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 2002
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
465 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 3G7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No ___X___
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
In December 2001, 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, 2001. At the same time, it also issued its notice of annual shareholders'
meeting, its form of proxy and its management proxy circular. This report on
Form 6-K sets forth these documents.
2001 ANNUAL REPORT
IT ALL
ADDS UP...
[EXFO LOGO]
EXFO is a leading provider of fiber-optic test, measurement and automation
solutions for the global telecommunications industry. Over 2000 companies rely
on our instruments and systems to enable the world's optical networks to perform
impeccably over their complete lifecycles. In 2001, we crossed a key innovation
threshold when over 45% of our sales came from leading-edge test equipment on
the market for two years or less.
TABLE OF CONTENTS
Financial Highlights 2 Consolidated Financial Statements 35 Management and Corporate
Letter to Shareholders 4 Notes to Consolidated Financial Officers 64
Management's Discussion Statements 39 Corporate Governance Practices 65
and Analysis 21 Quarterly Summary Financial Glossary 67
Management's Report 33 Information 63 Shareholder Information 68
Auditors' Report 34 Board of Directors 64
All dollar amounts are expressed in US dollars, except as otherwise noted.
104% INCREASE IN SALES
+ 20 NEW PRODUCTS
+ 3 STRATEGIC ACQUISITIONS
+ 2 TIMES THE ADDRESSABLE MARKETS
---------------------------------
1
GROWING COMPANY
FINANCIAL HIGHLIGHTS
(in thousands of US dollars, except per share data) 1997 1998 1999 2000 2001
----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Earnings Data
----------------------------------------------------------------------------------------------------------------------------------
Sales $24,475 $31,605 $42,166 $71,639 $146,013
----------------------------------------------------------------------------------------------------------------------------------
Gross margin $14,823 $20,260 $27,168 $46,927 $ 91,067
60.6% 64.1% 64.4% 65.5% 62.4%
----------------------------------------------------------------------------------------------------------------------------------
Gross R&D $ 2,753 $ 4,406 $ 6,390 $ 9,374 $ 17,601
11.2% 13.9% 15.2% 13.1% 12.1%
----------------------------------------------------------------------------------------------------------------------------------
Earnings from operations $ 4,925 $ 6,691 $ 8,676 $14,723 $ 14,507
20.1% 21.2% 20.6% 20.6% 9.9%
----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 3,070 $ 4,501 $ 5,814 $ 9,924 ($15,294)
12.5% 14.2% 13.8% 13.9% (10.5%)
----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net earnings (loss) per share $ 0.08 $ 0.12 $ 0.14 $ 0.25 ($ 0.29)
----------------------------------------------------------------------------------------------------------------------------------
Other Consolidated Statements of Earnings Data (unaudited)
----------------------------------------------------------------------------------------------------------------------------------
Adjusted earnings from operations** $ 5,404 $ 7,348 $ 9,574 $16,221 $ 31,230
22.1% 23.2% 22.7% 22.6% 21.4%
----------------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings* $ 3,079 $ 4,533 $ 5,843 $10,252 $ 24,463
12.6% 14.3% 13.9% 14.3% 16.8%
----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted adjusted net earnings per share $ 0.08 $ 0.12 $ 0.14 $ 0.26 $ 0.46
----------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets Data
----------------------------------------------------------------------------------------------------------------------------------
Working capital $ 5,973 $ 9,797 $12,745 $194,167 $130,289
----------------------------------------------------------------------------------------------------------------------------------
Total assets $13,238 $17,643 $22,840 $219,723 $442,577
----------------------------------------------------------------------------------------------------------------------------------
Long-term debt (excluding current portion) $ 20 $ - $ - $ 16 $ 664
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 7,644 $12,045 $14,679 $206,994 $414,805
----------------------------------------------------------------------------------------------------------------------------------
Sales
$ Thousands
97 $ 24,475
98 $ 31,605
99 $ 42,166
00 $ 71,639
01 $146,013
Gross margin
$ Thousands
97 $14,823
98 $20,260
99 $27,168
00 $46,927
01 $91,067
Earnings from operations
$ Thousands
97 $ 4,925
98 $ 6,691
99 $ 8,676
00 $14,723
01 $14,507
Gross R&D
$ Thousands
97 $ 2,753
98 $ 4,406
99 $ 6,390
00 $ 9,374
01 $17,601
* Net earnings excluding amortization of goodwill and the after-tax effect of
amortization of intangible assets and non-recurring expenses.
** Earnings from operations excluding amortization and non-recurring expenses.
Innovative by nature
profitable by design
Global Presence
1999 2000 2001
North America 56.3% 61.6% 58.3%
Europe 20.7% 20.2% 20.9%
Asia 7.6% 9.1% 13.1%
Rest of World 15.4% 9.1% 7.7%
Total Sales: $42,166 $71,639 $146,013
(in thousands of US dollars)
1999 2000 2001
[GRAPH HERE] [GRAPH HERE] [GRAPH HERE]
EXFO o 2001 Annual Report o 3
DEAR FELLOW SHAREHOLDERS,
In my 16 years at the helm of EXFO, fiscal 2001 ranks as one of the most
paradoxical. During the first half, which was punctuated by explosive demand for
our products, we focused on expanding manufacturing capacity and meeting
customer demand for urgent deliveries. In the second half, which was marked by a
softening in the economy and telecommunications industry, quality of execution,
control of expenses and market share initiatives captured our attention. Despite
this ongoing challenging environment, I am very pleased to report that fiscal
2001, our first full year as a public company, heralded our 16th consecutive
period of growth. We posted sales of $146 million, up 104% from 2000. In fact,
our compound annual growth rate for sales during the last 10 years was about 50%
and we never experienced a year with less than 25% growth in our history. On the
other hand, we estimate that the global telecommunications equipment market grew
between 10% and 15% annually during the same period.
EXFO people have been at the heart of our accomplishments over the years. Their
relentless pursuit of customer satisfaction, quality of execution and market
penetration have made EXFO a genuine success story. This results-driven attitude
has been bolstered throughout the entire organization with variable compensation
and stock option plans that are aligned with customer and shareholder
priorities. In addition, we have continued expanding training programs to
enhance the skill sets and management abilities of our people in line with the
long-term growth and development of the company.
Innovation was at the forefront of all our initiatives in 2001. We launched more
than 20 new products to expand our presence in various markets. Being
market-driven, we further improved our best-in-class product development
processes to respond quickly and efficiently to the most demanding
opportunities. These processes were deployed to our newly acquired subsidiaries,
while we expanded our role in driving international measurement standards and
filed several major patents. Gross R&D expenses amounted to $17.6 million in
2001, up 88% over the previous year. Altogether, 46% of our sales in 2001
originated from products that have been on the market for two years or less.
We demonstrated our commitment to international markets with expanded sales
coverage. Asia is strategically important for EXFO due to its long-term growth
potential. Consequently, we moved our international sales management team to our
EXFO Asia-Pacific office and service center in Singapore, and we further
increased our operations with a new sales office and service center in Beijing.
All told, we almost tripled sales to $19 million in Asia.
We relocated our EXFO Europe office to a larger facility in order to strengthen
our sales and after-sales support throughout the region. Altogether, 42% of our
sales came from outside of North America in 2001, including 21% from Europe,
13% from Asia and 8% from the rest of the world. We also bolstered our
diversification plan in terms of customers and products. Our top three
customers accounted for less than 13% of sales in 2001. Following our
acquisitions, our comprehensive product portfolio of approximately 40 product
families in each of our two divisions makes EXFO a truly global and diversified
company.
From a market development standpoint, we expanded our addressable markets with
the announcement of three strategic acquisitions to strengthen our technology
base in scientific instrumentation, process automation and protocol-layer
testing. The integration of these companies is proceeding according to plan and
we are leveraging the various synergies to unleash the full potential of our
very capable new partners.
With our long-term view, we deployed a Customer Relationship Management (CRM)
initiative throughout our global organization. This deployment will help our
staff keep better track of the specific interests of all our customers around
the world and, therefore, provide them with better and more customized service.
We also nearly doubled our combined manufacturing capacity in Quebec City, QC,
and Victor, NY, during the first half of 2001 to reduce our delivery lead times
and increase customer satisfaction for both of our product divisions.
Considering all of these financial, strategic and operational accomplishments,
IT ALL ADDS UP to one growing company!
PORTABLE AND MONITORING DIVISION
The long-term outlook for the telecommunications industry remains robust with
bandwidth demand still growing at remarkable levels. Just take a minute to
consider new applications that require a great deal of bandwidth like video
conferencing and Web-based video-on-demand. Optical fiber represents the best
medium to fulfill these bandwidth-intensive requirements.
There is a major shift in focus from long-haul to metro and access networks in
North America and Europe. Due to market conditions and a competitive landscape,
several network service providers are lowering their capital expenditures. These
carriers are now focusing on extracting the most possible value from their
existing optical networks by adding DWDM channels, lighting dark fibers and
increasing transmission rates to meet the demand for bandwidth-hungry
applications. Furthermore, the traditional boundaries defining the physical,
optical and protocol layers of an optical network are becoming blurred due to
the complexity of DWDM networks.
EXFO has developed a sound strategy to exploit these market opportunities. We
will continue to expand our addressable markets to ensure our long-term growth
and leadership position as demonstrated by the acquisition of Avantas Networks.
Avantas' field-portable product line represents the only solution on the market
that covers protocols like ATM, SONET, SDH, Ethernet and Gigabit Ethernet, as
well as data transmission rates from OC-192, or 10 Gb/s, all the way down to
DS0, or 64 kb/s, and STM-64 down to E0, all on a single platform.
EXFO o 2001 Annual Report o 5
Avantas' highly talented design team will help EXFO introduce a fully integrated
solution that provides efficient and cost-effective testing at the physical-,
optical- and protocol-layer levels inside a single box. As a result, field
technicians will no longer have to carry separate instruments like an Optical
Time Domain Reflectometer (physical layer), Optical Spectrum Analyzer (optical
layer) and SONET or SDH Analyzer (protocol layer) for their full testing
requirements. Fully integrated testing and protocol-layer testing solutions are
expected to be among our key growth vehicles in 2002.
We will continue to leverage our modular platform design to introduce new
testing technologies, provide new functionalities, be quicker to market and
allow our customers to protect their initial investments. This future-proof
approach will benefit our customers tremendously following the market acceptance
of the FTB-400 Universal Test System in 2001. This second-generation platform,
which covers DWDM networks with higher channel counts and more densely spaced
wavelengths, enables carriers to handle all of their testing requirements in
long-haul, metro and access areas.
We will further develop the capabilities of our Remote Fiber Test System (RFTS).
As telecommunication services are gaining in strategic, economic and security
importance, so are network reliability and quality of service. We were
first-to-market with DWDM monitoring capabilities on our RFTS, which includes
the physical and optical layers, and we will further extend its capabilities to
the protocol layer with Avantas' Network Guardian.
INDUSTRIAL AND SCIENTIFIC DIVISION
Optical component and system manufacturers have been affected by the slowdown in
network deployment and resulting buildup of inventories. Leading manufacturers,
however, are maintaining their R&D budgets in their quest to spearhead the
design of more flexible, higher-capacity networks that can be deployed at a
lower cost. Consequently, new production lines are still being rolled out in
significant numbers.
To help optical component and system manufacturers respond to these market
realities, we will continue to launch disruptive technologies and drive approval
of international standards. This initiative has been demonstrated by the
introduction of our Femtosecond PMD Analyzer, whose revolutionary technology has
been accepted as a reference test method by leading standards bodies. Our
Femtosecond PMD Analyzer enables users to measure the smallest PMD values in
narrowband DWDM channels and broadband components in the simplest, fastest and
most repeatable manner. We also released our Optical Waveguide Analyzer, which
represents the industry's first and only commercial refractive index profiler
for market-winning planar and arrayed waveguide (AWG) technologies. These latest
breakthroughs reflect our commitment to developing leading-edge technologies
that have tremendous competitive advantages in high-growth nascent sectors.
Tapping into new markets with a first-mover advantage is usually a sure-fire
plan for lucrative returns.
We will further enhance our innovative modular design for our Industrial and
Scientific platform. We will accomplish this by continuously introducing new
test modules and technologies that often trickle down to our field-portable
platform. We will also improve this platform's speed, capability, scalability
and ease of programming to accelerate the migration from research labs to
production engineering and from low-scale manufacturing to full-fledged
automation.
We will continue to design automated test systems, such as our DWDM Passive
Component Test System, that enable non-skilled workers to characterize
increasingly challenging optical parameters with relative ease. This will allow
manufacturers to devote their best minds to critical R&D activities. We will
also take advantage of leading-edge, interferometric measurement technologies
from partners like Burleigh Instruments that produce best-in-class Wavemeter(R)
instruments.
We will extend our involvement in automated component manufacturing by
leveraging our strategic expertise in automated test stations. With this vision
in mind, we acquired Burleigh Instruments for its multi-axis, nanopositioning
alignment robots, and EFOS, now EXFO Photonic Solutions, for its precision
light-based, adhesive spot-curing systems. We plan to combine these
best-in-class technologies with our automation expertise to offer our customers
stand-alone products and semi-automated manufacturing solutions that help them
increase yields and reduce costs on the production floor. We also intend to seek
strategic partnerships with leading system integrators in order to allow them to
customize EXFO's semi-automated solutions to the specific processes that
continue to be unique and proprietary to each manufacturer.
IT ALL ADDS UP
I firmly believe we are well-positioned for long-term growth at EXFO. As part of
our strategic planning process for fiscal 2002, we are focusing on profitable
growth, customer satisfaction, market-driven innovation, workforce development
and building strong foundations for the future. At this point, I would like to
thank our people for their hard work and commitment during the past year. Fiscal
2001 was particularly exciting for all of us with the integration of our
acquired companies. We will continue to foster our core values and common
beliefs throughout the company, so they can serve as a guide for our people to
make the best decisions based on a market-focused, results-oriented and
customer-driven mindset. Without the contribution of our 1,150 employees, EXFO
would not be primed to reach new heights.
We will also further strengthen EXFO's brand name recognition to reflect our
reputation in the industry by heightening our focus on innovation, quality and
customer satisfaction. I am particularly looking forward to launching key
products in upcoming months that will shed light on our growth strategy and,
ultimately, should impact the industry. These product launches highlight the
fact we are working diligently to capture market share in our competitive
environment and increase shareholder value. Put this together and IT ALL ADDS UP
to one unmistakable conclusion--EXFO is ready to fulfill its mission of becoming
the global leader in the fiber-optic test, measurement and automation industry.
Sincerely,
/s/ Germain Lamonde
Germain Lamonde
Chairman, President and CEO
November 7, 2001
EXFO o 2001 Annual Report o 7
2000 CUSTOMERS
+ 70 COUNTRIES
+ 80 PRODUCT FAMILIES
---------------------
Strong Global Player
[BURLEIGH LOGO + EFOS LOGO + GRAPH]
2000 December 2001 February March
Acquires Increases Joins Opens Acquires Launches Releases Introduces
Burleigh manufacturing TSE 300 Singapore EFOS, OWA-9500 IQ-12007A NR-9200HR
Instruments capacity sales office now EXFO Optical Multiwavelength Optical Fiber
and service Photonic Waveguide Comb Controller Analyzer
center Solutions Analyzer
o SERVICE CENTERS
Quebec City, Canada
Paris, France
Singapore
Beijing, China
o MANUFACTURING OPERATIONS
Quebec City, Canada
Toronto, Canada
Victor, NY, USA
o SALES LOCATIONS
(located in 12 countries)
[GRAPH HERE]
DIVERSIFIED GLOBAL CUSTOMER BASE. Global sales diversification was at the core
of EXFO's growth strategy for 2001. Geographically, our sales were spread among
North America, Europe, Asia and the rest of the world with a 58%, 21%, 13% and
8% split, respectively. As a multisite company, EXFO continues to enhance its
market positioning and sales coverage. In Europe, we expanded into a new Paris
sales office and service center. In Asia, our sales nearly tripled and were
backed by new service center openings in Singapore and Beijing. With our
diversified customer base, no single company accounted for more than 6.4% of
sales. The sum of the parts: we have designed a strategy to tap into diverse
revenue streams for dynamic global coverage and scope.
May June July August
Showcases Releases Opens Expands Introduces Launches Enters Posts
Novacure(R) IR FTB-400 Beijing into new FR-3000 IQ-12001-04 agreement to strong year-end
at OFC Universal Test sales office European NanoRobot(R) Multifiber acquire results
System and service sales office and Test System Avantas
center service center Networks
EXFO o 2001 Annual Report o 9
PORTABLE
& MONITORING
DIVISION
BUILDING ON OUR LEADERSHIP POSITION. In 1985 when telecommunications meant
phones and faxes, EXFO was founded to serve the optical network carrier market.
In today's Internet-driven world, EXFO has evolved into a global leader in
optical network test, measurement and monitoring. When a global carrier or
service provider adds new channels, lights new fiber or upgrades a network
transmission rate, EXFO equipment is there.
With the industry's shift in focus from long-haul fiber networks to the more
populated metropolitan and access arenas, demand for specialized test equipment
is growing. EXFO is successfully building on its leadership position based on
over 40 product families for installing, monitoring and repairing long-haul,
metropolitan and access networks.
To meet the needs of carriers and service providers for the more sophisticated,
higher-performance testing of next-generation networks, we launched the FTB-400
Universal Test System. In the handheld test sector, we strengthened our market
position with the release of a high-power model in our power meter series for
optical networks. A best-in-class solution, this model is designed to provide
accurate measurements on next-generation optical networks.
PHYSICAL LAYER
+ OPTICAL LAYER
+ PROTOCOL LAYER
-----------------
ONE INTEGRATED TESTING SOLUTION
EXFO o 2001 Annual Report o 11
Carriers and service providers are also seeking new ways to extract the most
value from their existing fiber plants; they do this by turning up network
speeds and adding DWDM channels in the optical layer. In 2001, we introduced the
best-of-breed field-portable Optical Spectrum Analyzer to meet this market need.
Networks are becoming more complex, deploying a multitude of telecom and datacom
rates in the protocol layer. In this environment, telecommunication carriers and
system manufacturers require fully integrated solutions that meet their multiple
physical, optical and protocol testing needs. With the acquisition of Avantas
Networks, EXFO is now strategically positioned to offer this unique value
proposition to all our customers. With our newly acquired capabilities, we
envisage almost doubling our addressable market.
TEST CONVERGENCE
We have added protocol testing to our technology portfolio, thus enabling EXFO
products to test the optical highway and lanes as well as the optical traffic.
EXFO products have long tested the highway, made up of fiber and components in
the physical layer of a network. EXFO products also cover the numerous lanes of
the highway, which are the DWDM channels in the optical layer. And with the
acquisition of Avantas Networks, our products test the optical traffic,
consisting of the bits and bytes of information in the protocol layer.
[GRAPHIC HERE] Protocol layer: test data
[GRAPHIC HERE] Optical layer: test wavelengths
[GRAPHIC HERE] Physical layer: test fiber and components
FTB-400 UNIVERSAL TEST SYSTEM
This year we took our innovative modular system design a step further. The
next-generation FTB-400 Universal Test System enables multitasking with up to
7 modules for significantly faster network testing. Because it meets and
anticipates crucial testing needs, the FTB-400 platform has earned strong market
acceptance among major carriers around the world. Newly acquired technology will
enable us to combine physical, optical and protocol testing for network carriers
and service providers. We plan to integrate these technologies inside both the
FTB-400 platform for field testing and the IQ platform for manufacturers. With
the ability to perform all of these tests from a single box, the result for the
industry will be ground-breaking: enhanced efficiency, greater
cost-effectiveness and a better ability to compete.
[GRAPHIC OF FTB-400 UNIVERSAL TEST SYSTEM]
ASSURING NETWORK RELIABILITY
In today's Information Age, network reliability, security and quick recovery
time are mission-critical. Carriers and network service providers rely on EXFO's
FiberVisor(R) Remote Fiber Test System for real-time pinpointing of actual and
potential troublespots through physical and optical monitoring. To provide
carriers with a fully integrated solution, FiberVisor(R) will be adding the
features of the Avantas remote data performance management system, Network
Guardian G2(TM). Network Guardian tests a wide range of protocols including ATM,
SONET, SDH, Gigabit Ethernet and Ethernet, as well as rates up to 10 Gb/s for
both North American and international standards.
[GRAPHIC OF NETWORK GUARDIAN G2(TM)]
[GRAPHIC OF FIBERVISOR(R)]
EXFO o 2001 Annual Report o 13
OPTICAL TEST EXPERTISE
+ AUTOMATION KNOW-HOW
+ MARKET-DRIVEN R&D
----------------------
FUTURE-PROOF
SOLUTIONS
INDUSTRIAL
& SCIENTIFIC
DIVISION
KEY PRODUCTIVITY SOLUTIONS. Since our entry into the optical equipment
manufacturer market five years ago, we have leveraged a single modular test
platform to now offer a full range of key productivity solutions - test systems
for optical component makers and system vendors. These key productivity
solutions support the make-or-break need to increase efficiency and reduce costs
across the entire manufacturing process, from R&D to production engineering and
from small-scale production to assembly-line automation.
EXFO productivity solutions are more than stand-alone instruments; they're
automated test systems. While EXFO systems excel at their primary task of
testing optical quality and performance, they also streamline test processes and
cut testing time. Because up to 60% of production time can be spent on test and
measurement, these advantages add up quickly.
We rolled out an unprecedented number of products in 2001, particularly for the
manufacturer market. Among 40 product families, there were new solutions for all
sectors: cable and fiber manufacturers, active and passive component makers, and
system vendors. These are solutions with staying power. All are designed to meet
current market needs for reducing costs while anticipating the need for
accelerating test performance and test speed.
EXFO o 2001 Annual Report o 15
We also implemented a key part of our acquisition strategy. We chose Burleigh
Instruments for its nanopositioning alignment equipment as well as for its
world-class Wavemeter(R) optical testing technology. We chose EFOS, now EXFO
Photonic Solutions, for its precision light-based spot-curing technology as well
as for its related expertise in material sciences. Both companies offer
world-class equipment and technological expertise in their respective fields.
Both companies have long-standing relationships within the optical manufacturer
market.
AUTOMATED TEST SYSTEMS
Our testing strategy, based on automated fiber-optic test systems, helps optical
component makers and system vendors increase productivity and decrease costs.
Automated test systems simplify complex testing, thus decreasing human error
while speeding up the test process. Compared to stand-alone instruments,
automated test systems are faster to deploy onto production floors, and they
integrate more easily into the assembly cycles of our customers. This year, EXFO
added new functionality to the IQ-12004B DWDM Passive Component Test System, a
workhorse system already on passive component production floors worldwide. With
this year's expansion, measurements are now faster and more accurate, enabling
customers to cut costs on the production floor.
[GRAPHIC OF THE IQ-12004B DWDM PASSIVE COMPONENT TEST SYSTEM]
AUTOMATING CRITICAL PRODUCTION STEPS
The optical manufacturing industry is migrating towards automated production,
moving from low-yield production by hand to streamlined robotic production by
the thousand. By combining newly acquired technologies with our expertise in
automated fiber-optic test and measurement, EXFO is preparing for this market's
transition to automation. We are poised to launch smart solutions for automating
the critical test, alignment and curing stages of component production and
assembly. We are also developing strategic agreements with select systems
integrators. These relationships will result in customized EXFO offerings based
on subsystems geared to the proprietary manufacturing processes of customers.
