UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of January 2001
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
465 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 3G7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F
------- ------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
In December 2000, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
issued its annual report containing its annual audited financial statements and
management's discussion and analysis thereof for its fiscal year ended August
31, 2000. This report on Form 6-K sets forth this annual report.
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THE WORLD'S ON THE MOVE
2000 Annual Report
[LOGO]
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AND EXFO'S MOVING THE WORLD OF
FIBER-OPTIC TEST AND MEASUREMENT
EXFO IS A WELL-ESTABLISHED TECHNOLOGY COMPANY WHOSE INNOVATIVE TEST,
MEASUREMENT AND MONITORING INSTRUMENTS PLAY A CRUCIAL ROLE IN ENSURING THE
RELIABILITY OF FIBER-OPTIC NETWORKS.
FINANCIAL HIGHLIGHTS
(In thousands of U.S. dollars, except per share data) 1996 1997 1998 1999 2000
CONSOLIDATED STATEMENT OF EARNINGS DATA
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Sales $19,229 $24,475 $31,605 $42,166 $ 71,639
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Gross margin $10,773 $14,823 $20,260 $27,168 $ 46,927
56.0% 60.6% 64.1% 64.4% 65.5%
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Gross R&D $ 2,667 $ 2,753 $ 4,406 $ 6,390 $ 9,374
13.9% 11.2% 13.9% 15.2% 13.1%
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EBITDA $ 2,913 $ 5,404 $ 7,348 $ 9,574 $ 16,221
15.1% 22.1% 23.2% 22.7% 22.6%
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Net earnings $ 1,671 $ 3,070 $ 4,501 $ 5,814 $ 9,924
8.7% 12.5% 14.2% 13.8% 13.9%
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Basic and fully diluted net earnings per share $ 0.04 $ 0.08 $ 0.12 $ 0.14 $ 0.25
CONSOLIDATED BALANCE SHEET DATA
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Working capital $ 3,550 $ 5,973 $ 9,797 $12,745 $194,167
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Total assets $11,725 $13,238 $17,643 $22,840 $219,723
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Long-term debt (excluding current portion) $ 40 $ 20 $ - $ - $ 16
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Shareholders' equity $ 4,676 $ 7,644 $12,045 $14,679 $206,994
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TABLE OF CONTENTS
Letter to shareholders 6
Management's discussion and analysis 27
Management's report 33
Auditors' report 33
Consolidated financial statements 34
Notes to consolidated financial statements 38
Quarterly summary financial information 55
Board of directors 56
Management and corporate officers 56
Corporate governance 57
Glossary 59
Shareholder information 60
All dollar amounts in this annual report are expressed in U.S. dollars,
except where otherwise indicated.
SALES
$ Thousands
1996 $19,229
1997 $24,475
1998 $31,605
1999 $42,166
2000 $71,639
GROSS R&D
$ Thousands
1996 $2,667
1997 $2,753
1998 $4,406
1999 $6,390
2000 $9,374
EBITDA
$ Thousands
1996 $ 2,913
1997 $ 5,404
1998 $ 7,348
1999 $ 9,574
2000 $16,221
NET EARNINGS
$ Thousands
1996 $1,671
1997 $3,070
1998 $4,501
1999 $5,814
2000 $9,924
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EXFO addresses two markets. The Portable and Monitoring Division provides
handheld and modular solutions to help telecommunications carriers deploy the
networks of today and tomorrow. The Industrial and Scientific Division
provides high-performance instruments and automated test systems for
manufacturers of optical components, value-added optical modules and optical
networks.
EXFO 2000 Annual Report 1
AHEAD OF THE CURVE
IN THE DATA TRAFFIC EXPLOSION
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2 2000 Annual Report EXFO
WITH INTERNET TRAFFIC EXPECTED TO INCREASE AT A COMPOUND ANNUAL GROWTH RATE
OF 156%,* EXFO'S ADVANCED TESTING TECHNOLOGY WILL CONTINUE PLAYING A VITAL
ROLE IN KEEPING NETWORKS UP AND RUNNING.
Today's carriers are scrambling to find ways of increasing the capacity of
their networks to meet the growing demand for bandwidth. This is where Dense
Wavelength Division Multiplexing, or DWDM, enters the picture. It is a
state-of-the-art technology that enables dramatically higher volumes of
voice, data and video information to pass through a single fiber. A few years
ago, EXFO anticipated the arrival of DWDM technologies with a wide portfolio
of products. Today, we are a global player in the DWDM test, measurement and
monitoring market.
* Based on figures from Ryan, Hankin & Kent, 2000.
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EXFO 2000 Annual Report 3
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ACCELERATION
THOUGH A NEWLY TRADED PUBLIC COMPANY, EXFO IS A TIME-TESTED VETERAN IN THE
FIELD OF FIBER-OPTIC TEST, MEASUREMENT AND MONITORING.
4 2000 Annual Report EXFO
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In 1985, when fiber-optic telecommunications was still a fledgling industry,
EXFO was founded and rapidly earned its place as a pioneer in the fiber-optic
test and measurement market. After 15 years of steady growth and continuous
profits, we raised $209 million through a successful Initial Public Offering
in June 2000. This added financial strength enables us to carry out long-held
plans for organic and acquisitional growth and to build on our leading
position in the industry.
EXFO 2000 Annual Report 5
[PICTURE]
FELLOW SHAREHOLDERS,
WE PRIDE OURSELVES ON BEING PIONEERS IN THE FIBER-OPTIC TEST, MEASUREMENT AND
MONITORING INDUSTRY.
THE WORLD IS MOVING AT INTERNET SPEED. Everybody keeps repeating this phrase,
but what does it mean in practical terms? Take a minute to sit down and
observe the latest high-bandwidth Internet applications that surround
us--video conferencing, e-commerce, video on demand and high-definition
television.
And that's only the tip of the optical fiber!
Bandwidth demand is doubling every nine months to support high-capacity
applications. Ryan, Hankin & Kent, a leading telecom research firm, forecasts
that Internet traffic will increase from 350,000 terabytes, or trillions of
bytes, per month at the end of 1999 to more than 15 million terabytes per
month in 2003. In terms of pure
6 2000 Annual Report EXFO
speed and information-carrying capacity, nothing compares to optical fiber
for handling this volume of traffic.
Optical fiber has become the medium of choice for telecommunications,
especially with the deployment of Dense Wavelength Division Multiplexing
technology, or DWDM. DWDM involves combining beams of light of slightly
different wavelengths through a single fiber, with each wavelength carrying
its own stream of information. A single strand of optical fiber can carry as
many as 160 distinct channels at today's rates of 10 billion bits per second,
which produces a bandwidth capacity of 1.6 trillion bits per second.
Commercial networks with a bandwidth capacity of 6.4 trillion bits per second
should hit the market in 2001.
OUR FOCUS ON DWDM AND COMMITMENT TO INNOVATION ENABLED US TO ACHIEVE RECORD
REVENUES AND EARNINGS FOR FISCAL 2000.
At EXFO, we specialize in helping to ensure that optical networks run
smoothly. In industry parlance, this is referred to as physical layer
testing. The complexity of having several closely spaced channels and higher
traffic counts significantly increases testing requirements, but we
anticipated this major trend a number of years ago. As a result, we've
developed a wide portfolio of products specifically dedicated to DWDM
testing, measurement and monitoring.
We pride ourselves on being pioneers in the fiber-optic test, measurement and
monitoring industry. During fiscal 2000, our Portable and Monitoring Division
and our Industrial and Scientific Division launched more than a dozen
innovative products. A strong indicator of technological innovation is the
percentage of revenues derived from new products. At EXFO, 32.6% of our
revenues in the fourth quarter and 26.9% in fiscal 2000 originated from
products that have been on the market for less than two years. These numbers
speak volumes about the strong growth potential of our products and our
commitment to innovation.
We believe that innovation is the key to gaining a competitive advantage in
this industry. A few years ago, we implemented portfolio management and
stage-gate processes to ensure that R&D projects are aligned with our
corporate strategies and priorities. These processes have resulted in
market-focused products that generate increasing profits. These processes
have also earned us recognition from the U.S.-based Product Development and
Management Association, which named EXFO winner of the Outstanding Corporate
Innovator Award in 2000.
As you can see, innovation and strong market focus drive EXFO!
RECORD YEAR
It's been a remarkable year at EXFO. Our focus on DWDM and commitment to
innovation enabled us to achieve record revenues and earnings for fiscal
2000. We increased our revenues by 70% to $71.6 million in fiscal 2000 from
$42.2 million in 1999. Net income, meanwhile, increased 71% to $9.9 million,
or $0.25 per share, for fiscal 2000 from $5.8 million, or $0.14 per share,
for 1999.
We also completed a highly successful Initial Public Offering of $209 million
in June 2000. This offering is a key step in providing us with the financial
resources to reach our corporate objectives.
EXFO 2000 Annual Report 7
LOOKING AHEAD
We are well positioned to capitalize on high-growth market segments in the
fiber-optic test, measurement and monitoring industry. Following are some of
the key strategies we plan to implement in the upcoming fiscal year:
- FOCUS R&D SPENDING ON DWDM AND
HIGH-BANDWIDTH SOLUTIONS
DWDM technology and high-bandwidth networks have created a strong demand for
our wide portfolio of test and measurement instruments. This year, we
launched a number of new DWDM-related products that will play a strategic
role in accelerating our growth. These products include our DWDM Passive
Component Test System that reduces testing time on the production floor from
hours to mere seconds; our second-generation Remote Fiber Test System, which
is the first in the industry to feature DWDM monitoring capabilities; our
widely tunable laser source to test DWDM components and value-added optical
modules; and our second-generation optical spectrum analyzers that
characterize critical parameters for DWDM testing in the field and
manufacturing plant. We plan to focus more R&D spending in this strategic
sector for the next few years.
- EXPLOIT OUR INDUSTRIAL AND SCIENTIFIC
MARKET OPPORTUNITIES
The Industrial and Scientific product market is in full expansion. Ryan,
Hankin & Kent estimates that the market for optical components will reach $23
billion by 2003. Customers in this market include manufacturers of optical
components, value-added optical modules and optical networking systems. These
customers require higher-end, more complex test instruments for R&D,
production and quality control applications. For example, manufacturers of
erbium-doped fiber amplifiers, key enablers of DWDM networks, use laser
sources, a variable attenuator and an optical spectrum analyzer to test for
quality and performance. EXFO plans to dedicate significant resources to
develop more solutions that will streamline our customers' production.
Accepted orders for our Industrial and Scientific Division increased by more
than 100% for the fifth consecutive year in fiscal 2000. By continuing to
develop new products for this market segment, we are on schedule to have this
division generate more than one-half of our revenues by fiscal 2002.
- INNOVATE WITH AUTOMATED TEST SYSTEMS
The demand for optical components is growing at a phenomenal rate. Optical
component manufacturers, who are faced with a scarcity of qualified technical
staff, are increasingly relying on automated test systems to increase yields,
reduce costs, improve productivity and reduce human intervention on the
production floor. EXFO provides several off-the-shelf systems, such as our
DWDM Passive Component Test System, Environmental Test System and Optical
Fiber Amplifier Test System, to meet these needs. We plan to work with
technical experts to develop new solutions for this rapidly growing market.
- INCREASE OUR MANUFACTURING CAPACITY
Demand for our products accelerated throughout fiscal 2000 with sequential
growth quarter to quarter. We accepted orders in the amount of $86.7 million
in fiscal 2000, representing an increase of more than 100% over last year. To
meet this increase in demand, we are ramping up manufacturing. Subsequent to
the year-end, we announced an agreement that provides us with an option to
purchase 4.2 million square feet of land in the Quebec Metro High-Tech Park.
A facility will be built to house administrative services, research and
development, marketing and some manufacturing. Our main manufacturing
activities, however, will remain at their current location. With the purchase
of a new facility in June 2000, EXFO makes use of 182,000 square
feet--including 55,000 square feet dedicated to manufacturing--among three
buildings. Once the first phase of construction, which includes a 150,000
square-foot building, is completed in the High-Tech Park in the fall of 2001,
the former buildings will be used exclusively for manufacturing. As a result,
we intend not only to fulfill demand for our products but also reduce our
lead time.
8 2000 Annual Report EXFO
- PURSUE ACQUISITIONS
Subsequent to our year-end, we acquired Burleigh Instruments, Inc. for $235
million in EXFO stock and $40 million in cash. Burleigh is a leading supplier
of DWDM wavelength measurement instruments and precision positioning
equipment. This acquisition increases the breadth and scope of our Industrial
and Scientific product line with a number of complementary, high-performance
DWDM test instruments. In addition, Burleigh's precision positioning
technology provides us with a competitive advantage by offering precision
alignment as well as testing during the assembly and packaging of optical
components. Following this acquisition, we believe we are one of the
best-positioned companies in the industry to offer a broad range of automated
solutions for testing and alignment. Prior to our Initial Public Offering, we
acquired Nortech Fibronic Inc. for $2.8 million to complement our Portable
and Monitoring product line.
Our acquisition strategy targets complementary businesses with leading-edge
technologies. We plan to leverage these technologies through our marketing
resources and global sales channels to increase our market coverage. Our
solid balance sheet and strong cash position will enable us to aggressively
pursue acquisitions that will enhance our competitive position and increase
shareholder value.
EXFO CULTURE AND VALUES
We have been on the move during the past year, especially with the transition
from a private to a public company. This year alone, the number of people
working at EXFO has almost doubled to more than 750. I'm proud that our
corporate culture remains as strong as ever with a high priority on
innovation, customer satisfaction and teamwork. We've reinforced these values
by including every employee in our stock option plan. In expanding our
company, we've implemented measures to transmit our best practices to
newcomers. We widely apply internal training and continuous improvement
programs. In addition, employee diversity matters to EXFO because we benefit
from valuable knowledge about global markets.
ACKNOWLEDGMENTS
I want to thank our employees for their strong commitment in providing
quality products and services to our customers. I also want to express my
gratitude to our customers for the confidence they have shown in EXFO.
Finally, I want to thank our Board of Directors for its wise counsel and our
shareholders for their continued support in building the premier fiber-optic
test, measurement and monitoring company in the world. Being No. 1, after
all, has been the single-minded aim of this company since we opened our doors
15 years ago. In the not too distant future, I hope to report that we have
become the prime mover in the fiber-optic test, measurement and monitoring
industry.
Sincerely,
/s/ Germain Lamonde
Germain Lamonde
Chairman, CEO and President
November 8, 2000
EXFO 2000 Annual Report 9
[Picture]
ONE STEP AHEAD IN DWDM
TEST AND MEASUREMENT
OUR STRONG CUSTOMER RELATIONSHIPS GIVE US VALUABLE INSIGHTS INTO INDUSTRY NEEDS
WORLDWIDE. AS A DIRECT RESULT OF THIS SYNERGY, OUR FOCUS ON STATE-OF-THE-ART
TESTING AND MEASUREMENT OF DWDM TECHNOLOGIES HAS MADE US A MAJOR PLAYER IN THIS
RAPIDLY GROWING MARKET.
10 2000 Annual Report EXFO
DENSE WAVELENGTH DIVISION
MULTIPLEXING (DWDM).
WE'RE ON THE MOVE.
DWDM is the key enabling technology that is raising fiber-optic networks to the
next level. By streaming multiple channels of information along a single strand
of fiber, DWDM dramatically expands the capacity and flexibility of networks. In
fact, today's commercially available DWDM systems carry over 160 channels at
speeds of up to 1.6 trillion bits per second. Due to the Internet revolution,
demand for bandwidth-hungry consumer and business-to-business applications is
setting new records. DWDM, the fastest-growing segment of the optical transport
market, is expected to grow from $8.8 billion in 1999 to $41.3 billion in 2003.*
*Ryan, Hankin & Kent, 2000.
