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 March 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-______.
On March 18, 2002, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the fiscal quarter ended
February 28, 2002. This report on Form 6-K sets forth the news release relating
to EXFO's announcement and certain information relating to EXFO's financial
condition and results of operations for the second fiscal quarter of the 2002
fiscal year. The press release and certain information relating to EXFO's
financial condition and results of operations for the second fiscal quarter of
the 2002 fiscal year are hereby incorporated as a document by reference to Form
F-3 (Registration Statement under the Securities Act of 1933) declared effective
as of July 30, 2001 and to Form F-3 (Registration Statement under the Securities
Act of 1933) declared effective as of March 11, 2002 and to amend certain
material information as set forth in these two Form F-3 documents.
[PRESS RELEASE]
[EXFO LETTERHEAD]
1 800 663-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211 Fiber-optic test, measurement and monitoring equipment
Fax: (418) 683-2170
EXFO MEETS PREVIOUSLY ANNOUNCED GUIDANCE
- Sales of US$14.6 million
- Pro forma net loss* of US$0.07 per share
- Net loss of US$0.37 per share
- Guides towards slight growth in upcoming quarter
QUEBEC CITY, CANADA, March 18, 2002--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO, TSE: EXF) announced today that it has met previously issued
guidance for the second quarter of fiscal 2002.
EXFO reported sales of US$14.6 million for the quarter ended February 28, 2002
compared to US$36.3 million for the same period in fiscal 2001 and US$20.1
million for the first quarter of 2002.
Pro forma net loss* for the second quarter of fiscal 2002 was US$4.1 million, or
US$0.07 per share, compared to pro forma net earnings of US$7.5 million, or
US$0.14 per share, for the second quarter of 2001 and a pro forma net loss of
US$1.9 million, or $0.03 per share, for the first quarter of 2002.
EXFO's net loss, which includes amortization of goodwill and the after-tax
effect of amortization of intangible assets and restructuring charges, for the
second quarter of fiscal 2002 was US$22.7 million, or US$0.37 per share,
compared to net earnings of US$24,000, or US$0.00 per share, for the same period
last year and a net loss of US$19.1 million, or $0.33 per share, for the first
quarter of 2002.
Gross margin, excluding inventory write-offs, amounted to 51.9% of sales for the
second quarter of 2002 compared to 64.8% for the same period in 2001 and 55.1%
for the first quarter of 2002. Including inventory write-offs of US$5.9 million
and US$3.5 million in the second and first quarters of 2002, gross margin
dropped to 11.8% and 37.8%, respectively.
"After 16 consecutive years of growth in sales, we have been affected by
difficult market conditions that are unprecedented in this industry," said
Germain Lamonde, Chairman, President and CEO of EXFO. "However, I am pleased
that we have strengthened our positioning in the fiber-optic test and
measurement segment. Our sequential increase in net bookings and decrease in
order cancellations represent encouraging signs that our business strategy is
reaping benefits."
[PRESS RELEASE]
[EXFO LETTERHEAD]
1 800 663-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211 Fiber-optic test, measurement and monitoring equipment
Fax: (418) 683-2170
BUSINESS HIGHLIGHTS
EXFO launched an unprecedented nine new products during the second quarter of
2002. Three major releases included the FTB-5800 Chromatic Dispersion Analyzer
for high-speed DWDM networks; the IQS-500 Cortex platform for manufacturing
automation and R&D; and the FPMD-5600 Femtosecond Polarization Mode Dispersion
Analyzer (PMD) to measure first- and second-order PMD for DWDM.
By the time the Optical Fiber Conference concludes this week, the Company will
have announced more than 20 new products since the beginning of fiscal 2002. In
comparison, EXFO launched the same number of products during the entire 2001
fiscal year.
OPERATING EXPENSES
Selling and administrative expenses amounted to US$9.3 million, or 63.4% of
sales, for the second quarter of fiscal 2002 compared to US$10.9 million, or
30.1% of sales, for the same period in 2001 and US$10.3 million, or 51.3% of
sales, for the first quarter of 2002. Gross research and development expenses
totalled US$4.8 million, or 33.0% of sales, for the second quarter of fiscal
2002 compared to US$4.5 million, or 12.4% of sales, for the same period last
year and US$4.2 million, or 20.9% of sales, for the first quarter of 2002.
During the second quarter of 2002, EXFO incurred additional severance expenses
of US$447,000 as part of its restructuring efforts.
The percentage increases in operating expenses were mainly due to decreased
sales during the second quarter of 2002 and the full effect of the Avantas
acquisition.
BUSINESS OUTLOOK
EXFO forecasted sales between US$14.5 million and US$17.0 million and a pro
forma net loss between US$0.05 and US$0.07 for the third quarter of fiscal 2002.
"We have made difficult choices preserving our long-term focus on innovation and
market share gains while aligning our cost structure to current market
conditions," Mr. Lamonde said. "Judging by the string of products we released so
far this year, we are optimistic about showing slight growth in the third
quarter."
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 5 p.m. (Eastern time) to review its
second-quarter results. To listen to the conference call and participate in the
question period via telephone, dial 1 (416) 620-2400.
Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA,
Vice-President of Finance and Chief Financial Officer, will participate in the
call. A replay of the conference call can be accessed after 7 p.m. (Eastern
time) today until midnight (Eastern time) on March 22, 2002. The replay number
is 1 (416) 626-4100 and the password is 20395770. A Webcast of the conference
call will also be available on EXFO's Web site at www.exfo.com, under the
Investors section.
[PRESS RELEASE]
[EXFO LETTERHEAD]
1 800 663-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211 Fiber-optic test, measurement and monitoring equipment
Fax: (418) 683-2170
*PRO FORMA NET EARNINGS (LOSS) REPRESENT NET EARNINGS (LOSS) EXCLUDING
AMORTIZATION OF GOODWILL AND THE AFTER-TAX EFFECT OF AMORTIZATION OF INTANGIBLE
ASSETS AND RESTRUCTURING CHARGES. ALL FIGURES ARE IN THOUSANDS OF US DOLLARS
EXCEPT PER SHARE DATA.
THREE MONTHS ENDED FEBRUARY 28,
2001 2002
NET EARNINGS (LOSS) IN ACCORDANCE WITH GAAP $ 24 $ (22,675)
PRO FORMA ADJUSTMENTS:
AMORTIZATION OF GOODWILL 6,377 12,409
AMORTIZATION OF INTANGIBLE ASSETS 1,648 3,469
TAX EFFECT OF AMORTIZATION OF INTANGIBLE ASSETS (538) (1,281)
RESTRUCTURING CHARGES - 6,309
TAX EFFECT OF THE RESTRUCTURING CHARGES - (2,330)
--------------- ---------------
PRO FORMA NET EARNINGS (LOSS) $ 7,511 $ (4,099)
=============== ===============
BASIC AND DILUTED PRO FORMA NET EARNINGS (LOSS) PER $ 0.14 $ (0.07)
SHARE
EXFO PROVIDES PRO FORMA FINANCIAL INFORMATION TO HELP THE READER BETTER
UNDERSTAND ITS OPERATING RESULTS. THIS INFORMATION IS NOT IN ACCORDANCE WITH, OR
AN ALTERNATIVE FOR, GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND MAY NOT BE
COMPARABLE TO SIMILARLY TITLED MEASURES REPORTED BY OTHER COMPANIES.
[PRESS RELEASE]
[EXFO LETTERHEAD]
1 800 663-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211 Fiber-optic test, measurement and monitoring equipment
Fax: (418) 683-2170
ABOUT EXFO
EXFO is a leading designer and manufacturer of fiber-optic test, measurement,
monitoring and automation solutions for the global telecommunications industry.
EXFO markets more than 90 product families to 2000 customers in 70 countries
around the world.
EXFO and its subsidiaries develop products for two main markets. The Portable
and Monitoring Division provides handheld and modular instruments for the
physical-, optical- and protocol-layer testing needs of telecommunications
carriers and network service providers. The Industrial and Scientific Division
offers an extensive line of high-performance instruments, test automation
systems and manufacturing automation equipment for optical component and
transmission system vendors as well as for research and development labs.
This news release contains forward-looking statements within the meaning of the
U. S. Private Securities Litigation Reform Act of 1995 and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate" or "continue" or the
negative or comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and actual results may differ materially
from those in the forward-looking statements as a result of various factors
including continued uncertainty over the world-wide economy, spending in the
telecommunications sector and our ability to execute successfully in these
uncertain conditions; the effects of the actions we have taken in response to
such economic uncertainty (including workforce reductions, ability to quickly
adapt cost structures to align with decreased levels of business, ability to
manage inventory levels to adapt to slowdowns); market acceptance of our
recently introduced new products and other upcoming new products; limited
visibility with regards to customer orders and the timing of such orders; our
ability to successfully integrate our acquired and to-be-acquired companies; and
future economic, competitive and market conditions. Assumptions relating to the
foregoing involve judgments and risks, all of which are difficult or impossible
to predict accurately and many of which are beyond our control. Other risk
factors that may affect our future performance and our operations are detailed
in our Annual Report on Form 20-F and our other filings with the U. S.