[GRAPHIC HERE OF KEY PRODUCTION STEPS]
INNOVATION: MARKET-DRIVEN R&D
In a competitive marketplace, the key to success is innovation based on
opportune research and development. Our award-winning product development
process aligns R&D activities with market insight. The process delivers quality
products with quick time-to-market, providing a strategic window of opportunity
to anticipate market needs. In 2001, we launched a multitude of products,
including the OWA-9500 Optical Waveguide Analyzer. This instrument enables
design engineers to extract crucial information about specialized components
quickly and easily. It supports the development and production of optimized
waveguide technology for networks. With no other company serving this test and
measurement niche, this product is breaking new ground.
[GRAPHIC OF THE OWA-9500 OPTICAL WAVEGUIDE ANALYZER]
EXFO o 2001 Annual Report o 17
GLOBAL TEAMWORK
+ RESULTS-DRIVEN
+ CAN-DO ATTITUDE
-----------------
CUSTOMER-FOCUSED
PEOPLE PROVIDE CORE VALUE. At the heart of EXFO's remarkable growth and success
are people. These are our customers, who use EXFO equipment to lead
breakthroughs in telecommunications and build the world's next-generation
networks. And these are our employees, who drive the innovation and deliver the
solutions that serve our customers.
To help our customers focus on new solutions for optical networking, EXFO
focuses on making technology easier to use for people. The result: integrated
testing procedures that are truly intuitive, software that soon becomes second
nature and services that anticipate demand. Similarly, we are focused on
listening to our customers. With this year's new Customer Relationship
Management (CRM) system, we are now consolidating and sharing customer
information for real-time updates and real-time action. Since we place customers
at the core of many business processes, our annual customer survey helps to
benchmark our operations. The result for 2001 was a resounding 94% customer
satisfaction rating, based on rankings of "good" and "excellent" products and
services - solid confirmation that our approach works.
Backed by a culture that rewards initiative, diversity and teamwork, the people
at EXFO are the backbone of the company's growth. Through a multitude of skills
and perspectives, the people at EXFO are building our market leadership. Thanks
to global diversity, we are well-positioned to understand varied customer needs
and respond strategically. Thanks to a local management strategy, we gain
insight into regional markets - adding up to global strength. Thanks to the
people from newly acquired companies, we are reinforcing our ability to actively
listen to our customers. Together we are building the customer relationships
that bring EXFO year after year of success.
IT ALL ADDS UP BECAUSE OF PEOPLE.
EXFO o 2001 Annual Report o 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial condition
and results of operations of EXFO Electro-Optical Engineering Inc. (EXFO) for
the fiscal years ended August 31, 2001, 2000 and 1999 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 US 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 US GAAP, except as
described in note 19 to our consolidated financial statements.
CORPORATE HIGHLIGHTS
EXFO REPORTS STRONG YEAR-END FINANCIAL RESULTS
EXFO announced in October 2001 it had increased sales by 104% to $146.0 million
for the fiscal year ended August 31, 2001 from $71.6 million in 2000. Net
earnings, excluding amortization of goodwill and the after-tax effect of
amortization of intangible assets and non-recurring expenses, jumped 139% to
$24.5 million, or $0.46 per share, for fiscal 2001 from $10.3 million, or $0.26
per share, for 2000. Including amortization of intangible assets and goodwill
related to acquisitions as well as non-recurring expenses, EXFO's net loss for
fiscal 2001 was $15.3 million, or $0.29 per share. In comparison, EXFO recorded
net earnings of $9.9 million, or $0.25 per share, in fiscal 2000.
EXFO ACQUIRES AVANTAS NETWORKS
EXFO reported in August 2001 it had entered into an agreement to acquire Avantas
Networks Corporation for $68 million, or $96 million for the equity minus $28
million of Avantas cash on hand. Consideration paid will consist of 4.4 million
EXFO shares and $36 million in cash. Avantas is a supplier of leading-edge
fiber-optic testing and optical network performance management equipment that
supports a wide range of protocols and data transmission rates.
EXFO LAUNCHES MORE THAN 20 PRODUCTS IN 2001
EXFO announced in August 2001 it had launched more than 20 products in fiscal
2001. Key product launches included the FTB-400 Universal Test System, which is
the industry's first modular platform that can perform essential physical layer
tests for DWDM long-haul, metro and access networks; the OWA-9500 Optical
Waveguide Analyzer, which represents the industry's first and only commercial
refractive index profiler for all-important planar and arrayed waveguides; the
FR-3000 NanoRobot(R) Alignment System wit multi-axis alignment and 0.1-nanometer
resolution for automated component manufacturing applications; and the
Novacure(R) IR, whic uses infrared spot-curing on conventional heat-cured
adhesives.
EXFO OPENS SALES OFFICES AND SERVICE CENTERS IN ASIA
EXFO opened sales offices and service centers in Singapore and Beijing during
fiscal 2001 to better serve its customers abroad. The expansion into the Asian
market proved to be a winning strategy since sales almost tripled from fiscal
2000 to 2001 in this region. EXFO also relocated its Paris office to strengthen
sales, application engineering and marketing services throughout Europe.
EXFO ACQUIRES EFOS
EXFO announced in March 2001 it had acquired EFOS Inc., now EXFO Photonic
Solutions Inc., for 3.7 million shares valued at $85 million and $25 million in
cash. EXFO Photonic Solutions is a leader in precision light-based adhesive spot
curing technologies as well as curing process control for the global optical
component manufacturing market.
EXFO o 2001 Annual Report o 21
EXFO JOINS TSE 300
EXFO announced in February 2001 it had been added to the Toronto Stock Exchange
(TSE) 300 Composite Index as well as the TSE 300 Capped, S&P/TSE Canadian
SmallCap and TSE 200 Indices. The TSE 300 Composite Index is a benchmark used to
measure the price performance of the broad Canadian equity market.
EXFO ACQUIRES BURLEIGH INSTRUMENTS
EXFO announced in December 2000 it had acquired Burleigh Instruments, Inc. for
$6.5 million shares valued at $147 million and $42 million in cash. Burleigh is
a leading supplier of DWDM wavelength measurement instruments and precision
positioning equipment.
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 information technology industry
analysts, the number of Internet users around the world is expected to increase
from 400 million in 2001 to nearly one billion, or 15% of the total population,
by 2005. In addition, users are increasingly seeking applications that require a
great deal of bandwidth such as video conferencing, video-on-demand, HDTV,
e-commerce and rich media streaming.
The dramatic increase in Internet users and in bandwidth-intensive applications
has created a tremendous need for high-capacity communication networks. To meet
this increasing demand for bandwidth, many telecommunication carriers 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. 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 access and metropolitan areas. According to
Kessler Marketing Intelligence (KMI), the global DWDM Transport Equipment Market
is expected to increase from $7.1 billion in 2001 to $23.2 billion in 2005.
Although the long-term outlook for the telecommunications industry remains
robust, 2001 was marked by a slowdown in the overall economy and reduced capital
spending in the optical networking market. On the carrier side, we observed a
trend towards maximizing existing networks by increasing transmission rates and
adding DWDM channels, while delaying deployment of new fiber cables. For optical
component and system manufacturers, the slowdown in the buildout of new networks
resulted in excess inventories throughout the industry. Despite this over-supply
of optical components, the most established component and system manufacturers
did not significantly slash their R&D budgets in order to remain competitive in
designing next-generation products. As a result, new production lines are still
being rolled out in significant numbers.
OPTICAL TEST, MEASUREMENT AND AUTOMATION EQUIPMENT MARKET
Fiber-optic test, measurement and automation equipment is essential for research
and development, manufacturing, network installation and maintenance as well as
network monitoring.
Conventional test and measurement instruments used by telecommunication 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 and measurement
equipment is critical for measuring these effects and helping carriers and
manufacturers of optical components, value-added optical modules and optical
networking systems ensure network performance, efficiency and reliability.
EXFO o 2001 Annual Report o 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Data sent along an optical network must respect transmission protocols, such as
ATM, SONET, SDH, Ethernet and Gigabit Ethernet, and fall within accepted data
transmission rates from 64 kb/s to 10 Gb/s. Otherwise, the information sent from
a transmitter will not be understandable to the receiver. Fiber-optic test and
measurement equipment like a bit-error rate tester is used to ensure data
integrity.
Optical components and value-added optical modules, which make up an optical
network, are typically assembled by hand on the production floor. Yields are
inevitably low and costs are high. As a result, optical component vendors are
increasingly looking for ways to increase efficiency and reduce costs by
adopting automated manufacturing solutions. They either build these complex
solutions in-house or turn to equipment manufacturers to help them automate
critical steps in the manufacturing process such as alignment, curing and
optical testing. The latter option enables optical component vendors to devote
their scarce technical resources to developing next-generation products instead
of manufacturing tools.
The fiber-optic test, measurement and automation market has not been immune to
the challenging conditions in the optical networking sector. However, vendors
with extensive product portfolios that include advanced optical test instruments
were still able to market their products to carriers, who need to upgrade their
networks to higher transmission rates or add DWDM channels. Likewise, test,
measurement and automation vendors, whose products increase efficiency and
reduce costs on the production floor, still attracted the attention of optical
component and system manufacturers, who kept investing in their R&D programs to
stay ahead of the competition.
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.
These products are marketed in what is known today as our Portable and
Monitoring Division. This division markets its products mainly to
telecommunication carriers and network service providers. These customers use
Portable and Monitoring Division products for installation and maintenance,
monitoring and troubleshooting applications. In 1996, we supplemented our
product portfolio with an extensive line of Industrial and Scientific products
that are dedicated to the research and development as well as manufacturing
markets in the fiber-optic industry. Our Industrial and Scientific products tend
to be more complex and higher priced than our Portable and Monitoring products.
Industrial and Scientific Division customers include optical component and
system manufacturers as well and research and development laboratories. In
fiscal 1999, we entered the market for remote fiber test systems. Remote fiber
test systems, which are marketed through our Portable and Monitoring Division,
allow carriers to deploy test equipment throughout their networks in order to
monitor the integrity of their fiber-optic networks.
In fiscal 2001, we announced three strategic acquisitions to bolster growth in
both of our product divisions. We acquired Burleigh Instruments for its
wavelength measurement instruments and nano-positioning alignment systems. We
added EFOS (renamed EXFO Photonic Solutions) for its precision light-based,
adhesive spot-curing technology. Both of these companies are expected to
accelerate growth in our Industrial and Scientific Division. Finally, we reached
an agreement to acquire Avantas Networks, a supplier of leading-edge,
fiber-optic testing and optical network performance management equipment that
supports a wide range of protocols and data transmission rates. Avantas should
increase sales in both product divisions, but initially in our Portable and
Monitoring Division.
The Avantas acquisition will enable us to enter the critical protocol-layer
testing market and, more importantly, almost double our addressable market size
to an estimated $3.3 billion, according to reports from Frost and Sullivan. In
layman's terms, EXFO products test the highway, or the fiber, optical components
and value-added optical modules that make up the physical layer of an optical
network. Our products also cover the numerous lanes along the highway, or the
DWDM wavelengths carrying bandwidth within the optical layer of a network. With
the Avantas acquisition, EXFO products will also test the traffic, or the bits
and bytes, running through the protocol layer of a network.
EXFO o 2001 Annual Report o 23
We sell our products to more than 2000 customers through our direct sales force
and indirectly through distribution channels. Cost of sales include raw
materials, salaries and related expenses for direct and indirect manufacturing
personnel and manufacturing overhead.
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.
Gross research and development expenses consist primarily of salaries and
related expenses for engineers and other technical personnel as well as fees
paid to third-party consultants. We are eligible to receive research and
development (R&D) tax credits and government grants. Related R&D tax credits and
government grants are recorded as a reduction of gross R&D expenses.
EXFO o 2001 Annual Report o 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth certain Canadian GAAP consolidated statements of
earnings data in thousands of US dollars, except per share data, and as a
percentage of sales for the years indicated:
Years Ended August 31, 1999 2000 2001 1999 2000 2001
----------------------------------------------------------------------------------------------------
Sales $42,166 $71,639 $146,013 100.0% 100.0% 100.0%
Cost of sales 14,998 24,712 54,946 35.6 34.5 37.6
----------------------------------------------------------------------------------------------------
Gross margin 27,168 46,927 91,067 64.4 65.5 62.4
Operating expenses
Selling and administrative 13,279 24,304 46,236 31.5 33.9 31.7
Net research and development 4,315 6,402 13,601 10.2 8.9 9.3
Amortization of property,
plant and equipment 857 1,451 3,559 2.0 2.0 2.4
Amortization of intangible assets 41 47 9,876 0.1 0.1 6.8
Non-recurring expenses - - 3,288 - - 2.3
----------------------------------------------------------------------------------------------------
Earnings from operations 8,676 14,723 14,507 20.6 20.6 9.9
Interest income, net 136 1,480 6,098 0.3 2.1 4.2
Foreign exchange gain (loss) (506) (684) 3,327 (1.2) (1.0) 2.3
----------------------------------------------------------------------------------------------------
Earnings before income taxes
and amortization of goodwill 8,306 15,519 23,932 19.7 21.7 16.4
----------------------------------------------------------------------------------------------------
Income taxes 2,492 5,298 8,150 5.9 7.4 5.6
----------------------------------------------------------------------------------------------------
Earnings before amortization
of goodwill 5,814 10,221 15,782 13.8 14.3 10.8
Amortization of goodwill - 297 31,076 - 0.4 21.3
----------------------------------------------------------------------------------------------------
Net earnings (loss) for the year $ 5,814 $ 9,924 $(15,294) 13.8% 13.9% (10.5)%
=====================================================================================================
Basic and diluted net earnings
(loss) per share $ 0.14 $ 0.25 $ (0.29)
=====================================================================================================
Research and development data:
Gross research and development $ 6,390 $ 9,374 $ 17,601 15.2% 13.1% 12.1%
Net research and development $ 4,315 $ 6,402 $ 13,601 10.2% 8.9% 9.3%
=====================================================================================================
OTHER DATA (UNAUDITED):
Adjusted net earnings* $ 5,843 $10,252 $ 24,463 13.9% 14.3% 16.8%
=====================================================================================================
Basic and diluted adjusted
net earnings per share* $ 0.14 $ 0.26 $ 0.46
=====================================================================================================
* Net earnings excluding amortization of goodwill and the after-tax effect of
amortization of intangible assets and non-recurring expenses. This information
may not be comparable to similarly titled measures reported by other companies
because it is non-GAAP information.
EXFO o 2001 Annual Report o 25
SALES
Sales totalled $146.0 million, $71.6 million and $42.2 million in fiscal 2001,
2000 and 1999, respectively. Sales increased 104% in fiscal 2001 compared to
2000 due to increased demand for our Industrial and Scientific products as well
as our Portable and Monitoring products, market acceptance of several products
launched in 2001 and the impact of the Burleigh Instruments and EXFO Photonic
Solutions acquisitions completed during the year. In addition, the increase in
sales of our Industrial and Scientific products significantly affected our top
line because these products have a higher average selling price than Portable
and Monitoring products.
$ Millions
150 $146.0
135
120
105
90
75 $71.6
60
45 $42.2
$31.6
30 $24.4
15
=======================================
97 98 99 00 01
Altogether, Industrial and Scientific products accounted for almost 50% of our
sales in fiscal 2001 compared to just over 30% in 2000. In fiscal 2002, we
expect our Portable and Monitoring products to regain a larger share of our
total sales due to continued carrier spending and the impact of the Avantas
acquisition in the second half of the year. Although telecommunication carriers
have lowered their capital expenditures for network deployment, they are
upgrading networks by adding DWDM channels and increasing data transmission
rates. As a result, they still need to purchase test and measurement equipment
to ensure network reliability. The Avantas acquisition will initially benefit
the Portable and Monitoring Division, but it should eventually increase sales in
the Industrial and Scientific Division.
Accepted orders increased 53% to $132.1 million in fiscal 2001 from $86.2
million for 2000. Our book-to-bill ratio, however, decreased 25% to 0.90 in
fiscal 2001 compared to 1.20 in 2000. The decrease in our book-to-bill ratio
reflects the downturn in the telecommunications industry, which began impacting
our booking in the third quarter of 2001.
In fiscal 2000, sales increased 70% compared to 1999. Growth in sales was mainly
due to increased demand for our Industrial and Scientific products as well as a
general sales increase in our other products.
North American sales accounted for 58.3%, 61.6% and 56.3% of global sales in
fiscal 2001, 2000 and 1999, respectively. International sales represented 41.7%,
38.4% and 43.7% of global sales in fiscal 2001, 2000 and 1999, respectively. The
increase in international sales in fiscal 2001 compared to 2000 mainly reflects
our sustained efforts to develop the Asian market. We almost tripled our sales
in this region and added service centers in Beijing and Singapore to better
serve our customers. The jump in North American sales in fiscal 2000 compared to
1999 was the result of our ability to exploit a robust economy in that region
during that period.
We sell our products to a broad range of customers including telecommunication
carriers, optical component and system manufacturers as well as research and
development laboratories. No customer accounted for more than 6.4%, 5.8% and
6.8% of sales in fiscal 2001, 2000 and 1999, respectively.
GROSS MARGIN
Gross margin amounted to 62.4%, 65.5% and 64.4% of sales for fiscal 2001, 2000
and 1999, respectively. Despite the increase in sales of Industrial and
Scientific products, which tend to be slightly higher-margin products, gross
margin decreased in fiscal 2001 compared to 2000 due to a number of reasons.
First of all, we significantly increased our manufacturing capacity as well as
hired and trained related manufacturing employees to face current and future
demand for our products. Secondly, we re-engineered our manufacturing processes
to be more cost-effective and to better mitigate the impact of potential pricing
pressure in the future. Thirdly, we acquired EXFO Photonic Solutions, which
operates in a market that has relatively lower-margin products. Finally, the
slowdown in the telecommunications industry, which affected us mostly in the
last quarter of fiscal 2001, prevented us from a better absorption of our fixed
costs.
70%
64.1 64.4 65.5
60% 60.6 62.4
50%
40%
30%
20%
10%
=======================================
97 98 99 00 01
EXFO o 2001 Annual Report o 26
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The improvement in gross margin in fiscal 2000 compared to 1999 reflects the
increase in government grants earned in 2000, increased sales of higher-margin
products and our cost-reduction manufacturing programs.
Gross margin can be negatively affected by competitive pricing pressure,
increases in component costs and obsolescence costs, shifts in product mix,
reductions in government grants, under-absorption of manufacturing fixed costs
and increases in product offerings by other suppliers in the fiber-optic test,
measurement and automation industry.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses reached $46.2 million, $24.3 million and
$13.3 million for fiscal 2001, 2000 and 1999, respectively. As a percentage of
sales, selling and administrative expenses amounted to 31.7%, 33.9% and 31.5%
for fiscal 2001, 2000 and 1999, respectively. The dollar increase for fiscal
2001 compared to 2000 is directly related to higher commissions resulting from
increased sales activity, increased promotional and marketing expenses, expenses
to consolidate our sales force in Asia, expenses related to running a public
company and the impact of the Burleigh Instruments and EXFO Photonic Solutions
acquisitions. The percentage decrease is mainly due to a better absorption of
these expenses because sales are increasing at a faster rate than selling and
administrative expenses.
40%
33.9
30% 32.0 31.3 31.5 31.7
20%
10%
===================================
97 98 99 00 01
The increase in selling and administrative expenses in fiscal 2000 compared to
1999 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 marketing expenses as well as
the expenses related to running a public company since June 2000.
Considering current market conditions, efforts will be undertaken to maintain
our selling and administrative expenses at an acceptable level without impeding
our efforts to strategically position our company, improve our sales, marketing
and customer service teams, integrate our acquired companies and satisfy our
customers.
RESEARCH AND DEVELOPMENT
Gross R&D expenses totalled $17.6 million, $9.4 million and $6.4 million for
fiscal 2001, 2000 and 1999, respectively. As a percentage of sales, gross R&D
expenses were 12.1%, 13.1% and 15.2% for fiscal 2001, 2000 and 1999,
respectively. The increase in gross R&D dollars in fiscal 2001 compared to 2000
reflects our commitment to innovation by hiring additional R&D personnel as well
as by the acquisitions of Burleigh Instruments and EXFO Photonic Solutions.
Taking into account these acquisitions, we added 95 employees to our R&D
departments in fiscal 2001, supporting our continued focus on innovative product
development. Our sustained efforts in R&D allowed us to launch more than 20 new
products in 2001. Altogether, 46% of our sales in fiscal 2001 originated from
products that have been on the market for two years or less. This figure
confirms our dedication to innovation and our anticipation of customers' needs
and expectations.
$Millions
20
$17.6
15
10 $9.4
$6.4
5 $2.8 $4.4
===================================
97 98 99 00 01
The decrease, as percentage of sales, in fiscal 2001 compared to 2000 is mainly
due to the fact that sales increased at a faster rate than R&D expenses during
this period.
The increase in R&D dollars in fiscal 2000 compared to 1999 reflects the hiring
of additional personnel to develop new products and enhance current ones. During
fiscal 2000, we added 45 employees to our R&D Department.
EXFO o 2001 Annual Report o 27
Tax credits and grants from federal, provincial and state governments for R&D
activities were $4.0 million, $3.0 million and $2.1 million for fiscal 2001,
2000 and 1999, respectively. The increase in tax credits and grants in fiscal
2001 compared to 2000 is directly related to the hiring of additional R&D
personnel as well as the impact of the EXFO Photonic Solutions acquisition. The
increase in tax credits and grants in fiscal 2000 compared to 1999 is the result
of hiring additional R&D personnel.
Tax credits and grants, as a percentage of gross R&D expenses, were 22.7%, 31.7%
and 32.5% for fiscal 2001, 2000 and 1999, respectively. The decrease in fiscal
2001 compared to 2000 is related to a reduction in the effective tax credit rate
and grants on R&D carried out in Canada. It should be noted that R&D carried out
by US-based Burleigh Instruments is not eligible for tax credits. As a result,
the gross R&D percentage was further reduced in fiscal 2001.
In terms of net R&D expenses, they amounted to 9.3%, 8.9% and 10.2% of sales for
fiscal 2001, 2000 and 1999, respectively. We expect to continue investing
heavily in R&D in the upcoming year, reflecting our focus on innovation and our
desire to exceed our customers' needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of Burleigh Instruments and EXFO Photonic
Solutions, we recorded $54.7 million in intangible assets primarily consisting
of core technology. These intangible assets, which are amortized over periods
from five months to five years, resulted in an amortization expense of $9.9
million in fiscal 2001.
NON-RECURRING EXPENSES
In June 2001, we implemented a structured plan to reduce costs and increase
efficiency in order to align our cost structure to market conditions and be
better positioned amidst a challenging environment.
Under this plan, we incurred non-recurring expenses of $3.3 million, including
$0.8 million in severance expenses for the 245 employees who were terminated and
$2.5 million in unused facilities and assets. No such expenses were incurred in
fiscal 2000 and 1999.
This plan should enable us to reduce our operating expenses by approximately $8
million in fiscal 2002.
INTEREST INCOME, NET
Interest income amounted to $6.1 million, $1.5 million and $0.1 million for
fiscal 2001, 2000 and 1999, respectively. The increase in our interest income
results solely from short-term investments of the remaining net proceeds of our
Initial Public Offering on June 29, 2000. The increase in interest income is
somewhat offset by interest expenses and bank charges related to borrowings
under our lines of credit. Our interest income will decrease in fiscal 2002
because we used short-term investments to pay for cash considerations in recent
acquisitions and because interest rates may continue to drop.