12 2000 Annual Report EXFO
What does this mean for EXFO? Our product portfolio is strategically positioned
to meet escalating customer demand for the precision-engineered test equipment
that is crucial to DWDM quality and reliability. Because data-carrying
wavelengths are spaced tightly in DWDM technology, our test instruments are
reaching new heights in accuracy. EXFO's instruments help to ensure the
performance and reliability of the fibers, lasers, amplifiers, filters and other
devices that make up a DWDM system. And our portfolio of instruments does this
at every step of the way for the fiber-optic industry: R&D, manufacturing,
installation and maintenance and network monitoring.
[Graphic of Optical Networking Market]
OPTICAL NETWORKING MARKET
R&D
OPTICAL EQUIPMENT MANUFACTURING
INSTALLATION & MAINTENANCE
NETWORK MONITORING
[Picture]
EXFO'S UNIQUE TEST AND MEASUREMENT EXPERTISE IN DWDM PROVIDES ALCATEL OPTRONICS
WITH THE RIGHT TOOLS TO ENSURE THE DEVELOPMENT AND THE PRODUCTION OF THE HIGHEST
STANDARD OF OPTICAL COMPONENTS AND SUBSYSTEMS. THIS GIVES US THE MARKED
COMPETITIVE ADVANTAGE TO PROVIDE HIGH-QUALITY SERVICE.
Philippe Bregi
Chief Operating Officer
Alcatel Optronics, France
EXFO 2000 Annual Report 13
[Picture]
PURSUING MARKET OPPORTUNITIES
OUR DIVERSIFIED GLOBAL CUSTOMER BASE FACES A MULTITUDE OF TEST, MEASUREMENT AND
MONITORING NEEDS. BACKED BY OUR CORE KNOWLEDGE AND TRACK RECORD FOR INNOVATION,
WE HAVE DEVELOPED A VERSATILE RANGE OF SOLUTIONS THAT MEET THE MOST EXACTING
DEMANDS, SAVE TIME AND IMPROVE YIELDS.
14 2000 Annual Report EXFO
THE OPTICAL EQUIPMENT
MANUFACTURING MARKET.
TIME IS OF THE ESSENCE.
On the manufacturing floor, production staff can spend up to 60% of its time on
test and measurement tasks. In the light-speed world of optical networking that
figure represents just so much lost time for companies that make optical
components, value-added optical modules and optical networking systems. And in
this industry driven by time to market, lost time means lost money.
To meet our customers' needs for better, more efficient testing, EXFO provides
two types of test and measurement solutions: stand-alone instruments and
automated test systems.
16 2000 Annual Report EXFO
Customers turn to EXFO's stand-alone Industrial and Scientific instruments when
their product testing needs outgrow their existing test setups. These EXFO
instruments do more than integrate easily into our customers' systems. They also
test rapidly and efficiently for the increasingly precise specifications and
quality of DWDM components and value-added modules.
By comparison, EXFO's turn-key, automated test systems serve the needs of
customers looking for entire systems that will speed up, automate and streamline
the essential testing of their products. For new entrants in the industry and
for established firms that are expanding, automated test systems are vital.
With our equipment, customers benefit from features like off-the-shelf test
implementation and system specifications that are top of the line. EXFO
instruments help our customers improve today's production yields and time to
market--which leaves them free to focus on tomorrow's new designs and new market
possibilities.
[Picture]
WITH THE VOLUME OF INTERNET TRAFFIC GROWING AT A RATE OF MORE THAN 150% A YEAR,
THE NEED FOR EXPANDED BANDWIDTH TESTING IS AN INDUSTRY PRIORITY. EXFO'S ADVANCED
DWDM TEST AND MEASUREMENT TECHNOLOGY IS CRUCIAL TO MATSUSHITA/PANASONIC AS WE
PUSH FOR INCREASED CAPACITY AND EFFICIENCY AND CONTINUE TO EXPAND THE SCOPE OF
OUR OPTICAL COMPONENTS WORLDWIDE.
Yoshihisa Mochida
Senior Staff Engineer
Matsushita/Panasonic, Japan
EXFO 2000 Annual Report 17
[Picture]
NETWORKS ON THE MOVE
AS THE TELECOMMUNICATIONS INDUSTRY SCRAMBLES TO WIRE UP ENTIRE CITIES WITH
FIBER-RICH NETWORKS, IT FACES TREMENDOUS INSTALLATION AND MAINTENANCE DEMANDS.
WITH OUR LEADERSHIP POSITION IN THE HANDHELD INSTRUMENTATION SECTOR, WE ARE A
KEY PLAYER IN THIS EXPANDING MARKET. WE ARE ALSO PROVIDING NETWORK CARRIERS WITH
INNOVATIVE SOLUTIONS IN THE NEW, FAST-GROWING OPTICAL NETWORK MONITORING MARKET.
HERE TOO, WE INTEND TO LEAD THE WAY.
18 2000 Annual Report EXFO
THE INSTALLATION AND
MAINTENANCE MARKET.
EXTENDING OUR REACH.
Throughout the long-haul, metropolitan and neighborhood access sectors,
the world's telecommunications companies are laying 70 million
fiber-kilometers*--enough to circle the globe more than 1750 times. As
transmission rates and channel counts increase, testing requirements become more
complex. Quality and reliability are crucial factors in keeping networks running
efficiently. This includes everything from ensuring that thousands of fiber
splices are adequate for high-speed transmission, right down to making sure that
minute wavelength spacing between DWDM channels remains distinct for years of
service.
EXFO, through its Portable and Monitoring instruments, already has a leadership
position in this market, and with the introduction of key DWDM test instruments
in 2000, we are poised to ensure and strengthen our leadership in this key
sector.
* Corning Inc., 2000.
20 2000 Annual Report EXFO
THE NETWORK MONITORING
MARKET. IT'S MISSION-CRITICAL.
IT'S OUR NEXT PRIORITY.
Speed and capacity are the watchwords of the carriers and service providers that
deliver everything from residential Internet access to security-conscious
business-to-business applications. With fiber networks carrying ever-increasing
amounts of critical data, downtime can result in million-dollar losses.
Enter EXFO's Remote Fiber Test System, better known as FiberVisor-TM-. At this
time, FiberVisor-TM- is the only RFTS that provides DWDM monitoring
capabilities. Carriers turn to this permanently installed surveillance system
for the preventive alerts, maintenance and security that are critical to the
running of their networks. With new market segments and regions emerging daily,
EXFO is well positioned to make this system a vital part of the world's
cutting-edge networks.
[Picture]
EXFO'S RFTS PROVIDES BESTEL WITH THE SCALABLE NETWORK MONITORING TOOLS TO
ENSURE 24-HOUR-A-DAY, 7-DAY-A-WEEK RELIABILITY OF OUR GROWING HIGH-CAPACITY
VOICE AND DATA NETWORK. WE HAVE THE EDGE WE NEED TO ENSURE QUALITY OF SERVICE
TO OUR CUSTOMERS.
Lic. Santiago Gutierrez
General Manager and CEO
Bestel, Mexico
EXFO 2000 Annual Report 21
MARKET-DRIVEN AND...
[Pictures]
...ANTICIPATING EMERGING NEEDS
IT ALL STARTS WITH INNOVATION.
A few years ago, EXFO implemented a market-oriented product development process
to align research and development activities with our corporate strategy. We've
always believed that our process is a good one, yielding quality products with
quick time to market. This ability to filter, identify and focus on the right
projects early in the game increases the effectiveness of our new product
investments. In short, we ensure that every dollar is spent on the projects with
the most potential for mid- and long-term profitability.
We also believe that innovative processes will yield results only if market
requirements are integrated from Day One. The U.S.-based Product Development and
Management Association agrees with us. It named EXFO winner of the prestigious
Outstanding Corporate Innovator Award for 2000.
[Graphic of 7-step Stage Gate process]
POSITIONING DEFINITION FEASIBILITY DESIGN VALIDATION TRANSITION
G0 G1 G2 G3 G4 G4.1 G5
IDEAS STRATEGIC FINANCIAL TECHNICAL MARKETING DELIVERIES CLOSE PROJECT
The heart of EXFO's product development process is the 7-step Stage Gate-TM-
process.
NEW PRODUCTS IN 2000.
In 2000, we launched over a dozen instruments and systems, including these four
key DWDM products.
IQ-12004B DWDM PASSIVE COMPONENT TEST SYSTEM
Launched this year to great acclaim, this automated test system dramatically
cuts down customers' testing time, resulting in greater efficiency and
substantial savings.
FTB-5240 OPTICAL SPECTRUM ANALYZER
This is the market's first instrument to provide lab-quality DWDM specifications
for rugged, portable use in the field.
FIBERVISOR-TM- REMOTE FIBER TEST SYSTEM
This second-generation RFTS has cutting-edge DWDM monitoring capabilities,
giving us fast-track entry into the growing optical network monitoring market.
IQ/FLS-2600B TUNABLE LASER SOURCE
This second-generation tunable laser source delivers the essential wavelength
range for testing broadband DWDM components. It's accurate, versatile and moving
onto production floors everywhere.
24 2000 Annual Report EXFO
[Picture of Universal Test System and modules]
The Universal Test System for field-based network testing has slots for
3 modules.
OUR INDUSTRY FIRSTS.
THE MODULAR CONCEPT
EXFO was the first in the fiber-optic test and measurement industry to use
complete modular-based designs. Today, standard practice has evolved. It's not
about boxes any longer--it's about modules.
Six years ago, EXFO took a major technological decision to go beyond the
standard practice of designing single-function instruments--instruments which
perform one type of test with no possibility of upgrades beyond buying a
brand-new piece of equipment. To develop our modular platforms, we had to think
outside the instrument box and find new ways to deliver upgradeable test
technology to our customers.
The solution we developed is based on a constantly growing series of
interchangeable modules that perform specific tests. The modules plug into a
durable test platform. That way, customers pay for new technology when they need
it, not for the box that surrounds it. In addition, they can make their test
systems as simple or as customized as their testing needs require. And with only
one software interface to learn, training costs are lowered. Customers find this
efficient and we find it profitable.
LEADER IN PMD TECHNOLOGY
PMD, or polarization mode dispersion, causes light pulses to spread in a cable
or fiber--which results in data scrambling or loss when transmission rates are
high. Years ago, when network speeds were slower, few imagined that PMD was
going to become a critical parameter to test during manufacturing and network
deployment. Yet, EXFO had already begun to act. In 1996, we launched the
market's first field-ready PMD analyzer. This instrument enabled
telecommunications companies with existing fiber-optic networks to ensure that
their networks were ready for needed upgrades to higher transmission rates.
Today, this instrument boasts a 50% share of the global PMD market.*
[Picture of Automated Loss Test Set]
This Automated Loss Test Set weighs just over 2 pounds (1 kilogram).
HANDHELD MARKET LEADERSHIP
Our Automated Loss Test Set, one of EXFO's long-standing success stories, has
approximately a 60% share of a multi-million dollar global market.* The reason?
This compact handheld test set was the first product on the market to include
six essential test instruments that were previously found separately. Even
better, this instrument revolutionized network loss testing because of its
patented FasTesT-TM- function, which automatically measures the loss in a fiber
in two directions, at two wavelengths, in under 30 seconds. Today, this
instrument plays a key role in helping network operators deploy their systems
efficiently.
*Based on internal estimates.
EXFO 2000 Annual Report 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN
THIS ANNUAL REPORT. OUR CONSOLIDATED FINANCIAL STATEMENTS ARE REPORTED IN
U.S. DOLLARS AND HAVE BEEN PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN CANADA, OR CANADIAN GAAP. TO THE EXTENT APPLICABLE TO
OUR CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT, THESE PRINCIPLES CONFORM IN ALL MATERIAL RESPECTS WITH ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES, OR U.S. GAAP, EXCEPT AS
DESCRIBED IN NOTE 20 OF OUR CONSOLIDATED FINANCIAL STATEMENTS.
CORPORATE HIGHLIGHTS
EXFO ACQUIRES BURLEIGH INSTRUMENTS: Subsequent to the year-end, EXFO acquired
Burleigh Instruments, Inc. for $235 million in EXFO stock and $40 million in
cash. Burleigh, a privately held company in Fishers, upstate New York, is a
leading supplier of DWDM wavelength measurement instruments and precision
positioning equipment.
EXFO EXPANDS INTO QUEBEC METRO HIGH-TECH PARK: Subsequent to the year-end,
EXFO announced an agreement that provides it with an option to purchase 4.2
million square feet of land in the Quebec Metro High-Tech Park. A facility
will be built to house administrative services, research and development,
marketing and some manufacturing. The first phase of construction, which will
include a 150,000 square-foot building, is expected to be completed in the
fall of 2001.
EXFO REPORTS RECORD REVENUES AND OPERATING RESULTS FOR FISCAL 2000: EXFO
announced that it had increased its revenues by 70% to $71.6 million for the
fiscal year ended August 31, 2000 from $42.2 million in 1999. Net income
increased 71% to $9.9 million, or $0.25 per share, for fiscal 2000 from $5.8
million, or $0.14 per share, for 1999.
EXFO INCREASES MANUFACTURING CAPACITY: EXFO unveiled plans in June 2000 to
increase its manufacturing capacity with the purchase of a 112,000
square-foot building, of which the company was already renting 25,000 square
feet. An additional 25,000 square feet were made available in October 2000,
including one-third for manufacturing, and the remaining 62,000 square feet
will become available by April 2001. EXFO currently dedicates 55,000 square
feet to manufacturing.
EXFO COMPLETES SUCCESSFUL INITIAL PUBLIC OFFERING: EXFO announced in June 2000
that it had closed its offering of 8,050,000 subordinate voting shares at
US$26.00 per share in the United States and at C$38.55 per share in Canada.
Total proceeds to EXFO, including the over-allotment option exercised by the
underwriters, were approximately $209 million.
EXFO INTRODUCES MORE THAN A DOZEN PRODUCTS AT OFC: EXFO introduced more than
a dozen new products in March 2000 at the Optical Fiber Conference in
Baltimore, Maryland. Key product launches included optical spectrum analyzer
test modules for field and manufacturing testing, widely tunable laser
sources for DWDM testing, automated test systems for DWDM optical components
and value-added optical modules, a single-slot optical time domain
reflectometer platform and related test modules, as well as high-power and
low-polarization sensitivity power meters.
EXFO ACQUIRES NORTECH FIBRONIC INC.: EXFO announced in February 2000 that it
had purchased Nortech Fibronic Inc. for $2.8 million to complement its
Portable and Monitoring product line. The acquisition enabled EXFO to add
more than 60 employees to its personnel.
INDUSTRY OVERVIEW
OPTICAL NETWORKING MARKET
The past decade has witnessed an explosive growth in the volume of data
traffic largely due to the soaring popularity of the Internet and related
bandwidth-intensive applications. According to the Angus Reid Group, a
leading polling firm, the number of Internet users around the world is
expected to increase from 300 million in 2000 to 1 billion by 2005. Ryan,
Hankin & Kent, a leading telecom market research firm, forecasts that
Internet traffic will increase from 350,000 terabytes, or trillions of bytes,
per month at the end of 1999, to more than 15 million terabytes per month in
2003, representing a compound annual growth rate of 156%.