Securities and Exchange Commission and the Canadian securities commissions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable based on information currently available to us, we
cannot assure you that the expectations will prove to have been correct.
Accordingly, you should not place undue reliance on these forward-looking
statements. In any event, these statements speak only as of the date of this
document. We undertake no obligation to revise or update any of them to reflect
events or circumstances after the date of this document.
FOR MORE INFORMATION:
Mike Lamanna
Director, Investor Relations
(418) 683-0211
michael.lamanna@exfo.com
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
AS AT AS AT
AUGUST 31, FEBRUARY 28,
2001 2002
---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,729 $ 8,105
Short-term investments 66,861 43,432
Accounts receivable
Trade, less allowance for doubtful accounts of $541
($893 as at August 31, 2001) 24,531 9,669
Other 3,660 3,408
Income taxes receivable - 15,781
Inventories (note 3) 44,345 36,143
Prepaid expenses 1,265 1,478
Future income taxes 1,423 1,808
-------- --------
149,814 119,824
PROPERTY, PLANT AND EQUIPMENT 27,140 28,537
INTANGIBLE ASSETS AND GOODWILL 264,242 291,318
FUTURE INCOME TAXES 1,381 1,909
-------- --------
$442,577 $441,588
======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 4) $ 16,180 $ 12,525
Income taxes payable 2,623 -
Deferred revenue 616 378
Current portion of long-term debt 106 91
-------- --------
19,525 12,994
DEFERRED GRANTS 1,002 636
LONG-TERM DEBT 664 620
FUTURE INCOME TAXES 6,581 5,522
-------- --------
27,772 19,772
-------- --------
CONTINGENCY (NOTE 7)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 429,995 489,611
CONTRIBUTED SURPLUS 1,457 1,483
CUMULATIVE TRANSLATION ADJUSTMENT (8,333) (19,234)
DEFICIT (8,314) (50,044)
-------- --------
414,805 421,816
-------- --------
$442,577 $441,588
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS SIX MONTHS ENDED THREE MONTHS SIX MONTHS ENDED
ENDED FEBRUARY 28, FEBRUARY 28, ENDED FEBRUARY 28, FEBRUARY 28,
2001 2001 2002 2002
------------------ ------------------ ------------------ ------------------
SALES $ 36,293 $ 64,812 $ 14,601 $ 34,739
COST OF SALES * 12,787 23,095 12,885 25,417
------------------ ------------------ ------------------ ------------------
GROSS MARGIN 23,506 41,717 1,716 9,322
------------------ ------------------ ------------------ ------------------
OPERATING EXPENSES
Selling and administrative 10,915 19,835 9,252 19,577
Net research and development (note 5) 3,315 5,287 3,673 6,818
Amortization of property, plant and
equipment 716 1,230 1,487 2,835
Amortization of intangible assets 1,648 1,662 3,469 6,740
Restructuring charges (note 6) - - 447 857
------------------ ------------------ ------------------ ------------------
TOTAL OPERATING EXPENSES 16,594 28,014 18,328 36,827
------------------ ------------------ ------------------ ------------------
EARNINGS (LOSS) FROM OPERATIONS 6,912 13,703 (16,612) (27,505)
Interest income, net 1,777 4,408 279 978
Foreign exchange gain 811 3,170 54 87
------------------ ------------------ ------------------ ------------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
AMORTIZATION OF GOODWILL 9,500 21,281 (16,279) (26,440)
------------------ ------------------ ------------------ ------------------
INCOME TAXES
Current 4,070 7,590 (5,241) (7,815)
Future (971) (339) (772) (1,754)
------------------ ------------------ ------------------ ------------------
3,099 7,251 (6,013) (9,569)
------------------ ------------------ ------------------ ------------------
EARNINGS (LOSS) BEFORE AMORTIZATION OF
GOODWILL 6,401 14,030 (10,266) (16,871)
AMORTIZATION OF GOODWILL 6,377 6,501 12,409 24,859
------------------ ------------------ ------------------ ------------------
NET EARNINGS (LOSS) FOR THE PERIOD $ 24 $ 7,529 $ (22,675) $ (41,730)
------------------ ------------------ ------------------ ------------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Earnings (loss) before amortization
of goodwill $ 0.12 $ 0.28 $ (0.17) $ (0.28)
Net earnings (loss) $ - $ 0.15 $ (0.37) $ (0.70)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000's) 51,804 49,267 61,321 59,822
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000's) (note 8) 52,043 49,431 61,321 59,822
* including restructuring charges for inventory write-off of $5,862 and $9,362
for the three months and the six months ended February 28, 2002, respectively,
nil in 2001 (see note 6).
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
RETAINED EARNINGS (DEFICIT)
SIX MONTHS
ENDED
FEBRUARY 28,
-----------------------------------------
2001 2002
------------------ -------------------
BALANCE - BEGINNING OF PERIOD $ 6,980 $ (8,314)
ADD
Net earnings (loss) for the period 7,529 (41,730)
------------------ -------------------
BALANCE - END OF PERIOD $14,509 $(50,044)
------------------ -------------------
CONTRIBUTED SURPLUS
SIX MONTHS
ENDED
FEBRUARY 28,
-----------------------------------------
2001 2002
------------------ -------------------
BALANCE - BEGINNING OF PERIOD $ - $1,457
ADD
Premium on resale of share capital 1,350 26
------------------ -------------------
BALANCE - END OF PERIOD $1,350 $1,483
------------------ -------------------
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
THREE MONTHS THREE MONTHS
ENDED SIX MONTHS ENDED ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2001 2001 2002 2002
------------------ ------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the period $ 24 $ 7,529 $ (22,675) $ (41,730)
Add (deduct) items not affecting cash and
cash equivalents
Discount on short-term investments 2,795 188 1 541
Amortization of property, plant and
equipment 716 1,230 1,487 2,835
Amortization of intangible assets 1,648 1,662 3,469 6,740
Foreign exchange gains (losses) on
disposal of short-term investments (878) (3,188) 3 (76)
Future income taxes (971) (339) (772) (1,754)
Amortization of goodwill 6,377 6,501 12,409 24,859
Change in non-cash operating working capital
items
Accounts receivable (1,039) (7,297) 6,182 15,103
Income taxes 2,571 4,383 (8,189) (16,300)
Inventories (9,307) (16,300) 6,826 9,335
Prepaid expenses (627) (605) 43 94
Accounts payable and accrued
liabilities (2,029) 4,371 (3,225) (5,447)
Deferred revenue 144 176 (104) (219)
Deferred grants (71) (61) (115) (334)
------------------ ------------------- ------------------- -------------------
(647) (1,750) (4,660) (6,353)
------------------ ------------------- ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances 654 812 - -
Repayment of mandatorily redeemable
preferred shares - (354) - -
Repayment of long-term debt (874) (1,004) (22) (59)
Redemption of share capital (11) (30) - (2)
Resale of share capital 364 1,380 - 28
Share issue expenses (26) (49) - (14)
------------------ ------------------- ------------------- -------------------
107 755 (22) (47)
------------------ ------------------- ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (194,325) (210,790) (104,400) (383,046)
Proceeds from disposal of short-term
investments 245,499 263,831 97,555 404,131
Additions to property, plant and equipment
and intangible assets (5,857) (8,038) (1,162) (4,300)
Business combinations, net of cash and cash
equivalents acquired (42,349) (42,349) - (9,756)
------------------ ------------------- ------------------- -------------------
2,968 2,654 (8,007) 7,029
------------------ ------------------- ------------------- -------------------
CHANGE IN CASH AND CASH EQUIVALENTS 2,428 1,659 (12,689) 629
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (778) (454) (82) (253)
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD 284 729 20,876 7,729
------------------ ------------------- ------------------- -------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,934 $ 1,934 $ 8,105 $ 8,105
------------------ ------------------- ------------------- -------------------
SUPPLEMENTARY INFORMATION
Interest paid $ (125) $ (157) $ (43) $ (96)
Interest received $ 4,057 $ 4,723 $ 321 $ 1,414
Income taxes paid $ (1,165) $ (2,110) $ (1,745) $ (6,218)
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
1 INTERIM FINANCIAL INFORMATION
The financial information as at February 28, 2002 and for the periods
ended February 28, 2001 and 2002 is unaudited. In the opinion of
management, all adjustments necessary to present fairly the results of
these periods have been included. The adjustments made were of a normal
recurring nature. Interim results may not necessarily be indicative of
results anticipated for the year.