FOREIGN EXCHANGE GAIN (LOSS)
Foreign exchange gain amounted to $3.3 million in fiscal 2001 compared to
foreign exchange losses of $0.7 million in 2000 and $0.5 million in 1999.
EXFO o 2001 Annual Report o 28
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The foreign exchange gain in fiscal 2001 can be mostly attributed to the
disposal of short-term investments denominated in US dollars and to the foreign
exchange impact on operating activities of Canadian entities denominated in
currencies other than the Canadian dollar. Foreign exchange losses incurred in
fiscal 2000 and 1999 are solely due to the foreign exchange impact on operating
activities of Canadian entities denominated in currencies other than the
Canadian dollar.
INCOME TAXES
Our effective income tax rates were 34.1%, 34.1% and 30.0% for fiscal 2001, 2000
and 1999, respectively. Our effective income tax rate was flat in fiscal 2001
compared to 2000. The increase from fiscal 1999 to 2000 can be attributed to a
decrease in our manufacturing and processing deduction.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of Burleigh Instruments and EXFO Photonic
Solutions, we recorded $248.5 million in goodwill. Goodwill, which is amortized
over five years, resulted in an amortization expense of $31.1 million in fiscal
2001.
NET EARNINGS (LOSS)
Net loss amounted to $15.3 million in fiscal 2001 compared to net earnings of
$9.9 million in 2000 and $5.8 million in 1999. In terms of per share amounts, we
recorded a net loss of $0.29 in fiscal 2001 compared to net earnings of $0.25 in
2000 and $0.14 in 1999.
ADJUSTED NET EARNINGS
As a measure to assess financial performance, we use adjusted net earnings and
adjusted net earnings per share. Adjusted net earnings represent net earnings
excluding amortization of goodwill and the after-tax effect of amortization of
intangible assets and non-recurring expenses.
Adjusted net earnings amounted to $24.5 million, $10.3 million and $5.8 million
in fiscal 2001, 2000 and 1999, respectively. In terms of adjusted net earnings
per share, it reached $0.46, $0.26 and $0.14 in fiscal 2001, 2000 and 1999,
respectively.
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 operations,
research and development tax credits and government grants. On June 29, 2000, we
closed our Initial Public Offering of 8,050,000 subordinate voting shares at a
price of US$26.00 per share in the United States and Cdn$38.55 per share in
Canada. Total proceeds, including the over-allotment option exercised by the
underwriters, were approximately US$209 million.
Cash Position and Short-Term Investments
As at August 31, 2001, cash and cash equivalents as well as short-term
investments consisted of $74.6 million. Our working capital was at $130.3
million. The announced acquisition of Avantas Networks Corporation will be
partially financed with $8.0 million of cash on hand.
EXFO o 2001 Annual Report o 29
Operating Activities
Cash flows provided by operating activities were $3.1 million in fiscal 2001
compared to cash flows used of $4.0 million in 2000 and cash flows provided of
$3.7 million in 1999. Cash flows provided by operating activities in fiscal 2001
were primarily due to net earnings after items not affecting cash and cash
equivalents of $24.5 million. This figure was mainly offset by an increase of
$20.3 million in inventories required to ensure minimal manufacturing and
delivery lead times.
Cash flows used in operating activities in fiscal 2000 were primarily due to net
earnings after items not affecting cash and cash equivalents of $10.9 million.
This figure was mainly offset by an increase of $10.5 million in accounts
receivable, resulting from higher volumes of sales and $10.7 million in
inventories that were required to ensure minimal manufacturing and delivery lead
times.
The major items not affecting cash and cash equivalents consisted of net
amortization expenses of $43.9 million for fiscal 2001 and $1.0 million for
2000.
Financing Activities
Cash flows used in financing activities were $4.6 million in fiscal 2001
compared to cash flows provided of $172.9 million in 2000 and cash flows used of
$3.3 million in 1999. Cash flows used in financing activities in fiscal 2001
were mainly due to the repayment of bank advances and long-term debt of $5.4
million. Considering these repayments, we have available credit facilities as at
August 31, 2001 that provide for advances of up to $11.4 million under lines of
credit. These lines of credit bear interest at prime rate.
Cash flows provided by financing activities in fiscal 2000 were the result of
the net proceeds of our Initial Public Offering of $192.9 million less the
dividends paid of $17.6 million. Cash flows used in financing activities in
fiscal 1999 were due to the payment of $3.2 million in dividends that were
declared that year. We do not foresee payments of additional dividends during
the next three fiscal years.
Investing Activities
Cash flows provided by investing activities were $9.2 million in fiscal 2001
compared to cash flows used of $169.0 million in 2000 and $1.2 million in 1999.
In fiscal 2001, we disposed of $93.4 million in short-term investments to
finance the $15.9 million purchase of property, plant and equipment as well as
to pay the cash consideration of $68.3 million for the Burleigh Instruments and
EXFO Photonic Solutions acquisitions. Despite these investments, the disposal of
short-term investments generated net cash flows of $9.2 million in fiscal 2001.
The purchases of $159.8 million in short-term investments from the net proceeds
of our Initial Public Offering and of $7.2 million in property, plant and
equipment explain the use of cash flows for investing activities in fiscal 2000.
In fiscal 1999, the purchase of $1.2 million in property, plant and equipment
explain the use of cash flows in investing activities. As at August 31, 2001,
property, plant and equipment amounted to $27.1 million, while intangible assets
and goodwill related to the acquisitions of Burleigh Instruments and EXFO
Photonic Solutions totalled $264.2 million, net of related accumulated
amortization.
Outlook
We believe that our existing cash balances and short-term investments, together
with cash flows from operations and available credit facilities, will be
sufficient to meet our expected liquidity and capital requirements for the
upcoming year, taking into account the cash consideration to be paid for the
previously announced acquisition of Avantas Networks. 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, it can be secured on terms satisfactory to us.
EXFO o 2001 Annual Report o 30
Management's Discussion and Analysis of
Financial Condition and Results of Operations
NEW ACCOUNTING STANDARDS
On August 1, 2001, the Canadian Institute of Chartered Accountants issued
section 1581 "Business Combinations," which supersedes section 1580, and issued
section 3062 "Goodwill and Other Intangible Assets." Section 1581 requires
business combinations initiated after June 30, 2001 or business combinations
accounted for by the purchase method with a date of acquisition after June 30,
2001, to be accounted for using the purchase method of accounting. This section
also broadens criteria for recording intangible assets separately from goodwill.
Upon the adoption of section 3062, recorded goodwill and intangible assets will
be evaluated against these new criteria and may result in certain intangible
assets being reclassified into goodwill or, alternatively, amounts initially
recorded as goodwill being separately identified and recognized apart from
goodwill as intangible assets. Section 3062 requires the use of a
non-amortization approach to account for purchased goodwill and indefinite-lived
intangibles. Under the non-amortization approach, goodwill and indefinite-lived
intangibles will not be amortized, but instead they will be reviewed for
impairment and written down and charged to earnings only in the periods in which
the recorded value of goodwill and indefinite-lived intangibles exceed their
fair value. This section will be adopted on September 1, 2002.
The impact of adopting section 3062 will allow us to use the non-amortization
approach for goodwill and will reduce annual goodwill amortization by
approximately $50 million. Moreover, we will implement a new goodwill impairment
methodology and any potential initial impairment losses on goodwill determined
by this methodology will be charged to deficit. Any subsequent impairment losses
on goodwill will be charged to earnings in the period in which it is incurred.
Under US GAAP, any potential initial impairment losses on goodwill determined by
this methodology will be charged to earnings.
For more details on new US accounting standards, see note 19 to our consolidated
financial statements.
RISKS AND UNCERTAINTIES
Over the past few years, we have been successful in maintaining a strong rate of
growth by effectively managing our activities, by focusing on the research and
development of new and innovative products, by penetrating international
markets, by seeking and closing important strategic acquisitions and, finally,
by attracting and retaining highly skilled employees. However, we operate in a
highly competitive field that is in constant evolution and, as a result, we
encounter various risks and uncertainties that must be given appropriate
consideration in our strategic management policies.
The main risks and uncertainties related to the fiber-optic test, measurement
and automation industry involve the quick development of new products that have
short lifecycles and require extensive research and development; the difficulty
of attracting and retaining highly skilled employees as well as offering them
effective training programs; and the ability to quickly adapt our cost structure
to changing market conditions in order to maintain or increase our growth.
In addition, given our strategic goals for growth and competitive positioning in
our industry, we are expanding into international markets. This exposes us to
certain risks and uncertainties related to changes in local laws and
regulations, multiple technological standards, protective legislation and
pricing pressure.
Furthermore, while the important strategic acquisitions we have made are
essential to our long-term growth, they also expose us to certain risks and
uncertainties related to the rapid and effective integration of these companies
as well as their products, technologies and personnel.
We are also exposed to currency risks as a result of the export of our products
manufactured in Canada, substantially all of which are denominated in US
dollars. These risks are partially hedged by the operating expenses of certain
international subsidiaries, the purchase of raw materials in US dollars and
forward exchange contracts. (See note 18 to our consolidated financial
statements).
EXFO o 2001 Annual Report o 31
Also, an economic slowdown in our industry could result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results. However, the sectorial and geographic diversity of our customer
base provides us with a reasonable level of protection in this area. Finally,
other financial instruments which potentially subject us to credit risks consist
principally of cash and cash equivalents, short-term investments and forward
exchange contracts. Our short-term investments consist of debt instruments
issued by high-credit quality financial institutions and corporations and units
of a low-risk mutual fund. Our cash and cash equivalents and forward exchange
contracts are held with or issued by high-credit quality financial institutions;
therefore, we consider the risk of non-performance on these instruments to be
remote.
To obtain more information about our risks and uncertainties, please refer to
the disclosure documents published with securities commissions.
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, those discussed in our Annual
Information Form filed with the US Securities and Exchange Commission and the
Canadian Securities Commissions. 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 statement, whether as a result of new information, future
events or otherwise, except as may be required under applicable law.
EXFO o 2001 Annual Report o 32
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 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.
/s/ Germain Lamonde /s/ Pierre Plamondon
--------------------------- ---------------------------
Germain Lamonde Pierre Plamondon, CA
Chairman, President and CEO Vice-President, Finance and
Chief Financial Officer
EXFO o 2001 Annual Report o 33
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, 2000 and 2001 and the consolidated statements
of earnings, retained earnings (deficit) and contributed surplus and cash flows
for each of the years in the three-year period ended August 31, 2001. 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 and United States 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, 2000
and 2001 and the results of its operations and its cash flows for each of the
years in the three-year period ended August 31, 2001 in accordance with Canadian
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
----------------------------------
Chartered Accountants
Quebec, Quebec, Canada
September 21, 2001
EXFO o 2001 Annual Report o 34
CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars)
The accompanying notes are integral part of these consolidated financial
statements.
As at August 31, 2000 2001
-----------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 729 $ 7,729
Short-term investments (notes 7 and 18) 162,659 66,861
Accounts receivable (notes 7 and 18)
Trade 18,272 24,531
Other 2,790 3,660
Income taxes receivable (note 7) 284 -
Inventories (notes 4 and 7) 18,868 44,345
Prepaid expenses 1,023 1,265
Future income taxes (note 15) 995 1,423
-------------------------------------------------------------------------------
205,620 149,814
PROPERTY, PLANT AND EQUIPMENT (notes 5 and 7) 8,694 27,140
INTANGIBLE ASSETS AND GOODWILL (notes 6 and 7) 2,320 264,242
FUTURE INCOME TAXES (note 15) 3,089 1,381
-------------------------------------------------------------------------------
$ 219,723 $ 442,577
===============================================================================
LIABILITIES
CURRENT LIABILITIES
Bank advances (note 7) $ 10 $ -
Accounts payable and accrued liabilities (note 8) 10,353 16,180
Income taxes payable - 2,623
Mandatorily redeemable preferred shares (note 9) 543 -
Deferred revenue 395 616
Current portion of long-term debt 152 106
-------------------------------------------------------------------------------
11,453 19,525
DEFERRED REVENUE 151 -
DEFERRED GRANTS (note 13) 1,109 1,002
LONG-TERM DEBT (note 10) 16 664
FUTURE INCOME TAXES (note 15) - 6,581
-------------------------------------------------------------------------------
12,729 27,772
-------------------------------------------------------------------------------
COMMITMENTS (note 11)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 12) 198,459 429,995
CONTRIBUTED SURPLUS - 1,457
CUMULATIVE TRANSLATION ADJUSTMENT 1,555 (8,333)
RETAINED EARNINGS (DEFICIT) 6,980 (8,314)
-------------------------------------------------------------------------------
206,994 414,805
-------------------------------------------------------------------------------
$ 219,723 $ 442,577
===============================================================================
/s/ Germain Lamonde /s/ Andre Tremblay
------------------------- --------------------
On behalf of the Board: Germain Lamonde Andre Tremblay
Chairman, Chairman,
President and CEO Audit Committee
EXFO o 2001 Annual Report o 35
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
The accompanying notes are integral part of these consolidated financial
statements.
Years Ended August 31, 1999 2000 2001
----------------------------------------------------------------------------------------------
SALES (note 16) $ 42,166 $ 71,639 $ 146,013
COST OF SALES 14,998 24,712 54,946
----------------------------------------------------------------------------------------------
GROSS MARGIN 27,168 46,927 91,067
----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and administrative 13,279 24,304 46,236
Net research and development (note 13) 4,315 6,402 13,601
Amortization of property, plant and equipment 857 1,451 3,559
Amortization of intangible assets 41 47 9,876
Non-recurring expenses (note 14) - - 3,288
----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 18,492 32,204 76,560
----------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 8,676 14,723 14,507
Interest income, net 136 1,480 6,098
Foreign exchange gain (loss) (506) (684) 3,327
----------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
AND AMORTIZATION OF GOODWILL 8,306 15,519 23,932
INCOME TAXES (note 15) 2,492 5,298 8,150
----------------------------------------------------------------------------------------------
EARNINGS BEFORE AMORTIZATION OF GOODWILL 5,814 10,221 15,782
AMORTIZATION OF GOODWILL - 297 31,076
----------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR $ 5,814 $ 9,924 $ (15,294)
==============================================================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Earnings before amortization of goodwill $ 0.14 $ 0.26 $ 0.30
Net earnings (loss) $ 0.14 $ 0.25 $ (0.29)
BASIC WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING (000's) 38,001 39,951 53,014
DILUTED WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING (000's) (note 17) 38,001 40,086 53,014
EXFO o 2001 Annual Report o 36
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(DEFICIT) AND CONTRIBUTED SURPLUS
(in thousands of US dollars, except per share data)
The accompanying notes are integral part of these consolidated financial
statements.
Retained Earnings (Deficit)
Years Ended August 31, 1999 2000 2001
----------------------------------------------------------------------------------------------
BALANCE - BEGINNING OF YEAR $ 12,044 $ 14,592 $ 6,980
ADD
Net earnings (loss) for the year 5,814 9,924 (15,294)
----------------------------------------------------------------------------------------------
17,858 24,516 (8,314)
----------------------------------------------------------------------------------------------
DEDUCT
Dividends
Class A shares 2,926 17,216 -
Class C share (note 3) 340 - -
Class F shares - 320 -
----------------------------------------------------------------------------------------------
3,266 17,536 -
----------------------------------------------------------------------------------------------
BALANCE - END OF YEAR $ 14,592 $ 6,980 $ (8,314)
==============================================================================================
DIVIDENDS PER SHARE
Class A shares $ 0.08 $ 0.45 $ -
Class C share $ 340 $ - $ -
Class F shares $ - $ 0.45 $ -
Contributed Surplus
Years Ended August 31, 1999 2000 2001
----------------------------------------------------------------------------------------------
BALANCE - BEGINNING OF YEAR $ - $ - $ -
ADD
Premium on resale of share capital - - 1,457
----------------------------------------------------------------------------------------------
BALANCE - END OF YEAR $ - $ - $ 1,457
==============================================================================================
EXFO o 2001 Annual Report o 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
The accompanying notes are integral part of these consolidated financial
statements.
Years Ended August 31, 1999 2000 2001
----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the year $ 5,814 $ 9,924 $ (15,294)
Add (deduct) items not affecting cash
and cash equivalents
Amortization of discount on short-term investments - (807) (594)
Amortization of property, plant and equipment 857 1,451 3,559
Amortization of intangible assets 41 47 9,876
Foreign exchange gains on disposal
of short-term investments - - (3,437)
Non-recurring expenses - - 1,083
Future income taxes (42) (33) (1,779)
Amortization of goodwill - 297 31,076
Change in non-cash operating working capital items
Accounts receivable (3,875) (10,476) 447
Income taxes receivable (381) 2,149 (2,291)
Inventories (1,259) (10,732) (20,308)
Prepaid expenses (205) (519) (67)
Accounts payable and accrued liabilities 1,965 3,917 (3,736)
Income taxes payable (115) - 4,528
Deferred revenue 327 215 100
Deferred grants 533 567 (57)
----------------------------------------------------------------------------------------------
3,660 (4,000) 3,106
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances (136) (357) (2,046)
Repayment of mandatorily redeemable preferred shares - - (354)
Repayment of loan from a company under common control - (1,349) -
Repayment of long-term debt (20) (812) (3,355)
Issuance of share capital 86 209,690 -
Resale of share capital - - 1,490
Redemption of share capital - - (33)
Share issue expenses - (16,743) (331)
Dividends paid (3,215) (17,587) -
----------------------------------------------------------------------------------------------
(3,285) 172,842 (4,629)
----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (33) (519,645) (772,808)
Proceeds from disposal of short-term investments - 359,886 866,158
Additions to property, plant and equipment
and intangible assets (1,181) (7,180) (15,911)
Business combinations (note 3) - (2,108) (68,255)
----------------------------------------------------------------------------------------------
(1,214) (169,047) 9,184
----------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (839) (205) 7,661
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS - 511 (661)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,262 423 729
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 423 $ 729 $ 7,729
==============================================================================================
SUPPLEMENTARY INFORMATION
Interest paid $ (148) $ (480) $ (377)
Interest received $ 98 $ 949 $ 6,046
Income taxes paid $ (2,801) $ (3,761) $ (8,171)
EXFO o 2001 Annual Report o 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
1 o 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 automation solutions for the telecommunications industry to measure the
physical characteristics of optical fiber and related hardware and to automate
manufacturing processes. The company derives substantially all of its revenue
from customers located in the United States, Canada, Europe, Asia and South
America. The company's customers consist primarily of telecommunications
carriers, optical component and system manufacturers, as well as research and
development laboratories.
2 o 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 19. 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 revenues and expenses during the reporting year. Actual
results could differ from those estimates.
Consolidation
These consolidated financial statements include the accounts of the company and
its domestic and international subsidiaries. Intercompany accounts and
transactions have been eliminated.
Reporting currency
The consolidated financial statements of the company were presented in Canadian
dollars up to August 31, 1999. Effective September 1, 1999, the US dollar has
been adopted as the reporting currency. The functional currency continues to be
the Canadian dollar. The financial statements for the year ended August 31, 1999
are presented in US dollars in accordance with a translation of convenience
method using the representative exchange rate as at August 31, 1999 of US$1.00 =
Cdn$1.4958. The translated amount for monetary and non-monetary items as at
August 31, 1999 became the historical basis for those items in subsequent years.
The financial statements as at August 31, 2000 and 2001 and for the years 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 revenues and expenses are translated at the average
exchange rate for the year. All gains and losses resulting from the translation
of the financial statements into the reporting currency are included in the
cumulative translation adjustment in shareholders' equity.
EXFO o 2001 Annual Report o 39
Foreign currency translation
Foreign currency transactions
Transactions denominated in currencies other than the functional currency are
translated into the functional currency as follows: monetary assets and
liabilities are translated at the exchange rate in effect at the balance sheet
date and revenues and expenses are translated at the average rate for the year.
Non-monetary assets and liabilities are translated at historical rates. Gains
and losses arising from such translation are reflected in the statements of
earnings.
Foreign subsidiaries
The financial statements of integrated foreign operations 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. Revenues and expenses are remeasured at the average rate for
the year. Gains and losses resulting from remeasurement are reflected in the
statements of earnings.
The financial statements of self-sustaining operations with a functional
currency other than the US dollar are remeasured into the functional currency
using the current rate method. Under this method, assets and liabilities are
remeasured at the exchange rates in effect at the balance sheet date and
revenues and expenses are remeasured at the average rate for the year. Gains and
losses resulting from remeasurement are reflected in the cumulative translation
adjustment in shareholders' equity.
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.
In 2000, the company entered into forward exchange contracts to sell Canadian
dollars in exchange for US dollars. These contracts, which were speculative in
nature, were carried on at fair value as at August 31, 2000. The unrealized loss
on these contracts as at August 31, 2000 has been included in earnings for that
year. As at August 31, 2001, the company does not hold such forward exchange
contracts.
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 is determined using the first-in,
first-out method. The cost of finished goods is determined using the average
cost method.
Property, plant and equipment and amortization
Property, plant and equipment are recorded at cost less related government
grants and research and development tax credits. Amortization is provided on a
straight-line basis over their estimated useful lives as follows:
Term
Buildings 15 and 25 years
Equipment 2 to 7 years
Leasehold improvements Remaining lease term including lease renewal option
EXFO o 2001 Annual Report o 40
Notes to Consolidated Financial Statements
The carrying value of property, plant and equipment is evaluated for impairment
whenever significant events occur which may indicate an impairment in value,
based upon a comparison of the carrying value to the net recoverable amount.
Intangible assets, goodwill and amortization
Intangible assets include the cost of acquired in process research and
development, core technology, work force and trademark, net of accumulated
amortization. Intangible assets are amortized on a straight-line basis over
their estimated useful lives ranging from five to eight months for in process
research and development, of five years for core technology, of one year for
work force and of two years for trademark.
Goodwill, which represents the excess of the purchase price of acquired
businesses over the estimated fair value of net identifiable assets acquired, is
amortized on a straight-line basis over the estimated useful life of five years.
Intangible assets and goodwill are reviewed for impairment when events or
circumstances indicate that costs may not be recoverable. Impairment exists when
the carrying value of the asset is greater than the pre-tax undiscounted future
cash flows expected to be provided by the asset. The amount of impairment loss,
if any, is the excess of the carrying value over the estimated pre-tax
undiscounted future cash flows. Intangible assets and goodwill are written down
for any permanent impairment in value of the unamortized portion. As at August
31, 2001, there are no events or circumstances indicating that the carrying
value may not be recoverable.
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 years of the support arrangement, except where
provided within one year of delivery, costs of providing this support are
insignificant and accrued at the time of delivery and no upgrades of software
are provided.
Advertising costs
Advertising costs are expensed as incurred.
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.
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, net of
related tax credits and government grants. Development expenses which meet
generally accepted criteria for deferral are capitalized, net of related tax
credits and government grants, and amortized against earnings over the estimated
period of benefit.
As at August 31, 2001, the company had not deferred any development costs.
EXFO o 2001 Annual Report o 41
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 years in which the
differences are expected to reverse.
The company establishes a valuation allowance against future income tax assets
if, based on available information, it is more likely than not that some or all
of the future income tax assets will not be realized.
Earnings (loss) per share
During the year, the company adopted the Canadian Institute of Chartered
Accountants (CICA) section 3500 "Earnings per Share", which requires the use of
the treasury stock method in calculating diluted earnings per share and to apply
the concept of contingently issuable shares. This standard has been applied
retroactively and did not result in any material change to previously reported
basic and diluted earnings per share.
Basic earnings (loss) and dividends per share are determined using the weighted
average number of common shares outstanding during the year, as adjusted for the
effects of reorganizations of share capital in prior years.
