. It is the basic tool for the verification of transmitters, amplifiers and optical transmission path integrity. | X | X | X | X | X | |
| Optical power reference module | Provides a highly accurate and traceable measurement of power for the calibration or verification of other power measurement instruments. | X | |||||
| Instrument Type | Typical Application | NSP Market | Manufacturer /R&D Market | ||||
FTB 400 Modules | FTB 200 Modules | AXS 200 Modules | Handhelds | IQS-600 Modules | Bench top Instruments | ||
| Optical return loss meter | Combines a laser and a power meter to measure the amount of potentially degrading back reflection. | X | X | X | X | ||
| Optical spectrum analyzer | Produces a graphical representation of power versus wavelength for an optical signal. Useful for measuring the drift, power and signal-to-noise ratio for each wavelength in a DWDM system. | X | |||||
| Optical switch | Provides switching between fibers. Used to provide flexible and automated test setups such as the measurement of multiple fibers or components with multiple ports with one instrument. | X | X | ||||
Optical time domain reflectometer (OTDR) | Like a radar, it measures the time of arrival of reflections of an optical signal to determine the distance to the breaks or points of excessive loss in a fiber network. | X | X | X | |||
| Passive component analyzer | Characterizes passive wavelength-selective devices, such as multiplexers, demultiplexers and add/drop filters, with respect to absolute wavelength in order to guarantee their performance within dense wavelength division multiplexing (DWDM) systems. | X | |||||
| Passive optical network (PON) power meter | Determines the power level of various signal types, including continuous (e.g., TV signal at 1550 nm) and framed (e.g., ATM or Ethernet at 1490 nm or 1310 nm) within a passive optical network. Various baud rates are covered, ranging from 155 Mbit/s to 2.5 Gbit/s, for both synchronous and non-synchronous signals. | X | |||||
| Polarization-dependent loss meter | Measures the difference in loss of power for the different states of polarization. | X | |||||
| Polarization mode dispersion analyzer | Measures the dispersion of light that is caused by polarization. Generally used to determine the speed-distance limitation of fiber and cables. | X | |||||
| SONET/ SDH analyzer | Provides accurate bit-error rate and performance analysis of SONET/SDH overhead format that reflects the quality of a transmission system. | X | X | X | |||
| Stable light source | Emitting diode or lasers used in connection with a power meter to measure signal loss. | X | X | X | X | ||
| Synchronization analyzer | Portable, stand-alone tester for network synchronization analysis and wander measurement in wireless and wireline transport networks. | X | |||||
| Talk set | A device that attaches to an optical fiber and serves as a temporary voice link facilitating coordination of work among installation crews. | X | X | ||||
| Telephone wire analyzer | Used by telecommunications service providers that have networks that are comprised mostly or partially of twisted-pair local loops to ensure that those loops are of sufficient quality to carry higher-frequency signals required for DSL. | X | |||||
| Variable optical attenuator | Used in network simulation setups to provide calibrated variable reduction of the strength of an optical signal. | X | X | X | |||
| Visual fault locator | A visible laser that can be connected to an optical fiber network to help locate breaks or points of excessive loss. | X | X | X | |||
| Widely tunable laser | Can produce laser light across a broad range of wavelengths. Used to test DWDM components and value-added optical modules. | X | X | ||||
Products for Network Service Providers
Test Equipment
We offer an extensive range of field-portable test, measurement and monitoring solutions that are mainly used by NSPs, butnetwork service providers that can also be utilized by system vendors.network equipment manufacturers. These products are available as handheld test instruments, portable platforms with related modules, and as rack-mount chassis with related modules. Our handheld instruments are durable, compact and easy to use. Our new AXS-200 SharpTESTER platform, which is designed for entry-level field technicians in access networks, can easily be configured for copper/DSL/triple-play, Ethernet or optical testing applications. We released Ethernet/IP and ADSL2+ triple-play test modules for the AXS-200 SharpTESTER in fiscal 2008, while several others modules and applications will be introduced in upcoming months. Our FTB-200 Compact Platform, designed for the “super field technician”, holds up to two interchangeable modules that are fully compatible with 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) and 10 Gigabit Ethernet testers. Our second-generation field-testing platform, the FTB-400 UTS, is available in threefour configurations: the two-slot model is ideal for OTDR, OLTS and Gigabit Ethernet applications; the four-slot model offers a high-speed bus, ideal for extensive datacom testing and dedicated OTDR, optical loss and Ethernet (up to 10 Gigabit) testing; the seven-slot model is used for dispersion characterization (PMD and CD), DWDM testing (OSA and MWM) and protocol (SONET/SDH/datacom) testing;testing. Finally, the eight-slot 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.
Service Assurance Systems
We also offer a family of service assurance and performance monitoring solutions, collectively known as the Brix System, to network service provider labs and large enterprises. The following describes the software and hardware elements of the Brix System:
Centralized Management and Correlation -- BrixWorx
BrixWorx represents the core of the Brix System. BrixWorx provides network- and service-wide control, visibility, and analysis for the fully integrated Brix System. Using the BrixWorx Operations Center user interface, administrators remotely control each component of the system and can easily configure and modify all aspects of the geographically distributed network of Verifiers and third-party measurement sources, including: choosing the desired performance tests and configuring their parameters, threshold values, and schedules.
The BrixWorx unified correlation engine quickly turns data into actionable information through a visualization layer for service-level agreement (SLA) conformance, root-cause analysis, troubleshooting, usage patterns, and trending.
The highly scalable BrixWorx architecture easily accommodates hundreds of thousands of Brix Verifier test points and third-party measurement sources.
Visualisation and Business Intelligence -- BrixView
Seamlessly integrated with the BrixWorx correlation engine, BrixView enables the flexible presentation of performance and quality information to all decision makers. With interactive dashboard views, customizable reporting packages, and individual content portals, BrixView delivers fast, simple access to information when it is needed and in the format it is needed for all levels of users across an organization.
BrixView produces visualization and reports of varying levels to allow a broad audience to take the appropriate actions. With the appropriate information, network operators spend less time working with static charts and spreadsheets, and business owners and executives have the information and insights they need to make intelligent decisions and drive business value for the organization.
Testing Across the Entire Network -- Brix Verifiers
Installed at customer premise locations, the Brix Verifiers’ various interfaces include Ethernet, ATM, and Euro/ISDN PRI. Similarly, Verifier test capacity scales from the modest requirements of an enterprise branch office running hundreds of tests to a network core running hundreds of thousands of tests.
In addition to Brix Verifiers, the Brix System also supports selected third-party measurement sources. Brix Verifiers are designed for long-term 24x7 deployments in the lights-out, production networks of service providers and enterprises. Once a Brix Verifier is deployed, administrators do not need to locally access it again.
End-to-End IP Service Assurance: BrixNGN
The network core is the heart of the service delivery network, and where successful providers’ service assurance strategies start. To effectively guarantee end-to-end SLAs and meet customers’ requirements, providers must implement a service assurance solution that provides visibility from the provider edge and to end-users, while allowing segmented views of service quality for problem isolation. By continually monitoring the performance and quality of real-time IP services, and not just the physical network devices, BrixNGN provides the most effective service assurance solution.
With BrixNGN, providers can continuously collect, correlate, analyze, and visualize critical quality of service (QoS) and quality of experience (QoE) data from the network core to the customer endpoint for capacity planning, verifying service turn-ups, and identifying, diagnosing, and quickly resolving network and service performance issues before customers are impacted—thereby guaranteeing quality.
The BrixNGN software module performs proactive monitoring of the network core, extended Ethernet and IP networks between partners and customers, and data services, including E-mail, web-based applications, file transfers, and more. BrixNGN enables early detection and quick resolution of service affecting issues.
Performance Monitoring for IP Video: BrixVision
The BrixVision product line is a family of IPTV service assurance products that measure the end-to-end quality of IP-based video services and validate performance of broadcast and on-demand channel quality. The BrixVision product line provides full service lifecycle performance monitoring for IP Video services such as broadcast TV, video on demand, gaming, and videoconferencing. BrixVision provides visibility into service performance using a combination of proactive testing and user transaction generation, passive monitoring, and the collection of performance metrics from service delivery or home network devices.
Voice over IP Testing and Monitoring: BrixCall
BrixCall provides comprehensive visibility into the performance of live VoIP traffic to ensure call quality from the network core to customer care. Deployed in conjunction with the Brix family of Verifiers, BrixCall is an integrated component of EXFO Service Assurance’s live call monitoring solution and employs Brix Verifiers to monitor call signaling and media traffic throughout the network with the advanced BrixCall stream correlation and analysis engine. The solution delivers a single detailed Call Quality Report for each call monitored as well as visibility across all monitored calls.
In addition, the BrixCall dashboard presents critical information about the current state of the service, including all performance threshold violations, call disposition, average Mean Opinion Score (MOS), peak call volume and bandwidth utilization, answer seizure and network efficiency ratios, and call duration information.
BrixCall features the unique Brix Tri-Q Analysis, and graphically displays the impact of each of the elements that contribute to a user’s satisfaction with a call — signaling quality, delivery quality, and call quality.
The following table summarizes the principal service assurance solutions we provide as well as their typical applications:
| Service Assurance Solutions | ||
| Product Type | Product | Typical Application |
| Software Products | BrixWorx | Central site operations center |
| BrixCall | Advanced analysis and correlation of VoIP calls | |
| BrixVision | Advanced analysis and correlation of live video sessions | |
| BrixNGN | Network core and MPLS analysis, correlation and reporting | |
| Brix Verifier | Brix 100M Verifier | Customer premise end point monitoring |
| Brix 1000 Verifier | Network edge and lower capacity monitoring | |
| Brix 2500 Verifier | Network core, at a higher capacity | |
| Brix 3500T Verifier | PSTN monitoring | |
| Brix 4100 Verifier family | In-network live voice or video monitoring | |
Products for System/Network Equipment/Component Manufacturers
Test Equipment
Our system/network equipment/component vendor solutions, mainly built around our IQS-500IQS-600 ITS, are available as test modules or stand-alone benchtop instruments. The next-generation IQS-500IQS-600 platform can efficiently run as many as 100 optical test modules using a single controller unit. The IQS-500IQS-600 platform is equipped with the software and hardware technology to support single-button operation for automated testing. Its system-based approach – one box, several test modules – combined with an open architecture (PXI, Windows, LabVIEW™, etc.) and ease of programming, produces a highly flexible test environment.
The IQS-500IQS-600 also provides backward compatibility with recent IQ-generation test modules, while delivering all the power and advantages of a next-generation platform. EXFO’s wide selection of high-performance test modules includes high-speed power meters, light sources, WDM laser sources, tunable laser sources, variable attenuators, multi-wavelength meters, polarization-dependent loss (PDL) and optical return loss (ORL) meters, polarization controllers and optical switches.
As demonstrated by the release of our IQS-12001B Cable Assembly and Component Test System in fiscal 2007, our system/component vendor solutions also address testing issues that cannot be handled by standard test modules or stand-alone benchtop 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, subsystems and networks:
· CWDM/FTTH passive optical component test system | Used to automatically characterize all critical specifications, including spectral insertion loss, polarization-dependent loss and optical return loss of a CWDM passive component or a FTTH splitter with a high degree of accuracy, ease of use and speed. |
· Cable assembly and component test system | Used to perform insertion loss and mandrel-free reflection measurements with the highest degree of accuracy and repeatability on short fiber assemblies (including multifiber patchcords, hybrids and fan-out patchcords) and components like PLC splitters and fiber arrays. |
· DWDM passive component test system | Used to automatically characterize all critical specifications, including spectral insertion loss, polarization-dependent loss and optical return loss of a DWDM passive component with a high degree of accuracy, ease of use and speed. |
IMS/VoIP Test Systems
InterWatch Product Line
In addition, we offer a line of hardware modules and SolarisTM software-based telecommunications test products operating on a common hardware platform range. This product line consists of the InterWatch R14 system, originally introduced in 2005 and since extensively upgraded, and the M7 system, introduced in 2004. Our products simulate both network subscribers and network elements used in emerging IMS and NGN networks.
We maintain an extensive library of software modules that provide test support for a large number of industry standard protocols and variants thereon. Our emphasis is on testing complex, high-level and emerging protocols, including:
| · | IP Multimedia Subsystem (IMS); |
| · | IP Telephony (Voice over IP or VoIP); |
| · | Asynchronous Transfer Mode (ATM); |
| · | Packetcable; |
| · | ISUP. |
Our extensive technical know-how and proprietary software development tools enable us to implement test support for new protocols and protocol variants rapidly in response to customer needs. With their extensive libraries of software protocol test modules, large selection of proprietary hardware physical interfaces and versatile range of hardware platforms, our products are easily configured to support a wide variety of digital testing functions, thereby reducing a customer’s need for multiple test systems. In addition, the systems’ multi-protocol, multi-user capabilities allow multiple complex testing operations to be performed simultaneously, helping our customers to accelerate their product development cycles.
Our InterWatch test systems consist of advanced proprietary software together with our proprietary hardware interface and co-processor cards. When acquiring a system, customers typically license one or more software modules and purchase hardware and ongoing software support. Customers may upgrade their systems by purchasing additional software protocol test modules and additional hardware interfaces to meet future testing needs. Prices for our systems vary widely depending upon the overall system configuration parameters, including the number and type of software protocol modules and the number of physical interfaces required by the customer.
Applications
The principal applications of our InterWatch test systems are:
Feature Verification. Our systems are used to perform feature verification by simulating one or more network devices and testing a wide variety of possible scenarios to establish if the device under test can handle all features specified by the protocol. Users are able to initiate multiple simultaneous calls across one or many links, create correct call scenarios, send messages out of sequence to verify error response mechanisms and verify a voice or data path.
Interoperability Testing. Our systems are used to simulate one or more network devices, emulating their actions and responses. By simulating various network devices, such as digital switches, wireless base stations, network access nodes and network databases, our products assist engineers with the cost-effective development of equipment that will be compatible with other devices in the networks within which they will be deployed. This helps ensure that network equipment will interoperate reliably, thereby reducing costly failures after installation.
Load and Stress Testing. Our systems are used to verify that a device under test can successfully handle its designed traffic capacity and that its performance will degrade gracefully, rather than fail completely, when stressed beyond its specifications. The scalable architectures of the systems significantly improve our ability to address our customers’ growing need to generate and maintain high traffic volumes for load testing.
Monitoring and Analysis. Our systems are used in development laboratories to monitor network links and store network activity information for future analysis, typically without affecting network traffic. By collecting and analyzing traffic, our systems help ensure that the links have been brought into service and that the devices connected by the links are functioning properly.
Products for life sciences and industrial applications
Over the years, we have developed and acquired a number of core technologies that we leverage in selected high-precision assembly and life sciences markets. For example, we offer several light-based curing solutions for optical component manufacturing applications and have adapted our approach for other industries, such as semiconductor, microelectronic, and medical device manufacturing, in order to maximize revenues. Our Omnicure® systems deliver precise doses of the appropriate spectral light onto photosensitive adhesives to significantly reduce bonding time and increase repeatability. These light-based curing systems, supported by patented optical feedback, thermal control and radiometry technology, produce a high-quality bonding solution. Our technology and application knowledge place us at the forefront of this market.
The following table summarizes the principal types of high-precision assembly and life science solutions we provide as well as their typical applications:
Light Sources and Accessories | ||
Product Type | Product | Typical Application |
| UV Light Sources | Omnicure® S1000 Omnicure® S2000 | Used to initiate photo chemical reactions in polymer-based materials for a variety of end use applications. Examples include adhesive curing for manufacturing of high value-added items such as medical devices, micro-electronic and opto-electronic components, displays, and data storage devices. |
| Fluorescent Light Sources | X-Cite® 120XL X-Cite® 120 PC X-Cite® exacte | Fluorescence light source that attaches directly to most microscopes currently sold by major microscopes manufacturers. |
| Optical Accessories | Optional custom delivery optics used with EXFO UV light sources to tailor the properties of light beams to end-user applications. | |
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 |
| Radiometer | R5000 R2000 X-Cite® Radiometer | Handheld, broadband optical radiometers used in conjunction with EXFO UV light sources to ensure process quality control at the end-user location. |
| Cure-Site Radiometer | Attachments for the R2000 and R5000 radiometers that enable optical measurements under customer specific configurations. Examples include the cure-ring radiometer, which measures the output power of light from an EXFO cure ring; ideal for applications that requires a uniform 360° exposure. | |
Precision Positioning Instruments | ||
Product Type | Product Line | Typical Application |
| Micromanipulators | PCS-6000 Micromanipulators | Electrophysiology research such as patch clamp recording experiments on cells from the brain and central nervous system. |
| PCS-5000 Micromanipulators | ||
| Microscope Platforms | Gibraltar Platform/Stage | Stable mechanical platforms that facilitate cellular research with micropositioning and microinjection systems. |
| Microinjection Systems | MIS-5000 Microinjection | Microinjection and nuclear transfer for genetics and reproductive sciences research. |
Research and Development
We believe that our future success largely depends on our ability to maintain and enhance our core technologytechnologies and product functionality. To keep developing new products and enhancements, it is important that we retain and recruit highly skilled personnel. Our Telecom Division’s research and development department is headed by a Vice-President of Research and Development, while our Life Sciences and Industrial Division has a Director of Research and Development.
In fiscal 2007,2008, we implemented an R&D expansion strategy into India that accelerated our software development capabilities at our R&D center in India at a lower cost. We made an acquisition agreement withhad initially acquired a small outsourcing company based in Pune, India. From this base, we have increased the team throughout the year to reach a level of 65 engineers.
As of November 1, 2007,3, 2008, our research and development departments included 349359 full-time engineers, scientists and technicians, of whom 56who 62 hold post-graduate degrees. Gross research and development expenditures in fiscal 20072008 reached $25.2$32.5 million, compared to $25.2 million in 2007 and $19.5 million in 2006 and $15.9 million in 2005.2006. We launched 2027 new products in fiscal 20072008 compared to 20 in 2007 and 18 in 2006 and 15 in 2005.2006. Approximately 34%35% of sales in fiscal 20072008 originated from products that have been on the market two years or less compared to 34% in 2007 and 37% in 2006 and 42% in 2005.2006.
Through market-oriented product portfolio review processes at our telecom sites in Quebec City, Canada, Montreal, Canada, Concord, Canada, Chelmsford, USA, and Pune, India, we ensure that our investments in research and development are aligned with our market opportunities and customers’ needs. This process enables us to maximize our returns on R&D investments by focusing our resources on prioritized projects. Quarterly product portfolio review meetings enable us to chooseselect a realistic, balanced mix of new products and allocate the necessary resources for their development. All our projects, including those already underway, are reviewed, given a priority rating and allocated budgets and resources. Our existing projects can be stopped or substantially redefined if there have been significant changes in market conditions, or if the project development schedule or budget have significantly changed.
To manage our research projects once they are underway, we use a structured management process known as the stage-gate approach. The stage-gate approach is based on a systematic review of a project’s progress at various stages of its life cycle. The following are the key review stages of the stage-gate approach:
| · | market study and research feasibility; |
| · | product definition; |
| · | development feasibility; |
| · | development; |
| · | qualification; and |
| · | transfer to production. |
At each stage, we review our project risks, costs and estimated completion time. We compare our design to anticipated market needs and ensure that our new product development is synchronized with other internal departments and external industry events. Adherence to these inter-related portfolio review and stage-gate processes enabled us to be named winners of the Outstanding Corporate Innovator Award in 2000 by the U.S.-based Product Development and Management Association.
We also maintain research and development programs for our life sciences and industrial activities in Toronto, Canada. The product development process is managed using a similar stage-gate process, and projects are reviewed and approved through a quarterly portfolio review. The future success of our life sciences and industrial operations largely depends on our ability to maintain and enhance our core technology in light-based curing, fluorescence illumination systems and piezoelectric positioning.
Strong R&D capabilities at our Life Sciences and Industrial Division site in Toronto, Canada have made it possible to bring a number of successful new products to market quickly and retain customer intimacy. In the process, it has enhanced our ability to customize products for special applications and to develop original equipment manufacturing (OEM) products under partnerships and exclusive contracts. Outside consultants are often used for added support in areas like software development, mechanical design and rapid prototyping.
Customers
Our global and diversified telecom customer base relies on our test, measurement and measurementservice assurance 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,network service providers, cable television companies, public utilities, private network operators, third-party installers, equipment rental companies, systemlarge enterprises, network equipment manufacturers, component vendors and laboratory researchers. Our life science and industrial customers consist of major manufacturers of medical devices, microelectronics, optical displays, electronic storage systems, photonic components and microscopes, as well as universities, medical schools, governments, and private and industrial research laboratories. In fiscal 2007,2008, our top customer accounted for 14.7%7.4% of our sales and our top three customers represented 19.6%13.1% of our sales. In comparison, in 2007 our top customer accounted for 14.7% of sales and our top three customers represented 19.6%, while in 2006, our top customer accounted for 13.8% of sales and our top three customers represented 19.4%, while in 2005, our top customer accounted for 23.3% of sales and our top three customers represented 28.4%.
With regard to geographic distribution, sales to customers in the Americas (US, Canada and Central & South America) represented 59%56% of our sales in fiscal 2007,2008, while sales to customers in EMEA (Europe, Middle East and Africa) and Asia-Pacific accounted for 27%28% and 14%16% of sales, respectively. In comparison, the Americas, EMEA and Asia-Pacific accounted for 59%, 27% and 14% of sales, respectively, in 2007, and 60%, 25% and 15% of sales, respectively, in 2006, and 68%, 20% and 12%, respectively, in 2005.2006.
Sales
We sell our telecom test, measurement and measurementservice assurance solutions through direct and indirect sales channels in the Americas (US, Canada, Central & South America) and around the world.
In the Americas, we use a hybrid model, combining key account management with direct and indirect sales coverage. We typically use key account managers to serve large customers that generate high sales volumes or might potentially represent high sales volumes in the future. These key account managers are supplemented by regional sales managers, sales engineers, sales representatives and distributors in US andas well as Central &and South American metropolitan areas, as well asand regional sales managers in Canada.
We opt for a direct sales approach when selling higher-end, highly technical products to sophisticated buyers. Sales of low- to medium-level complexity products to less stringent technical buyers are usually done through a manufacturer representative organization supported by regional sales managers. Our main sales offices and service centers in the Americas are located in Addison,Plano, Texas, Quebec City, Canada, and Concord, Canada. They are supplemented by a regional presence in cities across the US, Central and South America, as well as Canada.
On the international front, we have sales personnel covering strategic areas such as EMEA (Europe, Middle EastMiddle-East and Africa) and APAC (Asia-Pacific region). Our sales network in EMEA is supported by a main office and service center in Southampton, UK, which maintains our head of European sales operations and also provides repair and calibration services for our EMEA customers. We also have additional sales offices in multiple countries across EMEA to serve and support our various customers and distributors.
As for APAC, our main sales offices for South East Asia is located in Singapore, while our main sales representative offices for mainland China are located in BeijingShenzhen and Shenzhen,Beijing, which also acts as a service center to better serve our customer base in that geographic area. In addition, we have other sales offices in strategic locations around the world to support our network of distributors and various customers.
We rely on a network of more than 90 distributors worldwide to work with us in supporting mostly our international sales and to participate in a large number of 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 Sales for the Americas and a Vice-President of International Sales. They are supported by sevennine regional sales directors that are leading a widely distributed team of more than 83112 people acting as key account managers, regional sales managers, sales engineers and application engineers. Our sales people are located throughout major metropolitan areas around the world. This group of sales professionals has on average more than 1314 years of experience in the fields of telecommunications, fiber optics, or test and measurement. We also have an in-house Customer Service Group to meet the needs of existing and new customers. This group is responsible for providing quotations to customers, supporting our sales force, managing demonstration units, order management, technical support and training as well as calibration and repair services.
Following the acquisitions of Navtel Communications and Brix Networks (renamed EXFO Service Assurance Inc.) in the third quarter of fiscal 2008, sales responsibilities within our Telecom Division were modified. Navtel Communications’ sales team was fully integrated within the Telecom Division, while EXFO Service Assurance’s sales force remained stand-alone as its systems are more complex than traditional test equipment and require longer sales cycles. EXFO Service Assurance, with its main sales office located in Chelmsford, MA, USA, consists of regionally based account executives and sales engineers that target carriers, service providers and cable MSOs. Regional sales offices are located in Southampton, England, Singapore and Beijing, China.
EXFO Service Assurance sells its solutions mainly through direct channels in the Americas (US, Canada, Central and South America) and around the world. In the EMEA and Asia/Pac regions, its sales teams work with resellers that have a strong local presence.
The main office for our Life Sciences and Industrial Division is located in Toronto, Canada. We use mixed sales channels to serve various markets supported by this division, depending on product line and geography. Optical light sources and related accessories used for industrial applications are sold in North America through a network of more than 10 manufacturer representatives and, internationally, through a network of more than 20 distributors. The X-Cite 120 and Exacte Fluorescence Illumination System isSystems are sold through value-added reseller agreements with major microscope companies and system integrators in North America and Europe. Positioning products are sold directly to customers in North America, which includes the United States and Canada, and internationally through a network of technical distributors. To gain additional access to the positioning life science research market in the United States and Canada, 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
Our telecom Product Management Group consists of one Vice-President responsible for our Optical, Protocol, Copper Access, and Systems product lines – as well as directors and product managers who have various degrees in engineering, science and business administration. Directors and product managers, under the direction of the Vice-President, are responsible for all aspects of our telecom marketing program including product strategy, new product introductions, definition of new features and functions, pricing, product launches and advertising campaigns. We follow up our marketing initiatives by attending industry trade shows. Furthermore, we have a customer relationship management (CRM) system to compile market and customer information including forecasts, opportunities, leads and competitive data. We use this information to make strategic business decisions. Finally, strategic marketing specialists analyze our markets of interests, compile competitive information and identify macro-trends in our sector.
Following the acquisitions of Navtel Communications and Brix Networks in the third quarter of fiscal 2008, product management responsibilities have remained within their respective groups. Under the direction of a Vice-President/General Manager for each group, directors and product managers are responsible for product strategy, new product introductions, definition of new features and functions, pricing, product launches and advertising campaigns.
Our Life Sciences and Industrial Group consists of a Director – responsible for both life sciences and precision assembly sectors – as well as product managers who have various degrees in engineering, science and business administration. Product managers, under the direction of the Director, are responsible for all aspects of their business line marketing programs including product strategy, new product introductions, definition of new features and functions, pricing, product launches and advertising campaigns.
The telecomTelecom Division product management group and the Life Sciences and Industrial Division product management group include 34 and 54 employees, respectively.
Marketing/Communications
The Telecom Division’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. This team falls under the responsibility of the Vice-President, Telecom Product Management and Marketing.
The Life Sciences & Industrial Division’s Marketing-Communications team shares a variety of marketing initiatives. This group is assisted by product managers, who provide the technical data and collaborative support required to produce product specification sheets, catalogues, application notes and multimedia marketing tools. This Marketing-Communications team is 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’s worldwide sales channels, including maintaining our elite partner program. This team falls under the responsiblityresponsibility of the Director of marketingMarketing for the Life Sciences and Industrial Division.
Customer Support
Customer support is deemed a corporate mandate at EXFO. As such, our Customer Support Group handles requests from customers worldwide. We aim to anticipate our customers’ needs, offering Inside Sales, Technical Support and After-Sales Service. EXFO Customer Service Department offers customer support in French, English, Chinese, German, Spanish, Portuguese, Italian, Russian and Japanese.
Our employees in the Inside Sales Team are mainly responsible for guiding customers in purchasing the correct equipment for their respective applications, issuing quotations and promoting our Flexcare extended warranty service and support 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.
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 in North America, Europe and Asia. These support centers provide technical support, order processing, inside sales, calibration and repairs for our customers.
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, 2007,3, 2008, we had 299310 employees involved in our telecom manufacturing operations. Most of our telecom manufacturing activities, which occupy a total of approximately 115,000 square feet, are spread among threefour buildings: two in Quebec City, Canada, one in Shenzhen, China, and one in Shenzhen, China.Chelmsford, MA, USA.
These manufacturing operations include the following responsibilities:
| · | Production. From production planning to product shipment, our production department is responsible for manufacturing high-quality products on time. Factories are organized in work cells; each cell consists of specialized technicians and equipment and has full responsibility over a product family. Technicians are cross-trained and versatile enough, so that they can carry out specific functions in more than one cell. This allows shorter lead times by alleviating bottlenecks. |
| · | Product Engineering and Quality. This department, which supports our production cells, acts like a gatekeeper to ensure the quality of our products and the effectiveness of our manufacturing processes. It is responsible for the transfer of products from research and development to manufacturing, product improvement, documentation, metrology, and the quality 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. |
| · | 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 |
Our Life Sciences and Industrial Division’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, Canada:
Manufacturing – consists primarily of assembly and test capabilities in which all major manufacturing elements are subcontracted to various key suppliers. These components are integrated into assemblies and tested in order to ensure all operating specifications have been met for each product manufactured. Cross-training of assembly technicians for each product group ensures scalability of manufacturing to meet customer demand. In addition, this group is responsible for capacity and production planning, which are necessary on an on-going basis to ensure that adequate resources are available to meet forecasted and actual demand.
Supply Chain Management – is responsible for the planning of materials required by manufacturing and developing key-supplier relationships to ensure materials have been manufactured to our specifications. This group’s main focus is to work with our worldwide supplier base to find effective manufacturing and logistic solutions in order reduce costs and cycle time. Paramount to this process is an effective communication system that provides timely feedback to our suppliers and forms an important element of our supplier evaluation system.
Manufacturing Engineering and Quality Assurance– is responsible for product integrity throughout the manufacturing cycle. From the release of new products, through our new product introduction process, and configuration management to manage engineering change, we ensure consistent manufacturing processes throughout the product life cycle. In conjunction with the above process, quality is maintained by performing quality tests at incoming receiving and final product verification. The responsibility for product quality is shared by all team members throughout the company and does not reside solely with the quality group.
Competition
The telecommunications test, measurement and measurementmonitoring 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:
| · | product performance and reliability; |
| · | price; |
| · | level of technological innovation; |
| product lead times; |
| · | breadth of product offerings; |
| · | ease of use; |
| · | brand-name recognition; |
| · | customer service and technical support; |
| · | strength of sales and distribution relationships; and |
| · | financial stability. |
Generally, competitors fall into two categories. The first category consists of global test and measurement vendors, who complement their broad range of products with telecom test, measurement and measurementservice assurance equipment. These companies include Agilent Technologies, Inc., Anritsu Corporation, Danaher Corporation (Tektronix), JDS Uniphase Corporation, Spirent plc, and Yokogawa.
The second category refers to niche companies in the telecom test, measurement and measurementservice assurance 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., Fluke Networks, an operating division within Danaher Corporation,Empirix, Inc., IneoQuest Technologies, Inc., IXIA, and Sunrise Telecom Inc., and VeEX Inc.
Competition for our life sciences and industrial solutions is quite varied, depending upon product line. Competitors that sell light-based curing products include Dymax, Henkle-Loctite in North America and Europe as well as Hamamatsu, Ushio and Matsushita (Panasonic) in Asia,Asia. With regard to our X-Cite 120 Fluorescence Illumination System, main competitors consist of microscope manufacturers who have developed lamp housings for low-wattage mercury burners in-house. Finally, our motion control Life Science instruments, which are designed for various life science applications, compete against products from companies likesuch as Sutter Instruments and Narishige.
Regulatory Environment
In most countries where our products are sold, our products must comply with the regulations of one or more governmental entities. These regulations often are complex and vary from country to country. Depending upon the country and the relevant product, the applicable regulations may require product testing, approval, registration, marking and unique design restrictions. Accordingly, we have appointed a team of engineers who are responsible for ensuring that our products comply with all applicable regulations.
In the United States, our products must comply with the regulations of several agencies of the U.S. federal government, including the Federal Communications Commission (FCC), the Food and Drug Administration (FDA) and the Occupational Safety and Health Administration (OSHA). Under the FCC’s regulations, our products must comply with certain electro magnetic compatibility (EMC) requirements to insure they do not generate and are immune from electrical noise which could possibly cause undesirable operation, as well as affect other surrounding devices. Depending upon the product, compliance with these rules may necessitate applying for and obtaining an FCC equipment authorization prior to importing into the United States, or marketing, any units of the relevant product. Additionally, some of our products must comply with the FDA’s non-medicalperformance standards and related rules concerning light-emitting products, such as lasers. The FDA’s regulations are intended to promote safety by limiting human exposure to harmful non-iodizing radiation. Similarly, our products must comply with safety standards adopted by OSHA. Furthermore, for our Life Science and Industrial Division, certain U.S. states require mandatory product registration and reporting of Mercury-added products being imported. This registration is controlled by the Interstate Mercury Education and Reduction Clearinghouse (IMERC).
Similar regulations apply in other countries. For example, in Canada our products must comply with the applicable standards adopted by the Standards Council of Canada (SCC). These include product safety standards developed by the Canadian Standards association as well as EMC requirements adopted by Industry Canada. Countries in the European Union require product compliance as dictated by an applicable directive, often referred to as CE marking. This includes testing to ensure compliance with harmonized European Norm (EN) standards for both product safety and EMC requirements. 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.
Additionally, to address the issue of environmental compliance, the European Union has mandated the Restriction of the Use of Certain Hazardous Substances or "RoHS" Directive, which applies to all products included within the scope of WEEE directive with the exception of Categories 8 (Medical devices) and 9 (Monitoring and control instruments). Mandatory product compliance includes the ban of certain substances within specified concentrations, unless formally exempted by the directive. To ensure compliance to this directive, a formal restricted substances control (RSC) program was implemented for our products included within the scope of WEEE. This program ensures the design, procurement and manufacturing of affected products prevents the inclusion of the banned substances as specified by the RoHS directive.
Other significant types of regulations not described in this annual report also may apply, depending upon the relevant product and country of destination.
Intellectual Property
Our success and ability to compete are dependent in part on our ability to develop and protect our proprietary technology. We file U.S. and international applications to protect technology, inventions and improvements important to the development of our business. We also rely on a combination of copyright, trademark, trade secret rights, licensing and confidentiality agreements.
As of August 31, 2007, EXFO2008, we held 3741 actively maintained granted patents from the U.S. (including one “design” patent), eightseven from Canada, threefour from Germany (including one “Utility Model”), twofour from the United Kingdom, twothree from France, and onetwo from China. In addition, EXFO has ninewe have 20 US patent applications in process, nineeleven Canadian patent applications in process, twothree European applications in process, two fromthree applications in China, two fromdirect national entry in Germany (not via the European application) and one fromin Russia, and fourthese applications being either direct national or regional submissions or submissions as applications under the Patent Cooperation Treaty patent applications pending. These issued and pending patents cover various aspects of our products and processes.Treaty. The expiration dates of our issued patents range from October 3, 2008 to August 3, 2024.January 13, 2026.
We consider eight of our inventions for which patents have either been granted or are pending to be material. These inventions are:
| · | a method and apparatus for “non-intrusive” live-fiber detection and |
| · | the measurement of attenuation of optical fibers using bidirectional transmission of information via the fiber, |
| · | 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. |
| · | 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 |
| · | 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 |
| · | 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 |
| · | 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 |
| · | a method and system for hardware time stamping packetized data to provide sub-microsecond accuracy in test measurements, which is embedded in the |
Confidentiality and proprietary information agreements with our senior management, employees and others generally stipulate that all confidential information developed or made known to these individuals by us during the course of their relationship is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements also generally provide that all intellectual property developed by the individual in the course of rendering services to us belongs exclusively to us. These efforts afford only limited protection.
As of November 1, 2007,3, 2008, 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.
| Property, Plant and Equipment |
Our head offices and facilities are located in Quebec City, Province of Quebec, Canada where we occupy two buildings. These buildings house our executive and administrative offices, research and development facilities and production facilities. We also have facilities in Montreal, Province of Quebec, Canada (formerly EXFO Protocol), in Concord, Ontario, Canada (formerly Consultronics Limited), in Markham, Ontario, Canada (formerly Navtel Communications Inc.), in Mississauga, Ontario, Canada (EXFO Photonic), in Budapest, HungaryChelmsford, Massachusetts, United States (EXFO Systems Development)Service Assurance Inc.), in Eastleigh, Hampshire, United Kingdom (EXFO Europe), in Shenzhen, China (EXFO Telecom Equipment (Shenzhen) Co. Ltd.) and in Pune, India (EXFO India). EXFO Burleigh’s facilities located in Victor, New York, were sold on August 31, 2006.
In addition, we maintain sales offices and/or have regional sales managers located in China, Czech Republic, France, Germany, Great Britain, Mexico, Singapore, Spain, United Arab Emirates and the United States.
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’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 that three. Though we no longer occupy the facilities at 465 Godin Avenue in 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).
The following table sets forth information with respect to the main facilities that we occupy as of November 1, 2007.3, 2008.
Location | Use of Space | Square Footage | Type of Interest |
436 Nolin Street Quebec (Quebec) G1M 1E7 | Partially occupied for manufacturing of telecom products | 44,164 (1) | Owned |
400 Godin Avenue Quebec (Quebec) G1M 2K2 | Fully occupied for research and development, manufacturing, management and administration | 128,800 (2) | Owned |
2260 Argentia Road Mississauga (Ontario) L5N 6H7 | Partially occupied for research and development, manufacturing of life science and industrial products, management and administration | 25,328 (3) | Leased |
2650 Marie-Curie St-Laurent (Quebec) H4S 2C3 | Fully occupied for research and development, management and administration | 26,000 | Leased |
160 Drumlin Circle Concord (Ontario) L4K 3E5 | Partially occupied for research and development, product management and administration | 23,500 (4) | Owned |
L3R 8H3 | 26,690 | Leased | |
285 Mill Road Chelmsford, MA 01824 United States | Partially occupied for research and development, | 23,052 (5) | Leased |
Location | Use of Space | Square Footage | Type of Interest |
Omega Enterprise Park Electron Way, Chandlers Ford, Eastleigh, Hampshire S053 4SE United Kingdom | 10,000 | Leased | |
Hua Chuang Da Industrial Park Bldg D, 2/F, Hangcheng Blvd, Gushu, Xixiang Shenzhen 518126 China | Partially occupied for manufacturing of telecom products | 40,000 | Leased |
113/1, Lane 4A Koregaon Park Pune India | Fully occupied for research and development | 5,986 | Leased |
Office No 701, Building 1 The Cerebrum IT Park Wadgaon Sheri, Pune 411014 India | Fully occupied for research and development | Leased |
| (1) | Approximately |
| (2) | Including the |
| (3) | 9,792 square feet have been subleased to a third party. The total square footage leased is 36,000. |
| (4) | Approximately 1/3 of these premises are not occupied. |
| (5) | 7,950 square feet have been subleased to a third party. The total square footage leased is 31,002. |
| (6) | Approximately |
| Unresolved Staff Comments |
Not applicable.
This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, will, expect, believe, anticipate, intend, could, estimate, continue, or the negative or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including consolidation in the global telecommunications test, measurement and monitoring industry; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; concentration of sales; fluctuating exchange rates and our ability to execute in these uncertain conditions; the effects of the additional actions we have taken in response to such economic uncertainty (including our ability to quickly adapt cost structures with anticipated levels of business, ability to manage inventory levels with market demand); market acceptance of our new products and other upcoming products; limited visibility with regards to customer orders and the timing of such orders; our ability to successfully integrate our acquired and to-be-acquired businesses; our ability to successfully expand international operations; the retention of key technical and management personnel; and future economic, competitive, financial and market conditions, including any slow-down or recession in the global economy. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.
The following discussion and analysis of the consolidated financial condition and results of operations of EXFO Electro-Optical Engineering Inc. for the fiscal years ended August 31, 2005, 2006, 2007 and 2007,2008, should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada, or Canadian GAAP. Significant differences in measurement and disclosure from generally accepted accounting principles in the United States, or U.S. GAAP, are set out in note 2019 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 1, 2007.3, 2008, except as indicated herein.
All dollar amounts are expressed in US dollars, except as otherwise noted.
INDUSTRY OVERVIEW
The basic fundamentals of the wirelineglobal telecom industry are fairly robustremain solid for the moment. However, it is still unknown what impacts the current financial crisis might have on the global economy particularly in most regionsthe United States, where a severe economic slowdown could potentially reduce investments and affect other parts of the world,world. The main fundamental telecom drivers are based upon exponential growth in bandwidth demand, as well as on the intense competition – mainly in the United States – between telecom operators (telcos) and cable companies (cablecos), who are pushing massive network investments andin Internet protocol (IP) converged next-generation networks to capitalize on significant operational efficiencies and service revenues generated by fully converged IP (Internet protocol) networks.revenues.
Global Internet bandwidth grew atdemand is growing very rapidly, due to a wide range of applications like video, webgaming, etc. TeleGeography Research has estimated its compound annual growth rate (CAGR) of 45%at 54% from 20032004 to 2006, according to TeleGeography Research.2008. This trend is likely to remain steady if not accelerate,in the years to come, with the upcoming anticipation and explosiondeployments of IPTV (Internet protocol television) and HD-IPTV (high-definition Internet protocol television)television (IPTV), as thishigh-definition Internet protocol television (HD-IPTV) and increased online video streaming, since these applications, among others, will consume a colossal amount of additional bandwidth. As a result, telcos and cablecos are investing substantially in their access networks in order to provide differentiated, revenue-generating services to attract and retain consumers, who are increasingly relying on broadband network services for their work, entertainment and everyday activities. From a telco perspective, it is now clear that fiber-to-the-premises (FTTP)fiber-to-the-home (FTTH) will become the access network architecture of choice, which will allow them to meet heightened bandwidth requirements and future-proof their access networks, as residential bandwidth requirements are growing from the 1 to 5 Mbit/s (megabits per second) of the past to the 30 to 100 Mbit/s required in the futurelong-term to assure multiple HD-IPTV channels, online gaming, high-speed content-rich Internet, VoIP (voice-over-Internet-protocol)(voice-over-Internet protocol) telephony and a myriad of additionalother IP-based applications. Hybrid architectures, combining copper and fiber (fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also keep expanding in the short term, since they are less expensiveless-expensive methods to increase bandwidth and can be mass-deployed faster.
These investment decisions are applicable not only to green-field deployments and high-rise buildings, but also to larger-scale rollouts as long-term operating costs are less than FTTC and FTTN. It is important to mention that the cost of deploying fiber-to-the-home (FTTH)FTTH has largely been fallingfallen over the last three years as volume increased and deployment tools, like those we offer, are making the task increasingly easier.simple and efficient. We are only at the early stages of fiber deployments in access networks, both in the Americas and around the world. Western Europe and China have become increasingly committed to deploying FTTH networks, given their high population density.
As bandwidth growth in access networks continues to increase, it has begun placing a strain on metro rings and core networks. It is also driving the need for higher-speed technologies, such astechnologies; for example, 43 Gbit/s(gigabits (gigabits per second)SONET/SDH is now seeing early deployments and becoming mainstream, while the upcoming 100 Gbit/s Ethernet becauseis in early field trials. The deployment of these solutions areis expected to be significantly more economical, especially if one willtrenches need to be forced to dig trenchesdug in order to deploy new fiber in metro or long-distance routes.
As telecommunication networks are being transformed to provide IP-based voice, video and data capabilities, the legacy SONET/SDH networks,standards, which were designedfirst established in the 1980s and 1990smid-1980s and implemented until 2005, do not have the payload flexibility to seamlessly and efficiently mix and transport video with voice and data. These networks will not be capable of efficiently carrying these emerging IP-based services as they are based on design standards aimed atdesigned for public switched telephone network (PSTN), point-to-point voice transmission only. As a result, telcoswith new SONET/SDH standards, which are part of what the industry is calling next-gen networks, telco operators are increasingly turning to next-generation, IP-based networks to allow for more flexible and future-proof IP-based, next-generation networks to allow for more versatile and efficient transport of a new range of applications and services, and to offer customers higher-margin triple-play services―and even quadruple-play services―as wireline and wireless technologies become increasingly interconnected. Finally, as subscribers of these new services while reducing their operating costs.reach a critical mass, telcos are relying on service assurance solutions to ensure that the quality of service (QoS) and quality of experience (QoE) demanded by users are optimal in the post-deployment phase.
These market dynamics positively affected telecom test and monitoring suppliers in fiscal 2008; however, deteriorating macro-economic conditions in the United States could instigate a slowdown in capital spending among customers, which would necessarily reduce demand for our test and monitoring solutions.
COMPANY OVERVIEW
EXFO is a leading provider of test and monitoring solutions for network service providers and equipment manufacturers in the global telecommunications industry. The Telecom Division, which represents more than 85% of our business, offers a wide range of innovative solutions extending across the full technology lifecycle― from design to technology deployment and onto service assurance―and covering all the layers of a network infrastructure to enable triple-play services and next-generation, converged IP networking. The Life Sciences and Industrial Division offers solutions in medical-device and opto-electronics assembly, fluorescence microscopy and other life sciences sectors.
Over the past fewseveral years, we have enhanced our competitive position through acquisitions of protocol, copper/xDSL (digital subscriber line) and service assurance test businesses.
In April 2008, we acquired all issued and outstanding shares of Brix Networks Inc. (renamed EXFO Service Assurance Inc.), for a cash consideration of $29.7 million, plus a contingent cash consideration of up to a maximum of $7.5 million, based on booking levels exceeding $16 million up to $40 million in the 12 months following the closing of the deal. Brix Networks, a privately held company located in the Boston (MA) area, offers VoIP and IPTV service assurance solutions across the three areas most affecting the success of a real-time service: signaling quality (signaling path performance), delivery quality (media transport performance) and content quality (overall quality of experience). Brix Networks’ service assurance solutions are mainly designed for network service providers (NSPs) and large enterprises.
In March 2008, we acquired all issued and outstanding shares of Navtel Communications Inc., for a cash consideration of $11.3 million. Navtel Communications, a privately held company in Toronto, Canada, is a leading provider of Internet protocol multimedia subsystem (IMS) and VoIP test solutions for network equipment manufacturers (NEMs) and NSP labs. Navtel Communications specializes in testing next-generation IP networks that are increasingly combining wireline and wireless technologies. Subsequent to the acquisition, Navtel Communications was merged into the parent company.
In fiscal 2008, we opened our own telecom manufacturing facilities in Shenzhen, China. We now have two main manufacturing sites for our Telecom Division and one plant for our Life Sciences Division. Over time, low-volume, high-complexity telecom products will be manufactured in Quebec City, whereas high-volume, low-complexity telecom products will be manufactured in Shenzhen.
In fiscal 2008, we accelerated the deployment of a software development center in Pune, India, to supplement the research and development capabilities of our labs in Boston, Toronto, Montreal and Quebec City. This will enable us to benefit from the wealth of IP expertise in India, to accelerate product development―especially for our software-intensive protocol test businesses. solutions―to take advantage of a lower cost structure.
In January 2006, we acquired substantially all the assets of Consultronics Limited, (now merged with the parent company) a leading supplier of test equipment for copper-based broadband access networks, for a total cash consideration of $19.1 million. Above and beyond copper/xDSL test solutions, Consultronics had a rich product portfolio for testing next-generation technologies, such as IPTV and VoIP, which are critical for NSPs in their deployment of triple-play services (voice, data, and video) over optical and copper links in access networks. This acquisition was a strategic initiative to position EXFO as a provider of a comprehensive solutiongenuine one-stop shop for broadband access and triple-play testing, since it complemented our market leadership in the optical FTTx test market.