These interim consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada and use the same
accounting policies and methods used in the preparation of the company's
most recent annual consolidated financial statements. All disclosures
required for annual financial statements have not been included in these
financial statements. These interim consolidated financial statements
should be read in conjunction with the company's most recent annual
consolidated financial statements.
2 BUSINESS COMBINATION
On November 2, 2001, the company acquired a 100% interest in Avantas
Networks Corporation (renamed EXFO Protocol Inc. ("EXFO Protocol")), a
Canadian company specializing in fiber-optic protocol testing, in exchange
for a total consideration valued at $94,952,000 or $69,381,000 net of
$25,571,000 of cash and cash equivalents acquired. The total consideration
includes acquisition-related costs of $1,272,000.
The consideration paid consisted of $9,756,000 in cash, net of cash and
cash equivalents acquired of $25,571,000 and the issuance of 4,374,573
subordinate voting shares valued at $59,625,000. The fair value of the
subordinate voting shares issued was determined based on the market price
of the shares beginning three days before and ending three days after the
terms of the acquisition were agreed and announced, being August 20, 2001.
This acquisition has been accounted for using the purchase method and
consequently, the results of operations of EXFO Protocol have been
included in the consolidated statements of earnings of the company since
November 2, 2001, being the date of acquisition.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
The purchase price, including acquisition-related costs, has been
allocated based on the estimated fair value of net assets at the date of
acquisition as follows:
(UNAUDITED)
Assets acquired
Current assets $ 6,040
Property, plant and equipment 2,003
In-process research and development 1,400
Core technology 5,050
Future income tax assets 476
Liabilities assumed (3,575)
------------
Net identifiable assets acquired 11,394
Goodwill 57,987
------------
Purchase price 69,381
Less: Subordinate voting shares issued 59,625
------------
Cash paid, net of cash and cash equivalents acquired $ 9,756
------------
The fair value allocated to intangible assets acquired was based upon an
independent valuation performed in conjunction with this acquisition.
The existing technology that has reached technological feasibility was
classified as core technology.
In-process research and development represents the existing technology
that has not reached technological feasibility and has no future
alternative use.
In-process research and development and core technology are amortized on a
straight-line basis over their estimated useful lives of ten months and
five years, respectively. Goodwill is not amortized but is reviewed for
impairment when events or circumstances indicated that cost may not be
recoverable.
3 INVENTORIES
AS AT AS AT
AUGUST 31, 2001 FEBRUARY 28, 2002
------------------ --------------------
(UNAUDITED)
Raw materials $29,891 $23,003
Work in progress 3,507 2,078
Finished goods 10,947 11,062
---------- ----------
$44,345 $36,143
---------- ----------
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
4 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT
AUGUST 31, AS AT
2001 FEBRUARY 28, 2002
------------------ --------------------
(UNAUDITED)
Trade $ 7,732 $ 5,159
Salaries and social benefits 3,917 3,517
Commissions 1,307 275
Tax on capital 463 697
Warranty 901 905
Restructuring charges 1,230 1,136
Other 630 836
--------- ----------
$16,180 $12,525
--------- ----------
5 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS SIX MONTHS ENDED THREE MONTHS SIX MONTHS ENDED
ENDED FEBRUARY 28, FEBRUARY 28, ENDED FEBRUARY 28, FEBRUARY 28,
2001 2001 2002 2002
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross research and development
expenses $ 4,508 $ 7,356 $ 4,823 $ 9,033
Research and development tax credits (867) (1,567) (1,075) (2,017)
Government grants (326) (502) (75) (198)
------------------- ------------------- ------------------- -------------------
$ 3,315 $ 5,287 $ 3,673 $ 6,818
------------------- ------------------- ------------------- -------------------
6 RESTRUCTURING CHARGES
During the three months ended November 30, 2001, the company incurred
restructuring charges of $3,910,000 in order to align its cost structure
to market conditions. The company recorded $410,000 in severance expenses
for the 101 employees who were terminated, which are included in the
restructuring charges in the statement of earnings for the six months
ended February 28, 2002. The company also recorded $3,500,000 in inventory
write-off for excess and obsolete inventories which is included in the
cost of sales in the statement of earnings for the six months ended
February 28, 2002. As at February 28, 2002, the accrued liabilities
related to these restructuring charges amount to $47,000 and consist of
severance expenses.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
During the three months ended February 28, 2002, the company incurred
additional restructuring charges of $6,309,000 in order to align its cost
structure to current market conditions. The company recorded $447,000 in
severance expenses for the additional 57 employees who were terminated,
which are included in the restructuring charges in the statements of
earnings for the periods ended February 28, 2002. The company also
recorded $5,862,000 in additional inventory write-off for excess and
obsolete inventories which is included in the cost of sales in the
statements of earnings for the periods ended February 28, 2002. As at
February 28, 2002, the accrued liabilities related to these restructuring
charges amount to $409,000 and consist of severance expenses.
Finally, as at February 28, 2002, the accrued liabilities related to the
restructuring plan of June 2001 amount to $680,000 and consist of future
payments on exit leased facilities.
7 CONTINGENCY
On November 27, 2001, a class action suit was filed in the United States
District Court for the Southern District of New York against the company,
four of the underwriters of its Initial Public Offering and some of its
executive officers pursuant to the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder and sections 11, 12 and 16 of the
Securities Act of 1933. This class action alleges that the company's
registration statement and prospectus filed with the Securities and
Exchange Commission on June 29, 2000 contained material misrepresentations
and/or omissions resulting from (i) the underwriters allegedly soliciting
and receiving additional, excessive and undisclosed commissions from
certain investors in exchange for which they allocated material portions
of the shares issued in connection with the company's Initial Public
Offering; and (ii) the underwriters allegedly entering into agreements
with customers whereby shares issued in connection with the company's
Initial Public Offering would be allocated to those customers in exchange
for which customers agreed to purchase additional amounts of shares in the
after market at pre-determined prices. The plaintiffs in this suit seek an
unspecified amount for damages suffered.
The company believes that its executive officers have fully complied with
all applicable securities laws and that the claims against it and its
officers are without merit. The company has referred this matter to its
insurers and plans to vigorously defend its position in this litigation.
However, at this time, it is not possible to predict the outcome of this
case, nor determine the amount of possible losses. Accordingly, no
provision for this case has been made in the interim consolidated
financial statements as of February 28, 2002.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
8 EARNINGS (LOSS) PER SHARE
The following table summarizes the reconciliation of the basic weighted
average number of shares outstanding and the diluted weighted average
number of shares outstanding used in the diluted earnings (loss) per share
calculation:
THREE MONTHS SIX MONTHS ENDED THREE MONTHS SIX MONTHS ENDED
ENDED FEBRUARY 28, FEBRUARY 28, ENDED FEBRUARY 28, FEBRUARY 28,
2001 2001 2002 2002
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Basic weighted average number of
shares outstanding (000's) 51,804 49,267 61,321 59,822
Exercice of options 153 121 - -
Exercice of restricted stock awards 86 43 - -
------------------- ------------------- ------------------- -------------------
Diluted weighted average number of
shares outstanding (000's) 52,043 49,431 61,321 59,822
------------------- ------------------- ------------------- -------------------
9 DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim consolidated financial statements are prepared in accordance
with Canadian GAAP which differ in certain respects from U.S. GAAP. Note
19 to the company's most recent annual consolidated financial statements
describes the significant differences between Canadian and U.S. GAAP that
affect the company. This note describes significant additional changes
occurring since the most recent annual consolidated financial statements
and provides a quantitative analysis of the significant differences. All
disclosures required in annual financial statements under U.S. GAAP have
not been provided in these interim consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
RECONCILIATION OF NET EARNINGS (LOSS) TO CONFORM WITH U.S. GAAP
THREE MONTHS THREE MONTHS
ENDED SIX MONTHS ENDED ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2001 2001 2002 2002
------------------ ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net earnings (loss) for the period in
accordance with Canadian GAAP $ 24 $ 7,529 $ (22,675) $ (41,730)
Non-cash stock-based compensation
costs related to stock option plan (641) (174) (224) (431)
Non-cash stock-based compensation
costs related to stock purchase
plan (113) (234) (232) (359)
Non-cash stock-based compensation
costs related to restricted stock
award plan (339) (339) (1,115) (2,027)
Unrealized gains (losses) on forward
exchange contracts 1,002 103 46 (220)
Future income taxes on forward
exchange contracts (439) (34) (15) 73
Reclassification of realized foreign
exchange gains on
available-for-sale securities 4,300 - - -
Future income taxes on
available-for-sale securities (1,935) - - -
Acquired in-process research and
development (1,309) (1,309) 420 (840)
Future income taxes on acquired in-
process research and development (162) (162) (133) (179)
Amortization of goodwill (2,034) (2,034) (3,237) (6,479)
------------------ ------------------- ------------------- -------------------
Net earnings (loss) available to
common shareholders for the
period in accordance with U.S.