Diluted earnings (loss) per share are determined using the weighted average
number of common shares outstanding during the year, plus the effects of
dilutive potential common shares outstanding during the year. This method
requires that diluted earnings (loss) 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 year or the date of issuance, as the case may
be, and that the funds obtained thereby be used to purchase common shares of the
company at the average fair value of the common shares during the year.
Stock-based compensation plans
The company maintains stock-based compensation plans, which are described in
note 12. Under accounting principles generally accepted in Canada, no
compensation cost is recognized when stocks, stock options or stock awards are
issued to plan participants. Any consideration received from plan participants
upon the purchase of stock or the exercise of stock options or stock awards is
credited to share capital. Cash amounts paid upon the exercise of stock
appreciation rights are charged to earnings.
New accounting standards
On August 1, 2001, the CICA issued section 1581 "Business combinations", which
supersedes section 1580, and issued section 3062 "Goodwill and Other Intangible
Assets". Section 1581 requires business combinations initiated after June 30,
2001 or business combinations accounted for by the purchase method with a date
of acquisition after June 30, 2001 to be accounted for using the purchase method
of accounting. This section also broadens criteria for recording intangible
assets separately from goodwill. Upon the adoption of section 3062, recorded
goodwill and intangible assets will be evaluated against those new criteria and
may result in certain intangible assets being reclassified into goodwill or,
alternatively, amounts initially recorded as goodwill being separately
identified and recognized apart from goodwill as intangible assets. Section 3062
requires the use of a non-amortization approach to account for purchased
goodwill and indefinite-lived intangibles. Under non-amortization approach,
goodwill and indefinite-lived intangibles will not be amortized, but instead
they will be reviewed for impairment and written down and charged to earnings
only in the periods in which the recorded value of goodwill and indefinite-lived
intangibles exceeds their fair value. This section will be adopted on September
1, 2002.
The impact of adopting section 3062 will allow the company to use the
non-amortization approach for goodwill and will reduce annual goodwill
amortization by approximately $50,000,000. Moreover, the company will implement
a new goodwill impairment methodology and any potential initial impairment
losses on goodwill determined by this methodology will be charged to deficit.
Any subsequent impairment losses on goodwill will be charged to earnings in the
period in which it is incurred.
EXFO o 2001 Annual Report o 42
Notes to Consolidated Financial Statements
3 o BUSINESS COMBINATIONS
Business combinations during 2001
Burleigh Instruments, Inc.
On December 20, 2000, the company acquired a 100% interest in Burleigh
Instruments, Inc. ("Burleigh"), a U.S. company which manufactures precision
scientific instruments used in basic and applied research, engineering and
production test applications in a variety of fields, in exchange for a total
consideration valued at US$189,270,000, including acquisition-related costs of
US$2,461,000.
The consideration paid consisted of US$42,461,000 in cash and the issuance of
6,488,816 subordinate voting shares for an amount of US$146,809,000.
Furthermore, as part of this acquisition, the company established a restricted
stock award plan for employees of Burleigh (note 12). This plan provides that in
the event of an employee's departure, shares to be issued to this employee under
the plan will be issued to Burleigh's former shareholders. In such
circumstances, this issuance of shares will be recorded as additional goodwill.
EFOS Inc. (renamed EXFO Photonic Solutions Inc.)
On March 15, 2001, the company acquired a 100% interest in EXFO Photonic
Solutions Inc. ("EXFO Photonic"), a Canadian company specializing in precision
light-based adhesive spot curing technologies as well as curing process control
for the global optical component manufacturing market. This acquisition was
settled for a total consideration valued at US$110,146,000, including
acquisition-related costs of US$194,000. The consideration paid consisted of
US$25,194,000 in cash and the issuance of 3,700,000 subordinate voting shares
for an amount of US$84,952,000.
These acquisitions have been accounted for using the purchase method and
consequently, the net earnings of Burleigh and EXFO Photonic have been included
in the consolidated statement of earnings of the company from the date of
acquisition of these subsidiaries, being December 20, 2000 for Burleigh and
March 15, 2001 for EXFO Photonic.
The purchase price, including acquisition-related costs, has been allocated
based on the estimated fair value of net assets at the dates of acquisition as
follows:
Burleigh EXFO Photonic
------------------------------------------------------------------------------------
Assets acquired
Current assets $ 7,092 $ 9,195
Property, plant and equipment 4,457 1,054
In process research and development 1,800 972
Core technology 24,000 25,324
Work force 1,250 907
Trademark - 421
Liabilities assumed (9,068) (7,169)
Future income taxes (8,342) (983)
-----------------------------------------------------------------------------------
Net identifiable assets acquired 21,189 29,721
Goodwill 168,081 80,425
-----------------------------------------------------------------------------------
Purchase price 189,270 110,146
Less: Subordinate voting shares issued 146,809 84,952
-----------------------------------------------------------------------------------
Cash paid $ 42,461 $ 25,194
===================================================================================
The fair value allocated to intangible assets acquired from Burleigh and EXFO
Photonic was based upon independent valuations performed in conjunction with
these acquisitions.
The existing technology that has reached technological feasibility was
classified as core technology.
EXFO o 2001 Annual Report o 43
Acquired in process research and development represents the existing technology
that has not reached technological feasibility and has no future alternative
use.
The fair value of subordinate voting shares issued as part of these business
combinations was determined based on the market price of the shares over a
reasonable period of time before and after the dates of acquisition of the
subsidiaries.
Vanguard Technical Solutions, Inc.
On March 16, 2001, the company, through one of its subsidiaries, Burleigh
Automation Inc., acquired substantially all the assets of Vanguard Technical
Solutions, Inc., a U.S. company specializing in the design and manufacturing of
ultra-precision assembly equipment for sensitive process and critical assembly
challenges on the production floor. This acquisition, which was settled for a
total cash consideration of US$600,000 allocated to property and equipment, has
been accounted for using the purchase method.
Business combinations during 2000
Nortech Fibronic Inc.
On February 4, 2000, the company acquired a 100% interest in Nortech Fibronic
Inc. ("Nortech"), a Canadian company specializing in fiber-optic testing and
temperature sensing, in exchange for total consideration valued at US$2,799,000.
The consideration paid consisted of US$2,108,000 in cash, the issuance of
800,000 Class G shares which were mandatorily redeemable, for cash or
subordinate voting shares at the option of the company, for an amount of
US$553,000 (note 9), and a non-interest-bearing debenture in the amount of
US$138,000 (note 10).
This acquisition has been accounted for using the purchase method. The estimated
fair value of assets and liabilities acquired amounted to US$2,488,000 and
US$2,231,000 respectively, resulting in goodwill of US$2,542,000 related to the
telecommunication core business.
The net earnings of Nortech have been included in the consolidated statement of
earnings of the company from the date of acquisition, being February 4, 2000.
The mandatorily redeemable preferred shares were settled during the year for
US$354,000, resulting in a purchase price adjustment of US$189,000 (note 9),
which has been applied against goodwill.
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 US$16,000. The carrying value
of the net assets of GAP Optique S.A. was US$19,000 as at December 31, 1999.
Since the exchange occurred 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 years have been restated as if the companies had always been
combined.
Business combination during 1999
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
US$340,000. This holding company had two wholly-owned subsidiaries, EXFO America
Inc. and EXFO Europe S.A.R.L., which market the company's products 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 these 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.
EXFO o 2001 Annual Report o 44
Notes to Consolidated Financial Statements
4 o INVENTORIES
As at August 31, 2000 2001
----------------------------------------------------------------------------------------------
Raw materials $ 12,057 $ 29,891
Work in progress 2,910 3,507
Finished goods 3,901 10,947
----------------------------------------------------------------------------------------------
$ 18,868 $ 44,345
==============================================================================================
5 o PROPERTY, PLANT AND EQUIPMENT
Accumulated
As at August 31, 2000 Cost 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
==============================================================================================
Accumulated
As at August 31, 2001 Cost amortization Net
----------------------------------------------------------------------------------------------
Land $ 2,735 $ - $ 2,735
Buildings 9,077 326 8,751
Equipment 23,906 9,286 14,620
Leasehold improvements 2,390 1,356 1,034
----------------------------------------------------------------------------------------------
$ 38,108 $ 10,968 $ 27,140
==============================================================================================
6 o INTANGIBLE ASSETS AND GOODWILL
As at August 31, 2000 As at August 31, 2001
-----------------------------------------------------------------------------------------------
Accumulated
Net Cost amortization Net
-----------------------------------------------------------------------------------------------
In process research and development $ - $ 2,769 $ 2,769 $ -
Core technology - 49,483 5,678 43,805
Work force - 2,155 1,281 874
Other assets 68 637 246 391
-----------------------------------------------------------------------------------------------
68 55,044 9,974 45,070
Goodwill 2,252 250,497 31,325 219,172
-----------------------------------------------------------------------------------------------
$ 2,320 $ 305,541 $ 41,299 $ 264,242
===============================================================================================
7 o CREDIT FACILITIES
The company has available credit facilities under lines of credit which provide
for advances of up to Cdn$13,000,000 (US$8,400,000) and up to US$3,000,000.
These facilities, which are renewable annually, bear interest at prime rate
(prime rate in 2000). Accounts receivable, inventories and all tangible and
intangible assets of the company have been pledged as security against these
facilities. Amounts of Cdn$15,000 (US$10,000) and nil were drawn against these
facilities as at August 31, 2000 and 2001, respectively.
EXFO o 2001 Annual Report o 45
8 o ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at August 31, 2000 2001
----------------------------------------------------------------------------------------------
Trade $ 6,847 $ 7,732
Salaries and social benefits 1,698 3,917
Commissions 966 1,307
Non-recurring expenses (note 14) - 1,230
Warranty 392 901
Other 450 1,093
----------------------------------------------------------------------------------------------
$ 10,353 $ 16,180
==============================================================================================
9 o 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, redeemed on 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 articles of amendment 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 tables summarize the preferred share activity since August 31,
1998:
Class C share Class E shares
-----------------------------------------------------------------------------------------------
Total
Number Amount Number Amount amount
-----------------------------------------------------------------------------------------------
Balance as at August 31, 1998 - $ - 19,000,000 $ - $ -
Business combination (note 3) 1 340 - - 340
Redemption (1) (340) - - (340)
Conversion of Class E shares
into Class A shares (note 12) - - (19,000,000) - -
----------------------------------------------------------------------------------------------
Balance as at August 31, 1999,
2000 and 2001 - $ - - $ - $ -
==============================================================================================
Class G shares Preferred shares Series 1
--------------------------------------------------------------------------------------------------------
Total
Number Amount Number Amount amount
--------------------------------------------------------------------------------------------------------
Balance as at August 31, 1998 and 1999 - $ - - $ - $ -
Business combination (note 3) 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
Redemption - - (800,000) (354) (354)
Purchase price adjustment (note 3) - - - (189) (189)
--------------------------------------------------------------------------------------------------------
Balance as at August 31, 2001 - $ - - $ - $ -
========================================================================================================
EXFO o 2001 Annual Report o 46
Notes to Consolidated Financial Statements
10 o LONG-TERM DEBT
As at August 31, 2000 2001
------------------------------------------------------------------------------------------------------------
Loans collateralized by equipment, bearing interest at 9.6%, repayable in monthly
instalments of $13,000 including principal and interest, maturing in 2008 $ - $ 754
Unsecured non-interest-bearing debenture, repaid during the year (note 3) 136 -
Unsecured non-interest-bearing loan repayable through July 2002 32 16
------------------------------------------------------------------------------------------------------------
168 770
Less: Current portion 152 106
------------------------------------------------------------------------------------------------------------
$ 16 $ 664
============================================================================================================
As at August 31, 2001, minimum principal repayments required in each of the next
five years are $106,000 in 2002, $100,000 in 2003, $110,000 in 2004, $122,000 in
2005 and $134,000 in 2006.
11 o COMMITMENTS
The company has entered into operating leases for its premises, which expire at
various dates through to 2007. Minimum rentals payable under these operating
leases amount to $3,170,000 as at August 31, 2001.
For the years ended August 31, 1999, 2000 and 2001, rental expense amounted to
$344,000, $579,000 and $1,580,000, respectively.
12 o 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 9) 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 articles of amendment 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.
EXFO o 2001 Annual Report o 47
The following tables summarize the share capital activity since August 31, 1998:
Class A shares Class F shares
--------------------------------------------------------------------------------------------------------------
Total
Number Amount Number Amount amount
--------------------------------------------------------------------------------------------------------------
Balance as at August 31, 1998 19,000,000 $ 1 - $ - $ 1
Conversion of Class E shares into
Class A shares (note 9) 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 and 2001 - $ - - $ - $ -
==============================================================================================================
Multiple voting shares Subordinate voting shares
--------------------------------------------------------------------------------------------------------------
Total
Number Amount Number Amount amount
--------------------------------------------------------------------------------------------------------------
Balance as at August 31, 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
Business combinations (note 3) - - 10,188,816 231,761 231,761
Conversion of multiple voting shares
into subordinate voting shares (100,000) - 100,000 - -
Redemption - - (43,999) (33) (33)
Resale - - 43,999 33 33
Share issue expenses, net of related
income taxes of $106,000 - - - (225) (225)
-------------------------------------------------------------------------------------------------------------
Balance as at August 31, 2001 37,900,000 $ 1 19,046,080 $ 429,994 $ 429,995
=============================================================================================================
Stock purchase plan
The company's stock purchase plan terminated at the time of the initial public
offering, being June 29, 2000. 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 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
from the date of acquisition. Prior to its initial public offering, the company
issued 707,264 Class F shares in exchange for a weighted average cash
consideration of Cdn$0.98 (US$0.68) per share. As at August 31, 2001, the
company has guaranteed the repayment of third party loans totalling Cdn$218,000
(US$141,000) obtained by certain employees with respect to the purchase of Class
F shares.
Stock option plan
In May, 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.
EXFO o 2001 Annual Report o 48
Notes to Consolidated Financial Statements
The maximum number of subordinate voting shares issuable under the plan cannot
exceed 4,470,961 shares. The maximum number of subordinate voting shares that
may be granted to any individual cannot exceed 5% of the number of outstanding
subordinate voting shares. The exercise price is the market price of the common
shares on the date of grant. Options granted under the plan generally expire ten
years from the date of grant. Options granted under the plan generally vest over
a four-year period, with 25% vesting on an annual basis commencing on the first
anniversary of the date of grant. Up to October 10, 2000, the number of options
which ultimately would become exercisable in any given year, and in aggregate,
was dependent on the degree to which the company's financial performance
objectives were met. Nevertheless, on October 10, 2000, the Board of Directors
of the company amended the vesting terms for options granted pursuant to the
option plan to remove the financial performance criterion. Accordingly, options
granted vest over the four-year period. The Board of Directors may accelerate
the vesting of any or all outstanding options upon the occurrence of a change of
control.
The following table summarizes the stock option activity since May 2000:
Years ended August 31, 2000 2001
----------------------------------------------------------------------------------------------
Weighted Weighted
average average
Number exercise price Number exercise price
----------------------------------------------------------------------------------------------
Outstanding - Beginning of year - $ - 609,734 $ 26
Granted 609,734 26 2,153,352 29
Forfeited - - (348,855) (29)
----------------------------------------------------------------------------------------------
Outstanding - End of year 609,734 $ 26 2,414,231 $ 28
==============================================================================================
Exercisable - End of year - $ - 510,244 $ 26
==============================================================================================
The following table summarizes information about stock options as at August 31,
2001:
Options outstanding Options exercisable
as at August 31, 2001 as at August 31, 2001
-----------------------------------------------------------------------------------------------------
Weighted Weighted
average average
remaining remaining
Exercise price Number contractual life Number contractual life
-----------------------------------------------------------------------------------------------------
$19.19 to $29.99 1,965,551 9.3 years 510,244 8.8 years
$30.00 to $39.99 72,500 9.1 years - -
$40.00 to $49.99 282,550 9 years - -
$50.00 to $56.75 93,630 9 years - -
-----------------------------------------------------------------------------------------------------
2,414,231 9.2 years 510,244 8.8 years
=====================================================================================================
Restricted stock award plan
On December 20, 2000, the company established a restricted stock award plan for
employees of Burleigh. A total of 359,781 stock awards entitle employees to
receive an equal aggregate number of subordinate voting shares at a purchase
price of nil. Stock awards granted under the plan vest over a four-year period,
with 25% vesting on an annual basis commencing on the first anniversary of the
date of grant. The plan will expire on December 20, 2004.
As at August 31, 2001, none of the 359,781 outstanding stock awards were
exercisable.
Stock appreciation right plan
On August 4, 2001, the company established a stock appreciation right plan for
certain of its employees. Under that plan, eligible employees are entitled to
receive a cash amount equivalent to the difference between the market price of
the common shares on the date of exercise and the exercise price determined on
the date of grant.
Stock appreciation rights granted under the plan generally expire ten years from
the date of grant.
Stock appreciation rights generally vest over a four-year period, with 25%
vesting on an annual basis commencing on the first anniversary of the date of
grant.
EXFO o 2001 Annual Report o 49
During the year, the company granted 22,400 stock appreciation rights with a
weighted average exercise price of US$29.72 and none of them were exercisable as
at August 31, 2001.
Considering the market price of the common shares of US$12.09 as at August 31,
2001, no compensation expense has been recorded in 2001 under that plan.
13 o OTHER DISCLOSURES
Net research and development expenses
Net research and development expenses comprise the following:
Years Ended August 31, 1999 2000 2001
------------------------------------------------------------------------------------
Gross research and development expenses $ 6,390 $ 9,374 $ 17,601
Research and development tax credits (1,935) (2,436) (3,369)
Government grants (140) (536) (631)
------------------------------------------------------------------------------------
$ 4,315 $ 6,402 $ 13,601
====================================================================================
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 Cdn$600,000 (US$388,000) 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 Cdn$2,220,000 (US$1,434,000) 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 maintains 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, 2001, the company recognized a total of
Cdn$2,820,000 (US$1,822,000) under this program, of which Cdn$1,505,000
(US$972,000) has been credited to earnings with the balance of Cdn$1,315,000
(US$850,000) having been included in deferred grants in the balance sheet.
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 Cdn$3,756,000 (US$2,427,000) 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, 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 Cdn$2,552,000
(US$1,649,000) under this program, of which Cdn$2,317,000 (US$1,497,000) has
been credited to earnings with the balance of Cdn$235,000 (US$152,000) having
been included in deferred grants in the balance sheet.
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 eligible 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%. Since 2000, the company has
recognized a total of Cdn$3,387,000 (US$2,188,000) under this program which has
been credited to earnings.
EXFO o 2001 Annual Report o 50
Notes to Consolidated Financial Statements
The reduction in the company's work force described in note 14 had no effect on
amounts recognized under these programs.
Following is a summary of the classification of these and certain other grants
and tax credits (government grants) in the statements of earnings.
Interest income for the years ended August 31, 1999, 2000 and 2001 is net of
related government grants of $126,000, $196,000 and $15,000, respectively.
Cost of sales for the years ended August 31, 1999, 2000 and 2001 is net of
government grants of $33,000, $915,000 and $1,742,000, respectively.
Selling and administrative expenses for the years ended August 31, 1999, 2000
and 2001 are net of government grants of $21,000, $386,000 and $260,000,
respectively.
Research and development expenses for the years ended August 31, 1999, 2000 and
2001 are net of government grants of $140,000, $536,000 and $631,000,
respectively.
Defined contribution plans
The company maintains separate defined contribution plans for certain eligible
employees. These plans, which are accounted for on an accrual basis, are
summarized as follows:
o Deferred profit sharing plan
The company maintains a plan for eligible Canadian resident employees, that
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. Contributions to
this plan during the years ended August 31, 1999, 2000 and 2001 amounted to
Cdn$156,000 (US$104,000), Cdn$202,000 (US$137,000) and Cdn$642,000
(US$419,000), respectively.
o 401K plans
The company maintains 401K plans for eligible U.S. resident employees. Under
these plans, 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,
1999, 2000 and 2001, the company recorded contributions totalling $21,000,
$23,000 and $285,000, respectively.
14 o NON-RECURRING EXPENSES
During 2001, the company implemented a structured plan to reduce costs and
increase efficiency.
Under that plan, the company recorded non-recurring expenses of $3,288,000,
including $844,000 in severance expenses for the 245 employees who were
terminated, $1,476,000 for unused assets and $968,000 for future payments on
exit leased facilities. These expenses are recorded as non-recurring expenses in
the statement of earnings. As at August 31, 2001, the accrued liabilities
related to this structured plan are $1,230,000, including $372,000 for severance
expenses and $858,000 for future payments on exit leased facilities.
EXFO o 2001 Annual Report o 51
15 o INCOME TAXES
The reconciliation of the income tax provision calculated using the combined
Canadian federal and provincial statutory income tax rate to the provision for
income taxes per the financial statements is as follows:
Years Ended August 31, 1999 2000 2001
------------------------------------------------------------------------------------------------------------
Income taxes at combined Canadian federal and provincial
statutory tax rate (38% in 1999 and 2000 and 37% in 2001) $ 3,156 $ 5,897 $ 8,855
Increase (decrease) due to:
Manufacturing and processing deduction (519) (645) (1,201)
Non-taxable income - - (144)
Non-deductible expenses 40 57 274
Higher rate on interest income - 133 480
Lower rate on foreign exchange gain - - (283)
Difference between combined Canadian federal and provincial
statutory tax rate and foreign subsidiaries statutory tax rates - - 60
Effect of consolidation of subsidiaries - - (276)
Tax deductions - - (136)
Other (185) (144) 159
Change in valuation allowance - - 362
------------------------------------------------------------------------------------------------------------
$ 2,492 $ 5,298 $ 8,150
============================================================================================================
Income taxes consist of the following:
Current $ 2,534 $ 5,331 $ 9,929
Future (42) (33) (1,779)
------------------------------------------------------------------------------------------------------------
$ 2,492 $ 5,298 $ 8,150
============================================================================================================
Significant components of the company's future tax assets and liabilities are as
follows:
As at August 31, 2000 2001
------------------------------------------------------------------------------------------------------------
Future tax assets
Property, plant and equipment and intangible assets $ - $ 107
Provisions and accruals 266 1,208
Government grants - 247
Deferred revenue 175 198
Share issue expenses 4,358 3,128
Non-recurring expenses - 930
Research and development expenses 94 86
Losses carried forward 105 272
Other (6) 39
------------------------------------------------------------------------------------------------------------
4,992 6,215
Valuation allowance - (362)
------------------------------------------------------------------------------------------------------------
$ 4,992 $ 5,853
============================================================================================================
Future tax liabilities
Property, plant and equipment and intangible assets $ (419) $ (8,640)
Research and development tax credits (474) (680)
Government grants (15) (310)
------------------------------------------------------------------------------------------------------------
(908) (9,630)
------------------------------------------------------------------------------------------------------------
Future tax assets (liabilities), net $ 4,084 $ (3,777)
============================================================================================================
As at August 31, 2001, a company's subsidiary has accumulated losses for income
tax purposes of approximately $902,000 and research and development expenses of
approximately $961,000 at the provincial level for which a valuation allowance
of $362,000 has been established. These losses can be carried forward against
the subsidiary's future years' taxable income until 2008. These accumulated
research and development expenses can be carried forward indefinitely against
the subsidiary's future years' provincial taxable income.
EXFO o 2001 Annual Report o 52
Notes to Consolidated Financial Statements
16 o SEGMENT INFORMATION
Management has organized the company under one operating segment, that being the
development, manufacture and marketing of fiber-optic test, measurement and
automation solutions.