The dramatic increase in Internet users and traffic has created a tremendous
need for high-bandwidth communications networks. To meet this increasing
demand for bandwidth, many communications service providers are designing and
installing new networks based on optical fiber, deploying additional fiber
within their existing networks or using advances in optical technology such
as Dense Wavelength Division Multiplexing, or DWDM. DWDM involves combining
beams of light of slightly different wavelengths through a single fiber, with
each wavelength carrying its own stream of information. This technique
requires separate laser sources for each signal or channel and more complex
equipment to control and amplify the signal in the network. Some DWDM systems
can carry as many as 160 separate channels per optical fiber. DWDM has wide
market acceptance because it incorporates technologies that greatly reduce
the cost of optical transmission over long distances and because it provides
network flexibility in local and metropolitan areas. According to Ryan,
Hankin & Kent, the global optical transport market is expected to increase
from $47 billion in 2000 to $64 billion in 2001, a 36% increase year over
year.
EXFO 2000 Annual Report 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OPTICAL TEST, MEASUREMENT AND MONITORING EQUIPMENT MARKET
Conventional test, measurement and monitoring instruments used by
telecommunications carriers and manufacturers of communications equipment
were designed for electrical transmission systems and are unsuitable for
optical networking. Unlike traditional electrical transmission systems, which
transmit electrical signals along copper wires, fiber-optic transmission
systems use pulses of light along glass or plastic fiber, often referred to
as optical fiber. When light travels along optical fiber and through the
optical components and systems that link optical fibers together, it is
subject to unwanted effects such as reflection, attenuation, noise and
various types of dispersion, all of which degrade signal quality and reduce
transmission performance. Fiber-optic test, measurement and monitoring
equipment is critical for measuring these effects and helping communications
carriers and manufacturers of optical components, value-added optical modules
and optical networking systems ensure network performance and reliability.
The main uses for fiber-optic test, measurement and monitoring equipment
include research and development, manufacturing, network installation and
maintenance as well as network monitoring.
CORPORATE OVERVIEW
EXFO was incorporated on September 18, 1985. Our original products were
focused primarily on the needs of installers and operators of fiber-optic
networks. In 1996, we supplemented our product line with an extensive line of
Industrial and Scientific products that are dedicated to the manufacturing
and research and development markets in the fiber-optic industry. Our
Industrial and Scientific products tend to be more complex and higher priced
than our field-testing products. In 1999, we entered the market for Remote
Fiber Test Systems. Remote Fiber Test Systems allow carriers to deploy test
equipment throughout their networks in order to monitor the status of their
fiber-optic networks.
We sell our products to customers through our direct sales force and
indirectly through distribution channels. We deliver products to a large
number of customers. No customer accounted for more than 5.8% of total sales
in fiscal 2000; in fiscal 1999, this figure was 6.8%.
Cost of sales include raw materials, salaries and related expenses for direct
and indirect manufacturing personnel and manufacturing overhead.
Gross research and development expenses consist primarily of salaries and
related expenses for engineers and other technical personnel and fees paid to
third-party consultants. We are entitled to research and development tax
credits granted by the Canadian federal government and the government of the
province of Quebec. See note 2. We are also entitled to government grants
resulting from agreements entered into with the government of the province of
Quebec. See note 15. Research and development tax credits and certain
government grants are recorded as a reduction of gross research and
development expenses.
Selling and administrative expenses consist primarily of salaries and related
expenses for personnel, sales commissions, travel expenses, marketing
programs, professional services, management information systems, human
resources and other corporate expenses. We intend to expand our sales
organization by opening additional international sales offices and service
centers. We expect that in support of our continued growth, the expansion of
our sales efforts and our operations as a public company, selling and
administrative expenses will continue to increase with sales for the
foreseeable future.
Effective September 1, 1999, we adopted the U.S. dollar as the reporting
currency for our consolidated financial statements. The financial statements
for all periods prior to fiscal 2000 are presented in U.S. dollars in
accordance with a translation of convenience method under Canadian GAAP,
using the representative exchange rate as at August 31, 1999 of $1.00 =
C$1.4958. The following historical results are not necessarily indicative of
the results to be expected for any future period.
28 2000 Annual Report EXFO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
$ %
YEARS ENDED AUGUST 31, 1998 1999 2000 1998 1999 2000
--------------------------------------------------------------------------------------------------------------
Sales $31,605 $42,166 $71,639 100.0% 100.0% 100.0%
Cost of sales 11,345 14,998 24,712 35.9 35.6 34.5
--------------------------------------------------------------------------------------------------------------
Gross margin 20,260 27,168 46,927 64.1 64.4 65.5
Operating expenses
Selling and administrative 9,898 13,279 24,304 31.3 31.5 33.9
Net research and development 3,014 4,315 6,402 9.5 10.2 8.9
Amortization of capital and other assets 657 898 1,498 2.1 2.1 2.1
--------------------------------------------------------------------------------------------------------------
Earnings from operations 6,691 8,676 14,723 21.2 20.6 20.6
Interest income, net (40) (136) (1,480) (0.1) (0.3) (2.1)
Foreign exchange loss (gain) (126) 506 684 (0.4) 1.2 1.0
--------------------------------------------------------------------------------------------------------------
Earnings before income taxes
and amortization of goodwill 6,857 8,306 15,519 21.7 19.7 21.7
--------------------------------------------------------------------------------------------------------------
Income taxes 2,356 2,492 5,298 7.5 5.9 7.4
--------------------------------------------------------------------------------------------------------------
Earnings before amortization of goodwill 4,501 5,814 10,221 14.2 13.8 14.3
Amortization of goodwill - - 297 - - 0.4
--------------------------------------------------------------------------------------------------------------
Net earnings for the year $ 4,501 $ 5,814 $ 9,924 14.2% 13.8% 13.9
--------------------------------------------------------------------------------------------------------------
Research and development data:
Gross research and development $ 4,406 $ 6,390 $ 9,374 13.9% 15.2% 13.1%
Net research and development $ 3,014 $ 4,315 $ 6,402 9.5% 10.2% 8.9%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
The above table sets forth certain consolidated statements of earnings data in
thousands of U.S. dollars and as a percentage of sales for the years indicated.
EXFO 2000 Annual Report 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SALES
Sales totaled $71.6 million, $42.2 million and $31.6 million for fiscal 2000,
1999 and 1998, respectively. Sales increased 69.9% from fiscal 1999 to fiscal
2000 and 33.4% from fiscal 1998 to fiscal 1999 mainly due to a higher demand
for our Industrial and Scientific products as well as a general sales
increase in our other products. Accepted orders increased 102.3% from $42.9
million for fiscal 1999 to $86.7 million for fiscal 2000.
North American sales accounted for 61.6%, 56.3% and 50.6% of total sales for
fiscal 2000, 1999 and 1998, respectively. International sales represented
38.4%, 43.7% and 49.4% of total sales for fiscal 2000, 1999 and 1998,
respectively. The steady growth in North American sales during the past three
years reflects a higher demand for our test, measurement and monitoring
products in this region.
$ Thousands
1998 $31,605
1999 $42,166
2000 $71,639
GROSS MARGIN
Gross margin amounted to 65.5% of sales for fiscal 2000, 64.4% for 1999 and
64.1% for 1998. The improvement in the gross margin from fiscal 1999 to 2000
is mainly due to the increase in the amount of government grants earned in
fiscal 2000. However, the level of grants that will be received in future
years may fluctuate based on the number of employees hired and changes in
government legislation. The slight increase in gross margin from fiscal 1998
to 1999 can be attributed to increased economies of scale in our production
process and increased sales of higher margin products.
Although competitive pricing pressures continue, EXFO has been able to
mitigate such pricing pressures through increased sales of higher margin
products and cost-reduction manufacturing programs. Gross margin can be
negatively affected by increases in component costs, shifts in product mix
and increases in product offerings by other suppliers in the test,
measurement and monitoring market.
1998 64.1
1999 64.4
2000 65.5
SELLING AND ADMINISTRATIVE
Selling and administrative expenses totaled $24.3 million, $13.3 million and
$9.9 million for fiscal 2000, 1999 and 1998, respectively. As a percentage of
sales, selling and administrative expenses amounted to 33.9%, 31.5% and 31.3%
in fiscal 2000, 1999 and 1998, respectively. The $11.0 million increase in
selling and administrative expenses from fiscal 1999 to 2000 reflects
increased personnel expenses for sales and marketing staff, increased
expenses related to customer support, increased sales commissions related to
higher sales, increased promotional and product marketing expenses as well as
the expenses related to operating a public company. The $3.4 million increase
from fiscal 1998 to 1999 reflects the hiring of additional sales personnel,
marketing and administrative personnel, the opening of offices in Asia and
commissions on higher sales volume.
1998 31.3
1999 31.5
2000 33.9
RESEARCH AND DEVELOPMENT
Gross research and development expenses totaled $9.4 million, $6.4 million
and $4.4 million for fiscal 2000, 1999 and 1998, respectively. As a
percentage of sales, gross R&D expenses were 13.1%, 15.2% and 13.9% in fiscal
2000, 1999 and 1998, respectively. Gross R&D expenses increased $3.0 million
from fiscal 1999 to 2000 and $2.0 million from fiscal 1998 to 1999. These
increases are due to the hiring of additional R&D personnel in order to
develop new products and enhance current ones. During fiscal 2000, we added
45 employees in our R&D Department, which reflects our continued focus on R&D
activities.
$ Thousands
1998 $4,406
1999 $6,390
2000 $9,374
Tax credits and grants from federal and provincial governments for our R&D
activities amounted to $3.0 million, $2.1 million and $1.4 million in fiscal
2000, 1999 and 1998, respectively. This increase in tax credits and grants is
directly related to the hiring of additional research and development
personnel. As a result, net R&D expenses increased 48.4% from fiscal 1999 to
2000 and 43.2% from fiscal 1998 to 1999. Our net R&D expenses represented
8.9%, 10.2% and 9.5% of sales in fiscal 2000, 1999 and 1998, respectively.
30 2000 Annual Report EXFO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST INCOME
Interest income amounted to $1.5 million, $0.1 million and nil for fiscal
2000, 1999 and 1998, respectively. The increase in fiscal 2000 primarily
results from the interest income derived from investment of the remaining net
proceeds of the Initial Public Offering on June 29, 2000. This income is
offset by interest expenses associated with borrowings under our line of
credit.
INCOME TAXES
Our effective income tax rates were 34.1%, 30.0% and 34.4% for fiscal 2000,
1999 and 1998, respectively. The lower effective tax rate in 1999 compared to
2000 and 1998 was the result of non-deductible expenses and other items that
have reduced overall income tax expenses.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our Initial Public Offering, we had financed operations and met our
capital expenditure requirements mainly through cash flows from our
operations, research and development tax credits and government grants. Cash
flows used for operating activities for fiscal 2000 were $4.0 million
compared to cash flows provided by operating activities in 1999 and 1998 of
$3.7 million and $3.2 million, respectively. Cash flows used for operating
activities during fiscal 2000 were mainly due to the significant increase in
accounts receivable, which is related to a higher volume of sales and
inventories that are required to ensure minimal manufacturing and delivery
lead times. As at August 31, 2000, we had cash and cash equivalents of
$729,000, short-term investments of $162.7 million and working capital of
$194.2 million.
Cash flows used for investing activities were $169.0 million, $1.2 million
and $2.0 million for fiscal 2000, 1999 and 1998, respectively. Cash flows
during fiscal 1999 and 1998 were mainly used for capital expenditures and
short-term investments. The cash flows used during fiscal 2000 mainly
resulted from the investment of the remaining net proceeds from the Initial
Public Offering in June 2000, the acquisition of Nortech Fibronic Inc. in
February 2000 and the purchase of a building located in Vanier, Quebec in
June 2000.
For the year ended August 31, 2000, cash flows provided by financing
activities amounted to $172.8 million compared to cash flows used in the
amount of $3.3 million and $0.3 million for the years ended August 31 of 1999
and 1998, respectively. Financing from the Initial Public Offering was the
main source of cash flows provided for fiscal 2000. Proceeds of the Initial
Public Offering were used to pay the share issue expenses of $16.7 million,
to pay dividends of $17.6 million and to repay our debts. For fiscal 1999 and
1998, cash flows used for financing activities were mainly due to dividends
paid as well as repayments of bank advances and long-term debts. We do not
foresee payments of additional dividends during the next three fiscal years.
We have available credit facilities that provide for advances of up to C$10.0
million (US$6,793,000) under lines of credit and C$3.0 million (US$2,038,000)
as an operating loan. These facilities, which are renewable annually, bear
interest at prime rate. Accounts receivable, inventories and all tangible and
intangible assets have been pledged as security against these facilities. As
at August 31, 2000, C$15,000 has been drawn against the facilities. The
interest rate of credit facilities drawn in Canadian dollars is the Canadian
prime rate (7.5% as at August 31, 2000) and the credit facilities drawn in
United States dollars is the U.S. prime rate (10.0% as at August 31, 2000).
We believe that our existing cash balances and short-term investments,
together with cash flows from operations and available lines of credit, will
be sufficient to meet our liquidity and capital spending requirements through
the end of fiscal 2001. However, possible investments in or acquisitions of
complementary businesses, products or technologies may require additional
financing prior to such time. There can be no assurance that additional debt
or equity financing will be available when required or, if available, can be
secured on terms satisfactory to us.
NEW ACCOUNTING STANDARDS
In 1999, the Canadian Institute of Chartered Accountants issued section 3461,
"Employee future benefits," which is effective for the fiscal year beginning
on or after January 1, 2000. Adopting this standard will not have a
significant impact on our earnings or shareholders' equity. For new U.S.
accounting standards, see note 20.
EXFO 2000 Annual Report 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISKS AND UNCERTAINTIES
CURRENCY RISKS
We are exposed to currency risks as a result of our export of products
manufactured in Canada, substantially all of which are denominated in U.S.
dollars. Our exposure to foreign exchange rate fluctuations is partially
hedged by operating expenses of our U.S. and European subsidiaries and the
portion of our raw materials purchased in U.S. dollars. In addition, we
frequently enter into forward exchange contracts to sell U.S. dollars at
fixed forward rates in exchange for Canadian dollars. We enter into such
contracts to manage the risk of exchange rate fluctuations between the
Canadian and U.S. dollars on cash flows related to anticipated future revenue
streams and firmly committed future sales transactions denominated in U.S.
dollars. In the last quarter of fiscal 2000, we entered into forward exchange
contracts to buy U.S. dollars at the maturity dates of certain short-term
investments denominated in Canadian currency.
The following table summarizes the forward exchange contracts in effect as at
August 31, 2000, classified by expected transaction dates, none of which
exceed two years. The table below presents the notional amounts of such
contracts (in thousands of dollars) along with the weighted average
contractual forward rates under such contracts. The notional amounts of such
contracts are used to calculate the contractual payments to be exchanged
under these contracts.
YEARS ENDING AUGUST 31, 2001 2002
--------------------------------------------------------------------------
FORWARD EXCHANGE CONTRACTS TO SELL U.S. DOLLARS
IN EXCHANGE FOR CANADIAN DOLLARS
Contractual amounts $ 5,400 $ 1,200
Weighted average contractual exchange rates 1.4871 1.4602
FORWARD EXCHANGE CONTRACTS TO BUY U.S. DOLLARS
IN EXCHANGE FOR CANADIAN DOLLARS
Contractual amount $40,500 -
Weighted average contractual exchange rates 1.4777 -
The fair value of the contracts to sell U.S. dollars as at August 31, 2000,
based on the prevailing exchange rate at that date of $1.00 = C$1.4722,
amounted to C$9.7 million compared to a contractual value of C$9.8 million,
resulting in a deferred unrealized loss of C$65,790 (approximately US$45,000).