In November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol Inc. and now merged with EXFO)the parent company), a supplier of legacy protocol-testing and optical-network performance management equipment for NSPs. This transaction served as a technology base from which we gradually expanded toward next-generation test capabilities; by fully integrating this technology into our modular PC-based FTB and IQS test platforms, it has allowedenabled us to offer unique combinedcombine optical and protocol test solutionsmodules inside a single field-portable test platform in order to help our customers increase acceleraterevenues and simplify test procedures while reducingreduce operating costs. In October 2002, our wholly-owned subsidiary, EXFO Gnubi, purchased substantially all the assets of gnubi communications, L.P., a supplier of multichannel telecom and datacom testing solutions for the system manufacturer market. AsThese 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 intoto protocol testing applications, we more than doubled our addressable test market and started to offer a more complete line of test solutions to our customers.customers.
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 2000.2000 for its wavelength measurement instruments and nanopositioning alignment systems. We also added EFOS Inc. (renamed EXFO Photonic Solutions Inc.) in March 2001.2001 for its precision light-based, adhesive spot-curing technology. We have since exited the optical component manufacturing automation business, and the remaining operations of these two businessesEXFO Burleigh have mostly been consolidated with those of EXFO Photonic Solutions in Toronto, Canada to serve as our Life Sciences and industrial Division.Canada.
In fiscal 2008, we faced a substantial and sudden increase in the value of the Canadian dollar versus the US dollar. The average value of the Canadian dollar increased 11.4% in fiscal 2008, compared to the same period last year. Given that most of our sales and earnings data for fiscal 2007, we concluded that it was more likely than not thatare denominated in US dollars but a significant portion of our future income tax assets, written off during the telecom downturnexpenses are denominated in 2003, would be recovered. As a result, we recognized $24.6 million in previously unrecognized income tax assets and $3.2 million in previously unrecognized research and development tax credits in the fourth quarter of 2007. These future income tax assets and tax credits relate toCanadian dollars, our operations in Canada and in the United States.
On November 5, 2007, the Board of Directors approved a share repurchase program, by way of normal course issuer bid on the open market, up to 9,9%9.9% of our public float (as defined by the Toronto Stock Exchange), or 2.9 million of subordinate voting shares, at the prevailing market price. The period of the normal course issuer bid commenced on November 8, 2007, and ended on November 7, 2008. All shares repurchased under the bid were cancelled. We redeemed 1.9 million subordinate voting shares for a total consideration of $8.5 million under that program.
On November 6, 2008, the Board of Directors approved a renewal of our share repurchase program, by way of a normal course issuer bid on the open market, of up to 10% of our public float (as defined by the Toronto Stock Exchange), or 2.7 million subordinate voting shares, at the prevailing market price. We expect to use cash, short-term investments or future cash flows from operating activitiesoperations to fund the repurchase of shares. The period of the normal course issuer bid will startstarts on November 8, 2007,10, 2008, and will end on November 7, 2008,9, 2009, or on an earlier date if we repurchase the maximum number of shares permitted under the bid. The program does not require that we repurchase any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid will be canceled.cancelled.
Upon the approval of the Offer, we suspended the normal course issuer bid referred to above, until 20 business days following the expiration of the Offer.
Sales
We sell our products to a diversified customer base in approximately 7095 countries through our direct sales force and channel partners like sales representatives and distributors. Most of our sales are denominated in US dollars and Euros.
We believe that we have a vast array of products,varied product lines, a diversified customer base, and gooda market for our products that is spread across geographical areas, which provideswe believe helps protect us with reasonable protection against concentration of sales and credit risk.
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
We classify our operating expenses into three main categories: selling and administrative expenses, research and development expenses and amortization expenses.
Selling and administrative expenses consist primarily of salaries and related expenses for personnel, sales commissions, travel expenses, marketing programs, professional services, information systems, human resources and other corporate expenses.
Gross research and development expenses consist primarily of salaries and related expenses for engineers and other technical personnel, material component costs as well as fees paid to third-party consultants. We are eligible to receive research and development tax credits and government grants on research and development activities carried out in Canada. All related research and development tax credits and government grants are recorded as a reduction of gross research and development expenses.
OUR STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER RESULTS
Strategic Objectives for Fiscal 20072008
In our fiscal 20062007 Annual Report, we had established three strategic objectives for fiscal 2007.2008. We planned to increase sales through market-share gains, maximize profitability and focus on innovation. The following section reviews our strategic objectives for fiscal 20072008 and the results achieved for each of these objectives.
Increase sales through market-share gains
Maximize profitability
We generated GAAP earnings from operations of 11.0%6.5% in fiscal 2007,2008, while our published metric was 7%8%. Our GAAP earnings from operations in fiscal 20072008 included $3.2 million for the one-time recognition of prior years’ non-refundable researchnegative contribution from newly acquired Brix Networks and development tax credits and one-time grant revenue of $1.1 million. These items wereNavtel Communications, which was not initially forecasted in our corporate metric. Consequently, excludingExcluding the negative contribution from these one-time items,acquisitions, our earnings from operations would have amounted to 8.2%, wellbeen above our stated goal. We believe we surpassed our goal largely due to operational excellence and market-driven innovation that makes a difference for our customers.8%.
Focus on innovation
Sales from new products (on the market two years or less) accounted for 33.7%34.6% of total sales in 2007,2008, compared to our stated goal of 35%30%. The ongoing success of our FTTx products lowered this ratio to a considerable extent, since many of them have surpassed the two-year threshold for new products but continue to generate significant sales. Nevertheless, we cannot be displeased with approximately one-third of our sales from new products as this figure remains well above industry levels.
Three-year Strategic Objectives
To achieve our long-term vision, we plan to expand our leadership position in the portable optical segment, while growing our protocol business even faster to surpass optical in terms of sales. This plan is based first and foremost on organic growth, but it will be supported by strategic acquisitions of small to mid-size companies with best-of-class technologies in nascent, high-growth markets complementary to EXFO’s. We also intend to improve our competitive position through strategic alliances and partnerships.
| Increase sales |
| o | Grow EBITDA* in dollars faster than sales (>20% |
| * | EBITDA is defined as net earnings before interest, income taxes, amortization of property, plant and equipment, amortization of intangible assets and extraordinary gain. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial conditions and results of operations is based on our consolidated financial statements included elsewhere in this Annual Report. As previously mentioned, they have been prepared in accordance with Canadian GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition,the fair value of financial instruments, the allowance for doubtful accounts receivable, the amount of tax credits recoverable, the reserveprovision for excess and obsolete inventories, the useful lives of capital assets, the valuation of long-lived assets, the valuation allowance of future income tax assets, the amount of certain accrued liabilities and deferred revenue as well as stock-based compensation costs. We base our estimates and assumptions on historical experience and on other factors that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
The following summarizes our critical accounting policies as well as other policies that require the most significant judgment and estimates in the preparation of our consolidated financial statements.
Revenue recognition. For products in which software is incidental, we recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. 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 substantially within one year of delivery, the costs of providing this support are insignificant (and accrued at the time of delivery) and no (or infrequent) software upgrades or enhancements are provided.
Maintenance contracts generally include the right to unspecified upgrades and enhancements on a when-and-if available basis and ongoing customer support. Revenue from these contracts is recognized ratably over the terms of the maintenance contracts on a straight-line basis.
Revenue for extended warranties is recognized on a straight-line basis over the warranty period.
For all sales, we use a binding purchase order as evidence that a sales arrangement exists.
Delivery generally occurs when the product is handed over to a transporter for shipment.
At the time of the transaction, we assess whether the price associated with our revenue transaction is fixed or determinable, and whether or not collection is reasonably assured. We assess whether the price is fixed or determinable based on the payment terms associated with the transaction. We assess collection based on a number of factors, including past transaction history and the creditworthiness of the customer. Generally, collateral or other security is not requested from customers.
Most sales arrangements do not generally include acceptance clauses. However, 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.
Allowance for doubtful accounts. We estimate collectibility of accounts receivable on an ongoing basis by reviewing balances outstanding over a certain period of time. We determine our allowance for doubtful accounts receivable based on our historical accounts receivable collection experience and on the information that we have about the status of our accounts receivable balances. If the financial conditions of our customers deteriorate, resulting in an impairment of their ability to make required payments, additional allowance may be required, which could adversely affect our future results.
Reserve for excess and obsolete inventories. We state our inventories at the lower of cost, determined on an average cost basis, and 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. We record research and development tax credits and government grants based on our interpretation of tax laws and grant programs, especially regarding related eligible projects and expenses, and when there is reasonable assurance that we have complied and will continue to comply with all conditions and laws. Also, our judgment and estimates are based on historical experience. It is possible, however, that the tax authorities or the sponsors of the grant programs have a different interpretation of laws and application of conditions related to the programs or that we do not comply with all conditions related to grants in the future, which could adversely affect our future results. Furthermore, a significant part of our research and development tax credits are refundable against income taxes payable, causing their ultimate realization to be dependent upon the generation of taxable income. If we obtain information that causes our forecast of future taxable income to change or if actual taxable income differs from our forecast, we may have to revise the carrying value of these tax credits, which would affect our results in the period in which the change was made.
Impairment of long-lived assets and goodwill. 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.
We assess impairment of goodwill on an annual basis, or more frequently, if events or circumstances indicate that it might be impaired. Recoverability of goodwill is determined at the reporting-unit level using a two-step approach. First, the carrying value of a reporting unit is compared to its fair value, which is 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.
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 as well as the carryforward of unused tax losses and reductions,deductions, using substantively enacted or enacted income tax rates for the years in which the assets are expected to be realized or the liabilities to be settled. In assessing the recoverability of our future income tax assets, we consider whether it is more likely than not that some or all of the future income tax assets will not be realized. The ultimate realization of our future income tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those assets are expected to be realized.
Stock-based compensation costs. We account for all forms of employee stock-based compensation using the fair value-based method. This method requires that we make estimates about the risk-free interest rate, the expected volatility of our shares, the expected life of the awards and the forfeiture rate.
Adopted in fiscal 2008
On September 1, 2007, we adopted the Canadian Institute of Chartered Accountants (CICA) issued four new accounting standards in relation to financial instruments:Handbook Section 1530, “Comprehensive Income”, Section 3251, “Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”;, and Section 3865, “Hedges”;. Sections 3251 and 3865 have been adopted prospectively, while Section 3855 has been applied retroactively, without restatement of prior years’ financial statements and Section 1530 “Comprehensive Income”; and Section 3251, “Equity”.has been applied retroactively with restatement of prior years’ financial statements.
Following the adoption of Section 3855, expands on Section 3860, “Financial Instruments – Disclosure and Presentation”, by prescribing whenwe classified our financial instruments as follows:
Cash
Cash is classified as a financial instrumentasset held for trading and is to be recognized oncarried at fair value in the balance sheet, and at what amount. It also specifies how financial instrument gains and lossesany changes in its fair value are to be presentedreflected in the financial statements.statements of earnings.
We elected to Section 3855classify our short-term investments as available-for-sale securities; therefore, they are carried at fair value in the balance sheet, and any changes in their fair value are reflected in comprehensive income. Upon the disposal or maturity of these assets, accumulated changes in their fair value are reclassified in the statements of earnings. Also, upon the adoption of this new standard, unrealized losses on short-term investments as of August 31, 2007, in the amount of $55,000 (previously recorded in the statements of earnings), have been reclassified from the opening balance of retained earnings to the opening balance of accumulated other comprehensive income for entities that choose to designate qualifying transactions as hedges for accounting purposes. It replacesthe year ended August 31, 2008.
Interest income on short-term investments is recorded in interest income in the statements of earnings and expands on Accounting Guideline 13, “Hedging Relationships”, and onin cash flows from operating activities in the hedging guidance in Section 1650, “Foreign Currency Translation”, by specifying how hedge accounting is applied and what disclosures it requires.statements of cash flows.
Accounts receivable are classified as loans and receivable. After their initial measurement at fair value, they are carried at amortized cost, which generally corresponds to temporarily present certain gains and losses outside net income.nominal amount due to their short-term maturity.
Accounts payable and accrued liabilities
Forward exchange contracts
Our forward exchange contracts, which qualify for hedge accounting, are used to hedge anticipated US-dollar-denominated sales and the related accounts receivable. They are recorded at fair value in the balance sheet with changes in their fair value being reported in comprehensive income. Upon the recognition of related hedged sales, accumulated changes in fair value are reclassified in the statements of earnings. Unrecognized gains on or after October 1, 2006. Any adjustment to financial assets and liabilitiesforward exchange contracts as at September 1,of August 31, 2007, will bein the amount of $1.9 million, net of future income taxes of $916,000, have been reflected as an adjustment to retained earnings orthe opening balance of accumulated other comprehensive income. Section 3865 also does not permit restatementincome for the year ended August 31, 2008.
Cumulative foreign currency translation adjustment
The cumulative foreign currency translation adjustment, which is solely the result of prior year'sthe translation of our consolidated financial statements. Any gains or losses on hedge relationships that no longer qualify arestatements in US dollars (our reporting currency), has been reclassified to be reflected in retained earningspresented as at September 1, 2007. Any gains or losses of hedging instruments are adjusted to retained earnings or thea component of accumulated other comprehensive income associated withfor all years presented.
Transition
We elected to use September 1, 2002, as the hedged items. We adopted thesetransition date for embedded derivatives.
Other than the adjustments described above for the short-term investments and the forward exchange contracts, the recognition, derecognition and measurement methods used to prepare the consolidated financial statements have not changed from the methods of periods prior to the effective date of the new standardsstandards. Consequently, there were no further adjustments to record on transition.
Section 1506, “Accounting Changes”
On September 1, 2007, we adopted Section 1506, “Accounting Changes”. This section establishes criteria for changes in accounting policies, accounting treatment and impacts consistent withdisclosures regarding changes in accounting policies, estimates and corrections of errors. In particular, this section allows for voluntary changes in accounting policy only when they result in the adjustments described under note 20 items a)financial statements providing reliable and c) tomore relevant information. Furthermore, this section requires disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. The adoption of this section had no effects on our consolidated financial statements included elsewhere in this Annual Report will affect our financial statements for the year ended August 31, 2008.
To be adopted after fiscal 2008 and beyond.
In December 2006, the CICA issued three new Sections,sections, which provide a complete set of disclosure and presentation requirements for financial instruments: Section 3862, “Financial Instruments − Disclosures”; Section 3863, “Financial Instruments − Presentation”; and Section 1535, “Capital Disclosures”.
Section 3862 is the Canadian equivalent to International Financial Reporting Standards (IFRS) 7, “Financial Instruments − Disclosures”, and replaces the disclosure portion of Section 3861, “Financial Instruments − Disclosure and Presentation”. The new standard places increased emphasis on disclosures aboutregarding risks associated with both recognized and unrecognized financial instruments and how these risks are managed. It is also intended to remove any duplicate disclosures and simplify the disclosures about concentrations of risk, credit risk, liquidity risk and price risk currently found in Section 3861.
Section 3863 carries forward the presentation requirements from Section 3861, unchanged.
51
Section 1535 applies to all entities, regardless of whether they have financial instruments and are subject to external capital requirements. The new section requires disclosure of information about an entity’s objectives, policies and processes for managing capital, as well as quantitative data about capital and whether the entity has complied with any capital requirements.
Sections 1535, 3862 and 3863 apply to fiscal years beginning on or after October 1, 2007. We will adopt these new standards on September 1, 2008, and are currently assessing the disclosure effects these new standards will have on our consolidated financial statements.
In June 2007, the CICA issued Section 3031, “Inventories” to harmonize accounting for inventories under Canadian GAAP with IFRS.. This standard requires the measurement of inventories at the lower of cost and net realizable value and includes guidance on the determination of cost, including allocation of overheads and other costs to inventory. The standard also requires the consistent use of either first-in, first-out (FIFO) or weighted average cost formula to measure the cost of inventories and requires the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. The new standard applies to fiscal years beginning on or after January 1, 2008. We will adopt this new standard on September 1, 2008, and are currently assessingits adoption will have no significant effect on our consolidated financial statements.
In June 2007, the CICA amended Section 1400, “General Standards of Financial Statement Presentation”, to include new requirements regarding an entity’s ability to continue as a going concern. These amendments apply to fiscal years beginning on or after January 1, 2008. We will adopt these amendments on September 1, 2008, and their adoption will have no effect on our consolidated financial statements.
In February 2008, the CICA issued Section 3064, “Goodwill and intangible assets”, which supersedes Section 3062, “Goodwill and other intangible assets” and Section 3450, “Research and development costs”. Various changes have been made to other sections of the CICA Handbook for consistency purposes. Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill remain unchanged from the standards included in the previous Section 3062. This new section applies to fiscal years beginning on or after October 1, 2008. We will adopt this new standard on September 1, 2009, and have not yet determined the effects this new standardits adoption will have on our consolidated financial statements.
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: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| Sales | $ | 152,934 | $ | 128,253 | $ | 97,216 | 100.0 | % | 100.0 | % | 100.0 | % | $ | 183,790 | $ | 152,934 | $ | 128,253 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Cost of sales (1) | 65,136 | 57,275 | 44,059 | 42.6 | 44.7 | 45.3 | 75,624 | 65,136 | 57,275 | 41.1 | 42.6 | 44.7 | ||||||||||||||||||||||||||||||||||||
| Gross margin | 87,798 | 70,978 | 53,157 | 57.4 | 55.3 | 54.7 | 108,166 | 87,798 | 70,978 | 58.9 | 57.4 | 55.3 | ||||||||||||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
| Selling and administrative | 49,580 | 40,298 | 31,782 | 32.4 | 31.4 | 32.7 | 61,153 | 49,580 | 40,298 | 33.3 | 32.4 | 31.4 | ||||||||||||||||||||||||||||||||||||
Net research and development (2) | 16,668 | 15,404 | 12,190 | 10.9 | 12.0 | 12.5 | 26,867 | 16,668 | 15,404 | 14.6 | 10.9 | 12.0 | ||||||||||||||||||||||||||||||||||||
| Amortization of property, plant and equipment | 2,983 | 3,523 | 4,256 | 1.9 | 2.7 | 4.4 | 4,292 | 2,983 | 3,523 | 2.4 | 1.9 | 2.7 | ||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,864 | 4,394 | 4,836 | 1.9 | 3.4 | 5.0 | 3,871 | 2,864 | 4,394 | 2.1 | 1.9 | 3.4 | ||||||||||||||||||||||||||||||||||||
| Impairment of long-lived assets | − | 604 | − | − | 0.5 | − | − | − | 604 | − | − | 0.5 | ||||||||||||||||||||||||||||||||||||
| Government grants | (1,079 | ) | (1,307 | ) | − | (0.7 | ) | (1.0 | ) | − | − | (1,079 | ) | (1,307 | ) | − | (0.7 | ) | (1.0 | ) | ||||||||||||||||||||||||||||
| Restructuring and other charges | − | − | 292 | − | − | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 71,016 | 62,916 | 53,356 | 46.4 | 49.0 | 54.9 | 96,183 | 71,016 | 62,916 | 52.4 | 46.4 | 49.0 | ||||||||||||||||||||||||||||||||||||
| Earnings (loss) from operations | 16,782 | 8,062 | (199 | ) | 11.0 | 6.3 | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||||
| Interest and other income | 4,717 | 3,253 | 2,524 | 3.0 | 2.5 | 2.6 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange loss | (49 | ) | (595 | ) | (1,336 | ) | − | (0.5 | ) | (1.4 | ) | |||||||||||||||||||||||||||||||||||||
| Earnings before income taxes | 21,450 | 10,720 | 989 | 14.0 | 8.3 | 1.0 | ||||||||||||||||||||||||||||||||||||||||||
| Earnings from operations | 11,983 | 16,782 | 8,062 | 6.5 | 11.0 | 6.3 | ||||||||||||||||||||||||||||||||||||||||||
| Interest income | 4,639 | 4,717 | 3,253 | 2.5 | 3.0 | 2.5 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange gain (loss) | 442 | (49 | ) | (595 | ) | 0.3 | − | (0.5 | ) | |||||||||||||||||||||||||||||||||||||||
| Earnings before income taxes and extraordinary gain | 17,064 | 21,450 | 10,720 | 9.3 | 14.0 | 8.3 | ||||||||||||||||||||||||||||||||||||||||||
| Income taxes | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 3,741 | 2,585 | 2,623 | 2.4 | 2.0 | 2.7 | (7,094 | ) | 3,741 | 2,585 | (3.9 | ) | 2.4 | 2.0 | ||||||||||||||||||||||||||||||||||
| Future | 14,094 | − | − | 7.7 | − | − | ||||||||||||||||||||||||||||||||||||||||||
| Recognition of previously unrecognized future income tax assets | (24,566 | ) | − | − | (16.0 | ) | − | − | (5,324 | ) | (24,566 | ) | − | (2.9 | ) | (16.0 | ) | − | ||||||||||||||||||||||||||||||
| (20,825 | ) | 2,585 | 2,623 | (13.6 | ) | 2.0 | 2.7 | 1,676 | (20,825 | ) | 2,585 | 0.9 | (13.6 | ) | 2.0 | |||||||||||||||||||||||||||||||||
| Net earnings (loss) for the year | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | 27.6 | % | 6.3 | % | (1.7 | )% | |||||||||||||||||||||||||||||||||||
| Basic and diluted net earnings (loss) per share | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | |||||||||||||||||||||||||||||||||||||||||
| Earnings before extraordinary gain | 15,388 | 42,275 | 8,135 | 8.4 | 27.6 | 6.3 | ||||||||||||||||||||||||||||||||||||||||||
| Extraordinary gain | 3,036 | − | − | 1.6 | − | − | ||||||||||||||||||||||||||||||||||||||||||
| Net earnings for the period | $ | 18,424 | $ | 42,275 | $ | 8,135 | 10.0 | % | 27.6 | % | 6.3 | % | ||||||||||||||||||||||||||||||||||||
| Basic and diluted earnings before extraordinary gain per share | $ | 0.22 | $ | 0.61 | $ | 0.12 | ||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted net earnings per share | $ | 0.27 | $ | 0.61 | $ | 0.12 | ||||||||||||||||||||||||||||||||||||||||||
| Segment information | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Telecom Division | $ | 129,839 | $ | 107,376 | $ | 80,120 | 84.9 | % | 83.7 | % | 82.4 | % | $ | 160,981 | $ | 129,839 | $ | 107,376 | 87.6 | % | 84.9 | % | 83.7 | % | ||||||||||||||||||||||||
| Life Sciences and Industrial Division | 23,095 | 20,877 | 17,096 | 15.1 | 16.3 | 17.6 | 22,809 | 23,095 | 20,877 | 12.4 | 15.1 | 16.3 | ||||||||||||||||||||||||||||||||||||
| $ | 152,934 | $ | 128,253 | $ | 97,216 | 100.0 | % | 100.0 | % | 100.0 | % | $ | 183,790 | $ | 152,934 | $ | 128,253 | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||
| Earnings (loss) from operations: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings from operations: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Telecom Division | $ | 13,132 | $ | 6,679 | $ | 763 | 8.6 | % | 5.2 | % | 0.8 | % | $ | 9,524 | $ | 13,132 | $ | 6,679 | 5.2 | % | 8.6 | % | 5.2 | % | ||||||||||||||||||||||||
| Life Sciences and Industrial Division | 3,650 | 1,383 | (962 | ) | 2.4 | 1.1 | (1.0 | ) | 2,459 | 3,650 | 1,383 | 1.3 | 2.4 | 1.1 | ||||||||||||||||||||||||||||||||||
| $ | 16,782 | $ | 8,062 | $ | (199 | ) | 11.0 | % | 6.3 | % | (0.2 | )% | $ | 11,983 | $ | 16,782 | $ | 8,062 | 6.5 | % | 11.0 | % | 6.3 | % | ||||||||||||||||||||||||
| Research and development data: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gross research and development | $ | 25,201 | $ | 19,488 | $ | 15,878 | 16.5 | % | 15.2 | % | 16.3 | % | $ | 32,454 | $ | 25,201 | $ | 19,488 | 17.7 | % | 16.5 | % | 15.2 | % | ||||||||||||||||||||||||
Net research and development (2) | $ | 16,668 | $ | 15,404 | $ | 12,190 | 10.9 | % | 12.0 | % | 12.5 | % | $ | 26,867 | $ | 16,668 | $ | 15,404 | 14.6 | % | 10.9 | % | 12.0 | % | ||||||||||||||||||||||||
Consolidated balance sheets data: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 279,138 | $ | 219,159 | $ | 190,957 | $ | 293,066 | $ | 279,138 | $ | 219,159 | ||||||||||||||||||||||||||||||||||||
| (1) | The cost of sales is exclusive of amortization, shown separately. |
| (2) | Net research and development expenses for the year ended August 31, 2007 include recognition of previously unrecognized research and development tax credits of |
SALES
Fiscal 2008 vs. 2007
In fiscal 2008, our global sales increased 20.2% to $183.8 million from $152.9 million for the same period last year, with an 88%–12% split in favor of our Telecom Division (85%–15% in 2007).
Telecom Division
In fiscal 2008, sales of our Telecom Division increased 24.0% to $161.0 million from $129.8 million in 2007.
In fiscal 2008, we posted sales growth due to the market acceptance of our next-generation IP test solutions and continued market-share gains in optical test solutions; due to revenue from newly acquired Brix Networks and Navtel Communications; and due to continued spending in access networks fuelled by the competitive dynamic between telephone and cable companies.
In fiscal 2008, sales of our optical test solutions increased 12.7% to $115.1 million, from $102.1 million in 2007. In addition, in fiscal 2008, we posted record-high sales and bookings of protocol test solutions, including next-generation IP test solutions and product lines of newly acquired Brix Networks and Navtel Communications. Protocol test solutions represented our fastest-growing product line with a year-over-year sales increase of 97.4% (organic growth of 65.6% excluding sales of $5.4 million from our new acquisitions of fiscal year 2008) as they reached $33.7 million in 2008, compared to $17.1 million in 2007. Also, they represented more than 20% of our telecom sales in 2008 (more than 10% in 2007). With these two acquisitions as well as the recent launches of significant strategic protocol test solutions—namely, a compact multiservice transport test set that combines next-generation SONET/SDH and Ethernet testing inside a single module (FTB-8120NGE/FTB-8130NGE Power Blazer), a 40/43 Gbit/s SONET/SDH field-test solution for high-speed optical networks (FTB-8140 Transport Blazer) as well as the advanced IQS-600 Integrated Qualification System, a highly scalable modular test platform for R&D and manufacturing applications—we have a much more comprehensive offering in this market segment, which provides us with a significant competitive advantage; we believe this should help us further increase our market share and sales in the upcoming quarters.
However, in fiscal 2008, we posted a year-over-year sales decrease of 3.9% ($7.4 million in fiscal 2008, compared to $7.7 million in 2007) for our copper-access test solutions given that our highly competitive new product offering is only just starting to establish itself on the market and that large-scale IPTV deployments have been delayed, which affected our sales in fiscal 2008 to some extent. During fiscal 2008, we launched new added-value products that integrate Consultronics (copper-access) core knowledge and intellectual property, such as the new AXS-200 SharpTESTER. Also in 2008, we launched a new test module housed inside the AXS-200 SharpTESTER platform, which differentiates our access network offering from those of other vendors. The AXS-200/630 Triple-Play Test Set, which leverages the benefits of Broadcom’s customer premises equipment (CPE) multimode VDSL2 chipset, enables the installation and troubleshooting of ADSL2+ and VDSL2 access networks with the highest level of interoperability. These new, innovative products have yet to contribute to our sales for this market segment. A large portion of our sales of copper-access products in fiscal 2007 were made to a Tier-1 carrier in the United States. In fiscal 2008, sales of copper-access test solutions made to this customer significantly decreased compared to 2007, which means that we were able to diversify our customer base year-over-year.
It should be noted however that in fiscal 2007, we benefited from aggressive FTTH rollouts from our top customer, and sales to this customer represented 17.3% ($22.5 million) of our telecom sales in fiscal 2007, compared to 8.4% ($13.6 million) this year. Excluding sales to this customer, our telecom sales would have increased 37.3% in fiscal 2008, compared to 2007; we believe this shows that we have properly diversified our customer base year-over-year.
In fiscal 2008, foreign exchange gains on our forward exchange contracts, which are included in our telecom sales, amounted to $4.2 million, compared to $1.3 million in 2007. In fiscal 2008, the average value of the Canadian dollar increased 11.4% versus the US dollar compared to 2007, which contributed to the increase in the foreign exchange gains on our forward exchange contracts year-over-year.
In fiscal 2008, sales of our Life Sciences and Industrial Division decreased 1.2% year-over-year at $22.8 million from $23.1 million in 2007.
A significant portion of sales of that division are conducted through original equipment manufacturer (OEM) agreements. Consequently, we are dependent, to some extent, on the buying pattern of our customers. In particular, one of our major OEM customers significantly reduced its purchases of our products following the launch of its own solution that competes against our products. Excluding sales to this customer, sales of this division would have increased 3.5% year-over-year.
Net Bookings
Overall, for the two divisions, net accepted orders increased 17.8% year-over-year to a record-high $184.6 million in fiscal 2008 from $156.7 million in 2007, for a book-to-bill ratio of 1.00 (excluding the backlog of Brix Networks and Navtel Communications) in fiscal 2008. Our 17.8% increase in net accepted orders in fiscal 2008, compared to the same period last year, is mainly due to the increased demand for our next-generation IP and optical test solutions, and the contribution of Brix Networks and Navtel Communications since their acquisitions.
Fiscal 2007 vs. 2006
In fiscal 2007, our global sales increased 19.2% to $152.9 million from $128.3 million in 2006, with an 85%-15%–15% split in favor of our Telecom Division (84%-16%–16% in 2006).
Telecom Division
In fiscal 2007, sales of our Telecom Division increased 20.9% to $129.8 million from $107.4 million in 2006.
In fiscal 2007, we posted organic sales growth due to market-share gains in optical testing and next-generation IP test solutions and due to continued spending in access networks fueled by the competitive dynamic between telephone and cable companies. In fiscal 2007, sales of our optical test solutions increased 19.9% to $102.1 million ($85.2 million in 2006), and we earned our fourth consecutive Growth Strategy Leadership Award from Frost & Sullivan for largest market-share gains in optical testing. Also, during fiscal 2007, protocol test solutions were our fastest-growing product line with a sales increase of 48.2% year-over-year as they reached $17.1 million, compared to $11.5 million in 2006. Also, in 2007, theyThese products represented more than 10% of our Telecom sales. Given the much larger addressable market for protocol test solutions and our very strong product offering – especially for next-generation IP-based test solutions – we believe that protocol revenues should continue to grow faster than our optical revenues over the next few years.sales in 2007.
In addition, during fiscal 2007, sales of our copper-access test solutions increased 15.5% to $7.7 million, compared to $6.7 million in 2006. It should be noted however that Consultronics (acquired in January 2006) contributed to our sales during the whole period compared to about seven months in 2006, which contributed to the increase in our sales year-over-year.This business unit did not perform as well as expected in 2007, as large-scale IPTV deployments have been delayed until calendar 2008. We expect sales of this sector to increase over time as we take advantage of a strengthening product offering, as our sales channels gain additional experience in this technology area, and as IPTV deployments accelerate. Following year-end, we launched new added-value products that integrate Consultronics’ core knowledge and intellectual property; namely, the AXS-200 SharpTESTER, a multiservice, multimedium test platform for characterizing and troubleshooting commercial and residential access networks.were delayed. A large portion of our sales of copper-access products in fiscal 2007 were made to a Tier-1 carrier in the United States.
During fiscal 2007, we faced increased pricing pressure, especially in the Asia-Pacific region, which prevented us from further increasing our sales year-over-year.
Life Sciences and Industrial Division
In fiscal 2007, sales of our Life Sciences and Industrial Division increased 10.6% to $23.1 million from $20.9 million in 2006. The increase in sales in fiscal 2007, compared to 2006, 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 Europe and Asia.
In fiscal 2006, we leveraged our portfolio of new products and an increased demand for our test solutions, especially in2008, sales to the Americas, Europe, Middle EastMiddle-East and Africa (EMEA) and Asia-Pacific 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 reduce cost of deployments. In addition, the positive spending environment, as well as the market share 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. The results of Consultronics 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(APAC) accounted for 16.5%56%, 28% and 16% of our Telecomglobal sales, respectively, compared to 28.2% of sales59%, 27% and 14%, respectively in 2005, reflecting the diversification of our customer base. In fact, excluding sales to our top customer, our sales of this Division would have increased 56.0% in fiscal 2006, compared to 2005.2007.
In fiscal 2006, sales of our Life Sciences and Industrial Division increased 22.1% to $20.9 million from $17.1 million in 2005. As for fiscal 2007,the Americas, the increase in sales in fiscal 2006,2008, compared to 2005, is mainly duethe same period last year, comes from every region; we posted a sales growth of 47.8%, 7.9% and 16.7% in Canada, United States and Latin America, respectively. In the United States, despite the decrease in sales to increasedour top customer year-over-year, we were able to increase our sales activitiesin this region. Additionally, Brix Networks and Navtel Communications contributed to the increase in sales in the curingUnited States and in Canada year-over-year as most of their sales are made in these two countries. As mentioned above, during fiscal 2007, we benefited from aggressive FTTH rollouts from our top customer, and sales to this customer represented 14.7% ($22.5 million) of our global sales in fiscal 2007, compared to 7.4% ($13.6 million) this year. We believe that we did not lose market share with this particular customer in fiscal 2008; in fact, we believe we have expanded market share as we successfully got additional product-line approvals to partially offset the decline in optical business. Excluding sales to this customer, sales to the United States would have increased 28.7% in dollars year-over-year; this shows that, overall, we have diversified our customer base year-over-year in this region. Finally, sales to Latin America fluctuate depending on the timing and scope of our customers’ projects.
The increase in sales in the EMEA market, in dollars, in fiscal 2008, compared to 2007, is a result of our continued strategy to aggressively develop this market in the past several years, to consistently invest in sales resources, and to develop stronger support and service operations in this region. In addition, many Tier-1 carriers in EMEA are migrating their traditional circuit-switched core networks to higher-speed, dense wavelength-division multiplexing (DWDM) and next-generation packet-based architectures, which is creating a market demand for our protocol test solutions as well as market-share gainsour DWDM, ROADM and fiber characterization test kits. Furthermore, we are leveraging our FTTx leadership gained in the fluorescence illumination market, following our effortsUnited States to expand international markets, mainly Europe and Asia.provide consultancy with many of the early adopters in this field in EMEA.
Fiscal 2007 vs. 2006
In fiscal 2007, sales to the Americas, Europe-Middle East-AfricaEurope, Middle-East and Africa (EMEA) and Asia-Pacific (APAC) accounted for 59%, 27% and 14% of global sales, respectively, compared to 60%, 25% and 15%, respectively in 2006.
In fiscal 2007, we reported sales increases in dollars in every geographic area. In fact, sales to the Americas, EMEA and APAC increased (in dollars) 18.7%, 27.5% and 7.8% year-over-year, respectively.
In the Americas, the increase in sales in dollars in fiscal 2007, compared to the same period last year, comes from the United States and Canada, where we witnessed an increase in sales of our optical and protocol test solutions. In the United States, we continue leveraging our dominant FTTx market position to increase our sales. In addition, sales to our top customer, who is located in the United States, increased in dollars in fiscal 2007, compared to 2006. Sales to this customer represented $22.5 million, or 14.7% of global sales in 2007, compared to $17.7 million, or 13.8% of our global sales in 2006, representing an increase of 27.0% year-over-year. In Latin America, we reported a slight decrease in sales in fiscal 2007 compared to 2006.
The significant increase in sales in the EMEA market, in dollars, in fiscal 2007, compared to 2006, is apparent in the results for all our product lines, following our efforts to aggressively develop this market in the lastpast several years, and our continued investment to increase our sales presence andas well as our initiatives to develop stronger support and service operations in this region. Many Tier-1 carriers in EMEA are migrating their traditional circuit-switched core networks to higher-speed, dense wavelength-division multiplexing (DWDM)DWDM and next-generation packet-based architectures, which is creating a market demand for our protocol test solutions and fiber characterization test kits. In addition, we are leveraging our FTTx leadership gained in the United States to provide consultancy with many of the early adopters in this field in EMEA.
In the APAC market, we are startingstarted to see the impact of the introduction of some specific optical, protocol and life sciencesciences and industrial products as we steadily increase our market presence in this growth region; this explains the increase in sales in this region in fiscal 2007, compared to the corresponding period last year. However, although we reported sales growth year-over-year in this region, we are facing significant competitive pricing pressure, which prevented us from reaching expected sales growth. In addition, a significant portion of our sales to this market are made through tenders, which vary in number and importance year-over-year.
Through our two divisions, we sell our products to a broad range of customers, including network service providers, network equipment manufacturers, wireless operators, cable TV operators, optical system and component manufacturers, as well as customers in the life sciences and high-precision assembly sectors. DuringIn fiscal 2008, no customer accounted for more than 10% of our global sales, and our top three customers accounted for 13.1% of our global sales. In fiscal 2007, our top customer accounted for 14.7% ($22.5 million) of our global sales, and our top three customers accounted for 19.6% of our global sales. For the corresponding period last year, our top customer accounted for 13.8% ($17.7 million) of our global sales, and our top three customers accounted for 19.4% of our global sales.
GROSS MARGIN
Gross margin amounted to 57.4%58.9%, 55.3%57.4% and 54.7%55.3% of sales forin fiscal 2008, 2007 and 2006, and 2005, respectively.
Fiscal 2008 vs. 2007
Fiscal 2008 marked the sixth consecutive year that the company raised its gross margin as it reached its highest level since fiscal 2001. The increase in our gross margin in fiscal 2008, compared to 2007, can be explained by the following factors. First, in fiscal 2008, our gross margin was positively affected by the significant increase in sales of our protocol test solutions year-over-year, including those of Brix Networks and Navtel Communications, as these products have better margins than our other test solutions. In addition, the significant increase in global sales, year-over-year, resulted in an increase in manufacturing activities, allowing us to better absorb our fixed manufacturing costs. Furthermore, we were able to reduce our cost of goods sold by better leveraging our supplier base and by developing innovative new products with cost-effective design. Also, our cost of goods was positively affected by lower costs for raw material due to the significant increase in the value of the Canadian dollar, compared to the US dollar in previous quarters, as most of these costs are incurred in US dollars.
However, the shift in sales between the Americas in favor of APAC had a negative impact on our gross margin year-over-year. In fact, sales to APAC tend to have lower margins than sales to the Americas since we are facing higher pricing pressure in the APAC region. In addition, we are facing continued aggressive pricing pressure worldwide. Furthermore, in fiscal 2008, a stronger Canadian dollar, compared to the US dollar year-over-year, prevented us from further improving our gross margin as most of our overhead costs and a portion of our raw material purchases are denominated in Canadian dollars. Finally, the startup of our own manufacturing activities in China, over the last few months, resulted in additional expenses, which reduced our gross margin in fiscal 2008, compared to 2007.
On an ongoing basis and when technically possible, we adjust the design of our products to reuse excess inventory; over the past few years, we experienced higher sales than expected on some product lines and consumed such excess inventory. Consequently, we were able to reuse excess inventories that were written off in previous years. Excess inventory reuse accounted for approximately $1.2 million, or 0.7% of sales in fiscal 2008, compared to approximately $1.7 million, or 1.1% of sales in 2007 and approximately $1.2 million, or 0.9% of sales in 2006.
Fiscal 2007 vs. 2006
Despite the increased strength of the Canadian dollar, compared to the US dollar in fiscal 2007 versus 2006, and the intense competitive pressure on selling prices that we faced in 2007, we were able to significantly increase our gross margin (2.1%) year-over-year.
This increase in our gross margin in fiscal 2007, compared to 2006, can be explained by several factors. First, the increase in sales year-over-year resulted in an increase in manufacturing activities, allowing us to better absorb our fixed manufacturing costs. In addition, sales of our protocol test solutions increased in dollardollars and as a percentage of sales year-over-year; this had a positive impact on our gross margin, as these products are more software-intensive and tend to have better gross marginmargins than our optical test solutions. Furthermore, we were able to reduce our cost of goods sold by better leveraging our supplier base and by developing innovative new products with cost-effective design. Finally, our initiative to outsource the manufacturing of some product lines to China in fiscal 2007 helped us to improve our gross margin year-over-year.
However, as mentioned above, we are facing continued aggressive pricing pressure worldwide, which negatively affected the gross margin in fiscal 2007. In addition, in 2007, a stronger Canadian dollar, compared to the US dollar year-over-year, prevented us from further improving our gross margin, as some cost of sales items are denominated in Canadian dollars. Furthermore, the transfer, in fiscal 2007, of our protocol and copper access manufacturing operations from Montreal and Concord to our Quebec City plant resulted in one-time charges, which negatively affected our gross margin during that period. Finally, in fiscal 2007, the setup of our own manufacturing activities in China (which will be operationallate in 2008)fiscal 2007 resulted in additional one-time costs in 2007, thus reducing the gross margin of that year. We believe these two initiatives should contribute to bring our gross margin close to 60%.
Outlook for Fiscal 20082009
Considering the expectedour expectations of sales growth in fiscal 2008, the expected2009, our expectations of increase in sales of protocol products and the full contribution of Brix Networks and Navtel Communications (which tend to generatehistorically have generated higher margins)margins than our own product lines), the cost-effective design of our products, our manufacturing activities in China (which we believe should lower our cost of goods over time),and our tight control on operating costs, while no assurance can be given, we expect our gross margin to improve in 2008 and beyond.the next few years. However, our gross margin may fluctuate quarter-over-quarter as our sales may fluctuate. Furthermore, our gross margin can be negatively affected by increased competitive pricing pressure, customer concentration and/or consolidation, increased obsolescence costs, shifts in customer and product mix, under-absorption of fixed manufacturing costs, challenges encountered in the ramp-up of our manufacturing facilities in China and increases in product offerings by other suppliers in our industry. Finally, any further increase in the strength of the Canadian dollar, compared to the US dollar, would have a negative impact on our gross margin in fiscal 2008.2009 and beyond.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses were $61.2 million, $49.6 million and $40.3 million for fiscal 2008, 2007 and 2006, respectively. As a percentage of sales, selling and administrative expenses amounted to 33.3%, 32.4% and 31.4% for fiscal 2008, 2007 and 2006, respectively.
In fiscal 2008, we continued intensifying our sales and marketing activities to develop our markets and leverage our significant research and development investments; this resulted in higher sales and marketing expenditures (including number of employees and expenses to support the launch of several new products and to increase brand-name recognition), compared to 2007.
Also, Brix Networks and Navtel Communications contributed about four months and five months, respectively, in fiscal 2008, which caused our selling and administrative expenses to increase compared to 2007.
The substantial increase in the average value of the Canadian dollar compared to the US dollar also had a significant negative impact ou our selling and administrative expenses since more than half of these expenses are denominated in Canadian dollars and since these expenses increased year-over-year as our sales grew.
Fiscal 2008 vs. 2007
In fiscal 2008, we continued intensifying our sales and marketing activities to develop our markets and leverage our significant research and development investments; this resulted in higher sales and marketing expenditures (including number of employees and expenses to support the launch of several new products and to increase brand-name recognition), compared to 2007.
Also, Brix Networks and Navtel Communications contributed about four months and five months, respectively, in fiscal 2008, which caused our selling and administrative expenses to increase compared to 2007.
The substantial increase in the average value of the Canadian dollar compared to the US dollar also had a significant negative impact ou our selling and administrative expenses since more than half of these expenses are denominated in Canadian dollars and since these expenses increased year-over-year as our sales grew.
Finally, in fiscal 2008, we discontinued certain product lines, which led to the layoff of some of our sales and $31.8 million formarketing personnel, resulting in severance expenses during that year.
However, in fiscal 2007, 2006we had large orders sold directly to international customers, for which we still had to pay commissions to distributors instead of selling through our distributors at a discounted price; this did not occur at the same extent in 2008, resulting in higher selling expenses for 2007, compared to 2008.
In fiscal 2008, and 2005, respectively. As a percentage ofdespite an increase in sales, our selling and administrative expenses amountedincreased in percentage of sales compared to 32.4%, 31.4%2007. The significant increase in the average value of the Canadian dollar compared to the US dollar year-over-year, the setup of our manufacturing facilities in China and 32.7% for fiscal 2007, 2006R&D center in India, as well as the impacts of the acquisitions of Brix Networks and 2005, respectively.Navtel Communications—whose selling expenses tend to be higher as their products deliver better margins compared to the rest of our product lines—contributed to the increase in these expenses as a percentage of sales.
Fiscal 2007 vs. 2006
In fiscal 2007, we continued intensifyingintensified our sales and marketing activities to develop our markets and leverage the significant research and development investments of the prior years; this resulted in higher sales and marketing expenditures (including the number of employees), compared to the corresponding period last year. 2006.
In addition, our overall commission expenses increased in fiscal 2007, compared to the corresponding period last year, due to the increase in sales year-over-year and the shift in customer mix. In fact, in fiscal 2007, we had large orders sold directly to international customers for which we still had to pay commissions to distributors instead of selling through our distributors at a discounted price, which increased our selling expenses year-over-year, but had, to some extent, a positive impact on our gross margin.
Furthermore, Consultronics, acquired in January 2006, contributed for the whole period to our selling and administrative expenses throughout the entire period, compared to about seven months in 2006, thus increasing these expenses year-over-year.
Also, a stronger Canadian dollar on average for the period, compared to the US dollar during fiscal 2007 versus 2006, caused our selling and administrative expenses to increase year-over-year, as more than half of these expenses are denominated in Canadian dollars.
In addition, late in fiscal 2007, the setup in 2007 of manufacturing facilities in China and a software development center in India contributed to an increase in our administrative expenses year-over-year.
Finally, in fiscal 2007, and despite an increase in sales, our selling and administrative expenses increased in percentage of sales compared to the corresponding period last year. Larger commissions on international sales as well as our efforts to develop international markets and operations contributed to the increase in these expenses as a percentage of sales.
Outlook for Fiscal 2006 vs. 20052009
RESEARCH AND DEVELOPMENT
Gross research and development expenses
Gross research and development expenses totaled $32.5 million, $25.2 million $19.5 million and $15.9$19.5 million for fiscal 2008, 2007 2006 and 2005,2006, respectively. As a percentage of sales, gross research and development expenses amounted to 16.5%17.7%, 15.2%16.5% and 16.3%15.2% for fiscal 2008, 2007 2006 and 2005,2006, respectively, while net research and development expenses accounted for 10.9%14.6%, 12.0%10.9% and 12.5%12.0% of sales for these respective periods. Net research and development expenses for fiscal 2007 included the recognition of non-refundable research and development tax credits in the amount of $3.2 million that were written off in fiscal 2003 following the downturn in the telecommunications industry; this explainsrepresented 2.1% of sales.
Fiscal 2008 vs. 2007
In fiscal 2008, the 2.1%significant increase in the average value of the Canadian dollar, compared to the US dollar year-over-year, decreasehad a significant and negative effect on our gross research and development expenses as a significant portion of these expenses are denominated in netCanadian dollars and also because these expenses increased year-over-year. In addition, we intensified our research and development activities, including additional employees, which resulted in more gross research and development expenses in both divisions in fiscal 2008, compared to 2007. Furthermore, Brix Networks and Navtel Communications contributed about four months and five months, respectively, in fiscal 2008, which caused our gross research and development expenses to increase compared to 2007. It should be noted that Brix Networks and Navtel Communications tend to incur a higher percentage of sales for research and development expenses compared to our other product lines as their products are more software-intensive; but they deliver higher margins than most of our other product lines. Also, we established a research and development center focused on software development in Pune, India, which resulted in increased expenses year-over-year. Finally, in fiscal 2008, we closed down our R&D operations in Budapest, Hungary, and certain R&D projects, which resulted in severance expenses during that year and caused our fiscal 2008 expenses to increase year-over-year.
The increase in our gross research and development expenses as a percentage of sales.sales year-over-year is mainly due to the negative effect of the increased value of the Canadian dollar versus the US dollar year-over-year, the impact of the acquisitions of Brix Networks and Navtel Communications as well as the severance expenses incurred in fiscal 2008.