Sales to external customers by geographic region are detailed as follows:
Years Ended August 31, 1999 2000 2001
----------------------------------------------------------------------------------------------
United States $ 20,755 $ 36,139 $ 72,604
Canada 2,973 8,006 12,531
Europe 8,721 14,503 30,568
Asia 3,199 6,486 19,059
South America 2,271 2,221 5,838
Other 4,247 4,284 5,413
----------------------------------------------------------------------------------------------
$ 42,166 $ 71,639 $ 146,013
==============================================================================================
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.
Long-lived assets by geographic region are detailed as follows:
As at August 31, 2000 2001
----------------------------------------------------------------------------------------------
United States $ - $ 171,450
Canada 11,014 119,932
----------------------------------------------------------------------------------------------
$ 11,014 $ 291,382
==============================================================================================
Long-lived assets consist of property, plant and equipment, intangible assets
and goodwill.
17 o EARNINGS PER SHARE
The following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding used in the diluted earnings per share calculations:
Years Ended August 31, 1999 2000 2001
---------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding (000's) 38,001 39,951 53,014
Conversion of preferred shares Series 1 - 26 -
Exercise of stock options - 109 -
---------------------------------------------------------------------------------------------------------
Diluted weighted average number of shares outstanding (000's) 38,001 40,086 53,014
=========================================================================================================
Unaudited supplementary per share information
The following supplementary per share information is calculated from net
earnings before the amortization of goodwill of $31,076,000 ($297,000 in 2000
and nil in 1999), the after-tax effect of amortization of intangible assets of
$6,513,000 ($31,000 in 2000 and $28,700 in 1999) and the after-tax effect of
non-recurring expenses of $2,168,000 (nil in 2000 and 1999). The unaudited
supplementary information may not be comparable to similarly titled measures
reported by other companies because it is non-GAAP information.
Years Ended August 31, 1999 2000 2001
----------------------------------------------------------------------------------------------------------
Net earnings before amortization of goodwill and after-tax
effect of amortization of intangible assets
and non-recurring expenses $ 5,843 $ 10,252 $ 24,463
Basic and diluted per share net earnings before amortization
of goodwill and after-tax effect of amortization of intangible
assets and non-recurring expenses $ 0.14 $ 0.26 $ 0.46
EXFO o 2001 Annual Report o 53
18 o FINANCIAL INSTRUMENTS
Short-term investments
Short-term investments consist of the following:
As at August 31, 2000 2001
---------------------------------------------------------------------------------------------------------
Mutual fund denominated in Canadian dollars $ - $ 14,861
Commercial paper denominated in Canadian dollars, bearing interest at annual
rates of 5.77% to 5.98% in 2000 and 4.35% to 4.60% in 2001, maturing on
different dates between November 2000 and February 2001 in 2000
and September 2001 and November 2001 in 2001 41,872 52,000
Commercial paper denominated in US dollars, bearing interest at annual rates
of 6.51% to 6.79%, matured in 2001 120,787 -
---------------------------------------------------------------------------------------------------------
$ 162,659 $ 66,861
=========================================================================================================
Fair value
Cash and cash equivalents, accounts receivable, bank advances, accounts payable
and accrued liabilities 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 $162,719,000 and $66,861,000 as at August 31, 2000 and 2001,
respectively.
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 units of a low-risk mutual fund. 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, European, Asian and South American 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 ongoing credit reviews of all its customers and establishes an
allowance for doubtful accounts receivable when accounts are determined to be
uncollectible. Allowance for doubtful accounts amounted to $149,000 and $893,000
as at August 31, 2000 and 2001, respectively.
Interest rate risk
As at August 31, 2001, 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
Long-term debt As described in note 10
EXFO o 2001 Annual Report o 54
Notes to Consolidated Financial Statements
Forward exchange contracts
The company is exposed to currency risks as a result of its export sales of
products manufactured in Canada, substantially all of which are denominated in
US dollars. These risks are partially hedged by forward exchange contracts and
certain operating expenses. As at August 31, 2000 and 2001, the company held
contracts to sell US dollars at various forward rates, which are summarized as
follows:
Weighted average
Contractual amounts contractual forward rates
-------------------------------------------------------------------------------------
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, 2001
September 2001 to August 2002 $ 15,200 1.4969
September 2002 to February 2003 1,800 1.5184
As at August 31, 2000 and 2001, these contracts resulted in deferred unrealized
losses of US$45,000 and US$533,000, respectively, which have not been reflected
in the statements of earnings.
As at August 31, 2000, the company held forward exchange contracts to buy US
dollars at various forward rates, which are summarized as follows:
Weighted average
Contractual amount contractual forward rate
------------------------------------------------------------------------------------
Maturing between November 2000
and January 2001 $ 40,500 1.4777
As at August 31, 2000, these contracts resulted in an unrealized loss of
US$24,000 which has been reflected in the statement of earnings for that year.
19 o 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 significant disclosures required under U.S. GAAP have also been
provided in the accompanying financial statements and notes. The following
summarizes the significant differences between Canadian and U.S. GAAP and other
required disclosures under U.S. GAAP not already disclosed in the accompanying
financial statements.
EXFO o 2001 Annual Report o 55
Reconciliation of net earnings (loss) to conform with U.S. GAAP
The following summary sets out the significant differences to the company's
reported net earnings (loss) and net earnings (loss) per share which would be
made to conform with U.S. GAAP:
Years Ended August 31, 1999 2000 2001
--------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year in accordance
with Canadian GAAP $ 5,814 $ 9,924 $ (15,294)
Non-cash stock-based compensation costs
related to stock option plan a) - (1,464) (954)
Non-cash stock-based compensation costs
related to stock purchase plan a) (10) (538) (477)
Non-cash stock-based compensation costs
related to restricted stock award plan a) - - (3,481)
Change in reporting currency b) (44) - -
Unrealized gains on forward exchange contracts c) 208 - 97
Future income taxes on forward exchange contracts c) (67) - 20
Future income taxes on acquired in process
research and development d) - - (936)
Amortization of goodwill d) - - (8,453)
--------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year in accordance
with U.S. GAAP 5,901 7,922 (29,478)
Other comprehensive income (loss)
Foreign currency translation adjustments b) 606 1,555 (9,888)
Unrealized holding gains on available-for-sale
securities, net of related future income taxes e) 36 37 -
Reclassification of holding gains on available-for-sale
securities included in net earnings (loss),
net of related future income taxes e) - (36) (37)
--------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 6,543 $ 9,478 $ (39,403)
========================================================================================================
Basic and diluted net earnings (loss) per share
in accordance with U.S. GAAP f) $ 0.15 $ 0.20 $ (0.56)
As a result of the aforementioned adjustments to net earnings (loss),
significant differences with respect to shareholders' equity under U.S. GAAP are
as follows:
Share capital
As at August 31, 1999 2000 2001
--------------------------------------------------------------------------------------------------------
Share capital in accordance with Canadian GAAP $ 87 $ 198,459 $ 429,995
Stock-based compensation costs related to stock
purchase plan a), g)
Current year 45 2,647 (150)
Cumulative effect of prior years - 45 2,692
Shares issued upon business combinations d) - - 65,584
--------------------------------------------------------------------------------------------------------
Share capital in accordance with U.S. GAAP $ 132 $ 201,151 $ 498,121
========================================================================================================
EXFO o 2001 Annual Report o 56
Notes to Consolidated Financial Statements
Deferred stock-based compensation costs
As at August 31, 1999 2000 2001
--------------------------------------------------------------------------------------------------------
Deferred stock-based compensation costs in
accordance with Canadian GAAP $ - $ - $ -
Stock-based compensation costs related to stock-
based compensation plans a), g)
Current year (45) (21,396) (8,145)
Cumulative effect of prior years - (35) (19,429)
Amortization for the year 10 2,002 4,912
Reduction of stock-based compensation costs - - 14,694
--------------------------------------------------------------------------------------------------------
Deferred stock-based compensation costs in
accordance with U.S. GAAP $ (35) $ (19,429) $ (7,968)
========================================================================================================
Other capital
As at August 31, 1999 2000 2001
--------------------------------------------------------------------------------------------------------
Other capital in accordance with Canadian GAAP $ - $ - $ -
Stock-based compensation costs related to stock-
based compensation plans a)
Current year - 18,749 8,145
Cumulative effect of prior years - - 18,749
Reduction of stock-based compensation costs - - (14,544)
--------------------------------------------------------------------------------------------------------
Other capital in accordance with U.S. GAAP $ - $ 18,749 $ 12,350
========================================================================================================
Retained earnings (deficit)
As at August 31, 1999 2000 2001
--------------------------------------------------------------------------------------------------------
Retained earnings (deficit) in accordance with
Canadian GAAP $ 14,592 $ 6,980 $ (8,314)
Stock-based compensation costs related to stock-
based compensation plans a)
Current year (10) (2,002) (4,912)
Cumulative effect of prior years - (10) (2,012)
Unrealized gains on forward exchange contracts,
net of related future income taxes c)
Current year - - 117
Future income taxes on acquired in process
research and development d)
Current year - - (936)
Amortization of goodwill d)
Current year - - (8,453)
Change in reporting currency b)
Current year
Net earnings (44) - -
Dividends 24 - -
Cumulative effect of prior years 1,036 1,016 1,016
--------------------------------------------------------------------------------------------------------
Retained earnings (deficit) in accordance
with U.S. GAAP $ 15,598 $ 5,984 $ (23,494)
========================================================================================================
EXFO o 2001 Annual Report o 57
Accumulated other comprehensive income (loss)
Years Ended August 31, 1999 2000 2001
--------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments b)
Balance - Beginning of year $ (1,622) $ (1,016) $ 539
Change during the year 606 1,555 (9,888)
--------------------------------------------------------------------------------------------------------
Balance - End of year (1,016) 539 (9,349)
--------------------------------------------------------------------------------------------------------
Unrealized holding gains on available-for-sale
securities, net of future income taxes e)
Balance - Beginning of year - 36 37
Unrealized gains arising during the year,
net of related future income taxes 36 37 -
Reclassification adjustment for amounts
included in net earnings (loss), net of
related future income taxes - (36) (37)
--------------------------------------------------------------------------------------------------------
Balance - End of year 36 37 -
--------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (980) $ 576 $ (9,349)
========================================================================================================
Balance sheets
The following table summarizes the significant differences in balance sheet
items between Canadian GAAP and U.S. GAAP:
As at August 31, 2000 As at August 31, 2001
---------------------------------------------------------------------------------------------------------
As reported U.S. GAAP As reported U.S. GAAP
Goodwill d)
Cost $ 2,549 $ 2,549 $ 250,497 $ 315,547
Accumulated amortization (297) (297) (31,125) (39,762)
---------------------------------------------------------------------------------------------------------
$ 2,252 $ 2,252 $ 219,172 $ 275,785
=========================================================================================================
Shareholders' equity
Share capital a), d), g) $ 198,459 $ 201,151 $ 429,995 $ 498,121
Contributed surplus - - 1,457 1,457
Cumulative
translation adjustment b) 1,555 - (8,333) -
Deferred stock-based
compensation costs a), g) - (19,429) - (7,968)
Other capital a) - 18,749 - 12,350
Retained earnings (deficit) a), b), c), d) 6,980 5,984 (8,314) (23,494)
Accumulated other
comprehensive income (loss) b), e) - 576 - (9,349)
---------------------------------------------------------------------------------------------------------
$ 206,994 $ 207,031 $ 414,805 $ 471,117
=========================================================================================================
Statements of cash flows
For the years ended August 31, 1999, 2000 and 2001, there are no significant
differences between the statements of cash flows under Canadian GAAP as compared
to U.S. GAAP.
Reconciliation items
a) 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").
EXFO o 2001 Annual Report o 58
Notes to Consolidated Financial Statements
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. This plan terminated at
the time of the Initial Public Offering on June 29, 2000.
During the years ended August 31, 1999 and 2000, the weighted average fair value
per share under the stock purchase plan amounted to $0.68 and $10.80,
respectively. The fair value per share since inception of the plan to June 29,
2000 ranged between $0.68 and $18.00.
Stock option plan
In accordance with APB 25, the company's stock option plan was considered to be
a variable plan until October 10, 2000. As a result of the amendment to the
stock option plan described in note 12, the performance criterion was removed
and the number of shares to be issued under the plan was fixed. Aggregate
compensation cost for the period from the date of grant to August 31, 2001
amounts to $2,418,000. Accordingly, the current year reflects a net reduction of
the compensation cost and deferred compensation cost previously recognized of
$467,000 and $14,544,000, respectively. Compensation cost under this plan is
measured as the difference between the fair value of the underlying stock at the
date of grant and the exercise price of the option. Compensation cost is
amortized to expense over the estimated vesting period up to a maximum of four
years.
Restricted stock award plan
Under APB 25, compensation cost related to the restricted stock award plan is
measured as the difference between the fair value of the underlying stock at the
date of grant and the exercise price which is nil. Compensation cost is
amortized to expense over the estimated vesting period up to a maximum of four
years, being the acquisition period.
Under Canadian GAAP, no compensation cost is recognized for these stock-based
compensation plans.
b) Change in reporting currency
As mentioned in note 2, on September 1, 1999, the company adopted the US 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 statement of earnings for the year ended August 31,
1999 was translated into US dollars using an exchange rate of US$1.00 =
Cdn$1.4958. Under U.S. GAAP, revenues and expenses would be translated at
exchange rates prevailing at the respective transaction dates. Average exchange
rate for the year ended August 31, 1999 was US$1.00 = Cdn$1.5068. The exchange
rate as at August 31, 1999 was US$1.00 = Cdn$1.4958.
c) Forward exchange contracts
On September 1, 2000, the company prospectively adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and its amendments (SFAS 138), which requires all
derivatives to be carried on the balance sheet at fair value. The forward
exchange contracts used by the company have not qualified for hedging accounting
treatment during the year ended August 31, 2001 and accordingly, changes in the
fair value of the derivatives have been charged to earnings during the year.
Prior to the adoption of SFAS 133, forward exchange contracts held by the
company were accounted for in accordance with SFAS 52 under U.S. GAAP.
Accordingly, certain of the forward exchange contracts held for hedging and
other purposes in 1998 and 1999, for which the underlying transactions were not
firmly committed, did not qualify for hedge accounting. Consequently, unrealized
gains or losses on these contracts at each balance sheet date were reflected in
earnings for the corresponding year.
EXFO o 2001 Annual Report o 59
Under Canadian GAAP, the company's forward exchange contracts held for the
purpose of hedging anticipated sales qualified for hedge accounting and any
unrealized gains or losses were deferred and recognized in the statement of
earnings upon settlement of the related transactions.
d) Business combinations
Under U.S. GAAP, the value of shares issued upon a business combination should
be determined based on the market price of the shares over a reasonable period
of time before and after the companies have reached an agreement on the purchase
price, the significant terms of the agreement are known and the proposed
transaction is announced.
Consequently, the measurement dates of the acquisitions of Burleigh and EXFO
Photonic occurred on December 14, 2000 and March 6, 2001, respectively, the
dates on which all significant terms of the agreements were known. The average
market price of the shares a few days before and after those dates was $31.09
and $25.84, respectively. Considering the number of shares issued upon those
acquisitions, the total consideration for U.S. GAAP purposes amounts to
$244,198,000 ($189,270,000 under Canadian GAAP) for Burleigh and $120,802,000
($110,146,000 under Canadian GAAP) for EXFO Photonic, thus increasing share
capital and goodwill under U.S. GAAP.
Furthermore, under U.S. GAAP, in process research and development acquired in a
business combination is written off at the time of acquisition and no future
income taxes are recognized on this asset in the purchase price allocation
process. Under Canadian GAAP, in process research and development acquired in a
business combination is capitalized and amortized over its estimated useful
life. Future income taxes are recognized on the acquisition date on that asset
in the purchase price allocation process. As at August 31, 2001, in process
research and development recorded under Canadian GAAP was fully amortized.
e) 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 (loss) 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.
f) Earnings (loss) per share
Under U.S. GAAP, the presentation of per share figures for earnings before
amortization of goodwill and of any other unaudited supplementary per share
non-GAAP information is not permitted. In addition, under U.S. GAAP,
amortization of goodwill would be included in the computation of earnings from
operations.
g) Share capital
Under Canadian GAAP, restricted shares reacquired from employees under the stock
purchase plan are treated as arm's length repurchases of shares whereas under
U.S. GAAP, the reacquisition of shares would be accounted for as a forfeiture by
the employee, resulting in any difference between the amount originally credited
to share capital and the remaining deferred compensation cost being credited to
compensation expense in the current period. The subsequent resale of the shares
would be treated as an issuance of shares for the proceeds received.
h) New accounting standards
On June 15, 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligation", which is effective for fiscal
years beginning on or after June 15, 2002. This standard requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The company has not yet assessed the impact of the adoption of this new
standard.
EXFO o 2001 Annual Report o 60
Notes to Consolidated Financial Statements
On July 20, 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 141 requires business combinations initiated after June 30, 2001 or
business combinations accounted for by the purchase method with a date of
acquisition after June 30, 2001 to be accounted for using the purchase method of
accounting. This section also broadens criteria for recording intangible assets
separately from goodwill. Upon the adoption of SFAS 142, recorded goodwill and
intangible assets will be evaluated against those new criteria and may result in
certain intangible assets being reclassified into goodwill or, alternatively,
amounts initially recorded as goodwill being separately identified and
recognized apart from goodwill as intangible assets. SFAS 142 requires the use
of a non-amortization approach to account for purchased goodwill and
indefinite-lived intangibles. Under non-amortization approach, goodwill and
indefinite-lived intangibles will not be amortized, but instead they will be
reviewed for impairment and written down and charged to earnings only in the
periods in which the recorded value of goodwill and indefinite-lived intangibles
exceeds their fair value. This section will be adopted on September 1, 2002.
The impact of adopting SFAS 142 will allow the company to use the
non-amortization approach for goodwill and will reduce annual goodwill
amortization by approximately $63,000,000. Moreover, the company will implement
a new goodwill impairment methodology and any potential initial impairment
losses on goodwill determined by this methodology will be charged to earnings.
Unaudited pro forma information on business combinations
Under U.S. GAAP, pro forma information must be provided as though the business
combinations had occurred at the beginning of the reported periods.
The following unaudited pro forma information reflects the results of operations
as if the 2001 acquisitions had been completed on September 1, 2000 and 1999,
the 2000 acquisitions had been completed on September 1, 1999 and 1998, and the
1999 acquisition had been completed on September 1, 1998.
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.
Years Ended August 31, 1999 2000 2001
------------------------------------------------------------------------------------
Sales $ 44,948 $ 107,262 $ 165,754
Net earnings (loss) $ 5,689 $ (71,143) $ (56,498)
Basic and diluted net earnings (loss) per share $ 0.14 $ (1.42) $ (0.99)
Accounting for stock-based compensation
Under U.S. GAAP, the company has elected to measure compensation cost related to
grants of stock options and stock awards 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 (loss), basic and diluted net earnings (loss) per share as if
the fair value based method of accounting had been applied.
The fair value of options or awards granted was estimated using the
Black-Scholes options pricing model with the following weighted average
assumptions:
Years Ended August 31, 2000 2001
-----------------------------------------------------------------------------------
Risk-free interest rate 6.04% 5.36%
Expected volatility 75% 75%
Dividend yield Nil NIL
Weighted average expected life 32 months 33 months
EXFO o 2001 Annual Report o 61
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options and awards which have no vesting restrictions,
and are fully transferable. In addition, option and award valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the company's employee stock options and stock awards
have characteristics significantly different from those of traded options and
awards, 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 and stock awards.
If the fair value based method had been used to account for stock-based
compensation costs related to stock options and stock awards issued to
employees, directors and executive officers, the net earnings (loss) and related
net earnings (loss) per share figures under U.S. GAAP would be as follows:
Years Ended August 31, 2000 2001
------------------------------------------------------------------------------------
Pro forma net earnings (loss) for the year $ 8,939 $ (39,109)
Pro forma basic and diluted net earnings (loss) per share $ 0.22 $ (0.74)
20 o SUBSEQUENT EVENT
Acquisition of Avantas Networks Corporation
On August 20, 2001, the company entered into an agreement to acquire a 100%
interest in Avantas Networks Corporation, a Canadian company specializing in
fiber-optic protocol testing. This acquisition is expected to be settled for a
total consideration of approximately US$95,625,000, less cash acquired of
US$28,000,000. The consideration paid will consist of US$36,000,000 in cash and
the issuance of approximately 4,400,000 subordinate voting shares. The fair
value of subordinate voting shares to be issued was determined based on the
market price of the shares over a reasonable period of time before and after the
terms of the acquisition are agreed to and announced. This acquisition will be
accounted for using the purchase method according to the new CICA section 1581.
The goodwill resulting from this acquisition will not be amortized according to
CICA section 3062 but will be subject to an impairment test.
This acquisition is expected to be closed in the first quarter of 2002.
EXFO o 2001 Annual Report o 62
QUARTERLY SUMMARY
FINANCIAL INFORMATION (UNAUDITED)
(in thousands of US dollars, except per share data)
Years ended
1st quarter 2nd quarter 3rd quarter 4th quarter August 31,
---------------------------------------------------------------------------------------------------
2001
Sales $ 28,519 $ 36,293 $ 45,781 $ 35,420 $146,013
Cost of sales $ 10,308 $ 12,787 $ 17,418 $ 14,433 $ 54,946
Gross margin $ 18,211 $ 23,506 $ 28,363 $ 20,987 $ 91,067
Earnings (loss) from operations $ 6,791 $ 6,912 $ 4,335 $ (3,531) $ 14,507
Net earnings (loss) $ 7,505 $ 24 $ (8,630) $(14,193) $(15,294)
Adjusted net earnings* $ 7,638 $ 7,511 $ 6,204 $ 3,219 $ 24,463
Basic and diluted net earnings
(loss) per share* $ 0.16 $ - $ (0.15) $ (0.25) $ (0.29)
Basic and diluted adjusted net
earnings per share* $ 0.16 $ 0.14 $ 0.11 $ 0.06 $ 0.46
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
Adjusted net earnings* $ 1,306 $ 2,461 $ 2,885 $ 3,599 $ 10,252
Basic and diluted net earnings
per share* $ 0.03 $ 0.06 $ 0.07 $ 0.08 $ 0.25
Basic and diluted adjusted net
earnings per share* $ 0.03 $ 0.06 $ 0.07 $ 0.08 $ 0.26
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
Adjusted net earnings* $ 1,182 $ 1,052 $ 1,630 $ 1,979 $ 5,843
Basic and diluted net earnings
per share* $ 0.02 $ 0.03 $ 0.04 $ 0.05 $ 0.14
Basic and diluted adjusted net
earnings per share* $ 0.02 $ 0.03 $ 0.04 $ 0.05 $ 0.14
* Adjusted net earnings and per share data are calculated independently for each
of the quarters presented. Therefore, the sum of this quarterly information
may not equal the corresponding annual information. Adjusted net earnings
represent net earnings excluding amortization of goodwill and the after-tax
effect of amortization of intangible assets and non-recurring expenses. This
information may not be comparable to similarly titled measures reported by
other companies because it is non-GAAP information.
EXFO o 2001 Annual Report o 63
BOARD OF DIRECTORS
Germain Lamonde, Chairman, President and CEO
Germain Lamonde is one of our founders. Mr. Lamonde has been our Chairman of the
Board, President and Chief Executive Officer since our inception in 1985. Mr.
Lamonde holds a bachelor's degree in Physics Engineering from the Ecole
Polytechnique, Universite de Montreal in Canada, and a master's degree in Optics
from Universite Laval in Canada.