The fair value of the contracts to buy U.S. dollars as at August 31, 2000
amounted to US$27,431,000 compared to a contractual value of US$27,407,000,
resulting in an unrealized loss of US$24,000.
OPERATIONAL RISKS
Gross margin has varied in the past and may continue to vary significantly in
the future depending on the mix of products sold, our capacity to introduce
new products with higher margins, our ability to achieve economies of scale
in our production process, the impact of large orders with reduced margins,
fluctuations in raw material costs, increases in personnel costs and level of
government grants earned. In addition, we plan to significantly increase our
operating expenses to expand our manufacturing, sales and marketing, customer
support, administration and research and development activities.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions. We have identified these statements by the use
of words such as "may," "will," "expect," "anticipate," "intend," "plan,"
"estimate," "believe," "continue" or other similar expressions. These
forward-looking statements reflect our current expectations and assumptions
as to future events that may not prove to be accurate. Our actual results are
subject to a number of risks and uncertainties and could differ materially
from those discussed in these statements. Factors that could contribute to
these differences include, but are not limited to, our ability to adapt to
current and future changes in technology; our ability to introduce new and
enhanced products on a timely basis; our ability to overcome significant and
increasing competition in our industry; the impact of depending on a single
supplier or a limited number of suppliers for key components and materials in
our products; our ability to attract and retain sufficient numbers of highly
skilled technical, sales and marketing and other personnel; and our ability
to sustain research and development activities. In addition, such
forward-looking statements could be affected by general industry and market
conditions as well as growth rates, general international economic conditions
including exchange rate fluctuations, and other future factors. In light of
the many risks and uncertainties surrounding our business and operations, you
should keep in mind that we cannot guarantee that the forward-looking
statements described in this annual report will transpire. We undertake no
obligation and do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise, except as may be required under applicable law.
32 2000 Annual Report EXFO
MANAGEMENT'S REPORT
EXFO's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information presented in this Annual Report.
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles and include some amounts
that are based on estimates and judgments. Management has determined such
amounts on a reasonable basis in order to ensure that the financial
statements are presented fairly in all material respects.
EXFO's policy is to maintain a system of internal accounting and
administrative controls designed to provide reasonable assurance that the
financial information is relevant, accurate and reliable, and that our assets
are appropriately accounted for and adequately safeguarded.
The Board of Directors is responsible for ensuring that Management fulfills
its responsibilities for financial reporting and is ultimately responsible
for reviewing and approving the financial statements. The Board carries out
this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board and is comprised of outside
directors. The Committee meets periodically with Management and external
auditors to review accounting, auditing and internal control matters.
These consolidated financial statements have been reviewed and approved by
the Board of Directors on the recommendation of the Audit Committee.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, the external auditors, in accordance with
generally accepted auditing standards on behalf of the shareholders. The
external auditors have full and free access to the Audit Committee.
Vice-President,
Chairman, CEO and President Finance and Chief Financial Officer
/s/ Germain Lamonde /s/ Pierre Plamondon
Germain Lamonde Pierre Plamondon, CA
AUDITORS' REPORT
To the Shareholders of
EXFO Electro-Optical Engineering Inc.
We have audited the consolidated balance sheets of EXFO Electro-Optical
Engineering Inc. as at August 31, 1999 and 2000 and the consolidated
statements of earnings, retained earnings and cash flows for each of the
years in the three-year period ended August 31, 2000. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at August 31,
1999 and 2000 and the results of its operations and its cash flows for each
of the years in the three-year period ended August 31, 2000 in accordance
with Canadian generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Quebec, Quebec, Canada
September 20, 2000
EXFO 2000 Annual Report 33
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
The accompanying notes are an integral part of these consolidated financial
statements.
AS AT AUGUST 31, 1999 2000
------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 423 $ 729
Short-term investments (notes 9 and 19) 1,371 162,659
Accounts receivable (note 9)
Trade 8,869 18,272
Other (note 5) 1,026 2,790
Income taxes receivable (note 9) 381 284
Inventories (notes 6 and 9) 7,591 18,868
Prepaid expenses and deposits 475 1,023
Future income taxes (note 17) - 995
------------------------------------------------------------------------------
20,136 205,620
CAPITAL ASSETS (notes 7 and 9) 2,639 8,694
GOODWILL AND OTHER ASSETS (notes 8 and 9) 65 2,320
FUTURE INCOME TAXES (note 17) - 3,089
------------------------------------------------------------------------------
$22,840 $219,723
------------------------------------------------------------------------------
------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank advances (note 9) $ - $ 10
Accounts payable and accrued liabilities (note 10) 5,523 10,353
Dividend payable 51 -
Mandatorily redeemable preferred shares (note 11) - 543
Loan from a company under common control (note 15) 1,337 -
Deferred revenue 218 395
Current portion of long-term debt - 152
Future income taxes (note 17) 262 -
------------------------------------------------------------------------------
7,391 11,453
DEFERRED REVENUE 109 151
DEFERRED GRANTS 533 1,109
LONG-TERM DEBT (note 12) - 16
FUTURE INCOME TAXES (note 17) 128 -
------------------------------------------------------------------------------
8,161 12,729
------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 13) 87 198,459
CUMULATIVE TRANSLATION ADJUSTMENT - 1,555
RETAINED EARNINGS 14,592 6,980
------------------------------------------------------------------------------
14,679 206,994
------------------------------------------------------------------------------
$22,840 $219,723
------------------------------------------------------------------------------
------------------------------------------------------------------------------
On behalf of the Board:
/s/ Germain Lamonde
Germain Lamonde
Chairman, CEO and President
/s/ Andre Tremblay
Andre Tremblay
Chairman, Audit Committee
34 2000 Annual Report EXFO
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of U.S. dollars, except share and per share data)
YEARS ENDED AUGUST 31, 1998 1999 2000
---------------------------------------------------------------------------------------
(note 3) (note 3)
SALES (note 18) $31,605 $42,166 $71,639
COST OF SALES 11,345 14,998 24,712
---------------------------------------------------------------------------------------
GROSS MARGIN 20,260 27,168 46,927
---------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and administrative 9,898 13,279 24,304
Net research and development (note 15) 3,014 4,315 6,402
Amortization of capital assets 609 857 1,451
Amortization of other assets 48 41 47
---------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 13,569 18,492 32,204
---------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 6,691 8,676 14,723
Interest income, net (40) (136) (1,480)
Foreign exchange loss (gain) (126) 506 684
---------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL 6,857 8,306 15,519
INCOME TAXES (note 17) 2,356 2,492 5,298
---------------------------------------------------------------------------------------
EARNINGS BEFORE AMORTIZATION OF GOODWILL 4,501 5,814 10,221
AMORTIZATION OF GOODWILL - - 297
---------------------------------------------------------------------------------------
NET EARNINGS FOR THE YEAR $ 4,501 $ 5,814 $ 9,924
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
BASIC AND FULLY DILUTED EARNINGS PER SHARE
Earnings before amortization of goodwill $ 0.12 $ 0.14 $ 0.26
Net earnings $ 0.12 $ 0.14 $ 0.25
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING (000'S) 38,000 38,001 39,951
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
EXFO 2000 Annual Report 35
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of U.S. dollars, except per share data)
YEARS ENDED AUGUST 31, 1998 1999 2000
-----------------------------------------------------------------
(note 3) (note 3)
BALANCE - BEGINNING OF YEAR $ 7,643 $12,044 $14,592
ADD
Net earnings for the year 4,501 5,814 9,924
-----------------------------------------------------------------
12,144 17,858 24,516
-----------------------------------------------------------------
DEDUCT
Dividends
Class A shares - 2,926 17,216
Class C share (note 4) - 340 -
Class E shares 100 - -
Class F shares - - 320
-----------------------------------------------------------------
100 3,266 17,536
-----------------------------------------------------------------
BALANCE - END OF YEAR $12,044 $14,592 $ 6,980
-----------------------------------------------------------------
-----------------------------------------------------------------
DIVIDENDS PER SHARE
Class A shares $ - $ 0.08 $ 0.45
Class C share $ - $ 340 $ -
Class E shares $ 0.005 $ - $ -
Class F shares $ - $ - $ 0.45
-----------------------------------------------------------------
-----------------------------------------------------------------
36 2000 Annual Report EXFO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
YEARS ENDED AUGUST 31, 1998 1999 2000
----------------------------------------------------------------------------------------------
(note 3) (note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings for the year $ 4,501 $ 5,814 $ 9,924
Add (deduct) items not affecting cash and cash equivalents
Amortization of discount on short-term investments - - (807)
Amortization of capital assets 609 857 1,451
Amortization of goodwill and other assets 48 41 344
Future income taxes 289 (42) (33)
Change in non-cash operating working capital items
Accounts receivable (1,297) (3,875) (10,476)
Income taxes receivable - (381) 2,149
Inventories (758) (1,259) (10,732)
Prepaid expenses and deposits (117) (205) (519)
Accounts payable and accrued liabilities 369 1,965 3,917
Income taxes payable (490) (115) -
Deferred revenue - 327 215
Deferred grants - 533 567
----------------------------------------------------------------------------------------------
3,154 3,660 (4,000)
----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances (142) (136) (357)
Repayment of loan from a company under common control - - (1,349)
Repayment of long-term debt (21) (20) (812)
Issuance of share capital - 86 209,690
Share issue expenses - - (16,743)
Dividends paid (100) (3,215) (17,587
----------------------------------------------------------------------------------------------
(263) (3,285) 172,842
----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (647) (33) (519,645)
Proceeds from disposal of short-term investments - - 359,886
Additions to capital and other assets (1,336) (1,181) (7,180)
Business combination, net of cash
and cash equivalents acquired (note 4) - - (2,108)
----------------------------------------------------------------------------------------------
(1,983) (1,214) (169,047)
----------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 908 (839) (205)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS - - 511
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 354 1,262 423
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,262 $ 423 $ 729
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
Interest paid $ 145 $ 148 $ 480
Interest received $ (40) $ (98) $ (949)
Income taxes paid $ 2,032 $ 2,801 $ 3,761
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
EXFO 2000 Annual Report 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share
data and as otherwise noted)
1 - INCORPORATION AND NATURE OF ACTIVITIES
The company, incorporated in 1985 under the Canada Business Corporations Act,
designs, manufactures and markets a full line of fiber-optic test,
measurement and monitoring equipment and instruments for the
telecommunications industry. The company derives substantially all of its
revenue from customers located in the United States, Canada, Europe and Asia.
Marketing activities outside Canada are carried out by subsidiaries located
in the United States and Europe and independent representatives worldwide.
The company's customers consist primarily of telecommunications carriers,
cable television companies, public utilities, private network operators,
third-party installers, equipment rental companies, as well as optical
component, value-added optical module, and optical networking system
manufacturers.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. These principles conform,
in all material respects, with accounting principles generally accepted in
the United States, except as described in note 20. The principal accounting
policies of the company, which have been consistently applied, are summarized
as follows:
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting year.
Significant estimates include the allowance for doubtful accounts receivable,
tax credits receivable, provisions for obsolete inventories, the useful lives of
capital assets and goodwill and certain accrued liabilities. Actual results
could differ from those estimates.
CONSOLIDATION
These consolidated financial statements include the accounts of the company and
its subsidiaries.
FOREIGN CURRENCY TRANSLATION
FOREIGN SUBSIDIARIES
The company's subsidiaries are considered to be integrated. As a result, the
subsidiaries' accounts are remeasured into the functional currency using the
temporal method. Under this method, monetary assets and liabilities are
remeasured at the exchange rates in effect at the balance sheet date.
Non-monetary assets and liabilities are remeasured at historical rates.
Revenue and expenses are remeasured at the average rate for the year. Gains
and losses resulting from remeasurement are reflected in the statement of
earnings.
FOREIGN CURRENCY TRANSACTIONS
Transactions denominated in foreign currencies are measured into the functional
currency using the temporal method.
FORWARD EXCHANGE CONTRACTS
The company enters into forward exchange contracts in order to hedge against
potential exchange rate fluctuations on cash flows related to anticipated future
revenue streams denominated in foreign currencies. Unrealized gains and losses
on these forward exchange contracts are deferred and recognized upon settlement
of the related transactions. Accordingly, cash flows resulting from forward
exchange contract settlements are classified as cash flows from operating
activities along with the corresponding cash flows being hedged.
Furthermore, the company has entered into forward exchange contracts to sell
Canadian dollars in exchange for U.S. dollars. These contracts, which are
speculative in nature, are carried on the balance sheet at fair value. Any
unrealized gains or losses on these contracts at each balance sheet date are
included in earnings for the year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and balances with banks and
all highly liquid short-term investments with original maturities of three
months or less.
SHORT-TERM INVESTMENTS
Short-term investments are valued at the lower of cost and market value. Cost
is composed of acquisition cost plus amortization of discount or less
amortization of premium.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. The
cost of raw materials and work in progress inventories is determined using
the first-in, first-out method. The cost of finished goods is determined
using the average cost method.
38 2000 Annual Report EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL ASSETS AND AMORTIZATION
Capital assets 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 of the capital assets as
follows:
TERM
Building 25 years
Equipment 3 to 5 years
Leasehold improvements Remaining lease term including lease renewal option
The carrying value of capital assets is evaluated whenever significant events
occur which may indicate an impairment in value, based upon a comparison of
the carrying value to the net recoverable amount.
GOODWILL, OTHER ASSETS AND AMORTIZATION
Goodwill, which represents the excess of the purchase price of an acquired
business over the net identifiable assets acquired, is amortized on a
straight-line basis over the estimated useful life of five years. The company
assesses the carrying value of goodwill for future recoverability on an
annual basis by estimating the associated net undiscounted future cash flows.
The amount of impairment loss, if any, is the excess of the carrying value
over the estimated net undiscounted cash flows. Goodwill is written down for
any permanent impairment in value of the unamortized portion.
Other assets include the cost of acquired patents, net of accumulated
amortization. Patents are amortized on a straight-line basis over the
estimated useful lives of four years.
GOVERNMENT GRANTS
Government grants are accrued as a receivable when there is reasonable
assurance that the company has complied and will continue to comply with all
the conditions related to the grant. 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 asset. Grants related
to job creation and training programs for extended periods are deferred and
amortized on a straight-line basis over the minimum period for which the
created job must be maintained or training provided.
REVENUE RECOGNITION
For products where the software is incidental, the company recognizes revenue
when the products are delivered, with provisions made for estimated returns,
warranties and support obligations.
For products where software is not incidental, the revenues are separated
into two categories, product and customer support revenues based upon
vendor-specific objective evidence of fair value. The product revenues for
these sales are recognized when the products are delivered with provisions
made for estimated returns and warranties. The customer support revenues are
deferred and recognized ratably over the year of the support arrangement,
except where provided within one year of delivery, costs of providing this
support is insignificant and accrued at the time of delivery and no upgrades
of software are provided. Prior to September 1, 1998, the revenues for
support were included in sales upon delivery with a provision for any costs
associated with future support obligations. The effect of this accounting
change for the years ended prior to 1999 was not determinable by the company.
For the year ended August 31, 1999, the company deferred revenues amounting
to $327,000 which had an effect on net earnings of $226,000. The change
resulted in a reduction in net earnings per share for the year ended August
31, 1999 of $0.01.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
The company provides for income taxes using the liability method of tax
allocation. Under this method, future income tax assets and liabilities are
determined based on deductible or taxable temporary differences between
financial statement values and tax values of assets and liabilities using
enacted income tax rates expected to be in effect for the year in which the
differences are expected to reverse.