Fiscal 2007 vs. 2006
In fiscal 2007, we intensified our research and development activities in both divisions, which resulted in higher gross research and development expenses, including additional employees, compared to 2006. In addition, in fiscal 2007, we subcontracted a larger portion of our research and development projects in Canada and India, compared to the corresponding period last year, which resulted in an increase in our gross research and development expenses year-over-year.
Furthermore, Consultronics contributed to our research and development expenses during the whole period this year, compared to about seven months in 2006, thus increasing these expenses year-over-year. Finally, in fiscal 2007, the increased strength of the Canadian dollar, on average, compared to the US dollar year-over-year, contributed to the increase in our gross research and development expenses, as most of these are denominated in Canadian dollars.
The above-mentioned factors explain the increase of our gross research and development expenses as a percentage of sales in fiscal 2007, compared to 2006.
| Tax credits |
Fiscal 2008 vs. 2007
In fiscal 2006, Consultronics contributed about seven months to our2007, and as explained below, tax credits included $3.2 million, or 12.5% of gross research and development expenses, which caused these expenses to increase year-over-year. In addition, in fiscal 2006, our grossfor the recognition of non-refundable research and development expensestax credits that were negatively affected bywritten off in fiscal 2003 following the downturn in the telecommunications industry. Excluding this one-time revenue, tax credits would have increased $216,000 in fiscal 2008, compared to 2007.
This increase in the dollar amount of our tax credits in fiscal 2008, compared to 2007, is due to the increased strength of the Canadian dollar, compared to the US dollar year-over-year, as most ofsince these expensescredits are incurred in Canadian dollars following the consolidation of most of our research and development activities in Canada. Finally, mix and timing of research and development projects in fiscal 2006 resulted in more grosssolely earned on research and development expenses during that year compared to 2005 for both divisions.
Fiscal 2007 vs. 2006
During fiscal 2003, following the downturn in the telecommunications industry and after being in a cumulative loss position, we wrote off deferred non-refundable research and development tax credits of our parent company because it was more likely than not that these assets would not be realized.
In fiscal 2007, after reviewing both available positive and negative evidences,evidence, and because we were in a cumulative profit position in the parent company at the Canadian federal level, and also because we expect to generate sufficient taxable income in future years, we concluded that is was more likely than not that deferred non-refundable income tax credits of our parent company would be realized. Consequently, in fiscal 2007, we recorded previously unrecognized non-refundable research and development tax credits in the amount of $3.2 million, or 12.5% of gross research and development expenses. These non-refundable tax credits of $3.2 million recognized in fiscal 2007 can be carried forward against future years’ Canadian federal income taxes payable and expire between 2011 and 2014.
In addition to this one-time tax credit, our tax credits increased in dollars in fiscal 2007, compared to 2006, for several reasons. First, the increase in gross research and development expenses in Canada in 2007, compared to 2006, resulted in more expenses being eligible for tax credits as we were 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 solely earned on research and development expenses incurred in Canada.
Also, due to the one-time recognition of non-refundable tax credits from prior years, our tax credits significantly increased as a percentage of gross research and development expense.expenses. Had prior years’ credits not been recognized, our tax credits would have been flat year-over-year as a percentage of gross research and development expenses, as we incurred most of our expenses in Canada and were entitled to the same grant programs and tax credits.
Outlook for Fiscal 20082009
For fiscal 2008,2009, we plan to increaseexpect that our research and development expenses at about the same rate we grow ourwill increase in dollars, and range between 14% and 16% of sales, given our focus on innovation, the addition of Brix Networks and Navtel Communications, whose products are software-intensive, the addition of software features in our products, our desire to gain market sharesshare and our goal to exceed customer needs and expectations. Also, we are increasingly taking advantage of talent pools around the world by establishingwith the establishment of a research and development center focused on software development in Pune, India. Finally, any further increase in the strength of the Canadian dollar in the upcoming quarters would cause our net research and development expenses to increase, as most of these are incurred in Canadian dollars.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
In fiscal 2007,2008, amortization of property, plant and equipment was $3.0$4.3 million, compared to $3.0 million in 2007 and $3.5 million in 20062006.
Fiscal 2008 vs. 2007
The recent startup of our own manufacturing and $4.3 millionresearch and development facilities in 2005. China and India, the upgrade of our IT systems, and the impact of the acquisition of Brix Networks and Navtel Communications, which contributed about four months and five months in fiscal 2008, respectively, resulted in an increase in our amortization expenses in fiscal 2008 compared to last year. In addition, the increase in the average value of the Canadian dollar versus the US dollar in fiscal 2008, compared to 2007, contributed to the increase in our amortization expenses year-over-year as most of these expenses are denominated in Canadian dollars.
Fiscal 2007 vs. 2006
The decrease in amortization expenses over the last twoin fiscal years,2007, compared to 2006, despite the increase in the strength of the Canadian dollar, compared to the US dollar, as well as the acquisition of Consultronics in January 2006, is mainly due to the fact that some of our property, plant and equipment became fully amortized over the last three years.in 2007 and 2006.
Outlook for Fiscal 20082009
For fiscal 2008,2009, we expect the amortization of property, plant and equipment to increase in dollars due to the upgrade of our IT systems in fiscal 2008, the full impact of the acquisitions of Brix Networks and Navtel Communications, and, more importantly, the startupexpansion of our own manufacturing and research and development facilities in China and India. Also, any further increase in the strength of the Canadian dollar in the upcoming quarters would cause our amortization of property, plant and equipment to increase, as most of these are denominated in Canadian dollars.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the business combinations we completed over the past several years, we recorded intangible assets, primarily consisting of core technology. These intangible assets resulted in amortization expenses of $3.9 million, $2.9 million $4.4 million and $4.8$4.4 million for fiscal 2008, 2007 and 2006, respectively.
Fiscal 2008 vs. 2007
The increase in amortization expenses in fiscal 2008, compared to 2007, is mainly due to the acquisition of Brix Networks core technology, acquired in the third quarter of 2008 and 2005, respectively. the increased strength of the Canadian dollar compared to the US dollar.
Fiscal 2007 vs. 2006
The decrease in amortization expenseexpenses in the last two fiscal years,2007, compared to 2006, despite the increased strength of the Canadian dollar compared to the US dollar, and the acquisition of Consultronics in January 2006 is mainly due to the fact that some of our core technologies became fully amortized during fiscal 2005 and 2006; namely, those related to the acquisition of EXFO Burleigh, EXFO Photonics Solutions and EXFO Protocol.
Outlook for Fiscal 20082009
For fiscal 2008,2009, we expect the amortization of intangible assets to remain flat in dollars. This assumes no business combinationsincrease because we will be made during this period.Also, any further increase inhave the strengthfull impact of the Canadian dollar in the upcoming quarters would cause our amortizationacquisition of intangible assets to increase, as most of these are denominated in Canadian dollars.Brix Networks.
IMPAIRMENT OF LONG-LIVED ASSETS
Fiscal 2006
In June 2006, we entered into an agreement to sell one of our buildings (located in Rochester, NY) along with some equipment, and we recorded an impairment charge of $604,000 in the third quarter of fiscal 2006. The impairment charge represented the excess of the carrying value of these assets over the expected net selling price of $1.2 million. The sale of these assets was finalized in the fourth quarter of 2006 for the expected net selling price, which was received in November 2006.price. These assets were related to the Life Sciences and Industrial Division.
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 over the period from January 1, 1998, through December 31, 2002, payable based on the number of full-time jobs created during that period.
The above 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) in the balance sheet 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 CA$1.5 million (US$1.3 million) in the earnings from operations in the statement of earnings of fiscal 2006.
Furthermore, until December 31, 2006, companies operating in the Quebec City area were eligible for a refundable credit granted by the Quebec provincial government. This credit was earned based on the increase of eligible production and marketing salaries incurred in the Quebec City area at a rate of 40%. From the total amount we claimed under this program, a sum of CA$1.1 million (US$1.1 million) was deferred in the balance sheet until we received the final approval of eligible salaries by the sponsor of the program. In fiscal 2007, the sponsor of the program granted us with its final approval, and we recorded CA$1.1 million (US$1.1 million) in the earnings from operations in the statement of earnings of fiscal 2007.
As at August, 31, 2007 and 2008, we were not part of any significant grant programs.
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 $4.6 million, $4.7 million $3.3 million and $2.5$3.3 million for fiscal 2008, 2007 and 2006, respectively.
Fiscal 2008 vs. 2007
The slight decrease in interest income in fiscal 2008, compared to 2007, is mainly due to the decrease of our cash and 2005, respectively. short-term investments following the cash payment of $41.0 million for the acquisitions of Brix Networks and Navtel Communications, the redemption of share capital for $8.1 million in accordance with our share buy-back program as well as the general reduction in interest rates year-over-year. However, the significant increase in the average value of the Canadian dollar, compared to the US dollar year-over-year, contributed to the increase in our interest income in fiscal 2008, compared to 2007, as it is denominated in Canadian dollars. In addition, in fiscal 2008, we received interest of $241,000 by the Canadian tax authorities following the recovery during that period of prior years’ income tax receivable.
Fiscal 2007 vs. 2006
The increase in our interest income in fiscal 2007, compared to 2006, is mainly due to the increase in interest rates year-over-year. Also, our average cash position increased in fiscal 2007 due to cash flows from operating activities, which contributed to the further increase in interest revenue year-over-year.
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Outlook for fiscal 2008Fiscal 2009
Assuming no acquisitions paid in cash are made in fiscal 20082009 and relative stability in interest rates, we expect our interest income to slightly increasedecrease in 2009 as our average cash position is expected to be lower in fiscal 2009, considering the impact of our share repurchase programs and the cash used in fiscal 2008, namely for the consideration paid for the acquisitions of Brix Networks and Navtel Communications, the redemption of share capital and the additions of capital assets. This should increase with expectedbe slightly mitigated by cash flows from operating activities in fiscal 2008, compared to 2007.2009.
FOREIGN EXCHANGE LOSSGAIN (LOSS)
Foreign exchange gains and losses are mainly the result of the translation of operating activities denominated in currencies other than the Canadian dollar.
In fiscal 2007, the Canadian dollar fluctuated compared to the US dollar and overall, this resulted in a small exchange loss of $49,000. During that period,2008, we witnessed instability in the value of the Canadian dollar as it fluctuated compared to the US dollar.dollar, which overall, resulted in a foreign exchange gain of $442,000. The average exchange rate was CA$1.0071 = US$1.00 in fiscal 2008, compared to a year-end exchange rate of CA$1.0564 = US$1.00 as at August 31, 2007, and CA$1.0626 = US$1.00 as at August 31, 2008.
In fiscal 2007, we also witnessed instability in the value of the Canadian dollar as it fluctuated compared to the US dollar, which overall, resulted in a small foreign exchange loss of $49,000. The average exchange rate was CA$1.1215 = US$1.00 in fiscal 2007, compared to a year-end exchange rate of CA$1.1066 = US$1.00 as at August 31, 2006, and CA$1.0564 = US$1.00 as at August 31, 2007.
It should be noted that foreign exchange rate fluctuations also flow through the profit and lossP&L line items as a significant portion of our operating items are denominated in Canadian dollars and we report our results in US dollars. Consequently, the significant increase in the average value of the Canadian dollar in fiscal 2008, compared to 2007, resulted in a significant and negative impact on our financial results. This was amplified by the fact that our operating activities incurred in Canadian dollars increased year-over-year. In fact, the average value of the Canadian dollar in fiscal 2008 was CA$1.0071 = US$1.00 versus CA$1.1215 = US$1.00 in 2007, representing an increase of 11.4% in the average value of the Canadian dollar year-over-year. In fiscal 2007, the average value of the Canadian dollar was CA$1.1215 = US$1.00 versus CA$1.1481 = US$1.00 in 2006, representing an increase of 2.4% in the average value of the Canadian dollar year-over-year.
We manage our exposure to currency risks with forward exchange contracts. In addition, some of our Canadian entities’ operating activities are denominated in US dollars or other currencies, which further hedges these risks. However, any further increase in the value of the Canadian dollar, compared to the US dollar, would have a negative impact on our operating results.
INCOME TAXES
We recorded an income tax expense of $1.7 million in fiscal 2008, compared to an income tax recovery of $20.8 million in fiscal 2007, compared toand an income tax expense of $2.6 million in both fiscal2006.
Fiscal 2006 and 2005.
Fiscal 2007
During fiscal 2007, after reviewing both available positive and negative evidences,evidence, and because we were in a cumulative profit position in ourthe parent company (Canadian federal and provinces level)levels) and in one of our subsidiaries, located in the United States, and also because we expectexpected to generate sufficient taxable income in future years, we concluded that it is was more likely than not that the future income tax assets and deferred non-refundable research and development tax credits of ourthe parent company in Canada and a portion of our future income tax assets in the United States would be realized.realizable. Consequently, we recorded previously unrecognizedreversed a portion of our valuation allowance against future income tax assets in the amount of $24.6 million. From this amount, $16.2 million was related to the Canadian federal level, $3.2 million was related to the Canadian provinces levelprovincial levels and $5.2 million was related to the United States federal level.
Canada | ||||||||||||
Year of expiry | Federal | Provinces | United States | |||||||||
| 2008 | $ | 1,230,000 | $ | 869,000 | $ | – | ||||||
| 2009 | 2,845,000 | 162,000 | – | |||||||||
| 2010 | 4,663,000 | 176,000 | – | |||||||||
| 2014 | 93,000 | 2,000 | – | |||||||||
| 2022 | – | – | 3,795,000 | |||||||||
| 2023 | – | – | 1,671,000 | |||||||||
| Indefinite | – | – | 7,474,000 | |||||||||
| $ | 8,831,000 | $ | 1,209,000 | $ | 12,940,000 | |||||||
Future income tax assets recognized in 2007 were recorded in the income tax provision.provision in the statement of earnings for that year.
In other tax jurisdictions where we have future income tax assets, we arewere still in a cumulative loss position as at August 31, 2007, and available negative evidences outweighevidence outweighed positive evidences. Forevidence. Consequently, for these tax jurisdictions, we maintained a full valuation allowance against our future income tax assets. As at August 31, 2007, the valuation allowance recorded for these other tax jurisdictions amounted to $4.9 million and mainly relatesrelated to deferred operating losses carried forward, which expire at various dates over the next 20 years.losses.
Except for the reversal of the valuation allowance in fiscal 2007, most of the income tax expenses recorded in fiscal 2005, 2006 and 2007 represent income taxes payable at the Canadian federal level, which are reduced by research and development tax credits that are recorded against gross research and development expenses in the statements of earnings.
Fiscal 2008
During fiscal 2008, reductions to the Canadian federal statutory tax rate were substantively enacted. Therefore, Canadian federal future income tax assets decreased by $1.5 million and generated a future income tax expense in the same amount during the year.
In addition, during fiscal 2008, taking into account these new Canadian federal substantively enacted tax rates, we reviewed our tax strategy for the future use of our Canadian federal operating losses, research and development expenses, certain timing differences and research and development tax credits to minimize income taxes payable on future years’ taxable income. Consequently, we amended our prior year’s income tax returns to generate a net operating loss to be carried back to prior years, which reinstated previously used research and development tax credits. This resulted in an increase of $2.7 million in both our tax-related assets in the balance sheet and future income tax recovery in the statement of earnings for the year ended August 31, 2008.
Finally, during fiscal 2008, considering the expected positive impacts the acquisitions of Navtel Communications and Brix Networks will have on future years’ taxable income at the United States federal level and because actual taxable income in the United States is greater than initially expected, we concluded that it was more likely than not that all future income tax assets of our existing consolidated US group would be recovered. Consequently, we reversed our valuation allowance against future income tax assets in the amount of $7.6 million. The portions of the valuation allowance that were reversed, and that were attributable to the effects of the Navtel Communications and Brix Networks acquisitions—in the amount of $652,000 and $1.6 million, respectively—were included in the purchase price allocation of the related acquired businesses. The remainder of the reversal, in the amount of $5.3 million, has been recorded in income taxes in the statement of earnings for the year ended August 31, 2008.
As at August 31, 2008, our net future income tax assets amounted to $24.7 million, and our non-refundable research and development tax credits amounted to $20.7 million. In order to realize these future income tax assets and non-refundable research and development tax credits, we need to generate approximately $174 million in pretax earnings at the Canadian federal level, approximately $33 million at the Canadian provincial levels, and approximately $37 million at the United States federal level.
Based on the existing and expected levels of pretax earnings in these tax jurisdictions, we believe that we should be able to recover our income tax assets at the Canadian federal level, at the Canadian provincial levels, and at the United States federal level over the next seven years, four years and nine years, respectively.
Valuation allowance
As at August 31, 2008, we were still in a cumulative loss position in certain of our subsidiaries and negative evidence outweighed positive evidence. For these subsidiaries, we maintained a full valuation allowance against our future income tax assets. As at August 31, 2008, the valuation allowance for these subsidiaries amounted to $15.5 million and mainly related to operating losses and research and development expenses carried forward. Of the global valuation allowance of $15.5 million, $8.2 million related to Brix Networks. In the event that we reverse a portion of or all the valuation allowance, the amount of such reversal would reduce the amount of goodwill recognized for this acquisition.
Please refer to note 1615 of our consolidated financial statements included elsewhere in this Annual Report for more details on income taxes and a full reconciliation of the income tax provision.
EXTRAORDINARY GAIN
In conjunction with the acquisition of Navtel Communications, we recorded negative goodwill in the amount of $3.0 million. This negative goodwill has been recorded as an extraordinary gain in the statement of earnings for fiscal 2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and Capital Resources
As at August 31, 2007,2008, cash and short-term investments increased to $129.8totalled $87.5 million, from $111.3 million in 2006, while our working capital was $180.4at $144.6 million. DuringOur cash and short-term investments decreased $42.2 million in fiscal 2008, compared to 2007, mainly due to the cash payments of $41.0 million, $6.5 million and $8.1 million for the acquisitions of Brix Networks and Navtel Communications, the purchases of capital assets and the redemption of share capital, respectively. On the other hand, operating activities generated $14.4 million in cash. In addition, wecash flows of $13.8 million. We also recorded an unrealized foreign exchange gain of $5.8 million on our cash and short-term investments.investments of $0.4 million. This unrealized foreign exchange gain resulted from the translation, in US dollars, of our Canadian-dollar-denominated cash and short-term investments and was recordedincluded in the cumulative translation adjustmentaccumulated other comprehensive income in the balance sheet. Furthermore, net proceeds from disposal of capital assets of $3.1 million increased our cash position year-over-year. Finally, issuance of subordinate voting shares generated $802,000 in cash in fiscal 2007 following the exercise of stock options. On the other hand, we made cash payments of $5.6 million for the purchase of capital assets.
Our short-term investments consist of commercial paper issued by seven (nineten (seven as ofat August 31, 2006)2007) high-credit quality corporations and trusts; therefore, we consider the risk of non-performance of these financial instruments to be remote.limited. None of these debt instruments are expected to be affected by a liquidity risk; 47% of them are guaranteed by the Government of Canada and none of them representrepresents asset-backed commercial paper.For the purposes of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis. These short-term investments will be used for working capital and other general corporate purposes, including other potential acquisitions.acquisitions and our share repurchase programs.
We believe that our cash balances and short-term investments will be sufficient to meet our liquidity and capital requirements for the foreseeable future, including the cash contingent consideration payable for the acquisition of Brix Networks and the effect of theour share repurchase program approved on November 5, 2007.programs. In addition to these assets, we have unused available lines of credit of $12.0totaling $10.5 million for working capital and other general corporate purposes and an unused linelines of credit of $11.3$18.5 million for foreign currency exposure related to forward exchange contracts. However, possible operating losses and/or possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms. Our lines of credit bear interest at prime rate.
Years ending August 31, | 2008 | 2009 | 2010 | 2011 | 2012 and later | Total | ||||||||||||||||||
| Operating leases | $ | 2,313,000 | $ | 2,164,000 | $ | 2,064,000 | $ | 1,145,000 | $ | 641,000 | $ | 8,327,000 | ||||||||||||
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.
Operating Activities
Cash flows provided by operating activities were $13.8 million in fiscal 2008, compared to $14.4 million in fiscal 2007 compared toand $12.3 million in 20062006.
Fiscal 2008 vs. 2007
Cash flows provided by operating activities in fiscal 2008 were attributable to the net earnings after items not affecting cash of $34.7 million, offset in part by the negative net change in non-cash operating items of $20.9 million. The negative net change in non-cash operating items was mainly due to the negative effect on cash of the increase of $4.3 million of our accounts receivable, the negative effect on cash of the increase of $12.8 million of our income tax and $14.0tax credits recoverable, the negative effect on cash of the increase of $2.2 million of our inventories as well as the negative effect on cash of the decrease of $1.4 million of our accounts payable and accrued liabilities. The increase of our accounts receivable is directly attributable to the increase in 2005. sales year-over-year. The increase in our income taxes and tax credits is mainly due to the increase in our tax credits recoverable that were earned during the year but not yet recovered as well as the effect of the change in our tax strategy, explained elsewhere in this document. This increase was mostly offset by the positive effect on cash of the decrease of our future income tax assets (in items not affecting cash), which also resulted from the change in the tax strategy. The increase in our inventories resulted from expected increased sales activities for the next quarters. The decrease in our accounts payable and accrued liabilities is due to the timing of certain purchases and payments.
Fiscal 2007 vs. 2006
Cash flows provided by operating activities in fiscal 2007 were mainly attributable to the net earnings after items not affecting cash of $24.6 million, less the negative net change in non-cash operating items of $10.1$10.2 million. Our accounts receivable, our income taxes and tax credits recoverable as well as our inventories increased in fiscal 2007, resulting in negative effects on cash flows of $5.5 million, $3.4 million and $5.5 million, respectively. However, our accounts payable and accrued liabilities increased during fiscal 2007, resulting in a positive effect on cash flows of $4.1 million. The increase in sales year-over-year explains the increase in accounts receivable. Also, one-time recognition of prior years’ non-refundable tax credits of $3.2 million explains most of the increase in our income taxes and tax credits recoverable year-over-year. Furthermore, increased sales activities in fiscal 2007 resulted in higher inventory levels in 2007 in order to sustain these additional sales activities. However, increased levels of activities in fiscal 2007, compared to 2006, resulted in an increase in our accounts payable and accrued liabilities year-over-year.
67
Investing Activities
Cash flows used by investing activities wereamounted to $4.2 million in fiscal 2008, compared to $16.1 million in fiscal 2007 compared toand $13.2 million in 2006 and $13.0 million in 2005.2006.
Fiscal 2008 vs. 2007
In fiscal 2008, we disposed (net of acquisitions) of $43.3 million worth of short-term investments to pay for the cash consideration of $41.0 million for the two business combinations closed during the year. Also, we paid $6.5 million for the purchase of capital assets.
Fiscal 2007 vs. 2006
In fiscal 2007, we acquired (net of sales) $13.6 million worth of short-term investments and paid $5.6 million for the purchase of capital assets. On the other hand, in fiscal 2007, we received net proceeds of $3.1 million from the disposal of capital assets.
Financing activities
Cash flows used by financing activities amounted to $8.0 million in fiscal 2008, compared to cash flows provided of $330,000 in 2007 and of $142,000 in 2006.
Fiscal 2008 vs. 2007
In fiscal 2008, we redeemed share capital for a cash consideration of $8.1 million. However, during that year, exercise of stock options generated $61,000 ($557,000 and $802,000 in fiscal 2006 we made cash payments of $18.1 million and $3.4 million for the acquisition of Consultronics and the purchase of capital assets, respectively. In order to finance a part of these payments, we disposed of $8.3 million worth of short-term investments. We paid the remaining with cash flows from operating activities and cash on hand.2007, respectively).
FORWARD EXCHANGE CONTRACTS
We utilize forward exchange contracts to manage our foreign currency exposure. Our policy is not to utilize those derivative financial instruments for trading or speculative purposes.
Our forward exchange contracts, which are used to hedge anticipated US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign exchange translation gains and losses on these contracts are recognized as an adjustment of the revenues when the corresponding sales are recorded.
As at August 31, 2007,2008, we held forward exchange contracts to sell US dollars at various forward rates, which are summarized as follows:
Expiry dates: | Contractual amounts | Weighted average contractual forward rates | ||||||
| September 2007 to August 2008 | $ | 36,900,000 | 1.1295 | |||||
| September 2008 to December 2009 | 15,400,000 | 1.1199 | ||||||
Expiry dates | Contractual amounts | Weighted average contractual forward rates | ||
September 2008 to August 2009 | $36,600,000 | 1.0686 | ||
September 2009 to August 2010 | $17,400,000 | 1.0535 | ||
September 2010 to August 2011 | $2,400,000 | 1.0619 |
As at August 31, 2007,2008, the fair value of our forward exchange contracts, which represents the amount we would receive or pay to settle the contracts amounted to an unrecognized gainbased on the forward exchange rate at year end, represented net gains of $3.4 million ($5.5$62,000 ($3.4 million as at August 31, 2006)2007).
CONTINGENCY
On November 27, 2001, a class actionclass-action suit was filed in the United States District Court for the Southern District of New York against EXFO, four of the underwriters of our Initial Public Offering and some of our executive officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of 1933. This class action alleges that EXFO’s registration statement and prospectus filed with the Securities and Exchange Commission on June 29, 2000, contained material misrepresentations and/or omissions resulting from (i) the underwriters allegedly soliciting and receiving additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated material portions of the shares issued in connection with the company’sEXFO’s Initial Public Offering; and (ii) the underwriters allegedly entering into agreements with customers whereby shares issued in connection with the company’sEXFO’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-determinedpredetermined 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 ourEXFO’s underwriters, EXFO and two of our executive officers. In addition to the allegations mentioned above, the amended complaint alleges that the underwriters (i) used their analysts to manipulate the stock market; and (ii) implemented schemes that allowed issuer insiders to sell their shares rapidly after an initial public offering and benefit from high market prices. As concerns EXFO and our two of our executive officers in particular, the amended complaint alleges that (i) the company’sEXFO’s registration statement was materially false and misleading because it failed to disclose the additional commissions and compensation to be received by underwriters; (ii) the two named executive officers learned of or recklessly disregarded the alleged misconduct of the underwriters; (iii) the two named executive officers had motive and opportunity to engage in alleged wrongful conduct due to personal holdings of EXFO’s stock and the fact that an alleged artificially inflated stock price could be used as currency for acquisitions; and (iv) the two named executive officers, by virtue of their positions with EXFO, controlled the companyit and the contents of the registration statement and had the ability to prevent its issuance or cause it to be corrected. The plaintiffs in this suit seek an unspecified amount for damages suffered.
In July 2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint and a decision was rendered on February 19, 2003. Only one of the claims against EXFO was dismissed. On October 8, 2002, the claims against ourits officers were dismissed pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs.
In June 2004, an agreement of partial settlement was submitted to the court for preliminary approval. The proposed partial settlement was between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.
On April 6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing en banc.banc. In light of the Second CircuitCircuit’s opinion, liaison counsel for all issuer defendants, including EXFO, informed the court that this settlement cannot be approved, because the defined settlement class, like the litigation class, cannot be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class actionclass-action complaints against the focus cases and, plan to moveon September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class-action complaints. On March 26, 2008, the district court denied the motions to dismiss, except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside of the previously certified class period. Briefing on the class certification again.motion was completed in May 2008.
SHARE CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share capitalCapital
As at November 1, 2007,3, 2008, EXFO had 36,643,000 multiple voting shares outstanding, entitling to 10ten votes each and 32,361,56130,606,791 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and without par value. In fiscal 2008, we redeemed 1,682,921 subordinated voting shares for a total consideration of $8.1 million based on our share buy-back program.
Long-Term Incentive Plan and Deferred Share Unit Plan
The aggregate number of subordinate voting shares covered by stock options, restricted share units (RSUs) and deferred share units (DSUs) granted under the Long-Term Incentive Plan and the Deferred Share Unit Plan was 2,601,0452,748,457 as at November 1, 2007.August 31, 2008. The maximum number of subordinate voting shares issuable under these two plans cannot exceed 6,306,153 shares. The following tables summarize information about stock options, RSUs and DSUs granted to the members of the Board of Directors and to Management and Corporate Officers of the company and its subsidiaries as at November 1, 2007:August 31, 2008:
Stock Options | Number | % of issued and outstanding | Weighted average exercise price | |||
| Chairman of the Board, President and CEO (one individual) | 179,642 | 10% | $9.05 | |||
| Board of Directors (five individuals) | 194,375 | 11% | $6.23 | |||
| Management and Corporate Officers (eight individuals) | 212,139 | 11% | $14.49 | |||
| 586,156 | 32% | $10.08 |
Restricted Share Units (RSUs) | Number | % of issued and outstanding | ||||
| Chairman of the Board, President and CEO (one individual) | 85,460 | 10% | ||||
| Management and Corporate Officers (ten individuals) | 238,069 | 28% | ||||
| 323,529 | 38% |
Stock Options | Number | % of issued and outstanding | Weighted average exercise price | |||||||||
| Chairman of the Board, President and CEO (one individual) | 179,642 | 9 | % | $ | 9.05 | |||||||
| Board of Directors (five individuals) | 194,375 | 10 | 6.23 | |||||||||
| Management and Corporate Officers (eight individuals) | 212,139 | 11 | 14.49 | |||||||||
586,156 | 30 | % | $ | 10.08 | ||||||||
Deferred Share Units (DSUs) | Number | % of issued and outstanding | ||||
| Board of Directors (four individuals) | 79,185 | 100% |
Restricted Share Units (RSUs) | Number | % of issued and outstanding | ||||||||||
| Chairman of the Board, President and CEO (one individual) | 89,823 | 15 | % | |||||||||
| Management and Corporate Officers (ten individuals) | 292,442 | 48 | ||||||||||
382,265 | 63 | % | ||||||||||
As at August 31, 2007,2008, our off-balance sheet arrangements consisted of letters of guarantee and forward exchange contracts. These off-balance sheet arrangements are respectively described in detail in notes 12 and 18 to our consolidated financial statements, included elsewhere in this Annual Report.
As at August 31, 2007,2008, our letters of guarantee amounted to $5.7 million; these letters of guarantee expire at various dates through fiscal 2010. From this amount, we had $1.5 million worth of letters of guarantee for our own selling and purchase requirements, which were reserved from one of our lines of credit. The remainder in the amount of $4.2 million was used to secure our line of credit in Chinese currency. This line of credit was unused as at August 31, 2008. These letters of guarantee were secured by short-term investments. Our forward exchange contracts are described above.
VARIABLE INTEREST ENTITY
As of August 31, 2008, we did not have interests in any variable interest entities.
| Directors and Senior Management |
The following table sets forth information about our executive officers, senior managers and Directors as of November 1, 2007.3, 2008.
Name and Municipality of Residence | Positions with EXFO | |
PIERRE-PAUL ALLARD Pleasanton, California | Independent Director | |
JON BRADLEY Worminghall, United Kingdom | Vice-President, Telecom Sales - International | |
STEPHEN BULL Quebec City, Quebec | Vice-President, Research and Development, Telecom Division | |
NORMAND DUROCHER St-Sauveur, Quebec | Vice-President, Human Resources | |
ALLAN FIRHOJ Georgestown, Ontario | Vice-President and General Manager, Life Sciences and Industrial Division | |
ROBERT FITTS Minesing, Ontario | Vice-President, Corporate Development | |
ÉTIENNE GAGNON Quebec City, Quebec | Vice-President, Telecom Product Management and Marketing | |
LUC GAGNON St-Augustin-de-Desmaures, Quebec | Vice-President, Telecom Manufacturing Operations and Customer Service | |
VIVIAN HUDSON Beaconsfield, Quebec | Vice-President and General Manager, EXFO Service Assurance Business Unit | |
GERMAIN LAMONDE St-Augustin-de-Desmaures, Quebec | Chairman of the Board, President and Chief Executive Officer | |
PIERRE MARCOUILLER Magog, Quebec | Independent Director | |
GUY MARIER Lakefield Gore, Quebec | Independent Lead Director | |
PIERRE PLAMONDON Quebec City, Quebec | Vice-President, Finance and Chief Financial Officer | |
BENOIT RINGUETTE Boischatel, Quebec | General Counsel and Corporate Secretary | |
JOSEPH SUTHERLAND Apsley, Ontario | Vice-President and General Manager, Navtel Product Group | |
DAVID A. THOMPSON Newton, North Carolina | Independent Director | |
ANDRÉ TREMBLAY Outremont, Quebec | ||
| Independent Director | ||
DANA YEARIAN Lake Forest, Illinois | Vice-President, Telecom Sales - Americas |
The address of each of our executive officers, senior managers and Directors is c/o EXFO Electro-Optical Engineering Inc., 400 Godin Avenue, Quebec, Quebec, Canada. The following is a brief biography of each of our executive officers, senior managers and Directors.
Pierre-Paul Allard was appointed a member of EXFO’s Board of Directors in September 2008 and has been a board member of many other technology companies in Canada and in the US. Today, he is also an active philanthropist for l’Institut de Cardiologie de Québec. Mr. Allard is presently Area Vice-President, Sales for Cisco Systems Inc., where he has held several management positions over the years. Currently, he is responsible for sales and field operations of Cisco’s Global Enterprise Client segment, focusing on new market opportunities, accelerated revenue growth and increased customer satisfaction. Prior to joining Cisco, Mr. Allard worked for IBM Canada for 12 years. In 2002, Mr. Allard co-chaired the Canadian e-Business Initiative, a private-public partnership aiming to measure the role e-Business plays in increasing productivity levels, job creation and competitive position. In 1998, he was the laureate of the Arista-Sunlife Award, for Top Young Entrepreneur in Large Enterprise, by the Montreal Chamber of Commerce. In 2003, he received the Queen’s Golden Jubilee Medal, which highlights significant contributions to Canada. In the same year, he was also awarded the prestigious Trudeau Medal from the University of Ottawa, School of Management. Pierre-Paul Allard holds a bachelor’s and masters’ degree in Business Administration from the University of Ottawa, School of Management, in Canada.
Jon Bradley was appointed Vice-President, Telecom Sales - International for EXFO in March 2007. He is responsible for managing telecom sales, both direct and indirect, and for the execution of sales strategies in the international arena. He manages an accomplished and diverse sales and distribution team. As a member of the Strategy and Management Committees, he also develops corporate strategy for EXFO. Prior to his appointment as Vice-President, International Telecom Sales, Dr. Bradley held the position of Sales Director for the Europe, Middle East and Africa (EMEA) territory from 2003 to 2007, and Regional Sales Manager from 1999 to 2003. Before joining EXFO in 1999, Dr. Bradley was employed as Sales and Marketing Director by Queensgate Instruments (UK) from 1997 to 1999 and as Sales Engineer by Lambda Photometrics (UK) from September 1993 to September 1997. Dr. Bradley holds an honors degree in chemistry, as well as a Ph.D. in Raman spectroscopy from the University of Durham in the United Kingdom.
Stephen Bull was appointed our Vice-President, Research and Development, Telecom Division in December 1999. He joined us in July 1995 and held the positions of Assistant Director-Engineering from September 1997 to December 1999 and Group Leader (Engineering Management) from July 1995 to September 1997. From June 1990 to March 1995, Mr. Bull held the position of General Manager and Managing Director for Space Research Corporation, a military engineering company in Belgium. Mr. Bull holds a bachelor’s degree in Electrical Engineering from Laval University in Quebec City, Canada.
Normand Durocher was appointed Vice-President of Human Resources in April 2004. In addition to managing our human resources team, his main responsibility is to develop and implement a human resources plan that supports EXFO’s business strategy. Mr. Durocher began his career in labor relations in the Cable division of Nortel and then took on several key roles at Nortel Networks and Nordx/CDT, all relating to human resources and operations. Since then, Normand Durocher has accumulated more than 25 years’ experience in operations and human resources management within the telecommunications industry. Prior to joining EXFO, Mr. Durocher ran his own human resources consulting business. Normand Durocher holds a Bachelor of Science from the University de Montreal and also completed the Advanced Human Resources program at Dalhousie University in Halifax, Nova Scotia, Canada.
Allan Firhoj was appointed Vice-President and General Manager, Life Sciences and Industrial Division in July 2003. Prior to that, he held the position of General Manager of EXFO Photonic Solutions Inc. since November 2001. He is responsible for the overall strategic direction and management of the Life Sciences and Industrial Division. Mr. Firhoj joined EFOS Inc. in 1996, where he was responsible for Sales, Marketing and Business Development of the Dental Curing-Products Division. Following the sale of this division to Dentsply International in 1997, he was appointed Director of Marketing and Business Development. Mr. Firhoj continued in this capacity until being appointed to the position of General Manager of EXFO Photonic Solutions Inc. Prior to joining us, Mr. Firhoj spent six years with The Horn Group, a plastics business involved in medical devices/instrumentation and office communication equipment. He successively held the positions of ISO 9000 Implementation Manager, Technical Sales Manager as well as Marketing and Business Development Manager. In this latter role, he successfully contributed to increasing sales in their medical market by an annual average of 60% during a three-year period. Mr. Firhoj holds a bachelor’s degree in Political Science from Bishop’s University in Lennoxville, Quebec.
Robert Fitts was nominated Vice-President, Corporate Development in May 2007. His main role is to seek out new business opportunities (such as strategic alliances, OEM agreements and acquisitions), which will allow the company to enhance its competitive position in the telecom test and measurement market. Prior to this appointment, Mr. Fitts acted as Vice-President, Product Management - Copper Access Products,, since our acquisition of Consultronics in January 2006. Before taking on this position, Mr. Fitts was Executive Vice-President at Consultronics, where he began his career more than 20 years earlier. He therefore 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 given by Queens University School of Business, located in Kingston, Ontario.
Étienne Gagnon was appointed Vice-President, Telecom Product Management and Marketing in May 2003 and, in May 2007, he took on the responsibility of all our telecom business units – Optical; Transport and Datacom; and Access. As such, he is responsible for EXFO’s general marketing direction on both the product level and communications level. Mr. Étienne Gagnon is not related to Mr. Luc Gagnon. For nearly three years, before returning to EXFO in early 2003, Mr. Gagnon was Vice-President of Sales and Marketing at TeraXion, an optical component manufacturer based in Quebec City. Mr. Gagnon began his career as a design engineer for Bombardier/Canadair, where he worked on the Canadian Regional Jet project between 1990 and 1993. Later, he held the position of Business Development Manager for France Telecom in Hungary. In 1994, he joined EXFO’s European office as a Regional Sales Manager, and in 1996, he was brought back to Quebec City to head the OSP marketing group. Mr. Gagnon then went on to become the director of our Outside Plant division in 1998, and remained in that function until he joined TeraXion in 2000. Etienne Gagnon holds a bachelor’s degree in mechanical engineering from the University of Montreal’s School of Engineering, and a master’s degree in European business from the Ecole nationale supérieure des télécommunications in France.
Luc Gagnon was appointed Vice-President, Telecom Manufacturing Operations in May 2003 and, in May 2007, he also took on the vice-presidency of the Customer Services department. Mr. Luc Gagnon is not related to Mr. Étienne Gagnon. He is responsible for ensuring the smooth operation of all manufacturing activities, which include production, purchasing, product engineering, quality assurance, planning, manufacturing engineering, product configuration, transportation and customs, as well as material resources. In addition, he maintains an ongoing and efficient relation between the manufacturing process and the end customer. Prior to his nomination in 2003, Mr. Gagnon held the position of Production Director since 2000. Before joining EXFO, he had similar roles in several other high-technology companies. He worked for Mendes from 1999 to 2000, for C-MAC from 1997 to 1999, for STERIS from 1993 to 1997 and for MITEL from 1991 to 1993. Luc Gagnon holds a bachelor’s degree in electrical engineering and master’s degree in engineering, both from the Université de Sherbrooke, in Canada.
Vivian Hudson was nominated Vice-President and General Manager for EXFO’s Service Assurance business unit in September 2008. Prior to joining EXFO, Ms. Hudson held various general management positions at Nortel, including those of General Manager for the Systems Integration unit for the Microsoft-Nortel Innovative Communications Alliance; the GSM business in France; and the High-Capacity Optical Networks group. Ms. Hudson first began at Nortel in 1990 and worked through the ranks, namely in European Marketing (based in the UK and in France), Optical Product Management, Wireless Operations, as well as Optical and Wireless General Management. Prior to this, she held positions at Bell Canada as a business/services planner, at Canadian Pacific as a telecommunications networking end user, and at DMR as a telecommunications consultant. A recognized global high-tech business leader, Ms. Hudson has also pursued sustainable development activities in the telecommunications area and serves on several boards. Namely, she is a governor of Carleton University’s Board of Governors and sits on the board of Shad International. She also holds the ICD.D designation from the Institute of Corporate Directors of Canada. Vivian Hudson holds a Bachelor of Science from Université Laval in Quebec City, and a Master of Business Administration from McGill University in Montreal.
Germain Lamonde, a company founder, has been Chairman of the Board, President and CEO of EXFO since its inception in his apartment in 1985. Mr. Lamonde, who is responsible for the overall management and strategic direction of EXFO and its subsidiaries and divisions, has grown the company from the ground up into global leader in the telecommunications test and measurement industry. Mr. Lamonde has served on the boards of several organizations such as the Canadian Institute for Photonic Innovations, the Pole QCA Economic Development Corporation and the National Optics Institute of Canada to name a few. Germain Lamonde holds a bachelor’s degree in physics engineering from the University of Montreal’s School of Engineering (École Polytechnique), a master’s degree in optics from Laval University, and is also a graduate of the Ivey Executive Program offered by the University of Western Ontario.
Pierre Marcouiller has served as our Director since May 2000. Mr. Marcouiller is Chairman of the Board and CEO of Camoplast Inc., an industrial manufacturer specializing in rubber tracks, molded composites, thermoplastic components and off-road tracked vehicles. Prior to joining Camoplast, Mr. Marcouiller was President and General Manager of Venmar Ventilation Inc. (1988-1996), where he was the controlling shareholder from 1991 to 1996. Mr. Marcouiller is also a Director of Canam Group Inc., an industrial company specialized in the design and fabrication of construction products and solutions in the commercial, industrial, institutional, residential, and bridge and highway infrastructures markets. Mr. Marcouiller also holds directorships in other privately held companies. Pierre Marcouiller holds a bachelor’s degree in business administration from the Université du Québec à Trois-Rivières and an MBA from the Université de Sherbrooke.
Guy Marier has served as our Director since January 2004. Formerly President of Bell Québec (1999 to 2003), Guy Marier completed his successful 33-year career at Bell as Executive Vice-President of the Project Management Office, before retiring at the end of 2003. From 1988 to 1990, Mr. Marier headed Bell Canada International’s investments and projects in Saudi Arabia and, for the three following years, served as President of Télébec. He then returned to the parent company to hold various senior management positions. Guy Marier holds a Bachelor of Arts from the University of Montreal and a Bachelor of Business Administration from the Université du Québec à Montréal.
Pierre Plamondon has been our Vice-President, Finance and Chief Financial Officer since January 1996. Prior to joining us, Mr. Plamondon served as Senior Manager for Price Waterhouse, now PricewaterhouseCoopers LLP, from September 1981 to December 1995 in Canada and France. Pierre Plamondon holds a bachelor’s degree in business administration and a license in accounting, both from Laval University in Quebec City, Canada. Mr. Plamondon has been a member of the Canadian Institute of Chartered Accountants since 1983 and a member of the Board of Directors of SOVAR Inc. (Société de valorisation des applications de la recherche de l’Université Laval) since December 2000.
Benoit Ringuette has been our in-house Legal Counsel and Corporate Secretary since April 2004. Prior to joining EXFO, Mr. Ringuette practiced mainly in commercial, corporate and securities law from 1998 to 2003 as an associate in the law firms of O’Brien, Flynn Rivard in Quebec City and Desjardins Ducharme Stein Monast in Quebec City. Mr. Ringuette has been a member of the Quebec Bar since 1998. Mr. Ringuette holds a bachelor’s degree in Civil Law and a master’s degree in Business Administration (MBA) from Laval University in Quebec City, Canada.
Joseph Sutherland was appointed Vice-President and General Manager of Navtel Product Group in March 2008, following EXFO’s acquisition of Navtel Communications Inc., an Ontario-based, communications software company. Mr. Sutherland was President of Navtel Communications Inc. from 2005 to 2008, and from 1976 to 1998. In this role, he was responsible for growing the company from inception to over $40 million in revenue with several hundred employees. During his tenure at Navtel, Mr. Sutherland raised significant venture capital, conducted several acquisitions and successfully divested Navtel to a large European public company. After divesture, he continued on as Divisional President of GN Nettest and was part of the executive management team, participating in numerous acquisition and strategy development activities until his retirement in 1998. Prior to resuming his functions as President of Navtel in 2005, Mr. Sutherland served on several boards. Namely, from 1998 until his successful exit in 2004, he was Chairman of the Board of Toogood Financial Systems, a financial software company based in Richmond Hill, Ontario Mr. Sutherland completed an Executive Management Program in Marketing and Sales Management at the University of British Columbia in Canada.
David A. Thompson has served as our Director since June 2000. Dr. David A. Thompson is currently Vice-President and Director of Hardware & Equipment Technology at Corning Cable Systems, where he has held this position since January 2006. Prior to this, he was Vice President and Director of Hardware & Equipment Technology Strategy for Corning Cable Systems from January 2002 to December 2005. Dr. Thompson first joined Corning Incorporated in 1976 as a Senior Chemist in glass research. He then took on several technology Directorships and strategic planning roles for Corning’s Component and Photonics Technologies Division between 1988 and 1998; and in 1999, he was appointed technical leader for the creation of the new Samsung-Corning Micro-Optics joint venture. His last position at Corning prior to transferring to Corning Cable Systems in January 2002 was Division Vice-President for the Strategic Planning & Innovation Effectiveness in Research, Development and Engineering. 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 18 patents and has over 20 technical publications in the areas of inorganic chemistry, glass technology and telecommunications.
André Tremblay has served as our Director since June 2000.Mr. 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, having been actively involved in the conception, financing and management of several companies. As a special advisor to the President of Telesystem Ltd., and as President of Telesystem Enterprises Ltd. from 1992 to 1998, he managed a portfolio of telecommunication companies. For almost 10 years, he served as President and Chief Executive Officer of Microcell Telecommunications, a wireless network and service provider, which he led from its inception on through the different phases of its evolution. During that time, he has also provided early-stage financing, along with strategic advice and direction, for start-up technology firms. In 2005, he was appointed by Canada’s Industry Minister as member of the Telecommunications Policy Review Panel to make recommendations on how to modernize Canada’s telecommunication policies and regulatory framework. AndréMr. Tremblay holds bachelor’s degrees in management and in accounting from Laval University, a master’s degree in taxation from Université de Sherbrooke, and is also a graduate of Harvard Business School’s Advanced Management Program.
Dana Yearian was appointed our Vice President, Telecom Sales - Americas in March 2007. Prior to this appointment, Mr. Yearian held the position of Vice-President, Telecom Sales − North America. He is responsible for managing telecom sales, both direct and indirect, and the execution of sales strategies across North, Central and South America. Mr. Yearian oversees all sales-related functions for the EXFO sales organization throughout this territory, including sales operations, global account management and partner programs. As a member of the Strategy and Management committees, he also helps develop corporate strategy. Prior to joining EXFO, Mr. Yearian held senior executive sales positions at Spirent Communications Service Assurance Division and Acterna Corp. Mr. Yearian also held various executive positions; namely, at Toshiba America, Silicon Sensors (Advanced Photonix, Inc.), and Impell Corporation (ABB Ltd.). DanaMr. Yearian holds a bachelor's degree in electrical engineering from the Illinois Institute of Technology in Chicago and has completed MBA course work at DePaul University, also in Chicago, Illinois, USA.