GAAP (1,646) 3,346 (27,165) (52,192)
Other comprehensive income (loss)
Foreign currency translation
adjustments 664 (7,878) (5,805) (10,901)
Unrealized holding gains on
available-for-sale
securities, net of related
future income taxes 419 382 - -
Reclassification of realized
foreign exchange gains on
available-for-sale
securities, net of related
future income taxes (2,365) - - -
------------------ ------------------- ------------------- -------------------
Comprehensive loss $ (2,928) $ (4,150) $ (32,970) $ (63,093)
------------------ ------------------- ------------------- -------------------
Basic and diluted net earnings (loss) $ (0.03) $ 0.07 $ (0.44) $ (0.87)
per share in accordance with U.S.
GAAP
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
SHARE CAPITAL
AS AT AS AT
AUGUST 31, FEBRUARY 28,
2001 2002
------------------ -----------------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 429,995 $ 489,611
Stock-based compensation costs related to stock purchase plan
Current period (150) -
Cumulative effect of prior periods 2,692 2,542
Shares issued upon business combinations 65,584 65,584
------------------ -------------------
Share capital in accordance with U.S. GAAP $ 498,121 $ 557,737
------------------ -------------------
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
AUGUST 31, FEBRUARY 28,
2001 2002
------------------ -----------------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with
Canadian GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Current period (8,145) -
Cumulative effect of prior periods (19,429) (7,968)
Amortization for the period 4,912 2,817
Reduction of stock-based compensation costs 14,694 216
------------------ -------------------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (7,968) $ (4,935)
------------------ -------------------
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
OTHER CAPITAL
AS AT AS AT
AUGUST 31, FEBRUARY 28,
2001 2002
------------------ -----------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Current period 8,145 -
Cumulative effect of prior periods 18,749 12,350
Reduction of stock-based compensation costs (14,544) (216)
------------------ -------------------
Other capital in accordance with U.S. GAAP $ 12,350 $ 12,134
------------------ -------------------
DEFICIT
AS AT AS AT
AUGUST 31, FEBRUARY 28,
2001 2002
------------------ -----------------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $ (8,314) $ (50,044)
Stock-based compensation costs related to stock-based compensation plans
Current period (4,912) (2,817)
Cumulative effect of prior periods (2,012) (6,924)
Unrealized gains (losses) on forward exchange contracts, net of
related future income taxes
Current period 117 (147)
Cumulative effect of prior periods - 117
Acquired in-process research and development
Current period - (840)
Future income taxes on acquired in-process research and development
Current period (936) (179)
Cumulative effect of prior periods - (936)
Amortization of goodwill
Current period (8,453) (6,479)
Cumulative effect of prior periods - (8,453)
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
------------------ -------------------
Deficit in accordance with U.S. GAAP $ (23,494) $ (75,686)
------------------ -------------------
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE LOSS
AS AT AS AT
AUGUST 31, FEBRUARY 28,
2001 2002
------------------ -----------------
(UNAUDITED)
Foreign currency translation adjustments
Balance - Beginning of period $ 539 $ (9,349)
Change during the period (9,888) (10,901)
------------------ -------------------
Balance - End of period (9,349) (20,250)
------------------ -------------------
Unrealized holding gains on available-for-sale securities, net of future
income taxes
Balance - Beginning of period 37 -
Reclassification adjustment for amounts included in net loss, net of
related future income taxes (37) -
------------------ -------------------
Balance - End of period - -
------------------ -------------------
Accumulated other comprehensive loss $ (9,349) $ (20,250)
------------------ -------------------
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
BALANCE SHEETS
AS AT AUGUST 31, 2001 AS AT FEBRUARY 28, 2002
--------------------------------------- ---------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Goodwill
Cost $ 250,497 $ 315,547 $ 302,984 $ 367,620
Accumulated
amortization (31,325) (39,762) (55,718) (70,650)
------------------ -------------------- -------------------- ------------------
$ 219,172 $ 275,785 $ 247,266 $ 296,970
------------------ -------------------- -------------------- ------------------
Shareholders' equity
Share capital $ 429,995 $ 498,121 $ 489,611 $ 557,737
Contributed surplus 1,457 1,457 1,483 1,483
Cumulative translation
adjustment (8,333) - (19,234) -
Deferred stock-based
compensation costs - (7,968) - (4,935)
Other capital - 12,350 - 12,134
Deficit (8,314) (23,494) (50,044) (75,686)
Accumulated other
comprehensive loss - (9,349) - (20,250)
------------------ -------------------- -------------------- ------------------
$ 414,805 $ 471,117 $ 421,816 $ 470,483
------------------ -------------------- -------------------- ------------------
STATEMENTS OF CASH FLOWS
For the periods ended February 28, 2001 and 2002, there are no significant
differences between the statements of cash flows under Canadian GAAP as
compared to U.S. GAAP.
UNAUDITED PRO FORMA INFORMATION ON BUSINESS COMBINATION
Under U.S. GAAP, pro forma information must be provided as though the
business combination had occurred at the beginning of the reported
periods.
The following unaudited pro forma information reflects the results of
operations as if the acquisition of EXFO Protocol Inc. had been completed
on September 1, 2000 and 2001.
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.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2001 2001 2002 2002
------------------- ------------------- ------------------- -------------------
Sales $ 36,459 $ 65,143 $ 14,601 $ 34,846
Net loss $ (3,680) $ (313) $ (27,165) $ (52,856)
Basic and diluted net loss
per share $ (0.07) $ (0.01) $ (0.44) $ (0.86)
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA)
revised section 1650, "Foreign Currency Translation", which is effective
for fiscal years beginning on or after January 1, 2002. The revised
standard no longer permits the deferral and amortization of unrealized
exchange gains and losses that arise on the translation of long-term
foreign currency denominated monetary assets and liabilities. Under the
new rules, such gains and losses must be reported in earnings as they
arise. Adopting this revised standard is not expected to have a
significant impact on the company's financial statements.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging
Relationships", which shall be applied to hedging relationships in effect
in fiscal years beginning on or after July 1, 2002. This new accounting
guideline establishes basic criteria that must be met before hedge
accounting can be used. It also describes the types of exposures that can
be hedged and the types of instruments that qualify as hedges, sets
detailed designation and documentation requirements and requires formal
effectiveness testing. The company has not yet assessed the impact of the
adoption of this new guideline.
In November 2001, the CICA issued section 3870, "Stock-Based Compensation
and Other Stock-Based Payments", which is effective for fiscal years
beginning on or after January 1, 2002. The new section applies to awards
granted on or after the date of adoption, and requires that stock-based
payment to non-employees and direct awards to employees and non-employees
be accounted for using a fair value-based method. The company has not yet
assessed the impact of the adoption of this new standard.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
141 "Business Combinations" and SFAS 142 "Goodwill and other intangible
assets" and in August 2001 the CICA issued section 1581 "Business
Combination" and section 3062 "Goodwill and other intangible assets". SFAS
141 and section 1581 require 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. SFAS 141 and section 1581 also broaden
criteria for recording intangible assets separately from goodwill. Upon
the adoption of SFAS 142 and 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. SFAS
142 and section 3062 require 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 the
fair value. SFAS 142 and section 3062 will be adopted on September 1,
2002.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and
per share data and as otherwise noted)
The impact of adopting SFAS 142 and section 3062 will result in the
non-amortization of goodwill recorded prior to July 1, 2001 resulting in
the elimination of goodwill amortization for the year ending August 31,
2003 by approximately $63,000,000 under SFAS 142 and $50,000,000 under
section 3062. 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 under
SFAS 142 and to deficit under section 3062. Any subsequent impairment
losses on goodwill will be charged to earnings in the period in which it
is incurred.
Under the transitional provisions of SFAS 142 and section 3062, the
company did not amortize the goodwill resulting from the acquisition of
EXFO Protocol Inc., which closed on November 2, 2001.
In June 2001, the FASB 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.