The company establishes a valuation allowance against future income tax
assets if, based on available information, it is more likely than not that
some or all of the future income tax assets will not be realized.
TAX CREDITS
The company is entitled to scientific research and experimental development
("SRED") tax credits granted by the Canadian federal government ("Federal")
and the government of the Province of Quebec ("Provincial"). Federal SRED tax
credits are earned on qualified Canadian SRED expenditures at a rate of 20%
and can only be used to offset Federal income taxes otherwise payable.
Provincial SRED tax credits, which are refundable, are earned on qualified
SRED salaries in the Province of Quebec at a rate of 20%. Additional
refundable provincial SRED tax credits are earned at a rate of up to 20%.
These additional tax credits are reduced to nil, on a pro-rata basis, as
total assets of the company increase from C$25 million to C$50 million.
SRED and other tax credits are accounted for as a reduction of the related
expenditures. The refundable portion of SRED and other tax credits is
recorded in the year in which the related expenditures are incurred. The
non-refundable portion of SRED tax credits is recorded in the year in which
the related expenditures are incurred, provided the company has reasonable
assurance that the credits will be realized.
EXFO 2000 Annual Report 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT EXPENSES
All expenses related to development activities, which do not meet generally
accepted criteria for deferral, and research are expensed as incurred.
Development expenses which meet generally accepted criteria for deferral are
capitalized and amortized against earnings over the estimated period of
benefit. As at August 31, 2000, the company had not deferred any development
costs.
STOCK-BASED COMPENSATION PLANS
The company maintains two stock-based compensation plans, which are described
in note 13. Under accounting principles generally accepted in Canada, no
compensation cost is recognized for those plans when stocks or stock options
are issued to plan participants. Any consideration received from plan
participants upon the purchase of stock or the exercise of stock options is
credited to share capital.
EARNINGS AND DIVIDENDS PER SHARE
Basic earnings and dividends per share are determined using the weighted
average number of common shares outstanding during the year, as adjusted for
the effects of stock splits and other reorganizations of share capital in
prior years.
Fully diluted earnings per share are determined using the weighted average
number of shares and dilutive share equivalents outstanding during the year.
Earnings for the year are increased by the estimated additional earnings, net
of applicable income taxes, on the proceeds, if any, from the exercise of
dilutive common share equivalents.
NEW ACCOUNTING STANDARD
In 1999, the CICA issued section 3461, "Employee future benefits" which is
effective for fiscal beginning on or after January 1, 2000. Adopting this
standard will not have a significant impact on the company's earnings or
shareholders' equity.
3 - CHANGE IN REPORTING CURRENCY
The consolidated financial statements of the company were presented in
Canadian dollars up to August 31, 1999. Effective September 1, 1999, the U.S.
dollar has been adopted as the reporting currency. The functional currency
continues to be the Canadian dollar. The financial statements for the years
ended August 31, 1998 and 1999 are presented in U.S. dollars in accordance
with a translation of convenience method using the representative exchange
rate as at August 31, 1999 of US$1.00 = C$1.4958. The translated amount for
monetary and non-monetary items as at August 31, 1999 becomes the historical
basis for those items in subsequent years.
The financial statements as at August 31, 2000 and for the year then ended
have been translated 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 at the
date of the balance sheet and revenue and expenses are translated at the
average exchange rate for the year. All gains and losses from the translation
of the financial statements into the reporting currency are included in the
cumulative translation adjustment in shareholders' equity. Changes in the
cumulative translation adjustment during each year result solely from the
application of this translation method.
4 - BUSINESS COMBINATIONS
NORTECH FIBRONIC INC.
On February 4, 2000, the company acquired a 100% interest in Nortech Fibronic
Inc. ("Nortech"), a company specializing in fiber-optic testing and
temperature sensing, in exchange for total consideration valued at
C$4,051,000 (US$2,799,000). The consideration paid consisted of C$3,051,000
(US$2,108,000) in cash, the issuance of 800,000 Class G shares which are
mandatorily redeemable, for cash or subordinate voting shares at the option
of the company, on November 30, 2000 for an amount of C$800,000 (US$553,000)
(note 11), and a non-interest-bearing debenture in the amount of C$200,000
(US$138,000) due November 30, 2000 (note 12).
This acquisition, which has been accounted for using the purchase method,
resulted in goodwill amounting to C$3,677,000 (US$2,542,000) based on the
following allocation of the purchase price to the identifiable assets
acquired and liabilities assumed.
Current assets $1,842
Capital assets 409
Future income taxes 237
------------------------------------------------------------
2,488
------------------------------------------------------------
Current liabilities 1,933
Long-term debt 298
------------------------------------------------------------
2,231
------------------------------------------------------------
Net identifiable assets acquired 257
Goodwill 2,542
------------------------------------------------------------
Purchase price 2,799
Less: Class G shares issued 553
Less: Non-interest-bearing debenture 138
Less: Cash and cash equivalents acquired -
------------------------------------------------------------
Cash paid net of cash and cash equivalents acquired $2,108
------------------------------------------------------------
------------------------------------------------------------
The net earnings of Nortech have been included in the consolidated statement
of earnings of the company from the date of acquisition, February 4, 2000.
40 2000 Annual Report EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA INFORMATION
The following unaudited pro forma information regarding the acquisition of
Nortech has been prepared by the company's management based upon the audited
consolidated financial statements of the company for the years ended August
31, 1999 and 2000 and the unaudited consolidated financial statements of
Nortech.
This pro forma information includes adjustments related to the amortization
of goodwill as well as the income tax effects of the acquisition.
Consequently, such information is not necessarily indicative of the actual
results which would have been achieved, nor is it necessarily indicative of
future consolidated results of the company.
The following unaudited pro forma information for the year ended August 31,
1999 has been prepared as if the acquisition had occurred on September 1,
1998. The unaudited pro forma information for the year ended August 31, 2000
has been prepared as if the acquisition had occurred on September 1, 1999:
YEARS ENDED AUGUST 31, 1999 2000
-------------------------------------------------------------------------
(unaudited) (UNAUDITED)
(note 3)
Sales $44,948 $73,024
Earnings before amortization of goodwill 6,091 10,179
Net earnings $ 5,602 $ 9,716
Basic and fully diluted earnings per share
Earnings before amortization of goodwill $ 0.15 $ 0.26
Net earnings $ 0.14 $ 0.24
GEXFO DISTRIBUTION INTERNATIONALE INC.
On September 1, 1998, the company acquired from its parent company all the
issued and outstanding shares of GEXFO Distribution Internationale Inc. in
exchange for 1 Class C share of the company, which was redeemed at a price of
C$509,000 (US$340,000). This holding company has two wholly-owned
subsidiaries, EXFO America Inc. and EXFO Europe S.A.R.L., which market
fiber-optic test and measurement and monitoring equipment and instruments for
the American and European markets.
Since the exchange was between entities under common control, the exchange
has been accounted for in a manner similar to a pooling of interests. The
assets, liabilities and shareholders' equity of the company and the other
companies have been combined using their respective carrying amounts and
financial statements of prior years have been restated as if the companies
had always been combined.
The statements of earnings and cash flows for 1998 reflect the results of
operations and cash flows on a combined basis. The creation, issuance and
redemption of the Class C share on September 1, 1998 has been presented as a
mandatorily redeemable preferred share and a dividend distribution from the
combined retained earnings.
The combined companies' net assets as at August 31, 1998 are as follows:
EXFO GEXFO ELIMINATIONS TOTAL
ELECTRO-OPTICAL DISTRIBUTION
ENGINEERING INC. INTERNATIONALE INC.
-----------------------------------------------------------------------------------------------------------
(note 3)
Total assets $17,384 $ 639 $ (380) $17,643
Total liabilities (5,679) (299) 380 (5,598)
-----------------------------------------------------------------------------------------------------------
Net assets $11,705 $ 340 $ - $12,045
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Consolidated sales and net earnings for GEXFO Distribution Internationale
Inc. during the year ended August 31, 1998 were insignificant.
GAP OPTIQUE S.A.
On June 1, 2000, the company acquired the 85% interest in GAP Optique S.A.
held by its parent company for a cash consideration of $16,000. The carrying
value of the net assets of GAP Optique S.A. was $19,000 as at December 31,
1999. GAP Optique S.A. did not have any operations in 1998, 1999 or 2000.
Since the exchange occured between entities under common control, the
exchange has been accounted for in a manner similar to a pooling of
interests. The assets, liabilities and shareholders' equity of the company
and GAP Optique S.A. have been combined using their respective carrying
amounts and financial statements of prior year have been restated as if the
companies had always been combined.
5 - OTHER RECEIVABLES
AS AT AUGUST 31, 1999 2000
----------------------------------------------------
Grants receivable $ 479 $2,046
Company under common control 27 -
Other 520 744
----------------------------------------------------
$1,026 $2,790
----------------------------------------------------
----------------------------------------------------
EXFO 2000 Annual Report 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - INVENTORIES
AS AT AUGUST 31, 1999 2000
-----------------------------------------------------
Raw materials $ 4,005 $12,057
Work in progress 1,177 2,910
Finished goods 2,409 3,901
----------------------------------------------------
$ 7,591 $18,868
-----------------------------------------------------
-----------------------------------------------------
7 - CAPITAL ASSETS
AS AT AUGUST 31, 1999 COST ACCUMULATED AMORTIZATION NET
----------------------------------------------------------------------
Equipment $ 4,426 $ 2,469 $ 1,957
Leasehold improvements 1,146 464 682
----------------------------------------------------------------------
$ 5,572 $ 2,933 $ 2,639
----------------------------------------------------------------------
----------------------------------------------------------------------
AS AT AUGUST 31, 2000 COST ACCUMULATED AMORTIZATION NET
----------------------------------------------------------------------
Land $ 299 $ - $ 299
Building 3,442 32 3,410
Equipment 8,451 4,158 4,293
Leasehold improvements 1,373 681 692
----------------------------------------------------------------------
$13,565 $ 4,871 $ 8,694
----------------------------------------------------------------------
----------------------------------------------------------------------
8 - GOODWILL AND OTHER ASSETS
AS AT AUGUST 31, 1999 2000
------------------------------------------------------------------------------------
Goodwill - net of accumulated amortization of $297,000 $ - $2,252
Patents - net of accumulated amortization of $111,000 and $159,000
as at August 31, 1999 and 2000, respectively 65 68
------------------------------------------------------------------------------------
$ 65 $2,320
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
9 - CREDIT FACILITIES
The company has available credit facilities which provide for advances of up
to C$10,000,000 (US$6,793,000) under a line of credit and C$3,000,000
(US$2,038,000) as an operating loan. These facilities, which are renewable
annually, bear interest at prime rate. Accounts receivable, inventories and
all tangible and intangible assets of the company have been pledged as
security against these facilities. Amounts of nil and C$15,000 (US$10,000)
were drawn against the facilities as at August 31, 1999 and 2000,
respectively.
10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AUGUST 31, 1999 2000
------------------------------------------------------------------
Trade $ 1,884 $ 6,473
Salaries and social benefits 1,112 1,698
Outstanding cheques in excess of bank balances 1,942 374
Commissions 421 966
Other 164 842
------------------------------------------------------------------
$ 5,523 $10,353
------------------------------------------------------------------
------------------------------------------------------------------
42 2000 Annual Report EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 - MANDATORILY REDEEMABLE PREFERRED SHARES
Authorized - unlimited as to number, without par value
Preferred, non-voting, ranking in priority to subordinate and
multiple voting shares, each series ranking pari passu with the preferred
shares of every other series, issuable in one or more series
Preferred Series 1, non-voting, mandatorily redeemable on November
30, 2000 at their paid-in value, ranking in priority to all other existing
and future classes of shares. The company may elect to settle the redemption
value by issuing the number of subordinate voting shares obtained by dividing
the paid-in value of the preferred shares Series 1, being C$800,000, by the
average trading price of the subordinate voting shares for a period of ten
trading days preceding November 30, 2000
On February 7, 2000, the company filed articles of amendment pursuant to
which the Class G shares were created.
Prior to June 29, 2000, the company's authorized mandatorily redeemable
preferred shares consisted of Class B, C, E and G shares.
On June 29, 2000, the company filed restated articles of incorporation
pursuant to which preferred shares issuable in series and preferred shares
Series 1 were created, the 800,000 issued and outstanding Class G shares were
converted into 800,000 preferred shares Series 1 and Class B, C, E and G
shares were cancelled.
The following table summarizes the preferred share activity since August 31,
1997:
CLASS C SHARE CLASS E SHARES
--------------------------------------------------------------------------------------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT TOTAL AMOUNT
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1997 and 1998 - $ - 19,000,000 $ - $ -
Business combination (note 4) 1 340 - - 340
Redemption of Class C share (1) (340) - - (340)
Conversion of Class E shares into Class A shares (note 13) - - (19,000,000) - -
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1999 and 2000 - $ - - $ - $ -
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
CLASS G SHARES PREFERRED SHARES SERIES 1
--------------------------------------------------------------------------------------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT TOTAL AMOUNT
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1997, 1998 and 1999 - $ - - $ - $ -
Business combination (note 4) 800,000 555 - - 555
Conversion of Class G shares into preferred shares Series 1 (800,000) (555) 800,000 555 -
Foreign currency translation adjustment - - - (12) (12)
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 2000 - $ - 800,000 $543 $ 543
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
12 - LONG-TERM DEBT
AS AT AUGUST 31, 1999 2000
----------------------------------------------------------------------------------
Unsecured non-interest-bearing debenture due November 30, 20 $ - $136
Unsecured non-interest-bearing loan repayable through July 2002 - 32
----------------------------------------------------------------------------------
- 168
Less: Current portion - 152
----------------------------------------------------------------------------------
$ - $ 16
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
As at August 31, 2000, minimum principal repayments required in each of the
next two years are as follows:
2001 $ 152
2002 16
EXFO 2000 ANNUAL REPORT 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13 - SHARE CAPITAL
Authorized - unlimited as to number, without par value
Subordinate voting and participating, bearing a non-cumulative
dividend to be determined by the Board of Directors, ranking pari passu with
multiple voting shares
Multiple voting and participating, entitling to ten votes each,
bearing a non-cumulative dividend to be determined by the Board of Directors,
convertible at the holder's option into subordinate voting shares on a
one-for-one basis, ranking pari passu with subordinate voting shares
Prior to June 29, 2000, the company's authorized share capital consisted of
Class A, D and F shares.
On September 2, 1998, the company filed articles of amendment pursuant to
which the Class A shares were split on a 190,000-to-one basis. Pursuant to
articles of amendment dated September 3, 1998, the 100 issued and outstanding
Class E shares (note 11) were converted into Class A shares on a
190,000-to-one basis. All references to numbers of shares and per share
amounts have been restated in order to reflect the share split and conversion
noted above.
On June 29, 2000, the company filed restated articles of incorporation
pursuant to which subordinate and multiple voting shares were created, the
38,000,000 issued and outstanding Class A shares were converted into
38,000,000 multiple voting shares, the 707,264 issued and outstanding Class F
shares were converted into 707,264 subordinate voting shares and the Class A,
D and F shares were cancelled.