Term of Executive Officers
Executive officers are appointed annually by the Board of Directors and serve until their successors are appointed and qualified or until earlier resignation or removal.
| Compensation |
Director Compensation
In the financial year ended August 31, 2007,2008, each director who was not an employee of the Corporation or any of its subsidiaries received the level of compensation set forth in the table below as annual compensation payable in a combination of cash and Deferred Share Units (“DSUs”) as chosen by the Director pursuant to the Deferred Share Unit Plan.
Annual Retainer for Directors (1) | CA$50,000 (2) | US$ | ||
| Annual Retainer for Lead Director | CA$5,000 | US$ | ||
| Annual Retainer for Committee Chairman | CA$5,000 | US$ | ||
| Annual Retainer for Committee Members | CA$3,000 | US$ | ||
| Fees for all Meetings Attended per day in Person | CA$1,000 | US$ | ||
| Fees for all Meetings Attended per day by Telephone | CA$500 | US$ |
| (1) | All the Directors elected to receive 50% of their Annual Retainer in form of Deferred Share Units except Mr. André Tremblay who elected to receive 100% of his Annual Retainer in form of Deferred Share Units. |
| (2) | The Annual Retainer for Mr. David A. Thompson is US$50,000 (CA$ |
| (3) | The compensation information has been converted from Canadian dollars to U.S. dollars based upon an average foreign exchange rate of CA$ |
In the financial year ended August 31, 20072008 and as of November 1, 2007,3, 2008, the Directors who were 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$) (1) |
Pierre Marcouiller (4) | 27,642 | 3,586 | 22,292 | 4,012 |
Guy Marier (5) | 30,490 | 3,586 | 22,292 | 4,904 |
Dr. David A. Thompson (6) | 27,675 | 3,975 | 25,000 | 4,283 |
André Tremblay (7) | 7,133 | 7,172 | 44,583 | 5,796 |
Michael Unger (8) | 29,425 | 8,586(9) | 53,544 | 5,796 |
| Name | Annual Compensation Paid in Cash (US$) (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-Paul Allard | – | – | – | – |
Pierre Marcouiller (4) | 30,781 | 5,174 | 24,824 | 5,461 |
Guy Marier (5) | 35,746 | 5,174 | 24,824 | 8,440 |
Dr. David A. Thompson (6) | 29,217 | 5,228 | 25,000 | 6,951 |
André Tremblay (7) | 7,944 | 10,349 | 49,648 | 7,944 |
Michael Unger (8) | 28,655 | 3,760 | 18,618 | 6,454 |
| (1) | The compensation information has been converted from Canadian dollars to U.S. dollars based upon an average foreign exchange rate of CA$ |
| (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 Audit Committee and the Human Resources Committee, Lead Director and |
| (6) | Member of the Human Resources |
| (7) | Member of the Human Resources Committee and Chairman of the Audit Committee. |
| (8) | Member of the Audit Committee and Chairman of the Human Resources |
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 and 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, and one other executive officer of the Corporation who would have been included within the three most highly compensated executive officers had he been in the employ of the Corporation, or a subsidiary, at the year end (collectively, the "Named Executive Officers"). This information includes the U.S. dollar value of base salaries, bonus awards and long-term incentive planLong-Term Incentive Plan grants, the number of options or Restricted Share Units granted, and other compensation, if any, whether paid or deferred.
Name and Principal Position | Financial Years | Salary (1) ($) | Bonus (2) ($) | Other Annual Compensation ($) (3) | Securities Under Options (4) (#) | Restricted Share Units (5) (#) | All Other Compensation ($) |
Germain Lamonde, President and Chief Executive Officer | 2007 | 294,334 (US) 330,096 (CA) | 131,145 (US) 147,080 (CA) | - | - | 25,347 | - |
| 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 | - | |
Pierre Plamondon, Vice-President Finance and Chief Financial Officer | 2007 | 173,862 (US) 194,986 (CA) | 56,906 (US) 63,820 (CA) | - | - | 12,930 | 4,836 (US) (6) 5,423 (CA) |
| 2006 | 165,691 (US) 190,230 (CA) | 60,167 (US) 69,078 (CA) | - | 3,653 | 6,994 | 4,283 (US) (6) 4,918 (CA) | |
| 2005 | 151,441 (US) 186,500 (CA) | 48,735 (US) 60,017 (CA) | - | 5,383 | 33,927 | 2,316 (US) (6) 2,852 (CA) |
Dana Yearian, Vice-President, Telecom Sales - Americas | 2007 | 250,592 (US) 281,039 (CA) | 8,326 (US) 9,338 (CA) | - | - | 6,645 | 566 (US) (6) 634 (CA) |
| 2006 | 7,851 (US) (7) 9,014 (CA) | - - | - | - | 5,000 | 236 (US) (6) 270 (CA) | |
| 2005 | - - | - - | - | - | - | - | |
Jon Bradley, Vice-President, Telecom Sales - International | 2007 | 226,991 (US) 254,571 (CA) 116,011 (£) (8) | 19,470 (US) 21,836 (CA) 9,951 (£) | - | - | - | - |
| 2006 | 194,908 (US) 223,774 (CA) 108,778 (£) | 12,684 (US) 14,563 (CA) 7,079 (£) | - | - | 2,500 | - | |
| 2005 | 129,726 (US) 159,758 (CA) 70,258 (£) | 13,400 (US) 16,502 (CA) 7,257 (£) | - | 4,000 | 2,000 | - |
Allan Firhoj, Vice-President and General Manager, Life Sciences and Industrial Division | 2007 | 148,373 (US) (9) 166,400 (CA) | 58,969 (US) 66,133 (CA) | - | - | 21,178 | - |
| 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 | - |
Juan-Felipe Gonzalez, Vice-President, Telecom Sales - International | 2007 | 195,508 (US) (10) 219,262 (CA) | 9,237 (US) 10,359 (CA) | - | - | - | - |
| 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 | - |
Name and Principal Position | Financial Years | Salary (1) ($) | Bonus (2) ($) | Other Annual Compensation ($) (3) | Securities Under Options (4) (#) | Restricted Share Units (5) (#) | All Other Compensation ($) |
Germain Lamonde, President and Chief Executive Officer | 2008 | 347,533 (US) 350,000 (CA) | 198,848 (US) 200,260 (CA) | - | - | 29,910 | - |
| 2007 | 294,334 (US) 330,096 (CA) | 131,145 (US) 147,080 (CA) | - | - | 25,347 | - | |
| 2006 | 271,753 (US) 312,000 (CA) | 147,558 (US) 169,412 (CA) | - | 11,218 | 21,477 | - | |
Pierre Plamondon, Vice-President Finance and Chief Financial Officer | 2008 | 201,569 (US) 203,000 (CA) | 71,047 (US) 71,551 (CA) | - | - | 9,637 | 5,240 (US) (6) 5,278 (CA) |
| 2007 | 173,862 (US) 194,986 (CA) | 56,906 (US) 63,820 (CA) | - | - | 12,930 | 4,836 (US) (6) 5,423 (CA) | |
| 2006 | 165,691 (US) 190,230 (CA) | 60,167 (US) 69,078 (CA) | - | 3,653 | 6,994 | 4,283 (US) (6) 4,918 (CA) | |
Dana Yearian, Vice-President, Telecom Sales - Americas | 2008 | 289,219 (US) 291,272 (CA) | 4,826 (US) 4,861 (CA) | - | - | 7,225 | 7,401 (US) (6) 7,453 (CA) |
| 2007 | 250,592 (US) 281,039 (CA) | 8,326 (US) 9,338 (CA) | - | - | 6,645 | 566 (US) (6) 634 (CA) | |
| 2006 | 7,851 (US) (7) 9,014 (CA) | - - | - | - | 5,000 | 236 (US) (6) 270 (CA) | |
Jon Bradley, Vice-President, Telecom Sales - International | 2008 | 296,960 (US) 299,069 (CA) 149,276 (£)(8) | 34,940 (US) 35,188 (CA) 17,563 (£)(8) | - | - | 6,122 | - |
| 2007 | 226,991 (US) 254,571 (CA) 116,011 (£)(8) | 19,470 (US) 21,836 (CA) 9,951 (£)(8) | - | - | - | - | |
| 2006 | 194,908 (US) 223,774 (CA) 108,778 (£)(8) | 12,684 (US) 14,563 (CA) 7,079 (£)(8) | - | - | 2,500 | - | |
Stephen Bull, Vice-President. Research and Development, Telecom Division | 2008 | 173,369 (US) 174,600 (CA) | 49,835 (US) 50,189 (CA) | - | - | 7,340 | 4,235 (US) (6) 4,265 (CA) |
| 2007 | 141,891 (US) 159,131 (CA) | 35,399 (US) 39,700 (CA) | - | - | 15,905 | 3,657 (US) (6) 4,102 (CA) | |
| 2006 | 133,917 (US) 153,750 (CA) | 33,144 (US) 38,053 (CA) | - | 1,803 | 4,602 | 3,330 (US) (6) 3,823 (CA) |
| (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 CA$1.0071 = US$1.00 for the financial year ending August 31, 2008, CA$1.1215 = US$1.00 for the financial year ending August 31, 2007 and CA$1.1481 = US$1.00 for |
| (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 only an aggregate amount if such amount is equivalent or greater than $50,000 and 10% of the total of the annual salary and bonus of the Named Executive Officer for the financial year ended August 31, |
| (4) | Indicates the number of Subordinate Voting Shares underlying the options granted under the Long-Term Incentive Plan during the financial year indicated. |
| (5) | Indicates the number of Restricted Share Units granted under the Long-Term Incentive Plan during the financial year indicated. |
| (6) | Indicates the amount contributed by the Corporation during the financial year indicated to the Deferred Profit Sharing Plan or 401K 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. |
| (7) | This amount represents the salary paid to Mr. Yearian from August 14, 2006 until August 31, 2006 which is based on an annual salary amounted to US$173,424 (CA$199,109) for the financial year ended August 31, 2006. |
| (8) | The compensation information for UK resident has been converted from British Pound to U.S. dollars based upon an average foreign exchange rate of £1.9893 = US$1.00 for the financial year ended August 31, 2008, £1.9566 = US$1.00 for the financial year ended August 31, 2007 and £1.7918 = US$1.00 for |
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’s employment without cause, Mr. Lamonde will be entitled to severance payments (in no case exceeding 24 months of remuneration) and the immediate vesting of all stock options and RSUs. In addition, in the event that Mr. Lamonde’s employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation’s assets or of the majority of ourits share capital, or ifhe will be entitled to severance payments (in no case exceeding 24 months remuneration plus health benefits) and to the immediate vesting of all stock options and RSUs. If Mr. Lamonde voluntarily resigns, he will be entitled to theimmediate vesting of all stock options and RSUs.
We have an employment agreement with Mr. Pierre Plamondon, ourVice-President,our Vice-President, Finance and Chief Financial Officer. The agreement is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Plamondon’s employment without cause, Mr. Plamondon will be entitled to severance payments (in no case exceeding 12 months of the current base salary). In addition, in the event Mr. Plamondon’s employment is terminated following a merger or an acquisition by a third party of substantially all of ourthe Corporation’s assets or of the majority of ourits share capital, he will be entitled to severance payments (in no case exceeding 18 months remuneration plus health benefits) and to the immediate vesting of all stock options and RSUs.
We have an employment agreement with Mr. Dana Yearian, our Vice-President, Telecom Sales - - Americas. The agreement is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Yearian’s employment without cause, Mr. Yearian will be entitled to severance payments (in no case exceeding 12 months of the current base salary). In addition, in the event Mr. Yearian’s employment is terminated following a merger or an acquisition by a third party of substantially all of the our assets or of the majority of our share capital, he will be entitled to severance payments (in no case exceeding 18 months remuneration plus health benefits) and to the immediate vesting of all stock options and RSUs.
We have an employment agreement with Mr. Jon Bradley, our Vice-President, Telecom Sales - - International. The agreement is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Bradley’s employment without cause, Mr. Bradley will be entitled to severance payments (in no case exceeding 12 months of the current base salary). In addition, in the event Mr. Bradley’s employment is terminated following a merger or an acquisition by a third party of substantially all of the our assets or of the majority of our share capital, he will be entitled to severance payments (in no case exceeding 18 months remuneration plus health benefits) and to the immediate vesting of all stock options and RSUs.
We have an employment agreement with Mr. Allan Firhoj,Stephen Bull, the Corporation’s Vice-President, Research and General Manager, Life Sciences and IndustrialDevelopment, Telecom Division. The agreement is for an indeterminate period and the compensation is reviewed annually. In the event of termination of Mr. Firhoj’sBull’s employment without cause, Mr. FirhojBull will be entitled to severance payments (in no case exceeding 12 months of the current base salary). In addition, in the event Mr. Firhoj’sBull’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 severance payments (in no case exceeding 18 months remuneration plus health benefits) and to the immediate vesting of all stock options and RSUs.
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 long-term success and the creation of shareholder value. In determining executive compensation, the Committee considers the following four principles:
| · | Performance-based: Executive compensation levels reflect both corporation and individual results based on specific quantitative and qualitative objectives established at the start of each financial year in keeping with |
| · | 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 |
| · | 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 our 20072008 executive compensation program were Base Salary,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 executive compensation program. The Committee did not assign specific weightings to any key element of the Corporation’s 2007our 2008 executive compensation program.
In establishing the base salaries of senior officers, including the President and Chief Executive Officer, the Corporation takeswe 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/Telecommunicationshigh-technology/telecommunications and Manufacturing-Durable Goodsmanufacturing-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 year ended August 31, 20072008 were established to be in line with the objective of the Committee 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 2007the financial year ending August 31, 2008 were as follows:
Our President and Chief Executive Officer, Mr. Germain Lamonde, has a short term incentive target of 50%55% 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, Research and General Manager, Life Sciences and IndustrialDevelopment, Telecom Division, Mr. Allan Firhoj,Stephen Bull, 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 (1) | Weighting Mr. Lamonde and Mr. Plamondon | Weighting Mr. Firhoj | |
| Corporate objectives | |||
| Sales | 35% | 30% | |
| Earnings | 15% | 25% | |
| Gross margin | 25% | 25% | |
| Customer satisfaction (quality and on time delivery) | 25% | 20% | |
| Total | 0% - 150% | 0% - 150% | |
| Personal objectives (multiplier) | 0% - 125% | 0% - 125% | |
| Bonus portion: corporate objectives (0% - 150%) x personal objectives (0% - 125%) | Total bonus portion | Total bonus portion | |
Measure (1) | Weighting Mr. Lamonde, Mr. Plamondon and Mr. Bull |
| Sales | 35% |
| Earnings | 15% |
| Gross margin | 25% |
| Customer satisfaction (quality and on time delivery) | 25% |
| Growth metrics | 10% |
| Personal objectives (multiplier) | 0% - 125% |
| (1) | Sales, Earnings, Gross margin and Customer satisfaction measures are established to provide a metric from 0% to 150% and such a metric is multiplied by the personal objectives measure. This result is then multiplied by the short term incentive target % of the individual annual base salary. |
Our Vice-President, Telecom Sales - International, Mr. Jon Bradley, and Vice-President, Telecom Sales - Americas, Mr. Dana Yearian, do not participate in the short term incentive plan that is available to the company’s other senior executives. Instead, Mr. Bradley and Mr. Yearian participate in the company’s sales incentive plan (SIP). Under the SIP, Mr. Bradley and Mr. Yearian have target incentives of 40% of their annual base salaries. The SIP is based 40% on the achievement of revenue targets (billings), 40% on margin targets and 20% on sales quotas achievements.management objectives.
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 of our subsidiaries as determined by our Board of Directors, to attract and retain competent Directors, executive officers, employees and consultants motivated to work toward ensuring our success and to encourage them to acquire our shares. A copy of the Long-Term Incentive Plan has been filed as exhibit 4.35 to our fiscal year 2005 annual report.
The principal component of the long-term incentive compensation that we offer is made up of the Long-Term Incentive Plan for directors, officers, employees and consultants of us and our subsidiaries.
Introduced in May 2000, amended in October 2004 and effective in January 2005, the Long-Term Incentive Plan is designed to provide directors, officers, employees and consultants with an incentive to create value and accordingly ensures that their interests are aligned with those of the Corporation’sour shareholders. 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 theour securities of the Corporation are then traded and with all relevant securities legislation.
The Long-Term Incentive Plan provides for the issuance of options to purchase Subordinate Voting Shares and the issuance of Restricted Share Units (“RSUs”) redeemable for actual Subordinate Voting Shares or the equivalent in cash to directors, officers, employees and consultants. 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, 2007,2008, 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 the balance are made at, above, or below target levels based on 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. At the end of our financial year ended August 31, 2007,2008, there were a total of 1,929,3881,821,481 options granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average exercise price of US$18.5313.83 (CA$20.78)20.66).
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, 2007,2008, there were a total of 488,015847,791 RSUs granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average fair value at the time of grant of US$5.675.62 (CA$6.62)6.05) per RSU.
The maximum number of Subordinate Voting Shares that are issuable under the Plan shall not exceed 6,306,153 Subordinate Voting Shares, which represents 9.1%9.4% of our issued and outstanding voting shares as of November 1, 2007.3, 2008. 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 cannot be earlier than the third anniversary date of their grant. Some RSUs granted in the financial year ended August 31, 2008, vest at a rate of 1/2 annually commencing on the third anniversary date of the grants in October 2007, January 2008, April 2008 and July 2008. Some RSUs granted in the financial year ended August 31, 2007, vest at a rate of 1/2 annually commencing on the third anniversary date of the grants in September 2006, January 2007 and July 2007 and others at a rate of 1/3 annually on the third, fourth and fifth anniversary dates of the grants in September 2006, October 2006 and January 2007. Some RSUs granted in the financial year ended August 31, 2006 vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in February 2006 and in June 2006 and others at a rate of 1/3 annually commencing on the third anniversary date of the grant in August 2006. Some RSUs granted in the financial year ended August 31, 2005 vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in February 2005 and others at a rate of 55%, 35% and 10%, on the third, fourth and fifth anniversary dates of the grant in January 2005. Some RSUs granted during the last threefour financial years vest on the fifth anniversary date of each grant respectively in October 2007, October 2006, December 2005 and in January 2005. However, these RSUs are subject to early vesting on the third and fourth anniversary dates of the grant on the attainment of performance objectives, namely related to long term growth of revenue and profitability, as determined by ourthe Board of Directors of the Corporation. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. If such vesting date falls into any black-out period or any other restrictive period during which the RSU holder is not entitled to trade the Corporation’s Subordinate Voting Shares, 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 usorus or one of our subsidiaries (or within 30 days if the holder’s employment is terminated for reasons not related to cause); and (ii) 30 days after a Director ceases to be a member of 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 our 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.
The following table summarizes information about stock options granted to the members of our Board of Directors, and to Management and Corporate Officers of us and our subsidiaries as at August 31, 2007:2008:
Number of Options | % of Issued and Outstanding Options | Weighted Average Exercise Price ($US/Security) | |
| President and CEO (one individual) | 179,642 | 9.86% | 9.05 |
| Board of Directors (five individuals) | 194,375 | 10.67% | 6.23 |
| Management and Corporate Officers (eight individuals) | 212,139 | 11.65% | 14.49 |
Number of Options | % of Issued and Outstanding Options | Weighted Average Exercise Price ($US/Security) | ||||||||||
| President and CEO (one individual) | 179,642 | 9.31 | % | 9.05 | ||||||||
| Board of Directors (five individuals) | 194,375 | 10.07 | % | 6.23 | ||||||||
| Management and Corporate Officers (eight individuals) | 212,139 | 11.00 | % | 14.49 | ||||||||
The following table summarizes information about RSUs granted to the members of our Board of Directors and to Management and Corporate Officers of us and our subsidiaries as at August 31, 2007:
Number of RSUs | % of Issued and Outstanding RSUs | Weighted Average Fair Value at the Time of Grant $US/RSU | ||||||||||
| President and CEO (one individual) | 59,913 | 12.28 | % | 5.28 | ||||||||
| Board of Directors (five individuals) | - | - | - | |||||||||
| Management and Corporate Officers (ten individuals) | 236,185 | 48.40 | % | 5.25 | ||||||||
Number of RSUs | % of Issued and Outstanding RSUs | Weighted Average Fair Value at the Time of Grant $US/RSU | |
| President and CEO (one individual) | 85,460 | 10.08% | 5.66 |
| Board of Directors (five individuals) | - | - | - |
| Management and Corporate Officers (ten individuals) | 238,069 | 28.08% | 5.62 |
Option Grants in Last Financial Year
There were no options to purchase the Corporation’s Subordinate Voting Shares granted during the financial year ended August 31, 2007.2008. At the end of the financial year ended August 31, 2007,2008, there were a total of 1,929,3881,821 481 Subordinate Voting Shares covered by options granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average exercise price of US$18.5313.83 (CA$20.78)20.66). See “Report on Executive Compensation by the Human Resources Committee - Long-Term Incentive Compensation” for a description of the Long-Term Incentive Plan.
Aggregated Option Exercises in Last Financial Year and Financial Year End Option Values
The following table summarizes, for each of the Named Executive Officers, the number of stock options, if any, exercised during the financial year ended August 31, 2007,2008, the aggregate value realized upon exercise and the total number of unexercised options, if any, held at August 31, 2007.2008. Value realized upon exercise is the difference between the market value of the underlying Subordinate Voting Shares on the exercise date and the exercise or base price of the option. The value of unexercised in-the-money options at financial year-end is the difference between its exercise or base price and the market value of the underlying Subordinate Voting Shares on August 31, 2007,29, 2008, which was US$6.664.20 (CA$7.07)4.47) per share. These values, unlike the amounts set forth in the column “Aggregate Value Realized,” have not been, and may never be, realized. The underlying options have not been, and may never be exercised, and actual gains, if any, on exercise will depend on the value of the Subordinate Voting Shares on the date of exercise. There can be no assurance that these values will be realized. Unexercisable options are those that have been held for less than the time required for vesting.
Name | Securities Acquired on Exercise (#) | Aggregate Value Realized (US$) (1) (4) | Unexercised Options at August 31, 2007 | Value of Unexercised “In-the-Money” Options at August 31, 2007 (2) (3) (4) | ||
Exercisable (#) | Unexercisable (#) | Exercisable (US$) | Unexercisable (US$) | |||
| Germain Lamonde | - | - | 162,258 | 17,384 | 233,041 | 24,996 |
| Pierre Plamondon | - | - | 75,545 | 5,431 | 89,925 | 6,086 |
| Dana Yearian | - | - | - | - | - | - |
| Jon Bradley | - | - | 22,000 | 4,500 | 23,011 | 8,537 |
| Allan Firhoj | 5,188 | 21,093 | 18,000 | 3,478 | - | 3,934 |
Named Executive Officer Not in the Employ of the Corporation at year End | ||||||
| Juan-Felipe Gonzalez | 11,118 | 39,437 | Cancelled (5) | Cancelled (5) | - | - |
| Name | Securities Acquired on Exercise (#) | Aggregate Value Realized (US$) (1) (4) | Unexercised Options at August 31, 2008 | Value of Unexercised “In-the-Money” Options at August 31, 2008 (2) (3) (4) | ||
Exercisable (#) | Unexercisable (#) | Exercisable (US$) | Unexercisable (US$) | |||
| Germain Lamonde | - | - | 169,549 | 10,093 | 92,654 | - |
| Pierre Plamondon | - | - | 77,804 | 3,172 | 37,061 | - |
| Dana Yearian | - | - | - | - | - | - |
| Jon Bradley | - | - | 25,500 | 1,000 | - | - |
| Stephen Bull | - | - | 25,328 | 2,100 | - | - |
| (1) | The aggregate value realized is equivalent to the difference between the market value of the securities underlying the options at exercise and the exercise price of the options. This value, as the case maybe, has been converted from Canadian dollars to U.S. Dollars based upon the average foreign exchange rate on the day of the exercise. |
| (2) | “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. |
| (3) | The value of unexercisable “in-the-money” options is calculated using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August |
| (4) | This value has been converted from Canadian to US dollars based upon the foreign exchange rate on August |
Compensation of Chief Executive Officer
In establishing Mr. Lamonde’s compensation for the year ending August 31, 2007,2008, 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, 2007,2008, Mr. Lamonde’s compensation was adjusted accordingly.
In the financial year ended August 31, 2007,2008, 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 (1) | Weighting ALL | |
| Sales | 35% | |
| Earnings | 15% | |
| Gross margin | 25% | |
| Customer satisfaction (quality and on time delivery) | 25% | |
| Personal objectives (multiplier) | 0% - 125% | |
| (1) | Sales, Earnings, Gross margin and Customer satisfaction measures are established to provide a metric from 0% to 150% and such a metric is multiplied by the personal objectives measure. This result is then multiplied by the short term incentive target % of the individual annual base salary. |
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.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 our fiscal year 2005 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”), 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. DSUs attract dividends in the form of additional DSUs at the same rate as dividends on Subordinate Voting Share. When a Director ceases to be a member of 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 9.1%9.4% of the total issued and outstanding voting shares.
The following table summarizes information about DSUs granted to the non-employee members of theour Board of Directors as at November 1, 2007:3, 2008:
Number of DSUs | % of Issued and Outstanding DSUs | Weighted Average Estimated Value at the Time of Grant $US/DSU | |
Board of Directors (five individuals) | 70,195 | 100% | 5.55 |
| Number of DSUs | % of Issued and Outstanding DSUs | Weighted Average Estimated Value at the Time of Grant $US/DSU | |
| Board of Directors (five individuals) | 79,185 | 100% | 5.26 |
The following table summarizes information about DSUs converted and paid in Subordinate Voting Shares when a director ceased to be a member of the Board as at November 3, 2008:
| Name | Number of DSUs converted | Aggregate Value Realized (US$) (1) |
| Michael Unger | 20,695 | 88,894 |
| (1) | The aggregate value realized is equivalent to the market value of the securities underlying the DSUs at conversion. This value, as the case maybe, has been converted from Canadian dollars to U.S. dollars based upon the average foreign exchange rate on the day of conversion. |
Deferred Share Unit Grants in Last Financial Year
The aggregate number of Deferred Share Units (“DSUs”) credited to non-employee directors during the financial year ended August 31, 20072008 and as of November 1, 20073, 2008 was 26,905.35,162. 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. As of November 1, 2007,3, 2008, there were a total of 70,19579,185 DSUs credited to directors pursuant to the Deferred Share Unit Plan having an estimated value at the time of grant of US$389,672416,640 (CA$442,017)461,587).
DSUs attract dividends in the form of additional DSUs at the same rate as dividends on Subordinate Voting Shares. The DSUs are converted and paid in Subordinate Voting Shares at the time a director ceases to be a member of our Board.
Therefore, the value at vesting of a DSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place. The table below shows information regarding DSU grants made under the Deferred Share Unit Plan during the financial year ended August 31, 20072008 and as of November 1, 2007.3, 2008.
During the financial year ended August 31, 20072008 and as of November 1, 2007,3, 2008, the following DSUs were granted to the directors:
DSUs # | Weighted Average Estimated Value at the Time of Grant US$/DSU | Vesting | Weighted Average Estimated Value at the Time of Grant US$/DSU | Vesting |
26,905 | 6.32 | At the time director cease to be a member of the Board of the Corporation | ||
| 35,162 | 5.14 | 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, 20072008 was 219,002,469,847 having a weighted average fair value at the time of grant of US$6.485.46 (CA$7.48)5.43) 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, 2007,2008, there were a total of 488,015847,791 RSUs granted and outstanding pursuant to the Long-Term Incentive Plan having a weighted average fair value at the time of grant of US$5.675.62 (CA$6.62)6.05) per RSU. All RSUs first vesting cannot be earlier than the third anniversary date of their grant. Some RSUs granted in the financial year ended August 31, 2008, vest at a rate of 1/2 annually commencing on the third anniversary date of the grants in October 2007, January 2008, April 2008 and July 2008. Some RSUs granted in the financial year ended August 31, 2007, vest at a rate of 1/2 annually commencing on the third anniversary date of the grants in September 2006, January 2007 and July 2007 and others at a rate of 1/3 annually on the third, fourth and fifth anniversary dates of the grants in September 2006, October 2006 and January 2007. Some RSUs granted in the fiscalfinancial 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 during the last threefour financial years vest on the fifth anniversary date of each grant respectively in October 2007, October 2006, December 2005 and in January 2005. However, these RSUs are subject to early vesting on the third and fourth anniversary dates of the grant on the attainment of performance objectives, namely related to long term growth of revenue and profitability, as determined by ourthe Board of Directors.Directors of the Corporation. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant.
The RSUs are redeemed for actual Subordinate Voting Shares or the equivalent in cash at the discretion of ourthe Board of Directors of the Corporation on the vesting dates established by ourthe Board of Directors of the Corporation at the time of grant in its sole discretion.
Therefore, the value at vesting of a RSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place. The table below shows information regarding RSU grants made under the Long-Term Incentive Plan during the financial year ended August 31, 2007.2008. See “Report on Executive Compensation by the Human Resources Committee – Long-Term Incentive Compensation – Long-Term Incentive Plan” for a description of the Long-Term Incentive Plan.
During the financial year ended August 31, 2007,2008, the following RSUs were granted:
RSUs # | Fair Value at the Time of Grant US$/RSU | Vesting (1) |
| 2,000 | 5.38 | 1/3 on each of the third, fourth and fifth anniversary dates of the grant in September 2006 (2) |
| 1,200 | 5.83 | 50% on the third and fourth anniversary dates of the grant in September 2006 (3) |
| 71,802 | 6.02 | 100% on the fifth anniversary date of the grant in October 2011 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 (4) |
| 25,000 | 6.02 | 1/3 on each of the third, fourth and fifth anniversary dates of the grant in October 2006 (5) |
| 22,550 | 6.42 | 1/3 on each of the third, fourth and fifth anniversary dates of the grant in January 2007 (6) |
| 34,250 | 6.42 | 50% on the third and fourth anniversary dates of the grant in January 2007 (7) |
| 60,200 | 7.32 | 50% on the third and fourth anniversary dates of the grant in January 2007 (7) |
| 2,000 | 7.14 | 50% on the third and fourth anniversary dates of the grant in July 2007 (8) |
| RSUs # | Fair Value at the Time of Grant US$/RSU | Vesting (1) |
| 29,000 | 6.28 | 50% on the third and fourth anniversary dates of the grant in October 2007 (2) |
| 86,167 | 6.28 | 100% on the fifth anniversary date of the grant in October 2007 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained (3) |
| 76,200 | 4.16 | 50% on the third and fourth anniversary dates of the grant in January 2008 (4) |
| 21,600 | 6.09 | 50% on the third and fourth anniversary dates of the grant in April 2008 (5) |
| 185,570 | 5.82 | 50% on the third and fourth anniversary dates of the grant in April 2008 (6) |
| 71,310 | 4.39 | 50% on the third and fourth anniversary dates of the grant in July 2008 (7) |
| (1) | All RSUs first vesting cannot be earlier than the third anniversary date of their grant. |
| (2) | Those RSUs granted in the financial year ended August 31, |
| Those RSUs granted in the financial year ended August 31, |
| Those RSUs granted in the financial year ended August 31, |
| Those RSUs granted in the financial year ended August 31, |
| (6) | Those RSUs granted in the financial year ended August 31, 2008 vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in April 2008. |
| (7) | Those RSUs granted in the financial year ended August 31, 2008 vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in July |
During the financial year ended August 31, 2008, the following RSUs were granted to the following Named Executive Officers:
| Name | RSUs # | Percentage of Net Total of RSUs Granted to Employees in Financial Year (%) | Fair Value at the Time of Grant US$/RSU | Vesting (1) | |
| Germain Lamonde | 29,910 | 6.37 | 6.28 | 100% on the fifth anniversary date of the grant in October 2007 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 | 9,637 | 2.05 | 6.28 | 100% on the fifth anniversary date of the grant in October 2007 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 | 7,225 | 1.54 | 6.28 | 100% on the fifth anniversary date of the grant in October 2007 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$/RSU | Vesting (1) |
| Germain Lamonde | 25,347 | 11.57% | 6.02 | 100% on the fifth anniversary date of the grant in October 2006 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained (2) |
| Pierre Plamondon | 8,430 | 3.85% | 6.02 | 100% on the fifth anniversary date of the grant in October 2006 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained (2) |
| Pierre Plamondon | 4,500 | 2.05% | 6.02 | 1/3 on each of third, fourth and fifth anniversary dates of the grant in October 2006 (3) |
| Dana Yearian | 6,645 | 3.03% | 6.02 | 100% on the fifth anniversary date of the grant in October 2006 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained (2) |
| Jon Bradley | − | − | − | − |
| Allan Firhoj | 6,145 | 2.81% | 6.02 | 100% on the fifth anniversary date of the grant in October 2006 subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if the performance objectives are fully attained (2) |
| Allan Firhoj | 15,033 | 6.86% | 6.42 | 1/3 on each of third, fourth and fifth anniversary dates of the grant in January 2007 (4) |
| Name | RSUs # | Percentage of Net Total of RSUs Granted to Employees in Financial Year (%) | Fair Value at the Time of Grant US$/RSU |
|
| (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, |
Aggregated RSUs vested in Last Financial Year and Financial Year-End RSU Values
The following table summarizes, for each of the Named Executive Officers, the number of RSUs, if any, vested during the financial year ended August 31, 2007,2008, the aggregate value realized upon vesting and the total number of unvested RSUs, if any, held at August 31, 2007.2008. Value realized upon vesting is the market value of the Subordinate Voting Shares on the vesting date. The value of unvested RSUs at financial year-end is the market value of the Subordinate Voting Shares on August 31, 2007,29, 2008, which was US$6.664.20 per share. These values, unlike the amounts set forth in the column "Aggregate Value Realized", have not been and may never be realized. The actual gains on vesting will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
| Name | Securities Acquired on Vesting (#) | Aggregate Value Realized (US$) (1) | Unvested RSUs at August 31, 2008 (#) | Value of Unvested RSUs at August 31, 2008 (US$) (2) (3) |
| Germain Lamonde | 4,363 | 18,805 | 85,460 | 358,932 |
| Pierre Plamondon | 17,809 | 76,757 | 45,679 | 191,852 |
| Dana Yearian | - | - | 18,870 | 79,254 |
| Jon Bradley | 667 | 3,663 | 9,955 | 41,811 |
| Stephen Bull | 17,373 | 95,402 | 43,092 | 180,986 |
Name | Securities Acquired on Vesting (#) | Aggregate Value Realized (US$) (1) | Unvested RSUs at August 31, 2007 (#) | Value of Unvested RSUs at August 31, 2007 (US$) (2) (3) |
| Germain Lamonde | - | - | 59,913 | 401,417 |
| Pierre Plamondon | - | - | 53,851 | 360,802 |
| Dana Yearian | - | - | 11,645 | 78,022 |
| Jon Bradley | - | - | 4,500 | 30,150 |
| Allan Firhoj | - | - | 38,223 | 256,094 |
| (1) | The aggregate value realized is equivalent to the market value of the securities underlying the RSUs at vesting. This value, as the case maybe, has been converted from Canadian dollars to U.S. dollars based upon the average foreign exchange rate on the day of vesting. |
| (2) | The value of RSUs is calculated using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August |
| (3) | The actual gains on vesting will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized. |
Number of Subordinate Voting Shares reserved for future issuance
During the financial year ended August 31, 2007, 26,9052008, 35,162 Deferred Share Units (as of November 1, 2007) and 219,002469,847 Restricted Share Units were granted to directors, officers and employees. Such awards were issued from the same pool of Subordinate Voting Shares reserved for issuance pursuant to the Long-Term Incentive Plan of which is 9.1%the maximum number of Subordinate Voting Shares issuable shall not exceed 6,306,153 Subordinate Voting Shares, which represents 9.4% of the totalCorporation’s issued and outstanding voting shares as of November 1, 2007. Therefore, as3, 2008. As of November 1, 20073, 2008, the number of Subordinate Voting Shares reserved for future issuance is 3,060,490.2,440,302.
Stock Appreciation Rights Plan
On August 4, 2001, the Corporation established a Stock Appreciation Rights Plan (“SAR Plan”) for the benefit of certain employees residing in countries where the granting of options under the Long-Term Incentive Plan is not feasible in the opinion of the Corporation. The Board has full and complete authority to interpret the SAR Plan and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration of the SAR Plan.
Under the SAR Plan, eligible employees are entitled to receive a cash amount equivalent to the difference between the market price of the Subordinate Voting Shares on the date of exercise and the exercise price determined on the date of grant. No Subordinate Voting Shares are issuable under the SAR Plan.
The Board of Directors has delegated to Management the task of designating the recipients of stock appreciation rights, the date of vesting, the expiry date and other conditions. Under the terms of the SAR Plan, the exercise price of the stock appreciation rights may not be lower than the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars. Stock appreciation rights are non-transferable.
The stock appreciation rights vest over a four-year period, with 25% vesting annually commencing on the first anniversary date of the date of grant. However, since October 2007, some stock appreciation rights vest at a rate of 50% annually commencing on the third anniversary date of the grantgrants in October 2007.2007 and October 2008. Once vested, stock appreciation rights may be exercised between the second and the fifteenth business day following each release of the Corporation’s quarterly financial results. All of the stock appreciation rights that are granted under the SAR Plan may be exercised within a maximum period of 10 years following the date of their grant. Any stock appreciation rights granted under the SAR Plan will lapse immediately upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause or at the date on which an employee resigns or leaves his employment with the Corporation or one of its subsidiaries (or within 30 days if the holder is dismissed without cause). In the event of retirement or disability, any stock appreciation right held by an employee lapses 30 days after the date of any such disability or retirement. In the event of death, any stock appreciation right lapses 6 months after the date of death.
As of November 1, 2007,3, 2008, there were 30,70040,374 SAR’s outstanding.
Deferred Profit Sharing Plan
We maintain a plan for certain eligible Canadian resident employees, under which the Corporation may elect to contribute an amount equal to 2% of an employee’s gross salary, provided that the employee has contributed at least 2% of his gross salary to a tax-deferred registered retirement savings plan. Cash contributions to this plan and expenses for the years ended August 31, 2006, 2007 and 2008, amounted to US$316,000, US$419,000 and US$531,000, respectively.
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’s current compensation subject to certain legislated maximum contribution limits. In the yearyears ended August 31, 2006, 2007 and 2008, we made an aggregate of US$126,000, US$166,000 and US$216,000 respectively, 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. As of August 31, 2007,2008, we made an aggregate of US$1,526,0001,742,000 in matching contributions to the 401(k) plan.
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 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’ and officers’ liability insurance is maintained by us, which insures our Directors and officers and those of our subsidiaries against liability incurred by, arising from or against them for certain of their acts, errors or omissions. Accordingly, we maintain insurance protection against liability incurred by our officers and Directors as well as those of our subsidiaries in the performance of their duties. The entire premium, amounting to US$165,000 from September 30, 20072008 to September 30, 2008,2009, 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$250,000.
Board of Directors
Our Directors are elected at the annual meeting of shareholders for one-year terms and serve until their successors are elected or appointed, unless they resign or are removed earlier. Our articles of incorporation provide for a Board of Directors of a minimum of three (3) and a maximum of twelve (12) Directors. Our Board of Directors presently consists of six Directors. Under the Canada Business Corporations Act, twenty-five percent of the Directors and of the members of any committee of the Board of Directors must be resident Canadians. We have no arrangements with any of our Directors providing for the payment of benefits upon their termination of service as Director except for the vesting of their respective Deferred Share Units as detailed above.
The following table and notes set out the name of each of the individuals 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 | Number of Subordinate Voting Shares | Number of | Multiple Voting Shares | ||
Pierre-Paul Allard (1) Independent Director | Area Vice-President, Sales Cisco Systems Inc. | Pleasanton, California, USA | September 2008 (2) | - | - | |||
Germain Lamonde Chairman of the Board, President and Chief Executive Officer | Chairman of the Board, President and Chief Executive Officer, EXFO Electro-Optical Engineering Inc. | St-Augustin-de-Desmaures, Quebec, Canada | September 1985 | 4,363 | 36,643,000 | |||
Name and Position or Office with the Corporation | Principal Occupation or Employment | Residence | Director Since | Number of Subordinate Voting Shares | Number of Multiple Voting Shares |
Pierre Marcouiller Independent Director | Chairman of the Board and Chief Executive Officer, Camoplast Inc. | Magog, Quebec, Canada | May 2000 | 5,000 | |
Guy Marier Independent Lead Director | Executive Consultant | Lakefield Gore, Quebec, Canada | January 2004 | 1,000 | |
Dr. David A. Thompson, Ph.D.(5) (8) Independent Director | Vice-President & Director, Hardware & Equipment Technology, Corning Cable Systems (9) | Newton, North Carolina, USA | June 2000 | 2,100 | - |
André Tremblay Independent Director | Founder and Managing Partner, Trio Capital Inc., a private equity fund | Outremont, Quebec, Canada | May 2000 | 6,650 | |
| (1) | Mr. Pierre-Paul Allard is presently Area Vice-President, Sales for Cisco Systems Inc. In this role, Mr. Allard is responsible for sales and field operations of Cisco’s Global Enterprise Client Segment. From January 2003 to January 2007, Mr. Allard was Vice-President of Worldwide Enterprise Marketing where his primary responsibility was to develop Cisco’s global enterprise market. Cisco Systems Inc. is a leading network equipment manufacturer in the global telecommunications industry. |
| (2) | Named pursuant to a Board resolution in accordance with the Corporation’s by-laws. |
| (3) | Mr. Lamonde exercises control over this number of Multiple Voting Shares through G. Lamonde Investissements Financiers inc., a company controlled by Mr. Lamonde and through Fiducie Germain Lamonde, a family trust for the benefit of Mr. Lamonde’s family. |
| Member of the Audit Committee. |
| Member of the Human Resources Committee. |
| Camoplast Inc. designs, develops and manufactures specialized components, sub-systems and assemblies for the world leading original equipment manufacturers (OEMs) of both on- and off-road vehicles in a variety of markets including automotive, agricultural, construction and industrial, defense and powersports. |
| Member of the Audit Committee since April 2008. |
| (9) | Corning Incorporated is a diversified technology company that concentrates its efforts on high-impact growth opportunities. Corning combines its expertise in specialty glass, ceramic materials, polymers and the manipulation of the properties of light, with strong process and manufacturing capabilities to develop, engineer and commercialize significant innovative products for the telecommunications, flat panel display, environmental, semiconductor, and life sciences industries. |
| (10) | Chairman of the Audit Committee. |
| (11) | Mr. Tremblay exercises control over this number of Subordinate Voting Shares through 9104-5559 Quebec inc., a company controlled by Mr. Tremblay. |
Since September 1, 20062007 until November 1, 2007,3, 2008, the Board met a total of eight (8)fourteen (14) times. Attendance at all meetings was perfect,satisfactory, except Mr. Pierre Marcouiller who was absent four (4) times, Mr. David A. Thompson who was absent two (2) times and Mr. Pierre MarcouillerPierre-Paul Allard, Mr. André Tremblay and Mr. Michael Unger who waswere absent one time.
Committees of the Board of Directors
Our Board of Directors has established an audit committee, a human resources committee and a disclosure committee.
Our audit committee will recommend a firm to be appointed as independent auditors to audit financial statements and to perform services related to the audit, review the scope and results of the audit with the independent auditors, review with management and the independent auditors our annual operating results and consider the adequacy of the internal accounting procedures and the effect of the procedures relating to the auditors’ independence. Further to changes to NASDAQ corporate governance rules and Securities and Exchange rules flowing from the adoption of the Sarbanes-Oxley Act, our audit committee charter is being revised every financial year to ensure that we comply with all new requirements. Accordingly, in March 2005, the Board updated and adopted an Audit Committee Charter. A copy of this Audit Committee Charter has been filed as Exhibit 11.6 to our fiscal year 2005 annual report and is also readily available from EXFO’s website at www.EXFO.com. The audit committee revised such Charter in October 20072008 but no amendment was required. The audit committee is composed of four independent Directors: André Tremblay, Michael Unger, Guy Marier, Pierre Marcouiller and Pierre Marcouiller.Mr. David A. Thompson since April 2008 in replacement of Mr. Unger. The chairperson of the audit committee is André Tremblay.
During the fiscal year ended August 31, 2007,2008, the Audit Committee met a total of four (4) times and attendance was perfectsatisfactory at all meetings, except Mr. Pierre Marcouiller who was absent two (2) times and Mr. Michael Unger who were 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 our fiscal year 2005 annual report and is also readily available from EXFO’s website at www.EXFO.com. The human resources committee is composed of fivefour independent Directors: Pierre Marcouiller, Guy Marier, David A. Thompson and André Tremblay andTremblay. Mr. Michael Unger.Unger was also a member of the Human Resources Committee until his resignation effective in June 2008. The chairperson of the human resources committeeHuman Resources Committee is Michael Unger.Mr. Guy Marier.
During the fiscal year ended August 31, 2007,2008, the Human Resources committee met a total of four (4) times and attendance was perfectsatisfactory at all meetings, except Mr. David A. ThompsonPierre Marcouiller who was absent two (2) times and Mr. Pierre MarcouillerDavid A. Thompson, Mr. André Tremblay and Mr. Michael Unger who waswere 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.
Furthermore, our independent Directors hold regularly scheduled meetings at which non-independent directors and members of management are not in attendance. The independent Directors hold as many meeting, as needed, annually and any Director may request such meeting at any time. Since September 1, 2007 and prior to November 3, 2008, four (4) meetings of independent Directors without management occurred.
| Employees |
We have fostered a corporate culture where growth and change are strongly encouraged. In fact, employees are constantly evolving with the rapid pace of technology to meet new challenges and realities. We believe that we possess a good cross-section of experience and youth to handle these inevitable changes in the industry.
As of November 1, 2007,3, 2008, we had a total of 1,0461,174 employees, up from a total of 8621,046 on November 1, 2006.2007. We have 835888 employees in Canada, primarily based in Quebec, and 211286 employees based outside of Canada. 349419 are involved in research and development, 331372 in manufacturing, 183198 in sales and marketing, 9698 in general administrative positions and 87 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” and “out-the-money” options and the beneficial ownership of our share capital as of November 1, 20073, 2008 by our Chief Executive Officer, Chief Financial Officer, our Directors, our three other most highly compensated executive officers, our other executive officers as a group, all of our Directors and executive officers as a group and one other executive officer of the Corporation who would have been included within the three most highly compensated executive officers had he been in the employ of the Corporation, or a subsidiary, at the year end.
group.
Each multiple voting share is convertible at the option of the holder into one subordinate voting share. Holders of our subordinate voting shares are entitled to one (1) vote per share and holders of our multiple voting shares are entitled to ten (10) votes per share.