In October 2001, the FASB issued SFAS 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS 121 and the
provisions of APB 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" with regard to
reporting the effects of a disposal of a segment of a business. SFAS 144
retains many of the provisions of SFAS 121, but significantly changes the
criteria that would have to be met to classify an asset as held for
disposal such that long-lived assets to be disposed of other that by sale
are considered held and used until disposed of. In addition, SFAS 144
retains the basic provisions of APB 30 for presentation of discontinued
operations in the statement of earnings but broadens that presentation to
a component of an entity. This new standard is effective for fiscal years
beginning on December 15, 2001. Adopting this new standard is not expected
to have a significant impact on the company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE U. S. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND WE
INTEND THAT SUCH FORWARD LOOKING STATEMENTS BE SUBJECT TO THE SAFE HARBORS
CREATED THEREBY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER THAN HISTORICAL
INFORMATION OR STATEMENTS OF CURRENT CONDITION. WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE" OR "CONTINUE"
OR THE NEGATIVE OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS, INCLUDING CONTINUED UNCERTAINTY OVER THE WORLD-WIDE
ECONOMY, SPENDING IN THE TELECOMMUNICATIONS SECTOR AND OUR ABILITY TO EXECUTE
SUCCESSFULLY IN THESE UNCERTAIN CONDITIONS; THE EFFECTS OF THE ACTIONS WE HAVE
TAKEN IN RESPONSE TO SUCH ECONOMIC UNCERTAINTY (INCLUDING WORKFORCE REDUCTIONS,
ABILITY TO QUICKLY ADAPT COST STRUCTURES TO ALIGN WITH DECREASED LEVELS OF
BUSINESS, ABILITY TO MANAGE INVENTORY LEVELS TO ADAPT TO SLOWDOWNS); MARKET
ACCEPTANCE OF OUR RECENTLY INTRODUCED NEW PRODUCTS AND OTHER UPCOMING NEW
PRODUCTS; LIMITED VISIBILITY WITH REGARDS TO CUSTOMER ORDERS AND THE TIMING OF
SUCH ORDERS; OUR ABILITY TO SUCCESSFULLY INTEGRATE OUR ACQUIRED AND
TO-BE-ACQUIRED COMPANIES; AND FUTURE ECONOMIC, COMPETITIVE AND MARKET
CONDITIONS. ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS AND RISKS,
ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH
ARE BEYOND OUR CONTROL. OTHER RISK FACTORS THAT MAY AFFECT OUR FUTURE
PERFORMANCE AND OUR OPERATIONS ARE DETAILED IN OUR ANNUAL REPORT ON FORM 20-F
AND OUR OTHER FILINGS WITH THE U. S. SECURITIES AND EXCHANGE COMMISSION AND THE
CANADIAN SECURITIES COMMISSIONS. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE BASED ON INFORMATION
CURRENTLY AVAILABLE TO US, WE CANNOT ASSURE YOU THAT THE EXPECTATIONS WILL PROVE
TO HAVE BEEN CORRECT. ACCORDINGLY, YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS. IN ANY EVENT, THESE STATEMENTS SPEAK ONLY AS OF THE
DATE OF THIS DOCUMENT. WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE ANY OF
THEM TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
ALL DOLLAR AMOUNTS ARE EXPRESSED IN US DOLLARS, EXCEPT AS OTHERWISE NOTED.
OVERVIEW
Market conditions in the telecommunications industry worsened during the second
quarter of fiscal 2002 compared to the same period last year. Not only did the
market deteriorate, but the quarter ended February 28, 2002 was marked by many
telecommunications carriers and optical equipment manufacturers postponing
buying decisions because their capital spending budgets for 2002 were not
finalized or because they reduced their spending outright. In addition, the slow
sales months of December and January negatively affected our quarterly results,
especially those for our Portable and Monitoring Division. As a result, we
witnessed decreases in spending from several customers in the second quarter.
In the first two quarters of fiscal 2002, we implemented cost-cutting measures
to align our cost structure to current market conditions, that provided
approximately $6 million in annualized pre-tax savings. We lowered operating
expenses, froze employee salaries, reduced our workforce and wrote-off excess
and obsolete inventories. These measures incurred charges of $3.9 million,
consisting of inventory write-off of $3.5 million and severance expenses of
$410,000, in the first quarter of 2002 and of $6.3 million, consisting of
inventory write-off of $5.9 million and severance expenses of $447,000, in the
second quarter of 2002.
In terms of new product development, we expect to announce more than 20 new
product introductions (since the beginning of fiscal 2002) by the time the
Optical Fiber Conference and Exhibit concludes at Anaheim, California in
mid-March 2002. In comparison, we launched the same number of products during
the entire fiscal year in 2001. This unprecedented number of product launches in
fiscal 2002 is a clear indicator that we continue to invest heavily in R&D,
despite the downturn in the telecommunications industry.
On December 1, 2001, our new Enterprise Resource Planning (ERP) system was
implemented at our major facility in Quebec City, QC. This ERP system will
enable us to improve the efficiency of our operations and should provide our
customers with better and more prompt service down the line.
On November 2, 2001, we completed our acquisition of Avantas Networks
Corporation (renamed EXFO Protocol Inc) for a total consideration valued at
$94,952,000 or $69,381,000 net of $25,571,000 of cash and cash equivalents
acquired. This acquisition has been accounted for using the purchase method and
has resulted in goodwill of $57,987,000 which, under the new accounting rules,
is not amortized. EXFO Protocol Inc., a Montreal-based, pre-revenue company, 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. This 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.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations for the periods ended February 28, 2001 and 2002 should be read in
conjunction with our interim consolidated financial statements and the related
notes thereto. All figures are expressed in thousands of US dollars unless
otherwise noted. Our interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in Canada,
or Canadian GAAP, which conform in all material respects with generally accepted
accounting principles in the United States, or U.S. GAAP, except as described in
note 9 to our interim consolidated financial statements.
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------- ----------------------------
2001 2002 2001 2002
---------------------------- ----------------------------
(UNAUDITED)
Sales $ 36,293 $ 14,601 $ 64,812 $ 34,739
Cost of sales 12,787 12,885 23,095 25,417
-------------- -------------- -------------- --------------
Gross margin* 23,506 1,716 41,717 9,322
Operating expenses
Selling and administrative 10,915 9,252 19,835 19,577
Net research and development 3,315 3,673 5,287 6,818
Amortization of property, plant and
equipment 716 1,487 1,230 2,835
Amortization of intangible assets 1,648 3,469 1,662 6,740
Restructuring charges - 447 - 857
-------------- -------------- -------------- --------------
Total operating expenses 16,594 18,328 28,014 36,827
Earnings (loss) from operations 6,912 (16,612) 13,703 (27,505)
Interest income, net 1,777 279 4,408 978
Foreign exchange gain 811 54 3,170 87
-------------- -------------- -------------- --------------
Earnings (loss) before income taxes and
amortization of goodwill 9,500 (16,279) 21,281 (26,440)
Income tax expense (recovery) 3,099 (6,013) 7,251 (9,569)
-------------- -------------- -------------- --------------
Earnings (loss) before amortization of
goodwill 6,401 (10,266) 14,030 (16,871)
Amortization of goodwill 6,377 12,409 6,501 24,859
-------------- -------------- -------------- --------------
Net earnings (loss) for the period $ 24 $ (22,675) $ 7,529 $ (41,730)
-------------- -------------- -------------- --------------
Basic and diluted net earnings (loss) per
share $ - $ (0.37) $ 0.15 $ (0.70)
Research and development data:
Gross research and development $ 4,508 $ 4,823 $ 7,356 $ 9,033
Net research and development $ 3,315 $ 3,673 $ 5,287 $ 6,818
Other data:
Pro forma net earnings (loss)** $ 7,511 $ (4,099) $ 15,126 $ (6,036)
Basic and diluted pro forma net earnings
(loss) per share** $ 0.14 $ (0.07) $ 0.31 $ (0.10)
* Including restructuring charges for inventory write-off of $5,862 and
$9,362 for the three months and the six months ended February 28, 2002,
respectively, nil in 2001.
** Net earnings (loss) excluding amortization of goodwill and the after-tax
effect of amortization of intangible assets and restructuring charges. This
information may not be comparable to similarly titled measures reported by
other companies because it is non-GAAP information.
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------- ----------------------------
2001 2002 2001 2002
---------------------------- ----------------------------
(UNAUDITED)
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 35.2 88.2 35.6 73.2
-------------- -------------- -------------- --------------
Gross margin* 64.8 11.8 64.4 26.8
Operating expenses
Selling and administrative 30.1 63.4 30.6 56.4
Net research and development 9.1 25.2 8.2 19.6
Amortization of property, plant and
equipment 2.0 10.2 1.9 8.2
Amortization of intangible assets 4.5 23.7 2.6 19.4
Restructuring charges - 3.1 - 2.4
-------------- -------------- -------------- --------------
Total operating expenses 45.7 125.6 43.3 106.0
Earnings (loss) from operations 19.1 (113.8) 21.1 (79.2)
Interest income, net 4.9 1.9 6.8 2.8
Foreign exchange gain 2.2 0.4 4.9 0.3
-------------- -------------- -------------- --------------
Earnings (loss) before income taxes and
amortization of goodwill 26.2 (111.5) 32.8 (76.1)
Income tax expense (recovery) 8.5 (41.2) 11.2 (27.5)
-------------- -------------- -------------- --------------
Earnings (loss) before amortization of
goodwill 17.7 (70.3) 21.6 (48.6)
Amortization of goodwill 17.6 85.0 10.0 71.5
-------------- -------------- -------------- --------------
Net earnings (loss) for the period 0.1% (155.3)% 11.6% (120.1)%
-------------- -------------- -------------- --------------
Research and development data:
Gross research and development 12.4% 33.0% 11.3% 26.0%
Net research and development 9.1% 25.2% 8.2% 19.6%
Other data:
Pro forma net earnings (loss)** 20.7% (28.1)% 23.3% (17.4)%
* Including restructuring charges for inventory write-off of 40.1 % and 26.9
% of sales for the three months and the six months ended February 28, 2002,
respectively. Excluding these restructuring charges, gross margin would
have reached 51.9% and 53.8% of sales for the three months and the six
months ended February 28, 2002, respectively.