Pierre Marcouiller, Chairman, Camoplast Inc.
Pierre Marcouiller is Chairman of the Board and Chief Executive Officer of
Camoplast Inc., a supplier of components to the recreational, agricultural and
motorized vehicle and automotive parts markets. Mr. Marcouiller holds a
bachelor's degree in Business Administration from the Universite du Quebec a
Trois-Rivieres in Canada and a master's degree in Business Administration from
the Universite de Sherbrooke in Canada.
David A. Thompson, Division Vice-President Strategy and Innovation, Corning Inc.
Dr. David 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 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 Universite Laval in Canada, as well as a master's degree in
Taxation from the Universite de Sherbrooke in Canada.
Michael Unger, Executive Consultant
Michael Unger worked with Nortel Networks Limited, now Nortel Networks
Corporation, from 1962 to 2000. Mr. Unger's most recent position was President
of Nortel's Optical Networks Business Unit, which 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, President
and Chief Executive Officer
David Farrell
President, Burleigh Instruments
John Kennedy
President, EXFO Photonic Solutions
Bruce Bonini
Vice-President, North American Sales
Jean-Francois Boulet
Vice-President, Human Resources
Stephen Bull
Vice-President, Research and Development
Juan-Felipe Gonzalez
Vice-President, International Sales
Mario Larose
Vice-President, Marketing
Pierre Plamondon, CA
Vice-President, Finance
and Chief Financial Officer
Gregory Schinn
Chief Technology Officer
Kimberley Okell
Secretary and Legal Counsel
EXFO o 2001 Annual Report o 64
CORPORATE GOVERNANCE PRACTICES
Both the Board of Directors and management recognize the importance of having
appropriate structures and procedures in place to permit good corporate
governance. At the time we completed our Initial Public Offering in June 2000,
an Audit Committee and Human Resources Committee were appointed, forming the
basis of a structure that will be defined and refined, in order to continue to
ensure good corporate governance. The Board of Directors is of the opinion that
the corporate governance practices in existence within our company comply with
most of the guidelines adopted by the Toronto Stock Exchange.
The present Board members were elected at our last Annual General Meeting of the
Shareholders held on January 17, 2001.
Responsibilities of the Board
The Board is responsible for the stewardship of our business and affairs by
reviewing, discussing and approving our strategic direction and organizational
structure, and supervising management. Annually, the Board reviews and approves
regular updates received from management regarding our strategic planning
process. The Board identifies the principal risks of our business and reviews
our risk management systems on an annual and on-going basis.
In addition to those matters requiring Board approval under applicable laws, the
Board grants final approval with respect to each of the following: (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.
During the fiscal year ended August 31, 2001, the Board met a total of ten
times.
Currently, EXFO does not have a Board member who 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 twelve 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 a 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 General Meeting of the 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 EXFO 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 hire independent, external advisors at our expense. All committees
of the Board are entirely comprised of unrelated Directors.
EXFO o 2001 Annual Report o 65
The following is a general description of the composition and general duties of
each Board committee as contained in its mandate as at the fiscal year ended
August 31, 2001.
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 external auditors. The Audit Committee
is responsible for reviewing our internal control systems with regard to
finance, accounting, legal compliance and ethical behavior. 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 external auditors for appointment by the shareholders. The Audit Committee is
composed of Mr. Andre Tremblay, Mr. Michael Unger and Mr. Pierre Marcouiller.
The Chair of the Audit Committee is Mr. Tremblay.
Human Resources Committee
The 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 who 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 is to report annually to the Board on the
organizational structure and a 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 Chair of the Human Resources Committee is
Mr. Unger.
Disclosure Committee
In August 2001, we adopted a Disclosure Policy to ensure that communications to
the investing public are timely, factual, accurate and broadly disseminated. At
the same time, the Board of Directors established a Disclosure Committee
responsible for overseeing our disclosure practices. The Disclosure Committee
consists of the Chief Executive Officer, Chief Financial Officer, Investor
Relations Manager, Communications Director as well as Legal Counsel and
Corporate Secretary.
Shareholder/Investor Communications and Feedback
EXFO has an Investor Relations Manager who is responsible for facilitating
communications between senior management and EXFO's shareholders and financial
analysts. Communications to shareholders are disseminated through annual and
quarterly reports, press releases, the Annual Shareholders Meeting and investor
presentations. The Investor Relations Manager receives and responds to all
shareholders' inquiries in an appropriate and timely manner. In communications
to senior management, the Investor Relations Manager provides feedback from
shareholders.
EXFO o 2001 Annual Report o 66
GLOSSARY
ACCESS NETWORK: The portion of a network that links end-users in businesses and
homes with broadband services.
ATM: Asynchronous Transfer Mode. A data networking protocol used for
high-bandwidth, low-delay, connection-oriented, packet-like switching and
multiplexing.
AUTOMATED TEST SYSTEM: System integrating multiple test applications that can
run simultaneously and requiring very little handling.
DWDM: Dense Wavelength Division Multiplexing. A technology that enables a single
optical fiber to carry multiple data channels (or wavelengths). Commercial DWDM
systems can have as many as 160 separate channels.
DS0: Digital Signal 0. North American Digital Hierarchy standard used for
transmitting data over an optical network at 64 Kb/s.
E0: European Digital Hierarchy standard used for transmitting data over an
optical network at 64 Kb/s.
ETHERNET: Protocol for data networking. Ethernet networks typically operate at
10, 100 or 1000 Mb/s.
GIGABIT ETHERNET: A version of Ethernet that operates at 1 Gb/s (1000 Mb/s).
LONG-HAUL NETWORK: A long-distance network that transmits data between cities or
countries.
METROPOLITAN NETWORK: Metropolitan area network (MAN or metro). A network, often
ringed in structure, that covers an entire city and its suburbs.
NANOPOSITIONING: A positioning technique used during optical component
manufacturing to align components with a precision measured in nanometers (one
billionth of a meter).
OC-192: A standard optical signal transmission rate of approximately 10 gigabits
per second. Equivalent to SDH STM-64.
OPTICAL LAYER: Commonly used to refer to specific wavelengths or channels of a
DWDM network. Each wavelength carries a separate stream of data encoded in a
light signal.
PHYSICAL LAYER: Commonly used to refer to the propagation medium of an optical
network, including the glass fiber and all in-line active and passive
components. Light signals, which are forms of encoded data, are transmitted over
this layer.
PROTOCOL LAYER: Commonly used to refer to the formatting rules for transmitting
data over an optical network. Networks send and receive data using industry-wide
formats; some examples are SONET, SDH, ATM and Ethernet.
PROTOCOL: A formal set of rules governing the format, timing, sequencing and
error control of data exchange across a network. Many
protocols may be required and used on a single network.
SDH: Synchronous Digital Hierarchy. Standardized by the International
Telecommunication Union (ITU-TSS). A protocol for transmitting information over
optical fiber.
SONET: Synchronous Optical NETwork. Standardized by the American National
Standards Institute (ANSI). A protocol for backbone networks, capable of
transmitting at extremely high speeds and accommodating gigabit-level bandwidth.
SPOT-CURING TECHNOLOGY: Technology by which a dose of energy of a specific
wavelength band and irradiance is used to cause an adhesive, encapsulant or
sealant to change from a liquid to a solid in a small area.
STM-64: Synchronous Transfer Module. Optical signal standards transmission rate,
part of SDH. STM-64 operates at a rate of 9953.28 Mb/s. Equivalent to SONET
OC-192.
WAVEGUIDE TECHNOLOGY: Technology, based on the localized control of the index of
refraction, allowing the manufacturing of optical lightguides on planar
substrates. Devices made from such lightguides can be used in optical components
to add, drop or modify wavelengths used to carry data in optical networks.
EXFO o 2001 Annual Report o 67
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 Bourse de Montreal, Tour de la Bourse, 800 Victoria Square,
4th Floor, Montreal, Canada, on January 16, 2002, at 10:00 a.m.
TRANSFER AGENTS AND REGISTRARS
CIBC Mellon Trust Company
Montreal, Toronto and Vancouver, Canada
Mellon Investor Services, L.L.C.
New Jersey, USA
AUDITORS
PricewaterhouseCoopers LLP
INVESTOR RELATIONS CONTACT
Michael Lamanna
Manager, Investor Relations
Tel.: 1 418 683-0211, ext. 3731
E-mail: michael.lamanna@exfo.com
GENERAL ACCESS
EXFO Electro-Optical Engineering Inc.
465 Godin Avenue
Vanier (Quebec) G1M 3G7
Tel.: 1 418 683-0211
E-mail: ir@exfo.com
www.exfo.com
This annual report is available in electronic format at www.exfo.com. It is also
available in print and on our Website in French.
EXFO o 2001 Annual Report o 68
[GRAPHICS OF STOCK PERFORMANCE]
WORLDWIDE OFFICES
CORPORATE HEADQUARTERS
465 Godin Avenue, Vanier (Quebec) G1M 3G7 CANADA
Tel.: 1 418 683-0211 o Fax: 1 418 683-2170
EXFO AMERICA INC.
1201 Richardson Drive, Suite 260, Richardson TX 75080 USA
Tel.: 1 800 663-3936 o Tel.: 1 972 907-1505
Fax: 1 972 907-2297
EXFO EUROPE S.A.R.L.
Le Dynasteur 10/12, rue Andras Beck,
92366 Meudon la Foret Cedex FRANCE
Tel.: +33.1.40.83.85.85 o Fax: +33.1.40.83.04.42
o EXFO UK Limited
The Stables and the Barn Crown House
28 Winchester Road, Romsey (Hampshire)
UNITED KINGDOM 50 51 8AA
Tel.: +44 (0) 1794 511 157 o Fax: +44 (0) 1794 511 924
o GAP Optique S.A.
17 Boul. des Philosophes,
CH-1205 Geneve SWITZERLAND
Tel.: +41.22.702.6844 o Fax: +41.22.781.0980
EXFO ASIA PACIFIC PTE LTD.
151 Chin Swee Road #03-29,
Manhattan House, SINGAPORE 169876
Tel.: +65 333 8241 o Fax: +65 333 8242
o EXFO BEIJING
Beijing New Century Hotel Office Tower, Room 1754-1755
No.6 Southern Capital Gym Road, Beijing 100044, P.R. CHINA
Tel.: +86 (10) 6849 2738 o Fax: +86 (10) 6849 2662
o EXFO JAPAN
JP Hamacho Bldg.10F, Nihonbashi Hamacho 2-23-5 Chuo-ku,
Tokyo 103-0007 JAPAN
Tel.: +81-3-5614-7014 o Fax: +81-3-5614-7015
EXFO PHOTONIC SOLUTIONS INC.
2260 Argentia Road, Mississauga (Ontario) L5N 6H7 CANADA
Tel.: 1 800 668-8752 (USA and Canada) or 1 905 821-2600
Fax: 1 905 821-2055
BURLEIGH INSTRUMENTS, INC.
7647 Main St. Fishers, Victor NY 14564-8909 USA
Tel.: 1 716 924-9355 o Fax: 1 716 924-9072
EXFO o 2001 Annual Report o 69
www.exfo.com
(C) 2001 EXFO Electro-Optical Engineering Inc.
All rights reserved. Printed in Canada.
[EXFO LOGO]
Vanier, November 30, 2001
Dear Shareholder:
You are cordially invited to attend the Annual General Shareholders Meeting
(the "Meeting") of EXFO Electro-Optical Engineering Inc. to be held at the
Bourse de Montreal, Stock Exchange Tower, 800 Square Victoria, 4th Floor,
Montreal, Quebec on January 16, 2002, at 10:00 a.m. (EST).
Details of the business to be conducted at the Meeting are provided in the
attached Management Proxy Circular and Notice of Annual Meeting of Shareholders.
It is important that your shares be represented at the Meeting. WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you send
in your proxy card and then decide to attend the Meeting to vote your shares in
person, you may still do so. Your proxy is revocable in accordance with the
procedures set forth in the Management Proxy Circular.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in EXFO. We look forward to seeing you
at the Meeting.
Sincerely,
/s/ Germain Lamonde
Germain Lamonde
Chairman, President and
Chief Executive Officer
EXFO Electro-Optical Engineering Inc.
[EXFO LOGO]
EXFO ELECTRO-OPTICAL ENGINEERING INC.
-------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting (the "Meeting") of
shareholders of EXFO Electro-Optical Engineering Inc. (the "Corporation") will
be held at 10:00 a.m. local time, on Wednesday, January 16, 2002, at the Bourse
de Montreal, Stock Exchange Tower, 800 Square Victoria, 4th Floor, Montreal,
Quebec for the following purposes:
1. to receive the consolidated financial statements of the Corporation for
the financial year ended August 31, 2001, and the Auditor's report thereon;
2. to elect Directors of the Corporation;
3. to appoint PricewaterhouseCoopers LLP as auditors and to authorize the
Board of Directors to fix their remuneration; and
4. to transact such further or other business as may properly come before
the Meeting or any adjournment or adjournments thereof.
Enclosed is a copy of the 2001 Annual Report of the Corporation including the
consolidated financial statements and the Auditor's Report thereon, together
with the Management Proxy Circular and a form of Proxy.
DATED at Vanier, Quebec, this 30th day of November, 2001.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Kimberley Okell
Kimberley Okell
Secretary
SHAREHOLDERS UNABLE TO ATTEND THE MEETING ARE REQUESTED TO COMPLETE THE ENCLOSED
PROXY FORM AND RETURN IT IN THE ENVELOPE PROVIDED. TO BE VALID PROXIES MUST
REACH THE OFFICE OF CIBC MELLON TRUST COMPANY, 2001 UNIVERSITY STREET, SUITE
1600, MONTREAL, QUEBEC, CANADA, H3A 2A6, NO LATER THAN THE LAST DAY PRIOR TO THE
DATE OF THE MEETING OR ANY RECONVENING OF THE MEETING IN CASE OF ADJOURNMENT.
SHAREHOLDERS MAY ALSO HAVE THE PROXY FORM DELIVERED TO THE CHAIRMAN OF THE
MEETING PRIOR TO THE TIME OF VOTING ON THE DAY OF THE MEETING OR ANY ADJOURNMENT
THEREOF.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
MANAGEMENT PROXY CIRCULAR OF THE CORPORATION
FOR THE ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED BY THE MANAGEMENT OF THE CORPORATION
The undersigned shareholder of EXFO ELECTRO-OPTICAL ENGINEERING INC. hereby
appoints (CHECK EITHER (A) or (B)):
/ / (A) Mr. Germain Lamonde of Cap-Rouge, Quebec, or failing him, Mr. Pierre
Plamondon of Quebec, Quebec;
/ / (B) ____________________________ of ___________________________________;
(Name) (Address)
AS THE REPRESENTATIVE OF THE UNDERSIGNED TO ATTEND, ACT AND VOTE AND ON BEHALF
OF THE UNDERSIGNED AT THE ANNUAL MEETING OF THE SHAREHOLDERS (THE "MEETING") OF
THE CORPORATION TO BE HELD AT THE BOURSE DE MONTREAL, LOCATED IN THE STOCK
EXCHANGE TOWER AT 800 SQUARE VICTORIA, 4TH FLOOR, IN THE CITY OF MONTREAL,
PROVINCE OF QUEBEC, CANADA, ON WEDNESDAY, JANUARY 16, 2002, AT 10:00 O'CLOCK
A.M. (MONTREAL TIME) AND AT ANY ADJOURNMENTS OF SUCH MEETING.
THE UNDERSIGNED WISHES THAT ALL SHARES REPRESENTED BY THIS PROXY BE VOTED IN
ACCORDANCE WITH THE INSTRUCTIONS HEREINBELOW. ALL SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR, AGAINST OR BE THE SUBJECT OF ABSTENTIONS, AS SPECIFIED
BY THE SHAREHOLDER. HOWEVER, IN THE ABSENCE OF INSTRUCTIONS, THE SHARES
REPRESENTED BY PROXY WILL BE VOTED IN FAVOUR OF EACH OF THE PROPOSALS SET FORTH
HEREIN.
(MARK WITH AN X)
To elect Germain Lamonde, Pierre Marcouiller,
David A. Thompson, Andre Tremblay and Michael Unger, FOR / /
whose cities of residence are indicated in the
Management Proxy Circular, as Directors of the Corporation. ABSTENTION / /
To appoint PricewaterhouseCoopers LLP as auditors FOR / /
and to authorize the Directors to fix their remuneration.
ABSTENTION / /
A DISCRETIONARY POWER IS HEREBY CONFERRED as to any amendment or change made to
the matters mentioned in the Notice of Meeting or as to such other matters as
may legally come before the Meeting. The Management of the Corporation is not
aware of any amendments, changes or other matters which may come before the
Meeting.
* A SHAREHOLDER IS ENTITLED TO APPOINT, DATED this day of
TO ATTEND AND ACT FOR AND ON BEHALF OF
SUCH SHAREHOLDER AT THE MEETING, A PERSON
OTHER THAN THE PERSON MENTIONED IN
(A) HEREIN ABOVE AND MAY DO SO BY CHECKING
(B) HEREINABOVE AND ADDING THE NAME OF __________________________________
SUCH OTHER PERSON IN THE SPACE RESERVED SIGNATURE OF SHAREHOLDER
FOR SUCH PURPOSE.
[ ]
name of shareholder
[ ]
THIS PROXY MUST BE SIGNED BY THE SHAREHOLDER OR HIS PROXYHOLDER AUTHORIZED IN
WRITING OR, IF THE SHAREHOLDER IS A CORPORATION, UNDER ITS CORPORATE SEAL, BY A
DULY AUTHORIZED OFFICER OR PROXYHOLDER OF THE CORPORATION. PLEASE REMEMBER TO
DATE AND SIGN THIS PROXY. IF THIS PROXY IS NOT DATED, IT WILL BE DEEMED TO BEAR
THE DATE OF ITS MAILING BY MANAGEMENT.
YOU ARE REFERRED TO THE MANAGEMENT PROXY CIRCULAR APPENDED.
[EXFO LOGO]
-------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
AND
MANAGEMENT PROXY CIRCULAR
-------------------------------------------------------------------------------
November 30, 2001
EXFO ELECTRO-OPTICAL ENGINEERING INC.
MANAGEMENT PROXY CIRCULAR
SOLICITATION OF PROXIES
THIS MANAGEMENT PROXY CIRCULAR IS PROVIDED IN CONNECTION WITH THE SOLICITATION
BY THE MANAGEMENT OF EXFO ELECTRO-OPTICAL ENGINEERING INC. (THE "CORPORATION")
OF PROXIES TO BE USED AT THE ANNUAL MEETING OF SHAREHOLDERS (THE "MEETING") OF
THE CORPORATION TO BE HELD AT THE TIME AND PLACE AND FOR THE PURPOSES STATED IN
THE ACCOMPANYING NOTICE OF MEETING AND AT ANY ADJOURNMENT THEREOF. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED HEREIN IS GIVEN AS OF NOVEMBER 9,
2001.
It is expected that the solicitation will be made primarily by mail but proxies
may also be solicited personally by officers, employees or agents of the
Corporation. The Corporation may also reimburse brokers and other persons
holding shares in their names, or in the names of nominees, for their costs
incurred in sending proxy material to principals and obtaining their proxies.
The cost of solicitation will be borne by the Corporation and is expected to be
nominal.
APPOINTMENT AND REVOCATION OF PROXIES AND ATTENDANCE OF BENEFICIAL SHAREHOLDERS
The persons named in the enclosed Form of Proxy (the "Form of Proxy") are
officers of the Corporation. A SHAREHOLDER DESIRING TO APPOINT SOME OTHER PERSON
(WHO NEED NOT BE A SHAREHOLDER) TO REPRESENT HIM OR HER AT THE MEETING MAY DO SO
BY INSERTING SUCH PERSON'S NAME IN THE BLANK SPACE PROVIDED IN THE FORM OF PROXY
AND CHECKING ITEM (B).
To be valid, proxies must be received at the Montreal, Canada office of CIBC
Mellon Trust Company, 2001 University Street, Suite 1600, Montreal, Quebec,
Canada, H3A 2A6, the transfer agent of the Corporation, no later than the close
of business on the last business day preceding the day of the Meeting or any
adjournment thereof, or proxies may be delivered to the Chairman of the Meeting
on the day of the Meeting or any adjournment thereof. A beneficial shareholder
who completes a Form of Proxy and who wishes to attend and vote at the Meeting
personally must appoint himself or herself proxy holder in the foregoing manner.
A proxy given pursuant to this solicitation may be revoked by instrument in
writing executed by the shareholder or by his or her attorney authorized in
writing if such instrument is deposited either at the registered office of the
Corporation to the attention of the Secretary no later than the close of
business on the last business day preceding the day of the Meeting or any
adjournment
1
thereof or with the Chairman of the Meeting on the day of the Meeting or any
adjournment thereof.
VOTING OF PROXIES
The shares represented by proxies appointing the persons, or any one of them,
designated by Management thereon to represent the shareholder at the Meeting
will be voted in accordance with the instructions given by the shareholder.
UNLESS OTHERWISE INDICATED, THE VOTING RIGHTS ATTACHING TO THE SHARES
REPRESENTED BY A FORM OF PROXY WILL BE VOTED "FOR" IN RESPECT OF ALL THE
PROPOSALS DESCRIBED HEREIN.
The Form of Proxy confers discretionary authority upon the persons named therein
with respect to amendments or variations to matters identified in the
accompanying Notice of Meeting. As at the date hereof, Management is not aware
that any other matter is to be presented at the Meeting. If, however, other
matters properly come before the Meeting, the persons designated in the Form of
Proxy will vote thereon in accordance with their judgment pursuant to the
discretionary authority conferred by such proxy with respect to such matters.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
As at November 9, 2001, 23,422,153 Subordinate Voting Shares and 37,900,000
Multiple Voting Shares were outstanding, being the only classes of shares
entitled to be voted at the Meeting. Each holder of Subordinate Voting Shares is
entitled to one vote and the holder of Multiple Voting Shares is entitled to 10
votes for each share registered in his or her name at the close business on
December 10, 2001, being the date fixed by the Board of Directors for the
purpose of determining registered shareholders entitled to receive the
accompanying Notice of Meeting (the "Record Date"). In the event that such a
shareholder transfers the ownership of any of his or her shares after the Record
Date, the transferee of such shares shall be entitled to vote at the Meeting if
he or she produces properly endorsed share certificates or otherwise establishes
proof of his or her ownership of the shares and demands, not later than 10 days
before the Meeting, that his or her name be included on the list of shareholders
entitled to vote. This list of shareholders will be available for inspection
during normal business hours at the Montreal, Canada office of CIBC Mellon Trust
Company, the transfer agent of the Corporation, 2001 University Street, Suite
1600, Montreal, Quebec, Canada, H3A 2A6, and at the Meeting.
Unless otherwise indicated, the resolutions submitted to a vote at the Meeting
must be passed by a majority of the votes cast by the holders of Subordinate
Voting Shares and Multiple Voting Shares, as a single class, present at the
Meeting in person or by proxy and voting in respect of all resolutions to be
voted on by the shareholders of the Corporation.