Name | Subordinate Voting Shares Owned | Currently Exercisable Options Owned as of November 1, 2007 | 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) | – | * | 61,776 | * | 100,482 | * | 162,258 | * | 36,643,000 | 100 | 91,9 |
| Pierre Plamondon | 34,527 (5) | * | 20,914 | * | 55,977 | * | 111,418 | * | – | – | * |
| Pierre Marcouiller | 5,000 | * | 25,000 | * | 23,882 | * | 53,882 | * | – | – | * |
| Guy Marier | 1,000 | * | – | * | 9,375 | * | 10,375 | * | – | – | * |
| David A. Thompson | 2,100 | * | 25,000 | * | 17,734 | * | 44,834 | * | – | – | * |
| André Tremblay | 6,650 (6) | * | 25,000 | * | 19,691 | * | 51,341 | * | – | – | * |
| Michael Unger | – | * | 25,000 | * | 20,568 | * | 45,568 | * | – | – | * |
| Dana Yearian | – | * | – | * | – | * | – | * | – | – | * |
| Jon Bradley | – | * | 11,000 | * | 11,000 | * | 22,000 | * | – | – | * |
| Allan Firhoj | – | * | 0 | * | 18,837 | * | 18,837 | * | – | – | * |
| Other executive officers as a group | 35,025 | * | 22,181 | * | 50,365 | * | 107,571 | * | – | – | * |
| All of our Directors and executive officers as a group | 84,302 | * | 215,871 | * | 327,911 | * | 628,084 | * | 36,643,000 | 100 | 92.0 |
Named Executive Officer Not in the Employ of the Corporation at year End | |||||||||||
| Juan-Felipe Gonzalez | – | * | – | * | – | * | – | * | – | – | * |
| Name | Subordinate Voting Shares Owned | Currently Exercisable Options Owned as of November 3, 2008 | 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 | 4,363 | * | 50,000 | 2.75% | 119,549 | 6.57% | 173,912 | * | 36,643,000 (4) | 100 | 92,33 |
| Pierre Plamondon | 52,336 (5) | * | 20,000 | 1.10% | 59,150 | 3.25% | 131,486 | * | – | – | * |
| Pierre-Paul Allard | – | * | – | * | – | * | – | * | – | – | * |
| Pierre Marcouiller | 5,000 | * | 12,500 | * | 36,382 | 2.00% | 53,882 | * | – | – | * |
| Guy Marier | 1,000 | * | – | * | 12,500 | * | 13,500 | * | – | – | * |
| David A. Thompson | 2,100 | * | 12,500 | * | 30,234 | 1.66% | 44,834 | * | – | – | * |
| André Tremblay | 6,650 (6) | * | 12,500 | * | 32,191 | 1.77% | 51,341 | * | – | – | * |
| Dana Yearian | – | * | – | * | – | * | – | * | – | – | * |
| Jon Bradley | – | * | – | * | 25,500 | 1.40% | 25,500 | * | – | – | * |
| Stephen Bull | 30,389 | * | – | * | 26,226 | 1.44% | 56,615 | * | – | – | * |
| Other executive officers as a group | 18,866 | * | 15,000 | * | 57,372 | 3.15% | 91,238 | * | – | – | * |
| All of our Directors and executive officers as a group | 120,704 | * | 122,500 | 6.73% | 399,104 | 21.94% | 642,308 | 2.06% | 36,643,000 | 100 | 92.45 |
| * | 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 |
| (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 and 34,743,000 multiple voting shares held of record by G. Lamonde Investissements Financiers inc. |
| (5) | The number of shares held by Pierre Plamondon includes 6,874 subordinate voting shares held of record by Fiducie Pierre Plamondon. |
| (6) | The number of subordinate voting shares held of record by André Tremblay is held by 9104-5559 Québec Inc, a company controlled by Mr. Tremblay. |
The following table presents information regarding stock options held as of November 1, 20073, 2008 by our Chief Executive Officer, Chief Financial Officer, our Directors, our three other most highly compensated executive officers and our other executive officers as a group and one other executive officer of the Corporation who would have been included within the three most highly compensated executive officers had he been in the employ of the Corporation, or a subsidiary, at the year end.group.
Name | Securities Under Options Granted (1) (#) | Exercise Price (2) (US$/Security) | Expiration Date | Securities Under Options Granted (1) (#) | Exercise Price (2) (US$/Security) | Expiration Date |
| Germain Lamonde | 25,402 5,080 70,000 50,000 17,942 11,218 | $26.00 $22.25 $9.13 $1.58 $4.51 $4.76 | June 29, 2010 January 10, 2011 October 10, 2011 September 25, 2012 February 1, 2015 December 6, 2015 | 25,402 5,080 70,000 50,000 17,942 11,218 | $26.00 $22.25 $9.13 $1.58 $4.51 $4.76 | June 29, 2010 January 10, 2011 October 10, 2011 September 25, 2012 February 1, 2015 December 6, 2015 |
| Pierre Plamondon | 8,700 10,000 5,000 9,240 19,000 20,000 5,383 3,653 | $26.00 $45.94 $34.07 $22.25 $9.13 $1.58 $5.13 $4.76 | June 29, 2010 September 13, 2010 October 11, 2010 January 10, 2011 October 10, 2011 September 25, 2012 October 26, 2014 December 6, 2015 | 8,700 10,000 5,000 9,240 19,000 20,000 5,383 3,653 | $26.00 $45.94 $34.07 $22.25 $9.13 $1.58 $5.13 $4.76 | June 29, 2010 September 13, 2010 October 11, 2010 January 10, 2011 October 10, 2011 September 25, 2012 October 26, 2014 December 6, 2015 |
| Pierre-Paul Allard | − | − | − | |||
| Pierre Marcouiller | 2,000 400 17,966 1,037 2,479 12,500 12,500 | $26.00 $22.25 $9.13 $12.69 $5.65 $1.58 $3.51 | June 29, 2010 January 10, 2011 October 10, 2011 December 1, 2011 March 1, 2012 September 25, 2012 October 27, 2013 | 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 | 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 | 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 | 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 | |||
| Dana Yearian | − | − | − | − | − | − |
| Jon Bradley | 5,000 5,000 1,000 1,500 10,000 4,000 | $45.94 $22.25 $12.22 $3.19 $3.50 $4.51 | September 13, 2010 January 10, 2011 January 3, 2012 January 7, 2013 December 17, 2013 February 1, 2015 | 5,000 5,000 1,000 1,500 10,000 4,000 | $45.94 $22.25 $12.22 $3.19 $3.50 $4.51 | September 13, 2010 January 10, 2011 January 3, 2012 January 7, 2013 December 17, 2013 February 1, 2015 |
| Allan Firhoj | 10,000 8,000 1,675 1,803 | $23.40 $9.13 $5.13 $4.76 | March 15, 2011 October 10, 2011 October 26, 2014 December 6, 2015 | |||
| Stephen Bull | 900 5,000 2,930 15,000 1,795 1,803 | $26.00 $45.94 $22.25 $9.13 $5.13 $4.76 | June 29, 2010 September 13, 2010 January 10, 2011 October 10, 2011 October 26, 2014 December 6, 2015 | |||
Name | Securities Under Options Granted (1) (#) | Exercise Price (2) (US$/Security) | Expiration Date |
| Other Executive Officers as a group | 4,000 18,000 15,000 5,000 2,000 7,726 | $ $34.07 $22.25 $23.40 $9.13 $1.58 $3.19 $5.13 $4.51 $4.76 | September 13, 2010 October 11, 2010 January 10, 2011 March 15, 2011 October 10, 2011 September 25, 2012 January 7, 2013 October 26, 2014 February 1, 2015 December 6, 2015 |
| | |||
| (1) | Underlying securities: subordinate voting shares |
| (2) | The exercise price of options granted is determined based on the highest of the closing prices of the subordinate voting shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required. |
The following table presents information regarding Deferred Share Units and Restricted Share Units held by our Chief Executive Officer, our Chief Financial Officer, our Directors, our three other most highly compensated executive officers, our other executive officers as a group, all of our Directors and executive officers as a group, and one other executive officer of the Corporation who would have been included within the three most highly compensated executive officers had he been in the employ of the Corporation, or a subsidiary, at the year end, as of November 1, 2007.3, 2008.
| Name | DSUs | RSUs | ||||
| Number | Percentage | Estimated Average Value at the time of grant US$/DSU (1) | Number | Percentage | Fair Value at the time of grant US$/RSU (2) | |
| Germain Lamonde | – | – | – | 8,726 (3) | 0.72% | 4.69 |
– | – | – | 21,477 (4) | 1.76% | 4.76 | |
– | – | – | 25,347 (5) | 2.08% | 6.02 | |
– | – | – | 29,910 (6) | 2.46% | 6.28 | |
– | – | – | 65,254 (7) | 5.36% | 2.36 | |
| Pierre Plamondon | – | – | – | 2,618 (3) | 0.21% | 4.69 |
– | – | – | 13,500 (8) | 1.11% | 4.69 | |
– | – | – | 6,994 (4) | 0.57% | 4.76 | |
– | – | – | 8,430 (5) | 0.69% | 6.02 | |
– | – | – | 4,500 (9) | 0.37% | 6.02 | |
– | – | – | 9,637 (6) | 0.79% | 6.28 | |
– | – | – | 20,644 (7) | 1.70% | 2.36 | |
– | – | – | 20,339 (10) | 1.67% | 2.36 | |
| Pierre-Paul Allard | – | – | – | – | – | |
| Pierre Marcouiller | 17,109 (11) | 21.6% | 5.26 | – | – | – |
| Guy Marier | 17,109 (11) | 21.6% | 5.26 | – | – | – |
| David A. Thompson | 19,097 (11) | 24.1% | 5.26 | – | – | – |
| André Tremblay | 25,870 (11) | 32.7% | 5.26 | – | – | – |
| Dana Yearian | – | – | – | 5,000 (12) | 0.41% | 5.16 |
– | – | – | 6,645 (5) | 0.55% | 6.02 | |
– | – | – | 7,225 (6) | 0.59% | 6.28 | |
– | – | – | 23,072 (7) | 1.89% | 2.36 | |
– | – | – | 25,424 (10) | 2.09% | 2.36 | |
| Jon Bradley | – | – | – | 1,333 (13) | 0.11% | 4.51 |
– | – | – | 2,500 (14) | 0.21% | 5.59 | |
– | – | – | 6,122 (6) | 0.50% | 6.28 | |
– | – | – | 16,826 (7) | 1.38% | 2.36 | |
– | – | – | 25,416 (10) | 2.09% | 2.36 | |
| Stephen Bull | – | – | – | 1,745 (3) | 0.14% | 4.69 |
– | – | – | 13,500 (8) | 1.11% | 4.69 | |
– | – | – | 4,602 (4) | 0.38% | 4.76 | |
– | – | – | 5,905 (5) | 0.48% | 6.02 | |
– | – | – | 10,000 (9) | 0.82% | 6.02 | |
– | – | – | 7,340 (6) | 0.60% | 6.28 | |
– | – | – | 17,756 (7) | 1.46% | 2.36 | |
– | – | – | 13,559 (10) | 1.11% | 2.36 | |
Name | DSUs | RSUs | ||||
Number | Percentage | Estimated Average Value at the time of grant US$/DSU (1) | Number | Percentage | Fair Value at the time of grant US$/RSU (2) | |
| Germain Lamonde | – | – | – | 13,089 (3) | 2.2% | 4.69 |
| – | – | – | 21,477 (4) | 3.6% | 4.76 | |
| – | – | – | 25,347 (5) | 4.2% | 6.02 | |
| – | – | – | 29,910 (6) | 5.0% | 6.28 | |
| Pierre Plamondon | – | – | – | 3,927 (3) | 0.7% | 4.69 |
| – | – | – | 30,000 (7) | 5.0% | 4.69 | |
| – | – | – | 6,994 (4) | 1.2% | 4.76 | |
| – | – | – | 8,430 (5) | 1.4% | 6.02 | |
| – | – | – | 4,500 (8) | 0.8% | 6.02 | |
| – | – | – | 9,637 (6) | 1.6% | 6.28 | |
| Pierre Marcouiller | 11,935 (9) | 17.0% | 5.55 | – | – | – |
| Guy Marier | 11,935 (9) | 17.0% | 5.55 | – | – | – |
| David A. Thompson | 13,869 (9) | 19.8% | 5.55 | – | – | – |
| André Tremblay | 15,521��(9) | 22.1% | 5.55 | – | – | – |
| Michael Unger | 16,935 (9) | 24.1% | 5.55 | – | – | – |
| Dana Yearian | – | – | – | 5,000 (10) | 0.8% | 5.16 |
| – | – | – | 6,645 (5) | 1.1% | 6.02 | |
| – | – | – | 7,225 (6) | 1.2% | 6.28 | |
| Jon Bradley | – | – | – | 2,000 (11) | 0.3% | 4.51 |
| – | – | – | 2,500 (12) | 0.4% | 5.59 | |
| – | – | – | 6,122 (6) | 1.0% | 6.28 | |
| Allan Firhoj | – | – | – | 2,443 (3) | 0.4% | 4.69 |
| – | – | – | 10,000 (7) | 1.7% | 4.69 | |
| – | – | – | 4,602 (4) | 0.7% | 4.76 | |
| – | – | – | 6,145 (5) | 1.0% | 6.02 | |
| – | – | – | 15,033 (13) | 2.5% | 6.42 | |
| – | – | – | 7,676 (6) | 1.3% | 6.28 | |
Name | DSUs | RSUs | |||||
Number | Percentage | Estimated Average Value at the time of grant US$/DSU (1) | Number | Percentage | Fair Value at the time of grant US$/RSU (2) | ||
| Other executive officers as a group | – | – | – | 9,023 (3) | 1.5% | 4.69 | |
| – | – | – | 51,500 (7) | 8.5% | 4.69 | ||
| – | – | – | 16,708 (4) | 2.8% | 4.76 | ||
| – | – | – | 3,250 (12) | 0.5% | 5.59 | ||
| – | – | – | 25,235 (5) | 4.2% | 6.02 | ||
| – | – | – | 20,500 (8) | 3.4% | 6.02 | ||
| – | – | – | 1,750 (13) | 0.3% | 6.42 | ||
| – | – | – | 25,597 (6) | 4.2% | 6.28 | ||
| All of the directors and executive officers as a group | – | – | – | 28,842 (3) | 4.7% | 4.69 | |
| – | – | – | 91,500 (7) | 15.2% | 4.69 | ||
| – | – | – | 2,000 (11) | 0.3% | 4.51 | ||
| – | – | – | 49,781 (4) | 8.3% | 4.76 | ||
| – | – | – | 5,750 (12) | 1.0% | 5.59 | ||
| – | – | – | 5,000 (10) | 0.8% | 5.16 | ||
| – | – | – | 71,802 (5) | 7.7% | 6.02 | ||
| – | – | – | 25,000 (8) | 4.1% | 6.02 | ||
| – | – | – | 16,783 (13) | 2.8% | 6.42 | ||
| – | – | – | 86,167 (6) | 14.3% | 6.28 | ||
| 70,195 | 100% | 5.55 | 382,265 | ||||
Named Executive Officer Not in the Employ of the Corporation at year End | |||||||
| Juan-Felipe Gonzalez | – | – | – | Cancelled (14) | − | − | |
| __________________________ | |||||||
| Name | DSUs | RSUs | |||||
| Number | Percentage | Estimated Average Value at the time of grant US$/DSU (1) | Number | Percentage | Fair Value at the time of grant US$/RSU (2) | ||
| Other executive officers as a group | – | – | – | 5,899 (3) | 0.48% | 4.69 | |
– | – | – | 14,175 (8) | 1.16% | 4.69 | ||
– | – | – | 16,708 (4) | 1.37% | 4.76 | ||
– | – | – | 3,250 (14) | 0.27% | 5.59 | ||
– | – | – | 25,475 (5) | 2.09% | 6.02 | ||
– | – | – | 10,500 (9) | 0.86% | 6.02 | ||
– | – | – | 15,033 (15) | 1.23% | 6.42 | ||
– | – | – | 1,750 (16) | 0.14% | 6.42 | ||
– | – | – | 25,933 (6) | 2.13% | 6.28 | ||
– | – | – | 1,750 (17) | 0.14% | 4.16 | ||
– | – | – | 73,133 (7) | 6.00% | 2.36 | ||
– | – | – | 50,846 (10) | 4.17% | 2.36 | ||
| All of the directors and executive officers as a group | – | – | – | 18,988 (3) | 1.56% | 4.69 | |
– | – | – | 41,175 (8) | 3.38% | 4.69 | ||
– | – | – | 1,333 (13) | 0.11% | 4.51 | ||
– | – | – | 49,781 (4) | 4.09% | 4.76 | ||
– | – | – | 5,750 (14) | 0.47% | 5.59 | ||
– | – | – | 5,000 (12) | 0.41% | 5.16 | ||
– | – | – | 71,802 (5) | 5.90% | 6.02 | ||
– | – | – | 25,000 (9) | 2.05% | 6.02 | ||
– | – | – | 15,033 (15) | 1.23% | 6.42 | ||
– | – | – | 1,750 (16) | 0.14% | 6.42 | ||
– | – | – | 86,167 (6) | 7.08% | 6.28 | ||
– | – | – | 1,750 (17) | 0.14% | 4.16 | ||
– | – | – | 216,685 (7) | 17.79% | 2.36 | ||
– | – | – | 135,584 (10) | 11.13% | 2.36 | ||
| 79,185 | 100% | 5.26 | 675,798 | 55.49% | 5.62 | ||
| (1) | The estimated average value at the time of grant of a DSU is the average of the estimated value at the time of grant of a DSU which is determined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required. The value at vesting of a DSU is equivalent to the market value of a Subordinate Voting Share when a DSU is converted to such Subordinate Voting Share. |
| (2) | The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. |
| (3) | Those RSUs will vest on the fifth anniversary date of the grant in January 2005 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
| (4) | Those RSUs will vest on the fifth anniversary date of the grant in December 2005 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
| (5) | Those RSUs will vest on the fifth anniversary date of the grant in October 2006 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
| (6) | Those RSUs will vest on the fifth anniversary date of the grant in October 2007 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
| (7) | Those RSUs will vest on the fifth anniversary date of the grant in October 2008 but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. |
| (8) | Those RSUs will vest at a rate of 55%, 35% and 10%, on the third, fourth and fifth anniversary dates of the grant in January 2005. |
| Those RSUs will vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in October 2006. |
| Those RSUs will vest on the fifth anniversary date of the grant in October 2008 but are subject to early vesting on the third anniversary date of the grant on the attainment of performance objectives as determined by the Board of Directors. Accordingly, subject to the attainment of performance objectives, the early vesting is up to 100% of the units on the third anniversary date of the grant. |
| (11) | Those DSUs will vest at the time Director |
| Those RSUs will vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in August 2006. |
| Those RSUs will vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in February 2005. |
| Those RSUs will vest at a rate of 1/2 annually commencing on the third anniversary date of the grant in February 2006. |
| Those RSUs will vest at a rate of 1/3 annually commencing on the third anniversary date of the grant in January 2007. |
| (17) | Those RSUs |
| Escrowed Securities |
The following table presents information regarding the number of securities of each class of the Corporation held, to our knowledge as of November 1, 2007,3, 2008, in escrow and the percentage outstanding securities of that class.
Designation of Class | Number of Securities held in escrow | Percentage of Class | ||
| Subordinate Voting Shares | nil | nil | ||
| Multiple Voting Shares | nil | nil |
| Major Shareholder and Related Party Transaction |
The following table presents information regarding the beneficial ownership of our share capital as of November 1, 20073, 2008 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 | Multiple Voting Shares Beneficially Owned (1) | Subordinate Voting Shares Beneficially Owned (1) | Total Percentage of Voting Power | |||||
Name | Number | Percent | Number | Percent | Percent | Number | Percent | Number | Percent | Percent |
Germain Lamonde (2) | 36,643,000 | 100% | Nil | 91.89% | 36,643,000 | 100% | 173,912 | 0.57% | 92.29% | |
Fiducie Germain Lamonde (3) | 1,900,000 | 5% | Nil | 4.76% | 1,900,000 | 5% | Nil | Nil | 4.79% | |
G. Lamonde Investissements Financiers inc. (4) | 34,743,000 | 95% | Nil | 87.13% | 34,743,000 | 95% | Nil | Nil | 87.51% | |
Pyramis Global Advisors, LLC (5) | Nil | Nil | 3,576,400 | 11.05% | * | |||||
Kern Capital Management, LLC (6) | Nil | Nil | 1,855,113 | 5.73% | * | |||||
| Connor, Clark & Lunn Investment Mgmt. Ltd. | Nil | Nil | 1,693,900 | 5.53% | * | |||||
| * | Less than 1% |
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Options that are currently exercisable (including options that have an exercise price above the market price) are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
| (2) | The number of shares held by Germain Lamonde includes 1,900,000 multiple voting shares held of record by Fiducie Germain Lamonde and 34,743,000 multiple voting shares held of record by G. Lamonde Investissements Financiers inc. |
| (3) | Fiducie Germain Lamonde is a family trust for the benefit of Mr. Lamonde and members of his family. |
| (4) | G. Lamonde Investissements Financiers inc. is a company controlled by Mr. Lamonde. |
Each multiple voting share is convertible at the option of the holder into one subordinate voting share. Holders of our subordinate voting shares are entitled to one vote per share and holders of our multiple voting shares are entitled to ten votes per share.
As of November 12, 2007, 32,361,56117, 2008, 30,606,791 subordinate voting shares were outstanding. Approximately 98.5% (31,887,322)98.3% (30,077,643) of our subordinate voting shares were held in bearer form and the remainder (474,239(529,148 subordinate voting shares) was held by 151161 record holders. As of November 12, 2007,17, 2008, we believe approximately 57.5%60.83% of our outstanding subordinate voting shares were held in the United States.
B. Related Party Transactions
Indebtedness of Directors, Executive Officers and Employees
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
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 Quebec City, Quebec. Until September 1, 2003, there 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 CA$144,000.
Location | Square Footage | Annual Rent | Expiry Date |
| 465 Godin | 24,000 | CA$144,000 | November 30, 2006 |
Based on third-party valuation of the property values, we believe this lease agreement was at prevailing market terms.
See Item 18, “Financial Statements” for certain other information required by this item.
Valuation and qualifying accounts are as follows (in thousands of US dollars):
Allowance for doubtful accounts
Years ended August 31, | Years ended August 31, | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||||||||||
| Balance – Beginning of year | $ | 451 | $ | 352 | $ | 510 | $ | 206 | $ | 451 | $ | 352 | ||||||||||||
| Addition charged to earnings | 42 | 115 | 329 | 204 | 42 | 115 | ||||||||||||||||||
| Write-offs of uncollectible accounts | (271 | ) | (123 | ) | (23 | ) | (53 | ) | (271 | ) | (123 | ) | ||||||||||||
| Recovery of uncollectible accounts | (16 | ) | (111 | ) | (464 | ) | (52 | ) | (16 | ) | (111 | ) | ||||||||||||
| Business combination | − | 218 | − | |||||||||||||||||||||
| Business combinations | − | − | 218 | |||||||||||||||||||||
| Balance – End of year | $ | 206 | $ | 451 | $ | 352 | $ | 305 | $ | 206 | $ | 451 | ||||||||||||
Valuation allowance on future income tax assets
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
| Balance – Beginning of year | $ | 38,543 | $ | 38,406 | $ | 32,613 | ||||||
| Change in valuation allowance | (28,646 | ) | (1,877 | ) | 3,375 | |||||||
| Foreign currency translation adjustment | 2,595 | 2,014 | 2,418 | |||||||||
| Balance – End of year | $ | 12,492 | $ | 38,543 | $ | 38,406 | ||||||
| Years ended August 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
| Balance – Beginning of year | $ | 12,492 | $ | 38,543 | $ | 38,406 | ||||||
| Change in valuation allowance | (4,927 | ) | (28,646 | ) | (1,877 | ) | ||||||
| Business combination | 8,195 | − | − | |||||||||
| Foreign currency translation adjustment | (231 | ) | 2,595 | 2,014 | ||||||||
| Balance – End of year | $ | 15,529 | $ | 12,492 | $ | 38,543 | ||||||
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, | Years ended August 31, | ||||||||||||||||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||
| Export Sales | $ | 143,315 | 94 | % | $ | 119,486 | 93 | % | $ | 90,386 | 92 | % | $169,571 | 92% | $143,315 | 94% | $119,486 | 93% | |||||||||||||||
| Domestic Sales | $ | 9,619 | 6 | $ | 8,767 | 7 | $ | 6,830 | 8 | 14,219 | 8 | 9,619 | 6 | 8,767 | 7 | ||||||||||||||||||
| $ | 152,934 | 100 | % | $ | 128,253 | 100 | % | $ | 97,216 | 100 | % | $183,790 | 100% | $152,934 | 100% | $128,253 | 100% | ||||||||||||||||
Legal Proceedings
On November 27, 2001, a class action suit was filed in the United States District Court for the Southern District of New York against EXFO, four of the underwriters of our Initial Public Offering and some of our executive officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of 1933. This class action alleges that EXFO’s registration statement and prospectus filed with the Securities and Exchange Commission on June 29, 2000, contained material misrepresentations and/or omissions resulting from (i) the underwriters allegedly soliciting and receiving additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated material portions of the shares issued in connection with the company’s Initial Public Offering; and (ii) the underwriters allegedly entering into agreements with customers whereby shares issued in connection with the company’s Initial Public Offering would be allocated to those customers in exchange for which customers agreed to purchase additional amounts of shares in the after-market at pre-determined prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing master allegations against all of the underwriters in all of the 310 cases included in this class action and also filed an amended complaint containing allegations specific to four of our underwriters, EXFO and two of our executive officers. In addition to the allegations mentioned above, the amended complaint alleges that the underwriters (i) used their analysts to manipulate the stock market; and (ii) implemented schemes that allowed issuer insiders to sell their shares rapidly after an initial public offering and benefit from high market prices. As concerns EXFO and two of our executive officers in particular, the amended complaint alleges that (i) the company’s registration statement was materially false and misleading because it failed to disclose the additional commissions and compensation to be received by underwriters; (ii) the two named executive officers learned of or recklessly disregarded the alleged misconduct of the underwriters; (iii) the two named executive officers had motive and opportunity to engage in alleged wrongful conduct due to personal holdings of EXFO’s stock and the fact that an alleged artificially inflated stock price could be used as currency for acquisitions; and (iv) the two named executive officers, by virtue of their positions with EXFO, controlled the company and the contents of the registration statement and had the ability to prevent its issuance or cause it to be corrected. The plaintiffs in this suit seek an unspecified amount for damages suffered.
In July 2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint and a decision was rendered on February 19, 2003. Only one of the claims against EXFO was dismissed. On October 8, 2002, the claims against our officers were dismissed pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs.
In June 2004, an agreement of partial settlement was submitted to the court for preliminary approval. The proposed partial settlement was between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.
On April 6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing en banc.banc. In light of the Second CircuitCircuit’s opinion, liaison counsel for all issuer defendants, including EXFO, informed the court that this settlement cannot be approved, because the defined settlement class, like the litigation class, cannot be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the focus cases and, plan to moveon September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the district court denied the motions to dismiss, except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside of the previously certified class period. Briefing on the class certification again.motion was completed in May 2008.
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.
We do not currently anticipate paying dividends for at least the three next years. Our current intention is to reinvest any earnings in our business long-term growth. Any future determination by us to pay dividends will be at the discretion of our Board of Directors and in accordance with the terms and conditions of any outstanding indebtedness and will depend on our financial condition, results of operations, capital requirements and such other functions as our Board of Directors considers relevant.
No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this annual report.
| Offer and Listing |
Not Applicable, except for Item 9A (4) and Item 9C.
NASDAQ (US$) | TSX (CA$) | |||||||||||||||
High | Low | High | Low | |||||||||||||
| September 1, 2002 to August 31, 2003 | 3.63 | 1.40 | 5.60 | 2.30 | ||||||||||||
| September 1, 2003 to August 31, 2004 | 7.09 | 2.71 | 9.15 | 3.75 | ||||||||||||
| September 1, 2004 to August 31, 2005 | 5.51 | 3.92 | 6.90 | 4.92 | ||||||||||||
| September 1, 2005 to August 31, 2006 | 8.69 | 4.32 | 9.60 | 5.15 | ||||||||||||
| September 1, 2006 to August 31, 2007 | 7.57 | 4.89 | 8.85 | 5.55 | ||||||||||||
| 2006 1st Quarter | 5.05 | 4.32 | 5.92 | 5.15 | ||||||||||||
| 2006 2nd Quarter | 6.70 | 4.39 | 7.64 | 5.16 | ||||||||||||
| 2006 3rd Quarter | 8.69 | 6.44 | 9.60 | 7.18 | ||||||||||||
| 2006 4th Quarter | 7.01 | 4.86 | 7.80 | 5.45 | ||||||||||||
| 2007 1st Quarter | 6.13 | 4.89 | 6.90 | 5.55 | ||||||||||||
| 2007 2nd Quarter | 7.48 | 5.21 | 8.85 | 6.05 | ||||||||||||
| 2007 3rd Quarter | 6.94 | 5.92 | 7.82 | 6.70 | ||||||||||||
| 2007 4th Quarter | 7.57 | 5.94 | 7.95 | 6.42 | ||||||||||||
| 2007 May | 6.65 | 6.01 | 7.23 | 6.70 | ||||||||||||
| 2007 June | 7.03 | 6.60 | 7.60 | 7.07 | ||||||||||||
| 2007 July | 7.57 | 6.83 | 7.95 | 7.47 | ||||||||||||
| 2007 August | 7.55 | 5.94 | 7.93 | 6.42 | ||||||||||||
| 2007 September | 7.28 | 6.61 | 7.35 | 6.62 | ||||||||||||
| 2007 October | 7.07 | 6.17 | 6.92 | 5.93 | ||||||||||||
| 2007 November | 6.41 | 5.86 | 6.05 | 5.56 | ||||||||||||
| (until November 12) | ||||||||||||||||
| NASDAQ (US$) | TSX (CA$) | |||
| High | Low | High | Low | |
| 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 |
| September 1, 2006 to August 31, 2007 | 7.57 | 4.89 | 8.85 | 5.55 |
| September 1, 2007 to August 31, 2008 | 7.28 | 3.92 | 7.35 | 3.97 |
| 2007 1st Quarter | 6.13 | 4.89 | 6.90 | 5.55 |
| 2007 2nd Quarter | 7.48 | 5.21 | 8.85 | 6.05 |
| 2007 3rd Quarter | 6.94 | 5.92 | 7.82 | 6.70 |
| 2007 4th Quarter | 7.57 | 5.94 | 7.95 | 6.42 |
| 2008 1st Quarter | 7.28 | 5.10 | 7.35 | 5.01 |
| 2008 2nd Quarter | 5.50 | 3.92 | 5.54 | 3.97 |
| 2008 3rd Quarter | 6.14 | 4.06 | 6.00 | 4.04 |
| 2008 4th Quarter | 5.47 | 3.96 | 5.59 | 4.15 |
| 2008 May | 6.14 | 5.44 | 6.00 | 5.33 |
| 2008 June | 5.47 | 4.45 | 5.59 | 4.52 |
| 2008 July | 4.45 | 4.11 | 4.60 | 4.15 |
| 2008 August | 4.49 | 3.96 | 4.62 | 4.15 |
| 2008 September | 4.57 | 3.24 | 4.86 | 3.38 |
| 2008 October | 3.19 | 2.13 | 3.50 | 2.50 |
| 2008 November | 2.96 | 2.74 | 3.54 | 3.25 |
| (until November 17) | ||||
Our subordinate voting shares have been quoted on the NASDAQ National Market under the symbol EXFO and listed on The Toronto Stock Exchange under the symbol EXF since our initial public offering on June 29, 2000. Prior to that time, there was no public market for our subordinate voting shares. The 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 12, 2007,17, 2008, the last reported sale price for our subordinate voting shares on the NASDAQ National Market was US$6.092.74 per share and the last reported sale price for our subordinate voting shares on the Toronto Stock Exchange was CA$5.923.34 per share.
| Additional Information |
Not Applicable
B.B.Memorandum and Articles of Association
Incorporated by reference to our registration statement on Form F-1 dated June 9, 2000 (File No. 333-38956).
C.C.Material Contracts
Except as otherwise disclosed in this annual report and our financial statements and notes included elsewhere in this annual report, we have no other material contracts.
D.D.Exchange Controls
Subject to the following paragraph, there is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to non-resident holders of our subordinate voting shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by our articles of incorporation or our other charter documents on the right of a non-resident to hold or vote subordinate voting shares, other than as provided by the Investment Canada Act, the North American Free Trade Agreement Implementation Act (Canada) and the World Trade Organization Agreement Implementation Act. The Investment Canada Act requires notification and, in certain cases, advance review and approval by the Government of Canada of an investment to establish a new Canadian business by a non-Canadian or of the acquisition by a “non-Canadian” of “control” of a “Canadian business”, all as defined in the Investment Canada Act. Generally, the threshold for review will be higher in monetary terms for a member of the World Trade Organization or North American Free Trade Agreement.
United States Taxation
The information set forth below under the caption “United States Taxation” is a summary of the material U.S. federal income tax consequences of the ownership and disposition of subordinate voting shares by a U.S. Holder, as defined below. These discussions are not a complete analysis or listing of all of the possible tax consequences of such transactions and do not address all tax considerations that may be relevant to particular holders in light of their personal circumstances or to persons that are subject to special tax rules. In particular, the information set forth under the caption “United States Taxation” deals only with U.S. Holders that hold subordinate voting shares as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and who do not at any time own individually, nor are treated as owning 10% or more of the total combined voting power of all classes of our stock entitled to vote. In addition, this description of U.S. tax consequences does not address the tax treatment of special classes of U.S. Holders, such as financial institutions, regulated investment companies, traders in securities who elect to mark-to-market their securities, tax-exempt entities, insurance companies, partnerships, persons holding subordinate voting shares as part of a hedging, integrated or conversion transaction or as part of a “straddle,” U.S. expatriates, persons subject to the alternative minimum tax, persons who acquired their subordinate voting shares through the exercise or cancellation of employee stock options or otherwise as compensation for services, dealers or traders in securities or currencies and holders whose “functional currency” is not the U.S. dollar. This summary does not address U.S. estate and gift tax consequences or tax consequences under any foreign, state and local tax laws or local laws other than as provided in the section entitled “Canadian Federal Income Tax Considerations” provided below.non-U.S. tax laws.
As used in this section, the term “U.S. Holder” means a beneficial owner of subordinate voting shares that is for U.S. federal income tax purposes:
| (a) | an individual citizen or resident of the United States; |
| (b) | a corporation created or organized under the laws of the United States or any state thereof and the District of Columbia; |
| (c) | an estate the income of which is subject to United States federal income taxation regardless of its source; |
| (d) | a trust if (1) a court within the United States is able to exercise primary |
| (e) | any other person whose worldwide income or gain is otherwise subject to U.S. federal income taxation on a net income basis; |
If a partnership or other flow-through entity holds subordinate voting shares, the U.S. federal income tax treatment of a partner will generally depend upon the status of the partner or other owner and upon the activities of the partnership or other flow-through entity. If you are a partner of a partnership holding subordinate voting shares, you should consult your tax advisor.
Holders of subordinate voting shares who are not U.S. Holders, sometimes referred to as “Non-U.S. Holders”, should also consult their own tax advisors, particularly as to the applicability of any tax treaty.
The following discussion is based upon:
| · | U.S. judicial decisions; |
| · | administrative pronouncements; |
| · | existing and proposed Treasury regulations; and |
| · | the Canada – U.S. Income Tax Treaty. |
Any of the above is subject to change, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. We have not requested, and will not request, a ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to any of the U.S. federal income tax consequences described below, and as a result, there can be no assurance that the IRS will not disagree with or challenge any of the conclusions we have reached and describe here.
The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder of subordinate voting shares and no opinion or representation with respect to the U.S. federal income tax consequences to any holder is made. Holders of subordinate voting shares are urged to consult their tax advisors as to the particular consequences to them under U.S. federal, state, local and applicable foreignnon-U.S. tax laws of the acquisition, ownership and disposition of subordinate voting shares.
Dividends
Subject to the discussion of passive foreign investment companies below, the gross amount of any distribution paid by us to a U.S. Holder will generally be subject to U.S. federal income tax as foreign source dividend income to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income will be includable in the gross income of a U.S. Holder on the day received by the U.S. Holder. The amount of any distribution of property other than cash will be the fair market value of such property on the date of the distribution. In the case of a taxable corporate U.S. Holder, such dividends will be taxable as ordinary income and will not be eligible for the corporate dividends received deduction, which is generally allowed to U.S. corporate shareholders on dividends received from a domestic corporation. In the case of an individuala non-corporate U.S. Holder, under recently enacted tax legislationincluding individuals, such dividends should generally be eligible for a maximum tax rate of 15% for dividends received before January 1, 2011, provided such holder holds the subordinate voting shares for at least 60 days and certain other conditions are satisfied, including, as we believe to be the case, that we are not a “passive foreign investment company”. To the extent that an amount received by a U.S. Holder exceeds such holder’s allocable share of our current and accumulated earnings and profits, such excess will be applied first to reduce such U.S. Holder’s tax basis in his subordinate voting shares, thereby increasing the amount of gain or decreasing the amount of loss recognized on a subsequent disposition of the subordinate voting shares. Then, to the extent such distribution exceeds such U.S. Holder’s tax basis, it will be treated as capital gain. We do not currently maintain calculations of our earnings and profits for U.S. federal income tax purposes.
The gross amount of distributions paid in Canadian dollars, or any successor or other foreign currency, will be included in the income of such U.S. Holder in a U.S. dollar amount calculated by reference to the spot exchange rate in effect on the day the distributions are paid regardless of whether the payment is in fact converted into U.S. dollars. If the Canadian dollars, or any successor or other foreign currency, are converted into U.S. dollars on the date of the payment, the U.S. Holder should not be required to recognize any foreign currency gain or loss with respect to the receipt of Canadian dollars as distributions. The U.S. Holder will have a basis in any Canadian dollars or other foreign currency distributed equal to their U.S. dollar value on the payment date. If, instead, the Canadian dollars are converted at a later date, any currency gains or losses resulting from the conversion of the Canadian dollars will be treated as U.S. source ordinary income or loss for foreign tax credit purposes.loss. U.S. Holders are urged to consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of Canadian dollars.
A U.S. Holder may be entitled to deduct, or claim a foreign tax credit for, Canadian taxes that are withheld on dividends received by the U.S. Holder, subject to applicable limitations in the Code. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, for taxable years beginning before January 1, 2007, dividends distributed generally will constitute foreign source “passive income”, or, in the case of certain U.S. Holders, “financial services income”, and, for taxable years beginning after December 31, 2006, such dividends should generally constitute foreign source “passive category income”, or, in the case of certain U.S. Holders, “general category income”. 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 foreignnon-U.S. corporations if the dividends are eligible for the 15% maximum tax rate on dividends described above. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
A Non-U.S. Holder of subordinate voting shares generally will not be subject to U.S. federal income or withholding tax on dividends received on subordinate voting shares unless such income is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States.
Sale or Exchange
A U.S. Holder’s initial tax basis in the subordinate voting shares will generally be cost to the holder. A U.S. Holder’s adjusted tax basis in the subordinate voting shares will generally be the same as cost, but may differ for various reasons including the receipt by such holder of a distribution that was not made up wholly of earnings and profits as described above under the heading “Dividends.” Subject to the discussion of passive foreign investment companies below, gain or loss realized by a U.S. Holder on the sale or other disposition of subordinate voting shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference (if any) between the U.S. Holder’s adjusted tax basis (determined in U.S. dollars) in the subordinate voting shares and the U.S. dollar value of the amount realized on the disposition of such subordinate voting shares. Capital gains of non-corporate taxpayers,U.S. Holders, including individuals, derived with respect to a sale, exchange or other disposition prior to January 1, 2011 of subordinate voting shares held for more than one year are subject to a maximum federal income tax rate of 15%. The deductibility of capital losses is subject to limitations. In the case of a non-corporate U.S. Holder, the federal tax rate applicable to capital gains will depend upon:
| · | the holder’s holding period for the subordinate voting shares, with a preferential rate available for subordinate voting shares held for more than one year; and |
| · | the holder’s marginal tax rate for ordinary income. |
Any gain realized will generally be treated as U.S. source gain and loss realized by a U.S. Holder generally also will be treated as from sources within the United States.
The ability of a U.S. Holder to utilize foreign taxes as a credit to offset U.S. taxes is subject to complex limitations and conditions. The consequences of the separate limitation calculation will depend upon the nature and sources of each U.S. Holder’s income and the deductions allocable thereto. Alternatively, a U.S. Holder may elect to claim all foreign taxes paid as an itemized deduction in lieu of claiming a foreign tax credit. A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit, but the availability of the deduction is not subject to the same conditions and limitations applicable to foreign tax credits.
If a U.S. Holder receives any foreign currency on the sale of subordinate voting shares, such U.S. Holder may recognize ordinary income or loss as a result of currency fluctuations between the date of the sale of subordinate voting shares and the date the sale proceeds are converted into U.S. dollars.
A Non-U.S. Holder of subordinate voting shares generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such subordinate voting shares unless:
| · | such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States; or |
| · | in the case of any gain realized by an individual Non-U.S. Holder, such Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of such sale and certain other conditions are met. |
Passive Foreign Investment Company
We believe that our subordinate voting shares should not currently be treated as stock of a passive foreign investment company for United States federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change based on future operations as well as the composition and valuation of our assets. In particular, a significant portion of our gross assets are comprised of cash and short-term investments, which the PFIC rules treat as passive without regard to the purpose for which we hold those assets. If the proportion of these passive assets were to increase relative to the fair market value of our other assets, we may be treated as a passive foreign investment company. In general, we will be a passive foreign investment company with respect to a U.S. Holder if, for any taxable year in which the U.S. Holder holds our subordinate voting shares, either:
| · | at least 75% of our gross income for the taxable year is passive income; or |
| · | at least 50% of the average value of our assets is attributable to assets that produce or are held for the production of passive income. |
For this purpose, passive income includes, among other things, income such as:
| · | dividends; |
| · | interest; |
| · | rents or royalties, other than certain rents or royalties derived from the active conduct of trade or business; |
| · | annuities; |
| · | gains from assets that produce passive income. |
If a foreignnon-U.S. corporation owns at least 25% by value of the stock of another corporation, the foreignnon-U.S. corporation is treated for purposes of the passive foreign investment company tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation’s income.
If we are treated as a passive foreign investment company, a U.S. Holder that did not make a qualified electing fund election, or, if available, or a mark-to-market election, as described below, would be subject to special rules with respect to:
| · | any gain realized on the sale or other disposition of subordinate voting shares; and |
| · | any “excess distribution” by us to the U.S. Holder. |
Generally, “excess distributions” are any distributions to the U.S. Holder in respect of the subordinate voting shares during a single taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder in respect of the subordinate voting shares during the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the subordinate voting shares.
Under the passive foreign investment company rules,
| · | the gain or excess distribution would be allocated ratably over the U.S. Holder’s holding period for the subordinate voting shares; |
| · | the amount allocated to the taxable year in which the gain or excess distribution was realized and to taxable years prior to the first year in which we were classified as a PFIC would be taxable as ordinary income; and |
| · | the amount allocated to each other prior year |
| the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each such year. |
A U.S. Holder owning actually or constructively “marketable stock” of a passive foreign investment company may be able to avoid the imposition of the passive foreign investment company tax rules described above by making a mark-to-market election. Generally, pursuant to this election, such holdera U.S. Holder would include in ordinary income or, subject to the following sentence, loss, for each taxable year during which such stock is held, an amount equal to the 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 valuedifference as of the endclose of the taxable year between the fair market value of its stock and its adjusted tax basis in such stock. Any mark-to-market loss is treated as an ordinary deduction, but only to the extent of the ordinary income that the U.S. Holder has included pursuant to the election in prior taxable year.years. The electing U.S. Holder’s basis in its stock would be adjusted to reflect any of these income or loss amounts. Holders desiring to make the mark-to-market election should consult their tax advisors with respect to the application and effect of making such election.
In the case of a U.S. Holder who does not make a mark-to-market election, the special passive foreign investment company tax rules described above will not apply to such U.S. Holder if the U.S. Holder makes an election to have us treated as a qualified electing fund and we provide certain required information to holders. For a U.S. Holder to make a qualified electing fund election, we would have to satisfy certain reporting requirements. We have not determined whether we will undertake the necessary measures to be able to satisfy such requirements in the event that we were treated as a passive foreign investment company.
A U.S. Holder that makes a qualified electing fund election will be currently taxable on its pro rata share of our ordinary earnings and net capital gain, at ordinary income and capital gains rates, respectively, for each of our taxable years, regardless of whether or not distributions were received. The U.S. Holder’s basis in the subordinate voting shares will be increased to reflect taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the subordinate voting shares and will not be taxed again as a distribution to the U.S. Holder. U.S. Holders desiring to make a qualified electing fund election should consult their tax advisors with respect to the advisability of making such election.
United States Backup Withholding and Information Reporting
A U.S. Holder will generally be subject to information reporting with respect to dividends paid on, or proceeds of the sale or other disposition of, our subordinate voting shares that are paid within the United States or through some U.S. related financial intermediaries to U.S. Holders, unless the U.S. Holder is a corporation or comes within certain other categories of exempt recipients. A U.S. Holder that is not an exempt recipient will generally be subject to backup withholding with respect to the proceeds from the sale or the disposition of, or with respect to dividends on, subordinate voting shares unless the U.S. Holder timely provides a taxpayer identification number and otherwise complies with the other 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’s U.S. federal income tax liability or refundable to the extent that it exceeds such liability. A U.S Holder who does notfails to provide a correct taxpayer identification number may be subject to penalties imposed by the United States Internal Revenue Service.
Non-U.S. Holders will generally be subject to information reporting and possible backup withholding with respect to the proceeds of the sale or other disposition of subordinate voting shares effected within the United States, unless the holder certifies to its foreign status or otherwise establishes an exemption and the broker does not have actual knowledge or reason to know that the holder is a U.S. Holder. Payments of dividends on or proceeds from the sale of subordinate voting shares within the United States by a payor within the United States to a non-exempt U.S. or Non-U.S. Holder will be subject to backup withholding if such holder fails to provide appropriate certification. In the case of such payments by a payor within the United States to a foreign partnership other than a foreign partnership that qualifies as a “withholding foreign partnership” within the meaning of such Treasury regulations, the partners of such partnership will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against a holder’s U.S. federal income tax liability, provided that the required information is furnished to the IRS.
Canadian Federal Income Tax Considerations
The following is a summary of the material Canadian federal income tax considerations generally applicable to a U.S. person who holds subordinate voting shares and who, for the purposes of the Income Tax Act (Canada) (the “ITA”), and the Canada-United States Income Tax Convention (1980) (the “Convention”), as applicable and at all relevant times:
| · | is resident in the United States and not resident in Canada, |
| · | holds the subordinate voting shares as capital property, |
| · | does not have a “permanent establishment” or “fixed base” in Canada, as defined in the Convention; and |
| · | deals at arm’s length with us. Special rules, which are not discussed below, may apply to “financial institutions”, as defined in the ITA, and to non-resident insurers carrying on an insurance business in Canada and elsewhere. |
This discussion is based on the current provisions of the ITA and the Convention and on the regulations promulgated under the ITA, all specific proposals to amend the ITA or the regulations promulgated under the ITA announced by or on behalf of the Canadian Minister of Finance prior to the date of this annual report and the current published administrative practices of the Canada Customs and Revenue Agency. It does not otherwise take into account or anticipate any changes in law or administrative practice nor any income tax laws or considerations of any province or territory of Canada or any jurisdiction other than Canada, which may differ from the Canadian federal income tax consequences described in this document.
Under the ITA and the Convention, dividends paid or credited, or deemed to be paid or credited, on the subordinate voting shares to a U.S. person who owns less than 10% of the voting shares will be subject to Canadian withholding tax at the rate of 15% of the gross amount of those dividends or deemed dividends. If a U.S. person is a corporation and owns 10% or more of the voting shares, the rate is reduced from 15% to 5%. Subject to specified limitations, a U.S. person may be entitled to credit against U.S. federal income tax liability for the amount of tax withheld by Canada.
Under the Convention, dividends paid to specified religious, scientific, charitable and similar tax exempt organizations and specified organizations that are resident and exempt from tax in the United States and that have complied with specified administrative procedures are exempt from this Canadian withholding tax.
A capital gain realized by a U.S. person on a disposition or deemed disposition of the subordinate voting shares will not be subject to tax under the ITA unless the subordinate voting shares constitute taxable Canadian property within the meaning of the ITA at the time of the disposition or deemed disposition. In general, the subordinate voting shares will not be “taxable Canadian property” to a U.S. person if they are listed on a prescribed stock exchange, which includes The Toronto Stock Exchange, unless, at any time within the five-year period immediately preceding the disposition, the U.S. person, persons with whom the U.S. person did not deal at arm’s length, or the U.S. person together with those persons, owned or had an interest in or a right to acquire more than 25% of any class or series of our shares.