** Net earnings (loss) excluding amortization of goodwill and the after-tax
effect of amortization of intangible assets and restructuring charges. This
information may not be comparable to similarly titled measures reported by
other companies because it is non-GAAP information.
SALES
For the three months ended February 28, 2002, sales decreased 60% to $14.6
million from $36.3 million for the same period last year. The decrease in sales
is directly related to a reduced demand for our products and pricing pressure
attributable to the continued severe downturn in the telecommunications
industry. Indeed, market conditions worsened and the second quarter of 2002 was
marked by many telecommunications carriers as well as optical equipment
manufacturers postponing buying decisions because their capital spending budgets
for 2002 were not finalized or were reduced outright. Telecommunications
carriers have reduced their capital expenditures for network deployments and
they are focusing on providing additional bandwidth at the minimum cost by
turning up data transmission rates, increasing DWDM channels and lighting dark
fiber. Optical equipment manufacturers were hit harder due to reduction in
network deployments. Both our Portable and Monitoring products and our
Industrial and Scientific products suffered from this lack of demand and pricing
pressure but the downturn was more severe in the Industrial and Scientific
division as it was the case in the first quarter of 2002, as compared with the
same periods last year.
Portable and Monitoring products and Industrial and Scientific products
accounted both for 50% of our sales in the second quarter of 2002, compared to
43% and 57%, respectively for the same period last year. They represented 62%
and 38%, respectively for the first quarter of 2002.
We expected our Portable and Monitoring products to represent a larger portion
of our sales during the second quarter of 2002. Nevertheless, our sales of
Portable and Monitoring products decreased 41% compared to the first quarter of
2002, because slow sales months December and January negatively affected our
quarterly results in this division more than anticipated. On the other hand, our
sales of Industrial and Scientific products remained flat in dollars in this
quarter compared to the first quarter of 2002. We believe that our extensive
product portfolio in this division helped us gain a relative stability.
Our net book-to-bill ratio for the three months ended February 28, 2002 is at
0.91 compared to 0.63 for the previous quarter. Order cancellations amounted to
approximately $4 million and $2 million during the first two quarters of 2002.
Without these cancellations, our book-to-bill ratio would be at 0.84 and 1.05
for the first two quarters of 2002.
North American sales accounted for 48% and 59% of sales for the three months
ended February 28, 2002 and 2001, respectively. International sales represented
52% and 41% of sales for the three months ended February 28, 2002 and 2001,
respectively. The increase in our international sales is the result of our
sustained efforts to develop the Asian market. Despite the significant decrease
in sales for every other geographical area, especially in North America, our
sales to the Asian market remained flat at $3.8 million year over year. For the
three months ended February 28, 2002, no customer accounted for more than 4.6%
of sales.
For the six months ended February 28, 2002, sales decreased 46% to $34.7 million
from $64.8 million for the same period last year. The decrease in sales is
directly related to a reduced demand for our products and pricing pressure
attributable to the continued severe downturn in the telecommunications
industry. Indeed, market conditions worsened and the first half of 2002 was
marked by many telecommunications carriers as well as optical equipment
manufacturers postponing buying decisions because their capital spending budgets
for 2002 were not finalized or were reduced. Telecommunications carriers have
reduced their capital expenditures for network deployments and they are focusing
on providing additional bandwidth at the minimum cost by turning up data
transmission rates, increasing DWDM channels and lighting dark fiber. Optical
equipment manufacturers were hit harder due to reduction in network deployments.
Both our
Portable and Monitoring products and our Industrial and Scientific products
suffered from this lack of demand and pricing pressure but the downturn was more
severe in the Industrial and Scientific division.
Portable and Monitoring products accounted for 57% of our sales and Industrial
and Scientific products accounted for 43% of our sales in the first half of
2002, compared to 52% and 48%, respectively for the same period last year.
North American sales accounted for 53% and 60% of sales for the six months ended
February 28, 2002 and 2001, respectively. International sales represented 47%
and 40% of sales for the six months ended February 28, 2002 and 2001,
respectively. The increase in our international sales is the result of our
sustained efforts to develop the Asian market. Despite the significant decrease
in sales for every other geographical area, especially in North America, our
sales to the Asian market increased 4.4% to $7.3 million in the first half of
2002, compared to $7.0 million for the same period last year. For the six months
ended February 28, 2002, no customer accounted for more than 5.9% of sales.
GROSS MARGIN
Gross margin represented 11.8% of sales for the three months ended February 28,
2002, compared to 64.8% for the same period last year.
The percentage decline in gross margin is due to a number of reasons. First of
all, we recorded an additional inventory write-off of $5.9 million for obsolete
and excess inventories as part of our restructuring plan. Excluding this
restructuring charge, gross margin would have reached 51.9%. Secondly, the
continued severe slowdown in the telecommunications industry resulted in a
reduced demand and pricing pressure for our products in the second quarter of
2002 which prevented a better absorption of our fixed manufacturing costs. Our
manufacturing capacity in Quebec City, QC and Victor, NY, have almost doubled
since November 2000, while our sales decreased significantly in the second
quarter of 2002. Thirdly, we experienced a shift in product mix in favor of
Portable and Monitoring products which tend to be slightly lower-margin
products. Finally, EXFO Photonic Solutions operates in a market that has
relatively lower-margin products.
Gross margin represented 26.8% of sales for the six months ended February 28,
2002, compared to 64.4% for the same period last year.
The percentage decline in gross margin is due to a number of reasons. First of
all, we recorded $9.4 million in inventory write-offs for obsolete and excess
inventories as part of our restructuring plans. Excluding these restructuring
charges, gross margin would have reached 53.8%. Secondly, the continued severe
slowdown in the telecommunications industry resulted in a reduced demand and
pricing pressure for our products in the first half of 2002 which prevented a
better absorption of our fixed manufacturing costs. Our manufacturing capacity
in Quebec City, QC and Victor, NY, have almost doubled since November 2000,
while our sales decreased significantly in the first half of 2002. Thirdly, we
experienced a shift in product mix in favor of Portable and Monitoring products
which tend to be slightly lower-margin products. Finally, EXFO Photonic
Solutions operates in a market that has relatively lower-margin products.
Gross margin can be negatively affected by competitive pricing pressure,
increase in obsolescence costs, shifts in product mix, reductions in government
grants, under-absorption of fixed manufacturing costs and increases in products
offerings by other suppliers in the fiber-optic test, measurement, monitoring
and automation industry.
SELLING AND ADMINISTRATIVE
For the three months ended February 28, 2002, selling and administrative
expenses were $9.3 million, or 63.4 % of sales, compared to $10.9 million, or
30.1% of sales for the same period last year. The dollar decrease is mainly due
to lower expenses resulting from our restructuring plans implemented since June
2001 and lower commission expenses as our sales decreased significantly during
the second quarter of 2002. However, the dollar decrease was offset in part by
the impact of the acquisitions of EXFO Photonic Solutions and EXFO Protocol.
The significant decrease in sales in the second quarter of 2002 caused the
percentage to increase since a large portion of our selling and administrative
expenses tends to be fixed and because sales decreased at a faster rate than
selling and administrative expenses.
For the six months ended February 28, 2002, selling and administrative expenses
were $19.6 million, or 56.4 % of sales, compared to $19.8 million, or 30.6% of
sales for the same period last year. The slight dollar decrease is due to lower
expenses resulting from our restructuring plans implemented since June 2001 and
lower commission expenses as our sales decreased significantly during the first
half of 2002, which were mainly offset by the impact of the acquisitions of
Burleigh Instruments, EXFO Photonic Solutions and EXFO Protocol.
The significant decrease in sales in the first half of 2002 caused the
percentage to increase since a large portion of our selling and administrative
expenses tends to be fixed and because sales decreased at a faster rate than
selling and administrative expenses.