The following tables summarize the share capital activity since August 31,
1997:
CLASS A SHARES CLASS F SHARES
--------------------------------------------------------------------------------------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT TOTAL AMOUNT
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1997 and 1998 19,000,000 $ 1 - $ - $ 1
Conversion of Class E shares into Class A shares (note 11) 19,000,000 - - - -
Issued for cash under stock purchase plan - - 197,588 86 86
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1999 38,000,000 1 197,588 86 87
Issued for cash under stock purchase plan - - 509,676 390 390
Conversion of Class F shares into subordinate voting shares - - (707,264) (476) (476)
Conversion of Class A shares into multiple voting shares (38,000,000) (1) - - (1)
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 2000 - $ - - $ - $ -
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES
--------------------------------------------------------------------------------------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT TOTAL AMOUNT
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1997, 1998 and 1999 - $ - - $ - $ -
Conversion of Class F shares into subordinate voting shares - - 707,264 476 476
Conversion of Class A shares into multiple voting shares 38,000,000 1 - - 1
Issued pursuant to the Initial Public Offering - - 8,050,000 209,300 209,300
Share issue expenses, net of related income taxes of $5,425,000 - - - (11,318) (11,318)
--------------------------------------------------------------------------------------------------------------------------------
Balance as at August 31, 2000 38,000,000 $ 1 8,757,264 $ 198,458 $198,459
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
44 ANNUAL REPORT EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK PURCHASE PLAN
The company's stock purchase plan terminated at the time of the Initial
Public Offering. In accordance with that plan, officers, directors and key
employees could purchase Class F shares up to a maximum of 5% of all
participating, issued and outstanding shares of the company. The maximum
number of shares held by one person could not exceed 1% of all issued and
outstanding shares of the company. The purchase price of shares under that
plan was determined as a multiple of the company's equity as at the end of
the preceding fiscal year. Shares issued under that plan are restricted as to
sale and transferability for a period of at least five years. Prior to June
29, 2000, the date of the Initial Public Offering, the company issued 707,264
Class F shares in exchange for a weighted average cash consideration of
C$0.98 (US$0.68) per share. As at August 31, 2000, the company has guaranteed
the repayment of third party loans totalling C$270,000 (US$183,000) obtained
by certain employees with respect to the purchase of Class F shares.
STOCK OPTION PLAN
On May 25, 2000, the company established a stock option plan for directors,
executive officers, employees and consultants and those of the company's
subsidiaries, as determined by the Board of Directors.
The maximum number of subordinate voting shares issuable under the plan shall
not exceed 4,470,961 shares. The maximum number of subordinate voting shares
that may be granted to any individual shall not exceed 5% of the number of
outstanding subordinate voting shares. The exercise price shall be the market
price of the common shares on the date of granting. Options granted under the
plan generally expire ten years from the date of granting. Options granted
under the plan generally vest over a four-year period, with 25% becoming
exercisable at the end of each of the first four fiscal years of the company
following the date of granting. The number of options which ultimately become
exercisable in any given year, and in aggregate, depends on the degree to
which the company's financial performance objectives are met. The Board of
Directors may accelerate the vesting of any or all outstanding options upon
the occurrence of a change of control.
On June 27, 2000, the company granted options to purchase a total of 609,734
subordinate voting shares at the Initial Public Offering price. As at August
31, 2000, there were 3,861,227 shares reserved for issuance under the stock
option plan.
The following table summarizes the stock option activity since May 25, 2000:
YEAR ENDED AUGUST 31, 2000 NUMBER WEIGHTED AVERAGE EXERCISE PRICE
------------------------------------------------------------------------------
Outstanding - Beginning of year - $ -
Granted 609,734 26
------------------------------------------------------------------------------
Outstanding - End of year 609,734 $ 26
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Options exercisable - End of year - -
------------------------------------------------------------------------------
As at August 31, 2000, the weighted average remaining contractual life of the
outstanding options was 4.83 years.
14 - COMMITMENTS
OPERATING LEASES
The company has entered into operating leases for its premises, which expire
at various dates through to 2003. As at August 31, 2000, the minimum rentals
payable during each of the next three years are as follows:
2001 $ 397
2002 209
2003 49
------------------------------------------------------------------------------
$ 655
------------------------------------------------------------------------------
------------------------------------------------------------------------------
During the years ended August 31, 1998, 1999 and 2000, rental expense
amounted to $283,000, $344,000 and $579,000, respectively.
15 - OTHER DISCLOSURES
LOAN FROM A COMPANY UNDER COMMON CONTROL
The loan from a company under common control bearing interest at prime rate
plus 1% and unsecured was reimbursed during the year.
During the years ended August 31, 1998, 1999 and 2000, the effective interest
rate on this loan was 6.25%, 6.95% and 7.75%, respectively.
NET RESEARCH AND DEVELOPMENT EXPENSES
Net research and development expenses comprise the following:
YEARS ENDED AUGUST 31, 1998 1999 2000
------------------------------------------------------------------------------
(note 3) (note 3)
Gross research and development expenses $ 4,406 $ 6,390 $ 9,374
Research and development tax credits (1,332) (1,935) (2,436)
Government grants (60) (140) (536)
------------------------------------------------------------------------------
$ 3,014 $ 4,315 $ 6,402
------------------------------------------------------------------------------
------------------------------------------------------------------------------
EXFO 2000 ANNUAL REPORT 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER GRANTS AND TAX CREDITS
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 a maximum of C$600,000 (US$417,000) towards interest costs incurred over
the period from January 1, 1998 through December 31, 2002. In addition, the
Minister agreed to provide grants up to a maximum of C$2,220,000
(US$1,541,000) over the period from January 1, 1998 through December 31,
2002, payable based on the number of full-time jobs created during the period.
The above grants are subject to the condition that the company maintain its
Canadian principal place of business within the Province of Quebec until at
least December 31, 2002 and that jobs created pursuant to the agreement be
maintained for a period of at least five years from the date of creation.
Should these conditions not be met by the company, the Minister may enforce
various recourse options, which include suspension or cancellation of the
agreement or requiring the repayment of amounts received by the company.
During the period from January 1, 1998 to August 31, 2000, the company
recognized a total of C$2,396,000 (US$1,627,000) under this program, of which
C$1,048,000 (US$712,000) has been credited to earnings with the balance of
C$1,348,000 (US$915,000) having been included in deferred grants.
Furthermore, in 1999, the company entered into another agreement with the
Minister. Pursuant to this agreement, the Minister agreed to provide grants
up to a maximum of C$3,756,000 (US$2,551,000) over the period from February
1998 to June 2002, payable based on the number of jobs created and certain
specific training expenses related to such jobs. The above grant is subject
to the condition that 361 jobs be created pursuant to the agreement and that
the new employees continue to participate in the specific training program
for a period of at least ten consecutive months. Should these conditions not
be met by the company, the Minister may enforce various recourse options,
which include suspension or cancellation of the agreement or requiring the
repayment of amounts received by the company. Since 1998, the company has
recognized a total of C$1,322,000 (US$898,000) under this program, of which
C$1,037,000 (US$704,000) has been credited to earnings with the balance of
C$285,000 (US$194,000) having been included in deferred grants. Should any
repayments of amounts received pursuant to these agreements be required, such
repayments will be charged to earnings as the amounts of any repayments
become known.
Finally, since 2000, companies operating in the Quebec city area are entitled
to a refundable tax credit granted by the government of the Province of
Quebec. This credit is earned on the increase of production and marketing
salaries incurred in the Quebec City area at a rate of 40%. The company has
recognized a total of C$1,297,000 (US$881,000) under this program which has
been credited to earnings.
Following is a summary of the classification of these and certain other
grants and tax credits in the statements of earnings.
Interest income for the years ended August 31, 1998, 1999 and 2000 is net of
related government grants of $66,000, $126,000 and $196,000, respectively.
Cost of sales for the years ended August 31, 1998, 1999 and 2000 is net of
government grants of $11,000, $33,000 and $915,000, respectively.
Selling and administrative expenses for the years ended August 31, 1998, 1999
and 2000 are net of government grants of $22,000, $21,000 and $386,000,
respectively.
Research and development expenses for the years ended August 31, 1998, 1999
and 2000 are net of government grants of $60,000, $140,000 and $536,000,
respectively.
DEFINED CONTRIBUTION EMPLOYEE BENEFITS PLANS
The company maintains two separate defined contribution employee benefits
plans for certain eligible employees. These plans, which are accounted for on
an accrual basis, are summarized as follows:
- DEFERRED PROFIT SHARING PLAN
This plan, maintained for eligible Canadian
resident employees, requires the company to contribute an amount equal to 1%
of an employee's gross salary, provided that the employee has contributed at
least 2% of gross salary to a tax-deferred registered retirement savings
plan. In addition, at the end of each fiscal year, the company may contribute
an additional amount of up to 4% of an employee's gross salary to the
employee's tax-deferred registered retirement savings plan. Contributions
paid to this plan during the years ended August 31, 1998, 1999 and 2000
amounted to nil, C$156,000 (US$104,000) and C$202,000 (US$137,000),
respectively.
- 401K PLAN
The company maintains a 401K plan for eligible U.S. resident
employees. Under the plan, the company may elect to contribute an amount of
up to 50% of the first 6% of an employee's current compensation, subject to
certain legislated maximum contribution limits. During the years ended August
31, 1998, 1999 and 2000, the company made contributions totalling US$8,000,
US$21,000 and US$23,000, respectively.
46 ANNUAL REPORT EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16 - RELATED PARTY TRANSACTIONS
In the normal course of operations, the company entered into transactions
with certain companies under common control. These transactions have been
measured at the exchange amount which is the amount of consideration agreed
upon by the related parties. These transactions have been reflected in the
financial statements as follows:
YEARS ENDED AUGUST 31, 1998 1999 2000
-----------------------------------------------------------------------------
(note 3) (note 3)
Rent $ 219 $ 232 $ 241
Interest expense 84 92 105
17 - INCOME TAXES
The reconciliation of the income tax provision calculated using the Canadian
federal and provincial statutory income tax rates to the provision for income
taxes per the financial statements is as follows:
YEARS ENDED AUGUST 31, 1998 1999 2000
-------------------------------------------------------------------------------
(note 3) (note 3)
Income taxes at combined Canadian federal
and provincial statutory tax rate (38%) $ 2,606 $3,156 $ 5,897
Increase (decrease) due to:
Manufacturing and processing deduction (387) (519) (645)
Non-deductible expenses 43 40 57
Other 94 (185) (11)
-------------------------------------------------------------------------------
$2,356 $2,492 $ 5,298
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income taxes consist of:
Current $2,067 $2,534 $5,331
Future 289 (42) (33)
-------------------------------------------------------------------------------
$2,356 $2,492 $5,298
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Significant components of the company's future tax assets and liabilities are
as follows:
AS AT AUGUST 31, 1999 2000
-------------------------------------------------------------------------------
Future tax assets
Provisions and accruals $ - $ 266
Government grants 18 -
Deferred revenue 101 175
Share issue expenses - 4,358
Other 4 193
-------------------------------------------------------------------------------
123 4,992
-------------------------------------------------------------------------------
Future tax liabilities
Capital assets (183) (419)
Research and development tax credits (330) (474)
Government grants - (15)
-------------------------------------------------------------------------------
(513) (908)
-------------------------------------------------------------------------------
$ (390) $ 4,084
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Presented as:
Current $ (262) $ 995
Long-term (128) 3,089
-------------------------------------------------------------------------------
$ (390) $ 4,084
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
EXFO 2000 ANNUAL REPORT 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18 - SEGMENT INFORMATION
Management has organized the company under one operating segment, that being
the development, manufacture and marketing of fiber-optic test, measurement
and monitoring equipment and instruments. Substantially all of the company's
long-lived assets are located in Canada.
Sales by geographic region are detailed as follows:
YEARS ENDED AUGUST 31, 1998 1999 2000
-------------------------------------------------------------------------------
(note 3) (note 3)
United States $ 13,644 $ 20,755 $36,139
Canada 2,353 2,973 8,006
Europe 6,717 8,721 14,503
Asia 3,229 3,199 6,486
Other 5,662 6,518 6,505
-------------------------------------------------------------------------------
$ 31,605 $ 42,166 $71,639
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Sales have been allocated to geographic regions based on the country of
residence of the related customers. During all years presented above, there
were no customers from which 10% or more of total sales were derived.
19 - FINANCIAL INSTRUMENTS
SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
AS AT AUGUST 31, 1999 2000
-------------------------------------------------------------------------------
Corporate bonds denominated in
Canadian dollars bearing interest
at annual rates of 4.9% to 5% $ 1,371 $ -
Commercial paper denominated in Canadian dollars,
bearing interest at annual rates of 5.77% to
5.93%, maturing on different dates between
November 22, 2000 and February 2, 2001 - 41,872
Commercial paper denominated
in U.S. dollars, bearing interest
at annual rates of 6.51% to 6.79%,
maturing at different dates between
November 14, 2000 and March 2, 2000 - 120,787
-------------------------------------------------------------------------------
$ 1,371 $162,659
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
FAIR VALUE
Cash and cash equivalents, accounts receivable, bank advances, accounts
payable and accrued liabilities, dividend payable, mandatorily redeemable
preferred shares, loan from a company under common control and long-term debt
are financial instruments whose fair values approximate their carrying values.
The fair value of short-term investments, determined based on market value,
amounted to $1,430,000 and $162,719,000 as at August 31, 1999 and 2000,
respectively.
48 2000 ANNUAL REPORT EXFO
CREDIT RISK
Financial instruments which potentially subject the company to credit risk
consist principally of cash and cash equivalents, short-term investments,
accounts receivable and forward exchange contracts. The company's short-term
investments consist of debt instruments issued by high-credit quality
financial institutions and corporations and the company's cash and cash
equivalents 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.
Due to the North American and European distribution of the company's
customers, there is no particular concentration of credit risk. 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 on-going
credit reviews of all its customers and establishes an allowance for doubtful
accounts receivable when accounts are determined to be uncollectible.
INTEREST RATE RISK
As at August 31, 2000, the company's exposure to interest rate risk is
summarized as follows:
Cash and cash equivalents Non-interest bearing
Short-term investments As described above
Accounts receivable Non-interest bearing
Bank advances Prime rate
Accounts payable and accrued liabilities Non-interest bearing
Mandatorily redeemable preferred shares Non-interest bearing
Long-term debt As described in note 12
FORWARD EXCHANGE CONTRACTS
The company is exposed to currency risks as a result of its export sales,
substantially all of which are denominated in U.S. dollars, of products
manufactured in Canada. These risks are partially hedged by forward exchange
contracts and certain operating expenses. As at August 31, 1999 and 2000, the
company held contracts to sell U.S. dollars at various forward rates, which
are summarized as follows:
CONTRACTUAL WEIGHTED AVERAGE
AMOUNTS CONTRACTUAL FORWARD RATES
-----------------------------------------------------------------------------
As at August 31, 1999
September 1999 to August 2000 $5,800 1.4815
September 2000 to June 2001 3,000 1.5014
As at August 31, 2000
September 2000 to August 2001 $5,400 1.4871
September 2001 to April 2002 1,200 1.4602
As at August 31, 1999 and 2000, these contracts resulted in deferred
unrealized losses amounting to US$35,000 and US$45,000, respectively.
As at August 31, 2000, the company held forward exchange contracts to buy
U.S. dollars at various forward rates which are summarized as follows:
CONTRACTUAL WEIGHTED AVERAGE
AMOUNT CONTRACTUAL FORWARD RATE
-----------------------------------------------------------------------------
Maturing between November 2000
and January 2001 $40,500 1.4777
As at August 31, 2000, the fair value of these contracts amounted to
US$27,431,000 compared to contractual value of US$27,407,000, resulting in an
unrealized loss of US$24,000 which has been reflected in the statement of
earnings for the year.