If the subordinate voting shares are taxable Canadian property to a U.S. person, any capital gain realized on a disposition or deemed disposition of those subordinate voting shares will generally be exempt from tax by virtue of the Convention if the value of the subordinate voting shares at the time of the disposition or deemed disposition is not derived principally from real property, as defined by the Convention, situated in Canada. The determination as to whether Canadian tax would be applicable on a disposition or deemed disposition of the subordinate voting shares must be made at the time of the disposition or deemed disposition.
Holders of subordinate voting shares are urged to consult their own tax advisors to determine the particular tax consequences to them, including the application and effect of any state, local or foreign income and other tax laws, of the acquisition, ownership and disposition of subordinate voting shares.
F.F.Dividends and Paying Agents
Not Applicable.
G.G.Statement by Experts
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.
You may review a copy of our filings with the SEC, including exhibits and schedules filed with it, at the SEC’s public reference facilities at 100 F Street, N.E., Washington, D.C. 20549 and at the regional offices of the SEC located at 233 Broadway, New York, New York 10279 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such materials from the Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. 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’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.
I.I.Subsidiary Information
See Item 4.C. of this annual report.
| Qualitative and Quantitative Disclosures about Market Risk |
Market Risk
Currency Risk
Our measurement currency is the Canadian dollar. We are exposed to currency risks due to the export of our Canadian-manufactured products, the large majority of which are denominated in US dollars. These risks are partially hedged by operating expenses denominated in US dollars, the purchase of raw materials in US dollars and forward exchange contracts. The increased strength of the Canadian dollar, compared to the US dollar, over the last couple of years caused our operating expenses to increase and we incurred foreign exchange loss.as some of these expenses are denominated in Canadian dollars. Any further increase in the value of the Canadian dollar in the upcoming months will negatively affect our results of operations.
We enter into forward exchange contracts to manage the risk of exchange rate fluctuations between the Canadian and US dollar on cash flows related to anticipated future revenue streams denominated in US dollars. We do not enter into forward exchange contracts for hedging purposes.
The following table summarizes the forward exchange contracts in effect as at August 31, 2007,2008, 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 exchangeforward 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, | Years ending August 31, | |||||||||||||||||||||||
2008 | 2009 | 2010 | 2009 | 2010 | 2011 | |||||||||||||||||||
Forward exchange contracts to sell US dollars in exchange for Canadian dollars Contractual amounts | $ | 36,900 | $ | 14,200 | $ | 1,200 | $ | 36,600 | $ | 17,400 | $ | 2,400 | ||||||||||||
| Weighted average contractual exchange rates | 1.1295 | 1.1180 | 1.1425 | |||||||||||||||||||||
| Weighted average contractual forward rates | 1.0686 | 1.0535 | 1.0619 | |||||||||||||||||||||
Fair Value
The fair value of forward exchange contracts, which represents the amount we would receive or pay to settle the contracts based on the exchange rate at year end, amounted to an unrecognized gainnet gains of $3.4$62,000 as at August 31, 2008 ($3.4 million as at August 31, 2007 ($5.5 million as at August 31, 2006)2007).
Interest rate and liquidity risks
We are exposed to the impact of interest rate changes and changes in the market values of our short-term investments. We do not use derivative financial instruments for our short-term investments. As at August 31, 2007,2008, our short-term investments consist of commercial paper issued by seven (nineten (seven as of August 31, 2006)2007) high-credit quality corporations and trusts; therefore, we consider the risk of non-performance of these financial instruments to be remote.limited. None of these debts instruments are expected to be affected by a liquidity risk; 47% of them are guaranteed by the Government of Canadarisk and none of them represent asset-backed commercial paper. For the purposes of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis. These short-term investments will be used for working capital and other general corporate purposes, including other potential acquisitions.
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 credit quality, corporations and trusts. Our cash and forward exchange contracts are held with or issued by high credit quality, financial institutions; therefore, we consider the risk of non-performance on these instruments to be remote.limited.
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 $451,000$206,000 and $206,000$305,000 as at August 31, 20062007 and 2007,2008, respectively.
| Description of Securities Other than Equity Securities |
Not Applicable.
Not Applicable.
Not Applicable.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as at the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Office have concluded that these disclosure controls and procedures are effective.effective as at August 31, 2008.
(b) Management’s Annual Report on Internal Control over Financial Reporting
EXFO management is responsible for establishing and maintaining adequate internal control over financial reporting. EXFO’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in Canada.1
EXFO’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of EXFO; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in Canada, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of EXFO; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of EXFO’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| 1 | Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) and significant differences in measurement and disclosure from generally accepted accounting principles in United States (“U.S. GAAP”) are set out in note |
The recent acquisitions of Navtel Communications Inc. and Brix Networks Inc. have been excluded from management’s assessment of internal controls as at August 31, 2008, because these companies were acquired by EXFO in March and April 2008, respectively; therefore, it was not possible for management to assess their internal control over financial reporting in the period between the consummation dates and the date of management’s assessment. Navtel is a wholly-owned subsidiary of the company whose total assets and total revenues represent 0.3% and 0.7%, respectively, of the related consolidated financial statements as at and for the year ended August 31, 2008. Brix is a wholly-owned subsidiary of the company whose total assets and total revenues represent 1.0% and 2.2%, respectively, of the related consolidated financial statements as at and for the year ended August 31, 2008.
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, 2007.2008.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, independently assessed the effectiveness of EXFO’s internal control over financial reporting. They have issued an attestation report, which is included on page F-1 of this Annual Report on Form 20-F.
(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.
| Audit Committee Financial Expert |
Our Board of Directors has determined that Mr. André Tremblay, CA, chairman of our audit committee is an audit committee financial expert. Mr. Tremblay is independent of management. For a description of Mr. Tremblay’s education and experience, please refer to Item 6A. The other members of the Audit Committee are Mr. Pierre Marcouiller, Mr. Guy Marier and Mr. Michael Unger whichuntil June 2008, and Mr. David A. Thompson joined in April 2008, all of whom are all Independent.independent. For a description of their respective education and experience, please also refer to Item 6A.
| 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 our fiscal year 2005 annual report. In March 2005, the Board updated and adopted the following policies:
| · | Board of Directors Corporate Governance Guidelines; |
| · | Code of Ethics for our Principal Executive Officer and Senior Financial Officers; |
| · | Ethics and Business Conduct Policy; |
| · | Statement of Reporting Ethical Violations (Whistle Blower). |
A copy of those policies has been filed respectively as exhibits 11.2 through 11.5 inclusively to our fiscal year 2005 annual report. All these policies are also readily available on our website at www.EXFO.com. Accordingly, we believe that our corporate governance practices are in alignment to current regulatory requirements. We will provide without charge to each person, on the written or oral request of such person, a copy of our code of ethics. Requests for such copies should be directed to us at the following address: 400 Godin Avenue, Quebec, Quebec, G1M 2K2, Canada, Attention: Corporate Secretary, telephone number (418) 683-0211.
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 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.
| Principal Accountant Fees and Services |
Audit Fees
During the financial years ended August 31, 20062007 and August 31, 2007,2008, our principal accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $247,000$190,000 and $190,000$239,000 respectively for the audit of our annual consolidated financial statements and services in connection with statutory and regulatory filings.
Audit-Related Fees
During the financial years ended August 31, 20062007 and August 31, 2007,2008, our principal accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $148,000$313,000 and $313,000,$128,000, respectively for services mainly related to Sarbanes-Oxley Act.
Tax Fees
During the financial years ended August 31, 20062007 and August 31, 2007,2008, our principal accountant, PricewaterhouseCoopers LLP, billed us aggregate amounts of $210,000$135,000 and $135,000,$142,000, respectively for services related to tax compliance, tax advice and tax planning.
All Other Fees
Not applicable.
Item 16D. Exemptions from the Listing Standards for Audit Committees
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 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, 2007,2008, 100% of tax fees were approved by the audit committee pursuant to this policy. During the financial year ended on August 31, 2007,2008, only full-time permanent employees of our principal accountant, PricewaterhouseCoopers LLP, performed work to audit our financial statements.
| Exemptions from the Listing Standards for Audit Committees |
Not Applicable.
| Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
Not Applicable.
Financial Statements |
Not Applicable.
See pages F-3 to F-40.F-43.
Exhibits |
Number | Exhibit |
| 1.1 | Amended Articles of Incorporation of EXFO (incorporated by reference to Exhibit 3.1 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 1.2 | Amended By-laws of EXFO (incorporated by reference to Exhibit 1.2 of EXFO’s annual report on Form-20F dated January 15, 2003, File No. 000-30895). |
| 1.3 | Amended and Restated Articles of Incorporation of EXFO (incorporated by reference to Exhibit 1.3 of EXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
| 2.1 | Form of Subordinate Voting Share Certificate (incorporated by reference to Exhibit 4.1 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 2.2 | Form of Registration Rights Agreement between EXFO and Germain Lamonde dated July 6, 2000 ) (incorporated by reference to Exhibit 10.13 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 3.1 | Form of Trust Agreement among EXFO, Germain Lamonde, GEXFO Investissements Technologiques inc., Fiducie Germain Lamonde and G. Lamonde Investissements Financiers inc. (incorporated by reference to Exhibit 4.2 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.1 | Agreement of Merger and Plan of Reorganization, dated as of November 4, 2000, by and among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.1 of EXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
| 4.2 | Amendment No. 1 to Agreement of Merger and Plan of Agreement, dated as of December 20, 2000, by and among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.2 of EXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
| 4.3 | Agreement of Merger, dated as of August 20, 2001, by and among EXFO, Buyer Sub, and Avantas Networks Corporation and Shareholders of Avantas Networks corporation (incorporated by reference to Exhibit 4.3 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.4 | Amendment No. 1 dated as of November 1, 2002 to Agreement of Merger, dated as of August 20, 2001, by and among EXFO, 3905268 Canada Inc., Avantas Networks Corporation and Shareholders of Avantas Networks (incorporated by reference to Exhibit 4.4 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.5 | Offer to purchase shares of Nortech Fibronic Inc., dated February 6, 2000 among EXFO, Claude Adrien Noel, 9086-9314 Québec inc., Michel Bédard, Christine Bergeron and Société en Commandite Capidem Québec Enr. and Certificate of Closing, dated February 7, 2000 among the same parties (including summary in English) (incorporated by reference to Exhibit 10.2 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.6 | Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation (incorporated by reference to Exhibit 4.1 of EXFO’s Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122). |
| 4.7 | Amendment Number One, dated as of March 15, 2001, to Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by reference to Exhibit 4.2 of EXFO’s Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122). |
| 4.8 | Share Purchase Agreement, dated as of November 2, 2001 between JDS Uniphase Inc. and 3905268 Canada Inc. (incorporated by reference to Exhibit 4.8 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.9 | Intellectual Property Assignment and Sale Agreement between EFOS Inc., EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by reference to Exhibit 4.3 of EXFO’s Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122). |
| 4.10 | Offer to acquire a building, dated February 23, 2000, between EXFO and Groupe Mirabau inc. and as accepted by Groupe Mirabau inc. on February 24, 2000 (including summary in English) (incorporated by reference to Exhibit 10.3 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.11 | Lease Agreement, dated December 1, 1996, between EXFO and GEXFO Investissements Technologiques inc., as assigned to 9080-9823 Québec inc. on September 1, 1999 (including summary in English) (incorporated by reference to Exhibit 10.4 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.12 | Lease Agreement, dated March 1, 1996, between EXFO and GEXFO Investissements Technologiques inc., as assigned to 9080-9823 Québec inc. on September 1, 1999 (including summary in English) (incorporated by reference to Exhibit 10.5 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.13 | Lease renewal of the existing leases between 9080-9823 Québec inc. and EXFO, dated November 30, 2001(incorporated by reference to Exhibit 4.13 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.14 | Loan Agreement between EXFO and GEXFO Investissements Technologiques inc., dated May 11, 1993, as assigned to 9080-9823 Québec inc. on September 1, 1999 (including summary in English) (incorporated by reference to Exhibit 10.9 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.15 | Resolution of the Board of Directors of EXFO, dated September 1, 1999, authorizing EXFO to acquire GEXFO Distribution Internationale inc. from GEXFO Investissements Technologiques inc. (including summary in English) (incorporated by reference to Exhibit 10.10 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.16 | Form of Promissory Note of EXFO issued to GEXFO Investissements Technologiques inc. dated June 27, 2000 ) (incorporated by reference to Exhibit 10.12 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.17 | Term Loan Offer, dated March 28, 2000, among EXFO and National Bank of Canada as accepted by EXFO on April 3, 2000 (including summary in English) (incorporated by reference to Exhibit 10.11 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.18 | Employment Agreement of Germain Lamonde dated May 29, 2000 (incorporated by reference to Exhibit 10.15 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.19 | Employment Agreement of Bruce Bonini dated as of September 1, 2000 (incorporated by reference to Exhibit 4.24 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.20 | Employment Agreement of Juan-Felipe Gonzalez dated as of September 1, 2000 (incorporated by reference to Exhibit 4.25 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.21 | Employment Agreement of David J. Farrell dated as of December 20, 2000 (incorporated by reference to Exhibit 4.26 of EXFO’s annual report on Form 20-F dated January 18, 2002, File No. 000-30895). |
| 4.22 | Deferred Profit Sharing Plan, dated September 1, 1998 (incorporated by reference to Exhibit 10.6 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.23 | Stock Option Plan, dated May 25, 2000 (incorporated by Reference to Exhibit 10.7 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.24 | Share Plan, dated April 3, 2000 (incorporated by reference to Exhibit 10.8 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.25 | Directors’ Compensation Plan (incorporated by reference to Exhibit 10.17 of EXFO’s Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956). |
| 4.26 | Restricted Stock Award Plan, dated December 20, 2000 (incorporated by reference to Exhibit 4.21 of EXFO’s annual report on Form 20-F dated January 18, 2001, File No. 000-30895). |
| 4.27 | Asset Purchase 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’s annual report on Form 20-F dated January 15, 2003, File No. 000-30895). |
| 4.28 | EXFO Protocol Inc. Executive Employment Agreement with Sami Yazdi signed November 2, 2001 (incorporated by reference to Exhibit 4.28 of EXFO’s annual report on Form 20-F dated January 15, 2003, File No. 000-30895). |
| 4.29 | Second Amending Agreement to the Employment Agreement of Bruce Bonini dated as of September 1, 2002, (incorporated by reference to Exhibit 4.29 of EXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 4.30 | Severance and General Release Agreement with Bruce Bonini dated August 8, 2003, (incorporated by reference to Exhibit 4.30 of EXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 4.31 | Separation Agreement and General Release with Sami Yazdi dated April 1, 2003, (incorporated by reference to Exhibit 4.31 of EXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 4.32 | Executive Employment Agreement of James Stevens dated as of October 4, 2003, (incorporated by reference to Exhibit 4.32 of EXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 4.33 | Termination Terms for John Holloran Jr. dated May 28, 2003, (incorporated by reference to Exhibit 4.33 of EXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 4.34 | Employment Agreement of Pierre Plamondon dated as of September 1, 2002, (incorporated by reference to Exhibit 4.34 of EXFO’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 4.35 | Long-Term Incentive Plan, dated May 25, 2000, amended in October 2004 and effective January 12, 2005 (incorporated by reference to Exhibit 4.35 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 4.36 | Deferred Share Unit Plan, effective January 12, 2005 (incorporated by reference to Exhibit 4.36 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 4.37 | Asset Purchase Agreement by and Among EXFO Electro-Optical Engineering Inc., Consultronics Limited., Andre Rekai, Consultronics Europe Limited, Consultronics Development Kft. and Consultronics Inc. dated January 5, 2006 (incorporated by reference to Exhibit 4.37 of EXFO’s annual report on Form 20-F dated November 23, 2006, File No. 000-30895). |
| 4.38 | Share Purchase Agreement by and Among EXFO Electro-Optical Engineering Inc., Navtel Communications Inc. and Vengrowth Investment Fund, BDC Capital Inc. and others, dated March 26, 2008 (incorporated by reference to Exhibit 4.38 of EXFO’s annual report on Form 20-F dated November 26, 2008, File No. 000-30895). |
| 4.39 | Agreement and Plan of Merger by and among Gexfo Distribution Internationale Inc., EXFO Service Assurance Inc. and Brix Networks, Inc. and Charles River Ventures, LLC dated April 2, 2008 (incorporated by reference to EXFO’s Material Change Report on Form 6-K dated May 2, 2008, File No. 000-30895). |
| 4.40 | Issuer Tender Offer, Letter of Transmittal and Notice of Guaranteed Delivery dated November 10, 2008 (incorporated by reference as Exhibits (a) (1) (i), (a) (1) (ii) and (a) (1) (iii) to EXFO’s Schedule TO dated November 10, 2008, File No. 000-30895). |
| 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’s annual report on Form 20-F dated January 15, 2004, File No. 000-30895). |
| 11.2 | Board of Directors Corporate Governance Guidelines (incorporated by reference to Exhibit 11.2 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 11.3 | Code of Ethics for our Principal Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 11.3 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 11.4 | Ethics and Business Conduct Policy (incorporated by reference to Exhibit 11.4 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 11.5 | Statement of Reporting Ethical Violations (Whistle Blower) (incorporated by reference to Exhibit 11.5 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 11.6 | Audit Committee Charter (incorporated by reference to Exhibit 11.6 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 11.7 | Human Resources Committee Charter (incorporated by reference to Exhibit 11.7 of EXFO’s annual report on Form 20-F dated November 29, 2005, File No. 000-30895). |
| 12.1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 12.2 | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 13.1 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 13.2 | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
The registrant hereby certifies that it meets all of the requirements for filing on Form 20 -F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
Name: Germain Lamonde
Title: Chairman of the Board, President
and Chief Executive Officer
Date: November 28, 2007.26, 2008.
Exhibit 12.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Germain Lamonde, certify that:
| 1. | I have reviewed this annual report on Form 20-F of EXFO Electro-Optical Engineering Inc. ("EXFO"); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of EXFO as at, and for, the periods presented in this report; |
| 4. | EXFO's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for EXFO and have: |
| a. | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to EXFO, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of EXFO's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as at the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in EXFO's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, EXFO's internal control over financial reporting. |
| 5. | EXFO's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to EXFO's auditors and the audit committee of EXFO's board of directors: |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect EXFO's ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in EXFO’s internal control over financial reporting. |
Date: November 28, 200726, 2008
/s/ Germain Lamonde
Germain Lamonde
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 12.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of EXFO, hereby certifies, that:
| 1. | The annual report of Form 20-F for the year ended August 31, |
| 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 28, 2007.26, 2008.
/s/ Germain Lamonde
Germain Lamonde
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as separate disclosure document.
Exhibit 13.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Pierre Plamondon, certify that:
| 1. | I have reviewed this annual report on Form 20-F of EXFO Electro-Optical Engineering Inc. ("EXFO"); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of EXFO as at, and for, the periods presented in this report; |
| 4. | EXFO's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for EXFO and have: |
| a. | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to EXFO, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of EXFO's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as at the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in EXFO's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, EXFO's internal control over financial reporting. |
| 5. | EXFO's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to EXFO's auditors and the audit committee of EXFO's board of directors: |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect EXFO's ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in EXFO's internal control over financial reporting. |
Date: November 28, 200726, 2008
/s/ Pierre Plamondon
Pierre Plamondon, CA
Vice-President Finance
and Chief Financial Officer
(Principal Financial Officer)
Exhibit 13.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of EXFO, hereby certifies, that:
| 1. | The annual report of Form 20-F for the year ended August 31, |
| 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 28, 2007.26, 2008.
/s/ Pierre Plamondon
Pierre Plamondon, CA
Vice-President Finance
and Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as separate disclosure document.
Report of the Independent AuditorsRegistered Public Accounting Firm
To the Shareholders of
EXFO Electro-Optical Engineering Inc.
We have completed an integrated auditaudits of the consolidated financial statements and internal control over financial reporting of EXFO Electro-Optical Engineering Inc. as ofat August 31, 2008 and 2007 and auditsan audit of its August 31, 2006 and August 31, 2005 consolidated financial statements. Our opinions, based on our audits, are presented below.
Consolidated financial statements
We have audited the accompanying consolidated balance sheets of EXFO Electro-Optical Engineering Inc. as ofat August 31, 20072008 and 2006,2007, and the related consolidated statements of earnings, comprehensive income and accumulated other comprehensive income, retained earnings (deficit) and contributed surplus and cash flows for each of the three years in the three-year period ended August 31, 2007.2008. We have also audited the financial statement schedule, Valuation and Qualifying Accounts, in Item 8.A. of this Annual Report on Form 20-F. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits of the Company's financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofat August 31, 20072008 and 20062007 and the results of its operations and its cash flows for each of the three years in the three-year period ended August 31, 20072008 in accordance with Canadian generally accepted accounting principles. Furthermore, in our opinion, the financial statements schedulesstatement schedule, Valuation and Qualifying Accounts, in Item 8.A. of this Annual Report on the changes in the allowance for doubtful accounts and in the valuation allowance on future income tax assets included in Form 20-F presentpresents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, the Company changed its accounting policies related to financial instruments.
Internal control over financial reporting
We have also audited EXFO Electro-Optical Engineering Inc.'s internal control over financial reporting as ofat August 31, 2007,2008, based on criteria established in Internal Control - Integrated—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. OurAn audit of internal control over financial reporting includedincludes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we consideredconsider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’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.
As described in the Management's Report on Internal Control Over Financial Reporting, management has excluded Navtel Communications Inc. (“Navtel”) and Brix Networks Inc. (“Brix”) from its assessment of internal control over financial reporting as of August 31, 2008 because these companies were acquired by EXFO in March 2008 and April 2008, respectively; therefore, it was not possible for management to assess their internal control over financial reporting in the period between the consummation dates and the date of management's assessment. We have also excluded Navtel and Brix from our audit of internal control over financial reporting. Navtel is a wholly-owned subsidiary of the Company whose total assets and total revenues represent 0.3% and 0.7%, respectively, of the related consolidated financial statements as at and for the year ended August 31, 2008. Brix is a wholly-owned subsidiary of the Company whose total assets and total revenues represent 1.0% and 2.2%, respectively, of the related consolidated financial statements as at and for the year ended August 31, 2008.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofat August 31, 20072008 based on criteria established in Internal Control –— Integrated Framework issued by the COSO.
/s/PricewaterhouseCoopers LLP
Chartered Accountants
Quebec, Quebec, Canada
October 30, 2007,15, 2008, except as to note 21Note 20 which is as of November 5, 200710, 2008
EXFO
Consolidated Balance Sheets
(in thousands of US dollars)
As at August 31, | ||||||||
2007 | 2006 | |||||||
Assets | ||||||||
Current assets | ||||||||
| Cash | $ | 5,541 | $ | 6,853 | ||||
| Short-term investments (notes 8 and 18) | 124,217 | 104,437 | ||||||
| Accounts receivable (notes 8 and 18) | ||||||||
| Trade | 26,699 | 20,891 | ||||||
| Other (note 4) | 2,479 | 2,792 | ||||||
| Income taxes and tax credits recoverable (note 15) | 6,310 | 2,201 | ||||||
| Inventories (notes 5 and 8) | 31,513 | 24,623 | ||||||
| Prepaid expenses | 1,391 | 1,404 | ||||||
| Future income taxes (note 16) | 7,609 | − | ||||||
| 205,759 | 163,201 | |||||||
Income taxes recoverable | − | 476 | ||||||
Property, plant and equipment (notes 6 and 8) | 18,117 | 17,392 | ||||||
Intangible assets (notes 7 and 8) | 9,628 | 10,948 | ||||||
Goodwill (note 7) | 28,437 | 27,142 | ||||||
Future income taxes (note 16) | 17,197 | − | ||||||
| $ | 279,138 | $ | 219,159 | |||||
Liabilities | ||||||||
Current liabilities | ||||||||
| Accounts payable and accrued liabilities (note 9) | $ | 22,721 | $ | 17,337 | ||||
| Deferred revenue | 2,598 | 1,772 | ||||||
| Current portion of long-term debt | − | 107 | ||||||
| 25,319 | 19,216 | |||||||
Deferred revenue | 3,414 | 2,632 | ||||||
Government grants (note 15) | − | 723 | ||||||
Long-term debt (note 10) | − | 354 | ||||||
Future income taxes (note 16) | 240 | − | ||||||
| 28,973 | 22,925 | |||||||
Commitments (note 11) | ||||||||
Contingencies (note 12) | ||||||||
Shareholders’ equity | ||||||||
| Share capital (note 13) | 150,019 | 148,921 | ||||||
| Contributed surplus | 4,453 | 3,776 | ||||||
| Retained earnings (note 13) | 42,275 | − | ||||||
| Cumulative translation adjustment | 53,418 | 43,537 | ||||||
| 250,165 | 196,234 | |||||||
| $ | 279,138 | $ | 219,159 | |||||
| As at August 31, | ||||||||
| 2008 | 2007 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 5,914 | $ | 5,541 | ||||
| Short-term investments (notes 8, 11 and 17) | 81,626 | 124,217 | ||||||
| Accounts receivable (notes 8 and 17) | ||||||||
| Trade | 31,473 | 26,699 | ||||||
| Other (note 17) | 4,753 | 2,479 | ||||||
| Income taxes and tax credits recoverable (notes 3 and 14) | 4,836 | 6,310 | ||||||
| Inventories (notes 5 and 8) | 34,880 | 31,513 | ||||||
| Prepaid expenses | 1,774 | 1,391 | ||||||
| Future income taxes (note 15) | 9,140 | 7,609 | ||||||
| 174,396 | 205,759 | |||||||
Tax credits recoverable (notes 3 and 14) | 20,657 | − | ||||||
Property, plant and equipment (notes 6 and 8) | 19,875 | 18,117 | ||||||
Intangible assets (notes 7 and 8) | 19,945 | 9,628 | ||||||
Goodwill (note 7) | 42,653 | 28,437 | ||||||
Future income taxes (note 15) | 15,540 | 17,197 | ||||||
| $ | 293,066 | $ | 279,138 | |||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities (note 9) | $ | 24,713 | $ | 22,721 | ||||
| Deferred revenue | 5,079 | 2,598 | ||||||
| 29,792 | 25,319 | |||||||
| Deferred revenue | 3,759 | 3,414 | ||||||
Future income taxes (note 15) | – | 240 | ||||||
| 33,551 | 28,973 | |||||||
Commitments (note 10) | ||||||||
Contingencies (note 11) | ||||||||
| Shareholders’ equity | ||||||||
| Share capital (note 12) | 142,786 | 150,019 | ||||||
| Contributed surplus | 5,226 | 4,453 | ||||||
| Retained earnings (note 12) | 60,494 | 42,275 | ||||||
| Accumulated other comprehensive income (note 2) | 51,009 | 53,418 | ||||||
| 259,515 | 250,165 | |||||||
| $ | 293,066 | $ | 279,138 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board
/s/ Germain Lamonde GERMAIN LAMONDE Chairman, President and CEO | /s/ André Tremblay ANDRÉ TREMBLAY Chairman, Audit Committee |
EXFO Electro-Optical Engineering Inc.
Consolidated StatementStatements of Earnings
(in thousands of US dollars, except share and per share data)
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Sales (note 19) | $ | 152,934 | $ | 128,253 | $ | 97,216 | ||||||
Cost of sales (1,2) | 65,136 | 57,275 | 44,059 | |||||||||
Gross margin | 87,798 | 70,978 | 53,157 | |||||||||
Operating expenses | ||||||||||||
Selling and administrative (1) | 49,580 | 40,298 | 31,782 | |||||||||
Net research and development (1) (notes 15 and 16) | 16,668 | 15,404 | 12,190 | |||||||||
| Amortization of property, plant and equipment | 2,983 | 3,523 | 4,256 | |||||||||
| Amortization of intangible assets | 2,864 | 4,394 | 4,836 | |||||||||
| Impairment of long-lived assets (note 4) | – | 604 | – | |||||||||
| Government grants (note 15) | (1,079 | ) | (1,307 | ) | – | |||||||
| Restructuring and other charges (note 4) | – | – | 292 | |||||||||
Total operating expenses | 71,016 | 62,916 | 53,356 | |||||||||
Earnings (loss) from operations | 16,782 | 8,062 | (199 | ) | ||||||||
| Interest and other income | 4,717 | 3,253 | 2,524 | |||||||||
| Foreign exchange loss | (49 | ) | (595 | ) | (1,336 | ) | ||||||
Earnings before income taxes (note 16) | 21,450 | 10,720 | 989 | |||||||||
Income taxes (note 16) | ||||||||||||
| Current | 3,741 | 2,585 | 2,623 | |||||||||
| Recognition of previously unrecognized future income tax assets | (24,566 | ) | – | – | ||||||||
| (20,825 | ) | 2,585 | 2,623 | |||||||||
Net earnings (loss) for the year | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | |||||
Basic and diluted net earnings (loss) per share | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | |||||
Basic weighted average number of shares outstanding (000’s) | 68,875 | 68,643 | 68,526 | |||||||||
Diluted weighted average number of shares outstanding (000’s) (note 17) | 69,555 | 69,275 | 68,526 | |||||||||
(1) Stock-based compensation costs included in: | ||||||||||||
| Cost of sales | $ | 118 | $ | 127 | $ | 143 | ||||||
| Selling and administrative | 633 | 701 | 626 | |||||||||
| Net research and development | 230 | 204 | 194 | |||||||||
| $ | 981 | $ | 1,032 | $ | 963 | |||||||
| (2) The cost of sales is exclusive of amortization, shown separately. | ||||||||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Sales (note 18) | $ | 183,790 | $ | 152,934 | $ | 128,253 | ||||||
Cost of sales (1,2) | 75,624 | 65,136 | 57,275 | |||||||||
| Gross margin | 108,166 | 87,798 | 70,978 | |||||||||
| Operating expenses | ||||||||||||
Selling and administrative (1) | 61,153 | 49,580 | 40,298 | |||||||||
Net research and development (1) (notes 14 and 15) | 26,867 | 16,668 | 15,404 | |||||||||
| Amortization of property, plant and equipment | 4,292 | 2,983 | 3,523 | |||||||||
| Amortization of intangible assets | 3,871 | 2,864 | 4,394 | |||||||||
| Impairment of long-lived assets (note 4) | – | – | 604 | |||||||||
| Government grants (note 14) | – | (1,079 | ) | (1,307 | ) | |||||||
| Total operating expenses | 96,183 | 71,016 | 62,916 | |||||||||
| Earnings from operations | 11,983 | 16,782 | 8,062 | |||||||||
| Interest income | 4,639 | 4,717 | 3,253 | |||||||||
| Foreign exchange gain (loss) | 442 | (49 | ) | (595 | ) | |||||||
Earnings before income taxes and extraordinary gain (note 15) | 17,064 | 21,450 | 10,720 | |||||||||
Income taxes (note 15) | ||||||||||||
| Current | (7,094 | ) | 3,741 | 2,585 | ||||||||
| Future | 14,094 | – | – | |||||||||
| Recognition of previously unrecognized future income tax assets | (5,324 | ) | (24,566 | ) | – | |||||||
| 1,676 | (20,825 | ) | 2,585 | |||||||||
| Earnings before extraordinary gain | 15,388 | 42,275 | 8,135 | |||||||||
Extraordinary gain (note 3) | 3,036 | – | – | |||||||||
| Net earnings for the year | $ | 18,424 | $ | 42,275 | $ | 8,135 | ||||||
| Basic and diluted earnings before extraordinary gain per share | $ | 0.22 | $ | 0.61 | $ | 0.12 | ||||||
| Basic and diluted net earnings per share | $ | 0.27 | $ | 0.61 | $ | 0.12 | ||||||
| Basic weighted average number of shares outstanding (000’s) | 68,767 | 68,875 | 68,643 | |||||||||
Diluted weighted average number of shares outstanding (000’s) (note 16) | 69,318 | 69,555 | 69,275 | |||||||||
(1) Stock-based compensation costs included in: | ||||||||||||
| Cost of sales | $ | 148 | $ | 118 | $ | 127 | ||||||
| Selling and administrative | 830 | 633 | 701 | |||||||||
| Net research and development | 294 | 230 | 204 | |||||||||
| $ | 1,272 | $ | 981 | $ | 1,032 | |||||||
| (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 Retained Earnings (Deficit)Comprehensive Income and Contributed SurplusAccumulated
Other Comprehensive Income
(in thousands of US dollars)
Retained earnings (deficit) | ||||||||||||
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Balance – Beginning of year | $ | – | $ | (381,846 | ) | $ | (380,212 | ) | ||||
Add (deduct) | ||||||||||||
| Net earnings (loss) for the year | 42,275 | 8,135 | (1,634 | ) | ||||||||
| Elimination of deficit by reduction of share capital (note 13) | – | 373,711 | – | |||||||||
Balance – End of year | $ | 42,275 | $ | – | $ | (381,846 | ) | |||||
| Comprehensive income | ||||||||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Net earnings for the year | $ | 18,424 | $ | 42,275 | $ | 8,135 | ||||||
| Foreign currency translation adjustment | (2,289 | ) | 9,881 | 13,115 | ||||||||
| Changes in unrealized gains (losses) on short-term investments | 31 | – | – | |||||||||
| Unrealized gains on forward exchange contracts | 962 | – | – | |||||||||
| Reclassification of realized gains on forward exchange contracts in net earnings | (3,915 | ) | – | – | ||||||||
| Future income tax effect of the above items | 909 | – | – | |||||||||
| Comprehensive income | $ | 14,122 | $ | 52,156 | $ | 21,250 | ||||||
| Accumulated other comprehensive income | ||||||||
| Years ended August 31, | ||||||||
| 2008 | 2007 | |||||||
| Foreign currency translation adjustment | ||||||||
| Cumulative effect of prior years | $ | 53,418 | $ | 43,537 | ||||
| Current year | (2,289 | ) | 9,881 | |||||
| 51,129 | 53,418 | |||||||
| Unrealized gains (losses) on forward exchange contracts | ||||||||
| Adjustment related to the implementation of new accounting standards (note 2) | 1,948 | – | ||||||
| Current year, net of realized gains and future income taxes | (2,044 | ) | – | |||||
| (96 | ) | – | ||||||
| Unrealized gains (losses) on short-term investments | ||||||||
| Adjustment related to the implementation of new accounting standards (note 2) | (55 | ) | – | |||||
| Current year, net of future income taxes | 31 | – | ||||||
| (24 | ) | – | ||||||
| Accumulated other comprehensive income | $ | 51,009 | $ | 53,418 | ||||
Contributed surplus | ||||||||||||
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Balance – Beginning of year | $ | 3,776 | $ | 2,949 | $ | 1,986 | ||||||
Add (deduct) | ||||||||||||
| Stock-based compensation costs | 973 | 1,027 | 963 | |||||||||
| Reclassification of stock-based compensation costs to share capital upon exercise of stock awards (note 13) | (296 | ) | (200 | ) | – | |||||||
Balance – End of year | $ | 4,453 | $ | 3,776 | $ | 2,949 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
EXFO Electro-Optical Engineering Inc.
Consolidated Statements of Cash FlowsRetained Earnings (Deficit) and Contributed Surplus
(in thousands of US dollars)
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities | ||||||||||||
| Net earnings (loss) for the year | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | |||||
| Add (deduct) items not affecting cash | ||||||||||||
| Discount on short-term investments | (404 | ) | (229 | ) | (302 | ) | ||||||
| Stock-based compensation costs | 981 | 1,032 | 963 | |||||||||
| Amortization | 5,847 | 7,917 | 9,092 | |||||||||
| Impairment of long-lived assets | – | 604 | – | |||||||||
| Gain on disposal of capital assets | (117 | ) | – | – | ||||||||
| Future income taxes | (24,566 | ) | – | – | ||||||||
| Deferred revenue | 1,299 | 786 | 977 | |||||||||
| Government grants | (752 | ) | (1,307 | ) | – | |||||||
24,563 | 16,938 | 9,096 | ||||||||||
| Change in non-cash operating items | ||||||||||||
| Accounts receivable | (5,468 | ) | (2,637 | ) | (838 | ) | ||||||
| Income taxes and tax credits | (3,403 | ) | 329 | 6,096 | ||||||||
| Inventories | (5,456 | ) | (2,287 | ) | (699 | ) | ||||||
| Prepaid expenses | 85 | 79 | 544 | |||||||||
| Accounts payable and accrued liabilities | 4,105 | (144 | ) | (164 | ) | |||||||
14,426 | 12,278 | 14,035 | ||||||||||
Cash flows from investing activities | ||||||||||||
| Additions to short-term investments | (807,056 | ) | (673,289 | ) | (585,665 | ) | ||||||
| Proceeds from disposal and maturity of short-term investments | 793,435 | 681,500 | 574,207 | |||||||||
| Additions to capital assets | (5,547 | ) | (3,378 | ) | (1,501 | ) | ||||||
| Net proceeds from disposal of capital assets | 3,092 | – | – | |||||||||
| Business combination, net of cash acquired (note 3) | – | (18,054 | ) | – | ||||||||
| (16,076 | ) | (13,221 | ) | (12,959 | ) | |||||||
Cash flows from financing activities | ||||||||||||
| Repayment of long-term debt | (472 | ) | (415 | ) | (121 | ) | ||||||
| Exercise of stock options | 802 | 557 | 148 | |||||||||
| Share issue expenses | – | – | (6 | ) | ||||||||
330 | 142 | 21 | ||||||||||
Effect of foreign exchange rate changes on cash | 8 | 535 | 863 | |||||||||
Change in cash | (1,312 | ) | (266 | ) | 1,960 | |||||||
Cash – Beginning of year | 6,853 | 7,119 | 5,159 | |||||||||
Cash – End of year | $ | 5,541 | $ | 6,853 | $ | 7,119 | ||||||
Supplementary information | ||||||||||||
| Interest paid | $ | 57 | $ | 65 | $ | 30 | ||||||
| Income taxes paid (recovered) | $ | 3,527 | $ | 2,541 | $ | (669 | ) | |||||
| Retained earnings (deficit) | ||||||||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Balance – Beginning of year | $ | 42,275 | $ | – | $ | (381,846 | ) | |||||
| Add (deduct) | ||||||||||||
| Adjustment related to the implementation of new accounting standards (note 2) | 55 | – | – | |||||||||
| Net earnings for the year | 18,424 | 42,275 | 8,135 | |||||||||
| Premium on redemption of share capital (note 12) | (260 | ) | – | – | ||||||||
| Elimination of deficit by reduction of share capital (note 12) | – | – | 373,711 | |||||||||
| Balance – End of year | $ | 60,494 | $ | 42,275 | $ | – | ||||||
| Contributed surplus | ||||||||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Balance – Beginning of year | $ | 4,453 | $ | 3,776 | $ | 2,949 | ||||||
| Add (deduct) | ||||||||||||
| Stock-based compensation costs | 1,287 | 973 | 1,027 | |||||||||
| Reclassification of stock-based compensation costs to share capital upon exercise of stock awards (note 12) | (514 | ) | (296 | ) | (200 | ) | ||||||
| Balance – End of year | $ | 5,226 | $ | 4,453 | $ | 3,776 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
EXFO Electro-Optical Engineering Inc.
Consolidated Statements of Cash Flows
(in thousands of US dollars)
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net earnings for the year | $ | 18,424 | $ | 42,275 | $ | 8,135 | ||||||
| Add (deduct) items not affecting cash | ||||||||||||
| Change in discount on short-term investments | 1,035 | (404 | ) | (229 | ) | |||||||
| Stock-based compensation costs | 1,272 | 981 | 1,032 | |||||||||
| Amortization | 8,163 | 5,847 | 7,917 | |||||||||
| Impairment of long-lived assets | – | – | 604 | |||||||||
| Gain on disposal of capital assets | – | (117 | ) | – | ||||||||
| Deferred revenue | 47 | 1,299 | 786 | |||||||||
| Government grants | – | (752 | ) | (1,307 | ) | |||||||
| Future income taxes | 8,770 | (24,566 | ) | – | ||||||||
| Extraordinary gain | (3,036 | ) | – | – | ||||||||
| 34,675 | 24,563 | 16,938 | ||||||||||
| Change in non-cash operating items | ||||||||||||
| Accounts receivable | (4,338 | ) | (5,468 | ) | (2,637 | ) | ||||||
| Income taxes and tax credits | (12,833 | ) | (3,403 | ) | 329 | |||||||
| Inventories | (2,166 | ) | (5,456 | ) | (2,287 | ) | ||||||
| Prepaid expenses | (127 | ) | 85 | 79 | ||||||||
| Accounts payable and accrued liabilities | (1,416 | ) | 4,105 | (144 | ) | |||||||
| 13,795 | 14,426 | 12,278 | ||||||||||
| Cash flows from investing activities | ||||||||||||
| Additions to short-term investments | (717,020 | ) | (807,056 | ) | (673,289 | ) | ||||||
| Proceeds from disposal and maturity of short-term investments | 760,310 | 793,435 | 681,500 | |||||||||
| Additions to capital assets | (6,508 | ) | (5,547 | ) | (3,378 | ) | ||||||
| Net proceeds from disposal of capital assets | – | 3,092 | – | |||||||||
| Business combinations, net of cash acquired (note 3) | (41,016 | ) | – | (18,054 | ) | |||||||
| (4,234 | ) | (16,076 | ) | (13,221 | ) | |||||||
| Cash flows from financing activities | ||||||||||||
| Repayment of long-term debt | – | (472 | ) | (415 | ) | |||||||
| Redemption of share capital (note 12) | (8,068 | ) | – | – | ||||||||
| Exercise of stock options | 61 | 802 | 557 | |||||||||
| (8,007 | ) | 330 | 142 | |||||||||
| Effect of foreign exchange rate changes on cash | (1,181 | ) | 8 | 535 | ||||||||
| Change in cash | 373 | (1,312 | ) | (266 | ) | |||||||
| Cash – Beginning of year | 5,541 | 6,853 | 7,119 | |||||||||
| Cash – End of year | $ | 5,914 | $ | 5,541 | $ | 6,853 | ||||||
| Supplementary information | ||||||||||||
| Interest paid | $ | 55 | $ | 57 | $ | 65 | ||||||
| Income taxes paid | $ | 759 | $ | 3,527 | $ | 2,541 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
1 Nature of Activities
EXFO Electro-Optical Engineering Inc. (“EXFO”) designs, manufactures and markets a comprehensive line of test measurement and monitoring solutions for network service providers and equipment manufacturers in the global telecommunications industry. The Telecom Division, which represents the company’s main business activity, offers integrated test solutions extending across the full technology lifecycle from design to technology deployment and onto service assurance and covering all layers of a network service providers, cable operators, system vendorsinfrastructure to enable triple-play services and optical component manufacturers.next-generation, converged IP networking. The Life Sciences and Industrial Division mainly leverages core telecom technologies to offer value-addedoffers solutions for medical-device and opto-electronics assembly, fluorescence microscopy and other life sciences applications and high-precision assembly processes, such as those required for microelectronics, optoelectronics and medical devices.sectors. EXFO’s products are sold in approximately 7095 countries around the world.
2 Summary of Significant Accounting Policies
Basis of presentation
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada, and significant differences in measurement and disclosure from U.S. GAAP are set out in note 20.19. These consolidated financial statements include the accounts of the company and its domestic and international subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Accounting estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant estimates include the fair value of financial instruments, the allowance for doubtful accounts receivable, the amount of tax credits recoverable, the provision for excess and obsolete inventories, the useful lives of capital assets, the valuation of long-lived assets, the valuation allowance for future income taxes, the amount of certain accrued liabilities and deferred revenue as well as stock-based compensation costs. Actual results could differ from those estimates.
Reporting currency
The measurement currency of the company is the Canadian dollar. The company has adopted the US dollar as its reporting currency. The financial statements are translated into the reporting currency using the current rate method. Under this method, the financial statements are translated into the reporting currency as follows: assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet, while revenues and expenses are translated at the monthly average exchange rate. Foreign exchange gains and lossesThe cumulative foreign currency translation adjustment arising from such translation areis included in the cumulative translation adjustmentaccumulated other comprehensive income in shareholders’ equity. Cumulative translation adjustment solely consists of such gains and losses.
In the event that management decides to declare dividends, such dividends would be declared in Canadian dollars.
Foreign currency translation
Foreign currency transactions
Transactions denominated in currencies other than the measurement currency are translated into the relevant measurement currency as follows: monetary assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet, and revenues and expenses are translated at the exchange rate in effect on the date of the transaction. Non-monetary assets and liabilities are translated at historical rates. Foreign exchange gains and losses arising from such translation are reflected in the statements of earnings.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Integrated foreign operations
The financial statements of integrated foreign operations are remeasured into the relevant measurement currency using the temporal method. Under this method, monetary assets and liabilities are remeasured at the exchange rate in effect on the date of the balance sheet. Non-monetary assets and liabilities are remeasured at historical rates, unless such assets and liabilities are carried at market value, in which case, they are remeasured at the exchange rate in effect on the date of the balance sheet. Revenues and expenses are remeasured at the monthly average exchange rate. Foreign exchange gains and losses arising from such remeasurement are reflected in the statements of earnings.
Forward exchange contracts
Forward exchange contracts are utilized by the company to manage its foreign currency exposure. Forward exchange contracts, which qualify for hedge accounting, are entered into by the company to hedge anticipated US-dollar-denominated sales and the related accounts receivable. The company’s policy is not to utilize those derivative financial instruments for trading or speculative purposes.
Prior to hedge anticipated US-dollar-denominated sales, qualifythe adoption of Section 3855 on September 1, 2007, the company’s forward exchange contracts qualified for hedge accounting; therefore, foreign exchange translation gains and losses on these contracts arewere recognized as an adjustment of the revenues when the corresponding hedged sales arewere recorded.
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 terms to maturity of three months or less and that are not required for the purposes of meeting short-term cash requirements are classified as short-term investments.
In accordance with the new requirements of the CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurement”, adopted by the company on September 1, 2007, short-term investments are classified as available-for-sale securities; therefore, they are carried at fair value in the balance sheet, and any changes in their fair value are reflected in comprehensive income. Upon the disposal of these assets, accumulated changes in their fair value are reclassified in the statements of earnings.
Interest income on short-term investments is recorded in interest income in the statements of earnings and in cash flows from operating activities in the statements of cash flows.
Prior to the adoption of Section 3855 on September 1, 2007, short-term investments were valued at the lower of cost and market value. Cost consisted of acquisition cost plus amortization of discount or less amortization of premium.
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.
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)
Property, plant and equipment and amortization
Property, plant and equipment are recorded at cost, less related government grants and research and development tax credits. Amortization is provided on a straight-line basis over the estimated useful lives as follows:
Term | ||
| Land improvements | 5 years | |
| Buildings | 25 years | |
| Equipment | 2 to 10 years | |
| Leasehold improvements | The lesser of useful life and remaining lease term |
Intangible assets, goodwill and amortization
Intangible assets primarily include the cost of core technology and software, net of accumulated amortization. Core technology represents existing technology that was acquired in business combinations and that has reached technological feasibility. Amortization is provided on a straight-line basis over the estimated useful lives of five years for core technology and four and ten10 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 usually determined based on a combination of discounted future cash flows and a market approach. If the carrying value of a reporting unit exceeds its fair value, the second step is performed. In this step, the amount of impairment loss, if any, represents the excess of the carrying value of goodwill over its fair value, and the loss is charged to earnings in the period in which it is incurred. For the purposes of this impairment test, the fair value of goodwill is estimated in the same way as goodwill is determined in business combinations; that is, the excess of the fair value of a reporting unit over the estimated fair value of its net identifiable assets.