Considering persistent market conditions, efforts will continue to be undertaken
in order maintain our selling and administrative expenses at an acceptable level
without impeding our efforts to strategically position our company, improve
sales, service our customers, integrate our acquired companies and satisfy our
customers.
RESEARCH AND DEVELOPMENT
For the three months ended February 28, 2002, gross research and development
expenses were $4.8 million, or 33.0% of sales, compared to $4.5 million, or
12.4% of sales for the same period last year. The slight increase in gross
research and development dollars is related to the acquisitions of EXFO Photonic
Solutions and EXFO Protocol, offset in part by the effect of our cost-cutting
measures. However, those measures had relatively limited impact on our research
and development activities as compared to the significant decrease in sales, and
did not jeopardize the development of our key products.
The percentage increase reflects our strong and continued focus on innovation
despite the significant decrease in sales. We firmly believe that innovation and
new product introductions will be the key to gain market share in this current
economic environment and ensure the long-term growth and profitability of the
company. In this quarter, 49.9% of our sales originated from products that have
been on the market for two years or less. This is an improvement compared to
43.1% of our sales reached in the same period last year.
We launched nine new products during the second quarter of fiscal 2002. Three
major releases included the FTB-5800 Chromatic Dispersion Analyzer for
deployments and upgrades of high-speed DWDM networks; the IQS-500 Cortex
platform for fiber-optic manufacturing and research and development
applications; and the FPMD-5600 Femtosecond Polarization Mode Dispersion
Analyzer for measuring second-order PMD in narrowband DWDM channels and
broadband components.
For the three months ended February 28, 2002, tax credits and grants from
federal, provincial and state governments for research and development
activities were $1.2 million, or 23.8% of gross research and development
expenses, compared to $1.2 million, or 26.5% of gross research and development
expenses, for the same period last year.
Our tax credits and government grants remained flat since our gross research and
development only slightly increased.
In terms of net research and development expenses, they amounted to $3.7
million, or 25.2% of sales for the three months ended February 28, 2002,
compared to $3.3 million, or 9.1% of sales, for the same period last year.
For the six months ended February 28, 2002, gross research and development
expenses were $9.0 million, or 26.0% of sales, compared to $7.4 million, or
11.3% of sales, for the same period last year. The increase in gross research
and development dollars is mainly related to the acquisitions of Burleigh
Instruments, EXFO Photonic Solutions and EXFO Protocol.
The percentage increase reflects our strong and continued focus on innovation
despite the significant decrease in sales. We firmly believe that innovation and
new product introduction will be the key to gain market share in this current
economic environment and ensure the long-term growth and profitability of the
company. In the first half of 2002, 50.3% of our sales originated from products
that have been on the market two years or less. This is a strong improvement
compared to 39.6% of our sales reached in the same period last year.
For the six months ended February 28, 2002, we released 16 new products. In
comparison, we released just over 20 new products during the entire fiscal year
in 2001.
For the six months ended February 28, 2002, tax credits and grants from federal,
provincial and state governments for research and development activities were
$2.2 million, or 24.5% of gross research and development expenses, compared to
$2.1 million, or 28.1% of gross research and development expenses, for the same
period last year.
Our tax credits and government grants remained flat mainly due to the fact that
our U.S based Burleigh Instruments, which caused an increase in gross research
and development expenses, is not eligible for tax credits.
In terms of net research and development expenses, they amounted to $6.8
million, or 19.6% of sales for the six months ended February 28, 2002, compared
to $5.3 million, or 8.2% of sales, for the same period last year.
We expect to continue investing heavily in research and development in the
up-coming quarters, reflecting our focus on innovation, our desire to gain
market share and our goal to exceed our customers' needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of Burleigh Instruments, EXFO Photonic
Solutions and EXFO Protocol, we recorded $61.1 million in intangible assets,
primarily consisting of core technology. These intangible assets, which are
amortized over periods from five months to five years from the date of
acquisition, resulted in amortization expenses of $3.5 million and $6.7 million
for the three months and the six months ended February 28, 2002, respectively,
compared to $1.6 million and $1.7 million for the corresponding periods of last
year.
RESTRUCTURING CHARGES
During the first two quarters of 2002, we implemented structured plans in order
to align our costs to current market conditions and to better position ourselves
amidst a challenging environment. Under these structured plans, we lowered our
operating expenses, froze employee salaries and reduced our work force in part
by attrition.
As a result, we recorded restructuring charges of $410,000 in severance expenses
for the 101 employees who were terminated in the first quarter of 2002 and
$447,000 in severance expenses for the 57 employees who were terminated in the
second quarter of 2002.
Our cost-cutting measures represent our efforts to respond to the difficult
market conditions. However, these efforts may be inappropriate or insufficient.
Our actions in this regard may not be successful in achieving the cost
reductions or other benefits expected, may be insufficient to align our cost
structure to market conditions, or may be more costly or extensive than
anticipated.
INTEREST INCOME, NET
For the three months ended February 28, 2002, net interest income amounted to
$0.3 million compared to $1.8 million for the same period last year. For the six
months ended February 28, 2002, net interest income amounted to $1.0 million
compared to $4.4 million for the same period last year. These decreases are
directly related to the use of short-term investments to finance our
acquisitions of Burleigh Instruments, EXFO Photonic Solutions and EXFO Protocol
as well as a general decrease in interest rates. Our net interest income will
decrease in the upcoming quarters since we used short-term investments to pay
for cash consideration in our recent acquisitions and because interest rates may
continue to drop.
FOREIGN EXCHANGE GAIN
For the three months ended February 28, 2002, foreign exchange gain amounted to
$54,000 compared to $0.8 million for the same period last year. These foreign
exchange gains are the result of the translation of operating activities
denominated in currency other than the Canadian dollar.
For the six months ended February 28, 2002, foreign exchange gain amounted to
$87,000 compared to $3.2 million for the same period last year. Last year's
foreign exchange gain was mainly due to the translation of short-term
investments denominated in US dollars.
During the three months and the six months ended February 28, 2002, we were able
to manage our exposure to currency risk with forward exchange contracts and
operating activities of Canadian entities denominated in currency other than the
Canadian dollar.
INCOME TAXES
Our effective income tax recovery rate was 36.9% for the three months ended
February 28, 2002, compared to our effective income tax rate of 32.6% for the
same period last year. The increase in our effective income tax recovery rate is
explained by the fact that our current operating loss will be carried back for
tax purposes and applied against specific prior years' taxable income that was
imposed at higher rates.
For the six months ended February 28, 2002, our effective income tax recovery
rate was 36.2%, compared to our effective income tax rate of 34.1% for the same
period last year. The increase in our effective income tax recovery rate can be
explained by the fact that our current operating loss will be carried back for
tax purposes and applied against specific prior years' taxable income that was
imposed at higher rates.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of Burleigh Instruments and EXFO Photonic
Solutions, we recorded $248.5 million in goodwill, which is amortized over five
years, resulting in amortization expenses of $12.4 million and $24.9 million for
the three months and the six months ended February 28, 2002, respectively,
compared to $6.4 million and $6.5 million for the corresponding periods of last
year. The acquisition of EXFO Protocol has been accounted for using the new
accounting standards contained in sections 1581 and 3062 of the CICA and
consequently, goodwill resulting from this acquisition is not amortized but
instead reviewed for impairment. Considering that this acquisition closed on
November 2, 2002, no impairment review of goodwill has been made on
February 28, 2002.
NET EARNINGS (LOSS)
Net loss amounted to $22.7 million, or $0.37 per share and $41.7 million, or
$0.70 per share, for the three months and the six months ended February 28,
2002, respectively, compared to net earnings of $24,000, or $0.00 per share and
$7.5 million, or $0.15 per share, for the corresponding periods of last year.
PRO FORMA NET EARNINGS (LOSS)
As a measure to assess financial performance, we use pro forma net earnings
(loss) and pro forma net earnings (loss) per share. Pro forma net earnings
(loss) represent net earnings (loss) excluding amortization of goodwill and the
after-tax effect of amortization of intangible assets and restructuring charges.
Pro forma net loss amounted to $4.1 million, or $0.07 per share and $6.0
million, or $0.10 per share, for the three months and the six months ended
February 28, 2002, respectively, compared to pro forma net earnings of $7.5
million, or $0.14 per share, and $15.1 million, or $0.31 per share, for the
corresponding periods of last year.