To the knowledge of executive officers and directors of the Corporation, as of
November 9, 2001, the only person who is beneficial owner or exercised control
or direction, directly or indirectly, over shares carrying more than 10% of the
voting rights attaching to any class of shares of the Corporation is:
2
PERCENTAGE OF PERCENTAGE OF
VOTING RIGHTS PERCENTAGE OF VOTING RIGHTS
NUMBER OF ATTACHED TO VOTING RIGHTS ATTACHED TO ALL
SUBORDINATE ALL NUMBER OF ATTACHED TO SUBORDINATE AND
VOTING SUBORDINATE MULTIPLE ALL MULTIPLE MULTIPLE VOTING
NAME OF SHAREHOLDER SHARES VOTING SHARES VOTING SHARES VOTING SHARES SHARES
--------------------------- ------------- --------------- -------------- --------------- ------------------
Germain Lamonde(1) - - 37,900,000 100% 94.18 %
--------------------------- ------------- --------------- -------------- --------------- ------------------
---------------
(1) Mr. Lamonde exercises control over this number of Multiple Voting Shares
through G. Lamonde Investissements Financiers inc., a company controlled
by Mr. Lamonde and through Fiducie Germain Lamonde, a family trust for the
benefit of Mr. Lamonde and members of his family.
PRESENTATION OF THE FINANCIAL STATEMENTS
The consolidated financial statements of the Corporation for the financial year
ended August 31, 2001 and the Auditors' report thereon accompany this Circular.
ELECTION OF THE DIRECTORS
According to the articles of the Corporation, the Board of Directors shall
consist of a minimum of 3 and a maximum of 12 directors. At the Meeting,
Management proposes to nominate five individuals for election as directors to
hold office until the next annual meeting or until the office is otherwise
vacated in accordance with the Corporation's by-laws.
Management does not anticipate that any of the nominees mentioned below will be
unable, or for any reason whatsoever, be reluctant to fulfil their duties as
directors. Should this occur for any reason whatsoever before the election, the
persons named in the Form of Proxy reserve the right to vote for another nominee
of their choice unless the shareholder specified on the Form of Proxy to abstain
from voting for the election of the directors.
The following table and notes thereto set out the name of each of the
individuals whom is proposed to be nominated at the Meeting for election as a
director of the Corporation, all other positions and offices with the
Corporation and its subsidiaries now held by each such individual, if any, the
principal occupation or employment of each such individual, their respective
period of service as a director and the approximate number of shares of the
Corporation beneficially owned by each such individual or over which each of
them exercised control or direction.
3
NUMBER OF NUMBER OF
NAME AND POSITION OR SUBORDINATE MULTIPLE
OFFICE WITH THE PRINCIPAL OCCUPATION CITY OF VOTING VOTING
CORPORATION OR EMPLOYMENT RESIDENCE DIRECTOR SINCE SHARES SHARES
------------------------- ---------------------- ---------------- --------------- ------------ ------------
Germain Lamonde(1) Chairman of the Cap-Rouge, September 1985 - 37,900,000
Chairman of the Board, Board, President and Quebec
President and Chief Chief Executive
Executive Officer Officer, EXFO
Electro-Optical
Engineering Inc.
------------------------- ---------------------- ---------------- --------------- ------------ ------------
Pierre Chairman of the Magog, Quebec May 2000 3,000 -
Marcouiller(2)(3) Board and Chief
Director Executive Officer,
Camoplast Inc.
(a supplier of
automotive and
recreational vehicle
parts)
------------------------- ---------------------- ---------------- --------------- ------------ ------------
Dr. David A. Division Horseheads, June 2000 2,100 -
Thompson(3) Vice-President New York
Director Strategy and
Innovation,
Corning Inc.
------------------------- ---------------------- ---------------- --------------- ------------ ------------
Andre Tremblay(2)(4) President and Chief Outremont, May 2000 7,000 -
Director Executive Officer, Quebec
Microcell
Telecommunications
Inc.
------------------------- ---------------------- ---------------- --------------- ------------ ------------
Michael Unger(2)(3) Executive Consultant Woodbridge, May 2000 - -
Director Ontario
------------------------- ---------------------- ---------------- --------------- ------------ ------------
---------------
(1) Mr. Lamonde exercises control over this number of Multiple Voting Shares
through G. Lamonde Investissements Financiers inc., a company controlled
by Mr. Lamonde and through Fiducie Germain Lamonde, a family trust for the
benefit of Mr. Lamonde and members of his family.
(2) Member of the Audit Committee.
(3) Member of the Human Resources Committee.
(4) Mr. Tremblay exercises control over this number of Subordinate Voting
Shares through 9044-6451 Quebec inc. and 9089-3082 Quebec inc.,
companies controlled by Mr. Tremblay.
In the past five years, each of the foregoing nominee Directors had the
principal occupation set out opposite his name, except that:
o Pierre Marcouiller has been the Chairman of the Board of Camoplast Inc.
since June 2000. Mr. Marcouiller is the founder and has been the sole
shareholder of Nexcap Inc., an investment company in the manufacturing
sector, since December 1996.
o Michael Unger was President of Nortel Networks Corporation's Optical
Networks Business Unit from May 1998 to April 2000. From March 1990 to
May 1998, Mr. Unger was Nortel's Group Vice-President, Transport Networks.
The information as to Subordinate Voting Shares and Multiple Voting Shares
beneficially owned or over which the above-named individuals exercise control or
direction is not within the direct knowledge of the Corporation and has been
furnished by the respective individual.
4
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF DIRECTORS
In the financial year ended August 31, 2001, directors who were not employees
received CDN$18,000 (US$11,785) as annual compensation of which CDN$12,000 must
be paid in stock options, though a director may opt to receive the total amount
in the form of stock options. Fees of CDN$1,000 (US$655) for each meeting of the
Board of Directors or of a Committee attended by them in person and fees of
CDN$500 (US$327) if such participation was made by telephone were also paid.
Directors who are also committee members received additional annual compensation
of CDN$3,000 (US$1,964) per committee. The Chairman of any Committee of the
Board of Directors received a total additional annual remuneration of CDN$5,000
(US$3,274). The annual compensation for chairing or participating on a committee
is paid by way of stock options. Any amounts payable in cash may also be paid in
the form of Subordinate Voting Shares or stock options. In the financial year
ended August 31, 2001, 1,600 options were granted to directors who were not
employees under the Corporation's Stock Option Plan (the "Stock Option Plan").
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The table below shows certain compensation information for Mr. Germain Lamonde,
the Chairman of the Board, President and Chief Executive Officer of the
Corporation, and the 4 other most highly compensated executive officers of the
Corporation and its subsidiaries during the financial year ended August 31, 2001
(collectively, the "Named Executive Officers"). This information includes the US
dollar value of base salaries, bonus awards and long-term incentive plan
payments, the number of options granted, and certain other compensation, if any,
whether paid or deferred.
5
SECURITIES
OTHER ANNUAL UNDER ALL OTHER
NAME AND PRINCIPAL FINANCIAL SALARY BONUS(1) COMPENSATION OPTIONS(2) COMPENSATION
POSITION YEAR (US$) (US$) (US$) (#) (US$)(3)
---------------------- ----------- ------------ ----------- ---------------- --------------- ---------------
Germain Lamonde, 2001 180,044 99,024 - 5,080 -
President and
Chief Executive 2000 134,932 63,566 - 25,402 -
Officer
---------------------- ----------- ------------ ----------- ---------------- --------------- ---------------
Bruce Bonini, 2001 272,678(4) 33,450 - 82,780 4,565
Vice-President,
North American 2000 309,801 20,000 - 3,900 6,768
Sales
---------------------- ----------- ------------ ----------- ---------------- --------------- ---------------
Juan-Felipe 2001 204,781(5) 129,629(8) - 45,630 -
Gonzalez,
Vice-President, 2000 153,502 15,879 - 6,900 -
International Sales
---------------------- ----------- ------------ ----------- ---------------- --------------- ---------------
David J. Farrell, 2001 184,500(6) 16,326(9) - 40,000 4,513(9)
President, Burleigh
Instruments, Inc.
---------------------- ----------- ------------ ----------- ---------------- --------------- ---------------
William S. Gornall, 2001 135,000(7) 11,874(9) - 30,000 3,332(9)
Vice-President of
Technology, Burleigh
Instruments, Inc.
---------------------- ----------- ------------ ----------- ---------------- --------------- ---------------
---------------
(1) A portion of the bonus amounts is paid in cash in the year for which they
are awarded and the balance is paid in cash in the year following the
financial year for which they are awarded.
(2) Indicates the number of Subordinate Voting Shares underlying the options
granted under the Stock Option Plan during the financial year indicated.
(3) Indicates the amount contributed by the Corporation during the financial
year indicated to the Deferred Profit Sharing Plan or the 401K plans, as
applicable, for the benefit of the Named Executive Officer. Mr. Lamonde is
not eligible to participate in the Deferred Profit Sharing Plan and Mr.
Gonzalez did not participate.
(4) This amount includes an amount of US$28,654 paid as a retroactive
adjustment to salary for the financial year ended August 31, 2000.
(5) This amount includes an amount of US$4,935 paid as a retroactive adjustment
to salary for the financial year ended August 31, 2000.
(6) This amount represents Mr. Farrell's base annual salary. Since he joined
the Corporation on December 20, 2000, the base salary paid to him for the
financial year ended August 31, 2001 amounted to US$134,097.
(7) This amount represents Mr. Gornall's base annual salary. Since he joined
the Corporation on December 20, 2000, the base salary paid to him for the
financial year ended August 31, 2001 amounted to US$99,193.
(8) This amount includes an amount of US$2,771 paid as a retroactive adjustment
to bonus for the financial year ended August 31, 2000.
(9) These are the amounts paid or payable for the financial year ended August
31, 2001 to Messrs Farrell and Gornall, as applicable, since December 20,
2000, the date that they joined the Corporation.
Other than its Stock Option Plan, Restricted Stock Award Plan and Stock
Appreciation Rights Plan, which are described below in the "Report on Executive
Compensation by the Human Resources Committee - Long-Term Incentive
Compensation", the Corporation does not have any other formal long-term
incentive plans. However, pursuant to the terms of his employment agreement, Mr.
Juan-Felipe Gonzalez is entitled to receive a cash payment of CDN$750,000 if he
has not voluntarily resigned or been dismissed with cause prior to September
2003.
SHARE PLAN
In September 1998, the Corporation adopted a share purchase plan for officers,
directors and key employees, as amended in April 2000. On April 3, 2000, the
Corporation adopted a new share plan which replaced the 1998 share plan and on
June 29, 2000, at the time of the
6
Corporation's initial public offering, all of the 707,264 Class "F" shares
issued and fully paid under this plan were converted into Subordinate Voting
Shares. No additional shares will be issued under the new share plan. The new
share plan requires the Subordinate Voting Shares to be held in trust by a
trustee until August 31, 2004, except for 249,977 Subordinate Voting Shares
which will be released between October 21, 2003 and January 20, 2004. The new
share plan provides for the earlier release of these Subordinate Voting Shares
in the event the employment of a holder of Subordinate Voting Shares terminates
or upon the occurrence of a change of control and establishes conditions
pursuant to which the Subordinate Voting Shares of a holder under this plan are
to be sold by the trustee on the public market. For example, if the employment
is terminated before the end of the trust period for reasons other than death,
retirement, disability or without cause, the trustee will, on instructions from
the Corporation, sell the holder's Subordinate Voting Shares on the public
market, reimburse the lesser of the proceeds of sale or the purchase price paid
by the holder plus 8% interest annually, with the balance being paid to the
Corporation. As of August 31, 2001, 662,485 Subordinate Voting Shares were being
held in trust under the plan.
The following table shows the breakdown, as of August 31, 2001, of the
Subordinate Voting Shares that have been allocated and released from trust to
the Named Executive Officers.
SUBORDINATE SUBORDINATE VALUE OF SUBORDINATE
VOTING VOTING SHARES VOTING SHARES
SHARES ALLOCATED(1) RELEASED RELEASED FROM TRUST
NAME OF EXECUTIVE OFFICERS (#) FROM TRUST (#) (CDN$)
---------------------------------- ------------------------ --------------------- -------------------------
Germain Lamonde(2) - - -
---------------------------------- ------------------------ --------------------- -------------------------
Bruce Bonini 49,324 - -
---------------------------------- ------------------------ --------------------- -------------------------
Juan-Felipe Gonzalez 51,452 - -
---------------------------------- ------------------------ --------------------- -------------------------
David J. Farrell(3) - - -
---------------------------------- ------------------------ --------------------- -------------------------
William S. Gornall(3) - - -
---------------------------------- ------------------------ --------------------- -------------------------
---------------
(1) If the employment is terminated before the end of the trust period for
reasons other than death, retirement, disability or without cause, the
trustee will, on instructions from the Corporation, sell the holder's
Subordinate Voting Shares on the public market, reimburse the lesser of the
proceeds of sale or the purchase price paid by the holder plus 8% interest
annually, with the balance being paid to the Corporation.
(2) Mr. Lamonde holds no Subordinate Voting Shares and, thus, does not
participate in the Share Plan.
(3) Mr. Farrell and Mr. Gornall joined the Corporation in December 2000, and,
as such, were not eligible to participate in the Share Plan.
DEFERRED PROFIT SHARING PLAN
The Corporation maintains a plan for eligible Canadian resident employees. Under
this plan, the Corporation contributes an amount equal to 1% of each employee's
gross salary to that employee's individual deferred profit sharing plan to the
extent that such employee contributes at least 2% of his or her gross salary to
his or her individual tax-deferred registered retirement savings plan. Mr.
Germain Lamonde is not entitled to participate in this plan. In the financial
year ended August 31, 2001, the aggregate amount of contributions under the plan
was US$419,000 (CDN$642,000).
7
401K PLANS
The Corporation maintains 401K plans for eligible United States resident
employees of its subsidiaries. Under these plans, the Corporation 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 financial year ended August 31, 2001, the Corporation recorded contributions
totaling US$285,000.
OPTION GRANTS IN LAST FINANCIAL YEAR
The aggregate number of Subordinate Voting Shares covered by options granted
during the financial year ended August 31, 2001 was 1,804,497 (net of cancelled
options due to employment terminations) at a weighted average exercise price of
US$29.00 (CDN$44.29) per Subordinate Voting Share. At the end of financial year
ended August 31, 2001, there were 2,414,231 Subordinate Voting Shares covered by
options granted and outstanding pursuant to the Stock Option Plan. The table
below shows information regarding stock option grants made to the Named
Executive Officers under the Stock Option Plan during the financial year ended
August 31, 2001. See "Report on Executive Compensation by the Human Resources
Committee - Long-Term Incentive Compensation" for a description of the Stock
Option Plan.
PERCENTAGE OF MARKET VALUE OF
NET TOTAL OF SECURITIES
SECURITIES OPTIONS GRANTED UNDERLYING
UNDER OPTIONS TO EMPLOYEES IN EXERCISE OR OPTIONS ON THE
GRANTED(1) FINANCIAL YEAR BASE PRICE(2) DATE OF GRANT
NAME (#) (%) (US$/ SECURITY) (US$/SECURITY)(3) EXPIRATION DATE
---------------------- --------------- ---------------- ---------------- ------------------- ------------------
Germain Lamonde 5,080 0.28 % $22.25 $23.56 January 10, 2011
---------------------- --------------- ---------------- ---------------- ------------------- ------------------
Bruce Bonini 20,000 1.10 % $45.94 $48.19 September 13, 2010
30,000 1.67 % $34.07 $36.88 October 11, 2010
32,780 1.82 % $22.25 $23.56 January 10, 2011
---------------------- --------------- ---------------- ---------------- ------------------- ------------------
Juan-Felipe Gonzalez 15,000 0.83 % $45.94 $48.19 September 13, 2010
15,000 0.83 % $34.07 $36.88 October 11, 2010
15,630 0.87 % $22.25 $23.56 January 10, 2011
---------------------- --------------- ---------------- ---------------- ------------------- ------------------
David J. Farrell 40,000 2.22 % $22.62 $19.69 December 20, 2010
---------------------- --------------- ---------------- ---------------- ------------------- ------------------
William S. Gornall 30,000 1.67 % $22.62 $19.69 December 20, 2010
---------------------- --------------- ---------------- ---------------- ------------------- ------------------
---------------
(1) Underlying securities: Subordinate Voting Shares.
(2) The exercise price of options granted is determined based on the highest of
the closing prices of the Subordinate Voting Shares on The Toronto Stock
Exchange and the NASDAQ National Market on the last trading day preceding
the grant date, using the noon buying rate of the Federal Reserve Bank of
New York on the grant date to convert the NASDAQ National Market closing
price to Canadian dollars, as required.
(3) Based on the closing price on the NASDAQ National Market on the date of the
grant.
8
AGGREGATED OPTION EXERCISES IN LAST FINANCIAL YEAR AND FINANCIAL YEAR END OPTION
VALUES
The following table summarizes, for each of the Named Executive Officers, the
number of stock options, if any, exercised during the financial year ended
August 31, 2001, the aggregate value realized upon exercise and the total number
of unexercised options, if any, held at August 31, 2001. Value realized upon
exercise is the difference between the market value of the underlying
Subordinate Voting Shares on the exercise date and the exercise or base price of
the option. The value of unexercised in-the-money options at financial year-end
is the difference between its exercise or base price and the market value of the
underlying Subordinate Voting Shares on August 31, 2001, which was US$12.09 per
share. These values, unlike the amounts set forth in the column "Aggregate Value
Realized," have not been, and may never be, realized. The underlying options
have not been, and may never be exercised, and actual gains, if any, on exercise
will depend on the value of the Subordinate Voting Shares on the date of
exercise. There can be no assurance that these values will be realized.
Unexercisable options are those which have been held for less than the time
required for vesting. See "Report on Executive Compensation by the Human
Resources Committee - Long-Term Incentive Compensation."
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS AT
AGGREGATE AT AUGUST 31, 2001 AUGUST 31, 2001(1)
SECURITIES VALUE ------------------------------ -------------------------------
ACQUIRED ON REALIZED Exercisable Unexercisable Exercisable Unexercisable(2)
NAME EXERCISE (#) (US$) (#) (#) (US$) (US$)
---------------------- ------------ ---------- --------------- -------------- --------------- ---------------
Germain Lamonde - - 6,351 24,131 - -
---------------------- ------------ ---------- --------------- -------------- --------------- ---------------
Bruce Bonini - - 975 85,705 - -
---------------------- ------------ ---------- --------------- -------------- --------------- ---------------
Juan-Felipe Gonzalez - - 1,725 50,805 - -
---------------------- ------------ ---------- --------------- -------------- --------------- ---------------
David J. Farrell - - - 40,000 - -
---------------------- ------------ ---------- --------------- -------------- --------------- ---------------
William S. Gornall - - - 30,000 - -
---------------------- ------------ ---------- --------------- -------------- --------------- ---------------
---------------
(1) "In-the-money" options are options for which the market value of the
underlying securities is higher than the price at which such securities may
be bought from the Corporation.
(2) The value of unexercised "in-the-money" options is calculated using the
highest of the closing prices of the Subordinate Voting Shares on The
Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2001
using the noon buying rate of the Federal Reserve Bank of New York to
convert the NASDAQ National Market closing price to Canadian dollars, as
required, less the exercise price of "in-the-money" options.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
The Corporation has an employment agreement with Germain Lamonde. The agreement
provides for Mr. Lamonde's employment as President and Chief Executive Officer
at a base salary applicable from September 1, 2000 to August 31, 2001 of
CDN$275,000 (approximately US$180,044) per year. In addition, a bonus of
CDN$137,500 (approximately US$90,022) will be payable if performance-based
objectives are met. If performance objectives are exceeded, such bonus will be
greater in a proportional amount. The agreement is for an indeterminate period
and the salary is reviewed annually. In the event of the termination of Mr.
Lamonde's employment without cause, Mr. Lamonde will be entitled to severance
payments (in no case exceeding 24 months of remuneration) and the vesting of all
stock options. In addition, in the event that Mr. Lamonde's employment is
terminated following a merger or an acquisition by a third party of
substantially all of the Corporation's assets or of the majority of its share
capital or if Mr. Lamonde voluntarily resigns, he will be entitled to the
vesting of all stock options.
9
The Corporation also has employment agreements with Mr. Bruce Bonini and Mr.
Juan-Felipe Gonzalez, and its subsidiary, Burleigh Instruments, Inc., has
employment agreements with David J. Farrell and William S. Gornall.
The agreement with Mr. Bonini provides for Mr. Bonini's employment as
Vice-President, North American Sales at a base salary of US$145,000, plus
commissions of US$100,000 if sales objectives are met, for the period from
September 1, 2000 to August 31, 2001. If sales objectives are exceeded,
commissions will be greater. The agreement is for an indeterminate period and
salary is reviewed annually. In addition, bonuses totalling US$39,000 will be
payable if various performance-based objectives are met. If performance
objectives are exceeded, such bonus will be greater in a proportional amount. In
the event Mr. Bonini's employment terminates for any reason whatsoever and he is
unable to accept new employment due to his non-competition obligations to the
Corporation, Mr. Bonini may receive compensation for a period of 18 months
following the date of termination in amounts varying from 5% to 125% of his base
monthly salary at the time of termination depending on the cause of the
termination.
The agreement with Mr. Gonzalez provides for Mr. Gonzalez's employment as
Vice-President International Sales at a base salary of US$110,000, plus
commissions on sales of US$72,540, for the period from September 1, 2000 to
August 31, 2001. If sales objectives are exceeded, commissions will be greater.
Upon Mr. Gonzalez's move to Singapore, effective March 1, 2001, the agreement
provides that the annual base salary is US$120,753 to take into account cost of
living differences. The agreement is for an indeterminate period and salary is
reviewed annually. In addition, bonuses totalling US$140,500 will be payable if
various performance-based objectives are met. If performance objectives are
exceeded, such bonus will be greater in a proportional amount. In addition Mr.
Gonzalez shall be paid a bonus of CDN$750,000 if he has not voluntarily resigned
or been dismissed with cause prior to September 2003. In the event Mr.
Gonzalez's employment terminates for any reason whatsoever and he is unable to
accept new employment due to his non-competition obligations to the Corporation,
Mr. Gonzalez may receive compensation for a period of 18 months following the
date of termination in amounts varying from 5% to 50% of his base monthly salary
at the time of termination depending on the cause of the termination.
The agreement between Burleigh Instruments, Inc. ("Burleigh") and Mr. Farrell
provides for Mr. Farrell's employment as President of Burleigh at an annual base
salary of US$184,500. In addition, a bonus of US$16,326 was payable based on
Burleigh's performance for the financial year ended August 31, 2001. The
agreement is for an indeterminate period and salary is reviewed annually. In the
event of termination of Mr. Farrell's employment other than for cause, Mr.
Farrell will be entitled to severence payments equivalent to 6 months of
remuneration. In the event of Mr. Farrell's termination due to a merger or
acquisition by a third party of substantially all of Burleigh's assets or of the
majority of its share capital, Mr. Farrell shall be entitled to severence
benefits ranging from 6 to 12 months of remuneration, based on his length of
service with Burleigh since such merger or acquisition.
The agreement between Burleigh and Mr. Gornall provides for Mr. Gornall's
employment as Vice-President of Technology of Burleigh at an annual base salary
of US$135,000. In addition, a bonus of US$11,874 was payable based on Burleigh's
performance for the financial year ended August 31, 2001. The agreement is for
an indeterminate period and salary is reviewed annually. In the event of
termination of Mr. Gornall's employment other than for cause, Mr. Gornall will
be entitled to severence payments equivalent to 6 months of remuneration. In the
event of Mr. Gornall's termination due to a merger or acquisition by a third
party of substantially all of Burleigh's assets or of the majority of its share
capital, Mr. Gornall shall be entitled to severence
10
benefits ranging from 6 to 12 months of remuneration, based on his length of
service with Burleigh since such merger or acquisition.