The company elected to performperforms its annual impairment test in Maythe third quarter of each fiscal year for all its existing reporting units.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when events or circumstances indicate that cost may not be recoverable. Impairment exists when the carrying amount/value of an asset or group of assets is greater than the undiscounted future cash flows expected to be provided by the asset or group of assets. The amount of impairment loss, if any, is the excess of the carrying value over the fair value. The company assesses fair value of long-lived assets based on discounted future cash flows.
Warranty
The company offers its customers warranties of one to three years, depending on the specific products and terms of the purchase agreement. The company’s typical warranties require it to repair or replace defective products during the warranty period at no cost to the customer. Costs related to original warranties are accrued at the time of shipment, based upon estimates of expected rework and warranty costs to be incurred. Costs associated with separately priced extended warranties are expensed as incurred.
Revenue recognition
For products in which software is incidental, the company recognizes revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. In addition, provisionsProvisions are made for estimated returns, warranties and support obligations.
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)
For products in which software is not incidental, revenues are separated into two categories: product and post-contract customer support (PCS) revenues, based upon vendor-specific objective evidence of fair value. Product revenues for these sales are recognized as described above. PCS revenues are deferred and recognized ratably over the years of the support arrangement. PCS revenues are recognized at the time the product is delivered when provided substantially within one year of delivery, the costs of providing this support are insignificant (and accrued at the time of delivery), and no (or infrequent) software upgrades or enhancements are provided.
Maintenance contracts generally include the right to unspecified upgrades and enhancements on a when-and-if available basis and ongoing customer support. Revenue from these contracts is recognized ratably over the terms of the maintenance contracts on a straight-line basis.
Revenue for extended warranties is recognized on a straight-line basis over the warranty period.
For all sales, the company uses a binding purchase order as evidence that a sales arrangement exists.
Delivery generally occurs when the product is handed over to a transporter for shipment.
At the time of the transaction, the company assesses whether the price associated with its revenue transaction is fixed or determinable and whether or not collection is reasonably assured. The company assesses whether the price is fixed or determinable based on the payment terms associated with the transaction. The company assesses collection based on a number of factors, including past transaction history and the creditworthiness of the customer. Generally, collateral or other security is not requested from customers.
Most sales arrangements do not generally include acceptance clauses. However, when a sales arrangement does include an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period. For these sales arrangements, the sale is recognized when acceptance occurs.
Advertising costs
Advertising costs are expensed as incurred.
Government grants
Grants related to operating expenses are included in earnings when the related expenses are incurred. Grants related to capital expenditures are deducted from the related assets. Grants are included in earnings or deducted from the related assets, provided there is reasonable assurance that the company has complied and will comply with all the conditions related to the grant.
Research and development expenses
All expenses related to research, as well as development activities that do not meet generally accepted criteria for deferral are expensed as incurred, net of related tax credits and government grants. Development expenses that meet generally accepted criteria for deferral, in accordance with the Canadian Institute of Chartered Accountants (CICA) handbookCICA Handbook Section 3450, “Research and Development”, are capitalized, net of related tax credits and government grants, and are amortized against earnings over the estimated benefit period. Research and development expenses are mainly comprised of salaries and related expenses, material costs as well as fees paid to third-party consultants.
As at August 31, 2007,2008, the company had not deferred any development costs.
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)
Income taxes
The company provides for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities as well as the carry forward of unused tax losses and reductions, using enacted or substantively enacted income tax rates expected to be in effect for the years in which the assets are expected to be realized or the liabilities to be settled.
The company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized.
Earnings per share
Basic earnings per share are determined using the weighted average number of common shares outstanding during the year.
Diluted earnings per share are determined using the weighted average number of common shares outstanding during the year, plus the effect of dilutive potential common shares outstanding during the year. This method requires that diluted earnings per share be calculated (using the treasury stock method) as if all dilutive potential common shares had been exercised at the latest at the beginning of the year or on the date of issuance, as the case may be, and that the funds obtained thereby (plus an amount equivalent to the unamortized portion of related stock-based compensation costs) be used to purchase common shares of the company at the average market price of the common shares during the year.
Stock-based compensation costs
The company accounts for stock-based compensation on stock options, restricted share units and deferred share units, using the fair value-based method. The company accounts for stock-based compensation on stock appreciation rights, using the intrinsic value method. Stock-based compensation costs are amortized to expense over the vesting periods.
New accounting standards and pronouncements
Adopted in fiscal 2008
On September 1, 2007, the company adopted the CICA Handbook Section 1530, “Comprehensive Income”, Section 3251, “Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”, and Section 3865, “Hedges”. Sections 3251 and 3865 have been adopted prospectively, while Section 3855 has been applied retroactively, without restatement of prior years’ financial statements, and Section 1530 has been applied retroactively with restatement of prior years’ financial statements.
Following the adoption of Section 3855, the company classified its financial instruments as follows:
Cash
Cash is classified as a financial asset held for trading and is carried at fair value in the balance sheet, and any changes in its fair value are reflected in the statements of earnings.
Short-term investments
The company has elected to classify its short-term investments as available-for-sale securities; therefore they are carried at fair value in the balance sheet, and any changes in their fair value are reflected in comprehensive income. Upon the disposal of these assets, accumulated changes in their fair value are reclassified in the statements of earnings. Also, upon the adoption of this new standard, unrealized losses on short-term investments as at August 31, 2007, in the amount of $55,000 (previously recorded in the statements of earnings), have been reclassified from the opening balance of retained earnings to the opening balance of accumulated other comprehensive income for the year ended August 31, 2008.
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)
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are classified as other financial liabilities. They are initially measured at their fair value. Subsequent measurements are at amortized cost, using the effective interest rate method. For the company, accounts for all formsthat value corresponds to nominal amount as a result of employee stock-based compensation using the fair value-based method. Stock-based compensation costs are amortized to expense over the vesting periods.their short-term maturity.
Forward exchange contracts, which qualify for employee stock-based compensation. However,hedge accounting, are entered into by the company is required to disclose pro forma information with respect to net earnings (loss)hedge anticipated US-dollar-denominated sales and net earnings (loss) per share as if stock-based compensation costs were recognizedthe related accounts receivable. They are recorded at fair value in the financial statements for all reporting years using the fair value-based method for unvested outstanding stock options granted prior to September 1, 2003 (note 14).
Cumulative foreign currency translation adjustment
The cumulative foreign currency translation adjustment, which is solely the result of prior year'sthe translation of the company’s consolidated financial statements. Any gains or losses on hedge relationships that no longer qualify arestatements in US dollars (the reporting currency), has been reclassified to be reflected in retained earningspresented as at September 1, 2007. Any gains or losses of hedging instruments are adjusted to retained earnings or thea component of accumulated other comprehensive income associated with the hedged items. for all years presented.
Transition
The company will adopthas elected to use September 1, 2002, as the transition date for embedded derivatives.
Other than the adjustments described above for the short-term investments and the forward exchange contracts, the recognition, derecognition and measurement methods used to prepare the consolidated financial statements have not changed from the methods of years prior to the effective date of these new standardsstandards. Consequently, there were no further adjustments to record on transition.
Section 1506, “Accounting Changes”
On September 1, 2007, the company adopted Section 1506, “Accounting Changes”. This section establishes criteria for changes in accounting policies and impacts consistent withaccounting treatment and disclosures regarding changes in accounting policies, estimates and corrections of errors. In particular, this section allows for voluntary changes in accounting policy only when they result in the adjustments described under note 20 items a)financial statements providing reliable and c) will affectmore relevant information. Furthermore, this section requires disclosure when an entity has not applied a new source of GAAP that has been issued but is not yet effective. Such disclosure is provided below. The adoption of this section had no effect on the company’s consolidated financial statements.statements for the year ended August 31, 2008.
To be adopted after fiscal 2008
In December 2006, the CICA issued three new sections, which provide a complete set of disclosure and presentation requirements for financial instruments: Section 3862, “Financial Instruments − Disclosures”; Section 3863, “Financial Instruments − Presentation”; and Section 1535, “Capital Disclosures”.
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)
Section 3862 is the Canadian equivalent to International Financial Reporting Standards (IFRS) 7, “Financial Instruments − Disclosures”, and replaces the disclosure portion of Section 3861, “Financial Instruments − Disclosure and Presentation”. The new standard places increased emphasis on disclosures aboutregarding risks associated with both recognized and unrecognized financial instruments and how these risks are managed. It is also intended to remove any duplicate disclosures and simplify the disclosures about concentrations of risk, credit risk, liquidity risk and price risk currently found in Section 3861.
Section 3863 carries forward the presentation requirements from Section 3861, unchanged.
Sections 1535, 3862 and 3863 apply to fiscal years beginning on or after October 1, 2007. The company will adopt these new standards on September 1, 2008, and is currently assessing the disclosure effects these new standards will have on its consolidated financial statements.
In June 2007, the CICA issued Section 3031, “Inventories” to harmonize accounting for inventories under Canadian GAAP with IFRS.. This standard requires the measurement of inventories at the lower of cost and net realizable value and includes guidance on the determination of cost, including allocation of overheads and other costs to inventory. The standard also requires the consistent use of either first-in, first-out (FIFO) or weighted average cost formula to measure the cost of inventories and requires the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. The new standard applies to fiscal years beginning on or after January 1, 2008. The company will adopt this new standard on September 1, 2008, and is currently assessingits adoption will have no significant effect on its consolidated financial statements.
In June 2007, the CICA amended Section 1400, “General Standards of Financial Statement Presentation” to include new requirements regarding an entity’s ability to continue as a going concern. These amendments apply to fiscal years beginning on or after January 1, 2008. The company will adopt these amendments on September 1, 2008, and their adoption will have no effect on its consolidated financial statements.
In February 2008, the CICA issued Section 3064, “Goodwill and intangible assets”, which supersedes Section 3062, “Goodwill and other intangible assets” and Section 3450, “Research and development costs”. Various changes have been made to other sections of the CICA Handbook for consistency purposes. Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill remain unchanged from the standards included in the previous Section 3062. This new section applies to fiscal years beginning on or after October 1, 2008. The company will adopt this new standard on September 1, 2009, and has not yet determined the effects this new standardits adoption will have on its consolidated financial statements.
3 Business CombinationCombinations
Fiscal 2008
Navtel Communications Inc.
On March 26, 2008, the company acquired all issued and outstanding shares of Navtel Communications Inc. Based in Toronto, Canada, Navtel Communications Inc. was a privately held company specializing in tests for next-generation Internet Protocol networks. On March 26, 2008, Navtel Communications Inc. was liquidated into the parent company.
This acquisition was settled for a total cash consideration of $11,477,000, or $11,332,000 net of $145,000 of cash acquired. The total consideration included acquisition-related costs of $172,000.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
This acquisition was accounted for using the purchase method and, consequently, the results of operations of the acquired business have been included in the consolidated financial statements of the company since March 26, 2008, being the date of acquisition.
The purchase price, including acquisition-related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:
| Assets acquired, net of cash acquired | ||||
| Accounts receivable | $ | 776 | ||
| Inventories | 447 | |||
| Other current assets | 320 | |||
| Tax credits | 7,074 | |||
| Core technology | 2,919 | |||
| Future income tax assets | 8,586 | |||
| Current liabilities assumed | ||||
| Accounts payable and accrued liabilities | (431 | ) | ||
| Deferred revenue | (523 | ) | ||
| Future income tax liabilities | (2,737 | ) | ||
| Net identifiable assets acquired | 16,431 | |||
| Purchase price, net of cash acquired | 11,332 | |||
| Excess of the fair value of net identifiable assets acquired over the purchase price | $ | (5,099 | ) | |
The excess of the fair value of the net identifiable assets acquired over the purchase price in the amount of $5,099,000 has been eliminated in part by fully reducing the value assigned to acquired core technology and related future income tax liabilities. The remaining excess in the amount of $3,036,000 has been presented as an extraordinary gain in the statement of earnings for the year ended August 31, 2008. The basic and diluted extraordinary gain per share amounted to $0.04 for the year ended August 31, 2008.
This business reports to the Telecom Division.
Brix Networks Inc. (renamed EXFO Service Assurance Inc.)
On April 22, 2008, the company acquired all issued and outstanding shares of Brix Networks Inc. (renamed EXFO Service Assurance Inc.). Based in the Boston (MA) area, Brix Networks Inc. was a privately held company offering VoIP and IPTV test solutions across the three areas that most affect the success of a real-time service: signaling quality (signaling path performance), delivery quality (media transport performance) and content quality (overall quality of experience).
This acquisition was settled for a cash consideration of $29,696,000, or $29,684,000 net of $12,000 of cash acquired, plus a contingent cash consideration of up to a maximum of $7,537,000, based upon the achievement of a bookings volume exceeding $16,000,000 up to $40,000,000 in the 12 months following the acquisition. The purchase price allocation took into account severance expenses of $497,000 (note 4) for the termination of employees of the acquired business. Severance expenses payable as at August 31, 2008, in the amount of $292,000 (note 9), will be paid in the first quarter of fiscal 2009. Any amount payable for the contingent cash consideration will increase goodwill.
This acquisition was accounted for using the purchase method and, consequently, the results of operations of the acquired business have been included in the consolidated financial statements of the company since April 22, 2008, being the date of acquisition.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The purchase price, including acquisition-related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:
| Assets acquired, net of cash acquired | ||||
| Accounts receivable | $ | 1,106 | ||
| Inventories | 1,229 | |||
| Other current assets | 488 | |||
| Capital assets | 1,097 | |||
| Core technology | 13,765 | |||
| Future income tax assets | 1,641 | |||
| Current liabilities assumed | ||||
| Accounts payable and accrued liabilities | (2,565 | ) | ||
| Deferred revenue | (2,445 | ) | ||
| Net identifiable assets acquired | 14,316 | |||
| Goodwill | 15,368 | |||
| Purchase price, net of cash acquired | $ | 29,684 | ||
Intangible assets are amortized on a straight-line basis over their estimated useful life of five years.
Upon completion of the final purchase price allocation in the fourth quarter of fiscal 2008, the company revised the estimated fair value assigned to deferred revenue and reduced the fair value from $4,120,000 to $2,445,000, thus reducing goodwill as well.
Future income tax assets at the acquisition date amounted to $13,701,000 and were mainly comprised of net operating losses and research and development expenses carried forward. A valuation allowance of $8,195,000 was recorded against these assets. In the event that the company would reverse a portion or all of the valuation allowance, the amount of such reversal would reduce the amount of goodwill recognized at the date of acquisition.
This business, including acquired goodwill, reports to the Telecom Division. Acquired goodwill is not deductible for tax purposes.
Fiscal 2006
Consultronics Limited
On January 26, 2006, the company acquired substantially all the assets of 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), Internet ProtocolIP TV and Voice-over-Internet Protocol (VoIP)VoIP test solutions for broadband access networks.
This acquisition was settled for a total cash consideration valued atof $19,093,000 or $18,838,000 net of $255,000 of cash acquired. The purchase price allocation took into account severance expenses of $660,000 (note 4) for the termination of employees of the acquired business, as well as other acquisition-related costs of $822,000.
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 statements of earnings of the company since January 26, 2006, being the date of acquisition.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The purchase price, including acquisition-related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:
| Assets acquired | ||||||||
| Current assets, net of cash acquired | $ | 5,135 | ||||||
| Assets acquired, net of cash acquired | ||||||||
| Accounts receivable | $ | 2,298 | ||||||
| Inventories | 2,452 | |||||||
| Other current assets | 385 | |||||||
| Property, plant and equipment | 3,115 | 3,115 | ||||||
| Core technology | 8,709 | 8,709 | ||||||
| Current liabilities assumed | (2,826 | ) | (2,826 | ) | ||||
| Loans assumed | (402 | ) | (402 | ) | ||||
| Net identifiable assets acquired | 13,731 | 13,731 | ||||||
| Goodwill | 5,107 | 5,107 | ||||||
| Purchase price, net of cash acquired | $ | 18,838 | $ | 18,838 | ||||
Acquired core technology is amortized on a straight-line basis over its estimated useful life of five years.
This business, including acquired goodwill, reports to the Telecom Division. Acquired goodwill is deductible for tax purposes.
4 Special Charges
Impairment of long-lived assets
In June 2006, the company entered into an agreement to sell one of its buildings (located in Rochester, NY) along with some equipment, and it recorded an impairment charge of $604,000 in the third quarter of fiscal 2006. The impairment charge represented the excess of the carrying value of these assets over the expected net selling price of $1,200,000. The sale of theseprice. These assets was finalized inwere finally sold during the fourth quarter of fiscal 2006 for the expected net selling price, which was received in November 2006.price. These assets were related to the Life ScienceSciences and Industrial Division.
Restructuring and other charges
Year ended August 31, 2005
Balance as at August 31, 2006 | Additions | Payments | Adjustments | Balance as at August 31, 2007 | ||||||||||||||||
Fiscal 2006 plan | ||||||||||||||||||||
| Severance expenses (note 3) | $ | 631 | $ | − | $ | (631 | ) | $ | − | $ | − | |||||||||
Fiscal 2003 plan | ||||||||||||||||||||
| Exited leased facilities | 60 | − | (60 | ) | − | − | ||||||||||||||
| Total for all plans (note 9) | $ | 691 | $ | − | $ | (691 | ) | $ | − | $ | − | |||||||||
Balance as at August 31, 2007 | Additions | Payments | Balance as at August 31, 2008 | |||||||||||||
| Fiscal 2008 plan (notes 3 and 9) | ||||||||||||||||
| Severance expenses | $ | − | $ | 497 | $ | (205 | ) | $ | 292 | |||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Year ended August 31, 2007
Balance as at August 31, 2006 | Additions | Payments | Balance as at August 31, 2007 | |||||||||||||
| Fiscal 2006 plan | ||||||||||||||||
| Severance expenses | $ | 631 | $ | − | $ | (631 | ) | $ | − | |||||||
| Fiscal 2003 plan | ||||||||||||||||
| Exited leased facilities | 60 | − | (60 | ) | − | |||||||||||
Total for all plans (note 9) | $ | 691 | $ | − | $ | (691 | ) | $ | − | |||||||
Year ended August 31, 2006
Balance as at August 31, 2005 | Additions | Payments | Adjustments | Balance as at August 31, 2006 | ||||||||||||||||
Fiscal 2006 plan | ||||||||||||||||||||
| Severance expenses (note 3) | $ | – | $ | 660 | $ | (29 | ) | $ | – | $ | 631 | |||||||||
Fiscal 2003 plan | ||||||||||||||||||||
| Exited leased facilities | 150 | – | (90 | ) | – | 60 | ||||||||||||||
| Total for all plans (note 9) | $ | 150 | $ | 660 | $ | (119 | ) | $ | – | $ | 691 | |||||||||
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 | $ | 1,169 | $ | 482 | $ | (1,311 | ) | $ | (190 | ) | $ | 150 | ||||||||
Balance as at August 31, 2005 | Additions | Payments | Balance as at August 31, 2006 | |||||||||||||
| Fiscal 2006 plan | ||||||||||||||||
| Severance expenses (note 3) | $ | – | $ | 660 | $ | (29 | ) | $ | 631 | |||||||
| Fiscal 2003 plan | ||||||||||||||||
| Exited leased facilities | 150 | – | (90 | ) | 60 | |||||||||||
| Total for all plans | $ | 150 | $ | 660 | $ | (119 | ) | $ | 691 | |||||||
5 Inventories
As at August 31, | As at August 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
| Raw materials | $ | 16,898 | $ | 14,353 | $ | 17,651 | $ | 16,898 | ||||||||
| Work in progress | 1,387 | 1,043 | 1,961 | 1,387 | ||||||||||||
| Finished goods | 13,228 | 9,227 | 15,268 | 13,228 | ||||||||||||
| $ | 31,513 | $ | 24,623 | $ | 34,880 | $ | 31,513 | |||||||||
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)
6 Property, Plant and Equipment
As at August 31, | As at August 31, | |||||||||||||||||||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||||||||||||||||||
Cost | Accumulated amortization | Cost | Accumulated amortization | Cost | Accumulated amortization | Cost | Accumulated amortization | |||||||||||||||||||||||||
| Land and land improvements | $ | 2,265 | $ | 1,177 | $ | 4,249 | $ | 1,082 | $ | 2,295 | $ | 1,184 | $ | 2,265 | $ | 1,177 | ||||||||||||||||
| Buildings | 12,300 | 3,516 | 14,417 | 6,262 | 12,319 | 3,985 | 12,300 | 3,516 | ||||||||||||||||||||||||
| Equipment | 33,184 | 25,710 | 33,562 | 28,263 | 36,423 | 27,083 | 33,184 | 25,710 | ||||||||||||||||||||||||
| Leasehold improvements | 3,236 | 2,465 | 2,788 | 2,017 | 3,698 | 2,608 | 3,236 | 2,465 | ||||||||||||||||||||||||
50,985 | $ | 32,868 | 55,016 | $ | 37,624 | 54,735 | $ | 34,860 | 50,985 | $ | 32,868 | |||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||
| Accumulated amortization | 32,868 | 37,624 | 34,860 | 32,868 | ||||||||||||||||||||||||||||
| $ | 18,117 | $ | 17,392 | $ | 19,875 | $ | 18,117 | |||||||||||||||||||||||||
As at August 31, 2006, 2007 the carrying value of property, plant and equipment, which were in the process of being installed and which were not yet amortized, amounted to $1,488,000.
7 Intangible Assets and Goodwill
As at August 31, | As at August 31, | |||||||||||||||||||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||||||||||||||||||
Cost | Accumulated amortization | Cost | Accumulated amortization | Cost | Accumulated amortization | Cost | Accumulated amortization | |||||||||||||||||||||||||
| Core technology | $ | 50,014 | $ | 43,298 | $ | 47,629 | $ | 38,972 | $ | 62,933 | $ | 45,981 | $ | 50,014 | $ | 43,298 | ||||||||||||||||
| Software | 8,083 | 5,171 | 6,781 | 4,490 | 8,631 | 5,638 | 8,083 | 5,171 | ||||||||||||||||||||||||
58,097 | $ | 48,469 | 54,410 | $ | 43,462 | 71,564 | $ | 51,619 | 58,097 | $ | 48,469 | |||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||
| Accumulated amortization | 48,469 | 43,462 | 51,619 | 48,469 | ||||||||||||||||||||||||||||
| $ | 9,628 | $ | 10,948 | $ | 19,945 | $ | 9,628 | |||||||||||||||||||||||||
Estimated amortization expense for intangible assets in each of the next five fiscal years will amountamounts to $2,705,000 in 2008, $2,658,000$5,387,000 in 2009, $2,606,000$5,336,000 in 2010, $1,392,000$4,127,000 in 2011, $2,909,000 in 2012 and $196,000$1,752,000 in 2012.2013.
Additions to intangible assets for the years ended August 31, 2005, 2006, 2007 and 20072008 amounted to $236,000, $9,190,000, $1,156,000 and $1,156,000,$14,828,000, 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)
Changes in the carrying value of goodwill are as follows:
As at August 31, | ||||||||
2007 | 2006 | |||||||
| Balance – Beginning of year | $ | 27,142 | $ | 20,370 | ||||
| Addition from business combination (note 3) | − | 5,107 | ||||||
| Foreign currency translation adjustment | 1,295 | 1,665 | ||||||
| Balance – End of year (note 19) | $ | 28,437 | $ | 27,142 | ||||
| Years ended August 31, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Telecom Division | Life Sciences and Industrial Division | Total | Telecom Division | Life Sciences and Industrial Division | Total | |||||||||||||||||||
| Balance - Beginning of year | $ | 23,622 | $ | 4,815 | $ | 28,437 | $ | 22,545 | $ | 4,597 | $ | 27,142 | ||||||||||||
| Addition from business combinations (note 3) | 15,368 | − | 15,368 | − | − | − | ||||||||||||||||||
| Foreign currency translation adjustment | (1,124 | ) | (28 | ) | (1,152 | ) | 1,077 | 218 | 1,295 | |||||||||||||||
| Balance – End of year (note 18) | $ | 37,866 | $ | 4,787 | $ | 42,653 | $ | 23,622 | $ | 4,815 | $ | 28,437 | ||||||||||||
8 Credit Facilities
The company has a line of credit that provides for advances of up to CA$10,000,000 (US$9,466,000)9,411,000). This line of credit bears interest at prime rate (prime rate in 2006).rate. As at August 31, 2007,2008, an amount of CA$1,542,000 (US$1,451,000) was reserved from this line of credit was unused.for letters of guarantee (note 11).
The company also has anothera second line of credit, which provides for advances of up to CA$4,500,000CNY10,000,000 (US$4,260,000)1,500,000) and up to US$2,500,000. This line of credit bears interest at the Chinese prime rate for letters of guarantee.advances made in CNY and at LIBOR plus 3.5% for advances made in US dollars. As at August 31, 2007, an amount of CA$1,811,000 (US$1,714,000) was reserved from2008, this line of credit (note 12).was unused.
Finally, the company has a third lineother lines of credit of $12,000,000$20,000,000 for the foreign currency risk exposure related to its forward exchange contracts.contracts (note 17). As at August 31, 2007,2008, an amount of $701,000$1,473,000 was reserved from this linethese lines 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.
9 Accounts Payable and Accrued Liabilities
As at August 31, | As at August 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
| Trade | $ | 11,749 | $ | 7,487 | $ | 10,303 | $ | 11,749 | ||||||||
| Salaries and social benefits | 7,929 | 5,991 | 8,888 | 7,929 | ||||||||||||
| Warranty | 800 | 1,006 | 974 | 800 | ||||||||||||
| Commissions | 824 | 835 | 761 | 824 | ||||||||||||
| Tax on capital | 923 | 524 | ||||||||||||||
| Restructuring charges (note 4) | − | 691 | 292 | − | ||||||||||||
| Forward exchange contracts (note 17) | 714 | − | ||||||||||||||
| Other | 1,419 | 1,327 | 1,858 | 895 | ||||||||||||
| $ | 22,721 | $ | 17,337 | $ | 24,713 | $ | 22,721 | |||||||||
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)
Changes in the warranty provision are as follows:
As at August 31, | As at August 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
| Balance – Beginning of year | $ | 1,006 | $ | 725 | $ | 800 | $ | 1,006 | ||||||||
| Provision | 801 | 895 | 655 | 801 | ||||||||||||
| Addition from business combinations | 175 | − | ||||||||||||||
| Settlements | (1,007 | ) | (645 | ) | (656 | ) | (1,007 | ) | ||||||||
| Addition from business combination | − | 31 | ||||||||||||||
| Balance – End of year | $ | 800 | $ | 1,006 | $ | 974 | $ | 800 | ||||||||
10 Long-Term Debt
As at August 31, | ||||||||
2007 | 2006 | |||||||
| Loans collateralized by equipment, bearing interest at 4.9%, fully repaid in fiscal 2007 | $ | − | $ | 461 | ||||
| Less: Current portion | − | 107 | ||||||
| $ | − | $ | 354 | |||||
The company entered into operating leases for certain of its premises and equipment, which expire at various dates through September 2012.August 2013. As at August 31, 2007,2008, minimum rentals payable under these operating leases in each of the next five years will amount to $2,313,000 in 2008, $2,164,000$3,596,000 in 2009, $2,064,000$3,051,000 in 2010, $1,145,000$1,528,000 in 2011, $629,000 in 2012 and $598,000$57,000 in 2012.2013. Total commitments for these operating leases amount to $8,327,000.$8,861,000.
For the years ended August 31, 2005, 2006, 2007 and 2007,2008, rental expenses amounted to $1,370,000, $1,523,000, $1,847,000 and $1,847,000,$2,427,000, respectively.
Class action
On November 27, 2001, a class actionclass-action suit was filed in the United States District Court for the Southern District of New York against the company, four of the underwriters of its Initial Public Offering and some of its executive officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of 1933. This class action alleges that the company’s registration statement and prospectus filed with the Securities and Exchange Commission on June 29, 2000, contained material misrepresentations and/or omissions resulting from (i) the underwriters allegedly soliciting and receiving additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated material portions of the shares issued in connection with the company’s Initial Public Offering; and (ii) the underwriters allegedly entering into agreements with customers whereby shares issued in connection with the company’s Initial Public Offering would be allocated to those customers in exchange for which customers agreed to purchase additional amounts of shares in the after-market at pre-determinedpredetermined prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing master allegations against all of the underwriters in all of the 310 cases included in this class action and also filed an amended complaint containing allegations specific to four of the company’s underwriters, the company and two of its executive officers. In addition to the allegations mentioned above, the amended complaint alleges that the underwriters (i) used their analysts to manipulate the stock market; and (ii) implemented schemes that allowed issuer insiders to sell their shares rapidly after an initial public offering and benefit from high market prices. As concerns the company and its two executive officers in particular, the amended complaint alleges that (i) the company’s registration statement was materially false and misleading because it failed to disclose the additional commissions and compensation to be received by underwriters; (ii) the two named executive officers learned of or recklessly disregarded the alleged misconduct of the underwriters; (iii) the two named executive officers had motive and opportunity to engage in alleged wrongful conduct due to personal holdings of the company’s stock and the fact that an alleged artificially inflated stock price could be used as currency for acquisitions; and (iv) the two named executive officers, by virtue of their positions with the company, controlled the company and the contents of the registration statement and had the ability to prevent its issuance or cause it to be corrected. The plaintiffs in this suit seek an unspecified amount for damages suffered.
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 July 2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint and a decision was rendered on February 19, 2003. Only one of the claims against the company was dismissed. On October 8, 2002, the claims against its officers were dismissed pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs.
In June 2004, an agreement of partial settlement was submitted to the court for preliminary approval. The proposed partial settlement was between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.
On April 6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing en banc.banc. In light of the Second CircuitCircuit’s opinion, liaison counsel for all issuer defendants, including the company, informed the court that this settlement cannot be approved, because the defined settlement class, like the litigation class, cannot be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class actionclass-action complaints against the focus cases and, plan to moveon September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class-action complaints. On March 26, 2008, the district court denied the motions to dismiss, except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside of the previously certified class period. Briefing on the class certification again.motion was completed in May 2008.
Letters of guarantee
As at August 31, 2007,2008, in the normal course of its operations, the company had outstanding letters of guarantee for its own selling and purchase requirements in the amount of CA$1,811,0006,018,000 (US$1,714,000)5,663,000), which expire at various dates through fiscal 2010; these2010. From this amount, the company had CA$1,542,000 (US$1,451,000) worth of letters of guarantee for its own selling and purchase requirements, which were reserved from one of the lines of credit (note 8). The remainder in the amount of CA$4,476,000 (US$4,212,000) was used by the company to secure its line of credit in CNY. This line of credit was unused as at August 31, 2008 (note 8). These letters of guarantee were secured by short-term investments.
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’s option into subordinate voting shares on a |
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes the share capital activity since August 31, 2004:2005:
Multiple voting shares | Subordinate voting shares | Multiple voting shares | Subordinate voting shares | |||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Total amount | Number | Amount | Number | Amount | Total amount | |||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||
| Redemption of restricted stock awards | – | – | 53,592 | – | – | |||||||||||||||||||||||||||||||||||
| Share issue expenses | – | – | – | (6 | ) | (6 | ) | |||||||||||||||||||||||||||||||||
| Balance as at August 31, 2005 | 37,900,000 | 1 | 30,665,774 | 521,874 | 521,875 | 37,900,000 | $ | 1 | 30,665,774 | $ | 521,874 | $ | 521,875 | |||||||||||||||||||||||||||
| Exercise of stock options (note 14) | – | – | 182,425 | 557 | 557 | |||||||||||||||||||||||||||||||||||
| Redemption of restricted share units (note 14) | – | – | 4,770 | – | – | |||||||||||||||||||||||||||||||||||
| Exercise of stock options (note 13) | – | – | 182,425 | 557 | 557 | |||||||||||||||||||||||||||||||||||
| Redemption of restricted share units (note 13) | – | – | 4,770 | – | – | |||||||||||||||||||||||||||||||||||
| Conversion of multiple voting shares into subordinate voting shares | (757,000 | ) | – | 757,000 | – | – | (757,000 | ) | – | 757,000 | – | – | ||||||||||||||||||||||||||||
| Reclassification of stock-based compensation costs to share capital upon exercise of stock awards | – | – | – | 200 | 200 | – | – | – | 200 | 200 | ||||||||||||||||||||||||||||||
Elimination of deficit by reduction of share capital (1) | – | – | – | (373,711 | ) | (373,711 | ) | – | – | – | (373,711 | ) | (373,711 | ) | ||||||||||||||||||||||||||
| Balance as at August 31, 2006 | 37,143,000 | 1 | 31,609,969 | 148,920 | 148,921 | 37,143,000 | 1 | 31,609,969 | 148,920 | 148,921 | ||||||||||||||||||||||||||||||
| Exercise of stock options (note 14) | – | – | 250,528 | 802 | 802 | |||||||||||||||||||||||||||||||||||
| Redemption of restricted share units (note 14) | – | – | 1,064 | – | – | |||||||||||||||||||||||||||||||||||
| Exercise of stock options (note 13) | – | – | 250,528 | 802 | 802 | |||||||||||||||||||||||||||||||||||
| Redemption of restricted share units (note 13) | – | – | 1,064 | – | – | |||||||||||||||||||||||||||||||||||
| Conversion of multiple voting shares into subordinate voting shares | (500,000 | ) | – | 500,000 | – | – | (500,000 | ) | – | 500,000 | – | – | ||||||||||||||||||||||||||||
| Reclassification of stock-based compensation costs to share capital upon exercise of stock awards | – | – | – | 296 | 296 | – | – | – | 296 | 296 | ||||||||||||||||||||||||||||||
| Balance as at August 31, 2007 | 36,643,000 | $ | 1 | 32,361,561 | $ | 150,018 | $ | 150,019 | 36,643,000 | 1 | 32,361,561 | 150,018 | 150,019 | |||||||||||||||||||||||||||
| Exercise of stock options (note 13) | – | – | 18,500 | 61 | 61 | |||||||||||||||||||||||||||||||||||
| Redemption of restricted share units (note 13) | – | – | 65,870 | – | – | |||||||||||||||||||||||||||||||||||
| Redemption of deferred share units (note 13) | – | – | 20,695 | – | – | |||||||||||||||||||||||||||||||||||
| Reclassification of stock-based compensation costs to share capital upon exercise of stock awards | – | – | – | 514 | 514 | |||||||||||||||||||||||||||||||||||
Redemption of share capital (2) | – | – | (1,682,921 | ) | (7,808 | ) | (7,808 | ) | ||||||||||||||||||||||||||||||||
| Balance as at August 31, 2008 | 36,643,000 | $ | 1 | 30,783,705 | $ | 142,785 | $ | 142,786 | ||||||||||||||||||||||||||||||||
| (1) | On August 31, 2006, upon the approval of the Board of Directors, the company eliminated its deficit against its share capital. |
| (2) | On November 5, 2007, the Board of Directors of the company approved a share repurchase program, by way of a normal course issuer bid on the open market, of up to 9.9% of the company’s public float (as defined by the Toronto Stock Exchange), or 2,869,585 subordinate voting shares, at the prevailing market price. The company uses cash, short-term investments or future cash flows from operations to fund the repurchase of shares. The period of the normal course issuer bid commenced on November 8, 2007, and ended on November 7, 2008. All shares repurchased by the company under the bid are cancelled (note 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)
13 Stock-Based Compensation Plans
The maximum number of additional subordinate voting shares issuable under the Long-Term Incentive Plan and the Deferred Share Unit Plan cannot exceed 6,306,153 shares. The maximum number of subordinate voting shares that may be granted to any individual on an annual basis cannot exceed 5% of the number of outstanding subordinate voting shares. The company settles stock options and redeems restricted share units and deferred share units through the issuance of common shares from treasury.
Long-term incentive plan
In May 2000, the company established a Stock Option Plan for directors, executive officers and employees and those of the company’s subsidiaries, as determined by the Board of Directors. In January 2005, the company made certain amendments to the existing Stock Option Plan, including the renaming of the plan to Long-Term Incentive Plan, which includes stock options and restricted share units. This plan was approved by the shareholders of the company.
Stock Options
The exercise price of stock options granted under the Long-Term Incentive Plan is the market price of the common shares on the date of grant. Stock options granted under the plan generally expire ten years from the date of grant and vest over a four-year period, being the required period of service from employees, generally with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. The Board of Directors may accelerate the vesting of any or all outstanding stock options upon the occurrence of a change of control.
The following table summarizes stock option activity since August 31, 2004:2005:
Years ended August 31, | Years ended August 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||||||||||
Number | Weighted average exercise price | Number | Weighted average exercise price | Number | Weighted average exercise price | Number | Weighted average exercise price | Number | Weighted average exercise price | Number | Weighted average exercise price | |||||||||||||||||||||||||||||||||||||
(CA$) | (CA$) | (CA$) | (CA$) | (CA$) | (CA$) | |||||||||||||||||||||||||||||||||||||||||||
| Outstanding – Beginning of year | 2,439,375 | $ | 20 | 2,763,759 | $ | 19 | 2,934,518 | $ | 21 | 1,929,388 | $ | 21 | 2,439,375 | $ | 20 | 2,763,759 | $ | 19 | ||||||||||||||||||||||||||||||
| Granted | − | − | 31,992 | 6 | 246,233 | 6 | − | − | − | − | 31,992 | 6 | ||||||||||||||||||||||||||||||||||||
| Exercised | (250,528 | ) | (4 | ) | (182,425 | ) | (4 | ) | (71,699 | ) | (3 | ) | (18,500 | ) | 3 | (250,528 | ) | 4 | (182,425 | ) | 4 | |||||||||||||||||||||||||||
| Forfeited | (259,459 | ) | (32 | ) | (173,951 | ) | (18 | ) | (345,293 | ) | (27 | ) | (8,750 | ) | 6 | (37,869 | ) | 5 | (68,489 | ) | 6 | |||||||||||||||||||||||||||
| Expired | (80,657 | ) | 29 | (221,590 | ) | 37 | (105,462 | ) | 27 | |||||||||||||||||||||||||||||||||||||||
| Outstanding – End of year | 1,929,388 | $ | 21 | 2,439,375 | $ | 20 | 2,763,759 | $ | 19 | 1,821,481 | $ | 21 | 1,929,388 | $ | 21 | 2,439,375 | $ | 20 | ||||||||||||||||||||||||||||||
| Exercisable – End of year | 1,746,699 | $ | 22 | 1,852,870 | $ | 25 | 1,650,404 | $ | 28 | 1,762,969 | $ | 21 | 1,746,699 | $ | 22 | 1,852,870 | $ | 25 | ||||||||||||||||||||||||||||||
The intrinsic value of stock options exercised during fiscal 2005, 2006, 2007 and 2007,2008 was CA$214,000 (US$174,000), CA$552,000 (US$481,000)$481,000, $743,000 and CA$833,000 (US$743,000),$43,000, respectively.
The weighted average grant-date fair value of stock options granted during fiscal 2005 and 2006 amounted to CA$5.68, and CA$5.50, respectively.$4.76.
Expected forfeitures are immaterial to the company and are not reflected in the table above.
Years ended August 31, | ||||
2006 | 2005 | |||
| Risk-free interest rate | 3.9% | 3.6% | ||
| Expected volatility | 87% | 95% | ||
| Dividend yield | Nil | Nil | ||
| Expected life | 66 months | 66 months | ||
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 stock options granted in fiscal 2006 was estimated using the Black-Scholes options valuation model with the following weighted average assumptions:
| Risk-free interest rate | 3.9% | |
| Expected volatility | 87% | |
| Dividend yield | Nil | |
| Expected life | 66 months |
The factors considered in developing assumptions used in the Black-Scholes option valuation model are the following:
The risk-free interest rate is based on the interest rate on Government of Canada bonds for maturities consistent with the expected life of the stock options. The historical volatility of the company’s common sharesshare price is used to establish the expected share price volatility. Finally, the company estimates the expected life of the stock options based on historical data related to employees’ exercise of stock options.
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, 2005, 2006 and 2007, the net earnings (loss) per share and the pro forma net earnings (loss) per share would have been the same for all reporting years.
| Stock options outstanding | Stock options exercisable | |||||||||||||||||||||||||||
| Exercise price | Number | Weighted average exercise price | Intrinsic value | Weighted average remaining contractual life | Number | Weighted average exercise price | Intrinsic value | Weighted average remaining contractual life | ||||||||||||||||||||
| (CA$) | (CA$) | (CA$) | (CA$) | (CA$) | ||||||||||||||||||||||||
| $2.50 to $3.36 | 259,625 | $ | 2.51 | $ | 509 | 4.1 years | 259,625 | $ | 2.51 | $ | 509 | 4.1 years | ||||||||||||||||
| $3.96 to $5.60 | 409,404 | 5.10 | 2 | 5.7 years | 356,170 | 5.03 | 2 | 5.5 years | ||||||||||||||||||||
| $6.22 to $9.02 | 149,641 | 6.56 | – | 5.4 years | 144,363 | 6.58 | – | 5.4 years | ||||||||||||||||||||
| $14.27 to $20.00 | 396,846 | 15.55 | – | 3.1 years | 396,846 | 15.55 | – | 3.1 years | ||||||||||||||||||||
| $29.70 to $43.00 | 437,474 | 36.39 | – | 2.2 years | 437,474 | 36.39 | – | 2.2 years | ||||||||||||||||||||
| $51.25 to $68.17 | 132,561 | 66.45 | – | 2.0 years | 132,561 | 66.45 | – | 2.0 years | ||||||||||||||||||||
| $83.66 | 35,930 | 83.66 | – | 2.0 years | 35,930 | 83.66 | – | 2.0 years | ||||||||||||||||||||
| 1,821,481 | $ | 20.66 | $ | 511 | 3.7 years | 1,762,969 | $ | 21.16 | $ | 511 | 3.6 years | |||||||||||||||||
Stock options outstanding | Stock options exercisable | |||||||||||||||
Exercise price | Number | Weighted average exercise price | Intrinsic value | Weighted average remaining contractual life | Number | Weighted average exercise price | Intrinsic value | Weighted average remaining contractual life | ||||||||
(CA$) | (CA$) | (CA$) | (CA$) | (CA$) | ||||||||||||
| $2.50 to $3.36 | 280,625 | $ 2.51 | $1,280 | 5.1 years | 280,625 | $ 2.51 | $1,280 | 5.1 years | ||||||||
| $3.96 to $5.84 | 429,404 | 5.11 | 841 | 6.7 years | 285,133 | 5.01 | 587 | 6.4 years | ||||||||
| $6.22 to $9.02 | 157,316 | 6.58 | 116 | 6.4 years | 118,898 | 6.70 | 83 | 6.3 years | ||||||||
| $14.27 to $20.00 | 412,296 | 15.61 | − | 4.1 years | 412,296 | 15.61 | − | 4.1 years | ||||||||
| $29.70 to $43.00 | 468,926 | 36.36 | − | 3.2 years | 468,926 | 36.36 | − | 3.2 years | ||||||||
| $51.25 to $68.17 | 143,391 | 66.58 | − | 3.0 years | 143,391 | 66.58 | − | 3.0 years | ||||||||
| $83.66 | 37,430 | 83.66 | − | 3.0 years | 37,430 | 83.66 | − | 3.0 years | ||||||||
| 1,929,388 | $20.78 | $2,237 | 4.7 years | 1,746,699 | $ 22.38 | $1,950 | 4.4 years | |||||||||
Restricted Share Units (RSUs)
RSUs are “phantom” shares that rise and fall in value based on the valuemarket price of the company’s subordinate voting shares and are redeemable for actual subordinate voting shares or cash at the discretion of the Board of Directors as determined on the date of grant. Vesting dates are also established by the Board of Directors on the date of grant. The vesting dates are subject to a minimum term of three years and a maximum term of ten years from the award date, being the required period of service from employees. RSUs granted under the plan expire at the latest ten years from the date of grant. Fair value of RSUs equals the market price of the common shares on the date of grant. This plan was approved by the shareholders of the company.
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
| Outstanding – Beginning of year | 327,877 | 176,185 | – | |||||||||
| Granted | 219,002 | 173,803 | 176,185 | |||||||||
| Redeemed | (1,064 | ) | (4,770 | ) | – | |||||||
| Forfeited | (57,800 | ) | (17,341 | ) | – | |||||||
| Outstanding – End of year | 488,015 | 327,877 | 176,185 | |||||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes RSU activity since August 31, 2005:
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Outstanding – Beginning of year | 488,015 | 327,877 | 176,185 | |||||||||
| Granted | 469,847 | 219,002 | 173,803 | |||||||||
| Redeemed | (65,870 | ) | (1,064 | ) | (4,770 | ) | ||||||
| Forfeited | (44,201 | ) | (57,800 | ) | (17,341 | ) | ||||||
| Outstanding – End of year | 847,791 | 488,015 | 327,877 | |||||||||
None of the RSUs outstanding, as at August 31, 2005, 2006, 2007 and 2007,2008, were redeemable. As at August 31, 2007,2008, the weighted average remaining contractual life of the outstanding RSUs was 8.58.6 years. The weighted average grant-date fair value of RSUs granted during fiscal 2005, 2006, 2007 and 20072008 amounted to CA$5.72, CA$6.18$5.39, $6.48 and CA$7.48,$5.46, respectively.
As at August 31, 2007,2008, the intrinsic value of RSUs outstanding was CA$3,450,000 (US$3,266,000).$3,566,000.
Expected forfeitures are immaterial to the company and are not reflected in the table above.
As at August 31, 2007,2008, unrecognized stock-based compensation costs of unvested RSUs amounted to $1,843,000.$3,390,000. The weighted average period over which they are expected to be recognized is 3.43.1 years.
Deferred share unit plan
In January 2005, the company established a Deferred Share Unit (DSU) Plan for the members of the Board of Directors as part of their annual retainer fees. Each DSU entitles the Board members to receive one subordinate voting share. DSUs are acquired on the date of grant and will be redeemed in subordinate voting shares when the Board member will ceaseceases to be Director of the company. This plan was approved by the shareholders of the company.
The following table summarizes DSU activity since JanuaryAugust 31, 2005:
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
| Outstanding – Beginning of year | 43,290 | 23,734 | – | |||||||||
| Granted | 21,428 | 19,556 | 23,734 | |||||||||
| Outstanding – End of year | 64,718 | 43,290 | 23,734 | |||||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Outstanding – Beginning of year | 64,718 | 43,290 | 23,734 | |||||||||
| Granted | 35,162 | 21,428 | 19,556 | |||||||||
| Redeemed | (20,695 | ) | – | – | ||||||||
| Outstanding – End of year | 79,185 | 64,718 | 43,290 | |||||||||
None of the DSUs outstanding as at August 31, 2005, 2006, 2007 and 20072008 were redeemable. The weighted average grant-date fair value of DSUs granted during fiscal 2005, 2006, 2007 and 20072008 amounted to CA$5.50, CA$6.56$5.81, $6.29 and CA$7.00.$5.14.
As at August 31, 2007,2008, the intrinsic value of DSUs outstanding was CA$458,000 (US$433,000).$335,100.
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)
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 and vest over a four-year period, being the required period of service from employees, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. This plan was approved by the shareholders of the company.