Pro forma net earnings (loss) is reconciled as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------ ------------------------
2001 2002 2001 2002
(UNAUDITED)
(in thousands of US dollars, except per share data)
Net earnings (loss) in accordance with GAAP $ 24 $ (22,675) $ 7,529 $ (41,730)
Pro forma adjustments:
Amortization of goodwill 6,377 12,409 6,501 24,859
Amortization of intangible assets 1,648 3,469 1,662 6,740
Tax effect of amortization of intangible
assets (538) (1,281) (566) (2,426)
Restructuring charges - 6,309 - 10,219
Tax effect of the restructuring charges - (2,330) - (3,698)
----------- ----------- ----------- ------------
Pro forma net earnings (loss) $ 7,511 $ (4,099) $ 15,126 $ (6,036)
----------- ----------- ----------- ------------
Basic and diluted pro forma net earnings
(loss) per share $ 0.14 $ (0.07) $ 0.31 $ (0.10)
We provide pro forma financial information to help the reader better understand
our operating results. This information is not in accordance with, or an
alternative for, generally accepted accounting principles and may not be
comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our Initial Public Offering, we 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 for net proceeds
of approximately $209 million, including the over-allotment option exercised by
the underwriters. Since our Initial Public Offering, we have financed our major
investments mainly by the issuance of subordinate voting shares and the use of
our short-term investments.
CASH POSITION AND SHORT-TERM INVESTMENTS
As at February 28, 2002, cash and cash equivalents as well as short-term
investments consisted of $51.5 million. Our working capital was $106.8 million.
Our cash and cash equivalents and short-term investments have decreased by
approximately $6.7 million since November 30, 2001, mainly due to the financing
of operating activities for $4.7 million and the cash payment of $1.2 million
for the purchase of property, plant and equipment and intangible assets.
Our cash and cash equivalents and short-term investments have decreased by
approximately $23.1 million since August 31, 2001, mainly due to the cash
payment of $9.8 million for the acquisition of EXFO Protocol, the cash payment
of $4.3 million for the purchases of property, plant and equipment and
intangible assets and the financing of operating activities of $6.4 million for
the first half of 2002.
OPERATING ACTIVITIES
Cash flows used by operating activities were $4.7 million for the three months
ended February 28, 2002, compared to $0.6 million for the same period last year.
Cash flows used by operating activities were primarily due to the net loss after
items not affecting cash and cash equivalents of $6.1 million. This figure was
offset, in part, by the net decrease in accounts receivable and inventories of
$13.0 million over the decrease in accounts payable and accrued liabilities of
$3.2 million and the increase in income taxes receivable of $8.2 million. The
decrease in our accounts receivable, inventories and accounts payable and
accrued liabilities is respectively due to the reduction in our sales level, our
inventory write-off and our efforts to maintain inventories at the lowest
acceptable level and the reduction in our purchases due to the actual slowdown
in our industry. The increase in our income taxes receivable is directly related
to income tax recovery following the carry back to previous years' taxable
income of our consolidated tax loss for the second quarter of 2002.
For the three months ended February 28, 2002, the major items not affecting cash
and cash equivalents consisted of amortization expenses of $17.4 million.
Cash flows used by operating activities were $6.4 million for the six months
ended February 28, 2002, compared to $1.8 million for the same period last year.
Cash flows used by operating activities were primarily due to the net loss after
items not affecting cash and cash equivalents of $8.6 million. This figure was
offset, in part, by the net decrease in accounts receivable and inventories of
$24.4 million over the decrease in accounts payable and accrued liabilities of
$5.4 million and the increase in income taxes receivable of $16.3 million. The
decrease in our accounts receivable, inventories and accounts payable and
accrued liabilities is respectively due to the reduction in our sales level, our
inventory write-offs and our efforts to maintain inventories at the lowest
acceptable level and the reduction in our purchases due to the actual slowdown
in our industry. The increase in our income taxes receivable directly relates to
income tax recovery following the carry back to previous years' taxable income
of our consolidated tax loss for the first half of 2002.
For the six months ended February 28, 2002, the major items not affecting cash
and cash equivalents consisted of amortization expenses of $34.4 million.
FINANCING ACTIVITIES
Cash flows used by financing activities were $22,000 for the three months ended
February 28, 2002, compared to cash flows provided by financing activities of
$107,000 for the same period last year.
Cash flows used by financing activities were $47,000 for the six months ended
February 28, 2002, compared to cash flows provided by financing activities of
$0.8 million for the same period last year.
As at February 28, 2002, we have credit facilities that provide for advances of
up to $6.2 million under lines of credit. These lines of credits bear interest
at prime rate.
INVESTING ACTIVITIES
Cash flows used by investing activities were $8.0 million for the three months
ended February 28, 2002, compared to cash flows provided by investing activities
of 3.0 million for the same period last year. During the second quarter of 2002,
we acquired for $6.8 million in short-term investments and for $1.2 million in
property, plant and equipment and intangible assets.
Cash flows provided by investing activities were $7.0 million for the six months
ended February 28, 2002, compared to $2.7 million for the same period last year.
During the first half of 2002, we disposed of $21.1 million in short-term
investments to finance the $4.3 million purchases of property, plant and
equipment and intangible assets and to pay the cash consideration of $9.8
million for the acquisition of EXFO Protocol. Despite these purchases and
acquisition, the disposal of short-term investments generated net cash flows of
$7.0 million in the first half of 2002.
OUTLOOK
As described above, we incurred an operating loss in the second quarter and the
first half of 2002, and operating activities for these periods used $4.7 million
and $6.4 million in cash flows, respectively. There can be no assurance as to
whether and when we will return to profitability or that our revenues will
return to prior level. However, we believe that our cash balances and short-term
investments, together with available credit facilities, will be sufficient to
meet our expected liquidity and capital requirements for the next twelve months.
However, possible additional operating losses and/or possible investments in or
acquisition 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.
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA) revised
section 1650, "Foreign Currency Translation", which is effective for fiscal
years beginning on or after January 1, 2002. The revised standard no longer
permits the deferral and amortization of unrealized exchange gains and losses
that arise on the translation of long-term foreign currency denominated monetary
assets and liabilities. Under the new rules, such gains and losses must be
reported in earnings as they arise. Adopting this revised standard is not
expected to have a significant impact on our financial statements.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging
Relationships", which shall be applied to hedging relationships in effect in
fiscal years beginning on or after July 1, 2002. This new accounting guideline
establishes basic criteria that must be met before hedge accounting can be used.
It also describes the types of exposures that can be hedged and the types of
instruments that qualify as hedges, sets detailed designation and documentation
requirements and requires formal effectiveness testing. We have not yet assessed
the impact of the adoption of this new guideline.
In December 2001, the CICA issued section 3870, "Stock-Based Compensation and
Other Stock-Based Payments", which is effective for fiscal years beginning on or
after January 1, 2002. The new section applies to awards granted on or after the
date of adoption, and requires that stock-based payment to non-employees and
direct awards to employees and non-employees be accounted for using a fair
value-based method. We have not yet assessed the impact of the adoption of this
new standard.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and other intangible assets" and
in August 2001, the CICA issued section 1581 "Business Combination" and section
3062 "Goodwill and other intangible assets". SFAS 141 and section 1581 require
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. These sections
also broaden criteria for recording intangible assets separately from goodwill.
Upon the adoption of SFAS 142 and 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. SFAS 142 and section 3062 require 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
exceeds the fair value. SFAS 142 and section 3062 will be adopted on
September 1, 2002.
The impact of adopting SFAS 142 and section 3062 will result in the
non-amortization of goodwill recorded prior to July 1, 2001 and resulting in the
elimination of goodwill amortization for the year ending August 31, 2003 by
approximately $63,000,000 under SFAS 142 and $50,000,000 under section 3062.
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 earnings under SFAS 142 and to deficit under section 3062.
Any subsequent impairment losses on goodwill will be charged to earnings in the
period in which it is incurred.
Under the transitional provisions of SFAS 142 and section 3062, we did not
amortize the goodwill resulting from the acquisition of EXFO Protocol Inc.,
which closed on November 2, 2001.
In June 2001, the FASB 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. We have not yet assessed the
impact of the adoption of this new standard.
In October 2001, the FASB issued SFAS 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS 121 and the provisions of
APB 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" with regard to reporting the effects of a
disposal of a business segment. SFAS 144 retains many of the provisions of SFAS
121, but significantly changes the criteria that would have to be met to
classify an asset as held for disposal such that long-lived assets to be
disposed of other than by sale are considered held and used until disposed of.
In addition, SFAS 144 retains the basic provisions of APB 30 for presentation of
discontinued operations in the statement of earnings but broadens that
presentation to a component of an entity. This new standard is effective for
fiscal years beginning on December 15, 2001. Adopting this new standard is not
expected to have a significant impact on our financial statements.
RISKS AND UNCERTAINTIES
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,
monitoring 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 ensure 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.
Also, the 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. 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.
For a more complete understanding of risk factors that may affect us, we refer
you to the risk factors set forth in our disclosure documents published with
securities commissions.
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/ Kimberley Okell
--------------------------------------
Name: Kimberley Okell
Title: Corporate Secretary
Date: March 20, 2002