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
As a registrant with the Securities and Exchange Commission in the United
States, the company is required to reconcile its financial results for
significant differences between generally accepted accounting principles as
applied in Canada (Canadian GAAP) and those applied in the United States
(U.S. GAAP).
Additional disclosures required under U.S. GAAP have been provided in the
accompanying financial statements and notes. In addition, the following
summarizes differences between Canadian and U.S. GAAP and other required
disclosures under U.S. GAAP.
ACCOUNTING FOR STOCK-BASED COMPENSATION
To conform with U.S. GAAP, the company measures stock-based compensation
costs using the intrinsic value method (APB 25 "Accounting for Stock Issued
to Employees").
STOCK PURCHASE PLAN
Under APB 25, compensation cost related to the stock purchase plan is
measured as the difference between the fair value of the purchased stock and
the purchase price paid by plan participants. Compensation cost is amortized
to expense over a period of five years, being the restriction period.
During the years ended August 31, 1999 and 2000, the weighted average fair
value per share under the stock purchase plan amounted to approximately $0.68
and $10.80, respectively. The fair value per share since inception of the
plan ranged between $0.68 and $18.00. As at August 31, 1999 and 2000, the
balance of deferred stock-based compensation amounted to $40,000 and
$2,144,000, respectively.
EXFO 2000 Annual Report 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN
In accordance with APB 25, the company's stock option plan is considered to
be a variable plan. Accordingly, subsequent increases in the fair value of
the underlying stock, in excess of the exercise price of the option, are
accounted for as additional compensation costs. Compensation cost is
amortized to expense over the estimated vesting period up to a maximum of
four years. As at August 31, 2000, the balance of deferred stock-based
compensation amounted to $17,285,000.
Under Canadian GAAP, no compensation cost is recognized for these stock-based
compensation plans.
CHANGE IN REPORTING CURRENCY
As mentioned in note 3, on September 1, 1999, the company adopted the U.S.
dollar as its reporting currency. Under U.S. GAAP, the financial statements,
including prior years, are translated according to the current rate method.
Under Canadian GAAP, at the time of change in reporting currency, the
historical financial statements are presented using a translation of
convenience.
Under Canadian GAAP, the statements of earnings for the years ended August
31, 1998 and 1999 were translated into U.S. dollars using an exchange rate of
US$1.00 = C$1.4958. Under U.S. GAAP, revenue and expenses would be translated
at exchange rates prevailing at the respective transaction dates. Average
exchange rates for the years ended August 31, 1998 and 1999 were US$1.00 =
C$1.4390 and C$1.5068, respectively. The exchange rates as at August 31, 1998
and 1999 were US$1.00 = C$1.5722 and C$1.4958, respectively.
SHORT-TERM INVESTMENTS
Under U.S. GAAP, the short-term investments would be classified as "available
for sale" securities. Consequently, these securities would be carried at fair
value, with any unrealized holding gains or losses at each balance sheet date
being reflected in other comprehensive income on a net of tax basis. Under
Canadian GAAP, short-term investments are carried at the lower of cost and
market value and cost is composed of acquisition cost plus amortization of
discount or less amortization of premium.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 121, Accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of, the company reviews the
carrying value of its long-lived assets, including goodwill associated with
assets acquired in a purchase business combination, when events or changes in
circumstances indicate that the carrying value may not be recoverable. If
this review indicates that the carrying amounts of the assets and goodwill,
where applicable, will not be recoverable, as determined based on estimated
undiscounted cash flows, an impairment loss is recorded. Impairment losses,
if any, are measured as the excess of the carrying values over the fair
values of the related assets. In addition, goodwill is reviewed periodically
as disclosed in note 2.
FORWARD EXCHANGE CONTRACTS
Under U.S. GAAP, in accordance with SFAS 52, certain of the forward exchange
contracts held for hedging and other purposes in 1998 and 1999, for which the
underlying transactions are not firmly committed, would not qualify for hedge
accounting. Consequently, unrealized gains or losses on these contracts at
each balance sheet date would be reflected in earnings for the corresponding
year. Under Canadian GAAP, the company's forward exchange contracts held for
the purpose of hedging anticipated sales qualify for hedge accounting and any
unrealized gains or losses are deferred and recognized in the statement of
earnings upon settlement of the related transactions.
EARNINGS PER SHARE
For purposes of earnings per share calculations, the subordinate voting
shares and multiple voting shares (previously Class A, E and F shares),
collectively, are considered to constitute common shares.
Under U.S. GAAP, diluted net earnings per share is calculated based on the
weighted average number of common shares outstanding during the year, plus
the effects of potential common shares, such as options, and conversions of
senior shares outstanding during the year. This method requires that diluted
net earnings per share be calculated, using the treasury stock method, as if
all potential common shares had been exercised at the later of the beginning
of the period or the date of issue, as the case may be, and that the funds
obtained thereby were used to purchase common shares of the company at the
average fair value of the common shares during the period.
Under Canadian GAAP, fully diluted earnings per share is calculated based on
the current imputed earnings method (note 2).
Under U.S. GAAP, the presentation of per share figures for earnings before
amortization of goodwill is not permitted. In addition, under U.S. GAAP,
amortization of goodwill would be included in the computation of earnings
from operations.
FUTURE INCOME TAXES
As a result of adjustments from Canadian GAAP to U.S. GAAP, future income tax
liabilities under U.S. GAAP include an adjustment of $23,000 as at August 31,
1999 and 2000, related to short-term investments and forward exchange
contracts carried at fair value.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard, which must be applied
prospectively, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The only derivatives held by the company are
forward exchange contracts. The new standard is effective September 1, 2000
and will be applied prospectively, as required. On September 1, 2000, the
company hedged certain firm sales commitments with forward exchange
contracts, as disclosed in note 19. The impact of adopting the standard
related to
50 2000 Annual Report EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these derivatives will not be material. The other derivatives currently
disclosed in note 19 do not qualify as hedging instruments and the method of
accounting for these derivatives will not change as a result of the
application of SFAS 133.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition". SAB 101, as amended
by SAB101B, is effective no later than the fourth fiscal quarter of the first
fiscal year beginning after December 15, 1999. The implementation of this SAB
is not expected to have any material effect on the company's financial
statements or revenue recognition policy in future years.
In March 2000, the Financial Accounting Standards Board issued Interpretation
44 "Accounting for Certain Transactions Including Stock Compensation", an
interpretation of APB 25, which provides guidance on applying APB 25 for
certain stock compensation issues. FIN 44 is effective since July 4, 2000.
The implementation of this FIN did not have any effect on the company's
financial statements.
RECONCILIATION OF NET EARNINGS TO CONFORM WITH U.S. GAAP
The following summary sets out the material adjustments to the company's
reported net earnings and net earnings per share which would be made to
conform with U.S. GAAP.
YEARS ENDED AUGUST 31, 1998 1999 2000
---------------------------------------------------------------------------------------------------------------
Net earnings for the year in accordance with Canadian GAAP $ 4,501 $5,814 $ 9,924
Non-cash stock-based compensation costs related to stock purchase plan * - (10) (538)
Non-cash stock-based compensation costs related to stock option plan under
variable accounting * - - (1,464)
Change in reporting currency 178 (44) -
Unrealized gains (losses) on forward exchange contracts (208) 208 -
Future income taxes on forward exchange contracts 67 (67) -
---------------------------------------------------------------------------------------------------------------
Net earnings for the year in accordance with U.S. GAAP 4,538 5,901 7,922
Other comprehensive income (loss)
Foreign currency translation adjustments (1,350) 606 1,555
Unrealized holding gains on short-term investments, net of related
income taxes of $23,000 in 1999 and nil in 2000 - 36 1
---------------------------------------------------------------------------------------------------------------
Comprehensive income $ 3,188 $6,543 $ 9,478
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Basic and diluted net earnings per share in accordance with U.S. GAAP $ 0.12 $ 0.15 $ 0.20
*Required under APB 25
EXFO 2000 Annual Report 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings available to common shareholders is reconciled as follows:
YEARS ENDED AUGUST 31, 1998 1999 2000
--------------------------------------------------------------------------
Net earnings for the year $4,538 $5,901 $7,922
Dividend on Class C share - (333) -
--------------------------------------------------------------------------
Earnings available to common shareholders $4,538 $5,568 $7,922
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The diluted weighted average number of common shares outstanding calculated
according to U.S. GAAP is as follows:
YEARS ENDED AUGUST 31, 1998 1999 2000
----------------------------------------------------------------------------
Weighted average number of
common shares outstanding - Basic (000's) 38,000 38,001 39,951
Conversion of preferred shares Series 1 - - 26
Exercise of stock options - - 109
----------------------------------------------------------------------------
Weighted average number of
common shares outstanding - Diluted (000's) 38,000 38,001 40,086
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The number of common shares issuable upon the assumed conversion of the
preferred shares Series 1 has been determined by dividing the paid-in value
of the preferred shares Series 1 (previously Class G shares) by the market
value of the former Class A shares as at February 4, 2000 (the date the Class
G shares were issued), or $18.00 per Class A share, weighted from the date of
issuance of the Class G shares to the end of the year.
As a result of the above adjustments to net earnings, differences with
respect to the shareholders' equity under U.S. GAAP are as follows:
SHARE CAPITAL
AS AT AUGUST 31, 1999 2000
---------------------------------------------------------------------------------
Share capital in accordance with Canadian GAAP $87 $198,459
Stock-based compensation costs related to stock purchase plan
Current year 10 538
Cumulative effect of prior years - 10
---------------------------------------------------------------------------------
Share capital in accordance with U.S. GAAP $97 $199,007
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
OTHER CAPITAL
AS AT AUGUST 31, 1999 2000
-------------------------------------------------------------------------------
Other capital in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock option plan
under variable accounting - 1,464
-------------------------------------------------------------------------------
Other capital in accordance with U.S. GAAP $ - $1,464
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
52 2000 Annual Report EXFO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RETAINED EARNINGS
AS AT AUGUST 31, 1999 2000
-------------------------------------------------------------------------------
Retained earnings in accordance with Canadian GAAP $14,592 $ 6,980
Stock-based compensation costs
Current year (10) (2,002)
Cumulative effect of prior years - (10)
Change in reporting currency
Current year
Net earnings (44) -
Dividends 24 -
Cumulative effect of prior years 1,036 1,016
-------------------------------------------------------------------------------
Retained earnings in accordance with U.S. GAAP $15,598 $ 5,984
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
AS AT AUGUST 31, 1999 2000
---------------------------------------------------------------------------------------------
Foreign currency translation adjustments
Balance - Beginning of year $(1,622) $(1,016)
Change during the year 606 1,555
---------------------------------------------------------------------------------------------
Balance - End of year (1,016) 539
---------------------------------------------------------------------------------------------
Unrealized holding gains on short-term investments, net of income taxes
Balance - Beginning of year - 36
Unrealized gains arising during the year, net of related income taxes
of $23,000 in 1999 and 2000 36 37
Reclassification adjustment for amounts included in net earnings,
net of related income taxes of $23,000 - (36)
---------------------------------------------------------------------------------------------
Balance - End of year 36 37
---------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (980) $ 576
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Following are condensed statements of earnings for the years ended August 31,
1998, 1999 and 2000 and condensed balance sheets as at August 31, 1999 and 2000
prepared under U.S. GAAP:
STATEMENTS OF EARNINGS
YEARS ENDED AUGUST 31, 1998 1999 2000
-----------------------------------------------------------
Sales $32,853 $41,858 $71,639
Cost of sales 11,793 14,889 24,712
-----------------------------------------------------------
Gross margin 21,060 26,969 46,927
Total operating expenses 14,105 18,367 34,503(1)
-----------------------------------------------------------
Earnings from operations 6,955 8,602 12,424
-----------------------------------------------------------
Net earnings for the year $ 4,538 $ 5,901 $ 7,922
-----------------------------------------------------------
-----------------------------------------------------------
(1) includes the non-cash stock compensation costs totalling $2,002,000
BALANCE SHEETS
AS AT AUGUST 31, 1999 2000
-------------------------------------------------------
Current assets
Cash and cash equivalents $ 423 $ 729
Available-for-sale securities 1,430 162,719
Accounts receivable 9,895 21,062
Inventories 7,591 18,868
Other current assets 856 1,307
Future income taxes - 972
-------------------------------------------------------
20,195 205,657
Capital assets 2,639 8,694
Goodwill and other assets 65 2,320
Future income taxes - 3,089
-------------------------------------------------------
$22,899 $219,760
-------------------------------------------------------
-------------------------------------------------------
EXFO 2000 Annual Report 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS
AS AT AUGUST 31, 1999 2000
-----------------------------------------------------------------------
Current liabilities
Bank advances $ - $ 10
Accounts payable and accrued liabilities 5,523 10,353
Other current liabilities 1,891 1,090
-----------------------------------------------------------------------
7,414 11,453
Long-term liabilities 770 1,276
-----------------------------------------------------------------------
8,184 12,729
-----------------------------------------------------------------------
Shareholders' equity
Share capital 97 199,007
Other capital - 1,464
Accumulated other comprehensive income (loss) (980) 576
Retained earnings 15,598 5,984
-----------------------------------------------------------------------
14,715 207,031
-----------------------------------------------------------------------
$22,899 $219,760
-----------------------------------------------------------------------
-----------------------------------------------------------------------
STATEMENT OF CASH FLOWS
Under Canadian GAAP, the statements of cash flows, which have been prepared
on a basis consistent with International Accounting Standards, for the years
ended August 31, 1998 and 1999 were translated into U.S. dollars using an
exchange rate of US$1.00 = C$1.4958. Under U.S. GAAP, the historical exchange
rates on the dates of the cash flow activities would be used. Following are
summary statements of cash flows under U.S. GAAP:
YEARS ENDED AUGUST 31, 1998 1999
--------------------------------------------------------------------------------------------
Operating activities $3,278 $ 3,633
Financing activities (273) (3,261)
Investing activities (2,061) (1,206)
--------------------------------------------------------------------------------------------
Change in cash and cash equivalents 944 (834)
Effect of foreign exchange rate changes on cash and cash equivalents (124) 56
Cash and cash equivalents - Beginning of year 381 1,201
--------------------------------------------------------------------------------------------
Cash and cash equivalents - End of year $1,201 $ 423
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
For the year ended August 31, 2000, there are no material differences between
the statement of cash flows under Canadian GAAP as compared to U.S. GAAP.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under U.S. GAAP, the company has elected to measure compensation cost related
to awards of stock options using the intrinsic value method of accounting. In
this instance, however, under SFAS 123, Accounting for Stock-Based
Compensation, the company is required to make pro forma disclosures of net
earnings, basic net earnings per share and diluted net earnings per share as
if the fair value based method of accounting had been applied.
The fair value of options granted was estimated using the Black-Scholes
options pricing model with the following weighted average assumptions: a
risk-free interest rate of 6.04%, an expected volatility of 75%, dividends of
nil and a weighted average expected life of 32 months. The weighted average
grant-date fair value of options granted during the year was $13.