The following table summarizes stock appreciation rights activity since August 31, 2005:
| Years ended August 31, | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Number | Weighted average exercise price | Number | Weighted average exercise price | Number | Weighted average exercise price | |||||||||||||||||||
| Outstanding – Beginning of year | 27,700 | $ | 11 | 24,500 | $ | 11 | 19,000 | $ | 12 | |||||||||||||||
| Granted | 3,000 | 6 | 5,200 | 6 | 5,500 | 6 | ||||||||||||||||||
| Forfeited | – | – | (2,000 | ) | 2 | – | – | |||||||||||||||||
| Outstanding – End of year | 30,700 | $ | 10 | 27,700 | $ | 11 | 24,500 | $ | 11 | |||||||||||||||
| Exercisable – End of year | 19,550 | $ | 12 | 13,875 | $ | 15 | 11,000 | $ | 18 | |||||||||||||||
The following table summarizes information about stock appreciation rights as at August 31, 2008:
Stock appreciation rights outstanding | Stock appreciation rights exercisable | ||||||
| Exercise price | Number | Weighted average remaining contractual life | Number | ||||
| $4.51 to $6.50 | 25,700 | 7.2 years | 14,550 | ||||
| $22.25 | 2,500 | 2.4 years | 2,500 | ||||
| $45.94 | 2,500 | 2.0 years | 2,500 | ||||
30,700 | 6.4 years | 19,550 | |||||
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, | ||||||||||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||||||||||
Number | Weighted average exercise price | Number | Weighted average exercise price | Number | Weighted average exercise price | |||||||||||||||||||
| Outstanding – Beginning of year | 24,500 | $ | 11 | 19,000 | $ | 12 | 13,000 | $ | 16 | |||||||||||||||
| Granted | 5,200 | 6 | 5,500 | 6 | 6,000 | 4 | ||||||||||||||||||
| Forfeited | (2,000 | ) | (2 | ) | – | – | – | – | ||||||||||||||||
| Outstanding – End of year | 27,700 | $ | 11 | 24,500 | $ | 11 | 19,000 | $ | 12 | |||||||||||||||
| Exercisable – End of year | 13,875 | $ | 15 | 11,000 | $ | 18 | 7,500 | $ | 24 | |||||||||||||||
Stock appreciation rights outstanding | Stock appreciation rights exercisable | ||||||
Exercise price | Number | Weighted average remaining contractual life | Number | ||||
| $4.51 to $6.50 | 22,700 | 7.9 years | 8,875 | ||||
| $22.25 | 2,500 | 3.4 years | 2,500 | ||||
| $45.94 | 2,500 | 3.0 years | 2,500 | ||||
27,700 | 6.6 years | 13,875 | |||||
Net research and development expenses
Net research and development expenses comprise the following:
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
| Gross research and development expenses | $ | 25,201 | $ | 19,488 | $ | 15,878 | ||||||
| Research and development tax credits and grants | (5,371 | ) | (4,084 | ) | (3,688 | ) | ||||||
| Recognition of previously unrecognized research and development tax credits (note 16) | (3,162 | ) | – | – | ||||||||
| $ | 16,668 | $ | 15,404 | $ | 12,190 | |||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Gross research and development expenses | $ | 32,454 | $ | 25,201 | $ | 19,488 | ||||||
| Research and development tax credits and grants | (5,587 | ) | (5,371 | ) | (4,084 | ) | ||||||
| Recognition of previously unrecognized research and development tax credits (note 15) | – | (3,162 | ) | – | ||||||||
| $ | 26,867 | $ | 16,668 | $ | 15,404 | |||||||
Government grants
During 1998, the company 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$2,220,000 over the period from January 1, 1998, through December 31, 2002, payable based on the number of full-time jobs created during that period.
The above 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, the company had deferred in the balance sheet CA$1,450,000 (US$1,307,000) from the amounts received until it received the final approval by the sponsor of the program related to jobs created. In fiscal 2006, the sponsor of the program granted the company with its final approval, and the company recorded CA$1,450,000 (US$1,307,000) in the earnings from operations in the statement of earnings of fiscal 2006.
Furthermore, until December 31, 2006, companies operating in the Quebec City area were eligible for a refundable credit granted by the Quebec provincial government. This credit was earned based on the increase of eligible production and marketing salaries incurred in the Quebec City area at a rate of 40%. From the total amount claimed by the company under this program, a sum of CA$1,142,000 (US$1,079,000) was deferred in the balance sheet until the company received the final approval of eligible salaries by the sponsor of the program. In fiscal 2007, the sponsor of the program granted the company with its final approval, and the company recorded CA$1,142,000 (US$1,079,000) in the earnings from operations in the statement of earnings of fiscal 2007.
Years ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
| Cost of sales | $ | 186 | $ | 262 | $ | 89 | ||||||
| Selling and administrative | $ | 11 | $ | 76 | $ | 32 | ||||||
| Net research and development | $ | 9 | $ | 4 | $ | 22 | ||||||
| Government grants | $ | 1,079 | $ | 1,307 | $ | – | ||||||
Defined contribution plans
The company maintains separate defined contribution plans for certain eligible employees. These plans, which are accounted for on an accrual basis, are summarized as follows:
| · | Deferred profit-sharing plan |
The company maintains a plan for certain eligible Canadian resident employees, under which the company may elect to contribute an amount equal to 2% (1% prior to June 2005) of an employee’s gross salary, provided that the employee has contributed at least 2% of his gross salary to a tax-deferred registered retirement savings plan. Cash contributions to this plan and expenses for the years ended August 31, 2005, 2006, 2007 and 2007,2008, amounted to CA$221,000 (US$179,000), CA$363,000 (US$316,000)$316,000, $419,000 and CA$470,000 (US$419,000),$531,000, 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)
| · | 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’s current compensation. During the years ended August 31, 2005, 2006, 2007 and 2007,2008, the company recorded cash contributions and expenses totaling $134,000, $126,000, $166,000 and $166,000,$216,000, respectively.
Since fiscal 2003, following the downturn in the telecommunications industry, the company recordedhas maintained a full valuation allowance onagainst its consolidated future income tax assets in every applicableassets. In fiscal 2006, the company recorded an income tax jurisdictions and we wrote off non-refundableexpense of $2,585,000. Most of this expense represented income taxes payable at the Canadian federal level, which were reduced by research and development tax credits because it was more likely than not that these assets would not be realized.
Fiscal 2007
During fiscal 2007, after reviewing both available positive and negative evidences,evidence, and because the company iswas in a cumulative profit position in the parent company (Canadian federal and provinces level) and in one of its subsidiaries, located in the United States, and also because the company expectsexpected to generate sufficient taxable income in future years, management concluded that it was more likely than not that future income tax assets and deferred non-refundable research and development tax credits of the parent company and a portion of the company’s future income tax assets in the United States would be realizable. Consequently, it reversed a portion of its valuation allowance against future income tax assets in the amount of $24,566,000 and recognized previously unrecognized non-refundable research and development tax credits in the amount of $3,162,000 (note 15)14). Future income tax assets recognized in 2007 were recorded in the income tax provision, while research and development tax credits were recorded against gross research and development expenses in the statement of earnings.earnings for that year.
However, in the United States (federal level), based on available positive and negative evidencesevidence as at August 31, 2007, as well as the level and the nature of cumulative and expected profits, the company maintained a valuation allowance of $7,568,000 on a portion of its future income tax assets in this tax jurisdiction because it iswas more likely than not that these assets willwould not be recovered. These future income tax assets consistconsisted of deferred operating losses; some of these losses expire between 2022 and 2026, while others can be carried forward indefinitely against future years’ taxable income.forward.
In other tax jurisdictions where the company has future income tax assets, the company iswas still in a cumulative loss position as at August 31, 2007, and available negative evidences outweighevidence outweighed positive evidences. Forevidence. Consequently, for these tax jurisdictions, the company maintainsmaintained a full valuation allowance against its future income tax assets. As at August 31, 2007, the valuation allowance recorded by the company for these tax jurisdictions amounted to $4,924,000 and mainly relatesrelated to deferred operating losses, which expire at various dates overlosses.
Fiscal 2008
During fiscal 2008, reductions to the next 20 years.Canadian federal statutory tax rate were substantively enacted. Therefore, Canadian federal future income tax assets decreased by $1,524,000, and generated a future income tax expense in the same amount during the year.
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 addition, during fiscal 2008, taking into consideration these new Canadian federal substantively enacted tax rates, the company reviewed its tax strategy for the future use of its Canadian federal operating losses, research and development expenses, certain timing differences and research and development tax credits to minimize income taxes payable on future years’ taxable income. Consequently, it amended its prior year’s income tax returns to generate a net operating loss to be carried back to prior years, which reinstated previously used research and development tax credits. This resulted in an increase of its tax-related assets of $2,715,000 and an income tax recovery of the same amount in the statement of earnings for the year ended August 31, 2008.
Finally, during fiscal 2008, considering the expected positive impacts the acquisitions of Navtel Communications Inc. and Brix Networks Inc. will have on future years’ taxable income at the United States (federal) level and because actual taxable income in the United States is greater than initially expected, management concluded that it was more likely than not that all future income tax assets of its existing consolidated U.S. group would be recovered. Consequently, it reversed its valuation allowance against future income tax assets in the amount of $7,617,000. The portion of the valuation allowance that was reversed, and that was attributable to the effects of the Navtel Communications Inc. and Brix Networks Inc. acquisitions, in the amount of $652,000 and $1,641,000, respectively, were included in the purchase price allocation of the related acquired businesses. The remainder of the reversal, in the amount of $5,324,000, has been recorded in income taxes in the statement of earnings for the year ended August 31, 2008.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The reconciliation of the income tax provision calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the financial statements is as follows:
Years ended August 31, | Years ended August 31, | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||||||||||
| Income tax provision at combined Canadian federal and provincial statutory tax rate (32% in 2007 and 2006 and 31% in 2005) | $ | 6,864 | $ | 3,430 | $ | 307 | ||||||||||||||||||
| Income tax provision at combined Canadian federal and provincial statutory tax rate (31% in 2008 and 32% in 2007 and 2006) | $ | 5,290 | $ | 6,864 | $ | 3,430 | ||||||||||||||||||
| Increase (decrease) due to: | ||||||||||||||||||||||||
| Foreign income taxed at different rates | (12 | ) | (85 | ) | (580 | ) | 147 | (12 | ) | (85 | ) | |||||||||||||
| Non-taxable income | (109 | ) | (207 | ) | (827 | ) | (448 | ) | (109 | ) | (207 | ) | ||||||||||||
| Non-deductible expenses | 692 | 527 | 784 | 998 | 692 | 527 | ||||||||||||||||||
| Tax deductions | – | – | (81 | ) | ||||||||||||||||||||
| Change in tax rates | 105 | 497 | – | 1,522 | 105 | 497 | ||||||||||||||||||
| Change in tax strategy | (2,715 | ) | – | – | ||||||||||||||||||||
| Foreign exchange effect of translation of foreign integrated subsidiaries | 45 | 61 | (209 | ) | 32 | 45 | 61 | |||||||||||||||||
| Other | 236 | 239 | (146 | ) | 378 | 236 | 239 | |||||||||||||||||
| Recognition of previously unrecognized future income tax assets | (24,566 | ) | – | – | (5,324 | ) | (24,566 | ) | – | |||||||||||||||
| Utilization of previously unrecognized future income tax assets | (4,080 | ) | (1,877 | ) | – | (1,872 | ) | (4,715 | ) | (3,336 | ) | |||||||||||||
| Unrecognized future income tax assets on temporary deductible differences and unused tax losses and deductions | – | – | 3,375 | 3,668 | 635 | 1,459 | ||||||||||||||||||
| $ | (20,825 | ) | $ | 2,585 | $ | 2,623 | $ | 1,676 | $ | (20,825 | ) | $ | 2,585 | |||||||||||
| The income tax provision consists of the following: | ||||||||||||||||||||||||
| Current | ||||||||||||||||||||||||
| Canadian | $ | 3,568 | $ | 2,573 | $ | 2,513 | ||||||||||||||||||
| Canada | $ | (7,474 | ) | $ | 3,568 | $ | 2,573 | |||||||||||||||||
| Other | 173 | 12 | 110 | 380 | 173 | 12 | ||||||||||||||||||
3,741 | 2,585 | 2,623 | (7,094 | ) | 3,741 | 2,585 | ||||||||||||||||||
| Future | ||||||||||||||||||||||||
| Canadian | 3,726 | 2,687 | (1,445 | ) | ||||||||||||||||||||
| Canada | 12,111 | 3,726 | 2,687 | |||||||||||||||||||||
| United States | 428 | (601 | ) | (1,723 | ) | 376 | 428 | (601 | ) | |||||||||||||||
| Other | (74 | ) | (209 | ) | (207 | ) | (189 | ) | (74 | ) | (209 | ) | ||||||||||||
4,080 | 1,877 | (3,375 | ) | 12,298 | 4,080 | 1,877 | ||||||||||||||||||
| Valuation allowance | ||||||||||||||||||||||||
| Canadian | (23,092 | ) | (2,687 | ) | 1,445 | |||||||||||||||||||
| Canada | 812 | (23,092 | ) | (2,687 | ) | |||||||||||||||||||
| United States | (5,628 | ) | 601 | 1,723 | (4,545 | ) | (5,628 | ) | 601 | |||||||||||||||
| Other | 74 | 209 | 207 | 205 | 74 | 209 | ||||||||||||||||||
| (28,646 | ) | (1,877 | ) | 3,375 | (3,528 | ) | (28,646 | ) | (1,877 | ) | ||||||||||||||
| (24,566 | ) | – | – | 8,770 | (24,566 | ) | – | |||||||||||||||||
| $ | (20,825 | ) | $ | 2,585 | $ | 2,623 | $ | 1,676 | $ | (20,825 | ) | $ | 2,585 | |||||||||||
| Details of the company’s income taxes: | ||||||||||||||||||||||||
| Earnings (loss) before income taxes | ||||||||||||||||||||||||
| Canadian | $ | 19,634 | $ | 13,202 | $ | 3,092 | ||||||||||||||||||
| Earnings (loss) before income taxes and extraordinary gain | ||||||||||||||||||||||||
| Canada | $ | 18,347 | $ | 19,634 | $ | 13,202 | ||||||||||||||||||
| United States | 1,059 | (2,103 | ) | (953 | ) | (748 | ) | 1,059 | (2,103 | ) | ||||||||||||||
| Other | 757 | (379 | ) | (1,150 | ) | (535 | ) | 757 | (379 | ) | ||||||||||||||
| $ | 21,450 | $ | 10,720 | $ | 989 | $ | 17,064 | $ | 21,450 | $ | 10,720 | |||||||||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Significant components of the company’s future income tax assets and liabilities are as follows:
As at August 31, | ||||||||
2007 | 2006 | |||||||
| Future income tax assets | ||||||||
| Long-lived assets | $ | 4,304 | $ | 4,453 | ||||
| Provisions and accruals | 6,257 | 7,315 | ||||||
| Deferred revenue | 1,005 | 486 | ||||||
| Share issue expenses | 106 | 531 | ||||||
| Research and development expenses | 10,422 | 8,527 | ||||||
| Losses carried forward | 17,230 | 18,118 | ||||||
| 39,324 | 39,430 | |||||||
| Valuation allowance | (12,492 | ) | (38,543 | ) | ||||
26,832 | 887 | |||||||
| Future income tax liabilities | ||||||||
| Research and development tax credits | (2,026 | ) | (887 | ) | ||||
| Provisions and accruals | (240 | ) | – | |||||
| (2,266 | ) | (887 | ) | |||||
| Future income tax assets, net | $ | 24,566 | $ | – | ||||
| As at August 31, | ||||||||
| 2008 | 2007 | |||||||
| Future income tax assets | ||||||||
| Long-lived assets | $ | 3,696 | $ | 4,304 | ||||
| Provisions and accruals | 3,475 | 6,257 | ||||||
| Deferred revenue | 1,466 | 1,005 | ||||||
| Share issue expenses | – | 106 | ||||||
| Research and development expenses | 12,424 | 10,422 | ||||||
| Losses carried forward | 29,890 | 17,230 | ||||||
| 50,951 | 39,324 | |||||||
| Valuation allowance | (15,529 | ) | (12,492 | ) | ||||
| 35,422 | 26,832 | |||||||
| Future income tax liabilities | ||||||||
| Research and development tax credits | (5,607 | ) | (2,026 | ) | ||||
| Long-lived assets | (5,135 | ) | – | |||||
| Other | – | (240 | ) | |||||
| (10,742 | ) | (2,266 | ) | |||||
| Future income tax assets, net | $ | 24,680 | $ | 24,566 | ||||
As at August 31, 2007,2008, the company had available operating and capital losses in several tax jurisdictions, against which a valuation allowance of $10,663,000$12,046,000 was recorded. The valuation allowance includes $6,291,000 for which subsequently recognized benefits will be allocated to reduce goodwill (note 3).
The following table summarizes the year of expiry of these losses by tax jurisdiction:
Canada | United States | Canada | United States | |||||||||||||||||||||
Year of expiry | Federal | Provinces | and Other | Federal | Provincial | and Other | ||||||||||||||||||
| 2008 | $ | 1,230 | $ | 869 | $ | – | ||||||||||||||||||
| 2009 | 2,845 | 162 | – | |||||||||||||||||||||
| 2010 | 4,663 | 176 | – | |||||||||||||||||||||
| 2013 | $ | 787 | $ | 712 | $ | – | ||||||||||||||||||
| 2014 | 177 | 84 | – | 2,186 | 2,184 | – | ||||||||||||||||||
| 2015 | 1,181 | 1,181 | – | 1,174 | 1,174 | – | ||||||||||||||||||
| 2016 | – | 22 | – | |||||||||||||||||||||
| 2017 | – | 33 | – | |||||||||||||||||||||
| 2019 | – | – | 826 | |||||||||||||||||||||
| 2020 | – | – | 3,470 | |||||||||||||||||||||
| 2021 | – | – | 10,202 | |||||||||||||||||||||
| 2022 | – | – | 3,795 | – | – | 9,615 | ||||||||||||||||||
| 2023 | – | – | 7,499 | – | – | 12,087 | ||||||||||||||||||
| 2024 | – | – | 4,564 | – | – | 7,076 | ||||||||||||||||||
| 2025 | – | – | 5,217 | – | – | 4,350 | ||||||||||||||||||
| 2026 | 1,081 | 1,081 | 2,308 | 1,019 | 1,019 | 1,971 | ||||||||||||||||||
| 2027 | 1,103 | 1,103 | – | 4,087 | 4,087 | – | ||||||||||||||||||
| 2028 | 395 | 395 | 769 | |||||||||||||||||||||
| Indefinite | 1,523 | 1,855 | 17,610 | 14,154 | 14,494 | 19,634 | ||||||||||||||||||
| $ | 13,803 | $ | 6,511 | $ | 40,993 | $ | 23,802 | $ | 24,120 | $ | 70,000 | |||||||||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
As at August 31, 2007,2008, in addition to operating and capital losses, the company had available research and development expenses in Canada amounting to $47,717,000$41,795,000 at the federal level and $9,352,000$29,264,000 at the provinces level, against which aprovincial level; in the United States, research and development expenses amounted to $4,680,000. A valuation allowance of $1,331,000$2,850,000 was recorded. Theserecorded against these assets. The valuation allowance includes $1,872,000 for which subsequently recognized benefits will be allocated to reduce goodwill (note 3). In Canada, these expenses can be carried forward indefinitely against future years’ taxable income in their respective tax jurisdiction.jurisdiction, and in the United States, these expenses can be carried forward against taxable income of fiscal years 2013 to 2016.
Finally, as at August 31, 2007,2008, the company had non-refundable research and development tax credits at the Canadian federal level in the amount of $3,815,000$21,300,000 that can be carried forward against future years’ income taxes payable over the next 20 years. As at August 31, 2007,2008, from this amount, $653,000$660,000 was not recorded in the financial statements.
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, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Basic weighted average number of shares outstanding (000’s) | 68,875 | 68,643 | 68,526 | |||||||||
| Plus dilutive effect of: | ||||||||||||
| Stock options (000’s) | 448 | 502 | 422 | |||||||||
| Restricted share units (000’s) | 179 | 99 | 8 | |||||||||
| Deferred share units (000’s) | 53 | 31 | 8 | |||||||||
| Restricted stock awards (000’s) | − | − | 17 | |||||||||
| Diluted weighted average number of shares outstanding (000’s) | 69,555 | 69,275 | 68,981 | |||||||||
| 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) | 1,207 | 1,628 | 1,962 | |||||||||
| Years ended August 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Basic weighted average number of shares outstanding (000’s) | 68,767 | 68,875 | 68,643 | |||||||||
| Plus dilutive effect of: | ||||||||||||
| Stock options (000’s) | 291 | 448 | 502 | |||||||||
| Restricted share units (000’s) | 181 | 179 | 99 | |||||||||
| Deferred share units (000’s) | 79 | 53 | 31 | |||||||||
| Diluted weighted average number of shares outstanding (000’s) | 69,318 | 69,555 | 69,275 | |||||||||
| 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) | 1,404 | 1,207 | 1,628 | |||||||||
Short-term investments
Short-term investments consist of the following:
As at August 31, | ||||||||
2007 | 2006 | |||||||
| Commercial paper denominated in Canadian dollars, bearing interest at annual rates of 3.98% to 4.67% in 2007 and 3.92% to 4.31% in 2006, maturing on different dates between September 2007 and January 2008 in fiscal 2007, and September 2006 and January 2007 in fiscal 2006 | $ | 124,217 | $ | 104,437 | ||||
| As at August 31, | ||||
| 2008 | 2007 | |||
| Commercial paper denominated in Canadian dollars, bearing interest at annual rates of 2.80% to 3.32% in 2008 and 3.98% to 4.67% in 2007, maturing on different dates between September 2008 and February 2009 in fiscal 2008, and September 2007 and January 2008 in fiscal 2007 | $ 81,626 | $124,217 | ||
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
Cash accountsand short-term investments are carried at fair value. Accounts receivable and 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 short-term investments based on market value, amounted to $104,437,000$124,217,000 and $124,217,000$81,626,000 as at August 31, 20062007 and 2007,2008, respectively.
The fair value of forward exchange contracts, which represents the amount that the company would receive or pay to settle the contracts based on the forward exchange rate at year end, amounted to unrecognizednet gains of $5,451,000$3,422,000 and $3,422,000$62,000 as at August 31, 20062007 and 2008, respectively. As at August 31, 2008, forward exchange contracts, in the amount of $614,000, are presented in the other receivables in the balance sheet, and forward exchange contracts, in the amount of $714,000, are presented in accounts payable and accrued liabilities in the balance sheet (note 9). As at August 31, 2007, respectively. Thethe carrying value of theseforward exchange contracts amounted to $555,000$555,000.
Based on the portfolio of forward exchange contracts as at August 31, 2007.2008, the company estimates that the portion of the net unrealized losses on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings over the next 12 months, amounts to $100,000.
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’s short-term investments consist of debt instruments issued by seven (nineten (seven in 2006)2007) high-credit quality corporations and trusts. None of these debt instruments are expected to be affected by a liquidity risk, and 47%none of them are guaranteed by the Government of Canada.represent asset-backed commercial paper. The company’s cash and forward exchange contracts are held with or issued by high-credit quality financial institutions; therefore, the company considers the risk of non-performance on these instruments to be 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 $451,000$206,000 and $206,000$305,000 as at August 31, 20062007 and 2007,2008, respectively.
Interest rate risk
As at August 31, 2007,2008, 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 |
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)
Forward exchange contracts
The company is exposed to currency risks as a result of its export sales of products manufactured in Canada, the majority of which are denominated in US dollars. These risks are partially hedged by forward exchange contracts and certain operating expenses. As at August 31, 20062007 and 2007,2008, the company held contracts to sell US dollars at various forward rates, which are summarized as follows:follows (note 8):
Contractual amounts | Weighted average contractual forward rates | |||||||
| As at August 31, 2006 | ||||||||
| September 2006 to August 2007 | $ | 37,000 | 1.1676 | |||||
| September 2007 to June 2009 | 26,800 | 1.1261 | ||||||
| As at August 31, 2007 | ||||||||
| September 2007 to August 2008 | $ | 36,900 | 1.1295 | |||||
| September 2008 to December 2009 | 15,400 | 1.1199 | ||||||
Contractual amounts | Weighted average contractual forward rates | |||||||
| As at August 31, 2007 | ||||||||
| September 2007 to August 2008 | $ | 36,900 | 1.1295 | |||||
| September 2008 to August 2009 | 14,200 | 1.1180 | ||||||
| September 2009 to December 2009 | 1,200 | 1.1425 | ||||||
| As at August 31, 2008 | ||||||||
| September 2008 to August 2009 | $ | 36,600 | 1.0686 | |||||
| September 2009 to August 2010 | 17,400 | 1.0535 | ||||||
| September 2010 to August 2011 | 2,400 | 1.0619 | ||||||
The company is organized under two reportable segments: the Telecom Division and the Life Sciences and Industrial Division. The Telecom Division offers integrated test solutions and network monitoring systems to network service providers, cable TV operators, system vendors and component manufacturers throughout the global telecommunications industry. The Life Sciences and Industrial Division mainly leverages developedoffers solutions in medical-device and acquired core telecom technologies for high-precisionopto-electronics assembly, fluorescence microscopy and researchother life sciences sectors.
The reporting structure reflects how the company manages its business and how it classifies its operations for planning and measuring performance.
The following tables present information by segment:
Year ended August 31, 2007 | Year ended August 31, 2008 | |||||||||||||||||||||||
Telecom Division | Life Sciences and Industrial Division | Total | Telecom Division | Life Sciences and Industrial Division | Total | |||||||||||||||||||
| Sales | $ | 129,839 | $ | 23,095 | $ | 152,934 | $ | 160,981 | $ | 22,809 | $ | 183,790 | ||||||||||||
| Earnings from operations | $ | 13,132 | $ | 3,650 | $ | 16,782 | $ | 9,524 | $ | 2,459 | $ | 11,983 | ||||||||||||
| Unallocated items: | ||||||||||||||||||||||||
| Interest and other income | 4,717 | |||||||||||||||||||||||
| Foreign exchange loss | (49 | ) | ||||||||||||||||||||||
| Interest income | 4,639 | |||||||||||||||||||||||
| Foreign exchange gain | 442 | |||||||||||||||||||||||
| Earnings before income taxes | 21,450 | |||||||||||||||||||||||
| Earnings before income taxes and extraordinary gain | 17,064 | |||||||||||||||||||||||
| Income taxes | (20,825 | ) | 1,676 | |||||||||||||||||||||
| Earnings before extraordinary gain | 15,388 | |||||||||||||||||||||||
| Extraordinary gain | 3,036 | |||||||||||||||||||||||
| Net earnings for the year | $ | 42,275 | $ | 18,424 | ||||||||||||||||||||
| Recognition of previously unrecognized research and development tax credits (note 15) | $ | (3,162 | ) | $ | − | $ | (3,162 | ) | ||||||||||||||||
| Government grants (note 15) | $ | (1,079 | ) | $ | − | $ | (1,079 | ) | ||||||||||||||||
| Amortization of capital assets | $ | 5,557 | $ | 290 | $ | 5,847 | $ | 4,128 | $ | 164 | $ | 4,292 | ||||||||||||
| Stock-based compensation costs | $ | 886 | $ | 95 | $ | 981 | $ | 1,171 | $ | 101 | $ | 1,272 | ||||||||||||
| Capital expenditures | $ | 5,424 | $ | 123 | $ | 5,547 | $ | 6,327 | $ | 181 | $ | 6,508 | ||||||||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
| Year ended August 31, 2007 | ||||||||||||
| Telecom Division | Life Sciences and Industrial Division | Total | ||||||||||
| Sales | $ | 129,839 | $ | 23,095 | $ | 152,934 | ||||||
| Earnings from operations | $ | 13,132 | $ | 3,650 | $ | 16,782 | ||||||
| Unallocated items: | ||||||||||||
| Interest income | 4,717 | |||||||||||
| Foreign exchange loss | (49 | ) | ||||||||||
| Earnings before income taxes | 21,450 | |||||||||||
| Income taxes | (20,825 | ) | ||||||||||
| Net earnings for the year | $ | 42,275 | ||||||||||
| Recognition of previously unrecognized research and development tax credits (note 14) | $ | (3,162 | ) | $ | − | $ | (3,162 | ) | ||||
| Government grants (note 14) | $ | (1,079 | ) | $ | − | $ | (1,079 | ) | ||||
| Amortization of capital assets | $ | 5,557 | $ | 290 | $ | 5,847 | ||||||
| Stock-based compensation costs | $ | 886 | $ | 95 | $ | 981 | ||||||
| Capital expenditures | $ | 5,424 | $ | 123 | $ | 5,547 | ||||||
| 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 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 14) | $ | (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 | ||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Year ended August 31, 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 | ||||||
Total assets by reportable segment are detailed as follows:
As at August 31, | ||||||||
2007 | 2006 | |||||||
| Telecom Division | $ | 109,065 | $ | 93,853 | ||||
| Life Sciences and Industrial Division | 9,199 | 11,339 | ||||||
| Unallocated assets | 160,874 | 113,967 | ||||||
| $ | 279,138 | $ | 219,159 | |||||
| As at August 31, | ||||||||
| 2008 | 2007 | |||||||
| Telecom Division | $ | 145,168 | $ | 109,065 | ||||
| Life Sciences and Industrial Division | 9,571 | 9,199 | ||||||
| Unallocated assets | 138,327 | 160,874 | ||||||
| $ | 293,066 | $ | 279,138 | |||||
Unallocated assets consistare comprised of cash, short-term investments, other receivables on forward exchange contracts, income taxes and tax credits recoverable andas well as future income taxes.
As at August 31, | ||||||||
2007 | 2006 | |||||||
| Telecom Division | $ | 23,622 | $ | 22,545 | ||||
| Life Sciences and Industrial Division | 4,815 | 4,597 | ||||||
| $ | 28,437 | $ | 27,142 | |||||
Sales to external customers by geographic region are detailed as follows:
Years ended August 31, | Years ended August 31, | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||||||||||
| United States | $ | 73,679 | $ | 59,457 | $ | 56,282 | $ | 79,471 | $ | 73,679 | $ | 59,457 | ||||||||||||
| Canada | 9,619 | 8,767 | 6,830 | 14,219 | 9,619 | 8,767 | ||||||||||||||||||
| Latin America | 7,592 | 8,380 | 3,127 | 8,858 | 7,592 | 8,380 | ||||||||||||||||||
| Americas | 90,890 | 76,604 | 66,239 | 102,548 | 90,890 | 76,604 | ||||||||||||||||||
| Europe-Middle East-Africa | 41,270 | 32,379 | 19,396 | |||||||||||||||||||||
| China | 13,960 | 9,329 | 9,084 | |||||||||||||||||||||
| Other | 15,148 | 11,445 | 10,186 | |||||||||||||||||||||
| Asia-Pacific | 20,774 | 19,270 | 11,581 | 29,108 | 20,774 | 19,270 | ||||||||||||||||||
| Europe, Middle-East and Africa | 52,134 | 41,270 | 32,379 | |||||||||||||||||||||
| $ | 152,934 | $ | 128,253 | $ | 97,216 | |||||||||||||||||||
| $ | 183,790 | $ | 152,934 | $ | 128,253 | |||||||||||||||||||
Sales were allocated to geographic regions based on the country of residence of the related customers. In fiscal 2005, 2006 and 2007, one customer represented more than 10% of sales with 23.3% of sales ($22,629,000) in fiscal 2005, 13.8% of sales ($17,706,000) in 2006 and 14.7% of sales ($22,480,000) in 2007. In fiscal 2008, no customer represented more than 10% of sales. For fiscal 2005, 2006 and 2007, this customer purchased from the Telecom Division.
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)
Long-lived assets by geographic region are detailed as follows:
As at August 31, | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Property, plant and equipment | Intangible assets | Goodwill | Property, plant and equipment | Intangible assets | Goodwill | |||||||||||||||||||
| Canada | $ | 16,434 | $ | 9,580 | $ | 24,801 | $ | 17,364 | $ | 10,690 | $ | 23,670 | ||||||||||||
| United States | 13 | 21 | 3,636 | 28 | 258 | 3,472 | ||||||||||||||||||
| China | 1,670 | 27 | – | – | – | – | ||||||||||||||||||
| $ | 18,117 | $ | 9,628 | $ | 28,437 | $ | 17,392 | $ | 10,948 | $ | 27,142 | |||||||||||||
| As at August 31, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Property, plant and equipment | Intangible assets | Goodwill | Property, plant and equipment | Intangible assets | Goodwill | |||||||||||||||||||
| Canada | $ | 15,916 | $ | 7,479 | $ | 23,007 | $ | 15,939 | $ | 9,563 | $ | 24,801 | ||||||||||||
| United States | 918 | 12,397 | 19,646 | 13 | 21 | 3,636 | ||||||||||||||||||
| China | 1,965 | 16 | − | 1,520 | 22 | − | ||||||||||||||||||
| Other | 1,076 | 53 | − | 645 | 22 | − | ||||||||||||||||||
| $ | 19,875 | $ | 19,945 | $ | 42,653 | $ | 18,117 | $ | 9,628 | $ | 28,437 | |||||||||||||
As a registrant with the Securities and Exchange Commission in the United States (SEC), the company is required to reconcile its financial statements for significant differences in measurement and disclosure between generally accepted accounting principles as applied in Canada (Canadian GAAP) and those applied in the United States (U.S. GAAP). Furthermore, additional significant disclosures required under U.S. GAAP and Regulation S-X of the SEC are also provided in the accompanying financial statements and notes. The following summarizes the significant quantitative differences between Canadian and U.S. GAAP, as well as other significant disclosures required under U.S. GAAP and Regulation S-X of the SEC not already provided in the accompanying financial statements.
Reconciliation of net earnings (loss) to conform to U.S. GAAP
The following summary sets out the significant differences between the company’s reported net earnings (loss) and net earnings (loss) per share under Canadian GAAP as compared to U.S. GAAP. Refer to corresponding explanatory notes in the Reconciliation Items section.
Years ended August 31, | ||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||
| Net earnings (loss) for the year in accordance with Canadian GAAP | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | |||||||||
| Unrealized losses on available-for-sale securities | a | ) | 55 | – | – | |||||||||||
| Stock-based compensation costs related to stock appreciation rights | b | ) | (73 | ) | – | – | ||||||||||
| Unrealized losses on forward exchange contracts | c | ) | – | – | (1,286 | ) | ||||||||||
| Net earnings (loss) for the year in accordance with U.S. GAAP | 42,257 | 8,135 | (2,920 | ) | ||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Foreign currency translation adjustment | 9,218 | 12,322 | 15,669 | |||||||||||||
| Unrealized losses on available-for-sale securities | a | ) | (55 | ) | – | – | ||||||||||
| Unrealized gains (losses) on forward exchange contracts | c | ) | (1,548 | ) | 5,394 | 2,313 | ||||||||||
| Reclassification of realized gains on forward exchange contracts in net earnings (loss) | c | ) | (1,039 | ) | (2,880 | ) | (65 | ) | ||||||||
| Future income taxes on unrealized gains on forward exchange contracts | d | ) | (916 | ) | – | – | ||||||||||
| Comprehensive income | $ | 47,917 | $ | 22,971 | $ | 14,997 | ||||||||||
| Basic and diluted net earnings (loss) per share in accordance with U.S. GAAP | $ | 0.61 | $ | 0.12 | $ | (0.04 | ) | |||||||||
| Basic weighted average number of shares outstanding (000’s) | 68,875 | 68,643 | 68,526 | |||||||||||||
| Diluted weighted average number of shares outstanding (000’s) | 69,555 | 69,275 | 68,526 | |||||||||||||
| Years ended August 31, | ||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||
| Net earnings for the year in accordance with Canadian GAAP | $ | 18,424 | $ | 42,275 | $ | 8,135 | ||||||||||
| Unrealized losses on available-for-sale securities | a | ) | − | 55 | – | |||||||||||
| Stock-based compensation costs related to stock appreciation rights | b | ) | – | (73 | ) | – | ||||||||||
| Net earnings for the year in accordance with U.S. GAAP | $ | 18,424 | $ | 42,257 | $ | 8,135 | ||||||||||
| Out of which: | ||||||||||||||||
| Earnings before extraordinary gain | $ | 15,388 | $ | 42,257 | $ | 8,135 | ||||||||||
| Extraordinary gain | $ | 3,036 | $ | – | $ | – | ||||||||||
| Basic and diluted earnings before extraordinary gain per share in accordance with U.S. GAAP | $ | 0.22 | $ | 0.61 | $ | 0.12 | ||||||||||
| Basic and diluted net earnings per share in accordance with U.S. GAAP | $ | 0.27 | $ | 0.61 | $ | 0.12 | ||||||||||
| Basic weighted average number of shares outstanding (000’s) | 68,767 | 68,875 | 68,643 | |||||||||||||
| Diluted weighted average number of shares outstanding (000’s) | 69,318 | 69,555 | 69,275 | |||||||||||||
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Reconciliation of shareholders’ equity to conform to U.S. GAAP
The following summary sets out the significant differences between the company’s reported shareholders’ equity under Canadian GAAP as compared to U.S. GAAP. Refer to the corresponding explanatory note in the Reconciliation Items section.
As at August 31, | ||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||
| Shareholders’ equity in accordance with Canadian GAAP | $ | 250,165 | $ | 196,234 | $ | 173,400 | ||||||||||
| Forward exchange contracts | c | ) | 2,864 | 5,451 | 2,937 | |||||||||||
| Goodwill | e | ) | (12,697 | ) | (11,908 | ) | (11,042 | ) | ||||||||
| Future income tax assets | d | ) | (916 | ) | – | – | ||||||||||
| Stock appreciation rights | b | ) | (73 | ) | – | – | ||||||||||
| Shareholders’ equity in accordance with U.S. GAAP | $ | 239,343 | $ | 189,777 | $ | 165,295 | ||||||||||
| As at August 31, | ||||||||||||
| 2008 | 2007 | |||||||||||
| Shareholders’ equity in accordance with Canadian GAAP | $ | 259,515 | $ | 250,165 | ||||||||
| Forward exchange contracts (note 2) | c | ) | – | 2,864 | ||||||||
| Goodwill | d | ) | (12,640 | ) | (12,697 | ) | ||||||
| Future income tax assets (note 2) | – | (916 | ) | |||||||||
| Stock appreciation rights | b | ) | (73 | ) | (73 | ) | ||||||
| Shareholders’ equity in accordance with U.S. GAAP | $ | 246,802 | $ | 239,343 | ||||||||
Share capital | Contributed surplus | Deficit | Deferred stock-based compensation costs | Other capital | Accumulated other comprehensive income | Shareholders’ equity | ||||||||||||||||||||||
| 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 | − | − | − | − | 954 | − | 954 | |||||||||||||||||||||
| Reclassification upon adoption of SFAS 123(R) | − | − | − | 1,715 | (1,715 | ) | − | − | ||||||||||||||||||||
| 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 | ) | − | 4,133 | 44,630 | 189,777 | ||||||||||||||||||||
| Net earnings for the year | − | − | 42,257 | − | − | − | 42,257 | |||||||||||||||||||||
| Stock-based compensation costs | − | − | − | − | 847 | − | 847 | |||||||||||||||||||||
| Foreign currency translation adjustment | − | − | − | − | − | 9,218 | 9,218 | |||||||||||||||||||||
Unrealized losses on available-for-sale securities | − | − | − | − | − | (55 | ) | (55 | ) | |||||||||||||||||||
| Unrealized losses on forward exchange contracts | − | − | − | − | − | (2,587 | ) | (2,587 | ) | |||||||||||||||||||
| Future income taxes on unrealized gains on forward exchange contracts | − | − | − | − | − | (916 | ) | (916 | ) | |||||||||||||||||||
Exercise of stock options (note 13) | 802 | − | − | − | − | − | 802 | |||||||||||||||||||||
| Reclassification of stock-based compensation costs upon exercise of stock awards (note 13) | 296 | − | − | − | (296 | ) | − | − | ||||||||||||||||||||
| Balance as at August 31, 2007 | $ | 599,519 | $ | 1,537 | $ | (416,687 | ) | $ | − | $ | 4,684 | $ | 50,290 | $ | 239,343 | |||||||||||||
As at August 31, | ||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||
| Current year | $ | 9,218 | $ | 12,322 | $ | 15,669 | ||||||||||
| Cumulative effect of prior years | 39,179 | 26,857 | 11,188 | |||||||||||||
48,397 | 39,179 | 26,857 | ||||||||||||||
| Unrealized losses on available-for-sale securities | a | ) | ||||||||||||||
| Current year | (55 | ) | − | − | ||||||||||||
| Unrealized gains on forward exchange contracts | c | ) | ||||||||||||||
| Current year | (2,587 | ) | 2,514 | 2,248 | ||||||||||||
| Cumulative effect of prior years | 5,451 | 2,937 | 689 | |||||||||||||
2,864 | 5,451 | 2,937 | ||||||||||||||
| Future income taxes on unrealized gains on forward exchange contracts | d | ) | ||||||||||||||
| Current year | (916 | ) | − | − | ||||||||||||
| $ | 50,290 | $ | 44,630 | $ | 29,794 | |||||||||||
Statements of cash flows
For the years ended August 31, 2005, 2006, 2007 and 2007,2008, there were no significant differences between the statements of cash flows under Canadian GAAP as compared to U.S. GAAP, except for the subtotal before change in non-cash operating items, whose presentation is not permitted under U.S. GAAP.
Reconciliation items
a) | Short-term investments |
Upon the adoption by the company of the CICA Handbook Section 3855 on September 1, 2007, existing GAAP differences between Canadian GAAP and U.S. GAAP with respect to accounting for short-term investments were eliminated (note 2). Under Canadian GAAP, prior to the adoption of Section 3855 on September 1, 2007, short-term investments were carried at the lower of cost and market value and any unrealized loss was reflected in the statements of earnings. Under U.S. GAAP, short-term investments would beare classified as “available-for-sale securities” and carried at their fair value and any changes in their fair value would beare reflected in other comprehensive income. Under Canadian GAAP, short-term investments are carried atincome consistent with the lower of cost and market value and any unrealized loss is reflected in the statements of earnings.accounting treatment required by Section 3855.
b) | Stock-based compensation costs related to stock appreciation rights |
Under U.S. GAAP, stock-based compensation costs related to stock appreciation rights must be measured using the fair value-based method at the end of each period. The company uses the Black-Scholes options valuation model to measure the fair value of its stock appreciation rights, based on the same assumptions than those used for stock options. Changes in the fair value of these awards must be charged to earnings. Under Canadian GAAP, stock appreciation rights are measured using the intrinsic value method, based on the market price of the common shares at the end of each period, and changes in the intrinsic value of these awards are charged to earnings.
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)
c) | Forward exchange contracts |
Goodwill |
Under U.S. GAAP, until the adoption of SFAS 142, “Goodwill and Other Intangible Assets”, when assets being tested for recoverability were acquired in business combinations accounted for by the purchase method, the goodwill that arose in that transaction had to be included as part of the assetsasset grouping in determining recoverability. The intangible assets tested for recoverability prior to the adoption of SFAS 142 were acquired in business combinations that were accounted for using the purchase method and, consequently, the company allocated goodwill to those assets on a pro rata basis, using the relative fair values of the long-lived assets and identifiable intangible assets acquired as determined at the date of acquisition. The carrying value of goodwill identified with the impaired intangible assets was written down before any reduction was made to the intangible assets.
Under Canadian GAAP, no allocation of goodwill was required and each asset was tested for recoverability separately based on its pre-tax undiscounted future cash flows over its expected period of use.
This created a permanent difference in the carrying value of goodwill under Canadian GAAP and U.S. GAAPGAAP.
Research and development tax credits |
Under Canadian GAAP, all research and development tax credits are recorded as a reduction of gross research and development expenses in the statements or earnings. Under U.S. GAAP, tax credits that are refundable against taxable income taxes otherwise payable are recorded in the income taxes. These tax credits amounted to $2,169,000, $2,546,000, $6,639,000 and $6,639,000$3,692,000 for fiscal 2005, 2006, 2007 and 2007,2008, respectively. This difference has no impact on the net earnings (loss) and the net earnings (loss) per share figures for the reporting years.
Elimination of deficit by reduction of share capital |
As at August 31, 2006, under Canadian GAAP, the company proceeded to eliminate its deficit against its share capital (note 13)12). However, under U.S. GAAP, such elimination is not permitted, which creates a permanent difference of $373,711,000 in the deficit and the share capital between the Canadian GAAP and U.S. GAAP figures. This difference has no impact on the total amount of the shareholders’ equity.
New accounting standards and pronouncements |
Adopted in fiscal 2006
In December 2004, the FASB issued SFAS 123(R), “Share-Based Payments”. This statement supersedes ABP 25, “Accounting for Stock Issued to 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 adopted this statement on September 1, 2005, using the modified prospective application method of transition and its adoption had no significant impact on its financial statements.
EXFO Electro-Optical Engineering Inc.
Notes to Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Adopted in fiscal 2007
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This statement replaces APB 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in Interim Financial 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. The company adopted this new statement on September 1, 2006, and its adoption had no effect on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainties in income taxes recognized in accordance with SFAS 109, “Accounting for Income Taxes”. The interpretation is effective for fiscal years beginning after December 15, 2006. The company will adoptadopted this interpretation on September 1, 2007, and its adoption is not expected to have significant impactshad no impact on its consolidated financial statements. Upon the adoption of FIN 48, the company elected to classify interest and penalties in interest expense.
In September 15, 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which establishes a framework for measuring fair value in GAAP and is applicable to other accounting pronouncements, in which fair value is considered to be the relevant measurement attribute. SFAS 157 also expands disclosures about fair value measurement. In February 2008, the FASB amended SFAS 157 to exclude leasing transactions and to delay the effective date by one year for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. This statement is effective for fiscal years beginning after November 15, 2007. The company will adopt this statement on September 1, 2008, and has not yet assessedis currently evaluating the impact its adoption will have on its consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R), “Business Combinations”, and SFAS 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. These new standards will significantly change the accounting and reporting for business combination transactions and non-controlling (minority) interests in consolidated financial statements. SFAS 141(R) and SFAS160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The company will adopt this statement on September 1, 2009, and is currently evaluating the impact it mightthe adoption of SFAS 141(R) and SFAS 160 will have on its consolidated financial statements. Should the company decide to adopt SFAS 159, it will be adopted on September 1, 2008.
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 March 2008, the FASB issued SFAS 161, “Disclosure about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement no. 133”, which will require entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flow. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The company will adopt this statement on September 1, 2009, and is currently evaluating the impact its adoption will have on its note disclosures related to derivative instruments and hedging activities.
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles”. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. For non-governmental entities, the guidance in SFAS 162 replaces that prescribed in Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles” and will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The company is currently evaluating the impact the adoption of SFAS 162 will have on its consolidated financial statements.
20 Subsequent Events
On November 5, 2007,6, 2008, the Board of Directors of the company approved a renewal of its share repurchase program, by way of a normal course issuer bid on the open market, of up to 9.9%10% of the company’sits public float (as defined by the Toronto Stock Exchange), or 2,869,5852,738,518 subordinate voting shares, at the prevailing market price. The company expects to use cash, short-term investments or future cash flows from operations to fund the repurchase of shares. The period of the normal course issuer bid will startcommences on November 8, 2007,10, 2008, and will end on November 7, 2008,9, 2009, or on an earlier date if the company repurchases the maximum number of shares permitted under the bid. The program does not require the company to repurchase any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased by the company under the bid will be canceled.cancelled.
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)
On November 10, 2008, the Board of Directors of the company approved a substantial issuer bid (the “Offer”) to purchase for cancellation up to 8,823,529 subordinate voting shares for an aggregate purchase price not to exceed CA$30,000,000. The Offer is being made by way of a “modified Dutch Auction” pursuant to which shareholders may tender all or a portion of their shares (i) at a price not less than CA$3.40 per share and not more than CA$3.90 per share, in increments of CA$0.05 per share, or (ii) without specifying a purchase price, in which case their shares will be purchased at the purchase price determined in accordance with the Offer. The Offer will expire on December 16, 2008, unless withdrawn, extended or varied by the company. The company expects to use cash, short-term investments or future cash flows from operations to fund the repurchase of shares. The Offer is not conditional upon any minimum number of shares being tendered, but it is subject to certain other conditions.
Upon the approval of the Offer, the company suspended the normal course issuer bid referred to above, until 20 business days following the expiration of the Offer.