REPORT ON EXECUTIVE COMPENSATION BY THE HUMAN RESOURCES COMMITTEE
MEMBERS OF THE HUMAN RESOURCES COMMITTEE
During the financial year ended August 31, 2001, the Human Resources Committee
was composed of Michael Unger, as Chairman, Pierre Marcouiller and David A.
Thompson, none of whom were officers or employees, or former officers or
employees, of the Corporation or its subsidiaries.
HUMAN RESOURCES COMMITTEE MANDATE
The Human Resources Committee is a committee of the Board of Directors. It is
responsible for assessing the performance and establishing the annual
compensation of all the Corporation's executive officers, including the
President and Chief Executive Officer. This Committee also reviews and submits
to the Board the salary structure and the short-term and long-term incentive
compensation programs for all employees of the Corporation. Though the Committee
is responsible for the review and approval of the employees that will receive
options to purchase shares of the Corporation, in accordance with policies
established by the Board and the terms of the Stock Option Plan, these functions
have been performed through the Board of Directors during the period from
September 1, 2000 to August 31, 2001. The remuneration to be paid by the
Corporation to its Directors is recommended to the Board by the Human Resources
Committee.
Since September 1, 2000, the Human Resources Committee held two meetings prior
to November 9, 2001.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In establishing Mr. Lamonde's salary for the year ending August 31, 2001, the
Corporation relied on a study completed by an independent consulting firm. Such
study indicated average salaries and bonuses, median salaries and bonuses and
maximum salaries and bonuses paid to chief executive officers by Canadian and
American computer hardware and software companies as well as by a specific group
of companies active in the fiber optics industry identified by the Corporation
that it considers to be the best available comparisons. It was decided that Mr.
Lamonde's salary and bonus reflect the median of Canadian computer hardware and
software companies and of the specific group of companies in fiber optics
identified by the Corporation.
In the financial year ended August 31, 2001, the bonus portion of Mr. Lamonde's
salary was tied to the financial and strategic objectives of the Corporation
based on the following factors: sales, earnings and customer satisfaction
(quality and production). Mr. Lamonde's bonus is payable in the same proportion
at which the Corporation attains such objectives. When the objectives are
exceeded, the bonus is higher; when objectives are not met, the bonus is lower.
11
SHORT-TERM INCENTIVE COMPENSATION
The short-term incentive plan offers bonuses tied to the Corporation's financial
performance and the achievement of strategic corporate and business unit
objectives established on a yearly basis.
In the case of the Named Executive Officers eligible for incentive bonuses in
the year ended August 31, 2001, such bonuses constituted a certain percentage of
base salary which is tied to the achievement of the financial and strategic
objectives of the Corporation based on the following factors: sales, earnings
and customer satisfaction (quality and production). When such objectives are
exceeded, bonuses are higher; when objectives are not met, the incentive bonuses
are lower.
LONG-TERM INCENTIVE COMPENSATION
STOCK OPTION PLAN
The principal component of the long-term incentive compensation offered by the
Corporation is made up of the Stock Option Plan for directors, officers and
employees of the Corporation and its subsidiaries and persons or companies
providing ongoing management or consulting services ("consultants") to the
Corporation and its subsidiaries.
Introduced in May 2000, the Stock Option Plan is designed to motivate directors,
officers, employees and consultants to share interest with the Corporation's
shareholders over the long-term. It is subject to Human Resources Committee
review to ensure maintenance of its market competitiveness. The Board has full
and complete authority to interpret the Plan and to establish the rules and
regulations applying to it and to make all other determinations it deems
necessary or useful for the administration of the Plan, provided that such
interpretations, rules, regulations and determinations are consistent with the
rules of all stock exchanges on which the securities of the Corporation are then
traded and with all relevant securities legislation.
The Stock Option Plan provides for the issuance of options to directors,
officers, employees and consultants to purchase Subordinate Voting Shares. The
Board of Directors designates the recipients of options and determines the
number of Subordinate Voting Shares covered by each option, the date of vesting,
the expiry date and any other conditions relating to these options, in each case
in accordance with the applicable legislation of the securities regulatory
authorities. During the financial year ended August 31, 2001, the Corporation
maintained a policy of granting a fixed number of options to all of its
employees, and to employees of subsidiaries, such number being determined in
relation to employment categories. Additional options are granted pursuant to
promotions. In addition, further options may be granted based on merit.
The exercise price of the options is determined by the Board of Directors at the
time of granting the options, subject to compliance with the rules of all stock
exchanges on which the Subordinate Voting Shares are listed and with all
relevant securities legislation. In any event, the price at which the
Subordinate Voting Shares may be purchased may not be lower than the highest of
the closing prices of the Subordinate Voting Shares on The Toronto Stock
Exchange and the NASDAQ National Market on the last trading day preceding the
grant date, using the noon buying rate of the Federal Reserve Bank of New York
on the grant date to convert the NASDAQ National Market closing price to
Canadian dollars. Any option issued is non-transferable.
The maximum number of Subordinate Voting Shares that are issuable under the Plan
shall not exceed 4,470,961 Subordinate Voting Shares, which represents 7.3% of
the Corporation's issued
12
and outstanding share capital. The maximum number of Subordinate Voting Shares
that may be granted to any one individual shall not exceed 5% of the number of
outstanding Subordinate Voting Shares.
Except for certain options granted to Directors of the Corporation, options vest
on a cumulative basis at a rate of 25% annually commencing on the first
anniversary date of their grant and may be exercised in whole or in part once
vested. All of the options that are granted under the Plan must be exercised
within a maximum period of 10 years following the date of their grant or they
will be forfeited. Some options granted to Directors vest on the first
anniversary date of their grant and may be exercised in whole or in part once
vested.
Any option granted pursuant to the Stock Option Plan will lapse (i) immediately
upon the termination of the relationship with the Corporation or one of its
subsidiaries for a good and sufficient cause for employees or officers or at the
date on which an employee or an officer resigns or leaves his employment with
the Corporation or one of its subsidiaries (or within 30 days if the holder is
dismissed without cause), and (ii) 30 days after a Director ceases to be a
member of the Board of Directors of the Corporation or one of its subsidiaries.
In the event of retirement or disability, any option held by an employee lapses
30 days after the date of any such disability or retirement. In the event of
death, any option held by the optionee lapses 6 months after the date of death.
RESTRICTED STOCK AWARD PLAN
The EXFO Electrical-Optical Engineering Restricted Stock Award Plan (the "RSAP")
was established to provide a means through which employees of Burleigh can be
granted awards of restricted shares ("Restricted Shares") of Subordinate Voting
Shares to promote retention and foster identity of interest between stockholders
and employees of Burleigh.
The effective date of the RSAP is December 20, 2000. The expiration date of the
RSAP is the business day next following the final grant of Restricted Shares
under the RSAP, which was December 20, 2000. However, the administration of the
RSAP shall continue until all awards of Restricted Shares have been forfeited or
settled. The aggregate number of shares subject to the RSAP is 360,000. The
Human Resources Committee administers the RSAP.
Awards of Restricted Shares are subject to forfeiture and restrictions on
transfer until the Restricted Shares become vested at which point a stock
certificate will be issued to a participant with respect to the number of vested
shares, which are then freely transferable. Restricted Shares become vested,
subject to a participant's continued employment with the Corporation or its
affiliates, on each of the first four anniversaries of the date of grant of an
award of Restricted Shares.
Upon a participant's termination of employment with the Corporation or any of
its affiliates due to the participant's death, disability or retirement on or
after age 60, the participant's award of restricted shares becomes fully vested
and is no longer subject to forfeiture. However, the transfer restrictions
remain in place until the occurrence of the vesting dates originally
contemplated by the award.
Upon the voluntary resignation of a participant, the termination of a
participant's employment for cause, the termination of a participant who is not
designated a member of Burleigh's "Management Team" without cause prior to a
change in control of the Corporation or a
13
termination without cause of a participant who is designated a member of
Burleigh's Management Team that is initiated by Burleigh prior to a change in
control of the Corporation, the unvested portion of the participant's award of
Restricted Shares will be forfeited.
Upon the termination without cause of a participant who is designated a member
of Burleigh's Management Team that is initiated by the Corporation or a
termination of a participant's employment without cause following a change in
control of the Corporation, a participant's award of Restricted Stock will
become fully vested and all restrictions will lapse.
In the event of a change in control, the committee administering the RSAP may in
its discretion remove restrictions on Restricted Shares or provide for the
cancellation of awards in exchange for payment in respect of the Restricted
Shares subject to an award.
STOCK APPRECIATION RIGHTS PLAN
On August 4, 2001, the Corporation established a Stock Appreciation Rights Plan
("SAR Plan") for the benefit of certain employees residing in countries where
the granting of options under the Stock Option Plan is not feasible in the
opinion of the Corporation. The Board has full and complete authority to
interpret the SAR Plan and to establish the rules and regulations applying to it
and to make all other determinations it deems necessary or useful for the
administration of the SAR Plan.
Under the SAR Plan, eligible employees are entitled to receive a cash amount
equivalent to the difference between the market price of the Subordinate Voting
Shares on the date of exercise and the exercise price determined on the date of
grant. No Subordinate Voting Shares are issuable under the SAR Plan.
The Board of Directors has delegated to Management the task of designating the
recipients of stock appreciation rights, the date of vesting, the expiry date
and other conditions. Under the terms of the SAR Plan, the exercise price of the
stock appreciation rights may not be lower than the highest of the closing
prices of the Subordinate Voting Shares on The Toronto Stock Exchange and on the
NASDAQ National Market on the last trading day preceding the grant date, using
the noon buying rate of the Federal Reserve Bank of New York on the grant date
to convert the NASDAQ National Market closing price to Canadian dollars. Stock
appreciation rights are non-transferable.
The stock appreciation rights vest over a four-year period, with 25% vesting
annually commencing on the first anniversary date of the date of grant. Once
vested, stock appreciation rights may be exercised between the second and the
fifteenth business day following each release of the Corporation's quarterly
financial results. All of the stock appreciation rights that are granted under
the SAR Plan may be exercised within a maximum period of 10 years following the
date of their grant. Any stock appreciation rights granted under the SAR Plan
will lapse immediately upon the termination of the relationship with the
Corporation or one of its subsidiaries for a good and sufficient cause or at the
date on which an employee resigns or leaves his employment with the Corporation
or one of its subsidiaries (or within 30 days if the holder is dismissed without
cause). In the event of retirement or disability, any stock appreciation right
held by an employee lapses 30 days after the date of any such disability or
retirement. In the event of death, any stock appreciation right lapses 6 months
after the date of death.
14
COMPENSATION PLAN CONTROL AND REVIEW
The Corporation's relative position in terms of compensation levels is
determined annually through studies performed by independent consulting firms
using a selected reference market of comparable companies. Internal pay equity
studies are a key factor to complete the process and provide necessary
adjustments where required.
CONCLUSION
By way of application of the Corporation's executive compensation policy, an
important part of executive compensation is linked to corporate performance and
particularly to stock performance and long-term improvement. The Human Resources
Committee continuously reviews executive compensation programs to ensure that
they maintain their competitiveness and continue to focus on the Corporation's
objectives, values and business strategies.
Depending on specific circumstances, the Committee may also recommend employment
terms and conditions that deviate from the policies and the execution by the
Corporation or its subsidiaries of employment contracts on a case-by-case basis.
By the Human Resources Committee:
Michael Unger, Chairman
Pierre Marcouiller
David A. Thompson
15
PERFORMANCE GRAPH
The performance graph presented below compares the cumulative total shareholder
return of a $100 investment in the Subordinate Voting Shares and the cumulative
total return of the TSE 300 Stock Index for the period commencing September 1,
2000, and ending August 31, 2001.
THE CORPORATION'S STOCK PERFORMANCE
(SEPTEMBER 1, 2000 TO AUGUST 31, 2001)
[GRAPHIC HERE]
16
INDEBTEDNESS OF DIRECTORS AND OFFICERS
As at November 9, 2001, the Corporation had guaranteed loans made to employees,
directors, officers and senior officers by another entity in an amount totalling
US$141,900 for the purchase by such persons of Subordinate Voting Shares in the
share capital of the Corporation pursuant to the Share Plan. The following table
indicates outstanding guarantees that were provided by the Corporation to
directors, executive officers and senior officers of the Corporation for loans
used by such persons to acquire shares in the Corporation's share capital
pursuant to the Share Plan. All such guarantees were made by the Corporation in
the financial year ended August 31, 2000.
FINANCIALLY ASSISTED
LARGEST AMOUNT SECURITIES PURCHASES
INVOLVEMENT OF OUTSTANDING DURING DURING FINANCIAL
NAME AND PRINCIPAL THE FINANCIAL 2001 2001 SECURITY FOR
OCCUPATION CORPORATION ($US) (#) INDEBTEDNESS
--------------------------- --------------- --------------------- --------------------- -------------------
Pierre Plamondon, Guarantor 21,982.07 - Guarantee by the
Vice-President, Finance Corporation
and Chief Financial
Officer
--------------------------- --------------- --------------------- --------------------- -------------------
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Corporation maintains insurance protection against liability incurred by its
officers and directors as well as those of its subsidiaries in the performance
of their duties. The entire premium, amounting to approximately US$434,000 from
June 30, 2000 to June 30, 2003, is paid by the Corporation. The aggregate limit
of liability in respect of any and all claims is US$ 20 million per year. The
policy provides for the indemnification of directors and officers in the case of
claims for which the Corporation has not indemnified or is not permitted by law
to indemnify them, and for the reimbursement of the Corporation, subject to a
deductible of US$ 250,000 for claims brought and maintained in the United States
and US$ 100,000 for claims brought and maintained elsewhere than in the United
States in the case of claims for which it has indemnified or was permitted to
indemnify the directors or officers involved.
APPOINTMENT AND REMUNERATION OF AUDITORS
Management, upon the advice of the Audit Committee, recommends that
PricewaterhouseCoopers LLP be appointed as Auditors of the Corporation and that
the Board of Directors be authorized to fix their remuneration.
REPORT ON CORPORATE GOVERNANCE PRACTICES
The Toronto Stock Exchange requires that issuers listed on the Toronto Stock
Exchange provide annual disclosure on their corporate governance practices
through a Statement of Corporate Governance Practices. The Corporation's
disclosure of its corporate governance practices is set out in matrix form and
attached to this Management Proxy Circular as Schedule A.
17
ADDITIONAL INFORMATION
The Corporation shall provide to any person or company, upon request to the
Secretary of the Corporation, at 465 Godin Avenue, Vanier, Quebec, Canada,
G1M 3G7.
(a) one copy of the Form 20-F of the Corporation filed with the Securities and
Exchange Commission (the "SEC") in the United States pursuant to the
SECURITIES EXCHANGE ACT OF 1934, and with securities commissions or similar
authorities;
(b) one copy of the comparative financial statements of the Corporation for its
most recently completed financial year and the Auditors report thereon,
included in the Annual Report of the Corporation, and one copy of any
interim financial statements of the Corporation subsequent to the financial
statements for its most recently completed financial year;
(c) one copy of this Management Proxy Circular.
DIRECTORS' APPROVAL
The contents and the sending of this Management Proxy Circular have been
approved by the Directors of the Corporation.
DATED at Vanier, Quebec, Canada, this 30th day of November, 2001.
/s/ Kimberley Okell
Kimberley Okell
Secretary
EXFO ELECTRO-OPTICAL ENGINEERING INC.
465 Godin Avenue
Vanier, Quebec, Canada, G1M 3G7
18
EXFO ELECTRO-OPTICAL ENGINEERING INC.
SCHEDULE A
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TSE CORPORATE GOVERNANCE GUIDELINES COMMENTS
-----------------------------------------------------------------------------------------------------------------
1. Board should explicitly assume
responsibility for stewardship of
the Corporation specifically for:
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(a) Adoption of a strategic planning The Board participates in the strategic planning
process process as the acceptor/adopter of strategic plans
developed and proposed by management annually.
In addition, as strategic planning matters arise
during the year they are discussed at Board meetings.
-----------------------------------------------------------------------------------------------------------------
(b) Identification of principal risks, The Board identified the Corporation's principal risks
and implementing risk management and manages these risks through regular appraisal of
systems management's practices on an ongoing basis.
-----------------------------------------------------------------------------------------------------------------
(c) Succession planning and The Human Resources Committee is responsible for
monitoring senior management the elaboration and implementation of a succession
planning process, which is expected to be completed
during the present financial year. In addition, the
Human Resources Committee is responsible for monitoring
the performance of the Chief Executive Officer and that
of all other senior officers.
-----------------------------------------------------------------------------------------------------------------
(d) Communications policy The Corporation has an Investor Relations Manager that is
responsible for facilitating the communications between
Management and the Corporation's current and potential
shareholders and financial analysts. The Board adopted
and implemented Disclosure Guidelines to ensure
consistency in the manner that communications with
shareholders and the public are managed. The Audit
Committee reviews press releases containing the quarterly
results of the Corporation prior to release. In addition,
all press releases of the Corporation are reviewed by the
President and Chief Executive Officer and internal legal
counsel. The Disclosure Guidelines have been established
in accordance with the relevant disclosure requirements
under applicable Canadian and United States securities
laws.
-----------------------------------------------------------------------------------------------------------------
(e) Integrity of internal control and The Audit Committee has the responsibility to review the
management information systems Corporation's systems of internal controls regarding
finance, accounting, legal compliance and ethical
behaviour. The Audit Committee meets with the
Corporation's external auditors on a quarterly basis.
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19
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TSE CORPORATE GOVERNANCE GUIDELINES COMMENTS
-----------------------------------------------------------------------------------------------------------------
2. Majority of Directors should be The Board presently consists of 5 Directors, four of
"unrelated" (independent of which are unrelated Directors within the meaning of the
management and free from Guidelines. The Chairman of the Board, Mr. Germain
conflicting interest) Lamonde is a significant shareholder in the Corporation
as he has the ability to exercise a majority of the votes
for the election of the Board of Directors. The Board
believes that the current majority of unrelated Directors
provides appropriate independent representation for the
public shareholders of the Corporation.
-----------------------------------------------------------------------------------------------------------------
3. Disclosure for each Director Mr. Germain Lamonde - Related - is President and Chief
whether he or she is related, and Executive Officer of the Corporation.
how that conclusion was reached
For the remainder of the proposed Directors, none of them
or their associates have any interest or 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 the
Corporation, other than interests arising from
shareholding.
Mr. Pierre Marcouiller - Unrelated
Mr. Andre Tremblay - Unrelated
Dr. David A. Thompson - Unrelated
Mr. Michael Unger - Unrelated
-----------------------------------------------------------------------------------------------------------------
4. (a) Appoint a committee responsible At the present time, the Corporation has no formal
for appointment/assessment of procedures in place for recruiting new Directors. While
Directors there is no formal process for assessing Directors on an
ongoing basis, the Directors feel free to discuss specific
situations from time to time among themselves and/or with
the Chairman of the Board.
-----------------------------------------------------------------------------------------------------------------
(b) Composed exclusively of
non-management directors, the
majority of whom are unrelated
-----------------------------------------------------------------------------------------------------------------
5. Implement a process for assessing The Human Resources Committee is responsible for
the effectiveness of the Board, the monitoring of the Board's corporate governance
its committees and directors practices, the functioning of the Board and the powers,
mandates and performance of the Committees.
-----------------------------------------------------------------------------------------------------------------
6. Provide orientation and education Presentations and reports relating to the Corporation's
programs for new directors business and affairs are provided to new Directors. In
addition, new Board members meet with senior management
of the Corporation to review the business and affairs
of the Corporation.
-----------------------------------------------------------------------------------------------------------------
20
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TSE CORPORATE GOVERNANCE GUIDELINES COMMENTS
-----------------------------------------------------------------------------------------------------------------
7. Consider reducing size of board, The Board is presently composed of five members and has
with a view to improving determined that this size is appropriate for the Corporation
effectiveness at this time and that it offers the flexibility to respond
quickly to corporate opportunities and challenges as they
arise from time to time. The Board as currently constituted
brings together a mix of experience and backgrounds that the
Board considers appropriate for the stewardship of the
Corporation.
-----------------------------------------------------------------------------------------------------------------
8. Review compensation of directors The Human Resources Committee reviews periodically
in light of risks and compensation policies in light of market conditions,
responsibilities industry practice and level or responsibilities. Only
non-related directors are compensated for acting as a
director of the Corporation.
-----------------------------------------------------------------------------------------------------------------
9. (a) Committees should generally be The Board has two committees: the Audit Committee and
composed of non-management the Human Resources Committee. Each of the members of
directors the Audit Committee and Human Resources Committee are
non-management.
-----------------------------------------------------------------------------------------------------------------
(b) Majority of committee members Both the Audit Committee and the Human Resources
should be unrelated Committee consist of three members each, all of whom
are unrelated Directors.
-----------------------------------------------------------------------------------------------------------------
10. Appoint a committee responsible The Human Resources Committee is responsible for
for approach to corporate the monitoring of the Board's corporate governance practices,
governance issues the functioning of the Board and the powers, mandates and
performance of the committees.
-----------------------------------------------------------------------------------------------------------------
11. (a) Define limits to management's
responsibilities by developing
mandates for:
-----------------------------------------------------------------------------------------------------------------
(i) the board There is no specific mandate for the Board, however the
Board of Directors is, by law, responsible for managing
the business and affairs of the Corporation. Any
responsibility, which is not delegated, to senior
management or a committee of the Board remains the
responsibility of the Board.
-----------------------------------------------------------------------------------------------------------------
(ii) the CEO The corporate objectives which the President and Chief
Executive Officer is responsible for meeting, with the rest
of Management placed under his supervision, are determined
by the strategic objectives and budget as they are
presented each year to the Board of Directors.
-----------------------------------------------------------------------------------------------------------------
(b) Board should approve CEO's The Board in conjunction with Management establishes the
corporate objectives corporate objectives of the Corporation annually
which, in turn, are expected to be implemented by the CEO.
-----------------------------------------------------------------------------------------------------------------
21
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TSE CORPORATE GOVERNANCE GUIDELINES COMMENTS
-----------------------------------------------------------------------------------------------------------------
12. Establish structures and the The Corporation does not currently have a member of the
procedures to enable the Board Board that is responsible for ensuring that the Board
to function independently properly discharges its duties, independent of
of management management. However, if the "unrelated" Directors
wished, meetings in the absence of "related" Directors
could be held.
-----------------------------------------------------------------------------------------------------------------
13. (a) Establish an audit committee The Audit Committee is mandated to monitor audit functions,
with a specifically defined the preparation of financial statements, review press
mandate releases on financial results, review other regulatory
documents as required, and meet with outside auditors
independently of Management. The Committee also
recommends to the Board the selection of the
external auditors for appointment by the shareholders.
The aggregate fees billed for professional services rendered by
PWC for the audit of the Corporation's consolidated annual
financial statements for the financial year ended August
31, 2001 were approximately US$162,000. The aggregate fees
billed for services rendered by PWC, other than services
covered for auditing services above, for the financial year
ended August 31, 2001 were approximately US$352,000 which
related, for the most part, to the acquisition of Burleigh
and EXFO Photonic Solutions Inc. (formerly EFOS Inc.) and
tax planning matters.
-----------------------------------------------------------------------------------------------------------------
(b) All members should be All of the three members of the Audit Committee are
non-management directors non-management Directors.
-----------------------------------------------------------------------------------------------------------------
14. Implement a system to enable The Corporation has a practice of permitting the Board,
individual directors to engage any Committee thereof and any individual Director to
outside advisors, at engage independent, external advisors at the
Corporation's expense Corporation's expense.
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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 10, 2002