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions, and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
If the fair value based method had been used to account for stock-based
compensation costs related to stock options issued to employees, directors
and executive officers, the net earnings and related net earnings per share
figures under U.S. GAAP would be as follows:
YEAR ENDED AUGUST 31, 2000
-------------------------------------------------------------
Pro forma net earnings for the year $8,939
Pro forma basic and diluted net earnings per share $ 0.22
54 2000 Annual Report EXFO
QUARTERLY SUMMARY FINANCIAL INFORMATION (UNAUDITED)
(in thousands of US dollars, except per share data)
YEAR
ENDED
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER AUGUST 31,
-------------------------------------------------------------------------------------------------------------
2000
Sales $11,688 $17,423 $19,411 $23,117 $71,639
Cost of sales $ 3,733 $ 5,876 $ 7,347 $ 7,756 $24,712
Gross margin $ 7,955 $11,547 $12,064 $15,361 $46,927
Earnings from operations $ 2,092 $ 3,640 $ 3,847 $ 5,144 $14,723
Net earnings $ 1,300 $ 2,412 $ 2,748 $ 3,464 $ 9,924
Basic and fully diluted net earnings per share* $ 0.03 $ 0.06 $ 0.07 $ 0.08 $ 0.25
1999
Sales $ 9,124 $ 9,604 $10,916 $12,522 $42,166
Cost of sales $ 3,402 $ 3,619 $ 3,753 $ 4,224 $14,998
Gross margin $ 5,722 $ 5,985 $ 7,163 $ 8,298 $27,168
Earnings from operations $ 1,890 $ 1,640 $ 2,417 $ 2,729 $ 8,676
Net earnings $ 1,175 $ 1,045 $ 1,623 $ 1,971 $ 5,814
Basic and fully diluted net earnings per share $ 0.02 $ 0.03 $ 0.04 $ 0.05 $ 0.14
1998
Sales $ 7,115 $ 7,486 $10,069 $ 6,935 $31,605
Cost of sales $ 2,400 $ 2,421 $ 3,980 $ 2,544 $11,345
Gross margin $ 4,715 $ 5,065 $ 6,089 $ 4,391 $20,260
Earnings from operations $ 1,805 $ 1,924 $ 2,488 $ 474 $ 6,691
Net earnings $ 1,215 $ 1,255 $ 1,635 $ 396 $ 4,501
Basic and fully diluted net earnings per share $ 0.03 $ 0.04 $ 0.04 $ 0.01 $ 0.12
*Net earnings per share are calculated independently for each of the quarters
presented. Therefore, the sum of the quarterly per share information may not
equal the annual net earnings per share.
EXFO 2000 Annual Report 55
BOARD OF DIRECTORS
GERMAIN LAMONDE, CHAIRMAN, CEO AND PRESIDENT
Germain Lamonde is one of our founders. Mr. Lamonde has been our Chairman of the
Board, Chief Executive Officer and President since our inception in 1985. Mr.
Lamonde holds a bachelor's degree in Physics Engineering from Ecole
Polytechnique, University of Montreal in Canada, and a master's degree in Optics
from Laval University in Canada.
PIERRE MARCOUILLER, CHAIRMAN, CAMOPLAST INC.
Pierre Marcouiller is Chairman of the Board of Camoplast Inc., a supplier of
components to the recreational and motorized vehicle and automotive parts
markets. Mr. Marcouiller holds a bachelor's degree in Business Administration
from Universite du Quebec a Trois-Rivieres in Canada and a master's degree in
Business Administration from the University of Sherbrooke in Canada.
DR. DAVID A. THOMPSON, DIRECTOR, TECHNOLOGY AND STRATEGY, CORNING INC.
David A. Thompson has held various positions with Corning Inc., a manufacturer
of optical fiber and other products for the telecommunications, television and
other communications-related industries, since 1976. Dr. Thompson holds a
bachelor's degree in Chemistry from Ohio State University in the United States
and a doctorate in Inorganic Chemistry from the University of Michigan in the
United States.
ANDRE TREMBLAY, PRESIDENT AND CEO, MICROCELL TELECOMMUNICATIONS INC.
Andre Tremblay has been President and Chief Executive Officer of Microcell
Telecommunications Inc., a wireless telecommunications provider, since May
1995. Mr. Tremblay holds a bachelor's degree in Business Administration and a
license in Accounting from Laval University in Canada, as well as a master's
degree in Taxation from the University of Sherbrooke in Canada.
MICHAEL UNGER, EXECUTIVE CONSULTANT
Michael Unger worked with Nortel Networks Corporation from 1962 to 2000. Mr.
Unger's most recent position was President of Nortel's Optical Networks Business
Unit, a position he held from May 1998 to April 2000. Mr. Unger holds a
bachelor's degree in Science from Concordia University in Canada.
MANAGEMENT AND CORPORATE OFFICERS
GERMAIN LAMONDE
Chairman of the Board, Chief Executive Officer and President
PIERRE PLAMONDON, CA
Vice-President, Finance and Chief Financial Officer
BRUCE BONINI
Vice-President, North American Sales
JUAN-FELIPE GONZALEZ
Vice-President, International Sales
JEAN-FRANCOIS BOULET
Vice-President, Human Resources
STEPHEN BULL
Vice-President, Research and Development
MARIO LAROSE
Vice-President, Marketing
ROXANE VEZINA
Director, Information Technology
and Supply-Chain Management
LUC GAGNON
Director, Manufacturing
GREGORY SCHINN
Chief Technology Officer
KIMBERLEY OKELL
Secretary and Legal Counsel
56 2000 Annual Report EXFO
CORPORATE GOVERNANCE
Both the Board of Directors and management recognize the importance of having
appropriate structures and procedures in place to permit good corporate
governance. Our present Board members were elected in May and June 2000, just
prior to our Initial Public Offering. At such time an Audit Committee and a
Human Resources Committee were appointed to form the starting point of a
structure that will be defined and refined to continue to ensure good corporate
governance.
Early in the mandate of the Board members, EXFO provided them with two full days
of orientation and education relating to our activities, structures, policies
and processes, which included a visit of our facilities and meetings with
management.
RESPONSIBILITIES OF THE BOARD
The Board is responsible for the stewardship of the business and affairs of EXFO
by reviewing, discussing and approving our strategic direction and
organizational structure, and supervising management. The Board, which receives
regular updates from management, annually reviews and approves EXFO's strategic
planning process and internal control and management information systems. The
Board has identified the principal risks of our business and has reviewed
present risk management systems. Over the next fiscal year, the Board will
analyze additional risk management strategies for the future. In addition, the
Board has identified the following objectives for the coming fiscal year: the
elaboration and implementation of a succession planning process by the Human
Resources Committee and the establishment and implementation of a communications
policy for EXFO.
The Board grants final approval with respect to each of the following matters,
in addition to those that require Board approval under applicable laws: (i) the
strategic direction of EXFO; (ii) material contracts, acquisitions or
dispositions of our assets; and (iii) the annual operational plan and capital
and operating budgets.
The Board is responsible for the establishment and functioning of all Board
committees, the appointment of members to serve on such committees, their
compensation and their good standing. At regularly scheduled meetings of the
Board, the Directors receive, consider and discuss Board committee reports.
As of September 30, 2000, the Board had met five times since EXFO became a
public company in June 2000.
EXFO does not currently have a member of the Board that is responsible for
ensuring that the Board properly discharges its duties, independent of
management. At the present time, EXFO has no formal procedures in place for
recruiting new Directors.
COMPOSITION OF THE BOARD
Our articles of incorporation provide for a Board of Directors with a minimum of
three and a maximum of 12 Directors. Our Board presently consists of five
Directors, four of whom are independent of management and free from any interest
and any business or other relationship which could, or could reasonably be
perceived to, materially interfere with the Director's ability to act with a
view to the best interests of EXFO, other than interests arising from
shareholding. 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. Under the Canada Business
Corporations Act, a majority of the Directors and of the members of any
committee of the Board of Directors must be composed of Canadian residents.
Our Chairman of the Board, Mr. Germain Lamonde, is a significant shareholder in
EXFO as he has the ability to exercise a majority of the votes for the election
of the Board of Directors. Since the other four Board members do not have
interests in or relationships with either EXFO or Mr. Lamonde, we believe that
the interests of investors in EXFO other than Mr. Lamonde are fairly
represented.
COMMITTEES OF THE BOARD
To facilitate the fulfillment of some responsibilities and to assist its
decision-making, the Board of Directors has formed an Audit Committee and a
Human Resources Committee. These committees are appointed annually and, in
addition, the Board may appoint ad hoc committees periodically as needed. EXFO
has a practice of permitting the Board, any committee thereof and any individual
Director to engage independent, external advisors at EXFO's expense. All
committees of the Board are entirely comprised of unrelated Directors.
The following is a general description of the composition and general duties of
each Board committee as contained in its mandate as of the year ended August 31,
2000.
AUDIT COMMITTEE
The Audit Committee approves the release of interim in-house financial
statements and reviews all annual audited financial statements and related
disclosure documents with management and the external auditors. The Committee
meets regularly with external auditors, with and without management, to consider
the scope and results of their audits, including analysis of the adequacy of the
internal controls and the effect of the procedures relating to the outside
auditors' independence. The Committee also recommends to the Board the selection
of the external auditors for appointment by the shareholders. The Audit
Committee is composed of Mr. Andre Tremblay, Mr. Michael Unger and Mr. Pierre
Marcouiller. The Chairman of the Audit Committee is Mr. Andre Tremblay.
EXFO 2000 Annual Report 57
HUMAN RESOURCES COMMITTEE
Our Human Resources Committee is responsible for assessing the performance and
establishing the annual compensation of all our senior officers, including the
CEO. This Committee also reviews and submits to the Board the salary structure
and the short-term and long-term incentive compensation programs for all our
employees. The Committee is responsible for the review and approval of the
employees that will receive options to purchase shares of EXFO, in accordance
with policies established by the Board and the terms of the Stock Option Plan.
In addition, the Committee reports annually to the Board on the organizational
structure and the succession plan for senior management. The Board's corporate
governance practices are monitored by the Human Resources Committee, as is the
functioning of the Board and the powers, mandates and performance of the
committees. The remuneration to be paid by EXFO to the Directors is recommended
to the Board by the Human Resources Committee. The Human Resources Committee is
composed of Dr. David A. Thompson, Mr. Michael Unger and Mr. Pierre Marcouiller.
The Chairman of the Human Resources Committee is Mr. Michael Unger.
SHAREHOLDER/INVESTOR COMMUNICATIONS AND FEEDBACK
EXFO has an Investor Relations Manager who is responsible for facilitating
communications between senior management and EXFO's current and potential
shareholders and financial analysts. Communications to shareholders are
disseminated through annual and quarterly reports, the general meeting and
investor presentations. The Investor Relations Manager receives and responds to
all shareholders' inquiries in an appropriate and timely manner. In
communications to management, the Investor Relations Manager provides feedback
from the shareholders to senior management.
58 2000 Annual Report EXFO
GLOSSARY
ATTENUATION: The loss of average optical power. Attenuation results from
absorption and scattering in the optical fiber.
BANDWIDTH: Measure of information-carrying capacity; the greater the bandwidth,
the greater the information-carrying capacity.
CHANNEL COUNT: The number of channels, or wavelengths, in an optical network.
DENSE WAVELENGTH DIVISION MULTIPLEXING: Key enabling technology that increases
bandwidth capacity by combining beams of light of slightly different wavelengths
through a single fiber, with each fiber carrying its own stream of information.
DISPERSION: Signal distortion caused by a spreading of an optical pulse in time
as it propagates along the length of the fiber. Such spreading can arise from
several different physical phenomena. The end result is that it limits the
bandwidth that can be transmitted through the fiber.
ERBIUM-DOPED FIBER AMPLIFIER (EDFA): An optical amplifier based on an optical
fiber doped with a small amount of the rare-earth element erbium. When this
fiber is illuminated with an appropriate laser source ("pump laser"), it serves
to boost or amplify optical signals.
LASER: Acronym for Light Amplification by Stimulated Emission of Radiation.
Source of highly coherent light via stimulated emission. Semiconductor lasers
find widespread use in the fiber-optic industry.
NOISE: In the context of optical fiber communications, any optical energy not
serving to transmit a signal or an optical carrier. Noise can also be induced
via the electronics and detectors used to detect the optical signals.
OPTICAL SPECTRUM ANALYZER: An instrument that produces a graphical
representation of power versus wavelength for one or a number of optical
signals. Useful for measuring key parameters of each wavelength in a DWDM
system.
POLARIZATION MODE DISPERSION (PMD): A physical phenomenon inherent to optical
fiber and other optical components that causes a spreading of light pulses as
they travel along a fiber. As a result, this degrades the transmission signal.
REFLECTION: In the context of optical fiber communications, a location along a
fiber where a fraction of the light signal reverses direction and returns to the
source. Reflections are generally undesirable and can lead to degradation of a
network, either by inducing loss and/or by causing instabilities in the optical
sources.
REMOTE FIBER TEST SYSTEM (RFTS): A permanently installed fault surveillance
system in which test equipment is connected to a communications network.
Strategically located remote test units continually check optical links and send
test data to a centralized test system controller. Upon detecting a problem, the
system sends out an alarm to a repair crew.
TRANSMISSION RATE: Rate at which data is sent along an optical network.
VARIABLE OPTICAL ATTENUATOR: An instrument used in network simulation setups to
provide calibrated variable reduction of the strength of an optical signal.
WIDELY TUNABLE LASER SOURCE: An instrument that can produce single-color light
across a broad range of wavelengths. Used to test DWDM components and
value-added optical modules.
EXFO 2000 Annual Report 59
SHAREHOLDER INFORMATION
The common shares of EXFO are listed on the Toronto Stock Exchange under the
stock symbol "EXF". The shares are also listed on the NASDAQ Stock Exchange
under the symbol "EXFO".
ANNUAL GENERAL MEETING
The annual general meeting of EXFO Electro-Optical Engineering Inc.shareholders
will be held at the News Theatre, 98 The Esplanade, Toronto, Canada, on January
17, 2001, at 10:30 a.m.
TRANSFER AGENTS AND REGISTRARS
CIBC Mellon Trust Company
Montreal, Toronto and Vancouver, Canada
ChaseMellon Shareholder Services, L.L.C.
New York, USA
AUDITORS
PricewaterhouseCoopers LLP
INVESTOR RELATIONS CONTACT
Michael Lamanna
Manager, Investor Relations
Tel.: (418) 683-0211, Ext. 3731
E-mail: michael.lamanna@exfo.com
GENERAL ACCESS
EXFO Electro-Optical Engineering Inc.
465 Godin Avenue
Vanier, Quebec
G1M 3G7
Tel.: (418) 683-0211
E-mail: ir@exfo.com
www.exfo.com
This annual report is also available in electronic format at www.exfo.com
STOCK PERFORMANCE
[GRAPIHIC - PERFORMANCE CHART]
[GRAPHIC--PERFORMANCE CHART]
WORLDWIDE OFFICES
CORPORATE HEADQUARTERS
465 Godin Avenue, Vanier (Quebec) G1M 3G7 CANADA
Tel.: (418) 683-0211 Fax: (418) 683-2170
EXFO AMERICA
1201 Richardson Drive, Suite 260, Richardson, TX, 75080, USA
Tel.: 1 800 663-3936 Fax: (972) 907-2297
EXFO EUROPE
Centre d'Affaires Les Metz, 100, rue Albert Calmette, 78353, Jouy-en-Josas,
FRANCE
Tel.: +33.1.34.63.00.20 Fax: +33.1.34.65.90.93
EXFO ASIA PACIFIC
151 Chin Swee Road #3-29, Manhattan House, SINGAPORE 169876
Tel.: +65 3338241 Fax: +65 3338242
60 2000 Annual Report EXFO
EXFO 2000 Annual Report THE WORLD'S ON THE MOVE
[COMPANY LOGO]
www.exfo.com
-C- 2000 EXFO Electro-Optical Engineering Inc. All rights reserved.
Printed in Canada.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
------------------------------------
Name: Germain Lamonde
Title: President and Chief Executive Officer
Date: January 4, 2001